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Will rising claim costs extend the Aviva share price’s fall?

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Aviva [AV] shares fell sharply in mid-May after the insurer returned more than £4bn to shareholders via a share consolidation and B-share scheme. Since then, the stock has flatlined. At the close on 5 August, the Aviva share price was down more than 25% for the year, underperforming the FTSE 100’s 0.75% gain over the same period.

With inflation driving claims costs higher, particularly in the automotive segment, Aviva has been weighed down by broader concerns impacting the insurance market. As the insurance provider prepares to announce its half-year results on 10 August, analysts are considering whether rising prices are likely to impact the group’s near-term profitability.

“This may seem harsh on the likes of Aviva, which has a more diversified business model, but any concerns over erosion to margins no matter where they are, tends to lead to weakness across the board,” commented CMC Markets’ chief markets analyst Michael Hewson ahead of the earnings update.

Amid these growing challenges for the insurance market, analysts offer a bleak forecast for Aviva’s full-year 2022 earnings. According to a median estimate from 18 analysts polled by the Financial Times, the company is expected to post earnings per share of 43.24p for the full year, down 13.6% from 50.1p in 2021.

‘Little evidence’ of weakness in Q1 results

While analysts forecast a decline in earnings for the full year, Aviva’s previous trading update on 18 May offered a more optimistic outlook for the company. As Hewson noted, “there was little evidence” of weakness in its Q1 numbers.

Sales in the UK and Ireland rose 2% to £8.4bn, and the value of new business grew 31% to £144m. General insurance sales were up 5% at £2bn, while healthcare and protection was the top performer with a 10% increase in sales to £696m.

The company said in the Q1 earnings report that the upbeat performance was due to the actions it had taken over the past two years to strengthen its financial position, which leaves the group “well placed to navigate the prevailing economic environment”.

Aviva also highlighted that its £385m acquisition of Succession Wealth, which was first announced in March, is on track to be completed in the second half of the year. The deal is intended to help Aviva expand its position in the UK’s financial advice sector.

Rising interest rates set to weigh down Q2 sales

Investors will likely be watching to see if higher interest rates affected Aviva’s domestic sales in Q2, as the Bank of England raised the base rate from 0.25% in April to 1.25% in June.

Aviva stated in its Q1 trading update that it was “observing increasing claims inflation across our [general insurance] businesses as a result of macro-economic uncertainties and volatility”. In light of these pressures, the company has enacted “swift pricing, underwriting and claims management actions to mitigate this”, which it expects to continue.

With profitability in focus, UBS analysts estimate that operating profit will have grown 6% year-on-year, according to Proactive Investors.

Investors will also be keeping an eye on Aviva’s interim dividend. The group previously reiterated that it was on target to deliver its full-year guidance and dividends for the next two years. It pledged to pay out a total of £4.75bn to shareholders by the end of May, surpassing its goal of “at least £4bn” announced last November.

“Aviva has finally settled down to life as a fairly boring, but highly cash generative, insurance business. Investors are enjoying the fruits of the transition, with bumper shareholder returns,” wrote Hargreaves Lansdown equity analyst Sophie Lund-Yates.

Can a sustainability focus bring long-term value?

Beyond fiscal year 2022, the group’s commitment to making sustainable investments is part of a long-term plan to deliver profitability, growth and value for shareholders.

Back in June, Aviva’s CEO Amanda Blanc told the Financial Times that the insurer was considering using shareholder money to fund early-stage infrastructure projects that are climate-friendly or have a social purpose. For example, building in deprived areas.

The group’s asset management business, Aviva Investors, is making progress towards its goal of being net zero by 2040. “As a major investor in UK infrastructure and real estate, Aviva has a significant opportunity and responsibility to ensure we finance projects that help the built environment in its transition to net zero ” Blanc said in May.

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Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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