Aviva takes £380m hit on Ogden rate change; to return cash as FY profits rise

Insurer Aviva said it was making a £380m charge to account for the change in the Ogden rate – the discount on personal injury claim payouts – as it revealed full year operating profits up 12% to £3bn and said it would return cash to shareholders.

“Fund management delivered a breakout year with strong positive net flows and operating profit up 30%. General insurance is growing, with operating profit up 17%1, and in UK Digital we have doubled online registrations to five million. We are becoming a digital disruptor for the benefit of our customers,” the company said.

"We are now actively planning a capital return to our shareholders and debt reduction in 2017 and will invest further to grow our businesses," said chief executive Mark Wilson, although there were no details on how Aviva would do this.

Aviva said there was a 20% jump in cash remittances across the group to £1.8bn driven by a 15% increase in general insurance net written premiums to £8.2bn.

Operating profits at its life insurance unit were up 8% to £2.6bn pounds, while in fund management profits increased 30% to £138m as group assets under management wer lifted to £450bn.

The total dividend was increased 12% to 23.3p.

"Looking forward, we will remain focused on achieving our financial objectives: mid single digit annual growth in operating EPS; £7bn of cumulative business unit remittances in 2016-18 inclusive; and an increase in the dividend payout ratio to 50% by the end of 2017," Wilson said.

The government incurred the ire of the insurance industry last week when it cut the Ogden discount rate to -0.75% from 2.5%, with Lord Chancellor Liz Truss saying the move reflected the fall in index-inked gilt yields, which are used in the calculation.

The Ministry of Justice said that when victims of life-changing injuries accept lump sum compensation payments, the actual amount they received was adjusted according to the interest they could expect to earn by investing it.

In finalising the compensation amount, courts apply the discount rate, with the percentage linked in law to returns on the lowest risk investments, typically index-linked gilts.

The law states that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life.

Compensation awards using the rate should put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs, the MoJ said.