While the introduction of a new U.K. bill is expected to have a negative impact on new annuity sales in the U.K., we believe Aviva (AV.) is ready to roll out new insurance and pension products in other parts of Europe to compensate for the potential loss in sales.
We believe Aviva's ongoing restructuring efforts will limit near-term growth. However, the company's reorganisation should not only improve its focus, but also enhance its capital position and financial condition. With Mark Wilson firmly at the helm, the company has been engaged in a flurry of restructuring efforts aimed at reviving what have been stagnant new sales efforts, improving the company's depleted capital base, and reversing the slide in the stock price.
So far, the efforts have shown some success. Aviva is retreating from underperforming markets and products – most significantly, its U.S. life and annuities business. It's also making hard decisions about cash flows, including making a significant cut to its dividend, which has more than doubled its capital surplus and improved the outlook for operating cash flows. At this point, we think Aviva has trimmed a lot of weight and, as a result, has a much sharper focus on cash flow generation and capital preservation, albeit at the expense of growth in the near term.
Management is sticking to its core operations in life insurance, general insurance, and asset management. We expect to see some growth where Aviva is redoubling its sales efforts, but believe that most of the improvement in the firm's operations will come from efforts aimed at improving productivity and performance. Although growth isn't a top priority for Aviva right now and is unlikely to be a priority until management is more comfortable with the company's capital position, the firm will probably need to focus on business outside its core U.K., Europe, and Canada markets, which are more mature and hence slower growing. That's not to say that the firm would not consider a deal that would improve its growth profile and overall profitability; but for now we expect Aviva to be more on the defensive, looking to improve the cash flows from its existing operations and building up capital in the face of ongoing changes to regulations in its European markets.
