RBC Downgrades Aviva To Underperform

Courtesy of Benzinga.

• Aviva Plc (ADR) (NYSE: AV) shares have risen 6 percent in the last one month, remaining upon $14.50 since October 27.
• RBC Capital Markets’ Gordon Aitken downgraded the rating on the company from Sector Perform to Underperform, while reducing the price Target from GBp 490 to GBp 460.
• Aviva’s solvency ratio may be towards the lower end of what is acceptable to investors, Aitken said.

Analyst Gordon Aitken mentioned that Aviva’s economic capital coverage ratio is at 172 percent, which appears to be close to the lower end of what investors consider as acceptable. He believes that investors would be comfortable with a ratio of 180 percent for life companies and 150 percent for non-life companies.

“We believe selling commercial mortgages and staying clear of UK bulk annuities [which is high growth, high margin] indicates Aviva itself thinks its ratio is not high enough,” Aitken wrote. He added that the company’s asset management business could take time to “develop a three year performance track record which it needs to drive institutional inflows.”

Aviva has not announced the capital synergies from the acquisition of Friends Life Group. This could add at most 10 percentage points to the coverage ratio. The analyst added, however, that the UK regulator is likely to “push back on the assumptions UK insurers are currently using,” which may adversely impact the coverage ratio by as much as 10 percentage points.

Although Aviva has recorded its 11th straight quarter of growth in life value of new business, this growth has been achieved via acquisition rather than being organic, Aitken pointed out.

In the report RBC Capital Markets added, “Longer term we see lower pensions sales when a single rate of tax relief is introduced (we expect a rate of 25% from April 2017).”

Posted-In: Gordon Aitken RBC Capital MarketsAnalyst Color Short Ideas Downgrades Price Target Analyst Ratings Trading Ideas