Group blames hedge funds for share price fall, but analysts disagree

Aviva has abandoned a proposal to prohibit the short-selling of its stock after receiving little support from its peers.

“We considered it, but the idea hasn’t gone further,” said a spokesman.

It is understood that Aviva’s fund management arm had been mulling over not lending its stocks to hedge funds since September last year.

Press reports earlier this week said Philip Scott, Aviva’s finance director, had emailed 20 other leading European insurers to sound out whether they too would consider prohibiting the lending of stocks, but the responses were divided.

Two insurers reportedly said they no longer lent equities while another was unsupportive. Aviva would not comment on which insurers it had contacted and would not reveal which had been for or against the plan.

Scrutiny of Aviva intensified after its stocks fell nearly 40% earlier this month.

The company insisted the share price had been affected by aggressive short-selling by hedge funds. But analysts disagreed, saying the falls were the result of an £11bn investment loss and other uncertainties.

“Aviva was put under review for a possible downgrade a couple of weeks ago and that was driven by the results and concerns of what may potentially be in their investment portfolio,” said Paul Oates, an analyst at Standard & Poor’s.

Last week Fitch Ratings downgraded Aviva’s long-term issuer default rating (IDR) to A from A+, reflecting capital depletion as a result of steep declines in equity and credit markets. Its core non-US operating subsidiaries’ insurance financial strength ratings were downgraded to AA- from AA, and the IDR of Aviva International Insurance to A+ from AA-. Fitch added that the outlook on all of these ratings was negative.

Aviva’s senior unsecured debt was downgraded to A from A+ and its subordinated debt was downgraded to BBB+ from A-.

David Prowse, senior director in Fitch’s insurance team in London, said Aviva’s preliminary 2008 results showed a significant drop of excess capital (unallocated divisible surplus) in its with-profits funds, to £2.3bn at the end of last year from £4bn at 30 June 2008 and £6.8bn at the end of 2007. “This capital, although ring-fenced, forms an important part of Fitch’s assessment of the overall capital strength of Aviva,” he said.