Aviva UK GI valued at £3.2bn as sale clamour grows

The clamour for Aviva to sell its UK general insurance arm, estimated at £3.2bn by one analyst, was growing today amid hopes that the new chief executive will take decisive action and split the life and general insurance business.

The decision by chief executive Andrew Moss to step down, amid a shareholder revolt over executive pay, has led to the debate about the effectiveness of Aviva having a life and general insurance composite model being revived.

RSA tried to buy the general insurance arm in a £5bn bid in September 2010. The bid was knocked by Aviva, but since then the eurozone crisis has struck and the company’s share price has tanked.

Although RSA chief executive Simon Lee has dismissed the idea of a large acquisition, a deal to buy Aviva’s UK general insurance arm would greatly enhance shareholder value, says Jeffries analyst James Shuck.

Shuck said: “We estimate a valuation of £1.5bn for Canada and £3.2bn for UK non-life. RSA approached Aviva in 2010 only for a complicated forced break-up to fall over.

“The situation is now very different. We estimate potential present value synergies of £1.5bn to RSA, equivalent to around 30% of the combined valuation of the two entities, highlighting the potential upside for RSA.

“A disposal at these levels would improve Aviva’s economic capital to around 155% – among the strongest in the sector – with the rump trading on 4.2x proforma 2012 earnings per share.

“Importantly, we think that the new company would still cover the cash dividend (at 1.3x) but could scrap the scrip and rebase the cash dividend to a more sustainable level.”

Shuck also rejected Aviva’s arguments of sustaining the composite model.

He said: “Aviva has argued that life and non-life insurance side-by-side bring greater diversification. This leads to lower capital requirements under economic capital and Solvency 2.

“We have some sympathy for this but what is gained in capital efficiency is lost in visibility. A market implied cost of capital is clearly lower for more focused businesses (and track records are also superior). Selling UK and Canadian non-life insurance would address this, also boosting the capital position in the process. There is much more demand for these assets, with a premium to net asset value likely in both cases.”

Shore Capital analyst Eamonn Flanagan agreed that Aviva was now vulnerable to a corporate predator.

He said: “….this hiatus in CEO leadership could, in our view, put Aviva ‘into play’. Aviva retains a number of powerful assets which, especially given the current undervaluation, could prove hugely attractive to a corporate predator…either in a single unit or as part of a break-up.”