Aviva fails to impress despite £2.3bn profit
Insurers feel the heat as £2.3bn Aviva's show of 'great resilience' fails to impress Simon English, Evening Standard Insurance companies endured stock-market carnage today after Aviva unveiled annual results that raised fresh fears about the solvency of the sector.
Quote me happy: The former Norwich Union insurer gave the City a nice surprise
The UK's biggest insurer tried to present itself as a source of strength in an uncertain world, holding its dividend and insisting its balance sheet is rock solid. But, after a close look at the numbers, the City took fright and the stock plunged by a third.
By 1pm today, Aviva was down 77p at 208p. Prudential lost 53½p to 222¾p, Friends Provident 12.8p to 57.4p, Legal & General 5.7p to 31.7p, Old Mutual 4.1p to 33.3p and Standard Life 25.6p to 147p. Aviva's operating profits for the year to the end of December edged up 4% to £2.3bn. But, including losses on investments, that falls to an £885m deficit.
Of greater concern is whether the insurer can afford its dividend payment of 33p. That's a £500m payout some analysts say would be better used to bolster finances.
Chief executive Andrew Moss defended the decision to pay a dividend as perfectly prudent, but the plunge in the shares clearly took the company and some sector watchers by surprise. Panmure Gordon said in a note that the results were 'ahead of the top end of expectations'. Cazenove praised the company management, claiming that 'real cost savings are being delivered'.
Fears that insurers could follow the banks into crisis have been spreading for months - short-selling hedge funds have moved to target the shares, which have duly dived.
Moss said it had been a 'tumultuous year' but Aviva has 'shown great resilience'. It has surplus capital of £2bn, a number that was supposed to reassure regulators and investors.
Instead, there is growing talk that this is not enough, and Aviva may even need to raise extra cash from a rights issue.
The firm is in the process of ditching the Norwich Union brand that has been around since the 1600s. It is spending at least £10m on the move, which it claims will lower marketing expenses in the long run.
Moss insists Aviva is solid: 'We have made cautious provision for future losses so that we are in good shape to withstand the ongoing volatility and uncertainty in world markets. In these markets, only the fittest will emerge as winners.'
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