Aviva plc (OTCPK:AIVAF) Q3 2020 Earnings Conference Call November 26, 2020 3:00 AM ET

Company Participants

Amanda Blanc – CEO

Jason Windsor – CFO

Conference Call Participants

Jon Hocking – Morgan Stanley

James Shuck – Citigroup

Oliver Steel – Deutsche Bank

Blair Stewart – Bank of America

Andrew Crean – Autonomous

Farooq Hanif – Credit Suisse

Greig Patterson – KBW

Ming Zhu – Panmure Gordon

Steven Haywood – HSBC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Aviva plc’s Q3 2020 Investor Update [Operator Instructions]. I will now hand over to your speakers today, company CEO Amanda Blanc, and company CFO, Jason Windsor. Please go ahead.

Amanda Blanc

Thank you, operator and good morning, everyone. And thank you for joining for our Q3 trading update. I really hope everyone is being staying safe and well in these difficult times. I’m here with Jason, our CFO, who will take you through the Q3 trading performance shortly. But before I hand over to Jason to take you through the nine months trading update, I’d like to update you on two key areas. First, the progress we are making on the strategic options and priorities I set out in August. Second, as I promised we would, I will take you through the decisions we’ve made around our dividends.

So in August, I outlined three strategic priorities, focus the portfolio, transform performance and financial strength. The first priority is to focus the portfolio on our strongest and most strategically advantaged businesses in the UK, Ireland and Canada. These are our core market where we have marketing leading positions, can generate attractive returns and have the rights to win. For our international markets in continental Europe and Asia, I said we would manage these for long term shareholder value. And I was clear that ultimately there may be better owners for these businesses than Aviva. Since August I’m pleased to report that we have made good progress and have already announced £2 billion of disposals. All of which will be accretive to capital. We are continuing to work with a clear purpose and are exploring the options available to us elsewhere. I will touch upon this more in detail in a moment.

Our second priority is to transform performance. As we have started to make progress on this during Q3, I’m pleased to report that we are delivering robust growth in our core businesses, especially in the key segments where we can achieve attractive margin and have long term growth prospects. We have seen strong life insurance sales of £32 billion, including £5 billion of bulk purchase annuities in the year to date, which is more than double that of last year. There has been a 20% uplift in net funds growth in UK savings and retirements, achieving £6 billion and Aviva investors delivered £1.2 billion of third party net fund flows. Our commercial lines’ net written premium is up 9%, building on the double digit growth we achieved in 2019. As we have been recognized for our success claiming a clean sweep at the British Insurance Awards last week, winning general, personal and commercial lines insurer of the year. This is the first time any company has won all three awards together. And we’re very proud that our strong product offering and high service standards have been recognized in this way during a very challenging year for many of our customers.

On costs, we are on track to exceed £150 million savings for the full year 2020. Furthermore, I can confirm that we will deliver the £300 million cost savings targets by full year 2022 from our core markets of UK, Ireland and Canada, and we will not rely on any of the disposals to achieve these savings. What is abundantly clear to me, however, is that Aviva needs to deliver meaningful change in order to truly transform our performance. We are already taking actions across a number of fronts. For example, rationalizing the number of projects and legacy platforms, simplifying, automating and digitizing more of our customer journeys, removing the layers of bureaucracy, accelerating the reduction in our property costs and investing in our underwriting, claims and sales capabilities. Thus, we need to continue identifying the changes that are necessary and we need to execute them efficiently and effectively. My colleagues will tell you that they are clear on what is required and the change is underway. However, despite some initial success, transforming the performance of Aviva will take time and there is a great deal to do. But we’re focused on delivery and I will update you as we make substantive progress.

Our third priority is financial strength. Our Q3 results demonstrate that Aviva’s balance sheet is in robust health. Solvency II capital surplus of £11.8 billion, Solvency II ratio of 195%, up 1 percentage point from the half year, central liquidity of £2.8 billion, which will be further strengthened by disposal proceeds. I am reiterating my commitment to reducing Aviva’s debt leverage ratio. We are intending to use the aggregate cash disposal proceeds of £1.5 billion from Singapore and Aviva Vita Italy to reduce debt. And as we continue to work on the portfolio, there will be other opportunities over the next two years to do more of this.

Let me now touch upon our portfolio actions in more detail. We have made good progress into August in our efforts to refocus the portfolio and have announced £2 billion of disposals. In September, we sold a majority of our Singapore business with consortium led by Singlife for a total of £1.6 billion. By retaining a 25% share holding, we hope to benefit from the attractive future potential of that market and this is consistent with our approach to managing our portfolio for long term shareholder value. I’m pleased to confirm that we are on track to complete the deal next week, two months ahead of our original expectations. Earlier this week, we announced the sale of Aviva Visa Italy for approximately £400 million with completion expected in Q2, 2021. We have also completed the disposal of our Indonesian business and we expect to complete the sale of our Hong Kong [interest], by the end of this year. We are being decisive. We are focused on delivery. And as you can see one-by-one we are ticking them off.

Now I think it is worth saying that, you shouldn’t believe everything you read in the paper. But I can confirm that we are exploring our options to France, Poland, the remainder of our Italian businesses and our joint ventures. These are complex businesses with multiple stakeholders, and I want to be very direct in saying that it will take time for us to reach conclusion. We will be disciplined in doing the right thing for our shareholders and our people. We will continue to manage these businesses for long term shareholder value and we will update you as we make progress.

Turning now to dividends. I said in August, we would 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 are today announcing our new dividend policy, which we believe will deliver a sustainable and resilient ordinary dividend. Covered by the capital generation, cash remittances and growth from our core businesses in the UK, Ireland and Canada, we expect to grow our ordinary dividends per share and the low to mid single digits. Aligned to this new dividend policy, we are announcing an interim dividend for 2020 of seven tenths per share, which will be paid on the 21st of January 2021. and subject of course to the board’s final determination at the time, our current expectation is that the final 2020 dividend will be £0.14 per share, which has been the total 2020 dividend to £0.21 per share. We will not be distributing a final 2019 dividends. This has been a challenging year with significant market volatility and we have taken the prudent decision to conserve our capital and enhance our financial strength to ensure that we are well positioned through the period of COVID and Brexit uncertainty.

We absolutely understand the importance of dividends to our shareholders, but we believe that now is the appropriate moment to align our dividend with our new strategy of focusing on the core markets. We have stress tested our capacity and believe that our go forward dividend will be sustainable and resilient. Future growth in the dividend will be driven by the transformed performance of our market leading businesses by lower levels of debt and from the benefits of focusing the portfolio. An important component of aligning our new dividend policy to the core market is to clearly set out our new capital framework. We have been clear that financial strength remains a key priority, and this is at the heart of our capital framework. Our Solvency II cover ratio working range will remain at 160% to 180%. Although, we intended that our cover will remain above this range as we go through the process of reshaping the group and reducing our debt. We are committed to reducing our Solvency II debt leverage ratio to below 30%. And as we reshape the group, this will likely result in us exceeding our £1.5 billion debt reduction target.

Once we have reached a sub 30 Solvency II leverage ratio, we expect to return excess capital to shareholders when the cover ratio is above 180%. This approach is consistent with maintaining our strong credit rating metrics. In terms of how we think about deployment of excess capital, we are absolutely committed to generating strong and sustainable shareholder value. We will look to reduce debt, return capital to shareholders and continue to invest in our core businesses where we see attractive opportunities to do so. We will carefully balance those priorities. And I will remind you that we already have a substantial amount of capital deployed within our core businesses to support growth.

Now let me hand over to Jason who’s going to take you through the Q3 financial performance, and will provide some more color on the dividends.

Jason Windsor

Thanks, Amanda, and good morning, everybody. As Amanda just commented, we’re making good progress delivering our priorities. We have strong and resilient businesses in the UK, Ireland and Canada, we’re confident in our ability to grow in these markets sustainably and our Q3 results demonstrate just that.

Let’s talk about core markets first. In UK and Ireland [line], we grew PVNBP 40% in the first nine months of the year, BPA volumes were £5 billion, an increase of 2.3 times relative to the first nine months of 2019 and 25% higher than our volumes for the whole of 2019. This includes the second deal with Marks and Spencer for £400 million. While communities is an important franchise for Aviva, our brands, strong corporate relationships and risk management capabilities all play an important role in supporting disciplined growth with clear hurdles on IRR and capital usage.

Health and protection saw a 6% increase in sales, primarily driven by price increases in group protection and health while individual protection trading remains competitive impacted by COVID-19 disruption. Individual annuities and equity release was down 29% in the period as the low yield environment continues to impact demand for individual annuities. Trading and equity release was disrupted by confinement measures. But I would like to highlight that we won the personal finance award for best equity release lender for the seventh year in a row, which is testament to our team and their response during the pandemic.

In saving and retirement, net flows grew to £6 billion, a 20% increase from the prior year. Our workplace platform continued its strong momentum with flows up 23% to £3.8 billion. Net flows are also positive on the retail platform, up 5% to £2.6 billion and we now have platform assets of £31 billion. Our advisor platforms continued to perform well, ranking third with a 10% share of net flows in the first nine months of the year. Aviva investors made solid gains with third party net flows of £1.2 billion and internal net flows of £3 billion, excluding heritage. In addition, our liquidity range generated £5.5 billion of external net flows over the first nine months compared to less than £1 billion in the prior period.

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Moving on to general insurance, net written premiums were flat at £5.8 billion. Commercial lines continued to perform strongly with growth of 10% and 8% in the UK and Canada respectively. This is primarily driven by property and liability rate increases, which saw above inflation rate increases and targeted growth. Personal lines saw 5% reduction in premiums as we continue to prioritize margins over volumes together with reduced activity levels from COVID disruption.

Moving to the next slide and looking at the quarterly trends for our core businesses. Of course it’s been an unusual year as the trend show, particularly for individual annuities, equity release and protection. In savings and retirement, discreet Q3 flows were resilient but remains muted compared to Q1, reflecting a cautious sentiment from ongoing macro and COVID uncertainty. Q3 volumes for BPA were up 43% on Q2 and this has led to a temporarily lower new business margin due to a timing mismatch with reinsurance and that target asset mix on those Q3 deals. You might remember we had a similar mismatch in the first half of 2018 and like you did in 2018, we expect our margins to a quarter by the end of the year. General insurance saw lower discrete premiums in Q3 compared to the prior quarter. This was mainly as a result of seasonality. Margins in GI were good in Q3 with strong underlying performance in the UK and Canada, partly offset by less benign weather. Our estimate for the impact of Q3 that COVID-19 net claims and general insurance has reduced to approximately £100 million compared to £165 million at the half year. This mainly reflects further frequency benefits in the third quarter. I would also note that we haven’t had to change our net BI claims estimate on the back of the SBA test case.

As mentioned by Amanda, our international businesses in Continental Europe and Asia are being managed for long term shareholder value. This means that we will selectively participate in these markets and we will withdraw capital where appropriate, as seen with our recent announcements for both Singapore and Aviva Vita in Italy. Likely business sales in Continental Europe and Asia decreased by 21% overall as a result of COVID-19 disruption and our continued actions to reduce the volume of with profits business in France and Italy as part of our managed for value strategy. As you can see from the chart, there was a marked reduction in life premiums in the second quarter of 2020, which is recovered somewhat in Q3 but remains below 2019. In general insurance, trading has been resilient with net written premiums increasing by 4% in the first nine months of the year. The higher volume in France in Q1 is the factor of seasonality.

Now moving on to financial strength, which is obviously one of our priorities. Our Q3 solvency ratio is 195%, well above our target working range. The 1 percentage point increase in the quarter reflects operating capital generation, offset by the payment of our £0.06 interim dividend in relation to 2019. We also have to correct the application of a rule and our France life model, which together with model enhancements to better reflect negative interest rates at a 2 points impact on the group solvency ratio, and this had an estimated £250 million impact on group OCG.

It’s worth highlighting that our Solvency II position at the end of September does not reflect the approximately 8 point benefit expected from the announced disposals of Singapore and Aviva Vita. And to be clear nor does it reflect the Tier 2 Canadian debt issued in October to refinance the Canadian dollar Tier 3 notes, which matures in May 2021. Our shareholder corporate bond portfolio has continued to perform well with no defaults and less than £15 million of bonds downgraded below investment grade. This compares very favorably to the broader market experience.

Our commercial mortgage portfolio was positioned fairly defensively, following previous restructurings with solid collateral and low LTV on new lending. As such, it has remained resilient to date but we continue to monitor positions very closely given the uncertain and difficult environment. Performance metrics in commercial mortgages have remained broadly stable since the half year. The LTV of the portfolio has not changed significantly while only 2% of the loans are in arrears by Q3 compared to 1% at the half year.

Moving onto centre liquidity, which remained very strong of £2.8 billion at the end of October. We will maintain liquidity of at least £1 billion at centre. So in normal times, this means that ahead of dividend payments, you should expect group liquidity to be in the range of £1.5 billion to £2 billion in line with what we’ve said previously. It’s important to recognize that as we restructure the group, group liquidity is likely to stay elevated and at least as it forms part of our plan to reduce debt in 2021 and 2022.

What I want to do with this slide is explain why we expect the 2020 dividends at £0.21 per share. To do that, we set out the expected cash generation from our core business units, essentially using the same targets from last year’s Investor Day. You can see that the sustainable cash flow from our core businesses is expected to be in the region of £1.6 billion per year. Once we allow for debt incentive costs we have £1 billion of excess cash flow. And please remember this is after growth and investment in the business. This allows for £0.21 dividend with a comfortable £200 million of headroom. There are additional levers to drive up headroom, including better performance for the core businesses, lower expenses, the reduction in interest costs from reductions in ’21 and ’22 and possible options to reduce our share count. Looking forward, we expect to grow dividend per share at low to mid single digits. Crucial to those remittances is the healthy solvency position of our core subsidiaries. I’ll give you some detail on the next slide.

On this slide, we set out the Q3 solvency ratios of our three core cash remitting subsidiaries and our reinsurance mixer. As you can see, all of the solvency positions are strong, they’re all above risk appetite despite COVID-19 effects and capital markets volatility. I’ve also shown the key sensitivities for each of these subs. This shows the resilience to rates and spreads providing further confidence in the cash outlook on the new dividend policy. With the backdrop of COVID-19 and wider macro uncertainty, we’ve delivered strong growth in premiums in flows in our core markets while maintaining our financial strength. In the context of the disruption we’ve seen these are solid trends. I wanted to highlight some points as we move toward the end of 2020.

We expect the second half performance trends to be broadly consistent with the first half and management actions and other to be ahead of previous guidance of £0.2 billion, mainly owing to UK Life longevity, albeit on its own, the longevity assumption change will be lower than in 2019. The impact of the Q4 lockdowns across the group is uncertain but we are not expecting any significant increase in BI claims. Savings and retirement is having a strong year with growth rates were expected to moderate due to strong Q4 comparisons. On cash and OCG, we expect the second half OCG to be broadly in line with the first half after absorbing the France life modeling change. While cash remittances in 2020 as I mentioned at the half year meeting will be below 2019 but the second half of 2020 will be in excess of the second half in 2019, which is good progress this year.

Thank you. I’ll now hand back to Amanda to close the presentation.

Amanda Blanc

Thanks, Jason. So to finish, let me summarize the key points. Firstly, we’ve made a good start to simplifying the group, selling Singapore and now a major business in Italy. Secondly, we have a new dividend policy, which is sustainable, resilient and which we intend to grow by low to mid single digits based on our core markets of the UK, Ireland and Canada. Thirdly, we have solid foundations from which we can transform performance and grow our business. We have market leading positions in our core market and have identified profitable areas that we can grow. Our robust performance in 2020 demonstrates just that. There’s a great deal to do but let me reassure you that meaningful change is underway at Aviva, and we are focused on execution and delivery as we seek to unlock value for our shareholders.

So thank you for that for listening. And now let me hand back to the operator and we will open the lines for Q&A.

Question-And-Answer Session

Operator

[Operator Instructions] You’ll first question comes from Jon Hocking from Morgan Stanley.

Jon Hocking

I’ve got three questions please, starting with the capital return, the debt to leveraging target. You talked about potentially returning capital once the debt to leveraging targets reached in 2022. Is that the end of 2022? Actually you’ve got a couple of big bond costs during 2022. So is it possible to restarting capital flow during ‘22, is it likely to be in 2023, that’s the first question. Second question in terms of the proceeds, is the interpretation here that the proceeds minus the debt-to-leveraging subject to 180% solvency threshold so everything else will come back to shareholders. So is there an implicit message here that you know material amount of overlay, that’s a second question. And then just finally a little bit more detail, on Slide 7, when you were talking about the dividend growth, there is a comment that the dividend growth might benefit from management value portfolio actions. Just a little bit confused about that as all the dividends being set on three core businesses. So is there — am I interpreting that correctly is there any chance that you can see a step up in the ordinary dividend through the management value? Thanks very much.

Amanda Blanc

So firstly, I think on the capital returns and the debt to leveraging and the time line for that. I mean, clearly, we’re not going to be committed to any timeline today. But I think you know what we’ve said is that we are exploring all the options in terms of how we manage the value portfolio and that we’re also being clear that we do intend to operate within the 150 to 180 solvency ratio and that we will return the excess capital once we have done our debt reduction, which is a key priority for us. So our debt leverage ratio needs to be below 30%. And as Jason outlined in his speech, there are opportunities that we will have to do that over 2021 and 2022. But I think in terms of getting specifics on the timeline, I think it’s going to be quite, quite, quite difficult for us to do that. And I think that goes to the heart also of your second question, which is around the proceeds, once we have delivered.

So I mean, we’ve set priorities. It feels like a broken record. I know the priority is debt reduction. So that is what we will do first. We’ve said the excess capital will be return to shareholders but we’ve also been clear about investing in the business. I think that we we’ve already got significant investments within the business. You talked about M&A. Clearly, at this point time, we have much on our plate. We have the priorities as we set out here. But we will never say never on that. Jason, did you want to pick up the third question on dividend growth?

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Jason Windsor

I think what we have done, Jon, is anchor the dividend of the core business and the remittances from those businesses. So there is nothing baked in for value or remittances from the manage for value market. So any remittances or investment proceeds or capital withdraw would be additive to the group’s financial strength. So we could use that to reduce debt or possibly in due course reduce share count, both of which could be additive to the headroom in terms of cash flow for share.

Operator

And your next question comes from James Shuck from Citigroup.

James Shuck

So a few things from me, firstly, in terms of the debt gearing itself based on the Solvency II basis. So actually what you end up selling anything forward or above owning funds will have an impact on that leverage ratio. So I’m just confident — I’m interested to know your confidence and actually be able to sell things at or above the owning funds level. And if you’re able to give an update on the golden ticket situation in France that would be very helpful. Secondly, in terms of the investment mix. So your solvency level is what about the target range, it’s more tricky to actually deploy that capital, it depends on cash flow and there are all the requirements around debt. It’s easier to reduce that solvency level by increasing your investment mix or the risk profile within that investment risk. So just want to get an understanding for how you might deploy that solvency through increased capital requirements on investment side please. Thank you.

Amanda Blanc

So I’ll let Jason pick up your second question. On your first question around the Solvency II and funds having an impact. Of course, that’s the case. I think what you all have seen, our disciplined approach to the way that we have handled the first two deals both in Singapore and in Aviva Vita Italy, which has been accretive. And I think that has been something which we have been very conscious that we are managing for value and I think that disciplined approach will continue. I think as far as France is concerned, as I said, for France, for Poland, for the rest of the Italian businesses and the joint ventures, we are at the stage of exploring our options. Jason, did you want to pick up the second point?

Jason Windsor

On golden ticket, I mean there’s nothing to say on that. That’s actually — there’s no new news on this, it’s behaving very much in line with what we’ve seen for many, many years now. So there’s no new news on that. In terms of capital deployment, we don’t have big plans to re-risk the balance sheet. I think we set out that we’ve taken that interest rate exposure wherever we can, we don’t think that’s rewarded. We’ve reduced exposure at the margin to equities. We’ve got property exposures and bond exposures, as you’d imagine. It’s just cool and integral to the growth of any insurance company. But there is no reasonable level of risk within the balance sheet. But certainly we’re not aggressively positioned as we go into 2021 and deliberately so and don’t see that changing in the near term.

Operator

Your next question comes from Oliver Steel from Deutsche Bank. Please go ahead.

Oliver Steel

First question, I guess, is really about timing. I mean, it’s really hard to understand why your planning to wait maybe until 2022 before you actually return some of the excess cash you’ve got. I mean, just if you’re going to use Singapore and Aviva Vita to pay down the maturity debt over the next two years, but implicitly, you’ve already got GBP 1 billion above your immediate target for cash. And then I look forward, and I can see that you’re covering your new dividend cost. Out of the U.K. and Canadian operations by themselves, which means all of the excess cash flow coming from France, Poland and the rest of Italy, as the next however long until you sell them is going to be in excess of that. So can you explain why you’re being so slow in actually returning any cash rather more quickly? I don’t think it is there are any other questions, perhaps asking if I lost that.

Jason Windsor

In terms of timing, I mean, with the first phase. Amanda has been in role four months, we’ve managed to announce not complete two divestments, one we expect to complete next week. So it is early days. We are pleased with the progress that we’ve made so far. As we go into 2021 that is a very big year in terms of the development of the company. We don’t want to be drawn today on specifics or in during capital return. We’ve got two redemptions coming up in Q2, but we’ve got one we’ve already pre-financed on the debt side, the Canadian one, as I mentioned in the script, we’ve got two more redemptions in Q2, so that’s £600 million that will net reduction in Q2, that’s sort of step one. As Amanda mentioned, we’ve got really big redemptions in 2022. We’ll look to all options to reduce debt, but that is the priority. And then depending on how we progress we’ll think through. But what we wanted to do today is give you a very clear framework for leverage for cash and for capital so you can take that and make your own assumptions.

Oliver Steel

If I can just sort of follow-up quickly. I mean, are you specifically saying there will be no cash return [open] above the normal dividend until 2022, or are you saying that actually it depends on how things progress?

Amanda Blanc

I think what we’re saying is that we are at the early stages of exploring the options for the other markets, in particular the France, Poland, Italy, et cetera. And as well as we do that we said that we will keep more capital above our working range, and we will focus on your debt reduction. So we’re just not being specific about the actual time lines today, we’re just giving you the framework. But clearly, we will not hold on to excess capital. And it is our plan to return that when we feel, but we have completed the work that we need to do.

Operator

Your next question comes from Blair Stewart from Bank of America.

Blair Stewart

I wanted to ask the same question, but I won’t try and ask in a different way. I’ll leave it at that. But a couple more. As you sell those businesses, what’s your expectation in terms of what happens to the SCR on a Solvency II basis? Should we just assume that that reduces in line with the footprint of the businesses that you’re being sold, or are there any that are particularly heavy or light from an SCR perspective? Just to try and get a better handle on the modeling there. Second question is you said low to mid single digit growth on the dividend. I think one of your competitors said the same and that translated to between 3% and 6%. I’m wonder if you’ll be drawn on something a bit more specific. And finally, the UK Life solvency dropped a bit during the year, clearly, lots of moving parts. But just wondering if the increase in bulks had a bearing on that. Thank you.

Amanda Blanc

I’ll pick up the second question and Jason, pick up first and the third question. So as far as the low to mid single digit growth. No, we’re not going to be drawn on an exact number, it’s low to mid single digits. I think that what we will say is that we are confident about the ability to be able to do that, because if you look at the UK, Ireland and Canada businesses, we’ve seen already from the Q3 performance that there is just a really strong and robust performance there. So we will continue obviously to do that. You saw the growth in BPA. The growth in workplace savings, we see it in commercial loans, market is hardening. So we see the opportunities to really capitalize upon that. We also see the potential to improve the efficiency of the organization. So we’ve already again made progress there in terms of simplifying, but we also see more opportunity to do that. Jason outlined that obviously the debt reduction will reduce the interest cost so that gives us more opportunity to go there. And then the real benefit of focusing the portfolio. So we have to — you have to note that we have not assumed any dividends from the managed for value market. So we’re confident in that sense but not to be drawn on a specific number, Blair, but thanks for asking. Jason, do you want to…

Jason Windsor

So the SCR and intensity of the business is very, very different. So I mean I’ll use the example, the two helpful examples, Singapore and Aviva Vita. We sell three quarters of Singapore for just over a billion, 1.5 times in funds and got 4 points of capital benefit. We sell Aviva Vita for £350 million approximately and got 4 points of capital benefit, so you can see in our own funds. So you can see the difference that comes from the group at the level of SCR intensity, particularly the Continental European businesses where the SCR intensity is much, much higher. In terms of UK Life, solvency has formed a little bit, I mean partly that’s payment of dividends. We have got cash in the group from UK Life. There’s a little bit of impact from bulks, the temporary point that I mentioned has impacted that by give or take £100 million of capital that will unwind relatively quickly in Q4 and the residual is, as you might imagine, little bit of macro uncertainty this year. So market levels are a little bit lower than at the start of the year.

Operator

Your next question comes from Andrew Crean from Autonomous.

Andrew Crean

Just three questions, if I may. When you do decide to return capital, can you give us some idea as to whether you have a preference for buybacks or specials? Secondly, could you remind me how you define your 30% leverage? Is that done on our first or own funds and if its our first including goodwill and the surplus in the pension fund? And then thirdly, this question I’m sure you have every capacity to duck but it would be helpful if you could give us some indication. What we’re looking, when I’m looking at, when you talk about France and Poland and the remainder of Italy and JVs, it’s very difficult from the outside for us to assess how much diversification credit will be lost from the disposal proceeds, as you shrink the breadth for the business. If you could give us some sort of percentage impact of that, it’d be really useful? Thanks.

Amanda Blanc

Andrew, I will pick up the first question and Jason can pick up the second two. In terms of how we decided about whether or not it’s buybacks or specials, I think we’re not committing to that or how we will return the capital. But one thing I think we will reissue obviously, will sit on that excess capital the priority is the debt reduction. And once we feel the boots in the right place then we will balance the return to the shareholders with some investments in our future growth. Jason, did you want to pick up…

Jason Windsor

The leverage ratios on a funds basis, so that does not include any big surpluses or any goodwill, just to be clear. And then diversification, I mean the proceeds, you say the proceeds with the to be cash and they wouldn’t be affected by diversification in terms of the capital benefits. I mean it depends. I think I’ve said in the past that on the non-life side that is about 35% reduction in SCR because of the diversification of the life. I think in the life businesses, the international life businesses relative to the UK in terms of total SCR reduction is sort of — used to be 10, it could be slightly higher because of interest rates have moved around a bit. So it’s somewhere between 10% and 15% of undiversified SCR is a benefit from diversification from international life companies.

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Operator

Your next question comes from Farooq Hanif from Credit Suisse.

Farooq Hanif

Just a couple of questions around transformation in the UK. So it seems to me that attractive areas on the GI side are to grow in commercial, in particular on SME and also to look at utilization and so transformation of UK GI. Can you talk a little bit more about what sort of capital commitment you would put towards that and what your plans are to accelerate that if there are any? And then conversely, would you revisit UK sort of legacy back book disposal in life? What are your thoughts on that? Thank you.

Amanda Blanc

So on the transformation point. So look, I think we do see that there are a number of opportunities to transform the performance across the UK business. We already start from a very strong position as number one commercial line insurer and I think we also have some very strong proof points around digitization. So to just remind you in the plan, we already have over £400 million worth of investments in the core businesses of the UK, Ireland and Canada. So there is already investments set aside to grow these businesses. We’ve seen good strong growth in commercial lines so far this year and we see the opportunity to continue to do that as we move forward. Over 60% of our customer journeys are already digitized.

We now see the opportunity to take that to the next level and we see the priority, as you know, creating the opportunity for our customers to be able to look at all of their products. So we’ve seen the number of log-ins on MyAviva this year is about £28 million, and we’ve seen a big increase in terms of the MyAviva app as people are looking at their workday pension and then looking at their motor policies or their home policy. So we see the opportunity to continue to enhance that customer experience. So I think it’s an important part of what we do. But we will also allocate capital to purchase annuity business, the pensions business. We see that there are strong areas of growth that we are already strongly positioned in and the market is growing and therefore, we have the opportunity to continue to grow that.

And in the other area that we will invest in is our brand. We have a number one brand in UK insurance, which is a great position to be but we’ve not invested in that brand over the last number of years. So we plan to relaunch the brand next year. And then we are targeting the businesses to deliver at the quartile efficiency. So there’s a range of measures around where we’ll allocate our capital and how we’ll do it, whether it’s teams or people, technology platforms, capital to grow. But I think we feel very confident about the business and the opportunities that we have there. Your second question around revisiting the UK legacy business that is not something that we are looking at, at the moment. We believe that, that business has an important role to play in terms of the cash flow in the UK life business and I think we discussed that at the half year and that strategy hasn’t changed.

Farooq Hanif

And just quickly on transformation. I mean, basically what you’re saying is that sort of major significant M&A is not on the list?

Amanda Blanc

So look, what we’re saying is that we’ve got plenty of other focus areas to focus on at the moment. And we believe that we are already as the number one player in the U.K., we’re in a pretty strong position, both in GI and in Life. But on that, we never say never.

Operator

Your next question comes Greig Patterson from KBW.

Greig Patterson

I have three questions. One is, I wonder if you could give us an idea of what the bulk of your margin in the third quarter would be, if you had normalized through asset allocation and reinsurance? And the reason I asked this is you’ve said previously that the first half margin was temporarily boosted by very favorable conditions. So I don’t know what normalized margins for this year. Second question is, or I’d say impact, the major increase in your competitive position on a competitor in Canada. I wonder if you could venture some thoughts on how that would impact you or the competitive landscape in Canada. And the third thing is just to check, the remittance table that you produced to explain what your base dividend is. Am I might correct that the central cost and debt reduction component of that table is pre-cost cutting and the current debt reduction program?

Jason Windsor

So the first one [Multiple Speakers] EB margin of around 4% is a pretty decent guide. Clearly Q3 was nothing like that. But as I said, we do express it to normalize as we get the assets invested and strike the reinsurance deals.

Amanda Blanc

On your second question about RSA and tax, obviously, very interesting development over the last number of weeks. I think in terms of our position in Canada, we already have a top three position in that market. We see that there is significant headroom for growth, particularly in commercial lines. And of course, we already have the partnership with RBC, which is the strongest financial services brand in that market. So we see really exciting opportunities to continue to grow there. On your third question, I think it’s a relatively straight forward, yes.

Jason Windsor

Well, we tried to just give a sense but it’s really anchored on 2020. We have not factored into that and it’s significant cost reduction. It’s really where we are and what we factored in significant debt reductions that will come through as we do it.

Greig Patterson

The reason I asked the question is the new rate of the gross amount includes your targets for remittances, which obviously include the £400 million in capital et cetera, et cetera. So it’s adjusted for expectations but the deduction is not for expectations, which implies that the headroom is actually higher than [£4.2 billion] that’s what I was reading there. Is that have a fair thought process?

Jason Windsor

Well, as I just said, we haven’t baked in all of the cost saves into the expectations, particularly in the group figure. That number does bump around a bit due to tax and other kind of one off project costs and things. But I think if you were to just annualize ‘19 and ‘20 on average 0.6 is a good place, which is why we used that number. And then looking forward we see that — the pressure is down on that, for the two reasons I just mentioned, cost reduction coming through and low interest costs.

Operator

Your final question comes from Ming Zhu from Panmure Gordon.

Ming Zhu

Just three questions, please. First, your nine month solvency position and central cash all look very strong. What is holding you back for not paying any more of the full year ‘19 final dividend? And my second question is going forward, just on your — based on you running a business on your cost focused market. What is the minimum and central liquidity you would need at center? And the third question is in terms of the BI, I think there’s a comment you mentioned on the BI and more cost paying out due to the recent lockdown. And in terms of the recent policies, you’ve sold the new business have you changed all your BI wording? Thank you.

Amanda Blanc

I’ll pick up one and three and Jason, you can pick up two. So in terms of full year ‘19, I think we are keen to say today that we’re back in the business of paying dividends that we’ve declared the 2020 £0.07 per share interim dividend, given that unexpected total 2020 dividend of £0.21 per share. So we recognize the environment, it’s been a challenging year. We took a prudent decision earlier this year in discussion with the regulators and everything else to conserve our capital position and enhance our financial strength to make sure that we were well positioned through the future just COVID and Brexit uncertainty. And I think from today really what we want to do is to look ahead, and we’re just reinforcing the financial strength as one of our key priorities.

On your third question around business interruption. There were two parts to that question, have we changed the policy wording. I think our policy wordings were on the whole largely very clear, but changing the policy wordings will require us to go through a renewal period. So we will be making sure that all the policy wordings are very clear as we renew policies. And many of the larger policies, as you will know renew either the first of January or end of March, beginning of April. As far as the business interruption estimates are concerned, what you see is that our business interruption essence have actually not changed. What you’re seeing is the benefit of frequency coming through in the numbers, which I think Jason outlined. Jason, on the [Multiple Speakers]…

Jason Windsor

I’ll just go over again. We aim to have a billion minimum in group treasury but before dividend payments and the like that means for the reporting date, which tends to be just before we announced dividends, you’ll see a figure in the sort of one and a half to two range. And that’s where we’re pretty comfortable for liquidity. As we look further forward and the group’s a bit smaller, we’ll revisit that but that’s sort of level you should expect and certainly over the next couple years.

Operator

And you have one more question from the line of Steven Haywood from HSBC.

Steven Haywood

I just wanted to ask a couple of quick questions, please. On the supply French solvency rule, could you tell me what the impact was on the actual — the French local solvency ratio, please? And then secondly, on the assumptions you have in your solvency ratio about credit downgrade defaults and U.K. property, can you provide an update on the actual experience performance versus your assumptions? And whether or not there’s potential for these assumptions to be improved in the future.

Jason Windsor

I’ll take the second first, if I may. So on the downgrade assumption, we kept that in Q3, as I said, it was something like 10% of BBBs and 5% of As that were downgrade that stayed. And we’ve seen about 7% in the first nine months of the year. So I think it’s actually reasonably prudent now. We started to see agencies catch up and I think that will bring us out with events probably by the year end that we won’t need to have overlays, but clearly we’ll take our decisions carefully. On the French side, what we’ve disclosed today is the impact on the group, 2 points insolvency there. We haven’t provided the disclosure in France. What I can say is it was a specific issue to France and the French subsidiary does remain well capitalized and we don’t expect any capital needs in the French sub as a consequence of this.

Amanda Blanc

Thank you. I think that’s the end of the questions. So with that, I just want to thank you all for all of your questions this morning and for listening. And Jason, I really appreciate it and hopefully at some point, we will actually get to physically see you, but thank you very much.

Operator

Thank you. That does conclude today’s presentation. Thank you all for joining. You may now disconnect.



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