Aviva split reignites M&A prospects

When RSA’s £5bn bid for Aviva’s general insurance division was rejected back in 2010, a big reason given was Aviva’s commitment to the composite model.

But now new boss Maurice Tulloch has split the reporting lines in general insurance and life, does this pave the way for a sale of general insurance? 

According to John Nisbet, partner at insurance M&A advisory firm IMAS, many of the benefits that would have come from RSA buying Aviva GI in 2010 remain.

With both firms having a strong GI presence in the UK, Ireland and Canada, synergies brought about by the deal are estimated to be at around £300m.

“It’s the most synergistic deal in UK insurance,” Nisbet said.

Share price

Long-term investors are desperate for anything that could shake up Aviva’s underwhelming share price performance.

Shareholder activist Philip Meadowcroft said: “Splitting up the two parts after they put them together smacks of dressing something up for eventual sale – although it might not be a bad thing.”

In the near-term though, Aviva will likely keep hold of this profitable part of the business.

“General insurance is not long-term insurance. It’s cash in and cash out. It is a good cash cow. Aviva needs as many cash cows as it can grab,” he added.

Panmure Gordon analyst Ming Zhu agrees it’s unlikely Aviva would sell its GI business anytime soon – but that could change.

When Tulloch may start to consider the option according to Zhu, is if Aviva fails to deliver on targeted savings.

She said: “Aviva’s priority is going to be to deliver the cost savings, and if the cost savings don’t come through within the timeframe then splitting life and GI would be an option, but that is more down the line and a more radical change.”

Zhu said the market had expected cost-cutting targets of £150m-£200m per annum, with Tulloch confirming a £300m target.

She said the half-year results later this year would be an important indication of how Aviva is performing to meet Tulloch’s more ambitious cost-saving target.

RSA merger

But if Aviva were open to a sale, Zhu said RSA is unlikely to be involved.

“RSA still have a lot of things they need to sort out,” she said. “They still need to turn around the SME performance, and sort out their UK business. If they were in a position to make an acquisition it might not be very welcomed by shareholders.”

Nisbet suggests if a deal were to be done between RSA and Aviva, an Aviva-led merger might be more likely.

He said that historically the GI business has played second fiddle to the life business and that with a new separate management team focused on GI, it could lead to a renewed appetite for acquisitions.

“With separate management you could have a more focused business with access to capital for M&A and a renewed energy, so it’s possible that the broken-off GI business could execute M&A,” he said.

“In that case the obvious transformational target is RSA, because the synergy case is proven and you have Stephen Hester running RSA, who for personal reasons would probably love an elegant exit that could create value for his shareholders. This could possibly be that sort of elegant exit.”

Alternatively, he suggested Aviva GI may have a look at acquiring smaller underwriters, although Zhu said this was unlikely short-term.

“Aviva needs to sort themselves out before doing an acquisition. They would be criticised for that,” she said. “But once they do and things start to turn around, then an acquisition down the line could be a possibility.”

Acquisition target

Nisbet believes the decision to break up life and general insurance does set up Aviva as a potential acquisition target, but said the pool of interested parties would be small.

Zurich has previously attempted to buy RSA, and he speculated Zurich might now be ready to bid again as it looks to build a larger UK GI book.

“If you’re a global insurer you probably want to be top three or top five in all the major insurance markets,” he said. “Allianz would be there, Zurich would be there, AXA would be there. There’s no point being number seven in the market.”

With Allianz having recently acquired the LV= GI and L&G home book, and AXA having bought XL Catlin, Nisbet thinks both are probably happy with their size in the UK market.

He said integrating a major GI business like Aviva would add huge levels of complexity and leave the businesses overly weighted in the UK compared to other countries.

However, having revealed its ambitions to grow its UK book, he suggested Zurich could have the means and appetite to make a bid.

American interest

Alternative players of a size big enough to make a bid for the Aviva GI business, with an estimated value anywhere between £5bn-£7bn, could come from an overseas player without a current foothold in the UK.

However, Nisbet said this was unlikely due to the maturity of the UK GI market.

“Every time there’s speculation of M&A action in the UK market everyone starts saying the Americans are coming and it hardly ever happens,” he said.

“You could count on one hand the number of insurers bigger than Aviva that have an interest in the UK market.”

Japanese buyers have shown interest in overseas markets before, but Nisbet said regulatory hurdles and the wide differences in company culture would put bidders off, particularly when there is a large Chinese market yet to be fully exploited.

“People think lots of foreign buyers come in and buy assets in the UK, which is a mature market. But statistically it doesn’t happen that often,” he said.

“Most of the foreign buyers of assets in a mature market are already in that market. Zurich is in the UK market already.

“It’s very unusual to have someone that is new to a market coming into it now in 2019 with a big splash. It’s more likely someone already in the market.”

An Aviva spokesperson batted away speculation of a general insurance sale, saying: “The changes we’ve announced are about managing the GI and life businesses separately; it’s not about the future portfolio strategy of Aviva and there are no plans to sell our UK GI or life businesses.”

But whether it’s a general insurance sale or something else, many investors are keen to see Tulloch do something to breathe new life into the share price.

“It’s a very good yield, but compared to Prudential shares, it is very poor,” says Meadowcroft, who remains doubtful Aviva is going to undergo any great change. 

“So much of what we have heard is a bucketful of motherhood and apple pie; wonderful aspiration, but no clear vision that will make the world change.”