An activist investor is stepping up pressure. But does it have anything new to offer? 

By Content Director Saxon East

These activist investors are tough guys that don’t mince their words. 

Saxon East

Saxon East

At the beginning of June, Cevian Capital co-founder and managing partner Christer Gardell 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.”

It’s a brutal assessment, but also an accurate one.

Aviva’s total return to shareholders has been abysmal amid the longest bull run in financial history. 

Earnings per share are forecast to decline 8.3% per year over the next three years, according to analysts. 

Pushing for change, Cevian - which holds an estimated £800m in stock - is hinting it wants a seat on the board.

White knights

But can Cevian really benefit shareholders? 

So far, it appears to want more cost cutting - at least £500m by 2023.

A large chunk of Aviva’s £5bn cash reaped from foreign sales should be given back to shareholders.

But these plans alone won’t address shareholders’ long-term issues - and could even make matters worse.

We’ve had years of cost-cutting agendas and it has not improved total shareholder returns. 

Furthermore, previous chief executive Mark Wilson returned billions to shareholders in the form of share buybacks, which did nothing for the insurer’s long-term outlook. 

Rinse and repeat. Rinse and repeat. Rinse and repeat. 

A slimmed down Aviva, with less cash for investment, burdened by a life business with a huge base of dwindling assets under management, is a recipe for more shareholder misery once they have devoured the initial gains. 

Instead, Cevian could examine splitting up the business. 

The general insurance business could fetch shareholders £8bn. 

That’s half of Aviva’s market capitalisation, for a smaller fraction of the business. Not a bad deal at all. 

The biggest argument against breaking the business up is that as a composite, Aviva enjoys an estimated £7bn capital diversity benefit. 

However, now is an excellent time. 

It could use some of the proceeds reaped from its recent sales to shore up two separately spun off companies with appropriate capital.

Even if Aviva decides against a break up, it could probe the idea of selling parts of the legacy business.

Aviva Investors, which will never have the scale to compete with rivals, should also be looked at.

Aviva facing punishment

Blanc’s plan so far is to ‘shrink to glory’ by selling off foreign assets to become a better, but smaller, performing UK champion. 

It has bought her valuable time and helped bounce the share price. She deserves some credit.

But this alone is unlikely to be the long-term solution for shareholders. 

Legendary investor Benjamin Graham said in the short-term, the market is like a voting machine which backs firms that are popular. But in the long-term, it is a weighing machine. 

Aviva is a perennial laggard for good reason. If it didn’t exist today, you wouldn’t build it. 

Sooner or later, the stock market will turn and when it does, an unreformed Aviva will be brutally punished.