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Aviva overhauls business structure, sells off Hong Kong division

20th November 2019 - Author: Matt Sheehan

UK insurer Aviva has simplified its business structure into five operating divisions as part of a new group strategy, in addition to announcing the sale of its stake in joint Hong Kong venture, Blue.

AvivaGoing forward, Aviva’s operations will consist of five divisions, comprising Investments, Savings & Retirement; UK Life; General Insurance; Europe Life; and Asia Life.

As part of the Asia Life overhaul, the insurer will sell its stake in Blue to its partner, Hillhouse Capital, and will continue discussions with partners in relation to its business in Vietnam and joint venture in Indonesia.

Aviva revealed earlier this week that it had decided to retain its Singapore and China businesses, following a comprehensive review of options.

As part of the new strategy, the company also plans to invest £1.3 billion over the next three years to “transform Aviva into a simpler, stronger and better business.”

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New financial targets include Solvency II return on equity of 12% by 2022, as well as group operating capital generation of £7.5 billion, and cash in-flows to centre of £8.5-9.0 billion.

Aviva also anticipates £300 million in net savings through cost reduction over the 2019-22 timeframe, and £1.5 billion in debt reduction.

For 2019, management expects operating profit to be broadly in line with expectations, consistent with the operating trends reported in Aviva’s interim results.

The company has seen continued progress in Canada this year and stronger sales in bulk purchase annuities, offset by weaker results in Aviva Investors and UK personal lines insurance.

Additionally, Aviva estimates a contribution of £300-£400 million from management actions in 2019, reflecting favourable development of longevity reserves and other items. In the longer-term it is signalling an expected range of £0 to £200 million per annum.

“Aviva is a business with ambition,” said Chief Executive Officer Maurice Tulloch. “We are investing in new services, new products and new technology. We expect growth, especially in higher return businesses such as General Insurance and Asia and also, from our new Investment, Savings & Retirement business.”

“Aviva’s focus is delivering sustainable growing returns to shareholders. Our forecast cash flows are more than sufficient to sustain our dividend, reduce debt and grow Aviva. Our return on equity target of 12% underpins our progressive dividend for the long-term,” Tulloch continued.

“Our strategic review has been rigorous and thorough. I am committed to running Aviva better. We will be more commercially focused, manage costs rigorously and be more disciplined in how we invest,” he explained.

“We will excel at the basics, giving customers a simpler, faster and more convenient service. Getting these fundamentals right will result in a simpler, stronger, better Aviva, while also improving returns for shareholders.”

Analysts at investment bank and financial services firm Citi also offered some commentary on the new announcements, suggesting that the strategic update brings no major announcements regarding the shape of the group, but instead focuses on simplification and execution of the existing businesses.

“The new 12% Solvency II ROE target is unconventional and will take some time to fully digest,” one analyst said.

“There is no change to the progressive dividend policy, £1.5bn debt reduction program or £300mn expense savings targets. The £8.5-£9.0bn 2019-22 remittance target is lower than the previous run-rate guidance; however, this is not surprising given the reduction in yields and importantly still more than covers central costs and dividends.”

They further stated: “There is a lot of underlying detail to work through but fundamentally Aviva strategy calls for a slow burn story that requires consistent execution vs. the more aggressive action regarding the shape of the group that some were hoping.”

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