As of April 1, the British insurance company put an end to writing professional indemnity insurance for small and medium-sized enterprises as part of its efforts to “take tough action” on lines of business that are failing to generate profitable returns.
The professional indemnity department at Aviva will now focus on corporate clients and companies that earn fees greater than £10 million a year, PostOnline reported March 27. David Hall, managing director for Aviva corporate and specialty risk, told the news source: “This has been a very strong and very tough call but these lines have been running uneconomically for some years. We have made improvements but there are some [professional indemnity] sub-segments were we can’t make money.
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“We have been destroying capital and that is not sustainable.”
The managing director added that Aviva will focus on firms with strong risk management ethics and multilines in future. “We want to be a whole-of-account underwriter,” he said.
Aviva is in a state of flux. With new CEO Mark Wilson at the helm, the company is looking to refocus its business to drag it back to being an attractive investment case. For the full year 2012, Aviva reported a total loss after tax of £3.05 billion, after the company took a £3.3 billion write-down on the disposal of its U.S. business. Group combined ratio of general insurance and health sat at 97% for the full year.
While the company is making progress on its strategy of exiting 16 noncore segments and turning around a further 27, its focus is still unclear. “Looking at the group combined operating ratio, in my view it is barely acceptable,” Investec analyst Kevin Ryan told SNL.
“Therefore there must be little areas like professional indemnity where it’s just not happening for Aviva.”
The lack of focus, however, prevents Aviva from making itself an attractive investment case, he added, noting that Aviva entered the SME market barely two years ago. “I suspect that many in the insurance market might grumble that Aviva provides capacity and then withdraws it, and then changes its mind again,” Ryan said. “I think investors and the market need to see and understand exactly how Aviva is setting out its stall.”
Aviva’s issue lies in the plethora of businesses it is involved in.
While the insurer has toiled away at disposing of Delta Lloyd NV and Aseguradora Valenciana SA de Seguros y Reaseguros — known as Aseval — as well as units in Sri Lanka, Malaysia and Russia, it still has operations in Canada, Ireland, Spain, France and Italy.
Meanwhile, its British core market remains fiercely competitive in general and life insurance — not to mention weighed down with increasingly tough regulatory standards, such as the retail distribution review and gender-neutral pricing.
“I guess it is a question of looking at combined ratio,” said Canaccord Genuity analyst Ben Cohen. “Possibly as a rule, anything with a combined ratio of 98% or more is going to be a focus for them.”
Cohen highlighted U.K. commercial motor, where large losses helped push the overall U.K. commercial combined ratio to 104%.
“In terms of property and casualty, Canada looks fine, but the U.K. is more of an issue with a 98% combined ratio — it needs to be pushed down to the mid-90s really, given where interest rates are.” he said.
“In life, the margins in most areas look alright — however Italy is underperforming, and France looks marginal, so it will depend on what happens with volumes there.”
While Spain appears to be “on target,” one might question how the sale of the Bankia distribution partnership may affect the business, Cohen added, also noting that the introduction of the RDR may also impact life figures for the U.K., which currently looks stable.
While trimming down the business is arguably Aviva’s best plan of action, there could also be consequences. In exiting several lines of business, the company runs the risk of making it more difficult to secure higher-margin deals with brokers.
“As Aviva selectively exits the lines which are lower-margin, I would think the chances of getting higher-margin deals would go down massively,” said Cohen.
This will also be a tougher challenge for the insurer without the leadership of Janice Deakin, the Aviva intermediary and partnership director who left the company earlier in April to join Gallagher International as U.K. commercial head. According to the Insurance Times, the move has been regarded as a “sad loss” for Aviva and brokers by the market.
“It’s a question of how good Aviva is at being selective [in exiting businesses],” said Cohen. “I think we need the passage of time to see how the strategy will all work together.”
But answers are not expected in the immediate future.
“I would have thought this refocus is going to take at least half a year, given that the new CEO started in January,” said Ryan.
“With a group the size of Aviva and the issues it has on its balance sheet there is an awful lot to look at. I would expect to see more of a focus to be apparent, certainly at a high level, by mid-year.”
