Selling the US business could add to £1bn to capital buffer against a Spanish bailout
Aviva could be trying to sell its US life assurance business to protect against the eurozone debt crisis and beef up its capital requirements, according to a top analyst.
This comes in a month when insurers’ share prices have plunged across the board amid fears of a Spanish bailout.
Shore Capital analyst Eamonn Flanagan said the sale of the insurer’s US business would free up capital that could be used as a firewall against any potential troubles
in the eurozone and Solvency II stipulations.
But he added that the company had already built up a capital buffer through the sale of RAC for £1bn and the Delta Lloyd IPO.
“I think their capital base as it stands is perfectly adequate to cope with Italy,” he said.
“Their exposure to Spain is on new business and the profit and loss account, but not the balance sheet, so it shouldn’t knock the company.”
Aviva’s capital surplus was reduced by 30% between July and September 2011 as eurozone government bond prices weighed heavy on its shares. But the insurer’s surplus was still £3.3bn as of 29 February, compared with £2.2bn at the end of last year.
The company announced last week that it was considering selling its US life assurance business in a bid to raise £1bn, having acquired the majority of the operation for
about £2bn, including debt, in 2006.
AXA, Allianz and Aviva had a significant chunk of their share price gains this year wiped out in just a couple of weeks. AXA dropped 10%, Allianz 7% and Aviva 6% during the first two weeks of April.
All three have invested heavily in Italian and Spanish government bonds, the two countries most at risk of needing a bailout.
By contrast, RSA had limited exposure of £138m to the eurozone last year, according to its annual results.
Brokers, meanwhile, are taking a closer look at their insurer ratings in the wake of the eurozone debt crisis. Concerns have been raised in recent weeks that Groupama’s credit rating may be downgraded.
The insurer, which put its UK arm and broking subsidiaries up for sale in February after being hit by the eurozone crisis, is currently on a BBB- rating - one above ‘junk’ status.
Romero Insurance Brokers managing director Simon Mabb said he was keeping a close eye on developments with insurer ratings.
“The likes of Groupama, for example, have been significantly hit and there is some concern with it, particularly when you start dipping below an A rating,” he said.
Brokerbility chairman Ashwin Mistry said: “We do view very carefully all our carriers’ solvency and insurance strength, and we have an in-house committee that looks at insurance rating. Obviously the eurozone crisis is back on the agenda, so the issue hasn’t really gone away.”
Mistry said Groupama remained under review while he welcomed QBE’s acquisition of Brit’s regional UK business.
Higos Insurance Services managing director Ian Gosden said he was focusing more on getting information on insurers from ratings agencies.
“We haven’t taken any steps, for example, with Groupama, but we never did a lot of business with them anyway,” he said.
Putting the insurer share price drop down to market sentiment, Gosden said he was more concerned with ratings, adding that RSA’s upgrade last week was well received.
“We are cautious of one or two companies because of their likely longevity,” he said. “Where we feel that an insurer is likely to be sold off, or there is uncertainty, we tend not to develop that relationship until we know it is on solid ground.”
We say …
● It makes sense for Aviva to sell its US life assurance business given the volatility of the equity markets and low bond yields of 2%-3%, combined with a drop in volume and being a capital-intensive product.
● Insurers are going to seek to reduce their exposure to eurozone debt, particularly in areas such as Spain, which are at risk of default.
● Whoever buys Groupama will have their work cut out to improve the insurer’s capital adequacy in the face of high euro debt exposure.