* Aviva could sell Canada unit alongside U.S. arm - investor
* RSA unlikely to buy Aviva assets - analyst
* No magic bullet for Aviva - banker
By Myles Neligan
LONDON, May 15 (Reuters) - Aviva could accelerate and expand asset sales as it seeks to mend relations with shareholders who last week forced out boss Andrew Moss, irked by its persistently weak share price.
That is the view of investors and analysts who see Britain's No. 2 insurer as vulnerable to capital erosion because of its heavy exposure to the troubled euro zone, the source of 40 percent of its operating profit last year.
Well-priced disposals would bolster capital reserves at the group, valued at 8.5 billion pounds ($13.7 billion).
They would also give shareholders confidence it can ride out a fresh deterioration in the euro zone crisis without cutting its dividend, eliminating a drag on the stock.
Aviva is widely expected to sell its U.S. arm, acquired in 2006 for 2 billion pounds, after chief executive Moss signalled he was open to offers for it about three weeks before he quit.
The group should go further and bundle the U.S. unit with its bigger Canadian operation, likely to fetch a higher price because it is more profitable, said one institutional investor.
"That's one business that is doing well, and when it's doing well you get a better price for it," the investor said.
"If balance sheet issues were put to bed, and Aviva became a UK and Europe-focused insurance company, in theory the rating should improve."
Aviva could make a loss from a standalone sale of the U.S. arm because American life insurers have fallen in value since it bought the unit.
One banker who has tried to find a buyer for the unit said there was little interest from other insurers, leaving price-conscious private equity firms as the most likely acquirers.
"This is a really hard business to sell," the banker said.
Aviva, which reports first-quarter results on Thursday, had planned to announce a disposal of the U.S. business at a May 24 investor presentation which has now been postponed, the Sunday Times reported last month.
Aviva declined to comment.
Incoming chairman John McFarlane, in day-to-day charge until a chief executive is found, last week began an "in-depth" review of Aviva's businesses, aimed at improving shareholder returns.
The scope for radical surgery, such as breaking up Aviva and selling its lucrative non-life units, is seen limited because buyers are scarce in a European sector keen to preserve cash due to worsening economic conditions and tougher capital rules.
"There is no magic bullet for Aviva," said a second banker who advises insurance companies.
"What they have to do in total will depend on how good a price they get for the first disposal. It is hard to see what they could sell next."
British rival RSA, which made a 5-billion pound bid for the bulk of Aviva's non-life operations in 2010 under former chief executive Andy Haste, is thought unlikely to make a fresh offer under his successor, Simon Lee.
"If you read what Simon Lee's talked about, he's just not in the mood for large acquisitions," said Panmure Gordon analyst Barrie Cornes.
Some sector watchers reckon a major reorganisation under new leadership is unlikely, because the company has laid some of the groundwork for recovery through a retrenchment strategy launched by Moss in 2010.
Under the plan, Aviva has slashed costs and sold sub-scale businesses in Britain and Europe, reducing the number of countries it operates in to 21 from 30.
"Moss had done a lot of good stuff - he made Jack Welch look like a pussycat," said Investec analyst Kevin Ryan, referring to the former General Electric chief executive, famed for his cost cutting.
But Moss's efforts to streamline the group came too late to mollify investors angered by a 60 percent slump in the group's shares during his five-year tenure, a decline blamed partly on strategic mis-steps, including an unpopular 2009 dividend cut.
Shares in rivals Prudential and Legal & General were flat and down 23 percent respectively, over the same period.
Potential replacements for Moss include Aviva's UK boss Trevor Moss, and Pat Regan, its finance chief, while external candidates include Andy Haste, seen as the shareholders' runaway favourite because of his successful turnaround of RSA.
"If Andy Haste put his hand up for the job tomorrow, all the pressure to sell things would go away in the medium term," a second banker said.
Haste is not interested in leading Aviva because McFarlane's review of the group could pre-empt changes he might make, the Sunday Telegraph reported at the weekend, citing unnamed sources.