Aviva Plc (AV/), the U.K.’s second-biggest insurer, said long-term savings sales in Europe fell by 18 percent in the first nine months of the year and the region’s debt crisis eroded a third of its capital buffer.
The drop in life insurance and pension sales in continental Europe caused total revenue to decline by 5 percent to 30.6 billion pounds ($49 billion) from a year earlier, London-based Aviva said today in a statement. Surplus capital shrank to 2.7 billion pounds from 4 billion pounds at June 30.
The drop in Aviva’s capital “is surprising in its magnitude,” Christopher Esson, a London-based analyst at Credit Suisse Group AG with an “outperform” rating on the stock, wrote in a note to investors today. “The bulk of the reduction has arisen from the wider credit spreads in the U.K. and France.”
The European sovereign debt crisis has affected Aviva more than its U.K. competitors as it gets almost half its profit from 12 countries on the continent. Aviva Chief Executive Officer Andrew Moss said today that the company would meet its financial targets this year, while making capital generation a priority.
Aviva traded up 1.4 percent to 329.5 pence in London, valuing the company at 9.4 billion pounds. The stock was the seventh-worst performer in the 28-member Bloomberg Europe 500 Insurance Index, which was up 2.8 percent.
Widening credit spreads caused about 700 million pounds of the surplus capital decline and a further 400 million pounds from falling equity markets, according to Toby Langley, a London-based analyst at Barclays Plc with an “equal-weight” rating on the stock.
“We built up the capital position particularly in the second quarter of the year as we saw the potential for more volatility in markets,” Moss said on a call with reporters. “We’ve been here before, we know how to manage this ratio and we’re confident in our ability to do it.”
The impact of widening credit spreads and falling equity markets will probably not be repeated in the fourth quarter because of hedges the company has in place, Chief Financial Officer Pat Regan said.
Two years ago, Aviva announced a “quantum leap” strategy to merge its European divisional headquarters and boost sales in the region, which it said would be the fastest growing continent for life insurance and pension sales over the next five years.
This year, as the sovereign debt crisis gathered pace, European CEO Andrea Moneta left the firm and the insurer reversed a decision to place its regional hub in Dublin, moving it to London instead.
The lower life insurance and pension sales were caused by difficult market conditions and a decision to sell products that required less capital reserves in France and Italy, European CEO Igal Mayer said.
“This really is a combination of hard market actions balancing the portfolio away from with-profits to the lighter capital products such as protection and unit linked in a subdued market,” he said.
Aviva holds about 1.4 billion pounds of Greek, Irish, Italian, Portuguese and Spanish government bonds, which is 11.5 percent of its shareholders’ equity, according to analysts at JPMorgan Chase & Co. That’s more than the U.K.’s Prudential Plc, Legal & General Group Plc (LGEN) and Standard Life Plc, whose investments are less than 7 percent of shareholders’ equity, the analysts said.
To limit the impact of the crisis, Moss has reduced the firm’s holdings of peripheral sovereign bonds this year, cut debt and is targeting 400 million pounds of cost savings by 2012. Aviva announced plans to reduce by half its Irish workforce last month at a cost of 950 jobs.
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