Aviva, the UK's largest insurer, yesterday warned of another tough year ahead as consumers continue to shy away from investing in volatile equity markets.
The group posted a 10 per cent fall in operating profits for 2002, down to £1.8bn after it had to bump reserves to pay pensions to customers that are living longer by £123m.
Some analysts had estimated Aviva might need to make a £400m provision to take account of improved longevity.
Legal & General, which reports its results today, has already said it will take a £140m charge to cover its policies to pensioners.
Richard Harvey, the chief executive of Aviva, yesterday said equity markets had taken their toll on its UK life fund and while the company remained financially strong, Aviva may look to the FSA for a solvency waiver.
"We are not yet clear how the FSA's rule changes will work, but if some of the artificial constraints on investment are relaxed, we shouldn't dismiss the idea," Mr Harvey said.
The company has reduced its equity investments throughout the year and Mr Harvey yesterday said he thought equities were now very good value. The life fund is propped up by a £4.3bn inherited estate and has a free asset ratio similar to Prudential's of 8 per cent.
Mr Harvey also sought to reassure shareholders that the group's dividend policy was sound. Aviva braved a share price hammering last year when it admitted its dividend was over-burdensome and cut it by 40 per cent. Mr Harvey yesterday said the re-investment of shareholder funds in growing the group would pay off in the long term.
"Our operating profits were very sound, given the ravages to equity values and we haven't had customers queuing up to invest," said Mr Harvey, who warned shareholders sales in 2003 would fall as negative investor sentiment prevailed.
While he hopes new link-ups with banks across Europe will boost sales, they may not be enough to offset the general decline. "Times are tough and we are being pretty realistic," Mr Harvey said.
Shares in the insurance group closed down 1.4 per cent at 378p yesterday.
One analyst said: "Cutting the dividend and seeing your share price half was pretty painful for Aviva, but it has now been proved it was the right thing to do."
Equity markets also affected the group's staff pension fund, which showed a deficit on FRS 17 calculations of £456m, compared with a surplus of £233m in 2001. The group is boosting contributions by £36m to £60m a year.
Mr Harvey yesterday said the group may plough capital to businesses outside the UK, where the Government is planning to introduce further price caps on savings and investment products. He warned the government initiative to improve savings in the UK will fail if it makes charges too low.
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