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Six years after Carl Icahn launched a campaign at insurance giant AIG with mixed results, the world’s largest activists have again started to see value in the sector.

In 2015, Icahn called on AIG to pursue a three-way breakup to simplify the business and return more capital to shareholders. Although he gained a board seat along with fellow billionaire John Paulson, Icahn failed to achieve his key demand and exited in 2018, without a big move in the stock price.

Now, a new cohort of large activists appears to be using similar strategies with more success, especially in Europe. Elliott Management, Third Point Partners, and Cevian Capital have all invested in the European insurance sector over the past two years. According to Activist Insight Online, eight insurance companies were subjected to demands by dedicated activists (partial- and primary-focus only) in 2020, the highest number since records began in 2013. In the first half of this year, five insurance companies have already been targeted by dedicated activists.

Elliott launched campaigns at Sampo in Finland and NN Group in the Netherlands in 2020, and Principal Financial Group in the U.S. this year. Third Point targeted U.K.-based Prudential in early 2020, and just recently Cevian Capital invested in U.K.-based Aviva after exiting RSA Insurance, which agreed a sale.

Better focus

Unlike Icahn six years ago, activists are now successfully pursuing breakup plays in the insurance sector. In many cases, they are pushing at an open door, as most European insurers are eager to unravel decades of empire-building in favor of more focused enterprises.

Prudential has sold its U.S. business to focus on high-growth Asia and Africa, after Third Point’s Dan Loeb called for the move. Sampo sold its large stake in Nordea following appeals from Elliott to simplify its equity story and zero in on insurance.

NN Group is running a strategic review for its investment arm, after Elliott called for an overhaul of the business. The activist is also pushing for an exit from Japan. With backing from Cevian, Aviva’s new CEO Amanda Blanc is pursuing a path of focusing on the U.K., Ireland, and Canada, while downsizing the company’s equity investing unit.

As insurance is typically a complex business, another common demand is better communication with shareholders. Elliott scorned both NN Group and Sampo for failing to clearly articulate their strategy to investors, which it believes resulted in a low trading multiple. PrimeStone Capital called on St. James’s Place to simplify its financial reporting, in addition to slashing costs and exiting the Asian business.

Take more risks

The sector’s attractiveness might be surprising given the low interest rate environment that typically hurts insurers’ profitability, and lack of growth opportunities, but activists might be forward-looking. With inflation picking up, interest rates could follow, providing a potential boon to the best-positioned insurers in the years to come.

Some insurance companies are not waiting for interest rates to rise, and are actively diversifying their portfolios into higher-yielding assets. According to J.P. Morgan Cazenove analysts, U.K.-based insurance companies have been shifting their portfolios away from government bonds towards lower-grade corporate bonds and illiquid assets like mortgage loans over the past five years. “We believe this reflects insurers’ active search for higher yield,” analyst Ashik Musaddi wrote in a May 4 report.

Indeed, Elliott criticized NN Group for having “one of the lowest-risk asset portfolios” in Europe and called for more investments in riskier assets like residential mortgages.

Undervalued

European insurance companies seem cheap relative to the broad market, a characteristic that most activists cherish, as it limits downside potential.

MSCI Europe Insurance Index, which includes Sampo, Aviva, and Prudential among its top holdings, trades at a price-to-earnings ratio of 11.50, versus 24 for MSCI Europe, according to data provider MSCI, as of May 31. Aviva is even more discounted, as it trades at around seven times earnings. NN Group is valued at 6.7 times earnings.

While insurers appear undervalued, they have outperformed MSCI Europe in all years since 2012, with the exception of 2016 and 2020.

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