Aviva plc (AV) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Aviva Q1 Analyst Call. I will now hand over to Aviva's Group CEO, Amanda Blanc.

Good morning, everyone, and welcome to Aviva's First Quarter Update. I'm joined by Charlotte, as usual. So I'll give a brief overview, and then hand over to her for some more details before we take your questions at the end. So I think it's been another great quarter for Aviva, making really great progress. We've demonstrated once again that our strategy and the diversified business model that we have built is the right one. We posted excellent trading results this morning, delivering attractive growth across key product lines in insurance, wealth and retirement. Our capital position remains strong at 196%, costs continue to fall and our GBP 300 million share buyback is nearing completion. We remain confident in our targets. We are confident that we will beat our cash remittance and OFG targets, and we're on track to hit our cost savings target. This will support our growing dividend, and we anticipate in supplementing this further with regular and sustainable capital returns in the future. We are fully focused on our 4 strategic priorities, and we've continued to make progress against each of them. Putting customers first is central to our strategy, and we're continuing to deliver for them. This includes launching a new restricted advice offering in succession Wealth and a new Digital Direct product in Canada through our RBC partnership. And we've been supporting customers in the U.K. through short-term financial difficulties while ensuring their coverage continues. On growth, it's been another excellent quarter for Aviva. We've delivered 11% growth in General Insurance with disciplined pricing. Health & Protection also grew by 11% as strong customer demand continues. Wealth net flows remain resilient at 6% of opening AUM with a particularly good performance in Workplace. In Retirement, BPA volumes were up in the quarter as we wrote the GBP 850 million Arcadia scheme. And as of today, we've written GBP 2.4 billion of BPA volumes year-to-date. And Aviva Investors delivered positive external net flows, a good result in a challenging macro condition. On efficiency, costs have come down a further 1% in the quarter as we continue to simplify the business and impressive performance in an inflationary environment. And finally, on sustainability, we're continuing to make a real contribution to communities across the U.K. We recently announced a GBP 100 million investment in the development of affordable accommodation and university facilities. And our partnership with the Money Advice Trust is helping small businesses significantly reduce their debt. So to summarize, we have continued to show very strong, consistent progress throughout the business. Our results today demonstrate once again the value in our diversified model. We have grown across our key product lines, and the outlook is positive. Thank you. And with that, I'll hand over to Charlotte.

Thanks, Amanda, and good morning, everyone. It's great to be here talking about another really strong set of results. I'm pleased to say that the trading momentum across the group remains very positive. Our capital position is extremely healthy at 196%, and our asset portfolio continues to perform well in a volatile market. As Amanda mentioned, we continue to see costs come down as we maintain our focus on efficiency levers. So I'll start with our business performance highlights before covering the group topics. In Protection & Health, sales measured on an APE basis were up 11%. We saw growth of 16% in Individual Protection with the highest level of monthly new applications in March, whilst group protection was down, owing to a particularly strong prior year comparator. In Health, sales were excellent. APE up 25%. Demand for private medical insurance remains high, particularly from large corporates as we continue to strengthen our offering. VNB for Protection & Health was up 6%, driven by volume growth. Wealth net flows of GBP 2.3 billion represent a resilient 6% of opening AUM. They are 15% lower than last year as market volatility continues to impact investment activity. We won an impressive 134 new Workplace schemes and saw high retention in the period, which alongside the impact of wage inflation, contributed to an excellent 25% growth in net flows. We are the #1 player in this space, and the business continues to go from strength to strength. In Platform, as you would expect, the trends seen in the second half of '22 continued. Net flows were 53% lower as cost of living pressures dampened investment and switching activity. Importantly, though, we saw a surge in late March ahead of the tax year-end, and we've seen an increase in the number of accounts with more than GBP 1 million in savings. We have a really attractive proposition that is admired by advisers, and we are well positioned to benefit when the market returns. In the Retirement business, BPA volumes in Q1 were up 26% to GBP 1.1 billion and included an GBP 850 million deal with Arcadia. Today, our year-to-date volumes of GBP 2.4 billion, including a GBP 900 million transaction with Thomas Cook announced earlier this month. The pipeline remains positive, and we are confident in our ambitions. The higher interest rate environment increased consumer demand for individual annuities, up an excellent 47%, but reduced demand for equity release. On VNB, in Q1, we have refined the methodology for the annuity business. We previously used actual asset mix and reinsurance for the calculation. We now apply the target asset mix and reinsurance cover. This change should reduce the volatility in quarterly results and better reflect the trading performance of the business. The prior year comparative has been restated in line with this new methodology. Across annuities and equity release, VNB was up 73% to GBP 29 million, reflecting the higher volumes and a better target asset allocation. Moving now to General Insurance, where the business has delivered disciplined and profitable growth. Premiums grew 11% at constant currency. This included double-digit growth in both Commercial and Personal Lines, as we remain vigilant and continue to price appropriately in the high inflation environment. Group COR was 95.4%, 0.3 points lower than last year. This is presented on an undiscounted IFRS 17 basis, which is the basis on which we manage the business. It's a good result. And clearly, we continue to look for improvements as we move forward towards our ambition of below 94% over time. Now including the impact of discounting, the COR was 91.8%. In the U.K., premiums were up a pleasing 13%. Commercial Lines grew 15% with strong new business and retention, supported by the continued favorable rate environment. Personal Line premiums were up 12%, reflecting actions to rate ahead of inflation and growth in the new Aviva Zero proposition and in high net worth. And you'll recall from the recent Personal Lines in focus session that these are targeted growth areas. And we signed a 5-year distribution agreement with Nationwide Building Society to provide travel insurance from May next year, which will take us to #1 in the market. During the first quarter, we increased new business rates by 12% in Motor and 8% in Home, and we have been putting through further rate increases in Q2, with more still to come as we maintain pricing discipline. A 0.5 point improvement in the COR to 98.4% reflects favorable weather, partly offset by some adverse PYD. This is primarily in Commercial Lines and relates to a small number of complex cases. In Canada, premiums were up 9% at constant currency. Top line trends were similar to those seen in the U.K. with Commercial Line premiums up 13% and Personal Lines 6%. COR was an excellent 92.4%. And although higher than last year, this reflects claims continuing to return to more normal levels, which more than offset lower CAT activity this year. Turning to Aviva Investors, where external net flows remain positive, a good result in a challenging market. Total net outflows of GBP 1 billion reflect expected outflows from the Heritage business and strategic actions from clients previously part of the Aviva Group. Assets under management grew by 2%, primarily driven by positive market movements, which more than offset net outflows. The business continues to focus on improving efficiency through further rationalizing the product portfolio and streamlining the operating model. So that covers the business unit highlights, and I'll now move on to the group metrics, starting with costs. We continue to make excellent progress despite the business growth and inflationary backdrop. Overall, group costs are down another 1% as we make further operational savings through focus on cost initiatives and simplification. Our cash and capital positions remain strong and resilient. On capital, the group Solvency II cover ratio reduced by 16 points during the quarter to 196%. The final dividend and share buyback account for 7 points and 4 points, respectively. And in February, we made the pension scheme payment as previously committed, which reduced the cover ratio by a further point. The remaining 4 points comprised of operating capital generated, which is more than offset by the interest -- the impact of interest rate reductions and lower property prices as well as a timing mismatch of reinsurance due to be placed for BPAs written in Q1. The pro forma cover ratio is 193% after allowing for the redemption of the Tier 2 notes that we announced last week. Liquidity remains healthy and largely unchanged from full year at GBP 2.1 billion at the end of April. And our GBP 300 million share buyback is nearing completion. Finally, our high-quality shareholder asset portfolio remains defensively positioned and continues to perform well. We've published some supplementary slides today providing the usual update on our portfolio, so I won't go into any further detail at this point. So to sum up, we've had another strong quarter of delivery and the outlook for the business remains really positive. We are on track to meet or exceed our key targets and the positive outlook for cash generation supports our growing dividend, and we anticipate further regular and sustainable returns of capital to shareholders in the future. That brings me to the end of my review. So with that, I'll hand back to the operator to manage Q&A.

[Operator Instructions] And with that, we have our first question. It's from Thomas Bateman at Berenberg.

Just on asset risk. I guess, we've seen a little bit of a headwind on solvency ratio. Can you give us what the impact from weaker property prices and interest rates were in solvency and potentially where you see any further risks. And second question on bulk margins. It's always a little bit difficult to see the underlying direction of margins on BPAs from the reported figures. Could you give us a feel for the pricing dynamics and margins in bulks? And finally, just on well flows. Although a bit weak, still positive. Is the acquisition of Succession Wealth having impact yet on those net flows?

Okay, Thomas, thank you for those questions. So maybe Charlotte can pick up the first and second question, and I'll pick up one -- the first and second question and I'll pick up the question around Succession Wealth. So shall I start, Charlotte, while I give you a chance to pull together some of the other stuff. So look, I think that we're really pleased, obviously, with the way that the integration with Succession Wealth is going. We've launched the restricted advice proposition and Succession Wealth, they've been able to undertake a couple of M&A, adding 22 advisers with the G&E Wealth acquisition. It's GBP 800 million of assets under advice, and a recent acquisition in Scotland of Spence & Spence at GBP 170 million of assets under advice. So I think overall, you're not seeing those numbers come through yet in the Wealth business. We would expect that to be -- to start to come through during next year. But I think we have actually moved sort of internally very fast to enhance the proposition for our customers. So a better service, a better platform, better solutions, which are being provided also by Aviva Investors, and those are being rolled out to the retail customers. So we're very positive about it. And we will do a deep dive in the fourth quarter, probably in October, to give some more detail around the integrated wealth proposition, so how Succession Wealth fits with the rest of the business. So I think very early days, clearly, but making a very positive difference so far. Charlotte?

Yes. So on the solvency effect of the asset risk, so I would say that in the period, we took a couple of points in relation to property. And on interest rate movements, again, we saw 30-point drop in the U.K. 10-year rate. And again, that's a couple of points. What we've seen in rates since then is it has largely moved back. So the outlook since Q1 on rates has come back. I mean, overall, the property -- our exposure to -- the asset portfolio is incredibly high quality. And of course, we have some property risks through the commercial real estate, but it's all very strong. So then on BPA margins, look, I think here, we've seen -- it continues to be a competitive market. We've seen some improvement in our margin year-on-year compared to the first quarter. Some of that relates to the target asset mix. So in particular, we've got more in corporates versus gilts than we had in the target profile this time last year. It does remain a competitive market for all the volume discussions. People are looking to get those deals away. And so -- but a positive movement. Thanks, Thomas.

Our next question is from Ashik Musadi from Morgan Stanley.

Just a couple of questions I have. One is on combined ratio. So now what we noticed is your combined ratio guidance is about 94%. I guess this is not just a specific this year guidance, but this is a generic guidance, whereas your printed number for first quarter is 95.5%. So how would you say that this year is going to progress from 95.5%? I mean are we progressing towards 94% or you think the first quarter is a good reflection because inflation continued to remain high and the current print on U.K. inflation is still again very high? So any color on where this 95.5% is trending for the year would be helpful and the dynamics between Canada and U.K. And second question is on P&C. I mean, clearly, premiums are -- were very strong, like double-digit across Personal Lines, Commercial Lines as well as within geography as well. So P&C premiums are very strong. But is it possible to get a bit of color about the rate and volume effect in U.K. and in Canada? So that would be very helpful. And a small one on platform. I mean platform flows were down 50%, not a surprise given the markets. But any color on what are you seeing right now?

Okay, Ashik. So Charlotte, do you want to pick up 1 and 2? I'll pick up the point on the platform flows?

Yes, absolutely. So as you say, 95.4% for the group COR at Q1 compared to 95.7%. What we see across the piece is a continued return to frequency normality. So that's the same in the U.K. It's the same in Canada. We took -- we talked in March about the reinsurance renewals that came in at the beginning of the year with pricing for that takes a little bit of time to earn through. But again, that will be a positive trajectory as that does. And we're continuing to rate ahead of inflation, which is also continuing to drive through. So as you've seen this time, Canada, a really healthy 92.4%. So ahead of that 94% long-term objective. U.K. a bit behind, but improved year-on-year. So it's a longer term. It's an over time overall objective to get to sub-94. I think in terms of rating, and your question was across the piece, wasn't it? It was Canada and the U.K.? So if I take broadly across our portfolio, it's 50-50 PL and CL. If I take it sort of area by area, in U.K., which is -- sorry, sorry 60. Yes. Okay. So if I take Personal Lines in the U.K., here, we can see really good pricing that we put through ahead of inflation. So if I take PL Motor rates up by about 12 points, Home by about 8, we were seeing inflation a little lower than that. Essentially, for the U.K., it's about 60% driven by rate and 40% driven by volume and the vol in PL. And the volume there is in, as I said in the prepared remarks, it relates to the products where we're really looking for growth, so the high net wealth and the new other new propositions. In U.K. Commercial Lines, it's about 50-50 rates and volume. And then in Canada, it's a similar sort of picture. Okay. And on the platform flows. So here, obviously, what you've got is a 2-side to the wealth story. So Workplace is obviously very strong. We're the #1 player, and we've obviously got, even though we say to myself an amazing proposition. So the progress has been strong. And what Workplace is experiencing is higher increments and new business volumes, and we expect that new business pipeline to grow into 2024. So very, very strong in terms of performance and outlook. And I think on the platform side, clearly, it's been more challenges with the advice business impacted by cost of living increases and subdued new business activity. And I think you've seen that from sort of across the market. I don't think our performance is vastly different there. Also, it's set against a particularly strong Q1 2022. So we are seeing consumer behavior so much shift as they sort of being a little bit more cautious, I think, in thinking about the cost of living crisis. On saying that, we definitely saw a good performance towards the back end of the quarter 1 as the tax year-end came in. And we've seen a strong performance in that end of that quarter starting into April. But we're very conscious of the external environment. I think we would have to be -- we have to see an improvement in the external environment, I think, for the adviser platforms to increase significantly. But this is where the benefit of having a Workplace business really pays off.

Our next question is from Riya Shah from Deutsche Bank.

Two questions from me. So the overall VNB margin, now that you're accounted for it on your target asset mix. Is that the right margin to look at for the full year as well? Is that the margin for the last quarter a good guide for 2023? And on the second question, in the statement, you talked about continuing the opportunities for investments. Could you just outline a bit more around that? Are you looking at more bolt-ons where there are gaps or organic improvements in the business?

Okay. Charlotte, do you want to pick up the first one, I'll pick up the second one?

Yes. So we use the target approach for both the asset mix and the reinsurance. It means that there's sort of no timing consequences if we, for instance, place reinsurance after the quarter end, but we've done the transaction before, which is the example this time. So each quarter, we will effectively bring the things together so that you don't get that timing mismatch. So that's what we will do each quarter. I think at the end of the year, again, it's a similar sort of consequence. If we've got something straddle in the year, we'd need to make sure it was appropriate to include it within this year. But essentially, that's the approach that we're taking going forward so that you get the mass match. And then if I look at it, how it's gone from year-on-year, we -- last year, overall, we exceeded our sort of target. So in terms of asset mix, we were richer in terms of the illiquids and as we progress through the year, we moved more to the corporates and away from the gilts. So the strong margin that you saw for last year, was a reflection of how we achieved. And we went into this year with some assets in the warehouse. So we were very quickly able to get to that. The target versus actually is very close for the asset mix as we turned into the transactions we've done this quarter. And this time last year, for instance, the Q1 margin was relatively low in terms of the target. But later, we improved it in what we're actually able to do. So I think you've always got to look at those dimensions, but last year was incredibly strong, which we wouldn't expect to necessarily repeat, but we are hitting the target levels that we've set, and that's what you can see in today's margin.

And on your second question around opportunities for investment, I mean, clearly, we're in the great position that we have a diversified business where we can allocate capital accordingly where we think we can make a great return and there are plenty of opportunities for investment. So obviously, into bulks, and we've already spoken about that. But also, if we look at the wealth side, there's opportunity to enhance our Master Trust proposition, which we've done. We won Workplace schemes. So clearly, that is an investment that the business is putting into what we see as a key future growth engine. There's a direct wealth opportunity that we're looking at future investment into that. The health business, the growth doesn't come without investment, both in terms of whether that's marketing spend, operational spend, getting the supply chain in place. Charlotte talked about the nationwide deal. I mean, that puts us as #1 into travel. So in the last 3 years, effectively, what we've done is given ourselves a #1 position in both high net worth and in travel. I think that is us investing in the business and us giving ourselves a really strong market position in Canada, in Digital Direct and in simplification of the business to make ourselves more efficient. So there is plenty of opportunity for us invest. And I think we feel that, that investment is actually coming through in these results, as you've seen some strong growth in the business and we see those opportunities continuing. So we're very optimistic about the opportunity for growth in the business. And therefore, we'll be able to allocate capital appropriately.

Our next question is from Farooq Hanif from JPMorgan.

Just going back to the combined ratio, could you set out the net impact of better weather versus additional reserving overall? So if you didn't -- if you had weather in line and PYD as 0, what would that do to the combined ratio just so we can get a sense of the net impact of that. Secondly, you still had some negative strategic actions in asset management from, I guess, disposed businesses. What more do you expect? And lastly, when do we expect -- when should we expect the next decision on level of buyback or capital return? Is that full year '23 results decision?

Okay. Charlotte, you want to take the first one, I'll take the second 2?

Yes. So look, on combined, we don't provide that split. At this point, it's a trading update. You'll see all of that at the half year, which is a more sensible time to see it because you've got a full 6 months of performance. So we're not providing that today.

So on the strategic asset -- sorry, actions in Aviva Investors. So we would expect, I think, see some continuation of the corporate activity flow through as a small amount in the second half of -- in the second quarter of Q1 2023. So I think you will expect to see that. And what's positive about the Aviva Investors performance is the external flows being positive in the first quarter, which I think set against what is clearly a challenging backdrop. We see that as a good indicator of what is the art of the possible. And I think also the strong cost outperformance in the business puts them in a strong position as we look forward. In terms of the buyback and when we'll talk next about the regular and sustained. I'm surprised it took us until this time to get to that question. But it's a good question, and thank you for it. Obviously, we only made the last announcement sort of 6 weeks go. I think that we said at that point that it would be something that we would consider with full year results. I would -- I don't expect -- that hasn't really changed, Farooq. But clearly, we are sitting in with a strong capital position. And I think the investment that I just talked about in the business is also paying off. So yes, regular and sustainable returns of capital, but also there will be investment into the business.

Our next question is from Andrew Sinclair from the Bank of America.

Three for me, please. First just on the 134 Workplace new scheme wins. Just wondering if you could give us any color on size of those and where we'd expect them to be funding? Second was on Succession. You mentioned some M&A, but there's also been some headlines recently about attrition within Succession, I guess, all of that would naturally be expected after Succession. But just really wondered if you can give us an update on head count today versus when it was acquired and trajectory for growth was in Succession. And third was just on Health. Really, really good quarter of sales. Anything one-off in the volumes there and how we should think about trajectory going forward?