Aviva: Chairman John McFarlane announces new strategic plan.

So the newly appointed Chairman and interim Executive, John McFarlane, has today announced a revised strategy for Aviva, along with the first identified steps to enacting it (Message for shareholders from Mr McFarlane, Aviva’s new chairman).

"The new strategic plan has three main objectives:

- Narrow Focus - Focus on fewer business segments where we believe we can produce attractive returns and with a high probability of success

- Build Financial Strength - Achieve target economic capital levels in line with our industry peers, reduce capital volatility, and bring leverage down to a conservative level

- Improve Financial Performance - Aim to deliver a higher level of revenue growth, a lower cost-income ratio, lower losses and claims and higher return on capital, notwithstanding the subdued economic environment in developed markets."



Under these 3 banners Aviva intends to:
- Narrow Focus through the closure/disposal of 16 business segments that are seen as non-core. Whilst seeking to improve the performance of 27 more deemed to be undeperforming.
- Build Financial Strength by targeting an improved capital level of 160-175% through disposals, reduced spend/cost reductions.
- Improve financial performance by increasing revenues through reduced spend/cost reduction/restructuring/productivity improvements.

In addition McFarlane has expressed an appreciation of shareholders' concerns that the current performance might lead to a fund raising or cut to the dividend.
And, as such the execution of the strategy is intended to head this off.

Interestingly he also stated that Aviva had reduced its Italian sovereign debt exposure by Eu2bn, as a result of reducing its holdings to Eu5bn from Eu6bn.

The Broker Jefferies has already voiced a little sceptism over another restructure given its track record whilst stressing the likely timescale of execution and expectation of benefits suggests a 2 year turnaround (http://www.sharecast.com: Aviva leaps on plans to slimline operations).

For my own portfolio, Aviva is now the 3rd largest holding (June 2012: Portfolio Update.), and, as you would expect, the weakest performer given the increasing concern about its weaker capital position (in comparison to peers), and exposure to European sovereign debt.

Positive for me to hear that the company is not looking to raise capital or cut its dividend but is instead looking to address this through a core/non-core strategy with efficiency measures.

It is going to take time to change things for the perceived better and I think the most significant weight on the shares is the the elevated risk to the Euro and Sovereign debt. Its exposure to Spain, Greece and Portugal (Eu100bn bailout for Spanish banks! Sovereign debt. Aviva exposure.), seems small in comparison to the Eu5bn exposure to Italian debt so the noises from Italian Prime Minister Mario Monti that Italy would not require a bail-out are welcome ones. 

Although the caveat remains Italy's ability to raise debt at a sustainable level hence its support of any facility allowing the ECB to purchase bonds as a means of keeping them at sustainable levels.

Of course, only time will tell if Aviva, Italy, and the EU have the time needed.

Related links:
- http://www.sharecast.com: Aviva leaps on plans to slimline operations
- http://www.aviva.com: Aviva announces senior management changes
- http://www.telegraph.co.uk: Aviva to cut staff and sell 16 businesses
- http://www.sharecast.com: Broker snap: Jefferies not convinced with Aviva's new strategy

Related posts:
- Eu100bn bailout for Spanish banks! Sovereign debt. Aviva exposure.
- June 2012: Portfolio Update.