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In this week’s Fat Tail Friday we pick up on the themes emerging from the first quarter trading updates amongst the specialty insurers as pricing levels decline. There are now only pockets where prices are still increasing, and it is fair to say, prices have come off peak levels. Reinsurance pricing has come off more year on year than primary insurance pricing, but the picture varies by line of business. It is easy, amongst the shift in tone and narrative from the trading statements, to think the good times are over, but that would be wrong. Margins and RoE’s have probably peaked, but RoE’s will gradually come down rather than face a cliff edge – meaning decent returns for years to come. We understand from our conversations across the industry that pricing levels remain highly attractive and a “long way off” from break-even – we put the gap between current prices and break-even at 25-75%. Importantly, the key terms and conditions within contracts remain tight. Overall, we think reported RoE’s will continue to be in the high-teens on average across the London-listed names over our forecast period, in part supported by reserve releases from back years, current year margins, and decent investment returns. Our top pick is Beazley.
AV/ BEZ CSN CRE HSX JUST LRE LGEN PHNX PRU
In this week’s Fat Tail Friday we discuss the widening credit spreads which have followed the increased recessionary fears from the whipsaw trade tariffs and continued uncertainty caused by the Trump administration. Widening spreads intuitively indicate increased credit and default risk in the corporate sector. This is only partially correct. Insurers would argue it also represents an increased flight to liquidity. Life insurers, in particular, do not need liquidity to the same extent as banks or P&C focused insurers, meaning this offers an opportunity for them to improve yields across their investment portfolios and earn higher investment returns and generate better pricing for customers or better margins or both. Annuity focused insurers benefit the most, we would pick up Just Group, L&G, and Phoenix Group. Other stocks we think have limited exposure to the Trump noise and represent good entry levels are Pru, Sabre and Beazley.
AV/ BEZ CSN CRE HSX JUST LRE LGEN PHNX PRU SBRE DLG
In this week’s Fat Tail Friday, we discuss the interest rate sensitivities of insurers, which tend to trade like bond proxies in the short term but ultimately reconnect with the fundamentals of the stocks over the medium term. The Solvency II balance sheets are all strong and overcapitalised, partly to absorb interest rate volatility and avoid expensive hedging programmes. With the possibility of heightened inflation-related noise in April and the potential of bond yield moves that follow thereafter, we point out which stocks have had strong correlations with bond yields year to date to facilitate short term positions and why, over the medium term, the positive fundamentals of the sector will ultimately win through. On this basis, we prefer PHNX, PRU, JUST, BEZ, SABRE and highlight the relatively limited interest rate sensitivity of CHESNARA.
In this week’s Fat Tail Friday, we discuss the themes emerging from earnings season and the read across to those yet to report. The UK Life sector continues to see a booming Bulk annuity market and the retail annuity market is now also following this trend. Workplace savings platforms are seemingly reaching scale and starting to generate positive returns. The UK Motor insures that have reported so far showed decent margins, with the expectation FY25 will be good but not as strong. The reinsurers suffered from elevated losses, with a wide array of RoE delivery, we think investors will need to be more selective going forward.
AV/ CSN JUST LGEN PHNX PRU BEZ CRE HSX LRE
What happened? Aviva has announced a scheme to redeem four Preference Shares (face value GBP450m) whose capital eligibility is ending in January 2026. BNPP Exane View: . PREFS: Aviva has four preference shares outstanding (two issued by Aviva, two by General Accident). Under grandfathering rules, these counted towards Restricted Tier 1 capital under Solvency II/UK. However, the grandfathering comes to an end on 1st Jan 2026, after which point they provide no capital benefit. . STRUCTURE: Aviva is offering a premium to the current value of the notes of c.10% (our estimates), totalling c.GBP660m. Note holders are invited to vote on accepting the proposal and cancelling the preference shares. Noteholders may also tender their preference shares for a similar premium. . IMPACT: Aviva have not disclosed the financial impact of the transaction, but we estimate that it will cost c.8-9ppts of Solvency cover if all the notes are cancelled in this way. It is possible that the group issues other debt instruments to replace the lost Solvency. The coupon on the notes cost c.GBP38m after tax per year (c.3% of group earnings). . OUR VIEW: Given the end of grandfathering benefit, this strikes us as a sensible action. Offering a premium to current market price, rather than attempting to cancel at par (as previous management attempted in 2018), should also help avoid the disruption seen during that prior episode.
Aviva plc
In this week’s Fat Tail Friday, we take an in-depth look at the UK Bulk annuity market, which has shown very strong growth credentials over the last few years. We anticipate this exceptional level of growth will continue, particularly if bond yields remain at around 3% or higher. Even at lower yields we anticipate demand will continue to outpace supply, despite the recent supply-side increases with several new entrants. Longevity trends also remain supportive to insurance balance sheets. For those worried this market will dry up, we note it will take over 20 years at the current rate of transactions. Moreover, before then, the retail annuity market will start to fill the gap as DC assets expand and retirees increasingly choose to protect their income in retirement through an annuity. Our top picks to play the themes are Just Group, Phoenix, and L&G.
AV/ CSN JUST LGEN PHNX PRU
What happened? Just Group (Not Covered) reported FY24 results today. Below we discuss results vs. company consensus and read-across to peers. BNPP Exane View: . EARNINGS: The company reported GBP504m of underlying op profit, 20% of ahead of the 2026 target (in-line with consensus). . NEW BIZ: Already announced: Just Group wrote GBP5.3bn of premiums in the year (excl. Funded Re), up 36% Y/Y, of which GBP1bn GIFL (Individual Annuities) and GBP4.3bn DB (Bulk Annuities). DB. New Biz profit of GBP460m grew 30% (4% ahead of consensus). Company emphasises it is now a whole of market player, having stepped into the GBP1bn deals bracket (already disclosed). . STRAIN: new business strain was 1.3% (vs. target of 2.5%, medium-term average of 1.5%, and consensus of 1.6%). . BALANCE SHEET: S2 ratio of 204%, up 7ppts Y/Y and 10ppts ahead of expectations, driven by non-operating items (rates, model changes). . CAPITAL RETURNS: DPS of 2.5p, +20% Y/Y (4% ahead of consensus) . READ-ACROSS: the new business performance and expansion into big-ticket deals was already known, so we see limited new read-across to the UK life names in our coverage (LandG, Aviva, MandG, Phoenix), albeit more competition remains slightly unhelpful for them. The lower strain than expected has been a recurring theme across the market - expect discussion on the call about how Just Group have achieved this, and whether they expect it to recur.
AV/ LGEN PHNX MNG
We have adjusted our estimates following FY24 results. Our operating profit reduces by 1-2%, but we add a restructuring charge in 2025, related to recent acquisitions, which reduces our EPS by a further 6%. We do not consider the changes to be material; our rating is unchanged.
What happened? Aviva''s FY24 conference call provided some details on the drivers of the strong result, with an emphasis on General Insurance. BNPP Exane View: Our hesitation on the Aviva investment case has centred on a) the underlying growth rate in the surplus capital generation, and b) the capital generation cover of cash returns. What have we learned on these items today? On the growth, the underlying OCG was pretty decent, and the Life expected emergence outlook has grown Y/Y for the first time in some time, albeit we expect much/most of this is the AIG acquisition. On the cash return cover, the group delivered 15ppts of OCG and spent 15ppts on cash returns. The OCG was held back by cat losses, but flattered by low NB strain - so it still looks tight to us. Details from the call: . UK GI: Aviva new business motor pricing -10%, but they don''t see any unreasonable behaviour in the market. Home is lagging motor - pricing turned negative in Q4, but they are still happy with rate adequacy. We infer that there may be some attritional deterioration into 2025+ from the exceptional underwriting conditions in 2024. Ogden benefit was c.GBP40m. Reiterated view that they have been well-behaved on premium finance (APR of 15%, below market average). Probitas is printing a mid-80s COR, and will recapture the c.20% of third party capital participation through 2026. . CANADA GI: seeing 5-6% claims inflation; rate increases of 9/11/4% in motor/home/commercial in 2024, and filing high-single digit price for 2025. While we expect reinsurance costs will offset some of the implied positive development, it sounds like they expect improvement in the underlying COR from c.97% in 2024. . IWR (LIFE): strain below the 3-4% guidance due to the asset mix orientation towards government bonds; this is largely a reflection of the market conditions (tight spreads), so we infer this isn''t the new normal. Possible they will trade into credit at a later date. 65% of workplace...
What happened? AVIVA beat op profit expectations by 6%, driven by strong general insurance (both attritional and investment income), partially offset by IWR (Life). Cap Gen metrics are also decent. We expect the stock to outperform a few ppts today. BNPP Exane View: . GENERAL INSURANCE: 10% beat vs. BBG op profit consensus. GWP in-line. COR 60bps better than our expectations, or 50bps excl. PYD/weather. Double-digit beat on net investment income as well. . IWR (LIFE): 7% miss on BBG op profit consensus. On our numbers, the miss is driven by protection/health (assumption change) and ''other'' (hedge costs), partially offset by heritage. IRRs on BPA ''above'' low-teens. . OTHER: Aviva Investors a small beat, International investments a miss, although in-line on our numbers. Central items much better than BBG consensus (a small beat on our expectations). . CAP GEN: OFG is a 5% beat to company consensus, although in-line with our own expectations. OCG a touch ahead of our forecast. Perhaps most importantly, it looks like the future surplus emergence has grown, which is helpful. . BALANCE SHEET: S2 ratio of 203% in-line. 28.9% leverage ratio (target is 30%). . CAPITAL RETURNS: DPS in-line. Reminder that buyback was paused. . OUTLOOK: no change to guidance. PRESS RELEASE AND SLIDES here WEBCAST at 9.00am UK here / Source: Company disclosures, BBG, BNPPE estimates.
In this week’s Fat Tail Friday, we discuss the increased activity in UK insurance M&A. Several owner-founders seek to retire in the privately held space, or otherwise, acquirers are seeking to pick up UK assets at attractive valuations. On the other hand, the management of listed companies are proactively seeking to crystallise value through disposals or listing subsidiaries and buying back their own shares – Legal & General and Prudential plc are case in point. Just Group and the global specialty insurers look particularly vulnerable to us, together with attractive opportunities across the MGA and insurance broker space.
In this week’s Fat Tail Friday, we review recent earnings revisions and preview what this may mean for the sector. Unsurprisingly, California wildfires will be a feature across the global specialty insurers – we revise our loss estimates higher following this week’s reported losses by peers. Beyond this, each sub-sector remains in good shape; we continue to expect additional capital distributions across the Life insurers that are already undertaking them, whilst some of the Lloyds’ names may pause until the half-year. Motor insurers are seeing pricing coming off peaks, so we believe investors must now be selective in choosing which insurer to play the underwriting cycle through.
AV/ CSN JUST LGEN PHNX PRU BEZ CRE HSX LRE DLG SBRE
In this week’s Fat Tail Friday, we highlight the exposure of hypothetical Trump tariffs on UK financial services, specifically UK insurers. The headline threat is seemingly material, but in reality, the global specialty insurers that write much of their business with US clients do so from international hubs, like the Lloyd’s insurance market, which serves to spread losses across global capital markets. Most of the US business written by UK insurers is secured through local offices in the US. We believe the UK-listed global insurers can and should argue they contribute immensely to the US economy. In any case, the insurers could pivot to write more business through their local offices or Bermudan hubs in any adverse tariff scenario. We understand why some investors are asking the question. We suggest the UK insurers keep calm and carry on, especially since Trump’s first administration focused on tariffs on goods, and he has not made any remarks on bringing services into the debate.
Updating estimates ahead of FY24 reporting We have updated our estimates ahead of FY24 results. Our operating profit (management basis) reduces c.2%, but there is a larger net income impact in FY24 due to an assumed negative mark-to-market effect. In 2025+, our op profit estimates decline by a similar amount, driven by expected headwinds to UK PandC profitability, partially offset by better expectations for Canada. We also remove the buyback previously expected to be declared at FY24 results, since management have communicated that this would be suspended in light of the Group''s offer for DLG. New target price reflects excess capital revealed by offer for DLG We recognise the value of the suspended GBP300m buyback in surplus capital, so while the buyback suspension impacts EPS by c.(2)% in 2025+, there is negligible impact on valuation. At this stage we do not model the integration of DLG, nor the change in DPS, since the acquisition has yet to be approved by either DLG shareholders or regulators. However, we believe that the offer structure reveals Aviva''s ability to extract excess capital from within the operating entities: we recognise this through a one-off remittance of GBP800m, which adds c.6% to our target price. We also make some other minor changes to estimates which drive the remaining TP increase. Reminder of the timeline Aviva has indicated that a scheme document will be published shortly (''beginning-mid Feb''), and that this will be followed by Aviva''s FY24 results on 27th Feb, then by DLG''s FY24 results in March (date to be confirmed). DLG shareholders will vote on the deal in March, and (if approved) the deal is expected to close in Mid-2025.
What happened? . REFORMS: Sky News and the FT report that UK Finance Minister Rachel Reeves will announce plans on Wednesday to allow companies to access surplus assets in Defined Benefit pension schemes. The intention is that this will encourage them to deploy more assets into investments that benefit the economy. . QUANTUM: According to Sky News, Government sources say this could unlock GBP60bn, while other estimates suggest the figure could be in the region of GBP100bn. The Penson Protection Fund reported that the UK DB sector had GBP219bn of surplus assets in March 2024 (s179 basis for the liabilities, which approximates an insurance buy-out value). . CONTEXT: These reforms take place in the context of the previous Government considering measures to ease companies'' access to pension scheme surpluses, although we get the impression that Reeves'' reforms are potentially further reaching. BNPP Exane View: . UNCERTAINTY: At this stage it is highly unclear how the mechanics of the proposal will work - for instance, what the role of pension scheme trustees will be in authorising surplus releases, how schemes with different rules will be affected, whether some of the released capital will accrue in benefits to the pensioners, what the tax implications of the release would be, or how ''surplus'' is to be defined (given the significant difference in the IFRS, actuarial, and buy-out views of funding positions). Without details on this, it is difficult at this stage to assess the extent to which corporate incentives and behaviour might change. . BPA IMPLICATIONS: While there are many uncertainties, whatever the specifics may be, the release of surplus capital to sponsor companies could mean there will be less surplus available to fund bulk purchase annuities (BPA) from insurers. And in the near term, while it is unclear what the specific proposals are, we could see a slowdown in BPA business until the changes are better understood. Indeed, the market in 2024...
In this week’s Fat Tail Friday, we highlight the attractive dividend yields across the UK insurance sector. The UK Life insurance sub-sector stands out with the highest average dividend yield across not only UK insurers but also across Europe. All the dividends are supported by capital generation and strong balance sheets. In general, the dividend yields continue to compare attractively relative to gilt yields and corporate bond yields, given that credit spreads are at 20-year lows. We also highlight select names across the London-listed specialty market and UK Motor insurers, which screen well.
AV/ CSN PHNX BEZ CRE HSX LRE ADM DLG SBRE
In this week’s Fat Tail Friday, we update our insured loss estimates from the California wildfires. This will be a major insured loss for the industry, but insurance premiums have risen materially for several years, especially across California, precisely for this type of risk. We think the reinsurance exposures will be manageable through existing loss budgets, prior-year reserve releases, in-year earnings, and strong investment returns, all helping to produce decent RoEs despite this loss. We also briefly discuss UK Gilt yield moves and their impact on the UK Life sector. We round off the week with a discussion on reinsurance pricing more broadly.
What happened? Aviva presented details on its DLG offer this morning (first take available here and copied below). Below we summarise our main incremental takeaways from the presentation: . BASELINE: While management wouldn''t provide specific guidance for DLG''s profit outlook, they suggested that their expectations for DLG''s baseline were roughly in-line with consensus. We think this implicitly means the financial projections are based on a c.13% NIM target, as per DLG''s stand-alone guidance. . CAPITAL SYNERGIES: the CFO explained that there would be SCR diversification both at a UK General Insurance level (since personal lines diversifies well against commercial) and at a Group level (since UK GI diversifies well against Life). They will likely renew DLG customers onto the Aviva balance sheet and have the option of reinsuring DLG liabilities into Aviva, so there are ways of extracting synergies before or without a Part VII transfer. . OTHER SYNERGIES: the CFO pointed to reinsurance, revenues and claims costs as areas of synergy which have not yet been quantified. They see significant opportunity in using their combined scale to manage their supply networks. Management indicated they saw positive optionality from merging the datasets, and that they saw more upside to revenues than downside from dis-synergies. . DEBT: the CFO mentioned that the DLG debt capital will not count towards Group capital on Day 1, which we assume reflects the fact that the debt will be issued by a subsidiary rather than the HoldCo post-close. We estimate that this non-recognition will cost the group c.6ppts of S2 coverage on Day 1, taking the Day 1 capital pre-synergies to the mid-170s%. We would expect the group moves the debt from OpCo to HoldCo in time, and that this capital is thus recovered at a Group level. . RESERVING: there was little the company could say at this stage regarding reserving - other than to point out that they haven''t changed their offer price post...
Aviva plc Direct Line Insurance Group Plc
What happened? Aviva has today announced a formal agreement on the takeover of DLG. The deal terms are unchanged, but there is some incremental detail on synergies and capital returns: . TERMS: The acquisition price and terms are unchanged vs. the preliminary agreement earlier this month: 0.2867 new Aviva shares, GBP1.297 in cash, and a pre-close dividend of up to 5p per DLG share. This is equivalent of 275p at the 27/11/24 closing price (c.265p at today''s price). . OP SYNERGIES: Aviva is targeting GBP125m of pre-tax cost synergies over-and-above DLG''s existing GBP100m cost plan, driving c.10% EPS accretion. They expect c.GBP250m of integration costs (for the incremental cost savings). There is no mention of non-cost operating synergies, which may reflect conservatism at this stage. We had forecast GBP130m of incremental operating synergies pre-tax, including non-cost items. Given that the company likely under-promises on synergies at this stage, we take this initial guidance as a small positive. . SOLVENCY: Expected to remain ''at the upper end'' of the working range (160-180%) on Day 1, with upside from ''material'' capital synergies over time (not quantified at this stage). We had forecast the S2 ratio would be c.183% pro forma excluding capital synergies, so we see this as in-line. . LEVERAGE: Expected to be 31-32% (Aviva management basis) on Day 1 (we had forecast 31%). . LIQUIDITY: Expected to remain GBP1bn (as we had expected, based on our assumption that the Group could upstream liquidity from the OpCos). . TIMETABLE: Expected to close mid-2025. . CAPITAL RETURNS: Aviva will declare a mid-single digit % uplift to its DPS following completion, with mid-single digit annual growth in the cash cost of the dividend thereafter (as per current guidance). The buyback is paused in 2025 but expected to resume in 2026 ''at higher levels''. In effect, the 2025 DPS will benefit from both the ''normal'' cash cost growth, plus the ''one-off'' benefit from the...
What happened? . PROFITABLE: EY estimates that UK motor insurers will report a 93% combined ratio for 2024, a significant improvement on the 113% reported in 2023, driven by a drop in inflation, better claims frequency, and 12% price rises. . DETERIORIATION: EY expects a 2% drop in prices in 2025, with the sector returning to a slight loss in 2025 (roughly in line with the historical norm). BNPP Exane View: . BNPPE VIEW: these reports confirm our view that pricing has reacted rationally to the strong profitability, as we set out in What''s not in the price?. If profitability in 2025 declines, this also points to the steep hill DLG will have to climb to achieve its 13% margin targets, whether stand-alone or as part of Aviva.
AV/ ADM DLG
Aviva has upgraded its offer for DLG from GBP2.50 to GBP2.75 / share, and the two parties have reached preliminary agreement. What''s next? Preliminary agreement at upgraded offer Aviva has increased its offer for DLG by 25p to a stated GBP2.75 / share, and the two parties have reached a preliminary agreement. The offer is composed of GBP1.297 of cash, and 0.2867 Aviva shares per DLG share, plus 5p of pre-close dividend for the DLG shareholders. The upgrade since last week''s GBP2.50 offer is largely driven by cash. We already had a pre-close final dividend of 4p in our DLG capital baseline, so we see this offer as closer to GBP2.70 adjusted for this. As we wrote in Talking telephone numbers, we saw a GBP2.65 offer as sufficiently accretive, and we see the agreed price as roughly in-line with that. Implications for funding and accretion We do not think the company needs to raise debt - but the new deal structure tips the leverage ratio over 30% on our calculations, and we think it is possible that the group pauses the buyback for one year to address this. On our estimates, the transaction is high single digit % accretive to EPS, c.2% more accretive than the equivalent return of capital to investors. On consensus'' more optimistic view of the DLG baseline, we estimate the accretion is c.4% better than returning capital. What''s next? The questions from here While a formal offer has not actually been made, we see limited impediments to getting the deal over the line, albeit we can''t completely rule out the possibility of an alternative bidder. The debate for Aviva shareholders from here is largely about the DLG earnings baseline, the level of synergies the group can achieve (we estimate c.GBP130m of operating synergies before tax, and c.GBP200m reduction in the SCR) as well as about the deserved multiple for Aviva post-transaction.
What price does DLG''s Board think is fair? And what can Aviva afford to pay? Today''s note deep-dives these topics, following-up on our first-take of the economics in Will they pick up the phone. What does DLG''s board think the shares are worth? On the face of it, it is surprising to see a 58% acquisition premium turned down. So investors are trying to assess how the DLG Board might be able to justify this (see our feedback note). What does the DLG Board think a fair price would be? On our best estimate of the ''management view'', including delivery against the 13% NIM target, we think the Board likely sees the shares as worth c.GBP2.80 on a stand-alone basis, and c.GBP3.10 including a fair share of expected synergies. This would of course represent a very high premium to the undisturbed price (90%); and just because the Board thinks this would be fair doesn''t mean it is the lowest price they would or should accept. But it may explain their response so far. We think Aviva can make the deal work at GBP2.65 / share - refreshing our merger model here We think there is room for Aviva to nudge up their offer to GBP2.65 and still deliver acceptable accretion. We refresh our assessment of the economics, including the DLG baseline, operating synergies, capital synergies, funding structure, and implications for capital returns. We now assume that the liquidity requirement for the deal can be met internally. We also believe that Aviva could finance the transaction without having to sacrifice its buyback - in fact, on our estimates, it makes the c.GBP300m buyback more sustainable on a run-rate basis. Upgrading Aviva, Downgrading DLG We no longer have downside for Aviva, and upgrade to Neutral. If the transaction proceeds, we think it could be value accretive. If the transaction does not proceed, shareholders may ask whether Aviva could return the funds that would have been used for the acquisition to investors instead, which we would see as a positive. We also downgrade...
What happened? Following the announcement that Aviva had made a GBP2.50 approach for DLG on the night of the 27th, we have been speaking with investors to discuss the potential outcomes and merits of any potential transaction (see our write-up here). Below we share key areas of debate: . Aviva rationale: Many investors seemed surprised that Aviva have made an approach at this stage: a) management seemed to downplay their potential interest in acquiring DLG earlier this year, b) management have seemed to indicate their focus would be on bolt-on deals; c) if anything, the pricing outlook has deteriorated since March; d) UK personal lines is probably not the area of the business on which investors were expecting the group to double-down. So some investors were wondering what had changed. Part of the answer, we think, may have simply been that Aviva management were busy with other transactions back in March (AIG Life, Probitas) and so were not in a position to consider another transaction. One hypothesis shared with us was that Aviva itself might want to avoid being an acquisition target, and so acquiring DLG was a defensive move: however, we find this unlikely, both because Aviva is not an obvious target, and also because a DLG transaction would not be large enough to change the equation for any hypothetical acquiror of Aviva. . DLG rationale: given the substantial premium offered by Aviva, investors were asking what one had to believe to think that DLG were right to reject it. As we discuss in What''s not in the price?, we think a bluesky scenario, in which DLG hits their NIM targets and restores their multiple, could result in a GBP3.20 share price in 2026. If the present value of this would be GBP2.60, a typical acquisition premium on top of that would result in a ''fair'' acquisition price GBP3 /share. Investors roughly agreed with this logic, while also pointing to the fact that this squarely depends on the company both hitting their targets (which the...
Will DLG engage with Aviva on their proposed acquisition offer? And how do the numbers stack up for Aviva? DLG have rejected Aviva''s bid (58% premium) On 27th November, press reports emerged that Aviva had made a proposal to buy DLG. Aviva subsequently disclosed that it had made an offer to DLG on 19th November at a price equivalent to GBP2.50 / share, representing a 58% premium. This offer had been rejected by DLG''s Board on the 26th. Aviva states that DLG''s board has declined to engage further with Aviva. Where next from here? As it stands, the bid has been rejected, although Aviva''s press release on the 27th November indicates that they believe the offer still offers a good deal to DLG shareholders. We see several potential routes forward - including a revisiting of Aviva''s offer, counter-offers from elsewhere, or DLG simply continuing as a stand-alone business. If Aviva is successful, we expect there is considerable overlap in the personal lines businesses, which should offer an opportunity for synergies. At the same time, we think the combined market shares would be c.20% in each of personal motor and home, limiting anti-trust constraints. Merger model: the transaction as proposed appears marginally accretive for Aviva We publish an initial merger model (available to download here) to assess the economics of Aviva''s proposed transaction. On our assumptions, the EPS accretion to Aviva could be in the high single digits - albeit that is largely a reflection of deploying excess capital and/or increasing leverage. On our preferred ''cash'' view, the accretion is in the low-to-mid single digits.
We have adjusted our estimates following the 9M24 trading update. We increase our EPS by c.2% in 2025+, reflecting higher expected benefit from discounting following the increase in bond yields, and make other minor changes. We roll forward our 12m valuation. The net of these changes is a 3% increase in our Target Price. We do not consider the changes to be material; our rating is unchanged.
What happened? Aviva has announced it made a non-binding offer to acquire DLG on the 19th November, which was rejected by DLG''s Board on the 26th November. The offer comprised 112.5p per share in cash and 0.282 new Aviva shares per DLG share, implying an acquisition price of GBP2.50 per share, or a 58% premium to the market close. For context, DLG''s board also declined a previous offer from another insurer for GBP2.37 in March this year. BNPP Exane View: As per this morning''s note UK Motor: What''s not in the price?, we saw a potential acquisition as a backstop to DLG''s valuation. This offer from Aviva is at a 26% premium to our Target Price for DLG, but a c.20% discount to our ''blue sky'' valuation. While the bid has been rejected, we would not be surprised if Aviva were to make a further offer. It is also at least possible that today''s announcement catalyses other potential acquirors to make an approach. Aviva previously indicated its market share in UK personal motor was 8% and 12% in home. We estimate that DLG has 12 and 10% share in motor and home respectively, and so we expect that anti-trust constraints will be limited. We would expect DLG''s shares to outperform tomorrow morning, while Aviva''s share price may lag given the size of the acquisition premium.
UK insurance field trip: our takeaways On 18th November, we hosted investors on a Field Trip ''walking tour'' to meet with management at leading UK Life Insurers in London: Aviva (-), Just Group (NC), LandG (=), Lloyds Banking Group (+, covered by our Banks team)/Scottish Widows, MandG (=), and Phoenix (+). This note summarises the main takeaways from the conversations with management. Where does growth come from? Six quite different answers Each insurer emphasised the growth opportunity - but in quite different ways. Just Group is geared to the expansion of the bulk annuity market and is expanding its appetite into larger transactions. For LandG, in addition to the core bulk annuity business, management see a particular opportunity in pivoting towards higher-margin asset management strategies. Scottish Widows is seeking to use technology to enhance customer engagement with the wider Lloyds Banking Group customer base. Phoenix''s opportunity in retail annuities could be a powerful complement to its existing bulk annuity and unit linked savings businesses. MandG can use its With Profits fund to write business in a highly capital-efficient way and is seeking to launch new products from it. And Aviva''s investment in technology and operations is translating into better flows in Platform and a good start for the Direct Wealth business. Policy, regulation and the courts Investors are currently nervous about the impact of government policy, the regulator and the courts on UK insurers. Management teams think the new budget will likely create more demand for financial advice, which may also catalyse demand for individual annuities, and were pleased that the Finance Minister declined to take measures mandating proportional allocations to UK investments. All companies emphasized that the introduction of Consumer Duty means that they are already well prepared for the FCA''s review of protection distribution practices. There was more ambivalence and uncertainty on the...
AV/ LLOY LGEN PHNX MNG
What happened? . UK GI: Personal motor pricing is softening, but home is hardening. Mixed picture on commercial, depending on the line. PYD ''consistent'' with HY (not clear whether this means further additions, or limited contribution); weather in-line at 3Q with budget (which is low in this quarter). They are increasingly positive on the opportunity for Probitas. . CANADA GI: Management sound confident they are achieving rate ahead of claims inflation. Small positive PYD development in 3Q, slightly offsetting the very elevated cat. . IWR (LIFE): Multiple factors contributing to the strength of Platform flows - for instance the new transition service. Still guiding to 3% VNB margin on annuities for FY24, suggesting a slight fade from stronger 9M. Management sounded optimistic about individual annuity volumes from here, with the UK budget potentially catalysing financial planning. Individual protection volumes are lower across the market, so Aviva is not the exception - ABI indicate down 6% at HY, and this reflects factors such as cost of living and fewer housing transactions. . REGULATION/CONDUCT: Confident that they are not likely to be negatively impacted by the protection review given their focus on good outcomes for customers. Confident there is no read-across from Motor Finance case, not least because they think they offer good value for money - although we caution it''s difficult to see how one could get full confidence on this at this stage given the case law itself is still in development. BNPP Exane View: Management expressed confidence on conduct topics, both related to the FCA review of protection and the read-across to insurance (or lack thereof) from the Motor Finance ruling: this is helpful, although we think it''s difficult to draw a line under topics like this. We''re surprised to see the shares outperforming 4%; this might be explained by reiteration of targets and capital return policy, if the market was worried about the...
AVIVA 9M24 TRADING: DECENT AVIVA -, TP GBP4.65 DECENT TRADING STATEMENT, with good IWR(Life) volumes, and GI combined ratio a touch better than we expected (albeit the lack of info on the drivers, especially in a quarter with heavy cat, means it''s difficult to read this). GI topline growth is strong, albeit expected. Solvency is fine; outlook reiterated. We''d expect the shares to outperform c.1% this morning. . GENERAL INSURANCE TOPLINE: 3Q24 GWP of GBP3,110m, 12% growth, was a touch less than we were expecting, but we think this is due to phasing of Probitas. UK motor policies grew 13% in 9M24. . GENERAL INSURANCE UNDERWRITING: all-in undiscounted combined ratio of 99.5% was c.1ppt better than we had expected, with Ireland better than we assumed. No specific detail on the cat loss in Canada, nor on the rest of the combined ratio drivers, so difficult to quite know what to make of this. . IWR (LIFE): 3Q24 PVNBP of GBP12.4bn grew 57%, well ahead of our expectations, driven by annuities volumes (BPA of GBP7.8bn YTD - ahead of previous guidance, and they don''t expect a material increase over the remainder of the year). Protection ex. acquisition of AIG shrank 5%; health new business shrank 15%, as expected given strong volumes last year. Wealth flows of GBP2.7bn in 3Q24 a bit ahead of our expectations, driven by platform. . AVIVA INVESTORS: flows roughly flat. . CAPITAL/CASH: 195% is a touch shy of our expectations, but likely reflects the greater BPA volumes in the quarter. GBP1.7bn of central liquidity. . OUTLOOK: targets reiterated; still expecting underlying combined ratio to improve. PRESS RELEASE here WEBCAST at 8.30am UK, available here
UK insurance field trip: 18th November On the 18th of November, we are hosting investors on a Field Trip ''walking tour'' to meet with management at leading UK Life Insurers in London: Aviva, Just Group, LandG, Lloyds Banking Group/Scottish Widows, MandG, and Phoenix. Growth options? Not according to the valuation The UK Life sector offers access to growth opportunities unavailable in the rest of Europe: in particular, in the bulk annuities market, as well as in the retail savings space (led by the rapid accumulation of workplace pensions). Complementing this has been a sharp increase in UK individual annuities volumes. There are regulatory and legislative tailwinds, with the introduction of Solvency UK a net benefit, and political momentum behind harnessing the power of the sector to facilitate real investments in the economy. The growth mood is not, however, reflected in valuation: the four UK life insurers in our coverage have almost the highest all-in yields in the sector. We highlight some of the areas of debate that are holding valuations back - fairly or unfairly. Questions for management Ahead of the field trip, we lay-out questions for management - on both sector-wide subjects, as well as company-specific topics.
Central costs substantially better than we expected, with helpful outlook Aviva''s central expenses reduced by 46% at HY24, reflecting lower project costs, and management have indicated that this new level should be sustainable. We had assumed the group had already reached run-rate, so this is a positive. We note that there is a new substantial non-operating restructuring expense (introduced at FY23) - nonetheless, we reduce our estimate of overall central expenses and project costs by GBP55m in 2025e. Sceptical on General Insurance attritional outlook, but capital conversion good Aviva beat General Insurance expectations on topline and discounting, while missing on attritional performance (vs. our numbers). The ''medium term'' guidance of a 94% undiscounted COR seems optimistic to us, given that it would require c.3ppts improvement from the HY24 print, despite what are actually quite favourable underwriting conditions at present. But the impact of bond yields through discounting has been substantial - and the capital generation was much stronger at HY24 than we expected. Increasing TP by 10%; maintain relative Underperform Our operating earnings expectations in FY25+ are largely unchanged, reflecting better central expenses offset by lower general insurance investment returns and 40bps worse combined ratios. Flowing through the capital generation beat drives an increase in our expectations for cash distribution capacity, which (combined with a lower CoE) drives the 10% increase in our Target Price. We continue to expect the company to hit the GBP2bn IFRS op profit target in 2025, 1 year early, and are 4-5% ahead of VA consensus op profit in ''24 and ''25. Nonetheless, we see better capital return cover elsewhere in the sub-sector (e.g. MandG, Phoenix), and maintain our relative Underperform rating.
We have adjusted our estimates and target price ahead of HY24 results. We increase our General Insurance earnings to reflect faster improvement in underwriting performance, but this is offset by a reduction in the assumed earnings impact from acquisitions in the IWR (Life) segment. We also make tweaks to capital generation and cash remittances which drive the small change in the target price. We do not consider the changes to be material; our rating is unchanged.
A largely comforting backdrop into the election Labour is on course for a landslide on 4th July, implying a comfortable mandated to govern. Unlike some neighbouring economies, the UK appears to be steering away from populist politics, with Labour campaigning on a centrist ground and wealth creation a pillar of its campaign, in contrast to prior Labour leadership. A tight fiscal outlook limits firepower but has also led to pragmatic messaging and limited divergences in top-down economic policy versus the Conservatives. Limited surprises welcome, particularly for the banks The labour manifesto published on Thursday contained negligible surprises, with proposed policies well flagged and the financial sector spared from curve balls of new taxes (private equity aside). Labour had also already defused the risk of (much hyped) deposit-tiering earlier this week. Half glass full, suggests further support for lending volumes It appears clear that Labour understands the corporate sector will need to be an engine of growth and is looking at how to work with the banks. For a sector devoid of lending growth in recent years, any support is welcome and proposed refinements to planning law, and commitments to deliver 1.5m homes this Parliament, could conceivably add 1% per annum to a GBP1.6trn mortgage market. For insurance - motor pricing, ground rents, and pensions in focus, but lacking specifics Labour will seek to tackle higher car insurance prices, as previously flagged, although we are no clearer on how. There is a vague commitment to act on Ground Rents (an asset on insurers'' balance sheets). And a pensions review will look at how to maximise productive investment from pensions. These topics have been well flagged, with no incremental detail in the Manifesto. Investment implications The election is not a game-changer, but political risks have diminished, supporting CoE. We remain constructive on the domestic UK banks and balanced on UK insurance.
AV/ NWG STAN BARC LLOY HSBA LGEN ADM PHNX DLG MNG
We have adjusted our estimates ahead of the 1Q24 trading update. The main effects are that we have increased our expected profitability for general insurance slightly to recognise the better margins at recently-acquired Probitas, and we deduct a debt instrument coming to call in 2024 and remove the associated interest costs. We do not consider the changes to be material; our rating is unchanged.
We are more than halfway through Q1 trading updates across the UK and European insurance sector. In this Fat Tail Friday edition we summarise our key takeaways and read across to the UK-listed insurers. Sabre and Aviva are yet to report next week. June and July will then bring on capital markets days for Legal & General and Direct Line Group. Overall, the P&C insurance and reinsurance sector, which includes the Lloyds names, has continued to enjoy favourable market conditions. The UK motor insurance industry remains in the attractive part of the cycle, but we must be selective with stock picks. The booming UK annuity market continues to attract new entrants. There have also been a number of management changes announced in recent weeks.
AV/ VIV AVIV BEZ CSN CDT CRE CND DLG HSX LRE SBRE JUST LGEN PRU VIVXF
UK Ground Rent reforms could cost investors GBP30bn, according to some reports. In our coverage, MandG has relevant exposure. But the capital impact has been largely absorbed in advance; leverage is where the impact would be more important. UK Ground Rent reforms could cost GBP30bn The UK Government has indicated it will table reforms to limit residential Ground Rents which, by some estimates, could cost investors GBP30bn. Insurers and pension funds are holders of these assets. So while we have yet to see firm proposals, we take this moment to assess the different scenarios and the potential impact. MandG has exposure, but has already absorbed a significant capital impact Of the listed companies in our coverage, MandG is the name with relevant exposure, totalling GBP859m (or 15% of market cap). While this appears to be a large number, our analysis suggests that MandG has already recognised a high-single-digit percentage points impact on the capital ratio. In a 75% write-down scenario, we expect the group would see only a mid-single digit impact on capital coverage - and this would largely be due to tiering restrictions. Impact on MandG''s leverage is more important; we apply a 5% haircut to our TP The impact on leverage would, however, be more substantial. The group ended FY23 at 35% on a management view, vs a target of 30% by 2025. Our scenario would add c.3ppts to the leverage ratio, making this target difficult to reach, even after the GBP300m note is called in July. In such a scenario, one could expect slower dividend growth. We recognise the risks around the Ground Rent topic by adopting a mid-single digit % haircut to our Target Price - but the upside remains attractive, and we reiterate our Outperform rating.
FY23 headline financials have already been well guided to by the UK life insurers. So we set out three things that matter at FY23 results beyond the headline print for each of the names in our coverage. We see the most upside from results at Phoenix. LandG: i) strategy, ii) capital returns, iii) OSG outlook FY23 results will be the first opportunity for investors to hear from the CEO: expect high-level priorities, but limited specifics yet. Some investors are asking if the group will announce a substantial buyback - we continue to think this is unlikely. The company has already guided to the OSG in FY23 (c.GBP1.8bn), but we will also get information on the outlook for annuity OSG in 2024 and beyond. Aviva: i) wealth, ii) underwriting, iii) capital vs. cash gen Wealth is disproportionately important to the investment case, but flows appear to have suffered in 2023. PandC underwriting deteriorated on an underlying basis at HY23 - we expect improvement by year-end, but are still sceptical on the 94% undiscounted COR target. The conversion of OCG into remittances has been very high - if this continues at FY23, expect questions on sustainability. Phoenix: i) capital deployment, ii) new business targets, iii) disclosure Phoenix has a few hundred million of deployable cash - we expect the company to reduce debt in the first instance. Phoenix has achieved the 2025 new business target two years early; there is potential for an upgrade of the target at results. The company will likely provide new IFRS 17 related disclosure, which may help assuage concerns on dividend sustainability. MandG: i) flows, ii) bulk annuities, iii) capital generation outlook Decent flows will be important to help get the cost/income ratio down to 70% by 2025 (79% in 1H23); wholesale is outperforming, but largely flat nonetheless. We will get more disclosure on the new BPA business. And we expect the capital generation outlook will have improved year on year.
What we learnt from the UK''s Autumn Statement: pension tweaks marginally negative The UK Finance Minister''s Autumn statement had more detail on some of the initiatives set out in his Mansion House proposals. Some of these, including Solvency II reform, are positive for the UK life sector and already well understood (see A Match(ing Adjustment) made in heaven). But we would highlight that some of the proposals regarding DC pensions may place some pressure on pricing, albeit at the margins. We think Phoenix will use a one-off cash benefit to reduce debt Meanwhile, Phoenix recently announced an upgrade to its 2023 cash remittance targets, reflecting a one-off release from the merger of operating entities. We now expect a GBP250m debt redemption in 2024, and would welcome an explicit plan to use excess cash for further deleveraging - although the increase in cash flexibility also creates the option to fund a buyback or small acquisition. Feedback on UK Life insurers: sentiment remains weak Last month, our note UK Life, uncovered addressed the important themes of dividend sustainability, sensitivity to rates, and drivers of cashflow for the UK life insurers. We also addressed the significant debates on each of the four stocks in our coverage, and upgraded our ratings on both Phoenix and MandG to Outperform. Feedback suggests sentiment on the sub-sector remains weak. The MandG upgrade was met favourably, although there was scepticism on the Phoenix case, with concerns on exposure to debt refinancing costs and reliance on management actions. On LandG, investors are wary of committing before hearing from the new CEO.
Aviva gave a Q3 update that confirmed the positive turnaround for the company. Beside that no material news was shared. Despite facing challenges from two major storms (Babet and Ciarán) during the quarter, the British insurer reiterated its targets and expressed confidence in its ability to exceed the Group’s medium-term goals, as previously indicated in the H1 release. Despite these weather-related events, the company asserted that the claims will fall within the annual long-term average weather assumption (4% of the undiscounted CoR).
Earnings don''t cover UK Life pay-outs. Does that matter? The UK Life dividend cover debate: OK, it''s tight, but let''s keep it in perspective UK Life payouts now exceed earnings under IFRS 17. This has brought greater focus on dividend cover, with increasing investor interest in the capital generation. Our analysis suggests that cover is tight, and that without management actions, new business strain would eat into capital buffers. But this is at least partly a function of the strong new business outlook - a nice problem to have. MandG (= +): positive gearing into higher rates We still have questions about the cash conversion of capital (see here). But we see positive revisions from the gearing of the capital generation into higher bond yields, not least through better prospective asset performance for AM and WP customers. With some of the strongest capital distribution capacity in the sub-sector, good dividend cover on a capital view, plus growth, we upgrade to O/P. Phoenix (= +): concerns on leverage and cash funding overdone We hear increasing investor concern about how the dividend is funded, and on leverage. Capital generation cover of the dividend is very reliant on management actions - but this largely reflects the new business ambition. Economic debt leverage is relatively high, but this doesn''t pose a specific constraint, and it''s more than in the price. We upgrade to Outperform. LandG (+): assessing the options for the new CEO The choice of an external appointment for CEO puts the strategic direction of the business in focus. We discuss the options available to Simoes, and explain why we see an improvement in the performance of LGIM as the biggest lever for value creation. Investors hoping for a buyback in the near-term will likely be disappointed, but we continue to rate LandG''s compounding potential. Aviva (=): evaluating Wealth ambitions, as well as takeover candidacy We kick the tyres on Aviva''s Wealth ambitions. We are sceptical...
Aviva achieved solid results and looks poised to surpass the management’s 2024 targets. Substantial dividends are in prospect, contingent upon the company’s ability to sustain the growth and enhancements demonstrated in this quarter. Despite a mildly disappointing combined ratio, we anticipate a positive turnaround in the upcoming reports due to the favourable impact of price increases.
Management reported interim results on the new IFRS 17 disclosure. This showed growth in profits and cash, helped by significant price increases in the general insurance business, a booming pension risk transfer business, and rapid growth in health insurance as individuals seek alternatives to the NHS. This has put the group in a position to exceed its medium term targets on cash remittances and deliver cost savings one year earlier. The balance sheet remains strong with excess capital earmarked for investment in internal infrastructure, growth, and possible further capital distributions.
AV/ VIV AVIV VIVXF
IFRS 17/9 guidance suggests net profit of GBP1.0-1.1bn in FY23, implying a 110% payout Aviva''s IFRS 17/9 disclosures included guidance of just over EUR1.4bn op profit for FY23. We derive an implied operating earnings attributable to shareholders of just over GBP1bn. Aviva have already guided to a dividend cost of c.GBP915m. Assuming GBP300m of buyback (as per FY23 VA consensus and FY22 declared), the total shareholder cash distribution for FY23 comes to GBP1.2bn - representing a 110% pay-out ratio. This contrasts with, for instance, LandG, which had a c.80% IFRS 17/9 operating payout ratio in FY22. To be clear, cash and capital pay for distributions, not IFRS. But can the gap be explained? Optically, this looks like an unsustainable pay-out ratio. But as we have explained in detail elsewhere (Cash Nexus), IFRS has little-to-no bearing on cash distribution capacity. Nonetheless, the question remains whether Aviva can explain this gap between IFRS earnings and distribution capacity, or whether there are questions about the sustainability of the buyback. We explore some of the possibilities in this note. We reiterate our view that the SBB is dependent on management actions, and so in principle is not fully sustainable forever Our analysis elsewhere explains why we think the underlying level of remittance capacity is insufficient to fund a recurring GBP300m buyback, and thus these buybacks depend on management actions (see What did we learn about cash at Aviva?, Cash Nexus, Where next? The pushbacks, and Hold your horses). The IFRS 17/9 disclosures do not change our views on distribution capacity or valuation - but they make the payout sustainability topic more visible. Despite the recent share price weakness, we continue to see better value elsewhere, preferring LandG within the UK Life segment and AXA among the multline insurers.
No change in the narrative. Aviva’s ship sails on as usual. The PRT business is still going well, inflation remains an impediment to a strong P&C improvement, retail customers seem more interested in the rising cost of living than savings’ products and Aviva investors see no real signs of an improvement. This is the same story as in recent quarters and, in that context, our thesis remains the same.
Management reported a decent set of 1Q23 numbers with growth in the top line across the general insurance business (+11% yoy) with underwriting margins coming in better than we had expected. Elsewhere, there is a pickup in Bulk annuity volumes, although we think margins can and should be better here. The balance sheet remains solid with a capital coverage ratio well above the target range despite a share buyback, market movements and debt redemption. The asset side of the balance sheet continued to perform well through the volatile market environment
In January, we relaunched our approach to the insurance sector with a focus on cash distribution capacity (Cash Nexus). This note reviews what we learned on cash generation from Aviva''s FY22 results. Strong remittances ahead of expectations (and targets) in FY22 Aviva delivered GBP1.8bn of remittances in FY22, ahead of both expectations and targets. Management also expressed their confidence in delivering above the GBP5.4bn targeted for 2022-24. Remittances as a % of OCG in the OpCos has now reached c.100%. Underlying OCG in the OpCos was stable - long-term outlook better, short-term a tad softer Stripping out both management actions and some one-off headwinds (re-risking in GI, higher reinsurance retentions), we think OCG in the Operating Companies (the underlying driver of remittances) was c.GBP1.4bn, in-line with recent years. Looking at the projected run-off of the life book, the 20 year surplus emergence actually improved 7%, but the short-term emergence of surplus is a touch softer, since the SCR run-off will be lower. Is OFG or OCG more important? Aviva is targeting GBP1.5bn of total Own Funds Generation in 2024, and management also indicated they think they can reach that with a normal level of management actions (GBP0.2bn). This implies a 13% CAGR vs. 2022 - and the company already grew the underlying OFG 15% in FY22 vs. FY21. This is clearly a significant growth ambition. But we think it is more important to focus on OCG, a measure of surplus capital generation, because dividends are paid out of surplus capital - and this does not have the same tailwind from rates as OFG. Although OFG will be important for managing the leverage ratio down. We still see more value elsewhere We continue to think Aviva is doing all the right things - but the dependence on management actions to fund remittances means we continue to question long-term buyback expectations. We remain Underperform, with a preference for LandG and NN in the Life sub-sector.
Strong FY 22 results reported by Aviva, and another layer of distribution, but doubts around the soft guidance provided. We confirm our case that Aviva is an M&A opportunity to offer scale while having a much less complex structure.
Management delivered operating PBT ahead of expectations and materially better than the prior year, even after stripping out lumpy longevity assumption changes, the PBT was a strong beat. The margins on the P&C business were preannounced, demonstrating a disciplined underwriting business given the issues facing the wider motor and home insurance sector. Cash remittances were up to £1.85bn, supportive of the growing dividend and share buyback. A share buyback £300m was announced, ahead of PG estimates. The balance sheet remains strongly capitalised with a coverage ratio of 196%, allowing for post-year-end payments, above the 180-160% target range.
Direct Line Group (not covered) profit warned yesterday on claims inflation, bad weather and falling real estate valuations. This note explores the read-across to our coverage. Direct Line (not covered) profit warned (again) and cancelled the FY22 final dividend On 11th January, Direct Line Group issued a trading statement downgrading combined ratio guidance for FY22 (to 102%-103% from c.98%) and FY23 (an increase of 2%-3%). This implies, we think, a c.18% reduction to Visible Alpha consensus 2023e net profit. Management attributed this to claims inflation, specifically third-party claims costs, as well as the cold weather in December. This combined with a reduction in real estate valuations places the Solvency ratio towards the bottom of their 140%-180% target range. Read-across 1: Is this a market pricing / inflation issue, or a company-specific challenge? UK motor pricing has been behind claims inflation for most of 2022, and we are seeing the pain as this earns-through and margins deteriorate. The open question from here is the extent to which the latest downgrade to guidance is a result of company specifics or wider market effects. We expect investors may start asking whether this will prompt consolidation in the sector. Read-across 2: Real estate is under pressure, but UK Life insurers start with strong Solvency DLG highlighted the impact of a 15% fall in UK commercial real estate prices. We see implications for the wider UK insurance sector, with Aviva (-) publishing the highest Solvency sensitivity. But given the strength of UK Life Solvency positions at present, we think they have significant capacity to absorb this. We make minor adjustments to estimates, but no valuation changes.
We update forecasts belatedly for H1 results and the Q3 trading update, while also making allowances for market movements in Q4 to date. The main change to operating forecasts is in General Insurance, where top-line growth has been stronger than expected earlier in the year, across the board in UK Personal and Commercial lines, and in Canada. There was a material (£1bn) reduction in Own Funds in Q3, driven primarily by higher bond yields, and, while this is likely to have partly unwound in Q4, the full year is likely to see a decline on H1, in our view. We still see the company ending the year in a strong solvency position, and have raised our estimate for share buybacks in 2023 from £300m to £500m (the company committed to an unquantified buyback at H1). On an IFRS 4 basis, our raised operating EPS forecasts (+3%/+4%) are 1% below and 3% above FY22E/23E Factset consensus. The latter may be because of a differing buyback assumption. Note that FY22E/FY23E DPS have been guided to explicitly, with growth beyond then targeted at low to mid-single digits. The introduction of IFRS 17 won’t impact dividends, but will lower operating profit by c.15% - historics will be available in Q2 2023. Aviva has outperformed its UK life peers over the last 12 months (vs Phoenix c.18%) and, while still offering an attractive dividend yield, this no longer stands out against peers or history. We leave unchanged the basis of our valuation – a target dividend yield of 7%, a premium to peers. Rolling forward from FY22E to FY23E, this increases our target price from 445p to 460p. This equates to 1.2x FY22E Own Funds per share, a small increase in the implied multiple previously of 1.1x forward Own Funds per share, against an ambition to return 12%.
The Chancellor of the exchequer, Jeremy Hunt, presented his final proposals on solvency II reforms with key decisions on a reduction of the risk margin by 65%, and broadening the list of eligible assets insurers can invest in without incurring punitive capital charges. Large parts of the regime will remain unchanged, that is in fact good news. Previous proposals on the Fundamental Spread, which essentially determines the level of capital insurers much hold for credit risk, would have left many insurers with a materially worse balance sheet. The day one benefit will be single digit on solvency II capital coverage ratios, the material benefits will be harvested going forward as the existing transitional measures run-off and insurers reallocate assets towards higher yielding long-term projects. We expect this will result in an immediate benefit to new business margins, consumer pricing or both, once legislation is passed.
AV/ VIV AVIV CSN JUST LGEN PRU VIVXF
Aviva is slowly reverting to our investment case scenario. AS expected, the firm is strongly capitalized following the disposal of its non-core businesses and will announce an extra round of distribution at FY 23. Beyond the capital story, it is largely UK-focused and bound to its domestic country’s health while crucially lacking scale in asset management. We reiterate our view that, in addition to distribution story, Aviva would be the perfect M&A target for predators seeking scalability.
Mixed Q3 update, with solvency weighing most Positives in the Q3 trading statement were Life margins, with big y/y swing in Annuity VNB (£68m versus £34m loss), Wealth new business volumes (+7% versus +2% in H1), and General Insurance volumes, with UK personal lines GWP +3% in Q3 versus -1% in H1 and Canada personal lines +20% versus +9%. A negative was the solvency coverage ratio, up only 2% points vs H1 pro-forma, to 215%, less than implied by stated solvencies after big yield moves towards quarter-end. Pro-forma Own Funds per share declined by c.29p to c.391p in Q3, against a 5p increase in H1 to 420p. Annuity volumes declined 46% in Q3 vs a 12% increase at H1, due to market dislocation. GI combined ratio declined slightly, from 94% at H1 to 94.3%, albeit consistent with guidance for a worse H2. Positive comments on claims inflation, caution on BPA volumes Management stressed on the call the commitment to share buyback at year-end, in the context of strong solvency and higher cash remittances expected this year than last. Solvency has moved minimally (down) post Q3. Comments on UK personal motor claims inflation were more bullish than peers, with the view that inflation peaked in Q2 at 12%, and improved to 8-10% in Q3. Metrics on personal lines pricing were quite strong: Motor +15% on new business, +4% renewal; Home +8% and flat on renewal. Aviva saw UK personal motor market pricing +11% in Q3. On Bulk Annuities, the CEO flagged near-term disruption from the LDI market ruckus, cautioning that Aviva expected the number of transactions to increase with higher yields, but that higher yields would also impact the size of liabilities – not news to us, but perhaps to wider market. Aviva expected higher annuity margins this year than last, and a better outlook for bulk margins. Note strong relative performance versus peers Our forecasts and target price are under review. Our relative preference for Aviva is supported by higher returns on Own Funds than Phoenix, noting the decline in Own Funds per share in Q3 and strong relative performance over 3 and 12 months (+22% and +25%).
Aviva plc Phoenix Group Holdings plc
The Q3 trading update was a mixed bag with highlights including strong growth in parts of the P&C business with margins maintained, which is better than domestic peers. Whilst on the savings & retirement the picture is not so good with net outflows and lower new business premiums. Capital remains strong, but some may have hoped for a higher capital coverage number ahead of the board’s decision on the amount of shares to buyback with the FY22 results.
Liability-driven investment (LDI) strategies have been employed by some defined-benefit pension schemes to put leverage behind gilt holdings to help close funding gaps that had emerged in the previous prolonged period of low and falling interest rates. Hedges lost value as the sharp spike in bond yields triggered margin calls, which pension funds tried to meet by selling more of their gilts held outside of the LDIs. This set off what looked like a self-reinforcing spiral in longer-dated yields, risking a liquidity crunch that could have triggered the collapse of certain schemes. Life insurers look less exposed to such a liquidity crunch. But they continue to suffer from a fall in the value of the assets they own in the market sell-off. We fear this process may yet have further to run. Still, current market conditions should provide opportunities for better returns on capital over time. The Bank of England stepped in to safeguard financial stability. But buying bonds in a situation where the underlying cause of the market squeeze is, in important part, a series of substantial proposed tax cuts by the new Chancellor that are anything but small along with steps that weaken the institutional framework underpinning fiscal discipline, is fundamentally at odds with the need to tighten monetary policy to bring inflation back in check. The intervention is therefore intended, and communicated to be, only a temporary fix. In a concession to markets, the Chancellor has now brought forward the timing of the publication of his medium-term fiscal plan, in which he must be aiming to demonstrate his commitment to fiscal discipline against the scrutiny of the OBR. For now, markets look unconvinced that this will be achieved, so yields have risen even further, adding to the cost of government funding. The move in fixed income markets has, most likely, exacerbated the poor performance of UK equities. Our concern is that, unless the root cause of eroding fiscal credibility is addressed, collateral damage could extend to the valuation of more illiquid assets too, including the housing market. A marked correction there would have implications for numerous parts of the financial sector, including life insurance, but also for the wider economy and, in time, for monetary policy. Conversely, most recently, there have been media reports of a possible U-turn by the government. If it is perceived to go far enough by markets to restore fiscal credibility, this could improve the outlook for numerous assets.
AV/ CSN PHNX
On Friday, we hosted Ben Gold, Head of Investment at pensions consultant XPS (N/R), to give his views on what had happened in the defined benefit pensions market, and what might happen going forward. XPS is a top five UK pensions consultant, with 90 people advising 400 schemes with £90bn of assets. He said that his team had been busier than in any other crisis because schemes needed to act, rather than just sit out volatility. The key action that pension funds have been taking has been the sale of assets to de-leverage and de-risk post the September 23rd spike in UK long-dated gilt yields. Ben estimated that de-risking of pension funds would total £100-150bn in asset sales. He estimated that half or just over half of the process had likely been completed, based on his discussions with clients, with the end of the bond buying programme by the BOE on October 14th seen as something of a deadline. He said that the most favoured asset classes to sell had been equities and corporate bonds, with some trying to access property investments, and looking at illiquid assets and closed end funds. Ben said that he thought demand for pension buyouts by life insurers will increase, due as much to improved scheme funding positions, due to rising yields, as to concerns with the LDI model. He thought that this environment would allow insurers to be more selective as to the schemes they wrote. We would note, however, that rising interest rates reduces the size of liabilities to transact, such that the historic £2trn DB market is likely closer to £1.4-1.5trn now. As well as increasing demand for pension scheme buy-outs, the impact of asset de-risking should be increasing opportunities for annuity writers to get yield pick up at better prices. To the extent that life companies can better handle illiquidity than pension funds, and get matching adjustment benefits for the various assets, current market conditions should provide opportunities for better returns on capital over time. However, we would note that the near-term impact on risk prices from pension fund de-risking could have further to run, impacting Own Funds and solvency positions. Remember that Chesnara has less than 1% of its liabilities as annuities, so has much lower exposure to corporate bonds and illiquids than peers, although it does have higher exposure to equity markets. While all life stocks arguably look cheap based on long-term dividend yields, these discounts are eroded by rising risk-free rates, as are Own Funds – we forecast a higher return on Own Funds for Aviva versus Phoenix, on similar multiples, hence our preference for the former. Please contact the author or rahim.karim@investec.co.uk if you would like to follow up with XPS management on market dynamics and opportunities for the UK’s only quoted pension consultant. For a replay, please email. nomi.smyth@investec.co.uk
Liability driven investment (LDI) had not been a focus for us until last week because we do not cover the companies that offer this service to pension funds. The market leaders are L&G (number one market share), Schroders, Blackrock, and Insight. We discuss in this note how a ‘black swan’ event in gilts pricing stressed funds and necessitated a £65bn buying programme. The sharp fall in the value of gilts on Monday 26th was outside the stress test range for defined benefit pension funds. The fall in gilt prices increased leverage ratios and led to margin calls, which pension funds struggled to meet, and that likely contributed to the selling of risk assets. The structuring of liability driven investing is similar to the approach that life companies with annuity books take in matching assets and liabilities. A key difference is that pension funds are not required to hold solvency capital and are not subject to the same liquidity stress tests as life companies. Hence, the consistent message we have had from our coverage (and some large life insurers we do not cover) is that liquidity has not been an issue for them, even where there have been collateral calls, and solvency, of course, has not been an issue. Unfortunately, no company has been willing to put a single number out there, perhaps reluctant to provide ‘one off’ information that then becomes another ‘stress’ point in the future. Life insurers are also big holders of risk assets that have got caught up in the broader sell-off, while rising bond yields also put pressure on Own Funds, even as they increase solvency ratios. Of our coverage, Aviva has a larger annuity book than Phoenix, supported by a broad range of assets, while Chesnara has very limited exposure, never having acquired an annuity book in the UK. Of total assets of £9.7bn at year-end (including unit-linked), less than 1% were immediate or deferred annuities. The broader questions, to our mind, are what has the impact been on risk assets in recent weeks, and what happens to gilt yields when the BOE’s emergency programme ends in two weeks’ time? How much will pension funds preparing for the ‘new normal’ impact risk asset prices in the near-term? To help answer these questions, we are pleased to host the head of investment at one of the UK's leading pensions consultants, Ben Gold of XPS, to explain how this happened, how liability driven investing works, how the industry will adapt, and risks and opportunities going forward. The call will be this Friday 10am. Please RSVP to noni.smyth@investec.co.uk or your salesperson if you would like to participate.
We screened for the UK companies that scored highest on our 7 key governance-related metrics and the result was a small group of just 14 companies (Aviva, Barclays, BT Group, Bunzl, Centamin, Drax Group, HSBC, Kier Group, Micro Focus, Mondi, NatWest, Persimmon, Rentokil Initial and Severn Trent). Most of these are widely held by ESG funds, but some are less widely recognised. While there is a distinct skew towards Financials in this group, several other sectors are also represented. We also note that some of the Financial companies have endured fines in recent years, which underscores how important continued improvement in governance is for that sector. These 14 companies have delivered a ROIC over the past 5 years that is 490bps higher than their respective industry averages. Sales growth over the last 12 months has been slower than the industry averages, however. We found very little correlation between governance scores and sustainability (environmental & social) scores, which is a little surprising. However, the Technology & Communications and Food & Beverage sectors had a relatively high correlation between governance and sustainability scores. We also looked at how well companies in “risky” industries, including Aerospace & Defence, Alcoholic Beverages, Casinos & Gaming, Metals & Mining, Oil & Gas Exploration & Production and Tobacco, are managing their unique governance-related ESG risks. These include, for example, bribery & corruption risks and responsible marketing risks. While all UK companies in these high-risk industries received at least a C grade on these risks, which is reassuring as it means they have a stated awareness of them, there is room for further improvement within a few sectors. The UK as a country has a governance score that is only in-line with the average of other major developed markets, due to relatively weaker political stability. But its strong corporate governance code means UK listed companies have the highest median governance scores across the major developed equity markets (the G7 plus Switzerland and the Netherlands).
AV/ BARC BT/A BNZL CEY DRX HSBA KIE MCRO MNDI NWG PSN RTO SVT CELTF
We attended a Fitch mini-conference on European life consolidators on Thursday. This was a rare opportunity to hear from the largest consolidators, including Athora, Chesnara, Monument Re, Phoenix and Viridium, as well as reinsurance broker, Guy Carpentor, to give the reinsurance alternative. Our key takeaway was that the acquirors see inflationary pressures as a key catalyst for further deals, with closed life books particularly sensitive to rising costs. The first six months of this year also showed the volatility of solvency ratios in a ‘risk off’ market with rising yields, encouraging conversations. In addition, higher interest rates made it easier to transact on businesses with guarantees. It was also a reminder that while solvency II has led to a certain standardisation of approach, each European market was unique, with local GAAP profits key, and with paucity of outsourcing vendors in most continental markets a tangible barrier to activity, necessitating substantial investment. Chesnara’s Head of Strategy said its M&A focus was on portfolios, rather than whole companies, as sellers’ focus became more granular. The Monument Re CEO said that the pipeline for small deals, where they focus, was well stocked. Phoenix Head of Corporate Development argued its key strength was capital and the synergies it could bring to a deal, albeit it now had open book and BPA demands on capital. Guy Carpenter pointed out that reinsurers were increasingly willing to assume asset risk, and that more block transfer deals had been done than had been made public. Phoenix made the point that cash generation was the key valuation parameter, with the multiple of Own Funds an output, while Viridium’s CEO said that on some of their transactions in the German market, Own Funds outputs were meaningless. The Fitch speaker acknowledged that rising interest rates would depress Own Funds, raising leverage ratios, but that their ratings would take into account changes in ‘economic’ value, without being drawn on what would be uncomfortable leverage. Phoenix did concede IFRS 17 changes may encourage it to look at different funding structures. We note that the three life companies we cover all trade on c.1x historic Own Funds, with Aviva having the structurally highest return on Own Funds, and Chesnara the best M&A opportunities. While our Aviva and Phoenix forecasts remain under review post H1 results, recent macro movements (wider credit spreads, higher risk free rates and weak equity markets) put pressure on Own Funds to varying degrees. Lower corporate tax rates should provide something of an offset, as may solvency II reform. Dividend yields should provide some support to share prices, albeit spreads above risk free are less attractive than at the start of the year, with UK ten-year gilt yield now approaching 4%.
H1 saw a 20% decline in Own Funds per share, from 372p to 296p, which was at the bottom of the range versus peers, with the biggest negative factor the very weak Swedish equity market (down 29%), followed by spread widening and weaker equity markets in the UK, and spread widening in Holland. The company’s preferred measure, EcV, decreased by 16% to 351p per share. The solvency ratio increased from 152% to 195%, due to debt issuance, with an underlying improvement of 10% points, due principally to the symmetric adjustment, as equity markets fell, and M&A a negative, as flagged. EcV operating earnings were weak at a £21m loss, albeit better than the £32m loss in H1 21. New business profits declined slightly due to the impact of weak equity markets on activity and margins in Sweden, but the bigger impacts were further losses on transfers out in Sweden and higher mortality costs in Holland. In contrast, divisional cash generation was very strong at £60m versus £11.5m in H1 21, boosted by reduced capital requirements as equity markets fell. Underlying (‘commercial’) cash generation of £19m covered the interim dividend by c.1.5x, and gives a better indication of long-term resilience. We have made material cuts to FY22E Own Funds and IFRS profits for H1 performance. Unlike Phoenix, for example, the gearing to equities at Chesnara means that as and when equity markets do recover, the bounce back in Own Funds/EcV should be material. Operating profits must be positive to deliver a return consistent with a greater price to book multiple, in our view. Our previous target price was based on a 6% dividend yield, equating to 0.95x forward Own Funds. We shift this to a 6.5% yield out to FY23E, equating to c.1.2x Own Funds, c.1x EcV, for a reduction in TP from 385p to 365p.
Aviva unveiled a fair operating result. While, in line with the insurance industry, Aviva saw a strongly negative impact from financial assets revaluation, the solvency position improved materially, yielding additional capital distributions. Once distributions cease, we believe that Aviva could be a takeover target.
Operating profit a 12% beat to consensus H1 results were a beat at almost every line versus company-compiled consensus. Operating profit was a 12% beat and the SII coverage ratio was very strong at 213% pro-forma, a 7pps beat. The better combined ratio at 94% vs 95.5% looks to be key driver of the profitability beat. The only small disappointment was DPS at 10.3p vs consensus at 10.4p, although company is saying that it expects to launch a fresh buyback with the FY22 results (we have modelled £300m). Undemanding multiples after underperformance The devil is no doubt in the detail, but, on first view, with shares trading on c.1x own funds and yielding close to 8%, having materially underperformed peers over 3 months, these results should be taken positively. Meeting at 8:45am. The size of the potential buyback is likely to be a key focus.
Chesnara has signed its seventh Dutch acquisition with the purchase of Conservatrix, a closed life insurer with largely funeral plan policies placed into bankruptcy by the regulator in December 2020. On top of a nominal 1€ payment, Chesnara will inject £35m in cash, for an expected annual cash return of £4m for up to 20 years. No Own Funds has been given, but on an EcV basis, Chesnara expects a gain of £18m, a 3% group uplift to year-end 2021. Funding will be £21m from the group and £14m from local own funds. This deal is consistent with Chesnara’s M&A strategy, and will roughly double AuA in the closed Dutch unit, Waard, to £1bn, as well as doubling its divisional dividend paying capability to £8m, or just under a quarter of the group dividend. Pro-forma, the group solvency ratio will decline from 182% to 171%, consistent with the company’s target to return the ratio to 140-160% as January’s tier two debt proceeds are invested in acquisitions. Subject to regulatory approvals, the deal is expected to close by year-end 2022. Chesnara has outperformed the UK market and its UK life peers over the last year, which we think reflects the diversification and defensiveness of its cash generation, supported by an active M&A strategy that has not needed fresh equity since 2017, with close to £100m deployed over the past 12 months. After today’s deal, we would estimate a further £80m of tier two debt available to fund future M&A. In absolute terms however, the Chesnara share price has not done a great deal, and offers an attractive (and rising) 8.3% dividend yield. While likely to show some NAV volatility with market movements, continued M&A at a discount to Own Funds and EcV should continue to build value for the long-term. Note we have not updated forecasts for m-t-m movements since end-March, or for today’s deal, and would expect to do so with H1 results due end-August.
Our downgrade of Aviva to Underperform last year has been one of our most controversial calls. Now that the disposals and capital returns are done, where next? We revisit investor feedback and address the pushbacks - and also update numbers following 1Q22 and the share consolidation. Buy case #1: Aviva can afford another GBP1.5bn special return from existing capital Aviva''s S2 Ratio is now likely in the high 190s, benefiting from rate moves, and the subsidiaries have plenty of surplus capital that could be remitted - so on paper the group could afford another GBP1.5bn of shareholder return. But we think it is highly unlikely the company will use market moves to fund one-off returns any time soon - and if we were to give credit for this, peers have plenty of excess as well. Buy case #2: the cash remittance targets imply a rolling GBP0.4bn buy-back Simple maths suggests that Aviva will be building c.GBP0.4bn in surplus cash / year if they hit their targets. So some investors expect rolling buy-backs. Our view is that the remittance targets are unlikely to be fully sustainable, based on our analysis of underlying capital generation - so while there will be some special return / acquisition capacity, we don''t see them as rolling perpetually. Buy case #3: expense savings create significant tailwinds The original cost saving target of GBP300m has been raised to GBP400m, after absorbing inflation. Every GBP100m of savings translates into +8% dividend capacity. But while controllable costs have declined, other costs have increased, at least partially absorbing the benefit. Buy case #4: Aviva is now a growth business GWP, Life new business and flow targets are all very ambitious. But we caution that many of the previous 2022 targets are likely to be missed. And while the latest ambitions are credible, there are reasons to be cautious about assuming they will convert into growth in underlying capital generation.
Following the year end results, Q1 trading update, return of capital and share consolidation we have taken the opportunity to review our forecasts. The net impact is to increase our 2022/23F Operating EPS to 46.3p/54.3p an increase of 27% and 51% respectively. Follow guidance given in the Q1 2022 trading update we have increased our 2022/23F dividend forecasts to 31.0p/32.6p an increase of 34%. We base our Buy recommendation and increased target price of 543p (from 467p previously) on an unchanged 10x multiple on FY23F Op EPS (FY22F previously). In our view the key challenge is for the greatly reduced Aviva is to demonstrate relatively quickly that it can outperform in what we view as three mature and competitive markets.
AV/ AVIV VIVXF
Aviva’s Q1 22 trading update was slightly above our expectations although this remains very much tied to the top-line and profitability could be impacted as of H1. Do the operations really mean that much for the share price with high dividends as a back-up? The latter are expected to continue as the firm has stated that it will release capital above its 180% solvency ratio.
Slowing top-line growth, weak GI, as expected Q1 trading was in-line with company guidance, with flattish (+1%) life sales, slowdown in GI top-line (+5% vs +6% FY21), weak combined ratio (96% vs 93% in FY21 and ‘better than 94%’ target) and pro-forma SII ratio up from 186% at FY to 192%. Note that while the SII ratio benefited from market movements in Q1, largely due to higher interest rates, the net impact to Own Funds was a small (c.1%) negative, meaning the shares trade on c.1x historic Own Funds per share. Expected DPS for FY22 and FY23 were 0.5p lower per year vs the FY indication, presumably due to the capital return ratio. Targets, set at the FY stage, were unchanged. Capital return stressed on call The CEO stressed on the call that surplus capital above a 180% SII ratio will be returned to shareholders, after regular investment in the business, with an 'exceptionally high bar' for potential M&A. In UK personal motor, Aviva put through greater rate increases as Q1 developed, due to rising inflation. The CEO said that post Q1 some big players put up prices, but not all players were pricing rationally. Weather costs in Q1 were in-line with the long-term average (UK worse, Canada better) – the decline in underlying margin was due to normalised claims frequency post Covid and a more competitive personal lines market in the UK, with reserve releases a small (0.5pps) negative. The medium-term target of sub-94% combined ratio is unchanged, with no FY22 guidance. High dividend yield in-line with UK life peers We see this update as likely neutral to consensus, with emphasis on excess capital return a positive at the margin, with shares yielding c.8% in FY23 even before potential additional returns. After recent pullback in the share price, this yield is now in-line with UK Life insurer peers. Our forecasts and TP remain under review post FY results.
Own Funds per share of 372p was 4p (1%) light of our forecast, and down 10p on H1. H2 was impacted, as expected, by symmetric adjustment from rising equity markets, albeit less than in H1, with a small (£8m) impact from inflation, partly offset by £3.5m reinsurance benefit. The company’s preferred measure, ECV, declined by 1% on H1 to 416p per share. Solvency II coverage ratio was 152% versus 153% at H1, and our 153% forecast. Pro-forma for recent deals and debt issuance, the coverage ratio is 182%, with target range still 140-160%. The lower symmetric adjustment headwind was also the key driver of the H2 improvement on H1 in group cash generation from £5m to £15m, with FX (Sterling strength) a big negative in both periods. On an adjusted basis (‘Commercial’ in new parlance), FY cash generation increased from £28m to £53m y/y, covering the FY dividend 1.56x. We place little importance on IFRS profits, but H2 net income of £9m was materially lower than H1’s £18m, with the FY result up materially y/y from £21m to £27m. The key difference to the H2 result on a Solvency II basis was the negative impact on the Dutch result from higher interest rates, which was a positive on a Solvency II basis. Management sees the M&A market as a bit more active into 2022. It has quantified “fire power to fund a deal over £100m from existing resources” after recent M&A and the £200m tier 2 debt issuance. Its sweet spot remains deals of less than £500m in value, with appetite for UK and Holland, closed and open. We note that Chesnara continues to trade at a material discount to historic yield multiples, despite 17 years of unbroken dividend growth, a much stronger track record than its peers. Our price target, based on a 6% FY22E dividend yield, is unchanged.
Aviva’s FY results yielded mixed feelings. On the one hand, the operating performance looks weaker than expected while, on the other, distributions are more lucrative than what had been guided…aligned with our expectations. Beyond, Aviva uncovers an interesting plan, but we believe it will have to deliver stronger profitability quickly.
Oil Market Tightening: Sanctions alongside companies trying to avoid the risk (commercial and reputational) of dealing in Russian oil exports resulted in the oil price spiking 10% to $110/bbl (up 40% YTD). This was highlight by shipping lines Maersk, Hapag-Lloyd and others announcing they will not be taking further Russian oil shipping contracts. Additionally Russian shipper Sovcomflot (largest owner of medium sized tankers) is encountering challenges as the UK refuses Russian registered vessels and the company is impacted by US sanctions. Indeed, some banks are reportedly refusing to deal in Russian oil even if current sanctions technically allow it. Russia is the third largest oil producer, exporting 5mb/d oil and c.3mb/d petroleum products. Estimates are that between 2-4mb/d are failing to find buyers, despite the main Urals export benchmark crude discount increasing from less than $1/bbl in late January to close to $19/bbl. Additional OPEC+ Increase Unlikely: OPEC+ (that includes Russia) is holding the ONOMM monthly meeting today, where, despite pressure, the expectation is the group will add back 0.4mb/d (of the 2020 production cut) from April. Indeed, OPEC+ remains 0.7mb/d behind previous quota increases as of January. However, given developments around Russian exports, there will be increasing focus on actual OPEC spare capacity. The <4mb/d spare capacity sits largely with Saudi Arabia, UAE and Kuwait, with studies by the OEIS suggesting spare capacity could be 1.3mb/d lower based on maximum historical production levels. IEA not enough: Yesterday the market shrugged off the announcement that the IEA was coordinating the release of 60mbbls (2mb/d over the next month) from emergency reserves (1.5bnbbl total stockpile). To make an impact, more will be required for longer, although OECD inventory levels are back to lows last seen in 2015 with oil demand reaching c.100mb/d, exceeding pre-COVID levels. Iran to the Rescue as US Shale Maintains Discipline? US production growth is expected to remain muted (EIA forecasts c.0.5mb/d growth y-o-y). The US industry is remaining disciplined around capex; 522 oil rigs active compared to almost 900 oil rigs in 2019 when the oil price averaged $64/bbl. Surprisingly, the potential of a nuclear deal with Iran could provide the most material supply surprise through 2022. On agreement, Iran has the potential to add back around 1mb/d, sufficient to at least ease the highest oil price for eight years. Surging UK Gas Price: The UK Gas price closed yesterday at c.300p/therm ($39/mcf or $235/boe) up 75% YTD on gas supply disruption concern. Russia provides 40% of EU gas demand transported by pipelines, including 20-25% gas exports to Europe transiting Ukraine (volumes are recent highs). Significantly, for UK consumers, the gas price remains materially above the 126p/therm UK gas price included in the April energy price cap increase.
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Material capital return, below some estimates Aviva to return £4.75bn to shareholders, above our £4.5bn estimate and slightly above consensus flagged by company at £4.7bn, but below some analysts at £5bn. Similarly, the new commitment to 31.5p DPS in FY22 is a big step-up (40%), and above our 27.5p estimate, albeit below Bloomberg consensus mean of 32.5p. Mid-single digit growth outlook unchanged, implying 33p in FY23 (we and consensus had forecast 5% medium-term dividend growth). 3-year cash remittance target rolled forward and increased to £5.4bn from £5.0bn. Cost reduction target increased by £100m to £400m, with £200m of costs to be taken to achieve new target. Of results themselves, op profit was a 2% miss to consensus, in-line excluding management actions, while DPS was 2% miss at 22.05p vs 22.5p. IFA acquisition announced Separately, Aviva announced £385m acquisition of Succession Wealth, an IFA network, which may raise questions over further inorganic investment plans. Dividend yield stands out, albeit in the pack with peers On first view, while some analysts had perhaps got ahead of themselves, the recent pullback in shares puts the prospective, growing yield at 7.7%, attractive in absolute terms, albeit in the pack with UK life peers. Meeting at 8:30am. We place our forecasts and target price under review.
Mid-single digit margins and growth expected in Health & Protection Health & Protection contributed 10% of UK&I Life operating profits in 2020, with UK&I Life c.70% of ongoing profit. Aviva is No.2 in both Individual and Group Protection markets, and No.3 in Health (albeit some way behind Bupa and AXA). Management targets a 6% 5-year sales CAGR and a 7% 5-year Value of New Business CAGR. In 2020, record Group Protection sales offset steep decline in Individual sales due to reduced face-to-face mortgage sales. Conservative view of Health growth? Management expectations for 3% CAGR growth in the private Health market seem conservative, given medical claims inflation. Perhaps this reflects that while underlying demand may be strong, the product is becoming less affordable for many? Focus for growth in Group is Small and Mid-Market, where Aviva’s share is lower than Large corporate, and in Individual, growth channels are direct, telephony and comparison sites. The goal is to get Health VNB margins up from 7% to 10%, with Protection margins expected to stay flat, in part due to lower margins in the nascent but growing direct markets, highlighted above. We understand payback and cash generation to be quicker in these markets than the average for UK&I Life, with heavy use of reinsurance pulling forward returns in Individual, and Group less reinsured and more sensitive to Mortality experience. Material capital return ongoing, growth in cash key The company has committed to at least £4bn capital return to shareholders and £1bn debt reduction, with the disposal programme done and £750m buyback ongoing, which we expect to be completed through share consolidation and step up in the annual dividend. The most recent SII ratio disclosure of 197% pro forma underpins this programme. The key to a sustained re-rating will be to demonstrate long-term cash generation growth, in our view. We expect updates on both with Full Year results on March 2nd, but see limited catalysts before then.
Aviva’s trading update came with some satisfaction, albeit in line with what it had been guiding. All indicators are “on track” as communicated by the firm. The interesting area will come, in our view, from the pressure that activist Cevian is exercising on the firm to distribute more excess capital.
Negative Annuity margins in Q3 consistent with last year On first view, there was weakness in Annuity margins, -1% in Q3 after weak but positive in H1 (+2%); however, Q3 last year was an even weaker -4% margin in Q3, with both reflecting timing differences before asset investment. In addition, Savings & Retirement margins at 0.6% were also slightly lower than the 0.9% at H1, but stronger than last year on a discrete quarter basis. Similarly, cash remittances were zero in Q3 after £1.1bn in H1, which looks weak, but no cash remittances had been planned. GI COR was 94% in Q3, weaker than H1’s 91.6%, as guided due to weather, but consistent with better than 94% for FY guidance, which is unchanged. We would note that Q3 CORs were worse than Intact reported yesterday (Canada: 93% versus 89% and UK: 95% versus 94%). GI growth slowed from 6% at H1 to 5% at 9m, consistent with our 4% FY forecast. SII ratio, pro-forma for disposals and £4bn capital return, as of Nov 5th, was 197%, consistent with our published FY22E forecast of 198% (it fell from 200% at Q3, due to lower government yields). Outlook for better full year margins and cash remittance unchanged Outlook remains for Annuity margins to improve in Q4, but for FY margin to be below last year, on lower volumes (now quantified at £5-6bn versus £7.5bn last year), and for cash remittances to grow strongly for the FY from last year’s £1.4bn, despite zero in Q3, with the medium-term guidance of cumulative remittances of £5bn through 2023 unchanged. Full year results next catalyst Net neutral to a small negative, in our view, albeit multiples are undemanding. Call at 9am. Aviva trades on c.0.9x Own Funds for 6% yield, rising to 7% in FY23E. Company is guiding to an update on capital return at full year results, when we would also expect an update on medium term targets, with confidence in long-term cash generation key to a sustained re-rating.
Aviva has provided a Q3 update: overall a set of solid numbers and the Group reiterates its targets: a “capital return of at least £4bn, cost savings target and over £5bn cash remittance between 2021-2023”. It has also completed c.£450m of the £750m share buyback. The remaining disposals of Poland, Italy (Life) and Vietnam are expected to complete by the end of 2021. We estimate Aviva could return another c.£1bn in addition to the £4bn announced at H1. We continue to believe Aviva needs to demonstrate its capability of growth in its core markets within the next two years. Otherwise, the best outcome would be to split the business and sell down all the regions to achieve the SOTP valuation for shareholders. We reiterate our Buy rating with an unchanged TP of 467p.
Analysts - Ming Zhu +44 (0)20 7886 2738 & Barrie Cornes +44 (0)20 7886 2758 ESG is constantly evolving and is becoming an increasingly important investment topic for institutional investors. We view the UK life insurers’ ESG strategic frameworks as fully aligned with business strategies and evolving industry standards. Overall, UK life insurers have received good ESG ratings from various rating agencies. They have made tremendous progress on ESG strategies with improved disclosure. We anticipate further development of their ESG strategies to overcome the challenges and meet their medium to long-term targets. We continue to argue that the sector offers attractive and resilient dividends (currently yielding 5.5-7.9% on FY21E dividends), supported by its robust earnings and capital position.
AV/ CSN LGEN JUST PRU
Chesnara is to acquire Sanlam Life & Pensions (SLP) for £39m, its first UK deal since 2013. The price paid equates to 1x Chesnara’s estimate of SLP’s FY20 Own Funds, and a 19% discount to Chesnara’s estimate of Economic Value (EcV) of £48m. Both ratios are before £2.8m of transaction costs. The deal is to be debt funded, and is expected to complete in Q1 2022. It will increase the EcV leverage ratio from 6% to 15%, and lower group Solvency II ratio from 156% at FY20 to 142% (Chesnara’s H1 21 SII ratio was 153%). The majority of the £3bn portfolio is unit-linked pensions, mainly invested in equities. The book is open, employs 100 FTES, and will be closed to new business and moved to Chesnara’s outsourced model upon completion. All costs of these changes are reflected in the £39m Own Funds estimate. Paying over 100% of Own Funds after costs and increasing leverage, we see the rationale of the deal in a step up in cash generation, estimated at c.£5m per year on a steady state basis, against FY20 UK cash generation of £29m, and FY dividend costs of c.£34m. This will be supported by real world returns above the risk free, run-off of the risk-margin and future synergies, none of which are captured in Own Funds or EcV. We update our forecasts for the recent H1 results, making a small cut to solvency after the H1 decline and immaterial cuts to IFRS profit forecasts, but update only solvency forecasts for SLP, with a step-down in solvency guided. On unchanged dividend forecasts of 3% growth p.a., we roll forward our target price basis from FY21E to FY22E on an unchanged 6% target dividend yield, and this drives an increase from 370p to 385p. We think investors should take comfort from the increased cash generation from this deal, and note that Chesnara traded at a premium to the sector on a yield basis prior to 2019.
Economic value (EcV) was down 1% in H1 at £630m (419p per share), after payment of the final dividend of £21m and £24m FX loss, and was consistent with our FY21E forecast of £634m. A stricter measure, Own Funds per share, rose slightly from 378p at FY20 to 382p, above our FY21E forecast of 375p. DPS increased by 3% to 7.88p, the 17th consecutive annual increase. The Solvency II ratio dipped from 156% at FY20 to 153% versus our FY21E forecast of 158%. This largely reflected increased capital requirements due to strong equity markets, a factor that had supported solvency in H1 20 when markets fell, and that we had flagged as likely to reverse in our sector preview. By division, the UK performed strongest, helped by higher equities and yields, while Scildon showed good recovery in capital position due to markets, helped in part by a new reinsurance cover, with an EcV operating loss due to the ongoing impact of guarantees due to low lapses. The Swedish symmetric adjustment meant rising markets were a large cash negative and impacted solvency, but of greater concern was an increase in transfers out, spurred by one very aggressive mutual competitor, after rules on transfer fees were changed last year, which had a £25m negative impact due to future transfer assumptions. At a group level, underlying cash generation from the UK (adding back a £6m symmetric adjustment hit due to rising markets) and Waard in Holland was £22m, which would cover the full year dividend 1.3x on an annualised basis. We also note the recovery in Scildon’s capital position means it could pay a dividend to the centre in H2. Both underline a good outlook for dividends. The company has taken a £100m RCF in July (£31m used), and says it is “increasingly optimistic that good [M&A] opportunities are available for us”. Chesnara offers an attractive 8% dividend yield.
AV/ CSN HAS HTG PHNX RCDO IO7
We estimate Aviva could return another c.£1bn in addition to the £4bn announced at H1. This is calculated by the excess capital above its 180% SII upper target level and allowing for investment for growth, supported by central liquidity at Group level. We believe Aviva needs to demonstrate its capability of growth in its core markets within the next two years. Otherwise, the best outcome would be to split the business and sell down all the regions to achieve the SOTP valuation for shareholders. In the near term, we believe the capital return and regular dividend should support the share price. We reiterate our Buy rating with an increased TP of 467p (from 460p).
Encouraging set of results posted by Aviva for this H1 release. The core markets operations are satisfying but the most interesting, capital distributions from disposals, will be fruitful and immediately effective for some of it while the biggest chunk is expected by HY 2022.
NWG’s Q2 2021 results exceeded consensus expectations, although >90% of the “beat” in underlying profit before tax was driven by a net £605m impairment write-back in the quarter. For us, the fact remains that pre-provision profits remain weak, and are likely to remain so throughout our forecast period despite our assumption of material ongoing cost take-out (Fig 1, page 2). The underlying cost:income ratio in H1 2021 remained stubbornly high at 60.3%. We regard the key “positive surprise” as management’s revised stance in relation to “in-market” share buybacks. The announcement of a £750m buyback for H2 2021 (of which c.£34m has been completed) should help to neutralise the impact from planned UK Government Investments (“UKGI”) disposals. Indeed, we now model both a “directed” share buyback of £1.25bn and an “in-market” buyback of £0.5bn in 2022e. Such buybacks are tNAV and EPS-accretive and appear consistent with management’s stated intention to manage its CET1 capital ratio down to 13-14% in 2023. Previously, we were sceptical of management’s intent to move at sufficient pace to “normalise” its capital position. The fact that it now appears willing to do so (alongside lower impairments) drives our EPS upgrades of 46%/21%/11% through 2021/22/23e (Fig 2, page 2) and supports ROTE. We are moderately encouraged by NWG’s progress, but we struggle to rationalise NWG’s premium valuation in relative and absolute terms. It trades on 0.8x 2023e tNAV (Fig 3, page 3); a premium to all other FTSE100 banks, for mediocre ROTEs of 8.9%/6.3%/7.6% through 2021/22/23e (Fig 4, page 3). With the NWG share price at an 18-month high, we downgrade to Sell (from Hold). Our target price rises to 200p (from 185p). This becomes our only Sell rec within our UK banks coverage; a sector where we continue to see value.
AV/ BARC CCH MER MGGT NWG STAN TBCG TRB DQ6
Aviva has reported H1 2021 results. Overall numbers are mixed. It missed consensus on UK & Ireland Life operating profit but beat on the general insurance division. The “at least” £4bn capital return (including up to £750m share buyback starting tomorrow) is lighter than Cevian’s anticipation of a £5bn capital return, which we thought was too optimistic. The difference is driven by a planned debt repayment of £1bn. We continue to struggle to see Aviva’s competitive edge in each of its core businesses but believe it could be further split up if it is unable to deliver post disposal of Europe. However, we believe it could take management at least another year or so after the completion of all the disposals to prove its capability of delivering in the core business. We reiterate our Buy rating with unchanged target price of 460p.
Mixed H1 results H1 operating profit was a 7% miss to consensus at £725m, as was SII ratio at 203%, vs 209% consensus A shareholder capital return of at least £4bn will begin with a £750m buyback - this is sooner than consensus and our expectation on timing, but in-line with our forecast by quantum, and may be slightly below consensus. A £1bn further external debt reduction was also announced, for a total capital return, including internal debt to be repaid, of £7.5bn, in-line with disposal proceeds. DPS raised 5% as forecast. Cash remittance ahead of consensus at £1.1bn vs £0.8bn, with the 3-year £5bn target re-iterated. Life key driver of earnings miss, with one-off element The operating profit miss was due to a material 22% miss in the largest division, UK & Ireland Life, in part because of low volumes and margins in annuities, but also Other falling to a negative, due to an increased provision for legacy customer remediation, which could be regarded as a one-off. Life PVNBP was a beat to consensus, at £16.9bn vs £14.8bn – growth in Savings & Retirement AUM should help profits going forward, with company commenting the underlying profit growth was 30% in H1 versus flat reported. GI was a beat to consensus, with 91.6% combined operating ratio versus 93.4%, albeit margins are forecast to reduce in H2, as expected. Aviva Investors was in-line with consensus and Strategic Investments a beat. Undemanding multiples broadly in-line with peers Aviva trades on FY22E 0.8x own funds and 8.8x FY23E PE, broadly in-line with peers, for below-average yield of 5.6% in FY22E, stepping up on our current forecasts to a much more attractive 6.8% in FY23E. We place our forecasts under review ahead of the 8:30am call, noting that the timing and structure of capital return is likely to be different to our forecasts.
The market loves a restructuring story. We also like what Aviva has been doing. But we think the market has got ahead of itself. Firstly - credit where credit''s due: fantastic execution Aviva''s management team has delivered its disposal programme at pace. It has already used part of the proceeds to de-lever to a point where we think one of the market''s major concerns has been taken off the table. And progress against stretching cost savings targets has been impressive. But while the market loves a restructuring story, relative performance has got ahead of itself We have no quarrel with the decision to sell the non-core businesses, nor with the use of proceeds (we est. GBP5bn for shareholders). But we don''t believe this has crystallised a material discount to the SOTP. The market seems to think that the ''Core'' Aviva businesses deserve a higher multiple than ''old'' Aviva: we challenge that view - because of both the growth potential and business mix. Consensus appears to ignore historic and current trends Turning away from the restructuring, we are concerned by consensus. The UKandI life business has seen unit linked margins decline by ~4bps per year for a decade, reflecting the run-off of heritage business and replacement with lower margin new business - but consensus forecasts these to be flat. New business margins have also declined, reflecting the mix shift towards unit linked savings; again, consensus expects these to be flat. And in non-life, we don''t think consensus fully reflects headwinds to top-line and underwriting margins from pricing and regulation. Cash remittance guidance is highly promising: but given the pressures we highlight above, we have questions about the extent to which this is driven by underlying earnings vs. management actions and the like. Downgrading Aviva to (-); we prefer LandG (+) in UK life and AXA (+) amongst multilines We are 9% below consensus op profit in ''22, and downgrade to U/P: amongst UK life insurers,...
Analyst - Ming Zhu +44 (0)20 7886 2738 We look at how rising inflation impacts life insurers, from both a standalone rise in inflation and an inflation rise with rising interest rates. We conclude that there would be some impact on the expense side, but on the claims side, insurers are A&L matched and/or inflation hedged. An increase in long-term inflation expectations is closely linked to long-term interest rates and so is frequently associated with interest rate risk. All life insurers would benefit from rising interest rates which lead to improved investment returns, better pricing/rates on annuities while increasing new business sales. We believe that rising inflation and interest rate expectations create a buying opportunity in the life insurance sector.
AV/ CSN JUST LGEN PRU
Aviva’s Q1 2021 trading update was positive. While operations remain flat with positive and negative performances offsetting each other in Savings & retirement and Annuities & Equity respectively, the great news come from the speed at which Aviva has been able to implement its restructuring plan. An improvement in the Solvency ratio and juicy distributions are expected.
Capital, leverage and profit progress Key in the Q1 trading statement was the pro forma solvency II ratio of 253%, better than our FY21E estimate of 244%, pro forma leverage of 26% versus a target of below 30%, and a strong Q1 combined ratio of 90.6%. UK GI GWP growth of 6% was strong against flat in 2020, driven by 13% growth in commercial lines. Flat personal lines GWP was stronger than at DLG, for example, and the company flagged an increased share of PCW new business, from a very low base, as well as Home price increases. Less positive were flat UK & Ireland Life sales, with value of new business down 23%. Savings & Retirement growth was strong at 23%, with annuity volumes halving and margins going to zero, on lower market activity and asset mix below target. No update on size and timing of capital return The pro forma SII ratio implies £6.6bn headroom to top of a 160-180% target solvency range. Management would not be drawn on size, format or timing of capital return, beyond reiterating that it would be substantial. Management stressed that the new outlook for FY COR better than 95% was so that analysts would not assume 90.6% as a guide. Q1 had unquantified claims frequency benefits due to lockdowns, which are expected to unwind through the year, with regulatory actions upcoming in Ontario. This outcome would be better than the 96.6% COR in our current forecast. Management thinks its low BPA volumes in Q1 reflected the market, while in Q2 to date premiums have increased to £0.9bn from £0.6bn in Q1, with last year’s £6bn volume cited as a realistic goal. Margins are expected to improve as sourcing of illiquid assets comes through. Big discount to own funds for growing business Capital strength ahead of expectations and positive trends in Non-life make for a solid update, albeit the market may have hoped for more news on capital return, even at this early stage. We place our forecasts under review, principally for the Non-life COR outlook. Multiples are undemanding, with Aviva trading on a similar discount to own funds as closed life peers, despite a growing Non-life business, for a dividend yield forecast to step up from 2023E after a £4bn share buyback in 2022.
Aviva has reported its Q1 2021 update with overall numbers encouraging as new business sales held up in the Life division and grew in general insurance. The SII debt leverage medium-term target of below 30% has been achieved early, with Q1 at 28%. The focus for Aviva is how much and when excess capital will be returned to shareholders. Management indicated there will be a further update on substantial capital return to shareholders later in the year as they make progress with the completion of divestments. We estimate c.£3.7bn (94p/share) excess surplus could potentially be returned. We reiterate our Buy rating with unchanged TP of 430p, the sum of Aviva (post all disposals) and the potential excess return to shareholders within the next 12 months.
Aviva has agreed the sale of 8 businesses in 8 months for nearly GBP8bn. Once these disposals close, Aviva''s pivot towards the core businesses of the UK, Ireland and Canada will be largely complete. Rapid delivery against the portfolio plan Aviva has been gradually shrinking its global footprint over many years. But CEO Amanda Blanc''s announcement in August that the group would focus on the Core markets of UK, Ireland and Canada was a particularly drastic step towards simplifying the business. Aviva has agreed eight disposals since that announcement, for a total of GBP7.7bn - and also completed the disposal of Friends Provident International, first announced in 2017. We had been somewhat concerned about execution risk for this ambitious plan - but while not all the disposals have closed, that execution risk is significantly diminished. Implications for capital returns: GBP5bn for shareholders and GBP2.9bn debt reduction We have updated our estimates of the capital returns available to shareholders (see our previous estimates for different scenarios in The G word and The Div-il is in the Detail). The sale of Poland attracted a better price than we anticipated, and so we revise up our expected shareholder returns to GBP5bn, with GBP2.9bn of debt deleveraging. The capital returns could start this year (and the debt deleveraging has already begun). Updating our estimates and valuation We have updated our forecasts for the disposals, with earnings declining by c.30% in 2022+. We recognise the shareholder returns as a separate addition to valuation, rather than through explicit buy-backs, because the size of the returns relative to traded volumes may make a buy-back for the full GBP5bn difficult to execute. We reduce our beta slightly in recognition of the reduction in leverage, leading to a 5% increase in our Target Price. After adjusting for special returns, the 2022 ordinary dividend yield reaches 8.4%.
Aviva released its 2020 figures, with an operating profit of £3,161m and an IFRS profit after tax at £2,910m up 9.2% yoy. The Board will propose a final dividend of 14p/share. The insurer announced new financial targets with at least $5bn of cumulative cash remittance, £300m of cost reduction and a debt leverage ratio <30%. This update was expected regarding the sale of many operations in 2020. Aviva plans also to become a net zero carbon emissions company by 2040.
Profit beat and debt reduction plan Key in the FY results today was a material operating profit beat, driven by UK Life and UK GI, against our forecasts; the sale of the remaining Italian businesses; and a £1.7bn debt reduction plan, including an £800m tender offer launched today. 14p Final dividend was as guided, while Solvency II ratio at 202% was in-line with consensus. The company set out a new cumulative Core cash remittance target of £5.0bn for 2021-23, with £1.8bn targeted in 2023, implying a c.10% CAGR from £1.4bn achieved in 2020. This compares to medium-term regular dividend growth guidance of low to mid-single digits, unchanged. Questions were asked on whether dividend growth was therefore overly conservative, with management explaining there was still a lot to deliver. £4bn capital to be returned to shareholders? Italian and French sales are expected to increase the Solvency II coverage ratio to 236%. After a 12%-point negative impact from debt reduction, this implies 44%-point headroom to the 180% target ratio, in turn implying over £4bn of capital available for shareholders, on top of regular dividends. This would be over 25% of the current market cap. Our forecasts make no assumption of additional capital return, but we understand consensus was up to £3.5bn. The CFO cautioned on the call not to expect capital return before the sales complete by year-end. Management would also not be drawn on whether capital return would be by buyback or special dividend(s). The sales process will then be largely complete, with only Poland and JVs outstanding. Premium to life peers, but capital return plans supportive We placed our forecasts, target price and recommendation under review when the sale of France was announced last month. Our current cash generation forecasts are for declining returns from 2021, which are likely too conservative given today’s update and outlook, and below consensus. Aviva trades at a premium to life peers on price to own funds and regular dividend yield, but with the prospect of material additional capital return in 2022.
Aviva continues to execute rapidly its strategy, leaving France and Turkey. In the last few months, the insurer has realised six transactions. The cash will be used to improve business in the targeted markets (the UK, Ireland, Canada), reduce debt (£1.5bn in 2022) and to distribute a dividend to shareholders (14p per share to be proposed at the upcoming General Meeting).
Raised capital forecasts… Post year-end, and ahead of the full year results on March 30th, we update forecasts for changes in asset values since H1 2020. Net is a high single-digit uplift to Own Funds per share, principally due to stronger equity markets and narrowed credit spreads. …but lowered capital strength. Unlike larger peers, Chesnara does not provide sensitivities for its solvency ratio, but given that there was a material benefit to the solvency ratio in H1 from lower capital requirements due to a fall in equity markets, we forecast a negative impact in H2 on a strong recovery in equity markets, with the Swedish market up c.13% in H2. Flattish solvency over the year consistent with peers. We would put our lowered solvency forecast for Chesnara (at a group level) in the context of estimates of flat to down solvency ratios forecast for peers, year-over-year, such that ending the year in the same position as at the beginning should be seen as a reasonable result. Higher risk-free rates in 2021 should be supportive of a higher marked-to-market solvency position, however. In part due to the volatility of asset values, but also reflecting Chesnara’s long track record of uninterrupted dividend growth, we base our price target on a target dividend yield of 6%, against 8% currently. That said, the c.30% discount to Own Funds does stand out, and may well have increased since year-end. Should the gap continue to widen if bond yields move higher, the rationale for a private equity or strategic acquirer would increase, we believe.
AV/ CSN DPH MGP PHNX TSTL
If Aviva disposes of the rest of its non-core portfolio, how much of the proceeds can be used for shareholder returns? It''s very sensitive to the Diversification impact. The Diversification debate Solvency II has plenty of features that sound purely technical but can actually be material. One of these relates to diversification benefit. Put simply - if Aviva sells its Non-Core operations, the Group gets less diverse, its risks are more concentrated, and that is negative for capital. But by how much? We previously assumed not a lot. But there is a debate amongst investors on the topic - and comments from management can be interpreted to imply a figure in the billions of pounds. A GBP2bn diversification loss could make the disposal programme EPS dilutive This note models the impact of a GBP2bn loss of diversification benefit: on our analysis, this would reduce the shareholder distribution potential by c.35% to GBP2.9bn and make the programme c.13% EPS dilutive. It could still make sense - the remaining business would deserve a higher multiple, and the Non-Core businesses likely have lower cash conversion than the core. But clearly a loss of diversification of this size would be impactful on potential value creation. Downgrading to Neutral after strong performance since December The disposal programme scenario analysis does not change our Target Price, because we do not model the impact of disposals until they have actually been announced. But the share has been very strong since our last update in December, outperforming UK life peers by c.13%. It has the lowest dividend yield in the UK life sub-sector. And we find ourselves c.5% behind consensus Earnings forecasts for 2021. Our Target Price remains unchanged, but we downgrade our recommendation from Outperform to Neutral.
Headlines. Revenue is expected to be £268m with PBT of £42m, which is ahead of our £262.8m and £40.4m. We leave FY21E unchanged. Billable Mountie headcount at year-end was 3,580, which is 2% ahead of our 3,504 estimate. Net cash was an exceptional £65m (FY19 £37m), materially ahead of our £40.9m estimate, driven by the new billing software and increased cash collection staff resource. Trends. We understand that the year has started strongly with a record first few weeks. However, we would not want to extrapolate this performance at this stage, with some potential pent-up demand from the end of December as new lockdowns came through and the US election process took hold. Nevertheless, this strong start, across all regions, is a very encouraging sign and the business is backing this up with hiring plans close to 2019 levels. Regions. The UK ended FY20 at 1,625 Mounties, implying a broadly flat H2, vs 273 H1 reduction, driven we understand by strong financial services and an improving public sector. North America slowed during the latter part of the year, with 1,086 year-end Mounties, implying a 136 H2 reduction, we suspect due to the uncertain political backdrop and increased lockdown pressures seen in Q4. This seems to have eased since the start of the year, with a good level of Jan new client wins. EMEA was flat while APAC saw a c27% increase in headcount finishing at 633, driven by a strong performance in Australia. Dividends. The strong cash position means we tweak up our dividend estimates. FDM will pay a second interim of 13p to rebalance the overall dividend outflow following the FY19 final cancellation. A normal dividend payment will now resume. We forecast FY20E DPS of 46.5p vs our previous 38.5p, up FY21E to 30p from 27p and FY22E to 32p from 30p. View. The mix of accelerating growth as the FDM model continues to gather momentum, cash generation and dividends supports our Buy and 1300p TP.
AV/ CSN FDM HSP PHNX SCS TLW
Time to shift the debate from dividend resilience to dividend growth For most of 2020, the investment debate for UK Life has focused on balance sheet resilience and dividend sustainability. The COVID downturn is far from over - but we think the sub-sector has shown resilience despite market volatility. Brexit trading terms are still up in the air, but we sense that the investment debate is shifting from the question of whether balance sheets can withstand the shock towards whether and by how much dividends can grow. Aviva (+) - potential for GBP4.5bn of buy-backs and DPS upside The downwards re-set of the dividend is a function of a shrinking perimeter. There are reasonable questions about the organic growth the company can achieve from here. But working through the potential disposals of the non-core operations, we think there is potential for GBP4.5bn of buy-backs and GBP3.3bn of debt redemption by the end of 2023. And the resulting business would be more focused; be less exposed to European life; and carry a lower level of debt, reducing the CoE. LandG (+) - sustainable compounding organic growth LandG''s growth in capital-intensive bulk annuities has created Solvency strain. There has been a long-standing question about how it funds this growth. We examine the drivers of capital strain to test management''s view that the annuity book is approaching self-sustainability. We continue to think this is an attractive compounder, redeploying its earnings at a RoE in the high teens. Phoenix (=) - wait and see before pencilling-in DPS increases The new management team not only wants to replace run-off cashflows with new business - it wants to grow the flows, and thereby grow the dividend. We examine whether management''s ambitions stack up. A lot depends on a big expansion of the bulk annuity business on improved economics. This will be a stretch: we will wait for delivery before giving the benefit of the doubt. MandG (=) - is Wealth the next source...
H2 to date has seen a big rally in equities, corporate bond spread narrowing and higher risk free yields, albeit the latter has eased in recent days. Swedish market performance, the most important for Chesnara, has been particularly strong. We highlight the greater sensitivity to equity market movements for Chesnara than peers, due to the Swedish business being substantially a fee-based equity pensions business, with part of the UK business exposed through pensions. Unlike Phoenix, which also has substantial pensions and savings businesses, Chesnara does not hedge its equity exposure. Conversely, it has much lower spread sensitivity because it does not have a material annuity back book and does not write new annuity business (a growth market for peers due to bulk purchase annuity demand). While we are not updating Chesnara forecasts ahead of year-end, we note that H2 asset price movements should have been supportive for solvency and EcV, potentially increasing values to above those at the end of 2019, based on stated sensitivities. We estimate the uplift in solvency surplus at c.20% and the uplift in EcV at c.10% since H1 2020. Sector M&A has picked up in H2 as asset markets have stabilised. The most relevant news for Chesnara was Phoenix’s statement in mid-November that it was considering its options for its European (German, Irish and offshore bond businesses) operations, having received expressions of interest from third parties, while Aviva is to sell an Italian life jv for 1x Own Funds. We note that peer dividend yields have reduced materially since H1, while Chesnara’s is back close to historical highs at 8% in 2022E. With cash coverage likely further improved by market movements, we re-iterate our Buy.
When Amanda Blanc, Aviva’s new CEO, took the job in July she promised to move at pace, and if press speculation is to be believed, she is certainly doing this. The company has already announced the sale of its operations in Singapore. Les Echoes in France reported that the company had 3 serious suitors for its French business, while Reuters has suggested Allianz and Athora for a rumoured price of €2 to €3bn. Italian press has suggested Athora and Cinven are interested in the Italian book, while its Italian JVs can be exited on multiples agreed within the contracts. In this note we analyse the impact of the asset sales, and conclude that, if 70% of the proceeds returned to shareholders via share buybacks, the current yield of 11% could be protected, even if the buyback was completed at our 450p price target (61% upside).
With the sale of the Singaporean operations for £1.6bn, the new CEO, Amanda Blanc, shows her intention to focus rapidly on its preferred markets (the UK, Ireland and Canada). The next candidate for sale is the French unit. This transaction is more complicated than the previous one, with the necessity to obtain the agreement of Afer, its key partner in France. With potential proceeds of £2.9bn, Aviva could reduce its debts significantly and allocate more capital to the UK bulk annuity business.
We raise operating profit forecasts for higher new business profits, after a strong H1, and with the CEO saying at H1 that the intention was to increase capital deployed above previous £100m per annum guidance. BPA profits in any one period are likely to be volatile, and, short-term, cash invested in BPAs would be a strain on cash generation, with payback in later years. Our cash generation forecasts therefore follow closely updated guidance of £1.5-1.6bn for FY20E and £5.9bn FY20E through FY23E, unchanged at H1. The H1 presentation pointed to 20 years of dividend visibility, before new business and management actions. The CEO was clear at H1 that there would be no ‘big reveal’ at the annual strategy update in December. On top of updates on costs and capital, we would expect an update of the ‘wedge’, the interplay between run-off, and new business cash flows. On our raised BPA assumptions, we model a more stable cash position through FY28E, with minimal incremental management actions needed to hold cash flat. Solvency impacted by lower bond yields. The relative weakness at H1 was the updated pro-forma solvency II position, which at 150% is in the lower half of the company’s target range of 140-180%, albeit down only modestly from the (previously undisclosed) 152% at FY19. Longer-dated yields have moved up since H1, and spreads improved further. L&G Part VII transfer should lift the H2 ratio, while cash generation should increase the ratio going forward, even after repaying debt coming due in 2021 and 2022. We leave our 780p target price unchanged, based on a target dividend yield of 6.25%, which would be a small premium to Phoenix’s dividend yield over the last five years, and equates to a c.10% discount to FY21E Own Funds.
We reassumed coverage on Aviva with a Buy rating and 450p price target on the 26th August 2020 on the thesis that the refocus of the group on its core operations and managing for value its international operations could lead to a material (60%+) re-rating of the stock from its current depressed valuation. While investors recognise the value in the stock, the key pushback has been whether this time really is different, and whether the likely rebased dividend will hold back the stock. In this note we take each by turn and argue why this time could really be different and why the rebased dividend will not limit share price upside due to the £7bn of value in the international operations.
Most companies are like swans: everything appears smooth on the surface, but the operations are scrabbling furiously underneath. Right now, Aviva is in flux in plain sight. But look below the surface, and the operations are actually performing decently. Back to the drawing board New CEO Amanda Blanc has set out a change in strategic direction. Aviva will now focus on the UK, Ireland and Canada, while managing its European and Asian businesses for value. She made an explicit commitment to withdraw capital where returns are unsatisfactory. And a new (presumably lower) dividend policy will be announced in Q4. This leaves some open questions: what is the shape of the business going to be? How will disposal proceeds be used? What will the new dividend policy be? And what prompted the change in direction? The new approach is a promising attempt to grasp the nettle - although we are also mindful on execution risk. Meanwhile, operational performance is decent If you ignore all of the strategic changes, HY20 saw a robust performance across the important metrics: Solvency, capital generation, operating profit, new business value and flows. Management expect to exceed (already challenging) expense reduction targets for the year. The big question is whether the anticipated dividend cut is a function of some sort of underlying weakness in the operations: the financial results suggest it is more a matter of strategic direction. Updating our estimates We now account for better than expected life flows and better margins in unit linked savings, offset by lower expected ''other'' profits. In non-life, increased underwriting profit expectations (with bumper profits in 2H20 due to COVID effects) are offset by lower investment returns. The net effect on earnings for 2021+ is immaterial, but the increase in higher quality earnings offsets lower-quality ''other'' items. We have cut our dividend forecasts by about a third following management comments indicating...
Whilst we have been here before – a new CEO promising to refocus Aviva and improve performance. However, we believe previous CEO’s did make progress not reflected in the current valuation, and Amanda Blanc should be given the benefit of the doubt to build on the work of her predecessors. The balance sheet is in a much stronger position today, allowing Ms Blanc to focus on improving the performance of the operations. She has gone further than her predecessors in refocusing solely on the UK / Irish / Canadian operations, where it has a leadership positions, increasing the likelihood of success. We believe Aviva is in a similar position to when Mark Wilson joined the company in 2013, trading at a material discount to peers. Mr Wilson was an external hire with a clean sheet of paper, focused on improving performance and the balance sheet, built credibility with investors and the stock re-rated by 60% over the subsequent 18 months. We believe Ms Blanc can enjoy the same success, and with the stock on 5x forward earnings and 0.6x book value, can drive similar re-rating. We resume coverage with a Buy rating and 450p fair value.
H1 20 operating profit declined by 12% to £1,225m and the COVID-19 claims impact was £165m. Cash remittances from business units to the group was only £150m. The insurer said that it will focus on the UK, Ireland and Canada, which means an exit from other European and Asian markets. The Board has declared a second interim dividend in respect of the 2019 financial year of 6p/share and will inform shareholders about the 2019 final dividend in Q4 20.
With a new CEO, Amanda Blanc, Aviva’s shareholders could dream of a possible change in the group’s strategy, with a more focused insurance business. The new Chief has an opportunity to take painful decisions in a year where no one will require a high operating performance.
Covid-19 losses and macro impact manageable so far. The solvency II coverage ratio declined from 206% to 182% in Q1 (with no final dividend paid). Solvency II own funds per share declined 12% from 423p to 372p per share. On top of the impact of wider credit spreads, lower government bond yields and lower equity markets, the company updated for Covid-19 GI losses, released Brexit property allowance (£440m), an assumed 15% fall in commercial property and 12% fall in residential property, and assumed one letter downgrade on 10% of BBB debt and 5% of A debt. Bar the impact from Covid-19 on FY20E earnings and balance sheet, our forecasts, already materially below consensus, are little changed, post FY19 and Q1 2020. The key impact for FY21E (EPS -1%) is lower growth and lower margins in Fund Management, partly offset by materially lower central costs, with Life better and GI worse. Dividend policy could be resumed, which would be a positive. On our forecasts, the previous dividend policy of nominal growth could be returned to and would equate to a c.80% payout ratio of cash generation after interest costs. We estimate this would be a similar ratio to Phoenix, before cash from management actions and after cash investment in new business. There is risk to the dividend if macro worsens and leverage increases. We estimate that a further 20% fall in own funds would take leverage to unsustainable levels. We therefore move from a yield-based valuation (previously 7.5% target yield) to price to own funds, targeting an 0.8x 2020E multiple, broadly in-line with where Chesnara and Phoenix trade, but below our target multiples for those peers. Management said it would have a clearer view on the Covid-19 impact end-June, which suggests a July trading update.
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Covid-19 losses manageable Aviva quantified £160m net losses from Covid-19, with £200m of losses, principally business interruption, offset by £40m benign claims in other lines, based on lockdown until end-June. The CEO clarified on the call that a second lockdown wave could incur further losses. Headwinds to capital position March-end solvency II ratio of 182% was unchanged from last disclosed value at 13th March. Own funds per share declined by 12% in Q1 from 423p to 372p. These declines assume Brexit property allowance release (£400m benefit); a 15% fall in commercial property, a 12% fall in residential property; full letter downgrade on 10% of BBB-rated bonds and 5% on bonds rated A. We would see these as fairly conservative assumptions (our DLG and RSA forecasts are based on a 20% commercial property fall, however). Much attention on the call was focused on management cautioning that there could be losses on its commercial mortgage portfolio of £7.7bn, with the CFO clarifying that £6.2bn has an LTV below 70%, with a small number of high LTV loans. Limited clarity on outlook, but some reassurance on return target “We remain committed to achieving our 2022 targets, however, Covid-19 is expected to provide additional challenges to achieving these targets.” Key among these is a 12% return on solvency II capital, with the CFO flagging that inflow targets would be harder to hit in a weaker economic environment. Restatement that the dividend will be considered again in Q4. Our forecasts were already under review for the 2019 final suspension, at which time we flagged material risk of a dividend cut, given limited cash coverage to the current dividend. Shares trade at a 0.65x own funds, which is a material discount to peers under our coverage (Chesnara and Phoenix), albeit we see downside risk to our c.10% return on own funds forecast (versus 12% company target). Near-term positive catalysts appear limited, with sentiment towards Covid-19 recovery and higher government bond yields the key drivers.
Carr’s has reported 1H results of £9.6m PBT and EPS of 7.9p (FD). The interim dividend was deferred until the full effects of COVID-19 become clearer. The profits show a 16% decline on the prior year, which was anticipated following the 12th March update where the group reported that trading had been weaker than expected in Agriculture in 1H (both in the UK and US). It also reported that there had been a delay in (two) anticipated engineering contracts in Asia, but this is more a factor for 2H20. The engineering pipeline is still strong so the medium-term outlook for this division remains robust. In Agriculture, farmer confidence (UK and USA) has remained weak. In the UK, we still face Brexit uncertainty (future trade deals) as well as some weakening in farmgate prices. In the US, cattle prices have risen from their lows, but not by any sizeable margin. In both countries, mild winter weather has allowed farmers to reduce purchases, of feed in particular, to keep costs in check. With lower demand, feed margins have also come under pressure. The group has reacted to these challenges by reducing central costs, which has helped to mitigate some of the profit shortfall vs original expectations. COVID-19 has not had any dramatic impact on the business at the present time (see overleaf), but prudently the group is keeping a tight focus on cash. Net debt closed the half at £25.4m (excl. leases), which is a comfortable 1.2x EBITDA. The undrawn facilities were £22m. We anticipate FY20E net debt of just under £30m, after the payment of some deferred consideration. We make no changes to forecasts today having adjusted them just one month ago for issues unrelated to COVID-19. The underlying trading outlook has not changed materially since, although COVID-19 adds a layer of uncertainty and the group will continue to monitor its effects closely.
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Key pillars of solvency resilience and dividend progression already announced. Chesnara disclosed the improvement in the FY19 solvency II ratio from 155% to 163% as of March 20th as the key numbers in its trading statement on March 30th. It also then said the final dividend would be raised by 3%, in-line with its long-term track record. It had estimated a decline in Economic Capital of c.£100m, which improved to a £90m decline as of March 31st, with the solvency II ratio estimate unchanged. Economic value likely to move; dividend paying capability more predictable. While the present value of future profits is likely to move in volatile equity, bond and currency markets, strong starting cash and underlying cash generation gives greater visibility to dividends. We would point to updated disclosure on opening and closing cash, with this year’s coming shareholder dividend more than covered by dividends expected only from CA and Waard books, which de-risks if payments from Scildon and Movestic were to be barred by local regulators. Details on cash generation and new business. IFRS profits benefited in 2019 from narrowing credit spreads and higher equity markets, while solvency and cash generation were negatively impacted by increased capital requirements. The sharp fall in equity markets in Q1 has benefited solvency. New business value improved in Holland in 2019, helped by cost saves, while Sweden’s declined, due to fee pressure, with profit improvement a focus. Attractions of a steadily rising dividend in volatile, politicised markets. Cancelled dividends elsewhere, and further disclosure on cash coverage of next year’s dividend at Chesnara, underline the investment case, in our view, and the attractiveness of a starting 7% dividend yield.
Final pulled, dividends to be reconsidered in Q4 ‘In light of the significant uncertainties presented by COVID-19, the Board agrees with our regulators that it is prudent to suspend dividend payments at this time’ The Board intends to reconsider any dividends in Q4 2020. We note that Aviva has a sizeable operation in France, whose insurance regulator has asked insurers not to pay dividends. No update on mid-March capital position Aviva has not updated the estimate it gave for its Solvency II position as of March 13th, when it was 182% (excluding the final dividend) above the top of its target range, but down materially from 213% at year-end. Aviva says it is too early to quantify the impact of Covid-19 on claims and investments. Aviva expects to provide an operational update for investors in the second half of May Forecasts under review, with risks to the dividend We place our forecasts, target price and recommendation under review. Note that our published forecasts below had been updated for the November analyst day, but not for the full year results at end-February. We note that Aviva had lowered its outlook for IFRS and cash generation materially in 2019, while keeping its dividend policy of low single digit growth unchanged. From a starting yield north of 8% before Covid-19, and with the shares now yielding double digits, we think the market was already pricing in the material probability of a dividend cut.
Strong solvency key in the update. Having scheduled full year results for March 31st, Chesnara has published an update a day early, postponing the full release until April 15th. The December 31st solvency cover ratio of 155% was very slightly behind our 158% forecast, but we were very encouraged by the increase in the ratio to 164% as of March 20th. The improvement was due primarily to the benefit from the symmetric adjustment, which has reduced required capital as equities have fallen, but other factors have also contributed (gains on bonds in Sweden, volatility adjustment in Holland). Economic value has fallen by c.£100m since year-end to £570m, broadly consistent with given sensitivities, equal to c.380p per share. Own funds have not been disclosed. Strong solvency and cash allows dividend growth. As of March 20th, surplus value above required capital had reduced only from £211m at year-end to £193m versus £208m at H119, with parent cash of £73.5m. The combination of strong solvency, even after market volatility, and central cash covering over two years’ worth of dividends, gives the visibility for an unchanged dividend decision of 3% growth, in-line with our published forecast. Forecasts under review pending more detailed disclosure. We had not updated forecasts for market movements year-to-date, such that there will be reductions to Own funds estimates, if markets do not recover. The company has also cautioned that new business activity in Holland and Sweden has seen some small impact from the current environment, while noting capital required to support new business will also be reduced. We will update after April 15th. Merits of Chesnara’s strategy highlighted. Back book cash generation, supported by M&A, and capital light new business, provide a solid basis for dividend growth, even in uncertain times, with a superior track record to peers.
Aviva announced an operating profit of £3,184m (up 6% yoy) and an IFRS profit after tax at £2,663m, better than expected. The main source of operating earnings improvement was the reduction in net expenses in the UK digital business by £165m regarding 2018. The cash remittance reached £2,597m, and the insurer is on the right track to deliver one of the key 2022 targets: remitting £8.5-9bn over 2019-22. We keep our positive opinion on the stock.
Increase to Own Funds, Solvency lower. Ahead of FY results on 9th March, we update our forecasts for the pending ReAssure acquisition, drawing on data from the January prospectus, on top of December guidance on the announcement. IFRS operating EPS rises, while Own Funds per share also increase, with deal synergies providing incremental benefit over time. Our cash generation forecasts track the guidance given with the deal, with the dividend covered going forward. On the negative side, the acquisition and the decline in government bond yields mean a cut to forecast solvency ratios. Strategic logic, with further cost potential. We see strong strategic logic in the acquisition of ReAssure, with £800m of cost and capital synergies underpinning the financial logic, for which shareholders will benefit from a 3% increase in the dividend. We see further cost reduction upside when ReAssure is fully integrated, although this is not expected before 2022/23. It is not clear whether this alone would allow a further increase in the dividend, but we see £80m in additional annual synergies as achievable. Cash generation no longer flat? Modest near-term catalysts. Post deal, the heavier weighting to back-book run-off means Open business growth and BPA cashflows are unlikely to keep cash generation flat over ten years, albeit the annual decline should be modest. Near-term catalysts are likely to be modest, with ReAssure expected to close mid-2020, and with very limited financial or management capacity to pursue additional transactions this year. Target price raised on higher dividend. Greater detail on additional cost targets and a stronger macro outlook could allow for a lower target dividend yield over time but, for now, we raise our target price for higher DPS on an unchanged 6.25% yield target, a discount to Chesnara and premium to Aviva.
Ongoing strength. Today’s trading statement highlights that the improved CVS performance first seen in 2H19 (and already flagged for July/August) has continued into September/October. In the four months to 31-Oct-19, group sales increased 16.8% with like-for-like growth at 8.0%. Within the practice division, like-for-like growth was 7.4%. In our view, this implies practice like-for-like growth in September/October having accelerated to a high single-digit %. Per management commentary, improved growth has been driven by a continuing focus on advanced clinical work (improved volume/value of referrals), as well as price increases in both Healthy Pet Club (Feb-19) and on vet fees (this year recorded in July rather than later in the year). Management highlighted the positive trends seen for July/August regarding gross margins, employment costs and vet vacancy rates which have continued at a similar level. Continued focus on organic growth. The group completed only one additional practice acquisition thus far in FY20E. As such, as at 31-Oct-19, net bank borrowing was at a similar level to end-FY19 (c.£96m) while leverage (on a bank test basis) has reduced to c.1.8x (vs 2.1x at end-FY19E), given the EBITDA growth. We update estimates and valuation to reflect current trading. By modelling improved like-for-like growth across the business, we raise our revenue and underlying EBITDA forecasts by c.2-4%. p.a. Our underlying EPS estimates increase 2.5%-4.0% p.a. (see full report). Our primarily DCF-based valuation increases by 50p. AGM today. CVS is holding its AGM at 11.00am today at the Crowne Plaza Birmingham City Centre, Central Square, Holiday Street, Birmingham.
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Fever-Tree has issued a trading update ahead of its December 31 year end. It has continued to see growth in all of its markets in FY19, with some regions accelerating. However, there has been a slower performance in the UK (off-trade) than the group had expected, given the tough comparators through the late summer but also a slowdown in consumer confidence. As a result, it anticipates full year revenues will be in the range of £266-268m. This is c.3% less than our forecast of £276m, but still 12-13% up on the prior year. It has maintained its #1 off-trade market share in the UK (38% at end Q3), with new premium entrants collectively still only having less than 5%. Schweppes has gained some share, but only from private label. The group’s performance in the UK on-trade (50% of the UK) has been better, with further new accounts added to its leading position. Overall, the UK is projected to grow sales by 2% in FY19. In the USA, the performance has accelerated in 2H in both the off and on-trade channels. The Southern Glazers relationship is working well. They expect to deliver c34% FY19 sales growth (c36% 2H19) which is higher than we were forecasting (prev 30%). The group has signed a west coast bottling partner and this will commence in 1H 2020. In Europe, growth has also accelerated in 2H19 and it expects to deliver FY19 growth of 19% (12% in 1H19; 25% in 2H19). With the slightly reduced sales figure, we trim our FY19E PBT number by 3% to £79.7m. This indicates EBITDA margins will be maintained at c31%. For FY20E we maintain our previous growth rates, so the reduction to key headline figures is similar, at 3% for revenue and PBT.
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Aviva presented its strategy for 2019-22. The insurer will continue to simplify its structure, reduce costs (£300m by 2022) and debts (£1.5bn) and pay a progressively increasing dividend. The insurer aims to generate operating cash of £7.5bn over 2019-22 with remitted cash to the group by different business units of £8.5-9bn, of which 50% by the UK Life division. FY 19 will benefit from lower longevity reserves with a positive impact within the range £300-400m. No convincing strategy.
No major changes to group structure Having announced on Monday that the bulk of the Asian businesses would be retained, it should not be a surprise that there is no material change in the scope of operations in today’s Capital Markets release. There will be a new operating segment ‘Investment, Savings and Retirement, which implies a bigger investment in bulk annuities going forward. Cost saving targets are also unchanged. We think this lack of material change will be disappointing to some. New targets focused on cash, downplaying IFRS earnings Key new targets are Solvency II return on equity of 12% by 2022 and group operating capital generation (OCG) of £7.5bn 2019-2022. We forecast £5.4bn of OCG between 2019E and 2021E, so this new guidance looks only marginally better than our expectation (£1.9bn pa vs INVe £1.8bn). While this year’s IFRS operating earnings are expected to be ‘broadly in-line with management expectations’, highlighting lower management action contributions going forward (£0-200m pa vs £3-400m), taking software amortisation above the operating line (£112m in 2018) and the planned sale of FPIL (£151m, but no cash – this should be in consensus) implies consensus IFRS operating profits will fall, perhaps materially. Aviva remains committed to a progressive dividend – on our first take of the maths, the 12% SII ROE implies c.£2.8-3.0bn of cash profit, comfortably covering the c.£1.2bn annual dividend cost. Valuation undemanding, but message underwhelming Key from the strategy day today will be detail on the underlying drivers of cash generation to give confidence in targets and sustainability of the dividend strategy. The shares trade on a c.15% discount to FY19E Solvency II Own Funds, a small discount to Phoenix, for a 7%+ dividend yield, again a discount.
Unique set of assets. Chesnara is different to peers in that it has a balanced book across three markets – the UK, Sweden and Holland, with UK closed book generating most cash and Europe growth. The focus on unit-linked business is also different, meaning value creation is more sensitive to equity markets and new business value and less sensitive to longevity and interest rates than for peers. Dip in cash, stable capital. Sentiment at H1 was impacted by the negative impact on cash generation from higher capital requirements after a sharp rise in equity markets, but cash generation still covered H1 dividends. Cash generation was particularly strong in 2017 on good equity market performance, while 2018 was supported by a material release from the with-profits fund in the UK. H1 parent cash of £84m covers the dividend for almost three years. Group solvency declined by less than peers at H1, but Scildon fell below its target, due to changes in asset mix (that may be reversed). Focus on operations. Both Dutch and Swedish businesses sell capital-light products in competitive and transparent markets. Sweden has scale and the c.50% increase in IFRS profits at H1 best reflects work that has been done on costs. Holland is a work-in-progress - the focus on costs, distribution and product mix is to increase new business profits, with margins currently below target on modest growth and flat market share. Material discount to peers and history. These headwinds mean a de-rating to levels last seen in the Financial Crisis for an 8% dividend yield. The discount to Own Funds of c.30% is also down to a historic low in absolute terms and relative to peers – both despite Chesnara’s superior track record through market cycles.
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Lessons from Phoenix’s outperformance. We think the main lesson from Phoenix’s outperformance and re-rating versus Aviva is to give clear cash generation guidance, on a one-year, five-year and long-term basis. Also, an outlook on uses of cash over time – including interest costs, debt repayments, pension funding and dividends. While a work in progress, Phoenix has also better communicated how its open book profits should enhance cash generation, an important topic on which Aviva needs to convince, in our view. Life into run-off? Our analysis suggests current dividend levels should be sustainable for ten years, even under a scenario in which Life would be put into run-off and there is no growth in earnings in General Insurance and Aviva Investors beyond FY21. This is from the starting point of a strong solvency ratio of 184% at H1 2019, above the company’s target range of 160-180%. Run-off not our central scenario, but analysis increases confidence in cash. We do not think Aviva will actually close to all new business – it has been successful in reducing capital strain in recent years, and there is probably scope to go further, perhaps by reducing participation in the bulk annuity market. The potential sale of assets, including Asia, could free up additional capital, although buybacks would be needed to limit dilution. We see a bigger break-up as unlikely given material diversification benefits and a large pension liability. New target based on yield premium to Phoenix. With reference to Phoenix yielding 7%, and our 750p Phoenix price target based on a 6.25% dividend yield, we base our new 455p price target for Aviva on a 7% dividend yield on FY20E DPS. On a Solvency II basis, our price target equates to 95% of FY19E Own Funds, in-line with the multiple we target for Phoenix.
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Aviva posted figures in line with estimates. Operating EPS grew by 2% to 27.3p and the interim dividend was increased by 3% to 9.5p/share. Cash remittance to the Group remained high at £1,582m, benefiting from the timing of dividend payments from a number of business units. The insurer announced that it is reviewing its strategy in Asia. A possible sale of its operations is not excluded. No major changes are expected in our model.
No change in the strategic guideline for Aviva in the coming years. This is the main conclusion after the investor update published this morning by the insurer. Again, the priority will continue to be given to cost reduction (£300m on 2019-21), operating cash generation, a progressive dividend and debt reduction (£1.5bn at least by 2022). Buying Aviva remains a good choice for dividend lovers, but not necessarily a best one for investors who are looking for a growth strategy.
Aviva has announced this morning that CFO Tom Stoddard will step down at the end of the month and leave Aviva at the end of the year (to allow for an orderly transition). Aviva UK CFO Jason Windsor will become interim CFO on 1 July 2019.
Aviva has undergone significant change in the last six years under the former CEO Mark Wilson and yet the share price has remained resolutely low. The incoming CEO, Maurice Tulloch, has a tough job ahead to inject a greater pace of change into an organisation that could still be feeling ‘change fatigue’. The group is the one true composite in the UK but the tangible benefits of this have yet to be exploited other than in capital diversification, in our view. Debt repayments seem a better use of excess capital than share buybacks and should help to move the RoE closer to that of peers. Our fair value, based on profit attributable to shareholders, of 430p indicates little upside at this point. HOLD.
Aviva posted record cash remittances at £3.2bn, but without reaching the £8bn targeted for 2016-18. The capital position remained solid with a Solvency II ratio at 204%. The Board decided to distribute a final dividend of 20.75p/share, bringing the dividend for the whole year to 30p. The IFRS profit after tax, up 2% to £1,687m, was better than expected, with a significant release of longevity provisions (£728m). The new management will continue to focus on debt reduction (£1.5bn) thanks mainly to internal sources.
Aviva posted a declining H1 18 IFRS profit of £376m, lower than expected. Compared to our estimates, the difference came from General insurance & Health which recorded a 28% drop in operating profits to £302m, with an increasing combined operating ratio by 290bp to 97.4%. The Solvency II capital surplus reduced to £11bn and the coverage ratio stood at 187% after debt repurchases. The interim dividend is 9.28p, up 10% yoy. We keep our positive opinion on the insurer.
Aviva posted a good and improved IFRS profit of £1,646m, better than expected. Compared to our estimates, the difference came from General insurance & Health which recorded a 16% drop in operating profits to £700m, with a combined operating ratio that increased by 2.4% to 96.6%. The Solvency II capital surplus is £12.2bn and the coverage ratio stood at 198%. The total 2017 dividend is 27.4p. We keep our positive opinion on the insurer.
The insurer has announced a higher than expected payout ratio for 2017-20, thanks to its comfortable cash position. It has revised up the remitted cash from subsidiaries from £7bn to £8bn over the 2016-18 period. We have revisited our model by increasing the dividend for 2017-19. According to our updated calculation, the total shareholders’ remuneration for this period would reach £2.7bn. Our opinion remains positive with a Buy recommendation.
Ahead of its CMD in Warsaw Aviva has announced that it is upgrading its targets for earnings growth, cash and dividend. We anticipate that the news will be well received. The investment case may not be as straight forward or as relatively simple as that at Pru or L&G but the valuation is attractive and in our view Aviva is well positioned in its chosen markets. As Aviva continues to 'do the right things' sentiment should improve and the current low PE multiples and high dividend yield will be seen, retrospectively, as having been a great buying opportunity. The view from Warsaw is that it's cold but at least Aviva's warming up. Buy.
Aviva is to acquire Irish Life insurer Friends First to consolidate its position as one of Ireland’s largest composite insurers. It’s a good acquisition being acquired from Dutch insurer Achmea (formerly Eureko) at what we view to be a great price at £116m or just 0.8x NAV. The transaction is expected to meet Aviva’s operating return on capital hurdle from year one and to significantly exceed the hurdle thereafter. It will boost Aviva’s share of the life market in Ireland to 15% to match its share of the non-life market. We view Aviva as undervalued and on track to deliver a good increase in 2017 EPS. Buy
Aviva has reported a good set of interim results with headline IFRS Operating profit at £1465m (+11%) which was just ahead of our close to consensus forecast at £1451m. There is an FX benefit of 5% but the underlying performance is still good at 6%. The interim dividend was well ahead at 8.4p/share (+13%) compared to expectations of 8.28p/share whilst the Solvency II capital surplus at 193% (H1 2016: 174%, FY2016: 189%) was in line but also supporting of the current share buy-back programme. The only real area of disappointment was in Canada where the General insurance business was impacted by poor weather but the overall impact on the Group was relatively limited. The share price is up 39% in the last 12 months but we think that there is much further to go. The valuation remains attractive with the shares trading on 2018/19F PE multiples of 9.3x and 8.7x respectively along with an attractive current year dividend yield of 4.8%. Buy.
Aviva has announced the sale of Friends Provident International (FPI) to RL360 Holding Co (a subsidiary of International Financial Group) for £340m in cash plus other minor adjustments. FPI didn’t sit comfortably within Aviva and so it is no surprise that it is being sold. In 2016 it made a £2m pre-tax loss and didn’t remit any cash to Group. We view this disposal positively and have anticipated such a move almost from the moment Aviva acquired Friends Life. Separately we highlight our H1 2017 forecast where we are forecasting Operating profit at £1451m (+10%). Additionally we take this opportunity to roll forward our valuation of Aviva and increase our target price to 635p/share from 592p/share previously.pan
Aviva has announced the sale of its 50% shareholdings in two of its Spanish life and pensions JV’s as well as its retail life business. Total consideration of c£403m represents c1.5x 2016 NAV and 12x 2016 earnings and will result in a gain of c£120m in IFRS NAV and increase its SII surplus by c£130m. The disposal reflects the strategy of allocating capital only to those markets where it can deliver good returns and in our view should be welcomed by shareholders. We believe that the combination of Aviva’s self-help programme, current valuation and attractive dividend yield should see the share price rise in the short to medium term. Buy.
The IFRS Operating profit (ex Ogden) at £3010m (+12%) was 5.2% ahead of consensus at £2,860m and ahead of our £2,905m forecast. The key drivers were Life at £2642m (+8%) and GI/Health at £833m (+9%) with Fund Management at £138m (+30%). The full year dividend was 23.3p/share (+12%) which was in line with expectations whilst the IFRS NAV at 31 December 2016 was 414p/share (2015: 389p) which was ahead of consensus at 409p. The company has announced that it is planning an additional capital return to shareholders in 2017 to reflect the Solvency capital ratio at 189% being ahead of target (150- 180%) range by 9% equivalent to c£1bn. The shares have rallied strongly post Brexit and even a large IFRS Ogden impact of £385m post tax has failed to slow Aviva’s performance. We increase our target price from 525p to 592p/share today to reflect the good performance, capital return and roll forward of our valuation. We maintain our Buy recommendation.
H1 16 operating EPS increased by 1.3% to 22.4p and IFRS operating profit improved to £1,325m (up 13.2% yoy). Life insurance has posted improvements in profits to £1,021m (+20% yoy) but the General insurance & Health showed a downturn trend to £334m (-20.8% yoy). The combined operating ratio increased by 3.1% to 96.2%. Fund Management’s earnings increased by 48% to £49m. IFRS profit after tax stood at £201m (-63.1% yoy). VNB increased 9% (7% at constant FX) to £583m. Progress was recorded in the UK & Ireland (+8% to £280m), Italy (+82% at £71m), Spain (+29% at £16m) and France (+6% to £103m) while a decrease was observed in Asia (-20% to £61m), Poland (-9% to £27m) and Turkey (-6% to £12m). Operating expenses increased by 13% to £1,696m and the integration of Friends Life and Solvency II costs reached £105m (£172m in H1 15), leading to an operating expense ratio of 53.4% (52.8% in H1 15). At the moment, the integration of Friends Life is delivering £201m in run-rate synergies. Management confirmed its £225m synergy target. Cash remittances from business units to the group amounted to £752m vs. £495m in H1 15. The Solvency II capital surplus is £9.5bn and the coverage ratio has remained broadly constant at 174%. The interim dividend per share increased to 7.42p, +10% relative to H1 15.
Aviva has reported a good set of interim results with headline IFRS Operating profit at £1325m (+13%) which compared to our close to consensus forecast at £1330m. The interim dividend was 7.42p/share (+10%) in-line with expectations of 7.43p/share whilst the Solvency II capital surplus at 174% (180% at YE 2015) was also ahead of expectations at 171%. We view Aviva as a recovery play with potential for material returns of surplus capital to shareholders in the medium term. The valuation remains attractive with the shares trading on 2016/17F PE multiples of 7.8x and 7.2x respectively along with a current year dividend yield of 6.1%. Buy.
Aviva will report its H1 2016 results on Thursday 4 August (same day as RSA). We are forecasting headline IFRS Operating profit at £1330m (+14%), IFRS NTAV (excluding goodwill) at 318p/share and an interim dividend at 7.43p/share (+10%). On the 27 June, post the Brexit vote, Aviva announced that its solvency II coverage ratio remained close to the top of its working range of 150-180%. We believe that it will be 173% at 30 June. The share price has recovered somewhat following the vote to leave the EU but is only trading on 2016/17F PE multiples of 7.8 and 7.2x. In addition we would highlight the 2016/7F dividend yield of 6.1% and 7.0% respectively as further reinforcing our view that the shares are stunningly good value.
Aviva will host a CMD today and in advance it has announced a number of objectives. These include mid-single digit IFRS Operating profit in the medium term which represents a slowdown on what we were previously forecasting. In addition it expects to generate £7bn of cumulative remittances over 2016/18 with a dividend payout ratio of 50% of Operating EPS (2015: 42%). There is talk of a share buy-back in the medium term if markets allow. The valuation on most metrics looks cheap but we will need to cut our 2017 IFRS Operating EPS forecast and as such we cut our target price to 525p/share from 660p previously but maintain our Buy recommendation.
In 2015, Aviva’s operating profit increased 20% compared to 2014 to £2,665m, thanks to the contribution from Friends Life (£554m) and underlying growth (£103m). Adverse forex movement cost it £117m. The Life business performed well with operating profits at £2,419m (up 20% yoy) and a VNB at £1,192m (up 24% yoy but only 14% excluding the impact of Friends Life). The General Insurance & Health operating profit recorded a 5% decline relative to FY 14 at £765m. The group’s combined operating ratio improved by 1.1% to 94.6%. Aviva Investors delivered fund management operating profits of £105m, up 33% yoy. AIMS had accumulated £3bn of AuM. Total cash remittances amounted to £1,507m vs. £1,431m in 2014 and excess centre cash flow was £699m, stable relative to 2014. Both the remittance and excess centre cash figures in 2015 exclude £230m of planned dividends that were retained by the Canadian business to fund part of the acquisition of RBC General Insurance and £150m of remittances paid by Friends UK to its parent company prior to acquisition. The integration of Friends Life is on the right track to achieve £225m of synergies in 2016, a year ahead of schedule. In 2015, Aviva has achieved run-rate synergies of £168m and expects £1.2bn of capital benefits, of which £400m was realised in 2015. The insurer expects that the UK Life business will be able to make £1bn of additional remittances over the next three years, enhancing the liquidity profile of the group and facilitating the reallocation of capital towards the high returning or fast growing businesses. The IFRS profit after tax (continuing operations) reached £621m, and the proposed final dividend is £14.05 per share, up 15% relative to 2014. The Solvency ratio II ratio stood at 180%.
Aviva has reported a better than anticipated set of 2015 results. The key points are Solvency II ratio at a very healthy 180% and Friends Life Capital synergies of £1.2bn which translates into £1bn of cash dividended up to Group. The key question now is what will Aviva do with the additional cash – we think it will in part be used to hike future dividends. The IFRS Operating profit at £2665m (+20%) was 7%% ahead of consensus at £2,489m within a tight range and ahead of our £2,510m forecast. The full year dividend was 20.8p/share (+15%) just 2% behind expectations. The IFRS NAV at 31 December 2015 at 389p/share (2014: 340p) which was bang in line with expectations at 389p/share or 315p/share (2014: 274p) excluding goodwill. Following the great figures and the capital synergy benefits from Friends Life, the question now is what is CEO Mark Wilson going to do with the cash? We maintain our Buy recommendation and 660p/share target price.
Headline numbers will be flattered by the inclusion of Friends Life, although we expect significant progress on integration cost-savings. The benefits of what is primarily a cash driven acquisition should be evident in a re-based dividend with expectations of further re-basing in 2016-7.
Following the UK floods in December and the more recent announcement of the acquisition of the RBC Insurance business in Canada we have adjusted our 2015 and 2017 earnings leaving 2016 unchanged. We have assumed that there will be a £100m net impact from the floods reducing 2015F Operating EPS from 49.2p/share to 47.0p/share. We have increased out 2017F Operating EPS to 57.2p/share from 56.9p/share as a result of the acquisition of RBC Insurance due to complete Q3 2016. These are minor changes that do not impact our view that the shares are materially undervalued and Aviva remains in our conviction list as the top large cap insurance pick for 2016. As an aside, it has no exposure to the UnionPay credit/debit card issue that impacted Pru shares yesterday. Buy, target price 660p.
We think that despite a small recent recovery in Aviva's share price the market has effectively missed the positive impact that Friends Life Group (FLG) will have on the capital position and dividend outlook for the Group. Ahead of the integration benefits coming through and Solvency II having little impact on the business we believe that there is a tremendous Buying opportunity. We estimate that by 2017/18 Aviva will have excess capital of between £1.0bn and £1.3bn to reward patient shareholders via what we believe could be a ‘special', a material hike in the normal dividend or share buybacks. Given that the share price is in the doldrums we think that a return of capital could occur ahead of the full delivery of the FLG tangible benefits. We think that the market is too cautious on Aviva and that when sentiment improves the share price should react quickly. We consequently maintain our Buy recommendation and our 12 month 660p target price.
Today we have released a new research note on Aviva. We think that despite a small recent recovery in Aviva's share price the market has effectively missed the positive impact that Friends Life Group (FLG) will have on the capital position and dividend outlook for the Group. Ahead of the integration benefits coming through and Solvency II having little impact on the business we believe that there is a tremendous Buying opportunity. We estimate that by 2017/18 Aviva will have excess capital of between £1.0bn and £1.3bn to reward patient shareholders via what we believe could be a ‘special', a material hike in the normal dividend or share buybacks. Given that the share price is in the doldrums we think that a return of capital could occur ahead of the full delivery of the FLG tangible benefits. We think that the market is too cautious on Aviva and that when sentiment improves the share price should react quickly. We consequently maintain our Buy recommendation and our 12 month 660p target price.
Aviva released its 9M Interim Management Statement. VNB increased by 20% ytd to £823m as reported thanks to a strong performance in its main market, the UK (+36%, £404m). Excluding Friends Life, the increase was limited to 13%. Only the French and Turkish markets recorded a decline, of 25% and 8%, respectively. In Asia, the 9M VNB was on a 24% uptrend (£115m). Italy recorded a strong increase (+39% to £57m). In General Insurance, net written premiums were up 2% to £6,110m. The combined operating ratio decreased to 94% (-1.9%) after a decrease in the UK & Ireland (1.4%), Canada (-2.6%) and Europe (-2.7%). At the moment, the integration of Friends Life is delivering £91m in run-rate synergies. Management confirmed its £225m synergy target. The transfer of £23bn of Friends Life's assets from AXA Investment Managers is due to occur in November. The IGD solvency surplus stood at £5.2bn in September 2015, stable relative to June 2015. Economic capital surplus reached £10.1bn vs. £10.8bn three months ago, a coverage ratio of 172%.
Aviva has reported a good Q3 2015 IMS with all key metrics moving in the right direction. Of the key metrics we would highlight the life value of new business for the 9 months to 30 September at £823m (+20%) which compared to our £764m forecast. In addition, the General Insurance operation has had a good quarter with the 9 months COR at a good 94.0% (9M 2014: 95.9%). The 30 Sept. IFRS NTAV was 313p/share (30 June 2015: 380p/share) and MCEV NAV at 504p/share (30 June 2015: 508p). The integration of Friends Life continues with annualised cost savings run rate at £91m (H1 2015: £63m) and we believe that it will deliver much more for Aviva than the market is currently assuming. We maintain our Buy recommendation and our 660p target price.
H1 15 operating EPS declined by 8.7% to 22.1p, but IFRS operating profit reached £1,170m (up 9.2% year-on-year). Underlying growth and the Friends Life contribution have more than offset adverse forex and disposals. Life insurance and General insurance & Health have posted improvements in profits to £1,021m (+4.9% year-on-year) and £422m (+4.7% year-on-year), respectively. The combined operating ratio reduced by 2.4% to 93.1%. However, Fund Management earnings decreased by 31.2% to £33m. IFRS profit after tax stood at £545m (-36.8% year-on-year).
Aviva has reported a good set of interim 2015 results that were ahead of expectations on most key metrics. IFRS operating profit at £1170m (+9%) was a 6% beat against consensus at £1,099m and 8% beat against our forecast. It was driven primarily by a strong performance in UK life (ex FLG) a low COR in general insurance at 93.1% (H1 2014: 95.5%) having benefitted from benign weather. The interim dividend was 6.75p per share (+15%), in line with expectations. The IFRS and MCEV NAV at 30 June was 380p and 508p respectively (H1 2014: 290p per share and 478p per share). The integration of Friends Life is progressing well with £63m of annualised run rate savings but it is very early days. The economic capital position at £10.8bn represents an economic coverage ratio of 176% and is after a £900m strengthening to align it with its targeted capital position for Solvency II. We maintain our Buy recommendation and 660p target price.
Following a strong performance in 2012/13/14 and Q1 2015 the insurance sector has traded sideways in Q2 reflecting difficult investment markets, tough trading conditions and uncertainty ahead of the introduction of Solvency II. We believe that Solvency II will have a relatively muted impact on the sector and welcome its introduction if only so that the debate can move on. We are not anticipating any major surprises with the interim results that kick off on Tuesday 28th July with Jardine Lloyd Thompson. In our view the three main areas of interest will be 1) the potential impact of Solvency II on all insurers 2) impact of changes to the individual annuity market 3) recent management changes in the sector.
AV/ JLT LGEN PA PRU STJ RSA ABDN
