Thank you for standing by. Welcome to the Aviva PLC Trading Update First Quarter 2022 analyst call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. I must advise you that today's conference is being recorded. I would now like to hand over the conference to the first speaker today, Ms. Amanda Blanc. Thank you, and please go ahead.
Thank you, Maria. Good morning and welcome to Aviva's first quarter update. I'll start with a brief overview and then hand over to Jason to go through the detail. Also will be in the room today is Colin Simpson, who will be taking over from Jason as our interim CFO for the next few months until Charlotte Jones arrives in September. It's been another quarter of positive progress for Aviva. The business continues to grow, our controllable costs are down, our capital position is strong and resilient, and the GBP 4.75 billion capital return is due to be completed by the end of May as promised. We remain well on track to meet the raised financial targets and dividend guidance we outlined in March at full year results. I'm pleased to report that the business delivered healthy trading numbers across all major lines.
What's more, our first quarter numbers show the clear benefit of Aviva's complementary portfolio across insurance, wealth and retirement and the U.K., Ireland and Canada. In general insurance, we continued our momentum with a record for first quarter sales. Our particularly strong performance in commercial lines, both in the U.K. and Canada, offset the impact of more challenging conditions in personal lines, where, like many general insurers, we were impacted by more cars on the road following the end of lockdown, claims inflation and supply pressures, as well as, of course, the U.K. storms. A strong first quarter, but we will need to remain highly disciplined in our pricing, underwriting and claims management to protect both our margins and our continued growth in the coming quarters.
Importantly, I do want to reiterate that we remain committed to our better than 94% combined operating ratio ambition for our general insurance business. In U.K. and Ireland Life, our business also delivered excellent results, with particularly strong performances in our BPA, equity release, health and group protection lines. In Wealth, the business continued to grow despite market volatility. Our market-leading workplace pension business performed strongly and our Adviser Platform reached the significant milestone of the number one ranking for net flows in 2021. The acquisition of Succession Wealth, adding critical advice capability, is on course to complete in the second half of 2022. In Aviva Investors, we continue to make progress on the turnaround. The business has been refocused, investment performance is improving and the delivery of greater efficiency is now well underway, but there is more to do.
On costs, underlying controllable costs are down, and we are well on track to deliver on our GBP 300 million net cost reduction target in 2022. Finally, our capital and liquidity position remains strong and resilient, supported by robust operating capital generation and the beneficial impact of higher interest rates. Overall, we have had a very good start to the year. We have once again demonstrated our ability to grow and attract new customers, building on our market-leading positions, deep capabilities and the strength of the Aviva brand. We recognize, of course, that this is only the first quarter and as we look forward, we're obviously mindful of the wider economic headwinds, with high inflation and rising interest rates contributing to the largest real income squeeze on UK households in decades.
We feel able to face these headwinds with confidence because our market position is strong, our diversified portfolio is resilient, we have the right strategy that is delivering and we have the products and the people to support our customers with all their needs and challenges in a way that only Aviva can. Despite the looming challenges, I'm pleased to report that we are on track to deliver on our higher cash generation, own funds generation and cost reduction targets as we set out in March. Our attractive dividend guidance also remains unchanged. A dividend of around GBP 0.31 per share in 2022 and rising to GBP 0.325 per share in 2023.
Speaking of our strong cash generation, I want to reiterate our clear commitment that any excess capital above our 180% solvency ratio that isn't reinvested in the business to generate more value will be returned to shareholders over time. We will be disciplined on this and absolutely will not retain excess capital where we can't put it to good use in the business. I'm now going to hand over to Jason to go through the detail.
Thank you very much, Amanda, and good morning, everybody. Before we open up for Q&A, let me just take a few minutes to talk through some of the key parts of our announcement in a little more detail. In UK and Ireland Life, total sales of GBP 8.4 billion was up 2% overall, driven by good performance in annuities and equity release and in protection and health. BPA sales were GBP 843 million, up 29%. This is pleasing. However, it's fair to say it's been a relatively subdued start to the year. We remain confident in the outlook for the market and the prospects for the business. Rising interest rates should be supportive of more schemes coming to market over time, and our pipeline of new business opportunities is healthy, albeit weighted toward the second half of the year.
Protection and health performed strongly, up 10% in the period to nearly GBP 700 million. This was driven by continued momentum with our Expert Select proposition in health. The strength of our brand and the quality-led proposition continues to resonate strongly with consumers. Group protection also performed well in the period, although this was partly offset by lower demand in individual protection. It's worth pointing out that the prior year period in individual protection benefited from the availability of stamp duty relief and the resulting buoyant housing market. Our wealth business, which as a reminder, is the new name for savings and retirement, has flourished in recent years and has proven resilient despite market volatility in the quarter.
While net flows are marginally down at GBP 2.7 billion in the period, this represents good growth of 7% of opening AUM on an annualized basis, and it's pleasing to see progress and the strength of our platform serving us well. Within this, workplace flows remained strong at 6% of opening AUM, down marginally versus last year, which was a particularly strong first quarter when a number of schemes transferred to Aviva, having been delayed from 2020. Now let me turn to our general insurance business, where the group combined ratio increased to 96.4%, driven by adverse weather in the U.K. and more normalized claims frequency levels. In the U.K., Q1 of last year benefited from lower claims frequency, given the ongoing lockdowns in the period. Claims have now returned to a more normal level, only slightly below pre-pandemic levels.
February's UK storms resulted in total claims of approximately GBP 70 million for Aviva across personal and commercial lines, whereas Q1 last year was benign for weather in the UK. The difference between Q1 2021 and 2022 was approximately five percentage points. In our Canadian business, combined ratio was 91.8%. This was 3.7 points higher as expected. Again, following a return to more normal levels of claims frequency in motor and relatively benign weather. We are observing rising inflation across our general insurance business, driven by macroeconomic uncertainties and supply chain dynamics. As you would expect, we have taken, and will continue to take, swift pricing and claims management actions to mitigate these effects, which we will keep under close review as the situation develops. Finally, a few words on our capital, which remains strong and resilient.
Our pro forma solvency cover ratio was 198% at the end of Q1, compared to 191% at the end of 2021. After allowing for the Succession Wealth acquisition, this pro forma ratio reduces to 192%. The seven-point increase in pro forma coverage over the quarter was driven by operating capital generation and market movements, mainly higher interest rates, partly offset by the declaration of the final dividend for 2021 of GBP 0.147 per ordinary share.
On a headline basis, the reported cover ratio reduced from 244% to 205% in the quarter, reflecting the movements I've just mentioned, together with the full recognition of the GBP 3.75 billion B share capital return and the recent redemption of the GBP 500 million of Tier Two debt. Before I hand back to Amanda, I'd just like to say, over the last 12 years I've been at Aviva, I've always very much enjoyed my interactions with analysts and investors, and I'm very pleased that as I leave, the group is in excellent shape with an exciting future following the two-year refocus and the completion of the capital structure work. I'll now hand back to Amanda.
Thanks, Jason. Just to conclude, the strategic refocusing is done. We are now fully into the next phase of our transformation, which is delivering on Aviva's promise. We have a clear strategy, and together with the senior team, and indeed all the colleagues at Aviva, we remain absolutely focused on our four strategic priorities, growth, customer, efficiency, and sustainability. On the latter, we've received exciting news. Our progress has been recognized with Sustainalytics upgrading our rank to sixth out of 295 insurers globally, which is well ahead of our major U.K. peers. We really believe that Aviva has an exciting future. Today's results demonstrate continued momentum, and the consistency of the performance we're now delivering is hugely encouraging. Now, thank you, Jason.
I guess before we turn over to Q&A, and given it is your last results announcement, I think that, in this audience, we should thank you for your enormous contribution that you've made to the business. I'm very, very grateful to you. The business is very grateful to you, and we wish you all the very best. Now back to the operator for Q&A, please.
Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. Once again, if you wish to ask a question, please press star one on your telephone keypad. All right, our first question comes from the line of Farooq Hanif from JP Morgan. You may ask your question.
Hi, everybody. Good morning, and thanks very much. So just one question on capital management, and another question on your UK commercial. On capital management, I mean, you talk about the pro forma GBP 1.5 billion of liquidity, which I believe is probably a bigger constraint right now than your 180% Solvency II ratio. Is that correct? What are the sort of moving parts we should bear in mind between now and the year end in that cash position? I mean, obviously you've deducted the debt from that, but just to kind of, if you could talk us through that would be helpful. And then the second question about your kind of growth in SME and global corporate specialty lines.
Are you growing share there, and what are your further ambitions in that area? Thank you very much.
Okay. Thanks, Farooq. I'll pick up the commercial question. Jason, if you pick up the question on the pro forma.
Sure. Pro forma liquidity is sort of a slightly peculiar one, because we don't include remittances, which are dynamic, and we've got things like we buy Succession Wealth, and we've got you know best part of. Well, last year we did just over GBP 1.6 billion in remittances. I won't give you a forecast for this year, but you get a sort of sense of the scale of the remittances that come out of the business. You know, that number really is just a simple arithmetic. You know, we have the proceeds. We take off the B share, we take off the debt redemption, that will develop you know as you would imagine from period to period as we take in remittances. We didn't have any remittances in the first quarter.
We actually had some reasonable ones in the second quarter as we'd expect, and we've got no change to our plans for the year. In terms of constraints, we manage capital and cash in balance, you know, across the different things that we can do. The subsidiaries have all got actually excellent capital positions. So we could, you know, bring more cash up if we wanted to do any further distributions. We manage the group sense of liquidity at a level that is supportive of our credit rating, supportive of the group's financial strength. You know, if we did want to take further steps, you know, in line with the way Amanda just described, I'm pretty sure that liquidity could be solved.
On commercial lines, I think we are seeing really good growth in both the UK and Canada. The growth in the UK is 11% and constant currency in Canada is 13%. In SME mid-market in those areas where we have targeted growth. You know, if you think about the UK, we made a concerted effort to go out and recruit into regional mid-market underwriting, and we are seeing growth in those areas. The same is true of Canada. In the UK we also see a steady growth in the SME business. I think the important thing to look at when you are looking at those growth rates is about 7% of it, that is coming from.
Well, 60% of the overall growth is coming from rate and about 40% from new business. You know, we're monitoring obviously the technical pricing to make sure that we are, you know, making the most of the opportunity I guess, which is a hardening market or hard market in commercial lines. I think it's really important to stress also if there's an underlying inflation question there, Farooq, that the commercial lines have index linking on, you know, the vast majority of their policies. The rate is in essence on top of the index linking that we see in those commercial lines products.
Maybe the global corporate, are you finding conditions now to be a little bit more positive than the last time you spoke about this at your kind of in focus session? Are you finding that, on top of pricing, you feel there are opportunities there to grow further share?
I think we'll maintain our discipline there. I think it's marginal actually, what we're seeing in that global corporate space. You know, we are very selective about the lines of business that we write, and we will continue to do that. I mean, you know, I think we know that it's very, very easy to grow a general insurance business. What we have to do is to make sure that we can grow that business profitably and with discipline. You know, I think that is what we are doing.
Very much. Thank you.
Thank you. The next question comes from the line of Steven Haywood from HSBC. Your line is now open.
Hi, Steven.
Your line is now open. Steven, you can ask your question.
Sorry, apologies about that. Three questions. One is a follow-up on the previous question about upstreaming additional cash from the subsidiaries. Are there any constraints that we should consider before you can upstream excess cash or capital from these subsidiaries? Second question on inflation. Your UK peers provide inflation sensitivities on Solvency II ratio. I haven't seen one from you. Could you give us an idea of, you know, the potential impact on your Solvency II ratio from changing inflation? Finally, the HM Treasury produced its consultation document on Solvency II review. Do you have any thoughts around this, any of the announcements different to what you're expecting and the general position of Aviva on this Solvency II review, please? Thank you.
Thanks, Steven. I'll pick up the last one, and Jason will pick up the first two. On Solvency II reform, obviously we're pretty pleased that the consultation is now underway, and you saw HMT and also the PRA come out with some documents last week. I think the industry are digesting this, and we're beginning to develop our responses. It's a step in the process, but I think it's also fair to say that there is still quite some way to go. We absolutely support the government's objective of a 10%-15% capital reduction in order that we can, you know, fulfill our commitment to invest in U.K. infrastructure. Clearly, we are, you know, very supportive of that.
Clearly there are some details in the consultation papers that needs a lot of work to flesh out the impact, particularly the matching adjustment at calibration. Look, I think there is a long way to go in the process, and there are some material issues that do still need to be resolved. On your first question around upstreaming additional cash, I think the answer to that is no. Jason, is there more on that?
No, nothing specific other than the statement to the obvious around, you know, risk appetite levels need to be appropriate in the subs, and we need to have liquidity in the subs, but you know, neither of those are a constraint.
On inflation?
Inflation. We do provide an expense sensitivity to maintenance expenses. We've not given a broader expense sensitivity, but you might imagine we've looked at that. The group's pretty neutral. You know, we buy a very competent ALM team that, you know, buys a significant amount of protection, and we set ourselves up. Over, you know, a number of different factors, you know, I think our sensitivity is broadly neutral, but obviously that assumes, you know, different inflation across the board, you know, behaves similarly. Of course, it never does because you've got different types of inflation. You know, with the model, you know, and the way that our sensitivities comes out, we would come out with a pretty much a neutral position with slightly positive in life, slightly negative in GI.
Okay, thank you. Just a quick follow on the HMT consultation. You said there's a lot more work to be done. Would you not expect anything to come into regulation until early 2024?
I can't really comment on the timescales. I think the end of the consultation is in July. Clearly, you know, the government put some of the course of events in their Queen's Speech last week around financial services regulation overall. You know, as I say, there is much work to do in terms of both consultations to make sure that we end up with the outcome that is expected, which is the freeing up of capital to be able to invest in U.K. infrastructure investment. That is absolutely critical.
Okay. Thank you very much.
Thank you. The next question comes from the line of Blair Stewart from Bank of America. Your line is now open.
Yes. Good morning, everyone. First question is on P&C, general insurance. Is the main message with all the moving parts that the underlying profitability is broadly stable? On that, I wonder if you could give a breakdown of the rate versus volume in U.K. personal lines. I'm assuming you are pricing for some elevated inflation there, despite the fact that the top line is weak. My second question is just I wonder. Thank you for the detail on the movements in capital. I wonder if we could unpack the capital generation numbers a little. Your own funds capital generation is - 0.1, and your SCR is positive.
I'm guessing there's some market effects in there as well as true operational movements. I wonder if you could just give us an indication as to how those play out. Thirdly, just coming back to the buildup of excess capital over time. You've obviously got you've paid about GBP 900 million in ongoing dividend costs versus your cash flow. There's residual cash each and every year. I wonder if you could just remind us of the investment spend that you've talked about that's needed for the business, that might soak up some of that excess. Thanks very much.
Okay, thanks. I'll pick up questions one and three, and Jason can pick up two. Just to go back to your point around P&C. I think firstly, let's just remind ourselves of the proportion of P&C business that we have in terms of commercial and personal lines. It's actually broadly 50/50. In fact, I think commercial lines has just tipped over the majority of business that we have now. I think that first of all, I think that shows the good diversification of the business. Actually, as I won't repeat myself, but you know, the commercial lines business for inflation, I've given you the numbers there in terms.
I've given you the numbers in terms of the rate increases, and I've given you our answer in terms of the inflation impact because of the index linking nature of that. The business that isn't index-linked in commercial lines is motor, and obviously that is experience related, and that will have the pricing responses in for the inflation that we are seeing. You know, I think that deals with commercial lines. On personal lines, there's two things going on, I think, in personal lines. Let's start with, you know, with the U.K. First of all, you've got the pricing practices, which obviously we've been building up to over the past year.
As far as average rate changes as we started the year are effectively on motor at 5% new business. That's what we would have expected to see because we were sort of seeing this normalization between new and existing. On home, the average new business rate increase will have been between 10%-15%. On renewal, the rate reduction on motor was between 0% and 5%, and on home was between 5% and 13%. Now, as you would expect, what we've also seen is that retention has gone up in both motor and home. Motor by about seven points and home by about five points, which reflects the brand strength.
What we've actually done is we've written less new business. We've kept our existing customers so broadly flat, because we're managing clearly, you know, what is a quite volatile environment in terms of the pricing practices coming in and then subsequently, obviously the inflationary environment. Focusing on inflation, going into Q1 when we were sort of budgeting and thinking about our rate, the rate that was required, we were seeing the need to put it into our base rates 4%-6% for claims inflation. This was already in our rate plans for the first quarter and priced into any of the FCA pricing practice rate changes. As the quarter developed and inflation expectations increased, we moved our current view to 6%-8%.
Later in Q1, we added between 2% and 2.5% of rate across the motor and the home portfolio to price for this increase in inflation. We are seeing similar trends, I think in Canada, except that obviously in Canada don't have pricing practices and in Canada for motor you have to file your rates. We have to, we're definitely managing volume in Canada to make sure that we can deal with any of the inflationary pressures in personal lines. On your third question around excess capital and investment in the business. You're right about the GBP 900 million.
Obviously in March what we did was we outlined to you what our additional investment in the business was going to be over the next three years. We said that we would invest GBP 200 million in the business to improve the cost efficiency, and that would deliver GBP 100 million cost run rate over time by 2024. That we would invest GBP 300 million in the organic growth of the business. Now that is in the numbers, and that is included, most of that is included in the remittance flow and the projections that we've already given to you. The excess capital, if you like, will be excess capital over time.
You know what we wanted to be clear of today is that, you know, on that excess capital, any additional investment above the normal investment which goes into the business and that additional GBP 500 million that we outlined in March would have to have an exceptionally high bar. You know, we wanna be very clear that, you know, our priority will be to return that to shareholders if we don't believe that we have investments that can meet that high bar within the business. You know, it's been a question that we've been asked many times over the last couple of months, and therefore we want you to be, you know, absolutely clear about that.
Now in terms of timescale, clearly, you know, we've literally just paid the GBP 4.75 billion, the GBP 3.75 billion this week, and then the GBP 1 billion of share buyback. So, you know, this clearly will be over time, but it will be something that we will continue to return to. We will not keep excess capital in the business that we believe should be returned to shareholders. Jason.
On the capital movements, I mean, we don't give quarterly capital generation figures, but as Amanda said, we're on trend. We know last year we did GBP 1.2 billion approximately of own funds and, you know, we've got a target to grow that over the next three years, but we're on trend. In terms of the movement in SCR, that's mainly interest rate increases. You would see an equal and offsetting kind of reduction in own funds for that. Then the delta would be the positive capital generation plus a little bit of positive economic movements on things like valuations of, you know, credit spreads, equities, other economic movements as a positive.
Thanks very much for very detailed responses. Amanda, can I just come back on the first response you gave, which was excellent. When you talked about the renewal reductions of between 0% and 5% in motor and I think 5%-13% in home. Now that that's washed through, that should, on an ongoing basis, should we expect the renewal book from this space to then just increase with your expectations of claims inflation going forward? Would that be the right way to think about it?
Ye-yes.
All else equal?
Yeah. Because obviously that was a sort of market move. It moved.
Yeah.
Well, I can't remember the date. I think it was the sixteenth of January. Everybody moved to, you know, the new
Yeah.
The new way of doing it. On saying that, we had been building up to that, Blair, over a number of years because we, you know, we were dealing with this difference between the front book and the back book on home particularly. Motor there's obviously less of a delta.
Thanks very much for that.
Thank you. The next question comes from the line of Ashik Musaddi from Morgan Stanley. Your line is now open.
Yeah. Thank you. Thank you and good morning, Amanda. Good morning, Jason, Colin. Just a couple of questions I have. Sorry to go back on the excess capital question topic again. I just want to understand as to would you say that your strategy, your policy is all now set with respect to what you'll be doing with excess capital above 180, what you'll be doing with any excess capital or cash generation in a given year versus like what you're generating versus what you're paying out on dividend?
Would you say that policy is set, or would you say that there needs to be a bit more formal policy that we might end up hearing later this year or next year, such as like a concept of an annual decision that you'll be taking like annually rather than over a three-year view, four-year view. Any thoughts on that would be very helpful, whether it's now set or would you say there is a bit more formal view needs to be taken. That's one. Secondly is interest rates have gone up quite a lot. I mean, there is an expectation in the market that annuities volumes can go up materially. But at the same time, I mean, there is a lot of credit volatility as well.
What are you seeing happening in the annuities BPA market at the moment, in terms of volumes, because of the market dynamics? Any thoughts on this would be very helpful. Thank you.
Okay. Ashik, I'll let Jason pick up the second question, I'll pick up the first one. Look, I think we only stood up in March, I think, and reiterated what, you know, what our targets were, and, you know, the capital within the business. What I wanted to do today was to just be very, very clear that, you know, we've set aside investment in the business. We've basically and we'll not hold on to any excess capital that we believe, you know, doesn't add value. There's a high bar for that within the business. Now, we're not. We're, you know, I think we were clear on that policy. We've been clear today.
I don't wanna set up any expectation that we will be coming back with any additional policy. You know, we will set a very high bar for any investment, and we will not hold on to capital above the 180 unnecessarily. You know, I'm not sure how much clearer I can actually be than that, to be honest. You know, hopefully that is very clear to everybody. Yeah, I just keep repeating myself. Jason, shall I hand over to you?
Sure. The annuity market does tend to pause for breath when interest rates move. We saw that quite a lot in Q1 last year, actually, if you remember. Talked about that. It was very, very quiet. I think we've seen similar impacts where trustees are just trying to recalibrate, make sure they got the right deal. Providers also slightly trying to recalibrate. Spreads have been a bit volatile, which is helpful in March. You know, we were opportunistic and bought in a reasonable amount of bonds, during that spread widening and widening again a bit now. So there's a little bit of recalibration going on. The secular growth that Amanda mentioned earlier, you know, remains. You know, we think the market this year will be GBP 30 billion, possibly GBP 40 billion.
You know, we do see continued strong interest for de-risking solutions, and we expect to continue, you know, to meet those, you know, in a reasonably competitive but still a pretty buoyant market.
Right. Thank you, Jason. Thanks, Amanda.
Bye, Ashik.
Thank you. The next question comes from the line of Larissa van Deventer from Barclays. Your line is now open.
Thank you, and good morning. A quick question on the, actually, on the outlook for wealth, and that is two parts. How are you perceiving the current market conditions, and are you seeing weakness, especially with the consumers being under pressure? Related to that, can you give us an indication of the impact you expect from Succession Wealth, please?
Yeah. Okay. I'll pick up both of those. I think in terms of wealth, you know, we saw, I think, excellent growth of 7% in wealth excluding the market movements in the first quarter. You know, our performance, I think versus the rest of the market has been good too. You know, we were particularly pleased about the performance of the Adviser Platform. I think the business actually has got excellent momentum. That number one in the advice space of 2021, I think that was an important milestone for us. January and February trading was strong. Clearly, market volatility had an impact in March as the events in Ukraine unfolded.
We actually saw a record week for net flows in the Adviser Platform at the end of March as the tax year-end approached. Our ambition is to grow the net flows by 10% CAGR over the next three years. We're a little behind where we initially expected to be at this point in the year, but we're absolutely not stepping back from that ambition, and I'm gonna absolutely be pushing the team to meet it. Which leads to your second point, which is around the impact of Succession Wealth, which I think fits very nicely. Because what we do with Succession Wealth is add capability to the business that the business doesn't currently have. You know, as we've outlined before, we lose about GBP 6 billion of AUM each year.
We know that about 80% of that business takes advice before it consolidates and moves on to the next stage or another platform. We want obviously that to stay on our platform. The ability to be able to provide advice is absolutely critical for that. The advisers that come with the Succession Wealth deal and the ability to build a sort of digital hybrid advice proposition means that, you know, at the start of the journey, a customer may be an investor in our Wealthify proposition, which is our robo investment proposition. They may then move into our direct wealth proposition, and we have a very strong direct wealth platform.
Into the advice platform or via the workplace platform into the advisory space. We really feel the opportunity to capture a proportion of that AUM. Now, we have not said what that proportion is going to be. You know, I would say that the work that we've done so far and all the infrastructure that Doug is building in the team is incredibly positive in terms of the conversion rates just on the 40 advisors that Aviva has today have been able to capture of that as we've been trialing this process over the last number of months in preparation for the Succession Wealth deal completing. We're feeling very upbeat about really maximizing this opportunity in the wealth space.
I mean, you know, you have to think that the wealth market is going to grow from GBP 1.6 trillion to GBP 2.1 trillion. Aviva has four million pension customers, and all of those pension customers are going to need to do something. The workplace pension business, we have a 26% market share. Our retirement proposition is incredibly strong. That integrated wealth proposition that Doug is building, we are incredibly excited about, and this gives us the, you know, the real potential to look forward on that business anyway with optimism. Now, of course, you know, we recognize the market conditions, but equally, we also have to see through that. This is a medium to long-term business for us and, you know, we feel super confident about that.
Thank you. Can you comment on the near-term outlook for the consumer being under pressure and specifically the PVNBP sales were down 3% in that segment? Is that something you expect to see for the rest of the year or do you expect that to continue longer?
I mean, the near-term outlook for our customers, clearly, we are watching for any signs of stress in the system. We have kept in place things like the three-month payment deferral for all our customers in health and protection and in general insurance, you know, recognizing that there may be a need for those customers to draw on that. Although I have to say, Larissa, that we have not actually seen a significant or even a small uptake in that. It's been really negligible so far.
You know, the thing I guess about insurance is that people want and need to protect the things that matter to them most, and therefore your home, your car, your life insurance are pretty important purchases, and we tend not to see too much of an impact there. Clearly, we recognize that flows may be impacted if people are going to save less, but actually we see, you know, we see that the sort of outlook for us anyway. It tends to be quite defensive. We were in quite a defensive position. I mean, it's hard to say that recognizing clearly that we see many people struggling with the environment, you know that is what we are seeing in our numbers so far.
On the second point, Jason?
Yeah. We've seen PVNBP for wealth is not the best metric, and it's likely to start to bounce around a bit as interest rates go up. Having said that, we look at the net fund flows, GBP 2.7 billion. As I said, that's a 7% growth rate, and you know, we continue to grow that business, and that was down as well, a little bit in terms of actual new business. But that figure, that ability to continue to grow those net new funds as a percentage of AUM is really the key value driver of the business.
Thank you.
Thank you.
Thank you. The next question comes from the line of Andrew Crean from Autonomous. Your line is now open.
Good morning, Amanda, and good morning, Jason. Jason, many thanks for all the years you've given. You've always been very candid in the answering of questions, so thank you for that and best of luck going forward. Questions I had were, could you give the impact of weather versus your long-term averages in the first quarter rather than against the Q1 2021? Secondly, BPAs. I think you raised about GBP 2.5 billion of internal BPAs last year. Within your targets this year, do you have a target for how much will come from internal pension funds? Thirdly, a question. You've put in this thing about the runoff of your legacy book being GBP 175 million of ACG falling by GBP 10-15 million.
Within your full year figures, I noted that you said on the UK life business that the runoff of the book would go down from GBP 900 million to about GBP 300 million a year in 10 years' time. I just wanted to know why there's such a steep decline. If it's not coming from the legacy book, where is it coming from?
Okay. Thanks, Andrew. I'll pick up the question on BPA, and then Jason can pick up question one and three. On BPA trading, you obviously yes, we did do some internal business last year, and I'll come back to that in a second. The volumes in Q1 were all external deals, so just to be completely clear on that. And the BPA business will continue to support the staff pension scheme on its route to the full buyout. However, I think it's probably important to just sort of put that into some sort of context.
The trustees, as you know, will have a fiduciary duty to manage the scheme and their members' interests, and the de-risking trades for the benefit of the members as they have the sort of ability to trade with any insurer. Our BPA trades are recognized in exactly the same way as any other external BPA. If you like, it's not a left pocket, right pocket from an economic perspective. There's sort of true value in that. Actually, the important point I think is doing the internal BPA deals enables us to capture the margin in the insurance business for the benefit of the shareholders.
Yeah.
You know, just gives you a bit of context on that. Jason, on the other points.
Yeah. On weather, overall for the group. For LTA, we're pretty much there. You know, that was a negative in the UK and a positive in Canada and Ireland to a degree. I think what we said in the release is that in the UK, you saw quite a big swing from very benign last year and to quite positive, sorry, negative this year in terms of actual weather performance. There's about three. That splits to about three and two. 3.3 benign. 3.3 contribution last year and two worse this year. That's how that five points breaks down in the UK. On the run-off, yeah, we did give that. We had a few questions on the contribution of legacy and how that runs off over time.
We just thought that'd be a helpful disclosure for that segment. It's easier for us to do legacy because it's got the SCR sort of ring-fence, and we can map that. It's a bit trickier for the other. You can see we've started to provide segmental own funds across UK Life for the first time in 2021. We'll continue to build on that disclosure. We've got our own funds target for growth. We've got our own funds disclosure. It feeds into the ROE. It feeds into ultimately the capital and the dividends in the future. You know, it's absolutely what we're after. The Heritage contributes to cash by running off. There's a little bit of own funds contribution, about GBP 40 million or so per year, but you can see the SCR release.
That's gonna contribute to cash flow for a significant period of time across the board. I can't quite reckon it to the 10-year cash flows or even longer that we give in the annual report. I'd have to think about that a little bit. I'll give you a call.
It is quite stark, that drop in the cash flows. Thank you.
Thank you.
Thanks, Andrew.
Thank you. The next question comes from the line of Dom O'Mahony from BNP Paribas. Your line is now open.
Hi, folks. Thanks for taking questions. Three for me if that's all right. First is just on the general insurance business. Thinking about the sort of frequency benefit unwind. I know this has been sort of a gradual feature of the business for, I guess, a few quarters. As you look into Q2 and beyond, do you think the frequency effect is now done as in, you know, the Q1 adjusted for weather and so on is sort of normal, and from here you can, you know, apply the expense savings and so on? Or do you think there's actually some more headwind to come that you need to deal with? Secondly, just another one on the Heritage run-off. Very helpful guidance. Thank you. Is this a change in trajectory?
Is this a slowdown in the rate of runoff? Or actually is the sort of rate of runoff that you're flagging here, is this what you've seen over the last several years? Just a final question on higher rates. My understanding, and I might be wrong, is that under Solvency II, you get an OCG contribution from the yield on the assets against your capital. Because of the you know the marks to market under Solvency II, the capital generation will go up essentially when rates go up and vice versa. Is that right? If so, how much do you think that's gonna impact your full-year 2022 OCG? Thank you.
Okay. Thanks, Dom. I'll pick up the first one, and Jason can pick up the second and third one. On general insurance for the frequency benefit unwind. You know, I think we see frequency levels as virtually back to where they were or pretty close to, as Jason said in his opening comments, back to where they were pre-COVID. Any benefit of frequency has been priced into rates. I mean, you know how competitive the market is on motor insurance, and therefore, you know, I think that has definitely been priced in. There's been so much else that is now going on in respect of inflation, supply chain, you know, returning to more normal driving.
I think that, you know, we are pretty much where we would expect to be, and now we are pricing for the experience that we see. You know, whether that is inflationary experience of, or frequency or large claims or whatever. On the other two points, Jason.
Sure. On the Heritage runoff, I think I've said for, I think, at least six years I've been doing this, it runs over about 10% a year. That's about right. We tend to do slightly better. We can find efficiencies. Customers tend to stay with us a bit longer. That 10-15 million assumes some, you know, reasonable management of that book, as it runs off over a period of time. I think the aim of giving it to you was just to say, this is how much it is, and this is the rate that we know. It's not a big headwind to us in terms of capital generation, across the business. In terms of, I mean, rate sensitivity is, you know, disclosed. You can see the sensitivities.
We manage the business such that, you know, the interest rates are hedged out as much as possible to protect surplus and cash flows. What you see is an increase in cover ratio as rates go up because, as I said a minute ago, SCR and own funds move roughly in the same proportion. That creates an increase in cover ratio. That's, you know, that goes through. That does free up some extra capital. The way that, you know, basically what I just talked about to Blair on the Q1 number is what you should expect as rates go further up. Which I think they're probably likely to, as we'll see SCR, you know, continue to come down.
Own funds will come down as well, but also, you'll see that freeing up a little bit of capital.
Just on the last one. I get the point about the spot solvency. I'm more interested in the OCG. Whether the OCG goes up, essentially whether run rate cash generation might go up because of the yield on the assets held against the equity and the debt.
With OCG, we would look through into rate movements. Sort of that's the O in OCG, if you like. For total capital generation is what I just said. You see this sort of movement in SCR offset by this reduction in the balance sheet.
Okay. Brilliant. Thank you. Jason, all the best with your next steps.
Thanks.
Thanks, Dom.
Thank you. The next question comes from the line of Greig Paterson from KBW. Your line is now open.
Hello, everybody. Can you hear me?
We can, Greig. Hi.
Yeah. I'll just echo the point about Jason in his new position. Thanks for all the help he's given us. Now I'll ask three questions. The first one is on the combined ratio ambition of 94%. In March, I got the impression that you felt you could achieve that for 2022. I wonder if you still have that ambition given the first quarter experience. That's the first one. The second one is two parts on the Solvency II reforms. Just speaking to your competitors, a lot of them are downplaying the benefits of the 10%-15% of the risk margin and fundamental spread package, arguing that the TMTP, the transitional measure adjusts to buffer it.
You know, there's a sort of consensus commentary from competitors that there's gonna be no release. I wonder if you wanna comment around that. The second part also to do with Solvency II, PRA reforms, UK reforms is, there's also some comments from competitors that the current matching adjustment admissibility rules are flexible enough that most high-yielding assets can be incorporated there, and that the proposed flexibility rules are not really going to move the dial. I was wondering if you had any thoughts on that, and if you did, maybe you can cite some examples of assets that currently can't go in, that could go in, possibly post the rule changes. Thank you.
Okay, thanks, Greg. Just on the COR of 94%, it was a good try, but I don't think we did say that would give any intention that we were going to deliver in 2022. We've not given any explicit guidance. We've said that that is our ambition over time. Below 94% combined operating ratio for the general business is absolutely our ambition. You know, but you know that in any one year, GI can get some volatility. There's some obvious headwinds in 2022, which makes it a little bit more challenging. We are definitely working hard to try to mitigate that.
Hopefully what you can see from this, you know, the benefit of the Canadian and UK business sort of offsetting each other in Q1, you know, we all hope that that continues for the rest of the year, and we're working hard to mitigate the inflation impacts and all the other challenges, you know, around pricing practices that have been there this year. I'll say a general comment on Solvency II reforms, and maybe Jason can talk about the admissibility point. I don't think I can say too much more to what I said at the beginning. You know, I think we are having seen the consultations that came out in the last couple of weeks. There is definitely an air of caution around Solvency II.
We have to really think very carefully about whether or not the reforms are now going to achieve the government's objective, which, let's be clear, was about UK infrastructure investment and facilitating the significant amount of opportunity that there was with pension money with the foreign insurers to be able to help them achieve their UK infrastructure investment goals. If those goals are not gonna be achieved until 2031, 2032, I'm not sure that that really fits the political timeframe that you know that the government is operating in.
Therefore, you know, I think we have to be very, you know, alluded to the fact that the consultation that as it currently is has some material issues, as I said, that need to be resolved before we can give a more positive view around what's been written. I mean, Jason, is there anything you can say on the admissibility point on the matching adjustments?
I think two points. I think with effort, you can normally get most things admissible. The consultation actually just makes it more straightforward to get things in. I mean, the best example, and you can actually do this, but, say, a build to rent. You know, it's easy to put it in once it's in the rent period, but in the construction phase, the development phase may not be eligible for MA treatment. You know, this would be an example in that regard. Maybe infrastructure would have a similar pre-operational phase where you're constructing whatever it might be, power station, wind farm, solar panels, or whatever it could be. You know, that can go more quickly into MA.
As I say, it's really about the process, and I think that the, at the moment it's pretty, laborious. If we can streamline that, it would make it much more nimble around actually being able to provide capital, to those projects.
Are you saying we're not really gonna get a sort of yield pick up from the admissibility rules per unit of credit rating?
Over time, possibly. You know, it would be hard to sit here today in the summer of 2022, and say, yeah, it's gonna open the floodgates to that, I think would be wrong. You know, it would take some time. But it's a marginal positive and, you know, obviously any flexibility, you know, that we can afford our investments team is to the good, but I wouldn't be banking it.
Thanks, Greg.
Thank you. The next question comes from the line of Barrie Cornes from Panmure Gordon. Your line is now open.
Good morning, all. Also, I'd echo the comments about Jason. Thanks for all your help over the years, Jason. Three questions, if I may. First of all, in terms of UK motor on the retail side, you talked about increasing your thoughts on claims cost inflation to 6%-8%. I just wondered if that's enough currently, given the comments from some of your competitors in that space. Second question I had is in terms of you talk about the importance of customer, Amanda, and I just wondered how with the previous and current cost savings programs going through, you ensure that the customer experience is what you would want it to be, and so it doesn't impact on growth rates going forward.
The last question I had was, I appreciate that the disposal program has completed, but just wondered about your thoughts on the need to own an asset manager as part of the group? Thank you.
Okay. Thank you very much. So firstly, I guess on U.K. motor retail, is that claims inflation enough? Well, I mean, I think we constantly of course keep that under review and we're using not just the external data that we see, but also the internal data that we are seeing from our own supply chain and our own repair process. I think, you know, pricing is not the only thing that we have in our armory here, clearly. We are very carefully managing the average repair cost by working closely with our supply chain to make sure that we are actively managing that. Obviously a brand the size of Aviva can do that perhaps more than some of the, you know, MGAs or the some of the.
Even the new entrants into the market. Clearly, they will not have that the capability that we and the other brands, the bigger brands do. I think the other point is, you know, we shouldn't underestimate this, taking full advantage of our wholly owned Solus Repair Center, which manages costs for us. MI, I mentioned it earlier, it manages the labor costs, and 35% of our repairs go through that network. We will, over the next couple of weeks, have those repair centers open 24 hours a day. That's one of the actions that we have taken to respond to the crisis, to make sure that we can actually, you know, get as many of those repairs through as possible.
That also actually answers some of your points around the customer, because obviously if we're in control of that customer experience, that's better. I mean, the other thing is around disciplined risk selection. You know, smarter risk-based questionnaires ahead of the claims process to make sure that we really understand what needs to be done, and very importantly, managing the average higher duration. Keeping our costs down so that we can get people back on the road more quickly. Same applies in home in terms of our, you know, the supply chain that we have there. I think, you know, the other point I think to point out on the home book is, about 40% of our home book is with our, the part.
Some of our partnerships and affinities where the deals include mechanisms that very much limit our exposure to inflation. Now on the point around the customer. Yeah, the cost savings are in there because, you know, we actually think that benefits the customer, 'cause if we are inefficient, we pass that inefficiency on to our customers in terms of the pricing. The investment that we've made into our digital capability, that's back office, front office, you know, means that we can actually deliver a better customer experience. What we actually see is that, you know, if we put something in place, improve our digital journey, we can see an immediate uptick in our TNPS, and we've seen that in some of the things that we've done in the first quarter.
I think we outlined at the full year, you know, what we were going to do on customer and where we were heading. You know, you can imagine I do get quite often this challenge of, well, you're taking costs out. How do you ensure that that doesn't impact customer experience? The biggest impact on customer experience as of today is really the supply chain and managing customers' expectations around when they're gonna get their vehicles back or when they're gonna get their houses repaired. You know, I think that is something that clearly better communication that we can focus on. Our life company TNPS scores are actually holding up very well.
In terms of Aviva Investors and do we need to own an asset manager, I think the answer to that is yes. I've answered that question a number of times before. You know, I think that on AI, the role with the life company is really important. The work that we did last year on bulk purchase annuities, you know, the reason that we were able to get the margins that we did at the back end of the year was because the Aviva Investors team were out there originating assets so that we had assets in the warehouse ready for when the deals were done.
That working together that Doug and Mark do, we're seeing that really pay off, and we've got actually a deep dive on annuities and equity release. Shameless plug for that on, I think, the twenty-ninth of June. Dial in to see some of that. We also you know believe that the AI team have a critical role to play in the savings and retirement proposition and the wealth proposition that we're building. We do think that they play an important role at the moment. You know, I think it's very difficult to judge a business that's mid-turnaround. You have to give the business time to complete that turnaround. As I said, the costs are down, the investment performance is improving. You know, most asset managers have had a pretty choppy quarter, right?
You know, we've got to now make sure that the flows that have left the business because of the divestment activity that we undertook last year flow through, so that effectively we can see the clean performance of Aviva Investors, you know, going into 2023. You know, I guess no more really to add on that.
That's very clear. Thank you.
Thank you. The next question comes from the line of Andrew Baker from Citi. Your line is now open.
Great. Thanks for taking my questions. Just two from me, please. The first one is on the bulk annuity margin. You mentioned, Jason, that you've opportunistically locked in some of the wider corporate spreads year to date. I appreciate the margin will sort of build through the year as we've seen over the last few years. Should we expect the full year 2022 BPA margin to be higher than what we saw in 2021? Then secondly, just a quick follow-up on U.K. personal motor.
Obviously, there's a lot going on here, and you've been pretty clear that you're pricing for the experience that you're seeing. When you look at the market as a whole, let's say more recently in April and May, do you see the market overall as behaving rationally, or do you think that more rate is needed across the board? Thank you.
Okay. Well, there's a quick answer to the second question, which is, we are pricing rationally, and I think we see perhaps some of the other brands doing the same thing, but not all players clearly are. Hence why you see our new business volumes down and our retention volumes up. Jason, on the BPA margin.
Yeah. I don't want to steal the thunder of the 29th of June, give you all the answers. Not all of those corporate bonds would have gone into the MA and actually be part of that. We did that quite during the course of March, and it takes a little bit of time to move things around. The margin that we had in Q1 2.4% is decently the full year 2020 margin. If I remember right, it was like 3.7%. 3.4%, which was down from 4.7% the year before. I think at the full year I said that that was the better year to use for 2022, and I think I will stick with that for now.
Great. Thank you.
Thank you. The next question comes from the line of Oliver Steel from Deutsche Bank. Your line is now open.
Good morning, Amanda. Good morning, Jason. Thanks for fitting me in. Two or three questions. The first is just following up on locking in corporate bond spreads. Have you now invested it up into the appropriate mix last year's and your new business? And if so, where do we see the benefit of that? Does that come through in other life income or does it just increase the margin on the in-force book? So that's question one. Question two is, are you able to give us some sort of indication as to reserve releases within the GI combined ratio? And then third question is, coming back to the solvency versus cash series of questions.
Apologies to keep sort of banging away on this, but the rise in bond yields have pushed up your solvency ratio since you set the expected cash releases going forwards. I mean, if we are to expect future cash return in due course, does that axiomatically mean you have to be beating your own guidance on cash remittances?
Okay. Thank you. Jason, you wanna pick up the first two out of the three?
Yeah. As corporate, there's a heap of things going on. We've not, you know, sold those gilts and reinvested them in the back book yet. They basically sit there. What I talked about on the corporate opportunistic side, on the corporate bond spread is largely for new business this year. You know, we put some of those bonds that we bought into the matching adjustment. We have a sort of holding pen, if you like, of illiquid and liquid assets that we haven't actually put into the MA because that in those bonds for this year are really for this year's account. That's that re-risking opportunity in simple terms on the back book from last year still exists. In terms of reserve releases, from the combined ratio, we actually had a slightly.
a small negative PYD, and there weren't any releases across the group level for around 0.5%.
I guess a quick answer to your last question. We don't believe that the cash remittances target would have to increase to be able to do any returns. We, you know, it is just a matter of the right environment, and the right time.
Can I follow up on the first two questions? When do you expect to get the back book properly invested? Because effectively what you're then saying is that you took on all last year's new business at minimal margin, which is not really the way we'd expect the new Aviva to operate. You know, surely it should be value over volume, not volume over value. Then the second question, coming back on the combined ratio, is why are reserve releases still negative?
On the first one, I mean, I think what I said, and I sort of bent over backwards myself at the full year results to say that, you know, the business on inception was profitable, you know. By backing it with gilts and sovereigns, other sovereign types, EIB and things like that, you know, the business is profitable. The capital usage and the return that you make on that is totally acceptable. But it's a smaller quantum of business, less capital deployed, less margin, less profit. That's why you see that comes through in a lower VNB margin. I'm totally comfortable and if we didn't actually re-risk it, that would more than meet all of our capital hurdles and we'd be, I'd say, happy. We'd be
It would be totally acceptable. What we've got is an opportunity to deploy, you know, more capital to actually create a bigger level of return and a bigger amount of margin. You'll see that come through. You know, we absolutely, you know, have a value first mindset. You'll hear more about that to come. That's, you know, how we run the business 100%. We've not flinched from that at all. We'll take time to select those assets. Sort of the flip side of having a value mindset is that we will not charge into the credit markets, we will not lend to projects, you know, that don't have the right credit capabilities. We'll not invest in corporate bonds at the wrong spread. We make sure that we go, you know, steadily in that, and we'll
That's an opportunity. How long will it take? I don't know the answer to that. It will depend a little bit on market conditions, but I would guide sort of probably could even be one to two years, you know, to actually for that to work through. Do you want me to pick up the points on adverse reserve development? Oliver, I mean, we reserve to best estimate. In any given period, you would expect some overs and you would expect some unders. Because in the first quarter, premium levels are actually lower than the rest of the year, you know, a small deterioration actually picks up in the combined ratio. Actually there's really not much to read into. In U.K., there was a bit of adverse case development. In Canada, there was some favorable.
Net net, slight adverse, as Jason said.
Very much.
Thank you. The next question comes from the line of Nasib Ahmed from UBS. Your line is now open.
Morning. Thanks for taking the question. Two questions from me. You mentioned in the release that you're reshaping the UK and Ireland Personal Lines portfolio towards higher margin lines. What lines are you looking to grow, and can you give more color around that? Just secondly, a quick one on the leverage ratio that increased to 29% versus 27% at full year. Does that take into account the B share scheme as well? Thanks.
Jason, do you want to pick up the leverage or?
Yes, it does. It's a pro forma figure that we provided to you. We continue to measure. You know, we've got a further debt reduction opportunity of around GBP half a billion that we've not done.
On the Personal Lines portfolio, I mean as you know, the U.K. market is split between intermediated and direct business. You know, the thing about intermediated motor business is that all the margin on things like premium finance and fees go directly to the broker and not to us, and therefore it is lower margin for us. We have been pivoting away from that intermediated business more into the business where we directly control the business over the last number of years, and we will continue to do that.
Can I just go back on mine? Sorry, did you say 28% or 29%? 'Cause we gave both numbers, and I think I answered the pro forma number for what I said is 28%. The actual number for the Friends Life reduction is 29%. I mean, the key point is that leverage is where we need it to be, and we've got the right plans in place to maintain leverage.
Yeah. My question was on the 29%.
Yeah.
Is that you before the capital return? I'm just thinking about the increase from 27%-29%. It seems like it's got the debt reduction, but presumably it has the capital return as well.
It does. You can see, I would focus on the 28%. That's the figure to look at, which, you know, the capital return was agreed last Monday and will be completed tomorrow.
Thank you. The next question comes from the line of Mandy Xu from Credit Suisse. Your line is now open.
Oh, hi. Good morning. Thank you for taking my questions. Just two questions please. First is one on the follow-up of your comment on excess capital, that you made a comment you're quite committed to return to shareholders if you don't see anything that have exceptional. I mean, exceptionally high bar for M&A. What form are we expecting that to come through, you know, in that event? Would that be more like a special dividend or the rebase of the ordinary dividend? My second question is on bolt-ons. What sort of which business segments or, you know, have you reviewed that's potential, you know, you could benefit from further bolt-on acquisitions? Thank you.
Oh, okay. Thank you. In terms of the form, any form of any potential capital return clearly will be decided by the board at the time. On bolt-on M&A. Just to reiterate the point around M&A, because you know, much has been written, I guess, over the last number of weeks about this. We reviewed our portfolio, and we looked at where we had a strategic gap, and that was in the wealth advisory space, and we have filled that gap. There is no desperate need for us to do any bolt-on M&A in either UK, Ireland, Canada or at Aviva Investors. You know, we will be very selective.
There will be a very, very high bar in areas where, you know, we think that it might be accretive to the portfolio. On saying that, you know, if there are some small portfolios which give us some specialist areas, like as we did last year with the AXA high net worth deal, then we will do those deals. We are talking about very small transaction amounts there. There is no gap as I see it in the portfolio as I sit here today. You know, I'm very comfortable with the view as I see it.
Thank you.
Thank you. There are no further questions at this time. Back to you, Amanda.
Okay. Look, just thanks for that. I think we weren't expecting as many questions as that, but that was really good. It's only a Q1 trading update, but I think it was all the thank you to Jason for his long service that sort of elongated it a little bit. Appreciate the questions. Hopefully, you appreciate the answers. I'm sure if there's any follow-up, you'll come back to Rupert or to Colin. Thank you very much to everyone. Have a good morning. You know, just once again thank you to Jason.
Thank you, everyone. That does conclude our conference for today. Thank you all for participating. You may all disconnect.