09 November 2022 (London, UK) - To read this update in full, click here.
Continued positive momentum in Q3 across our diversified business model
Strong capital and liquidity positions despite market volatility
Dividend guidance and outlook for capital returns unchanged
Amanda Blanc, Group Chief Executive Officer, said:
“Trading is positive and our performance is consistently strong. We have had a good nine months due to our market leading positions, our customer focus and the clear benefits of Aviva’s diversified business across insurance, wealth and retirement.
“Our customers have continued to save for their future and protect what is valuable to them. Flows in our Wealth business were encouraging and general insurance volumes continue to grow, especially in commercial lines. Profitability also remains robust across both life and general insurance.
“Aviva’s capital and liquidity position is strong and our high quality asset portfolio has performed well during the recent period of extreme market volatility.
“We remain confident in the outlook for Aviva. We are on track to deliver our financial targets and trading momentum is building. Our dividend guidance remains unchanged and, as previously announced, we anticipate commencing additional returns of capital to shareholders with our 2022 full year results.”
Continued strong trading momentum driven by our diversified business model
- UK&I Life value of new business (VNB) £466m, up 46%, and VNB margin of 1.9% (9M21: 1.3%), driven by higher VNB in Annuities & Equity Release of £143m (9M21: £16m).
- Continued good sales2 growth of 3% in Wealth and 4% in Protection & Health were offset by lower Bulk Purchase Annuity (BPA) volumes as we remain selective and disciplined on price. Overall UK&I Life sales2 of £24.9bn were down 1%.
- Strong net flows in Workplace of £4.1bn, up 11%. Overall Wealth net flows were a resilient 6%1 of opening AuM at £7.0bn, but down 4% versus 9M21 due to the challenging environment for investment activity on our Platform business.
- Acquisition of Succession Wealth completed in August. Succession Wealth advisers can now access Aviva's platform and are already benefiting from its competitive offering and outstanding service. As a result, they can also access Aviva's multi-asset funds.
- General Insurance gross written premiums (GWP) up 10% (7% at constant currency) to £7.2bn. UK GWP up 7% to £3.9bn and Canada GWP up 8% at constant currency to £3.0bn.
- GI combined operating ratio (COR) remains strong at 94.3% (9M21: 92.4%) and reflects more normal claims frequency versus the same period last year. We continue to maintain a disciplined response to claims inflation.
Continued focus on cost efficiency
- Baseline controllable costs3 down 2% year-on-year to £2bn, reflecting continued focus on efficiency as we continue to make further operational savings through cost initiatives and ongoing simplification of the business.
- On track to deliver savings target of £750m (gross of inflation) by end of 2024 relative to our 2018 baseline.
Capital position remains well above top-end of our target range
- Estimated Solvency II shareholder cover ratio of 223% (HY22: 234%) was down 11pp during Q3, mainly driven by operating capital generation and net positive market movements more than offset by the interim dividend, £500m redemption of Restricted Tier 1 debt, and the completion of the Succession Wealth acquisition.
- Estimated Solvency II cover ratio pro forma of 215% (HY22: 213%) after planned £500m further debt reduction and pension scheme payment, is 35 points above the top-end of our target range.
- Surplus capital above a 180% cover ratio increased during Q3 from £2.3bn to £2.5bn on a pro forma basis.
- Following the 'mini-budget' at the end of Q3, the UK experienced very high levels of market volatility. The Group’s capital and liquidity demonstrated very strong resilience during this period.
- The Group's Solvency II position remains very strong, and we estimate only a minimal impact to the cover ratio from the yield falls in October.
- The impact of the extreme market volatility in Q3 on our Solvency II cover ratio was not as positive as implied by our published sensitivities. This is because the sensitivities are one dimensional in nature (e.g. they assume parallel yield curve shifts, and they apply equally across all geographies) and could not fully capture the complex factors and exceptionally rapid movements in this period.
- Solvency II debt leverage ratio of 31% at Q322 (HY22: 30%), 29% pro forma for planned further debt reduction and pension scheme payment.
- In line with our Interim Results announcement in August, we anticipate commencing a new share buyback programme with our 2022 full year results, subject to market conditions and regulatory approval.
- Assuming a new buyback is agreed, its size will be determined by the Board at year end and will take account of the financial position at that time, as well as both the drivers of the capital surplus (including the impact of market movements) and our preference to return surplus capital regularly and sustainably.
Strong centre liquidity
- Centre liquidity (Oct 22) remains strong at £1.9bn (Jul 22: £2.7bn), with the reduction since July driven mainly by the interim dividend payment, £500m redemption of Restricted Tier 1 debt and completion of the Succession Wealth acquisition, partly offset by cash remittances to the centre during the period.
- In keeping with similar businesses in the sector, the Group uses a variety of derivative financial instruments. Objectives include managing exposure to market, foreign exchange, and/or interest rate risk, and also the matching of cashflows in its annuity business.
- Following the sharp and rapid rise in interest rates at the end of Q3 the value of these instruments moved significantly. This required sizeable collateral flows which we were able to routinely meet through our standard daily liquidity management procedures. Aviva has the ability to meet collateral calls through a variety of different types of assets.
- We regularly monitor and stress our capital and liquidity requirements to a 1 in 200 stress level and hold considerable buffers over these prudent requirements.
- The Group does not have an offering in the Liability Driven Investment (LDI) market, other than for the Aviva staff pension schemes, and therefore has no external exposures in this regard.
Shareholder asset portfolio remains well positioned
- Aviva’s high quality shareholder asset portfolio of £75bn at Q322 continues to perform well and is defensively positioned.
- Shareholder asset exposure to equities, emerging market sovereigns, and European peripherals is low.
- Corporate bonds represent £19.5bn or 26% of the portfolio. Of this 86% is externally rated investment grade and 14% internally rated. Aviva has a long history in private debt, with a robust internal rating model, and these internally rated assets are secured loans with an average rating of ‘single A’ quality.
- The corporate bond portfolio continues to perform well with <£150m downgraded to a lower letter during the first nine months of 2022, and no corporate bond downgrades below investment grade.
- Our commercial mortgage portfolio of £5.9bn comprises largely long-duration fixed rate contracts with low average loan-to-value (LTV) ratios of approximately 45%.
- Our securitised mortgage loans and equity release portfolio of £9.0bn is mostly internally securitised with low average LTVs of approximately 25%.
- Given the challenging economic backdrop and market volatility, our strong performance over the first nine months together with our diversified product set further reinforces our confidence in the prospects, financial targets and outlook for the Group.
- Our capital and liquidity positions have been tested by recent market conditions and have been shown to be robust and resilient. We continue to monitor exposures carefully but we believe our capital strength will remain a competitive advantage.
- Our dividend guidance4 of c.£870m (c.31.0p) for 2022 and c.£915m (c.32.5p) for 2023, together with our intention to return further capital to shareholders in 2023 are unchanged.
- Across our Workplace, Health and Group Protection businesses we expect a continuation of the strong Q3 YTD trends into the fourth quarter.
- We will maintain a disciplined approach in a competitive market for Bulk Purchase Annuities. The longer term outlook for BPAs remains very positive, and higher interest rates mean that we now expect more schemes to de-risk over the coming years, albeit with reduced transfer values of scheme liabilities. We remain committed to our target of £15-20bn of BPA volumes over 2022-24.
- In General Insurance we expect the rating environment to remain favourable in commercial lines, while in personal lines we will continue to price appropriately for claims inflation. We expect a full year COR that is broadly consistent with Q3 YTD performance, subject to normal weather conditions in Q4.
1 Net flows annualised as a percentage of opening assets under management
2 References to sales represent present value of new business premiums (PVNBP) which is an Alternative Performance Measure (APM). Further information can be found in the 'Other information' section of our Half Year 2022 Report.
3 Baseline controllable costs exclude strategic investment, cost reduction implementation, IFRS 17 and other costs not included in the 2018 baseline.
4 The Board has not approved or made any decision to pay any dividend in respect of any future period