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Aviva USA poised for big changes

July 3, 2012 by Victor Epstein

1:54 PM, Jul 2, 2012 | by Victor Epstein |

Employees of Aviva USA, the West Des Moines-based subsidiary of the global insurance giant, are bracing for change as their beleaguered employer looks to boost profits by shedding business units.

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 accounts for 1,800 of the 36,000 people employed by its parent company. About 1,400 of them work in the Des Moines area.

The London-based company is expected to announce a reorganization plan Thursday. Shares of Aviva rose 3.6 percent Monday to $8.89 behind the news that newly appointed executive chairman John McFarlane plans to sell as many as 15 of the company’s 58 business units.

“A change of management at Aviva brings hope for radical change,” said Oliver Steel, a research analyst at Deutsche Bank. He noted calls at the company for a stronger balance sheet with lower volatility.

“How these (goals) are to be achieved will be unveiled to investors on 5th July,” Steel said. “Our own analysis identifies a U.S. sale as the single most effective action that the group could take.”

The 65-year-old McFarlane is a turnaround expert who immediately announced a “strategic review” after being named chairman May 8 to replace Andrew Moss, who was forced out by a shareholder revolt over his pay. That’s corporate speak for fundamental changes to a business structure, which can include asset sales and layoffs.

McFarlane was brought in to engineer the same kind of turnaround at Aviva that he orchestrated at 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, according to Bloomberg LP. 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.

Eamonn Flanagan, an analyst at Shore Capital Stockbrokers, said the sale of Aviva USA would have generated $3 billion before the last U.S. recession began in December 2007, but is likely to attract only $1.5 billion now. That may not be enough to justify parting with the valuable subsidiary. Aviva bought the business, formerly known as AmerUS, for the equivalent of $3.2 billion in today’s dollars back in 2006.

“It isn’t a given that Aviva would sell at this price, (which) would be a big hit,” Flanagan said.

Oriel Securities analyst Marcus Barnard said any pricetag under $3.14 billion would be dilutive to shareholders. Aviva’s underlying business is in better shape than many investors realize, he said, but this is a difficult climate for asset sales.

“Current depressed valuations mean that exits will probably be difficult and where possible, are likely to be dilutive,” Barnard said.

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.

Still, Panmure Gordon analyst Barrie Cornes said there’s not a long list of potential buyers.

“We believe that it will ultimately be sold,” Cornes said of Aviva USA.

Originally Posted at The Des Moines Register on July 3, 2012 by Victor Epstein.

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