Aviva plc (OTCPK:AIVAF) Q4 2019 Earnings Conference Call March 6, 2020 4:00 AM ET
Maurice Tulloch – Chief Executive Officer
Jason Windsor – Chief Financial Officer
Chris Esson – Head-Investor Relations
Euan Munro – Chief Executive Officer, Aviva Investors
Colm Holmes – Chief Executive Officer, General Insurance
Chris Wei – Executive Chairman of Asia and FPI, and Global Chairman Aviva Digital
Conference Call Participants
Johnny Vo – Goldman Sachs
Ashik Musaddi – JPMorgan
Oliver Steel – Deutsche Bank
Jon Hocking – Morgan Stanley
Andrew Crean – Autonomous
Blair Stewart – BofA
Greig Paterson – KBW
Abid Hussain – Crédit Suisse
Steven Haywood – HSBC
Dom O'Mahony – Exane BNP Paribas
Fahad Changazi – Mediobanca
Good morning, ladies and gentlemen, and thanks for attending. Certainly, with the events going on, I'm pleased to see so many of you here. Welcome to Aviva for our 2019 results presentation.
Before I start today's presentation, I wanted to give you an update certainly on the topic du jour COVID-19. This represents a new uncertainty in 2020. Our primary focus is on operational readiness and the safety of our customers and staff, such that we continue to deliver on our promises as we have been for the last 324 years.
Our scale, diversity and the strength of our balance sheet allow us to meet the short-term challenges. During the Q&A session, I'd be pleased to provide more specifics related to COVID-19, on our operational readiness, our insurance products, trading updates and market impacts.
Overall, 2019 has been a galvanizing year for Aviva. And my thanks go out to our colleagues who've all gotten behind our efforts to run Aviva better. It's still early days, of course, and our 2019 results show that we're starting ahead in the right direction. We've generated strong return on equity at 14.3%, helping our Solvency II NAV increase by 8% to 423p per share.
Operating capital generation was £2.3 billion. Management actions were lower than in 2018 but were still significant at £0.8 billion. We've further increased capital strength with our Solvency II cover ratio up to 206%. And further reduced our debt leverage to 31%. Our IFRS results also showed good progress, with record operating profit at £3.2 billion and operating EPS growing by some 8%. The full year dividend has been increased by 3% to 30.9p per share.
These financial results reflect real gains we've made with customers and on the fundamentals, leading to improved operating performance. I'll cover this more during my presentation. So overall, a decent start, but we're under no illusions. There's still a lot to do to drive up our underlying results at Aviva, and lots of upside here as we execute on our detailed plans.
Jason will present the financials in more detail, but I'm going to highlight the progress we've made against our 2022 targets that we gave to the markets at our Capital Markets Day just in November.
Return on equity, this is strong and ahead of our 12% target. You would have seen from the disclosures that this included benefits from assumption changes and management actions, with underlying returns broadly stable.
Now clearly, this is an area we're focused on improving through cost reductions, improving fundamentals and capital allocation choices, so that we will deliver our 12% target on a sustainable basis.
Consistent return on equity, we've had another strong year in terms of OCG and cash inflows to center. As a result, after the first year of our 4-year cycle, we've achieved circa 30% of our cumulative targets for OCG and cash.
We continue to retire debt, paying off £210 million as planned. I expect a lot more progress there in the next 12 to 18 months. And expenses are also heading in the right direction, with in-year savings of £72 million in 2019, and lots of groundwork done for savings to build to £150 million in 2020, well on our way to our committed target.
Across the board, we're largely where we thought we'd be at this stage, and we remain highly confident of achieving each of our targets. Now let's turn our attention to our business performance highlights, starting with the Life & Savings business.
This slide provides a snapshot of the key drivers we are focused on to improve profits and returns in Aviva's Life & Savings business. They show solid organic growth, a diversified business mix and an opportunity to enhance margins. Organic growth is represented by the assets under management bridge on the left-hand side.
In 2019, we grew assets by some 9% to £418 billion. While investment markets provided a tailwind, we made good progress on net flows, which improved both here in the U.K. and also in Europe.
The middle panel shows the mix of policyholder reserves by liability type. Over half our Life business is in unit-linked, while another 30% is in U.K. annuities and with profit funds. European with profits account for 18% of the total, and this is concentrated in France and, to a much lesser degree, in Italy.
In these markets, products are designed to cope well with low yields, although negative interest rates provide more challenges, which we are actively managing, and Jason will provide some details later on.
On the right-hand side of the slide, we show our IFRS operating margins and unit costs. The key takeaway is a reduction in operating margin between 2017 and 2019 is matched by the increase in unit cost. This underlines the need to focus on bringing costs down to open up the jaws on our underlying results, and that's clearly been one of my key areas of focus I've implemented since taking this role.
Looking more deeply at the organic growth picture. What we found across nearly all of our businesses in Aviva is that customers are continuing to choose Aviva to meet their savings, their investments and protection needs due to our brand, our customer service and the strength of our balance sheet.
In this slide, we focus on U.K. Life & Savings and Aviva Investors. In annuities and equity release we increased sales by approximately 30% as we extended our strong performance in the bulk purchase annuity market. We've got fantastic capability in the retirement market and we're deploying that successfully, both with commercial and retail customers.
In long-term savings, our flows strengthened in 2019, which was a great result and shows the attractiveness of our business despite the backdrop of political uncertainty here in the U.K. Within this, we saw savings and retirement flows increased to a record of £7.5 billion. Our workplace and platform businesses are going from strength and strength with positive trends in new business and good retention.
And Aviva Investors has delivered a strong recovery inflows. The £2.3 billion in third-party flows in 2019 included £3.3 billion flows in the second half as the benefits of our investments and capabilities start to show fruit, but there's still much, much more to do. Our £10 billion target for Aviva Investors is undoubtedly stretching, but these results are a step in the right direction.
Turning to Europe and Asia. Our customer franchise has also continued to strengthen in our International Life business. In these markets, we focused on working constructively with our distribution partners to grow sales and assets, while optimizing our business mix.
In Europe, we responded to challenging interest rate environment, proactively managing the sales of stand-alone with profits products in France and Italy, down by more than 9% during the year. In contrast, we increased French and Italian sales of more capital-efficient unit-linked, hybrid and protection products by some 21%.
In other European markets, we also saw good progress. In Poland, we increased new business volumes by 30%, following the successful launch of our new protection products.
In Asia, we've committed to invest in distribution, providing our customers with guidance and much-needed choice. We increased adviser numbers in Singapore by 10%, to more than 1,800, and expanded active agency numbers in Aviva-COFCO as well in China.
As a result, we delivered 24% growth in new business volumes in Singapore and 10% in China. Our business mix remains heavily weighted towards protection, which accounted for approximately half of our revenue in Singapore in 2019.
Let's turn to our general insurance business, where the key drivers for profitable growth are premium volume, mix and margin. Our results in 2019 show that we've delivered modest growth while further shifting our business mix to commercial lines. Net written premiums increased 2% to £9.3 billion. Within this, commercial lines maintained its positive trajectory, with 7% growth here in the U.K. and 17% growth in Canada. Commercial lines now accounts for approximately 40% of group net written premiums.
Our combined ratio was 97.5%, which represented a slight improvement compared with the prior year. I'd also like to point out that the volatility of our results is extremely low, with a standard deviation of 0.8 percentage points on COR over the last five years.
As we highlighted in November, for our general insurance businesses, we are targeting growth in net written premiums of 20% over the four years to 2022 and a combined ratio of 95% or better. We've made a reasonable start in 2019, thanks to a large part to the recovery in our Canadian results and our performance across the group in commercial lines. Volumes will always be secondary to margins, and so it's the reduction in COR that is our primary focus.
Let's do a deeper dive on the GI margins. Really on this slide, there's two key messages: First, our accident year loss ratio improved in 2019 due to the recovery in Canada. There's still more to do here. We expect to benefit as previous rate increases continue to earn through into our Canadian results. And while looking further ahead, we're generally seeing favorable pricing trends across most of our key regions and product lines, as shown on the right-hand side of this slide.
Secondly, costs have increased as we brought our digital operations back into the business, and these will be addressed. As a result, we're expecting improvement in the expense ratio in the coming years. The path to a 95% COR, were based on disciplined execution, on efficiency and on mix and on focusing on the fundamentals. The business is capable of delivering this target while continuing to innovate for our customers.
Let's talk a bit about our customers and trust. On the past few slides, I've talked about how Aviva is improving its performance, increasing sales and fund flows and working to enhance profitability. This cannot happen without the support of customers who want to do business with Aviva, earning their trust is central to our vision. At Aviva, we take great pride in providing fantastic service, offering good value products and also being a good steward of the planet. This has been demonstrated in recent weeks as we've supported customers affected by the severe storm here in the UK.
As we usually do with such events, we invoked our major incident plan, setting up mobile offices near the affected areas so that we could be on site quickly and start working with our customers to resolve claims. The current estimate for the February storms in the UK is £70 million across personal lines and commercial lines. This is £20 million worse than our LTA at this point in the year.
During what's been a traumatic experience for many of our customers, our tNPS in the three days following the storms shows that our efforts are being recognized with a score, a very good score at 53.
Critically important to our values is also about being a good corporate citizen. And in Aviva, we've been a leader in ESG and a strong advocate for climate change for over 40 years now. In November 2019, Aviva joined the UN Net Zero Asset Owners Alliance, which commits us to transitioning our investment portfolio to a net zero carbon emissions by 2050. It is these commitments, including our carbon-neutral operations, that help make Aviva a partner of choice for our customers and our distributors.
So service is one part of the equation. But to win with customers on a sustainable basis, it's also about value. To enhance profitability and improve our competitiveness, we need to be efficient.
As I outlined last year, we targeted savings of £300 million per annum net of inflation. That's about £500 million gross savings. We made a good start towards this ambition in 2019. We achieved net savings of £72 million, with activation costs of £59 million. It is a good start, but I expect further progress in 2020. We continue to expect £150 million of achieved savings this year, compared with our 2018 baseline. And naturally, we're aiming for more.
While cost reduction is an important goal, we're still investing in this great business. And we plan to invest in IT, in efficiency, in automation and enhancing our customer service. So, we're looking to deliver a cost program as a leaner but also as a better business.
Before I hand over to Jason, let me recap the key messages for 2019 and give you a sense of what I'm focused on for the coming year. For me, 2019 was a year of early progress. We've clearly made gains with customers, increasing sales, flows and assets, and our focus on the fundamentals has supported profitability, but there's much, much more to do to drive growth, enhance margin and allocate capital.
Our focus remains on delivering great service and great outcomes for our customers and our distribution partners. We've increased our intensity, and this energy and ambition will continue. In addition to expense reductions, we're continuing to pursue improvement in business mix, and we'll use our advanced analytics and risks and pricing to compete with discipline across the markets.
To conclude. My objective is to run Aviva better. We will improve business performance, enhancing returns through disciplined execution on expenses and underwriting. We will focus capital and resources where we can achieve competitive advantage and strong returns. We will take robust action across the portfolio where our performance falls short or where we can see a better way of delivering value for our shareholders.
Thank you very much. I'm now going to hand over to Jason.
Thank you, Maurice, and good morning, everyone. In Maurice's presentation, he outlined the important changes Aviva made in 2019 and the good progress we made with our customers and our program to run Aviva better. Those themes will also come through in my presentation on the 2019 financial performance, which as I first set out at the Capital Markets Day, we'll provide you with more detailed disclosure on economic returns. It's early days in our performance improvement, but our financial results show some early signs of progress. So let's start with a snapshot of the key financial metrics.
At a headline level, we've increased return on equity to 14.3%. We had good levels of capital generation, which resulted in an increase of our cover ratio to 206%. We've grown operating profit by 6%, with gains across most of our business divisions and we've also made meaningful improvement in our central costs.
It's worth noting that the percentage changes you see in this table are after the realignment of the digital costs into the business units. So there's real underlying progress there. EPS grew by 8%. Our positive investment variances also gave rise to a much stronger basic EPS figure. The dividend increased by 3% to 30.9p per share, in line with our progressive dividend policy.
Turning to return on equity. Our ROE of 14.3% is a strong total return in 2019. As the chart highlights, this result included £944 million from assumption changes and other management actions, which added 6.2 percentage points to the return. These items are most notable in our UK Life business, where we had further material benefits from longevity reserves, and in Europe, where active asset liability management and hedging helped us to mitigate the impact of low yields.
Excluding management actions, and the temporary benefit of transitionals in 2018, own funds generation was broadly flat. It's clear that to deliver our 2022 targets, we need to improve our underlying results and that's exactly what we're planning on doing, by building new business value, reducing our core and improving our cost efficiency.
We're confident that you'll see those initiatives driving up underlying returns in future periods and help us deliver a 12% ROE target by 2022, with much less reliance on management actions.
Now moving on to the capital position, our Solvency II ratio increased by two percentage points to 206%. OCG provided 20 points of capital build, which comfortably covered our capital needs, the dividends, growth and debt reduction. Underlying OCG was stable at £1.4 billion, with positive business progress, offset by the transitional benefit of £0.2 billion not recurring. Other capital actions contributed positive £0.8 billion.
Looking at the £1.4 billion of underlying OCG from a different angle, the capital generated from our existing business was £2.1 billion. This is roughly evenly split between own funds generated and SCR runoff. We invested £241 million to write new business and cover our debt, and interest and central costs of £432 million. This shows we're generating strong capital and cash, while still investing to write new business and grow the long-term cash flows of the group. But we are satisfied with the OCG numbers and, consistent with the ROE target, we're focused on ensuring this moves higher in the coming years. In this regard, we expect to increase the underlying OCG in 2020, of course, while still investing to grow the business.
As you would expect, with strong capital generation across the group, cash remittances also remained at strong levels in 2019. In fact total cash remittances of £2.6 billion represents around 30% of our full year target. So we're off to a good start. Our 2019 remittance included a £500 million special dividend from the UK, as well as a special dividend from Italy of €200 million, following the sale of Avipop in 2018. Underlying remittances increased by 2%, mainly owing to increases from Canada and Singapore. Center liquidity has remained very strong throughout the year and is £2.4 billion at the end of February.
At the Capital Markets Day, I outlined Aviva's track record of compounding value through cumulative dividends and NAV growth, and that continued in 2019. Our Solvency II NAV has increased by £0.31 or 8% to £4.23 per share. Adding the dividend provides a total gain of 16% for the year, bringing our three-year compound annual growth to 13%.
I also talked in November about our focus on prudent and disciplined financial management: avoiding excessive balance sheet volatility, holding strong sense of liquidity, good levels of capital in our subsidiaries and reducing the group's debt leverage. This remains as important as ever, and is reflected in the progress we continue to make on capital strength.
We remain on track to meet our debt reduction commitment. As we previously highlighted, 2019 was a light year for our debt redemptions. We've reduced debt by the £210 million that was callable and the leverage ratio has reduced by two percentage points to 31%.
Now touching on the solvency ratios for the major businesses, which are all within their normal working ranges, in France Life, Aviva Vie added around 70 points of solvency cover in the second half, which included a 20 percentage point benefit by allowing PPE, following changes to regulations in France. So the position in December was very comfortable, and it gave us headroom to manage the volatility from the falling yields that we have seen once more in 2020. In the appendix, we've provided our group balance sheet sensitivity to the key assumptions. You can see the low levels of risk that we run, which supports our outlook for capital generation and cash flow.
Let's turn now to the business unit results, starting with UK Life, Investments, Savings and Retirement. The overall theme here is that our business has made good progress with customers, growing premiums and assets, although the profit picture was more nuanced. In UK Life and IS&R combined, return on capital was 9.5%. Our underlying results before management actions on both an economic and operating profit basis were broadly stable at the divisional level, but there were differing levels of performance across the major product lines, which I'll cover on the next slide.
In UK Life, overall, we had 2% profit growth, and we held costs flat despite high levels of project spending and the inclusion of UK digital costs. We had lower results in Aviva Investors, which, as you can see on the chart, saw operating profit fall by 35%. Revenue in Aviva Investors declined due to prior year disposals and lower assets under management in higher-margin propositions. Costs were flat despite our continued investment in capability, which is now expected to level off.
Investment performance has improved. And as Maurice highlighted, net inflows were much stronger in the second half of the year. While it will take time to rebuild momentum in results, there were some encouraging signs in the second half and we have stretching targets for flows into Aviva Investors.
Looking in more depth at the major business lines in UK Life, including Savings and Retirement, our savings business has continued to build momentum. We increased net flows year-on-year and saw higher flows in the second half than in the first half. As a result, we saw healthy double-digit growth in assets under administration.
Pulling out the Savings and Retirement business, which will be included in the new IS&R division, net flows were up 10% to an excellent plus £7.5 billion. Our workplace savings business again saw great results in terms of winning and retaining schemes, while our platform business increased its support amongst IFAs and customers. We'll provide further disclosure on the IS&R division from 2020. To give you a sense of the profit breakdown in 2019, of the £211 million of long-term savings profit, it is split roughly equally between the modern platform and pension savings business and heritage pensions, which will be included and reported in UK Life. There will also be some overhead allocated to S&R, which we'll run through with you later in the year.
In the annuities and equity release, we had an excellent year. Total new business volumes are up 29%, and the returns were attractive with the VNB margin increasing by 0.5% to 4.6%. Our pipeline of annuities remains strong, and we will continue to deploy capital with discipline over returns and payback to grow our long-term cash flows.
Protection was challenging, and the business has responded. In individual, heightened competition and increased reinsurance costs eroded sales and profitability in the first half, but we refined our pricing and propositions and made good progress in the second half, with new business volumes up 25%. But further work is required to enhance profitability.
In group protection, new business volumes were up, but we had some adverse critical illness claims late in the year. Our legacy business continued to generate attractive cash flows and operating profit contribution declined 13%, in line with our expectation.
In General Insurance, return on capital increased by four percentage points to 14%. In GI, there is a little noise in the reported numbers owing to the allocation of digital costs and the inclusion of amortization of internal intangibles in operating profit. Despite these changes, the combined ratio was 97.5%. Looking through these changes, as we've done on this slide, the results showed good progress in both capital generation and operating profit.
Let me start with Canada, which was a standout in terms of year-on-year trends. We've responded to the challenges in the Canadian motor market, and this is now coming through our results, with the combined ratio down five percentage points in 2019. Premium volumes improved through 2019, particularly with increases in commercial. We are expecting further progress in Canada in 2020, and we continue to target a combined ratio of 96% or better in 2020.
In the UK, the combined ratio deteriorated by 1%. In commercial lines, we continue to execute well, with 7% growth in volumes and a 96% combined ratio. Personal lines profitability was resilient despite a challenging market. But Colm and his team have good plans to reduce costs and sharpen our propositions, and this should help us improve profitability in 2020 and beyond.
Europe GI has maintained solid growth in premiums with attractive profitability, despite headwinds from weather and large losses in France and the gradual softening of the Irish market. Overall, it was a promising year for GI, and we remain focused on reducing our COR to our 95% target by 2022.
In Europe Life, we faced unprecedentedly low interest rates, as I mentioned at the interims. We've responded to these low yields through active management of both the product mix and through capital actions, and that's reflected in our OCG, operating profit and new business results. Our return on capital was 10.3%. This included a lower underlying result and higher level of management actions, mainly resulting from our capital management and hedging actions.
On business mix, we've moved further away from guaranteed products in new business. In France, we worked on distribution and product design, which helped to move our mix towards unit-linked, particularly in the second half, where sales rose 109% year-on-year, helped by a large corporate scheme win. In Italy, we deliberately reduced the sales of stand-alone with profits, which accounted for 35% of new business compared to 48% in the prior year. In Poland, our business mix is already attractive and we increased new business volumes by 28%, helped by the launch of a new protection product.
Across the European Life businesses, we are being proactive in managing capital and mix in a very low yield environment, while working constructively with our distribution partners to build a sustainable business for the future.
In Asia, we've continued to enhance performance with higher sales, capital generation and operating profits in our key markets. Return on capital increased by three percentage points to 12.7% for the region overall, with high levels of return generated in our larger markets of Singapore and China.
We've continued to focus on enhancing distribution. In Singapore, we increased financial adviser numbers by 10% to more than 1,800. While in China, the agency channel increased its contribution to new business volumes from 45% to 64%. This helped us generate double-digit growth in sales in both markets. Our Asia segment result also benefited from improvements in our health business in Singapore and a reduction in overheads from our regional office and digital operations.
Turning now to outlook, my focus is on improving our underlying performance, and there is much to do. The key drivers of improvement will be lower costs, better margins and disciplined capital allocation. We're targeting sustained growth in new business, improved profitability in GI and continued mix optimization in Europe Life.
There are also emerging external factors that will require our continued vigilance. Clearly, I'm thinking foremost about the consequences of the Coronavirus, both the human and the financial costs. We are well positioned to withstand volatility with a diversified business and a very solid balance sheet. Weather, overall, was benign in 2019, but it's tracking above long-term average so far this year, with heavy experience from storms in the UK and Ireland. As Maurice mentioned, it's still early in the year, but it's potentially a source of variation in 2020 compared to 2019. We also continue to work steadfastly toward the completion of the Friends Provident International sale. As you know, this has a bigger impact on IFRS operating profit than on economic returns.
Putting all this together, we anticipate improved underlying performance before disposals and external factors outside of our control. And consistent with our comments in November, we continue to expect a significant reduction in longevity and other management actions in profit and in OCG in 2020.
To conclude, we've made good progress in 2019, but we need to do better. We have detailed plans to meet our targets to improve returns, reduce debt leverage and enhance sustainable cash flow, while continuing to invest to grow the company over the long term. We're committed to achieving these targets, and we expect to deliver further progress in 2020.
Thank you. Now we'll move to Chris to Q&A.
A - Chris Esson
Thanks. Can we please start with Johnny Vo from Goldman Sachs. Thank you very much.
It's Johnny Vo from Goldman Sachs. Just three questions if I may. The first question, just in regards to the BPA business, I mean, obviously, you're getting volumes driven by your own pension scheme. But outside of your own pension scheme, what are you seeing in the market? And post your pension scheme, are you still committing to around about £4 billion of volume there?
Number two, just in France, you've obviously done some very good hedging. Can you just – I can't find the disclosure, but can you give us sensitivity to movement in rates in that? And does it mean that we can expect remittances from France? Or are you still saying there's a tepid remittance or zero remittance from France?
And the last question, just in terms – a question for Euan in terms of IS&R. Yes, you're showing good progress, but these businesses were effectively silos before. How integrated are the businesses working together? And are we seeing integrated flows in the business at all?
Great. Thanks, John. I think what we'll do, we'll take them in this order. I'll have Jason speak to France, Angela is most appropriate to give the market specifics, what we're seeing in BPA. And we'll have Euan come up last on IS&R. We'll start with Jason.
Let's start with France. So look, as I said, we've made significant progress in France in the second half. We took a series of actions to reduce interest rate volatility and to improve capital so we built the cover by about 70 points. 20% of that was the PPE change in France, which we don't include in the group ratio. By the way, if we did it, it would increase the group ratio by three to four points. That's a combination of factors, interest rate hedging, asset allocation changes as well, which can materially reduce our volatility. So we've been incredibly focused on just having the best matching portfolio that we possibly can have.
But there is an inherent volatility that remains in the business. And we saw that in the first half, as it went down; in the second half, as it came back and we'll see it again in 2020 as the market will fall. But we've taken steps, and we're very focused on keeping the volatility low.
And the remittances in France, just to be clear, we had a small remittance out of France, net in 2019, which is part of our target. We've got a range for Europe Life of 0.75 to 1.25. The bottom end of that range assumes 0 from France Life over for the rest of the period. Obviously, as we go to the top end of the range, we'll include more. Our base case doesn't assume any dividends out of France Life in 2020. We do expect some contribution from 2021 onwards.
And on BPA, I think, as we said at the Capital Markets Day, it's generally been our own internal restrictions which have kept the volumes in place there. I think we're very comfortable. We've made a very good start to 2020, as you will see with the co-op £1 billion scheme. So we're committed to that market. We think we have some innovative technical ideas as well. We're improving the capital efficiency of that business all of the time. And so I think you can expect us to continue to work hard in that market. And we're not seeing any restriction as basically our, as we said at the Capital Markets Day, our capital return requirements are key in that market.
Andrew, hand the mic to Euan. Thanks.
Yes. I think – thanks for the question, Johnny. I think I can be very positive about the outlook. I think part of my optimism about IS&R is the fact that the £10 billion, £10 billion targets that we announced which will be substantially delivered just by the operations of the two separate business units within IS&R. Obviously, in the second half, if you annualize the second half flows, you're getting something like £6.6 billion annualized, which doesn't look so out of whack against the £10 billion target by 2022. Is it maybe that Capital Markets Day where we had outflows. And then obviously, you've got the £7.5 billion going in Savings and Retirement. So the two businesses are operating well independently. Lindsey and Angela have obviously been sorting their leadership, go-forward leadership team, which Lindsey got hers in place by the end of January, and my team hooking up well, we've got work streams working together.
And we actually have some really interesting opportunities that are starting to bear fruit quite quickly. So things like in workplace, diverting people away from simple passive funds towards more stewardship because the client demand is for more ESG-related funds. And that's – that allows us to promote into that marketplace the ESG range.
I think the other opportunity will be in areas like Smooth Managed Fund, where the current market volatility actually is reminding people that portfolio construction and taking volatility out is important. So these are the areas we’re working on. And I think we will be able to sort of report further progress at the half year.
Can we please ask Ashik Musaddi from JPMorgan, please?
Yes. Hi, thank you. Ashik Musaddi from JPMorgan. Just three questions. So first of all, your Slide number 6 to Slide number 10 is pretty interesting. I mean you have just talked about volumes, which clearly kind of suggests that you’re trying to divert attention towards the underlying volume growth so that the business is growing. So that’s a good thing. Having said that, I think macro backdrop is really challenging, interest rates have dropped, we have uncertainty around recession. So how confident you are that you will be able to print similar slides going forward as well, i.e., print good volumes in annuities, good volumes in the Life & Savings business, in P&C? So that would be one, especially given macro backdrop.
The second one is, clearly, the French solvency moved up, but you must have given away some economics as well on that. So can we get some color on what you have given away to get that boost in the solvency ratio? And the third one would be on OCG. You have a target of £7.5 billion, if I’m not wrong. £1.7 billion per year is still left, whereas your underlying is about £1.4 billion. So is the remaining being covered by organic? Or would you say that there is a still one-off element in your expectations? Thank you.
Great. Thanks. Actually, I’ll take the first question, and Jason will take the second two. Listen, obviously our business is about managing it across various cycles. And as you point out, we have certainly potentially increased volatility as we enter 2020, not namely just because of the coronavirus. I think if you look at last year and you look at the diversity of our business, it held up very well. I mean there were challenging economic conditions certainly here in the UK with Brexit and political uncertainty. Record flows in our workplace business of £7.5 billion was a strong result. It shows the strength of our franchise and our brand, diversity of our distribution and certainly reinforces our position as number one in workplace pensions.
If you move across to third-party flows, we saw that accelerate in H2 at Aviva Investors with £3.3 billion in the second half and £2.2 billion or £2.3 billion overall for the year-to-date. That was a strong result. That gives us confidence. I can tell you that trading early in the year is continuing to look very positive. And a lot of that momentum for us actually started sort of close to the August holidays. So we’ve seen a good pickup as we get more confidence and as we’re dealing with distribution and sales.
In general insurance, the 2% was probably muted. We had to deal with some underlying profit concerns, certainly in our Canadian business. So we certainly were focusing on profit over volume, but we’re now starting to see a decent rate environment, and I’d certainly showed a slide on that.
And I think if you take it forward, and we do plan for various macroeconomic scenarios, so let’s start with the one that certainly is right in front of us. That’s on the continent. So we’ve seen a really good shift, certainly in France, to unit-linked. It’s now almost half of our new business volume is unit-linked. We’re continuing to see good growth in more capital-light business, certainly in Poland, and continuing to see success in our hybrid. So I like the diversity of our business, and I think that actually positions us well for different economic scenarios. But as a management team, we’ll pull the levers based on those scenarios. Jason, do you want to talk about solvency and OCG?
Sure. So in France, we have the dilemma that the value of the assets has gone up, and also the amount of risk has gone up. But the primary issue that we face under Solvency II is the 1-in-200 stress. So what we’ve had to do is buy interest rate options that protect that out of the money cost. So the value at the price of the swaptions, if you like, really is affecting – it isn’t fully priced into the benefit that we get, which is to reduce the 1-in-200. So I think it’s not free, but the number that it costs us is sort of in the range of 5%-ish of profit, it’s not a huge sum to take those sort of steps, and it depends how rates play out over the year. So the – but it was a disproportionate benefit on the SCR.
Is it just an annual thing or it’s like a longer term profit…
We buy – I mean, there’s a series of things that you buy to match your liability, but we tend to buy swaptions with at least a two-year strike into a sort of 10-year or 20-year period, which that sort of matches the book depending – there’s a range that you build just to get the best matching.
On the OCG, I think what I’ve said at the Capital Markets Day was guidance of £200 million per year of one-offs in OCG. So with three years to go, that’s sort of £600 million, give or take. So I think you need to add that. And excluding anything that comes at us outside of our control, we’ll seek to grow OCG in 2020 and beyond from the – it’s about £1.45 billion this year, and we are seeking to grow that.
Oliver Steel from Deutsche Bank, please. And then we’ll do Jon.
Oliver Steel, Deutsche Bank. So three questions. First is the positive exceptional in the UK, £303 million, broke down between what number, £700 million and £900 million of longevity releases and then some negative offsets. I’m more focused on the negative offsets because you’re putting through – you’ve been putting through sort of extra provisions for the last two years or three years and sort of taking a number in the UK. What are they, again, this time? What’s the outlook for that within your £0 million to £200 million guidance going forwards?
Secondly, UK protection, increasing your new business by 25% in the second half of the year after tweaking your prices. What are you actually doing there? I mean increasing volumes when you’re facing falling margins suggest that you’ve got a cost problem there rather than a – well, anyway perhaps you can tell us what’s happening there. And then thirdly, since nobody has asked the question yet, can you update us on FPI?
Okay, great. Thank you, Oliver. Let me start with the second one. Jason can take the first, and I think you provided an update on FPI, but perhaps there was something you want to say. I think, yes, obviously I mean, UK protection was probably one of the slight disappointments. Obviously, it’s become an incredibly competitive market. We had to respond to maintain our leading position.
So you’re right, PVNBP is up. Clearly, margins are down. That’s really driven by a couple of things. So one is experience and one is also responding to the competitive market. As we look forward, I mean, I should note that we do make very healthy margins in protection, but we’re certainly focused on further analytical skills as we look to improve our selection, also our mix and also getting more efficient. So it’s a business that we like and it’s a slight disappointment for this year, but I know Angela and the team have plans in play to improve that in 2020.
So the one-offs in the UK, £300 million net, you’re right, we had a mortality adjustment, which is about £750 million positive on longevity, small negative on protection. We had a £175 million product governance provision, which we clearly don’t expect to recur. We had an update to persistency assumptions, adverse £126 million. Update to our expense assumptions, which was adverse £50 million. That takes you through a number of the negatives. And then there’s also some overhead that is allocated and some debt interest that is allocated into the management actions and other line within that, which get nets down to the £300 million.
I think on FPI, I think the first thing I should say, the business continue to perform. The management team and the business is doing fine. There are no underlying issues. It’s a complex transaction for a relatively small business involving multiple approvals across border and there’s been an interplay in that approval process that we’ve had to go around a couple of times, unfortunately. We’ve made some good progress in 2020, and we expect it to close in the second quarter.
Jon Hocking, Morgan Stanley. I’ve got three questions, please. Firstly, on the life reserves. You made the comment, Maurice, you want to open up the jaws, all that in terms of the gap between revenue and expenses. Is the lever there purely expenses? Or are there things you can do to arrest the sequential decline in the revenue margin we’ve seen in the last few years? That’s the first question.
And then second question, on GI. The 95% combined ratio target, it looks like Europe and Canada and probably UK commercial can run materially below 95%. And given what’s happening with the sort of rate environment in terms of yields, you’d expect that to sort of reprice? So is it UK personal which is the laggard there? Or are you being conservative with the 95%?
And then finally, the comment, again, Maurice, you made in your opening remarks about being proactive in portfolio management, you’ll take decisions on underperforming businesses or products. Can you give us some color about what you think might fit into that category at the moment? Thank you.
Sure, great. Thanks, Jon. Let me start with – I’ll go question two, question three and question one. I may get – Jason, you chip in on question one. I think on the – we set a target of a 95% COR. I think if you look at our average five-year COR, it was on the slide, I think it was 95.8%. And what we showed at the Capital Markets Day is we’ve got a pretty good track record, over 10 years of delivering better-than-market-average CORs with a low standard deviation.
If we look at the constituent parts, I mean, you’re spot on. I mean the flight path, we always have to assume sort of normal long-term weather, the flight path looks good in our Canadian business. Last year, we were getting about 10% in rate increases across personal lines. A big part of that is still earning through. And certainly, right now, the commercial rating in North America is very strong. So that obviously looks positive. I think in the UK, we’re getting rating generally above the cost of inflation. It’s always tough to be the UK motor market, but it certainly looks like it’s poised to harden slightly. Commercial rollout was also good. Colm and the team are doing a tremendous job running that.
I think the one area that needs attention is certainly the UK personal lines. We had a number of businesses, we invested an awful lot of costs, and an awful lot of good cost was invested, I would sort of say that we’re pretty close to the gold standard in terms of efficiency, in terms of simplicity with customers, but we do have some work to do to rationalize the cost. So there’s a fair bit of work to do, and you’ll see that in the cost/income ratio on the slide I showed. So listen, our target is 95% or better. I don’t want to get ahead of myself, but I know that Colm and the team feel pretty confident about that.
In terms of the overall Aviva portfolio, I mean, this is sort of how I think about it and I think about the various constituent parts of the group. As I announced in November, my plan is to run it even better, and that’s my sole focus and that of the team. And I think we’re starting to see early benefits. We made good progress across the five divisions. I mean certainly, profit being up, capital up, COR like-for-like being down, dividend up and certainly strong, strong flows.
But I have – I’m always going to look at shareholder value, and I’m always going to look at the various constituent parts, and I’m always going to ensure that, are they making good returns? Do I believe they have a competitive advantage? Do I believe that we can continue to grow those returns securely and profitably into the future? And if I don’t, then obviously that’s something I have to look at in the context of capital allocation and doing the right thing for shareholders. Jason, do you want to talk about...
Sure, on the – I mean, the life side, as we talked about for several years, are clearly transforming from the old-style more revenue-rich products to new-style products, so that the improvement comes – it’s on three lines: cost reduction, and we set out clear plans to do that. The life company has made some progress in 2019, but it’s got much more to do beyond 2019.
Operational leverage, and we are growing the platform business, as you know, we’re around £29 billion there. We’ve been growing that materially over each year. That’s now a scale play, and we’ll get more leverage through that, same on workplace. We’ve got £138 billion in total on platform so that’s – we’re starting to see real scale in it coming through that, and we’re getting more efficient as we grow that business. And then frankly, in things like protection, we just need to sharpen up the pricing and just make slightly more return.
Christian, Andrew Crean, please, followed by Blair Stewart.
It’s Andrew Crean with Autonomous. A couple of questions, if I can. Could I just return to that portfolio strategy? Because you – back in November, you’d spent seven months confirming that you wanted to keep the current portfolio. You now seem to be taking a slightly more nuanced position. I just wonder what’s happened in between November and now.
And then secondly, in terms of all that news about strong net flows, I noticed that the undiscounted in-force still to monetize actually fell from £24.6 billion to £24.2 billion, which has slightly implied that the outflows are more valuable than the inflows. Could you comment a bit on that? And perhaps Euan might comment on the margins on the inflows in the second half, whether they were higher margin there.
Yes, great. Thanks, Andrew. Let me deal with the first. I don’t think I necessarily kind of nuanced it differently. I very much was focused I think back to even almost a year ago about – I’d leave no stone unturned. And we obviously started with an Asian strategic review. I very much have had, at the front of everything that we’ve done, about how do I maximize shareholder value. I think even in the strategic review, I think we evidenced that with respect to Singapore, we actually found that the business was going to be worth more to us than what the market thought at that particular time.
And obviously, that review does continue with respect to Vietnam and Indonesia. We set a number of targets, specifically coming out of November, and those were set by design. So certainly, when I look at a group target of a 12% return on capital, which, as we described, was 11%, probably with 1 point of management adjustments as we guided to lower management adjustments in the future, we’ll continue to look at every business in the group vis-à-vis those targets and their contribution to safely growing returns. Jason, do you want to…
Sure. I think – I mean, it’s a relatively small movement across the piece. We’ve had quite a lot of cash flows emerge, we’ve taken out from the life business best part of £2 billion as the surpluses come out. There are some small discounting errors. But I don’t think – one year’s new business isn’t going to change the margins. But as I mentioned a moment ago, that the margin on new business is materially lower than the margin on the back book, and that’s why we had to take actions to change the propositions, reduce the cost base and look forward.
Great, do you want to add a point, Euan?
Just comment on the margins in the second half. Clearly, the high-margin business that has flown out over the last few years, we’ve gone from about £12 billion to £8 billion in AIMS over the last few years, and that was a pretty high-margin business. Obviously, the performance last year makes me – and also the market volatility, the fact we’re up this year, we were up 10% last year, we’re starting to see some wealth managers to reallocate the multi-strap like AIMS makes me pretty confident that we’re not going to see material outflows from AIMS going forward.
The mix coming in, in the second half was a combination of fairly low-margin U.S. credit that comes in, in scale, but also realize that it’s a slightly higher margin. And interestingly, we’re getting some benefit from our investment in the equity business. And so our UK equity income fund, some of you might have observed is on the – part of this Lansdowne winners list, and we’re starting to benefit from that. So that’s quite high margin. So it is a mixture of different propositions. But the AIMS outflow has obviously been the pain point in the last few years.
First of all, can we have Blair Stewart then Dominic O’Mahony, please?
It’s Blair Stewart from BofA. Three questions, please. Just going back to one of Jon’s questions on the combined ratio target, looking at it more generally. You’ve got a 2.5-point gap to your target or maybe it’s 3.5 points, assuming normal weather, or maybe it’s 5 points assuming no PYD. So how do you look at that? And what do you think the moving parts are, just at a very high level? That’s quite a lot to do in a three-year period.
And secondly, just sticking with the general insurance business. Could you talk about the commercial insurance risks from business interruption from the current situation’s COVID? And thirdly, just an update on the Italian JVs in terms of the renewal process. What should we expect from those in terms of timing, et cetera? Was there any change since you last spoke on that, the Italian JVs?
Great. Thanks, we’re all going to tackle it. I’ll do your second question, your third and your first. I may ask Colm to chip in on the first question. I think on commercial, with respect to COVID-19. And listen, the vast, vast majority of our commercial policies exclude business interruption due to new pandemics. Our policies actually respond to a specific list of notifiable diseases. So we have minimal exposure with respect to business interruption as it directly relates to coronavirus or COVID-19.
On our Italian joint ventures, what can I say? Well, obviously we note the announcements that have been quite public with respect to Intesa and UBI. I’m not here to comment on those discussions. As you’re aware, we have a partnership with UBI that’s due to expire at the end of this year, and they have the option of acquiring our 80% stake.
We also have an agreement with UCI, UniCredito. We’ve had that since 2007, and we began discussions about the future of our partnership. But I think it’s also noteworthy, if you look at the last four years, we’ve done an awful lot of work to diversify our distribution in Italy, and approximately 40% of our new business now comes from Fineco, one of the largest IFAs in Italy. Colm, rather than me go through the path to 95%, you are running it. Do you want to give the highlights and touch on sort of weather, expense and mix of business?
Yes. The key thing, the business is the path to 95%, I mean, as Jason outlined, what we’ve actually done is added back in the impact of UKD and added back in the impact of amortization on the COR. So when you look at trajectory to 95%, we don’t just target a 95% COR, that’s the COR we used in terms of pricing. Obviously, depending on market movements, we adjust that. And we obviously look at volume and mix of business as well. So within Canada, we’re actually – the trajectory is to get to 95%. And almost certainly, we would look to continue that trajectory.
In commercial, we target a much lower COR than we would in other channels, so strategic partners, the channel – our banking channel would have a higher COR than you would in the direct. So across each product and across each channel, we target very different CORs and volume increases. And the 2% growth that we saw last year, the bulk of that came from commercial, we’ve shrunken the UK and personal lines by 4%, grew in commercial by 7%. And within that, it was about 4% growth in motor and 8% in non-motor classes, which is where we’re focusing our attention from a growth perspective, so very optimistic about the future in 2020 and beyond, notwithstanding the potential impact obviously of floods, storms and coronavirus.
Just come back – just a couple of comebacks. Sorry, did you say when the UniCredito increment comes up for renewal? Maurice, did I miss that?
We’re currently in discussions with that agreement.
Right. And if COVID does become a notifiable disease, does that change matters?
No, it’s not a listed disease on our policies.
Yes. It is a notifiable disease already for the moment. Yes.
To Greig Paterson, please, and then Abid after that.
I have two questions, unusually for me. The travel book, I wonder if you could just tell us how many policies you have in-force there, how much specific reinsurance you have, and if you burn through that, whether it will hit your aggregate – you aggregate cover will be any protection. And my second question, I was a little confused about the comments around the bulk annuity sales outlook. Did you say that the budget isn’t a constraint and you’re just focused on profitability? Or that there is a budget for 2020?
And then I suppose it’s a third question, sub-question. Am I correct that this year, you did a transaction where you effectively brought in a partner via reinsurance or however to finance the credit element of your SCR? And I wonder if you just want to talk about that and to what degree you will continue doing that next year and how that fits in the budget comments for 2020 on bulks.
Great. Let me take – thanks, Greig. I’ll take the first one. And Jason, I’ll let you take the second one? We don’t disclose specifics around our reinsurance agreements, but let me give you some color. So currently, the travel book for us, it’s a relatively small book. We write £150 million of travel insurance premium here in the UK that’s on a base of about £4.3 billion, £4.4 billion on a gross basis. To date, we’ve had 500 valid travel claims presented to us. And I do use the word valid. Obviously, we’ve had lots of claims, some not from customers of ours. It’s very important to note that, certainly, we have the disruption add-on, we stand behind our customers, and that wording effectively is triggered if you’re planning on traveling to a country that the FCO currently advises against travel against.
So on bulks. We had a good year in 2019, as we said for bulks, we grew from £2.6 billion to £4 billion approximately. We’ve obviously got a plan for bulks, which is to grow it again in 2020. We’ve set out a clear budget and a series of assumptions that we’d expect to meet for that. So we based the plan on how much capital we want to invest. And that’s obviously subject to returns, which depend on the assets. So our constraint is the speed at which we can add the assets into the book. And we’ve continued to be very measured in the way that we like to match our annuity production with our asset generation at the same time. So – but we expect to have a good first half in bulks. As Angela mentioned, we’ve had a good first quarter so far.
I think on the capital management side, we’ve started to use longevity reinsurance much more since sort of 2016, 2017 as a tool to manage down, particularly the risk margin. I think everyone knows that is bloated. When rates were where they were this time last year, it’s particularly bloated today and using reinsurance is very efficient. We have done a small transaction as well, which does include different elements of market risk. It’s not just about SCR. It’s about actually changing the form of the investment. We’ve entered into that as a sort of as a test project, if you like, to see the benefits of that and how that can actually make us more capital-efficient and increase the returns into future periods.
Hi. It’s Abid Hussain from Crédit Suisse. Just one question left for me, please, on mortality releases. I think you said that you released £750 million of mortality reserve releases. And that’s, I think, a similar level to last year. So I’m just wondering two things. What’s the outlook here? And then to what extent are you reliant on this in terms of cash remittances in your targets?
Great. Thanks, Abid. Jason?
Sure. We – the outlook is materially less. We’ve released £700 million this year and last year. And looking forward, we don’t anticipate significantly large releases. We just received CMI ‘19 on Monday, I think. That was pretty much what we expected it to say. And there’s plenty of work that goes into that. So when we set this year’s reserves, we just kind of knew what had happened to both trends in 2019 and the outlook for improvements. So there’s no surprises there. We don’t take the biggest move you can possibly take. So there is some strength remaining in there, but there will be, I expect, unless things change, materially lower, as I said, reserve releases in the future. And no, the capital and the cash remittances, I think I pointed to the £500 million special when we set the target. You’ve had that in this year’s £2.6 billion. The future is not reliant on that.
Hi. It’s Steven Haywood from HSBC. I’ve got three questions here. And on Slide 10, you give outlooks for rate on your non-life businesses, can you quantify or provide ranges around these rate increases? Can you tell us which ones are offsetting claims inflation, a little substantially or not enough offsetting claims inflation here? And then second question, you obviously don’t include the PPE in your group ratio, but other European companies do. Can you explain why you’re not including it here? And then third question, about your Singapore operations. Is there any concerns or worries that there’s a long-term care issue over here? Thank you.
Okay. Thanks, Steven, I’m going to probably give a little bit more than I normally would, but it will still be sort of directional at best because obviously every policy and every risk is slightly different. So in the Canadian business, as I did actually say, we were getting circa 10% across the country. And obviously, there’s different jurisdictions. The absolute rate levels come off of that. It’s now more in the mid-single digits. Of course, that depends on a number of factors, but what we got last year is flowing through. What we’re seeing in commercial in Canada, and again I can give you examples where it’s 50%, 60%, 70%. But there’s also, if you take the SMI, which is probably a more accurate marker, it’s probably high single digits. Certainly, both of those are well above claims inflation, but they’re also a little bit of catch-up in terms of the delta, the rate adequacy that existed in that market and for us.
In the UK, we’re starting to see an acceleration in commercial rates. There’s certainly some classes that capacity is being withdrawn, that we’re seeing more. But once again, a wide range. But if you take SMI, you’re probably in the mid-single to slightly higher, once again, ahead of inflation. And then obviously, we’re a big motor writer. That’s closer to sort of mid. And once again, depending, and that is slightly ahead for claims inflation. Obviously, claims inflation isn’t the same for everyone. The scale advantage does have an advantage. So that’s a fair bit of insight. Colm, if you would like to add any color, rather than disagree with me on any of those comments, I’m happy to...
I certainly won’t be disagreeing with you. I’m not that stupid. But yes. No, but Maurice is absolutely spot on. So in Canada, the one thing I would add is where we’re actually seeing a lot of rate coming is in commercial property, particularly in condo buildings where you’ve seen a significant reduction in capacity in that market, some of it driven by Lloyds and the decile work that’s been going on over there, some of it driven by the attractiveness of the U.S. market. So you’re seeing significant rate in. Just to be clear, it was needed. So I think that rate hardening will continue. The UK, less so but we’re beginning to see, as Maurice said, rate hardening in the UK and last year, I think we’ve been open about the fact that we probably didn’t rate, not probably – we didn’t rate in line with where inflation turned out.
So we underestimated the impact of inflation in motor and home. That’s been righted in the second half of the year, and we’re continuing to put rate through in 2020. So we do expect a continued hardening of the motor and home markets in the UK, and obviously the impact of the floods will have an impact on that. And similarly, the delay in the whiplash reforms and reduction in rate was going to pass around to our customers 100% will now be later in the year. So you will see the impact of that coming through. Then the final piece is obviously Ogden. The new Ogden rate obviously had an impact on motor rates as well.
I’d be remiss if I didn’t say that the French personal lines and commercial lines are tracking some of the UK ahead of inflation as well so. Jason, you want to talk about PPE?
Yes, PPE. I mean France and PPE and regulatory matters have been an interesting journey the last few months. It came pretty late in our process, so we just decided with the PRA that we wouldn’t put it into our group numbers just out of expediency. And we and they will continue to analyze it. I think going forward. I don’t really want it to be seen as part of our productive capital. I don’t – we can’t make a return on it, we can’t deploy it into the business. So I’m pretty cautious about including it in our sort of own funds, which I’m using very much as a measure of value. But I don’t think I can make a return on it going forward. So I think we’ll think carefully about it presentationally, but it does provide us a buffer against capital risk in the French subsidiary, and therefore, it has value to us. Singapore?
Sorry, did you have a – was the third question...
Maybe. We got Chris to answer that, I think.
Yes. Just first thing to say is the long-term care portfolio in Singapore is not the U.S.-style long-term care. We do have reinsurance cover on that. Secondly is there’s no long-term sort of fixed-rate limitation, so we can reprice as experience emerges. Singapore government took back the first loss on ElderShield. So we’re now covering the excess portion only, so it needs to burn through that before it hits us. We’re actually really comfortable with the profitability. We’ve got a large diverse portfolio. And we’re actually the largest risk underwriter in Singapore. So I think that sort of – our capabilities in sort of managing the long-term exposure is well covered.
We have time for two more questions. Firstly, Dominic, and then finishing with Fahad, please.
Thanks very much. Dom O’Mahony, Exane BNP Paribas. Just two quick questions, if that’s all right. The first is on the Brexit provision. Forgive me if this is in the disclosure and I’ve missed it. Is there sort of Brexit provision in there? I noticed you now include commercial and residential real estate sensitivities in your Solvency II sensitivity table. Has there been any change to the way that you’re treating that? Because as I understand it, that was an insulation against real estate shocks.
And then secondly, there was regulatory consultation from the PRA on – in particular on commercial real estate rent-backed debt, clearly, that’s an important thing for you. That consultation closed at the end of December. Do you have any update on whether there’s any impact at all for yourselves or too soon to tell?
Shall I take that?
So the Brexit provision, we left it – Brexit happened obviously on the 31 of January, the accounts at the 31 of December, I think we’ll expect to absorb that into the base provisions during 2020. Clearly, there’s a specter and it’s still of a no-trade deal, kind of hard-Brexit scenario. So we’re being cautious around how we’ll deal with that, but we didn’t change it. We did – I did include commercial and residential property in that scenario that I showed you in November. Just thought it would be helpful just to break that out so you can see how property does flex the capital ratio. I think that consultation was relatively low key. I don’t think, and Angela is nodding, there’s any particular issues for us that stem from that. If that’s not right, I’ll get back to you.
Everyone, good morning, Fahad Changazi from Mediobanca. Two very quick questions from me as well on protection. Firstly, on group, remember, there were two years ago, we had some adverse development as well. Could you just comment on this business? Is it just the nature of the beast that sometimes you do get volatility in group protection? And secondly, on individual protection and I sort of asked this last time as well. It’s competitive. Could you explain the dynamics around the competition? Is it a new entrant? For example, Lloyds was looking to enter. They have presumably a distribution advantage, in which case, the competition could be sustained.
Okay. Great. Thanks so much. Do you want...
Thanks. I think on group protection, you’re right. I mean it makes a significant, but not huge double-digit figure. So if you do have big claims, a bit like large losses in GI, you can see reasonably high volatility on it, slightly different in 2017 to 2019, but there’s – it’s continued to be very profitable. It’s an extremely high return on capital for us, and it’s continuing to trade well and had good growth in 2019 in terms of sales. I think on protection, there’s nothing in it, particularly, we have seen one or two parties try and grow their business.
There’s ourselves and Legal’s have gotten the number one and two position and we jostle for that over from time to time. I think the dynamics of that are about having sharp propositions, good reinsurance pricing and good relationships with IFAs. We totally revamped our products in 2016, and we had a great 2017. Others kind of caught up, a little bit of copying, if I could say that. And we continue to sort of jostle for share. The one piece is sometimes where the reinsurance renewals come up, there have been some significant price rises that are flowing through into our bottom line. And we’ve sought to take actions to remedy that.
That concludes the Q&A. Over to you, Maurice, to close the session.
I’d like to just start by saying thanks. Thanks, everyone, for coming to our 2019 results presentation. 2019 really signifies the start of a journey. I started with a real firm focus to run Aviva better, of the shareholder returns at the front of my mind. And I think when you look at these results today, they are a good early indication of the progress that we’re making. As I said earlier, we’re under no illusions. There’s an awful lot more to do, but myself and the team remain steadfast and focused on Aviva and continue to improve our results. Thanks very much. Safe travels, everyone.