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All in the family; Aviva and future partner beat profit forecast

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Aviva and Friends Life, ahead of the £5.6bn merger that will create the UK's largest insurance, savings and asset management firm, have both reported annual profits that beat forecasts.

Aviva, already the largest UK insurer, is acquiring Friends Life at a pivotal time for both firms, as the life insurance industry overall faces major pressure from the impending changes to the pension regime. As Your Money reported last month, sales of annuities collapsed last year at least in part due to the new freedoms retirees will enjoy as of 6 April; bulk sales of annuities by Aviva and Friends Life fell 16 per cent and 15 per cent respectively.

However, more positive news was issued yesterday, as Aviva posted a 6 per cent rise in operating profit to £2.17bn, and Friends Life smashed City predictions with a 38 per cent jump in operating profit to £556m. As a result, Aviva lifted its final dividend by 30 per cent, and its shares rose more than 6 per cent; Friends Life shares gained 5.6 per cent, making the pair the two biggest risers on the FTSE 100.

The merger, which is awaiting shareholder approval, would be the largest in the UK insurance sector since CGU and Norwich Union merged 15 years ago (a move which would, eventually, create AVIVA). The acquisition would add £70bn to Aviva’s fund management arm, increasing total funds to over £300bn overall.

Mark Wilson, Aviva’s group chief executive, said the merger was “the right acquisition at the right time”, but the proposal has provoked some sceptical reactions from industry commentators.

“Our view remains one of concern as to why Aviva felt the need to do the deal and the distractions involved in an even bigger turnaround story amidst ever greater regulatory oversight,” said Eamonn Flanagan, an analyst at Shore Capital.

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