Insurer Aviva Continues Revival

Aviva is well-positioned to grow in general insurance and traditional life business in its core markets, say analysts 

Vincent Lui, CFA 30 October, 2015 | 8:00AM
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Aviva’s (AV.) turnaround continued to produce positive results. With a more streamlined structure, as well as the benefits from the integration with Friends Life, the multiline insurer, while becoming more U.K.-centric and thus having more concentrated country risk, is well-positioned to grow in general insurance and traditional life business in its core markets. From a capital perspective, while the firm’s capital surplus fell 6% to £10.1 billion, we think that the slide was consistent with the increased market volatility seen in the quarter.

Aviva reported a 21% increase in new business sales in Asia

More importantly, management is on track to get approval from regulators for its internal model in December, getting the firm ready for the new Solvency II capital rules starting in 2016. We expect full-year premium to stay on track with our 2% projected growth.

Also, on the expense side of things, we expect the firm to achieve a relatively cost-neutral output by balancing the Friends Life integration cost with savings from a lower cost structure in the agent channels. With the firm performing largely in line with our forecast, we are maintaining our £5.70 fair value estimate and no-moat rating for Aviva.

Following a lacklustre second quarter, Aviva showed positive signs of new sales growth in its core markets. On a constant currency basis, the firm’s value of new business for the first nine months increased 25% from last year to £823 million. In the U.K, excluding Friends Life, the value of new business of £335 million for the first new months was 13% higher than the same period last year, reflecting improved performance in pensions, which have been negatively affected by the new budgetary rules.

Outside of the U.K. and Ireland, Aviva reported a 21% increase in new business sales in Asia, balanced by more modest growth in Europe because of lower interest rates, which affected the margins on savings products.

The firm’s general insurance segment had a good quarter, with the combined ratio improving to 94% from 96% for a nine-month period in 2014 as a result of lower weather losses and improved efficiency. Aviva Investors, which manages £1.9 billion of assets, continues to make progress on institutional sales, but outflows of £4.5 billion for the first nine months were relatively high for an asset manager of its size, in our view.

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Aviva PLC482.00 GBX0.42Rating

About Author

Vincent Lui, CFA  Vincent Lui, CFA is an equity analyst for Morningstar, covering life insurance companies.

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