Aviva: income on the cheap

Improving cash generation and strengthening the life assurer’s balance sheet has been top of chief executive Mark Wilson’s agenda since he became the boss in 2013. Management seems to be delivering on this objective. During the first half of 2018, cash generation rose more than a quarter to £1.5bn, largely thanks to a £500m special cash remittance from the UK insurance business following the 2016 acquisition of Friends Life. That took special remittances from that business to £1.25bn since 2016, exceeding management’s £1bn target. It also meant that during the two years to the end of June cash generation increased by around a quarter.

Rising cash generation has also enabled management to distribute more earnings as dividends since the payout was cut in 2013. After hitting a target ratio of 50 per cent of operating earnings for 2017, in March management increased the intended ratio to between 55 and 60 per cent by 2020. At the same time it outlined plans to deploy £3bn in excess capital by 2020. This year it will return more than £600m to shareholders through buying back ordinary shares. A further £900m will be used to pay down costly hybrid debt and £600m is earmarked for bolt-on acquisitions, which includes €130m (£116m) committed to the purchase of Irish insurer Friends First. During the first half, Aviva started share buybacks and paid down €500m in debt.

The life assurer has also been disposing of non-core businesses – which most recently included exiting the Spanish life and pensions markets – to focus on seven countries plus its asset-management arm, Aviva Investors. During the first half, growth plans included strengthening its UK bulk annuity operations – undertaking its largest ever transaction with Marks and Spencer – and increasing the headcount of its advisers in Singapore by 15 per cent to 772. 

However, it hasn't all been plain sailing. While operating profits at the life business rose 7 per cent during the first half – partially benefiting from changes in UK longevity assumptions and growth in long-term savings products – group operating profits dipped 2 per cent to £1.4bn. Aviva Canada went into £13m losses primarily because lousy weather meant higher motor policy claims. Weather-related claims also reduced underwriting profits at Aviva's general insurance business in the UK. Progress in growing assets at Aviva Investors also hit a speed bump during the first half, suffering £3.7bn in net outflows. 

That translated into a 4 per cent rise in operating EPS, shy of management’s target of 5 per cent annual growth, which it maintains it is on track to deliver in the full year. The brand also suffered bad publicity early this year after management proposed – and later scrapped – plans to cancel four classes of ‘irredeemable’ preference shares at par value. Aviva later made discretionary goodwill payments of about £14m to preference shareholders who panic sold their holdings.