Aviva says it needs to make 'significant improvements'

Aviva announced a change to its dividend policy and said it needs to make "significant improvements" in the business as profits for 2018 came in slightly better than analysts expected.

Group operating profits and post-tax profits both grew 2% to £3.1bn and £1.7bn respectively, as the strong performance from Aviva's life and general insurance businesses was partly offset by higher central costs and a challenging year for the fund management arm.

This fed through to earnings per share 58.4p, up 7% thanks in part to the share buyback and ongoing debt reduction.

A final dividend per share of 20.75p resulted in a total payout for 2018 of 30.0p, up from 27.4p a year ago. The board said it was moving from the medium-term payout ratio target to a progressive dividend policy, where the dividend will be maintained or grown over time depending on business performance and growth prospects.

EPS was 1% ahead of the average analyst forecast and the dividend broadly as expected.

The board said it was a "steady performance overall", with six out of eight major markets increasing operating profit in 2018.

Profit was increased in the UK from winning more workplace pension schemes and bulk annuity deals, including Aviva's £925m bulk purchase annuity contract with Marks and Spencer.

The Aviva Investors fund management arm battled through a tough investment market backdrop, though further investment was made in the business to continue the long-term expansion of the third-party franchise, resulting in operating profit falling 11%.

Aviva's international business increased profit 9% thanks to growth in France, Poland, Italy and Ireland but Canada was flat. Further growth in the Singapore distribution network resulted in growing profits, while losses grew from strategic investments.

The Solvency II cover ratio rose to 204% from 198% a year before, much stronger than the consensus expectation of 190%, even after £1.5bn was spent on repaying debt and the share buyback.

"Looking forward," said chairman Adrian Montague, "our capital management plan will prioritise debt reduction for the foreseeable future. We plan to reduce debt by at least £1.5bn by the end of 2022, saving approximately £90m per year in interest expenses."

Maurice Tulloch, who was only promoted to chief executive from boss of the international insurance arm at the start of the month, repeated his recent comments about seeing a "huge opportunity" to reach Aviva's full potential and said he will be "injecting a different pace of change into Aviva".

Montague added that the challenge of becoming a "better, simpler, more efficient company known for excellence in serving customers", will require "significant improvements" and "entail choices with respect to resource allocation". For one, he said the board's appetite for bolt-on acquisitions had diminished.

One way to become simpler, said Shore Capital analyst Paul De’Ath, would be "to sell more of the business and shrink the footprint of the group".

Aviva's shares were down 3.3% to 418.9p after almost an hour of trading on Thursday.

The results are broadly in line with consensus, De’Ath said, with operating profit, EPS and DPS all 1% ahead of expectations. He noted that expenses, up 7% to £4bn, were higher than expected but the balance sheet is stronger.

"While the results are in-line, the focus today will undoubtedly be on the new CEO and what changes he may be looking to make to the future strategy of the business. It feels a little early in his tenure for the full story to come out today, however."

UBS said change to a progressive dividend policy and a more cautious outlook on operating EPS growth could weigh on the shares, while also noticing a more cautious message, with the 7% operating EPS growth in each of the past two years being "difficult to sustain this momentum in 2019", although this is to be expected given no share buyback.

As well as the debt reduction target, said after the move to a progressive dividend policy "we expect dividends likely to grow more in-line with EPS from here, which is sensible, although lower than our expectation".

Nicholas Hyett at Hargreaves Lansdown said: “Aviva feels like the sleeping giant of UK insurance. When Mark Wilson joined Aviva there was talk of a major expansion into emerging markets, or perhaps a transformational deal, instead we saw a few large bolt-ons in the Friends Life and RBC deals and little else. Ongoing restructuring and the disposal of fringe businesses mean the group’s been very inward looking in recent years, although it’s also in much better shape, while rivals like Legal & General and Prudential have been piling into growing geographies and business lines and Standard Life has completely transformed itself from life company to asset manager.

"Maurice Tulloch is a potentially odd choice if the board are looking to shake things up though. He’s been with Aviva for 27 years and his pledge to cut debt and focus on 'insurance fundamentals' is hardly going to set the world on fire. It’s early days, but at first glance it looks like the plan is to ‘re-energise' Aviva with more of the same.”