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.

However, if that’s the case, we would expect Aviva to enhance the annuity benefits to make them more competitive for the buyers. In either case, Aviva is likely to see either lower growth or profitability for its annuity products.

With its combined ratio rising 2.2% over last year, Aviva’s property and casualty business didn’t fare too well relative to its industry peers in the quarter. A spike in weather-related claims in the U.K and North America led to the worsening of its combined ratio. In our view, while this issue looks one-time in nature and P&C results are inherently volatile, if Aviva should fail to improve its combined ratio in subsequent quarters, this could limit profitability and the company’s ability to raise dividends in the coming years.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Aviva PLC477.90 GBX0.48Rating

About Author

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

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