In the often turbulent world of financial companies, Aviva (LSE: AV.) has had a great year so far, with its share price climbing an impressive 13% to date. So, is this just the beginning of a longer rally for the British insurance giant?

A great year

The shares have not only outpaced many of peers in the financial sector but also the broader FTSE 100 index. This surge has pushed the firm’s market capitalization to a hefty £13.10bn, cementing its position as a major player in the UK insurance sector.

To me, one key factor behind the surge is its increasingly robust financial health. With a price-to-earnings (P/E) ratio of 10.2 times, the stock appears undervalued compared to many of its peers. A discounted cash flow (DCF) calculation supports this idea, with an impressive 47% gap between the current share price and an estimate of fair value. Clearly, nobody can guarantee this gap closing any time soon, but it shows that there’s a long road ahead if the company’s strategy works.

Moreover, with a generous dividend yield of 6.77%, the firm is turning heads among income-focused investors. In an era of uncertain interest rates, such a substantial yield from a blue-chip company is pretty hard 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 more increases could be on the cards.

Due a breather?

However, it’s crucial for investors to consider the significant risks and challenges here. The insurance industry is navigating a complex landscape of regulatory pressures, with evolving capital requirements and consumer protection rules potentially impacting profitability.

Intense competition in the sector, particularly from agile ‘insurtechs’ and established rivals, could squeeze margins and make customer acquisition and retention more challenging. Management also faces the ongoing task of adapting to rapidly changing technologies, which requires substantial investment and carries the risk of obsolescence if not executed effectively. Then there’s the direct exposure to various financial markets through investment portfolios, adding another layer of risk, as economic downturns or market volatility could negatively impact returns and capital position.

I’ve also got my eye on international operations. While providing diversification, these also expose the company to geopolitical risks and currency fluctuations. Brexit-related uncertainties continue to linger, potentially affecting 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 short-term disruptions. I’m also nervous around the risks from climate change, both physical risks to insured assets and transition risks as the global economy shifts towards low-carbon alternatives.

One to watch

For those willing to weather potential short-term volatility, I think Aviva is an option that could offer an intriguing blend of value, income, and growth potential. The 13% rise we’ve seen so far in 2024 might indeed be just the opening act of a longer performance. I’ll be buying shares at the next opportunity.