Aviva Has Loss on $1.4 Billion U.S. Writedown; Costs to Rise

Aviva Plc, the U.K.’s second-biggest insurer by market value, swung to a first-half loss after writing down its U.S. arm by 876 million pounds ($1.4 billion) and said restructuring costs will increase.

The net loss from continuing operations was 745 million pounds in the six months to June 30, compared with a 125-million-pound profit in the same period a year earlier, the London-based insurer said in a statement today.

Executive Chairman John McFarlane said costs to revamp Aviva will rise in the second half as he executes a plan to sell or exit at least 16 businesses and turn around at least 27 others. The U.S. writedown may presage a sale of the business, according to Eamonn Flanagan, an analyst at Shore Capital Group Ltd. Aviva bought Des Moines, Iowa-based Amerus Group Co. for $3.1 billion in 2006.

“There are still too many issues both on the operational level and in the macro environment for earnings to bounce,” said Jacob de Tusch-Lec, a London-based money manager at Artemis Investment Management LLP who oversees about $100 million, including Aviva shares. “This is a long, grinding corporate turnaround. Asset sales and restructuring can turn this business into something that should not trade on such a depressed multiple.”

Aviva rose 0.4 percent to 319.4 pence at 8:46 a.m. in London trading, valuing the firm at about 9.3 billion pounds. The stock is up 6.1 percent this year.

U.S. Writedown

The U.S. writedown “isn’t a statement of anything other than good capital allocation and our expectation of future profit streams,” Finance Director Pat Regan said on a call with reporters.

The unit has a return on equity of about 4 percent, compared with higher-performing divisions such as U.K. personal property cover, which have a 22 percent return on capital, Regan said. That means the insurer will give the division less capital in the future, he said.

The U.S. arm specializes in annuities linked to equity markets. A sale of the unit would help boost Aviva’s capital position and reduce the volatility of its reserves, according to analysts including Oliver Steel at Deutsche Bank AG.

“Who are the buyers for the various non-core businesses, and what price will be acceptable for shareholders?” Shore’s Flanagan, who is based in Liverpool, England, wrote in a note to clients today. The writedown “could smooth the path for a U.S. disposal at a fraction of the purchase price,” he said.

Restructuring Costs

The company incurred 186 million pounds of restructuring costs for the first half. That will increase as “we complete the de-layering program, the removal of the regions” and other elements of the restructuring plan, Regan said.

McFarlane took over from former Chief Executive Officer Andrew Moss in May after a shareholder revolt over executive pay. The insurer has about 18 billion pounds of European sovereign debt, more than any other U.K. insurer, and has lower and more volatile capital reserves than competitors. Its share price dropped 60 percent during Moss’s five-year tenure.

“Aviva was not built for a zero percent interest-rate world, but that is to a large extent reflected in the valuation,” de Tusch-Lec said.

Dividend Maintained

Operating profit, including earnings from its Dutch unit, Delta Lloyd NV, declined 2 percent to 1.12 billion pounds in the first half, compared with the 1.14 billion-pound median estimate of nine analysts surveyed by Bloomberg. Earnings from life insurance fell 7 percent in the period due to turmoil in the Eurozone and a lower value of the euro against the pound, Regan said. Profits from non-life insurance increased, he said.

Aviva will pay a first-half dividend of 10 pence per share, matching last year’s payout and analysts’ estimates. McFarlane didn’t rule out cutting the dividend to boost capital reserves when he announced the results of a strategic review in July.

The insurer has an economic capital surplus of 4.5 billion pounds, or 140 percent of its required reserves, Regan said. That compares with 130 percent at the beginning of the year. Half of the gain came from improving market conditions and half came from reinsurance deals and a reduction in corporate bond investments, Regan said.

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