Aviva is set to buy back shares for up to £750m, beginning this month, in its bid to award its shareholders with a £4bn payday.
But activist investor Cevian Capital, which holds an almost five per cent stake in Aviva and is thus its second biggest shareholder, quickly responded by saying the insurer had made a “good start” in returning £4bn but should go further.
“The at least £4bn excess capital return by June 2022 is a good start, but £4bn would not be enough to address the overcapitalisation and we expect the company to return five billion pounds by the end of next year,” said Niko Pakalén, partner at Cevian Capital.
The insurance group posted an operating profit of £1.13bn in its half year results, up from £1.22bn in the first six months of last year.
For the share buyback, Aviva has entered a deal with Citigroup Global Markets to secure up to 300m in shares, which is expected to be completed by 17 February 2022.
After opening higher, shares jumped a little over four per cent to 423.4p per share by mid-morning.
“We are delivering on our commitment to make a substantial capital return to our shareholders,” group CEO Amanda Blanc said in a statement.
“We intend to return at least £4bn to investors by the end of the first half of 2022 (subject to regulatory and shareholder approvals, completion of disposals and market conditions), starting with a share buyback of up to £750m.”
The share buyback forms part of the group’s downsizing, designed to streamline its operations into something more profitable.
Analyst at investment app Freetrade, David Kimberley said: “Aviva has felt more like an auction house than an insurer over the past 18 months.
“The rapid sale of eight of its businesses outside the UK, Ireland, and Canada may not have pleased those that want a ‘global’ insurer, but most investors are probably satisfied to see a narrowing down of the business so that it can remain more focused and profitable.”
Kimberley explained that today’s buyback is “obviously great for those looking to cash out”, but Aviva must remember to reinvest in itself as well as paying down debt and providing a return to shareholders.
“Selling off isn’t just about getting rid of subsidiaries and returning the resulting funds to investors — the company also has to ensure it remains strong in the markets it still operates in.”
While the insurance group is “both richer and less risky than it was”, according to senior personal finance expert at money.co.uk James Andrews, the pandemic has also prompted customers to rethink their plans for their future – which has buoyed its profits.
“Aviva’s second-quarter profits of 17 per cent reflect the current climate where more people are seeing insurance and provision for their futures as necessities rather than a choice.
“This alone will ensure that the retention of business remains strong for the foreseeable future, especially given record inflows to their pensions division last year.”
“More ‘steady-eddie’ than ‘Eddie the eagle’”
Despite the downsizing, the insurance group still has options for growth, equity analyst at Hargreaves Lansdown Nicholas Hyett explained.
“Having spent the last few years suffering a bit of an identity crisis, Aviva seems to have finally settled itself down to life as a fairly boring, but highly cash generative insurance business. Investors are enjoying the fruits of the transition, with bumper shareholder returns.
“The group does have some growth options – most notably sizeable workplace pension and advisor businesses which are scooping up assets, some of which are making their way through to the long unloved Aviva Investors – but the vast majority of the business is more ‘steady-eddie’ than ‘Eddie the eagle’.”
Aviva has seen record net flows within its savings and retirement division in the first six months of the year, up 24 per cent to £5.2bn – an increase of some £1bn in comparison to the first half of 2020.
The group expects to see continued growth its savings and retirement division in the UK, and said it is on track to finish its £300m cost reduction target next year.
The insurance heavyweight has also confirmed an interim dividend of 7.35p per ordinary share today, for the year to 31 December 2021.