Aviva Falls After Posting Loss, Maintaining Dividend (Update1)

By Kevin Crowley
Bloomberg News
March 5, 2009

March 5 (Bloomberg) -- Aviva Plc, the biggest U.K. insurer, fell the most in 21 years on concern about capital reserves as the company maintained its dividend after posting a record loss.

The stock fell 30 percent to 200.25 pence as of 11:59 a.m. in London trading. Aviva posted a 2008 net loss of 915 million pounds ($1.3 billion), compared with a profit of 1.3 billion pounds a year earlier, as it wrote down the value of corporate bond holdings.

"We don't believe their solvency level is particularly strong," said Trevor Moss, an analyst at MF Global Securities Ltd. in London who has a "neutral" rating on Aviva. "It's been negatively affected this year by the equity markets and paying the dividend weakens it further."

Aviva has fallen 53 percent this year, making it the second- worst performer in the nine-member FTSE ASX Life Insurance Index, as investors speculated U.K. insurers would be forced to raise capital as investment returns fall amid the global recession. The Financial Services Authority last month challenged life insurers with new stress tests to examine how they could cope with deteriorating markets.

Aviva, which has about 350 billion pounds of assets on its balance sheet, said its capital surplus was 2 billion pounds at Dec. 31 and would drop to 1.2 billion if equity markets fell 40 percent from year-end levels. The FTSE 100 Index of leading U.K. companies has fallen 20 percent since the beginning of 2009.

Bond Writedowns

The insurer marked down its 150 billion-pound bond holdings by 8 percent last year and set aside an additional 300 million pounds to cover defaults, the company said. It took a provision of 250 million pounds to cover losses on 9.1 billion pounds of U.K. commercial mortgages.

Aviva said its 2008 dividend will be 33 pence a share, the same as the previous year.

Maintaining the dividend is the "right balanced outcome" Chief Executive Officer Andrew Moss said on a call with reporters.

"Our objective has been, as far as possible, to put the group in a position where the balance sheet is weatherproofed against any storms to come," he said. "That's been taken account of in the capital position that we report today."

Reducing Costs

Aviva is reducing products and cutting jobs in the U.K. to improve profit growth at its general insurance unit as the economy slows. The company said it has reduced costs by 340 million pounds since October 2007 and remains on target to save 500 million pounds by 2010.

The insurer reduced its workforce by 3,000, or 6 percent, to 54,000 employees last year, Aviva's Moss said. The cuts included 2,000 jobs in the U.K. and scaling back operations that have been outsourced to India.

Recent market turmoil has made Aviva "more focused" on costs this year, when the company will continue reducing the number of U.K. operation centers, the CEO said.

"That will lead to some job losses," he said, declining to comment how many.

Talks aimed at redistributing 1.4 billion pounds surplus funds from so-called with-profits policies to shareholders and 1 million customers are continuing, U.K. life insurance head Mark Hodges said on the call with reporters. The surplus funds, which were 2.1 billion pounds in the middle of last year, were reduced by falling equity and bond markets in the second half of 2008.

Moss expressed "confidence" in achieving Aviva's goal of doubling earnings to 98.4 pence a share by 2012, saying that moving away from the target would be "absolutely the wrong thing to do."

Pretax operating profit, measured according to International Financial Reporting Standards, rose 4 percent to 2.3 billion pounds, matching the estimate of 13 analysts surveyed by the insurer.

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