Aviva, Friends Life top forecasts ahead of $8.5 bln merger

* Aviva (Other OTC: AIVAF - news) 2014 operating profit 2.17 bln stg vs forecast 2.15 bln

* Friends Life operating profit 556 mln stg vs f'cast 352 mln

* Aviva sees deal bringing in 225 mln stg in annual savings

* Aviva and Friends shares both up 4.6 pct, hit multi-year highs (Adds Friends Life results, share price, CEO, analyst comment)

By Carolyn Cohn and Matt Scuffham

LONDON, March 5 (Reuters) - Insurers Aviva Plc and Friends Life Group Plc reported forecast-beating yearly profits on Thursday, lifting their shares to multi-year highs ahead of a 5.6 billion pound ($8.5 billion) agreed merger due to complete next month.

Aviva is acquiring Friends Life as changes in the UK pensions market put pressure on life insurance companies, leading to a drop in their sales of income-bearing annuities.

The deal is expected to bring 225 million pounds in annual savings, Aviva reiterated on Thursday, and material capital savings, without giving further detail.

Aviva Chief Executive Mark Wilson, appointed two years ago from Asian rival AIA (HKSE: 1299-OL.HK - news) with the task of restructuring the company, told reporters: "The proposed acquisition of Friends Life accelerates our turnaround and our ability to deliver our investment thesis."

Aviva reported a 6 percent rise in operating profit to 2.17 billion pounds, a touch higher than forecasts of 2.15 billion in a company-supplied poll. Friends Life's operating profit jumped 38 percent to 556 million, beating forecasts of 352 million in its company poll.

Aviva shares hit their highest since Sept 2008 and were trading at 557.5 pence at 0850 GMT, up 4.6 percent. Friends rose to April 2009 highs and were trading at 424p, also up 4.6 percent and an 8 percent premium to their close on Nov. 20, when the two announced merger plans.

"Aviva's results represent a small beat compared to consensus on pretty much every key metric," said Barrie Cornes, analyst at Panmure Gordon in a client note, reiterating his "buy" recommendation.

PENSION CHANGES

Holders of Friends stock will receive 0.74 new Aviva shares for each Friends share. Investors, who vote on the merger on March 26, have said the deal makes sense as a way to cope with UK pension changes.

The reforms, to be implemented next month, allow retirees to use their pension pots as they choose, rather than forcing them to buy an income-bearing annuity.

Aviva said the value of new business for its UK annuity business fell 16 percent, as bulk annuity sales, or taking on the risk of company final-salary pensions, failed to outweigh a drop in individual annuity sales.

Friends also reported a 15 percent drop in annuity sales.

Aviva's fund management arm is looking to an increase of up to 70 billion pounds in funds under management with the Friends acquisition, boosting total funds under management above 300 billion.

The company said a 16 percent rise in Aviva Investors' operating profit "remains inadequate". It signed a deal in January with Virtus Investment Partners in the United States, which Wilson said would help distribution.

In emerging markets, Wilson said Aviva was considering options for its Indian joint venture with Dabur Group following a rule change increasing foreign investment limits. Options could include selling the business, Wilson said.

Aviva will pay a final dividend of 12.25p per share, up 30 percent, making a total of 18.1p. Friends will pay a total 31.15p, subject to completion of the merger. ($1 = 0.6559 pounds) (Editing by Sinead Cruise and David Holmes)