2023-11-29 14:58:08 ET
Summary
- Here at the Lab, we are pricing higher catastrophe headwinds in 2024, but we believe Aviva's price activities will likely offset this pessimistic scenario.
- At the operating level, Aviva is poised to grow thanks to higher investment income.
- Solid balance sheet, M&A/disposals optionality, and an attractive valuation make Aviva a buy.
Here at the Lab, we believe Aviva's (AIVAF) (AVVIY) business is shaping up nicely and is set for a solid 2024. In October, we provided our view on M&A speculation and rumors, updating our readers that the company was Not Likely A Potential Takeover Candidate . Despite that, we remained overweight on Aviva thanks to Solid Performance and four key takeaways: cost efficiency execution plan with a 2024 saving target of approximately £750 million, buyback coupled with higher DPS (the interim dividend was already up by 8%), GEO diversification sales with a focus on developed countries such as Canada and the UK, and a capital light business model with a solid Solvency Ratio. After analyzing the company's Q3 trading update, we reiterated our overweight target, which is supported by substantial growth and a better capital return outlook.
Source: Aviva Q3 trading update
Starting with the CEO's words, we reported how " Aviva has delivered nine months of strong growth. We have clear trading momentum driven by our uniquely diversified business. General Insurance premiums grew 13%, reflecting the strength of our operations in the UK, Canada, and Ireland across commercial and personal lines ."
After the Q3 results, we are making minor changes to our operating profit forecasts. We decided to slightly decrease Aviva's 2023 operating profit by 1% and increase by 2% the 2024 numbers. This is mainly due to several minor changes to our Life and General Insurance forecasts. These changes include a slight increase in the combined ratio forecasts. In Q3, Aviva missed our combined ratio estimates mainly due to the Canadian natural catastrophes, and we believe this will continue to be a negative trend in Q4 2024. Significant losses will be visible only after the reinsurance structure contract, but we are projecting stronger pricing activities in 2024.
In our forward-looking estimates, the company is already achieving double-digit rate increases across its general insurance divisions. This is already visible in the UK personal lines. Looking ahead, higher investment income and better margins are likely to drive available general insurance profit with an earnings uplift to £800 million from £660 million estimates in 2023 year-end numbers.
Why is Aviva a long-term Buy?
- The company is an attractive stock with a current total capital return of approximately 11% in 2024; this is still supported by an unchanged £300 million share buyback;
- Even if we decide to lower our 2024 operating profit estimates due to a medium-term combined ratio of 94%, Aviva will continue to deliver earnings growth. Our estimates show an operating profit CAGR of 10% in the next three-year visible period. In addition, we should also report that inflation claims in the UK and Canada are trending higher. For instance, in Canada, the company's earnings were offset by auto theft , and the company is putting tags to help mitigate future losses. In the UK market, concerning health insurance, Aviva clients are claiming more frequently due to NHS pressures; however, the company is pricing higher rates;
- For the above reason, Aviva pricing is solid across the board, but the insurance company is also benefiting significantly from market tailwinds in health and annuities. In numbers, the company has written £5 billion of bulk annuities in 2023 and is on track to achieve the £15/£20 billion target in the next three years;
- Here at the Lab, we also believe in a business simplification strategy by disposing of Aviva's international investments. Our internal team favorably views disposals from China and India and potential bolt on acquisitions in mature markets such as the UK or Canada. We are unsurprised to see a positive stock price reaction on market speculation about a possible takeover of Intact, which " is exploring strategic options in respect of RSA's UK personal lines business ." Aviva also seems warm to buying Lloyd's insurance market business, as this would provide the company with a new distribution channel;
- The company completed its original debt reduction program and has now a pro forma leverage of 30.6%. Here at the Lab, we believe that Aviva's debt stack is in a good place, and leverage is no longer an issue.
Conclusion and Valuation
To recap, we slightly increased our combined ratio forecasts of 20 and 40 basis points in 2024 and 2025, with a mid target of 94% by 2026. This is based on a higher underlying claims ratio in the next few years on claims frequency in the UK and higher theft claims in Canada. Despite that, Aviva's growth outlook remains very attractive, as well as its valuation. In our estimates, we project operating profits of £1.44 and £1.71 billion in 2023 and 2024, respectively. We are 5% ahead of consensus estimates in 2024. Demand for insurance products and protection remains exceptionally high, and B2C clients are willing to pay higher health insurance costs to avoid NHS waiting lists. On a negative note, we are lowering our 2023 end Solvency II estimates. This is due to the time delay in Singlife disposal . This has an impact of -12 basis points. The transaction is expected to be completed in Q1 2024; therefore, there is no implication in our twelve-month visible period. On our 2024 forecasted operating profit, we derive an EPS of 60 pence and applying our unchanged 8x P/E multiple, we confirmed a target price of £4.8 per share, maintaining a buy rating target.
For further details see:
Aviva: Remuneration Story In Place