Aviva plc (AV) Earnings Call Transcript & Summary

Thank you for standing by. Welcome to the Aviva plc Trading Update First Quarter and 2022 Analyst Call. [Operator Instructions] I must advise you that this conference is being recorded. I would now like to hand the conference over to our speaker today, Ms. Amanda Blanc. Thank you. 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 control over 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. And 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. Once 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. So 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. But 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 a significant milestone of the #1 ranking for net flows in 2021. And 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're well on track to deliver on our GBP 300 million net cost reduction target in 2022. And finally, our capital and liquidity position remains strong and resilient, supported by robust operating capital generation and the beneficial impact of higher interest rates. So overall, we've had a very good start to the year. We've 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 U.K. households in decades. We've been 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. So 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 31p per share in 2022 and rising to GBP 32.5p per share in 2023. And 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 U.K. 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 & 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 & 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, by 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 it's 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 as well. Within this, workplace flows remained strong at 6% of opening AuM, down marginally versus last year, which was a particularly strong first quarter, but 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 U.K. 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 U.K. The difference between Q1 2021 and 2022 was approximately 5 percentage points. In our Canadian business, combined ratio was 91.8%. This was 3.7 points higher as expected, again, pulling 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. And 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. And after a line for the Succession Wealth acquisition, this pro forma ratio reduces to 192%. The 7-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 14.7p per old share. On a headline basis, reported coverage 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 reduction of the GBP 500 million of Tier 2 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 2-year refocus and the completion of the capital structure work. I'll now hand back to Amanda.

Thanks, Jason. So 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 4 strategic priorities: growth, customer, efficiency, and sustainability. On the latter, we received exciting news of our progress has been recognized with Sustainalytics, upgrading our rank to 6 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. But 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.

[Operator Instructions] Our first question comes from the line of Farooq Hanif from JPMorgan.

So just one question on capital management. I had another question on your U.K. 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? And 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 kind of if you could talk us through that, 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? What are your further ambitions in that area?

Okay. Thanks. I'll pick up the commercial question. Jason, if you pick up the question on the pro forma?

So pro forma liquidity is sort of 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 the best part of -- well, last year, we did just over GBP 1.6 billion of remittances. So I won't give you a forecast for this year, but you've got a sort of sense of the scale of the remittances that come out of the business. So that number really is just a simple arithmetic. We had the proceeds, we take off the B share, we take off the debt redemption. That will develop 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 across the different things that we can do. The subsidiaries have all got actually excellent capital positions. So we could bring more cash up if we wanted to do further distributions. So we managed the group center liquidity at a level that is supportive of our credit ratings, supportive of the group's financial strength. But if we did want to take further steps in line with the way Amanda just described, I'm pretty sure that the liquidity could be solved.

On commercial lines, so I think we are seeing really good growth in both the U.K. and Canada. So the growth in the U.K. is 11%. And on currency in Canada was 13%. We [indiscernible] SME mid-market in those areas where we have targeted growth. So if you think about the U.K., we made a concerted effort to go out and recruit into regional mid-market underwriting, and we are seeing growth in those areas. And the same is true of Canada. In the U.K., we also see a steady growth in the SME business. And I think the important thing to look at when you're 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. And we're monitoring, obviously, the technical prices to make sure that we are keeping -- making the most of the opportunity, I guess, which is a hardening market or hard marketing commercial lines. I think it's really important to stress also if there's an underlying inflation question, that the commercial lines have index linking on the vast majority of their policies so that we are -- the rate in essence is on top of the index linking that we see in those commercial lines products.

So on 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? So are you finding that on top of pricing, you feel there are opportunities there to grow further share?

So I think we will maintain our discipline there. I think it's marginal actually, what we're seeing in that global corporate space, but we are very selective about the lines of business that we write, and we will continue to do that. I mean, 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. And I think that's what -- that is what we are doing.

And the next question comes from the line of Steven Haywood from HSBC.

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? And second question on inflation. Your U.K. peers provide inflation sensitivities on the Solvency II ratio. I haven't seen one from you. Could you give us an idea of the potential impact on your Solvency II ratio from changing inflation? And finally, the HM Treasury produced its consultation document on insolvency to 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?

And I'll pick up the last one and Jason will pick up the first 2. On Solvency II reform. Obviously, we're pretty pleased that the consultation is now underway, and you saw HMT and also the PRA came 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 still to go. We absolutely support the government's objective of a 10% to 15% capital reduction in order that we can fulfill our commitment to invest in U.K. infrastructure. And clearly, we are very, very supportive of that. But clearly, there are some details in the consultation papers that need a lot of work to flesh out the impact, particularly the matching adjustment at calibration. So 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 streaming additional cash, I think the answer to that is no, but Jason, give them more -- more information he will give on that.

No, nothing specific other than these things are the obvious around risk appetite levels need to be appropriate in the subs, and we need to have liquidity in the subs, but neither of those are constrained.

And on inflation...

Inflation, yes, we do provide an expense sensitivity to maintenance expenses. We've not given a broader expense entity, but you might imagine we go to that. The grow is pretty neutral. We buy a very confident team that buys a significant amount of protection, and we set ourselves up. So over a number of different factors. I think sensitivity is broadly neutral, but obviously, that assumes different inflation across the board, that behaves similarly, of course, it never does because we've got different types of inflation. But we -- the model the way that asset services comes out, we would come out with a pretty much a neutral position it slightly positive in Life side, negative in GI.

Just a quick follow... 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 time scale. If I think the end of the consultation is in July and clearly, the government put some cost of events in their Queen speech last week around financial services regulation overall. But as I say, there is much work to do in terms of the -- both consultations to make sure that we end up with the outcome that we -- that is expected, which is the freeing up of capital to be able to invest in U.K. infrastructure investment, that is absolutely critical.

And the next question comes from the line of Blair Stewart from Bank of America.

First question is on P&C or general insurance. Is the main message with all the moving parts that the underlying profitability is broadly stable? And on that, I wonder if you could give a breakdown of the rate versus volume in the 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 -- and 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 negative 0.1%, your SCR is positive. I'm guessing there's some market effects in there as well as true operational movements. So I wonder if you could just give us an indication as to how those play out? And thirdly, just coming back to the buildup of excess capital over time. Could you just -- you obviously got -- you've paid about GBP 900 million in ongoing dividend costs versus your cash flow. So 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 sock up some of that excess?

I'll pick up questions 1 and 3, and Jason can pick up 2. So just to go back to your point around P&C. So 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. So in fact, I think commercial lines as just tipped over the majority of business that we have now. So I think that's -- first of all, I think that shows the good diversification of the business. And actually, as I -- I won't repeat myself, but the commercial lines business for inflation, I've given you the numbers there in terms – so I've given you the numbers in terms of the rating increases. And I've given you the -- our answer in terms of the inflation impact because of the index-linking nature of that. The business 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. So I think that deals with Commercial Lines. On personal lines, there's 2 things going on, I think, in personal lines. Let's start 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. And as far as average rate changes in -- as we started the year, effectively on motor at 5% new business. So that's what we would have expected to see because we were sort of seeing this normalization between new and existing. And on home, the average new business rate increase would have been between 10% to 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 7 points and home by about 5 points, which reflects the brand strength. So 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 what is quite a volatile environment in terms of the pricing practices coming in and then subsequently, obviously, the inflationary environment. So focusing on inflation, going into Q1 when we were sort of budgeting and thinking about our rate of the rate that was required, we were seeing the need to put into our base rate, 4% to 6% for claims inflation. This was already in our rate plan 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% to 8%. So 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. So -- and we're seeing similar trends, I think in Canada except, but obviously, in Canada didn't have pricing practices and in Canada for motor, you have to file your rates. And so we have -- 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. So you're right about the GBP 900 million. And 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 3 years. And 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, and that we would invest GBP 300 million in the organic growth 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. So the excess capital, if you like, will be excess capital over time. And what we wanted to be clear of today is that on that excess capital. Any additional investment above the normal investment which goes into the business and that additional SEK 500 million that we outlined in March would have to have an exceptionally high bar. So we want to be very clear that 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. And it's been a question that we've been asked many times over the last couple of months. And therefore, we wanted to be absolutely clear about that. And now in terms of time scale, clearly, we've literally just paid the GBP 4.75 billion, the GBP 3.75 billion is weak and then GBP 1 billion of share buyback. So this clearly will be over time, but it will be something that we will continue to return to. And we will not keep excess capital in the business that we believe should be returned to shareholders. Jason?

So on the capital movements, we don't give quarterly capital generation figures. But as Amanda said, we're on trend. So last year, we did GBP 1.2 billion approximately of own funds, and we've got a target to grow that over the next 3 years. We're on trend. In terms of the movement in SCR, that's mainly interest rate increases. So you would see -- what you would see is an equal and offsetting reduction in own funds for that. And then the delta would be the positive capital generation plus a little bit of positive economic movements on things like valuations credit spreads, equities, other economic movements of a positive.

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% and motor and I think 5% to 13% in home. Now that that's washed through, that should -- on an ongoing basis, should we expect the renewal book to -- 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?

Yes.

All else equal?

Yes. Because obviously, that was a sort of market move, well, I can't remember the date, I think it was the 16th of January, everybody moved to the new way of doing it. On saying that, we have been building up to that play over a number of years because we were dealing with this difference between the front book and the back book on home, particularly. Motor this obviously less of a delta.

And the next question comes from the line of Ashik Musaddi from Morgan Stanley.

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 GBP 180 million, 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 in 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 3-year view, 4-year view. So 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. So that's one. And 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. So 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.

I'll let Jason pick up the second question. I'll pick up the first one. So look, I think we only stood up in March, I think, and reiterated what our targets were and the way that we look at the capital within the business. What I wanted to do today was to just be very, very clear that we've set aside investment in the business. We've basically -- and will not hold on to any excess capital that we believe doesn't add value, and there's a high bar for that within the business. Now we're not -- I think we were clear on that policy. We've been clear today. So I don't want to set up any expectation that we will be coming back with any additional policy. We will set a very high bar for any investment, and we will not hold on to capital above the GBP 180 million and necessarily. So I'm not sure how much clearer I can actually be than that, to be honest. So hopefully, that is very clear to everybody. Yes, I just keep repeating myself. Jason, can I hand over to you?

Sure. So the annuity market does tend to pause the breath when interest rates move. We saw that quite a lot in Q1 last year, actually, if you remember, we talked about that. It was very quiet. I think we've seen similar impacts where trustees just trying to recalibrate and make sure they've got the right deal providers slightly trying to recalibrate. Spreads have been a bit volatile, which is helpful in March. We were opportunistic and bought a reasonable amount of bonds during that spread widen in again a bit now. So there's a little bit of recalibration going on. But the secular growth that Amanda mentioned earlier, it remains -- we think the market this year, we see possibly GBP 40 billion. We do see continued strong interest for derisking solutions, and we expect to continue to meet those in a reasonably competitive but still a pretty buoyant market.

And the next question comes from the line of Larissa Van Deventer from Barclays.

A quick question on the -- actually on the outlook from wealth. And that is 2 parts. How are you seeing the current market conditions? And are you seeing weakness especially with the consumer being under pressure? And then related to that, can you give us an indication of the impact you expect from Succession Wealth, please?

Yes. Okay. I'll pick up both of those. So I think in terms of wealth, we saw, I think, excellent growth of 7% in wealth excluding the market movements in the first quarter. And our performance, I think, versus the rest of the market has been good too. We were particularly pleased about the performance of the adviser platform. I think the business actually has got excellent momentum and that #1 in the advice base 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. But we actually saw a record week or net flows in the adviser platform at the end of March as the tax year-end approach. Our ambition is to grow the net flows by 10% CAGR over the next 3 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 going to actually 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. So as we've outlined before, we lose about GBP 6 billion of AuM each year. And we know that about 80% of that business is takes advice before it consolidates and moves on to the next stage of -- or another platform. And we want obviously that to stay on our platform. And so the ability to be able to provide advice is absolutely critical for that and the advisers that came with the Succession Wealth deal. And the ability to build a sort of digital hybrid advice proposition means that 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 and then into the advice platform or via the workplace platform into the advisory space. And we really feel the opportunity to capture a proportion of that AuM. Now we have not said what that proportion is going to be. But 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 on the -- just on the 40 advisers 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. So we're feeling very upbeat about really maximizing this opportunity in the wealth space. I mean you have to think that the wealth market is going to grow from GBP 1.6 trillion to GBP 2.1 trillion. Aviva has 4 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 real potential to look forward on that business anyway with optimism. Now of course, we're not -- 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 we feel super confident about that.

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. So we have kept in place things like the 3-month payment deferral for our customers in health and protection and in general insurance, 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. 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 that the sort of -- the outlook for us anyway, we -- it tends to be quite -- were quite defensive position. I mean it's hard to say that, recognizing clearly that we see many people struggling with the environment. But that is what we are seeing in our numbers so far. On the second point, Jason?

Yes. We've seen PVNBP for a while, it's not the best metric, and it's like to start a bounce around a bit as interest rates go up. Having said that, so we look at the net fund flows GBP 2.7 billion. As I said, that's a 7% growth rate. And 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 sensitive AuM is really the key value driver of the business.

And the next question comes from the line of Andrew Crean from Autonomous.

We'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 '21? 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 fund? And then thirdly, a question, you put in this thing about the runoff of your legacy book being GBP 175 million of OCG falling by GBP 10 million to GBP 15 million. But within your full year figures, I noted that you said on the U.K. 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 that why there's such a steep decline? If it's not coming from the legacy book, where is it coming from?

I'll pick up the question on BPA and then Jason can pick up question 1 and 3. So on BPA trading 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' interest and the derisking trades for the benefit of the members as they have the sort of ability to trade with any insurer. And our BPA trades are recognizing exactly the same way as any other external BPA. So if you like, it's not a left pocket, right pocket from an economic perspective, the sort of – there is true value in that. And actually, the important point, I think, is doing the internal BPA deaths enables us to capture the margin in the insurance business for the benefit of the shareholders. So it just gives you a little bit of context on that. Jason, on the other points.

Yes. So weather overall for the group for LTA, we're pretty much there. That was a negative in the U.K. and a positive in Canada to a degree. So I think what we said in the release is that in the U.K., you saw quite a big swing from pro benign last year to quite positive -- sorry, negative this year in terms of actual weather performance. So it's about 3%. That splits to about 3 -- 3 contribution last year to worse this year. So that's how that 5 points breaks down in the U.K. And on the runoff. Yes, we did give that. We have a few questions on the contribution of legacy and how that runs off over time. We just thought it would be a helpful disclosure for that segment. It's easier for us to do legacy because it's got the SCR sort of ring-fenced and we can map that it's a bit tricky for the others. So you can see the -- we started to provide segmental owned funds across the U.K. light for the first time in 2021. We'll continue to build on that disclosure. We've got an own funds target for growth. We've got our own trans disclosure. It feeds into the ROE, feeds into ultimately the capital and the dividends in the future. So 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. And that's going to contribute to cash flow for a significant period of time across the board. I can't quite rack 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 can -- will give you a call.

This quite stark that drop in the cash flows.

And the next question comes from the line of Dom O'Mahony from BNP Paribas.

Three from me, if that's right. First is just on the General Insurance business. I'm thinking about the sort of the frequency benefit unwinds. I know this has been sort of a gradual feature of the business for, I guess, a few quarters. But as you look into Q2 and beyond, do you think the frequency effect is now done as in the Q1 adjusted for weather into is sort of normal. And from here, you can expense savings and so on? Or do you think there's actually some more headwind to come that you need to deal with? Taking just another one on the heritage runoff. Very helpful guidance. Is this a change in trajectory? So is this a slowdown in the rate of one-off? Or actually, is the sort of the rate of runoff that you're flagging here is this what you've seen over the last several years. And then 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. And because of the mark-to-market on the Solvency II, the capital generation will be -- will go up essentially when rates go up and vice versa. Is that right? And if so how much does the increase in rates? How much do you think that's going to impact your full year '22 OCG?

I'll pick up the first one and Jason is going to pick up the second and third one. On German issuance, the frequency benefit unwind, I think we see frequency levels as virtually back to where they were pretty close to, as Jason said in his opening comments back to where they were pre-COVID. And any benefit of frequency has been priced into rates. I mean you know how competitive the market is on motor insurance. And therefore, I think that has definitely been priced in. And there's been so much else that is now going on in respect of inflation, supply chain, returning to more normal or driver, I think that we are pretty much where we would expect to be. And now we are pricing for the experience that we see, whether that is inflationary experience or frequency or large claims or whatever. On the other 2 points, Jason?

Sure. So on the heritage runoff, I think I've said for, I think, at least 6 years, this it runs off at about 10% a year. That's about right. I mean, we tend to do slightly better. We can find efficiencies customers tend to stay with us a bit longer. So that GBP 10 million to GBP 15 million assumes some reasonable management of that book as it runs off over a period of time. I think the aim of giving you just saying this is how much it is, and this is the rate and it's not a big headwind to us in terms of capital generation across the business. In terms of -- I mean, brand sensitivity is disclosed. You can see the sensitivities. We manage the business that the interest rates are hedged out as much as possible to protect surplus and cash flows. So 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. So that creates an increase in cover ratio. So that's that goes through. So that does free up some extra capital. So the way that basically what I just talked about to Blair in 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 and it continues to come down. And funds will come down as well. But also, you'll see that freeing up a little bit of capital.

Just lastly, I get the point about the spot solvency -- so that the OCG goes up, essentially where the run rate cap generation might go up because of the yield of the assets held against the equity and the debt?

For OCG, we would look through interest rate movement ones sort of that's the an OCG, if you're right. For total capital generation is why I just said. So you see this sort of movement in SCR offset by this reduction in the balance sheet.

And the next question comes from the line of Greig Paterson from KBW.

I'll just echo the point about Jason's position. Thanks all the help he's given us. Now I'll ask 3 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. And the second one is it's 2 parts on the Solvency II reforms, just speaking to your competitors, a lot of them are downplaying the benefits of the 10% to 15% of the risk margin fundamental package arguing that the TMD, the transitional assets adjusted -- so there's a sort of consensus commentary from competitors. So there's going to be no release. I wonder if you want to comment around that. And the second part also to do with the Solvency II reforms, U.K. reforms is there's also some comments from competitors that the current matching adjustment and disability 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 down. I was wondering if you had any thoughts on that? And if you did, maybe can cite some examples of assets that currently can't go in that could go in possibly post rule changes?

So just on the CRR 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. But below 94% combined operating ratio for the general business is absolutely our ambition. But you know that in any 1 year, GI can't get some volatility. So some obvious headwinds in 2022, which makes it a little bit more challenging. But we are definitely working hard to try to mitigate that. And hopefully, what you can see from this, the benefit of the Canadian and U.K. business sort of offsetting each other in Q1, 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 around pricing practices that there have been this year. I'll say a general comment on solvency tutors and maybe Jason can talk about the visibility point. I don't think I can say too much more to what I said at the beginning. I think we are having seen the consultations that came out in the last couple of weeks. There is definitely an area of caution around Solvency here. 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 U.K. infrastructure investment and facilitating a significant amount of opportunity than there was with pension money with the for insurers to be able to help them achieve their U.K. infrastructure investment goals. If those goals are not going to be achieved until 2031, 2032, I'm not sure that that really fits the political time frame that the government is operating in. And therefore, I think we have to be very allude 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 visibility point on the matching adjustment?

I think 2 points. I mean, I think with effort, you can only get most things admissible. So the consultation actually just makes it more straightforward to get things in. I mean the best example and you can actually do this as say, build to rent it's easy to put it in once he's in the rent period. But in the construction phase, the development phase may not be eligible for MA treatment. This would be an example in that regard. Maybe infrastructure would have a similar preoperational phase where you're constructing whatever it might be, power station, wind farm, solar panels or whatever it could be. Put that back and go more quickly into MA. But as I say, it's really about the process. And I think that in a moment, it's pretty laborious if we can streamline that, it would make it much more nimble around actually able to provide capital to those projects.

Think you're not really going to get a sort of yield pickup from the addressability per unit of credit rating?

I think over time, possibly, it would be hard to sit here today in the summer '22 and say, yes, it's going to open the drug gates to that. I think we'd be wrong. It would take some time, but it's a marginal positive. And obviously, any flexibility that we can afford our investments team is to the goods, but I wouldn't be banking it.

And the next question comes from the line of Barrie Cornes from Panmure Gordon.

And also, I do commend that, Jason. Thanks for your help, Jason. 3 questions, if I may. First of all, in terms of U.K. motor, on the retail side, you talked about increasing your thoughts on claims cost inflation to 6% to 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 talked about the importance of customer Amanda. 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? And 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?

So firstly, I guess on your U.K. motor retail, is that claims inflation enough. Well, I mean I think we constantly, of course, keep that under review, and we are 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. But I think to just 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 manage -- we actively manage that. And obviously, a brand the size of Aviva can do that, perhaps more than some of the 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 and the bigger brands do. I think the other point is -- and we shouldn't underestimate this, taking full advantage of our wholly owned the solar repair center, which manages costs for us. I mentioned it earlier, it manages the labor cost of the 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. So that's one of the actions that we have taken to respond to the crisis to make sure that we can actually make -- get as many of those repaired through as possible. That also actually answers some of your points around the customer because, obviously, if we didn't control of that customer experience, that's better. I mean the other thing is around disciplined risk selection. 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, so keeping our costs down so that we can get people back on the road more quickly. Same applies in home in terms of our -- the supply chain that we have there. So I think the other point I think to point out on the home book is about 40% of our home book is without -- 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. So Yes, the cost savings are in there because we actually think that, that benefits the customer because if we are inefficient, we pass that inefficiency on to our customers in terms of the pricing. So the investment that we've made into our digital capability. So that's back office, front office means that we can actually deliver a better customer experience. And what we actually see is that 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 what we were going to do on customer and where we were heading. So I don't -- you can imagine I do get quite often this challenge of where you're taking cost out, how would you ensure 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 going to get their vehicles back on when they're going to get their houses repaired. And I think that is something that's clearly better communication that we can focus on. And our Life company, [ TMPcos ] 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. I think that on AI, the role with the Life company is really, really important. The work that we did last year on a purchase annuities. 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 are 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 to. We're seeing that really pay off. And we've got actually a deep dive on annuities and equity release, shameless plug for that, and I think, the 29th of June. So dialing to see some of that. We also believe that the AI team have a critical role to play in the savings of retirement proposition and the wealth proposition that we're building. So -- we do think that they play in and grow at the moment. I think it's very difficult to judge a business that's been turn around. You'll have to give the business time to complete that turnaround. As I said, the costs are down, investment performance is improving. But most asset managers are about a pretty choppy quarter, right? And 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 flows through. So that effectively, we can see the clean performance of Aviva Investors going into 2023. So I guess no more really to add on that.

And the next question comes from the line of Andrew Baker from Citi.

Just 2 for me, please. So the first one is on the bulk annuity margin. You mentioned -- Jason, you mentioned that you've opportunistically locked in some of the wider corporate [indiscernible]. I appreciate the margin will sort of build through the year as we've seen over the last few years. But should we expect the full year '22 BPA margin to be higher than what we saw in 2021? And then secondly, just a quick follow-up on U.K. Personal Motor. Obviously, there's a lot going on there, and you've been pretty clear that your pricing for the experience that you're seeing. But when you look at the market as a whole, let's say, more recently in April and May, do you see the market overall is behaving rationally, what do you think that more rate is needed across the board?

There is 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. And hence, why you see our new business volumes down and our retention volumes up. Jason, on the BPA.

I don't steal the thunder of the 29th of June, as you all the answers. Not all of those corporate bonds we've 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. So 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% a 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.

And the next question comes from the line of Oliver Steel from Deutsche Bank.

Two or 3 questions. The first is just following up on and about locking and corporate bond spreads. Have you now invested into the appropriate mix last year's than your new business? And if so where do we see the benefit of that? Does that come through in a life income? Or does it just increase the margin on the in-force book? So that's question one. Question 2 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've set the expected cash releases going forward. So I mean, if we are to expect future cash return in due course, does that actual dramatically mean you have to be beating your own guidance on cash remittances?

Jason, do you want to pick up the first one?

So corporate -- there's. We've not sold those gilts and reinvested them in the back book yet. So they basically sit there. What I talked about on the corporate opportunistic side on corporate bonds spread is largely for new business this year. We put some of those bonds that we bought into the matching adjustment. So 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 performance for this year really for this year's account. So that rerisking opportunity in simple terms on the backlog from last year still exist. In terms of reserve leases from the combined ratio, we actually had a slightly small negative PYD and we new releases across a group level around 0.5%.

Yes. And then I guess a quick answer to your last question, we don't believe that the concomitant target would have to increase to be able to do any returns. It is just a matter of the right environment and the right time.

Can I follow up on the first 2 questions? When do you expect to get the back book properly invested because -- I mean, effectively, what you're then saying is that you're taking on -- you talk on all last year's new business at minimal margin, which is not really the way we'd expect the new Aviva to operate. Surely, it should be value over volume, not volume over value. And then the second question coming back on the combined ratio is -- why are reserve releases still negative?

So on the first one, I think what I said as the bet over myself at the full year results to say that the business on inception was profitable. And by backing it with gilts and sovereigns, other sovereign types, the EIB and things like that, the business is profitable. So 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. So that's why you see that come through in a lower VNB margin. So we totally -- if we didn't actually rerisk it, that would be -- that would more than meet all of our capital hurdles, and we'll be, I'd say, happy, it would be totally acceptable. What we've got is an opportunity to deploy more capital to actually create a bigger level of return and a bigger amount of margin, and you'll see that come through. So we absolutely have a value-first mindset. You'll hear more about that to come, but that's how we run the business 100%, and we've not flinched from that at all and we'll take time to select those assets. So 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 that don't have the right credit capabilities and we'll not invest in corporate bonds and the wrong spread. So we make sure that we go steadily in that and 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 it could even be 1 to 2 years, just actually for that to work through.

Do you want me to pick up the points of adverse reserve development? So I mean, we've reserved the best estimate. So 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, a small deterioration actually picks up in the combined ratio. So 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. So net-net slight adverse as Jason said.

And the next question comes from the line of Nasib Ahmed from UBS.

So 2 questions from me. You mentioned in the release that you're reshaping the U.K. and Ireland Personal Lines portfolio towards higher margin line. So what lines are you looking to grow? And can you give more color around that? And just second quick one on the leverage ratio that increased to 29% versus 27% in full year. Does that take into account the capital return to B share scheme as well?

Jason, do you want to pick up the...

Yes, it's a pro forma, I guess, that we have provided to you. So we continue to measure we've got a further debt reduction opportunity of around GBP 0.5 billion that we've not done.

And on the personalized portfolio, I mean, as you know, the U.K. market is split between intermediated and direct business. And the thing about intermediated motor business is that all -- all the margin on things like premium finance and fees go directly to the broker and not to us. And therefore, the is lower margin for us. And 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 20 or 29 we gave both those numbers, and I think I answered 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 the leverage is where we need it to be, and we've got the right plans in place to maintain leverage.

My question was on the 29. Is that you before the capital returns. So I'm just thinking about the increase from 27% to 29%. It seems like it's got that reduction, but presumably, it has the capital return as well?

I'd focus on the 28, that's the figure to look at, which the capital return was agreed last Monday and will be completed tomorrow.

And the next question comes from the line of [ Ming Zhu ] from Credit Suisse.

Just 2 questions, please. First is one on the follow-up of your comment on exceed capital that you made a comment you're quite committed to return to shareholders if you don't come -- don't see anything that have exceptional -- I mean our exceptionally high bar for M&A? And what the form are we expecting that to come through in that event? Would that be more like a special dividend or the rebase of the ordinary dividend? And my second question is on bolt-ons. What sort of -- which business segments or have you reviewed that potential you could benefit from further bolt-on acquisitions?

So in terms of the -- any form of any potential capital return clearly will be decided by the Board at the time. On bolt-on M&A. So just to reiterate the point around M&A because much has been written, I guess, over the last number of weeks about this. We have -- 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. So there is no desperate need for us to do any bolt-on M&A in either U.K. Ireland, Canada or Aviva Investor. So we'll be very selective. There will be a very, very high bar in areas where we think that they might be accretive to the portfolio. In saying that, 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, and we will do those deals, but we're talking about very small transaction amounts there. But there is no gap as I see in the portfolio, as I said here today, I'm very comfortable with as I see it.

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. Thank you to Jason for his long service that's sort of elongated today 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 [indiscernible] or to Colin. Thank you very much, and everyone, have a good morning. And just once again, thank you to Jason.

Thank you, everyone. That does conclude the conference for today. Thank you all for participating. You may all disconnect.