Aviva slumps on worries over its solvency

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An unusually critical note from the insurance analyst at Citigroup claims that Aviva's balance sheet is strained from exposure to corporate bonds and high levels of gearing.

"We see Aviva as having some of the most extreme asset leverage in the sector," writes Andrew Crean. "Given the level of asset leverage, the solvency looks thin. Aviva has the lowest coverage ratio in the European sector."

Aviva shares almost halved last week after it reported annual results that it hoped would reassure the market.

Instead, its surplus of £2 billion was seen as insufficient in current markets to allow the continued payment of a dividend costing £500 million.

Today the shares fell another 30½p, 14%, to 183p. Two years ago those shares were trading at well above 800p. "In our view if the dividend policy is maintained, the balance sheet will not regenerate from future operating earnings...if markets recover Aviva's solvency should be able to cope. But further market falls would increase the pressure," said Crean.

Aviva finance director Philip Scott said the divi will be paid. "We didn't see anything new in the note. The negatives are getting a lot of oxygen at the moment," he said.