Aviva back in the black, looking at deals but dividend cut to fund them

Insurer also plans spin off of Dutch business to raise capital and boost reserves
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The Independent Online

Aviva said it was targeting deals yesterday as the company unveiled measures to raise hundreds of millions of pounds in capital including a sharp cut in its dividend and a flotation of Dutch operation Delta Lloyd.

The dividend cut is the most controversial of the measures and it is the second time in a decade that the life insurer has made such a move, with the half year payout falling by 31 per cent to 9p this time.

The company announced the move despite a return to profit, which came in at £747m after tax against a loss of £84m in the first half of 2008. The group's surplus cash has also risen to £3.2bn from £2bn. But Andrew Moss, the chief executive, said things were still tough and there was a need to conserve cash. "We need to continue to build our central reserves and to build strength. There are real opportunities and these measures, combined with the £450m raised from the sale of our Australian business, will allow us to capitalise."

Mr Moss said the proceeds could be used to cut debt, finance organic growth – which often requires considerable capital for life insurers – or to fund deals. Asked where the company might look, Mr Moss said: "We would look at things in the UK where we have proved ourselves to be an effective consolidator of business, Europe and the US. There are further opportunities in the Asia Pacific region although that will be more challenging. We have an open mind really but there are real opportunities out there."

The Delta Lloyd flotation could raise as much as £800m for the company and is set to bring to an end months of disputes over the company's governance. While Aviva owns 92 per cent of the business, it has only two directors on its board as a consequence of Dutch governance rules, meaning it has only limited influence over Delta-Lloyd's direction. Mr Moss said a flotation would resolve this issue."It will also provide Delta with a currency to fund acquisitions in the Benelux market. We will initially have a majority stake but we expect this to be sold down over time," he said.

Overall sales at the group fell to £17.5bn from £18.2bn. Mr Moss said the recession meant consumers were reluctant to commit cash to long-term savings contracts while the housing market collapse has meant sales of mortgage linked protection insurance products have fallen sharply.

The shares responded to the figures by gaining 19.4p to 375.7p. The results were ahead of analysts' expectations and the dividend cut was not as steep as investors feared. However, analyst reaction was mixed. James Pearce at Cazenove said the figures were better than expected but Bank of America Merrill Lynch was less positive. Blair Stewart said: "Aviva's interim results came in as a very mixed bag. The key conclusion is that these were disappointing figures that should be negative for the share price." Aviva has spent millions on an advertising campaign to raise awareness of the Aviva brand, particularly in the UK where it is dropping the respected "Norwich Union". Ironically the first steep dividend cut – of 40 per cent – was announced in 2003 when "Aviva" was first launched.

The company said most policyholders had backed a plan to divvy up surplus cash in its life fund between them and the company. Windfalls of up to £1,000 or more will be paid to those voting in favour.