Aviva counting on exit of 16 divisions to shore up weakened capital base

Aviva has revealed dramatic plans this week to axe or sell 16 under­performing businesses and convince sceptics in the City that it can successfully shore up its eurozone-hit capital base by £2.5bn.

As part of the shake-up, UK chief executive David McMillan has departed from his role, to be replaced by former chief risk officer Robin Spencer.

McMillan is now tasked with offloading the 16 divisions, in a new role as group transformation director.

Aviva also plans to save £400m by stripping out layers of management.

The insurer’s UK chairman Trevor Matthews said: “The capital level is sufficient and adequate, but now we want to increase the target to between 160% and 175% of required economic capital. We haven’t had a target before. The current level is 140%.

“£2.5bn is what we need to get to the bottom of the range, which is what we are confident of doing by operating in that non-core segment.”

Sceptics in the City

Despite Matthews’ optimism, there was still scepticism in the City as to whether Aviva can hit this target without further action.

Espirito Santo analyst Joy Ferneyhough said the “spectre of a rights issue” was still in the air, as the decision would be based on whether asset sales could be achieved.

‘The capital level is sufficient, but we want to increase to target to between 160% and 175% of required economic capital’

Trevor Matthews, Aviva

Jefferies analyst James Shuck said disposals were “difficult to achieve”, adding that “freeing up capital from inefficient areas takes time”.

Shuck said: “It’s not immediately clear how they get there. Expectations have been managed, but at first glance this is still a little disappointing.”

Aviva’s capital strength has deteriorated in the last two years owing to the eurozone crisis and general economic downturn.

Former chief executive Andrew Moss beefed up Aviva’s capital position by selling off RAC for £1bn as well as stakes in Dutch financial services group Delta Lloyd.

But the crisis in the eurozone has escalated in the past two years, resulting in a triple-whammy for Aviva, where life and pensions sales in Mediterranean countries have plummeted, sovereign bond values have deteriorated, and lingering investor concerns remain over whether Italy and Spain will restructure their government bonds.

Aviva revealed last week that it had trimmed its Italian bond holdings down to €5bn from €6bn.

Aviva cannot sell off all these holdings because it has 2.5 million life and general insurance customers in Italy, and has to hold a certain amount of Italian sovereign bonds to match its liabilities.

There is, however, a sense of relief that Aviva is finally taking bold action after two years of inertia under Moss, who departed earlier this year in a row over remuneration.

Requesting patience

Panmure Gordon analyst Barrie Cornes said that Aviva’s acting chief executive John McFarlane was “listening” to shareholders and, in return, he was requesting patience.

The decision also marks a watershed moment for the UK division, which is now almost certain to remain part of the group.

Aviva’s commitment to UK general insurance has been under the spotlight ever since RSA unsuccessfully bid £5bn for the business two years ago.

Matthews said: “UK GI is a great business, and a really strong business for us. As is UK life.

“The UK is a developed market, but we see a good opportunity for steady growth in this market.”