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RBC upgrades Aviva to ‘Top Pick’, says buy before new CEO takes control

Published: 11:13 11 Dec 2018 GMT

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RBC has pegged the blue-chip insurer with a 540p price target

RBC has upgraded Aviva PLC (LON:AV.) to ‘Top Pick’ status, calling it a 'buy' before a new chief executive takes over at the helm of the FTSE 100 insurer.

In a note, the bank’s analysts said the incoming CEO would be able to “take advantage of the key growth areas of the UK market” and “build on its dominant position in the UK retail annuity market”.

READ: Aviva shares drop as Barclays takes knife to target price after CEO steps down

RBC added that there would be an opportunity to increase the company’s focus on the UK by “pulling out of no-core areas such as Asia, Italy, Poland, and Spain” as these were “relatively small and unlikely to provide synergies with the core UK business”.

The cash proceeds from this move could then be focused on acquiring UK life insurance back-books, RBC said, adding that Aviva had “the scale and expertise” to tap into the £380bn, which is currently occupied by only two other players, Phoenix Group Holdings (LON:PHNX), and Reassure.

RBC moved Phoenix to ‘Outperform’ from ‘Top Pick’ but retained its 820p price target saying the group had an opportunity to expand its own position in the UK life books market as European insurers would likely look to offload them due to Brexit.

Yet more bulk annuity

Turning back to Aviva, RBC also pegged the firm with a 540p price target saying the company was expected to increase its bulk annuity transaction size.

“It is a little-known fact that Aviva writes more bulk annuities, by number than any other insurer. During H1 2018, it wrote 43% of bulk deals by number with an average deal size of £47mln (vs. a market average of £102mln). In May 2018, it wrote its largest-ever bulk: a £925mln buy-in with Marks & Spencer (M&S).

“We expect Aviva to take advantage of its balance sheet size by increasing its case size so that it is writing the largest schemes, which it has generally avoided to date. Further, Aviva now has the ability to originate illiquid assets in size, which should give it an advantage over the large non-listed writers.”

Pensions dominance

RBC also said Aviva could further dominate the pensions market, with an increase in minimum contribution rates expected to drive annual growth of around 13% between 2017 and 2020.

“Aviva and Standard Life were market leaders—Standard Life has sold its pensions business to Phoenix, a back book consolidator, which we expect provides Aviva with an opportunity, as Phoenix will not prioritise new sales. Aviva has already increased its market share from 6.5% to 16.8% between 2012 and 2017 in part due to the Friends Life acquisition.”

In late-morning trading Tuesday, Aviva shares were up 0.8% at 375.5p while Phoenix shares were up 1.3% at 551p.

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