It has been an interesting couple of months for insurance firm Aviva. The City giant sacked its fund manager and was dragged into a leasehold agreement affair it had hoped to avoid.
Nevertheless, following a year of cutting costs and selling foreign assets, Aviva feels confident about the future. The company is firmly on investors’ radar, particularly after it announced an ambitious share buyback program earlier this summer.
And recently, Aviva announced the completion of a bulk purchase annuity deal, worth £320m, with the John Laing Pension Fund.
With sizeable workplace pension and advisor businesses scooping up assets, the group has serious growth options and the ability to keep its momentum going into 2022.
As a result, the company is working to award its shareholders with a £4bn payday and with shares are up by more than a third in the last twelve months alone, Aviva’s outlook is steady and rosy.
Admittedly, news that Aviva is set to sack its top fund managers in a radical cost-cutting plan spread like wild-fire through the City, when it was first reported in June. The insurance giant fired 10 equity managers from its asset management arm Aviva Investors.
David Cumming, chief investment officer for equities, reportedly left the FTSE 100 firm, while head of global equities Mikhail Zverev was among the fund managers set to be ousted.
The news did not come as a complete surprise: the reports came only days after the largest activist investor in Europe, Cevian Capital, revealed to it had quietly built up a 5 per cent stake in Aviva.
The Swedish investment firm, which has $16bn of assets under management, urged Aviva to cut costs sell some of its international units. Conveniently, Aviva had already started disposing a host of non-UK divisions.
This change in overseas strategy can be linked directly to Amanda Blanc, who took over as chief executive of the FTSE 100 company last year.
Blanc has been withdrawing Aviva from overseas markets in Europe and Asia to focus on the business’ core markets in the UK, Ireland and Canada. It is understood Cevian is supportive of Blanc and Aviva’s management team.
Cevian Capital’s influence
More interestingly was Cevian’s call to return £5bn to shareholders. This bold statement did not go unnoticed in London: Aviva’s share price, already up around 40 per cent on the year, shot up even further.
Basically, Cevian, the same firm that took a stake in education publisher Pearson last year, wants the company to bring down costs by at least £500 million in the next two years.
Despite Cevian’s backing for Aviva’s senior management, the fund manager firings do raise questions about the extent of the activist investor’s influence over the insurer.
They also cast doubts over Aviva’s future status in the global asset management market. Aviva Investors will reportedly be left with about 25 fund managers once the departures have been finalised.
Another issue that came up earlier this year was Aviva – together with housebuilder Persimmon – agreeing to overhaul their leasehold contracts to make payments fairer for homeowners.
The decision came about following an investigation by the UK’s markets regulator: the Competition and Markets Authority (CMA) investigation into Persimmon’s leaseholds pushed the housebuilder to cap the price of freehold at £2,000 in its Right to Buy scheme until 31 December 2026.
The chief executive of the CMA, Andrea Coscelli, called the deal “a real win” for thousands of leaseholders.
The CMA’s probe resulted in Aviva agreeing to remove ground rent terms that were considered unfair and repay homeowners who saw rents doubled.
To illustrate the weight of the decision and its political impact, housing secretary Robert Jenrick slammed doubling ground rents as “unfair practices, which have no place in our housing market.”
Most recently, Aviva confirmed it will buy back shares for up to £750m, which started last month, in a bid to award its shareholders with a £4bn payday.
There was even the blessing from Cevian Capital as it said the insurer had made a “good start” in returning billions.
“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 £5bn by the end of next year,” said Niko Pakalén, partner at Cevian Capital.
In August, the insurance group posted an operating profit of just over £1.1bn in its half year results, up from £1.2bn in the first six months of last year. The results were widely welcomed by the market and seen as an endorsement that the nearly 40 per cent price climb in the last twelve months is justified.
For the share buyback, Aviva has entered a deal with Citigroup Global Markets to secure up to 300 million in shares, which is expected to be completed by the end of February of next year.
“We are delivering on our commitment to make a substantial capital return to our shareholders,”
CEO Amanda Blanc
“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 £750 million,” the executive explained.
The share buyback forms part of the group’s downsizing, as discussed earlier, a strategy that is designed to streamline the firm’s operations and head into a more profitable direction.
Although Aviva may have felt more like “an auction house than an insurer over the past 18 months,” as analyst David Kimberley recently put it, most investors and City observers seem very satisfied with the direction the company is heading: a slimmed-down business that is able to stay focussed and, more importantly, remain profitable.
The idea of Aviva being a global player may have been abandoned for now, the numbers do speak for themselves, is the consensus in the Square Mile.
One thing Aviva may want to keep in mind is that the buyback is obviously welcomed by those wanting to cash out, but Blanc and her team should not neglect investments in the company, including paying off debt.
Nevertheless, the company is £4bn than last year, as analyst James Andrews said. The pointed out recently that the pandemic has also forced customers to rethink their future plans, which has contributed further to a favourable profit margin.
Path to growth
Despite Aviva heading into 2022 as a smaller organisation, it still has plenty of options for growth.
That view is widely shared by analysts and industry observers in the City and Canary Wharf, including Nicholas Hyett, an equity analyst at Hargreaves Lansdown.
“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,” Hyett explained.
Within its savings and retirement business, record net flows were recorded in the first six months of the year, up 24 per cent to £5.2bn, a jump of about £1bn in comparison to the first half of last year.
Aviva anticipates continued growth its savings and retirement division in the UK, and said it is on track to finish its ambitious but realistic £300 million cost reduction target next year.
Hyett stressed that “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’.”