The Aviva (LSE: AV) share price is down 10% this year. For a leading British insurer and asset manager that yielded 7% last year, this surprises me. It is even more surprising as it continues to streamline its operations to reduce costs and keeps winning new business.
A big new pension deal just announced
The latest deal announced on 5 May is a £900m bulk annuity buy-in for the Thomas Cook Pension Plan.
This type of deal involves a specialist such as Aviva taking over another company’s defined benefit pension schemes. It reduces the ongoing cost burden of these expensive types of pensions for companies that are not pensions experts.
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Aviva has targeted this increasingly in-demand service as a key element of its future growth. In 2022, it made 50 such bulk annuity deals worth £4bn in total. In February this year, it completed an £850m pension scheme deal for Arcadia Group. Overall, Aviva expects to finalise between £15bn and £20bn worth of these deals by 2024.
Non-core assets to be sold off
In its 2022 results, CEO Amanda Blanc underlined that non-core businesses would continue to be sold off.
Since she took over in 2020, eight such businesses have been sold in Singapore, Italy, France, Poland, and Turkey. This included in 2021, the sale of its French business to Aéma Groupe for €3.2bn.
Overall, around £7.5bn has been raised to date through such sales.
Trending in the right direction
Many of these disposals were made after activist hedge fund manager Cevian took a 5% stake in Aviva in 2021. At that time, the fund manager said that the firm had been “poorly managed” for years.
Following the 2022 results, Cevian also said that Blanc had done an “excellent job in restructuring the company”.
This comment followed not just the sale of non-core assets but also the massive boost to shareholder returns. Aviva declared a final dividend of 20.7p per share, giving a total dividend of 31p per share for 2022.
It also announced an additional return to shareholders through a £300m share buyback. This took the total capital return to shareholders to over £5bn since 2021. Overall, it means that Aviva offers one of the strongest rates of return in its sector, at around 10%.
Laser focus on new business
The firm’s focus is also on increasing wealth fund flows in the UK, Ireland and Canada general insurance businesses.
In 2022, its life insurance new business increased by 15% in value from 2021 and general insurance sales went up 8%. Its general insurance written premiums increased 8% to £9.7bn. Operating profit was up a whopping 35%, despite difficult financial market conditions following Russia’s invasion of Ukraine.
The key risk for me in the Aviva share price is that inflation remains high in the UK and its other core markets. Higher inflation means it will pay out more in insurance claims.
That said, I think inflation is at or near its peak in its core markets. I also think its pensions business will offset some, or all, of any slide in its insurance business.
I already hold positions in Aviva. If I did not, then I would buy the shares now for their likely dividend and share price gains.
