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.

Bulls can’t catch a break

March 5 (Bloomberg) — European stocks and U.S. futures fell after Aviva Plc, the biggest U.K. insurer, reported a loss, China quelled speculation that the government will add to its stimulus plan and Goldman Sachs Group Inc. said the global economy is worsening. Shares in Asia advanced.

Aviva tumbled 28 percent, leading insurers lower, after maintaining its dividend despite its full-year loss. Salzgitter AG lost 11 percent as Germany’s second-biggest steelmaker said it’s “unlikely” to break even in the first half. BHP Billiton Ltd. retreated 6.6 percent after surging yesterday on speculation that an expansion of China’s stimulus would boost metal demand.

Europe’s Dow Jones Stoxx 600 Index slipped 2.2 percent to 163.88 at 12:23 p.m. in London. The gauge rebounded from a 12- year low yesterday, posting its biggest gain of 2009 on optimism China would broaden efforts to boost growth in the world’s third- largest economy. Premier Wen Jiabao said today that the country’s 8 percent expansion target for this year is within reach, indicating he doesn’t see the need to increase its stimulus.

“We are very near what could be the cycle low for the stock market but there will still be a lot of false starts,” said Steen Jakobsen, chief investment officer at Capinordic in Copenhagen. “There has been a lot of hope that China can restart the engines again” for the world economy, he said in a Bloomberg Television interview.

Goldman Sachs today predicted a deeper contraction in global gross domestic product than it previously anticipated and said the slump may worsen. London-based economist Binit Patel now expects the world economy to shrink 0.6 percent in 2009 compared with a previous forecast for a 0.2 percent contraction.

Bank of England, ECB

Stocks maintained their losses after the Bank of England reduced the benchmark interest rate to the lowest ever and said it would start purchasing 75 billion pounds ($105 billion) in assets, printing money to fight the recession. The European Central Bank is expected to reduce rates to a record low of 1.5 percent when it announces its decision today, according to economists surveyed by Bloomberg.

The euro fell to near the lowest level in three months against the dollar on speculation ECB President Jean-Claude Trichet will signal further cuts are needed to curb the deepening recession. Treasuries advanced as the decline in stocks spurred demand for the relative safety of U.S. government debt.

Futures on the Standard & Poor’s 500 Index slid 1.8 percent. The benchmark index for American equities rallied yesterday on speculation China would broaden its stimulus and U.S. lawmakers will reach agreement on a plan to stem mortgage defaults.

The MSCI Asia Pacific Index rose 0.6 percent, led by construction companies. Mazda Motor Corp., Japan’s fourth-largest carmaker, surged as the yen weakened.

MSCI World

Governments from the U.S. to Australia have sought to introduce policies to bolster their economies as a deepening global recession and dividend cuts at companies from HSBC Holdings Plc to General Electric Co. sent the MSCI World Index to a 22 percent plunge this year, the worst start since the gauge was created in 1970.

Aviva dropped 28 percent to 204.25 pence. The British insurer maintained its dividend as it reported a 2008 net loss of 915 million pounds ($1.3 billion) on writedowns of the value of its corporate bond holdings.

The dividend “is more of a concern than it is a benefit,” said Trevor Moss, an analyst at MF Global Securities Ltd. in London. “We don’t believe their solvency level is particularly strong.”

Aviva wrote down the value of its bond holdings by 8 percent. That provides “a pretty big buffer for future losses,” Chief Executive Officer Andrew Moss said in an interview with Bloomberg Television.

Debt Protection

Aviva led a surge in the cost of protecting debt sold by European insurers from default to records on concern the credit crisis is damaging their capital reserves.

ING Groep NV, the biggest Dutch financial-services company, dropped 18 percent to 2.62 euros. Friends Provident Plc, the 177- year-old U.K. insurer, declined 18 percent to 57.4 pence.

Salzgitter retreated 11 percent to 45.02 euros. The company’s pipe-making unit and other divisions won’t be able to make up for losses from rolled steel, the steelmaker said.

BHP Billiton, the world’s largest mining company, lost 7.3 percent to 1,087 pence after rallying 13 percent yesterday. Rio Tinto Group, the world’s third-biggest mining company, fell 6.1 percent to 1,734 pence. The shares yesterday jumped 14 percent.

Royal BAM Groep NV slumped 15 percent to 5.41 euros. The biggest Dutch builder posted a fourth-quarter loss and dropped sales and profit targets for this year after demand for homes deteriorated.

Profit Slump

Earnings for 252 companies in the Stoxx 600 that have reported earnings since Jan. 12 have dropped 94 percent, according to Bloomberg data. That compares to a 58 percent contraction in profit for the 465 companies that have reported results in the S&P 500 during the same period.

Michael Page International Plc decreased 3.1 percent to 195.5 pence. The U.K.’s second-largest recruitment company said full-year profit declined 4.3 percent to 97.3 million pounds as it was hurt by the global recession.

“Given the current uncertainty over the economic outlook, it is extremely difficult to predict the performance of our business in the short term,” Chief Executive Officer Steven Ingham said in a statement.

British Airways Plc dropped 4.1 percent to 129.9 pence after Europe’s third-largest airline said it sees no return to profit until fiscal 2011 at the earliest as the recession weighs on air- travel demand.

EasyJet, InBev

EasyJet Plc slipped 4.1 percent to 298 pence. Europe’s second-biggest discount airline said traffic declined 6.8 percent to 3.02 million passengers last month.

Anheuser-Busch InBev NV added 3.1 percent to 20.05 euros after the world’s largest brewer said cost reductions since the $52 billion merger last year had “exceeded expectations” so far with at least $1 billion less capital spending this year.

InBev posted a 41 percent drop in full-year profit to 1.29 billion euros ($1.63 million), missing analysts’ estimates.

Mazda soared 11 percent to 137 yen after the yen depreciated against the dollar to as much as 99.53, the weakest level since Nov. 5, from 98.44 at the 3 p.m. close of stock trading in Tokyo.

Honda Motor Co., which makes 51 percent of its revenue in North America, climbed 2.5 percent to 2,260 yen.

Ford Motor Co. dropped 5.9 percent to $1.76 in Germany. Standard & Poor’s lowered the second-biggest U.S. automaker’s rating to CC, from CCC+ after the company said it plans to reduce debt by as much as $10.4 billion through an exchange offer.

General Motors Corp. slumped 3.6 percent to $2.12. The biggest U.S. automaker said it needs “additional time in order to reflect accurately the outcome of” ongoing negotiations related to waivers of covenants in some debt agreements.

Slash and burn

March 5 (Bloomberg) — The Bank of England reduced the benchmark interest rate to the lowest ever and said it would start purchasing 75 billion pounds ($105 billion) in assets, printing money to fight the recession.

The bank’s nine-member panel, led by Governor Mervyn King, cut the rate a half point to 0.5 percent, the lowest since the bank was founded in 1694. The decision matched the median forecast of 60 economists in a Bloomberg News survey.

“In these highly uncertain times, there are merits to stimulating the economy through a variety of different channels,” King wrote in a letter to Chancellor of the Exchequer Alistair Darling dated Feb. 17 and published today.

King’s Monetary Policy Committee wants to pump newly printed money into the economy to alleviate a worsening recession as interest rates approach zero and lose their potency. Prime Minister Gordon Brown yesterday called on nations around the world to follow the U.S. and U.K. lead by cutting borrowing costs and spending more to battle the recession.

“We’re moving into a new world in the U.K. from interest- rate adjustment to quantitative easing,” said Charles Goodhart, a former Bank of England policy maker. “It’s a great deal more uncertain how things will be done. This month what the MPC says is going to be much more important than what they do.”

Bank Statement

In a statement accompanying the decision, the bank said it may take up to three months to carry out the asset purchases. Most of the assets will be U.K. government bonds known as gilts. The bank will hold a open market operation tomorrow.

The Bank of England has now reduced the key rate 4.5 percentage points since October. The U.S. Federal Reserve kept its benchmark at a range of zero to 0.25 percent last month. The European Central Bank will probably cut its rate a half- point to 1.5 percent at 1:45 p.m. in Frankfurt, according to all 55 economists in a Bloomberg News survey.

Chancellor of the Exchequer Alistair Darling said in a March 3 newspaper interview that the central bank has the necessary “levers” to print money and may decide this month that it needs to use them.

The Bank of England has already begun buying commercial paper through its 50 billion-pound ($71 billion) asset purchase facility, financed with Treasury bill sales.

Policy Makers

Policy makers unanimously decided last month that King should seek authority from Darling for quantitative easing by buying government bonds and other securities without funding through debt sales to raise the money supply. The bank didn’t release details of its plans before the decision and an exchange of letters is expected today between King and Darling.

“It seems to be much more messy than simply voting on the bank rate,” David Tinsley, an economist at National Australia Bank in London, said before today’s announcement. “I’d expect to see a much more concrete outline of what they’ll do along with the rate decision.”

Along with the central bank’s measures, Brown’s government has pledged billion of pounds to shore up Britain’s banking system. Last week he promised 325 billion pounds of support for Royal Bank of Scotland Group Plc’s investments, while Lloyds Banking Group Plc is also in talks on a government asset insurance program.

“Let us work together for a worldwide reduction of interest rates and a scale of stimulus round the world equal to the depth of the recession and the dimensions of the recovery we must make,” Brown told Congress in Washington yesterday.

Economy Shrinking

The U.K. economy contracted 1.5 percent in the fourth quarter, the most since 1980, as consumers curtailed spending. Former central bank Deputy Governor John Gieve said Feb. 20 the nation faces a “serious risk” of a decade-long depression as the credit squeeze hampers growth.

“The Committee judged that this reduction in Bank Rate would by itself still leave a substantial risk of undershooting the 2 percent CPI inflation target in the medium term,” the bank said in a statement. “Accordingly, the Committee also resolved to undertake further monetary actions, with the aim of boosting the supply of money and credit and thus raising the rate of growth of nominal spending to a level consistent with meeting the inflation target in the medium term.”

Economy Shrinks

Manufacturers and service industries shrank for a 10th month in February, according to surveys by the Chartered Institute of Purchasing and Supply and Market research. Net consumer lending rose by 1.1 billion pounds on the month, the least since at least 1993, the central bank said March 2.

Michael Page International Plc, the U.K.’s second-largest recruitment company, said today that full-year profit dropped 4.3 percent as it was hurt by the global recession. IMI Plc, the world’s biggest maker of pneumatic controls, said yesterday it has cut its global workforce by 10 percent and plans further reductions in coming weeks to weather falling demand.

Central bank forecasts published last month show economic growth will resume in the second quarter of next year while inflation will slow to 0.3 percent in early 2011, below the bank’s 2 percent goal.

“The bank’s forecasts on the speed of the recovery seem to be extremely optimistic,” said Jonathan Loynes, an economist at Capital Economics Ltd. in London. “It’s going to be some time before growth returns.”

Look out now

Largest scale effort since the 30’s

WASHINGTON — The Obama administration on Wednesday began the most ambitious effort since the 1930s to help troubled homeowners, offering lenders and borrowers big incentives and subsidies to try to stem the wave of foreclosures.

People with mortgages as high as $729,750 could qualify for help, and there is no ceiling on how high their income can be as long as they are in danger of losing their homes. Interest rates on loans could go as low as 2 percent for some. Many homeowners could see their mortgage payments drop by several hundred dollars a month, and some could save more than $1,000 a month.

Administration officials estimate that the plan will help as many as four million people avoid foreclosure, at a cost to taxpayers of about $75 billion. In addition, the Treasury Department said it intended to follow up with a plan to help troubled borrowers with second mortgages, which many homebuyers used as “piggyback” loans to buy houses with no money down.

The plan is bolder and more expensive than any of the Bush administration’s programs, which were based almost entirely on coaxing lenders to voluntarily modify loans. While the number of loan modifications has climbed sharply, the number of foreclosures skyrocketed to 2.2 million at the end of 2008, a record.

The new plan, which takes effect immediately, is intended to win much bigger concessions from lenders by offering a mix of generous financial incentives and regulatory arm-twisting. The final impact will depend on how both lenders and the investors who own mortgages respond, but housing experts said the administration had a good chance of achieving its goal.

The eagerness with which lenders agree to modify loans is likely to be affected by a bill that the House is expected to take up on Thursday. It would give bankruptcy judges the power to order changes in mortgages on primary residences and would protect loan-servicing companies from lawsuits by investors.

Several of the nation’s biggest mortgage-servicing companies, overseeing two-thirds of all home loans in the country — Citigroup, JPMorgan Chase, Bank of America and Wells Fargo — are expected to participate in the plan.

In addition, any bank that receives additional federal money under the Treasury Department’s $700 billion financial rescue program will be required to take part. But many lenders are expected to participate voluntarily, because the government would be absorbing much of the cost of resolving their bad loans.

“I predict this program will be extremely effective at reducing foreclosures,” said Eric Stein, senior vice president at the Center for Responsible Lending, a nonprofit advocacy group for homeowners.

Administration officials have similar expectations.

“It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets,” said Timothy F. Geithner, the Treasury secretary.

In releasing detailed guidelines on the plan, first unveiled Feb. 17, the Treasury Department made it clear that the program would not help every homeowner in trouble. It will do little to help families whose income has evaporated because one or more breadwinners have lost their jobs, nor will it save those swamped by big debts beyond their mortgages. It will not do much for homeowners who are current on their loans but “upside down” — owing more than their houses are worth.

Still, the program, when combined with a separate effort to help homeowners refinance their loans even if they are not in distress, could help put a floor under home prices.

The Treasury has instructed Fannie Mae and Freddie Mac, the two government-controlled mortgage-finance companies, to refinance homeowners at today’s low market rates even if the owners have less than the standard 20 percent equity that is usually required.

This second program applies to about 30 million people with mortgages owned or guaranteed by Fannie or Freddie, but will not be available to people whose mortgages are much higher than their home’s market value.

Administration officials said it could lower monthly payments for as many as five million homeowners. To finance that effort, the Treasury is providing the two companies with up to $200 billion in additional capital, on top of $200 billion that it had already pledged to them.

Under the new loan modification guidelines, the Treasury will offer mortgage-servicing companies upfront incentive payments of $1,000 for every loan they modify and additional payments of $1,000 a year for the first three years if the borrower remains current. The Treasury will also chip in $1,000 a year to directly reduce the borrower’s loan amount, if the borrower stays up to date on payments.

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Pork fat rules in the kitchen not Washington

WASHINGTON (CNN) — Two Senate Democrats urged President Obama Wednesday to veto a $410 billion spending bill and said they are going to vote against it, criticizing it for its cost and for including too many personal pet projects.

“I don’t think we should pass it [spending bill] this way,” Feingold said on CNN’s The Situation Room Wednesday. “[I’d like] to have the president veto it and say ‘clean it up, do it over.'”

Feingold added: “If that doesn’t happen I think he should … lay down a policy and [say] ‘OK, this was stuff from last year … but from now on don’t send me appropriations bills with earmarks or I’ll send it back to you.’ I would love to see him say that.”

The legislation in question is an omnibus bill that would keep the federal government running through the rest of the fiscal year, which ends in September 2009.

The legislation includes $7.7 billion in earmarks, which are unrelated pet projects that members of Congress insert in spending bills.

Sen. Evan Bayh, D-Indiana, said those who vote in favor of the bill “jeopardize their credibility.”

“But the bloated omnibus requires sacrifice from no one, least of all the government. It only exacerbates the problem and hastens the day of reckoning,” Bayh wrote in a Wall Street Journal editorial published Wednesday.

“Voters rightly demanded change in November’s election, but this approach to spending represents business as usual in Washington, not the voters’ mandate.”

During the election season, Bayh was considered one of the front-runners to be Obama’s vice president.

Other Democrats have defended the size of the spending bill, saying it is necessary to help counter the economic downturn and restore budget cuts made under former President George Bush.

Obama is expected to sign it bill when it crosses his desk.

White House Press Secretary Robert Gibbs said the legislation needs to be passed because the government has to “deal with last year’s business” and said Obama will work with Congress to reduce earmarks in the future.

“The president believes the best way to reduce wasteful spending is to work with Congress in order to do that,” Gibbs said. “We have seen throughout the past few years that the amount in the number of earmarks in the legislation has been cut significantly. The president believes we can do even more and looks forward to working with Congress to ensure that that happens.”

Gibbs said Monday that the Obama administration was formulating guidelines for earmark reform.

The following day, House Majority Leader Steny Hoyer declared that Congress, not Obama, will decide whether to put more limits on earmarks in upcoming spending bills.

Asked about Gibbs’ statement, Hoyer said flatly, “I don’t think the White House has the ability to tell us what to do.”

He paused deliberately and quipped to reporters in the room, “I hope you all got that down.”

Hoyer pointed out that Democrats have cut down the number of earmarks and now require that all requests get posted on the Internet. But, he conceded, “I think there are additional things we can do and consider.”

And the Maryland Democrat added, “It is certainly appropriate for the White House to suggest ways of going forward so that we can have agreement between the White House and ourselves.”

He said congressional leaders have talked to the White House about “concerns it had,” but refused to offer any specifics.

CNN reported Monday that, according to Democratic sources at a White House meeting last week, Obama urged Democratic leaders to “limit” future earmarks and, in what one official described as a “tense” exchange, the leaders told the president they’ll do what they can to continue reform, but that earmarking projects for districts and states is a prerogative of Congress.

Hoyer, who attended the White House meeting, vigorously defended earmark requests Tuesday, calling them “the congressional initiative process.”

The majority leader dismissed a reporter’s question on whether the $410 billion spending bill for the rest of this year is becoming an “embarrassment” to Obama, and reiterated Obama’s argument that the package is “last year’s business.”

Hoyer also said that even though Obama, then a senator, did not request any earmarks in last year’s spending bill, he did request projects for Illinois in prior years he served in the Senate.

Longtime pork barrel spending critic Sen. John McCain, who opposes earmarks, offered an amendment to the spending bill Tuesday that would have frozen spending at 2008 levels through the 2009 fiscal year, which ends September 30. McCain’s amendment failed to pass Tuesday, which means the spending bill made up of about 1 percent earmarks will now go to a vote.

Critics, including McCain, have said the excessive spending in the bill would be contrary to the president’s recent pledge to cut unnecessary government spending and pork-laden earmarks.

Several members of Obama’s administration served in Congress and have earmarks listed on the bill.

Vice President Joe Biden requested $750,000 for a University of Delaware program during his time as a senator from that state. Obama’s Chief of Staff Rahm Emanuel, who was a Democratic congressman from Illinois, requested $900,000 for a planetarium in Chicago, Illinois.

An Emanuel aide told CNN on Monday the request was submitted more than a year ago and is leftover business.

But Sen. Richard Burr, R-North Carolina, said Washington is in a “state of denial.”

“It seems that every morning you pick up the newspaper, you’re reading about another multibillion-dollar government spending plan being proposed or, even worse, passed. … We become numb to what the dollar figures really mean, or the obligation that accompanies them,” he said in the weekly Republican address Saturday.

Last week, the House of Representatives passed the $410 billion spending bill. House GOP leaders said the spending increases in the bill — $31 billion more than the previous fiscal year — are too large.

The bill passed on a largely party-line 245-178 vote, with most Democrats voting in favor of it and most Republicans opposed.

Taxpayers for Common Sense, a nonpartisan watchdog group, listed some of the earmarks being proposed by members on both side of the aisle.