Aviva returns a further £300mn to shareholders

It is a strange quirk of life insurance company results that market reversals can lead to wild swings in hedging profits, or losses, depending on prevailing market conditions. Full-line insurer Aviva (AV.) is no different in this respect, although these results were a particularly extreme example of negative market movements, where adverse hedging positions played havoc with the IFRS reported results. This is not as bad as it appears as Aviva uses hedges to protect its solvency II capital position, rather than its income statement, and this came out at a healthy 212 per cent for the year. Accepting swings in reported profits goes with the territory.

The market’s generally positive reaction to the results was partly down to adjusted operating profits, which were 35 per cent higher at £2.21bn – although it should be noted that this is a management-generated figure and is not compatible with IFRS. Still, management seemed confident enough in the company’s overall position to continue with its increasingly large capital returns to shareholders. A further £300mn of share buybacks was announced alongside the results. The flipside to higher payouts is lower costs and, despite inflationary pressures, controllable costs fell by 3 per cent for the year to £2.77bn. Management said the company was on track to achieve its £750mn cost-saving target by the end of next year.

The share buyback takes the company’s total capital returns since 2021 to over £5bn and represents the windfall from Aviva’s various overseas business sell-offs, as well as pressure from activist investor Cevian Capital to bump up payouts. Interestingly, Cevian cut its stake in Aviva to under 5 per cent prior to these results after what is likely to be seen as a successful activist holding for the Swedish investor.

Aviva’s operating divisions showed generally strong growth, with its core UK & Ireland market enjoying better interest rate returns and renewed interest from retirees in annuity products, alongside rising interest rates. Accordingly, adjusted operating profits here were 34 per cent higher at £1.9bn. Meanwhile, general insurance in the same market saw profits fall by 5 per cent to £338mn as claims returned to normality after working through the pandemic disruption.

Aviva’s results underlined its status as one of the key income shares on the London market. When the buyback capital is included, the shares currently yield 9 per cent. With an adjusted consensus price/earnings ratio of just 8, our advice remains the same. Buy.

Last IC view: Buy, 449p, 10 Aug 2022