Broker snap: Aviva could be in for a re-rating, says Nomura

17th May 2012 11:06

Nomura has reiterated its buy recommendation and 600p target price for insurance group Aviva following its first-quarter results, saying that solvency ratios are stable and sales are solid.Aviva's first-quarter IGD (Insurance Groups' Directive) solvency ratio was 151%, better than expectations given that it was 150% at the end of February and £300m of the final dividend was accrued in March, Nomura said. "Economic solvency remained in the range of 145-150%. Nevertheless, this level of solvency is below its peer group average and remains a concern for investors."Meanwhile, life and pension sales fell by 7% to £6,516m but still came in better than forecasts, with UK sales falling by a lesser 3%. "Bulk annuities fell sharply, but this is of limited significance because sales can be lumpy." The broker said that Eurozone life sales fell sharply, as expected, while all other key figures look "solid"."We believe that its focus will be on improving the capital strength of the group which is below its peer group average and is we think the main concern of investors. We expect disposals to be accelerated as the best method of improving the capital position, with the US likely to be one of the first candidates for disposal.""Although Aviva's solvency is below average, we think it offers considerable re-rating potential, trading on a 2012e price-to-earnings multiple of five and with a dividend yield of 10%."Shares were trading 2.21% lower at 274.7p by mid-morning.BC