Commercial strong, though personal lines have "difficult outlook"

The Armageddon anticipated at the start of this year by investors and commentators has not happened.

The UK is still in the middle of a financial crisis, but analysts say that people’s attitudes have changed.

“The investment climate has brightened,” says Duncan Hall, an analyst at FinnCap. “A lot of people no longer see problems with borrowing, refinancing and corporate defaults. That has taken some of the pressure off and we now have a very different picture than we had at the outset of the year.”

There was, therefore, no gloomy reaction to Aviva’s dividend cut this week. In fact, the market seems to have rolled its eyes, knowing that this should have happened some time ago, and carried on as normal.

“Chief executive Andrew Moss was pretty well wedded to one Aviva, twice the value,” Hall says. “He got himself caught and had to cut the dividend. But to my mind it wasn’t as severe as it could have been. Oddly enough, the shares touched 370p a while back and dropped to 260p after fears of a cut. But afterwards they went back up to 380p. If Moss had read the market more acutely, he might have realised that cutting the dividend might have helped the share price rather than hinder it.”

Analyst Joy Ferneyhough from Execution is not as positive about RSA’s prospects, though. She agrees that its results are solid but that a number of underlying trends will cause strain. She points out that 58% of RSA’s premiums and 83% of shareholder assets are in non-sterling denominated currencies. As sterling weakened over 2007 and 2008, RSA’s premiums, earnings and net asset value benefited. However, with the average of these currencies reversing 7% this year to date, she expects pressure on premiums in 2010.

Ferneyhough predicts that it will be difficult pushing through rate increases in personal lines and that there will be a large difference between how commercial Lloyd’s players and the personal lines business of insurers perform. “Personal lines has a very difficult outlook over the next 12 to 18 months. We will see deteriorating margins … whereas in commercial lines, everything we’ve heard from Lloyd’s vehicles and from some of the bigger European names is that they are able to push rates through.

“The problem they have is that they are trying to push through increases in competitive areas. It’s a difficult marketplace. Also their costs are rising. All that translates into pressure on margin.”

Barry Cornes, an equity analyst at Panmure Gordon, anticipates that this will not stop the likes of Aviva going on an acquisition hunt, following the partial float of “problem child” Delta Lloyd and its Australian business. “With that [Delta Lloyd] capital plus the Australian capital, they may go ahead and go for acquisitions. It will be more likely be an overseas acquisition, such as in the US or Asia,” he predicts.