How will Aviva’s share price react to half-year earnings?

Aviva’s share price has had a torrid year, falling by around a quarter as consumers tighten their purse strings and businesses count the cost of the coronavirus pandemic.

Nov. 26, 2020

This article was originally published on OptoUnderstand What Really Moves Markets.

As the UK insurer prepares to release its third quarter operating update on 26 November, is there hope for Aviva’s share price to recover before the year’s end?

Aviva’s share price began the year at 373.45p before slumping to 188.19p on 23 March as coronavirus fears battered markets. 

Aviva’s share price also suffered due to the suspension of its dividend in April, and, although it was reinstated in August, there remains doubt over its future direction. As of close on 24 November, Aviva’s share price was down 9.5% for the year to date at 337.80p.

An interruption to business

In its first quarter update, released in May, Aviva said general insurance net written premiums had risen 3% to PS2.4bn, with new life insurance sales up 28% to PS12.3bn. However, it added that COVID-19-related claims had come in at an estimated PS160m net of reinsurance, mainly centred on business interruption and travel disruption.

Aviva’s share price jumped up to 290.45p on 5 June as lockdown fears eased, but slipped back down to 258.49p on 31 July ahead of its interim results on 6 August.

Under the leadership of Amanda Blanc, Aviva’s new CEO, the group reported that net profits dropped 29% to PS1.08bn, and it had taken a PS165m charge for COVID-19 claims.

Earnings per share came in at 23.4p, down from 26.1p in the same period last year, as it was hit with “increased insurance claims and reduced customer activity levels”.

As an example, its UK Life operating profit included a PS25m provision relating to the expected impact of higher mortality and morbidity experience in its protection and annuity portfolios. 

It warned that “any recovery in customer activity is likely to be gradual… This means uncertainty in the outlook will persist in the near term and may mean that growth and profitability targets will be harder to deliver”.

There were some positive signs for the company, however, such as health insurance sales climbing 37%, driven by demand from large corporate customers.

In addition, an interim dividend of 6p at a time when many other blue-chips have frozen their pay-outs helped Aviva’s share price kick upwards to 297.70p on 12 August. 

There was another dip in Aviva’s share price to 256.50p on 29 October as a second wave of coronavirus emerged, but it has since recovered more than 30%.

Its Q3 figures are expected to reveal further customer caution around the buying of life insurance policies during the crisis, and further claims. There could also be more information on Aviva’s new strategy under Blanc to concentrate on the UK, Ireland, and Canada and less on its Asian markets.

Back in September, the company agreed to sell its Singapore business for PS1.6bn and this month it disposed of its entire stake in PT Astra Aviva Life, its joint venture in Indonesia. Further sales in France and Turkey are also on the cards.

More guidance about the potential of lower dividend payments in future as the group looks to cut debt could also follow. 

What does this all mean for Aviva’s share price outlook?

The stock has been given a consensus Outperform rating by 20 analysts polled on MarketScreener and an average target price of 369p. Barclays, meanwhile, has an Equal Weight rating and a 367p target price.

Aviva’s share price could rise by about a fifth from current levels, Tom Chen wrote in The Motley Fool.

“Aviva operates in an industry that will allow it to get stimulus funds if needed,” he noted. “And as governments continue to pour money into the markets, it is more than likely that we’ll see the Aviva’s share price rebound to pre-COVID-19 levels within the next one to five years… Aviva’s shares look like a bargain right now.”

Another driver for share price changes could come from the recent acquisition of UK-based company RSA Insurance for PS7.2bn by Canada’s Intact Insurance and Denmark’s Tryg. This could, given Aviva’s share price, spark further moves in the sector.

In addition, one potential legacy of the pandemic could be people’s long-lasting fixation on the vulnerability of their own health, finances and businesses, driving more demand for insurance.

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