Aviva Eyes Corporate Annuity Deals in Wake of U.K. Budget

May 15, 2014 11:59 am ET

(Updates with analyst comment in the eighth paragraph.)

May 15 (Bloomberg) -- Aviva Plc, the U.K.’s second-biggest insurer, is focusing on corporate pension deals after a measure of profitability for annuities fell in the wake of the government’s budget.

The value of new business, or VNB, for U.K. annuities dropped 43 percent to 40 million pounds ($67.1 million), the London-based company said in a statement today. Total VNB climbed 13 percent to 228 million pounds, as a jump in Europe and Asia help to offset a decline in the U.K.

The effect from the drop in annuities on the company will be “modest,” Chief Executive Officer Mark Wilson said on a conference call with reporters. “Bulk annuity purchases will be a target to fill some of that gap.”

Aviva had more than 700 million pounds wiped off its market value after the U.K. Chancellor of the Exchequer George Osborne scrapped rules in his March budget that pushed retirees to buy an annuity with their pension savings. The stock has since rebounded about 5 percent. The company joins Legal & General Group Plc, which last week said bulk annuities would offset an expected 50 percent drop in sales of the product.

Wilson said Aviva made 60 bulk-annuity purchases in the last 12 months with a value of 400 million pounds and said the insurer may exceed that level in 2014 in the mid-size range.

“We can be strong in that market,” he said. “We are not going to play in the jumbo end of the market. There will be more competition and I think margins will come down, but we are going to compete in our niche.”

Annuity Withdrawal

The value of new business in the U.K. declined 22 percent as Wilson said they had started to withdraw from individual annuities even before the budget announcement. VNB jumped 45 percent in Europe and by 96 percent in Asia.

The shares declined by the most since the budget was announced on March 19, falling 3.4 percent to 513.5 pence. Hari Sivakumaran, an analyst at Oriel Securities Ltd. in London, said the drop in annuities did “not bode well” for the second quarter, when the full impact from the budget is expected to be known.

In general insurance, Aviva’s combined ratio, or claims and expenses as a percentage of premiums, deteriorated to 97.7 percent from 95.5 percent, as the company was hit with higher weather losses in Canada and the U.K.