Insurers round-up: Aviva, Prudential and Legal & General

The three UK insurance providers all reported growth and returned windfalls of cash to shareholders in 2017. How did Aviva, Prudential and Legal & General perform, and what does the outlook for the insurance industry look like?

Source: Bloomberg

Aviva, Prudential and Legal & General all reported higher earnings and increased dividends for shareholders in 2017, with the outlook remaining rosy across the board.

Having sold off assets over the past couple of years, Aviva declared an end to its disposal programme and upgraded its outlook for 2018, accelerating its growth ambitions. The dividend was raised, and cash was returned to shareholders, with the trend expected to continue going forward.

Prudential finally settled rumours by declaring that it is to split its UK business from its US and Asian arms, having merged its UK life insurance business with its UK fund manager in 2017. Shareholders will take a stake in the new UK life insurance and asset management company M&G Prudential, and retain a holding in the existing Prudential, which will take on all other operations.

Legal & General reported growth across all metrics, with results receiving a boost after booking a significant mortality release, due to life expectancy not lengthening as much as anticipated. The outlook is bright, targeting double-digit earnings growth over the coming year.

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Aviva shares react to higher returns and rosier outlook

‘Our largest market, the UK, has gone from strength to strength, growing sales, market share and profit. For Aviva, the UK is a dependable and growing business. Aviva has broad-based growth, with six of our eight major markets delivering double-digit profit improvement. We now have a collection of strong and growing businesses,’ – chief executive Mark Wilson.

Aviva delivered its fourth consecutive year of double-digit dividend growth, lifting its payout 18% to 27.4p – meeting its promise to pay out 50% of operating profits, with a pledge to lift that to 55%, then to 60% of earnings by 2020.

A further £500 million will be returned to shareholders as Aviva looks to deploy a £2 billion surplus this year, with £500 million earmarked for bolt-on acquisitions. Another £900 million will be used to reduce its debt pile.

Operating earnings per share (EPS) rose 2% in 2017 to £3.1 billion, and Aviva has brought forward its growth ambitions. It now expects an annual EPS growth of over 5% from 2018 onwards, having previously guided for mid-single digit growth.

While the Aviva investors in the UK, France, Poland, Ireland, and Singapore all experienced double-digit growth in operating profit in 2017, Canada put in a disappointing performance which Aviva is now tackling by implementing a recovery plan.

Cash remittances climbed by one-third last year, and Aviva has a target to deliver £8 billion over 2016 to 2018, raising the target from £7 billion at the end of 2016.

With the business streamlined and its targets met or exceeded, the company is confident of delivering stronger earnings growth out to 2020, with the dividend to follow suit.

Aviva shares have bounced off the lows at 484p, but the rally appears to be faltering well short of the £5.37 high from January. Above this, the July 2017 high at £5.50 comes into view. A turn lower from £5.20 would create a lower high, and raise the risk of a return to the lows around 484p.

Prudential shares rise on demerger plans

‘The decision to demerge M&G Prudential follows a rigorous review by the board which considered all options, including the status quo, and concluded that it is in the best interest of the group to operate as two separately listed companies, able to focus on their distinct strategic priorities in their chosen geographies. Both are expected to meet the criteria for inclusion in the FTSE 100 index,’ – chairman Paul Manduca.

The focus at Prudential was on its plans to separate its UK business from its faster-growing operations in the US and Asia, with shareholders to hold stakes in both UK-based M&G Prudential and the existing Prudential business, which will look after US, Asia, and Africa and retain its current dividend policy that targets annual growth of 5%. The lift in 2017 was over that, up 8% to 47p.

M&G Prudential will have more control over its strategy and capital allocation after the separation, so it can develop UK and European savings and retirement markets more effectively, allowing Prudential to continue chasing the attractive returns and growth possibilities elsewhere.

The insurer also said M&G Prudential has agreed to sell £12 billion of its shareholder annuity portfolio to Rothesay Life. The sale is expected to close by the end of 2019 and generate capital that will help fund the demerger process, suggesting it could be 2020 before the separation is completed.

As for its financial results, Prudential’s operating profit rose 10% to £4.7 billion, rising 6% at constant currency. Asia was the driver of growth with a 15% jump in profit, alongside solid growth in new business. M&G Prudential’s assets under management climbed 13% to £351 billion, thanks to record net inflows into M&G and PruFund.

Prudential shares gapped higher following the recent results, which should mean that they push on to the recent highs at £19.89. Weakness will see £18.64 tested, and then down to £17.60. A new high is required to avoid the increasing possibility that the shares are in a sustained consolidation period.

Legal & General shares still off January highs despite high growth

‘Legal & General’s strategic focus, alignment to global growth drivers and excellent execution allowed us to deliver a record £2.1bn operating profit in 2017. Our shareholders are enjoying terrific EPS and return on equity growth, while our ‘inclusive capitalism’ model ensures customers and society also benefit,’ – chief executive Nigel Wilson.

Operating profit soared by 32% in 2017 after Legal & General booked a mortality release of £332 million, but profit still climbed 12% without it.

The release was the result of the company updating its life expectancy outlook, which shows ongoing improvement but at a slower rate than previously forecast. This means life insurers benefit, as annuities paid to customers fall, as they do not live as long as expected and, if the trend continues, further mortality releases could be booked over the coming years.

New annuity business rose 12% in the year, to £4.6 billion, while volumes of new lifetime mortgages, used to back the annuities it writes, surpassed £1 billion for the first time, after growing by two-thirds in 2017.  Assets under management at L&G Investment Management rose by 10% to £983 billion.

Legal & General raised its dividend 7% to 15.35p and said medium-term growth to the payout remains on track.

Moving forward, the insurer said it is aiming to deliver the same level of EPS growth out to 2020, as it did between 2011 and 2015, when EPS was growing by about 10% per year. EPS surged 50% in 2017 thanks to the mortality release, growing 9% without it.

Legal & General has £3.4 billion of cash at hand, which will be used to push organic growth and make bolt-on acquisitions and other investments. With £6.9 billion in excess regulatory capital, the insurer believes it is comfortably placed to absorb any downturn in the market should it occur.

Legal & General shares have faltered following the highs of January, and recent strength has petered out around 265p. Further losses will challenge 252p, and then 249p. A rally will target the 275-278p area. 

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