Aviva: Blanc cheque

Aviva’s name belies its status as one of the least lively shares in the FTSE 100 index, having travelled sideways for decades. That fact alone should add urgency to newish chief executive Amanda Blanc’s reform of the UK’s largest insurer. She is selling foreign assets and focusing on core markets. The sale of Aviva’s French business to mutual insurer Aéma Groupe for £2.8bn (€3.2bn) announced on Tuesday is a jaunty step forward.

This is Aviva’s largest and most complicated transaction. Priced at about nine times forward earnings, the sale will be welcomed by shareholders, as that exceeds Aviva’s own multiple. The division joins divestments of its Singaporean unit as well as parts of the Italian business. More should follow in Poland and Italy, bringing about £6.6bn of proceeds altogether. Plans for debt reduction and capital returns are pencilled in, but reinvesting in the core business cannot be ruled out.

Cash from the deal is expected to arrive by the end of this year allowing scope for early redemption of £1.9bn of debt that matures in 2022 and 2023. That would achieve the targeted Solvency II leverage ratio of below 30 per cent (less is more) paving the way for further capital returns in 2023. Mooted changes to Solvency II capital requirements following Brexit would increase that scope.

No surprise then that Aviva’s share price has jumped 45 per cent in less than four months. Blanc has delivered to shareholders what numerous previous chief executives have not. A once record valuation discount with other European insurers (such as Axa and Allianz), using a 2022 price to earnings multiple, has halved since November. Further delivery of Blanc’s plan should narrow that gap further.

Once she completes the latest disposals, Aviva will be only 22 per cent weighted towards non-life. Reinvested proceeds may go towards further annuity acquisitions. Possible deals with RSA’s UK business or Direct Line further down the road would bolster Aviva’s non-life exposure. Blanc will have put a bit more life in the step of her shareholders. The promise of more M&A activity within European insurance suggests things may remain lively a bit longer yet.

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