Aviva turnaround takes shape though debt and costs persist - UPDATE

8th Aug 2013 07:10

Insurer Aviva turned around last year's interim loss with a cash-rich first half performance, boosted by a strong UK contribution. Although costs were cut and levels of new business were up impressively, debt levels were largely unchanged and management conceded that tackling legacy issues would take time.Group Chief Executive Officer Mark Wilson said: "In the first half we have taken a number of steps to deliver our investment thesis of cash flow and growth. These results show satisfactory progress in Aviva's turnaround."The FTSE 100 group turned round the £624m loss in the first half of 2012, producing a £776m profit after tax, with cash flows from business units to the group increased by 30% to £573m and operating cash flow ahead slightly to £936m. Wilson pointed out that Aviva's key measure of sales, value of new business, had increased 17%, driven by the UK, France, Poland, Turkey and Asia.He said: "Although these results continue the positive trends of the first quarter, tackling our legacy issues will take time."So, while internal leverage was reduced by £700m to £5.1bn, external leverage remained broadly unchanged at 50% debt-to-equity, with €650m of hybrid debt raised in July to go towards the £0.8bn of debt due for repayment in the next eight months. However, operating expenses were 9% lower at £1.5bn and restructuring costs 10% lower at £164m.As forewarned, the dividend was cut from 10p to 5.6p per share.In his outlook statement, Wilson concluded: "There are a number of areas that must be addressed, in particular leverage, expenses, and underperformance in some of our markets. "These issues are largely within our gift to resolve. Completion of the sale of the US business is important to the group and we confirm our previous guidance that we expect it to complete by the end of the year."He confirmed that part of the proceeds of the US sale would be used to pay down debt.Analyst Barrie Cornes at broker Panmure Gordon said the reduction in internal leverage was a "big positive" given that the target was to reduce by £0.6bn by 2015.He concluded: "The shares are not expensive compared to valuations elsewhere within the sector but following the disappointment of the dividend cut and the uncertainty over the significant challenges that Aviva faces we believe that a hold is the most appropriate recommendation."OH