How Aviva Has Fared During 2012

Published in Company Comment on 4 December 2012

Aviva (LSE: AV.) has issued a series of mixed statements this year.

Aviva (LSE: AV) (NYSE: AV.US) has gained about 17% to 354p so far during 2012, making the share one of the year's better performers in the FTSE 100 (UKX). During the same time, the blue-chip index has gained about 3%.

With 43 million customers worldwide, general and life insurance provider Aviva is hoping that size is on its side -- especially after the year it's had. CEO resignation, radical corporate strategy changes and a generally tough operating climate have no doubt shaken shareholders.

After a tough 2011 in which the company reported pre-tax profits of just £87 million for the year (paling in comparison to the prior year's profit of £2.4 billion), Aviva shareholders were spooked.

In May, chief executive Andrew Moss resigned in response to shareholder anger over his remuneration. Incoming chairman John McFarlane took the helm as interim executive and immediately got to work streamlining the company's 58 business segments into:

1. Performing: 15 businesses with unusually high returns or growth, which hold £3 billion of capital and produce £650 million of after-tax operating profit for a 22% return on capital.

2. 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 of capital and produce £750 million of after-tax operating profit for an 11% return on capital.

3. Non-Core: 16 businesses that currently produce or will likely produce returns below the group's required return. These businesses to be exited hold £6 billion of capital and produce £300 million of after-tax operating profit for a mere 5% return on capital.

By getting rid of weak, underperforming businesses such as UK Large-Scale Bulk Purchase Annuities, South Korea and small Italian partnerships, Aviva would free up billions to invest in its faster-growing, more resilient divisions.

John McFarlane, executive deputy chairman, commented:

"My first task is to make an improvement in the capital and financial strength in the group as well as an improvement in our financial performance. Whilst not underestimating the significance of the challenge I am optimistic of the outcome."

At the half-year mark in August, McFarlane and his team clearly still had work to do. The company reported a net loss of £681 million and posted that operating profits were down 10%, citing restructuring costs, foreign exchange rates and the weather in the UK as reasons for the dip. It also wrote down £876 million of goodwill from its US business and announced it would hold its dividend at 10p per share.

In November, Aviva reported another mixed bag of results. It generated £1.3 billion in operating capital (up from £1.1 billion the year prior), but sales were down 5% worldwide.

Also in November, the company appointed its new CEO. Mark Wilson comes to Aviva from Asian rival AIA Group, where he is credited with steering the firm through the financial crisis and preparing it for a 2010 stock market listing.

"My first task will be to listen to Aviva's stakeholders, including customers, shareholders, staff and regulators, and ascertain the key concerns and opportunities that face the business," Wilson said in a statement.

Aviva investors are no doubt looking to Wilson to shed the firm's underperforming business units, boost profits and revitalise its stock when he begins 1 January 2013. Maybe Wilson can also reignite growth in the dividend -- currently forecast to stagnate around 26p per share over the next two fiscal years.

Insurance is a complex business, which doesn't help it garner analysts' support, but perhaps with new leadership at the top there's reason to be excited about Aviva's future.

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> Jill does not own shares in any company mentioned in this article.

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Harry34 04 Dec 2012 , 2:45pm

Thanks Jill - very helpful article! I would be delighted if the dividend were to 'stagnate' at 26p for the next two years, as my average purchase price is 315p, and so this would equate to a 8.25% yield. Surely a dividend cut is more likely, esp as Mr Wilson is not associated with the previous regime and so could not be accused of paying an unsustainable dividend over previous years?

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