Aviva PLC

Good morning and welcome to Aviva Plc's half year 2020 financial results briefing. I will now hand you over to your call, host Amanda Blanc, CEO of Aviva Plc.

Thanks Nicole and good morning everyone. Thank you for joining us and welcome to our conference call to take you through our interim results. This is obviously the first occasion that I have had the opportunity to speak to you So I will make some introductory remarks and then I'll ask Jason to take you through the results. The slides are available on our website and our intention is not to go through each slide. Let me start by saying that I have become Chief Executive of Aviva at an extraordinary time. The COVID crisis has been a tragedy for so many. And Aviva's response has been spot on. Whether that be the smooth running of our business, the £43 million we have donated to support charities and communities, or how our people have looked after our customers, I couldn't have asked for more and I am incredibly proud of the hard work of all our people. I think it is important to recognise this first and foremost. Now, if I may, I would like to turn to strategy. When I was appointed Chief Executive just four weeks ago, I said I would work at pace to assess our strategic opportunities and the actions that we should take across our portfolio. That is exactly what I have been doing and today I would like to give you a clear statement of my priorities and our future direction of travel. Let me start by saying that Aviva has enormous potential. We have fantastic franchises, market leading capabilities, trusted long-term relationships with both customers and distributors, and above all, we have great people. However, it is already abundantly clear to me that to unlock this potential, meaningful change is required. That is the challenge, and that is exactly what I intend to deliver. To achieve this, I have three priorities. First, we will focus the portfolio. We will concentrate Aviva around our strongest businesses in the UK, Ireland and Canada with the aim of being the UK's leading insurer. We are a top three player in each of these markets with attractive earnings growth and return potential. We have a strong, powerful brand. We deliver incredible customer service, and in my view, have a clear path to win. Across these markets, we will invest for growth. In our international businesses in Europe and Asia, our approach will be to manage for long-term shareholder value. We will be selective about where we participate and we will allocate capital with discipline. If we see attractive opportunities to be market leaders, generate strong returns, deliver robust cash flows to the centre and ultimately win, we will invest. But let me be clear, if we cannot meet our strategic objectives, We will take decisive action and we will withdraw capital. Ultimately, there may be better owners for these businesses than Aviva in the longer term. My second priority will be to transform performance. As I said, Aviva has fantastic businesses and I really mean that. I've been a competitor of Aviva for a large part of my career. and I can tell you that Aviva has a formidable market position. In terms of our brand, customers, distribution and capabilities in digital and data science, we benchmark extremely well in these areas. For example, in our life and GI businesses, TNPS is running in the 40s and 50s across a number of categories. These are outstanding scores in anyone's book. What's more, they have been increasing during the COVID lockdown thanks to the great work of our people under exceptional circumstances of which I am immensely proud. Helping our customers during difficult times is the reason Aviva exists and it is what we do best. These scores should tell you that we have a strong foundation in terms of our customer relationships and that's a great base from which we can build. If we consider digital, obviously you may think that Aviva has spoken a little less about digital over the last couple of years. I get that. But the reality is that digital is a critical part of our future. Whether it is insurance or any other sector, customer expectations are changing. And those firms that can offer convenience online, offer true value, and have trust with their customers, Those companies will win a disproportionate market share. That has been true for some time, but it's even more true post-COVID. What's interesting is when you strip back the layers, Aviva has a really great story here. We've been quietly building up registrations and digital interactions. As a result, logins are nearly at three-fold over two years. Over half of our direct motor and home claims are submitted online and digital is embedded in our distributor relationships. We are succeeding at helping customers to access information and transact faster. That gives us a positive baseline for customer experience and of course efficiency. Make no mistake though, we are not the finished article and there is a lot that must be done to bring it all together. But again, the foundations are there, and we have a real point of differentiation in the breadth of our products, distribution, and customer bases. So if we have these inherent strengths, and I really think we do, why haven't we converted them into performance and investor support? The truth is, and let's be honest, we haven't been as good as we needed to be at execution. And that is what will change. So how are we going to do this? Because we all know talking is the easy bit. We will bring a new intensity to how we approach performance management and competitiveness. It is virtually impossible to compete and win if you aren't top quartile on efficiency, customer experience, pricing, and risk management. And that is where we need to be. Getting there will require some fundamental changes in how we operate. I'm really focused on this and there'll be more detail on this in our future presentation. Turning to my third priority, financial strength. Not only financial strength, but also our financial resilience and sustainability. In recent years, we've maintained solid capital ratios and strong central liquidity. despite the external volatility. We are reporting a solid set of half-year results today with capital surplus of 12 billion and operating profit of 1.2 billion. The impact of COVID on general insurance claims net of reinsurance was 165 million pounds in line with the number we gave at our Q1 update in May. Our balance sheet risk has significantly reduced. A priority given the changing macro environment. And we've made progress in reducing debt leverage and I'm committed to taking this further. The actions we intend to take to focus the portfolio will give us greater financial flexibility. This will allow us to further enhance our financial resilience and capital sustainability and will give us optionality, either to invest in our businesses or to return capital to our shareholders. Financial strength and active capital management are a key priority for Jason and I, and they will be at the heart of our strategy going forward. And that brings me to the topic of dividends. We understand the importance of dividends to our shareholders. With that in mind, the board has declared a second interim dividend in respect of the 2019 fiscal year of six pence per share. This is consistent with our solid financial position and our resilient results, but also the board's cautious stance towards the macro risk as the economy slowly emerges from the current crisis. More fundamentally, The Board has decided to take the opportunity to review our longer term dividend policy in light of our strategic priorities, the future shape of the group, and our ongoing commitment to debt reduction. We will provide an update to shareholders on all dividend matters, including the 2019 final dividend in the fourth quarter. Before I hand you over to Jason, who will take you through the highlights of the half year results, I would like to reiterate my three priorities. Firstly, we will focus the portfolio investing for growth across the UK, Ireland and Canada with the aim of being the UK's leading insurer. Across international, we will manage for long-term shareholder value and ultimately there may be better owners for these businesses than Aviva in the longer term. Secondly, we will transform performance. And finally, Financial strength will be the key underpin. Jason over to you.

Thanks Amanda and good morning everybody. As Amanda said we've provided you with a slide pack on the website and I won't walk through each slide on the call but I will make some page number references. With the backdrop of COVID-19 in the first half our results demonstrate the strength and resilience of our business and financial position. As Amanda just commented Financial resilience is a priority for us going forward. You will also see that COVID has impacted our performance in terms of increased insurance claims, reduced customer activity levels, capital market volatility, and a meaningful contribution to support the community. But as a company, we've responded very well and delivered improved underlying returns. Our customer teams didn't miss a beat. We took decisive action to maintain service levels continuing to support our customers when they needed us most. We've not had to furlough any Aviva employees and we've been able to support colleagues needing to balance work and childcare. Starting on page 10 of the slide pack, the result highlights include return on equity of 7.1% with underlying return improving to 8.3% before the GI impact of COVID. Operating capital generation increased 14% and a number of others. We also want to make sure that we are providing the best possible service for all of our clients. We also want to make sure that we are providing the best possible service for all of our clients. We also want to make sure that we are providing the best possible service for all of our clients. and Canada, offset by higher weather costs and lower profitability in Europe and Aviva investors. Given their significance, my commentary will first focus on general insurance claims effects. In IFRS, we estimate net general insurance claims of £165 million from COVID-19, which is in line with the number we gave you on May 21. The estimate for business interruption and other COVID-19 claims is primarily in IBNR. It's still early days. The net figure of £165 million includes just over £200 million of favourable claims experience in the first half owing to the reduction in economic activity, but includes no allowance for similar effects in the second half. It also has a £34 million allowance for prior year inflation owing to expected supply chain disruption. On slide 11 of the PAC, for OCG, the impact from GI claims is $258 million. This is higher than IFRS as it includes an SCR allowance for uncertainty. As a result, underlying OCG pre-COVID from GI was just shy of $800 million, which is up 17% on the prior year. What this shows is we've increased capital generation and underlying returns despite the disruption. But there is much work still to be done to create a sustainable and resilient business. Turning to the balance sheet. Our solvency cover ratio increased in the second quarter and was 194% at 30 June. Solvency 2 surplus is £12 billion, which is £0.6 billion lower compared with the year-end figure. Positive operating capital generation was offset by £1.56 billion of market impacts, primarily related to lower interest rates and credit spread widening. In February and March, we took significant actions to reduce our risk in investment portfolios by hedging equities, credit and interest rates. As a result of these actions, we significantly increased resilience to market risks, which you can see in this morning's disclosure. We've enhanced that disclosure by providing you with the movement on surplus as well as the ratio. Sensor liquidity at the end of July was $2.5 billion. This benefited from the completion of the FPIL sale in July which added £0.2 billion. Remittances from subsidiaries were sharply down in the first half at £150 million. We did not seek to remit significant cash from the BU's in the first half given our desire to maintain strength in the subsidiaries in light of the economic, market and pandemic uncertainty and also regulatory guidance. We expect remittances to increase significantly in the second half But given the first half volatility and prevailing uncertainty, we expect full year 2020 to be well below the underlying level in 2019, plus approximately 100 million more in proceeds from announced divestments. Focusing now on the investment portfolio on slide 15, which I know is topical. Overall our portfolio is performing well and has remained resilient in the first phase of the credit downturn. In terms of corporate credit, we've had no defaults and our observed rating migration remains low. Only 0.2% of the shareholder portfolio has been downgraded below investment grade. 4% of our corporate bonds rated A or above have been downgraded to a lower rating letter. This is up only slightly on the 3% we reported to you in our May update. Our commercial mortgage portfolio has also remained resilient backed by solid collateral. although we expect the peak economic stress for borrowers to come. The LTV of the portfolio has increased slightly to 59%. Loan interest cover remains good at 2.8 times and the portfolio continues to perform with just 1% of loans and arrears. LTV is above 100% for just under 5% of the portfolio. And our long-term commercial property price assumption is a 15% fall over five years. This assumption is an average, which has not been applied uniformly across the portfolio. As you might expect, in certain areas like retail, where the pressure is more intense, we've allowed for much larger declines. And it's worth reminding you, we have a £3.8 billion IFRS default reserve across the UK annuities book. Switching gears and looking at performance and trading on slide 16. At a group-wide level, our first half sales volumes across life and general insurance overall were broadly flat. In the context of the disruption we've seen, that's a solid result. We've been very deliberate in how we've approached new business strategy across the group. As outlined last year, actively allocating capital is an important part of our strategy. We've announced today that we'll take this further at a strategic level. From a trading perspective, we're making choices about where we are prioritizing. and you can see the areas where we are investing for growth and also managing for long-term value. Looking at some of the individual highlights, in UK Life, BPA volumes were £3.1 billion, an increase of 2.5 times relative to the first half of 2019 and approximately 80% of our volumes in the whole of 2019. This helps us to achieve a near doubling of VNB in UK Life. In the first half, we had good market conditions for BPA pricing and we wrote the higher volume at an attractive margin. BPA demand remains strong. COVID-19 is not preventing deals from being completed. We expect BPA volumes to continue to grow in the second half, but more slowly than in the first half. In savings and retirement, our workplace and retail platforms continue to show good momentum. Net fund flows increased 28% to positive 4.2 billion, with good growth in net flows across workplace and retail savings. Looking at the sequential trends, we saw a slight reduction in net flows in the second quarter, which was mainly driven by lower volumes onto the retail platform. However, activity levels improved over the course of Q2, and we've seen continued strong support from our IFA partners. Aviva Investors' profitability was pressured by lower revenues, from lower asset values and reduced origination fees. Encouragingly, the third-party franchise made good gains with positive net flows of 1.3 billion in the first half, building on the strong finish to 2019. In Europe and Asia, new business sales reduced 23% owing to a combination of COVID-19 disruption and our actions to reduce sales with profit products in the face of ultra-low interest rates. The continued focus on mix helped to increase our new business margin to 4.2% up from 3.9% in the prior year. Our own sales networks were able to adapt well to support customers and write new business, for example, by using digital tools and video calls. However, our bank distribution partners were constrained by much lower footfall given the lockdown measures. As Amanda mentioned, we'll continue to be selective in allocating capital to new business in Europe. In general insurance, net written premiums were broadly flat. We saw continued momentum in commercial lines with growth of 8% and 11% in the UK and Canada respectively. Personal lines premiums saw a bigger impact from COVID-19, particularly in the UK, where volumes in the intermediary channels were disrupted by lockdowns. The combined ratio in GI increased 3 percentage points to 99.8%. Excluding the 3.6% impact from COVID, corn produced slightly compared to the prior year, despite meaningfully higher weather costs. Turning to expenses on slide 18. We've made further progress, reducing controllable costs by £54 million. We remain on track to meet our target of £300 million reduction by 2022. In the first half, staff costs were lower from actions taken in 2019. and we reduced our contract to headcount by more than 50%. While this provided incremental savings, we had to increase spending in IT to support remote working and we also contributed 43 million pounds to various community support schemes. At our full year results, we outlined our expectation that 2020 P&L savings would be 150 million, which as a reminder, is on top of absorbing inflation. Based on the first half trend, We are on track to beat that estimate. We are looking for opportunities to further accelerate our delivery. In conclusion, despite the challenges and disruption of COVID-19, we've delivered solid trends in trading profitability and resilient capital. The outlook remains uncertain. We take some encouragement from the lower number of reported cases, but as recent reports make clear, we are likely to be living with COVID-related restrictions for some time to come. Together with the withdrawal of government support, this will present continuing challenges and delay any return to normal levels of movement and economic activity. This makes it inherently difficult to make definitive outlook statements. Broadly, we expect volume levels for the remainder of 2020 to be around the level in Q2. Aviva has been deliberately cautious and forward-looking over recent years. We're continuing to take a disciplined approach to managing our market and trading risks. This puts us in a good position to continue to protect and grow value for shareholders and to embark on our strategic transformation under Amanda's leadership.