Aviva PLC (LSE:AV.) has been downgraded by investment bank Keefe, Bruyette & Woods, citing limited upside relative to peers and doubts over capital deployment potential, especially following the FTSE 100 group's acquisition of Direct Line’s brokered commercial business.
While KBW retains its 'overweight' stance on European insurers, it looked to sort the wheat from the chaff and identify those with stronger risk/reward dynamics.
Prudential PLC (LSE:PRU) and Beazley PLC (LSE:BEZ) are among its 'top picks', along with France's Axa and Denmark's Tryg.
"Aviva is complicated by the DLG transaction," KBW said in the note, with the deal diluting equity by around 10% upfront but with earnings accretion expected to rise to at least 10% by 2027 and beyond.
We are moving into "a negative point of this transition", analysts said. "It is a warning that the market is already pricing for a level of delivery that must be achieved to justify the current share price."
Aviva, together with Italian giant Generali, now offer the lowest forecast returns among the ‘Big 5’ European insurers, KBW analysts said, at an estimated 17% total annual return from 2024 to 2027.
In contrast, Axa screens as the cheapest and most attractive, while Zurich offers the highest returns but also trades at the richest valuation
KBW replaced Allianz with Prudential as a key 'outperform' idea, while the Lloyd’s insurers, "especially Beazley", screen as cheap.
We need to talk about buybacks
Balance sheets are strong and enabling share buybacks, but this comes at a cost, KBW said.
“Strong balance sheets permit sustainable repatriation and accelerating deployment,” KBW said, highlighting an average 7% potential equity buyback over two years among the top five insurers.
However, buybacks are diluting book value growth by at least one percentage point a year, the analysts warned, raising questions about capital efficiency.
Despite the sector’s long-term dividend-adjusted book value growth of 9%, KBW noted the volatility of outcomes, ranging from -3% to +19% annually over the past decade.
In the current environment of higher yields and sticky inflation, KBW sees continued merit in European insurers, but stresses that earnings delivery, capital discipline and shareholder returns will increasingly define winners and losers.
The shares fell 1% to 620.4p.