Aviva Solvency Fears Sends Ripples Ground the Globe

Aviva plunges 25%

Shares across the insurance sector tumbled today after Aviva crashed to a £1.3 billion annual pre-tax loss and wrote off a sizeable chunk of its corporate bond and mortgage securities portfolio.

Under a new accounting standard that makes insurers’ profits more volatile, Aviva’s losses after tax for the year to the end of December reached £7.7 billion.

Renewed worries about the solvency of some of Britain’s household name insurers sent Aviva down as much as 26 per cent and sparked a sector-wide sell-off in shares.

Friends Provident, Old Mutual, Prudential and Legal & General all followed the owner of Norwich Union sharply lower.

Friends was 15.5 per cent lower, while Old Mutual fell 14.4 per cent and L&G dropped 13.1 per cent.

The worries in the market came despite Aviva insisting that it remained financially strong. It maintained its dividend for the year of 33p a share.

The company reported its figures under more stringent accounting rules known as “market consistent embedded value”. Like all insurers, Aviva has also been forced to “stress test” its assets against severe market falls by the Financial Services Authority, the City regulator.

Aviva wrote off the value of its corporate bond portfolio and its mortgage-backed securities by £1.6 billion.

It said that its capital buffer stood at £2 billion as at the end of last year and would fall to £1.2 billion only if markets fell a further 40 per cent from that point.

However, Aviva said that it was sitting on unrealised losses equivalent to 8 per cent of its total bond portfolio, significantly above the highest ever realised losses reported in the past 100 years.

Although it insisted that actual losses would be much smaller, Aviva nevertheless said that it had made a provision of £1.13 billion to cover the life of its corporate bond and commercial mortgage portfolio.

Some analysts reacted angrily to the way that Aviva reported today’s results, noting that the strengthening of the reserves was booked as an exceptional item and so excluded from operating profits or tests of its capital efficiency.

One said: “The reporting of this company is shameless. Very shoddy.”

Analysts at MF Global said that the dividend payment was more of a concern than a benefit for shareholders.

“We don’t believe their solvency level is particularly strong. It’s been negatively affected this year by the equity markets and paying the dividend weakens it further.”

Aviva’s operating profits were up marginally at £2.3 billion on the back of continued strong pension sales but was eroded by the write downs.

Exceptional charges included £326 million in restructuring costs, which Aviva said would generate savings of £500 million by next year.

Other exceptional items included £304 million injected into the general insurance reserves to cover asbestos claims and £126 million to cover compensation claims for policies sold in the Netherlands.

Andrew Moss, the chief executive of Aviva, said: “In a tumultuous year, our underlying business has shown great resilience. Operating profits are up and we have maintained our dividend. Bottom line earnings have been affected by investment markets which have predictably created significant unrealised losses during the year.”

Aviva said that its life and pension sales had increased by 11 per cent last year and general insurance income was up 5 per cent. However, big falls on the stockmarket had cut investments sales by 43 per cent.

Aviva is streamlining its business and sold the British School of Motoring (BSM) for £36 million last month. It has also dropped the Norwich Union name to unify its brand.

The company angered savers last month when it announced that it would renege on a promise to pay £1 billion in bonuses to its customers.