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COMMENT: Aviva turnaround | rates speculation

Aviva have managed to boost profits despite Chancellor George Osbornes annuities bombshell in the Budget. Picture: PA

Aviva have managed to boost profits despite Chancellor George Osbornes annuities bombshell in the Budget. Picture: PA

  • by MARTIN FLANAGAN
 

IT WOULD be premature to say Andrew Moss’s ill-starred reign at Aviva is a distant memory. But the insurer’s steady progress since its former boss was ousted in the “shareholder spring” of 2012 shows there is clear water between his regime and that of successor, Mark Wilson.

True, Aviva remains a turnaround story, but its latest figures show Wilson is pressing most of the right buttons. Even allowing for a surge in claims from a waterlogged, wintry south Britain, an even harsher than usual Canadian winter, and Chancellor George Osborne’s annuities bombshell in the Budget, the company has still managed to boost half-time operating profits 4 per cent to £1.05 billion.

Wilson is on track to have shaken out £568 million of costs by the end of this year, has disposed of non-core assets and focused on debt reduction. And the divi is lifted again.

Aviva’s turnaround remains a work in progress, but all the key metrics – from cash flow to profit and new business – are heading in the right direction.

Perhaps most notably, the group’s combined operating ratio – a measure of underwriting profitability, with anything below 100 per cent signifying a profit and anything above a loss, has fallen to a seven-year low of 94.3 per cent in the UK.

There was a predictable sharp slide in individual annuities following Osborne’s move to allow pensioners to decide what they want to do with their pension pots, but this was partially offset by a rise in bulk annuities.

Aviva’s composite business model also helps it here, as its diversity means it was probably less affected on the change than some rivals.

Interestingly, Wilson believes some of the flight from individual annuities will fall off as interest rates begin to rise in Britain.

Rising rates – with many betting the first upward movement will be later this year or early next year – will make the returns on them more competitive, Wilson says.

While the restructuring of Aviva continues, it looks as if a lot of the heavy lifting has been done already. The near one-third jump in the company’s share price in the past year, against a 2 per cent jump for the wider Footsie, indicates that investors are beginning to buy its recovery story.

After a lengthy period of disillusion under Moss, culminating in a revolt over his pay, that is no mean achievement in the 20 months or so Wilson has been in the hot seat.

Reaching the crunch on interest rate rise

THE Bank of England’s monetary policy committee (MPC) kept its powder dry on any rate rise yesterday. But it won’t stop rising speculation, reading the runes of recent speeches by governor Mark Carney and others at the central bank, that the only thing preventing a rate rise now is the sluggish pace of earnings growth.

If there is any sign that situation on wages is beginning to change in the coming couple of month you would think the odds on a rise would be compelling this autumn rather than wait for some time in 2015.

Unemployment is down, manufacturing and services are both doing well, despite blips, and construction has recovered well.

It will be interesting to see if any of the MPC’s nine members voted for a rise at this week’s meeting as a straw in the wind when the minutes are published in two weeks’ time.

Meanwhile, sterling’s continued strength makes clear the markets think a rise is most definitely in the wind.

 

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