2023-03-12 05:21:51 ET
Summary
- Disclosed center liquidity of £2.2 billion (higher than our estimates).
- Therefore, ex-M&A, we are assuming a new buyback plan of £300 million for 2024.
- Capital position remains solid, and so we reaffirmed our buy rating target.
Here at the Lab, in 2022, we had a positive view of the UK life insurance business and we buy rated both L&G ( Time To Re-Enter ) and Aviva ( Pricing In The New Capital Deployment ). Our Aviva ( AIVAF ) ( AVVIY ) investment thesis was supported by: 1) a note on the company's discretionary capital , 2) a solid balance sheet demonstrated by a high solvency ratio, and 3) a good entry point supported by an ongoing buyback and a juicy DPS. On a business basis, we were positive on the Pension Risk Transfer where L&G and Aviva have the first and the third position in the UK market. And just related to Aviva, we were also forecasting a favorable currency development in Canada and a rebound in the company's bulk annuities. Despite our favor on L&G Group, Aviva " made the right move to rebalance and reorganize the company" and we concluded that there was a potential upside of " 25-30% of the current market capitalization".
Since our August 2022 release, the company is up by 11.75% outperforming the S&P 500 return.
Mare Evidence Lab's previous publication
Aviva just released its quarterly numbers, so we decided to double-check our estimates.
- GI gross written premiums were up by 8% to £9.74 billion with a CoR of 94.6%, while our supportive take on Canada GWP grew by 16% to exceed £4 billion with a CoR of 92.5% (Fig 1). We are not surprised to see solid growth in both personal and commercial lines (even at a constant currency rate);
- Important to note is the company's progression in achieving cost-saving initiatives. Despite inflationary impact and wage inflation, Aviva managed to decrease (on an adj. basis) its costs by 3% to arrive at £2.7 billion on a yearly comparison vs 2021 (Fig 2). We should also mention that the input cost excludes IFRS17; however, they reflect strong execution of efficiency and process streamlining;
- Despite negative nine-month results in terms of AuM flow, the Aviva Investors division recorded a positive net flow of £1.3 billion;
- Estimated Solvency II ratio reached 212% (higher than regulators' requirements). On a pro-forma basis, considering the final dividend and the ongoing buyback, the ratio will reach 196% (Fig 3);
- Our take on discretionary spending was the right one. In detail, the Solvency cover ratio will be deducted for further debt reduction, to increase Aviva's DPS, and to allow a new £300 million share buyback program (Fig 4). The company is fully committed to returning surplus capital to shareholders without compromising its sustainably. Aviva has also upgraded its dividend guidance to low-to-mid single-digit growth;
- Cross-checking our previous estimates, we were positively looking at Aviva's £1.5 billion in center liquidity and its credit rating. Today, the company just disclosed estimated center liquidity of £2.2 billion. Regarding the debt, we are estimating a £300 million reduction in 2023, so Aviva's credit rating debt (most likely) will be left unchanged.
Source: Aviva Q4 and Fiscal Year 2022 results presentation (Fig 1)
(Fig 2)
(Fig 3)
(Fig 4)
Conclusion and Valuation
Here at the Lab, we are forecasting a new £300 million buyback for 2024. How sustainable will be? We are estimating this additional share repurchase assuming that Aviva will meet its business targets thanks to a solid pricing momentum in General Insurance, and controllable cost inflation. Our internal team estimates a buyback limit when the Solvency ratio is close to 180%. However, given the strong performance in terms of cash generation, we believe that there is flexibility in its central liquidity. To sum up, the company is growing and delivering its diversified business model. Capital position remains solid and Aviva is focusing on sustainable shareholders remuneration. Therefore, we have kept Mare Evidence Lab's operating profit forecast broadly unchanged in 2023 and we left unchanged our target price of £5 per share ($12 in ADR) based on the shareholder value at 0.85x versus a historical average of 0.9x. Aside from the risks already presented in our initiation of coverage , we also include General insurance's lower price, the negative market conditions, and a disappointing capital return story.
Mare Evidence Lab's previous publication
For further details see:
Aviva Is Delivering, Buy Reiterated