Good morning, and thank you for standing by. Welcome to Aviva's Q3 2022 Trading Update analyst call. During the conference call, all participants will be in listen-only mode, and afterwards there'll be a question and answer session. I must advise you that this conference is being recorded. I'd now like to hand our conference over to our speakers today, Aviva's CEO, Amanda Blanc. Thank you. Please go ahead.
Thank you very much, Mark. Good morning, everyone, and welcome to Aviva's third quarter update. I am absolutely delighted to be joined by Charlotte Jones this morning, who is our new group CFO. I'll start with a brief overview of our performance before handing over to Charlotte for more details. We'll then take questions at the end. You may have seen that we published some supplementary slides on our website this morning.
We're not going to present these, but they are there to provide some further detail on today's update. Since we spoke to you in August, we've obviously seen unprecedented political and economic volatility here in the U.K. However, at Aviva, our business remains in a strong position, and our outlook is positive. Our capital and liquidity positions remain robust, and importantly, our targets, our dividend guidance, and our outlook for capital returns all remain unchanged.
We have also posted a really strong Q3 with continued growth and profitability across our business, demonstrating once again that our strategy and the diversified business model we have built is the right one. We remain focused on our four strategic priorities. They are customer, growth, efficiency, and sustainability. I'm pleased to say that we're making good progress against all of them. Putting customers first remains central to our strategy, and we are continuing to deliver for them.
We're making more affordable propositions available to support customers, including rolling out essentials motor and home insurance products on the major UK price comparison websites. I'm particularly proud of the partnerships we've recently announced with Citizens Advice and the Money Advice Trust, committing GBP nine million to support communities across the UK. On growth, the picture is positive across our insurance, wealth, and retirement businesses.
I'm particularly pleased with the performance in Q3 despite, where we've delivered continued momentum in challenging conditions. This has been most notable across our GI businesses, health and protection, workplace, and equity release. In insurance, year-to-date gross written premiums were up to GBP 7.2 billion, and we delivered a good combined operating ratio of 94.3%. In UK and Canadian commercial lines, we continue to see excellent volume and rate growth.
While in personal lines, our pricing and underwriting remains highly disciplined to manage the current inflationary environment. We also saw excellent further momentum across our health and group protection businesses. In wealth, our resilient performance continues, with GBP 7 billion of net flows in the first nine months, with a particularly strong performance in workplace pensions.
In line with our strategy to build a leading wealth offering, we've completed the acquisition of the Succession Wealth business. We now have 200 advisors giving critical high-quality advice. As we've said before, this acquisition will allow us to retain flows that would have otherwise gone to other providers. Turning to our retirement business, equity release has seen strong growth while we maintained our discipline in the bulk purchase annuity market.
The longer-term outlook for BPAs remains very positive and higher interest rate means that we now expect even more schemes to derisk over the coming years. Moving to efficiency, we have continued to manage costs down over the first nine months. We remain firmly on track to meet our target of GBP 750 million gross and inflation cost savings by 2024.
Continuing on this theme, Aviva Investors made good progress on operational improvement with further outsourcing and cost reduction completed in the quarter. Finally, on the subject of sustainability, I am delighted to report that we have been announced as the number one European financial institution in the new World Benchmarking Alliance's financial system benchmark that launched yesterday at COP 27.
This further underlines Aviva's outstanding ESG credentials and our leadership in this space. Our strong trading performance, combined with our prudent financial management, means that we closed the quarter in robust financial position. I'm delighted that our pro forma Solvency II ratio was 216%, 35 points above the top end of our target range. Our pro forma debt leverage was 29%, and central liquidity was a healthy GBP 1.9 billion.
The guidance we gave earlier this year on our regular dividend payments for 2022 and 2023 remain unchanged. We intend to return further capital to shareholders following the year-end via a new share buyback program. Our intention is that the capital returns will be sustainable and regular over a number of years. To summarize, I'm pleased that trading continues to be positive. I am particularly proud of the consistency of Aviva's performance.
Our third quarter numbers continue to show the clear benefit of Aviva's market leading customer franchise and diversified model across insurance, wealth, and retirement. That said, I'm under no illusions about the wider economic headwinds that we face, with high inflation contributing to the largest real income squeeze on U.K. households in decades.
We remain confident in our ability to excel and deliver on our promises for our customers and our investors. We will excel because we are very well positioned, our model is resilient, and our strategy is delivering. Thank you for listening. I'll now hand over to Charlotte, and she's gonna go through the results in more detail.
Thank you, Amanda, and good morning, everyone. I am delighted to be here for my first trading update at Aviva. I'm going to talk through some of the key parts of our update before handing back to Amanda for closing remarks and Q&A. As Amanda said, trading continues to be positive and our performance has remained strong across our diversified business model.
Our capital and liquidity positions are very healthy, and our high-quality asset portfolio continues to perform well. I shall start with our businesses. Overall, for UK and Ireland Life, VNB of GBP 466 million was up 46% year-on-year. This was mainly driven by annuities and equity release, which had VNB of GBP 143 million at an attractive VNB margin of 3.3%.
Sales for UK and Ireland Life were down just 1% compared to last year, a good outcome in a challenging environment. Unpacking this a bit more, our wealth business has proven resilient, with sales up 3%. Positive net flows of GBP seven billion were down 4% year on year, but represented a robust 6% of opening AUM. Within this, net flows in workplace were up 11%, driven by the benefit of low unemployment and wage inflation.
This more than offset the anticipated lower consumer demand in our platform business given the market volatility. Protection sales were up 3% at GBP 1.4 billion, driven by an excellent performance in group protection, which was up 20%. This more than offset individual protection, where volumes were flat, but PVNBP was down due to higher interest rates. Health sales were up 5%.
Our SME offering continues to perform well, and consumer demand for private medical insurance remains positive. Turning now to annuities and equity release. BPA sales were GBP 2.9 billion as we continue to maintain a disciplined response to the competitive conditions. Including schemes where we are preferred provider, October year to date volumes were higher at GBP four billion.
The recent market volatility and higher yield seems likely to have further improved the longer term outlook for volumes, although these higher yields will, of course, have reduced the transfer value of scheme liabilities. We remain committed to our target of GBP 15 billion-GBP 20 billion of BPA volumes over the next three years, and we will continue to hold our discipline. Total individual annuity sales were down 7%, but we saw excellent growth in external sales and a strengthening outlook due to the rise in interest rates.
Equity release sales were up 30% at the nine-month stage. We remain very focused on managing pricing and initial LTVs in the higher rate environment and with a cautious eye to the property market outlook. Moving on to general insurance. The group COR is a very good 94.3% and has remained stable in Q3. The increase of almost two points from last year reflects a return to more normal claims frequency, partly offset by better weather and PYD.
Across our GI businesses, we are experiencing rising inflation driven by macroeconomic uncertainties and supply chain dynamics. We are very focused on this and continuously take swift pricing and claims management actions to counteract these impacts. In our U.K. GI business, GWP was up 7% to GBP 3.9 billion. Strong commercial lines growth of 13% was driven by continued rate and rate strength.
We also enjoyed good new business and retention levels in SME and GCS. This was partly offset by personal lines, where premiums were flat as we continue to maintain pricing discipline. Overall for the UK, the COR increased by just under a point to 95%, which mainly reflects a return to more normal claims frequency post-COVID.
In Canada, premiums were up 8% on a constant currency basis. Trends in commercial lines were similar to those in the UK. GWP was up 15% in a favorable rate environment. We experienced strong new business and high retention. Personal line premiums were up 5%, reflecting additional rate in personal property and growth in our auto business in Ontario. The aggregate COR of 93.3% in Canada was up three points, also reflecting more normal claims frequency. Turning briefly to Aviva Investors next.
External net flows remained positive at GBP 570 million. This included GBP 500 million of net inflows in Q3 alone. Total net outflows primarily reflected the anticipated strategic actions taken by clients previously part of the Aviva Group, mainly in France. Now, I'd like to take a few minutes to update you on our GBP 75 billion shareholder asset portfolio.
It remains very well positioned. We've provided a Q3 update of our usual asset disclosures, which you will find in the supplementary slides. In summary, our corporate bond portfolio remains extremely high quality and continues to perform well. Less than 1% has been downgraded to a lower letter rating this year, and nothing to below investment grade. In our commercial mortgage and equity release portfolios, we are conservatively positioned with low LTVs of around 45% and 25% respectively.
Moving now to liquidity, which is obviously a hot topic for the sector, given the market turbulence following the mini-Budget. Firstly, and very importantly, our central liquidity remains strong at GBP 1.9 billion. Consistent with our peer group, we use appropriate financial derivatives in our annuity book for hedging purposes.
We've done this for many years. As a result of the market turbulence, and in particular, the sharp swings in the U.K. interest rates following the mini-Budget, the value of these instruments moved significantly. This required sizable amounts of collateral to be posted. All of these collateral calls were met routinely through our standard daily liquidity management procedures. I should emphasize that aside from arrangements for the Aviva staff pension schemes, we do not have any external LDI offering, and therefore have zero exposure in this regard.
Cash remittances to group center were GBP 1.1 billion at the nine month stage, and we expect full-year remittances to be ahead of the GBP 1.66 billion remitted last year. Lastly, turning to capital, details of which you can find on slide six in your supplementary slide pack. Our capital position remains strong and resilient.
Our pro forma Solvency II cover ratio increased from 213% at the half year to 215% at Q3. This was driven by operating capital generation and market movements, partly offset by the interim dividend. Our headline Solvency II ratio reduced from 234% at the half year to 223% at Q3. This change reflects these same movements as well as the closure of the. Sorry.
As well as the acquisition of Succession Wealth and the redemption of Tier one debt. Surplus capital above a 180% cover ratio increased in the period to GBP 2.5 billion. While net market moves were positive for the solvency cover ratio in Q3, we haven't benefited as much from rising UK interest rates as some of you might have been expecting. Importantly, though, despite sizable UK interest rate falls in October of around 65 basis points for the 10-year rate and 40 points for the 30-year rate, we estimate only a minimal impact from these new yield movements for our end of October solvency ratio. Let me explain why the rate movement impacts may be different to what you were expecting.
As we all know, and can't possibly forget, the mini-budget led to extreme levels of market volatility in the UK at the end of the Q3. As an illustration of this, both the 10- and 30-year rates increased by over 100 basis points in three working days after the mini-budget. Between the 23rd and 27th of September. This is more than a one in 10-year event in just three days.
Or put another way, the 2% increase in 10-year rates over Q3 was more than a one in 200-year event in just one quarter. These material increases in UK interest rates, as well as significant changes to the shape of the yield curve, peaked almost exactly at the balance sheet date. Thus, our 30th of September balance sheet was unhelpfully struck right in the middle of this extreme market volatility environment.
Regardless, throughout this time and since, the group's capital and liquidity has demonstrated very strong resilience. Resilience, which we view as a positive market validation of our balance sheet positioning. Our published group-wide Solvency II sensitivities are one-dimensional in nature. They don't cater for complex multifactor events with substantial and rapidly changing market conditions in a very short time, such as those we experienced at the end of Q3 after the mini-Budget.
As a result, the impact of market movements in Q3 on our solvency cover ratio was lower than a straightforward application of our published sensitivities might suggest. There are a few reasons for this. Firstly, our published sensitivities apply to the whole group, and while there were significant yield increases in the UK, which had a positive impact, that was not the case in our non-UK markets.
Our non-UK exposures are around a quarter of the total. Secondly, our published sensitivities assume that all points of the yield curve move by the same amount at the same time, effectively a parallel yield curve shift. However, at the end of Q3, the long end of the curve to which we are more sensitive increased significantly less than the shorter end, and this diminished the benefit for us. Finally, interest rate sensitivity is non-linear.
As rate increases become more extreme, the corresponding cover ratio benefit diminishes. As I said, the quantum of interest rate movements in the short period post the mini-Budget was extraordinary. Despite all this, the group's solvency position remained very strong. The ratio is 35 points above the top end of our target range. Our surplus above a 180 cover ratio has risen over the quarter to GBP 2.5 billion.
Our dividend and capital return intentions remain unchanged, and it is important to note that we estimate only a minimal impact to our solvency cover ratio for the sizable U.K. interest rate falls that we've seen in October. That brings me to the end of the summary. Before I hand back to Amanda, I'd like to say that I am delighted to have joined the team here at Aviva.
My first few months have certainly been memorable, coinciding with some remarkable turbulent times. What I found is that Aviva is incredibly resilient, and that resilience, combined with our strong trading momentum, gives us great confidence as we look forward. Thank you for listening. I'll now hand back to Amanda for closing remarks.
Thank you, Charlotte. So in summary, we've had a strong Q3, and you can see in these results the benefit of our market leading customer franchise and our diversified business model, which makes us, of course, the U.K.'s number one provider in insurance, wealth and retirement.
The outlook for Aviva remains very positive, and we're on track to deliver the targets that we set out in March of greater than GBP 5.4 billion of cash remittances over the next three years, GBP 1.5 billion of own funds generation by 2024, and GBP 750 million of gross cost reductions by 2024. With that, I will hand back to the operator, and we'll take some Q&A.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypad now to enter the queue. Once your name is announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel.
If you're using speakerphone equipment today, you might need to mute or lift your handset before you dial zero one just to make sure that comes through correctly. We'll have a brief pause now while we register your questions. Okay, our first question comes from the line of Farooq Hanif of J.P. Morgan. Please go ahead. Your line is open.
Hi there. Thank you so much for taking my call and my questions. Can you first quickly talk about any reserving that you think you have done for high inflation as a sort of catch up in your combined ratio? Or yeah is there a risk that this could be an element that you have to take into account over the full year basis?
Or do you think actually you've just been well ahead of the curve here on pricing? That's question one. Question two. You've talked about share buyback plans. Is there any risk at all here of you know you need to get regulatory approval and there being an issue given the market environment? Just wanted to sort of strike that off the table.
I guess the last question was on the individual annuity market. You alluded to the fact that it was down in the quarter. I guess as people were thinking about, you know, what to do with their savings, but you seem to be more positive about the outlook. If you can talk about that would be helpful. Thank you.
Okay. Thanks, Farooq. Maybe Charlotte can pick up the first question and I'll pick up the second two. Charlotte, on reserving.
Yeah. I think the point that we would make on inflation is we have been going at this from a very early stage and pushing through as much as we can through the pricing. You've heard the quotes there already, but 15 points to date in motor, eight for the home new business. I think, and we've maintained that discipline.
Clearly, you always have the reserves that you need to look at for the claims on the book or the business that was written slightly ahead of that. We have made appropriate reserving adjustments for that, and we will continue to monitor that as we go forward. I think you're right, that actually being ahead has meant that we've been going at this well for a while. Thanks. I think, you know, as I said, the COR outlook for the rest of the year remains consistent with what we said for today.
Okay. Thanks, Charlotte. On the share buyback. Sorry. You know, we really got to look, I think, at the facts, and we are sitting 35 points above the top end of our Solvency II cover ratio. We sit with GBP 2.5 billion of surplus capital, GBP 1.9 billion of liquidity. While obviously we can't speak on behalf of the regulator, we believe that we're in a strong position to return capital on a regular and sustainable basis, and we should not be holding on to capital that could be returned to shareholders.
We feel we're in a very strong position as far as that is concerned. You know, we've been, as Charlotte has said, through an extraordinary period over the last month or so on the individual annuity market. Our total individual annuity sales were down in the period, but this was primarily driven by the lower internal sales from the back book run-off. What we did see was excellent growth of 38% in external individual annuity sales, which is obviously in line with our ambition to grow in this area, which we outlined in the recent in-focus session.
Higher rates should obviously make annuities become more attractive to customers, and the average rate has increased 4% to 5.7% as yields have increased. For an average customer, that means an extra GBP 850 of extra income per year, which is of course, you know, fairly significant. In the short term, market volatility, rising inflation and cost of living crisis, you know, it may cause some customers to defer retirement. The market did shrink in Q2. I think actually our performance relative to all of that is actually very strong. Thank you for the question.
Okay. Thank you very much. Thank you. Thank you.
Thank you. Our next question comes from the line of Ashik Musaddi of Morgan Stanley. Please go ahead. Your line is open.
Thank you, and good morning, Amanda. Good morning, Charlotte. Just a couple of questions I have is, so first of all, going back to the Solvency II ratio, I mean, what would happen if, let's say, interest rates drop another 100 basis points from the October levels, i.e., back to the first half level? Would it still be more or less muted, the impact, and then we see the sensitivities playing out?
Or would you say that the sensitivities would more or less start playing out from now onwards? So that's the first question I have. I'm just focusing on U.K. interest rates rather than global interest rates. The second question I have is on the P&C premiums.
I mean, your premiums in third quarter, especially in the U.K., was pretty strong, 3% up in personal lines and 17% in commercial lines. Commercial lines, we are seeing hard market everywhere. Personal lines from some of your peers, we have seen that the premiums were down despite the rate increases. Can we get some more dynamics of what is happening in terms of rate versus volumes in the U.K. personal lines business for Aviva?
Thirdly, in annuities, I mean, volumes were lower at your end in nine months and third quarter as well. Would you say that that's a similar thing across the market, or are you taking a bit more cautious stance at the moment because of I mean, unprecedented volatility in the bond market? Thank you.
Thanks, Ashik. Maybe I'll pick up the second and third question and then come back to Charlotte on the Solvency II ratio. I mean, firstly on P&C premiums in the UK. We have been able to put through 15 points of new business rate year to date, and we will continue to push rates through. You know, very strong rating there. We think the market rate is about 11% on new business. And of course, the consequence of that is that our volumes have been flat. That's motor. On home, we put 8 points of new business rate through.
Although that has impacted our sort of new business numbers, our retention rates are 10% up in the PCWs, 7% up in direct on motor, and 12% up in PCW in home, and 2% up in direct. You know, I think that we did get ahead of the game on pricing. We have said. The last quarter, by the way, is very similar to the previous quarters, so we haven't seen any sort of deteriorating trends in the last quarter. Although I think, you know, we believe that the market could push harder on rate, I guess we would say that, wouldn't we? But our focus has been pretty much on making sure that we're pricing for inflation.
We think inflation peaked in the second quarter in motor at about 12%. We've seen that sort of coming back in the third quarter to somewhere between 8% and 10%. Largely driven, we think, you know, by things like second-hand car prices, which in the middle of the year were up sort of 28%-29% at some point, and are now down to about 11%.
We say that as if it's nothing, but obviously it's still significant. That's what's going on there. On commercial lines, obviously in the UK we've seen good strong growth across the GCS and the SME portfolio. That is around 13%, around 7% of rate, and around 6% of retention and new business.
Again, you know, I think that's showing discipline in terms of our technical pricing and a very strong rating performance there. Overall, I think, you know, we're very comfortable with what we're achieving. Actually, the situation in Canada is very similar. I know you didn't ask about Canada.
In terms of commercial lines, the dynamics are very similar in terms of the split of rate and volume, and we've put 12 points of breakthrough in auto. On BPA to the nine months. You know, I think there's a number of things going on here. We have been very disciplined and focused on trades that deliver the right economics. Okay?
We will always do that because we've got plenty of opportunity to allocate our capital to different areas, and therefore we don't need to just achieve growth in one area. On saying that, I think that the sales of, you know, GBP four billion to this period is actually a strong performance. And more importantly, as I will always say, the margin is actually very good.
And the outlook for the margin is also very good. We've got a strong pipeline, but what we do expect to see is some short-term disruption to the BPA market, as particularly as the liquidity position of some of the schemes may have impacted their ability to transact. I can't comment about the rest of the market dynamic. You know, I think you probably have to ask those questions yourself.
The other thing that you need to think about is the individual scheme sizes because of what Charlotte articulated around interest rate rises, and therefore it actually has reduced the size of the liability. You know, in essence, the size of business that you're writing versus last year will be lower because of that dynamic.
For Aviva, we are committed to the GBP 15 billion-GBP 20 billion of BPA volumes that we set out in the June deep dive. For us, the thirty-first of December is pretty much an artificial date. You know, effectively we are just managing the capital according to the opportunities in the market and where we believe we can make the right margin. Charlotte, on the Solvency II ratio.
Yeah. I think I'd start by just again repeating the headline cover ratio is strong. It's at 223%. That GBP 2.5 billion above the target 180 ratio. I think, you know, just always bearing that in mind, I think then when we look at that October effect, that shows very minimal impact on the group cover ratio from the real yield falls in October. Ultimately, we are looking at the UK rates as you said. Overall at these higher rate environment, it's clear that our sensitivities are less than in a lower rate environment. We of course manage the sensitivity of the ratio within an agreed risk tolerance through hedging.
My sense is if you go back to the sensitivities we published at the end of June, you know, they are an approximation for a very specific parallel shift at a point in time and using that balance sheet. If I take that, we won't publish any more sensitivities till the year end, but what we experienced was very different. What we experienced in October I think is incredibly reassuring. If we start to see a more normalized pattern, again, I think the hedging and that less sensitivity to the higher rate environment is gonna keep us on a continued steady footing.
Thanks, Charlotte.
That's very clear. Thanks a lot.
Thanks, Ashik.
Thank you. Our next question comes from the line of Blair Stewart from Bank of America. Please go ahead. Your line is open.
Thank you very much. A couple of questions from me. Given how strong the solvency is, are you tempted to take steps to lock that in? I mean, some of that strength has obviously been created by what's happened in markets. You've been clear that you don't want to return that solvency, excess solvency. I just wonder, given where you are, whether you're tempted to try and lock that in to allow you to be a bit more confident about returning that additional solvency.
My second question is on the margin outlook for annuities. You're at 3.3%. You're saying the outlook is good. I think you were at 3.6% for the full year last year. Would it be reasonable to expect higher margins given we're in a higher rate environment? Can those margins be achieved without taking additional levels of risk and perhaps less illiquids in future? Thank you.
Okay. Thanks, Blair. Charlotte, do you want to pick up those?
Yeah. If I start with the solvency ratio, I mean, I think in the period that we've been through, and I've just enjoyed sharing with you again. I think that, you know, it's kind of too early to make any decisions on what we do with that excess over the 180. I mean, we are of course looking at how we manage the capital if we see a sustained higher interest rate environment and looking at the best ways to manage the position. It's something that we're actively doing, and we always are actively doing. In terms of any additional payments, it's really too early to say. You know, not all capital, as we said before, is created equally.
With all of that macro uncertainty out there, I think we just need to pause. In the background, of course, we're very actively looking at the best ways of managing the position. As you can see from the October numbers, we're doing a reasonable job of keeping that stable. I think on annuities, we would say that we expect the sort of full year margin across annuities and equity release to be possibly a little bit better than last year.
You know, we have had over the course of this year and as repeated at the half year, more illiquids backing those, so it's more like 60% than 30%, and in the corporates it's more like 30% than a much lower last year. That's contributing to the higher margin. Also being very disciplined and choosy on the deals that we do. You know, I think across that, we would expect to see somewhat higher margin than we reported last year by the time we get to the full year.
Sorry, Charlotte, could you repeat those percentages again that you've experienced this year? Did you say 60% illiquids?
It's about 60% illiquids on new business compared to sort of more like 30% last year. In the corporate bonds, we're sort of up to 30%, whereas that was a sort of 2%-ish last year.
Okay, great. Thank you very much.
We're also further progressed. If you remember at this time last year, we had some reinsurance still to place. We're further progressed.
Yeah.
At this stage than we were. We've kind of been more on the front foot this year, I think, on all of that.
Okay, great. Thanks very much.
Thanks for the question, Blair.
Thank you. Our next question comes from the line of Larissa Van Deventer of Barclays. Please go ahead. Your line is open.
Thank you and good morning. Three quick ones from my side. The first on Workplace and the other two on bulk. On the Workplace growth, can you tell us where you expect the bulk of the growth to come from? Is it mainly inflation driven or are there other factors we should consider? On bulk annuities, you have spoken about the margins.
Thank you for that. The question is, with the increased volumes coming to market, do you expect those to impact margins positively or negatively? If the volumes are much stronger, would you consider doing more than the 20 if opportunity provides?
Okay, thanks. Larissa, did you say there were three questions? I've only got two there.
Yeah. One on workplace drivers, two on bulk margins, and the third one, why not do more?
Oh, okay. Sorry. I'll take those up. On Workplace growth. We've seen 11% growth on Workplace, which is brilliant. Obviously we have four million Workplace pension customers, and we've seen an additional 230,000 Workplace pension customers. We see there as being a real opportunity there. I mean, there's not just an opportunity per se in Workplace, but obviously for Succession Wealth and for the advice provision that we can provide to those schemes.
The growth has come from, we've won, I think about 90 new schemes in the last quarter. We've actually, if we look at the numbers, won about one scheme a day so far this year. We're actually winning schemes. We are also seeing with high employment in the UK, obviously we are benefiting from that in terms of Workplace, and we're also benefiting from higher wages. You know, people having higher salaries and therefore that affects the flows.
I think Workplace growth, you know, we're very positive about, and we believe that our proposition is incredibly strong. The team is an incredibly strong team and, you know, we're seeing success both in retention and in new business. On BPA margins, I think Charlotte has just answered the question around what the outlook for the year. Can I just, though, restate that, you know, we're really not in the market to write things for negative, you know, that we're not gonna make the right return on.
There may be a lot of competition in this market, but we have plenty of places that we can allocate our capital outside of BPA. Therefore, we know that capital has competition and therefore we will not write something at a loss, particularly if you think, you know, that actually you have that business for a very long time. We will stay disciplined. On saying that, we do believe that the outlook on margin is positive and the outlook on volume is positive, with all of the caveats that I said in my last answer. Hopefully that's answered sort of question two and question three. Would we write more? Only if the margin was right.
Would we write more if it meant that we would have to sacrifice allocating capital to other important strategic growth areas like wealth and and general insurance? No. We will allocate our capital across the business because, you know, I genuinely believe that what you have seen from Aviva over the consistent performance over the last few years, we have benefited enormously from diversification of our business model, and I would not want to sacrifice that.
That is very clear. Thank you.
Thank you.
Thank you. Our next question comes from the line of Andrew Crean at Autonomous. Please go ahead. Your line is open.
Hey, good morning, all. Couple of questions. Firstly, you said that weather was better than normal. Could you tell us by how much? And secondly, you told us what the rate increases on new business in your UK motor and household portfolios are. Could we have the rate across the book, including retentions, for both motor and household this year?
Okay. Thanks, Andrew. Charlotte, do you wanna do weather and I'll pick up Susan from home?
Generally speaking, weather has been pretty good across the portfolio. Obviously, we saw the February storms back in February. February storms in the UK that impacted us in Q1. But since then, it's largely been very much in line with sort of general trends. So nothing, you know, relatively favorable really. In Canada, we have also seen a year that's been largely better than the long-term averages.
At the end of Q3, we saw Hurricane Fiona, and you can see if you look in the sort of discrete quarter, COR, a slight elevation in the Canadian COR as a result of that. Actually that's very well protected by our insurance, and where our exposure is, so it wasn't that significant. Again, I would say overall in line with the sort of long-term averages there.
Andrew, just on-
Across the book, how many points better than your long-term averages are you in weather at nine months?
About 0.2 favorable.
Point two. Thank you.
Andrew, on motor and home in terms of rate increases on the existing book. For motor, it's +4% September year to date.
Great.
For home it's flat. Obviously that takes into account the renewal pricing practices and the harmonizing of the rate. I think I gave you the retention impact, but just in case, you didn't get those 10 points up on motor on the PCW and seven points on direct and 12 points up on PCW in home and two points on direct.
Great. Thank you very much.
Thanks, Andrew.
Thank you. Our next question comes from the line of Dominic O'Mahony at BNP Paribas. Sir, please go ahead. Your line is open.
Hello, folks. Thank you for taking questions. Just a first question on buyback program. Great to see that you're reiterating your expectation to do that at the end of the year. Could you just help us understand how you think about debt leverage in that context? So clearly it moves around a bit as market movements impact the balance sheet.
You know, if your buyback were to take you to, say, 31, would you just look through that and say, "We can manage that's no problem?" Or would you actually want to maintain at 30 or below in leverage? Second question, investment portfolio in general insurance.
I know you don't give us other detail at Q3, but over the last few periods, I think you've been moving, you know, away from moving some of the cash allocation into risk assets. I'm wondering whether that's a continued trend that you've seen. And actually, have you seen a material impact uplift even in the long-term investment return that you're expecting from in particular the UK general insurance book?
Then third question, could you just remind us when the rate environment is much higher as it is, how does that impact the operating capital generation? So I think for some of your peers, there's an uplift in operating capital generation as the assumed rate of return on the capital increases. Is that how it works for you folks? Is that gonna be a material tailwind in fully 2023? Thanks.
Okay. Thanks, Dom. Just on the first one around the debt leverage. The pro forma debt leverage ratio, once we've done the next tranche of debt redemption, which we've outlined, will take our debt leverage to 29% on a pro forma basis. We don't feel constrained by that at all in any of the activities that we have planned. Hopefully that answers that question. Charlotte, do you wanna pick up the point on the investment portfolio for GI and the rate environment?
You're right in your memory that we took steps, you know, effectively during COVID to de-risk the GI portfolio and have taken steps since to increase a little bit of risk, but it's still incredibly low risk. We've been doing that, and effectively that's been some of the cash holdings invested into equities and corporate credit, all incredibly high quality.
We're up to about 57% debt securities and equities up to about 10. Still very modest. I would say that with interest rates higher as well, we therefore expect that to give us some improvement in the rate on the investment portfolio. I guess our reinvestment is probably currently about 2%-3%. We would expect that to be a little bit of a modest tailwind coming from that very low risk situation that we were in a couple of years ago.
On the rate environment, I know it's you too, Charlotte.
On the rate environment, I think you know, you've got to look at the balance. I mean, we're generally growing the business overall.
You've got a balanced rate and inflation, and then a lot of the book that provides a very natural offset. Effectively, we're focused on growing OFG, you know, gradually to the GBP 1.5 billion by 2024, and we were at GBP 1.2 billion last year. I think it's, you know, it's relatively neutral. You know, actually the driving of the business is what it's all about.
Thank you very much. That's really helpful.
Thanks, Dom.
Thank you. Our next question comes from the line of Greig Paterson of KBW. Please go ahead. Your line is open.
Can you hear me, everyone?
Yeah, we can, Greig. Good morning.
Morning. Hope everyone's well. I was asking four questions, and you can decide on me, you can answer. Can you just talk about subsidence in the fourth quarter? Can you talk about the impacts of the backlog in court cases for bodily injury in motor in the UK? Could you just give us, when you spoke about the margins, you were talking about bulk annuities and equity release, and then you were talking about them together, then you started talking about bulk separately.
Could you just strip out equity release and tell us how the margin has developed in the nine months this year versus nine months last year? Finally, you mentioned that you don't use LDI except in your corporate pension funds. Could you just give us an idea of what that sort of LDI leverage is in the staff corporate pension scheme? Thank you.
Okay. Thank you, Greg. I'll pick up ERM, and then I'll come back to Charlotte to answer the other three questions. On equity release, we don't actually break out the margin. Because this is a trading update, remember Q3. Even though it doesn't always feel like that because we're giving quite a lot of information. Actually, we have seen equity release sales, as Charlotte mentioned, 30% year to date. You know, we are seeing clearly people looking at the money that they have tied up in their property and whether or not they want to release that. I think, you know, good pipeline.
As obviously interest rates have increased, we've got to think very carefully when we've been pricing accordingly to react to that. In fact, we've been repricing weekly and reducing our LTV scale as we do that. We're working hard, I guess, to make sure that customers still get value for money and that but they're also still allowed to and can release equity value from their homes.
We've got to exercise caution to make sure that the product continues to deliver good outcomes for customers. You know, I think that volumes have been good. We don't, we're not commenting on the margin at this stage in breaking it down. But we're also very conscious of the interest rate environment and making sure that we still provide good product value.
Charlotte, on the other three questions.
Sorry, probably Amanda. Just is the margin up or down? Neutral, up or down? I mean, I'm sure you can tell us that, and it's quite a material item, so.
It's up.
It's up. All right. Thank you.
Yeah.
Hi, Greg. On subsidence, you know, we have said in the past that for our UK general insurance business, a subsidence event would come kind of anywhere up to about GBP 20 million. Too, you know, perfectly manageable within the confines of our UK GI results. What we have seen is some elevation in the subsidence claims this year, and we've booked, you know, around GBP 10 million above the long-term average into the results that we've recorded so far this year.
I think on the backlog on bodily injuries in the UK, I mean, there's nothing really new to report on that at this point. You know, they just take the time to progress through the courts. You know, there's no particular things to mention.
On the LDI, on the staff schemes, you know, I think important to bear in mind that the staff schemes are very well funded. They are very strong. It's not very leveraged, and the asset structure is segregated rather than pooled, which has been very helpful in the market turbulence. They have effectively been able to manage the collateral calls that they've come up against that come from the derivatives that they do have on the books. But, you know, there isn't really anything else to say on those.
They've met all of their sort of stress tests under their liquidity risk tolerance ratios, and you know, the schemes trustees are managing the position alongside their investment advisor going forward.
Greig, I'm just gonna come back to you on that point because I think you were asking me about equity release margin and not overall annuity and equity release. Maybe I-
Yeah. Equity release.
Sorry. Yeah. Just individual annuity margin up, equity release margin under slight pressure, BPA margin up, outlook for the year on annuity and equity release positive.
Excellent. Thank you.
Okay. Sorry. Just to clarify, it's always best to do that in the moment. Okay. Thank you for that. Next question.
Thank you. Our next question comes from the line of Abid Hussain at Panmure Gordon. Please go ahead. Your line is open.
Oh, hi. Morning, all. Just one question remaining from me on bulk annuities. I think you've touched upon some of the points already, but really it's a broader question. I just wanted to get a sense, a direct sense from you, on whether higher interest rates are good or bad for bulk annuities. I'm really thinking here on demand side, on margins, and split across new business and back book. Just a sort of a slight follow-up on that, is inflation positive or negative for BPAs? I'm thinking of the back book here.
Right. Okay. I'll have a go at the first question, while we think about the second question. Just on BPAs, is the interest rate environment good for BPA? Yes, it is, because obviously schemes will be well-funded, and therefore they will feel more inclined to move towards buyouts. We believe that is good for the volume. Obviously then we can invest the assets and take advantage of that environment too. We do believe that is the case. However, I would just go back. The complexity of BPA is always there. If you think about the interest rates will reduce the size of the liabilities.
In terms of the size of the market, the market may look smaller in real terms, you know, pound note terms, whereas actually the number of schemes transacting may be more. We feel, because trustees will want to take advantage of the well-funded nature of the schemes. On saying that, we also believe that they feel that, you know, following the recent LDI issues, they may feel that the schemes are better placed with insurers than perhaps they are trying to manage them themselves. Charlotte, do we have an answer on the inflation?
Yeah, I think on inflation, probably worth just looking at slide 12 in the supplementary pack, which is the update to the slide, same slide that was given at the half year. You know, the top left-hand side talks about UK Life in general, more generally. I mean, effectively well matched on inflation due to the linked gilts. You know, that's really the best way of thinking about it.
Thank you.
Okay, folks.
Thank you. The next question comes from the line of Steven Haywood at HSBC. Please go ahead. Your line is open.
Good morning. Thank you very much. I've got three questions and one clarification, I think. Just on the clarification, you mentioned 4% up on motor and neutral on home. Now, was that for the entire book, or was that just for the renewal business? My three questions are on the UK claims inflation level that you're currently seeing in motor and property, can you sort of split out the claims inflation between the damage side claims inflation and the injury side claims inflation?
Can you provide a numeric split there? On the Canadian double-digit damage inflation year to date, can you be a bit more specific, whether that's around the 12% level that you're putting through on the rates or whether it's higher?
Finally, on surplus capital, what other opportunities could you use surplus capital for? Do you have a preference, share buyback or M&A or more BPA? If you can tell us, you know, the IRRs of sort of the share buyback versus the BPAs, is that a leading indicator to what your preference is here? Or is it just that you're committed to the share buyback now? Thank you.
Right. Okay. Thank you. I'll have a go at number one and three of that, and I'll pass to Charlotte for... Sorry, one and four, and pass to Charlotte for two and three. Let's start on capital. I'm not gonna break down the IRRs of the buyback versus the BPA. How we think about capital, and particularly the excess capital, in the business is, you know, we have, I guess, three uses for the capital. Firstly, do we want to reinvest it into the business for growth opportunities or for projects that can deliver more growth or efficiency initiatives.
In March, we outlined GBP 500 million of additional investment into the business, GBP 300 million on to increase growth and GBP 200 million to improve efficiency. You know, that is on top of already, you know, between GBP 300 million and GBP 400 million each year, which goes into the business to do the normal course of projects. I think the business has plenty of capital to invest in growth initiatives and to allow the business to grow. You know, whether that's in workplace pension or BPA or general insurance, we allocate it across the business. The second area we can use capital for is for M&A.
You know, as I've always said, the bar for M&A is very high, but we will move if we identify the right opportunities, particularly to enhance capabilities as we did with Succession Wealth, or you know, to put us in a number one position as we've now been able to do with our high net worth business with the acquisition of abrdn.
You know, this reinvestment and bolt-on M&A, we're in the fortunate position that that does not preclude us from also returning surplus capital. On capital return, you know, the way that we look at this is that this will be regular, and it will be sustainable. As Charlotte said, you know, not all capital is created equally. I think we also said that back in August that you know we would look to return the capital which we were generating through the course of doing business rather than that which has been provided by
By market movements. Just to clarify the point on rating increases, I think I might have said it a couple of times, but just to be clear. In new business rating increases, we put 15 points, 15 in motor this year, and the renewal four points. In home with our new business, we put 8 points and renewal is flat. That covers the entire book of business. Now of course, that will be blended across the various parts of the business, but that is in general what the number is. Do we have an answer on...
On UK claims inflation in motor, I mean, I'm not going to give you specific breakdown between how that's driven by, you know, the repairs and the cost versus bodily injury. The bigger challenges on inflation are coming from supply chain challenges and, you know, that's the bigger driver. The way we look at it is we look at every single data point that's relevant for our business.
Whether that's the cost of windshields or the parts and labor, and we look through the key to key time of when people drop off their cars to bring it up and how that affects all the other dimensions that go into the cost of a claim. That's what we're looking at.
I think, you know, it really important to remember that with our motor repair network, which includes Solus, that covers around 80% of our motor claims. You know, we would expect that. Well, we have got a very good grip on how that is affecting our claims cost and therefore, how much of that we can push through in rates. I think that gives us somewhat of an edge compared to the competition. So, I think that's the main thing to say there. In terms of Canada, can you just repeat, was that an inflation question as well?
Yeah, just being more specific on the double digit. Give us a number rather than just saying double digit would be helpful.
On double-digit on the pricing?
Inflation.
No.
It says damage inflation in the slide.
Yeah, we think it's about 15%. I think that's right. We'll come back to you if that's different.
No, that's fine. Thank you for that. Just going back to the
Sorry. Yeah. If you go to slide 12, you can see that. Is that where you're picking it up? I'm not gonna give you any more disclosure than that's written in that slide.
Okay. Just on the
Double-digit property damage.
Okay. On the renewal versus new business, can you tell us the split? You know, is it 80% renewal, 20% new business that you're seeing so we can get an idea of the entire book on both motor and property?
I'm not sure that we can do that actually. We'll have a think about that. I mean, I think we know what the retention is. I've given you the retention rate. Our retention rate on motor. Yes, I can do that actually. The retention rate on motor is 74% on the PCWs and 76% on direct. On home it's 84% PCW and 87% direct.
Perfect. Thank you very much for that help. Appreciate it.
Sorry. There's a lot of different numbers there.
No, it's great. Well done.
Thank you.
Thank you. Our next question comes from the line of Nasib Ahmed at UBS. Please go ahead. Your line is open.
Sorry. Morning. Thanks for taking my question. I've got three questions here. One similar to Dom's question on capital generation. Just looking at the in-force generation, your SCR is lower, so that mechanically just means that your capital generation will be lower just from the in-force. Is that correct?
Then I guess if you're kind of hedging at these levels, you would have to kind of bring down that forward-looking guidance as well, right, capital generation, and that's hedging for interest rates. The second question on the deal with Lemonade, if you can just talk about the structure and what it brings to Aviva.
Then final question, slightly going off piste here. But how are you tracking against your regulatory Tier two and Tier three own funds level versus the maximum 50% of SCR? I know the SCR has come down a bit, and then if I do the mechanical calculation, adding with profits, you're kind of at that level already. How are you thinking about that? Thanks.
Okay, Nasib, you may need to repeat your second question. You said it so quickly. I'm sorry I couldn't. I thought I spoke quickly, but I didn't catch it. What did you say?
It was about the deal with Lemonade, the structure around it and what it brings to Aviva.
Yeah. Right. Okay. Thank you. I'll pick that up, and I'll get Charlotte to pick up the first and the third question. Look, we've always said as far as Insurtech is concerned that I'm not going to give you the structure of the deal, by the way, as you would, you wouldn't expect me to do that. We've always said that we're very interested in working with Insurtech as opposed to trying to compete with them.
You know, we have a very strong customer base, and we have a strong credibility and a strong balance sheet. We know we appreciate the opportunity to work with Insurtechs who are working with different technology and different ways of doing things.
You know, the deal with Lemonade is very exciting, and we'll see how that progresses. On the other two questions, please. I think on the OFG, you know, we would see a lower SCR runoff, which is broadly neutral. On OCG, if it's off at all, it's very minor. And then I think what was your other question was on whether we're hitting the tiering, the Solvency II tiering constraints.
It wasn't an issue for us in Q3, and the headroom will have now increased since the rates have fallen, which then drives the SCR increasing since Q3, you know, nothing much to say. The planned deleveraging will further help that, so that GBP 500 million that we talked about will further increase the headroom over time.
Thank you. Thanks.
Thank you. Our next question comes from the line of Alan Devlin at Goldman Sachs. Please go ahead. Your line is open.
Thank you. I've got a couple of questions on investments. The first one was a follow-up from the answer you gave to Blair. It sounds like you're making a material shift in your asset allocation to your bulk annuity new business, particularly in higher corporate credits and the liquids. I'd be interested in more details on what you're doing there.
Also, is there an opportunity on the back book, given the movement in rates and spreads to, you know, potentially capture more yield and drive management actions? The second, probably related question is actually on the kind of the outlook and particularly on page eleven of your presentation on you.
Given we are going into, you know, with the Bank of England, things could be the longest recession in history and the unprecedented cost of living squeeze. You know, when you look at your investment portfolio, what parts of it are you concerned about?
You know, a lot of those, the Payment-In-Kind commercial mortgages are kind of lagging indicators. Is there any concerns in any parts of that mortgage portfolio you're focused on or looking at or are already part of your other asset portfolio? Thanks.
Yeah. Thanks for that, Alan. I mean, I think on the asset allocation to the folks, you know, not giving you any more detail, but we're always looking, as we said in the deep dive back in the summer. We're always looking to optimize and that gives opportunities, as you say, with the back book as well. On the asset portfolio, more generally, I mean, the specifics I was talking about there were very minor tweaks in the general insurance book.
I think if I look at commercial mortgages, you know, they're sort of 8% of the portfolio. It's largely fixed duration contracts with which means therefore very limited refinancing risk. Very low average LTVs of about 45%. You know, all extremely high quality. You know, no balances in arrears. You know, obviously we monitor that, particularly looking at the outlook for property prices, but we think we're incredibly well-positioned.
Cool. Thanks.
Thanks, Alan.
Thank you. We have one further question in the queue. That's from the line of Fahad Changazi of Mirabaud. Please go ahead. Your line is open.
Hello, good morning. Just a loose end from my end. Would you mind the gain of your house price assumptions in Solvency II, and your approach to updating the assumption of full year results in terms of internal and external estimates? Thank you.
We look at all of those assumptions really, as we get towards the year end. We've had a little bit of a look, and we've sort of minor tweak in a sort of downward way. We'll look again as we close the books for year end.
Okay. Fair enough. Thank you.
Okay. Thanks very much, everyone. Look, thank you. There were a lot of questions there. I guess possibly more than we were expecting. Hopefully that's been helpful for everybody. We really appreciated you calling. If you've got any follow-up questions, obviously you can pick it up with the IR team. Look forward to seeing you all soon. Thank you very much.
Please, that concludes the conference. Thank you all very much for attending. You may now disconnect your lines.