As Aviva PLC (LON:AV.) decides to reverse its earlier strategy of combining its UK life and non-life businesses, analysts suggest this was not enough to provide the major fillip the group needs.
So was the change mainly to drive cost savings or provide flexibility for other options down the line - and can a 323-year-old business of its huge size and complexity even expect to deliver major changes without a great deal more pain?
History of mergers
Getting to its current size, Aviva, like the wider insurance industry, has a history crowded with mergers and other consolidation.
But life insurance was slow to get to that stage after the first policy was issued in 1583 (to provide cover for a certain William Gibbons) and the first life companies were established in the UK during the 17th and 18th centuries, including the formation of the Hand-in-Hand fire insurance mutual that eventually evolved to become Aviva.
After taking off on the back of the growth of the middle classes in the 19th century, developments in the sector led to commercial insurers being absorbed by the larger life companies to form great composite insurers in the first quarter of the 20th century, with a growing trend for M&A leading to the 12 largest composite insurers accounting for 87% of UK insurance premiums at one point.
Aviva truly came into being after the merger trend in the 1990s saw the Commercial Union and General Accident combine to form CGU, which in 2000 then merged with the listed Norwich Union to form CGNU, with over £200bn of assets under management.
In the following few years, CGNU exited the Lloyds London market, launched in China and rebranded as Aviva, with operations in 28 countries by 2011.
Under previous chief executive Mark Wilson’s reign from the end of 2012 until earlier this year, Aviva’s plan was to improve cash flow and simplify the group by reducing the number of businesses to make it more joined-up as the digital strategy was also progressed.
Underperforming units were jettisoned and the operations were slimmed down to 16 countries in 2017, though significant expansion of the UK life book was effected by the acquisition of Friends Life in 2015.
Shares in the company at the start of 2019, however, were little changed from where they were in late 2009 as initial strong progress faded and the improvements in underlying cash remittances slowed in recent years.
“The bottom line performance of the group has also seen much less improvement given the level of restructuring charges, write downs and amortisation,” says analyst Paul De’Ath at Shore Capital, with growth in earnings per share and divided per share aided by share buybacks in recent years.
He suggested this was one of the reasons the board decided to take a new direction and change the CEO.
Even before new boss Maurice Tulloch joined, the board had decided to stop share buybacks and instead use excess capital to reduce debt gearing.
When one becomes two
Tulloch, who was promoted from his previous role as boss of the international insurance business, has been given the go-ahead to take Wilson’s simplification strategy further.
This is best done, he seems to feel, by reversing the decision to combine the life and non-life businesses, with an associated £300mln of cost cuts as 1,800 of the group’s 30,000 staff are culled.
Tulloch said the changes were “essential to remain competitive and this means tough decisions” and were “the first step in our plan to make Aviva simpler, more competitive and more commercial”.
Analysts said while the £300mln cost savings target by 2022 should support EPS growth, “we believe that the issue with Aviva is more about fixing the debt leverage and strategy of the group rather than supporting EPS growth through cost savings which are short term in nature rather long term”.
Aviva’s investor presentation explained that while the combined life and non-life operations had led to some new business wins it had also led to more complexity and had not delivered the expected efficiency benefits.
ShoreCap's De’Ath suspects driving significant change will be difficult. “A business the size of Aviva does not change overnight and the talk of increased pace of change is good to hear but the previous incumbent in the role was not shy about pushing for faster changes either.”
De’Ath said he did not expect either business to leave the group, but the split would allow management of the two parts of the business would allow them to be “more focused on their respective customers and specialties”.
If the cross selling doesn’t work?
He said that composite model’s cross selling has worked well in the corporate environment but not been very successful in retail as “fundamentally customers don’t care whether their car insurance is provided by the same company that provides their pension, they just want a good deal”, with the MyAviva app bringing all policies in one place a good concept but not if customers don’t use it.
“In our experience customers don’t regularly check their pension balances or statements and they only need contact with their car or home insurer at the time of renewal or when they need to make a claim.
“Using the app as a sales tool is therefore difficult, in our opinion. Tech savvy customers looking for car insurance are likely to use price comparison websites each year and therefore mostly have little loyalty to Aviva, even if they can see their details alongside their ISA.”
De’Ath declared that the key for Aviva is to provide an offer to customers at a level that is attractive enough to beat the comparison website options, which may be possible using its in-depth customer knowledge via the life insurance product data it holds “but this doesn’t seem to have been achievable so far”.
Barrie Cornes at Panmure Gordon said news of the cost savings was “very positive” but added: “We believe more radical changes could come if the cost savings don’t have the desired effect.”
He added that dividing the UK operation in two “gives Aviva an option to sell its general insurance business in future”.