6th Mar 2014 15:47
LONDON (Alliance News) - Life insurer Aviva PLC Wednesday reported a rise in its 2013 operating profit and it swung to a net profit compared with 2012's loss, prompting Chief Executive Mark Wilson to declare that its turnaround is intensifying.
The company's shares soared as it also made better progress on paying down it so-called inter-company loan. The stock was up 8.1% at 504.00 pence Thursday afternoon, making it the top FTSE 100 gainer.
Aviva is in the middle of a restructuring programme in an effort to try and turn more of its profits into cash. It has been shrinking the business, selling off a number of assets, as it focuses on cash-generating operations.
The life insurer reported a GBP2.05 billion operating profit for 2013, compared with GBP1.93 billion in 2012, while swinging to a GBP2.15 billion profit after tax from 2012's GBP2.93 billion loss, which including a writedown of the value of Aviva USA.
Analysts had been forecasting a GBP1.99 billion operating profit for 2013, according to consensus estimates provided by the company.
Aviva said cash remittances to the group increased to GBP1.27 billion from GBP904 million in 2012, while Aviva paid a 9.4 pence final dividend, up from 9.0 pence in 2012. However, the full-year dividend is down to 15.0 pence from 19.0 pence.
Operating expenses were down 7% to GBP3.01 billion, from GBP3.23 billion, as Aviva's cost cutting measures continued to gather momentum, but Wilson said there remains "significant opportunity" to reduce expenses further. Some of those savings would be redeployed to manage its existing books of business more efficiently by investing in digital and automation technology.
Wilson said the company's 'cash flow plus growth' approach had begun to come through in its overall performance, with value of new business up to GBP835 million from GBP738 million.
"Following our exit from a number of low margin, underperforming or non-strategic businesses, Aviva is simpler, more focused and better managed. We have significantly improved our capital surplus, increased our liquidity and have a stronger leadership team," Wilson added.
Wilson warned against complacency, however, adding that there was room for improvement.
He said: "Have we made progress? Yes, some. Is it a little faster than anticipated? Probably. Have we unlocked the full potential at Aviva? Not yet."
Aviva said it reduced the value of its inter-company loan by GBP1.7 billion to GBP4.1 billion at the end of February, and plans to further reduce it to GBP2.2 billion by the end of 2015.
Aviva's regulator, the Prudential Regulation Authority, required the insurer to shrink the loan to GBP2.5 billion by that date so that it wouldn't have to use it in the event of a major hit to its balance sheet. However, Aviva wants to go even further in order to build a buffer against the regulatory requirement.
According to Aviva's 2012 annual report and accounts, the group took action to improve its access to dividends from its insurance and asset management businesses by undertaking a corporate restructuring under which Aviva Group Holdings purchased Aviva Insurance Ltd's interest in the majority of its overseas businesses. The purchase was funded by the establishment of the original GBP5.8 inter-company loan.
Reducing the inter-company loan to GBP2.2 billion from the original GBP5.8 billion is to be achieved through a mixture of cash payments from disposals, as well as optimising the balance sheet, shrinking its liabilities so that less capital needs to be held against them. By doing so, Aviva can become more reliant on liquid assets in the case of stress and less so on the loan, a form of loan forgiveness.
Although the life insurer's turnaround is gaining momentum, it is likely to take longer at Aviva Investors, which reported GBP5 billion in net outflows in 2013.
Aviva said it has implemented measures to improve controls after a breach within the business.
"In 2013, we found evidence of improper allocation of trades in fixed income securities in Aviva Investors by two former employees. This occurred prior to 2013. The relevant regulatory authorities have been notified. A thorough review of internal control processes relating to the dealing policy has been carried out by management and reviewed by PwC," outgoing Chief Finance Officer Pat Regan said in a statement.
According to Regan, the breaches occurred between 2006 and 2012 and had an "adverse impact" of some GBP132 million on operating profit.
By Samuel Agini; [email protected]; @samuelagini
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