2012 full year results interview transcript with Mark Wilson

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Transcript

Interview with Mark Wilson Date: 7 March 2013 2012 preliminary results video interview with Mark Wilson Mark Wilson, chief executive officer, Aviva plc

Simon Meadows, interviewer

Simon Meadows: Hello Mark, so this is your first set of results for Aviva what are your

impressions?

Mark Wilson: Hello Simon. It’s been an interesting couple of months in the job. In that

time I’ve seen shareholders, I’ve seen regulators, my diary’s been full of staff and

customers. I’ve even spent time on the phones listening to our call centre people. I think

I understand the issues very clearly what the business is going through. We have

insurance in our DNA after 300 years and the core underlying insurance businesses have

performed well on the whole. That really comes through. But you know what, over a

number of years we have disappointed and even angered some of our shareholders. Our

investment performance as a stock has lagged some peers. John McFarlane and the

board in July last year took a fresh look at the company. They looked at the company

through

a

different

set

of

eyes

and

they

realised

the

issues

that

had

to

be

addressed.

They came up with a plan that was right. That plan meant that we disposed of some of

the large businesses and you can see a bit of the noise in our numbers this year from

those disposals they made. But it was the right plan, and really you can see that coming

through in the results.

Simon Meadows: So Mark, give us your perspective on results, give us some detail.

Mark Wilson: Well Simon, these results have dominated by the £3bn loss and that can be

mainly be attributed to the £3.3bn write‐down on the sale of the US business. That’s

been well signalled to the market so that shouldn’t be a surprise to anyone. Under that,

the underlying businesses performed very well. And of course, a bit more noise in those

numbers as we have quite a few restructuring costs that we put in through the year. The

focus of last year was on generating capital, strengthening our balance sheet. That was

the plan put in by the board, and that has been achieved very well indeed. In fact, if you

have a look at our economic capital surplus, that’s gone from about 130% to over 170% ‐

that’s doubling our surplus. That’s an important measure for an insurance company.

Simon Meadows: So Mark, you’ve talked about the importance of a strong balance

sheet, but what does that mean to you?



Mark Wilson: I think it means two things: a robust balance sheet means you have to

have a robust capital position, and I think we’ve achieved a lot of that. We’re now well

into our target range. And also you must have an acceptable level of leverage or debt.

And when it comes to debt, we have two aspects to it: internal and external. The board

and John

McFarlane

made

it

very

clear

last

year

that

debt

was

an

issue

to

the

group

and

had to be addressed. Now is the time to address that issue. And so we have clear plans in

place. On the internal leverage we will pay down £600 million over the next three years.

On the external leverage we would like to get down to under 40% leverage ratio or debt

ratio, and these are both achievable targets.

Simon Meadows: I’d like to ask about your investment thesis. What is your thinking on

that?

Mark Wilson: When I was talking to investors, one thing came across very clearly. They

all ask

the

same

question:

why

hold

the

stock,

or

why

buy

the

stock?

I call

this

our

investment thesis. What’s the central reason of why Aviva? I think there’s a compelling

answer to that. It’s about cash flow and growth, in that order. Aviva’s a big business. It

has a huge inforce book of £28bn, it has over £300bn in terms of funds under

management and that can be a huge cash flow generating machine if we do it right. So

our thesis is about cash flow plus growth, in that order.

Simon Meadows: This all sounds very interesting. Obviously people will be keen to know

how you’re going to achieve this?

Mark Wilson: To

buy

and

sell

investor

thesis

of

cash

flow

plus

growth.

You

need

to

believe a few things. One, that we have a robust balance sheet with the acceptable level

of leverage; two, that we can execute our plans, especially on these turnarounds amber

cells; three, that we can generate the cash flows out of our book and out of our back

book to get progressive dividends going forward. You have to believe these things to

believe the investor thesis. So to do that, we’re going to focus our large businesses on

cash flow generation above all else. That’s managing the compact books, that’s getting

the right products with the right profit signatures, that’s managing expenses very closely

indeed. That’s all achievable. On some other countries, like perhaps Turkey, Poland and

Asia, it’s more about growth. And they’ll be measured by value of new business

primarily, but

not

at

the

expense

of

cash

flow

and

not

at

the

expense

of

capital.

Simon Meadows: Now Mark, historically some have questioned whether Aviva should be

a composite insurer. What’s your take on that?

Mark Wilson: Simon, if the question is should we be a composite, then it’s the wrong

question. The fundamental principle of insurance is about diversity. It’s about taking the

risk from one person and spreading it over many. That’s diversity. It’s about cash flows

and diversity. Aviva has scale in Life Insurance, in General Insurance and in fund

management. They are three strong core businesses to the group. In any one market we



may be in one of those business lines, two or three. The interesting thing is that when

you have more than one business line, it should give you more consistency of earnings

because the earnings flow from those three business lines aren’t correlated. Also there’s

substantial capital benefits through being a diversified insurance group. Those benefits

allow us

to

reduce

our

capital

substantially,

because

we

can

diversify

risk.

That’s

a good

thing. It’s a good thing from an investment perspective. The question is can we manage

complexity and I think the moves that the group has taken over the past 12 months to

simplify the group, to have fewer countries to focus on, reduces that complexity

substantially. We need to continue along that journey and we’re not there yet. So one of

our focuses will be significantly simplify the group but have diversity of earnings from

those three core business lines. It’s pretty fundamental.

Simon Meadows: Now Mark, you are reducing the dividend. What’s the background to

that?

Mark Wilson: Leading up to the announcement there was definitely two schools of

thought. On one hand you had analysts who said, “You know what, Aviva’s got enough

liquidity from the sales and disposals to keep the dividend that was at that level”. On the

other hand you had analysts who were saying, “fundamentally the underlying businesses

haven’t been earning enough to keep that same level of dividend”. Both of these

arguments are right. The question that the board and I had to address was about our

overall balance sheet and leverage position, both internal and external. To believe our

investment thesis, as I said before, you have to believe we have a robust balance sheet

with clear plans in place to reduce leverage. We had to fix this question once and for all

and that’s

what

we’ve

done.

Simon Meadows: I’m sure you’ve anticipated, of course, that some investors won’t be

comfortable with this. How do you think they’ll react?

Mark Wilson: I think some investors would certainly be disappointed. I’d also hope that

would be mitigated to an extent by the fact that we have eliminated the scrip option.

Now the scrip is dilutive and a bad thing for shareholders and it is also not consistent

with our cash flow thesis. The scrip in fact has been dilutive by about 16% over the past 8

years, and that’s a lot. What we want is a clean, simple investment story of cash flow and

growth. By

rebasing

the

dividend,

by

paying

down

internal

and

external

debt,

and

by

eliminating the scrip, I think that’s a very positive story to go forward and puts Aviva on a

very sound footing.

Simon Meadows: Looking forward, what are your priorities for 2013?

Mark Wilson: I think they can be summed up in three things: cash flow, simplicity,

balance sheet strength. On the cash flow we need to focus the businesses on getting that

cash flow out, that’s part of our investment thesis. On the simplicity, we need to simplify

the business further. One of the key things we need to do is develop our customer thesis:



a simple proposition that customers know they can expect from Aviva. That’s going to

take a number of months’ work this year. The balance sheet strength is about reducing

the debt and continuing the good work that has been done over the past 12 months. You

know, it’s important not to forget fundamental underlying businesses are first class. Our

insurance expertise

really

is

right

up

there.

And

it’s

the

businesses

that

are

going

to

generate the cash flows that are going to keep our customers happy, and ultimately are

going to get the returns for the shareholders. We have a strong business, we have a

strong team, the announcements made put us on the right footing for the future.

Simon Meadows: Mark thank you very much for your time.

Mark Wilson: Simon, thank you.

Documents

2012 full year results interview transcript with Mark Wilson