Aviva PLC (LON:AV.) said it has moved to recognise the impact that coronavirus could have on its business, as new business sales have declined across the group and its solvency ratio was hit by capital market movements.
The life insurer’s solvency ratio fell to 182% at the end of March, above the top end of its target range but down from 206% three months earlier, which it said reflected the widening in the spread of yields on corporate bonds, reductions in risk free yields and declines in equity markets.
While Aviva had a “solid” first quarter of trading, in the words of chief executive Maurice Tulloch, with new life business increased 28% and general insurance sales up 3%, the second quarter has understandably seen more of a decline.
“While customer activity levels have risen somewhat more recently as we help distributors and customers manage through these measures, sales volumes for the year overall are likely to remain below expectations,” he said.
As at 30 April, the FTSE 100 group estimated Covid-19 general insurance claims to amount to just £160mln net of reinsurance, while the impact on UK property is reckoned to be around 15% on commercial property and 12% for residential property.
In life insurance, mortality and longevity claims experience arising from the pandemic are expected to broadly offset each other, the company said, while the investment portfolio has remained fairly solid, with just 3% of the portfolio so far downgraded.
“The economic outlook remains uncertain and will affect our business, however the strength of our capital and liquidity means we are well-positioned to manage this crisis and continue to support our customers,” said Tulloch.
At the end of April, Aviva's holding company liquidity was £2.5bn.
Analysts at broker Shore Capital noted: “In times of stress, it is not earnings that weigh on life insurers, it is the balance sheet and specifically the investment portfolio (downgrades and defaults).
“To date, the company has had minimal impact on the investment portfolio, with no defaults, less than £10mln of downgrades to below investment grade and only 3% of its investment portfolio downgraded to a lower rating letter. That said, defaults and downgrades typically lag and come later in an economic slowdown.”
UBS said it was an "encouraging early update", with the balance sheet "solid" and non-life claims "seem manageable".
"However, caution is needed here," the UBS analysts said, having recently quantified the Solvency and liquidity impacts across historical credit stresses including, with Aviva highlighted as "one of the most exposed to a credit cycle both in terms of solvency and liquidity impact".
Aviva shares opened higher on Thursday morning but by late morning were almost flat at 239.7p.
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