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 GBP 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 recognize 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 center, 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, 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 threefold 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 presentations. 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 half year look today, with capital surplus of GBP 12 billion and operating profit of GBP 1.2 billion. The impact of COVID on general insurance claims net of insurance was GBP 165 million, 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. 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 GBP 0.06 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'll 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-19. Operating capital generation increased 14% to GBP 890 million, benefiting from significant de-risking actions. Operating profit of GBP 1.2 billion is down 12%, and Solvency II NAV is GBP 0.416 per share, down GBP 0.7 relative to year-end. Excluding the general insurance COVID-19 impact, our headline results are solid. Group operating profit would have been broadly consistent with half year 2019, with positive trends in BPA, savings and retirement, and Canada, offset by higher weather costs and lower profitability in Europe and the Aviva Investors.
Given their significance, my commentary will first focus on general insurance claims effects. In IFRS, we estimate net general insurance claims of GBP 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 GBP 165 million includes just over GBP 200 million of favorable claims experience in the first half, owing to the reduction in economic activity. It includes no allowance for similar effects in the second half. It also has a GBP 34 million allowance for prior year inflation, owing to expected supply chain disruption. On slide 11 of the pack, for OCG, the impact from GI claims is GBP 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 GBP 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 June 30. Solvency II surplus is GBP 12 billion, which is GBP 0.6 billion lower compared with the year-end figure. Positive operating capital generation was offset by GBP 1.56 billion of market impacts, primarily related to low 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. Central liquidity at the end of July was GBP 2.5 billion. This benefited from the completion of the FPI sale in July, which added GBP 0.2 billion. Remittances from subsidiaries were sharply down in the first half, at GBP 150 million. We did not seek to remit significant cash from the BUs 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 GBP 100 million more in proceeds from announced divestments. Focusing now on the asset portfolio, which I know is topical. Overall, our portfolio is performing well and 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 from borrowers to come. The LTV of the portfolio has increased slightly to 59%. Loan interest cover remains good at 2.8x , and the portfolio continues to perform, with just 1% of loans in 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. It's worth reminding you, we have a GBP 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 the 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 GBP 3.1 billion, an increase of 2.5x relative to the first half of 2019, and approximately 80% of our volumes in the whole of 2019. This helps us to achieve a net doubling of VNB in UK Life.... In the first half, we had good market conditions for BPA pricing, and we wrote a higher volume at an attractive margin. BPA demand remains strong. COVID-19 is not preventing deals from being completed. We expect these 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 GBP 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 GBP 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 of 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 key 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 three percentage points to 99.8%.
Excluding the 3.6% impact from COVID, core increased 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 GBP 54 million. We remain on track to meet our target for GBP 300 million reduction by 2022. In the first half, staff costs were lower from actions taken in 2019, and we reduced our contractor 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 GBP 43 million to various community support teams. At our full-year results, we outlined our expectation that 2020 P&L savings would be GBP 150 million, which is, as a reminder, on top of absorbing inflation.
Based on the first half trend, we are on track to beat that estimate, and 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 and 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.
Thanks, Jason. So in summary, Aviva is embarking on decisive change, and I'm confident we'll unlock significant value in the business. Focusing on where we have strategic advantages and scale will give us a clear direction. This focus, combined with transforming our performance and a strong and resilient financial position, will put us in the right position to win, and to win for the long term. I do not intend to distract the organization with another lengthy strategic review or a Capital Markets Day. That is not what is required here. I've only been in the seat for a month, but I'm already confident that we have many of the ingredients to make Aviva a winner. It is my intention to update the market as we make tangible progress in delivering on the priorities that I have signaled today.
I do, of course, look forward to meeting with many of you virtually or in person in the coming weeks and months, and sharing our progress with you. But in the meantime, thank you for listening, and with that, I'll pass back to the operator, and we will open the lines for questions.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel that, please press the hash key. Your first question comes from the line of Jon Hocking at Morgan Stanley. Please go ahead. Your line is open.
Good morning, everybody. Got three questions, please. Firstly, Amanda, you spoke about things you'd like to improve operationally in the UK business in particular. Can you give us some color in terms of where you see the capability gaps, and how those might vary by line of business? Secondly, on the UK business, do you have any thoughts at this stage in terms of where you'd like to take the business mix? And then finally, on the dividends, given the guidance from the various regulatory bodies in Europe, do you think it's possible to get a dividend from France and Italy in the second half of the year? Thank you.
Okay. Thanks, Jon. I'll pick up the first two of those questions and hand to Jason on the third. In terms of improving operationally in the UK business and the capability gap, so I think as far as the UK business is concerned, you know, we already have a sort of market leading position. And the dilemma, I guess, is why doesn't that turn into a market leading performance? And so what we absolutely need to focus on in terms of the performance of that business, is how the investment that we have committed to making... I think Jason, in the Capital Markets Day, last November, said that it was going to be GBP 1.3 billion over the period. Yeah, how is that investment going to transform into performance?
And so, what we need to be, I guess, laser-like, is the various areas of performance improvement that are required. So how do we get a better return on capital in some of the business areas that are currently underperforming? How do we look at what we need to do on expense efficiency? So are we at the quartile in terms of all of our markets at the moment and all of our segments? You know, we've already started some of that work, and we believe that there is room to take that further. In terms of our customer experience, you know, we've got great TNPS scores, but there will be more that we can do to make the customer experience smoother.
Pricing, risk management, you know, the list is long, but I think these are all topics. You know, these are all topics. I have 32 years in insurance, and, you know, we all have a lot of experience around the room. I think we know where to look. What this is about is about execution, right? It's about making sure that we actually deliver what we say we're going to do, and that GBP 1.3 billion, the benefits flow from that, and that lack of rigor and execution. And I believe that, you know, that is where we should focus.
As far as the UK business mix is concerned, you know, look, if I look at the UK, we're number one in life, we're number one in GI, we're sort of, you know, got 25% share of the workplace market. We're number two in protection. You know, I think that we're in good shape. You know, we have a good market position, we have a diversified business, and there are huge benefits in that diversification of that business, as I'm sure you know. So, you know, I think the business mix looks good. We will be looking for more growth in terms of the GI business, we know that.
But we also know that there's opportunities in the savings and retirement business to see that business grow, and we've already demonstrated in the BPA, I think, the solid growth in the last six months. So maybe Jason, can I hand over to you?
Yeah, sure. Look, the regulatory guidance is evolving. You know, we've seen various statements from, you know, multinational agencies, and regulatory agencies. We have, yes, rather than I think, we didn't have, I think, any sort of getting the funds from L ife. You know, we've been continuing to look after them, which the plans there, and it is not easy for us. In any event, so that the regulatory prohibitions continue to get quite far in terms of willingness to allow. So we've got an expectation, as I said, in the prepared remarks of significantly higher remittances in the second half, but less so from the international side.
Okay. Excellent. Thank you.
Your next question comes from the line of James Shuck at Citi. Please go ahead. Your line is open.
Hi, James. Oh, you might be on mute.
I am indeed on mute. Apologies for that. Thank you.
It's the most, the most used expression in the lockdown. "You might be on mute.
The things we learned through lockdown. Yeah, I had two questions. So the reduction in market risk on the Solvency II ratio, so some big changes there. I guess I'm keen to understand to what extent that is temporary, a tactical decision, and or permanent. And are there implications on the earnings front? Because obviously, you're increasing hedging costs, and the asset allocation is changing. Secondly, on the international operations, you're not explicitly saying disposals, but you are saying that there might be better owners in the longer term. Are there any impediments to sale?
I know a bunch of the operations that sell through bancassurance agreements or through IFA networks, where you might have a change of control situation that might cause a problem. And perhaps you could just update whether there's been any expressions of interest up to this point. There's been very strategic reviews going on for some time, so it'd be just good to gauge the interest if there is any. Thank you.
Oh, okay. Thank you, James. I'll pick up your second question, and I'll pass over to Jason on the first. On the international operations, and impediments to sale, look, I think we are ... We're not saying today that these businesses are disposals, right? So what we're saying is that they're great businesses, they are excellent people, they serve their customers really well. And if we see opportunities to expand on that, to generate better returns or sustainable cash flows, we're willing to invest. But if we can't, we do need to be decisive and withdraw capital, and it may be better owners of the business in the longer term to just repeat, I guess, what I've already said. You wouldn't expect me to comment on expressions of interest, and I'm not going to do, I'm not gonna do that.
And as I said, I'm not saying that these businesses are disposals. In terms of impediments for sale, then clearly, you know, we do have strong JV relationships in some of these markets, and we will work through all of that. Jason?
Sure. I mean, it varies slightly in what we've done, but what I would say, we have a very clear economic value framework for asset allocation, where I talked about this at Capital Markets Day today, where we use the return on economic capital to really drive and define all of our decisions. And that's embedded in the way that we've been, you know, thinking about the balance sheet in the first half. So we're not thinking about risk per se. Capital is not short in and of itself, but we want to make sure that our exposure to market risks is aligned with the level of return that we can get. So on an economic basis, the return is slightly enhanced, in fact.
There is a small impact on IFRS, as I've talked about before, in France, a sort of double digit figure, buying interest rate options. And the interest rate is a risk that isn't really rewarded. So we're trying to make sure that, you know, we've taken that off the table. I don't think there's any significant change to the level of reward on the equity and credit side. You know, we've been quite thoughtful about how to bring that through, make sure we've got a well-diversified portfolio. But the margin, we've been reducing risk, but with wider spreads, you know, the actual return is, on an economic basis, has been maintained.
Okay, that's great. Thank you very much.
Your next question comes from the line of Greig Paterson at KBW. Please go ahead. Your line is open.
Well, can you hear me?
Yes, we can hear you.
We're great.
... and everything. Two questions, please. Just in terms of your internal mixers, reinsurance mixers, I wonder if you could give us an idea that if those were removed, how much that would impact the Solvency II ratio? The second question is, you mentioned investing in your focus market. I was wondering if you would consider-
Not material.
Acquisitions in the UK and Canada. And the third question, I note that in the verbiage on UK Life, there was very little reference to assumption changes slash management actions slash optimization annuity. Was that because it's now embedded in the underlying, so you're not calling it out separately, or it was low this time? And if so, what was the reason? Yep. Thank you.
Okay, thank you. I will pick up the second question, and Jason will pick up the first and the third. On the investment in the focus markets, so obviously, today is not a day to talk about acquisition activity. Today, we're talking about how we want to invest in those businesses to become market-leading performers in the areas that they're in, that we already have, actually, strong market share positions in all of those markets. So, you know, I feel very, very comfortable about that. But also, I'm comfortable that we have some headroom to continue to grow in those markets. Jason?
Yeah, on the mixer, the first order question... The first order answer to your question is zero. You know, the mixer does not enhance proof solvency, but by... You know, we get the diversification. It's about where we see the capital, whether we get it in the group or in the subs, and that's the fundamental question. There's a second order, subtle point around risk margin that I wouldn't be able to talk about that. That's a small, very small figure. In terms of UK Life, there've been, you know, on the OCG basis, you know, slightly more than on an IFRS basis, that came through where we've had, you know, some annuity optimization and activity.
The sort of answer I gave to James a moment ago, we've thought hard about how to, you know, manage, credit risk in particular, you know, as we back the new annuities. But there's no significant one-offs that I would say. And we certainly haven't changed assumptions. And that, that'll be something we'll come to in the second half.
Sorry, Jason, are you saying that if you remove the mixer, your diversification credits on the SCR won't change at all?
Correct.
All right. Thank you. Cheers.
Your next question comes from the line of Ashik Musaddi at JP Morgan. Please go ahead. Your line is open.
Yeah, thank you, and good morning, Amanda. Good morning, Jason.
Good morning.
Just a couple of questions I have is, first of all, I mean, I think you did mention about this Europe and Asia, that, it's not bad businesses, it's just that, you are looking for opportunities. But, I mean, what sort of metrics shall we look at to decide whether you are delivering on these businesses or not, whether you want to keep these businesses or not? What sort of metrics would you focus on? Would it be cash or operating profit, OCG? What will make you decide that these are the businesses you need to keep, and these are the businesses that you don't need to keep? So that would be the first one.
Second thing is, can we get some sense on local solvency ratios to understand how the remittances are going to look like for second half this year, and how comfortable you are on the full-year remittance for next year? Because clearly, I mean, remittances is very important, and given that you are planning that, you haven't taken out any remittance in first half, it would be great to get some color on how we should think about, like, second half and next year. And just last one is, sorry, going back to the dividend topic. I mean, you mentioned that there will be, there has been a first interim, second interim, and there will be a final dividend, but any color on what should it be based on? Should it be based on IFRS earnings?
Should it be based on Solvency II capital generation? What metrics do we need to focus on, or should it be based on IFRS basis? So any thoughts on that would be very helpful. Thank you.
Oh, okay, thank you. I'll take the second to, so the first and the third question, and, and, Jason will take the second. So on Europe and Asia and the metrics that we will use, so look, obviously, we will look at this across a range of metrics, I think probably all of the above, in terms of the ones that you mentioned there, Ashik, in your points. We will, we will look at, the returns of those businesses. We will look at the sustainability of the cash flows to the center. We will look at, the, you know, the, the return on capital. But, but also, we will look at our rates to win and our position within those markets to see whether or not, you know, we, we actually have the capability to be able to win there.
You know, recognizing quite rightly, as you said, that they are good businesses, and they are good, there are good people in them, and, you know, they deliver well for their customers. But it might be that, as we said very clearly, there might be better owners in the longer term. But this is part of a sort of, you know, thorough look that we will take at each of these businesses. Your point around the dividend, and, you know, I think we were clear that what we said on the dividend is that we would come back to all dividend questions in Q4. We thought it was important to be sort of transparent at this point.
What we would base that dividend policy on will be the strategic priorities, the future portfolio, the ongoing commitment to debt reduction, and the desire for more resilient and a sustainable dividend. We felt that as we were making a meaningful change to the strategy, that it was important that we should also review the dividend. Jason?
Sure. I mean, I'll just add on that one. We talked about capital generation, and obviously, it's the long term thing that we're after, the return on capital, you know, as we think about, you know, in the long term, clearly, we need to turn those returns into cash. So we're trying to manage those two as the primary metrics. Certainly, be fed into our thinking, as they have been for some time. On the solvency ratios, actually, all in pretty good shape, having had a pretty bumpy first half, yourself. But I talked at the year-end results about the significantly improved solvency position in France. I think I said the results, it was up 50 points or so in the second half, and there's no real change from that.
Probably backed up a little bit in July with the, with the falling rates. UK, the big UK subsidiary is down to very small single digits from the position at year-end. You know, we've worked hard, and it's built solvency. There is an impact in the GI businesses, as you might imagine. Pretty much, you know, if you took the COVID-19 loss on a OCG basis, and spread that across the GI subsidiaries, then you're probably looking about 10 points in those two subs. That's probably the biggest impact that I could guide you to.
That's very good. I mean, I just have one follow-up. Would you be able to comment on the timeframe that we need to look for Europe and Asia? Like, you're going to give them one year, two year, or ... I mean, any thoughts on that, or is it still too early to give clarity on that? Thanks.
No, I mean, I think bearing in mind 4, 4 weeks in the seat... What we've outlined today is our framework for how I'm viewing the portfolio. And we're not-- we won't discuss the timeframe today.
That's very clear. Thank you.
Your next question comes from the line of Blair Stewart at Bank of America. Please go ahead. Your line is open.
Thank you very much. Just coming off mute there. I almost forgot. A couple of questions. Firstly, on the dividend, I wonder, what's the significance of the GBP 0.06 that you've declared today as second interim? That takes us to GBP 0.155 dividend payment for full-year 2019. Is there any significance at all in that number? Then just related to the dividend, Amanda, you talked about being in a position in Q4 to set a dividend strategy with a view to or having a view on the strategic footprint of the group, but you also mentioned that, you know, these strategic decisions will be taken over time. I think you mentioned long term, you know, a few times in your comments. So I'm just trying to, you know, marry that up.
How can you be in a position to make a decision in Q4, given that your dividend choices will depend on your strategic footprint of the group? And my final question, just really thinking about possible synergies from shrinking the footprint of the group. Jason, perhaps you can remind us of the internal debt that remains and where that sits. That might be one issue, and there might be others as well, that you might care to mention at this stage. Thank you very much.
Okay. Thank you, thank you, Blair. So in terms of why only 6p, what we said in May, obviously, was that we would come back in Q4 on all dividend matters. But as we discussed this as a board, we felt that it was important that we would pay something at this point to recognize the importance of dividend to our shareholders, you know, particularly in this difficult economic environment. But obviously, we have to balance that with prudence. We felt it was right to pay something, but you know, but we will come back on all other matters in Q4. As you said, about the strategic footprint-...
You know, I think again, to go, to go back to, to something I said earlier on the dividend policy, you know, the strategic footprint will be one part of the dividend policy, as will our strategic priorities, you know, the ongoing commitment to debt reduction, the desire for a resilient and a sustainable dividend. And I think all of these things will be taken in the round when we consider that policy. Jason, on the dis-synergies?
Sure. Well, I'll answer the specific question, but on the internal debt, there's only one upstream loan that's from the GI business to the group, that is just over GBP 1 billion, dramatically reduced as part of the restructuring that we embarked on, and I remember it well, in 2013 when it was at GBP 6 billion. So that's, that has been fundamentally restructured over the past 7 years. I mean, otherwise, I don't see anything specific on other dis-synergies that you had in mind.
There's no other internal debt from group into the European subsidiaries, et cetera, is what I was thinking about?
I mean, there's downstream loans, but you'd expect that in the form, you know, that's just normal, you know, normal corporate finance. No, there's nothing else that you need to be aware of.
Okay, great. Sorry, Amanda, I forgot to just ask one question. Just on the de-leveraging, you've mentioned a few times the group's clearly got some de-leveraging targets out there. I just wondered if you'd if those still stand, or if you want to do more than that?
As I said, yes, we are committed to further debt reduction. The financial targets that we have in place still stand. We have GBP 2.2 billion of maturities over the next two years, so we believe there will be ample opportunity to reduce our debt.
Thank you.
Your next question comes from the line of Fahad Changazi at Mediobanca. Please go ahead, your line is now open.
Oh, hello, good morning. Just, two questions operationally, please, if I may. So, as you said, there's been a strong performance in opportunities in H1, given attractive pricing, and the growth moderate in H2. But has pricing come off now, or can we expect similar volumes in H2 versus H1, or will they be lower? And I suppose, given your comments on being a leader in the UK, are or will BPAs be a strategic focus, where we can see Aviva increasing its market share? And one more on Canada. A strong combined ratio, a little help from reserve releases, but in large part, the turnaround was to be driven by rates.
Given COVID considerations, can you still put through more rates, or will you get to your target core when the full impact of the rates you already put through comes through? Thank you.
Okay, thanks, Fahad. I'll pick up the question on the on BPAs and the leader in the UK, and then Jason will pick up the other two points. So I think, you know, we do see the BPA market as attractive for Aviva. We are number 3 in that market. It's a large, it's a compelling market, and clearly there is a structural growth opportunity there as companies seek to de-risk their pension liabilities. And I think, you know, combine that with the skills and capabilities that we have in that area, we do see that as a continued growth area. Jason, in terms of the other two points?
Sure. So the BPA growth in the first half was strong. I think last year we wrote just over GBP 4 billion. The first half last year we wrote 1. So you won't see that level of growth, you know, sort of 2.5x , as I said, in the second half, because we wrote GBP 3 billion in the second half last year. But the GBP 4 billion gives you a sense of, and we'll, we'll clearly, be higher than that. We've got, a GBP 1 billion scheme, where we are preferred provider on in July, so we're already at last year's volume. So the second half, you know, we can be a bit more selective. I think we will continue, you know, to allocate capital very, carefully.
And again, we've got, you know, as I said a moment ago, we've got really clear economic metrics for driving all the new business pricing, but particularly in BPA, given its scale. We're very clear the level of return that we can make, and we will continue to be very watchful of that as we look forward, both in terms of the price and the amount of capital that we allocate to it. And you'll see in the numbers that the strain in the first half was actually really, really very attractive, and that's obviously a direct corollary of the pricing. In terms of Canada, I think it's unlikely that Personal Lines rate rises will be going through any further. I think that, you know, we did have significant filings across that.
There was, you know, very large claim inflation in 2017 and 2018. I think we're sort of up with events, if you like. There will be some pressure from politicians, as there always is in Canada, to back out some of that rate increase. But the underlying, you know, performance in Canada is really strong. You know, across the board, the work that the guys have done in the last couple of years to turn that business around is, is excellent. It's a good platform in which to continue to grow.
Okay. Thank you very much.
Next is from the line of Colm Kelly at UBS. Please go ahead, your line is open.
Hi, thanks, and good morning, everyone. Just a question on the review of the dividend policy. So I know previous management were quite quick to reassure regarding the dividend policy and its sustainability, driven by the strong financials. Are those strong financials remaining on show at half year, despite volatility and de-risking having enhanced? So-
... Has anything specifically changed on these financials or your view of them to require the review of the dividend policy? That's the first question. Secondly, on the strategy, and thanks a lot for providing the update on that today. Is there anything you can say regarding your expectations for the mix, the business mix between life, P&C and asset management that you would like to achieve over the medium term? And then thirdly, a question on the return on capital. So the group, as you know, currently benefits a lot from diversification in its capital base, which is a core part of the return on capital that the group generates.
With the update in the strategy for the international business, are you confident that if those businesses are not part of the group over the medium term, that it wouldn't adversely impact on that diversification benefit to the extent that, that it would then create a drag on the return on capital, which is a core metric for the group? Thank you.
Thanks, Colm. So, in terms of just your first question around the dividend policy and the strong set of results, obviously, I think to just take a step back, what we've said today, I think strategically, is that there is a meaningful change to the focus of the group, and therefore, with meaningful change, we believe it's also important that we should review the dividend. So in the danger of repeating myself, but I will, if that's okay, you know, that will be set around the strategic priorities, the future shape of the group's portfolio, the commitment to debt reduction, and the desire for the dividend to be resilient and sustainable. So, you know, that's the context upon which we will review the dividend policy.
So for strategy and the expectations around the balance between life, P&C and asset management, I mean, you know, we have more work to do, clearly, in that area, and we... And today, I'm not going to be talking to you about specific numbers. All I would say is that, you know, if I think, if I look at the way that customers look at insurers, they do not look at us as individual business lines, and therefore, I think it's really important that we have a good diversification of products across those lines, and so we can really enhance the strength of the Aviva brand out to our customer base. And that's really what we will be looking to do. We have, you know, very strong positions in many of our life product lines, GI product lines.
Again, I feel really boring because I know I'm sort of repeating the same point, but I think it's really important to stress. What we're saying is, you know, we need to turn that, those leading market positions into, in, into leading market performance. Jason, on the return on capital diversification benefit?
Sure. Diversification comes in many forms within the group. Within, you know, the big legal entities, we have strong diversification by design. You know, we have multiple products in the UK, most obviously between annuities and protection, but between different types of savings and annuities. So that actual level of... There, there's real value in, you know, having a mixed product within both the life and the core non-life subsidiaries. As you think about diversification between entities, the predominant diversification benefit comes between the UK life business, which is our biggest business by quite a margin, and the general insurance businesses in the UK and Canada. So that's where we see the majority of it.
There is clearly some internationally, but that's, it tends to be slightly less because that does correlate more with the market risks that we have in the UK.
Okay. Thank you. I appreciate that.
Thank you, Colm.
Next comes from the line of Andrew Crean at Autonomous Research. Please go ahead. Your line is open.
Good morning. Good morning, everyone.
Good morning, Andrew.
A couple of three questions. Firstly, if you focus on UK, Ireland, and Canada, UK Life is 80% of that, and in November last year, a slide was presented saying that the cash generation from UK Life would be flat over the next decade. Does that not set the scene for the potential growth rate of the overall business in the long term, unless you can accelerate UK Life? The second question was, I say it's a little bit of a mean question, but we have had a number of chief executives here at Aviva who've talked about being better and more efficient and trying harder with greater focus and more operational efficiency.
Could you give us a little bit more detail below the line as to how you will be delivering things different from before, and whether you'll do so with a different, not a different strategy or business, as I would say, people? And then finally, on the debt reduction, are we to assume that you will leave it all now until the last year in 2022, or will you look in 2021? You've got some debt redemptions, I think, in next year. Thank you.
Okay. Thank you, Andrew. So maybe I should start with your main question first, which was the second one. So look, I think, as I think I said, and I think as you said earlier, talking is the easy bit, right? So we know that. We know that we have to improve performance. But you also appreciate that we always have to lay out our plans to you guys. And what will be different? Well, firstly, I think what will be different is the context in which we set the strategy. We've set the strategy that we will be clearly focused on the markets where we believe we can win, and where we believe we can't win, we will manage for the long-term shareholder value.
So, you know, that in itself creates an extra element of discipline and focus within the organization, which means that when we have GBP 1.3 billion to invest, we're very, very clear about where that investment goes. Now, the investment is one thing, but how we actually then deliver that is another. And that will be around the rigor, around the. You know, these things may sound sort of obvious, but, you know, execution is better than strategy. I, you know, I've always said that. And the rigor and discipline with which we follow through on where we've invested something, has it achieved the benefits that we said it would? Whether it's an efficiency benefit or, you know, whether it's around the financial balance sheet.
These are all areas where we will be monitoring closely and making sure that we deliver on that. You know, I have 32 years experience in working in insurance, the last sort of 15 as a CEO. I sort of know, I think, what good looks like. I'm very focused on performance management, and you have to judge me by my actions. I don't expect that to happen today. You know, progress needs to be made, and we'll come back to you on when we make progress, and, you know, we'll talk less and act more. But, you know, all I can say today is I am confident with what I have seen so far here, that we have the capability to be able to deliver, what we say we're going to do.
But as I say, you have to judge us by our actions, not by our words. In terms of the UK Life being a significant part of our business, of course it is. But also the cash generation that comes from the back book, the cashflow, is a very, very important part of how we invest and how we can grow the other areas of the business. We are seeing good growth in areas, you know, in Lindsey's area around workplace. We've seen, you know, fund flows in Euan's area over the last period, we've seen good growth in Colm's area around commercial lines. The BPA growth is good. So what we have to look at is what is the insurance company of the future going to look like?
Where is the growth of the insurance company of the future going to look like? And we have to align ourselves to that. But recognizing, I guess, we're in a good position in that we have a strong back book and, and cashflow coming through from that to help us to do that. Jason, on the debt reduction?
Sure. I mean, just on the cashflow, just expand a little bit, if I may. The UK Life, as we presented it, back in November, was excluding the savings and retirement and Aviva Investors business. So what we were trying to say, look, this, we know, you know, there are certain parts of it, about 20% of that book is that what we call heritage, is in runoff, but within that, we can grow and sustain that cashflow. And that is the bedrock of the dividend paying capability of the organization, and it's a very, very stable cashflow, stock of cashflows within UK Life. On top of that is the growth potential in the investment and savings business. You can see today we've made a good headway in continuing to grow that.
We're doing really well in workplace and retail savings, and that's starting to hit the bottom line. You know, we've got real operational leverage within those two segments that's starting to really take hold. But I'm pretty confident about the outlook that we can have in terms of dividends and profit growth within S&R. In terms of debt reduction, look, we have made some headway, but not as much yet on the GBP 1.5 billion reduction. The leverage ratio is 32%, right? So our core metric that we managed to is to get below 30%, that was the GBP 1.5 billion that we scaled previously, but value held up well.
We do have some redemptions in 2021, as you mentioned, I think, you know, reasonably significant and significant again in 2022. So we've got some flexibility. I think at this stage, you know, we remain committed to that, lower leverage, as we've mentioned, I think twice on the front page of the press release. So we're committed to that, the timing of which I think we will be reviewing again when we think about the strategy and dividends, but we're certainly hoping to make progress in 2021.
Okay, thanks.
Next comes from the line of Gordon Aitken at RBC. Please go ahead, your line is open.
Hey, morning. Thanks. First question is on disposals. It's very difficult to dispose of businesses when you can't meet people face to face, unless, of course, you already have relationships with potential buyers. So are there regions or countries where these relationships already exist, so that COVID won't be too much of a barrier? Second question is on the proceeds you might get. You've talked about the options of investing in businesses or returning capital to shareholders. Just ... are you talking about acquisitions or are you talking about, say, writing new, more new business? And then finally on bulk annuities, you know, do you share the view of your predecessors have had, that the large end of the market is not as attractive as the, the smaller end? Thanks.
Okay. Thank you, Gordon. So again, just to restate, what we haven't spoken about disposals today, what we said is this is the way that I'm viewing the portfolio, and we need to look at the businesses in the international area and ensure that they are delivering the right returns for us, whether that be around cash, around the return on capital. You know, those are all the areas that we will look at. And you know, the fact that we can't meet people face to face, I you know, I don't think there's not that sense of urgency. I've said longer term shareholder value. But in many respects, the world has adapted brilliantly, hasn't it, to this new way of working? And who...
I think if we just said six months ago that we would be working in the way that we are working today remotely, you know, I think, you know, we've been pretty successful at that. In on the proceeds, again, just to be clear, we, today is not the day to talk about acquisitions. Investment in the business, investing for growth, you know, that will be centered around the businesses that we've said are in our UK, Ireland, and Canada. Those businesses already have a significant amount of investment set aside for them.
What we need to do, and I'm very boring, I know I'm gonna say it again, is make sure that the money that we're investing is delivering the benefit that we expect, and that was - that is where we will be focused. In terms of the footprint on BPA,
BPA, so I think we've been spreading our wings slowly over the last three or four years. We continue. We've recently, as I said earlier, a big scheme already in July, which is around GBP 1 billion. We did a big scheme earlier in the year. It was over approximately GBP 1 billion. We wrote, you know, a big scheme last year. I think we still prefer, you know, to do bits around that level or smaller. It's just easier from a balance sheet management perspective, lining up the assets and the reinsurance and the like. You know, but we have, as I said, started to spread our wings, and we're starting to get more comfortable with the way that we can risk manage those particular transactions.
Thank you.
Next question comes from the line of Dom O'Mahony at Exane BNP Paribas. Please go ahead. Your line is open.
Oh, hi, folks, and thank you for taking questions. And firstly, Amanda, congratulations on the new job.
Thank you.
So, two questions. I guess the first is on the perimeter. You've been very clear about, you know, the focus being on UK, Ireland, Canada, and the other businesses being managed for, sort of, managed for value. There was some discussion in the investment community about whether Aviva is the, you know, the right holder of the heritage book in the UK. Whether there might be, you know, benefit to exposing that. Should we be reading the focus on the geography as a sort of a statement that that's not a priority or that's really not a likely outcome? And then the second question, and sorry, to harp on about the dividend and looking forward to the Q4 update.
But, you know, everything you've said in terms of the financials suggests that, you know, the financials of the business with the current perimeter are not preventing you from maintaining the dividend at the level it was, say, last year. I just wanted to confirm, in particular, you know, relatively recently, you gave us some targets for cash and capital generation. Assuming that the perimeter doesn't change, is there any reason for those cash and capital targets to be lower than you previously thought? Thank you.
Oh, okay. Thank you. So on the perimeter and your question around heritage, and what we do with that. So I think firstly, let's make the statement, you know, we're committed to being the UK's leading insurer, and therefore, we're committed to being composite. The UK back book generates, as Jason, I think, just alluded to, a significant amount of cash flow, and we believe that it is important to our financial strength and our balance sheet resilience. So, you know, that hopefully clarifies that point. But, you know, just to reinforce that into the composites. As far as the targets are concerned, I think, you know, we say it – we're saying today quite clearly, that we're not announcing any changes to the targets today.
But as Jason outlined, COVID-19 has made achieving some of those targets a little more difficult. But the dividend policy review will be set in the context of, you know, the meaningful change that we have spoken about today on the way we look at the portfolio, the strategic priorities of the group, our commitment to debt reduction. You know, I know I'm repeating myself, but I'll probably continue to do so.
On the targets, Dom, no one's changed my targets or any of the other management teams.
Absolutely.
We're after them, right? And we've got no room to maneuver, really. I said at the Q1 call, you know, that is gonna be harder to achieve. That's just life. But, you know, we're gonna take that and, you know, try our damnedest to make sure that we get there.
Very clear. Thank you so much.
Next question comes from the line of Abid Hussain at Credit Suisse. Please go ahead. Your line is open.
Oh, hi, morning, all. Thanks for taking my questions.
Morning.
Morning. So I've got two questions from me, I think. Firstly, just coming back to the remittances. I just wanted to check if there were any minimum capital hurdles that you came up against, within the local entities, that prevented you from taking out the cash? Sounds like there wasn't, or, and if that was the case, was it just, you know, was it just a case of a soft request from the regulators? So just any more color on that would be helpful. And then the second question, I'm afraid, can I just come back to the difficult question that Andrew asked on, on portfolio exits?
I guess the question is really, if you can remind us what options have already been looked at on the portfolio exits and on the international businesses in the past? And what is different in the way that you're approaching these businesses? I suppose there is a slight concern that, you know, we've been here before, and I think that's what some of us are concerned about, you know, especially if you're saying sort of you want to manage these international businesses for long-term value. So, you know, it's difficult to kind of decide what side you're landing on this. Are you just like landing on the side that, you know, you wanna dispose of these businesses or five years down the line, we still have the same perimeter?
Okay, thank you. I'll pick up that and then hand to Jason on the remittances. So you know, what we've said, I'm not gonna comment on the previous reviews on portfolios and exits and what we've considered and what we haven't considered, and I don't genuinely think that you would expect me to do that anyway. Your concern about having been here before, again, I know I'm in danger of repeating myself. I get that. What we've done here, I think, and I don't think this has been done before, is we've been very clear, and we're very transparent and honest about how we view the portfolio going forward.
We very much view the portfolio in terms of the businesses where we will invest for growth, the UK, Ireland, and Canada, and the businesses where we will manage for long-term shareholder value. That does put it, that is different, I think, from the past, because that does put a different lens on how you invest and how you see those businesses and, you know, and what and the actions that you take on a day-to-day basis. I think that, you know, we will come back to you as we have more to say when we make more tangible progress. Jason, on the remittances?
Sure. We chose, you know, somewhat out of discretion, you know, not to take dividends in the first half, clearly that there were challenges around the amplitude of the market moves in the early part of the crisis. And that's just not, you know, the right time to be thinking about dividends. We're thinking about many other things around supporting customers and stabilizing the balance sheet. The group's got very strong liquidity in the treasury as we've continued to announce, so there was no shortage of cash around the place. So that's, sort of, you know, the overriding concern. Clearly, it was being specific, as I said a minute ago, the multilateral and national supervisory comments on dividends, particularly out of Europe. We're cognizant of those.
As I've said, on a couple of these calls, we listen intently to the views of our regulators, and we continue to build relationships with them.
Thank you.
Thank you.
Next question comes from the line of Oliver Steel at Deutsche Bank. Please go ahead. Your line is open.
Good morning. Three questions. We're all very much looking forward to the fourth quarter update, by the way, because most of today's questions haven't really been answered. But the first is, you know, nine months ago, the board would have come up with a rather different strategy. And I know that was before your time, but you must be very well aware of how the decision-making process has changed during that period. So I'm wondering, what is it in the board's mind that has actually shifted you from the strategy under your predecessor to the new one? Secondly, at a rather more parochial level, any plans for management actions in the second half or guidance that you want to give on that?
And then thirdly, does possible disposals or certainly, a sort of lower emphasis on the international operations, change the local capital levels that are required in those local operations, either for better or worse?
Okay. Thank you, Oliver, and apologies if you think we've not been answering the questions. So in terms of the way that the board saw the strategy nine months ago, as you quite rightly say, I wasn't on the board nine months ago, so I really can't comment on that. Obviously, I've been on the board since the start of this year, and I have been part of the, you know, the very fulsome and good debate that we've had on the strategy. This is the strategy that the board is fully committed to. We have a new chair, we have, you know, a number of new board members, and we've had good debate about this strategy. And, you know, we're all fully behind and committed to delivering on this strategy.
You know, I think we've been clear. We've been very, very clear about what we will focus on and how we will take that, and how we will update you as we go forward. Jason, would you like to pick up the two points on management actions and the lower emphasis on capital?
Yeah. On management actions, I think from an IFRS perspective, we hit, I think GBP 69 million in the first half. I've given guidance in the past of 0 to 100. I don't think that'll go backwards, but it might be up slightly. We're not expecting anything like the level of release that we had in 2019 or 2018, just to be clear. I think I was clear on that back in November. I just reiterate that guidance, that somewhere in that 0 to 200 range is our long-term expectation for IFRS, and, as we said, slightly higher for OCG, somewhere around GBP 200 million more of a run rate there, and then there's contribution on the SCR side. On local capital levels, I mean, I honestly don't know.
We've thought about that a little bit, just the way that regulators are reacting to COVID-19 even more broadly. We actually think the Solvency II framework has actually behaved pretty well. Obviously, some refinements that Sam has talked about, but you know, we buy into that framework. You know, we believe in economic capital. We manage to it, and we think it's worked well for us, and I don't see any consequences of the capital management as a consequence of what Amanda said today.
So sorry, just to follow up quickly on that. What I'm asking, I suppose, is as a result of your strategic announcements today, does that change the local regulatory...? Does that change any, the need for cash in those subsidiaries?
Well, as you said, Oliver, I don't see any direct consequence on capital in those subs.
Thank you.
We're just giving a strategic update today. There's nothing beyond that. There's nothing beyond that for regulators to react to.
Thank you.
That does conclude the Q&A session. I will hand the call back over to Amanda.
Okay. Thanks, thanks, Nicole. Thanks, everyone, for joining the call. As we've outlined today, I think we're reporting a solid set of half year results. I'm really proud of how our people are going above and beyond to support customers during the crisis, and I'm gonna thank them all for their hard work. I will say again, look forward to meeting many of you virtually or hopefully in person in the coming weeks and months, sharing our progress with you. Thank you so much for listening, and I hope you all manage to get a break, even if it's a staycation, over the summer holidays. Thank you very much.
That does conclude the conference for today. Thank you for participating. You may all disconnect.