Aviva Plc (AV/), the U.K.’s second-biggest insurer by market value, will cut directors’ bonuses to zero and freeze pay for 400 top managers after slashing its second-half dividend by 44 percent and posting a loss. The shares plunged.
The insurer will pay a final dividend of 9 pence a share for 2012, down from 16 pence in the previous year, the London- based firm said today in a statement. That cut the total for the year to 19 pence a share, less than the 25.4 pence average estimate of 23 analysts surveyed by Bloomberg.
“These results look ghastly,” Marcus Barnard, a London- based analyst at Oriel Securities Ltd. with a hold rating on the stock, wrote in a note to clients. Chief Executive Officer Mark Wilson, 46, has cut the dividend “as much as possible to a lower level, from which it can grow.”
Wilson, the former CEO of Asian insurer AIA Group Ltd. (1299) who took over at Aviva at the start of this year, is selling assets to rebuild capital buffers depleted by the European sovereign debt crisis. Disposals of units in the U.S., Russia, Malaysia and the Netherlands are depriving the insurer of the cash flow it has used to generate an average dividend yield of 8.3 percent in the past 12 months, the seventh-highest in the benchmark FTSE 100 index, according to data compiled by Bloomberg.
Aviva slumped as much as 16.1 percent, the biggest intraday drop since March 5, 2009. The shares closed 12.5 percent lower at 314.8 pence, erasing about 1.3 billion pounds ($2 billion) in market value.
The insurer posted a net loss of 3.05 billion pounds in 2012, following a 3.3 billion-pound writedown on the U.S. business it agreed to sell to Leon Black’s Apollo Global Management LLC (APO) in December. Operating pretax profit dropped 15 percent from a year earlier to 2.13 billion pounds.
Aviva said it will also remove its dividend in stock. The company’s “overall situation” means executive directors won’t be awarded bonuses for 2012, Wilson said.
“Whilst we have enough liquidity to pay the current dividend level, the cash flows from the businesses are too tight to sustain that historical level,” he told reporters on a call. “It’s like walking up an escalator that’s going down -- it’s possible to climb up but eventually the escalator wins.”
The disposals have cut Aviva’s ability to generate cash that was used to pay its dividend, Alan Devlin, a London-based analyst at Barclays Plc (BARC) with a sell rating on the stock, said before the announcement. The firm would only have been able to fund the payout from recent asset sales, meaning it would be unsustainable in the long-run, he wrote in a March 5 note.
RSA Insurance Group Plc (RSA), the U.K.’s biggest non-life insurer by market value, plunged as much as 15 percent last month after it cut its dividend by a third, citing a “prolonged low bond yield environment” that hurt investment returns. Standard Life Plc (SL/), the Scottish insurer that boosted its cash surplus by moving into pension products that require holding less capital, said today it will pay a special dividend after reporting a 65 percent gain in annual profit.
Wilson aims to boost Aviva’s earnings by generating cash in the firm’s developed markets, such as the U.K., Canada and France, saying that will both pay the dividend and fund growth in emerging economies including Poland, Turkey and Singapore.
Cash flow needs to be “as predictable as a Swiss clock,” he told reporters. “There are parts of Europe, interestingly enough, that have some of the same dynamics as Asia. Some of the markets we’re strong in, like Poland and Turkey, have good gross domestic product growth.”
Aviva’s strategy is similar to that of Prudential Plc (PRU), the U.K.’s biggest insurer by market value, which has almost doubled its share price since 2011 by using its British arm’s cash and credit rating to fund expansion in south-east Asia.
Wilson took over seven months after his predecessor, Andrew Moss, stepped down following a shareholder revolt over his pay, and after Chairman John McFarlane unveiled a plan to sell or wind down almost a third of the insurer’s businesses. McFarlane focused on raising capital, paying down debt and making Aviva less susceptible to market movements as European leaders struggled to contain the region’s fiscal crisis.
“We now have to take Aviva to the next stage of this turnaround,” Wilson told reporters. “We will focus the business on cash flows.”
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