Analysis: Deconstructing Aviva

Over the past six months, Aviva has announced the sale of one overseas business after another, as it moves to make good on group CEO Amanda Blanc’s promise to transform the insurer.

To date, buyers have been found for operations in Indonesia, Singapore, Hong Kong, Vietnam, France, Italy, Poland and Turkey.

What the wave of disposals leaves behind are what Aviva considers its core markets: its life and general insurance business in the UK and Ireland and its Canadian GI business, as well as its investment arm.

Blanc was installed as Aviva CEO in July 2020. A month into the job, she raised the possibility of offloading overseas operations on an earnings call, saying of Aviva’s businesses in continental Europe and Asia: “If we can’t reach our strategic objective, we will take decisive action and we will withdraw capital.”

It was a more decisive articulation of what Blanc’s predecessor, Maurice Tulloch, gestured towards in August 2019, when he said that the insurer was “considering a range of options” regarding its Asian businesses.

“The background for this is a history of underperformance of the group on a on a much wider basis,” said Barrie Cornes, an analyst at Panmure Gordon.

“Investors felt that the returns weren’t adequate and that the business wasn’t being fairly valued by the market, and so there was a lot of pressure, first of all on Maurice Tulloch, to rationalise the business and start driving some real performance.”

Asia

In March 2020, before Blanc’s arrival, Aviva announced that it would sell its stake in its Indonesian joint venture.

However, at this point it was thought that the slimming down of the group’s portfolio would be less dramatic than eventually transpired, with the group’s Singaporean operations, for instance, being earmarked for retention in November 2019.

Come September 2020, it was announced that the majority of Aviva Singapore would be sold for £1.1bn, with Aviva holding on to a minority share. The sale of operations in Hong Kong and Vietnam followed.

Cornes suggested that Tulloch perhaps lacked the full backing of the board to make the changes required.

“Tulloch said that it was because the prices that the company could achieve for the businesses weren’t up to scratch,” he said. “But in our view, it’s more to do with the willingness of the board to do the disposals.”

Brandan Holmes, an analyst at Moody’s, suggested that Aviva’s lack of scale in Asian markets also drove its decision to sell.

“A lot of the big players there tend to be pan-Asian, whereas Aviva had some businesses there but not on a pan-Asian scale,” he said.

“You have to make a decision as to whether you really want to invest more in growing that and whether you can credibly do that, or whether it would be better to move away from large-scale plans in that part of the world.”

Europe

Though the sale of Italian life insurance joint venture Aviva Vita for around €400m (£344m) was announced in November 2020, the bulk of the group’s announcements regarding its future in continental Europe have come this side of the New Year.

In February, it was announced that Aviva France would be sold for €3.2bn, and as Aviva unveiled its full-year results for 2020 in March, it was announced that the group’s remaining Italian business would be sold for €873m.

The major driving force behind these disposals is believed to be low interest rates, which have made the business increasingly capital intensive.

Pierre Tournier, associate director of analytics at AM Best, explained that conditions in the French life insurance market had already become challenging in recent years due to low rates.

“French life insurers’ balance sheets are dominated by fixed savings contracts, where the insurer bears the investment risk. As seasoned, higher yielding investments mature, they have been reinvested at current yields, pressuring the segment’s results,” he said.

“Concurrently, regulatory solvency ratios have come under increasing pressure. Life insurers tend to invest at shorter durations than that of their liabilities as fixed savings contracts are very liquid. The resulting negative duration mismatch exposed solvency ratios to the drop in interest rates.”

Similar dynamics are playing out in Italy, and in both countries things have been exacerbated by the coronavirus pandemic.

Holmes said: “In this lower for longer interest rate environment, the French and Italian businesses are just less appealing and more capital intensive, especially for a group such as Aviva, which has opportunities in the UK market to deploy that capital potentially with a higher return.”

Federico Faccio, an analyst at Fitch Ratings, added: “Those overseas business were perhaps lacking in scale in some instances, in Italy and to some extent in France as well.”

Tatiana Grineva, an analyst at S&P Global Ratings, raised another contributing factor for the sales. “The market for mergers and acquistions is currently ripe, so Aviva is closing the deals quickly and getting a good price,” she said.

Analysts had keenly awaited to see what would happen to Aviva’s business in Poland. In late March the group announced the sale of Aviva Poland to Allianz, for a cash consideration of €2.5bn. The multiple achieved was 16.9x 2020 post-tax earnings, hailed as “impressive” by RBC analyst Gordon Aitken.

In an August 2020 note, Jefferies had highlighted the Polish business as one of the group’s “most interesting opportunities”, distinct from operations such as those in France and Singapore, which it predicted would be sold.

The insurer had said it was exploring options for its remaining joint ventures including plays in India in China, but Blanc’s words following the Poland sale may pour cold water on any further disposals.

“The sale of our Polish business is an excellent conclusion to the refocusing of our portfolio announced just eight months ago,” the Aviva boss stated.

Proceeds

At its full-year results in March, Aviva also announced that the proceeds from the sale of the overseas businesses (“the sale of our eight non-core businesses will generate total cash proceeds of £7.5bn”, Blanc updated after the Poland deal) would in part be put towards paying down the group’s debts.

“Aviva announced its plans to buy-back up to £800m of senior and hybrid debt instruments,” explained Grineva.

“It then upsized this tender offer to £1bn and this acceleration of deleveraging will contribute to the planned debt reduction in excess of £1.7bn in the first half of 2021.”

In 2020, Aviva’s leverage ratio stood at 31%, above its target of 30%. Commenting on its plans to pay down debts this year, Eugene McGeown, an analyst at Fitch Ratings said: “When we’re assessing the financial leverage ratio, by our calculation that should result in a decline from about 24% to around 20%.”

Beyond deleveraging the group, the proceeds from the sales – as well as the increased financial flexibility afforded by the removal of capital pressures stemming from, for example, the offloaded French business – are expected to be invested in Aviva’s core businesses or returned to shareholders.

Holmes said: “At a very high level, the group sees opportunities to benefit from macro trends in the markets it is strong in, and in the UK in particular, and it needs to free up capital to take advantage of those.”

Adding: “You don’t want to sit with a bloated balance sheet, and so once you’ve got leverage to what you think is a good level, you’ve got a good level of capitalisation and you’ve got enough to invest in the growth of the business, it makes sense to then return what’s left to shareholders.”

Aviva’s dividend was revised down by almost a third in November, though analysts at Citi have predicted that the insurer’s debt reduction efforts this year will prove to be a prelude to a £3bn share buyback next year.

Core

The UK, Irish and Canadian businesses designated as Aviva’s core represented about 70% of the group’s net profits after tax in 2020.

Grineva said: “We expect that in the long run Aviva will concentrate and retain better performing business with a smaller capital base. This will facilitate better capital generation going forward which can either be returned to shareholders or invested in their core markets.”

However, questions over what the next stage of Blanc’s strategy remain. Cornes said: “The question that the market is looking at is: what’s the strategy going forward? Yes, you will have completed the disposal programme, but what’s next?”

He continued: “Is the strategy to dispose of those businesses in years to come? Is it to drive better performance? Is it to acquire bolt on businesses? We haven’t really got answers, but to be fair, you probably wouldn’t expect it given the rapid changes that are taking place.”

Private client ambitions

A glimpse of that next stage may be offered by Aviva’s acquisition of a private client team from Axa XL, announced at the start of March.

“We are focused on our core growth markets, and in the UK GI business there is a clear opportunity to build our high-net-worth business, where we already have a strong presence and distribution network,” said an Aviva spokesperson.

Adding: “Axa XL’s market-leading team of underwriting and customer service specialists will complement our established Aviva Private Clients business and provide the means to extend our reach in the high net worth market, from mid to very wealthy clients.”

William Cooper, managing director of broker Stanhope Cooper, said that the private client market was currently “buoyant”, and that Aviva had always struck him as “a sleeping giant”.

“Selling the Aviva brands is easier than selling other brands,” he said. “If a wealthy international client comes to London and purchases a house, selling them an Aviva policy is a lot easier than selling some of the other brands out there.”

Cooper described the Axa XL team Aviva has acquired as “tier one”, and predicted the acquisition would propel Aviva to the top of the high-net-worth market.

But Cornes said that the acquisition did not amount to a strategy for the group going forwards, saying: “It alludes to the desire to do something more with the UK than simply leave it alone, which is positive.” 

“But in terms of affecting the share price, they’re relatively small changes and they wouldn’t really have an impact.”

McGeown said of the acquisition: “It’s not very material for our assessment of Aviva’s business profile.”