- Investors avoided life insurers last year because of concerns on economic and Brexit risks
- These companies' cyclicality is lower than it used to be and their solvency is better than during the financial crisis
- These include Aviva, which is is implementing far-reaching strategic changes and has significant scope to improve its cost base
Alex Wright, manager of Fidelity Special Values (FSV) and Fidelity Special Situations (GB00B88V3X40), explains why he has added to life insurance company Aviva (AV.).
"Life insurers is a space I have been excited about for a while and where I increased exposure during the volatility last year," he says. "This was because these companies were shunned by investors who saw them as UK gross domestic product proxies vulnerable to economic and Brexit risks.
"But life insurers are well regulated companies with good risk management, and are seeing strong demand for bulk annuities and pension de-risking. The Covid-19 crisis has validated our investment thesis that these businesses’ cyclicality is lower than it used to be and their solvency is significantly better than during the financial crisis. Since the virus outbreak, life insurers have proved resilient and reported stronger earnings than pre-Covid.
"My conviction in life insurers has increased further due to improved company disclosure. This sector offers an attractive combination of cheap valuations, strong demand/supply fundamentals and growing earnings.
"One of the stocks I added to and is now one of our largest holdings is Aviva. Its decision to temporarily pause dividends, despite not being required to do this, spooked the market and caused its shares to lag. Although its shares have since recovered it still only trades on eight times 2022 earnings. This is despite reporting strong results last year that underlined its resilience during the Covid-19 crisis and record sales of bulk annuities.
"Last year Aviva appointed a new chief executive officer, Amanda Blanc, who is implementing far-reaching strategic changes aimed at refocusing on core businesses in the UK, Ireland and Canada. The disposal of Aviva’s international businesses has been incredibly speedy given the pandemic, with the company recently announcing the sale of its Poland business. This is its eighth divestment over the past eight months and successfully concludes its planned refocus. These disposals have been at significantly higher multiples than the stock is currently trading on.
"Aviva also has significant scope to improve its cost base – another key initiative.
"Despite recent encouraging progress with the vaccination programme, nobody can predict how the virus will evolve globally over the next year or the speed of economic recovery. But investing in resilient companies with attractive valuations and catalysts for changes has proved a rewarding strategy over the long term, and I see no reason why this should change."
