Transcript

Half Year results 2013 08 August 2013 Simon: Mark, its good to see you. Thank you very much for joining us. Now lets talk about Avivas performance in the first six months. Whats your take on it? Mark: Simon, in one word, satisfactory. So far this year weve basically just done what we said we would do. Theres been a number of highlights and some things weve got to work on as well. For example the profit this year, the total bottom line profit after tax is 776 million pounds. That compares to a loss last year of about 624 million pounds. Thats quite a contrast. Simon: What progress are you making in your investment thesis? In particular how are you doing against your five key metrics? Mark: Simon, the investment thesis is crystal clear. Its about cash flow, plus growth in that order. And below that weve got the five key metrics and thats what we run the business on, thats our key focus. If you look at cash flow first. Cash flow is the money or the dividend we get paid from the subsidiary companies up to the group. Aviva is a profit making machine, our problem has been turning it into cash flow. So far this year its been adequate progress. The cash flow to group is about 600 million and thats about a 30% increase on the previous year. In terms of growth we measure that primarily by value of new business. The growth is about a 17% increase and theres been some pretty satisfactory results. And then our growth markets have performed pretty well as well. Its pretty balanced. Simon: What more would you want to say though about operating profit, expenses and COR? Mark: Well operating profit, which is another key measure for us, is about 1 billion. Thats a 5% increase from the previous year, again satisfactory progress. Expenses has been a key thing for both the market to follow and for us, and youll recall we put out a 400 million cost savings target. At a 9% reduction in actual expenses for the first half of the year, again we are on our way to achieving that target. And then on COR its been pretty stable at 96%. This is after taking a 70 million provision for the Alberta floods in Canada. Simon: So Mark what would you want to say today about the net asset value?

Mark: Well, Simon, the NAVs increased 3p; its increased modestly to 281 (pence). And thats been impacted by 8p and in fact 300 million provision on the commercial mortgages book. Now, Im slightly irritated weve had to take that. It relates to a pre-2009 book. Weve looked at it closely, weve looked at the loans and Im satisfied weve taken the appropriate action including strengthening the management team. Simon: Mark, lets talk about the balance sheet. Now you said that a key priority was reducing the intercompany loan. Whats the progress on that so far? Mark: Well, Simon, in all my many meetings with investors this seems to be the topic that comes up most, and I think thats probably an overhang on the stock. At the start of the year we said we were going to reduce this by 600 million over the next three years and by announcing that weve reduced it by 700 million in the first six months, clearly were a little bit ahead of their expectations. But I reiterate my previous guidance. Over the next two years we will only reduce, in terms of cash, 150 million in terms of 2014 and 150 million in terms of 2015. However, we will look to reduce that balance further in terms of noncash flow means. And weve got a lot of work to do. This is a complex issue, its a multi-year process. Simon: People are always keen to know what this means for the dividend. What can you say today about that? Mark: It doesnt mean much really. We signalled very clearly at the full year what the dividend was going to be. And the announcement of 5.6 pence today is, I think, entirely what the market was expecting. We are making progress; were about where we thought we would be at this time. Simon: In your words, these results are satisfactory. So what do you see as the key challenges and how are you going to focus on them? Mark: We really are focused on our key issues, I mean, after all, this is a turnaround story. To me theres a few things. Firstly Id look at the remittance ratios. Now our better peers are in the high 80s in terms of a ratio from OCG to dividends up to group. Last year we were 48%. Clearly that has to be higher and we would anticipate we need to get that into the 80s over the next few years. Simon: What would you want to say about external leverage? Mark: Well, external leverage, at the beginning of the year we went out to the market and we said we wanted to get that below 40% as a ratio. And thats a medium term target; were going to pay down 500 million over the medium term and then over time as NAV increases, well get it down. I think its important to note though that our internal measures are harder than the market. So, by way of an example, our S&P external debt ratio is 33%, so clearly were using a tougher measure internally.

Simon: Now, at the full year you promised investors you would give further detail on Avivas geographic strategy, so whats your current thinking this far in? Mark: You know, Simon, when I think of our geographies I put the countries into three simple buckets. The first is cash flow generators, the second is turnaround businesses that should be cash flow generators and the third is growth markets that will be cash flow generators. Thats how I think of it. Simon: So tell us about cash flow generators, whats your take on that? Mark: We have three major cash cows I guess you can call them in the business. The UK, both the Life and General Insurance businesses, Canada, and France. They are real scale businesses, they each have differentiated propositions to the market and they each have a history of generating stable returns. You know even the back book alone out of those business generate capital generation [of] over 1 billion per annum for the next ten years. Simon: And whats your view of the turnaround businesses? Mark: These businesses are in need of some work. Weve strengthened the management teams, weve taken some pretty tough action in them, but this will be a journey. We need to do things like changing the product range, reducing the capital that we use to write new business, reducing expenses and again focusing on cash flow. Theres also been quite a big drag on the value of new business and we need to turn that round as well.

Simon: And your thinking on future cash generators? Mark: We have some excellent what I would call options for growth. I should state right up front I dont expect the market to give us credit for the growth at this stage. You know, 17% value new business growth so far this year is probably a bit out of character for a stock that doesnt have a growth premium, but we certainly have options for growth in the future. If you look at Poland, were number two life and pensions provider in Poland, we got a great position. Turkey, were also the number two life and pensions provider; Turkey has all the characteristics of Asia, great demographics, growing economy, it really is a very nice market and we have a strong leadership position. And then, Asia. Asia we are taking more of a focus strategy. Were focusing on China and South East Asia; were going to be in markets where we have scale or the ability to get scale and places where we have a competitive advantage. So, were going to be selective, were going to focus our attention and were making some progress. Simon: So what about Aviva Investors? Whats your thinking there? Mark: Well, for a business of the scale that it has, and its a good sized business - the fact that it only gives us 2% of our earnings is a problem. Its performed in terms of returns on the funds, it hasnt performed in terms of returns for the shareholders and we need to work on that. Jason Windsors been heading a

strategic group for the last few months and that strategys just coming to its final stages. Its really culminated in the appointment of Euan Munro to head that business. Euans a class act hes got an impeccable track record, and hell make a difference to that business. Simon: Looking ahead what can we expect from Aviva? What is the outlook from your perspective? Mark: You know, Simon, the interesting thing about the Aviva turnaround story, is that most of these issues are within our own gift to resolve, were not relying on great markets or things, were being pretty conservative in our assumptions. Its not a question of can we do it, but over what time frame its going to be. I think when you look at our potential, the potential for this group, I classify our results as barely adequate, barely adequate in terms of our potential going forward. In my view, there remains substantial value to unlock at Aviva. Simon: You describe your results as satisfactory, so, from your perspective, what does good look like? Mark: Well, Simon, the results are satisfactory or only adequate in terms or our potential. Good looks like were the top performing insurance and fund management group in the world. Good looks like when we have investors who are delighted with the total shareholder returns on the dividends theyre getting. Good looks like when I have customers ringing me up or emailing me telling me what wonderful products we have and what outstanding service theyve been getting. Good to me looks like when we have our staff who are clear about what the strategy is, clear about what their roles are in it and are telling us how happy they are to work in an organisation like Aviva. Good to me looks like when were leading innovation and technology. And good to me looks like when distributors cant get enough of our products. Thats what good looks like. The question is not can we achieve these things, the question is how long will it take? And we need to do a lot more work and a lot more planning and a lot of execution just to get there. Simon: Patience and hard work? Mark: Oh, Im not so patient! Ends -