On 6 July 2020 Aviva announced that it had appointed Amanda Blanc as CEO with immediate effect. The CEO said back then:
“Aviva is a great company, full of great people, and I’m honoured to be given the opportunity to help shape its future. I want Aviva to be the leader in our industry again and the first choice for our customers and partners. My focus will be on achieving that for the benefit of all of our stakeholders.
“We will look at all our strategic opportunities, and at pace. I have been on the Aviva Board since the start of this year and have a good understanding of where the business has its strengths and what actions we should take across our portfolio.”
The 2019 Annual Report gives a flavour of what the CEO inherited. The business lacked focus, spread across multiple geographies. In 2019 the split of Aviva’s £31bn of Gross Written Premium was UK Life 28%, France 22%, Italy / Ireland / Other Europe 18%, UK General Insurance 15%, Canada 10%, Asia 5% and Poland 2%. The Group also had a number of associates and JVs, and its Aviva Investors business.
In 2019 the Group also had expensive legacy subordinated issuance within its capital stack. Total Tier 2 debt was £5.8bn while the Group had a further £0.3bn of Tier 3 securities.
Costs were another area of focus. What AV/ terms controllable costs ran to £4bn a year in 2019.
That is the helicopter view of what Amanda Blanc inherited a little over a year ago. While it is still comparatively early days in her reign, the Group has made rapid progress in her strategic priorities to: (i) focus the portfolio; (ii) financial strength; and (iii) transform performance.
To begin with the (re-)focus of the portfolio, progress here is very impressive. Aviva has agreed a total of eight disposals for £7.5bn. During H2 2020 AV/ completed the disposals of Friends Provident International, Aviva Singapore, Hong Kong and Indonesia. During H1 2021 AV/ completed the sales of Aviva Vita and Aviva Turkey. Before the end of this year it is expected to have closed the disposals of Aviva France, Aviva Poland and its remaining Italian insurance units.
In a short space of time, management has consolidated Aviva into a focused insurance business with leading positions in the UK, Ireland and Canada. The Group still has a number of JVs and Associates in China, Singapore and India, which I suspect will be managed for value.
Turning to financial strength, the Group has utilised some of the disposal proceeds to slash its financial liabilities. Solvency II debt leverage fell 5 points during H1 2021 to 26%, driven by the redemption of £1.9bn of subordinated debt and senior notes during the period. While the senior notes carried modest coupons, meaningful recurring savings have been achieved through successful tenders and calls for the Group’s 6.125% Tier 2 sub debt (€349m redeemed in H1); 6.125% restricted Tier 1 sub debt (£298m redeemed in H1); 4.5% Tier 3 sub notes (all C$450m redeemed at maturity in May); 12.0% Tier 2 sub notes (all £162m redeemed at maturity in May); and 6.625% Tier 2 sub notes (all £450m redeemed in full at the first call date).
AV/’s Tier 2 instruments outstanding fell to £5.5bn at end-June (was £6.7bn at end-2020) while Tier 3 liabilities are just £116m, versus £355m at end-2020.
In terms of transforming performance, AV/ delivered a 2% reduction in controllable costs during H1, with management saying it is on track to deliver £300m of savings by 2022 and is focused on “achieving top quartile efficiency in all our businesses”.
Management is also focused on cash flows, targeting £5bn of cash remittances over 2021-23 (£1.1bn delivered in H1 2021 from continuing operations).
What are AV/’s intentions for the £7.5bn of disposal proceeds? As set out above, £2bn of debt was repaid during H1 and a further £1bn of the proceeds has been set aside for more deleveraging. The Group will distribute “at least £4bn” to shareholders, with £750m of this earmarked for the share buyback which has been underway since the middle of August. The split of specials and buybacks has yet to be settled upon, although management has expressed a “preference for methods the would result in a reduction in share count”.
Not everyone is happy with the pace of progress, however. Activist fund Cevian has said that AV/ should return £5bn of capital to shareholders, although I’m not sure that this will move the dial relative to management’s £4bn+ plan given the £15bn+ market cap. Cevian is also pushing for £500m of cost take-out by 2023 versus management’s plan of £300m by 2022.
On dividends, in November 2020 Aviva announced “a new sustainable and resilient dividend policy”, saying it would return excess capital above a 180% solvency cover ratio (this was 203% at end-June 2021). A rebased dividend for 2020 of 21p was announced, expected to grow by low-to-mid single digits thereafter. I suggest that cutting the share count, cutting costs and cutting debt servicing costs (as AV/ is doing) while benefitting from underlying growth in its end-markets will lead to steady and sustainable growth in distributions.
Let us now turn to the investment view.
Bloomberg consensus has Aviva trading on 0.74x end-2021 price to book and offering a dividend yield of 5.59% (22.1p DPS, +5.2% y/y – the H1 2021 dividend was increased by 5% y/y so this seems reasonable).
During H1 2021 AV/ recorded a net gain of £1m from the disposal and measurement of subsidiaries, JVs and associates. This followed a net gain of £12m in FY 2020. It strikes me as peculiar that I can buy more shares in Aviva at a ~26% discount to book value while AV/ has been selling off non-core operations in-line with their book values.
For me – and acknowledging that as a shareholder in the company I am not an impartial observer, I see AV/ as very attractively priced. The Group trades on a 26% discount to NAV, despite generating strong return on equity (8.8%-10.2% over 2021-23, per Bloomberg consensus). It continues to make progress in paring underlying expenses and debt servicing costs, while its leading positions in growing markets further underpins the outlook for distributions. As a shareholder, my sense is that I am, as their marketing blurb in Ireland (used to?) says, “safe in the hands of Aviva”.
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