Briefing: Where next for Aviva strategically amid the coronavirus crisis?

By content director Saxon East

Those who have worked closely with Aviva boss Maurice Tulloch say he is the outstanding insurance practitioner of his era, especially in non-life.

But being a great divisional practitioner is a different thing from running a whole group business through turbulent times

Aviva share price has tumbled to a new low amid the pandemic outbreak. 

It’s left people asking two things: what is Aviva’s strategy and how it is going to be impacted by coronavirus? 

Aviva strategy 

On strategy, an interesting note came out of Moody’s last month outlining the obstacles ahead for Tulloch’s Aviva vision.

Aviva’s return of capital is weak, averaging just 5% over five years, (see graph below), lagging behind European peers.

Added to this, around 25% of profits over the last three years have come from releases from longevity reserves held against annuity contracts.

This is ‘unsustainable’, dropping from £800m to anywhere up to £200m. That is a lot of money disappearing from the bottom line. 

However, Tulloch has a plan: cut costs and boost performance in the sweet spots of the business. 

On costs, £300m will be saved over the next three years. 

The big challenge though is the decline on return on capital projected for the UK life, savings, and investments - it made over half the £3.1bn operating profits last year.

It was the chief beneficiary of the now diminishing longevity releases. 

Tulloch wants this counter-balanced by improved return on capital across three other key areas -  general insurance, European life, and Asia life.

In general insurance, net written premium is targeted for a 20% boost with 2.5% shaved off the combined ratio by 2022.

Aviva will use its edge in data, analytics and broker relationships to boost revenue. Mid-corporate and regional speciality in the UK will play a big part. In Canada, rate rises will help. 

In Europe, just ove half of profits come from France, and Aviva will lean on brokers to sell more unit-linked products. 

It’s all doable, except growing in tough market conditions is challenging, and can lead to increased claims. 

Coronavirus claims

Then you have coronavirus. There is a big danger here, but let us deal with the claims and solvency. 

In general insurance, claims will likely be small as pandemics are clearly excluded from contracts, Aviva having wisely learnt from previous virus outbreaks. 

On the life side, it’s difficult to know until Aviva gives more clarity. 

Tulloch rightly scrapped the dividend, and as a result, capital ratio will increase 7% to 182%, Aviva last updated. 

 Aviva does not have much exposure to the equity markets which have taken a drubbing.  

The real problem for Aviva is likely to be not so much the solvency, but what happens with the share price.

Weak share price 

The share price has pretty much been chopped in half over the last six months, tumbling from 435p to 242p as coronavirus bites hard.

If Aviva’s share price remains in the doldrums, failing to pick up, it’s hard to think of a better target for an activist investor.

 

The ingredients are perfect: a share price at an all time low, a significant chunk of investors unhappy and a challenged life arm that should arguably be hived off from the faster growing parts of the business. 

If activist investors such as Carl Icahn can force change in the much larger AIG, imagine what they could do to Aviva. 

This will be compounded if rivals bounce back faster. 

Allianz coronvirus claims have been pegged at just €600m, and its share price has already rebounded faster than Aviva’s. 

There could even be a predatory move from a larger and faster recovering insurer who sees value from a rival  trading so far below its book value. 

A lot will depend on Tulloch’s ability to fire up his team to improve performance in all the targeted areas. Ideally, get the share price pumping again. 

He’s going to need every last bit of those fabled insurance abilities to succeed in this monumental challenge.