Report
Henry Heathfield
EUR 850.00 For Business Accounts Only

Morningstar | Aviva's 2018 Results Decent, All Things Considered

Aviva reported a 2% rise in operating profit to GBP 3.1 billion for 2018, slightly below our expectations. Operating earnings per share came in at GBX 58.4 with a GBX 30.0 total 2018 dividend, giving Aviva's stock a roughly 7% yield. At the current market valuation, Aviva trades at a very rough 1.0 times current net asset value. We will hold our fair value estimate at GBP 5.75 per share until we have full-year financial statements and roll our financial model. However, we are lowering our stewardship rating to standard until Aviva outlines its business strategy under its new leadership.

All things considered, we think this is a fairly decent result from the British multiline insurer. But 2019 could be another tough year. While the 7% dividend yield is alarming, we think there will be a minimum of GBX 10-20 to add to the net asset value to normalise for an abnormal set of circumstances, largely stemming from market movements.

From what we can tell at the moment, the business is going to be focused on capital discipline and management, which has CFO Tom Stoddard written all over it. The plan is to reduce the GBP 10 billion debt load by a further GBP 1.5 billion by year-end 2022, topping up the GBP 1.4 billion repaid over the last two years. We think the business has plenty of operating capital generation to achieve this; 2018 came in at GBP 3.2 billion versus GBP 2.6 billion a year prior, and of this, GBP 3.1 billion has been upstreamed with GBP 1.6 billion left for dividends and growth investments.

For the U.K. business, life is the most important, and we would expect to see some alarming results, particularly in new business. But the 8% margin on annuities and equity release has remained stable. This has led to a very robust operating result across new and existing for this line of business, the most important for U.K. earnings.

However, the one area of weakness within U.K. life has been protection, where new business margins have dropped from 52% of annual premium equivalent to 43%, and that annual premium equivalent has also come in lower at GBP 212 million. This weaker result has come from individual protection due to a higher level of competition. But we think these lower sales probably also come down to lower levels of perceived affordability; that is, protection has moved down the priority list, given the U.K. uncertainty. We think there is a high likelihood of an extension of Article 50 and therefore a longer period of waiting in no-man's land, so we anticipate this protection new business margin will continue to come under pressure over the coming year. In terms of existing business, Aviva has offset the new business margin compression with a 200-basis-point rise in existing protection margins that have left the lines' operating results pretty much flat. We think this is largely coming from claims experience and don't anticipate ongoing rises of this magnitude as the pace of growth in the longevity trend slows.

The U.K. long-term savings results rose slightly on a stable 25-basis-point margin.

It's hard to see Aviva’s forward U.K. results not being affected by Brexit almost across the board. Within annuities and equity release, we anticipate there could be lower volumes in equity release from a likely slowdown in the residential market. Though it's important to remember that Aviva is a midmarket client base business, we still think potential policyholders are more likely to wait for the dust to settle. So we foresee lower growth in equity release assets, and we also think that the 800-basis-point new business margin will come under pressure.

We were pleasantly surprised to see stability in the 25-basis-point margin for long-term savings existing business, combined with 12% growth in assets. We think there is a high likelihood that extension of Article 50 and the ongoing uncertainty will lead to higher volumes here as long-term savers become increasingly concerned about their future. The success of MyAviva is helping to drive this. However, the mix of protection and long-term savings is a net margin compression.
Underlying
Aviva PLC ADS

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Henry Heathfield

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