Jul 06, 2012 – John McFarlane was appointed as UK-based Aviva plc’s new chairman on July 1 and on July 5, he issued a message to shareholders that outlines the insurer’s new strategic plan which includes exiting nearly a third of its business.
The company, without a chief executive office after Andrew Moss left the company in May, must narrow focus, build financial strength and improve financial performance, McFarlane said.
“Over and above this, we aim to advance our position and reputation with our customers and other stakeholders, and grow the capabilities of the group, such that we are in a stronger position at the end of each year in all respects than we began the year,” McFarlane said in his message. “In addition, we aim to implement a leaner and more agile operating culture, a higher performance ethic, and a less layered and bureaucratic management style.”
McFarlane pointed to Aviva’s strong position in the UK and Ireland, France, Canada, Poland and Singapore, as well as in other higher-growth markets, but admitted there are concerns among major shareholders, outlining them as such:
- Business Complexity – Shareholders find our business difficult to understand and feel we have expanded the international scope of our business too far. In addition, we have not demonstrated the benefits of being a composite insurer.
- Financial Strength – Shareholders believe we have weaker capital levels, higher external and internal leverage, and more volatile capital than our peers. They are nervous we may need new equity or reduce the dividend.
- Risk – Shareholders feel we are too exposed to the Eurozone and to traditional capital-intensive life products.
- Strategy – We are largely developed-market orientated with few high-growth positions. We have had too many changes of strategy which have not achieved the required traction. In addition, we have had �1.3 billion of below-the-line restructuring charges over the past 5 years, and yet we are perceived to be bureaucratic and inefficient.
- Financial Complexity – Our financial statements are cumbersome and difficult to understand. We use too many financial metrics which are confusing.
McFarlane said the new strategic plan and its three objectives will address stakeholder concerns “although we will need patience particularly from shareholders, as our plans are subject to execution risk and to the economic environment,” he added.
To narrow focus, the company said it will exit 16 segments that are currently producing � or will produce � returns below the group’s required return. This may include business in South Korea, UK Large-Scale Bulk Purchase Annuities and small Italian partnerships. These units account for �6 billion ($9.4 billion) of capital and �300 million of after-tax profit. The insurer said of its 58 individual business segments, 15 are “performing” and have unusually high return or growth involving �3bn capital, �650m operating profit after tax, and 22% return on capital. Examples of these include: Poland Life; Singapore Life; Turkey Life and Pensions; UK Personal Property; Canada Personal Property; and UK Life Protection. The remaining 27 segments are producing and likely to produce returns, but will require “significant improvement” involving �7bn capital, �750m operating profit after tax, and 11% return on capital. Examples of these include: Ireland General Insurance; Aviva Investors External; and Italy Unicredit.
To build financial strength, Aviva announced new target economic capital levels of 160-175% of required capital, that will require additional capital to be released.
“In addition, we intend to lower the level of external financial leverage but, in this plan, not materially reduce the internal leverage within the group,” said the statement from McFarlane. “This will largely be achieved through disposals and reducing capital to businesses with lower returns. Subject to execution, it is not our current intention to raise new equity.”
To meet the improving financial performance objective, Aviva said its current management practices must be overhauled to sharpen bottom-line performance. This is set out through revenue growth, capital, expenses and culture initiatives.
Aviva’s presentation can be found online. (PDF)
About Aviva Canada
Aviva Canada Inc. is one of the leading Property and Casualty insurance groups in Canada, providing home, automobile, recreational vehicle, group and business insurance to more than three million customers. The group has more than 3,000 employees, 30 locations, 1,700 independent broker partners and is a wholly-owned subsidiary of UK-based Aviva plc, the world’s sixth-largest insurance group. For more information visit avivacanada.com.
