Aviva plc (AV) Earnings Call Transcript & Summary

Good morning, and thank you for standing by. Welcome to Aviva's Q3 2022 Trading Update Analyst Call. During the [Operator Instructions] 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 actually 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 target, 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 4 strategic priorities. They are customer, growth, efficiency and sustainability. And 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 our substantial motor and home insurance products on the major U.K. price comparison website. And I'm particularly proud of the partnerships we've recently announced with Citizens Advice and the Money Advice Trust committing GBP 9 million to support communities across the U.K. On growth, the picture is positive across our insurance, wealth and retirement businesses. And I'm particularly pleased with the performance in Q3 discrete where we've delivered continued momentum in challenging conditions. This has been most notable across our GI businesses, Health & 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 U.K. and Canadian commercial lines, we continue to see excellent volume and rate growth. While in personnel 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 9 months, with a particularly strong performance in Workplace pensions. And 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 advisers 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 BPA 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 9 months. We remain firmly on track to meet our target of GBP 750 million gross and inflation cost savings by 2024. And continuing on this theme, Aviva Investors made good progress on operational improvement with further outsourcing and cost reductions completed in the quarter. Finally, on the subject of sustainability. I am delighted to report that we have been announced as the #1 European financial institution in the new World Benchmarking Alliance's financial system benchmark that launched yesterday at COP27. 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 215%, 35 points above the top end of our target range. Our pro forma debt leverage was 29% and centre liquidity with 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. And our intention is that the capital returns will be sustainable and regular over a number of years. So to summarize, I'm pleased the 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 am 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. But we remain confident in our ability to excel and deliver on our promises for our customers and our investors. And we will excel because we are very well-positioned, our model is resilient and our strategy is delivering. So thank you for listening. I'll now hand over to Charlotte, and she's going to 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 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 -- sorry. Overall, U.K. and Ireland Life, VNB of GBP 466 million was up 46% year-on-year. This was mainly driven by Annuities & Equity Release, which had VNB of GBP 143 million at an attractive VNB margin of 3.3%. Sales for U.K. 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 7 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 & 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 a preferred provider. October year-to-date volumes were higher at GBP 4 billion. The recent market volatility and higher yield seems likely to have further improved the longer-term outlook for Box. 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 to GBP 20 billion of BPA volumes over the next 3 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 9-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 core is a very good 94.3% and has remained stable in Q3. The increase of almost 2 points on 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 U.K., the core increased by just under 1 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 U.K. GWP was up 15% in a favorable rate environment, and 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 core of 93.3% in Canada was up 3 points, also reflecting more normal claims frequency. Turning briefly to Aviva Investors next. External net flows remained positive at GBP 700 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 center liquidity remains strong of 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. And 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 of GBP 1.1 billion at the 9-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 6 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 the same movements as well as the closure of the -- sorry, as well as the acquisition of Succession Wealth and the redemption of Tier 1 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 ratio in Q3, we haven't benefited as much from rising U.K. interest rates as some of you might have been expecting. Importantly though, despite sizable U.K. 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 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 U.K. 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 3 working days after the Mini budget. So between the 23rd and 27th of September. This is more than a 1 in 10-year event in just 3 days. Or put another way, the 2% increase in 10-year rates over Q3 was more than a 1 in 200-year event in just 1 quarter. These material increases in U.K. 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 an helpfully struck right in the middle of this extreme market environment. But regardless, throughout this time and since the group's capital and liquidity has demonstrated very strong resilience, which we view as a positive market validation of our balance sheet positioning. Our published group-wide Solvency II sensitivities are 1-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 U.K., which had a positive impact, that was not the case in our non-U.K. markets. And non-U.K. exposures are around 1/4 of the total. Secondly, our published sensitivities assume that all points of the yield curve moved 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 benefit for us. Finally, interest rate sensitivity is nonlinear. As rate increases become more extreme, the corresponding cover ratio benefit diminishes. And as I said, a quantum of interest rate movements in the short period post the Mini budget was extraordinary. Despite all this, the group's solvency position remains 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 #1 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 3 years, a EUR 1.5 billion of own funds generation by 2024 and GBP 750 million of gross cost reductions by 2024. And with that, I will hand back to the operator, and we'll take some Q&A.

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

Can you first quickly talk about any reserving that you think you have done for high inflation [ over this ] catch-up in your combined ratio? Or is there a risk that this could be an element, that you have to take into account a full year basis? Or do you think actually, you've just been well ahead of the curve there on pricing? That's question one. Question two, you've talked about share buyback plans. Is there any risk at all here of you need to get regulatory approval and there being an issue given the market environment? Just want to sort of strike off the table. And 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 are thinking about what to do with our savings, but you seem to be more positive about the outlook. If you could talk about that, that would be helpful.

Okay. Thanks, Farooq. Maybe Charlotte can pick up the first question, and I'll pick up the second here. Charlotte, on reserving.

Yes. So 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. And you've heard the quote there already, about 15 points to date in motor, 8 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. So we have made appropriate reserving adjustments for that, and we will continue to monitor that as we go forward. But I think you're right, that actually being ahead has meant that we've been going at this well for a while. And I think, as I said, the core outlook for the rest of the year remains consistent with what we said for today.

Okay. Thanks, Charlotte. On the share buyback, Farooq, we really got to look, I think, at the fact, and we are sitting 35 points above the top end of our Solvency II cover ratio. We are -- we sit with GBP 2.5 billion of surplus capital, GBP 1.9 billion of liquidity. And most 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. So we feel in a very strong position as far as that is concerned. And we've been, as Charlotte has said, to do an extraordinary period over the last month or so. On the individual annuity market. So our total individuality sales were down in the period, but this was primarily driven by the lower internal sales from the backlog run-off. And 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 have increased 4% to 5.7% as deals have increased. So for an average customer, that means an extra GBP 850 of extra income per year, which is, of course, fairly significant. And in the short term, market volatility, rising inflation and cost of living crises, it may cause some customers to defer retirement. So the market did shrink in Q2. So I think actually, our performance relative to all of that is actually very strong. Thank you for the question.

Our next question comes from the line of Ashik Mussadi of Morgan Stanley.

Just a couple of questions I have is, so first of all, going back to the solvency ratio, I mean what were -- 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 you -- 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, and I'm just focusing on U.K. interest rates rather than global interest sites. The second question I have is on the P&C premiums. I mean your premiums in third quarter especially in U.K. was pretty strong, 3% up in Personal Lines and 17% in commercial lines. In Commercial Lines, we are seeing hard market everywhere. But personal lines from some of your peers, we have seen that the premiums were down despite the rate increases. So 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? And thirdly, in annuities, I mean, volumes were lower at your end in 9 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 unforeseen -- I mean unprecedented volatility in the bond market?

Okay. Thanks, Ashik. Maybe I'll pick up the second and third question and then come back to Charlotte on the Solvency II ratio. So I mean, firstly, on P&C premiums in the U.K. So we have been able to put through 15 points of new business rate year-to-date, and we will continue to push rate through, so 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. So that's Motor. On Home, we put 8 points of new business rate through. On that together has impacted our sort of new business numbers. Our retention rates are 10 points up in the PCWs, 7 points up in Direct, on Motor; and 12 points up in PCWs in Home and 2 points up in Direct. So I think that we did get ahead of the game on pricing. We have said -- and 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 we think 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 are 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 for somewhere between 8% and 10%, largely driven, we think, by things like new car prices -- or secondhand car prices, which -- in the middle of the year, we're at sort of 28%, 29% at some point and are now down to about 11%. We say that as it is nothing, but obviously, it's still significant. So that's what's going on there. On Commercial Lines, obviously, in the U.K., we've seen good, strong growth across the GCS and the SME portfolio. That is around 13%, about 7% of rate and around 6% of retention and new business. So again, I think as showing discipline in terms of our technical pricing and a very strong rating performance there. So overall, I think we're very comfortable with what we're achieving. And actually, the situation in Canada is very similar. I know you didn't ask about Canada. But in terms of Commercial Lines, the dynamics are very similar in terms of the split of rate and volume, and we put 12 points of breakthrough in auto. On BPA to the 9 months. So I think there's a number of things going on here. we have been very disciplined and focused on trade to deliver the right economics, okay? And 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 1 area. Saying that, I think that the sales of EUR 4 billion to this period is actually a strong performance. And more importantly, as I would 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 in some short-term disruption to the BPA market, and particularly as the liquidity position of some of the schemes may have impacted their ability to transact. And I can't comment about the rest of the market dynamic. I think you probably have 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. So in essence, the size of business that you're writing versus last year will be lower because of that dynamic. But for Aviva, we are committed to the EUR 15 billion to EUR 20 billion of BPA volumes that we set out in the June deep dives. And for us, the 31st of December is pretty much an artificial date. 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.

Yes. So I think I'd start by just, again, repeating that the headline cover ratio is strong at 2.23% and that GBP 2.5 billion above the target 180 ratio. And then I think 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 for the real yield force in October. And ultimately, we are looking at the U.K. rate, as you said. And overall, at these higher rate environment, it's clear that our sensitivities are less than in a lower rate environment. And we, of course, manage the sensitivity of the ratio within an agreed risk tolerance through hedging. And so my sense is if you go back to the sensitivities we published at the end of June, they are an approximation for a very specific parallel shift. At a point in time, I'm using that balance sheet. So if I take that and we won't publish any more sensitivities till the year-end. But what we experienced was very different. But what we experienced in October, I think, is incredibly reassuring. And if we start to see a more normalized pattern, again, I think the hedging and that less sensitivity to the higher rate environment is going to keep us on a continued steady footing.

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

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. And you've been clear that you don't want to return that solvency, so excess solvencies. 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. And my second question is on the margin outlook for annuities. You're at 3.3%, you're seeing 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 within a higher rate environment and with those -- and can those margins be achieved without taking additional levels of risk and perhaps less illiquids in the future?

Okay. Thanks, Blaire. Charlotte, do you want to pick up those?

Yes. So if I start with the solvency ratio, I mean, I think in the period that we've seen through and I've just enjoyed -- sharing with you again. I think that it's kind of too early to make any decisions on what we do with that excess over the GBP 180 million. I mean we are, of course, looking at we manage the capital, if we see a sustained higher interest rate environment and looking at the best ways to manage the position. So it's something that we're actively doing and we always are actively doing. But in terms of any additional payments, it's really too early to say. Not all capital, as we said before, is created equally. And with all of that macro uncertainty out there, I think we just need to pause. But in the background, of course, we're very actively looking at the best ways of managing the position. But 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 ex new lease to be possibly a little bit better than last year. We have had, over the course of the year -- of this year and is repeated at the half year, more of -- more illiquids backing though, so it's more at 60% from 30% and in the corporate it's more like 30% on a much lower last year. And that's contributing to the higher margin. We're also being very disciplined and choosy on the deals that we do. So 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? You said 60% illiquids?

So it's about 60% of illiquids on new business compared to sort of more like 30% last year. And then in the corporate bonds, we're sort of up to 30%, whereas that was a sort of 2-ish percent last year. We're also further progressed, if you remember at this time last year, we had some reinsurance still to place. We're further progressed at this stage than we were. So we'd be kind of being more on the front foot this year, I think, on all of that.

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

Three quick ones from my side. The first on workplace and the other 2 on Box. On the workplace growth, can you tell us where you expect the bulk -- the bulk of the growth to come from? Is it mainly inflation-driven? Or are the other factors we should consider? And then on bulk annuities, you have spoken about the margins. The question is with the increased volumes coming to market, do you expect those to impact margins positively or negatively? And then also, if the volumes are much stronger, would you consider doing more than the 20, if opportunity provides?

Okay. Larissa, did you say there were 3 questions? I only got 2 there.

One on risk drivers; two, on bulk margins; and the third one, why not do more?

Okay. Okay. Okay. Sorry, but I'll take those. So on Workplace growth. So we've seen 11% growth on Workplace, which is brilliant. And obviously, we have 4 million Workplace pension customers, and we've seen an additional 230,000 Workplace pension customers. So we see there as being a real opportunity there. I mean, there's not just an opportunity per se for the same Workplace. But obviously, for succession will stand 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, 1 -- about 1 scheme a day so far this, year. So we're actually winning schemes. But we are also seeing with high employment in the U.K. Obviously, we are benefiting from that in terms of workplace, and we're also benefiting from higher wages. So people having higher salaries and, therefore, that affects the flows. So I think Workplace growth we're very positive about, and we believe that our proposition is incredibly strong. The team is an incredibly strong team, and we're seeing success and 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-end. Can I just restate that we're really not in the market to write things, that we're not going to make the right return on. And 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. And therefore, that capital has competition. And therefore, we will not find something at a loss, particularly, if you think that actually you have that business for a very long time. So we will stay disciplined on saying that, we do believe that the outlook -- our margin is positive, and the outlook on volume is positive with all of the caveats that I said in my last answer. So hopefully, that answered sort of question 2 and question 3. 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 General Insurance? No. We will allocate capital across the business because I genuinely believe that what you've 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.

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

A 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 U.K. 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 want to do weather and I'll pick up the [ household ] one?

Yes. So generally speaking, weather has been pretty good across the portfolio. Obviously, we saw the February storms back in U.K. Yes, February stones in the U.K. that impacted us in Q1. But since then, it's largely been very much in line with sort of general trends. So nothing and 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 strong one. And you can see, if you look in the sort of discrete quarter [indiscernible] a slight elevation in the Canadian core as a result of that. But actually, that's very well-protected by a reinsurance and where our exposure is. So it wasn't that significant. So again, I would say overall, in line with the sort of the long-term averages there.

Across the book, how many points better than your long-term averages are you in weather at 9 months?

About 0.2 favorable.

Andrew, on Motor & Home in terms of retention -- sorry, rate increases on the existing book. So for Motor, it's plus 4, September year-to-date; and the Home, it's flat. And obviously, that takes into account the newer 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 on Motor, on the PCWs and 7 points on Direct; and 12 points up on PCWs in Home and 2 points on Direct.

Our next question comes from the line of Dominic O'Mahony at BNB Paribas Exane.

So 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. If your buyback was taken to say, plus 1, would you just look through that and say we can manage that. 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 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 U.K. general insurance book? And then third question, could you just remind us when the rate environment is much high 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 going to be a material tailwind in full year '23?

Okay, thanks, Tom. Just on the first one around the debt leverage. So the pro forma debt leverage ratio once we've done the next tranche of debt redemption, which we've outlined, we'll take our debt leverage to 29% on a pro forma basis. And we don't feel constrained by that at all in any of the activities that we have planned. So hopefully, that answers that question. Charlotte, do you want to pick up the point on the investment portfolio for GI and the rate environment?

Yes. No, so you're right in your memory that we took steps effectively during COVID to derisk the GI portfolio and have taken steps since to increase a little bit of risk, but it's still incredibly low risk. So 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. So we're sort of -- we're up to about 57% debt securities and equities up to about [ 10% ]. So still very, very modest. I would say that, that we, therefore, see expecting when interest rates higher as well. We, therefore, expect that to give us some improvement in the rate on the investment portfolio. So I guess our reinvestment is probably currently about 2% to 3%. So 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.

And on the rate environment on the institution?

I know on the rate environment, I think you've got to look at the balance. I mean, we're generally growing the business overall. You've got a balance rate and inflation and then a lot of the book that provides a very natural offset. Effectively, we're focused on growing OFG gradually to the GBP 1.5 billion by 2024, and we were at GBP 1.2 billion last year. So I think it's relatively neutral, but actually, the driving of the business is what it's all about.

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

Can you hear me, everyone?

Yes.

Hope everyone as well. Three -- 4 questions, and you can decide, I mean you can answer. Can you just talk about subsidence in the fourth quarter? Can you talk about the impacts of the backlog of court cases for bodily injury in Motor in the U.K.? Could you just give us -- when you talk about the margins, you were talking about bulk annuities and equity release, and then you talking about them together, then you started to talk about Box separately. Could you just strip out equity release and tell us how the margin has developed in the 9 months this year versus 9 months last year? And then 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 leverages in the staff, corporate pension scheme?

Okay. Thank you, Greg. So I'll pick up the RM and then I'll come back to Charlotte to answer the other 3 questions. On equity release, we don't actually break out the margin. But because this is a trading scope remember, Q3, even though it doesn't -- I guess it doesn't always feel like that because we're giving quite a lot of information. But actually, we have seen equity release sales, as Charlotte mentioned, at 30% year-to-date. And 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. So I think good pipeline. But 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. And we're working hard, I guess, to make sure that customers still get value for money, but they're also still allowed to and can release equity value from their homes, but we've got to exercise caution to make sure that the product continues to deliver good outcomes for customers. So I think that volumes have been good. We've not commented on the margin at this stage and 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 [indiscernible]?

Sorry, 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.

It's up.

It's up. Okay.

Greig, so on subsidence, we have said in the past that for our U.K. general insurance business, subsidence event would come kind of anywhere up to about EUR 20 million so perfectly manageable within the confines of our U.K. GI results. What we have seen is some elevation in the subsidence claims this year. And so we booked around EUR 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 U.K., I mean, there's nothing really new to report on that at this point. They just take the time to progress through the courts. There's no particular thing to mention. And then on the LDI on the staff schemes, I think important to bear in mind that the staff schemes are very well-funded and very well -- very strong that they have it's not very leveraged and the asset structure is segregated rather than pooled, which has been very helpful in the market turbulence. And they have effectively been able to manage the collateral calls that they come up against, that come from the derivatives that they do have on the books. But 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 the scheme's trustees and managing the position alongside their investment adviser going forward.

Greig, I'm just going to 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 so when you're....

Yes, I was just trying to -- equity release.

Individual annuity margin, up; equity release margin, under slight pressure; BPA margin, up; outlook for the year on annuity and equity release, positive. Okay. Sorry, just to clarify, it's always better to do that in the moment. Okay. Thank you for that.

Our next question comes from the line of [ Abbey Tusane ] at Panmure Gordon.

Just one question remaining for 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 of the direct sense from you on where the higher interest rates are good or bad for bulk annuities. So I'm really thinking here on demand side on margins and split across new business and back book? And then just sort of a slight follow-up on that. Is inflation positive or negative for BPAs and 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 buyout. So we believe that, that is good for the volume. And obviously, then we can invest the assets and take advantage of that environment, too. So we do believe that, that is the case. However, I would just go back to see the complexity of BPA is always there. And if you think about the interest rates will reduce the size of the liabilities. So in terms of the size of the market, the market may look smaller in real terms, in pound note terms, where actually the number of themes transacting may be more, we feel, because we feel trustees we want to take advantage of the well-funded nature of the themes. On saying that, we also believe that they feel that following the recent LDI issue, 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?

Yes, 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. The top left-hand side talks about U.K. Life in generally more generally, I mean, effectively well matched on inflation due to the Linked Gilts. That's really the best way of thinking about it.

The next question comes from the line of Steven Haywood at HSBC.

I've got 3 questions and 1 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? And then my 3 questions are on the U.K. claims inflation and the 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? And then finally on service capital. What other opportunities could you use service capital for? Do you have a preference share buyback or M&A or more BPA? If you can tell us 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?

Right. Okay. I'll go at #1 and 3 of that, and I'll pass to Charlotte for -- sorry, 1 and 4 and pass to Charlotte on 2 and 3. So let's start on capital. I'm not going to break down the IRRs on the buyback versus the BPA. But how we think about capital and particularly, the excess capital in the business is we have, I guess, 3 uses for the capital. Firstly, can we -- do we want to reinvest it into the business for growth opportunities or for projects that can deliver more growth or efficiency initiatives? And in March, we outlined GBP 500 million of additional investment into the business, GBP 300 million to increase growth and GBP 200 million to improve efficiency. And that is on top of already between GBP 300 million or GBP 400 million each year, which goes into the business to do the normal course of project. So I think the business has plenty of capital to invest in growth initiatives and to allow the business to grow. And 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. And 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 to close -- sort of to put us in the #1 position, as we've now been able to do with our high net worth business with the acquisition of Azur. And these are -- this reinvestment and bolt-on M&A, we're in the fortunate position that, that does not preclude us from also returning surplus capital. But on capital return, the way that we look at this is that this will be regular and it will be sustainable. And as Charlotte said, not all capital is created equally. I think we also said that back in August. That we would look to return the capital, which we are generating through the course of doing business rather than that, which has been provided by market movements. Just to clarify the point on rating increase. I think I might have said it a couple of times. But just to be clear, in new business rating increase, we put 15 points, 15 in motor this year and the renewal, 4 points. And in Home, we on new business, we put 8 points and Renewal is flat. So that covers the entire book of business. Now of course, that would be blended and cost of the various parts of the business, but that is in general, what the number is. Do we have an answer on...

Yes. So on U.K., claims inflation in Motor. I mean, I'm not going to give you a specific breakdown between how that's driven by the repairs and the cost versus bodily injury. But the bigger challenges on inflation are coming from supply chain challenges and 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. So whether that's the cost of windscreens 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 the other dimensions that go into the cost of a claim. And that's what we're looking at. I think it's really important to remember that with our motor repair network, which includes Solace, that covers around 80% of our Motor claims. And so we would expect that we have got a very good grip on what -- how that is affecting our claims cost and, therefore, how much of that we can push through in rates. And I think that gives us at 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?

Yes. Just being more specific on the double digit given the number rather than just saying double digit would be helpful.

On double digit on the pricing...

Inflation. Damage inflation in the slides.

Yes, 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. And just going back to the... .

Sorry. If you go to Slide 12, you can see that. Is that where you're picking it up? I'm not going to give you any more disclosure that's written in that slide. Double digit [indiscernible]...

Okay. And on the renewal versus new business, can you kind of a split? Is it 80% renewal, 20% new business that you're seeing, so you can get an idea of the entire book from both Motor and Property.

I'm not sure that we can do that, actually. We'll have a think about that. But I mean, I think we know what the retention is. I've given you the retention rate. So 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. And on Home, it's 84% PCWs and 87% Direct. A lot of different numbers there. That's great. .

Our next question comes from the line of Nasib Ahmed at UBS.

So I've got 2 questions here. One, similar to Tom's question on capital generation. So 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 imports. Is that correct? And then I guess, if you kind of hedge at these levels, you would have to kind of bring down that forward-looking guidance as well, right on the capital generation. And that's hedging for interest rates. And second question on the deal with Lemonade. If you can just talk about the structure and what it brings to Aviva. And then final question, slightly going off peace here. But how are you tracking against your regulatory Tier 2 and Tier 3 on 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, I think with profits, you're kind of at that level already. And how are you thinking about that?

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.

Yes. Right, right. Okay. Thank you. I'll pick that up and I'll get Charlotte to pick up the first and the third question. So 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 wouldn't expect me to do that. But we've always said that we're very interested in working with Insurtech as opposed to trying to compete with them. We have a very strong customer base, and we have a strong credibility and a strong balance sheet and we appreciate the opportunity to work with Insurtech or working with different technology and different ways of doing things. So the deal with Lemonade is very exciting, and we'll see how that progresses. On the other 2 questions, please?

Yes. So I think on the OFG, 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 Tiering II constraint -- sorry, Solvency II tiering constraints. It wasn't an issue for us in and the headroom will have now increased since the rates have fallen, which then drives the SCR increasing since Q3. So 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.

And our next question comes from the line of Alan Devlin at Goldman Sachs.

I've got a couple of questions on investments. The first one was a follow-up on the answer you gave to Blair. And it sounds like you're making a material shift in your asset allocation to you, to your bulk annuity new business, particularly in higher corporate credits and illiquids. Just be interested in more details on what you're doing there. And also, is there an opportunity on the back book given the movement in resin spreads to potentially capture more yield and drive management actions? And then a second, probably related questions actually on the kind of the outlook and particularly on Page 11 of your presentation on -- given we are going into -- with the bank of [ bigger ] things could be the longest recession in history and the unprecedented cost of living squeeze. And when you look at your investment portfolio, what parts of it do you -- are you concerned about? And a lot of the [indiscernible] 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 any part of your other asset portfolio?

Yes. So thanks for that, Alan. I mean, I think on the asset allocation to the books, 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, the sort of 8% of the portfolio, it largely fixed duration contracts, which means, therefore, very limited refinancing risk, very low average LTVs of about 45%. All extremely high-quality, no balances in arrears. So obviously, we monitor that, particularly looking at the outlook for property prices, but we think we're incredibly well-positioned.

And we have one further question in the queue, that's from the line of Fahad Changazi of Mediobanca.

Just a loose ends from my end. Could you remind us again of your house price assumption in Solvency II and your approach to updating the assumption of full year results in terms of internal and external estimates.

So we look at all of those assumptions really as we get to II more to the year-end. We've had a little bit of a look and with sort of minor tweak in a sort of downward way, and we'll look again as we close the books for year-end.

Okay. Fair enough.

Okay. Thanks very much, everyone. So 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 -- your 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.

That concludes the conference. Thank you, all, very much for attending. You may now disconnect.