Morning Note: Market News and an Update from Aviva.

Market News

US equities moved higher last night – S&P 500 (+1.7%); Nasdaq (+2.4%) – after the US producer price index rose less than forecast. The market is also anticipating a soft consumer price report which will allow the Federal Reserve to start easing in September. Swap traders priced in a nearly 40 basis-point cut in September and a total reduction of 105 basis points for 2024. 10-year Treasury yields slipped back to 3.85%, while gold is $2,470 an ounce, close to an all-time high.

In Asia this morning equity markets were mixed: Nikkei 225 (+0.6%); Hang Seng (-0.4%); Shanghai Composite (-0.6%). Japan’s PM Fumio Kishida is withdrawing from his ruling LDP party’s leadership race in September, paving the way for someone else to become premier.

The FTSE 100 is currently trading 0.5% higher at 8,281. UK inflation jumped back above the Bank of England’s 2% target in July, but the 2.2% reading came in below the 2.3% expected by the market. The core reading was 3.3%. Sterling rose to $1.2843 and €1.1670.

Brent Crude rose to $80.80 a barrel Brent as an API report pointed to a US stockpile drawdown. This would be the seventh straight decline and take total holdings to the lowest in more than six months if confirmed by the EIA today. However, the S&P Energy index was the only sector in the red last night.

The US is considering breaking up Google as an option after a ruling found the company monopolised the online search market. Less severe choices include forcing the firm to share more data with rivals and measures to prevent it from gaining an unfair advantage in AI products, people familiar said.

Source: Bloomberg

Company News

Aviva has this morning released first-half results which highlight strong current trading and a 7% increase in the interim dividend. In response, the shares are little changed in early trading.

Aviva provides a wide range of insurance and saving products including car, home, and health insurance, to pensions, investments and asset management. The business is well placed to benefit from several industry trends such as: an ageing population and income in retirement gap; greater individual responsibility for retirement; the shift from Defined Benefit to Defined Contribution schemes and corporate de-risking; and a heightened focus on health and wellness.

Over the last few years Aviva’s financial and strategic position has been transformed, with the refocus of the portfolio now complete.  The core markets are the UK, Ireland, and Canada where the focus is on markets where management believes the company has high quality franchises which can achieve scale, profitability, and competitive advantage.

The aim is to generate strong organic growth, accelerated through bolt-on M&A. The target is to generate £2bn of operating profit by 2026. Over time, a combination of improved earnings quality, lower debt costs, and stronger-than-expected cash flows from a business which has become less capital-intensive means the group can grow its dividend and make regular capital returns.

In the first half, trading was strong, with operating profit up 14% to £875m, above the market forecast of £830m.

Insurance, Wealth & Retirement (IWR) sales rose by 12% to £19.7bn. Wealth net flows grew by 16% to £5.0bn, or 6% of opening Assets Under Management (AUM) as Platform flows saw significant improvement. Retirement sales fell 6% to £3,036m, driven by contraction of the equity release market. General Insurance premiums were up 15% to £6,005m, with UK & Ireland up 18% and Canada up 10%.

The combined operating ratio (COR) is a measure of underwriting profitability made up of the sum of claims and expenses divided by the earned premium – the lower the better – with anything below 100% implying an underwriting profit. During the first half, the COR rose from 94.8% to 95.6% but still well below 100%.

The group’s liquidity and capital position remain extremely healthy. Cash remittances rose by 16% to £959m and remain on track to meet the target of greater than £5.8bn cumulative in 2024 to 2026. 

Underlying Solvency II operating own funds generation rose by 27% to £768m. The Solvency II debt leverage ratio rose from 30.7% to 31.1%, or 28.8% pro forma for the Tier 2 notes redeemed on 3 July. Solvency II cover ratio rose fell from 207% to 205%.

The dividend guidance is for mid-single digit growth in the cash cost of the dividend. With today’s results, the group has declared an interim payment of 11.9p, up 7%. A £300m share buyback was executed in the first half, and the company anticipates further regular and sustainable returns of capital in the future.

The group highlights that it entered the second half with positive momentum and remains confident in meeting its financial targets for 2026.

Source: Bloomberg