Aviva Wields the Ax
LONDON -- John McFarlane was appointed executive chairman of giant insurance firm Aviva (ISE: AV.L) on July 1, having joined the board in September 2011. And despite being the new broom on Aviva's board, McFarlane has already gotten to work cutting the global insurer down to size. He's playing musical chairs with the directors and has plans to cut more jobs and dispose of a swath of businesses.
All change, please
Aviva has been rudderless of late. Since previous chief executive Andrew Moss left in May, the FTSE 100 firm has been looking for a new CEO, whom it expects to appoint in 2013.
In the meantime, Anglo-Australian banker McFarlane has taken the helm and is clearing Aviva's deck of incumbents. In an announcement this morning, Aviva revealed a serious shake-up of its senior management. Following this reshuffle, Aviva will have a new:
- Director of group transformation (David McMillan)
- Chief executive of U.K. and Ireland general insurance (Robin Spencer)
- Group chief capital and risk officer (John Lister)
- Group human resources director
As well as changing the faces at the top, McFarlane is reshaping Aviva's structure. The number of management layers will be cut to five from nine. Also, to "speed up decision-making and execution," there will be three key management groups:
- A weekly meeting of the office of the chairman, consisting of these five most senior group executives: McFarlane, McMillan, Pat Regan, Trevor Matthews, and Simon Machell.
- A bimonthly group executive meeting of the five bosses above, plus 10 other senior executives.
- A senior management group of 90 top managers that will meet twice a year.
Commenting on these changes, McFarlane said: "It is essential that we have the right people in place to implement the strategic plan and to achieve higher financial strength and performance. I am aware of past concerns regarding the frequency of management changes at Aviva; nevertheless, I judge these new appointments to be essential."
McFarlane has also decided that Aviva also needs some corporate surgery. In fact, his restructuring is so radical that it's more like operating with an axe than a scalpel. In order to "refocus and optimise the group business portfolio" -- and make the most of its 43 million customers worldwide -- McFarlane has taken a long, hard look at all 58 of Aviva's business segments and then placed them into three groups:
- Performing: 15 businesses with unusually high returns or growth, which hold 3 billion pounds of capital and produce 650 million pounds of after-tax operating profit for a 22% return on capital.
- Improve: 27 businesses that currently produce and are likely to produce returns close to the group's required return, but require significant improvement. These businesses hold 7 billion pounds of capital and produce 750 million pounds of after-tax operating profit for an 11% return on capital.
- Noncore: 16 businesses that currently produce or will likely produce returns below the group's required return. These businesses to be exited hold 6 billion pounds of capital and produce 300 million pounds of after-tax operating profit for a mere 5% return on capital.
By getting rid of weak, underperforming businesses such as U.K. Large-Scale Bulk Purchase Annuities, operations in South Korea, and small Italian partnerships, Aviva would free up billions to invest in its faster-growing, more resilient divisions. This seems like a sound plan to me. Indeed, it reminds of my time at General Electric in the '90s, when our renowned CEO, Jack Welch, placed weaker businesses into "fix, close, or sell" categories.
By making these changes, Aviva hopes to improve its financial strength -- which has often been identified as a weakness by shareholders. The group will have a new target to achieve economic capital levels of 160% to 175% of regulatory levels, giving it a fatter cushion against Mr. Market's periodic tantrums.
Shares still cheap
Of course, it could be argued that efficient deployment of capital is something that insurers have been doing for hundreds of years. Thus, Aviva has fallen well behind the pace by allowing corporate inefficiencies to hinder the firm's future. Perhaps this explains why its shares look so cheap in terms of their earnings rating and dividend.
As I write, Aviva shares trade at 284.6 pence, up 1.14% on the day. Thus, it seems investors have welcomed today's news of a leaner Aviva rebuilt with fewer businesses, less bureaucracy, reduced overheads, and improved financial strength (including lower capital volatility and more conservative external leverage).
Here's how the former Norwich Union compares with four of its major peers among FTSE 100 insurers, sorted from lowest to highest price-to-earnings ratio:
Share Price (pence)
Market Value (billions of pounds)
Old Mutual (ISE: OML.L)
Legal & General (ISE: LGEN.L)
Prudential (ISE: PRU.L)
Standard Life (ISE: SL.L)
Source: Digital Look.
At a mere 5.3, Aviva has the lowest forward P/E of all five, versus more than double that at archrival Prudential. Also, Aviva has a prospective dividend yield approaching double digits, which is 67% higher than the five's average yield of 5.9%. What's more, Aviva's dividend is covered twice by earnings, so it looks safe -- for now, at least.
In my view, Aviva's attractive fundamentals, together with today's announcements, make its shares a solid buy for value investors and dividend devotees. These are shares to tuck away while you sit back and watch the income roll in.
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