Aviva PLC (AV)

Q2 2010 Earnings Call

August 05, 2010 09:00 pm ET

Executives

Pat Regan - CFO

Andrew Moss - Group Chief Executive

Igal Mayer - Chief Executive, Aviva North America

Andrea Moneta - Chief Executive, Aviva Europe, Middle East and Africa

Analysts

Nick Holmes - Nomura

Oliver Steel - Deutsche Bank

Colin Simpson - Goldman

Barrie Cornes - Panmure Gordon

James Burse - UBS

Blair Stewart - B of A Merrill

Andrew Crean - Autonomous

Duncan Russell - JPMorgan

Raghu Hariharan - Citi

Presentation

Unidentified Company Representative

Good morning everybody. Thank you very much for making the time to come over here slightly earlier here, although I know is a very busy day for all of you. What we'll like to do this morning is first of all I am going to give you sort of overview of the business taking around the different regions and really try and assure you that these results, we believe are very strong almost every way you look and what I now want to do is hand over to Pat who will take you through the numbers in more detail and I will comeback and summarize and of course we will move to questions-and-answers and I think I'll have plenty of time as always for that part of the meeting.

Okay. The story I think is actually pretty simple, it's a story of strong growth in profits and of course the focus on capital generation that's have been of interest for many of you in the course of the last few months. I think we also have a good story to tell on that. So IFRS operating profit up 21%, MCEV operating profit up by the same percentage to £2 billion, return on equity on an IFRS basis across the business of 14.6%, substantial increase relative to last year. I am pleased to see the IFRS net asset value also increasing from the year end up to 394p.

On the capital generation point you know we gave you guidance for the full year of £1.3 billion of capital generation in the business. Pleased report that we're at £0.9 billion for the first half and we're getting a new guidance today for the full year at a figure of £1.5 billion.

Sales are growing across our business, across the big markets in which we operate in the UK and in Continental Europe, a 10% growth in sales, fueled by savings rates beginning to go up strongly in a number of our markets. And I think overall, it's a performance which demonstrates building momentum across the business.

It's great to see the capital being invested in new business now at internal rates in return a 12% up from 9.5% in the first half of 2009 and I can assure that we have a continued focus on cost reduction in the business. The overall cost in the business down 4% again in the first half of 2010. All of that means that the board is being confident in increasing the interim dividend that's going up by 6% to 9.5p.

And this is a graph I guess which looks right across the business of different performance metrics and tells I think a very positive story. 21% increase in operating profit on the IRFS spaces nearly doubling the IRFS profit after tax, capital generation up 80% relative to last year, sales across the business in total up 4% and that's partly because we have been pulling back intentionally on annuity sales in the US over the course of the last year. I have already mentioned the new business IRR and the combined operating ratio beating the target at 97% for the first half.

So let's move on to the regions and start with UK Life, and this is a business which effectively I think we have been transforming that for three or four years but the results are really showing through. Overall, life and pension sales up 10% here in the UK and in terms of mix a really significant increase in protection and annuity business. The cost space in absolute terms coming down by 12% in the first quarter and all of that flows through into that strong growth in new business internal rate of return at 15%.

So what we're talking about in our largest market is a 15% IRR market driven by the scale of our business and the cost reductions that we've made over the course of the last couple of years. The result of course is record Life operating profits. The first half profit 463 million broadly inline with what the full year profit was just four years ago.

And in terms of our ability to work with partners, I think some very positive news today adding to positive news earlier in the week. The restructuring of the Royal Bank of Scotland, deal that's now a seven year distribution agreement as we go forward freeing up the balance sheet taking ₤250 million of goodwill off the balance sheet increasing the net asset value as a result of that and we are very, very pleased with that restructuring of that deal. You will see no hope on Tuesday the announcement in respect to Santander there selling life protections through 1,300 branches of Santander from mid 2011 onwards.

And I have to say that you were already the general insurance partner Santander there and working on both fronts. And it's a real benefit of our composite model allows us to be competitive in all parts of our bancassurance business. If you just step back and think about it, we're working with Barclays, with HSBC, with Santander, with Royal Bank of Scotland here in the UK. We are the partner of choice as a manufacturer of insurance, exploiting the distribution power of many of the major banks in this country.

In terms of UK General Insurance very pleasing to see return to growth in the top line. As you know, we took some pretty decisive action exiting some unprofitable business in the calls to the last year. You can see on the graph there, I think it's something like a 7% growth relative to the second half of 2009 and I expect that to continue out driven in large part by the success of the brand in the direct space, the Aviva direct sales going up, RAC panel sales going up. We have something like a 100,000 more direct monthly customers at the end of June than we did at the end of December. So the brand really working well for us in that space.

The combined operating ratio coming down to 98% and I guess a good performance in the UK market as it is today. Small reduction in absolute profits but as Pat will show you later, current year profitability trends looking good. The rating environment, well we are not leading rates in anyway at the moment, we are following them and that means following double digit increases in major rates. It means single digit increases in home owner rates. And in the commercial market, where rating is still relatively static the name of the game for us there is retention. Our retention rates are stronger than ever in that business and it remains a profitable part of the business for us.

Let's move to Europe and you can see here that overall, life sales were up 13% in our continental European business and a lot of that was driven by bancassurance, up some 20%. New business internal rates of return, down a little bit but meeting our 12% hurdle rates, and that's really because of the mix of business in particular, the with profits business that we've been selling in Italy very high customer demand for products with guarantees in a number of our European countries.

General Insurance sales up 1% but some weather losses in the European business notably in Ireland and France, in the first half of 2010, so just looking at the European businesses combined operating ratio headed upwards a little bit at 102 but clearly we'd expect a resumption to more normal weather in the second half. So we'll be looking out for that.

So overall in Europe I think the story is one of our transformation program that quantum leap transformation program delivering life operating profits you can see up 29% in the first half, that's about 12% on an underlying basis after reserving change in Ireland.

I am very pleased with the progress we are making in relation to quantum leap. The claim center of excellence that we've put in place now delivering improved underlying General Insurance profits cost are down like-for-like 5%. The legal entity rationalization with a branch network being built out in Dublin although approvals now in place on that. 300 products removed from the product catalog in the first half. And lets not forget the re-branding [indiscernible] Ireland and in Poland over the course of the last year. That's going extremely well for us in both of those markets and opt our customer awareness in both of those markets very substantially.

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