Shorn in the USA

Aviva needs a shot in the arm. On the one hand, the UK insurer has dominant positions in the UK and some regions of Europe, and is meeting its return targets there. But the group also looks relatively undercapitalised and undervalued, and lacks the kind of appealing growth story enjoyed by its rival, Prudential. With new chairman John McFarlane just about to join, the sale of Aviva’s North American operations could herald a much bigger spring clean.

A US sale makes sense on two fronts. One is that so-called Solvency II capital rules being worked up by the European Union could increase the amount of capital European life insurance companies need to hold against their US fixed annuities by 2.5 times, according to Morgan Stanley. That would seriously constrain UK companies’ ability to compete with local North American peers.

The other is that Aviva’s US life insurance arm, like sibling businesses in Ireland, Spain and elsewhere, isn’t pulling its weight. In November 2010 the group set out a series of targets it wanted its businesses to hit, including a 12 per cent return on equity. Aviva is restructuring Ireland and has sold most of its east European operations. The United States is the other business that isn’t making the grade: ROE in 2011 was only 3.7 per cent.

Chief Executive Andrew Moss may feel inclined to wait. With US life businesses trading at only 0.9 times book value, a sale could crystalise a £348 million loss, according to UBS. But this could be offset by selling Aviva’s better-performing Canadian arm — AXA sold its business there last year for almost two times net asset value. And after the fright investors received in November, when Aviva’s capital surplus dropped by over 40 per cent as yields on euro zone sovereign debt widened, any improvement to the group’s comparatively weak capital position should be welcomed.

A speedy disposal would not solve Aviva’s other problem - heavy exposure to the crisis-ridden euro zone. But to erode the hefty discount between the insurer’s earnings multiple of seventimes and the sector average of 10.8, Moss should at least be following the logic of Aviva’s current strategy. McFarlane can then judge whether more radical departures are required.