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Aviva (NYSE:AV)

H1 2013 Earnings Call

August 08, 2013 3:15 am ET

Executives

Mark Andrew Wilson - Group Chief Executive Officer and Executive Director

Patrick C. Regan - Chief Financial Officer, Executive Director, Chairman of Disclosure Committee and Chairman of Aviva Investors

Nick Amin - Group Transformation Director

David McMillan - Chair of French Board and Chief Executive Officer of Europe Operations

Hock Seng Khor - Chief Executive Officer of Asia

David Barral - Chief Executive Officer of UK & Ireland Life Insurance

Maurice Tulloch - Chief Executive Officer and President

Analysts

Jon Hocking - Morgan Stanley, Research Division

Blair Stewart - BofA Merrill Lynch, Research Division

Andrew Hughes - Exane BNP Paribas, Research Division

William Elderkin - Goldman Sachs Group Inc., Research Division

Ashik Musaddi - JP Morgan Chase & Co, Research Division

Andrew Crean - Autonomous Research LLP

Christopher J. Esson - Crédit Suisse AG, Research Division

Gordon Aitken - RBC Capital Markets, LLC, Research Division

Marcus Barnard - Oriel Securities Ltd., Research Division

Barrie Cornes - Panmure Gordon & Co. plc, Research Division

Oliver Steel - Deutsche Bank AG, Research Division

Alan Devlin - Barclays Capital, Research Division

Fahad Changazi - Nomura Securities Co. Ltd., Research Division

Mark Andrew Wilson

Well, good morning, everyone, and welcome to our 2013 interims. I was reflecting before that I've been here since January, a period of 7 months, and it's fair to say a lot has happened over that time. At the start of the year, I think we said -- or I said that I wanted to make Aviva like a Swiss clock, predictable like a Swiss clock. Now I don't yet think we're that precision instrument, but I genuinely believe we're making some good progress.

So how would I classify these interim results? In a word, satisfactory. Although we are ahead of consensus in some key areas, we are about where I thought we'd be at this time of the year. Now we have some areas that are progressing well, and we had some areas of underperformance that are being addressed. And I'll take you through the detail of our results, starting with, first, our 5 key metrics.

So firstly, the cash flow. Aviva is a profit-making machine, up with the best of our peers. Profit has never been our issue. Our problem has been we've not been able to turn this profit into cash at the group level. And this, of course, is a key tenet of our investment thesis.

Now we have previously given you a broad indication that our OCG, which is, of course, the precursor to cash flow, should be in the GBP 1.0 billion range in 2013. And unlike the first half result, it's just over halfway towards that.

Now our results in 2013 show that actual dividends, or the cash flow flowing through to the group, is just short of GBP 600 million, and that's 30% higher than the same period year. So that's progress. But the final level of progress will not be known by the market, of course, until our full year results.

Now we're also declaring a 5.6p per share interim dividend today. This is entirely consistent with our guidance and reflects the adjustment we made in 2012 full year results. And as we announced in the full year, we're also eliminating the scrip, of course, which eliminates the dilutive impact that, that may have.

Now the second of our 5 key metrics is operating profit. Operating profit is up a little to 5%, up to GBP 1 billion, a little over GBP 1 billion at the group level. I know this result may be satisfactory at the group level, but frankly, I don't think it's satisfactory in all our businesses. And I will cover this in a bit more detail later.

Third, expenses. Expenses are a key part of what we promised our investors and promised the market. And our expenses are 9% lower at GBP 1.5 billion. And as you can see, this is starting to flow through to profit.

Fourth, value of new business growth has had a solid 17% increase to GBP 401 million. Now value of new business is a key measure of ourselves, and I think it's a good proxy for future profit and future cash flow. Now the 17% value of new business growth rate reported today, I should point out, is without assumption changes. And I guess it may be considered out of character for a stock that does not have a growth premium. However, I don't expect you or investors to give us any credit for growth yet, and our priority is to improve cash flow and then growth, consistent with our investment thesis. Nevertheless, value of new business growth was strong in both the U.K. and France, up 16% and 39%, respectively. And given we are now 6 months into RDR in the U.K., I think 16% growth in that business is highly satisfactory.

Now in our growth markets of Poland, Turkey and Asia, it was 17%, 54% and 41% higher, respectively. And however, as I said in our first quarter IMS, value of new business growth does get harder in the second half. And I would expect this level of growth to moderate somewhat from now.

Now our final key metric is our general insurance combined operating ratio, or COR. The COR was satisfactory at 96%. It was 97% at the end of the year, of course, including GBP 17 million total group claims for the Alberta storms in Canada. And we have Maurice and a lot of the rest of our team here today.

The fact that such a large event in Canada has had very little impact on our results I think demonstrates the benefits of geographic diversification and also the benefit of our predictive analytics in our underwriting. Our share of those losses are certainly less than our market share.

So as you can see, the early trends in our 5 key metrics are going in the right direction. But despite some areas of progress, I want to be very clear: highlighting the strengths or outperformance and not giving the attention to risks and issues is not the way we want to report or run this business. There are some key unresolved issues, which, I believe, are overhangs on the stock. I think of these as my problem children.

Now firstly, and there's a -- let's stop here. So firstly, remittance ratios are too low. Last year, we ended up at GBP 944 million cash remittances back from the businesses to asset growth. And that's 48% of OCG. Now this is well below our better peers. And we believe that after a few years, we can increase this into the 80s. Now this initiative is complex, it's time consuming. There's a large number of issues involved, and it will be a multi-year journey. Nevertheless, you can assume an improvement from last year.

Second, we need to turn around our underperforming businesses, namely Italy, Spain, Ireland and Aviva Investors. These are businesses that are not currently generating either sufficient cash flow to the group or, in fact, are also a drag on value of new business. And I'll talk more about these businesses later when we talk about our more better strategy.

Third, the disposal of the U.S. business is still to complete. Now this transaction, as you know, is important to our economic capital, our liquidity and our risk profile. But I would certainly maintain our previous guidance that this transaction will complete by the end of this year, and I'm entirely comfortable with the progress.

The next area of focus, of course, is the intercompany loan. Now this thing is featured prominently in just about all of my meetings with you and investors. The intercompany loan, I believe, is an overhang in our stock because some may think there are implications for our cash flow and our ability to grow dividends. Now I said we'll pay GBP 600 million over 3 years, and today, by reporting a GBP 700 million reduction in 6 months, today, this puts us a little ahead of our plans. Now this includes a GBP 300 million cash repayment and a GBP 400 million noncash reduction. But I'll repeat my previous guidance that only GBP 300 million more cash will be needed to repay the internal debt by the end of 2015. That's GBP 150 million in 2014 and GBP 150 million in 2015. And we will look to make further noncash reductions in this period. Pat will cover a little bit more about that later.

External leverage is another key area of focus. And as you know, we have a target to reduce our external leverage to below 40% in the medium term. Now this reduction can be done in 2 ways: first, by paying down GBP 500 million; and secondly, by increasing the book value. Now our plans will be flexible and will be in part determined by our progress in selling down the remaining noncore assets. And I have left us a little bit of wiggle room here. But just as an aside, our leverage ratio, understanded in Poor's basis, is more like 33%. So we're using a much tougher measure internally, tougher than the market.

Now to book value. Our IFRS NAV has grown modestly over the half and includes an increase in the commercial mortgages provision of GBP 300 million, taking a total provision of GBP 1.5 billion. Now frankly, I'm somewhat irritated we've had to take this provision, but I'm satisfied that the right actions have been taken to clean up this pre-2009 book, including making some management changes.

And finally, on my key focus areas, we need to ensure that the GBP 400 million of expense savings flows through to profit, and we need to substantially reduce our restructuring costs. And I think our first half results on the expenses show good progress.

Now I'll show you what that means, specifically in the next slide.

In the past, many of you have told me you found tracking our cost savings target somewhat difficult, and it has not always been apparent how these savings work through to the numbers you see in the financial statements. And I guess, this is true across the sector. But I want to clarify this now. This slide here shows that if you take out 2,011 cost base and adjust for the businesses we have sold, then you take out our GBP 400 million cost savings target, and this gets us to a 2,014 cost base of just under GBP 3 billion. Now this assumes no inflation in expenses. In other words, inflation needs to be absorbed on top of the expense cuts, which clearly necessitates a deeper cut. At the half year, expenses were 9% lower at about GBP 1.5 billion, which I think is satisfactory progress towards our target.

Now there are a couple of countries yet to meet their expense targets in the first half, and you can assume we are addressing this.

Restructuring cost reductions are in addition to the GBP 400 million. So as you can see on this slide, these costs have been considerable in the past at between GBP 200 million and, in fact, about GBP 460 million last year and have been a substantial drag on cash flow.

Now from my perspective, I don't care whether these costs are above or below the law and how we classify them, they all impact cash flow, and they all need to be addressed. Now I should also repeat my previous comments that restructuring costs for 2013 will be lower than the GBP 461 million last year, which of course includes Solvency II cost, but will still be significant at between GBP 300 million and GBP 400 million. Now we will work to ensure a much more modest figure in 2014. Now there may be a hangover on some things, but we don't want substantial restructuring costs next year.

So on to strategy. You'll recall at the full year results, we set out our investment thesis. It's very simple: cash flow plus growth. I also said that I will come back to you with clarity on our geographic strategy. This is an overlay on our investment thesis. That's the way I think about it. So strategically, when I think about our businesses, I put them into 3 simple groupings: we have our cash generators; we have our turnaround businesses that should be cash generators; and we have our future cash generators, our growth markets.

Now interesting to know, I guess -- you may be surprised that our growth markets actually contributed 21% of our value of new business over the last 6 months.

Now turning first to our cash generators, that's U.K., France and Canada. And we're not looking to grow top line for top line growth's sake, only if it's profitable. And the fact is, we already have substantial scale in those businesses. But we are intending to keep our leading market positions in those markets, that we are primarily looking to improve cash flow and profitability from these markets.

Now in the U.K. Life, we will focus on risk products, annuities and a much more effective management of our back book. We are the leader in annuities in the U.K., and there's been a lot of talk out of enhanced annuities recently. But in fact, 26% of our new annuities are enhanced annuities. And in fact, 50% has some form of underwriting on it. So we've got a substantial portion of enhanced annuities as well.

Now we have a strong brand here, which has given us pricing power in the U.K., and we've demonstrated this pricing power, I think in the last 12 months, with the pricing changes that we've put through.

Our Canadian and U.K. GI businesses. This group provides stable earnings for the group, largely uncorrelated, I think, with the financial markets. Our predictive analytics is market-leading in Canada, and we have similar areas of excellence in the U.K., and we're rolling it out further. And one of the opportunities I see for the group is exporting this predictive analytics capability right across the group, and we've just started to do that.

Finally, in France, of the cash generators, we need to move towards more profitable and less capital-intensive products such as unit linked and protection. And I think the team there, led by Nicola, has made some solid progress in the first half. The French business generates stable and consistent cash flows, which is what we want from a cash generator.

Turnaround businesses. We also have a number of underperforming businesses where performance needs to improve, and these are Italy, Spain, Ireland and Aviva Investors. Now in Italy and Spain, both businesses are focused on managing their back books. The idea is to release free capital and improve the dividend flows, the cash flows to the group. They're also focused on operating profit and removing the current drag on the value of new business. And you can see that from the result.

Aviva Investors is another of our business that has underperformed from a shareholder perspective. For a business that size with less than 2% of our earnings, that's unacceptable. Now we've just completed a 3-month strategic review, led by Jason Windsor, and this culminated in the appointment of Euan Munro as the CEO of that asset management business.

Our asset management business has scale, it's got some really good performance in some asset classes, and it should be a strong cash flow business. And certainly, I would expect or demand it to play a much more prominent role in our group going forward. Now Euan Munro is a class act. He's got an impeccable track record, and we certainly look forward to him joining that business in January.

Now to our future cash generators, Poland, Turkey, Southeast Asia and China. This next group of businesses are our growth markets. Now let me clarify what growth is. Growth to me means growth in future cash flows, and I measure that as a good proxy in value of new business. I don't reward people for just for top line growth. Of course, you need to have scale. But to be successful -- you need that scale to be successful. But scale without value of new business and scale without cash flow is totally irrelevant. It would be like summer without the sun, not something that happens here in the U.K. But that business -- we need scale, but more important, we need value of new business.

Now taking a few in turn. In Poland, we are the second largest life and pensions provider. We've got a good market position. That's a growth market for us.

Turkey. Turkey has all the demographic and economic characteristics of some of the best Asian markets, and that's a key focus of value of new business growth. You've seen that in the first half. The group is strong[ph] indeed. In Turkey, we are also the second largest life and pensions provider, and we have an excellent partner in the Sabanci Group. Now although we like the Turkish market, we have been clear in our strategy, we'll choose product lines in each market where we can be profitable going forward and where we have a scale position or can get a scale position.

Now our separate and subscale general insurance business is not performing adequately, with a combined ratio of over 114%, and we are reviewing the status of that business.

In Asia, Aviva is making some solid progress with a more focused approach, and our focus going forward will be China and Southeast Asia. Now, for example, Indonesia, with its good margins, its huge population, that's a key area of interest for us, and we have a small business there now.

Now turning lastly to our strategic framework. Our investment thesis of cash flow and growth is starting to drive the way we do business here, and this is bringing about quite a substantial change just in the way we make decisions. Now some projects have been stopped, that don't need cash flow, and those resources have either been reallocated to other projects or other initiatives or have been saved.

Our decision criteria on products has changed from top line-based metrics to bottom line metrics, cash flow payback periods, capital consumption and value of new business measures. And that's, of course, an entirely appropriate way in the product development.

Now implementing the investment thesis is in its early days. But in my opinion, it is working.

We also have 3 other key strategic areas to address, namely customers, distribution and people. Now this slide here shows the overall strategic framework we are developing by which we will base our decisions on the group going forward. Now this work defines the key principles of what each of these areas our stakeholders can expect from us and vice versa. It will also define the key metrics of which we measure our performance.

Now the customer thesis, by way of example, will define our customer segments, margins and product focus. The distribution thesis, this is well advanced, will define our multichannel strategy, including our increased focus on digital distribution. And our people thesis will define our culture, our values, our icons and rituals and, more importantly, our performance management for our people.

And from our work on the strategic thesis, there has been emerging -- a number of key strategic priorities. I just want to cover 3 of those very briefly. Of these strategic priorities, I see predictive analytics, automation of processes and digital distribution as the future focus for Aviva. Predictive analytics already gives us a competitive edge in underwriting, and I think this is demonstrated by our results in Canada and the U.K. And we are looking to export this analytical capability across our businesses.

Automation gives us a greater opportunity for efficiency and lower expense ratios. And by way of example, in our U.K. GI business, only about 17% of our claims process is automated, and I expect this to increase significantly over time. And digital, of course, enables us to have a much greater control over our distribution. We will, to be clear, reallocate quite substantial additional savings from our cost base to these priorities.

But I am very conscious that our investors will want to see continued results, and the numbers are quite appropriately the thing we should be judged on. So on that note, Pat, our CFO, I will hand over to you, and he'll take a detailed look at our numbers. And then we should have plenty of time for some detailed questions. Pat?

Patrick C. Regan

Thanks, Mark, and good morning, everybody. In my section today, I'm going to talk a little bit more detail about the big business units, cover some of the drivers behind the 5 key metrics and also talk in a little bit more detail about our balance sheet.

I'd have to click it every time?[ph] First of all, starting with our overall operating profit. You can see, the continuing operating profit on a continuing basis increased by 5% to just over GBP 1 billion. Life profitability increased. The general insurance and profitability was down, primarily as a result of the lower investment income, based on the restructure of the intercompany loan, and I'll come back to that in a little bit later.

What you see on the right-hand side there is the primary driver for the increase in operating profit. It was GBP 147 million of earned expense savings, hitting operating profit. And that was partially offset by the non-repeat of last year's provision release in the U.K. Life business.

On restructuring costs, integration and restructuring costs are slightly lower, primarily due to lower Solvency II costs. And for the full year, we'd expect it to be slightly more than double that number as we complete the cost save program.

Turning on to the bigger business units and starting with our biggest business unit, the U.K. Life business. Reported operating profit was down GBP 30 million to GBP 438 million. But if you strip out that provision release, the underlying operating profit was up about 11% in the first half, and again primarily driven by large expense reductions.

Expenses are down 14%, 1 4, in the first half, as a result of delevering of management structures, rationalization of distribution, reduction of IT costs, amongst others.

In terms of value of new business, value of new business is up primarily due to the repricing of individual annuities. And as you know, we repriced our book of individual annuities during 2012. And as the market followed, we were able to both increase to strong margins and only have slight reduction of volume.

Now we may not know if something like 1 quarter of our individual annuity sales are now enhanced annuities. In other words, they're medically underwritten. And that percentage has grown gradually over the last 5 or 6 years from probably 5% 5 years ago, up to, as I say, just over 1/4 of our sales now.

We now have one of the most comprehensive databases of longevity, experience that goes back literally decades, and that, together with external databases we have access to, research partnerships with universities, we believe sets us apart in this field from our peer group.

On the slightly less positive side, protection VNB was overall flat, primarily as some of the banks have pulled away from advised selling. We've also been pretty selective in terms of how much pension business we're writing. And certainly, in the workplace saving space, we're very much focusing on the smaller schemes within that.

It's also worth remembering that for the U.K., the comparator gets tougher in the second half of the year, so you should probably expect growth of VNB to somewhat moderate. And finally, as we announced in full year, the remittance back to the group center doubled to GBP 300 million.

The other feature of the U.K. Life business is the commercial mortgage portfolio. In the first half, we did observe a higher level of default, particularly in the first quarter, much less so in the second quarter, and some worsening indicators, particularly in relation to the portfolio made prior to 2009. So Mark and I asked the team -- and in particular, Clifford is our new CFO of that business, to really go and kick the tires hard of that portfolio and the provision.

And just as a reminder, we've got 2 blocks backing our annuity business, which, in total, is GBP 12.2 billion. You've got GBP 4.1 billion, which is primarily the NHS-backed or government-backed doctor surgeries, et cetera, which is very much lower risk in nature; then GBP 8.1 billion of other forms of commercial lending.

And what we're trying to do here is kind of triage that, if you'd like, into the different categories as we see them. First of all, you've got the biggest block of low-risk mortgages of GBP 4 billion. These are ones where they're clearly investment grade. You've still got strong, kind of 1.4 or better loan service cover and still strong loan-to-value as well.

And we've got a second bucket of around GBP 1.3 billion of loans, which is an LTV closer to 100%, but with better interest service cover. These are effectively loans where we've got good comfort over the borrowers' ability to meet their service costs, but the property values have fallen a little more than we would have liked.

And finally, the last portfolio of high risk of GBP 2.8 billion, where both the loan service cover and the loan-to-value has deteriorated a bit more than we would have liked.

So we've decided on the back of that to increase the provision up by GBP 300 million to a total now of GBP 1.5 billion. And clearly, most of that relates to those 2 buckets totaling GBP 4.1 billion, and particularly, a bucket totaling GBP 2.8 billion.

Another way thinking about that is if you took all of those loans, where loan-to-value is more than 100% and assuming they all default immediately, the negative equity, if you like, would be in the region of GBP 1.3 billion to GBP 1.5 billion against that provision of GBP 1.5 billion. So I think we are reasonably well protected.

As Mark alluded to, we have also made some changes to the people and the operating model. In particular, we've split out the origination of new business from dealing with the workouts, if you like, of some of that higher risk loan portfolio.

Probably worth me saying that I still do think, and we still do think, that commercial mortgages do provide good diversification away from just things like corporate credit when you back an annuity business. The business we've written over the last 3 or 4 years have been much lower risk in nature, and right now, we're writing commercial mortgages with LTVs of less than 50%.

Moving on to the U.K. General Insurance business, and again, expense side have somewhat driven the improvement in operating profit here together with relatively benign weather in the U.K. in the first half, somewhat offset, as I mentioned, by lower investment income. Now you'll see up here, you remember that when we talk to the full year, the investment income in the U.K. GI business receives from the intercompany loan is now at 4% interest rate, as against 6% previously, and that made a GBP 45 million impact to investment income, which you can see flowing through there, more than offset by GBP 57 million improvement in the underwriting result.

Looking at the different product lines, certainly, we've seen in the market softer rates in personal motor. But overall, we've maintained good profitability. We are definitely prioritizing rate over volume in personal motor, and our rates on that portfolio were broadly flat, probably down 1% in the first 6 months in clearly a declining market.

Home and commercial property performed well and clearly, this is where you've seen most of the benefit of good weather flowing through.

Overall, I'd characterize the personal and commercial businesses a bit -- into slightly different stages. On personal lines, we are seeing a -- rates being soft on both personal motor and actually, increasingly in the market on Home. But despite this, our overall combined ratio on personal lines is still good at 94%.

On the other hand, on commercial lines, rating conditions are actually improving in the U.K., actually, also in Canada. But the performance of some of the classes was a little bit mixed. We have seen deterioration in commercial motor, and that primarily relates to deterioration of a number of prior year large cases. Now clearly, we are putting rate through this book. We've introduced better pricing sophistication and exited a number of poor performing schemes.

Moving on to our French business. And the story here is less about cost cutting where, to be honest with you, there's probably a little more that we need to do there and more around what about benefits of product mix and pricing. And you've seen here, there's a significant shift towards protection, where VNB is up nearly 50% and unit-linked where VNB has more than doubled in the first half. This, together with things like high retention levels in France, some back book capital actions that we're doing, has enabled us to increase the dividend back to group, kind of doubling almost to GBP 103 million.

Now this represents the final dividend for full year 2012, and there'll be another interim dividend from France in the second half of this year. And I think in summary, France remains a stable cash generative business with improving product mix and is now taking steps to improve its efficiency, and we should see more of that flowing through in the second half.

The part of the business I want to highlight is our Canadian business, and for a couple of reasons, really. One is we think it's one of the best from an underwriting perspective, but also, clearly, there's been some unusual weather events in Canada. Taking each of those weather events in turn at the group's exposure to the floods in Alberta is a total of GBP 70, 7-0 million. The Canadian business has reinsurance up to a GBP 32 million attachment point, with the excess above that reinsured primarily back to Aviva rate. So the combined ratio you'll see here for the Canadian business includes that net exposure of GBP 32 million.

We have no exposure to the Québec train derailment, and the July floods in Toronto, clearly not included in these results, will cost in the region of GBP 50, 5-0 million at the group level.

Now I think when you take into account, we're the #2 player in Canada, we have a market share of around 10% there. Our gross losses actually, I think, are somewhat underweight compared to the gross losses of the paid group, and we think this is some evidence of our predictive analytics skills flowing through there. And again, without those very unusual weather events in Canada, the combined ratio of the Canadian business would again be sub 90% and represent another strong set of results for us.

We've also given you a little bit of new disclosure today on the combined ratio, breaking out the reported combined ratio of 96.2% into the underlying loss ratio impact of weather, impact of prior year and impact of expense ratio. Big picture, you'll see a slight deterioration on the current year loss ratio offset by lower expenses. Obviously, P&C is a somewhat cyclical business, but we're a large diversified player and you shouldn't see the underlying current ratio have big swings impacted by the rating environment of any one product.

You see a slight movement in the current year loss ratio impacted by the somewhat softer rates in U.K. personal motor and in commercial motor, but as I say, this was offset by lower expenses.

Despite the weather events in Canada, overall, weather was almost identical to last year, it's obviously, the U.K. enjoyed a better-than-average 6 months.

On our prior-year releases, there's not an awful lot to say. We've got a very small positive this year and a slightly larger positive last year, but we have a consistent reserving policy, a largely short tail books that shouldn't be too much to talk about there.

On value of new business, there's a couple of interesting developments when you look at it country by country. As I say in the U.K., we focus very much on risk products, particularly annuities. In France, we've now got 37% of our VNB from unit-linked and 35% from protection. And in Asia, up 41%, with most of that increase coming through in Singapore and in China.

Now that's not to say everything is going well. Obviously, there's more work to do in Italy and in Spain, but we have taken a number of actions there and hopefully, we'll see the benefits of that starting to flow through in the second half.

The other message overall is the increase in VNBs is not one of a volume story, but very much the benefit of mix and pricing actions, and you can see that flowing through to the margin benefit, which now, on an APE basis, is just under 30%.

On expenses, I just really wanted to show where the expense savings are coming through geographically. And you'll see that most of the initial expense saves are coming through from the U.K. Life business, U.K. General Insurance, Ireland, and regional group center costs in Europe and elsewhere. You'll also see there's actually a couple countries where there's probably a little bit more to do, in France and in Canada, and obviously, we're taking steps there and we should see more of that as we go forward.

Onto our net asset value development, you'll see growth in both IFRS and MCEV net asset values for broadly similar reasons. The amount of IFRS profit less dividend of 17p, mostly offset then by the addition for the commercial mortgage provisions and a movement in the pension fund.

Beyond that, there's a few modest overs and unders broadly offsetting each other. And following the de-risking in asset sales we've done over the last couple of years, we're very much focused on keeping these below-the-line items as small as possible and making our book value development as smooth as possible.

So on to the intercompany loan area. What I will just recap as a reminder on how the intercompany loans was formed. As you remember, we used to have an entity that was both a general insurance business and a holding company, and we described at the year end, we then split that into a general insurance business in what we call AIL and a holding company called AGH. And to do that, that involved AIL selling the subsidiaries to AGH to their economic value of GBP 5.8 billion. And AGH paid for them, if you like, by way of that loan balance. So that's how we started with the GBP 5.8 billion

So we talked about at year end, we are then going to use GBP 600 million of cash over 3 years to reduce that, split GBP 300 million this year and GBP 150 million in each of the next 2 years. And the GBP 300 million this year, you can see coming through as a loan reduction, all very straightforward. The new news today is in other noncash ways of reducing the loan, and this involves growing the economic capital surplus of AIL to rely less on capital coming from loan that allows us to reduce the loan. And in this case, we've now switched our commercial paper program or most of it to being on a non-guaranteed basis, and that's brought down the economic capital requirements in AIL that allows us to reduce the loan, and you can see, bring it down to a balance of GBP 5.1 billion at the half year.

Going forward, we do -- we are exploring a number of other projects that allow us to increase economic capital within AIL and further reduce intercompany loan balance and again, hopefully, we'll report progress on this when we get to the full year.

I'm not going to side on external leverage because there's really a lot new to say. Our leverage ratio remains at 50%, and we remain committed to reducing it to below 40%, using a combination of retained earnings, book value growth and disposal of proceeds to pay down debt.

Finally, for me, on to cash flow. On OCG in the first 6 months, we increased operating capital generation to GBP 936 million, up from GBP 906 million last year, 2/3 of that coming from the Life business, 1/3 from General Insurance, and as you can see, just 2% or just over 2% from fund management, and that's obviously an area we're focused on improving.

What we've done today is give you a little bit more detail of where that Life OCG of GBP 634 million comes from. You've got GBP 620 million flowing directly from the back book of in-force customers, fee service generation. We spend GBP 164 million of capital on new business. That's down from GBP 250 million last year. And as you saw, with better margins now. And then similar to last year, we have some positive variances and management actions. Within there, you've got the GBP 63 million in Asia, which is more one-off in nature financial reinsurance transaction. And then the other items are a collection of small positive actions on things like the back book and positive variances flowing through. Hopefully, that gives you some idea that we can modestly bring forward some very far forward cash flows.

A couple of other points on here. One is post-tax, post-minorities IFRS profits GBP 853 million, again, similar to the OCG number, as was the case in 2012. So if you prefer modeling IFRS, then again, you can see it's in close proximity to OCG. Then obviously, the remittances increased by 30% to GBP 573 million.

As we talked about, the U.K. Life dividend doubling to GBP 300 million, and the dividends from both France and Poland increasing. As we know, following that AIL restructure, the dividend from U.K. General Insurance now comes in the second half of the year.

Having said all of that, given the somewhat, like, lumpy nature of dividend payments, it's probably not appropriate to talk about remittance ratios at this stage, but just say the remittances, overall, are higher.

Lastly, then, we've put some new disclosure in our pack today about our future OCG generation. So within the pack, you'll see our VIF runoff in the fall. On the year-by-year basis, that's good exposure. And you can see, it's a relatively or very stable profile, as we go around the next 10 years.

And what I've attempted to do with this slide is then say, "If you take that profile, how do you actually get to an OCG number for us?" This is not a forecast of this year or for next year, it's an example of how the numbers fit together. So if you take our typical from our existing customer base, OCG, plug in GBP 1.1 billion for the back book capital generation. Assume we don't make any further improvement on the business we spend on new business -- while have improved in each and every year, but let's assume that stage is the GBP 300 million, obviously, we'll add to this as we write new business as we go out. We're adding a bit more than GBP 100 million a year. So obviously, as you go out, that number accumulates, but we've just tucked in GBP 200 million here. We currently make about GBP 700 million from our General Insurance and Fund Management. And then you could just throw in anything for positive management actions, positive variances, et cetera, you'll get to the GBP 1.8 billion in total. [indiscernible] include anything from future profitability improvement, future expense saves or anything like that. And just to say, if you use it as an example of how the number fit together form our free surplus generation. Just before I hand it back to Mark, they have made a number of changes to the end of this package, as you may have seen. We tried to align it better, so the flow fits better with the key metrics and add a little bit more disclosure to help you model them as well as taking away some of the perhaps less relevant data. Going forward, we'll try and make a few other improvements. And Colin tells me we still need to do better to help you model our General Insurance business, so we'll have a crack at that for the full year as well.

With that, I shall hand it back to Mark.

Mark Andrew Wilson

Thank you, Pat. So I guess, summing up, I think our first half year has being satisfactory. It's in line with the expectations. But I guess, what's more interesting is that the key issues we are facing are all within our own gift to resolve. We are not relying on rising interest rates or we're not relying on any good market changes. We're relying on things that we can control, which is, I think, helpful.

In the first half, I think we've just done what we said we would, no more, nor less. And we've taken I think in the first half, some pretty tough, but necessary decisions. But although I think we've made some progress on particularly the 5 key metrics, I would see our good performance as being barely adequate in terms of our potential. This business does generate a lot of profit and clearly, we need to get that through to the group. But I'm satisfied we're doing the right actions at this time.

We've also changed the management team up here in the first half. And probably more than you may have realized, we've got a quite a few other people here today with us. Key hires since the beginning of the year, there's Khor Hock Seng, who is around here somewhere [indiscernible] Khor Hock Seng, who heads up our Asian business; And Nick Amin is our Head of transformation. He's our Transformation Director. Christine Deputy is our HR Director. And most recently, of course, we announced Euan Munro to head up Aviva Investors. We've also had a number of internal promotions on our group executive. David McMillan, who heads up our European business; and Jason Windsor has joined the Executive Committee. Jason heads up Strategy and now, M&A.

So we've also made key appointments in Ireland, Poland and even Investor Relations, Colin. Colin didn't want me to say that, but -- I think the other thing we've been trying to do is to simplify our business in terms of what we give to you. And we've tried to simplify the investor compendium. We've tried to give you a bit more disclosure today on key issues and -- for example, the bank book capital generation that Pat just spoke about, and we're just trying to simplify to make it clear and more predictable.

But of course, we have much more to do. And if you had feedback later on, if you have a feedback on this compendium and the sort of way you like us to present the data, please, give us all the feedback you can.

So what I'd like to do is open for Q&A. As usual, please wait for the mic and say your name and the company that you're from, and then we'll do our best to answer your questions.

Question-and-Answer Session

Jon Hocking - Morgan Stanley, Research Division

Jon Hocking from Morgan Stanley. I've got 3 questions, please. Probably another fact question[ph], but the remittance ratio last year, 48%. It looks like it's improved in the first half. If you can just normalize that, where do you think you were the first half? And the full year, you were very reluctant to give any numbers in terms of remittance ratio and now you're talking about sort of 80s. That seems to be slightly more ambitious than the numbers you were talking about at the full year. Is that fair or not? Second point, on the additional expense savings, can you give us some idea or comments on -- and give your comments about payback. What sort of cash payback you're thinking on those new initiatives and can you give some more color? And then finally on Italy, you seem to have been talking for quite some time about moving away from guaranteed products. You mentioned again -- are you constrained by the agreements, the distribution partners in terms of making that product shift mix?

Mark Andrew Wilson

Okay. So 3 questions. Obviously, we're not going to give any guidance on what we think remittance treasure is going to be. You can assume it's going to increase this year. But like I said, before, this is -- it's an incredibly complex part of our transformation. It involves so many areas, it involves structures of business, it involves cash flows, it involves the products we're writing. Some cases involves negotiation with regulators in these countries, involves our capital position. But you...

Patrick C. Regan

Restructuring costs.

Mark Andrew Wilson

Restructuring. Yes, restructuring cost comes off of OCG as well. So that's another key. So this is a multi-year journey. I'm not going to give guidance. The 80%, we think we can certainly can get into the 80s. And our better peers are well into the 80s. But I would caution here that this is a multi-year journey. I don't think we're going to wake up in January and have 80% because we're not going to. At this certainly, multi-year journey, but I think that would all show where -- again, we're about where we thought we'd be. Additional expense savings, the question, I guess, is how much more additional expense savings can we get over the GBP 400 million, and the answer is considerable. The question that we've got to address and the question we still haven't frankly finalized here is how much of that do we put through to some of the things we need to spend money on. And I think in the next few years, I suggest, most of it. And I'll get Nick to comment on the expense savings in a minute, but I would think that things like digital, things like automation -- of course, automation brings down our expense ratios over time, so it becomes self-fulfilling to some extent, and it's important that we put someone there. So maybe, if I -- if Nick passes or comment on some of that transformation in cost savings, and I'll hand over to David on the Italy question.

Nick Amin

John, I think where we are in expenses, as you've see from the slides, we're making good progress. I think there's a lot more work to do, clearly, we're going to absorb inflation. And various other costs in[ph] the GBP 400 million. I mean, the changes we're making in terms of the question around payback, which, I know, Mark will come to. Initiatives, were very focused on the low-end in terms of making sure all of our investments are paid back between 2 and 3 years. Now the objective there is to make sure we get the return. Culturally, we haven't focused on the payback as much as we should have. We're clearly on the investment we're making around technology and et cetera to get a decent payback. We're pretty much on track on expenses. There's a lot more to do, but we have plans to execute and have clear accountability, and it goes all the way down the business, all the way down to the sale loaners and how we manage those businesses and their performance.

Mark Andrew Wilson

And just to help, with maybe a better guidance on the payback, I'll be specific, to be helpful. We say our internal benchmark today is a 2-year payback, and -- because I don't think we should be spending money on anything in terms of restructuring things when they say [indiscernible] until you pay back, and that's what we're attempting to do. Now we won't need to know situations, but that's our internal benchmarks we said ourselves. Do you want to pass a comment?

David McMillan

Yes, John, first thing to say on Italy, late last year, we replaced the CEO, the CFO and most of the management team in Italy. We're executing quite a broad-based transformation program in Italy, cost reduction, reduction in guarantees, exiting value-destroying distribution arrangements. I think you see that improvement less so far on the Life side. You can see it quite strongly in the General Insurance side, with the combined ratios improved from 116% in 2011 to 96% the first half of this year. I think turning specifically to the guarantees, our biggest distributor in Italy is UniCredit. We've reduced all our guarantees to 0 in the UniCredit relationship. We will -- we're also exiting smaller relationships where the guarantees have been too high. And by the end of this year, we will have 0% guarantees through pretty much all of our distribution in Italy.

Unknown Analyst

[indiscernible] calling from Nomura. Could I just a follow-up on the first question. Let me thank you for giving the 80s-percent target, but could you perhaps give us a trajectory, if at all, whether there'd be some further step changes? For example, U.K. Life doubled this year. Do we expect it to be lumpy or uniform? And the second thing is on -- there are some positive comments by your competitors on Solvency II, and I was wondering what that means for your annuities appetite, given you are the #1 player and you're growing that quite strongly in the U.K.?

Mark Andrew Wilson

The first one, the answer is no, I can't. I mean, I'm not going to give guidance because it won't be a depth that's going to be particularly uniform. It's just so complex and there's a lot of issues, and that's why.

Solvency II, we have been -- and I'll get Patrick to comment on that. We have been intimately involved in all the discussions on Solvency II. I can -- you could assume that all parties here in the U.K. are pretty much aligned. You have the government and the regulator and us. We've aligned with our thinking. I wouldn't assume that Solvency II will come in, in its existing form. I wouldn't assume that. And I think it would take some time to be clear what the outcome is. So you've got -- the issue with Solvency II, of course, is you have every country wants something different and it's become a very complex piece of regulation. As to the time frame, well, your guess will probably be as accurate as mine, but I wouldn't assume that we'll come in, in exactly the same form as it is now.

Patrick C. Regan

The other thing is, I mean, I think you all know that where it's at right now is the opera[ph] and the commission is put something on the table. That will go through the trial of process over the next number of months, and as Mark said, we don't know where that will lead. There's a number of different kind of pushing and pulling on that. What we do know is that the thing that's been put on the table includes a matching adjustment. I think there's fairly wide recognition that, that will change or have a broader inclusion of assets within it. So I think kind of we're all in coverage of that. That exists, and that's the kind of that cortex and hopefully, we're going to have kind of an approved version of that. The other thing that we know that's on the table is the transition, and that's kind of equally important. And again, the length of transitions, we don't know. The Germans are, I think, asking for 125 years, so I think you see that lengthy start. So we know that somewhere in the middle of between, I don't know, 10 years or 20 years will be the answer. And again, that's important because that means the -- when you -- if you got a sense of that, something that's broadly equivalent to the length of, for example, annuity book, really, what's important then is you make sure you write in new business in a way that complies with the new rules. So a lot more still to go, but actually, the thing that's on the table is, I think, even kind of workable in the form, or a likely form.

Blair Stewart - BofA Merrill Lynch, Research Division

Blair Stewart from Bank of America Merrill Lynch. Just one question. Your economic solvency at the group level looks strong, but you've talked about -- when talking about reducing the internal debt and also when upstreaming dividends from subsidiaries, you've talked about local regulatory capital as a possible roadblock. So do you talk about that in an economic capital sense, firstly? And secondly, if we are out of these 19 points and what can be done there, what's the priority in order to improve both the internal debt reduction and cash remittances?

Mark Andrew Wilson

So we'll not talk about the regulators[ph] in the country. So what's an example that -- the French doubled leverage that we had. I mean, that was clearly a roadblock to the situation in France. Now there's no barriers in France. I mean, the regulatory is entirely comfortable with where we are. So that's an example of the sort of thing we're talking about. Do you want to...

Patrick C. Regan

I mean, not an awful lot more tied to that, really. The -- there were not -- there's nothing I could point to that's a blockish[ph] today. I actually remember listening to you once where you were talking about the things you need to do to make sure you got really predictable cash flows is run the shockers, shock scenarios, stress test scenarios to all the sensitivities, to make sure that on the most circumstances, you continue your good cash flows. And that's really what it's about, is making sure you got well-run businesses that can survive those kinds of foreseeable circumstances.

Mark Andrew Wilson

To give you maybe another example that may help. So we're looking at everything that makes us -- the Swiss clock analogy again. We're trying to get predictable. So for example, we have just changed our reinsurance for Caribbeans. So we've increased the amount we put out to Caribbeans in the last month...

Patrick C. Regan

Yes, last month.

Mark Andrew Wilson

Yes. So our whole objective is try to get predictable and consistent, and we're doing a whole lot of things, country by country, on that. And really need to go into a country-by-country analysis because the stuff -- our plans are very, very detailed. Right here.

Andrew Hughes - Exane BNP Paribas, Research Division

Andy Hughes, Exane BNP Paribas. Three questions, if I could. Just try the cost once in a different way. I think you said in the press, the GBP 800 million of IT spend that the group spends on IT is exceptionally high. So I'm just wondering what you thought a normal level of IT cost for the group might be on an ongoing basis, and whether actually you could achieve the GBP 400 million just through IT? And the digital spend, let's face it another way, instead of it being a difference between the cost saving and what you can actually achieve, how much would you like to spend on digital IT over the next few years? And the final question, I guess, is on the commercial property loan provision. And it seems to me that with GBP 2.8 billion at -- yes, with this position of the GBP 2.8 billion with 1x coverage and significant, obviously, a provision equal to the amount of negative equity, the provision is therefore sensitive to the movements in the commercial property market. So if the commercial property market goes down, does the provision go down -- go up and vice versa? Could you give me sensitivity to movements in the commercial property market on that provision, please?

Mark Andrew Wilson

Sure. I'll get Pat to take the property and I'll take the expense. I'm not sure we'll not see the GBP 800 million, but I think I said in the last -- in the first quarter results. Last year, we spent, on a P&L basis, GBP 817 million on IT. I mean, that's clearly too high. It's definitely over 30% higher than we should be. Now there's a big question mark on it, though. So the question is to fix that over to spend some money on that. And so we can actually get quite a substantial chunk of money out of that. But I'm going to be reallocating that to fixing some of those legacy issues and digital and automation. So we want to automate some of those systems so it takes this.

The key way we're going to measure our business going forward, and frankly, I'm not going to give any more guidance on this until next year because it's set for this year, but the key way going forward is more about expense ratios. And we've set ourselves very clear targets of what we wanted to get our expense down. And then we're going to set ourselves some expense ratio targets in a business by business level, and we want to continually improve them, and that's our objective. The way we're going to get there is the automation. I'm not going to give guidance on how much we want to spend on digital automation except it's substantial. Part of the reason is because we don't know the exact figures yet. We have Nick and his team working out exactly how much we can save. We've got the rest of the teams in the business working at how much we need to spend on automation and digital. And we just haven't finished that piece of work yet, except to say, it will be substantial.

Patrick C. Regan

Yes, on the commercial mortgages, Andy, I mean, the GBP 2.8 billion portfolio against the GBP 1.5 billion provision is mostly pointed against that. I think it kind of indicates we're reasonably well covered. On the negative equity points, as I said, that assumes everything defaults now. And clearly, not everything is going to default now. If anything, I say, yes, so if you assume the commercial property price is significantly deteriorated from here, then obviously, you've got some more sensitivity to that. But I think, based on where we are now, we're well-provided.

William Elderkin - Goldman Sachs Group Inc., Research Division

So William Elderkin from Goldman. Two questions. First of all on the Polish business, how much of your -- I think it was GBP 78 million of operating earnings in the first half are coming from the back book, potentially threatened by some change in legislation, and what's your expectation of how that evolves? And secondly, very simplistically on the expenses, I mean you seemed to be down GBP 150 million over the first half. Does that mean you're at a run rate of 300 in relation to the 400 target? Or is that an overly simplistic reading of it?

Mark Andrew Wilson

Just the Polish business, and I'll hand over to David a bit on that. The pension stuff that's coming on the Poland business, it's -- the only thing that was clear about it is its opaque, and the government has put out all sorts of things. I'll probably get David to just talk a little bit about the impact of that. Just remember in that book, we don't sell a new business and then we haven't for some time. So the impact is, I think, probably a little less than some people are suggesting.

David McMillan

Yes. As Mark said the outlook on this is highly unpredictable. There's still quite a degree of debate going on within Poland, within the Polish Parliament and also publicly in Poland. What we know from our side is the pensions business in Poland is, as Mark said, has no impact in our new business. So our 17% growth in value of new business all comes from the life and pensions side, which will continue to be an engine of growth for us going forward. Around -- pardon me, around 40% of the VIF in Poland, so it's about GBP 1.3 billion of VIF. So about GBP 0.5 billion of that comes from the pension business and probably around 20% to 25% of the operating profit from the pensions business. Now clearly, in terms of what might happen to that business is still highly uncertain. Polish government has published 3 potential options for reforming pensions. The most benign of these options might account for anything up to about GBP 150 million, GBP 160 million of VIF, but some of the options might be considerably more than that.

Mark Andrew Wilson

[indiscernible] second, it will be more. It's in the range of, say, GBP 150 million to a maximum sort of 4. I think that's the range we sort of talked about.

David McMillan

Yes, it could be more than half.

Mark Andrew Wilson

I think so. Just on that, it's a long, long way to go.

Patrick C. Regan

Yes. On expenses, the -- what we've -- what we will avoid doing there is talking a lot about run rates. Nick's got a huge kind of compendium of activities, which could -- we could announce the biggest number you can think of in terms of the things we're doing in terms of run rate activity. So what we're going to talk about is the actual expenses in the P&L. If you compare back to -- our target was actually officially struck versus 2011 expense base. And compare the actual expense saved in about P&L to that, it's an annualized run rate of about 3 10.

Ashik Musaddi - JP Morgan Chase & Co, Research Division

Ashik Musaddi from JPMorgan. A couple of questions. First, can you talk a little bit more about your asset management plans because you recently hired Euan Munro. So are you looking to more focus on the third party? Or is it mainly to improve the earnings from the in-house? Or how should we think about that? Similarly, things around like what's your time line around improvement in Ireland, which continue to remain a drag? And you clearly highlighted in that pack as well. So yes, these 2 questions, sir.

Mark Andrew Wilson

Okay. Asset management, so Jason Windsor and his team completed quite an extensive 3-month review that we started just after I arrived here. And as I said, that culminated in the appointment of Euan. We're not at the stage we want to announce what that strategy is. But you can, I guess, take some assumptions that we've matched the CEO of that business to our plans. That's probably all the guidance I want to give on that today. Yes, there's -- you guys know this, the farm management industry, a bit of an eye [ph] and it will take some time. But we would want that to become a much more significant part of our earnings, and we do see this as a core part of the group. And the other things like Ireland, I'd break it into life and general insurance because they are different. And our focus in Ireland is more on general insurance going forward. And obviously, general insurance, you can make an impact relatively quickly in the market, and it's more longer term than life insurance. And Alison Burns and John Quinlan has strengthened that team as well. So we've got Alison Burns, is a very strong woman as a CEO, and we've got an Irish, our #2 in there, who's a very strong candidate as well. So both of those people, I think, will make a difference. I'm not going to give a specific time line just because we don't know yet, frankly. You can assume we're making some pretty robust actions on things like cost in there. And there's a lot of structural work going on in that business as well, both in the life and the general insurance side, just how we structure our capital and what we do there.

Andrew Crean - Autonomous Research LLP

It's Andre Crean from Autonomous. I had 3 questions. Firstly, could you -- I think one of the slides, which is gone is the one on new business IRRs and how much of a strain is soaked up by the inherited estate. Could you give us those figures and, hopefully, reinstate that slide? Because I'm interested to know how long you get coverage from the estate before you actually have to fund all the business from shareholders. Secondly, in terms of the cash to group, could you just say -- obviously, you have to pay the debt interest and some of the central costs before money is available. Could you say how much of the central costs are actually at the center as opposed to the regional centers, and therefore, have to be paid. And am I right in really thinking that once you've done that, everything is distributable in dividends, and you would be looking to distribute everything in dividends? And then finally, as you change the group and take a tougher approach on new business, that presumably will have some knock-on impacts on JV partners who may think that you're less committed in them. Could you talk a little bit about which JV relationships are coming up in the next couple of years and whether any of them are vulnerable?

Mark Andrew Wilson

Okay. I'll take the first and last, and Pat take the middle ones. Just a comment on IRRs first. I'm not a big -- and our IRRs are high, you know that. But I'm not a big fan of IRRs because, frankly, you can change a few assumptions and will change the capital requirements, and the IRRs look ridiculous. I'm a big fan of value of new business, assuming that your assumptions are in line with experience. I'm also a big fan of payback periods in terms of real cash flow, and that's how I look at it. I'll get you to talk about at RIEESA in a moment. On the JV partners, I think you already know all our JV relationships. I'm not going to give any guidance on when they come up. What I can tell you is our relationship with our JV partners, and I have met not quite all of them but most of them, is very good, indeed. You've just seen in Poland and the U.K., we've expanded substantially, and lengthened our agreements with Santander. The Polish one was quite a sizable win for us, and I'm pretty comfortable with our relationship with our JV partners.

Patrick C. Regan

On the RIEESA, Andrew, the specific answer to your question is just over GBP 80 million, 8-0 million pounds in the first half. Actually, if we didn't -- if we had to include the RIEESA in it in total in OCG, that would actually be a benefit to the numbers we're reporting. The other thing worth noting is the benefit of the business we've written in the reattributed estate historically has been the non-annuity business, generally. And as you know, we've been a lot more selective about the type of pensions and savings business we're writing in there, anyway. On the cash to group, the center cost is just over GBP 100 million that we cover in group center. There's a slide in the pack that talks about that. The other costs, we have to cover, obviously, the external interest on hybrid, and in, obviously, in -- to complete AGH, the center pays interest to AIL loans, so you would need to include that as well.

Andrew Crean - Autonomous Research LLP

[indiscernible]

Patrick C. Regan

Yes, it's the -- you can. It's the 4% tranche, whatever the loan balance is. You can see all of those numbers in the package. So...

Mark Andrew Wilson

Notes [ph]. Thank you, Jason.

Christopher J. Esson - Crédit Suisse AG, Research Division

Christopher Esson from Crédit Suisse. Three questions, please. Firstly, on the gearing. So you're still at 50%, and you haven't changed your 40% target for gearing by the end of 2014. Does this imply, given the relatively weak development of NAV in 2Q, that you will be increasing the GBP 500 million absolute reduction target? Or that NAV is going to be kind of reaccelerating fairly quickly from here? Secondly, in terms of the IDB, just wondered if you could share with us your thoughts on final destination for that number and the parameters on the consideration, whether it's percentage of total tangible results or something like that. And lastly, on Asia, which has obviously had quite a good period for new business growth. Can you talk about the reliance [ph] within your business there on the relationship with DBS and how you're progressing with the extension of the relationship?

Mark Andrew Wilson

Okay. Again, we'll split these round a bit. On the external, bluntly, we're -- exactly where we thought we'd be this time of the year. It does rely on completion of deals and, as I said before, have given ourselves a little bit of wiggle room. I'm not changing my guidance at this time, but we are exactly where we thought we'd be, so exactly where our planning was. Asia may be a far -- I'll pass over to Khor. Just a note on our Singapore business, though, our Singapore business, I think, is far more diversified than you would expect. And Khor, just want to talk about that a little bit more detail and how the relationship is with DBS?

Hock Seng Khor

I think for the Asian business, the growth in VONB has basically come from both Singapore and China. But for Singapore in particular, if you look at the contribution from our various distribution channel. While DBS still plays an important part of the business in Singapore, but they are now only contributing first half, only 33%, from the new business value creation. So we have actually diversified our distribution channels over the last few years. And the other channels, like the FA channels and our type agency channel together with our group insurance business contribute the other balance. So it's pretty diversified now.

Mark Andrew Wilson

Yes. And I guess, that's probably the surprise by how diversified that business is. I mean, it's -- we still got quite some time left on that arrangement yet. And as we get closer to it, we will look at what we do with the extensions.

Hock Seng Khor

Yes. I think maybe just to add, the relationship with DBS, of course, is very strong. Their sales and their contribution has actually improved. This year alone, sales for the first half from DBS has increased by nearly 40%. So good relationship. We have until -- a few more years to look at the relationship and to ensure the renewal.

Mark Andrew Wilson

Did you want to cover the IDB?

Patrick C. Regan

There's not a lot more to add on the IDB than we've already said there I think, Chris. I mean, we're are exploring a number of other projects, noncash type of projects, and we will update on that later in the year.

Gordon Aitken - RBC Capital Markets, LLC, Research Division

Gordon Aitken from RBC. Three questions, please. Now insurance is a very typical that you can -- there's trade off the between growth and cash. Cash generation is up but your sales are down. In fact, sales are down in every geography. And within that, every product class, apart from one. And just wondering what you think about that trade-off. And there's a short-term versus long-term thing going on here. And the question is at what point does the group start to grow again. That's the first question. And the second one is on the external leverage, where's the pressure coming from? Is it you bring upon yourselves to reduce the leverage, and what the rating agencies saying ? And I'm particularly interested in what the regulator is saying. And has the regulator talked about a specific time period to get leverage down to a certain level? And the final thing is, you mentioned you're very confident in the U.S. life sale completing. Obviously, some news flow with some other people over there. What happens if that doesn't complete?

Mark Andrew Wilson

Thanks, Gordon. I'm smiling because I wondered how long it would take for people to turn from our balance sheet to growth, and I guess that's inevitable. But our investment thesis is cash flow and growth, in that order. And we've still a lot of work to do on cash flow. Nevertheless, things like Santander, we're always working on various things we can that will help the growth. Just to be very clear, my view on growth is not top line growth. Any idiot can get a growth in top line. Anyone can do it. You can put out on center. You can change the price, and you can get growth in top line. You need to do that when you're subscale. You don't need to do that when you have scale. And so my only measure of growth is value of new business. Obviously, the total profits out of the GI side is different. But I think that's important because at any time you want for a quarter, you can turn on a tap to get top line growth, and that's not how we manage this business. So that's the first thing I'd say on that. On the pressure, where's the pressure coming from in the external? I mean, that's ourselves. That's what we want. Now anyone who says they don't talk to the regulators, I don't believe it. We -- of course, we talk to the regulators about everything we do in terms of capital and debt and that sort of stuff. But it would be entirely wrong to suggest that the regulators have a different view to what we have. That will be entirely wrong to suggest that, and we have a very open and transparent relationship. That pressure is from us. It's not from rating agencies, It's not from analysts. Its from us. And it's what we think the optimum mix of our business is. This business has been derisked to a large extent. I've never seen a business as well matched on assets and liabilities as this one. And the reason for that is obvious. Because if you ever look at the beginning of last year, we had insufficient capital. And there's been a whole lot of work done. It started with John and the board, and that's improved a lot. But we're incredibly well matched. U.S., what can I say? It would have been very imprudent of us if we hadn't have contingency measures in place had, let's say, assume New York doesn't approve for a second. That would be very imprudent of us if we didn't have those measures. I'm not going to go into detail on that today, but you can assume that our contingency planning was robust. You can also take my previous guidance that I am confident that it will complete this year. But I'm not going to say anymore about the detail of that right now. Yes? So I need to come over here in a minute.

Andrew Hughes - Exane BNP Paribas, Research Division

Andy Hughes, Exane BNP Paribas. A couple of additional questions for me. The first one, you haven't said anything about the impact of RDR and what it's done to the lapse rate of the business in the U.K. at all so far this year? Has there been no change? Or are we looking at a possible positive scenario there. Second question was one of your competitors disclosed their economic capital mix for the GI business. I'm principally thinking about U.K. and Canada here in terms of what's in the legacy bucket, because obviously that's running off over time, and would -- should release some of the economic capital. So could you give -- kind of give us an idea of how much of the economic capital within the GI business relates to legacy? And I just want to make sure I understood the answers to the question on commercial property. Are you sort of saying if there's a small move in commercial property like 10%, you wouldn't expect the provision to change, but a bigger one it probably would?

Mark Andrew Wilson

Okay. RDR first. It was an interesting one because a lot of people were pretty doom and gloom about RDR for us. And I don't know who was winding that up last year, but I think the results show today we've had a pretty robust result. You want to just talk about lapse rates?

David Barral

Andy, lapse rates are pretty much in line with assumptions. In fact, I think we would have positive improvement on general net fund flow position. But as you know, our focus really post RDR has been towards focused on our higher-margin risk businesses of protection and annuity. Of course, the actions we've taken in terms of increasing our prices, reducing our costs, lowering our capital stream has meant that we've been able to increase that overall margins through the payback periods actually as well, and drive up that value in new business by 16%. So you can expect us to have more focus on the managing the in-force pensions and investment going forward. But so far, we are very comfortable with that.

Mark Andrew Wilson

And Andy, I mean, the simple answer is the fund flow has improved not gone the other way so far, and really dying short[ph]? so we still have lot of work to do, but we haven't seen deterioration. On your question on the property, just to be clear, the provision we took was quite substantially greater than the deterioration. Just to be clear, which I think probably answers your question...

Patrick C. Regan

On the economic capital one, I'm absolutely sure they didn't put out what their legacy was in economic capital. I will tell you, it's a bit more than GBP 0.5 billion that we hold for license [ph] within our economic capital. Yes, I'm sorry?

Andrew Hughes - Exane BNP Paribas, Research Division

Pension schemes on top of that?

Patrick C. Regan

Pension schemes on top of that, yes.

Marcus Barnard - Oriel Securities Ltd., Research Division

Marcus Barnard from Oriel Securities. You mentioned you have plans to grow in Indonesia and Vietnam. Can I just ask a little more detail about what you're going to do there, whether that's by acquisition, what resources you're going to throw at it? Or do you think you have partnerships or recruiting agents because all of those roots have their own challenges.

Mark Andrew Wilson

I actually assume all of the above. The -- I like partnerships in Asia, where you can get substantial distribution out of it. We've got a fine bank partner in Vietnam. But it's very much an emerging market, and that will take time. I'm a big fan of Indonesia. I spend a lot of time there over the years. And our local contacts and Khor Hock Seng is, obviously, from that part of the world. We'll take our time, but I do like partnerships. I do like it where you can get substantial distribution out of it. It's a market that's going through extraordinary growth with high margins, and you can make an impact in the market fairly quickly. The cash flow payback on product is some of the best in the world. But we'll wait and see and we'll see how that develops over time. Vietnam, we're already there. As you know, we have a bank partner. I wouldn't expect quick progress there at all. Vietnam is an option for growth in the future, and we have a fine partner.

Barrie Cornes - Panmure Gordon & Co. plc, Research Division

It's Barrie Cornes of Panmure Gordon. A couple of questions from me. Can I take you back to the U.S.? My query really is whether or not there are any perceived delay in the sale is actually costing you perhaps by reinsurance costs for that deal? And secondly, in respect to the flood losses in Canada, given the Alberta losses, the Toronto losses, the second half losses seem relatively high, whereas one of your competitors had the loss going down in terms of an estimate so far, whilst yours is going up.

Mark Andrew Wilson

About the first one, the answer is no. I don't perceive any at all because there's no perceived delay. I think we are well advanced in where we are. So the answer is a clear no. We've got Maurice here, our Canadian Head here. Do you want to talk about Toronto?

Maurice Tulloch

Sure. Thanks, Mark. I mean, Barrie, I think to talk about the 2 losses, I mean, the first thing, the Alberta loss is likely going to come in as the largest loss in Canadian history. Economic at about GBP 5 billion and insured will be probably between GBP 2.5 billion to GBP 3 billion. The growth exposure to the Aviva Group, as Pat and Mark have both talked about, is GBP 70 million. More significant weight, when I look at our competitors who have released, such as market leader Intact and RSA last week. The Toronto losses, Toronto, we have a significant market share, Pat talked about approximately 10% across the Canadian market. We're probably closer to about 15% on market share in Ontario, which is the most populous province. And the estimate, which is a good solid estimate of GBP 50 million for Toronto will also be underweight relative to our competitors.

Mark Andrew Wilson

Just to -- sorry, just to back up coming on the U.S. as well. The only thing we're waiting for is regulatory approval, and I can tell you what -- it's public, of course, that you'll recall that Iowa was 97% of that business. New York was 3%. And Iowa had their public hearing on the 17th of July. So Iowa has 30 days from that time to approve the transaction. And you can do your math -- it's next week on Iowa. And then you've got New York as well to complete that transaction. Andrew?

Andrew Crean - Autonomous Research LLP

Andre Crean, Autonomous. Just a couple of questions. On current economic assumptions, what would be the impact on your new business profits? How much would that lift by -- or the margins lift by? And secondly, one of your competitors in Canada, Toronto Dominion, had a second go at rereserving their Ontario order books to the tune of $400 million. I mean, everyone's going to say that they're behind the curve. But how confident from -- and we don't know the market particularly, how confident from the outside can we be that, that is true?

Mark Andrew Wilson

Again, will start with Maurice in Canada, and then we'll move...

Maurice Tulloch

Yes, thanks. With respect to the TD announcement, certainly, I think that took the market by surprise. It relates to the auto reform in Ontario, which came in, in September of 2010. At Aviva Canada, since that period, we strengthened our BI reserves by over GBP 200 million. I think it's also important to note that our appointed actuary reviews that every quarter, every year. It's also reviewed by Rotter's[ph], PwC. And we also take the further steps to have a peer review, and we've had a peer review each of the last 2 years. And all 3 of those reviews, they've been within 1% of our number. obviously, we're very confident in our reserve position for bodily injury in Ontario.

Mark Andrew Wilson

And on capital [ph]

Patrick C. Regan

I just want to make sure I understand what your question is on the new business.

Andrew Crean - Autonomous Research LLP

On the new business profits, you updated the current economic assumptions, the higher interest rates, would that lead the margin up?

Patrick C. Regan

The places sensitive to that to some extent is Italy, really, but it wouldn't make a huge difference to it to be honest. The items that David talked about are more meaningful in that context.

Oliver Steel - Deutsche Bank AG, Research Division

Oliver Steel at Deutsche Bank. Can I just take you back to the process automation. I accept you didn't want to sort of give us target expense ratios at this stage. So any indications you want to give on that front would be useful. But if you're not going to give us that, can you give us an idea of how automated you are both in terms of taking on new business and in terms of the claims management? You gave us U.K. GI but does this -- what about life, what about other countries? How quickly can you spread it from -- presumably you're starting in the U.K. to other countries.

Mark Andrew Wilson

Yes. And just on the expense ratios, we're working through that. We'll show you the measure, I'd say, at the beginning of next year. To answer your question is it depends entirely on the country. So the U.K. is actually quite, I won't say quite well -- further advanced, but still not the automated, so 17% was an example. And our new business and our digital stuff is much more automated as well. So on digital, for example, when we write new business through the net, we've got the algorithms that are working real-time in terms of the pricing. So when we write someone's house, we can work out things like the length of the driveway and all that sort of stuff, a little risk-relating factors, so that's quite automated. So the new stuff is the claims processing, nowhere near where it needs to be. And that's probably true right across the board. I don't want to automate things like front-end customer stuff, like the phones. Because that's an area that differentiates us and the ratings we're getting from the customers are really good in there. So I don't want to go down that line. I'm talking about our back-end processes here. I'm talking about processes that you might otherwise outsource to India, say. That's the sort of thing when we're talking about automation. That's really what we're trying to do. That sort of gives a bit of color. Yes?

Alan Devlin - Barclays Capital, Research Division

Alan Devlin from Barclays. Just a couple of questions on your U.K. Life business. First of all, I think you mentioned in talking about RDR, I wonder if you have any view on the impact of RDR to an elimination of field[ph] commissions? Could that have any impact on your lapse assumptions and the GBP 1.1 billion cash generation from your back book that you talked about? And then secondly, you mentioned your pensions and investments are primarily in the -- on the back -- managed in the back book. Does that mean auto enrollment, workplace pensions isn't really a focus for you guys?

Mark Andrew Wilson

No, auto enrollment is absolutely a focus. We will get more benefit from auto enrollment on the first phase, because our pensions is more in the SMEs and midsize corporates. And as you know, that doesn't get impact in the first phase. So as it goes forward, you will see that will impact us positively, not negatively in auto enrollment, just to be clear. RDR, RDR is very much in its early days. And there was a big predictors of gloom for us in RDR. They're in a market which haven't eventuated. But you can assume that we are putting a lot -- that's one of the reasons we're putting a lot of money into digital and those sorts of channels. And digital in the U.K. is an area that we do pretty well so far. We get a pretty good share of market, particularly in the GI and more -- becoming more so in life on digital channels. In terms of lapse rates, I think that's too early to tell. I don't think we know yet. And anyone who says they do -- I think RDR is too much in its early days. I'm concerned about RDR and not so much from a business perspective. I'm concerned more about it from a social perspective. What RDR's done is cut out advice, and I think there's social consequences of that. So these things will probably go through clauses as the regulator refines and adapts their strategy, and that's okay. But too early to tell I think. Yes.

Fahad Changazi - Nomura Securities Co. Ltd., Research Division

Fahad Changazi again. Apologies for this. I know you just had the dividend cut, but you made good progress and you seem to be open with the market. So could I ask that given at the full year stage, cash remittances will be up, internal leverage will be down, will expense savings filtering through potentially lower restructuring costs going forward, potentially new expense ratio targets as well? Could you update us on potentially the dividend from that point onwards?

Mark Andrew Wilson

No, I can't. And because I wondered how long that was going to take, frankly. Look, we're making progress, but we are where we thought we're going to be, and I don't want to -- I do want to manage expectations. I do want to manage expectations. Yes, we're making progress, we're a little bit ahead in some areas where we thought we might be. But I want -- have been highlighting the downside all day, hopefully. So -- and we're just trying to be realistic. We're not going to give any further guidance. That depends on cash flow. That depends on earnings. I'm not giving any guidance there. Come along to the full year, and state your name[ph], and we'll see if we can give guidance then.

Patrick C. Regan

We're comfortable to tell you the full year dividend.

Mark Andrew Wilson

So thanks, everyone. Thanks for the session. That we'll have some follow-up sessions and things with the team when you need clarification. So thank you.

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