Aviva's CEO Discusses Q1 2013 Results - Earnings Call Transcript

May.16.13 | About: Aviva plc (AV)

Aviva (NYSE:AV)

Q1 2013 Interim Management Statement Call

May 16, 2013 4:30 am ET

Executives

Mark Andrew Wilson - Group Chief Executive Officer and Executive Director

Jason Windsor - Chief Strategy and Development Officer

Maurice Tulloch - Chief Executive Officer and President

Patrick C. Regan - Chief Financial Officer, Executive Director, Chairman of Disclosure Committee and Chairman of Aviva Investors

Robin Spencer - Chief Executive of UK & Ireland General Insurance

David Barral - Chief Executive Officer of UK & Ireland Life Insurance

Analysts

James Pearce - UBS Investment Bank, Research Division

Blair Stewart - BofA Merrill Lynch, Research Division

Sean Darby - Nomura Securities Co. Ltd., Research Division

Abid Hussain - Societe Generale Cross Asset Research

Kevin Ryan - Investec Securities (NASDAQ:UK), Research Division

Christopher J. Esson - Crédit Suisse AG, Research Division

Andrew Hughes - Exane BNP Paribas, Research Division

Oliver Steel - Deutsche Bank AG, Research Division

Marcus Barnard - Oriel Securities Ltd., Research Division

Paul De'Ath - RBC Capital Markets, LLC, Research Division

Operator

Good day, and welcome to the 2013 Q1 IMS teleconference call. Today's conference is being recorded. At this time, I would like to hand the conference over to Mr. Mark Wilson. Please go ahead, sir.

Mark Andrew Wilson

Yes. So good morning, everyone, and welcome to the call. I've got a number of my senior team joining me, including Pat Regan, the CFO, and the heads of the major business units.

Today's results demonstrate, I think, a -- early steps, good first steps, towards delivery of our investment thesis. We spoke a lot about cash on growth. That's what we're focusing on as a business. What I'll do is go through the highlights and the lowlights of the results, and then we'll have plenty of time to take questions from thereon.

We have clear objectives. We've got clear trends. And the first trends are the basis of delivering what we said we would. And from my perspective, it's been a satisfactory start to the year. And we have a great deal more to do for our shareholders. There is a covenant [ph] in the investment thesis of the full year. We're managing our business by focusing on 5 key metrics: cash flow, expenses, value of new business, combined operating ratio in the GI business, and of course, the IFRS operating profit. And as usual, we'll update on the profits of the half year rather than at the quarter.

So in the first quarter, we've made progress against these metrics. We're focusing the business on cash. We're focusing on reducing expenses. We're focusing growing the value of new business and maintaining the profitability in the general insurance focus [ph]. We've also strengthened the balance sheet in the quarter. So I'll take each of these metrics in turn and just go over the key points, I think.

So firstly, cash flow. So as you know, we have 4 main contributors to cash flow in the group: U.K. Life, U.K. General Insurance funds, and Canada. And we're managing these businesses together with the other established markets to improve cash flows. Now the operating cash generation, as you know, is a precursor to cash. And in the first quarter we generated GBP 0.5 billion of OCG. This is in line with the previous year. We are taking action to improve remittance ratios from OCG to dividends. And obviously, we won't be able to give much an update on that until we go through the year. But that's progressing pretty much on plan.

Reducing the expenses is important for us to remain efficient and competitive and get the cash flows through. And there are 2 key parts to our expense plan. So the first, as you know, is to deliver the GBP 400 million on the cost saving target. The second part and, frankly, equally as important is to reduce the restructuring costs. We're focused on those. As you know, the restructuring costs, we've had restructuring costs every year for many years, and it's hard to take [ph] ask to get them to more modest level.

So in the first quarter, the group's expenses fell by 10%. That's operating expenses. And we're on track to deliver the GBP 400 million run rate cost savings target for the end of the year. And the fact that we can deliver more cost savings, what we're still ascertaining is what we'd do with those. And some of the cost savings above that level will be reallocated to important things, like fixing IT and doing other things like that. This is pretty much, as I've said, with the full year results.

Reducing our costs involves some fairly tough calls. We announced last month that we will reduce our global staff by 2,000 roles across the group. That's about 6% of our global workforce. And we're doing other savings with things like consultancy and IT and rental accommodation. I mean, there's a whole long list that Nick Amin and this team are focusing on and again making satisfactory progress.

Now as well as the GBP 400 million target I mentioned before, of course, we need to lower these restructuring costs over time. And you'll be aware last year, these costs were GBP 460 million. In fact, if you go back over 10 years, its average is probably between GBP 250 million and GBP 460 million. In the first quarter, these restructuring costs were GBP 54 million. I expect this quarterly run rate will increase during the year. I mean, this doesn't include, obviously, the 2,000 redundancies, or as it is [indiscernible] many of the 2,000 redundancies. And so you would expect the run rate of that costs, restructuring costs to increase. In future years, we would expect these costs to be much more modest. We'll go in 2013, you will still see reasonably substantial costs in this area, although lower than the GBP 460 million we saw last year.

Now the second part of our investment thesis, of course, is growth. And for the full year, I don't expect you to give us a whole lot of credit for growth yet. We're a turnaround story at this point in time. But we do have good options for growth in both established markets and in the emerging markets, particularly in Poland, Turkey and Asia.

As I've said at the full year results, our key measure of growth is value of new business. Let's be fairly clear, this is an MCEV basis, so it's a fairly conservative basis. But that basis, on a like-for-like, which is increased by 18% to GBP 191 million. I'm aware that these levels of growth would be consistent with a growth stock. And I just want to manage expectations here a little bit that, in this regard, we have a lot of work to do to get consistency in these and get the product margins we require. We're only just starting in this journey. I wouldn't expect that level of growth to continue throughout the whole year. I think we can get good growth, but 18%, I think, is pretty good across the group.

Our highlights in our development of markets were the U.K. and France. In the U.K., the value of new business was up 33%. And that's as a result of a number of actions. It's a large part pricing, reduction of expenses, mix of product. There's a whole lot of things in it. In particular, annuities did well. But I do expect the growth rates in U.K. Life will moderate from these levels in the second half of the year in particular. The U.K. Life business, while we're on that point, is adapting well to the introduction of retail distribution review. And that's an important point, I guess, that 80% of the business has got nothing to do with the IDR and our Life business, and it's performed well. The platform business and other issues we've taken have done pretty well at the moment. And again, I will classify it as satisfactory, I think, at this time.

In France, the value of new business is up about 11%, and that's strong performances from the AFER group. And protection sales have been good, which that mix of businesses helped us in terms of our value of new business.

In the growth markets, Poland, Turkey and Asia, Poland was I think somewhat disappointing. We've got a lot of work to do. We do see this as a very attractive market. And we've got much to do and we're making some progress. David McMillan's taking over all of that European operations, and he's given the group supposed issues very quickly [ph] indeed. Turkey, we have initial local part from the Solvency group, which I'm sure most of you will know of. And that increased by -- value of new business by 67%. That's showing some nice growth in the execution of the plans. Asia, as well, was also very strong, 29%. We're delighted with the start [indiscernible] making, with a lot of work to do on pricing and product mix, and we're really only starting what we do there. The problems in Asia, I guess, is more in line with my expectations, and we have a particularly good performance from Singapore and China, in particular, delivered strong VNB.

The value of the new business in certain other markets frankly was disappointing, and there's clear scope for improvement. In Spain and Italy, the value of new business fell to GBP 3 million and GBP 4 million, respectively, partly driven by the lower euro risk-free rate used to calculate VNB on the value of new business on a MCEV basis. That had a little bit of volatility that perhaps you don't see. And others that don't use MC [ph] are following MCEV basis, like we do. And it's also partly due to mix and some product pressure. So those businesses, under David McMillan's leadership, are a work in progress. We are continuing to take action. That is a key focus for the group, and we have some work to do. And that's the work on pricing, on product mix, on managing guarantees, and reducing expenses, and that will take some time.

In general insurance, our key performance metric is the COR, and this was delivered in the first quarter at 96%. Strong performance in Canada where the COR was 93%, and that's really, again, our highly sophisticated pricing and mix selection coming through. In the U.K., the COR was 98%. That's in line with our expectations for the -- and it was a, I'll call it, a resilient performance in the 1-2 quarter. The U.K. motor rates continue to soften, and we didn't chase [ph] the share on that. In Ireland, our performance is unsatisfactory, and that has a COR of 108% and remained very much a work in progress. Again, that would be one of a business that'll be much quicker in the turnaround space. And we're taking a number of actions in Ireland, including substantial cost reduction and also leveraging the scale and underwriting expertise in the U.K. business, running a pack-led [ph] operation from the U.K., and that will take some time.

Now finally we've also taken further steps to simplify the business and to strengthen the balance sheet. And again, I think that's a highly satisfactory quarter. In the quarter, we sold our remaining stake in Delta Lloyd for GBP 353 million. We completed the sale of our business in Malaysia for GBP 152 million. We completed the sale of Russian business. And in April, of course, we received a EUR 608 million in cash for transfer of Aseval to Bankia of Spain.

Now it's important to note, I think, as well that the businesses that we sold, the contribution to OCG, has in the past, been minimal, and the dividends minimal, in some years negative. So we haven't had major impacts in the earning or OCG and cash. And more particularly, the OCG and cash, which are our investment thesis, from the sale of these businesses, and that's helpful.

I should point out we are still cleaning up and simplifying our business further. There will be further sales. I wouldn't expect them in the next quarter. And there are -- these are some complicated and tricky sales that don't cut a whole lot of cash. And we'll announce those as they come along. Those don't count to the earning, so it shouldn't impact the earnings portfolio of the group.

Now in line with our aim to reduce internal leverage that was sent to all of the half year by GBP 600 million over 3 years, we have reduced the balance by GBP 300 million to date, which is helpful.

The balance sheet's been strengthened. The net asset value per share increased by 9% to 302p. And that was primarily due to profits in the quarter, a little bit of favorable investment variances as well, but mainly profits. Our economic capital position remains within our target range, increased marginally, our pro forma economic capital surplus of 173% or GBP 7.3 billion.

So that's I think the summary. I've [indiscernible] the turnaround story of these results demonstrate some early steps in delivering our investment thesis on cash flow and growth. I am trying to manage expectations a bit. The results are, I think, encouraging, and the feedback this morning seems to be that they are positive. But I am also very conscious of the challenges, and I don't want to set the expectations at an unrealistic level. The progress so far has been satisfactory or very satisfactory, and there is a great deal more we need to do for our shareholders.

So on that note, and I have my team here as well, I'd like to open the line to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question.

James Pearce - UBS Investment Bank, Research Division

It's James Pearce from UBS. A couple of things. First of all, you've already hit your target for internal debt repayment. Do you want to set a revised target for the rest of the year, or how should we think about that? Second, can you update us on the U.S. disposal process, and when you can expect to see the money in your bank account from that? And thirdly, could you talk about Canadian, or particularly Ontario, major pricing in light of recent fiscal noise?

Mark Andrew Wilson

Sure, James, we can do those 3. First on internal debt. The internal debt is in line with our expectations. We'd hope to be able to pay that early and things have gone well. We're not going to change -- just to be very clear on this, we're not going to change our cash flow target for internal debt replacement. I'm choosing my words very carefully. The target was GBP 639 million for 3 years in cash, and GBP 300 million this year, and we'll be done on GBP 300 million this year. However, I want to assume that all of the actions you can take on internal leverage about cash flow, there's a number of structural things we can do over, over time, and they won't be short timeframes at all. But over time, there's a number of other structural things you can do that don't involve cash flow. Now, I know the next question will be, what are they? We're not going to give any guidance on that at all today. But there's a lot of work going on and this is a long term and [indiscernible]. And so just to be clear, no, we don't have any intention of paying that debt down more out of cash flow. U.S., I will get Jason to update on. It is going to plan, there's really not a whole lot of news on that. Do you want to comment, Jason?

Jason Windsor

Sure. There's not to say, it's on track. The filings went into IRS and New York regulators as expected. And we are in that process with those regulators, and we expect the completion during the course of the second half.

Mark Andrew Wilson

And on Canada, we're being -- I'm not sure whether Maurice is on the line in Canada. But Maurice has been very actively involved in the interior motor issue.

Maurice Tulloch

Mark, I am online.

Mark Andrew Wilson

Well, Maurice, do you have any update on that, as you have been the one in discussions with the government?

Maurice Tulloch

Sure, sure. Thanks, Mark. James, let me provide some useful context. I mean, you do reference political noise. The noise commenced about 4 weeks ago. We have a 3-party system here in Ontario. And the NDP party started making demands on the governments, numerous demands. And one of them, at the bottom of the list, was the auto insurance, and they were demanding rate reductions in the magnitude of 15%. Over the last 4 weeks, myself, a couple other CEOs and the Insurance Bureau Canada have lobbied under the vows of the government. And I think that resulted, about 10 days ago, in a pretty pleasing statement in the Ontario budget. And the budget effectively said that the government announced its intention to achieve an average rate reduction of 15% within a period of time, to be prescribed by regulation. But I think what's really key is the government has linked any rate reduction to a cost-reduction strategy. And the industry has very much lobbied that at the end of the day, rates can certainly fall. They need to fall correspondingly with product reform. At this point, we're still going to wait for the budget to come out. We know budgets fees are the great, but after they move through the regulation. But the industry has been very active. And at this point, we're pleased with the government's intent to move forward with product reform and corresponding rate reductions. So we're very close to this file and managing it almost daily.

Operator

We will now take our next question.

Blair Stewart - BofA Merrill Lynch, Research Division

Yes, it's Blair Stewart here. I've got a couple of questions. Firstly, Italian volumes were down year-on-year, but they were up quite substantially quarter-on-quarter. Just wondering what's going on there given that there is a disappointing VNB result? Secondly, Asia saw, I guess, conflicting volumes with Singapore, up really strongly, and Hong Kong down, just wondering if you can give us a word on what's going on there? And then in normalized -- the price versus volume effect would be useful, what source of pricing is going through, particularly in the U.K. where volume -- where the premium shot 5%? And just talking about Canada, just wondering, what percentage of your business does come from Ontario that you saw?

Mark Andrew Wilson

Okay. We have a number of questions, and I'll just give them around a bit here. Italy is pretty modest in terms of the group, as you know, and it's certainly one of the most [indiscernible] turnaround. We're doing a whole lot of actions there. And that frankly was disappointing and needs to do a whole lot more. That's about synergies and large amounts on product mix, and that's taking a little bit of time to change. But they are taking the actions needed. The -- I'll hand over to Pat. But part of it is a technical issue in terms of what's happening with the spreads and the underlying changes on that, which impacted the value of new business and that's been a factor. Pat, do you want to comment in more detail?

Patrick C. Regan

Yes. Thanks, Mark. On volumes, Blair, it's purely a seasonal thing. The first quarter actually is always the biggest quarter of the year. And that's been true for the last x number of years, and it's true across the industry. So that's why volume-wise, you'd see a higher first quarter than you saw fourth quarter. As Mark said, in terms of the VNB, there's still actually quite a lot to be done there, both in terms of product mix, more protection and less profits. We've done a lot of work to bring down guarantee levels. But as interest rates keep coming down, there's still more work we need to do on that and the type of products that we're selling there. So volumes is a seasonal book. VNB is definitely still a work in progress.

Mark Andrew Wilson

On Asia, I'm pretty comfortable with the stock quotes may cause varied financial issues. It focuses very much on pricing and margins, and that isn't the system that we have in Asia. We've got some pretty good operations. We are a -- we're pretty strong in China, as probably not many people know. And in China, it's about pricing action for the course taken, frankly, and about mixed issues in terms of business. So what you're seeing is our core having a focus on trading volume, and that is a change of focus in that business. We're very clear. We measure our sales not by top line, we measure sales by the value it creates. And that's how we reward our people.

Blair Stewart - BofA Merrill Lynch, Research Division

Is that coming through to Hong Kong as well, Mark?

Mark Andrew Wilson

No. Not -- certainly not so much Hong Kong. Our Hong Kong operation's very modest. It's more China and Singapore where they -- were really the strong entities. Hong Kong, we haven't taken advantage really of the relationship we have with DBS. And we will come out to the market later this year. We are pretty set now on our Asia strategy. I'm not going to name the countries, not just yet, because we will make some more very modest disposals in Asia. We have already said we will dispose of South Korea as one and Taiwan as another. Maybe 1 or 2 others as well. And COR is very set in the strategy. We'll announce that later in the year. For competitive reasons, we're not going to announce that now, but we'll give you more clarity later. On the U.K., Robin [ph], do you want to pass your [indiscernible]?

Robin Spencer

There's a couple things going on. In terms of your questions, basically on rate, the reason for the overall premium reduction wasn't really rate. If look at year-on-year, the rate was pretty much flat. So that was the point where the premium come down. What we decided, as we went into Q1, given both the pro forma [ph] agenda directed was to be fairly prudent in terms of new businesses as well as our renewal prices. In going through that period, we probably also became a little bit more, from a risk-selection perspective, we took on high-quality risk, which reduced the overall average premiums as well. So they were the key impacts, all the impacts that were going on. I think you also have one question about the portion of the business in Ontario. Or motors. It's probably better to hand over to Maurice for that.

Mark Andrew Wilson

Maurice?

Maurice Tulloch

Thanks, Robin. Blair, over the last 4 years, we've optimized our portfolio weights. And our Ontario auto has fallen from 33% to 26.5%. And now, it's now in line with the weight for that line in market.

Operator

We will now take our next question.

Sean Darby - Nomura Securities Co. Ltd., Research Division

This is Sean Darby calling for Nomura. I have 3 questions please. First, on cash. You recommitted to increasing remittance ratios. And I appreciate that U.K. Life [indiscernible], besides U.K. Life, everything else happens later in the year. But qualitatively, could you talk about what progress you have made since the full year results to increase remittance ratios for the year? Second is on business value, the new business value. You mentioned in the U.K. is driven by pricing action, but you also mentioned annuities. And I presume that means coming out of bulks [ph] in H2 last year. So could you perhaps give us the underlying improvement in VNB excluding that impact? And third, just very quickly on the combined ratio. Your U.K. margin were slightly worse than last year. They [ph] mentioned benign quarter for weather, where it appears you had a normal quarter. But was there anything else happening, for example, large losses impacting your results?

Mark Andrew Wilson

Okay, thanks. On the cash remittance ratios, as I said [indiscernible], remittance ratio if you assume for the last year that was paid this year, it was 300 out of Life business. That makes our remittance ratio about 50%. Now the market's mid to high 80s, and some of it higher than that. And frankly, this is going to be a multiyear journey. And I think I'll give you some of the examples of the things we're doing without, obviously, the quantitative guidance on it. But this will very much be a multiyear journey. And we've got a long way to go. I mean, you can do the math, and you shouldn't say 1.8 in terms of OCG, and with a 50% ratio, we can get that up to -- it's a very large number, and a lot more cash flow through to our shareholders. Some of the things we're doing -- some of them are structural. So for example, one of the reasons of doing the internal debt the way we did was to take out what was going to become a dividend trap there. Some of it is expense. So having all these restructuring costs year after year after year comes directly off the OCG and therefore reduces your remittance ratio. And that's why we have committed to have a much more modest figure on that next year. And some of it's regulators. You have to -- a number of countries negotiate with regulators and make sure that they are happy on passing dividends. Now, a good example of that would have been France last year, where we had double leverage. And we [indiscernible] had concerns, we fixed the double leverage, we fixed the concerns, and dividends started again. And some of it's capital. There's some businesses where we'd want to hold more capital is the optimal. Some of it's product mix. There's a whole lot of level structural issues as well in there. So in each country, there's literally dozens of initiatives that we're doing over our multiyear program. And I would hope that you would see -- I'll choose my words carefully. I hope you would see steady progress on that year after year. But it is a multiyear initiative. Pat, on the value of new business, you want to talk about the bulk annuities for a minute?

Patrick C. Regan

Yes. It's a -- thank you, Mark. The BPAs didn't make a lot of difference. The reason we exited them, they weren't about contributing anything anyway. So it wasn't a big number, a very small number in last year, and it's a very small number this year. So the underlying change will be almost identical with that of our BPAs.

Sean Darby - Nomura Securities Co. Ltd., Research Division

Okay. So -- but you are expecting the value of new business to come down going forward for U.K.? It has nothing to do with mix.

Mark Andrew Wilson

We -- 33%. We've certainly done it last year 33% on that. We might expect some other countries to improve. But you can expect the value of new business in the second half of the year on U.K. Life to decrease from that number, yes. Absolutely. I just -- we're doing some good start, but I think expecting 33% to continue is unrealistic. And actually with [indiscernible] ratio, Robin?

Robin Spencer

It's actually a good question. In terms of the -- you're right. We also, from a weather perspective, just want to be in the cold, one of the coldest quarters on record, actually. It was relatively benign from a claims perspective. So what's going on? Well, actually last year in Q1, we had about 25 million of payable releases. And this year, we didn't have any favorable development coming through in the quarter.

Mark Andrew Wilson

It's in line with expectations for that business in fiscal. In fact, there was another question, I should say, of Ireland, that we still have a lot of work to do. That's not a satisfactory outcome.

Operator

We will now take our next question.

Abid Hussain - Societe Generale Cross Asset Research

It's Abid Hussain from Soc Gen. I've got 3 questions. Can I just come back on to the internal loan. Can you just kind of share to us -- share your thinking with us on why it might benefit you to reduce the internal loan to less than GBP 5.2 billion, the number that you mentioned previously? And then you also mentioned some noncash options to reduce that internal -- I understand we're not going to be into what they might be. But can you just give us an idea what sort of timeframe those options may come through? And then secondly, just on Poland. When should we be expecting the value of new business to grow there? And then finally on the U.S. disposal, I think the question may have been asked, but I didn't quite catch the answer. Can you just clarify if all of the necessary regulatory hurdles have been met there?

Mark Andrew Wilson

Okay, thanks. Gentlemen, [ph] I'm not going to give any more details today on the long cash ways to reduce it. And we are committed in sticking to our GBP 600 million of cash reduction every 3 years. I said at the full year results, there's no magic formula here. There's no formal regulators I've got. It's just an ongoing discussion about what's the best level. I know that some of you have said the supports that, and I think that level's too high. Well, that remains to be seen. But as I said, the key thing here, if there's a number of noncash things we can do, and this will be an ongoing debate, as it should be in every life insurance company or general insurance company about what the optimum level of internal debt is. But there's no magic formula. And our GBP 600 million target on a cash basis over the next 3 years remains intact. Poland. Poland is -- there's a bunch of [ph] stuff going on there. It's a nice business. It's a good cash contributor. And frankly, there's a bit of a change of strategy in Poland. Poland is a very attractive market in our view. We have a very strong position in Poland, and we have good partnerships in terms of distribution there. And it will take a little while to get that business up to where we expect it to be in terms of growth and value of new business. So just to be clear, it doesn't change the votes [ph] for those businesses. You saw at the full year results, and we win from each country. Instead, we were focusing the attention on Poland there's [ph] on value to new business growth. Historically, that's probably being on cash flow growth. In a growth market like that, we need value growth, our value of new business growth. I'm not going to give any guidance on when I think that will happen, except to say that they have clear plans in place. But it is a change of strategy for them. The U.S. [ph]?

Patrick C. Regan

Certainly, nothing else to add to [indiscernible]. The regulatory approval processes are ongoing. The filings are in front of those regulators in Ireland and New York. It is a stimulating process, we know that, and these U.S. approvals for the completion is expected in the course of the second half.

Mark Andrew Wilson

Yes, and definitely, we'll not be in the first half and it was never planned to be, I should point out.

Abid Hussain - Societe Generale Cross Asset Research

Okay. Can I just come back, sorry, briefly on the pressures around the internal loan? You mentioned regulatory from discussions. Is it -- should I -- what should I think the pressure is coming from, the regulator or is it an internal dynamic?

Mark Andrew Wilson

It's -- I'll be wrong to say that the regulator wasn't actively involved. But we certainly went to them and the regulator couldn't say the target or they hadn't got a formula. But we went to them when we said, for the percentage of assets -- so what it was, was the percentage of assets were horrible in those funds, the foreign subsidiaries was too high as a percentage of available assets. And that's really the issue. So having debt for me is quite okay, and every company has some form of debt either through branching or through subsidiaries holding other subsidiaries, which is the case for most. It was getting too high, so we formalized a loan and then we agreed to bring it down. Now just to be clear though, we went to the regulator and said we want to bring it down on a cash basis by GBP 600 million over 3 years. And the regulator is supportive of that and have said they are supportive of that. And I specifically went to them and said, "I want to be able to say you are supportive of our plans here to [ph] give some certainty." So in the models, you'll be very safe in assuming that we will -- of that [indiscernible] the GBP 600 million over 3 years, which we have already paid GBP 300 million. And I've said that we are looking at other noncash flow ways as well over the long term to bring that down, and I wouldn't expect anything in the near future. But I hope to get back to a stage where you don't ask me anymore because of the clear [ph] trends. And I think we can do that, but it will take some time.

Operator

We will now take our next question.

Kevin Ryan - Investec Securities (UK), Research Division

It's Kevin Ryan from Investec. Could you please give us a little bit more background on U.K. Life? I am surprised that the very modest reduction in volumes, given that RBS is no longer doing face-to-face advice and so on and so forth. So can you just give us a little bit of a sense of what your strategy is in the U.K. in the post-RDR world and how you're managing that dynamic [ph] in volume and value?

Mark Andrew Wilson

I'll hand it over to David, [indiscernible] officer.

David Barral

Kevin, David Barral. I think the first thing to say is, I mean, we had reduction regarding [indiscernible] RDR that we gave. But we have over 80% of the value of new business is unaffected by RDR, [indiscernible] and protection. You're right about RBS. But on the other hand, actually, our focus is now on investment business with the banks and other strategic partners and so on in protection business, where we excel and we're actually growing our business. And we really expect that to continue over the course of this year. I think on the [indiscernible] side more generally, it's a bit early to tell. The fact is we still got there's things coming through from the RDR, on the person pensions and that kind of things, so time to kind of pull out there. On the individual savings, so you've actually [indiscernible] there are well off on last year. But it's come back to real focus of value of new business driven by protection and business and [indiscernible].

Operator

We will now take our next question.

Christopher J. Esson - Crédit Suisse AG, Research Division

Chris Esson from Crédit Suisse. Just a couple questions. Firstly, one for David again, on the U.K. Just wondered if you could provide a little bit more detail on VNB growth and perhaps the contribution of different business mix to that? It look like volumes were fairly soft, but VNB progressed quite well. So I just want to get a little bit more color on the breakdown there. Secondly, wondered if you would provide or quantify the effect of investment markets on NAV on the quarter? And lastly, just on Poland, would be interested in your thoughts in terms of expectations on potential for regulatory form intentions [ph] and how you are likely to be positioned for that.

Mark Andrew Wilson

All right. Thanks, Chris. 3 questions. We're not going to give any more guidance in terms of mix and stuff today. We'll do that at the half year. You can assume, as I said, annuity is strong. And we're pretty competitive in the annuity markets, but we have strengthened our pricing there. And that is the top, and we haven't seen a drop-off from volumes. So we're not going to give any mix of guidance today as we don't. I'll hand over to Pat on the [indiscernible] investment markets, and I'll come back to you on Poland.

Patrick C. Regan

We don't normally give out every year how much of the wreck on NAV. There was a prophecy it's single-digit, kind of high-single digits, and it's obviously on an investment basis.

Mark Andrew Wilson

The mainstream papers, as we said, it was solid [indiscernible] no surprise. Poland, we are very active in these discussions on Poland. There's a lot and it's a highly political issue that happens in election times. And as you know, we are strongly -- just to be clear though, we're really capped out as you probably are aware in terms of the earnings from pensions over there that we can get, so it's not a contributor to growth, it's not a contributor to new business, it hasn't been for some time. It's a bit unclear how that will flow through, and we are active. I think it's always challenging from a market -- from a customer [ph] perspective over there. The government says it's going to take funds that are effectively in private provision [ph] and nationalize part of it. I think that's challenging and that's all playing out in the media and politics. It will be -- we expect some announcements coming up from the government. And they know a period of time that may have an impact. But just to be clear, this isn't part of our ongoing new business. This is part of our force base [ph] at the moment. We're very close to it. As we get more information, we'll share it and we are active in planning [indiscernible] very much.

Operator

We will now take our next question.

Andrew Hughes - Exane BNP Paribas, Research Division

It's Andy from Exane PNB Paribas. A couple of questions. First one is again on the Internal Revenue fight. So just wondering when you talk about the noncash actions you can take, obviously there's 2 ways this can go. You can reduce the internal debt, or you can improve the remittances to holding company. And the way you were suggesting it is that the noncash action that you make actually reduces the internal debt. Is that the way I should interpret it? Or should I look at it as a mix of improved remittances and also reduced internal debt? And the second question was about the U.K. business, margin improvement, but maybe you could split out the benefit, the expense contribution to the new business margin and maybe talk about sort of the things that happened post RDR, any lapses, have they changed? And the final point is on the OCG generation, right, that there's a 100 million one-off financing benefit last year. So actually on the like-for-like basis, the OCG is actually improved by 100 million year-on-year. When I think about the life business and improvement in costs, should I be thinking about the benefit in terms of reserving coming through end of this year or end of next year?

Mark Andrew Wilson

Okay, a lot of questions there. On the remittance, I know you guys are trying to get me into detail, which I'm not going to talk about that particular issue today. I'll give you a little bit about dispose. So you see an improvement from that business. But remittances will be just, that's cash, isn't it? So the way to think about this is are there structural ways we can reduce that line? And it's structural rather than cash. Now if you go back to investment thesis, investment thesis is improving cash to our shareholders year after year after year. And so we'll take action that will improve that, but I'm not going to go into any more detail yet. There's a lot of work going on, but this is a very long-term initiative. Some of the things we're talking about on that are years. But what we -- what will come at the right time is appropriate plans and we'll share them. I don't want anyone to get too overexcited about it yet. It would be consistent with what we said that in those and GBP 600 million cash over 3 years. The OCG, Pat, do you want to just cover that?

Patrick C. Regan

Yes. Andy, you're right to say that there was 100 million, just over 100 million positive onetime benefit last year in U.K. Life, so the underlying is up. It's actually a bit less than 100 million. I don't want to get too carried away. But the way the remedies [ph] work is the underlying is up, but it's a bit less than 100 million. On the capitalization expense reductions, we haven't done that yet. Obviously, as time goes on, actually [indiscernible] it's too profitably under the embedded value calculations, and so that's on list this morning. As we get forward, obviously, we'll lower expense. They will begin to flow through into embedded value, which will flow through into all key metrics. We haven't captured that as of now.

Mark Andrew Wilson

Yes. It's more the expenses in that business are down. I think U.K. Life businesses being one of our leaders in the expense reduction work that we've been doing, which is great. The biggest improvement here though I mean, there's been some -- there's been partial changes across all sorts of books. But as I said, annuities is one of the key. And I keep on saying, I'm trying to manage expectations here, maybe unsuccessfully, but I'm trying to manage expectations that we would not expect our growth rate for the group to end out the year at 18%, and we would not expect U.K. Life to be anywhere near that at the end of the year. Yes, it has had a very satisfactory quarter.

Andrew Hughes - Exane BNP Paribas, Research Division

And reduction in the internal debt, I know you don't want to give doing guidance. Just trying to get my head around how you balance the -- obviously, question was trying to get my head around the bouncing if you do take action which is noncash related, which reduces the capital requirements of AIL, to what extent do you decide to pay down internal debt and to what extent do you decide to improve the cash to the holding company? I think obviously from previous comments, I thought 5.2 was kind of a fixed number, if you like, and any further action you took would lead to higher dividends. And now it seems you're suggesting maybe it's a mixture of 2. I'm just trying to understand what's happening there.

Mark Andrew Wilson

So I think the way to think about this is they are related, but only partly. I mean, a lot of people are trying to -- and your lot, I think a lot of people are trying to assume that internal debt is the same as external debt, and clearly, it's not. Nuts and bolts together, what happens to the internal debt is not to think about it. The actions, if we can -- I'll tell this way. If we can improve the capital position that gives you much more flexibility to pay dividend out of debt, good. So through reducing the internal debt by doing structural actions just gives us more flexibility over time. But from a modeling perspective just to share, GBP 300 million this year was already done, and GBP 150 million and GBP 150 million, so GBP 150 million next year, GBP 150 million the year after from a cash flow perspective. Then what we compared to that, that will depend on the performance of that business. I know there's been concern on internal debt, and I am signaling there shouldn't be as much concern as probably something to think from that aspect. It depends on the performance in that business. But I really can't to go into any specifics about the actions we're going to take because we will come to you at the right time and be clear on what we're doing and make sure we can deliver what we said we can.

Operator

We will now take our next question.

Oliver Steel - Deutsche Bank AG, Research Division

It's Oliver Steel at Deutsche. I have 2 questions. The first is given the rise in the MCEV, I was a bit surprised not to see the economic solvency ratio pushing up a bit further than it did. So I'm just wondering if you can reconcile the difference. And then secondly, following up on Andy's question on the OCG, slightly under GBP 100 million increase underlying, I guess it's not on the normal life side. Within the life, what's driving that? Is that lower strain on your business? Because certainly, that improved dramatically second half versus first half last year. Or is that the gross cash flow coming from the life business?

Mark Andrew Wilson

Okay. Thanks. You're right, it is a lot of strain. And it's been some good work done on that last year on that and also from the first quarter so. And there's still a lot more work to do just given efficient. We have reduced capital strain in the business quite a bit over the last period and you are seeing that flow through. And MCEV. In terms of the actual economics capital service the non-pro forma number, that went up by 1 billion. It's a combination of things as you referred to, of the MCEV increasing. But also things that were pro forma actually now being completed, so they go into the actual number. Also included improvements in the U.S. so obviously that is not included in the pro forma numbers as we basically that.

Oliver Steel - Deutsche Bank AG, Research Division

Again, sorry, just to come back on that because the pro forma solvency ratio barely moved on that; I think it was at 1%. So you're saying that's implication most of the MCEV movement was U.S.?

Patrick C. Regan

Not most of it. Some of it was. A portion of it was related to the U.S. U.S. capital services went up on an economic basis and on a local basis for that matter. What we reflected is a bit coming through on the economic basis. You could make an argument for the same, but that would mean we've received higher proceeds as the [indiscernible] we cannot reflect about. So we've been quite cautious in how that flows through the pro forma number.

Oliver Steel - Deutsche Bank AG, Research Division

I'm trying to work out what sort of the offsetting factor is? Because is the economic solvency, is there a dividend here that we should be taking into account?

Patrick C. Regan

Over the first quarter, yes. Obviously, the dividend is factored in the Q1 numbers. It's not in the full year number.

Operator

[Operator Instructions] We will now take our next question.

Marcus Barnard - Oriel Securities Ltd., Research Division

It's Marcus Barnard from Oriel Securities. I just like to take you to task on Ireland a bit if I may. I mean, you are losing volumes and margin on both GI and life, and that sort of takes some doing. And I just wonder what's going on there? I mean, is it just the economy and low volumes? Or have you got a problem here with your reputation and your public image, particularly after your history of making acquisitions, mergers like in New York and have been closing it down. And I would like to know why you think cost cutting is going to fix this, other than you can't think of anything else to do?

Mark Andrew Wilson

Okay. The -- Ireland is complicated, and there's a whole -- I'm looking at Pat to try to explain some of them. But I don't think it's reputation issues so much, but there's a change in business strategy there. And some of it is market, but I don't think we can sit here and use the market as a excuse for what we're doing. I think it's more what we've been doing and it'll take us some time to fix and we've been taking rating action within deliberately reducing our volumes whether in fundamental cost cutting and that will have an impact on the Ireland business for sure. We are quite open about that. We still have a lot more work to do and we would expect that to improve throughout the year. At this point the outcome and get back to one of the lowlights [ph] and pretty solid set of results. Maybe I'll pass it over to Robin to comment on.

Robin Spencer

A bit on that market. Year-over-year will have take our costs down by about 25% in the Irish business and we've probably got a little bit more to go. What we found is from an underlying perspective, both from the personalized side and commercialized side, one I've wanted to sit back and really the whole book we needed to reunderwrite. We've got the benefit now of using all of the expertise from the U.K. market to help do that, and we're going through that process. Necessarily, that means we're walking away from some markets. We're walking away from some liability as well. We just can't -- we don't feel in medium to the long term we can make good returns for shareholders. So we are seriously reducing our premium, which actually put some pressure on the expense base itself. That said, I think given the progress that's being made to date on the actions that are being taken, it will take a while for to come through in the earnings. But actually from morale and motivation perspective, I think we hit a low point last year. But actually, we're really picking it up. We've got a real clarity of strategy. And I'm confident as we go through 2014, you'll start to see the results turning around strongly. I think David would just say something quickly on the volumes on the life side of things.

David Barral

Markets, we exited a joint venture with [indiscernible] Bank at the end of Q1 last year. [indiscernible] that and the volumes, actually excluding that, sales volumes were flat. We've actually driven the value of new business in our business by a range of taxes, sales equipment savings but drawing on drop on products as well as try to aggressive costs. So I think we're confident we'll be able to improve the overall margin performance for the first throughout [ph] this year.

Mark Andrew Wilson

The other thing I'm probably mentioned, Ireland needs to be kept in a little bit of context, it's 3% on the nonlife of our business and 2% on life. So it's pretty modest. Nevertheless as we keep on saying, it's unsatisfactory and that lasted through the effect of turnaround.

Operator

We will now take our next question.

Andrew Hughes - Exane BNP Paribas, Research Division

It's Andy Hughes. As a former General Accident employee, I'd just like to congratulate you on resurrecting the brand. I wonder can you talk a bit more about what you're trying to do with the brand? Because it seems as if the idea that General Accident brand in the motor market. Obviously you've had relatively weak U.K. revenue because I understand it the idea is we couldn't have the Internet based only so it appeals to kind of old people like me paying GBP 300 a year for car insurance. But younger people want to buy the same, and that was idea of relaunching General Accident brand. Is the idea to sell more car insurance to younger people again? And are you thinking that's now an attractive market again?

Mark Andrew Wilson

Andy, I'll hand it over to Robin. I should say that we're both fairly ex-employees from General Accident the target market.

Robin Spencer

Joking aside, when we did do the testing as to the role that we'd go with, General Accident did test really well and it still resonates well with customers. In terms of what we do strategically, 20% of all customers who shop -- or over 20% of all customers who shop our iron gaters [ph], still actually complete that sale by talking to somebody. As you know, as you said, currently actually is all Internet. So we were really missing out on 21% of customers. And therefore, what we've done as we've develop GA on platform as the low-cost platform as the Quotemehappy platform, which gives us the opportunity to capture our target customers, actually right across the board in terms of age range but we couldn't previously. As you know, it's such from a cost compactness perspective, it's such a tricky market. You go to make sure you've got your pricing points exactly right. The General Accident plan, that operating model allows us to do that. So fairly early days at this stage. But hopefully we're going to emulate some of the success of Quotemehappy.

Operator

We will now take our next question.

Paul De'Ath - RBC Capital Markets, LLC, Research Division

So it's Paul De'Ath from RBC. I just really want a quick question on the disclosures. Because clearly changed the disclosures. So you're no longer putting out the rate from the U.K., which as you said that you're not going to do. I'm just wondering what the thinking was there and sort of why you know have a split of the Asian businesses. You can see a much smaller part of the business than the investment case. But we don't get to see what's going on in the U.K. and pensions line.

Patrick C. Regan

Generally, what we try to do with it just simplify the pact a bit so it's shorter overall and to really focus on the 5 key metrics. So what we try to do is de-emphasizing our sales dates we put in there and just focus on VNB expenses, et cetera, combined ratio et cetera. So certainly when we get to half year and the full year, we will try and simplify and streamline it pack a bit. Likewise, you really going to focus on cash remittances, value of the business, expenses, et cetera. We do that by design. We will be cutting some stuff out. We actually make the pack a bit shorter and simpler. As we go through that, people really find there's a bit of information we cut out that they really want then feed it into their volume intake.

Paul De'Ath - RBC Capital Markets, LLC, Research Division

Yes, certainly. I mean, it just strikes me a little bit strange that the U.K. is nearly half [ph] of this, and we don't get any kind of breakdown of that in the numbers. I know the numbers question has been asked about the [indiscernible] business and the pension business, which we don't really get to see any detail on there. I think it's a little bit strange.

Patrick C. Regan

Okay. I have to say we'll think of the comment. As David says, we went through more than 80% of our VNB from the risk products of annuities and protection, and much, much less on the pension side, so. But again, we can pick up the disclosure points as we go forward.

Operator

[Operator Instructions] We will now take our next question.

James Pearce - UBS Investment Bank, Research Division

It's James Pearce from UBS again. I wonder if you could talk about external debt again, and a couple points within that. Have you been active in the commercial paper market yesterday? Has the, I think it's 0.6 billion a year come down, or is it higher even? And secondly, am I right in thinking that it feels like there's a link between getting the U.S. proceeds and saying anything more concrete about what you're going to do with the October hybrid call? If could just talk around the external debt in general, that would be very helpful.

Mark Andrew Wilson

Really not a lot of new stuff to say on the external debt. As we talked about the plan to bring it down to a ratio of less than 40% over the medium terms, so over 3 to 4 years. And 2 months in, there's not a lot to report, to be honest with you. And on the commercial paper program we're doing is we're moving from guaranteed to unguaranteed. So if you see any activity, it's had little impact. We typically actually don't talk about what our intentions are particularly on a call until actually we do it. So the reason we're not saying anything is, is really in line with that. So you wouldn't expect to hear anything from us on that until later in the year. I think on the U.S., we have been clear that getting the U.S. proceeds is an important part of our capital plan. So as we talked about that, it's on track and we expect that to happen in the second half of the year. But that's always been an important part of our capital plans.

James Pearce - UBS Investment Bank, Research Division

Is the CP balance up or down since the [indiscernible]?

Mark Andrew Wilson

It's up.

Operator

There are no further questions, gentlemen.

Mark Andrew Wilson

Okay. Well, on that basis, I think we can wrap it up, and I doubt I wouldn't have follow-up calls where appropriate over the coming weeks. I think you can probably see these results as being very satisfactory. What we are aiming for, as we said at the full year, that was to get -- we want it to be consistent. We want to be boring. We want to be predictable that we just keep on improving our results quarter after quarter, and that's what we're aiming to do. And you all see some volatility but I think comparably business, as those are the rates, would extraordinary if we were able to continue to them. And so we are, I guess, trying to manage some expectations down on that. As to the prior questions we can take and provide more clarity where we're able to. So thank you, everyone, for joining us this morning.

Operator

That will conclude today's conference call, ladies and gentlemen. Thank you for your participation. You may now disconnect.

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