(Bloomberg) — Aviva Plc, the U.K.'s second-biggest insurer by market value, plans to exit almost a third of its units to bolster capital reserves and limit the impact of further turmoil in the euro region.

The insurer plans to sell 16 non-core divisions including U.K. bulk-purchase annuities, its South Korean unit and some partnerships in Italy, the London-based firm said in a statement today. The company is aiming to bring its capital levels in line with other insurers to between 160 percent and 170 percent of reserves required by regulators from 140 percent today.

Chairman John McFarlane began the strategic review on May 8, the same day that Chief Executive Officer Andrew Moss stepped down following a shareholder protest over pay. The 65-year-old inherited a company with 18 billion pounds ($28 billion) of European government debt, more than any other U.K. insurer, lower and more volatile capital reserves than competitors, and a share price that fell 60 percent under Moss's five-year tenure.

"The scale of the task ahead is significant and will take time" said James Shuck, a London-based analyst at Jefferies International Ltd. with a hold rating on the stock. "This is at least a two-year turnaround story with economic capital likely to remain below target during a volatile macro period."

The stock rose 2 percent to 287.5 pence at 9:42 a.m. in London trading, valuing the firm at about 8.4 billion pounds.

Dividend Payments

McFarlane said the insurer doesn't need to cut the dividend for now, though turmoil in the euro area may make it harder to meet future payments, he added. The insurer has no plans to raise equity, he said.

A sale of Aviva's U.S. unit and its stake in Dutch insurer Delta Lloyd NV could boost capital to the targeted 170 percent level, according to Oliver Steel, an analyst with a buy rating on the stock at Deutsche Bank AG in London.

McFarlane said today the U.S operation isn't one of the firm's core‚ "performing" units. On a call with reporters today, he declined to comment on whether it's one of the 16 units earmarked for sale.

"There is 6 billion pounds of capital in that category and therefore it is reasonably significant," he said, referring to those business put up for sale. "Obviously it can't be just tiny little pieces of the organization."

Cost-Cutting

Aviva will reduce its 2011 costs by 400 million pounds by cutting the number of management layers within the organization to five from nine, it said in the statement. The cost-cutting program should be complete by 2014, McFarlane said.

The firm also reduced its holdings of Italian sovereign debt to 5 billion euros ($6.3 billion) in June from 6 billion euros in May, Finance Director Pat Regan said on the call.

The insurer hired two investment banks to help conduct the strategic review and they considered whether breaking up the firm either by geography or by splitting its life and non-life insurance divisions would boost the share price.

"We considered for 10 seconds that we should do that and it became perfectly obvious that that was (a) not attractive and (b) couldn't be executed," McFarlane said. "The investment bankers looked at it as well. I think they took 20 seconds."

The firm expects to announce a replacement CEO at the start of next year, McFarlane said.

(Kevin Crowley; Editors: Edward Evans, Keith Campbell)

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