On What’s Next for RSA & Aviva

Aviva: £3.3 billion of impairments and writedowns in 2012

As the results season finally draws to a close, the specialist insurers and reinsurers will look back with satisfaction to 2012; a year where despite paying out vast losses from super storm Sandy and earning just a trickle of investment income, virtually all firms performed at least to and in many instances exceeded analysts’ expectations. That so many were able to increase dividends or release capital to shareholders demonstrates the financial resiliency of the bespoke corner of the markets in London, Bermuda and on the Continent.

At the other end of the spectrum, in the commoditised world of UK private car insurance there was also some good news. Here it is as cut-throat as it gets, yet Admiral defied the odds, delivering strong results on the back of an entrepreneurial model that appears to work. With strong sentiment also predicted towards the Esure floatation later this month, the implication is that money can be made for those that are innovative even in this most brutal sector of our industry.

Maybe unsurprising, therefore, that shareholders reacted so savagely to the uniquely disappointing results of the UK flag carriers RSA and Aviva and in particular the cut that each of them made in their dividend. So far this year, during one of the strongest bull runs in stock market history in which the FTSE 100 has gained over 10%, the share prices of RSA and Aviva have actually fallen by 8% and 12% respectively. Clearly investors now doubt the underlying cash-earning power of UK’s two largest non-life insurers, especially when compared to their life-only peers Prudential, L&G and Standard Life all of whom are delivering fantastic returns currently.

Writing in the Financial Times, Neil Collins blames Aviva’s woes on the fallout from past mergers and this could equally apply to RSA. Legacy is a wretched thing for insurers, he argues, as it sucks in resource and management time to wrestle with incompatible systems, outdated products and internal turf wars. A plausible explanation perhaps and certainly a factor for sure, but this may understate the challenge that RSA and Aviva both face in defining a longer term strategy that will recover for them the support of their capital providers.

The harsh reality is that RSA and Aviva may have fallen too far behind their European rivals Allianz, Axa, Generali and Zurich to make headway as leading players on the global stage or in the high-growth economies. They are probably too small in this respect yet just as worryingly they could be too big and clunky to mine the higher margin specialist areas of the market landscape. A tempting choice of almost opposing strategies is therefore emerging for them: either to scale-up via merger or acquisition with all the attendant risk that involves or alternatively re-focus investment and effort in a narrower set of business lines where sustainable competitive advantage can be developed. The direction that these two great companies ultimately pursue over the coming months could have a defining effect on the makeup of the UK insurance industry for years to come.

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