UK’s Aviva Posts $6.52 Billion Operating Profit

February 29, 2008

UK insurer Aviva beat forecasts with a one percent rise in 2007 profit, as strong growth in life sales offset the heavy cost of Britain’s summer floods. The Group aims to double earnings per share by 2012.

Britain’s largest insurer, which left some disappointed last year with the lack of detail in newly appointed chief executive Andrew Moss’s strategy, also unveiled plans on Thursday to drive profit from its asset management business.

“It’s a brave move and ambitious, given we are in a global slowdown, and it is never easy to drive a life business forward in a slowdown,” analyst Kevin Ryan at ING said.

Aviva had said last year it would use earnings per share as a growth measure.

Aviva’s shares — battered in the recent sell-off across the financial sector — jumped more than 6 percent in morning trade, fuelled by the profit target, fresh reassurance on the group’s limited exposure to risky U.S. assets and a reduced sensitivity to market volatility after a large equity sale last autumn. At 0921 GMT, the shares were up 3.3 percent at 630 pence ($12.49).

Aviva’s 2007 operating profit, on a European embedded value (EEV) basis, rose to £3.29 billion ($6.52 billion). Analysts polled by Reuters had forecast profit of £3.05 billion ($6.05 billion).

Statutory operating profit, on which the dividend is based and is worse hit by lower investment gains, was £2.23 billion ($4.42 billion), down 15 percent but broadly in line with expectations.

Aviva also said it would increase its 2007 dividend by 10 percent to 33 pence (65.4 cents), and indicated its new statutory earnings target — suggesting a compound annual growth rate of 15 percent — could mean a faster growth rate in the future.

“There is some logic in the assertion that there may be room to increase the dividend over and above the growth rate today. We’d love to do that, but we can’t make that prediction,” Moss told reporters on a conference call.

Aviva had said last month that a higher-than-expected £475 million ($942 million) impact from flood losses meant its combined operating ratio — costs and claims as a percentage of premiums — would be 100 percent, missing a 98 percent target it would otherwise have met. As a result, the broader general insurance unit saw operating profit fall 39 percent to £1.03 billion ($2.043 billion).

Aviva said it was considering renegotiating its reinsurance for multiple “weather events” in order to help ease the initial charge if the freak floods or storms were repeated.

The engine behind the group’s growth, however, was Aviva’s life business, with its strong U.S., UK and European units boosting profit by 35 percent to £2.75 billion ($5.455 billion). In its core UK market, which still accounts for a third of the group’s total life profit, life profit rose 16 percent, and Aviva did not see a repeat of 2006 charges to cover the cost of customers cashing in policies early.

The group said it expected the UK market to slow in 2008 but remained positive its own performance would beat competitors’.

Aviva is embroiled in negotiations to reallocate surplus assets in two of its funds, and the group said it expected a response on a third cash compensation offer made to policyholders in the coming weeks. But it warned that delays had already meant that 50,000 policyholders had left since the summer, and they would lose out on payments.

Aviva said on Thursday its balance sheet was not materially affected by the global credit turmoil, adding it had reduced its exposure to market volatility by selling £3.4 billion ($6.74 billion) of equities in its general insurance shareholder funds and UK pension scheme in the autumn, switching to bonds.

By Clara Ferreira-Marques

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