Aviva PLC (LON:AV.) reported a 7% increase in 2018 operating profit but warned that it would be "difficult to sustain this momentum" this year given the uncertainties surrounding Brexit.
“Given current uncertainties, including the unknown future impacts of Brexit on the economies of the United Kingdom and Europe, our near-term outlook entering 2019 is more muted than our outlook a year ago,” said chief financial officer Thomas Stoddard.
“While we achieved 7% operating earnings per growth in each of the past two years, it will be difficult to sustain this momentum in 2019.”
He said there are potential headwinds from weak investment markets in late 2018 on fee income and a possible increase in the blended tax rate due to changes in the business mix of operating profit.
More positively, Stoddard expects the results to benefit from improved profitability in Canada along with a lower interest expense and a reduction in weighted average shares in issue following capital management initiatives undertaken last year.
2018 profits led higher by growth in life insurance
In 2018 operating earnings per share – the group’s preferred profits measure – rose by 7% to 58.4p while adjusted operating profit increased 2% to £3.1bn.
Profit before tax gained 6.2% to £2.13bn last year from £2.0bn in 2017.
The insurance and investment management firm said a 5% increase in operating profit in the life insurance arm offset an 11% decline in the fund management division and a flat performance in the general insurance and health business.
Brexit uncertainty bites
The fund management business was hit by investors exercising more caution due to Brexit uncertainty as well as regulatory costs.
Assets under management fell to £470bn from £487bn, reflecting the disposal of part of its real estate business, adverse market movements and net outflows in the legacy life insurance books.
Life insurance profits were supported changes in mortality assumptions and growth in long-term savings and bulk annuities along with an increase in new business volumes of savings products in Italy and a unit-linked savings product in France.
In general insurance, operating profit rose by 1% in the UK while Canada was flat due the impact of weather-related claims.
The insurance net written premium was broadly flat at £9.1bn and the combined operating ratio – a key measure of profitability for insurers – was stable at 96.6%.
Aviva’s Solvency II capital cover ratio rose to 204% from 198% and the capital surplus was £12.0bn, compared to £12.2bn the prior year.
Aviva to change dividend plans
The group raised its full-year dividend by 9% to 30p each.
Aviva plans to move from a fixed payout ratio to a progressive dividend linked to underlying growth as part of efforts to cut debt. This will give the board more flexibility to make adjustments.
“The security and sustainability of our dividend remains paramount,” said chairman Sir Adrian Montague
“We are moving to a progressive dividend policy, which will see the dividend maintained or grown over time depending on business performance and growth prospects.”
Montague said the capital management plan will prioritise debt reduction for the "foreseeable future". The firm plans to reduce debt by at least £1.5bn by the end of 2022.
On Monday, Aviva announced it had appointed Maurice Tulloch, the head of international insurance, as its new chief executive, replacing Mark Wilson.
Montague, who was acting in an executive capacity while the company searched for a new boss, will return to his duties as non-executive chairman.
“Under Maurice's leadership, we are confident that we can make Aviva a better business for the benefit of our customers and our shareholders,” Montague said.
Aviva said it plans to reallocate resources to make changes to improve the performance of the business, led by Tulloch.
Maurice Tulloch 'potentially odd choice' for CEO, says analyst
“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," said Nicholas Hyett, equity analyst at Hargreaves Lansdown.
"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.”
Shares fell 3.8% to 416.7p in late morning trading.