March 6 (Bloomberg) -- Aviva Plc rallied to its highest in more than five years after profit beat analysts’ estimates and Chief Executive Officer Mark Wilson said he planned to restore bonuses at the U.K.’s second-biggest insurer by market value.
Operating income rose 6 percent to 2.05 billion pounds ($3.4 billion) in the 12 months to Dec. 31, topping the 1.99 billion-pound estimate of 21 analysts provided by the company. Cost-cutting expenses fell 21 percent and its internal loan was reduced by 1.7 billion pounds to 4.1 billion pounds, according to a statement today.
“The turnaround at Aviva is intensifying,” Wilson said on a conference call from London. “We said to the market that we will pay for performance and we talked to our shareholders and made sure they were aligned. Yes, we will be paying bonuses, and shareholders will be quite O.K. with that scenario.”
Wilson, 47, replaced Andrew Moss in January 2013 after shareholders rejected the former CEO’s compensation plans. Wilson scrapped directors’ bonuses for 2012 and froze pay for the firm’s top 400 managers as he sought to appease investors and rebuild capital depleted by the euro area’s debt crisis and repay the internal company loan.
The shares surged 8.1 percent to 504 pence in London to the highest since September 2008, extending gains this year to 12 percent. Panmure Gordon & Co. upgraded the shares to buy from hold as the company reached an agreement with the Prudential Regulation Authority to reduce its internal loan to 2.2 billion pounds by the end of 2015.
“We view this has hugely significant for Aviva and as a consequence, combined with better-than-anticipated results, we upgrade to buy,” Barrie Cornes, a Panmure analyst, said in a note to clients today.
The reduction in the loan may also boost cash paid back to Aviva and help “secure dividend growth,” according to Charles Graham, an analyst at Bloomberg Industries. Wilson, who cut Aviva’s dividend by 44 percent last year, declared a final payment of 9.4 pence a share in 2013, up from 9 pence in 2012.
Aviva said 72 percent of cash generated was paid to the group in 2013, from 49 percent in 2012, boosted by its Italian and Irish units, which resumed paying dividends. The capital surplus rose to 8.3 billion pounds and net income was 2.2 billion pounds from a loss of 2.9 billion pounds a year earlier.
Wilson said Aviva Investors contributed an “inadequate” 3 percent to operating profit and had 5 billion pounds of net outflows in 2013. He said the unit’s newly appointed CEO, Euan Munro, who was lured from Standard Life Investments last year, will announce a new strategy later in the year.
The insurer also took a 132 million-pound charge after two former employees at the investment unit were found to have breached its trading policy since 2006 to benefit external hedge funds. The breaches were first disclosed in a letter to clients in December.
In general insurance, Aviva’s combined operating ratio, or claims and expenses as a percentage of premiums, rose to 97.3 percent from 97 percent as it took an 60 million-pound hit from the recent U.K. floods.
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