Aviva PLC (LSE:AV.) said it still expects to hand piles of excess cash back to shareholders at the end of the year but analysts were disappointed with worse-than-forecast solvency levels and profitability.
Overall, the FTSE 100-listed life insurer’s third-quarter trading update was “mixed” versus expectations, said UBS and analysts at Panmure Gordon said it was “a mixed bag”.
While there was good growth in general insurance, Panmure said, “on savings & retirement, the picture is not so good with net outflows and lower new business premiums”.
Keith Bowman, an analyst at Interactive Investor, felt the latest update was “broadly reassuring if reflective of the more challenging conditions battled in the third quarter”.
A Solvency II cover ratio (SCR) of 223% was significantly below UBS’s expectations of 240%, which was due to lower benefits from market movements.
Excess surplus above the 180% minimum coverage ratio improved from £2.3bn to £2.5bn over the quarter, though, with centre liquidity ahead of expectations at £1.9bn.
The Life business was below UBS forecasts on volumes, driven by lower bulk annuity volumes, though volumes picked up in October.
The Wealth business was better than expected, driven by the employee contributions towards the workplace business.
Panmure said general insurance was better than predicted, with cost pressures said to be easing in motor insurance and chief executive Amanda Blanc telling media that inflation peaked in the second quarter at 12% and was returning to a range of 8-10%.
This comes with motor rate rises of 15 percentage points in UK and 12pps in Ontario, with UBS saying the UK rate rise appears ahead of claims inflation.
The core operating ratio – a key measure of profitability for insurers – was 0.6pps above UBS expectations.
With management expecting the full year to remain in line with that performance, UBS analyst Nasib Ahmed said this implied a full-year COR slightly above the long-term target of <92%.
Bowman noted that while life companies’ exposure to increased UK bond market volatility since the mini-budget has raised caution around the sector, with Aviva’s geographical diversity having also reduced over recent years following exits of some overseas units, he said the group was tackling costs and its strong capital generation is fuelling shareholder returns.
Blanc said the group’s capital and liquidity position is “strong” and dividend guidance remained unchanged and, as previously announced, “we anticipate commencing additional returns of capital to shareholders with our 2022 full year results”.
She said the group anticipates starting a new share buyback programme alongside the results in early March 2023, "subject to market conditions", with the size of any buyback to "be determined by the board at year end and will take account of the financial position at that time, as well as both the drivers of the capital surplus (including the impact of market movements) and our preference to return surplus capital regularly and sustainably".