IN FINANCIAL terms, Aviva’s £1.1 billion acquisition of the RAC, the motor services group, is small beer. The half-share, half-cash terms will see Aviva’s equity base increase by a barely visible 3.7 per cent.

But the signal sent by Aviva in moving to tuck away the RAC is remarkable. The RAC may not be a conventional general insurer but it certainly has more in common with Aviva’s general insurance operations than with its life and pensions activities. Yet general insurance has long been the poor relation of groups, such as Aviva, that straddled both arenas. Aviva sold much of its commercial business after the 1999 merger of CGU and Norwich Union that created the company. And only last year Aviva sold its Asian and Australian general insurance companies.

It would be a mistake to assume that Aviva has neglected its general business. But the cyclical nature of the insurance premium rating environment and the historic inability of insurers to make sustained profits from underwriting has undermined its attractions. Life and pensions has tended to dominate the Aviva investment story.

Results posted by Aviva yesterday provide complementary evidence that general insurance, for Aviva at least, is back in fashion. The life and pensions side of the operation registered good growth, which exceeded expectations.

But the rate of increase was knocked into a cocked hat by the expansion in general insurance. In life, Aviva recorded 9 per cent growth in operating returns last year. In general, the rise in operating profits was 47 per cent.

Much of the growth came as Aviva cut costs. Aviva’s suggestion that the RAC deal will save £80 million in operating costs indicates that it sees further overhead saving. The numbers posted yesterday suggested that it is convinced of the need to make underwriting profits from general insurance on a sustainable basis. The numbers also suggest it has the capacity to succeed.

The greater financial strength brought to the party by Aviva brings hope that it can draw more out of the RAC brand, although cross-selling opportunities are easier to talk about than to earn cash from. Aviva shares, which give a dividend yield of 4 per cent, are fully priced. But that is a good return for a relatively low-risk stock. Buy.

Balfour Beatty

ONE way or another Balfour Beatty, the construction group, derives two thirds of its business from the UK Government.Not all is done under the auspices of the Private Finance Initiative (PFI) but the controversy surrounding PFI structures gives Balfour reputational challenges. Associations with Railtrack and the awful events at Hatfield cast another cloud over the company.

The fact that Balfour is so dependent on the one customer also creates unease because of the suspicion that political imperatives will change and knock the company off balance. But although Balfour’s big client may play fast and loose with the normal rules of commercial engagement there is less evidence that it does, or that Balfour is undermined by its vicissitudes.

Profit numbers posted yesterday for the year to December 31 suggest that Balfour’s relationship with the UK Government is creating few financial strains. Turnover grew 13 per cent to £4.2 billion and pre-tax profits, struck before exceptional items, rose 15 per cent. Those exceptional items, moreover, are positive in nature. They are positive in financial terms, arising as they do from the disposal of Andover, a US bridge building operation, for £226 million. They have a positive impact on sentiment, too, since the disposal of Andover saw the company rid itself of a business that is intractably complex and held the capacity to become a troublesome distraction.

Balfour’s dependent relationship with the UK Government brings stability as well as unease. The pace and size of public works may wax and wane but a bedrock of demand is likely to remain. The building and rebuilding of schools and hospitals is occupying Balfour at present. Road contracts and work with the Metronet London Underground consortium is also keeping the company busy. Social housing construction projects present another opportunity.

Balfour has grown profits steadily over the past five years and more could come. The dividend, which has increased by a total of 65 per cent in that time, leaves the stock yielding only 2.3 per cent. But shares in this company are attractive. Buy.

James Fisher

JAMES FISHER’S metamorphosis from ship owner to marine services group gathers pace. It was the appointment of Tim Harris, a veteran of the P&O empire, three years ago that set the ball rolling. The establishment of two new divisions — one for defence services and a second that will look after operations related to the nuclear industry — opens a new chapter.

Fisher is not starting from scratch in defence or nuclear. It has well-established businesses that run naval supply ships. Transportation contracts with British Nuclear Fuels are also in place. The establishment of separate divisions, however, is a clear statement of intent. Fisher wants to win more business in these sectors.

The paucity of other companies willing to undertake such work makes life easier for Fisher. The fact that customers are increasingly supporting outsourcing ancillary services such as those supplied by Fisher is even more helpful. Fisher, based in Barrow-in-Furness, Cumbria, and down the coast from Sellafield, is also ideally located to pick up additional work.

Fisher is delivering good growth from its offshore oil services division. Overall pre-tax profits rose 29 per cent in the year to the end of December, while earnings per share climbed 22 per cent and the dividend was raised 14 per cent. The company reduced debt gearing from 68 per cent to 40 per cent last year, leaving it with ammunition for acquisitions.

Shares have trebled in value over the past three years but while the pace of growth may slow, growth is still likely. Buy.

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