Have we been thinking about market risk all wrong?
Allow us to take you through the looking-glass. With a fresh look at solvency, liquidity and capital dynamics, we argue that insurance is not geared to market conditions in the way it seems at first glance. To show why, we dig back into the history of insurance failures. Asset risk haunts many investors, but it''s liquidity that more often poisons the well. Yes, credit downturns are ugly, but fire sales leave lasting scars. Our work leads us to be upbeat on the sector, seeing value where the market is fearful - though we are cautious on the imputed positive impacts of a rate spike. With analysis of market sensitivities and direct and indirect risks, we reaffirm our view of LandG and NN''s capacity to deliver value and upgrade Aviva to Outperform, swapping it with MandG (downgrade to Neutral).
AV/ AGN LGEN AGS CNP PRU CNP NN MNG
22 Jul 20
Finally, a change of strategy?
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.
07 Jul 20
Change of analyst
Due to a change of analyst at Shore Capital, the insurance sector will now be covered by Alan Devlin. As such the coverage analyst for the below listed stocks changes from Paul De’Ath to Alan Devlin. At this time, we also change the recommendations for the listed stocks to ‘Under review’ and suspend our published forecasts.
AV/ ADM BEZ DLG HSTG HSX JUST LRE LGEN MNG PRU RSA STJ
26 Mar 20
No big issues for 2020
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.
05 Mar 20
All tied in with the UK Life division
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.
20 Nov 19
FCA interim report on insurance pricing
This morning the FCA has published its initial report into the insurance market pricing practices. The overall conclusion is that the market is not working well for many customers and it plans to take actions to improve things. The potential remedies suggested by the FCA include tackling higher prices for those who do not switch; encouraging more people to switch; and making firms be clearer and more transparent in their dealings with customers. These are all reasonable goals. Pricing within insurance is, however, complex and a source of competitive advantage for many firms and therefore implementation of some of the proposals could prove difficult. We expect that those firms more focused on switching (Hastings, Buy at 195p) will be better placed to adjust to the new rules than those with a more traditional customer acquisition model (Direct Line, Buy at 289p) though overall, any additional regulatory oversight on pricing is likely to be negative for profitability in the industry.
AV/ ADM DLG HSTG RSA
04 Oct 19
Asian presence under review
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.
08 Aug 19
The new old cost reduction strategy
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.
06 Jun 19
More changes at the top, CFO to leave at the end of the month
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.
05 Jun 19
A change is as good as a rest
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.
05 Apr 19
New management, same issues
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.
07 Mar 19
Declining earnings but a new double-digit growth in the dividend
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.
02 Aug 18
Solid earnings and higher new targets
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.
08 Mar 18
Winning strategic bets
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.
04 Dec 17
Good signs for 2016
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.
01 Sep 16
The “new Aviva” is emerging
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%.
10 Mar 16
FY 15: reporting Thursday, 10 March
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.
04 Mar 16
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%.
03 Nov 15
No honeymoon with Friends Life
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).
11 Sep 15