Aviva's H1 profit up 21 per cent, warns on UK margins

Insurer Aviva hit the top end of expectations with a 21 per cent rise in first-half profit, but its weak outlook for UK life insurance margins sent its shares, and those of rivals, into the red.

Aviva said yesterday that operating profit in the six months to June 30 was £1.32 billion, fuelled by an 18 per cent increase in earnings in its general insurance operations to 694 million and strong life and pensions sales in mainland Europe.

The average forecast in a Reuters poll of 10 analysts was for operating profit of £1.21 billion, with a range of 1.14 billion to 1.3 billion.

Overall, Aviva's life operating profit rose five per cent to £857 million. But profit in the UK, its single largest market, fell five per cent as sales declined to £4.2 billion from 4.3 billion in the same period last year.

Aviva has a strategy of focussing on profit over volume in the country, and increased its margins to 3.2 per cent from three per cent by cutting commissions and focusing on more lucrative products. But despite its pricing action, Aviva said it expected some margin pressure in the short term as competitors slug it out for a share of a modestly growing market.

"(In) the past 6-12 months it has been a fairly tough market out there. It looks like being more of the same for the rest of the year," Gary Withers, head of Aviva's UK life operations, told reporters on a conference call.

Nic Clarke, analyst at stockbrokers Charles Stanley, said Aviva's comments had weakened investor sentiment for smaller UK rivals Prudential Legal & General.

"This has a negative read-across for Legal & General, which generates the majority of its sales in the country, and the Prudential, which is investing the lion's share of the funds it raised in its rights issue in the UK."

At 1020 GMT Aviva was down 2.36 per cent at 641-1/2 pence, the second-largest faller in the FTSE 100 index. Prudential was 2.28 per cent weaker, and L&G was down 1.12 per cent.    

Amid high claims relative to price in some general insurance products and margin pressure in the country's life and pensions market, Aviva is relying on cost-cutting and higher sales in its continental European life business to drive profits.

In its general insurance business, which accounted for around two-thirds of overall profit, low claims and a tight lid on costs benefited earnings.

General insurance rival Royal & Sun Alliance reported a 60 per cent improvement in its UK underwriting profit yesterday, due to higher sales and improving efficiency.

Aviva said its combined ratio, a key measure of general insurance underwriting profitability, had improved to 95 per cent from 97 per cent. A figure below 100 per cent represents a profit.

Aviva's overall life and pension sales rose 13 per cent to 12.1 billion, bolstered by a 23 per cent increase in sales in mainland Europe.

Yesterday, Dutch insurer ING reported a 6.7 per cent fall in quarterly net profit, and domestic rival Aegon reported a 71 per cent rise.

Morley, Aviva's fund arm, said its operating profit nearly doubled to £33 million, and assets under management rose to £290 billion from 280 billion at the end of 2004.

Aviva said it was recommending a five per cent increase in its interim dividend to 9.83 pence a share.