Aviva plc’s Group CEO, Mark Wilson talks to interviewer Simon Meadows about the company’s 2013 interim results, including a review of progress in the first six months of 2013, the outlook for Aviva and an update on the group’s geographic strategy.

1. Transcript
Half Year results 2013
08 August 2013
Simon: Mark, it’s good to see you. Thank you very much for joining us.
Now let’s talk about Aviva’s performance in the first six months. What’s
your take on it?
Mark: Simon, in one word, satisfactory. So far this year we’ve basically just done
what we said we would do.
There’s been a number of highlights and some things we’ve 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.
That’s 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. It’s about cash flow, plus
growth in that order. And below that we’ve got the five key metrics and that’s
what we run the business on, that’s 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 it’s been adequate
progress. The cash flow to group is about £600 million and that’s 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 there’s been some pretty satisfactory results.
And then our growth markets have performed pretty well as well. It’s 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. That’s 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 you’ll
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 it’s 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?

2. Mark: Well, Simon, the NAV’s increased 3p; it’s increased modestly to 281
(pence). And that’s been impacted by 8p and in fact £300 million provision on the
commercial mortgages book. Now, I’m slightly irritated we’ve had to take that. It
relates to a pre-2009 book. We’ve looked at it closely, we’ve looked at the loans
and I’m satisfied we’ve taken the appropriate action including strengthening the
management team.
Simon: Mark, let’s talk about the balance sheet. Now you said that a key
priority was reducing the intercompany loan. What’s 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 that’s 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 we’ve reduced it by £700 million in
the first six months, clearly we’re 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 non-
cash flow means. And we’ve got a lot of work to do. This is a complex issue, it’s
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 doesn’t 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; we’re
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 there’s a few things. Firstly I’d 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 that’s a
medium term target; we’re going to pay down £500 million over the medium term
and then over time as NAV increases, we’ll get it down. I think it’s 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 we’re using a tougher
measure internally.

3. Simon: Now, at the full year you promised investors you would give further
detail on Aviva’s geographic strategy, so what’s 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. That’s how I think of it.
Simon: So tell us about cash flow generators, what’s 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 what’s your view of the turnaround businesses?
Mark: These businesses are in need of some work. We’ve strengthened the
management teams, we’ve 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. There’s 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 don’t 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 doesn’t have a growth premium, but we
certainly have options for growth in the future. If you look at Poland, we’re number
two life and pensions provider in Poland, we got a great position. Turkey, we’re
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. We’re focusing on China and South East Asia; we’re going to be
in markets where we have scale or the ability to get scale and places where we
have a competitive advantage. So, we’re going to be selective, we’re going to
focus our attention and we’re making some progress.
Simon: So what about Aviva Investors? What’s your thinking there?
Mark: Well, for a business of the scale that it has, and it’s a good sized business
- the fact that it only gives us 2% of our earnings is a problem. It’s performed in
terms of returns on the funds, it hasn’t performed in terms of returns for the
shareholders and we need to work on that. Jason Windsor’s been heading a

4. strategic group for the last few months and that strategy’s just coming to its final
stages. It’s really culminated in the appointment of Euan Munro to head that
business. Euan’s a class act he’s got an impeccable track record, and he’ll 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, we’re not relying on
great markets or things, we’re being pretty conservative in our assumptions. It’s
not a question of can we do it, but over what time frame it’s 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 we’re 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 they’re 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 they’ve 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 we’re
leading innovation and technology. And good to me looks like when distributors
can’t get enough of our products. That’s 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, I’m not so patient!
Ends -