Tony Cornell looks at the case for a totally separate general insurance business
Companies that are quoted on the stock market are highly visible and there is an instant and updated view of how they are performing. Chief executives are judged on share price by existing and potential investors and it is the ultimate test of their performance in managing the business. Maximising shareholder value should be the driving force but it can often happen that this becomes secondary to the ego needs of the CEO who can spend investors’ cash with gay abandon irrespective of a long-term strategy and shareholder returns.
It is interesting to view the insurance market in this context and the major player that demands scrutiny is Aviva plc. Last year, new chairman John McFarlane was appointed and, following the departure of Andrew Moss, he assumed the role of CEO as well. He came from banking and had a fresh attitude to the business. Strategically, he felt that the business was spread too thinly and that it had a large number of underperforming assets. He also assessed that it lacked capital and that it was really difficult to get things done because of a culture of resisting change. He has now appointed a new group CEO, Mark Wilson, ex AIA, from outside the company, who is charged to continue a strategy of change and focus within the business. However, Mr Wilson is a life man with little if any general insurance (GI) experience.
Aviva is the largest general insurer in the UK. It is very strong in SME business controlled by the independent broker sector and can be a major influence on pricing within the market. Since Patrick Snowball departed, the GI business has had a succession of CEOs with their own views on strategy and tactics and it has not been beneficial for the sector that this major player is in a constant state of flux. It is perhaps notable that during this lack of long-term leadership, the whole commercial market has drifted downwards with no one daring to start the much needed hardening.
The changes at Aviva were well overdue and we hope it does not turn out to be a false dawn. Aviva has failed to create any shareholder value for a long time. At the time of the merger between Commercial Union and General Accident, the value of the combined business was £15bn.When it merged with Norwich Union two years later, CGU was valued at £10bn. The new business CGNU (later Aviva) was valued at £19bn. It is now valued at £11bn. If we go back to 1999 and add in NU’s separate value, the two groups were worth over £20bn, so the management over the last 13 years have destroyed half the value of the company. The stock market has now virtually recovered to its 2008 high but Aviva has had a dismal time. As the table shows, shares have dropped by 56%. Its only saving grace is it has continued to pay a high dividend. It is no wonder a change at the top was necessary.
Aviva has the dubious advantage of being the only true composite quoted on the UK market and it is difficult to compare with other listed companies. It argues that other European composites have not done well because of the Euro problems. This may be the case but, if Aviva’s share price is compared with its competitors in its separate fields, it is again a very poor performer. The three other quoted life companies have outperformed the market over the last five years – Prudential, managed by an ex-Aviva finance director has grown by 29%, Standard Life by 52% and Legal & General by 16%. The major quoted general insurer, RSA, has grown by 13% and the larger Lloyd’s quoted companies have collectively grown by over 40%. The specialist personal lines players have also done well – Admiral is up 10% and Direct Line is now 8% above their flotation price. Aviva has spectacularly underperformed compared to the specialist life market, the general insurer and Lloyd’s market, as well as the specialist personal lines insurers.
On these figures, there must be a real case for breaking up the business into financial services and GI. Management egos have dismissed this in the past as it reduces their empires but the new team may commit to growing value through a tighter focus and a will to develop profitable businesses. A split business could recruit the best management in each of its sectors rather than having to ensure life expertise. It could even float off Quote Me Happy to form another direct personal lines insurer. Without the shackles of being part of a composite group, the three separate businesses would be accountable, comparable to peer competitors and have to be disciplined because of more focused and intense scrutiny.
This will take time, but in the meantime let us hope that the return on capital on its UK commercial operation is under the spotlight and the market leader has the courage to lead the hardening of the market that is desperately required by all players.”
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