Aviva PLC (LSE:AV.) is poised to report a 6% increase in its operating profit to £698m for the first half of 2023 on Wednesday, underscoring its resilience in a UK life insurance sector that, according to Barclays Capital, is experiencing a "modestly improving" macroeconomic backdrop.
While the broader trajectory for the sector is positive, the pace of growth remains cautious.
Solvency II ratios, a crucial measure of insurers' financial well-being, are anticipated to stay robust, buoyed by the dual tailwinds of higher interest rates and organic capital generation.
However, these gains might be offset by factors such as dividend payouts, narrowing credit spreads, and a somewhat subdued property market.
A notable area of focus for the sector is the bulk annuities segment. With interest rates in their favour, insurers, including Aviva, are expected to tap into their surplus cash reserves to capitalise on the uptick in bulk annuity deals.
Yet, despite the promising returns this segment offers, a prevailing negative sentiment seems to be dampening its full potential.
In tandem with its projected rise in operating profit, Aviva's dividend is also set to mark a 6% growth, pegged at 10.9p.
Zooming out to the wider UK life insurance landscape, many firms are presenting strong yields and cash profiles.
Yet, Barclays Capital remains circumspect about Aviva's growth potential, positioning it as potentially lagging behind its peers.
This perspective is further elaborated in Barclays' "Sentimental value" report from August 4, which offers a comprehensive analysis of the macroeconomic drivers influencing the sector.
As the results unfold, stakeholders will keenly observe how Aviva has manoeuvred through the prevailing economic conditions, with a particular emphasis on its strategies in the bulk annuities domain.
Barclays last week reduced its price target for shares in Aviva by 14% to 470 pence per share while maintaining an 'equal weight' stance on the insurer (it remains positive on the wider sector).
The focus of Aviva's upcoming results is anticipated to be on growth and sustainable earnings, especially under the new International Financial Reporting Standard 17 (IFRS17) for life insurance operations.
This standard aims to bring more consistency to life insurance profits by spreading earnings over the contract period. In 2022, Aviva's pro forma metrics, adjusted for IFRS17, indicated that life operations contributed 63% of the group's earnings.
Ahead of the figures, the shares were down 4.75p at 379.5p. The drag was exerted by rival Legal & General Group PLC (LSE:LGEN), which saw its shares fall almost 4% after a surprise fall in assets under under the purview of its fund management operation.