What do Aviva’s results mean for the insurer’s share price?
British insurance giant Aviva today set out plans to buy back £300m worth of its own shares from investors, after posting what analysts and the firm itself described as “strong” results for 2022.
Aviva’s announcement saw its share price jump by almost four per cent in trading this morning, before settling at a rate almost three per cent higher than its closing price yesterday afternoon.
Britain’s biggest insurance company is now well placed to continue pushing its share price upwards by hiking its investor payouts and making progress in achieving its financial goals.
Yet, with major headwinds facing the insurance sector, particularly in relation to high levels of inflation, mean Aviva’s task could well be harder than it seems.
Aviva’s decision to launch its £300m share buyback scheme comes as the firm has faced mounting pressure from activist investors to return more money to shareholders.
In particular, Cevian Capital, a Swedish investment fund which owns five per cent of shares in Aviva, had placed major pressure on the insurance company to give £5bn back to shareholders over 2022.
Aviva chief executive Amanda Blanc has, since taking up her position as the head of Britain’s biggest insurance company in July 2020, responded to those calls by boosting payouts to the company’s investors.
Blanc’s efforts have seen the firm raise £7.5bn, by selling off eight of its global businesses, with a view to streamlining the company. This saw Aviva give its investors £4.75bn over 2022.
The FTSE 100 insurance company’s new £300m share buyback initiative now brings Aviva’s overall investor payouts up to heights of more than £5bn since 2021.
In selling off its non-core business, Aviva has in turn sought sharpen its focus on its main UK, Ireland, and Canadian markets, by disposing of its divisions in Asia and continental Europe.
In boosting shareholder returns, Aviva today also upped its dividend by almost 50 per cent to 31p per share, as the firm said it expects to pay around £915m in dividends in 2023.
Analysts at JP Morgan not that all of this means Aviva now offers some of “the strongest levels of capital return” in the insurance sector.
Aviva’s high payouts should make shares in the firm more attractive to investors looking for reliable returns on their money.
However, potential investors must also trust that Aviva will continue achieving such financial successes in order to continue returning capital to shareholders.
For the moment, Aviva’s payouts look set to continue, with the firm today claiming it is making “excellent progress” in achieving its aims.
Notably, Aviva reported that its operating profits during the full year 2022 increased by 35 per cent to £2.21bn, as it boosted sales from its insurance business and generated 37 per cent higher returns on its Solvency II reserves.
Aviva and the DB pensions buyout boom
Nonetheless, the inflationary pressures currently hitting the insurance sector, mean Aviva will likely be forced to rely more heavily on pensions buyout business in the near term.
The British firm also successfully capitalised on ongoing the pensions buyout boom, in completing 50 bulk purchase annuity (BPA) deals worth £4.4bn.
Higher interest rates have driven a major uptick in companies seeking to de-risk their defined benefit (DB) or final salary pensions schemes by handing liability for them over to insurers, such as Aviva.
This shift has given insurers billions worth of capital that they are now hoping to generate even higher returns from, following the UK’s overhaul of the Solvency II rules.
Aviva said it expects to carry out even more BPA deals over the coming year, following its £850m deal to take over retail firm Arcadia Group’s pension scheme in February, in a good sign for the firm’s future prospects.
JP Morgan’s analysts were bullish on the insurer’s prospects in suggesting Aviva’s success in securing its position as one of the UK’s top three BPA dealmakers will strengthen its growth over the coming decade.
The analysts said Aviva’s efforts to streamline its business will also let it to sharpen its focus on the UK’s highly-profitable pensions buyout market, in the face of headwinds in the general insurance sector.
Analysts’ comments come as insurers across the board have come under major pressure from high levels of inflation, as rising prices have pushed up the costs they face in fulfilling claims, particularly in fixing cars and buildings.
Blanc today acknowledged the impactsof inflation on Aviva’s business. She said the insurer will likely have to hike its premiums to deal with the inflationary pressures, having already increased its prices by five per cent in the first quarter of 2023.
Higher prices have already forced Aviva to up its premiums by average rates of 20 per cent in its motor division and 13 per cent in its home insurance lines over 2022.
The insurer is now aiming to keep a lid on its costs, with a view to ensuring its underwriting business remains profitable.
In doing so, Aviva is aiming to make sure the costs it faces in fulfilling claims are less than 94 per cent of the sums it takes in through premiums.
In JP Morgan’s view, Aviva is in a strong position to continue on its upwards trajectory, particularly if it continues returning capital to shareholders and capitalising on the booming pensions buyout market.
However, it now remains to be seen whether Aviva can successfully keep meeting its financial targets, and maintain its payouts to shareholders, in the face of what it described itself as “challenging market conditions”.
For now, everything’s to play for. The firm does, however, have a lot of potential to deliver returns.