Aviva Long Term Prospects Threatened

Since Aviva is highly exposed to the U.K market, analysts think the Chancellor's bill to scrap annuities will have a profound implications for the company’s long-term growth

Vincent Lui, CFA 16 May, 2014 | 10:55AM
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There is little in Aviva’s first quarter that would alter our long-term view of the U.K. insurer, so we are maintaining our fair value estimate and no-moat rating.

Aviva (AV.) continued to make good progress in improving cash flow and new sales in the January quarter. The firm generated £400 million of operating cash flow, thanks to improving cash remittances from the European markets. New business value increased 13% to £228 million.

That said, the introduction of a U.K. budgetary bill led to a drop in annuity sales, as we expected. Under the new bill, the country’s 1.2 million pensioners can now elect to receive their benefits in a lump sum, without the need to purchase annuities from insurance companies, if their benefits are below the £30,000 threshold. As a result, new business sales in the U.K. fell 22%.

Since Aviva is highly exposed to the U.K market, we think the new bill will have a profound implications for the company’s long-term growth. If U.K. pensioners do not believe annuities satisfy their retirement needs as a savings vehicle, the lost sales will be permanent, in our view.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Aviva PLC395.50 GBX0.48Rating

About Author

Vincent Lui, CFA  Vincent Lui, CFA is an equity analyst for Morningstar, covering life insurance companies.