8:26 AM, Jul 5, 2012 | by Victor Epstein |
Aviva Plc made virtually no mention of the future of its U.S. insurance unit, which employs about 1,400 people in the Des Moines area, during a presentation to analysts in London Thursday morning. The stressed insurance giant is trying to sell 16 non-core business units to raise about $3.9 billion in fresh economic capital.
“It’s hard to be certain but our view is that it will be disposed of within 12 months,” Panmure Gordon analyst Barrie Cornes said of Aviva USA.
London-based Aviva Plc is the second-largest insurer in the United Kingdom by market value and its U.S. operations are among its most valuable assets. Aviva USA, which is based in West Des Moines, accounts for 1,800 of the 36,000 people employed by its parent company. Aviva Plc has 58 business units.
Newly appointed executive chairman John McFarlane laid out a new strategic plan Thursday to create a smaller and more efficient Aviva through the end of 2013 by shedding business units that return too little on the capital invested in them. Under-performing business units include Aviva operations in South Korea, large-scale bulk purchase annuities in the United Kingdom and small Italian partnerships.
McFarlane, who asked investors and analysts for patience, didn’t directly mention the future of the U.S. life insurance business, which has recently been reported as a potential divestment target, or whether it’s slated for sale. Analysts indicated the absence of Aviva USA from the reorganization outline was noteworthy.
McFarlane did acknowledge that Aviva USA is not among the core “performing” units Aviva is being reorganized around.
“Most investors assume that the U.S. is in the ‘exit’ group,” a second analyst, who declined to be named, said of Aviva USA.
Aviva workers in West Des Moines were concerned about the prospect of a second sale in six years, but wary of reporters Thursday morning.
“I’ve got so much to do I really don’t have time to worry about it,” said one middle-aged man smoking a cigarette with colleagues in the parking lot outside the West Des Moines headquarters, who declined to give his name. “It’s Corporate America, what can you do.”
Chris Littlefield, Aviva USA president and CEO, issued the following statement:
“Today, our parent company Aviva plc announced progress on the ongoing strategic review of each of its 58 business units. While some of Aviva plc’s businesses were identified in today’s update, others, like Aviva USA, were not discussed. Therefore, we do not have anything new to report.
“While we do not comment on the speculation that accompanies this process, Aviva USA continues to be a strong and profitable business. As an industry leader in the sale of indexed life insurance and annuities, we have performed well over the last few years. For all of us at Aviva USA, it is business as usual as we continue to focus on growing our business and serving our Key Distribution Partners, agents and consumers.”
The excess units Aviva hopes to sell represent $9.4 billion in capital, which could be more profitably employed elsewhere, according to McFarlane. The company also is looking to cut costs by $626 million by reducing the number of management layers to five from nine, he said. Aviva reduced its holding of Italian government bonds by about $1.6 billion in June, according to chief financial officer Pat Regan.
The 65-year-old McFarlane is a turnaround expert who reorganized and led the Australian & New Zealand Banking Group Ltd., from 1997 to 2007.
Aviva has underperformed its U.K. peers by 25 percentage points over five years and boasts lower capital reserves. The company has greater exposure to the European debt crisis than most of its peers by virtue of its extensive operations in places like Spain, Italy and Ireland. Aviva Europe reportedly accounted for 37 percent of the group’s total gross written premiums last year.
Aviva sells indexed annuities in which the rate of return is tied to the performance of a market index, such as the Standard & Poor’s 500 Index. The company was the No.2 seller of indexed annuities in the U.S. in 2011, with $4.5 billion in sales, according to the AnnuitySpecs.com industry data firm.
Aviva global sales fell 3.8 percent in the first quarter to $15.24 billion. Meanwhile, U.S. sales rose 29 percent to $1.6 billion.
“As we suspected, it is simply too soon to offer anything more than outlines, with little concrete actually provided today,” Eamonn Flanagan, an analyst at Shore Capital Stockbrokers, said of the reorganization plan. Current market conditions and the resulting dearth of buyers may be hindering Aviva’s efforts to sell non-core assets like its U.S. business, he said.
Aviva USA remains for sale, but is unlikely to raise more than $1.5 billion, according to Flanagan. Aviva purchased its U.S. operations in 2006 for the equivalent of $3.2 billion in today’s dollars.
“They could sell it today but the price wouldn’t be acceptable,” Flanagan said.
Originally Posted at The Des Moines Register on July 5, 2012 by Victor Epstein.