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The new chairman of Aviva pulled no punches in recounting how the insurer ran into difficulties under the tenure of Andrew Moss – but was rather less forthcoming on exactly how he would overcome them.
Setting out his turnround strategy, John McFarlane said Aviva had extended its international footprint too far, reported confusing financial metrics and had became too exposed to sluggish markets.
The company had made “too many changes of strategy which have not achieved the required traction” and was perceived to be “bureaucratic and inefficient”.
“We’re not making any statement, like ‘One Aviva Twice the Value’,” he told City investors, referring to an ill-fated target Mr Moss had set to double earnings per share in the five years to 2012.
“This is a much more realistic programme.”
While investors largely agree with his assessment of the problems, the market remains sceptical about how he – or anyone else for that matter – can address them.
The shares ticked up 3.2p to 284.6p but still trade at only 65 per cent of book value, a hefty discount to UK and several continental peers.
“No bazooka,” was how James Shuck at Jefferies summed up Mr McFarlane’s plan.
Aviva is particularly eager to avoid cutting the dividend, which bearish analysts say is one of the few benefits of owning the shares, which yield 9.1 per cent. Only a very large dividend reduction would improve the capital position materially, Mr McFarlane said.
After considering various possibilities – including “mergers” or becoming a dedicated life assurer – Mr McFarlane has settled on a strategy of making Aviva a safe, if rather unexciting, investment prospect.
However, investors were left reading between the lines on exactly which businesses Aviva has identified as having returns well below their cost of capital.
Without spelling out a list of business for sale, the group quantified for the first time the total size of its 16 “non core” businesses. They account for only 18 per cent of operating profit but £6bn – 38 per cent – of total capital employed.
Several analysts said this meant it was almost certain the capital-hungry US life business, bought six years ago for $2.9bn, was now up for sale. One analyst said Aviva was reluctant to spell this out because of concerns it would struggle to find buyers.
Mr McFarlane said it was not in Aviva’s interests to be too categoric about which units would be sold. “It will make the execution of this much more difficult.”
However, he dropped hints about the US. “There’s something big [in the non-core category],” he said.
More generally, analysts also raised questions about Aviva’s “Plan B” if market turmoil worsened. “If market conditions turn south, will you end up selling a bad business for a very bad price?,” asked Andy Hughes, analyst at Exane BNP Paribas.
Aviva did say explicitly that any markets already identified as non-core were set to go. The remaining 27 per cent stake in Benelux insurer Delta Lloyd, as well as a series of small businesses in Asia such as South Korea, are likely to be sold.
Meanwhile, the dust kicked up during Mr Moss’s high-profile departure has yet to fully settle.
People familiar with the matter said Aviva has been dissatisfied with the role of the group’s corporate brokers – Morgan Stanley and JPMorgan Cazenove – a large part of whose job is to gauge the view of shareholders. But a change is not under consideration.
The new chairman is said to have been happier with Scott Wheway, chairman of the remuneration committee, who has been working to rebuild investor trust. He is to keep his job.