Aviva PLC (AV) is a London, United Kingdom-based multinational composite insurer group. The group offers a wide range of savings and insurance products - including life, general and health insurance – and operates an asset management business as well. It is the UK's largest insurer and is country's only large scale, multi-line insurer, and has a strong international presence in Europe, Canada and Asia. The group consists of four operating segments being General insurance and health, Fund management, Long-term business and Other. The group also differentiates its operations based on geography; the segments are United Kingdom, Canada, France, Poland, Italy, Ireland, Spain and Other, Asia, Aviva Investors and Other Group activities. The company's share is a constituent of the FTSE 100 index.

The current Chairman is Sir Adrian Montague, CBE and was appointed on April 2015 as Chairman. Maurice Tulloch held the responsibilities of the Chief Executive Officer and was appointed as CEO on March 4th, 2019.

Key Statistics


Top Shareholders

 

Segment Performance

The company had divided its business based on either geography or by activity. The company’s UK business is segregated into general insurance and life insurance. Canadian operations are related to general insurance. The company’s French operations include general insurance and long-term business operations. The Poland business comprises of general insurance and long-term business and also include Lithuania based long term business. The company’s Italy, Ireland and Other business includes general insurance and long-term business in the Italian and Irish market. The other business includes Turkey-based life operations. The company’s Asian operations include long-term business in Indonesia, Vietnam, Singapore, India, China and Hong Kong Etc. It also includes health operations and general insurance in regions of Singapore and Indonesia based health operations. The Aviva Investors business manages shareholders' invested funds, investment management services, management of retail investment products and policyholders' invested funds in the Asia Pacific, North America, UK and France. The operations related to finance functions and treasury are taken care of by the Other Group activities of the company.

The company’s income in the first half of the financial year 2019 surged from all reportable segments except Aviva Investors business. The company’s PBT (Profit before tax) increased from UK-Life business, Canada business, French Business, Italy, Ireland and other, and Asia business in H1 FY2019.

Financial Highlights – First Half Financial Year 2019 (£, million)


(Source: Half Yearly Report, Company Website)

For the H1 of the financial year 2019, Gross written premium was at £15,211 millionversus £15,180 million in H1 FY2018. The company’s Net earned premium was at £13,496 millionin H1 FY2019 versus £13,785 million in H1 FY2018. The company’s total income for the first half of the financial year 2019 was at £42,570 millionversus £14,081 million in H1 FY2018. The increase in total income was driven by a significant increase in revenue from Net investment income for the period. The company’s total expenses increased significantly to £40,522 millionin H1 FY2019 from £13,649 million in H1 FY2018. The company’s operating profit for the H1 FY2019 was at £1,448 millionin H1 FY2019 versus £1,438 million in H1 FY2018. The PBT (Profit before tax) for the first half of the financial year 2019 stood at £2,048 million as against £432 million in H1 FY2018. The company’s PBT (attributable to shareholders) for the first half of the financial year 2019 stood at £1,523 millionas against £526 million in H1 FY2018. The PAT (Profit after tax) for the first half of the financial year 2019 stood at £1,180 million as against £376 million in H1 FY2018. The company’s PAT (attributable to shareholders) for the first half of the financial year 2019 stood at £1,116 millionas against £330million in H1 FY2018. The company’s Basic earnings per share were up by 257 per cent to 28.2 pence in the first half of the financial year 2019 from 7.9 pence in the first half of the financial year 2018. The diluted earnings per share for H1 FY2019 were at 27.9 pence as against 7.8 pence in H1 FY2018. The combined operating ratio (COR), which represents the underlying performance of the Group, was at 95.9 per cent in H1 FY2019 versus 97.4 per cent in H1 FY2018. Despite significant actions undertaken in 2018 for capital management, the Solvency II cover ratio in the first half of the Financial year 2019 declined to 194 per cent from 204 per cent recorded on Dec-31-18 (FY2018). The estimated Solvency II surplus for H1 FY2019 was £11.8 billion versus £12 billion in FY2018. The company’s NAV (Net asset value) per share was at 432 pence in H1 FY2019 against 424 pence on Dec-31-18 (FY 2018). The company increased its interim dividend per share by 3 per cent to 9.50 pence in H1 FY2019 from 9.25 pence in H1 FY2018.

Key Performance Indicators
 
Customer Net Promoter Score
 
NPS is a non-financial metric used to measure the customer’s loyalty towards a brand. As per the survey conducted, the company’s NPS score was 8 above market average in FY2018 versus 7 above market average in FY2017.


Engagement
 
The Aviva allows its people to work in line with the values and can be benefited from recognition and collaboration. The company, through its “Voice of Aviva” Survey, measured the engagement score of 76 per cent in FY 2018 versus 75 per cent in FY 2017.


Group’s adjusted operating profit

The company’s adjusted operating profit surged by 2 per cent to £3,116 million in FY2018. The major markets adjusted operating profit was up by 7 per cent to £3,669 million except Canada and Aviva Investors businesses.


Operating earnings per share

Operating EPS (excluding the effect of exceptional items) measures the operating profit attributed to shareholders. The company’s operating EPS surged by 7 per cent to 58.4 pence in the FY2018. The company had met the target to deliver above 5 per cent growth in the operating EPS in 2018.


Combined operating ratio

The combined operating ratio (COR), which represents the underlying performance of the Group, remained flatat 96.6 per cent for the year. The COR measured the profitability of the general insurance business. The lower COR below 100 per cent represents more profitability for the company.

Financial Ratios
 

(Source: TR)

The reported Loss Ratio in H1 FY2019 declined by 2.5 per cent to 63.8 per cent against 66.3 per cent reported last year for the same period. The reported Expense Ratio of 33.7 per cent for the H1 FY2019 stood higher than the industry median of 26.8 per cent and is lower than 34.2 per cent for H1 FY2018. The reported Combined Ratio in H1 FY2019 declined by 3 per cent to 97.5 per cent from 100.5 per cent reported last year for the same period. Pre-tax Return on equity for the H1 Financial year 2019 stood at 12.1 per cent, which was higher than the industry median of 6.4 per cent. On leverage front, the debt-equity ratio of the Aviva Plc’s was 0.59x, which was higher as compared to the industry median of 0.38x, reflecting that the company is more leveraged as compared to its peers.  

 
Share Price Performance


Daily Chart as at August-19-19, before the market close (Source: Thomson Reuters)

On August 19, 2019, at the time of writing (before the market close, at 12:53 PM GMT), Aviva Plc shares were trading at GBX 363.40, up by 0.75 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 501.00/GBX 355.55. At the time of writing, the share was trading 27.47 per cent lower than the 52w High and 2.21 per cent higher than the 52w low. Stock’s average traded volume for 5 days was10,696,254.60; 30 days – 8,981,345.57 and 90 days – 8,276,855.51. The average traded volume for 5 days was up by 19.09 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.05, reflecting roughly the same volatility as equated to the benchmark index. The outstanding market capitalisation was around £14.13 billion, with a dividend yield of 8.39 per cent.

Valuation Methodology
Method 1: Price to Cash Flow Approach (NTM)
 
To compare Aviva Plc with its peers, Price/Cash Flow multiple has been used. The peers are Hastings Group Holdings PLC(NTM Price/Cash Flow was 13.00), Direct Line Insurance Group PLC(NTM Price/Cash Flow was 12.97), Swiss Life Holding AG(NTM Price/Cash Flow was 9.84), Standard Life Aberdeen PLC(NTM Price/Cash Flow was 11.74) and Aegon NV(NTM Price/Cash Flow was 3.78). The Average of Price/Cash Flow (NTM) of the company’s peers was 10.00x (approx.)

Method 2: Price to Earnings Approach (NTM)


To compare Aviva Plc with its peers, Price/Earnings multiple has been used. The peers are Unipol Gruppo SpA(NTM Price/Earnings was 6.39), Standard Life Aberdeen PLC(NTM Price/Earnings was 11.91), Saga PLC(NTM Price/Earnings was 5.26), Legal & General Group PLC(NTM Price/Earnings was 6.86) and Just Group PLC(NTM Price/Earnings was 2.87). The Median of Price/Earnings (NTM) of the company’s peers was 6.7x (approx.)

Growth and Risk Assessments

Investment in future business helps in achieving further sales growth and operational efficiencies. A well-balanced approach to evolve in the regulatory and macroeconomic environment. To meet the new regulations, the group needs to implement new processes, failing to do so would increase the compliance risk. Acquisitions to match rapid transformation may increase integration risks, and expected synergies may not be achieved.

Conclusion

The company has strong fundamentals with a robust and resilient balance sheet, which is supported by lower interest expense and a reduction in weighted average shares in issue. The company's businesses, in their respective markets, are well-positioned, and the overall performance has been steady with expectations to improve profitability in Canada.

The appointment of a new Chief Executive will help to focus on reallocating resources and making changes to the company's priorities, like improve efficiency, optimise products and market portfolio and prioritise of debt deleveraging– which is the group plan to reduce by at least £1.5 billion by the end of 2022.

However, the final deal of Brexit has still not been given any shape yet, and the company faces substantial uncertainty about the future impacts of it on the economies of Europe and the United Kingdom. The effect of weak investment markets is a potential headwind for the company in 2019.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 360.70 (as on 16th August 2019) with high single-digit upside potential based on 10.00x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.) and 6.70x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).
 
 
*The buy recommendation is valid for the current price as covered in the report (as on 19^th August 2019).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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