Aviva / NAB

Insurance executives are desperate to refocus minds on their earning power. Investors won't let them. Current sector valuations – about 50 per cent below historic averages – show that few are ready to contemplate returns in a calmer world, where below-the-line losses on investments don't tear net profits to shreds. As it is for banks, capital is still the question.

Hence Aviva's unemotional exit from Australia, selling most of its local businesses to National Australia Bank for an initial A$825m (£400m). This small, mature, low-growth market, entered decades ago, was always top of the list for the chop. Aviva was the ninth-largest life assurance provider – a status at odds with its strategy of being at least a top-five player wherever it goes. Investors barely gave it a second thought – and with less than 3 per cent of operating profit, and only 1 per cent of new business, why would they?

NAB has a good price: 1.1 times embedded value is much less than the 1.9 times Aviva paid for AmerUs of Iowa three years ago. But the proceeds will lift Aviva's solvency margin – accumulated surplus as a percentage of net claims outstanding – to about 160 per cent, which is right in the pack with every other European composite insurer. So far this year Aviva has magicked about £500m of capital through hybrid bonds and reinsuring assets; the additional cash may quell fears about its 2009 dividend, which will cost about £550m.

The catch is that solvency is a moving target. After offloading some Taiwan assets last week, Prudential has pushed through a 200 per cent ratio. Standard Life is already well over that threshold. Even if insurers are generating more capital than they're consuming, it will take at least another set of results for capital one-upmanship to die down completely.

BACKGROUND NEWS Aviva on Sunday night agreed to sell its Australian life and wealth management businesses to National Australia Bank for up to A$925m. The UK insurer, which put the business up for sale this year to bolster its capital position, received final offers from up to four parties, and Australian insurer AMP battled it out with NAB in the final hours. Aviva had been looking for a sale price closer to A$1bn.

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