2023-05-25 11:55:37 ET
Summary
- Aviva disclosed a positive combined ratio evolution.
- Buyback almost completed, now it is time to deleverage.
- The company confirmed its 2023 financial outlook, so we maintain our buy target.
Aviva ( AIVAF ) ( AVVIY ) just disclosed its quarterly numbers. We know that our followers all have their perspectives and here at the Lab, we are always providing the company's latest trends in value and growth. After the US regional banking crisis and the Credit Suisse bailout, we decided to increase our exposure to insurance companies. It was a good move , and Aviva is up by 6.86% since early March 2023.
As a reminder, our buy rating was supported by macro and micro reasons. On the macro potential upside, we are long-term believers in insurer efficiency in managing their cost basis. This is why we are estimating a stable (or declining combined ratio development). Of course, the ratio is influenced by natural catastrophes and we cannot predict calamities; however, thanks to massive data/artificial intelligence, insurance players are getting better and better at forecasting. On interest rates, a company like Aviva suffered in a zero-environment, inflation is stickier than expected and the company's reinvestment yield is estimated to go higher. For this reason, Aviva's core margin should expand.
On the micro-likely upside, the company 1) has a strong solvency ratio, 2) has " Discretionary Capital Deployments " capabilities, 3) " is deleveraging ", and 4) offers a tasty dividend per share coupled with an ongoing buyback. In addition, Aviva is well positioned in its UK market (with positive news on the Pension Risk Transfer/Retirement) as well as in Canada. As already mentioned last time, despite our favor on L&G, the company " continues to deliver " and " made the right move to reorganize and rebalance the company".
Q1 Update
Starting with the CEO's words , Aviva " delivered an encouraging start to 2023 and continues to build clear trading momentum. New business volumes across the company's diversified business are good, despite persistent economic uncertainty ".
Source: Aviva Q1 results
Compared to AXA, Zurich Insurance Group, and Allianz AG, the company disclosed its combined ratio. The data released is very supportive and is well on track with our macro evidence. In numbers, Aviva reported a combined operating ratio of 95.4% compared to the 95.7% achieved last year same quarter. This was presented on an IFRS 17 new accounting basis and was supported by the company's pricing strength which is proactively responding to inflationary pressure.
Looking at our micro upside and double-checking our internal estimates, we should highlight the following:
- Insurance in Protection & Health top line sales were up by 11% and key to note was the Retirement performance, again up by 17%. These results were driven by individual annuities sales;
- Despite higher costs for IFRS 17 regulatory requirements, in 2022, Aviva managed to decrease its expenses by 3%. This positive result was also achieved in Q1 2023. Aviva baseline costs were down 1% to £675 million. Cost-saving initiatives and simplified businesses are further helping the company;
- Related to point 2), gross of inflation, the company is on track to achieve a savings target of £750 million by 2024;
- Compared to our EU insurance coverage, and despite market volatility, the company recorded a positive AuM net flow of £2.3 billion. This result was lower than last year, but the company remained resilient.
Fig 1
Fig 2
Still related to our upside, the company's Solvency II ratio reached 196% from 212% at the year-end (Fig 3). This was 16 points lower and was due to the 2022 final dividend payment, the ongoing share buyback, and the company's pension scheme payment which were £576 million, £300 million, and £75 million respectively.
Fig 3
Conclusion and Valuation
In our previous conclusion, we were estimating a £300 million share repurchase, and the company disclosed that is nearing completed. Aviva's stock price performance was resilient; however, we are still far from our target price. Here at the Lab, after the Q1 release, we are even more confident in Aviva and we believe that the company is placed to prevail in the negative economic environment for the above reasons, and also because the management team confirmed the 2023 financial outlook. Our higher confidence is also backed up by center liquidity which is solid at £2.1 billion (in the guidance upper end). If there are no additional buyback announcements, we are still estimating a £300 million debt reduction in 2023. Therefore, being already above Wall Street consensus, and supported by Q1 positive results and guidance reiteration, we left unchanged our operating profit as well as our target price of £5 and $12 in ADR. Our valuation is supported by a shareholder value of 0.82x versus a historical average of 0.9x. The risk paragraph is included in Mare Evidence Lab's initiation of coverage . In addition, we should also include compliance risks and relatively higher costs, and reputational risks.
For further details see:
Aviva: Solid Q1, Time To Buy More