Aviva to Cut 16 Segments in Strategy Shift
July 9, 2012 by David Pilla
Best’s News Service – July 05, 2012 12:02 PM
LONDON – U.K.-based Aviva plc unveiled a strategic plan that will involve its exit from 16 underperforming segments, including its South Korea presence, U.K. large-scale bulk purchase annuities and small partnerships in Italy.
In an investor and analyst briefing, Aviva said its new strategy will involve a narrower focus on business segments that can produce “attractive” returns, an effort to bring economic capital up to the levels of industry peers and improved financial performance.
Chairman John McFarlane identified markets in the United Kingdom, Ireland, France, Canada, Poland and Singapore as among Aviva’s “great strengths” that can be further leveraged with a better focus.
“We aim to implement a leaner and more agile operating culture, a higher performance ethic and a less layered and bureaucratic management style,” he said at the investor briefing.
“Shareholders have been disappointed about our share performance,” said McFarlane. “They think we are too complicated as an organization and so we need to simplify the organization considerably. And they think that we could do with a bit more capital. And so we are putting in a plan to do exactly those things.”
Kevin Ryan, an equity analyst with Investec Securities in London, said in a research note that Aviva’s announced measures “should offer, we believe, a further, sharper re-focusing of Aviva. In due course we believe that the returns achieved by many of the business units will become identifiable, making the reported numbers more transparent and hence useful to investors.”
Ryan wrote improvements will “likely to take some time to come through” and nothing should be expected from interim results due Aug. 9.
“It is clear to us that the strategic review has gone to the heart of the Aviva problem, which is that it has too many operations that do not make enough money for the group,” he wrote. “This sharper focus is to be applauded, but selling businesses in the current environment is likely to be challenging. Our sum of the parts valuation remains unchanged.”
According to McFarlane, Aviva is also looking to cut about 400 million pounds (US$625.8 million) in expenses, which will involve “a reduction in the number of managers.”
Aviva had 30 billion pounds in gross premiums in 2011 down 17.3% from the previous year, according to A.M. Best Co.’s BestLink company report. The group’s after-tax profit fell 69.1% to 584 million pounds.
The group said it has 43 million customers and 36,600 employees worldwide. It is the largest insurer in the United Kingdom, where it has 14 million customers.
McFarlane recently took over executive management of Aviva following the departure of former chief executive Andrew Moss (Best’s News Service, May 8, 2012). The multiple-line insurer announced a business review at the time of Moss’s resignation in early May.
According to McFarlane, the 16 underperforming or “non-core” segments are currently producing or are expected to produce returns that are “below the group’s required return.” Taken together, they involve 6 billion pounds of capital, 300 million pounds in after-tax operating profit and a 5% return on capital.
Another 15 segments were identified as having “unusually high return or growth” with a 22% return on capital. These segments include life insurance in Poland, Singapore, Turkey and the United Kingdom, along with pensions in Turkey and the United Kingdom and Canadian personal property. They involved 3 billion pounds of capital.
In addition, 27 segments have been identified that are producing or will produce returns close to the group’s requirement and that require “significant improvement.” Examples include general insurance in Ireland, Aviva Investors External and Italy Unicredit.
In line with the new strategy, Aviva named David McMillan as director of group transformation to manage implementation. Robin Spencer will replace him as CEO of U.K. and Ireland general insurance, and John Lister will replace Spencer as group chief capital and risk officer — a position with newly expanded responsibilities.
Aviva expects to make most of the strategic changes over the next 12 months, though some may take until the end of 2013 to achieve. McFarlane said the full effect of the changes won’t be seen until 2014.
Several of Aviva’s operating units have Best’s Financial Strength Ratings of A (Excellent). A.M. Best affirmed the under-review status of the ratings in June (Best’s News Service, June 6, 2012)
“In December 2011, the ratings were placed under review with negative implications due to the continued negative developments regarding the eurozone sovereign debt crisis,” said A.M. Best at the time. “Subsequently, A.M. Best has developed more confidence in Aviva plc’s capital position in relation to its eurozone exposure; however, the ratings remain under review due to the recently announced strategic evaluation of Aviva plc’s businesses and changes to its senior management, especially the departure of the chief executive officer.”
(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com) BN-NJ-07-05-2012 1202 ET #
