Aviva : Earnings Document

AVIVA

Half Year Analyst Session

Thursday 12th August 2021 8:30am

Transcript

Speakers:

Amanda Blanc (group CEO), Jason Windsor (group CFO)

OPERATOR: Welcome to Aviva PLC's half year 2021 results call for analysts and investors. I will now hand you over to CEO Amanda Blanc. Please go ahead.

AMANDA: Thanks Nicole and good morning everyone. I hope you are all well. Thank you for joining Jason and me for our 2021 interim results presentation. We will start this morning by providing an update on the progress we are making towards our strategic priorities. And then, as usual, Jason will take you through the detail of the results of the first half, before we open the lines for Q&A.

Let's get started by turning to slide 5. Since I was appointed CEO just over one year ago, I have solely focussed on creating value for our shareholders, our customers and our people. At the heart of our strategy is the strong belief is that Aviva has the potential to win in our chosen markets. We have leading positions. The number one brand in insurance, genuine ESG credentials and the financial strength and capabilities to serve all of our customers' needs. This is unique.

Our strategy required us to focus Aviva's portfolio, transform the performance of our core business and to improve our financial strength. We are convinced that delivering our strategy will create value and we are highly committed to its success. I am therefore pleased to report that we have been working at pace, with conviction and are making good progress on all fronts. In terms of focussing the portfolio that work is now largely complete. In less than 12 months we have realised significant value for our shareholders, announcing the sales of eight businesses for total proceeds of £7.5 billion. We have completed the sales of Aviva Vita in Italy and AvivaSA in Turkey. We expect to complete the remaining disposals by the end of 2021, with all regulatory approval processes currently proceeding to plan.

Our success in focusing the portfolio is enabling us to improve our financial strength. Again, you will have observed we have accomplished a great deal in the past year, and our balance sheet today is extremely robust: capital surplus of £12 billion, solvency II cover ratio of 203%, centre liquidity of £2.8 billion and debt leverage of 26% - well below our target of operating at sub- 30%, following the £1.9 billion of debt reduction in the first half.

Today, we are announcing an interim dividend of 7.35 pence per share - an increase of 5% - reflecting our confidence in the strength of the business and the underlying cash flow. From the moment we embarked on our refocusing strategy, I have been very clear it is our intention to

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deliver a substantial return of capital to shareholders, following the completion of the disposals. And I meant it. Today we are kicking off that return of capital, with the immediate commencement of up to £750 million share buyback and announcing we intend to return a total of at least £4 billion by the half year 2022. This is subject of course to completion of the disposals, regulatory approval for the capital distribution and market conditions. We are moving on this ahead of expectations based on our assessment of the strength of our liquidity and capital position and because we don't believe it's right for us to sit on excess cash and capital unnecessarily.

Turning to slide 6. Our go-forward strategy is now solely focused on transforming the performance of Aviva and realising the full potential of our core businesses. In this respect I am pleased to report we have delivered an encouraging first half performance, with cash remittances up significantly to £1.1 billion, controllable costs down 2%, operating profit up 17% to £725 million, and I now have the senior team in place with everyone sharply focussed on execution. We are making good progress in the areas we are targeting to grow, notably in General Insurance and Savings & Retirement.

Turning to slide 7, let me provide some more colour on this. In March, I outlined the areas we are targeting for growth, and we have seen some encouraging signs of progress in the first half. Individual savings net flows of £2.8 billion, including record in flows for Aviva. We remain number one in workplace savings, with assets under management up 10% to £89 billion and net flows up 8%. Protection and Health profits have returned to growth, up 32% year on year.

In General Insurance we have delivered our highest top line in a decade, largely driven by UK Commercial Lines, which is up 16% year on year. And in bulk purchase annuities, we have traded with discipline in a subdued market during the first half. The outlook for the second half is good. We have written £3.7 billion of new business July YTD and are happy with the strength of our pipeline. I'm pleased to see the benefits of our diversified group coming to the fore yet again.

Last year, a strong BPA performance negated the COVID impact on General Insurance and in the first half of this year, General Insurance, Protection and Health have rebounded, helping negate a subdued BPA market. As we look forward, our strong BPA pipeline will serve us well as we face into the personal lines soft market, further seeing the benefit of a composite in action.

Turning to slide 8. Alongside delivering topline growth, we continue to focus on reducing controllable expenses, which are down 2% year on year. We remain on track to deliver our intended £300 million of savings in 2022, which is after absorbing growth and approximately £200 million of inflation. Furthermore, we are focussed on delivering top quartile efficiency across all of our businesses. As the right-hand side of this slide demonstrates, our cost reductions are structural, driving digitisation in our operations which has the double impact of achieving cost reduction and improving customer outcomes. For example, in UK motor, 65% of claims are now processed digitally. This has enabled us to reduce head count and deliver

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indemnity savings with the average digitally processed claims being closed out for £106 less than one handled offline.

Furthermore, 91% of vehicles are now directed into our own repair network, the second largest in the UK. And all of this is resulting in better customer service and satisfaction. We have also achieved a material reduction of 30% in our office space since the beginning of the year. This has reduced our costs by £20 million, as we seek to work more efficiently and flexibly in the new operating models post-COVID. We see opportunities to go further here, and we believe we can both reduce our costs and improve employee engagement without any detriment to productivity.

Turning to slide 9. We continue to power up our brand, extending our number one position by 5 percentage points to 16% ahead of our nearest competitor. Both consumer awareness and consideration are up considerably following the launch of our new campaign in April. It is gratifying that 87% of retail GI customers allow marketing permissions for Aviva via the price comparison websites, reflecting high levels of trust in the brand.

Customer numbers are also rising in key areas, up 3% in workplace to 3.9 million and up 9% in Retail General Insurance to 3.5 million today. Customers continue to increasingly interact with us digitally. MyAviva mobile log-ins are up 50% year-on-year and MyPension app usage is up 58% over the same period.

Overall, we are making good progress. But we are going step by step and it will take time to realise the performance that we believe the business is capable of.

Turning to slide 10, Aviva is the clear leader in UK financial services on ESG. We are the major- first major insurer globally to commit to being net zero by 2040. We have launched a climate- focused partnership with the World Wildlife Fund. Share Action rated Aviva Investors number 2 overall for voting practice. We are a key member of GFANZ and have been rated in the top 5% of the insurers globally by Sustainalytics. This focus is resonating very positively with customers. It is early days, but the flows into Aviva Investors ESG funds in the first half of 2021 are double those for the whole of 2020 at £324 million.

Our market leading real assets team play a critical role for society. With £43 billion of assets under management invested across infrastructure and real estate. And we are going further. Having committed to investing £10 billion in UK infrastructure and real estate by 2023, as we seek to support the broader economy and UK Government initiatives. In the first half of 2021, we have invested £1.4 billion across a number of key projects.

Turning to slide 11. In November I outlined the priorities of deployment of excess capital. First, debt reduction. Second, shareholder returns. And third, targeted investment to accelerate growth. Today we are providing further detail around how we are deploying the £7.5 billion of proceeds generated from disposals. First, debt reduction. We have delivered £1.9 billion of debt reduction during the first half of 2021 and will utilise an additional £1 billion to maintain our

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leverage ratio below 30%. A further £700 million will be used to reduce the internal loan following the sales of France and Poland.

Second, as promised, delivering a substantial return of capital to shareholders. We intend to return at least £4 billion to shareholders by the half year 2022, subject to the deals completing and obtaining regulatory approval for the capital distribution. As part of this, I am today announcing that the Board has authorised a £750 million share buyback which will commence immediately. And thirdly we will invest in our business to accelerate growth. This will be both organically and potentially through strategic bolt-on acquisitions where we identify opportunities to accelerate our progress and that will be accretive to our financial performance.

Turning to slide 12. We are making good progress towards our strategic priorities. We remain on track to fulfil our key financial commitments, and we will deliver attractive value creation for our shareholders, through the return of capital in the short term and delivery of a transformed performance over time. I'm very encouraged by the direction of travel but we've still got lots to do. We are all keen to execute our plan as fast as possible, so that we can deliver the results that we believe Aviva is capable of. Our shareholders deserve nothing less. Let me now hand over to Jason who will take you through the interim financial results in more detail.

JASON: Thanks Amanda, and good morning everybody. I'm going to spend a few minutes to take you through what has been another extremely busy six months. Trading has been very good, setting us up well as we move in the second half of 2021 and beyond. Whilst there is plenty work to do to transform our performance, we are making good progress in the key areas. Cash remittances of £1.1 billion from continuing operations is very strong, and operating profit is up 17% to £725 million, benefitting from the breadth of our business and our diverse earning specs. As you know we made decisive progress focussing the portfolio and the remaining transactions are progressing well. We now expect all to complete by the end of the year, paving the way for the substantial return of capital in 2022. After reducing debt by £1.9 billion and the leverage ratio by five points to 26%, our Solvency II position and centre liquidity remain strong, providing significant flexibility. I'll come back to the capital return later, after I have first covered our financial results, beginning with cash remittances and our interim dividend. Increasing and sustaining cash flow to support our growing dividend is fundamental to our strategy. In the last half, we had very strong remittances of £1.1 billion, up from £0.1 billion in the first half last year. 2021 in total, we expect annual cash remittances to grow strongly, compared to the £1.4 billion in 2020, with continued growth in 2022 toward our 2023 ambition of £1.8 billion. We remain very much on track to achieve our three-year target of over £5 billion of cash remittances in 21-23. This confidence has allowed us to increase the interim dividend by 5% in line with the policy we announced last November. As you know, we aim to grow the dividend per share sustainably by low to mid-single digits per annum. Now just a quick word on the Group metrics, with very strong cash remittances of £1.3 billion, own funds generation of £710 million and Group operating profit of £1.1 billion, 8% lower, which mainly reflects the absence of profit from FPI and Singapore, the sales of which were sold last year.

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The IFRS loss of £198 million was driven by negative investment variances, largely from higher interest rates, as well as the anticipated loss on the disposal of France, which we expect to be more than offset by the profit on disposal of Poland in the second half.

I will now focus the presentation on the continuing operations. First, the headline metrics. I have already covered the big increase in cash, and own funds generation was up by 49%, mainly from the GI businesses. Operating profit increased by 17%, with very strong performance from General Insurance, as well as growth from Aviva Investors.

Costs were 2% lower in the half, and we are looking for cumulative savings of over £225 million in 2021, compared to 2018. Implementation costs to deliver the savings in the second half are expected to be significantly higher compared to the first half, as we remain on track to achieve our £300 million cost saving target in 2022.

Let's now look at the performance of each of the businesses starting with UK & Ireland life. Headline operating profit was 34% lower at £545 million. At a trading level, we are pleased with the growth in Protection and Health and in Savings and Retirement. We made good progress in the lumpy BPA market. I will go through those segments in a moment. First, a word on Management Actions and Other and on Heritage. The reduction in Management Actions and Other from £69 million in the first half of 20 to a negative £38 million is largely driven by increases in the provision for legacy customer remediation. And as a reminder, we review our longevity and other major assumption changes in the second half. We expect the full-year profit from management actions and other to be in the £0-£200 million range. The half year reduction in heritage reflects an unusually high comparative in the first half last year, where profit over the year was heavily weighted toward the first half. In 2021, we expect a similar level of profit from heritage in the second half, as in the first, which would mean profit for the full year in line with our around 10% expected run-off profile. As a reminder, Heritage had profit of £321 million in 2020.

I'll now cover in more detail the segments of UK Life where we are confident we can drive quality, long-term growth, segments where we already have leading positions and capabilities. Starting with Annuities & Equity Release, which was a relatively quiet six months for the BPA market. Pleasingly, sales of Equity Releases were up by 43% reflecting easing of lockdown restrictions and the introduction of virtual valuations, while sales of individual annuities remained steady. Volumes of the bulks were £1.6 billion compared to £3.1 last year. I'm pleased to tell you that we have won a further £2.1 billion of bulks since June, including the £900 million Kingfisher deal we announced in July and we're on track to have a good 2021. VNB and IFRS margins were impacted by the higher proportion of assets being temporarily invested in gilts, as low spreads made investments in corporate bonds unattractive, while investments in illiquid assets are typically weighted towards the second half of the year. Adding these assets will improve full year margins, similar to the pattern we saw last year. BPAs and equity release remain attractive and growing markets where we can capitalise on our strong position to deliver long-term growth.

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