The share price of FTSE 100 insurer Aviva (LSE: AV) rose by about 2% this morning, after the firm said chief executive Mark Wilson would step down with immediate effect.
Mr Wilson will remain available until April to assist with a handover, but in a statement the firm said that following a successful turnaround, “it is time for new leadership to take the group to the next phase of its development.”
Why is he leaving?
Mr Wilson was hired in 2013 to turn around the company, which he says was “in poor health” at the time. Today the picture is quite different. The group’s balance sheet is much stronger, with a Solvency II regulatory surplus of £11bn at the end of June.
Earnings are rising and the group’s cash generation has improved considerably. The 2015 acquisition of life insurance specialist Friends Life appears to have been a particular success, contributing £500m of cash remittances last year, out of a group total of £2,398m.
However, Mr Wilson caused friction with investors earlier this year when Aviva tried to cancel irredeemable preference shares, before being forced into a U-turn. He also annoyed some investors by taking a seat on the board of US asset management giant Blackrock, a direct competitor to the Aviva Investors business.
It wasn’t hard to sense that he might soon be ready to move on.
Good performance so far
Aviva has not escaped the sell-off that’s being seen across the insurance sector. The insurer’s share price has fallen by 15% from its 52-week high of 554p to trade at the lowest levels seen since 2016.
There are concerns that last year’s severe winter weather will hit profits. But in general the group’s financial performance has been improving. Last year saw operating earnings rise by 7% to 54.8p per share, while cash remittances climbed 33% to £2,398m.
This progress continued during the first half of 2018, when operating earnings rose by 4% and cash remittances climbed 27% to £1,493m. Aviva returned £1.8bn to shareholders during the period through dividends and share buybacks.
What comes next?
Today’s statement confirmed consensus forecasts that operating earnings will rise by 5% to 57.7p this year. This puts the stock on a modest forecast P/E of 8.1.
Dividend income should also continue to increase. This year’s payout is expected to rise by 10% to 30p per share, giving a forecast yield of 6.3%.
Next year, the group is expected to increase its dividend payout ratio towards a 2020 target of 55%-60% of earnings. This is expected to result in another 10% hike to the dividend, giving a forecast yield of 7%.
What’s less certain is how this business can achieve higher levels of growth. One solution might be a greater emphasis on the group’s overseas businesses. During the first half of this year, the value of new business in Europe rose by 25% to £307m, but much of this gain was offset by UK new business, which fell by 26% to £198m.
Other growth areas include Asia and the Aviva Investors asset management business, although both are currently relatively small.
We don’t yet know what Mr Wilson’s replacement as CEO will decide to do. But with strong cash generation and a 6.5% yield, I remain happy to hold and might consider buying more.