Aviva's recent Q4 2022 earnings call was a symphony of pronouncements about 'disciplined growth,' 'sustainable returns,' and 'robust capital.' Amanda Blanc, the ever-optimistic CEO, painted a picture of a company firing on all cylinders, exceeding expectations, and returning capital to shareholders. Yet, beneath the surface of this upbeat narrative, a more intriguing story is unfolding, one that hints at a potential seismic shift in Aviva's strategic landscape.

A careful examination of the transcript reveals an almost obsessive focus on one specific area: Bulk Purchase Annuities (BPAs). Blanc and CFO Charlotte Jones repeatedly emphasized the 'strong pipeline' and 'positive outlook' for BPAs, even going so far as to reaffirm their ambition to write £15 billion to £20 billion worth of business over the next three years. This insistence on BPA's bright future, coupled with repeated assurances that Aviva is not constrained by deal size, raises a tantalizing question: is Aviva preparing to make a colossal splash in the BPA market, potentially even a mega-deal that could dwarf anything it has undertaken before?

The clues are subtle, but they are there. Consider the emphasis on capital allocation. Blanc acknowledged Aviva's 'lucky position' of being able to choose where to deploy its resources, while simultaneously stressing the importance of diversification. However, when discussing potential mega-deals in the BPA market, the commitment to diversification seemed to soften, replaced by an eagerness to 'look at every scheme on its own merit.' This shift in tone, subtle as it is, suggests a willingness to deviate from the diversification mantra if a truly transformative opportunity arises.

The timing couldn't be more opportune. The BPA market is expected to explode in the coming years, fueled by improved funding positions and a growing appetite for de-risking among pension scheme trustees. Aviva, with its leading BPA offering and robust capital position, is perfectly poised to capitalize on this surge in demand.

Furthermore, Aviva's internal asset management arm, Aviva Investors, plays a critical role in fueling BPA growth. The ability to source high-quality illiquid assets at attractive prices gives Aviva a competitive edge in the market, allowing it to secure more deals at higher margins. This in-house expertise, highlighted repeatedly throughout the call, further strengthens the case for a potential mega-deal.

Hypothetical Impact of a £10 Billion BPA Deal

Let's assume Aviva secures a £10 billion BPA deal, a figure that, while large, is not out of the realm of possibility given the current market dynamics. Such a transaction would significantly impact Aviva's capital position, likely exceeding the 'operating capital' generated through business performance and forcing the company to dip into the surplus created by market movements.

This, in turn, could have a ripple effect on Aviva's capital return strategy. While the £300 million share buyback and the low to mid-single-digit dividend growth guidance were presented as a reflection of Aviva's 'disciplined' approach, a mega-deal could necessitate a reevaluation of this strategy. Aviva might be forced to prioritize capital retention over immediate returns, at least in the short term, to maintain its financial strength and absorb the impact of the deal.

Of course, this is just a hypothesis, and Aviva has given no concrete indication of pursuing a mega-deal. However, the clues are there, hidden within the carefully crafted language of the earnings call. The repeated emphasis on BPAs, the softening stance on diversification, the confidence in Aviva's ability to handle large transactions - all point towards a company that is quietly positioning itself for something big, something that could reshape its future and send shockwaves through the insurance industry.

Whether this whisper campaign translates into a concrete deal remains to be seen. But one thing is clear: Aviva is not content with simply playing it safe. They are on the hunt for a transformative opportunity, and the BPA market might just be the perfect hunting ground.

"Fun Fact: The largest BPA deal ever recorded in the UK was a £16 billion transaction between Prudential and the British Telecom Pension Scheme in 2014. Could Aviva be eyeing a deal that surpasses even this behemoth?"