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Aviva to prioritise debt reduction over buybacks

The life insurer will also move to a progressive dividend payout policy
March 7, 2019

The installation of a new chief executive at Aviva (AV.) was always likely to bring a strategic shift, after former boss Mark Wilson was ousted in October. Newly appointed chief Maurice Tulloch – former international insurance head – confirmed that the life insurer’s capital management plan would “prioritise debt reduction for the foreseeable future”, over returning capital to shareholders’ pockets via share buybacks or special dividends. Management is aiming to reduce debt by at least £1.5bn by 2022, saving around £90m a year in interest expenses. The life insurer will also move to a progressive dividend policy, rather than a rigid payout of 55 to 60 per cent of operating earnings, as had been targeted by 2020.

IC TIP: Buy at 417.8p

Cash remittances were up almost a third on the prior year to £3.1bn, driven by the £728m release of UK longevity provisions due to changes in life expectancy assumptions. Operating profits at the core UK life business rose 7 per cent to £2.3bn, with annuity and equity release sales rising 12 per cent thanks to higher volumes of bulk annuities. Meanwhile, higher releases of prior year reserves offset an increase in weather-related claims at the domestic general insurance business, which recorded a flat combined operating ratio – of claims expenses as a proportion of premiums – of 93.8 per cent.     

However, the international performance was more mixed. Excluding disposals, operating profits rose 10 per cent due to the life business. Yet in Canada, elevated weather losses, inflated motor insurance claims and costs associated with integrating its RBC Insurance acquisition resulted in a loss-making combined operating ratio of 102.4 per cent. Management has increased premium rates, cancelled some broker relationships and adjusted its underwriting approach to aid recovery.

Investment management arm Aviva Investors suffered £7bn in net outflows, although £6.3bn of those came via the disposal of legacy assets. Nevertheless, combined with £12.4bn in negative market movements, that meant assets under management fell 6 per cent to £331bn.        

Analysts expect adjusted EPS of 62.3p for 2019, according to Bloomberg consensus forecasts, up from 58.4p the prior year.

AVIVA (AV.)    
ORD PRICE:417.8pMARKET VALUE:£16.31bn
TOUCH:417.8-417.9p12-MONTH HIGH:555pLOW: 362p
DIVIDEND YIELD:7.2%PE RATIO:11
NET ASSET VALUE:448p*SOLVENCY II RATIO:204%
Year to 31 DecGross premiums (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201421.72.6650.418.1
2015 (restated)21.91.2023.120.8
201625.41.8315.323.3
201727.62.3735.027.4
201828.71.6538.230.0
% change+4-30+9+9
Ex-div:11 Apr   
Payment:30 May   
*Includes intangible assets of £5.1bn, or 130p a share