Inside London

March 8, 2013 3:06 pm

Aviva’s woes expose insurance deal legacy

Buying shares triumph of hope over experience

You may not remember General Accident, Commercial Union, or even Norwich Union, but they live on, under the made-in-marketing umbrella of Aviva. And that, in a nutshell, is the problem. They’re all still there, with their incompatible systems, their legacy products and (you may be sure) their internal turf wars. For the truth is integrating insurance businesses is messy, and the gains which look so obvious on the spreadsheet are illusory. As Morgan Stanley’s analyst put it: “Thursday’s announcement will raise significant new questions about the underlying cash earnings power of the business.”

It’s rough on Aviva that the news of its third dividend cut in a decade coincided with results from Standard Life good enough to support a special payout on top of the (raised) final, and followed the 20 per cent rise from Legal & General earlier in the week. Both companies are reinventing themselves, but unlike Aviva neither has felt the need for a deal which might attract the dreaded “transformational” tag.

Aviva’s problems are hardly a bolt from the blue; even before Thursday’s dive, the shares were half the price they hit in 2006, when such was the hubris of management at the time that it launched a bid for Prudential. Since then successive chief executives have talked about restructuring, paid themselves as if they had managed it, and departed. The latest one has discovered a “rich legacy” in the business, which sounds ominous. Unless and until he can unlock those elusive cost savings, buying the shares is a triumph of hope over experience.

Balls’ capital idea

Why is capital gains tax like the weather in the Scottish highlands? Because if you don’t like it now, wait five minutes and it’ll change. Since CGT was introduced half a century ago, every chancellor has fiddled with it, and Ed Balls isn’t even waiting for office before having a go.

He likes the idea of a 50 per cent hit on profits realised in less than a year, as part of his war on short-termism. (He also wants to disenfranchise buyers of shares during takeover bids. Best of luck with that.) Current Labour ideology says investment good, speculation bad, even though it’s really a continuum, and there’s truth in the old City joke that a long-term investment is a short-term one that went wrong.

Yet there is something in his argument. Short-term traders hardly care what a company does. Their view of shares as merely counters on the board must be profoundly dispiriting to those trying to make the company prosper. Besides, short-term gains are more like income than capital gains, and could sensibly be taxed as such.

Reimposing a tapering tax rate for longer-term gains would provide an incentive for shareholders to engage with companies. The carrot of gains being tax-free after, say, a decade would encourage investors to consider whether a business is genuinely sustainable, or whether it’s being run down to support the directors’ bonuses. The current CGT regime of 18/28 per cent produces the opposite incentive, since inflation turns the tax into a capital levy on long-term investments.

CGT doesn’t raise much (roughly one day’s public spending), but it’s a fantasy to suggest that it might be abolished. We need it for a sort of equality of misery with income tax, but that’s no reason why it shouldn’t be rationalised to make the financial weather a little less changeable.

Short shrift

Short sellers are used to the cross-and-garlic treatment, with exhortations that they be cast into the outer darkness for dragging down good businesses. Company executives hate them, and politicians try to ban them. Now Warren Buffett has, as so often, applied common sense. Rather than castigating them, he has invited one to join his discussion panel in front of 30,000 adoring shareholders at Berkshire Hathaway’s annual meeting.

He’s picked Douglas Kass, hedge fund manager, CNBC pundit and long-time Berkshire bear. It’s a fine precedent. Crispin Odey was vilified for shorting banks ahead of the crash. But not only does the contrary view inject a little life into an annual meeting, just think how much misery might have been avoided had Fred Goodwin invited him to the AGM of Royal Bank of Scotland in 2006.

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