Share buybacks at Aviva not a joke, Berenberg says

Analysts at Berenberg reiterated their 'sell' recommendation on Aviva shares, arguing that the insurer's balance sheet was overleveraged, its operating profits had been flattered by less prudence on reserves and its prospects for organic earnings growth was limited.

As regards, the first point, the German broker said the prudence of Aviva's decision to release roughly £1.3bn in longevity and expense reserves and another £1.1bn in credit default and non-life reserves "could certainly be questioned".

Furthermore, had it not been for "substantial and unanticipated" changes to its models, then the better part of its capital cushions under Solvency II requirements would not have occurred.

"The majority of any surplus solvency capital is not able to be utilised as it only exists in an actuarial model as it is not hard shareholder capital and Aviva claims to have surplus capital despite having only c£7bn of tangible equity against c£10bn of debt. On these facts alone, we find it extremely difficult to rationalise a view that says Aviva has a strong balance sheet," Berenberg said.

"When we first heard talk of a share buy-back we thought it might be a joke, but apparently not," it added.

Berenberg did however raise its target price on the shares from 440p to 456p, albeit pointing out that it remained "well below the share price".

Given the lack of growth potential in the business and the increasing squeeze on profits, another acquisition might be on the cards, the broker added.

Indeed, after exlcuding what it termed "management actions" from ots estimates of the insurer's profits - which should be the basis for comparing Aviva to its peers - Berenberg said it was now 13% and 18% below consensus forecasts for 2017 and 2018.

As a result, Aviva shares were in fact changing hands at a 2018 price-to-earnings multiple of 11 and sporting a dividend yield of 4.8%.

"We find this to be expensive on an absolute basis and more expensive still on a relative basis and believe that there are many more attractive companies with less risk in this sector."