What Next for Aviva?

LONDON -- It's a well-known company, popular with private investors. Its name has become a byword for executive greed coupled with an underperforming share price. Analysts criticize its complex structure and unclear strategic vision. Many think its businesses would be worth more if the company was broken up.

That's Cable and Wireless Worldwide  (LSE: CW.L  ) I'm describing. But in a different context, the same characteristics apply pretty well to Aviva  (NYSE: AV  ) . So has CWW set a precedent? Might Aviva's shareholders see a bid or a breakup, finally outing the value in this stock?

A vacant throne
Aviva's shares rose 5% on the day CEO Andrew Moss resigned in response to shareholder anger over his remuneration. Right now there's an interregnum, with incoming chairman John McFarlane taking an interim executive role at the end of the month.

So we have a business where the management was perceived as destroying value in the company, now rudderless until a new executive team is installed. That's ideal timing for an opportunistic bidder to step in. To put it another way: There are a number of international insurers whose management would be negligent if they weren't running their slide rules over the company.

Equally, when the new team is installed at Aviva, it will be incumbent on the group to conduct the traditional strategic review. They will want to show shareholders a clear route to increasing the share price. More of the same with better execution might work, but strategic disposals, refocusing of the business, and breakup options will have to be considered.

Acting in Haste?
Intriguingly, one of the candidates touted for CEO is Andrew Haste, who, as former CEO of RSA Insurance  (LSE: RSA.L  ) , was widely credited with turning it around. It's been just more than 18 months since RSA proposed buying Aviva's general insurance arm under his leadership.

Were he to take on the job, shareholders would no doubt approve. Might he then conclude that a breakup of the business would generate more value? That's what he did at RSA. And remember, it was a former executive of Vodafone who came in as CEO of CWW and promptly sold the company to his ex-employer.

That story has yet to play out, but it would not be surprising if, having completed the acquisition of CWW, Vodafone then sells the parts of the business it least wants -- such as the undersea cable network -- to a firm that sees more value in them. That firm could even be the unsuccessful bidder, Tata Group. CWW shareholders wouldn't have received the benefit of the breakup; instead, Vodafone would have gotten the assets it wanted very cheaply.

Perhaps the lesson for Aviva's new management team will be that there are more plaudits for breaking up a company yourself than for leaving it to an opportunistic bidder.

Breaking up is hard to do
Is Aviva worth more broken up into its general-insurance and life-insurance parts? The company stands alone in the U.K. in retaining its composite business model. Insurance is a complex enough business anyway, so that doesn't help it garner analysts' support. Part of the debate that was waged when RSA made its pitch was whether the composite model is more, or less, capital-efficient. The argument went unresolved.

Certainly, the two separate businesses would be more attractive assets for U.K. players in the life and non-life sectors. But the composite model remains popular in Europe, so Aviva would make an attractive acquisition for a European flagship insurer such as Allianz, Axa, Zurich, or even Italian Generali.

BRICS versus PIIGS
A major drag on Aviva's share price is its large exposure to the dysfunctional eurozone. Unlike Prudential, which has pursued the growth markets of Asia despite the failure of its bid for AIG's Asian business, Aviva has stubbornly stuck to its own back yard. It may even sell its underperforming U.S. operations.

There's potentially a double hit: Impoverished Europeans might cut back their spending on insurance, and the company's investment portfolio is exposed to the vagaries of sentiment towards the Eurozone -- although, to be fair, it has done a good job of limiting exposure to the sovereign debt of the PIIGS (i.e., the economies of Portugal, Italy, Ireland, Greece, and Spain).

Its European problem has of late given rise to a capital problem. Analysts have questioned whether it has sufficient capital for the volatility and risk in its business. Its low share price makes capital-raising expensively dilutive -- and probably prohibitively so. But shoring up the capital base wouldn't be so difficult for a larger purchaser.

Let's hope the new management team members focus more on generating value for shareholders than on keeping themselves in a job.

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