RSA Insurance Group's Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.28.14 | About: RSA Insurance (RSAIF)

RSA Insurance Group plc (OTC:RSAIF) Q4 2013 Results Earnings Conference Call February 27, 2014 3:15 PM ET

Executives

Martin Scicluna - Chairman

Stephen Hester - Group Chief Executive

Richard Houghton - Chief Financial Officer

Matt Hotson - Investor Relations Director

Analysts

Andy Hughes - Exane BNP Paribas

Tom Dorner - Citi

Oliver Steel - Deutsche Bank

Will Hardcastle - Bank of America

Kamran Hussain - RBC

Andrew Crean - Autonomous

Andy Broadfield - Barclays

Marcus Rivaldi - Morgan Stanley

Thomas Wright - Bernstein

Fahad Changazi - Nomura

Oliver Steel - Deutsche Bank

Martin Scicluna

Good morning, everybody and welcome. I am going to make some brief opening remarks before Stephen and Richard take you through the detail of today’s announcement.

There is no doubt about 2013 was a very difficult year for RSA. Extreme weather across Scandinavia, Canada and the UK, coupled with the problems we identified in Ireland in the final quarter led to a very disappointing performance for the Group. This together with our decision to write down certain goodwill and intangible assets led to a loss after tax of £338 million pounds. Under the circumstances, the Board has completed that it’s not possible to justify recommending a final dividend for 2013.

Whilst the 2013 results are poor, they contain some sizable non-cash items. On a normalized basis, performance in 2013 still justifies the strong underlying business case for RSA.

The issues which emerged in Ireland are totally unacceptable, and the Board laid a thorough review of our risk uncontrolled processes, which have included the involvement of external independent firms. They also prompted us to commission an independent review of the Group’s claims reserves, which Richard will come on to shortly. The important point is that none of these independent reviews have identified any further concerns.

As you know, at the end of 2013, we commenced the thorough review of the business with the objectives of improving the capital strength of the Group, optimizing the Group’s portfolio and delivering the sustainable dividend into the future.

I am delighted to say that pathway through this process; we were joined by new Group Chief Executive, Stephen Hester. Stephen started by immediately picking up the reins on the business review and he is going to take you through this shortly. I’m very pleased with the work that has gone into the business review and the team has worked extremely well together.

Before you hear from Stephen, I’m going to now hand over to Richard to take you through the results. Thank you.

Richard Houghton - CFO

Thank you Martin and good morning everyone. At a headline level, it’s been a tough year and this is clearly apparent in the number as you can see on this slide. However, there have been some good underlying performances, which I’ll draw out as I take you through the results.

These results also reflect a number of shifts towards a more prudent position in the balance sheet and as you’ll hear, a strong focus on TNAV with several actions to protect and improve our capital position. We’ve already seen some of the key metrics, so I’ll move straight on to the details of today’s numbers.

Starting with the operating results. Underwriting profits of £57 million have been hit by rains in Ireland and significant adverse weather. Adding back these one-offs, the single biggest of which is the £200 million cost of addressing issues in Ireland, will produce a normalized underwriting result of £309 million as per the detail on the underlying adjustments in the appendix to your packs. I’m not looking to underplay our disappointment in the underwriting results but hopefully this helps you understand what a more normal year would have produced.

Investment income of £493 million was slightly ahead of expectations but down 4% from prior year, reflecting a continued low yield environment. The discount unwind was impacted by our decision to reduce the long tail liability discount rates in the UK and Irish businesses from 5% to 4%, also reflecting the persistent low investment return environment. Other activities of £104 million are £18 million low than last year and included the benefits of restructuring of group corporate center in 2012, and lower costs associated with our emerging market start up businesses.

The headline operating result was £286 million with the normalized operating profit of £601 million. Net written premiums grew 3% to constant exchange and comprised growth of 3% from rate increases, a 2% reduction below volumes and 2 points of growth driven by acquisitions we made in Argentina and Canada in 2012. Scandinavian premiums were flat, with growth in Sweden, Norway offset by plan shrinkage in Denmark where we continued to focus on improving profitability.

In Canada, premiums grew by 11% to constant exchange with 4 points of organic growth and 7 points of growth coming from the acquisition we made in Quebec in 2012. UK premiums were down 3% overall with reductions across both personal and commercial motor including the renegotiation of the Motability contract. Emerging markets continued to deliver good organic growth of 13%.

As you can see, underwriting profit was significantly depressed in 2013 with the profits of £57 million, mainly reflecting the issues we faced in Ireland, but also about £50 million of adverse weather. Adjusting for these items gives normalized underwriting profit of £309 million with the normalized current year profit of £184 million, and then ex-Ireland prior year profit of a £125 million. This demonstrates that despite the events of 2013, the core underlying business continues to perform.

This slide shows our usual breakdown of the loss ratio and hopefully what’s apparent here is the same point I made on the previous slide. So, the underlying performance of our business remains strong. The underlying loss ratio of 59.9% is in line with recent years, which is encouraging. Our large losses of 7.1% were also in line with recent years and our long-term average.

What I do want pick out though is the prior year development which helped the loss ratio by only 1 point. This was much lower than previous years and was heavily impacted by the events in Ireland as well as reserve strengthening in our UK liability business and in particular in professional lines. The weather ratio of 3.5% was worse than our long-term average which is 2.9% for the five year period ending in 2013 and included a significant level of caps which I will come on to.

This slide shows the growth in net costs of the major weather events in 2013 and breaks out our reported weather ratio of 3.5% or £293 million in total. This compares to a £175 million in 2012.

One of the actions we’ve taken following our 2013 experience is to materially strengthen our planning assumption for weather and to explicitly include all of our cap losses in the five year average. On this basis, the five year average has increased to 2.9% and accordingly, we have set our planning assumption for 2014 to more prudent 3%. In the first two months of 2014, we have experienced severe and prolonged flooding and storms in the UK as well as severe winter weather in Canada. Our initial estimates of the net losses of between £75 million and £100 million, although these are of course extremely early numbers. The mid-point of this range is around 50 million higher than our weather planning assumptions for January and February.

Finally on weather, I do want to [step] briefly on our cat insurance program for 2014 and there is a slide on this in the appendix to your packs. For 2014, we have reduced our retentions in both the UK and the rest of the world. In UK, our cat protection now attaches £75 million. For floods, storm and freeze, we have a 168 hours, a week’s cover between 75 million and 100 million; over a 100 million, we have 504 hours or three weeks of cover. For the rest of the world, excluding the U.S., we brought our retention down to £25 million although there are some minor variations around this, which give slightly low retentions in Canada, Ireland and some of our emerging markets businesses.

Turning now to our underwriting performance by region, Scandinavia delivered another strong result. And its combined ratio of 88.1% is in line with the expectations we laid out at the Scandinavia investor briefing in November. In Canada, despite the worst and third worst weather events on record, we still delivered an underwriting profit which we think is testament to resilience of the underlying business.

In the UK, we’ve continued to make good progress in reshaping the portfolio. However, the continuing tough conditions in the UK motor market as well as the need to strengthen reserves in our liability business weighted heavily on the result. The Western Europe result was clearly impacted by events we have discussed in Ireland. However, I want you to take a moment just to highlight our Italian results.

An underwriting loss of just £1 million against a loss of £15 million last year, demonstrates the significant improvement that we made in that business over the last couple of years. Emerging markets delivered an underwriting profit of $46 million with good performances across all regions and we continue to see operating leverage come through in the expense ratio.

Investment income of $493 million was slightly ahead of guidance, but down 4% from prior year. The average yield on the certain portfolio was 3.5%, down marginally from 2012 with the average yield on the bond portfolios of 3.3%, again down marginally on prior year.

The investments rates in the group’s bond portfolios at the end of the year were approximately 130 points lower than the existing portfolio booked yield. Average duration at the end of 2013 was unchanged of 3.8 years. In contrast to 2012, when we increased the proportion of assets, invested in corporate bonds, asset allocations remained relatively consistent throughout 2013.

Income continues to be subdued by the persistent low yield environment and this will affect investment income expectations for the coming year. In addition to this, since the end of 2013 and in order to improve our capital position, we sold 79% of our equities portfolio, which stood at $582 million at the year end.

The sale of these assets while it’s important for capital generation will have a negative impact on investment income going forward given that relatively high yield. Our expectations for 2014 investment income are therefore around £430 million.

Now as you have seen, below the operating results we have taken some non-cash charges within the reorganization cost line. Firstly, we have impaired purchased goodwill by £110 million, £71 million relates to our Polish business as a result of lower than expected economic growth projections. £19 million was in respect of our Argentinean operations due to increased economic uncertainty. The balance relates to smaller write-downs elsewhere in the book.

Secondly, we’ve written down just over £200 million of software in our UK business in recognition to some of our investments in the period 2005, 2011, we’re not producing the benefits anticipated with fresh technology spend now required.

Headline pre-tax income was a loss of £338 million, but adjusting for one off items underlying pre-tax income was a profit of £424 million.

This slide shows a walk from profits to reported NAV and TNAV. What you can see is on a normalized basis, we generated positive operational NAV and TNAV, but the impacts of the significant one offs together with movements in rising yields, FX and pension valuation reduced NAV by £875 million and TNAV by £471 million over the year.

As a consequence of this, our cash flow position at the year-end was significantly lower than we would feel comfortable with. The IGD surplus was £0.2 billion with the coverage of 1.1 times, whilst our economic capital surplus of an A rating calibration was an £0.7 billion with coverage of 1.3 times.

You can see the key drivers from the 2012 year-end position on this slide. Now we’ve already taken quick and decisive action to impair this and Stephen will talk later about what our estimated capital positions will look like post the rights issue.

The movements of our IGD surplus during the final quarter of 2013 from an £0.8 billion to £0.2 billion is driven by the cost of resolving the issues in Ireland, adverse weather and the hybrid debt restriction which puts the capital on the proportion of loan capital that can be accounted as available capital resources. And this restriction will of course lift as a result of the proposed rights issue.

Turning to reserves, we have confidence in the adequacy of our overall claims reserves. Our own assessment of the margin in reserves, which is the difference between our actuarial indication of the ultimate claim cost on the booked reserves you see in the accounts is 5% of total books claimed reserves or just under £500 million.

However, the events of 2013 on the commencement of a business review on appropriate points on which the gains on further external independent assurance of RSA’s reserving position to build on the insurance we get from the annual review by our external auditors.

As you will have seen from this morning’s press release, we appointed Towers Watson to review our actuarial indication claims reserves net of reinsurance. This review covers specified segments of our global business, excluding Ireland, representing around 90% of the Group’s total net claims reserves.

Towers Watson concluded that RSA’s actuarial indication net claims reserves are a reasonable best estimate and that they fall within the range of reserves regarded as reasonable buy them. Our book reserves included margin above our actuarial indication reserve estimates. And this margin is sufficient to comfortably cover minor differences in actuarial estimates.

We believe that this should give the market increased confidence in the overall adequacy of our reserves. And I must refer you to the additional information concerning the scope and nature of the Towers Watson review, which in the appendix to your [packs]. However, we’ve also taken some additional actions which I believe will give further confidence.

Firstly in January 2014, we purchased reinsurance against volatility in our claims reserves to an adverse development cover. It was underwritten by Berkshire Hathaway and covers the net reserves in existence of 31st of December 2012. It provides £550 million of cover with an attachment point £550 million above our actuarial indication. And we retained 20% of the exposure.

I won’t go into further specific details here, but in very broad and simple terms we have begin recover on the policy if our reserves as at 31st December 2012 deteriorated by around £100 million or more above our 5% margin.

Now this cover provides significant benefit to our capital and rating agency models, but the terms of the cover should also provide further comfort against material adverse volatility in our claims reserves.

At the end of the year we also lowered the discount rates that we used on our UK and Ireland long tail liabilities from 5% to 4% and this reflects the ongoing low yield environment and our desire to ensure that our discount rates reflect the yield we will continue to earn on the assets to back those liabilities.

Turning now to cash and firstly, repatriation. We continued to receive a healthy flow of cash to the center. In 2013 the Group received around £450 million of dividend from its subsidiaries. After capital injections into its subsidiaries of £275 million, of which £220 million related to Ireland, the Group benefited from net capital repatriation of around £175 million, the details of these flows are shown in the appendix to your packs.

We’ve seen a positive trend in cash generation in the period with operational cash generation from our insurance operations from investments increasing to £743 million in 2013. After group operating cash movements and dividends paid, our net cash inflow in the year was £114 million, an increase of £344 million from last year.

Finally, our outlook for 2014, as a result of the actions Stephen will discuss, premiums were full in 2014, by as much as 10%. On the regional underwriting level, we expect to mid to high 80s COR in Scandinavia, low to mid 90s in Canada and ongoing improvements in the UK and emerging markets.

As I’ve mentioned, we have increased our group planning assumption of weather cost to 3% marginally ahead of our five year average of 2.9%, but I’ve also mentioned that we started 2014 with difficult weather. So holding to 3% in 2014, may prove a challenge. Finally investment income is expected to be around £430 million.

That concludes my review of the 2013 numbers and with that I’ll hand over to Stephen.

Stephen Hester

Richard, thank you very much for that and may I say that it’s a pleasure to be here and look forward to getting to know many of you who I don’t already in the coming months. Let me also express my thanks to Martin, first of all it’s my view that he has done an outstanding job setting into bridge, if you like him as an executive for a few, no doubt uncomfortable months. The work done and led by Martin with all of my new collogues and the executive on the strategic review was progressing extremely, and I’d been a, makes feel a very welcome at and b, there has been a really very high level of overlap between the views, if you like what I was developing coming in and the views that the company was developing on a strategic review. And so I think this is a comfortable set of the agreements, if you like that we are presenting to you today.

We are also conscious that because of the short period of time in which these things have developed and at least the three weeks that I have had to be here. There is a level of detail that you probably want that we won’t be able to give you today or that it is not responsible to give you the [damn] so we would expect at the half year results to have more detail on some of the implementation plans that I will lay out.

The detail actually exists and is there in the actions plans of all of our businesses, but I think it would be responsible to spend a bit more time and then especially for me to have a chance to spend a bit more time on them, before if you like giving that to you. So I hope you bear with us.

Now, clearly, the announcements we have made today in terms of the last year and in terms of having deposit dividend and in terms the rights these are uncomfortable announcements for companies to make and quite properly shareholders will be obsessed that those were all if you like necessary outcomes. So we think it’s incumbent on us, to make sure that we are at decisively firmly with the clear plan going forward that corrects the issues that are being, if you like uncovered and not just with the 2013 results, but were pre existing.

In the program that we are announcing today essentially has three components, which you will see on the slide tightening the strategic focus of the group. So that we can concentrate more of our management and financial resources on the areas where most likely be successful. Resetting both the quality and quantity of our financial strength, we all know that the direction travels is upwards for financial institutions generally. But I think, I want to emphasize both quality and quantity, because clearly there are a number of issues with people being uncertain about in terms of transparency and in terms of reserving assumptions, some of which now Richard has addressed in his slides, where we want to put forward a better testament and how to develop a higher level of confidence with what we’re doing.

And then of course, once we have got the strategy and the capital strength rise, we need to then make a return to shareholders on all of that and that requires significant business improvement albeit based on a foundation which is not bad in many areas.

Before going into those actions, what I call I do just on the next two slides is give you if you like to elevated speech on my own impressions and coming into RSA and things that we’re so juggling within putting this plan together and deciding whether we believe that we can deliver it.

And hopefully, most of this is known to you already. But the essence of this first slide is we think that we have the raw material to make a strong well performing group of RSA into the future. And that raw material comes from the strong competitive positions of our major businesses, from the business line and geographic balance that makes us less vulnerable to the big reason swings of anyone individual segment, albeit we need to focus that more tightly.

In many of our businesses the underlying performance is solid in terms of underwriting results and underpinning all of that and very, very important is the strength of our relationships with our 19 million customers and certainly my early observation as I spend time with our businesses is that actually across a whole range of what I call customer measures retentions and that promoters call these sorts of thing we are in pretty decent shape with customers of course the ambition is always to strengthen that further. So, the foundations to make something good.

There is some important challenges for us set out on hand, things we have to fix. And the top left is of course the chart that underlies the rights issue, not just in 2013 but actually for a number of years capital and RSA has been eroded and that’s partly a result of acquisitions, partly in the result of software capitalization, partly result of operating results and partly result of dividends.

And I think that one could argue that the company has had insufficient attention on tangible equity what you really have to take risk with and possibly look too much at regulatory ratios which also include debt along the way, we will fix that. And this slide as you can see I have a major, I call present measure of capital which I accept is entirely flowed, but that’s me and (inaudible) have to premium to me is an interesting way of thinking about the real money that you have to support your scope of business and that’s why we put this up here alongside the traditional regulatory and economic capital measures. So reversing decisively that capital position is one thing we have to do.

The second thing on the top right and there is some disclosure here that we haven’t given before is to improve not just the quantity but the quality of the profit that we are making. And as you will see past years at RSA have relied in my view too much on the combination of prior year releases and taking money out of margin. We have not published the margin before you will see at least on that measure in the last two years nothing has been taken out and indeed we put some back into the margin in our closing adjustment for this year’s account, but quality of earnings is I think an extremely important thing to focus on and the transparency we give you will act as a useful discipline on us to make sure that that is a promise which we follow through on.

The group like all insurance companies needs to keep bearing down expenses and in quite a number of areas we are not in line with where we should be on expenses and indeed some of our accounting has flatted our expense ratios for example in Canada Noraxis being counted on the -- income being counted on the expense lines hasn’t been a secret but nevertheless it could argued to have allowed us into more secured than we might had on expenses.

And so one of the most important areas of self improvement going forward will be expenses. Of course there are tones of industry wide challenges that we all need to work hard on and every company needs to work on, they are not going to go away, they are listed on the bottom right.

So now moving through the three action points that I talked to you about strategy, capital and business performance. And the strategic work as I mentioned is basically to establish four core UK, Ireland, Scandinavia, Canada, Latin America (inaudible) us any great surprises there. They represent our strongest franchises, the ones who are most likely to succeed and if we concentrate our effort there. Our other markets are under review, that doesn’t mean to say we will definitely exit every single one. I’m sure there would be some we don’t, but you could expect significant actions over the next couple of years to address. But the other markets are under review and in some cases some business areas in our core markets.

And what we’re trying to do again not extremely unique is make sure that we have a business mix which can support strong customer appeal, sustainable market leadership positions. We think that there are both business and financial benefits from diversification balance provided that’s within a framework that you can manage effectively and of course making sure that we have the capacity to service that in management and financial terms.

Now not just disposals and geographic actions in the strategic tightening up, but a whole series of portfolio actions within our existing core businesses, where there are business lines that currently make inadequate returns and either need to be exited downsized or substantially readdressed in pricing and other terms and you will see here, a pretty possibly uninformative chart where over our different business portfolios lie on the spectrum of returns and we will take a more aggressive approach than before to the pink ones that go below zero on this chart. The result of that is likely to be several £100 million reduction in premier, we’ve given in the pack if you like some idea for you to model that.

So those are the two key areas if you like of conceptual strategic refocusing. Let’s talk about capital. What we have tried to do as I mentioned is both address capital quality i.e. the transparency and riskiness of our balance sheet as well as coming onto address quantity. And we hope that these will be continuing themes in disciplines that we put upon ourselves going forward.

And again, Richard has mentioned a number of these, but there has been action taken and there will be more action taken on capital quality and transparency, and we’ve talked about goodwill and software. We could have written down a lot more, there is of course always in these decisions attention between trying to get rid of the worst, [so funds] that are taking but not being profligate with our shareholders’ funds and making sure that whatever we do, we can earn a return on going forward.

In terms of increased confidence in the underwriting results, a whole series of actions, now of course the world delivers surprises, so there will be things that will happen, both in terms of past reserves and future profits that swing away from current estimates. But nevertheless, the adverse development cover that has been mentioned, increasing prudency of forward looking, whether assumptions, increased reinsurance, a transparent reserve margin and the higher reserve margin and therefore Towers Watson and the discount raise in UK, liability reduction, all of these are designed to improve transparency and improve quality and improve confidence and if you like, the base financials. And there is some important asset de-risking which has gone on in the first quarters, as been mentioned.

So the portfolio review in addition to the rights issue, we’ll supplement the quantity of recourses we have. We’re setting an anticipated target in 2014 of $300 million of proceeds from a couple of disposals underway. Of course, there will be more disposals over ‘14 and ‘15. And so hopefully that amount will ultimately be higher. The portfolio review by reducing premium will also release some levels of capital and I hope that our retained earnings in the coming periods will return to be positive.

And so the self help measures are substantial, they should be, but we think they are durable. And that of course comes then on to the rights issue. And we have announced today our intention to launch this £775 million, you all have seen it, roughly 20% relative to our current market capitalization and the launch will be sometime later in March, depending on when UKLA allows us to publish the prospectus and we hope the money will come in by Easter. We will also admittedly as a cosmetic action, propose at the AGM a 5 to 1 share consolidation in many.

So, the pro forma impact of the first stages of this plan, the actions we took in the last two months and the rights issue obviously is a past reset of the capital position. Our ambition is to have a significantly stronger capital position still than the one pro forma for rights issue. And that’s of course what the remaining self help actions are designed to do. But we think that the certainty of capital position post rights issue should be sufficient for regulators and rating agencies, we’ll find that out in due course and of course our determination to build further and then make a return on that further build are essential parts of the plan.

You will see that, we are pushing here what we have termed a balanced scorecard to capital to try and give you some indication of how we’re thinking about capital going forward. And unfortunately there is no single algorithm as you all know, so one single formula or single measure that one can speak to regarding the levels of capital we should carry. And effectively what we have to do is toggle across a range of things from my own patents view of net assets to premium through the different regulatory capital measures, at least 2 of the 3 of which we allow to disclose, rating agency, capital models again which we don’t disclose and ECA which we do.

So the objective is to manage across all of those to a position of strength, consistent with single A rating ranges. We think that probably will give us target for let’s say 2016 of somewhere between 35% and 45% TNAV to premium, take the middle of that range if you want to build your models and help think about where we might get in the extent of self-help measures that we would need because our pro forma TNAV to premium post the rights issue I think is 28% or something like that. So there is a chunk yet to go and then the higher TNAV if we go to make some money on.

Turning to making money. This I suppose you can say is a sort of reasonably motherhood and apple pie indications such as from things you go to do in insurance companies to improve performance. And we will be aggressively doing that in each of these areas and indeed in a number of our businesses, many of our businesses that is process which is ongoing as rather than one that is just starting.

And so clearly improvements, although I think that our expense ratio maybe the bigger moving thing over the next few years and our loss ratio is likely to mostly improve through business mix things rather than through premium, we will be paying a lot of attention to underwriting disciplines and portfolio disciplines as we’ve talked about to continuing to make sure we’re distributing in the most effective way our business, working with partners to do that; we’ve talked about expenses.

Technology is of course a big issue. In our industry technology spend needs to be at strong levels or you fall behind and become less good at what you do. Sadly, our Group has in similar areas, I’ll pick Canada probably not spent enough on technology; we need to correct that. In other areas, let me pick the UK that technology spend has not been effective enough hence we’ve had to write down the software. And so we have a very major challenge as all insurance companies do but in our particular case to make sure that our technology spend A, preserves the quality of our businesses; but B, is effective. And there is a lot of work to do there. And of course on the people side, this can only be done with people performing well. We have many good people we need to make sure that we have a team that’s operating as effectively as possible going forward.

The dividend, clearly we have to pass it, the Chairman has mentioned not to regret but we have to pass it for the year end. We’re setting a new target of 40% to 50% payout ratio in the medium term. How quickly we get there will be a bit conditional on if you like how quickly our confidence rises and the execution of the main bits of the plan. But we think that that’s a responsible level to get to. And should we end up generating surplus capital in addition to that post the increase of our capital levels, if you like the retention, the capitalization the TNAV implies, clearly there are plenty of one-off ways that we can return capital to shareholders.

So we believe that if we complete these plans and we certainly intend to complete the plans, RSA will be a business not only prudently managed and reserved but strongly capitalized and more transparent. We think we will be focusing on things we have the best chance to be successful at. And we’ve set out a medium term target on that much higher tangible equity base, not just the pro forma for the rights issue but the forecast increases thereafter of something in the range 12% to 15% return on tangible equity.

Three action steps: Strategic focus; quantity and quality of financial strength; and improving our business performance. And of course that’s what we’re going to try and do.

So with that, thank you very much for listening. And will turn over to Q&A which I think Matt is going to compound.

Question-and-Answer Session

Matt Hotson

Thanks Stephen. I know a number of you want to get away to another results presentation, so we’ll try and accommodate that but I’m sure (inaudible) questions to 2. Andy, do you want to start?

Andy Hughes - Exane BNP Paribas

Hi. Thank you, Matt. Andy Hughes, Exane BNP Paribas. Three questions if I could. The first one is on the 12% to 15% you set on tangible equity target over the medium term. I guess it sounds like those 15%, 15 does get higher, but when I look at the slide 73, when you show the returns on capital allocated across the business last year, given that capital allocated including debt, it doesn’t seem a particularly stretched target. What am I missing from that? Second question was a technical one about the sort of -- about this development cover. Obviously, there is not much discussion what’s going on but am I right in thinking that it’s paid for out of the 5% reserve margin, so they have a 5% reserve margin; is that -- is some of that going to perhaps half way to pay for ADC or is it exclusive premium? And the third question was I guess about the IT expenditure that you’re planning to make possibly and in the UK is it going to be a significant number of the order 100s of millions per annum, and is that can be capitalized or come through the -- about the P&L? Thank you.

Stephen Hester

Sure. Do you want to deal quickly with it…

Richard Houghton

Yes, because I thought that’s very easy one, it’s nothing paid for us in margin has a separate premium attached to it, it is providing comfort above the margins, the margin remains absolutely in place and there was a separate premium for the others development. I am not going to disclose that, I don’t think it would be appropriate to disclose it. What I will say, I think this is tremendous value for the shareholders not only for the advances it gives to our capital measures, but also a degree of comfort it gives us in respect to (inaudible) we have regarded extreme volatility in the reserve position.

Stephen Hester

On your other two questions, I’ll take the second one first, if I may, on IT spend. I think our focus this year has to mostly be about improving the confidence that we have in our ability to successfully execute IT projects and spend money wisely. So my guess is that spend is likely to be greater ‘15 and ‘16 than it would be in ‘14. I don’t think this will be at levels that are substantially in excessive prior years indeed it may will be at levels that are smaller than prior years; the issue is what you get with money.

And I think with my previous position that it’s impossible not to capitalize some under accounting rules and so on, but we need to make sure that our capitalization policy is better aligned with benefits and the period of benefits it has been the case going forward.

In terms of whether, we can do better than that return on tangible equity your guess maybe as good as mine and so the future will tell us. I think that what’s fair to say is that the bottom up plans from our businesses, if they work would come to a higher figure, but this company has a record over many years of bottom up plans not having all worked and that not having being the outcome.

And when you look at the sorts of combined operating ratios that you need across our Group to exceed the range we put through, I think that that would require some market optimism over and above optimism about our execution. Now you’re welcome to have market optimism if you like, but I think we need to try to assume that markets continue to be pretty competitive and that some gains are given back in pricing and some gains are hard fought.

So our feeling is 12% to 15% is, if you have the right amount of tangible, which we have not had in the past is a demanding good, attractive return when that sends up well against all the comparable insurers.

Matt Hotson

Tom?

Tom Dorner - Citi

Hi, it’s Tom Dorner, Citi. My first question is how much do you think that the $300 million of disposals will improve your economic capital ratios by -- given that some of the businesses you’ll be disclosing probably have a lot of goodwill attached to them. And I think you also indicated you might be having more disposals in 15, presumably not of the similar magnitude, but any guidance on that will be helpful?

And then the second question is, you also indicated you might have more goodwill and intangible impairments, is that going to be material? And the third one is just a quick one, the charge in respect to Ireland has gone up from £200 million to £220 million is that just weather or is there anything else going on?

Stephen Hester

Yes, certainly. Just let me cover out the [Ireland] thing. Yes, the £220 million that we are recording is the actual loss in respect to Ireland for 2013 that would differ from the announcements that we were making about the specific issues that we discussed out late in January. So the gap is £20 million which relates to underlying losses that we have in Irish businesses.

Richard Houghton

Your question on disposals and their capital effects and how many there will be I guess we think it’s not fair either on these businesses to help with our customer franchise or indeed on our people to be undressing more comprehensively at this point and we also need to get a record of execution. But I think if you work through the figures we have given both in portfolio premium reduction from portfolios and then if you like the geographic focus areas for disposals you can begin to get some grasp of what that might mean financially.

Each of the actions has different impacts on our different capital measures. So you rightly imply that economic capital often benefits less from disposals because you built in if you like a DCF of those businesses already whereas particularly if you want to make gains relative to tangible on some disposals, you might have a bigger impact on IGD and you might have a bigger impact on TNAV.

So there will be pluses and minuses and what where as I said in my presentation it’s actually we’re trying to do is toggle across the whole picture of 4, 5, or 6 measures let’s say 2016 and the combination of our actions should get us to the right place, but any individual one will have better and worse impacts on certain measures.

Stephen Hester

And it’s perhaps also worth picking up saving, just to point to other top of your slide deck, it’s about strategic focus as well as financial impact of disposals, so it’s about making sure that we’re absolutely focused in management terms on our core businesses.

Richard Houghton

Yes. Well look this is just another caution we’ve done a sort of a fast job in the last three weeks of trying to call around some stuff and see what’s most vulnerable. And so I am just slightly preserving the right to do a bit more calling around in the next year without anything specific in mind.

Matt Hotson

Oliver?

Oliver Steel - Deutsche Bank

Oliver Steel with Deutsche Bank, three questions, first of all could you just give me a little bit more of a sort of roll forward from the tangible book at 28% at profile on the premiums at the moment through to the 35% to 45%. I mean apart from the Canadian broking business I am sort of assuming you are not going to get much in Argentina on most of the disposals you don’t have to answer that, but perhaps you could concern but it’s mainly coming out of retention in your plan? That’s question one.

Question two is on debt. Are you looking to pay down any debt, are you looking reduce the absolute debt number what sort of debt ratio do you expect let’s say in 2016? And then the third question is, this 12% to 15% target that you are setting it feels a very long way out I mean you are not planning to get to this capital ratio before 2016 you are talking about continued investment spend in 2015 and ‘16 so is this sort of 2017 target?

Stephen Hester

I mean it might be something just on that last one that we hit every year we’ll have to see because obviously the bar is lower, our tangible equity lower in the early years and so while hopefully our underlying profits will be on an upward trend so will our equity so there have to be on an upward trend.

But I think it would be foolish having delivered the surprises on a negative side we did last year with inevitably some degree of disruption from the business review change in leadership and so on and from the strategic plan and then right around top of that I think it would be naive to think that this year 2014 would be an on trend year maybe it is terrific and certainly it would be my hope that 2016 would be within that range that you mentioned. But again I think, we will have some tolerance of certainly in my sense, I’m only three weeks into this job?

Richard Houghton

Can I try and pick up the debt question, hope you are going through all the Stephen’s comments as a focus on tangible equity. And on real equity, I think directionally it will be nice to have slightly low leverage, without predicting exactly what’s going to happen in respect of the debt which is callable at the end of this year around about 450 million. One of the real strengths of what we’re proposing today is that it gives us the financial flexibility to take the right decisions for our shareholders. And that is different from where we have been for some time. Whatever happens in respect of the debt, which is just recalled it currently has a over 8%, now whatever the cost will be we do actually choose to replace, it will be significantly people not [pupil].

Oliver Steel - Deutsche Bank

Interesting I think that will be other disposals that can that are likely to produce it premium to TNAV even if they don’t produce a premium to NAV as well. So it’s not just for TNAV?

Matt Hotson

Can we pass now to Will or…

Will Hardcastle - Bank of America

Hi there. Will Hardcastle with Bank of America. It sounds like cost cutting is very much in mind now are these already baked into the return on tangible targets that’s all or is that clean of those numbers?

Stephen Hester

Never baked in.

Will Hardcastle - Bank of America\

Okay. And...

Stephen Hester

No baked in and haven’t happened. So we hope that we can bake them.

Will Hardcastle - Bank of America

Okay. And how is manage remuneration being aligned with the new return on tangible targets?

Stephen Hester

We’ll publish our Annual Report in a week or two and of course that has the huge number of pages on rent that you have now a days, but what those pages will say is that management incentives both in respective to bonus and relative are being altered to align with, if you like the promises that we are making today both in terms of content, but also to broaden the measures that are being incentivized, because I think that some of the treadmill the company got on was an unhealthy singular focus on premium growth and combined operating ratio and there are other things imaging company well that are important that we will be adding into light capital strength measures return on tangible and so on.

And I think you will see that although I don’t specially believe that the new ones as those incentives dramatically affect management behaviors there should be an alignment behind between what we are saying we are going to do and how management benefit or don’t benefit from that achievement.

Matt Hotson

Kamran.

Kamran Hussain - RBC

Good morning. It’s Kamran Hussain from RBC. So two questions. First of all on the adverse development cover. Can I just ask, is this a short term measure or just say kind of (inaudible) should we elect to kind of the have this in place in the medium term. And secondly, just in results this is really, really helpful to get the margin over best estimate. We will be looking to increase that margin creativity, the ratios that some of your peers have going forward? Thanks.

Martin Scicluna

We love it if you could give us a list of where our peers’ margins are at and choose the ones that disclosed it over the last six years and that will help us answer the second of the questions. Our thought was that 5% a decent position to be in, but perhaps you can educate us on that, we are going to (inaudible) annual reports we open.

Richard Houghton

On the [ADC] it is not just a one year cover. It’s actually in place of five years. So the reasons are hopefully I would articulate, so I can this part of structure which does support our reserve position go to sometimes come.

Martin Scicluna

Obviously, what have trying to do in a number of actions is increased trust in the balance sheet today. And the ADC is obviously one of those, it maybe with the passage of time, that there are one or two things where that’s not something like in ADC may not be good value for shareholders, once we’ve had a long operating period where people are trusting more surfing positions, but that’s not today’s problem anyway.

Matt Hotson

Andrew.

Andrew Crean - Autonomous

Good morning, this is Andrew Crean with Autonomous. A couple of numbers questions actually can you give us the TNAV behind the emerging markets businesses ex LatAm? And also the profits for those, I think those are ones on the block.

And then can you just expand a bit more on the cost savings potential. I noticed that in other costs, there is about £28 million related to the emerging markets. I understand you will also take a look at the UK expense basis…..?

Stephen Hester

I appreciate, this is frustrating. But that’s why I said at the half year, I hope that we can undress on more on things like cost programs and so on. But I don’t feel comfortable giving you as much help as you could reasonably ask for at the moment on that. In terms of TNAV, I don’t actually know the answer. Do you know the answer?

Richard Houghton

No, as I said you….

Stephen Hester

Matt can try and give you some help afterwards, no doubt.

Matt Hotson

I will do my best. Okay. Andy, over there.

Andy Broadfield - Barclays

Hi, Andy Broadfield from Barclays. And just one question to state, you’ve taken some actions around reinsurance asset reduction, asset risk reduction. But if I look at your capital strengthening program, I don’t think it’s on the reinsurance side in particular, you’re taking your attentions now to ADC, et cetera. Is that material or is it just sort of (inaudible) because it’s more kind of…

Stephen Hester

At the moment, we don’t have huge, obviously we don’t add more style plan to dramatically change our insurance arrangements of the Group. We don’t at the moment see things that provide value for money but of course you can’t be in this industry without always looking at that and thinking about that both in terms of annual tweaks and in terms of more fundamental things, but there is nothing into base plan of substance on changing reinsurance arrangements.

Andy Broadfield - Barclays

But you have already changed it. And you’ve taken the ADC and taken the 25% of what you’ve announced….

Stephen Hester

Yes. Beyond what we’ve announced.

Andy Broadfield - Barclays

But there is nothing in the capital charges to lead.

Richard Houghton

Not in the IGD and economic I should say but some of the other capital measures do benefit from some of those sort of reinsurance changes.

Andy Broadfield - Barclays

Okay. And a follow-up just to your conversations relating agencies to-date, should be that happened and any sort of qualitative segments around those?

Stephen Hester

No, and look I think we’ve got to wait for the rating committee whenever they have that in the coming days. I believe we’ve made it very hard for them to downgrade us and I suspect they will be slow to upgrade us than we would wish but that’s life.

Andy Broadfield - Barclays

Okay, thanks.

Matt Hotson

Craig.

Unidentified Analyst

Good morning, Craig (inaudible) from KBW. Two questions. One is I don’t think you’re correct admin and direct line have produced external certificates with the percentage of reserve redundancy. I notice absent from your reserve redundancy certificate, I wonder if there is another side and if it is could you please publish what the number is so that we can draw a line under this redundancy thing? Second question is once you have restructured the business given that ROE sort of indicative ROE range, wondering if you could give us a feel for in the long-term what sort of net written premium growth you would be expected onto the model?

And the third point is. The big element to the room is very large to capital ratio you said is going down slightly and that concerns me, I was wondering what the rating agencies’ targets are and how far you are from those targets please?

Stephen Hester

Just on the last actually I think pro forma for the action plan over the next 3 years including the rights issue I think the debt to cap ratio may longer look successive which doesn’t mean that say it wouldn’t be in shareholders’ interest to take it down some further, but I think that will be fixed with the improvements in team now that we are proposing. But Richard do you want address that?

Richard Houghton

Yes certainly I mean put by the margin here we have absolutely explicit today about management’s view of margin, the additional work that we commissioned actually focused on actuarial indication i.e. best estimate and the independent conclusion as our result pulls within a reasonable range but actually is exactly the sort of words that KKNG are using as well having done a similar sort of review.

So if you face a view in respect of our reserves starting with the actuarial position being given that take us to reasonable arrange by those two independent parties what we have is margin of actually 474 million on top of those reasonable range of reserves. So to me that feels like significant progress and I would hope that would give some comfort as to overall reason most of reserves.

Unidentified Analyst

On medium term premium debt?

Stephen Hester

Our reasonable assumption is if you look at the markets we are in and wait them somewhere 0% to 5% doesn’t it and we are depending whether the markets accommodating rate rises or not but that’s what it is.

Matt Hotson

Marcus.

Marcus Rivaldi - Morgan Stanley

Marcus Rivaldi, Morgan Stanley. On your slide on the rebuild on the cash flow ratios could you roll forward those numbers please and I am assuming it’s more on the economic side to include the impact of the ADC the equity sales and the property sale and lease back transactions?

Martin Scicluna

That is everything that was done as at February as in the ratios that we put out.

Marcus Rivaldi - Morgan Stanley

[Notably clear]. And then just on the rate case…

Martin Scicluna

For example ADC more impacts rating agency models and less impacts some of the other models. Some of our -- the actions that we’ve already taken as well as the actions we’re going to take impact different models with different, by different amounts.

Marcus Rivaldi - Morgan Stanley

And on S&P calculation, I mean that being very explicit about looking a particular target level of capital for you to avoid the downgrade, would these plans in action you significant inaccessible in that?

Martin Scicluna

In the meetings we have had with them, they haven’t said, this is all about capital number £1.50 or whatever it would be there some capital ranges they have in their models and then there are ranges of their assessments across the whole series of other things. And so that’s why it was to be the case that these capital actions make that thresh more remote but it’s not the only thing, it’s not as simple as that sound like.

Marcus Rivaldi - Morgan Stanley

No appreciate that, just one question on that capital metric though have you look to exceed what they wanted to offset a some (inaudible).

Martin Scicluna

As I say they have not said, you must be at x in order for rating to have rating year, it’s a more complex algorithm. So we have put our capital in the position, both with the rights issue and then with the self help which we believe taken with all of the other things. We’ll produce that result but it their judgment and not ours.

Marcus Rivaldi - Morgan Stanley

Okay. Thank you.

Matt Hotson

Thomas.

Thomas Wright - Bernstein

Thanks. Thomas Wright with Bernstein. Question on capital again. Looking at the capital rise you have 775 and looking at the varies ratios, so economic capital you are already above the target, the rating seems to be in line and you brought back solvency I ratio to 180 and you have still management actions outstanding, you reduced the premium and you are going to dispose asset. So the question is what has driven the capital increase 775 as opposed to a lower number given you have other management in action, is it the leverage or is it really a capital discussion here?

Stephen Hester

I think it’s all of the above. We looked out let’s call it for the second -- I mean this is an overly simplistic portfolio. But we looked out to 2016 and where ideally we’d like to operate across the balance scorecard. We looked at how much we thought we could safely assume for self help. We looked at what the gap then was between starting point and that, and we also considered certainty, because obviously as a company that has delivered some disappointments, some of the people, some of our stakeholders no doubt you, but also regulators and rating agencies will put a greater value on things that are certain than things that we just hope to do in the coming years or even if we do, do those things in the coming years, of course there can be issues that arise, banana skin is that you slip on once or another.

And so that led us to try to calibrate a level of certainty today that would be we felt adequate for our stakeholders as a base from which to operate, so we didn’t operate out of distressed in the next three years, but needed to be augmented by self help actions to get to our real target level.

I think there is -- three clearly isn’t a magic to 775, I mean could I tell you, it couldn’t have been 700 or 850 or something, of course that’s one of those. But it clearly needed to be more than 500 and 1 billion would look like; we were being overly comfortable in the bed we were trying to make for ourselves. And I think that would have been wrong in when you are asking a lot from shareholders. So it was that kind of a triangulation.

Thomas Wright - Bernstein

Second question on the disposals, can I or is right to understand the core regions concept that you are ruling out disposal in the core regions?

Stephen Hester

I do think it’s responsible to ever rule things out. We should always operate the Group rationally on behalf of shareholders, but I think it is most unlikely that major disposals of core regions would make shareholder sense.

Fahad Changazi - Nomura

Good morning Fahad Changazi from Nomura. Thank you for disclosure on reserving and underwriting. I suppose in terms of setting expectations, could you perhaps comment on the quantum of the reserve business and how they will develop with previous years given your comments on looking at the quality we’ve been running profit, where we might be tend to put one time stream, to put on reserve releases.

Second question on the reinvestment yield, it is quite [blur] now. Will you be changing the investment portfolio at all going forward as this -- as it correctly stands? And a third point is just a point of clarity. You mentioned that 10% flow of 2014 premiums, does that include the 400 million disposals you highlighted, is that coming later in ‘15, 16? Thanks.

Stephen Hester

The last one, there obviously be always be some timing effect because we won’t have a full year effective disposal. So therefore there will be some full year effect in 2015. But it does include the disposals that we have in mind at least for whatever part of the year they close down.

Richard Houghton

And in respect of releases going forward, we are placing less reliance on property development in our plans going forward than we have enjoyed in our actual results historically. However, I do think there will be a feature of our results going forward and I think there should be if you price some reserve appropriately. So there will be a feature but we are less reliant upon them.

Fahad Changazi - Nomura

So, the investment portfolio?

Stephen Hester

Sorry, investment yield, reinvestment yield, any change to portfolio.

Richard Houghton

Short answer is no.

Matt Hotson

Andy?

Andy Hughes - Exane BNP Paribas

Hi. Thank you so much. Andy Hughes, Exane Paribas. Four questions if I could. The first one on slide 87 where it shows the reserve development pattern; when you look at the 2013 one, it’s pretty hard to see the £200 million reserve strength in Ireland. Is that spread over a number of portfolios? And maybe give some information about the two very big positives which seem much bigger than the negatives in that chart because I mean I looked at it and I would have expected a very big negative number from the personalized motor strengthening in Ireland and much less positive side. So obviously we don’t know the scale of these but just looks odd. And the second question is about dividends. Obviously no final dividend but at what point do you resume dividends, do you wait until you restore the balance sheet to the point at which it’s okay or do we get something before that? Thank you.

Stephen Hester

I’ll give Richard some more time to figure out on the first which I don’t know. On the second on dividends, I would hope that we would resume dividends sooner rather than later. And if our actions pass, I think that would be the expectation, clearly the Board hasn’t decided. And so we’ve said if we were to declare an interim this year, it would be likely to be tokenish in scale. But hopefully thereafter, we’ll start being more meaningful but that inevitably must be a bit caveat by whether we succeed in the bigger moves that we’ve set out here along the time and scale we think.

Richard Houghton

And with respect to what’s been happening on prior development. The Ireland numbers that we’re talking about were not just prior, so just quite a big chunk of that was actually current year as well. So I think I go to split back in the January release but I am happy to clarify that with you. The other point which I did mention in my remarks was that we have had the strength in respect to UK liability in professional lines in particular which is so clear after that financial crisis in 2008; professional lines of those architects et cetera coming through into the book which we no longer engage in.

Matt Hotson

Oliver?

Oliver Steel - Deutsche Bank

Hello. Oliver Steel, Deutsche Bank, actually just one very quick follow up question to Andy’s. Are you committing to no scrip dividend going forward?

Stephen Hester

I think it would be very stupid to commit absolutely to most things. So clearly in a perfect world, dividends will be as clean as they can be but I don’t want to give you an absolute commitment. But obviously whatever we do, we try and do sensibly and in interest of shareholders.

Matt Hotson

Okay. It looks like we are running out of questions, thank you very much for your time this morning. Next announcement is IMS on the 8th of May. We will look forward to talking to you then if not before. Thanks very much.

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