Insurance giant counts cost of restructuring

EXECUTIVES AT insurance giant Aviva expect operating profits to continue a double-digit slump as the group spends tens of millions of pounds on restructuring.

Britain’s biggest insurer, which employs around 1,400 people at Pitheavlis in Perth, said operating profits fell by 10% in the first half of the year — and warned things were likely get worse in the six months to come.

The £935m return for the period to June 30 was down £100m on the same period last year, largely thanks to costs associated with attempts to turn around the business. Without restructuring costs, operating profits fell by 2%.

Aviva’s sale of the RAC, reduced returns from life insurance and pensions, and the adverse impacts of foreign-exchange movements and severe weather in the UK were also blamed for the downturn.

The group’s after-tax losses for the six months reached £681m following the writedown of £876m of goodwill and intangible costs in the US. Last year’s half-year aftertax profit was £465m.

Chairman John McFarlane said his board is “taking the necessary actions” to improve Aviva’s position, but added that conditions were likely to remain challenging.

“This environment is likely to continue and therefore we expect second-half performance trends to be broadly similar to the first six months, but with higher restructuring costs as we implement our strategic plan,” he said, in a note accompanying the interim statement.

Mr McFarlane said the company would reduce its cost base by £400m, and had already removed regional structures and reduced middle management.

He said “substantive changes” had also been made to “promote a sharper performance ethic” throughout the company.

However, the group said it would retain its dividend at a constant level of 10p per share.

Mr McFarlane is leading the restructuring efforts at Aviva after the group hit the headlines earlier this year in a row over executive pay and bonuses.

The company and its former chief executive Andrew Moss became one of the major focuses of shareholder anger after the value of stocks fell 30% inside 12 months.

Mr Moss stepped down after proposals for his paycheque plus perks deal, which amounted to almost £1m, were rejected by investors in an advisory vote at the group’s annual general meeting.

Now the group is accelerating its efforts at a turnaround. Aviva said it was delivering against a plan to narrow the scope of the business, build financial strength and improve performance.

The company continues to build its customer franchise in the UK, having signed a new distribution deal with Tesco Bank.

Returns from life insurance fell 8% in the period, while profit in the general insurance business rose by 17%, despite an increase of £62m in payouts because of damage caused by storms and freak weather.

The group’s fund management operation saw profits fall to £34m compared to £39m in the first six months of last year.

Total funds under management stood at £342bn. The group said a programme was under way to “improve the financial performance” of that aspect of the business.

The group highlighted the sale of a 21% stake in financial service firm Delta Lloyd, taking Aviva’s total shareholding to just below 20% and generating £313m in cash.

Meanwhile, Aviva also sought to reduce its exposure to sovereign debt in the eurozone and revealed it now has £1bn invested in the public finances of Portugal, Greece, Italy, Ireland and Spain.

The group said it had access to £1.4bn of liquid assets, while £2.1bn of undrawn credit facilities, provided by a range of leading international banks, were also available.

Shares in Aviva fell 1.5p to 316.7p.

Chairman John McFarlane said conditions are likely to remain challenging.