Aviva PLC

Ladies and gentlemen thank you for standing by and welcome to Aviva Plc's Q3 2020 investor update. At this time all participants are in a listen early mode. After the presentation there will be the opportunity to ask questions by pressing star and one on your telephone keypad. I must also advise that the conference is being recorded so I would now like to hand to your speakers today company CEO Amanda Blanc and company CFO Jason Windsor. Please go ahead.

Thank you operator and good morning everyone and thank you for joining us for our Q3 trading update. I really hope everyone has been 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 would take you through the decisions we have made around our dividend. 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 markets. where we have market leading positions can generate attractive returns and have the right 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 and we have started to make progress on this during Q3. I am pleased to report that we are delivering robust growth in our core businesses, especially in the key segments where we can achieve attractive margins 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 fund flows in UK savings and retirement, achieving 6 billion. and Aviva Investors delivered 1.2 billion of third-party net fund flows. Our commercial lines net return premium is at 9%, building on the double-digit growth we achieved in 2019. And we are being recognised for our success, claiming a clean sweep of 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 recognised 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 target 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 products 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. But 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 to capital surplus of 11.8 billion, Solvency to cover ratio of 195% at one percentage point from the half year. Central liquidity of 2.8 billion, which will be further strengthened by the 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. 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 since August in our efforts to refocus the portfolio and have announced two billion of disposals. In September, we sold the majority of our Singapore business to a consortium led by Sing Life for a total of 1.6 billion. By retaining a 25% shareholding, 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 expectation. Earlier this week, we announced the sale of Aviva Vita 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 papers but I can confirm that we are exploring our options for 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 a 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 in the low to mid single digits. Aligned to this new dividend policy, we are announcing an interim dividend for 2020 of seven pence 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 would be 14 pence per share, which would bring the total 2020 dividend to 21 pence per share. We will not be distributing a final 2019 dividend. 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 this 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 to cover ratio working range will remain at 160 to 180%, although we intend 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 the 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 is going to take you through the Q3 financial performance and will provide some more colour on the dividends.

Thanks Amanda. 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 look at our core markets first. In UK and Ireland life, we grew PV and BP 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. Balkan Newities is an important franchise for Aviva. Our brand, 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 remained 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 in 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 savings and retirement, net flows grew to £6 billion, a 20% increase on the prior year. Our workplace platform continued its strong momentum with flows up 23% to £3.8 billion. Net flows were also positive on the retail platform, up 5% to £2.6 billion, and we now have platform assets of £31 billion. Our advisor platform has 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 a billion in the prior period. 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 a 5% reduction in premiums as we continue to prioritize margins over volumes together with reduced activity levels from COVID disruption. Let's go to the next slide. and looking at the quarterly trends for our core businesses. Of course, it's been an unusual year as the trends show, particularly for individual annuities, equity release and protection. In savings and retirement, discrete Q3 flows were resilient, but remained 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 our 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 have caught up 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 at Q3 of COVID-19 net claims on 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 VI claims estimate on the back of the SCA 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 manage 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 has recovered somewhat in Q3, but remains below 2019. In general insurance, trading has been resilient with net risk and premiums increasing by 4% in the first nine months of the year. The higher volume in France in Q1 is a 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 one percentage point increase in the quarter reflects the operating capital generation, offset by the payment of our six pence interim dividend in relation to 2019. We also had to correct the application of a rule in our French Life Model, which together with model enhancements to better reflect negative interest rates, had a two-point impact on the Group Solvency Ratio. 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 eight-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 a Canadian dollar tier 3 note 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 favourably with the broader market experience. A commercial mortgage portfolio is 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 at Q3 compared to 1% at the half year. Moving on to central liquidity, which remained very strong at £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 to £2 billion in line with what we've said previously. It's important to recognise that as we restructure the group, group liquidity is likely to stay elevated, not 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 have set the 2020 dividend at 21 pence per share. To do that, we set out the expected cash generation from our core business units. simply using the same targets from last year's investor debt. You can see that the sustainable cash flow for my core businesses is expected to be in the region of £1.6 billion per year. Once we allow for debt and centre costs, we have £1 billion of excess cash flow. And please remember, this is after growth and investment in the business. This allows for a 21 pence 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 redemptions in 2021 and 2022, 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, on which I will give you some detail on the next slide. On this side, 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 are all above risk appetites 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 and the new dividend policy. With the backdrop of COVID-19 and wider macro uncertainty, we've delivered strong growth in premiums and 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 in retirement is having a strong year, but growth rates are 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 Prime's life modelling change. While cash remittances in 2020, as I mentioned at the half year meeting, will be below 2019, but the second half 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.