LONDON (ShareCast) - (ShareCast News) - Life insurer Aviva grew earnings per share 7% and the dividend 18% for 2017 and has upgraded its growth targets for 2018 and beyond, though a slip in Canada and perhaps the shape of capital returns were a disappointment to some investors.
Simplification of the FTSE 100 group's geographic footprint is complete, said chief executive Mark Wilson, leading to this bringing forward of growth targets to aim for at least 5% EPS growth from 2018, with 55-60% to be paid out in dividends.

Aviva, which now operates in eight major markets and with six strategic investments, operating profit increased 2% to £3.07bn last year and IFRS profit after tax leapt 91% higher to £1.65bn, with operating EPS rising to 54.8p from 51.1p a year before and above the consensus forecast of 53.0p.

Capital generation shrank to £2.6bn from the bumper £3.5bn a year before but its capital surplus grew 8% to £12.2bn under the EU Solvency II rules.

This surplus means Aviva has a Solvency II cover ratio of 198% well above its required 150-180%, which will allow it to deploy £3bn of excess cash in 2018 and 2019. For 2017, the total dividend of 27.4p per share was better than the 26.4p expected by analysts.

For 2018, directors will pay off around £900m of expensive hybrid debt and have allocated roughly £600m for bolt-on acquisitions, including the €130m already committed to the Friends First acquisition in Ireland.

Shareholders will see at least £500m in capital returns, either via share buy-back, special dividends or liability management.

"Our largest market, the UK, has gone from strength to strength, growing sales, market share and profit," said chief executive Mark Wilson. "For Aviva, the UK is a dependable and growing business."

Looking across the group, six of its eight major markets delivered double-digit profit improvement during the year.

"We continue to invest in our businesses and in particular on priorities such as digital to make our products and services easier for our customers."

The UK digital and direct business passed the £1bn premium mark in 2017, delivering growth of 14%, while Aviva said its digital intellectual property played a pivotal role in helping secure long-term relationships with HSBC in the UK and Tencent in Hong Kong.

Establishing an artificial intelligence and global data science group, Aviva Quantum, last year with 550 data scientists employed has led to significant improvements in insurance quoting and customers' buying process. Wilson said this IP is being used to develop a "new generation" of insurance products, called Aviva Plus, that applies the subscription model to insurance and is expected to be progressively rolled out to existing UK customers.

"In the next few years, we will continue to invest heavily to grow revenue and fully digitise our business. Through this, we are targeting improvements in efficiency and customer experience that we expect to lead to higher sales, better retention, expanding margins and in turn growing profit over the medium to long term," he said.

REACTION & ANALYSIS

Aviva shares fell on Thursday morning, however, fell more than 2% to below 495p before erasing the worse of losses.

Analyst Nicholas Hyett at broker Hargreaves Lansdown said while the results were overwhelmingly positive, with growing general insurance premiums, increasing scale at Aviva investors and new business growth in life insurance, "it's not all plain sailing", with the underwriting performance having deteriorated due to a poor performance in Canada and with life expenses climbing sharply.

Analysts at Bernstein said the general insurance profit was 14% shy of forecasts. "Aviva had flagged at the November capital markets day that the Canadian GI business was having a challenging year, but the FY result came in even worse than the market expected due to adverse prior year development, a spike in motor claims inflation and elevated weather and large commercial lines losses. Aviva doesn't expect Canada to get back to a 94-96% combined ratio until 2020."

In the UK, the combined ratio was stable excluding the effect of the Ogden rate on accident compensation, while Life's 5% beat of expectations was basically driven by a £290m boost from changes in assumptions and methodology, as longevity releases of £710m were partially offset by strengthening in other areas.

Bernstein provided another clue to investor's minor disappointment as analysts had assumed £600m of buybacks after Aviva had previously announced more than £0.5bn of "capital returns" at the capital markets day.

Richard Hunter at Interactive Investor said: "Disappointments are few and far between, although committed bears may point to a slightly softer general insurance operating profit, an uptick in operating expenses and a 'disappointing' contribution from Canada."

Goldman Sachs said it was an "encouraging" set of results, with the key focus being the company's potential cancellation of around £450m of expensive preference shares, with the possibility of additional capital returns in the second half on top of its debt repayment and M&A spend.

"Encouragingly, its profits appear slightly stronger with a better than expected life result (including mortality assumption change benefits) offsetting a weaker GI result (largely Canada driven)."

In terms of the key details of the release, Goldman highlighted Life profits of £2.9bn and that Aviva is starting to boost new business growth in bulk annuities, "an encouraging step in our view". The General insurance result was "weaker than we expected" due to an increase in the claims ratio as favourable prior year reserve releases seen in Canada were not repeated and a smaller increase in the expense ratio, due to changes in business mix and the consolidation of the group's Polish joint venture.

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