Aviva assures market on UK outlook as profits soar

CASH-strapped UK and European households continue to squirrel away savings despite constraints on their budgets, insurance heavyweight Aviva said yesterday as it unveiled a 21 per cent surge in profits.

The firm, formerly called Norwich Union, topped the FTSE 100 risers after a third consecutive quarter of sales pushed half-year operating profits to 1.27 billion.

Aviva's shares gained more than 7 per cent to close at 394.3p after it said the UK and European life and pensions market - where the firm generates the lion's share of its revenues - continued to perform well in the first six months of the year. The dividend is raised by 6 per cent to 9.5p from 9p last time.

Despite other insurers looking to the Far East for income growth, Mark Hodges, UK chief executive at Aviva, said the British and European markets offered plenty of potential despite the economic uncertainties.

"As ever, there's no complacency but we think these results are sustainable," Hodges told The Scotsman.

"People do seem to be saving still. While there are economic challenges, if you look at the savings ratios in countries like the UK, France and Italy, they are either increasing or are holding up well."

The half-year figures were unveiled as Aviva announced it was in negotiations with Royal Bank of Scotland over a new distribution deal. The two companies have long worked together through a joint venture in which Aviva's insurance products were sold through RBS branches.

Under the new agreement, Aviva will "manufacture" products that RBS then distributes - but the latter will receive all of the profits from the distribution of those products.

While Aviva insisted that the terms of the new agreement were still under negotiation and therefore remained "commercially sensitive", RBS said it would take a 235 million hit to its balance sheet as a result of the change in terms.

However an RBS spokesman insisted it would not make a cash loss. He said the bank would have to make a "goodwill write-down" on its balance sheet.

News of the RBS agreement comes just days after Aviva announced a five-year deal with Santander to sell life assurance products through its 1,300 UK branches.

Hodges said both the RBS and Santander agreements were proof that the UK and European markets still had legs despite rivals, notably the Prudential, trying to beef up their presence in the Far East.

Europeans are forecast to spend about 1,072bn on pensions and insurance products over the next few years.

"We are investing in our Asian businesses for the longer term but for the near term, the UK and Europe is our focus," Hodges said.

Despite continued speculation that the UK market would be subject to further consolidation this year, Hodges said Aviva was focusing on organic growth.

"We have got plenty to do in continuing to grow our own business without talking to other people," he said.