Aviva and the Blame Game

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(Bloomberg) -- Nasty crashes are usually followed by the battle to apportion blame and wrest a payout from the insurers. Aviva Plc has decided to make a rare apology and pay up quickly after a painful run-in with its own preference shareholders. It's the right thing to do, but leaves too many unanswered questions.

The British insurer said on Monday it will pay out as much as 14 million pounds ($20 million) in compensation after announcing last month that it might cancel its irredeemable securities and pay owners back at par value -- far less than where the shares had been trading.

The move to cancel what for the company is an expensive and, in regulatory terms, soon-to-be-useless form of capital stunned the whole market for the securities. Irredeemable preference shares are highly valued by pension funds and individual investors for their generous and supposedly permanent yields.

Only investors who sold their holdings between March 8, when the company first proposed cancelation, and March 22, when the insurer retreated, will get redress. Even then, they won't get the equivalent of where the securities were trading before the announcement, only the lower price from March 23 onwards.

It looks like a compromise carefully constructed to head off potential lawsuits from aggrieved individual investors without leaving the insurer vulnerable to claims from those who held on.

It should, though, help to restore investors' trust in Aviva. Rather than engage in lengthy litigation with angry investors, as Lloyds Banking Group Plc did when it tried to cancel expensive legacy capital, the insurer is retreating gracefully.

Aviva repeats it followed "clear legal advice" in saying it could cancel the securities and was within its rights to act in the interests of all shareholders.

That professional advice might have been clear, but it lacked any feel for how the market would react. At least Aviva has now promised that future redemptions will be conducted in an open and fair manner, suggesting holders will get more generous treatment.

But this all leaves two points unanswered.

Firstly, Aviva emphasizes it has kept the Financial Conduct Authority informed at all times. Ordinary shareholders might reasonably ask why they are paying up for a move the regulator blessed.

Secondly, the FCA is finally conducting its own review of what is becoming an industry-wide issue. The regulator shouldn't be relying on individual companies to tackle this with its tacit approval. Where are the clear guidelines from the FCA?

The scrapes from this fender-bender are still visible. Prices of these securities haven’t fully recovered since. That suggests investors aren't holding out for much more than scrap value when more of these things are eventually canceled.

©2018 Bloomberg L.P.

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