In the often turbulent world of financial firms, Aviva (LSE:AV.) has had a great year so far, with the share price up an impressive 13% so far. Is this just the start of a longer rally for the British insurance giant?

A great year

The stock not only outperformed many financial stocks, but also the entire sector. FTSE100 index. This raise raised the company’s market capitalisation to a solid £13.10bn, cementing its position as a major player in the UK insurance sector.

For me, the key driver behind this growth is its increasingly robust financial health. With a price-to-earnings (P/E) ratio of 10.2, the stock seems undervalued compared to many of its peers. Discounted cash flow (DCF) calculations support this idea, with an impressive 47% difference between the current share price and the fair value estimate. It’s clear that no one can guarantee that this gap will close anytime soon, but it shows that the company has a long way to go if its strategy works.

Moreover, with a generous dividend yield of 6.77%, the company attracts the attention of income-oriented investors. In an era of uncertain interest rates, such a significant yield from a blue-chip company is demanding to ignore. The company’s commitment to shareholder returns is further evidenced by its sustainable payout ratio of 45%, indicating that the dividend is well covered by earnings and that further increases are possible.

Time for a break?

However, it is crucial for investors to consider the significant risks and challenges in this area. The insurance industry navigates a sophisticated landscape of regulatory pressures, and changing capital requirements and consumer protection laws can impact profitability.

Intense competition in the sector, particularly from nimble insurtechs and established rivals, can squeeze margins and make it harder to attract and retain customers. Management also faces the constant challenge of adapting to rapidly changing technologies, which requires significant investment and carries the risk of obsolescence if not done effectively. Then there’s direct exposure to various financial markets via investment portfolios, which adds another layer of risk, as an economic slowdown or market volatility can negatively impact returns and capital positions.

I also keep an eye on international operations. While they provide diversification, they also expose the business to geopolitical and currency risks. Brexit uncertainty continues, potentially impacting cross-border operations and regulatory compliance.

Efforts to streamline operations and focus on core markets, while strategically sound, carry execution risks and could lead to near-term disruption. I am also nervous about climate change risks, both physical risks to insured assets and transition risks as the global economy transitions to low-carbon alternatives.

It’s worth watching

For those prepared to weather potential short-term volatility, I think Aviva is an option that could offer an intriguing mix of value, income and growth potential. The 13% growth we have seen so far in 2024 may indeed be just the first act of a longer run. I will buy shares at the next opportunity.