Aviva shares hit 17-year high as profits surge 22% — can the rally last?

Aviva shares climbed to their highest level since before the 2008 financial crisis on Thursday, after the FTSE 100 insurer reported a 22% jump in first-half operating profit and lifted its interim dividend by 10%.

The London-listed group’s stock rose 5% in early trading to 691p, a more than 17-year high, as it posted operating profits of £1.1 billion for the six months to June.

By 11:44 am, the stock had given up some of the gains and was trading more than 3% higher.

The results were buoyed by strong growth in general insurance premiums and higher inflows into its wealth business.

This was the company’s first set of results since completing its £3.7 billion takeover of smaller rival Direct Line in July.

While the acquisition fell outside the reporting period, chief executive Amanda Blanc said integration was “well underway”.

Growth across core divisions

General insurance gross written premiums rose 7% year on year to £6.29 billion, just shy of analysts’ consensus forecast of £6.32 billion.

The health division reported a 14% increase in premiums to £1 billion, driven by an increase in customers opting for private medical insurance.

The wealth division attracted net flows up 16% to £209 billion in assets under management, reflecting continued demand for Aviva’s investment products.

Blanc said trading had been “very good right across Aviva”, with all major business segments contributing to the performance.

The company announced an interim dividend of 13.1p per share, up from 11.9p a year earlier, and maintained its financial targets through 2026.

Strategic focus on capital-light growth

Aviva has been reshaping its portfolio over recent years, selling off non-core businesses to concentrate on operations that require less capital and produce steady income.

It has also pursued selective acquisitions to bolster its capabilities, including the purchase of AIG Life UK last year to strengthen its protection business and Probitas to gain exposure to the Lloyd’s of London market.

Blanc said Aviva was “very well positioned to accelerate growth in the capital-light areas of wealth, health and general insurance” and to deliver increased returns to shareholders.

Direct Line integration to drive future gains

The Direct Line acquisition is central to Aviva’s expansion strategy.

While premiums at Direct Line’s core motor insurance unit were flat in the first half amid pricing pressure, the integration is expected to create cost synergies and broaden Aviva’s customer base.

The company will provide an update on the acquisition’s impact during its November 13 investor presentation.

Jefferies analyst Philip Kett said Aviva’s “recent run of success appears to have continued” and the group was well placed to sustain its growth trajectory.

Dividend growth and shareholder returns

Aviva’s dividend yield has declined from about 7% a few years ago to 5.3% today, largely due to the share price rally, but it still comfortably exceeds the FTSE 100 average of 3.5%.

Analysts forecast yields of 5.81% in 2025 and 6.24% in 2026, suggesting income-focused investors will continue to be rewarded.

The insurer’s Solvency II capital coverage ratio stood at 206% at the end of June, compared with 203% six months earlier, underscoring its strong balance sheet.

Stock valuation and risks: should you buy AV?

Aviva’s share price rally has lifted its price-to-earnings ratio to about 28.7, a level that could temper further gains in the near term.

"There may be scope for a further rerating should the group complete the switch from being regarded as a general insurer rather than a pure life insurer, which tends to carry higher price valuations," Interactive Investor analyst Richard Hunter said.

However, risks remain.

Harvey Jones at Motley Fool UK warned that a major catastrophe could hit insurance profits, while integration challenges at Direct Line could slow progress.

In addition, annuity sales may be pressured if interest rates fall.

Jones cautioned that after such a strong run, momentum could slow.

“Aviva’s riding high today, but it could slip from here,” he said, though he added that the long-term story remained attractive, particularly for income investors.

"Blanc’s done a brilliant job and the long-term story remains attractive. Momentum may slow from here though, and investors might want to check other FTSE 100 or FTSE 250 insurers for potential catch-up opportunities," he added, recommending buying the stock with a long-term view.