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Aviva activist is part outrider, part salesperson

3 minute read

A pedestrians walks past the Aviva logo outside the company head office in the city of London, Britain March 7, 2019.

LONDON, June 8 (Reuters Breakingviews) - Aviva (AV.L) may find its new activist rather helpful. Cevian Capital has taken a 5% stake in the 16 billion pound British insurer. Far from rubbishing Chief Executive Amanda Blanc’s strategy, the Swedish investor is sold on its general direction. As such it could ensure she hits her targets, and may even enable a lucrative sale.

Aviva is Cevian’s third British insurance target. The activist, known for its relatively friendly approaches, owned stakes in Old Mutual (OMUJ.J) and more recently RSA, which was gobbled up for a toppy 7 billion pounds by a consortium including Canada’s Intact Financial (IFC.TO) and Danish insurer Tryg (TRYG.CO) in November last year. It wants Blanc to release 5 billion pounds of excess capital next year, crank her cost-cut targets from over 300 million pounds to 500 million pounds by 2023 and double the share price to 8 pounds within three years.

Cevian is pushing on an open door. Blanc has already promised to return any excess capital beyond the insurer’s 180% solvency ratio. Having sold off the French, Polish and other businesses she will focus on the UK, Ireland and Canada. The divestments alone will boost Aviva’s solvency ratio to over 250%. That means she can release over 70% of the 9.1 billion pound solvency capital requirement Aviva stated at its first-quarter results, or 6.6 billion pounds.

At Aviva’s current 4.13 pound share price, a 5 billion pound buyback could reduce the group’s 3.9 million shares to 2.7 million. Assuming Blanc invests 300 million pounds, the remaining 1.3 billion pounds could bump up the dividend. The lower share count and higher payout could see her dividend per share double to 48 pence.

The catch, as demonstrated by Aviva shares’ relatively muted 3.5% response on Tuesday, is that investors already know the potential. Yet the company still only trades on 8 times its forward earnings, a steep discount to rivals’ 13 times, according to Refinitiv. Still, if Cevian’s prodding incentivises Blanc to hit her own targets, then a potential buyer may take a more positive view.

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- Activist investor Cevian Capital said on June 8 it had built up a 4.95% stake in Aviva and that the British insurer should be able to return 5 billion pounds of excess capital in 2022.

- Cevian said Aviva has been poorly managed for many years, and its high-quality core businesses have been held back by high costs and a series of bad strategic decisions.

- Cevian said Aviva would be able to return the 5 billion pounds of excess capital once it had completed earmarked disposals. The investor is also predicting cost cuts of 500 million pounds by 2023.

- Aviva should be able to have a value in excess of 8 pounds per share within three years, and more than double the dividend to 45 pence, Cevian added.

- Shares in Aviva were up 3.5% at 425 pence by 0721 GMT on June 8.

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