Aviva's 2011 Profit Falls 97% on Investments, Delta Lloyd Costs
March 10, 2012 by Robert O'Connor
| By Robert O’Connor |
| A.M. Best Company, Inc. |
Aviva reported a 97% fall in 2011 after-tax profit related to “adverse investment variances and the disposal of a stake in Netherlands-based Delta Lloyd NV.
In what it described as a partial reflection of “the reversal of investment variance gains seen in 2010,” Aviva said pretax profit fell to 87 million pounds (US$137 million) from 2.4 billion pounds in 2010, and after-tax profit fell 97% to 60 million pounds from 1.89 billion pounds.
Operating profit fell 2% to 2.5 billion pounds. Excluding Delta Lloyd, operating profit rose 6% to 2.2 billion pounds.
The fall in after-tax profit included a loss of 726 million pounds relating to Delta Lloyd for the first four months of the year as a result of the reversal of investment variance gains seen in 2010, said Aviva. Operating profit was offset by adverse investment variances of 1.06 billion pounds, “the vast majority of which were unrealized, which arose largely from widening credit spreads on government and corporate bonds.”
Early in 2011, the group reduced its stake from 58% to 43% in Netherlands-based bank and insurer Delta Lloyd and sold its U.K. roadside assistance company RAC Ltd. for 1 billion pounds (Best’s News Service, Nov., 3, 2011).
A profit on the disposal of the RAC business was offset by restructuring and integration costs and write-downs in the value of Aviva’s holdings in Delta Lloyd, the group said.
Return on equity was 12%, down from 14.8%. The group combined ratio was 96.8, compared with 97.1 in 2010.
“We delivered a strong operating performance in 2011,” said Andrew Moss, group chief executive, in a video interview released by the company. “Despite challenging market conditions, we have beaten all our operating targets. We have made good strategic progress, focusing on markets where we will grow and earn higher returns.”
The group improved its position in both the United Kingdom and continental Europe. “Aviva continues to perform well, even in tough times,” Moss said.
Life insurance operating profit rose 7% to 2.1 billion pounds. The internal rate of return on new business increased to 14.4% from 13.3%. The group generated 2.1 billion pounds in operating capital, up from 1.7 billion pounds.
Long-term savings sales fell 6% to 31.4 billion pounds. Profits in the U.K. life and pension business increased by 8% to 920 million pounds.
Operating profit in general, or nonlife, insurance rose 3% to 935 million pounds.
Aviva estimated its Insurance Groups Directive Surplus at 3.3 billion pounds at the end of February 2012. This was up from 2.2 billion pounds at the end of 2011.
In his review of the year, Moss said the uncertain economic picture in Europe had produced “exceptional market volatility.”
Aviva exceeded its operating targets, Moss said. He noted the group increased its dividend, produced a nonlife combined ratio of 96.8 and moved toward its goal of 400 million pounds in cost savings by the end of 2012. The full-year dividend rose to 26 pence, from 25.5 pence in 2010.
The group sought to grow in its most promising markets, such as the United Kingdom, which contributes about 50% of group profit, said Moss. At the same time, Aviva moved away from “capital-intensive business” in other territories.
Moss pointed to strong results in such European markets as France, Spain and Poland. Aviva has folded its operations in the “difficult” Irish market into those in the United Kingdom, Moss said, noting the expected benefits of economies of scale.
“Whilst in the short term trading conditions in some European markets will be challenging, in the medium–term, Europe contains some of the most attractive insurance markets in the world with strong savings rates,” he said.
Operating earnings rose in Canada and the United States, while investment in the group’s Asian operations “is clearly paying off as we successfully grow profits and build an attractive franchise,” said Moss.
He added Aviva’s efforts to transform itself in recent years had created a “leaner and stronger company.” Since 2009, he said, the cost base had dropped to 4.1 billion pounds from 5.1 billion pounds, while operating profits grew to 2.5 billion pounds from 4.1 billion pounds.
Units of Aviva have current Best’s Financial Strength Ratings of A (Excellent.
(By Robert O’Connor, London editor: Robert.OConnor@ambest.com)
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(c) 2012 A.M. Best Company, Inc. |
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