The volatility of Aviva PLC's (AV.LN) level of capital surplus
and the uncertainty surrounding the upcoming Solvency II capital
regime could force the large U.K. insurer to make a U-turn and
consider selling its important U.S. life insurance operations,
analysts said Thursday.
The comments come after newspaper reports said Aviva is
considering the sale and could fetch around GBP1 billion from it,
which is only about half the price Aviva paid for the business,
including debt, in 2006.
The reports surprised the market and run counter to Aviva's
oft-repeated strategy of focusing on 12 key markets around the
world. These 12 are the U.K., Ireland, France, Spain, Italy,
Poland, Russia, the U.S., Canada, Turkey, China and India.
"This seems at odds to previous indications that the U.S. was
one of the group's 12 core divisions, albeit that it accounted for
8% of continuing IFRS profits in 2011," said Shore Capital analyst
Eamonn Flanagan.
Oriel Securities analyst Marcus Barnard said: "This would in our
opinion be a U-turn and change of strategy."
Aviva has set requirements that its businesses must meet to be
considered "core market," including that they should generate an
annual operating profit of $100 million and a 12% return on
capital. The U.S. business meets these requirements. Last year, it
grew its life insurance operating profit by 13% to GBP197 million,
with a return rate of 14%.
"The U.S. business, being spread-based, has volatile capital
requirements under Solvency II. We feel this has similarities to
complaints from Prudential (PRU.LN) that said its capital position
under Solvency II would be difficult to manage," Barnard said.
"The capital surplus at Aviva fell during the third quarter only
to recover during the fourth quarter. Selling the U.S. business
would reduce this capital volatility," Barnard said.
An Aviva spokesman declined to comment on the reported plan to
sell the U.S. business.
Last month, Aviva Chief Executive Andrew Moss said the company
was "very experienced" in managing its capital surplus, which acts
as an extra buffer of cash to cover liabilities.
"We know that it's volatile--between GBP4 billion to GBP3
billion and then to GBP2 billion--but we also know the way
calculations work, and because of the hedges we've got in place,
it's far less volatile when you get down to about GBP2 billion," he
said.
Aviva's surplus capital at the end of 2011 was GBP2.2 billion,
down from GBP3.8 billion at the end of 2010, and down from GBP4.5
billion at end-2009.
That figure had risen to GBP3.3 billion by the end of February
as stock markets rose.
"The requirement is to have one solitary pound in excess, if we
take it to the extreme. I don't want to sound complacent but we're
very experienced in managing this number," Moss said.
Another reason why Aviva would sell its U.S. life business,
analysts say, is the uncertainty over Solvency II, more
specifically, its provision on so-called "equivalence."
This provision answers whether or not other countries like the
U.S. would be deemed by the European Commission as having a capital
regime which is as stringent as Solvency II.
Lawmakers are still debating the draft law but it is currently
scheduled to be implemented by European insurers in 2014.
If the U.S. capital regime isn't deemed equivalent to Solvency
II, European insurers fear they may be forced to set aside billions
of euros worth of capital as added buffers for their U.S.
operations.
"Do we think it (Solvency II) is the right way to treat our U.S.
business for capital purposes? No, we don't, just like the Pru. But
it's a lesser issue for us because our U.S. business is broadly
half their size," Moss said.
Prudential last month said it is looking at whether it should
move its headquarters away from the U.K. due to the uncertainties
surrounding Solvency II.
However, Moss said the issue of equivalence could be resolved
amicably.
"I'm pretty confident that some sort of solution will be
reached. Because, politically, how can it make sense for the U.S.
subsidiaries of large European insurance companies to be massively
commercially disadvantaged relative to their American competitors?
It doesn't make any sense," he said last month.
Shore Capital's Flanagan said a U.S. disposal would remove "a
capital intensive business from Aviva's stable, a positive move in
the group's focus on improving its return on equity, particularly
as Solvency II approaches."
This would also "bring Aviva's focus firmly back to the U.K. and
Continental Europe," he said.
"The question, however, is who might be a buyer?," Flanagan
said.
Panmure Gordon analyst Barrie Cornes said: "Whilst there may be
a strong rationale for such a sale including the consequent capital
boost, Solvency II concerns and the European strategic focus, we do
not think that current prices for U.S. life businesses make a
disposal sensible at the current time."
"Whilst obviously Aviva would consider any serious offer for any
part of the business, in our view a suitable offer is unlikely in
the short to medium term," Cornes said.
-By Vladimir Guevarra, Dow Jones Newswires: +44 (0) 2078429486,
vladimir.guevarra@dowjones.com