Aviva PLC (LON: AV.) –Operating with a robust capital position and strong trading momentum 

Aviva PLC is a FTSE 100 quoted Company, which provides a broad range of insurance and savings products. It operates through six divisions, namely UK & Ireland Life, Canada, Aviva Investors, UK & Ireland General Insurance, Continental Europe, and Asia. In 2019, the Company paid claims and benefits of nearly £33.2 billion to its 33.4 million customers. By the end of H1 FY20, total assets under management were £522 billion. The Company has leading market positions in the UK, Ireland, and Canada, while its international focus remains in Europe and Asia.

On 4 March 2021, the Company expects to publish results for FY20.

 (Source: Company Website)

Growth Prospects and Risk Assessment

The Company is among the market leaders in the insurance sector with a strong balance sheet and insurance cover. It has maintained its financial strength by building a robust capital framework, liquidity, and reducing debt leverage. Moreover, it has long-term relationships with customers and distributors to deliver resilient performance. Going forward, Aviva would focus on the business portfolio, and it will invest for growth in the businesses where it will see substantial returns and robust cash flows. The Company would withdraw from the businesses that do not meet the strategic objectives. Furthermore, the recent disposal Aviva’s Vietnam business is anticipated to enhance the Net Asset Value and Solvency II surplus by around £0.1 billion. 

However, the Group’s performance is subject to some principal risks and uncertainties, such as the volatility in market conditions can adversely impact earnings and profitability. Moreover, legislative changes and new entrants can disrupt the market environment. The material failure in IT security and business processes can cause reputational damage and unanticipated financial loss. Further, the emerging threats of climate change can significantly impact the investment portfolio. Also, 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.

Industry Outlook Dynamics

As per the publication from Research and Markets, the market size for global insurance providers is expected to grow to US$6,840.70 billion by 2023, growing at a CAGR of ~6% from 2021. The fundamentals of the industry remain strong with several growth drivers, such as increasing ageing population, climate change, and globalisation of the asset market.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Aviva Plc

Recent Developments

On 10 December 2020: The Company has completed the sale of the Hillhouse Capital (which was a joint venture Company in Hong Kong), with its entire shareholding. Hillhouse Capital was a joint venture partner with Aviva Life Insurance Company Limited.

On 9 December 2020: Aviva announced the appointment of Pippa Lambert as Independent Non-Executive Director.

On 30 November 2020: The Company announced that it had completed the sale of a majority shareholding in Aviva Singapore to a consortium led by Singapore Life Ltd, with a total consideration of SGD 2.7 billion. Therefore, the business has changed its name to Aviva Singlife Holdings Pte Ltd.

Q3 and 9M FY20 Trading Update (as on 26 November 2020)

(Source: Company Website)

• The Company delivered good progress with Aviva Vita and Aviva Singapore's sale, which was for a consideration of £2 billion.
• Aviva has a strong financial position and robust trading performance delivered in Q3, with an £11.8 billion of capital surplus.
• In the nine months of 2020, the Company has shown a resilient performance with a strong performance in the core markets, partly offset by a decrease in the manage-for-value portfolio.
• The Company witnessed strong solvency and liquidity position, with a target debt leverage of £1.5 billion by 2022.
• The Board has declared an interim dividend per share of 7.0 pence in respect of the financial year 2020, which will be paid in January 2021.
• Despite a challenging market backdrop, the Company delivered a resilient performance in 9M FY20, with the sustainable capital and cash generation of the core businesses.
• AV expects no significant surge in net BI claims. For FY20, the cash remittances will remain below 2019 levels but also expects H2 FY20 to be above H2 FY19 in terms of cash remittances.
• The Company will deliver value to shareholders by returning excess capital, with more than 180% solvency cover ratio.
• The Board expects to recommend a 2020 final dividend per share of 14 pence and is expected 2020 total dividend per share of 21.0 pence.
• Moreover, the bulk purchase annuities sales surged to £5 billion, which increase the Aviva and commercial insurance premiums across the UK, Canada and Ireland.

Financial and Operational Highlights (for the six-month period ended 30 June 2020 (H1 FY20), as on 6 August 2020)

(Source: Company Website)

• The Company delivered a strong financial performance in H1 FY20, with a strong financial position and robust operating profit of £1.2 billion.
• It witnessed strong solvency and liquidity position, with a decrease in debt leverage.
• Led by higher premium ceded to reinsurers for the period, net earned premium declined to £13 billion.
• The Board has declared a 6 pence second interim dividend per share and will review the 2019 final dividend and the long-term dividend policy in the fourth quarter of the current year.
• On 30 June 2020, Aviva’s solvency surplus stood at £12.0 billion, and the cover ratio was 194%. It has a track record of disciplined financial management and strong capital position.
• On 31 July 2020, the centre liquidity stood at £2.5 billion, which shows conservative management of cash-flows and centre liquidity.

Financial Ratios

Share Price Performance

On 11 January 2021 (before the market close, at 8.03 AM GMT), Aviva’s shares were trading at GBX 346.60, down by 0.57% against the previous day closing price. Stock 52-week High and Low were GBX 418.80 and GBX 205.70, respectively.

From the technical standpoint, 20-day SMA (329.50), and 20-day EMA (332.90) are currently supporting an upside potential, which means the stock price could increase in the short term.

In the past six months, Aviva’s share price has delivered ~23.48% return as compared to the ~12.62% return FTSE 100 index, and a positive ~19.38% return of FTSE All-Share Life Insurance index, which shows that the stock has outperformed the benchmark index and the sector.

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Business Outlook Scenario

Aviva has made significant progress towards its business simplification strategy, which reflected in its recent disposal of Italy and Vietnam business for nearly £2 billion. Moreover, the Group has a resilient and new sustainable dividend policy, while it has achieved debt leverage target ratio. The strong capital framework shall offer capital return opportunities to shareholders for the long-term. However, the economic and social outlook is likely to remain uncertain in the short-term; however, the Company is confident in its strategy to unlock long-term value for its shareholders.

(Source: Company Website) 

Considering the strong solvency position, decent fundamental performance in H1 FY20, robust liquidity position, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Aviva Plc at the current market price of GBX 346.60 (as on 11 January 2021, before the market close at 8:03 AM GMT) with lower double-digit upside potential based on 0.82x Price/NTM Book Value (approx.) on FY21E book value per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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