- The company announced an early buyback. This is a positive surprise for the market.
- Solid half-year results.
- Aviva is more resilient, and we favor its preference to remunerate shareholders "regularly and sustainably".
After our Q2 quarterly analysis of Legal & General where we confirm our buy rating, today is the result day for Aviva ( AIVAF ) which just r eleased its half-year report. Despite a comps analysis more in favor of L&G Group, last time we concluded that Aviva was set to be a long-term winner in the insurance sector. We explained how the CEO already " made the right move to rebalance and reorganize Aviva" including also " the upside potential from the discretionary capital deployments which we believe will reach 25-30% of the current market capitalization this year ".
As previously mentioned, our internal team was a first-time believer in Aviva's higher capital flexibility and new capital deployments. Today, the company announced a buyback and the stock price is up by more than 10% . That's great for our investment thesis.
Aside from the new share repurchase, Aviva delivered a very good set of numbers. Let's analyze the quarterly account.
Half-Year Results
Cross-checking with Wall Street expectations, Aviva recorded broad-based beats in almost every line. The group operating profit and the general insurance results were 13% and 3% higher than the average analyst forecast. This positive outcome was mainly driven by the general insurance performance. During the call, the CEO also reported that Aviva has increased UK motor pricing by 12.5% anticipating cost pressure from inflation. The combined ratio was also stronger, Aviva delivered a strong performance and stood at 94% against a consensus of 95.5%.
Source: Aviva half-year presentation
Looking at the group Solvency II ratio, the company recorded 213% versus a consensus of 206%, once again Aviva demonstrated its financial solidity (despite a pretty volatile macro environment). We remember that the minimum capital requirement set by the regulators is 180%. According to our calculation, there is a £2.3bn surplus in the capital. We were positively surprised by Aviva's preference to remunerate shareholders " regularly and sustainably ".
Conclusion & Valuation
Last time, we concluded that capital flexibility was not priced in, valuing Aviva at £5 per share, today we reaffirm our valuation . To reinforce our buy rating, we should note that the company is trading at 0.8x shareholder value against a historical average of 0.9x. The group is also in line to deliver its cash remittance guidance set at >£5.4bn in the period between 2022 and 2024. In addition, the dividend yield is very supportive versus its history (and also versus our comps analysis with L&G). Indeed, Aviva is currently yielding more than 7% thanks to a 40% DPS increase.
Dividend Yield History L&G vs Aviva
For further details see:
Aviva: Pricing In The New Capital Deployment