July 29 (Bloomberg) -- Aviva Plc and Prudential Plc, Britain's biggest insurers, may post losses for the first half after the worst stock market declines since 2002 cut into the value of their investments.

Aviva may report a net loss of 1.1 billion pounds ($2.2 billion) tomorrow, compared with profit of 1.4 billion pounds a year before, based on the median estimate of three analysts surveyed by Bloomberg. Prudential, which publishes results in two days, probably lost 604 million pounds after earning 1.8 billion pounds a year earlier, the survey found.

Prudential and Aviva may report a combined 4 billion pounds of investment markdowns, according to analysts at Keefe, Bruyette & Woods Ltd., after the Dow Jones 600 Index of European stocks fell 24 percent this year. The two London-based insurers will be profitable on an operating basis, helped by increasing sales in Asia, analysts estimated.

``The companies are creatures of the market,'' said Kevin Ryan, a London-based analyst at ING Financial Markets, who has a ``buy'' rating on Prudential and Aviva. ``They will be up or down quite sharply if the market is gyrating. It will paint a more dire picture than is really the case.''

Munich Re, the world's second-biggest reinsurer, fell the most in five years on July 25 after saying that second-quarter profit fell on ``substantial'' market writedowns. Aviva slid 1 percent to 465.5 pence at 10 a.m., extending this year's loss to 31 percent. Prudential fell 2.6 percent to 502.5 pence today and has slumped 28 percent this year.

Investment Results `Scrutinized'

While analysts generally focus on operating profit, ``the impact of the investment markets will be scrutinized,'' said Tony Silverman, an analyst at Standard & Poor's Equity Research Ltd. in London. He rates on Prudential a ``buy,'' Aviva a ``hold'' and said their capital strength is ``not an issue.''

Falling stock prices led Prudential to cut its first-half dividend in 2003 and raise 1 billion pounds in a rights offering in 2004, costing former Chief Executive Officer Jonathan Bloomer his job. Aviva, currently led by CEO Andrew Moss, last reported a loss for 2002.

Prudential took a ``defensive position'' on investments this year and has ``robust'' capital, CEO Mark Tucker said in April.

``We've seen some erosion of capital,'' said Trevor Moss, an analyst at MF Global Securities Ltd. in London who is ``neutral'' on Aviva and has a ``buy'' rating on Prudential. ``If the situation gets worse before it gets better, it could lead to some stresses on the balance sheet.''

Asian Growth

Prudential is counting on growth in Asia to cushion the effects of a slowing economy in the U.K., where the housing market is the weakest in 15 years. Tucker said in March that Prudential will meet a target to double new business profit in Asia this year, 12 months ahead of his earlier forecast.

The company, which gets 30 percent of its profit in the region, sells insurance in India, China and Taiwan, the biggest drivers of growth, wrote Greig Paterson, a London-based analyst at Keefe Bruyette who rates Prudential ``outperform.''

New business in the U.K. will be lower than last year for both Aviva and Prudential, said Youssef Ziai, a London-based analyst at ABN Amro with ``buy'' ratings on both. ``People will be looking for new business growth'' outside Britain, he said.

Prudential may post an operating profit of 1.34 billion pounds, up less than 1 percent, according to the average estimate of seven analysts. Paterson estimates Prudential's Asian sales will rise 25 percent, offsetting declines of 7 percent in the U.S.

Signs of Slowdown

``People will be looking to see if there are signs of any slowdown in Asia,'' said Philip Graves, who helps manage 8 billon pounds at Resolution Asset Management in Glasgow, including shares of both insurers. ``I wouldn't expect any slowdown yet.''

Operating profit at Aviva probably rose 12 percent to 1.72 billion pounds in the first half, according to the average estimate of seven analysts surveyed by Bloomberg. Aviva gets about 16 percent of earnings from the U.S. and Asia after adding distribution agreements this year.

Moss, who took the top job at Aviva a year ago, said in April the company faces a ``more challenging year'' in continental Europe, where it gets about half its sales. The company bought Des Moines, Iowa-based Amerus Group Co. for $3.1 billion in 2006 to lift sales of annuities.

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net

Last Updated: July 29, 2008 05:10 EDT