MENTION Brussels to any senior London-based insurer and you will always get the same reaction: anger and exasperation. With just over 18 months to go before the introduction of Solvency II, the insurance industry’s equivalent of the new Basel III banking rules, European regulators have still not produced a framework that properly reflects the business practices of real companies. In other words, it’s chaos.
Unsurprisingly, Andrew Moss, chief executive of Aviva, Britain’s second largest insurer, is not exactly happy about this either. While the bureaucrats dither, industry grandees such as Moss are starting to kick back at the limbo in which it leaves them. “We’ve been talking about this for five or six years and frankly it’s an uncertainty that the industry can do without,” Moss tells City A.M. “We need certainty to emerge so we can all move forward and get on with our lives.”
Just days before we meet, Europe’s four leading insurance representative bodies published a stark warning to EU commissioner Michel Barnier that the reforms were misjudged and their concerns were being ignored.
Moss is right behind them. “The industry – quite rightly in my view – has decided that now is the time to be extremely forthright in relation to this issue,” he says. “The insurance industry in Europe has come through the biggest financial crisis that anyone can remember without any significant failures. That’s a very significant stress test, which argues that the industry does not need significant amounts of new capital. And the industry is not going to stand by and see more capital required in companies which in the end will only be a cost that is passed on to consumers.”
A hefty burden of regulation looks set to be a major legacy of the financial crisis – and it will have serious consequences for firms such as Aviva, as well as to the members of the public who will have to pay higher prices for financial services.
KPMG estimates that insurers globally already bear $25bn (£15.3bn) of additional annual costs from complying with differing regulatory regimes around the world.
Worryingly, Moss believes the world has become “less global” than five years ago, as regulation has toughened in most of its markets. It means Aviva has to think harder about where it allocates resources.
“If you look at the way governments and regulators have reacted to the financial crisis, you will find that they actually they have become slightly more nationalistic, slightly more protectionist. That really affects highly regulated businesses like insurance,” he says.
And while Aviva’s financial position has improved drastically – profits after tax were up 44 per cent at £1.9bn in 2010 – the crisis has certainly left its mark on the business. Since 2009, Moss has pulled Aviva away from its previous slightly unfocused expansion strategy that grew it to a sprawling 30-country empire. It closed its Australian business, announced its withdrawal from Taiwan and floated just over 40 per cent of its Dutch arm, Delta Lloyd.
Then, last November, Moss decided to go further and focus Aviva on just 12 of its remaining 27 insurance markets. It will now stay only where it makes at least $100m annual profit, a 12 per cent or higher return on capital or has a business valued at $1bn or more.
“We took a long hard look at the world, really, in early 2010, and said it’s a different place to what it was three years ago,” Moss says. “Our customers are buying different products, they’re looking more for guaranteed products. Economies which had been growing steadily across the world have diverged and different places are growing at different rates.”
It was a tough call – Aviva’s non-core territories now include swathes of eastern Europe as well as Germany, the Netherlands, and Asian markets such as Malaysia, Singapore and South Korea. But he’s serious: last week Aviva cut another 15 per cent from its Delta Lloyd stake to cede majority control after 38 years in the Netherlands. The deal raised £381m for Aviva, boosting its cash position and enhancing its flexibility. Delta Lloyd is a big investor in corporate bonds and mortgage loans, so the disposal will make the British insurer less vulnerable to credit risk, analysts said.
“There were certain businesses where we simply faced up to the fact that they were never going to make a real difference to our overall profitability as a company,” Moss said. “Concentrating on our main markets – that we believe is absolutely the key to success for us.”
Aviva’s global strategy may be set, but what about the UK? Its business here is a strange beast, a composite of life and pensions but also non-life personal lines such as motor, household and small business.
The rumour mill has repeatedly questioned whether Aviva ought to sell parts of the business. The talk recently centred on whether roadside rescue business RAC is up for sale, while last year local insurer Royal & Sun Alliance (RSA) proposed buying chunks of its non-life book.
Aviva rebuffed RSA’s offer in part because the £5bn offer price was far lower than the £8bn value Aviva placed on it, but also because the sale would have left Aviva with all pension liabilities and £750m of hybrid debt.
One of Moss’ major achievements of 2010 has been to entirely eliminate the £1.7bn pension deficit, and announce a three-year plan to fully repay the debt.
Does this mean a sale of its non-life arm to RSA could be back on the cards? Apparently not. “We love being in both the general and life insurance business so we have no plans to change that,” Moss says. “We’re the only company that writes right across the piece so I think we have a cross-selling opportunity that nobody else has.”
But cross selling has been traditionally tricky to pull off, even if you insure 19m people in the UK, and Moss knows it.
“Historically that has been difficult to make work but I think we’re beginning to see signs with the brand and the way we’ve promoted the brand that we may benefit from that. So over the next couple of years that’s our big challenge but I think our big opportunity as well,” he says.
The other interesting target for a sale is its US life and pensions business, acquired in 2006. Moss admitted in November that it was not worth its original price – and said it had little appetite to invest further in the market. Analysts suggest it could be sold off as soon as its value rises, though Moss isn’t saying.
“We more than doubled profits in the US business in 2010 so we’re focused in 2011 on further increasing that profitability,” he says. “We think there’s more to come.”
Moss is a careful talker and thinker, as you’d expect from an ex-auditor whose first degree was in law, and he’s not keen to discuss difficulties in the business. Standard & Poor’s’ decision to downgrade Aviva’s Ireland business, in response to the declining quality of its sovereign debt, is “a country issue”, I’m curtly told.
And while Aviva has avoided the kind of spectacular investor bust-up seen at arch-rival the Prudential (over trying to buy AIA last year), Aviva’s shareholders were said to be upset at the idea that former Lloyds Banking Group CEO Eric Daniels was added to a shortlist to replace its chairman Colin Sharman.
Moss doesn’t want to talk about it. “There’s no new news on that and we will continue to find the right person,” he says. And the relationship with shareholders after this? “We always stay close to our shareholders on these issues.”
He’s more forthcoming on what he sees as one of Aviva’s key roles – encouraging greater take-up of pensions and tackling the chronically low adult savings rates in the UK. This campaign has seen Aviva win plaudits in some circles in Westminster, where there is a growing realisation that the UK faces a crisis.
Moss says in European markets such as France people save more than twice as much as in the UK. They are aided by support such as tax incentives – and he argues, persuasively, that more are needed here.
“While we understand at the moment that the government’s priority is on reducing the budget deficit, quite rightly so, I think we have to look through that and say, over time, if private individuals don’t provide for themselves in retirement then some of that burden will fall on government, so it makes sense for the government to take that long term view.”
Moss’ vision for the company is clear – now all he’s waiting for is a nod from the regulators that he’ll be able to realise it. Let us hope Brussels gets its act together soon.
CV | ANDREW MOSS
Work: Andrew Moss first trained as an accountant at Coopers & Lybrand (now part of PwC).
He subsequently became a vice president at Citibank (now Citigroup); head of group asset and liability management at HSBC in 1997, then HSBC’s chief financial officer for investment banking; finance director at Lloyd’s of London; Aviva’s finance director in 2004 and then was appointed chief executive in July 2007, a position which he retains today
Education: read law at Oxford University
Hobbies: Golf, rugby, gardening