Aviva PLC Q2 2010 Earnings Call Transcript

Aug. 7.10 | About: Aviva plc (AV)

Aviva PLC (NYSE:AV)

Q2 2010 Earnings Call

August 05, 2010 09:00 pm ET

Executives

Pat Regan - CFO

Andrew Moss - Group Chief Executive

Igal Mayer - Chief Executive, Aviva North America

Andrea Moneta - Chief Executive, Aviva Europe, Middle East and Africa

Analysts

Nick Holmes - Nomura

Oliver Steel - Deutsche Bank

Colin Simpson - Goldman

Barrie Cornes - Panmure Gordon

James Burse - UBS

Blair Stewart - B of A Merrill

Andrew Crean - Autonomous

Duncan Russell - JPMorgan

Raghu Hariharan - Citi

Presentation

Unidentified Company Representative

Good morning everybody. Thank you very much for making the time to come over here slightly earlier here, although I know is a very busy day for all of you. What we'll like to do this morning is first of all I am going to give you sort of overview of the business taking around the different regions and really try and assure you that these results, we believe are very strong almost every way you look and what I now want to do is hand over to Pat who will take you through the numbers in more detail and I will comeback and summarize and of course we will move to questions-and-answers and I think I'll have plenty of time as always for that part of the meeting.

Okay. The story I think is actually pretty simple, it's a story of strong growth in profits and of course the focus on capital generation that's have been of interest for many of you in the course of the last few months. I think we also have a good story to tell on that. So IFRS operating profit up 21%, MCEV operating profit up by the same percentage to £2 billion, return on equity on an IFRS basis across the business of 14.6%, substantial increase relative to last year. I am pleased to see the IFRS net asset value also increasing from the year end up to 394p.

On the capital generation point you know we gave you guidance for the full year of £1.3 billion of capital generation in the business. Pleased report that we're at £0.9 billion for the first half and we're getting a new guidance today for the full year at a figure of £1.5 billion.

Sales are growing across our business, across the big markets in which we operate in the UK and in Continental Europe, a 10% growth in sales, fueled by savings rates beginning to go up strongly in a number of our markets. And I think overall, it's a performance which demonstrates building momentum across the business.

It's great to see the capital being invested in new business now at internal rates in return a 12% up from 9.5% in the first half of 2009 and I can assure that we have a continued focus on cost reduction in the business. The overall cost in the business down 4% again in the first half of 2010. All of that means that the board is being confident in increasing the interim dividend that's going up by 6% to 9.5p.

And this is a graph I guess which looks right across the business of different performance metrics and tells I think a very positive story. 21% increase in operating profit on the IRFS spaces nearly doubling the IRFS profit after tax, capital generation up 80% relative to last year, sales across the business in total up 4% and that's partly because we have been pulling back intentionally on annuity sales in the US over the course of the last year. I have already mentioned the new business IRR and the combined operating ratio beating the target at 97% for the first half.

So let's move on to the regions and start with UK Life, and this is a business which effectively I think we have been transforming that for three or four years but the results are really showing through. Overall, life and pension sales up 10% here in the UK and in terms of mix a really significant increase in protection and annuity business. The cost space in absolute terms coming down by 12% in the first quarter and all of that flows through into that strong growth in new business internal rate of return at 15%.

So what we're talking about in our largest market is a 15% IRR market driven by the scale of our business and the cost reductions that we've made over the course of the last couple of years. The result of course is record Life operating profits. The first half profit 463 million broadly inline with what the full year profit was just four years ago.

And in terms of our ability to work with partners, I think some very positive news today adding to positive news earlier in the week. The restructuring of the Royal Bank of Scotland, deal that's now a seven year distribution agreement as we go forward freeing up the balance sheet taking ₤250 million of goodwill off the balance sheet increasing the net asset value as a result of that and we are very, very pleased with that restructuring of that deal. You will see no hope on Tuesday the announcement in respect to Santander there selling life protections through 1,300 branches of Santander from mid 2011 onwards.

And I have to say that you were already the general insurance partner Santander there and working on both fronts. And it's a real benefit of our composite model allows us to be competitive in all parts of our bancassurance business. If you just step back and think about it, we're working with Barclays, with HSBC, with Santander, with Royal Bank of Scotland here in the UK. We are the partner of choice as a manufacturer of insurance, exploiting the distribution power of many of the major banks in this country.

In terms of UK General Insurance very pleasing to see return to growth in the top line. As you know, we took some pretty decisive action exiting some unprofitable business in the calls to the last year. You can see on the graph there, I think it's something like a 7% growth relative to the second half of 2009 and I expect that to continue out driven in large part by the success of the brand in the direct space, the Aviva direct sales going up, RAC panel sales going up. We have something like a 100,000 more direct monthly customers at the end of June than we did at the end of December. So the brand really working well for us in that space.

The combined operating ratio coming down to 98% and I guess a good performance in the UK market as it is today. Small reduction in absolute profits but as Pat will show you later, current year profitability trends looking good. The rating environment, well we are not leading rates in anyway at the moment, we are following them and that means following double digit increases in major rates. It means single digit increases in home owner rates. And in the commercial market, where rating is still relatively static the name of the game for us there is retention. Our retention rates are stronger than ever in that business and it remains a profitable part of the business for us.

Let's move to Europe and you can see here that overall, life sales were up 13% in our continental European business and a lot of that was driven by bancassurance, up some 20%. New business internal rates of return, down a little bit but meeting our 12% hurdle rates, and that's really because of the mix of business in particular, the with profits business that we've been selling in Italy very high customer demand for products with guarantees in a number of our European countries.

General Insurance sales up 1% but some weather losses in the European business notably in Ireland and France, in the first half of 2010, so just looking at the European businesses combined operating ratio headed upwards a little bit at 102 but clearly we'd expect a resumption to more normal weather in the second half. So we'll be looking out for that.

So overall in Europe I think the story is one of our transformation program that quantum leap transformation program delivering life operating profits you can see up 29% in the first half, that's about 12% on an underlying basis after reserving change in Ireland.

I am very pleased with the progress we are making in relation to quantum leap. The claim center of excellence that we've put in place now delivering improved underlying General Insurance profits cost are down like-for-like 5%. The legal entity rationalization with a branch network being built out in Dublin although approvals now in place on that. 300 products removed from the product catalog in the first half. And lets not forget the re-branding [indiscernible] Ireland and in Poland over the course of the last year. That's going extremely well for us in both of those markets and opt our customer awareness in both of those markets very substantially.

So I think a good underlying performance in Europe. Let's talk about Delta Lloyd, which are not in those European numbers and let's just remember this is the first full half year that Delta Lloyd is reporting as a separate publicly listed entity. You see sales have been broadly inline with the Dutch market but IFRS operating profit up some ₤22 million in total. Life profit is a little lower due to some changes in investment return assumptions but general insurance number is looking driven partly by positive development in some historical disability business. Well this is a business which now publicly listed is taking actions frankly and I don't think it would have done before. Notably it's closing its German Life operation to new business.

There is a significant revision in these numbers for that closure. It's transferring its private banking business to a third-party. It's taking action to restructure its business including its cost space and today, Delta Lloyd has announced new cost saving targets of EUR50 million in each of 2011 and 2012, so total of 100 million on a run rate basis by the end of 2012.

Turning to North America, I think this is a business now which is genuinely developing strong earnings momentum. On sales terms you know that we have been pulling back on annuities to a degree, managing the business for profitability and managing the capital flows in the business. But the mix of business is important to note as well, Life sales up 35% within the overall decrease in sales. What's the result of that? Well a radical change in the internal rate of return on new business driven partly by business mix but also by re-pricing of new business and the existing book which is important to note.

So crediting rates to customers changed, commission rates changed, all of that flowing through together with the effect of AXXX reinsurance agreement doubling the internal rates of return on new business. Life operating profit going up by over 250% to ₤86 million and on top of that in the North American region Canada had an excellent first half driven partly by some actually very benevolent weather relative to normal expectations in the first quarter but underlying performance good as well. So 96% combined operating ratio, ROE at 19% in that business in the first half.

Now Asia Pacific, let's just step back and remember what we're trying to achieve in Asia Pacific which is to grow the value of the franchise of our business organically for the longer term. And that's driven by two things, it's driven by sales volumes and it's driven by the value of the new business sales.

So in sales terms, an encouraging picture up 49% in the first half and you can see the big markets there of China and India up 40% in the first half of the year. As you spread that higher volume over what is essentially a fixed cost business in many ways, you can see the internal rate of return doubling from 5% to 10% on new business. As volumes continue to drive up, we'll continue to see that change upwards in the internal rate of return.

So Life operating profit, remember these are young businesses. So you would expect them to be in IFRS operating profit terms just turning the corner into profitability and that's exactly what you can see from the slide on an underlying basis that life operating profit turning from a negative £10 million in to a positive £35 million and building momentum.

Aviva Investments, these are being difficult markets over the last year or two for investment businesses. Many asset management businesses have seen significant outflows. That's not been the case at Aviva Investors. In fact the external net flows as you can see have increased something like five fold in the first half of the year. So I think what we have here is again to building momentum in the business.

Operating profit up 17% in the first half, second-half tends to have higher profitability in this business because performance fees get booked in the second-half. Very positive investment performance in the first half of this year building on strong investment performance last year. So 80% of institutional funds beating their external benchmarks over one year.

So the key (inaudible) in this business is garnering more third-party assets and I think the signs are that it's beginning to happen and we will continue to push out in that respect.

So, I think what we've been doing to deliver these numbers is keeping our strategic focus and continuing to execute against the consistent strategy. But let's just be clear region by region what that means.

First of all UK and Europe are our key priority markets and we remain focused on those markets. In macroeconomic terms, clearly there are challenging one or two years coming down the track in those markets. But if you look at savings rates and what's happening in those markets now, it's a very, very encouraging picture.

Let's take Spain, 20% on employment, saving rates two years ago 10% today 19%. That's just an example of what's happening in one of our key European markets. France, 15% two years ago up to 16% today, that is the key driver of the growth of Aviva over the course of the next two or three years.

Meanwhile, we have businesses in the US and a year which are incontrovertibly gaining in value. The driving of profitability and managing that business on a capitally self-funded basis that means we would put new capital into North America. You got to note that he has to run the business with this own capital, but his driving profits up strongly in that market. And in Asia-Pacific we continue to focus on organic growth building that franchise value over time. And in Avia Investors that focus on garnering third-party assets key to driving revenues up in the business.

So the actions that we have taken over the course of the last year, we will continue to focus on. So we have continued to strengthen our leadership team in the business. The focus on capital generation at Aviva has always been there but perhaps we've made it a little more public and evident for you in the course of the last six months. Investments in new business, you can see there is higher internal rates of return. It's a capital allocation in terms of new business; I think strong discipline is being applied.

Cost savings building on the £500 million of cost that we took out in the business last year one year early, continuing reductions in cost savings and we're going to come to you later in the year in the autumn with some more concrete numbers about what we expect to happen in the UK as a result of bringing the life and general insurance businesses closer together.

So I am saying to you there is more to come in that regard and of course all of that needs to be overlaid with strong risk management and risk in the balance sheet being I think controlled very well. Not only have we taken action on the balance sheet itself, we keep our equity hedges in place with one eye to downside risk in the equity market, we put in place off balance sheet derivative hedges against the weakening of the euro in the course of the last three months as well. So maintaining a strong balance sheet continues to be of importance to us.

Right, I think I have said enough at this point. I am going to ask Pat to come and talk a little bit more detail on the numbers themselves.

Patrick Regan

Thank you Andrew. Good morning everybody. Nice to see you all again. I am going to run through the normal financial metrics with a little bit more emphasis on the items we talked about on 2nd of July. So new business levels obviously but capital efficiency as well alongside that, IFRS operating profits and the IFRS operating profit drivers, you may have noticed at the back of the pack in the appendices we've split out the UK, Europe and the rest of the world offer us operating profit drivers. You got more detail in that to look at. Obviously follow-up on capital generation then IFRS total profits MCV and the balance sheet.

Starting that with new business and capital efficiency, 4% overall growth in our Life sales but equally important at the same time our growth in an un-levered IRRs from 9.5% to 12%. Ex-Delta Lloyd that will be 10% to 13% growth over the first six months. Business-by-business Andrew touched upon some of these a 10% growth and volumes in our UK Life business, again predominantly driven by strong growth in annuity and protection together of some 60% growth in annuity and protection in the first six months. Pension is broadly flat and then a deliberate reduction of our bond sales. That together with continued cost reductions has helped drawn up our IRR from 13% to 15% for the first six months.

In Europe of 13% overall growth, 20% growth in bank insurance in Europe very strong growth in Italy, very strong growth in France, good growth now coming back in Ireland. Naturally lower in Spain because of the economic environment in Spain at the moment. In terms of the IRR, still maintained a 12% IRR a nudge down from first six months last year as we're selling the higher proportion with profit guaranteed business in the first six months.

Because of some of the actions that we have taken are partly due to the seasonal patterns, we're already seeing a lower proportion with profit guaranteed sales. In the second six months, we continue to expect the higher proportion of unit-linked and protection type business in Europe in the second six months.

In North America as Andrew said couple of really big trends here? High proportion of Life business is up 35%, lower proportion of annuity business, deliberant and specific action from the US team are here with us. They have been taken up over the last 12 months in particular, so low bondage rate to distributors, lower crediting rates, different product features, lower guarantee rates, different redemption features which together with those features and the AXXX structure we put in place, doubled the IRRs to 14% in the first six months.

In Asia-Pacific, the story as Andrew said was really as volume growth 49% if you exclude the sale of Australia. 49% growth coming through across the page, China, India, Hong Kong, Singapore spread the fixed cost base over a broader volume of sales, plus some specific focus on product profitability stopping writing a capital intensive product in Hong Kong as an example doubled IRRs in Asia-Pac as well to our double-digit 10%.

Obviously Delta Lloyd the Dutch market is a lower market for margins on new business. Again we are seeing an increased focus on new business profitability in Delta Lloyd; the closure of Germany's is an example of that. The further expense cuts is another example of that.

The other way looking at this is a capital efficiency point. We have seen a significant reduction in the capital invested in new business in the first six month's Life and General taken together. So an 80% reduction from £900 million down to £500 million, and a consequence improvement from 14 years to eight years payback or again ex-Delta Lloyd that will be a seven year payback for the group taken as a whole.

Same story in the UK, you can't see it in the rounding but on an annualized basis is about £100 million benefit from the reattributed site helping our efficiency of new business coming through that and again flowing through to a seven year payback now in the UK business.

In Europe, a slight up-tick in new capital again because of those higher proportion with profit guaranteed sales. Again, we would expect that to see that trend reverse in the second half of the year, still a good eight year payback period overall for Europe.

All of those actions in North America are not only reducing very significantly from £500 million to £200 million capital invested obviously a very big impact from payback periods as well.

Last thing to note is the second benefit of the actions we've taken in the General Insurance business. One is the combined ratios I'll talk to in a moment. The second is a reduction in our capital resource requirements for the General Insurance businesses and particularly the UK General Insurance business.

In the first six months again is a £200 million benefit to the capital usage, probably fair to say it won't be quite that level of run rate in the second six months. So, overall slightly up-tick in the run rate of capital invested, but again overall all contributing to a significant reduction in capital invested in new business.

On General Insurance, as Andrew said, we've now see the return to growth in the first half of this year compared to the second half 2010 about 7% increase one versus the other.

I'll talk in a little bit more detail later. Our combined ratio has been 96.8%, if I include the decimal points, but the story within there is a much lower level of prior reserves and a much bigger improvement in our current year combined ratios. I'll talk more to that later but about £100 million lower benefit from prior reserve releases in '10 versus '09. There is also some weather impacts as well.

Business-by-business, in the UK business again we're seeing a return to growth in the first six months of '10. Direct motor policy is going up, good combined ratio is coming through in our household book, continued group combined ratio is coming through on the commercial book always a much lower level of prior year reserve releases. We are still getting prior year reserve releases positive development because we continue to reserve above best estimate. But our current year combined ratios improved probably about 4% in the UK business.

In Europe it's difficult to see, but again we do have a commonly combined ratio improvement, expense reductions, claim center of excellence or helping, two eventually in that one is again, we've reduce the reliance on prior year reserve releases and the second is the extreme cold weather in Ireland and the Xynthia Storm in France pushing up the combined ratio. And that together with the prior reserve releases was more than accounted for that six point increase.

Very strong performance in Canada again, reducing down to 96 but again with lower reliance on prior year reserves in the Canadian business. And Delta Lloyd posting a strong 93% combined ratio, some positive prior development in the liability classes of business there.

Little bit more detail on the IFRS operating profits there. Now just a quick, I know I showed you this chart July the 2nd, I have snuck in General Insurance as well here. So it's now seven operating streams that we have, different types of income streams on a product basis and virtually all of them going up even in a low interest rate environment, virtually all of them were going up, and as hopefully I'll demonstrate later based on things that we are doing to drive, (inaudible) a very good diversification both by geography, but also by different types of product income.

Little bit of detail on the increase from £1049 billion up to £1.27 billion a 21% increase overall, £188 million from the Life business up 20% of total in more detail in a moment. GI combined ratio has improved slightly, we had a slightly lower level of earned premium, the last bit of the element of the profile cleansing coming through there. Obviously that will flip back as we go into a growth of net written premium going forward.

60% increasing from management profits both in Delta Lloyd and in Aviva Investors, £60 million improvement in non-insurance costs, half of that was a one-time claims equalization reserve benefit in Delta Lloyd, the other half was £30 million lower costs in the UK.

Slight up-tick in corporate costs for project costs. The group debts and pensions actually, if you look in the table you can see is entirely pension cost as a higher accounting pension costs because of the higher opening accounting pension deficit. I'll talk more about the pension plan a little bit later.

Business unit, Andrew will actually talk to these 26% increase in the UK Life profits, great annuity profits, great protection profits, benefits of the reattribution, I'll come back to that later, 10% higher sales, 12% lower costs. In Europe, 29% increase in Life business, 13% up in sales, 5% down in costs and £50 million benefit from a move to realistic reserving in the Irish business.

Delta Lloyd has slightly lower expected, investment return. North America, Andrew mentioned not only are we reprising the new business, as the policy anniversary has come up; we're re-pricing the existing book of business. So increasing those crediting spreads which is significantly increasing our IRFS profits as we go forward. Asia-Pacific, last year's results benefited from £58 million reserve release, ex-that we got an underlying increase in the profits in Asia-Pacific.

Now a little bit more than on the IFRS life profit obviously, an overall 20% increase in our pre-tax operating profits. 20% increase in income again largely driven by actions that we've taken, I'll point out where the market has helped us well. 5% increase on expenses and commissions, that's entirely driven by commissions and our operating expenses.

Operating expenses you will see later actually down at 7% in our Life businesses. Within DAC, I'll just talk to that for a moment. So £20 million DAC and other, £20 million last year was held by that £58 million reserve release in Asia-Pac. And this year we have a higher run rate of DAC amortization. The higher profits we earned in North America, the naturally, the amortization level that goes to. So, we've got a higher level of DAC amortization primarily in North America and that's probably a reasonable run rate now to assume for the second half of 2010.

I think my favorite slide, the new business income. IFRS new business income, so again it represents day one income, less day one reserves primarily driven by our single premium business. And the stories are pretty simple, which is increases across the board, 29% increase overall, 28% in the UK which is bigger volume, 6% up volumes and the margin again driven by the very strong pricing we are getting on protection and annuity and a higher proportion of protection and annuity.

In Europe, mainly driven by higher volumes, so overall 11% high volume but still again mainly driven by Italy and France and at the same time, still maintaining a very strong margin actually slightly increasing margin and overall 20% increase in new business income.

In rest of the world again you can see the benefits flowing through in the margin of the increased pricing we are doing in North America. On our underwriting margin again, I mentioned before we have eight countries around the world on an annualized basis contribute £50 million or more each year of underwriting profit. So very diverse stream of underwriting profits by geography, also by type. So when we take pricing risk on expenses, mortality, longevity or persistency, we are good at delivering a better result than we priced and that trend has continued into the first half of 2010.

In terms of the actual investment return there, so 21% overall increase in investment return up to just shy now of £1.7 billion. You remember from the July 2 presentation, we were at 2.9 billion for the full-year '09. So that run rate has ticked up quite nicely. What's driving that, well on the unit-linked couple of things there? We are down by about 90 billion of unit-linked business. You remember, we have about 35 billion in the UK, about 45 billion in Europe. We have ticked that up about 10% again, partly helped by the markets in this year versus '09, and the average basis points in the UK has nudged up to about a 100 basis points and again partly helped by the market, about 140 basis points across Europe, together driving a 16% increase in unit-linked income to over £500 million.

Again as we talked about a few weeks ago, two trends offsetting in participating. So within the UK we've got the gradual decline of the with profits profit streams. I will talk to that more in a second, and then great volume growth in particularly France and Italy offsetting that. So in total, broadly flat. We are about 45 billion of with profit business in the UK. As a reminder, as we had in '09, we had a special distribution of about £80 million in the first half of '10, but that will be the last of the special distributions so we won't get that in this time 2011. And about a £30 million reduction in the regular distributions for the with-profit business. So UK down about 30 million and then Europe up about 30 million due to higher levels of business, particularly in France and particularly in Italy.

In spread margin, again as you remember, we have about 20 million of this annuity style business in the UK, 15 billion in Delta Lloyd, about 25 billion in the US business. Volume's broadly the same. The increase in spread margin income of 42% is entirely due to what we're driving in North America. So the North American credit spread basis points have going from 80 basis points this time last year to 180 basis points now, driving that 100 million plus increase in spread margin of 42% overall.

Lastly there on the shareholder assets, the 36% increase or just over £70 million increase is almost entirely attributable to the additional shareholder income we earn on the reattributed estate. So just over £60 million in the first half, which is pretty much run rate you should expect flowing through that block so about £120 million each year of additional shareholder asset return flowing through from the reattributed stake.

On expenses, couple of things going on here. On the acquisition costs and commissions, slightly higher commission cost driven by that with-profit guarantee business in Italy. Again as we see lower levels, higher level of protection in unit-linked in Europe in the second half. We should see that trend slightly reverse as we go into the second half.

And then a continued reduction on admin expenses cost. There is a lot of effort we can do in to this expense reductions in our core businesses, that trend comes down from 50 basis points, you remember, if you go back to 2008 down to 49, down to 46. Now again reductions in the UK and again reductions in Europe core expenses coming out as you saw on Andrew's slide.

Overall expense picture, again just to take entire al those numbers, I'll let you look at this in your ledge. Big reductions coming through the UK business again, big reductions coming through in Europe. 7% reduction in overall Life expenses. G&I health expenses basically flat, holding on to those big £300 million plus reductions we've done over the last couple of years, and including restructuring costs, overall total operational expenses down 4%.

Just a couple of comments on the General Insurance business. I'll talk in a moment to the overall combined ratio. Expected investment returned basically flat, about £440 million, not a lot of movement in the overall expected investment return.

Pre-tax profits down due to, as I mentioned earlier, lower earned premium coming through should reverse as we got forward. And then just lastly, on the expense ratio, again 50 basis points improvement in the first half versus last year. Again improvements in the UK business and in Europe flowing through to now a sub-12% expense ratio.

Just looking overall then at the General Insurance results; (inaudible) about, we have reduced by about 50 basis points the overall combined ratio, but within that we've got some £100 million lower prior-year reserve releases. We still do get positive prior development, we still reserve better than best estimates.

For the six months flowing through some 100 million lower prior-year reserve development versus last year, weather impact primarily in Europe and then a four point current-year improvement in the combined ratio. Again strong motor rate increases not just in the UK, Canada and our other businesses as well, claim centers of excellence, risk selection, use of credits in our motor selection, all of those actions driving the current year combined ratio.

Aviva Investors, as I mentioned earlier, the other line is really Delta Lloyd better, higher assets under management there. 17% improvement in profits of Aviva Investors, higher assets under managements, higher net new flows coming through as, as Andrew meant, 80% of funds beating benchmark. And again, the ratios average basis points and cost income will get better in the second half as the performance fees flow through in the second half of the year.

Just a couple of comments then on MCV before we move on. The trends are basically all the same. Volumes we've talked about, 16% increase in value of new business, but the volumes coming through then again as you would expect, a significant increase in the margin driven by all the same factors that we've already talked about UK now at 3.5% margin and the group overall ex-Delta Lloyd did a 3% margin in total. So a really significant increase over-time in those new business margins.

In terms of the operating profit, again basically the same trends flowing through that. Higher levels of new business value as you can see; expected return up again, driven by the reattributed estate benefits flowing through; we got a lower level of lapse variances in '09 versus '10, so a benefit to '10; and a slight benefit from a higher level of other operating variances flowing through as well. The MCEV now, and I will come back and talk to a little later when I talk to the IFRS net asset value as well.

On capital generation, when we got together on July the 2nd, we talked a lot about the resilience of our capital generation. So how we get £2 billion each and every year from our Life business, why, because we have got £30 plus million customers on long-term contracts.

Within these numbers, we had £1.1 billion of contribution from the Life business, £300 million from General Insurance so again, very predictable, very resilient, which we believe overtime still gives us some upside on both Life as we keep our customers, manage our expenses, and General Insurance we think there's upside to that capital generation as we go forward. Very consistent Life and General, very consistent by business units as well.

In terms of capital usage, the 1.4 billion then, same as last year. Capital usage we talked to you before, so an 80% reduction in our capital usage giving us the £400 million increase in net capital generation for the first six months.

Probably we have had to say, you are not going to get £900 million every six months, we should probably get a lower benefit from General Insurance in the capital usage in the second half.

So our run rate will be a little bit lower than 0.9. We do think this gives us a confidence to increase the full year expectation from the previously stated £1.3 to £1.5 billion for the full year.

In terms of the total profits, obviously operating profit up 21% we talked to. Restructuring cost are half what they were last year. We've got some final costs in the UK restructuring, Quantum Leap has obviously too cut costs.

Within Delta Lloyd, we do have some exceptional costs of the closure of the German business and from units and unit-linked and pension compensation costs. They are one-time costs, they will not re-occur going forward. Within the investment variances line, we've got a bit over £900 million that also relates to Delta Lloyd. Some £350 million or so that is genuine asset out-performance, primarily due to the fixed income book and about £600 million, that's a feature of their liabilities move with a collateralized AAA curve, their assets have gone up as the interest rates have fallen. So a £600 million benefit from that. If you take that £600 net of the exceptionals post-tax and post minorities, that's equivalent to about 7p if you want to do that maths. Obviously, all that's coming through the £2 billion profit before tax and overall just shy of 39p earnings per share for the six months.

In terms of the IFRS return on equity again when we got together on July the 2nd, we talked a lot about have a long-term sustainable nature of our Life profits allows us amongst other things to put in place long-term cheap sustainable low cost capital structures at the group. Its also gives us a natural diversification benefit with our General Insurance business, and that together with the strong GI return on equities gives us an overall combined group IFRS return on equity of just shy of 15% for the first six months. Obviously, this is based on operating profits post tax and post minorities, doesn't include the investment variances we just talked about.

In terms of the net asset value, I'll try and do walk of both IFRS and MCEV here. So opening net asset value, profits and investment variances, the different between the two obviously you've got that Delta Lloyd £600 million, which contributes to the IFRS. Investment variances doesn't contribute to MCEV and investment variances then with MCEV you have got some other market movements, equities and credit spreads slightly going up.

Dividend is obviously the same. Pension scheme I'll come back to in a moment. The accounting deficit actually stayed flat, but if you exclude the contributions we put in, increased because of the decrease of discount rates in the six months. On foreign exchange, the difference between those two numbers if you think about it is euro weakened, dollar strengthened versus the pound. We have lower embedded value than we have IFRS assets in dollars. So I had corresponding lower benefits in MCEV than it did in IFRS and the reverse in Europe where we have higher embedded value than we do IFRS assets so we had a correspondingly bigger negative impact in MCEV versus IFRS, I hope that made sense.

So overall, 20p increase in net asset value and a £0.10 decrease in MCEV embedded value. Just on the pension scheme, we are taking and have taken actions on the pension scheme. We have announced the plan to closure of the future accrual. We are in a consultation period at the moment, but when we do announce that, that will make a significant difference both our accounting deficit, actual deficits and ongoing costs.

We've also put in place a long-term funding agreement with the trustees with that over the next 10 to 12 years we believe will address the deficit position. We've put a one time contribution of just over £300 million in the first six months and also increased our long-term funding each year as well.

That agreement also contemplates us to further de-risk the assets to further reduce the growth seeking assets within the pension scheme, as we go forward, and reduce the volatility of those assets as we go forward as well.

Just lastly then for me, a couple of comments on the balance sheet. IGD solvency, when you think about that, we have taken very specific and deliberate action on the pension scheme. There was as we always planned a £0.5 million impact on the IGD surplus. So you start at kind of £4 billion and we have stayed basically at £4 billion over that six months. Operating profit contribution offset by market movements and some FX movement primarily due to the euro, as I mentioned. £3.8 billion at the end of June, we are probably about £4 billion as we kind of stand here today.

Lastly from me then, a couple of comments on the balance sheet. We do actually plan to do a session later in the year in late autumn, but we are going through some of this in a little bit more detail. In essence to give you a couple of high level comments, we think we've got some £95 million just under our debt securities and mortgages. We have shown this slide early, we've about £70 billion annuities book. We have just under £20 billion of asset back in our General Insurance book. So of that £95 billion, you've got £90 billion that's pretty well matched against the underlying liabilities of that business.

So if you think about what's our default risk, well, they are invested in high quality government bonds, 97% investment grade or better, some £500 million just now in Greece, Portugal and Spain. Corporate bond book remains high quality, again similar level as the past 95% investment grade or better.

On the mortgages, similarly we have got some very low levels of risk in books and that book both in Holland and in the UK continues to be high quality, continues to have a high rental cover of 1.3 times, and in total we still retain the £1.1 billion provision against the fixed income corporate bond and mortgage book.

In terms of the rest of the balance sheet, we have £8.4 billion of share of cash on the shareholder balance sheet. We have notional protection against at least the £4.6 billion of our equity position, so we have downside protection in a hedge program against that. And as also as Andrew mentioned, we have over £1 billion of notional protection on the euro to pound relationship as well. So just a few samplings on the balance sheet to give you a flavor of that. More detail to come when we talk about that later.

Thank you. And with that, I shall have back to Andrew.

Andrew Moss

Let me just summarize briefly then. And the first thing to say I think is that, as I think Pat has shown in the numbers right across the piece are significantly better, first half of '10 versus first half '09; and that is the result. Again, as I think he said all actions that we have taken across the book. And just by way of example, the return on shareholder assets, that increase of shareholder assets coming from the re-attribution of the inherited estate. That's why we did it. That's why we invested £471 million in that income flow of £120 million a year steadily plus some that may come from things like customer lapses and think about £20 million came in the first half.

In terms of what we're doing overall as a business, I think you can summarize by saying we are growing from a position of strength. The business always has been and remains a powerful cash generator. We are operating in the UK and Europe in what are the world's largest Life and pensions market, a stock of Life and pension assets of $8 trillion, $1.7 trillion expected to come through those markets in the next five years more than anywhere else in the world. And we remain very, very committed to the diverse business model that we have, the composite model. So diverse and complementary income streams coming from the Life, General Insurance and Asset Management businesses.

And I think you can see from these numbers that we continue to invest, to grow our franchise, and with 53 million customers around the world and growing, across those markets, we continue and will continue to do that. And of course, it's pleasing to resume an increase in the dividend flow as we go forward, well supported by IFRS earnings, well supported by cash and capital generation in the group.

So all of that I think makes us confident about the outlook. I think cautious in terms of the economic outlook in some of our markets, but still I make this point about the way savings rates are moving up and you shouldn't look just at economic growth in those markets to see the growth opportunity for Aviva. Thank you.

Okay. Now, what we are going to do is move to Q&A. I am going to ask Pat and Mark and Andrew to join me on the stage, and we will go from there.

Question-and-Answer Session

Andrew Moss

Andy, let's start with you.

Unidentified Analyst

The first one is about the pension scheme further de-risking. Is one of the things that's planned something similar to what Lloyd's announced earlier in the week whereby they capped the salary accrual for existing members, and roughly if that is plan what will be the rough benefit of that?

And the second question was on the North American business, just trying to get my head round the crediting rate change, I think you mentioned the margin going from 80 to 180, it sounds like quite a big drop. How much is the implied credited rate moved by and is there a delayed effect on renewal of policies or is the full effect that half one number? And that's fine, thank you.

Andrew Moss

We will start with the pension scheme. I think the effects are actually broader than just that aspect that you point out. Mark, do you want to comment on that?

Mark Hodges

Yeah. Well, Andy, thanks. I mean the honest answer is it's too early for us to actually make an announcement. We're just in the process of consulting with staff. We told you and them that this is our intention some months ago. We then said formally we have to go through a three-month process of detailed consultations. Those notices have gone out. We're having conversations now with individual pension scheme members. That will carry on till around mid-October. At that stage we then should be in a position to give a lot more detail about the proposals that we've consulted on and what the financial implications are. So right now, I wouldn't want to be drawn on those specific proposals for the scheme.

Andrew Moss

But I think why are we doing it, Andy, it's because it is going to reduce the deficit all other things being equal. It is going to significantly reduce the funding costs as we go forward. Now what was the numbers on that, when as Mark says we've been through the final consultation process.

Pat, do you want to comment on the US side?

Pat Regan

Yes, so we talked about the crediting rate going from 80 to 180, so that's obviously the proportion we keep of when you enter into obviously the fixed income versus what we pay the customer. I mean as Igal and the team can give in more detail, we've managed the lapse rates to a very acceptable level, at least in line with our historical averages, so no kind of bad news looming in terms of lapse rates.

Andrew Moss

And in terms of the relatively movement in crediting rates, has it gone from sort of 3 to 2, and is the full effect in the H1 numbers basically with 100 basis points.

Pat Regan

The absolute amounts are kind of 2.5 to a bit over about 3, Igal?

Igal Mayer

The credit rates are now between 2, 2.5%, so that the way to think of that 180 is they were about 100 basis points higher a year ago, so we're achieving that on a net account. And then on the lapse rates, they are actually slightly below our long-term average, so they are holding up very nicely.

Andrew Moss

And we are doing this as policyholder anniversaries come through, so obviously there is more policyholder anniversaries...

Igal Mayer

A quarter to go, Andy.

Andrew Moss

Thank you. Greg?

Unidentified Analyst

Yes, just two questions, one is on the volatility assumption for MCEV, I noticed in the US you're using round about 31%.

Andrew Moss

Right.

Unidentified Analyst

I think the VX was round about over 40%, so I'm just trying to see how you determine and reconcile those two numbers. And the second point is just in terms of the dividend, I mean if the IFRS program is going well and you get anywhere near your 2012 targets and you keep to your 1.5 to 2 times cover, then you're going to have to at some point in the next two years massively increase your dividend growth rate. Do you want to comment around that or are you just being overly cautious with those 5% increase today?

Andrew Moss

Well, let's go with the first question first which is definitely one for Pat.

Pat Regan

Are you sure? It's to do with the duration, but we'll double back with you on the detail that afterwards if that all right. Okay, great, it has to do with the duration.

Andrew Moss

Yeah. Look I think on the dividend, what we've done, Greg, is, as I said, resume growth in the dividend, we rebased the dividend, we said it would be at the level from which we would grow the dividend going forward. That's what we've started to do. Yes, the IFRS profits are up strongly; yeah, if you look at the earning per share close to 39p, it's a very encouraging performance. Pat talked about the double effect on that, but underlying it's still really coming through well.

We have to think about General Insurance cycle in terms of the dividend payments as well. We're still operating at probably toward the lower end of General Insurance profitability in cyclical terms and it'll be interesting to see just in the next year or two how that changes. Interesting to see actually some of our competitors' numbers coming out, particularly in the UK market, in the course of the last 24 or 48 hours. So it's going to be interesting to see how it might affect pricing I think going forward. So all of those things have to be thought about.

What I can of course confirm, Greg, is that our focus on driving those IFRS profits and earnings per share upwards is extremely keen. That is what we are focused on as a management team, and the dividend will follow from that. But you can expect us for that dividend growth rate to follow through to the end.

Unidentified Analyst

If you do achieve your target of capital generation of 1.5% increased target in the year, I mean is it fair to say, would you put through a 5% increase if that was the case, I mean, would you...

Andrew Moss

No, I really can't comment on a decision that's going to get made in March next year. So clairvoyant I am not.

Nick Holmes - Nomura

Nick Holmes of Nomura. Couple of questions. One is on cash generation. You have massively improved the strain in America. UK has come down a lot over a longer period. The big question now seems to be Europe where the strain is still quite big over capital invested, and I guess a question for Andrew, what is the outlook, is there an opportunity to get strain down further and thereby improve cash generation further? That's right, that's the first question, and there's now a question on the U.S., so should I give it to you now, the U.S. there's been a massive improvement in profitability, massive change in product focus. But fundamental strategic question, why are you in the U.S.? I mean, you don't have the critical mass that you have in the UK and Europe. What is the justification for continuing to be in the U.S.? Thank you.

Andrew Moss

Okay. Thank you. Let's do your question first and I'll come back to the second.

Nick Holmes - Nomura

Yes. Sure. Thanks a lot.

Andrea Moneta

I mean we have in Europe to grow and now I'm voting numbers in euro, not in pounds, so you will maybe notice some differences, but basically we posted 8 billion sales; out of them we posted 3.4 billion net sales. We wrote this business at 12% at Tier. We posted 23% growth in Bancassurance where we moved the margin from 4.4 to 3.6. We posted 4% in the retail channel, as we call it, in terms of new sales and the margin there increased from 3.1 to 3.4. So we are very happy with the level of sales, the level of margins, the level of returns that we are making there.

Now don't double this 8 billion for the second half for the year. We add a lot of cash, especially from our banks' partners in terms of with-profit funds for the first half of the year. We expected this not to continue and therefore as Pat said, we expect in the second half of the year to have more kind of protection and unit in sales and therefore to re-put a little bit the mix in a similar shape at last year. So you would see lower sales, high margins, better mix, but the fact that we give you 15% the sales and we made 3.4 billion net sales at this level of margin service that is a great success.

Nick Holmes - Nomura

So sort of in summary just looking at the new business or capital investment picture overall, would you say you have achieved most of the improvement that you can do? I mean Andrea said there is a bit more maybe in Europe.

Andrew Moss

I think there is a bit more to come, yes. I think we have to respond, we work with I think 51 for banks in Continental Europe alone. We have to respond to what they want to do at different times. We can't simply make our own decisions about that. But the trend is good. They understand our priorities and we have to respond to customer needs. And in particular in the first quarter this year, as indeed the first quarter of 2009, in Italy in particular, there was a very higher demand for with-profit guaranteed product. Now we're happy to write that, but we're not happy to write that ad infinitum. So I think it is just getting the balance right. And I think frankly we've done a pretty good job of that in the first half. But as Andre said, you won't expect to see that sort of volume of sales of that sort of product in the second half, because we will see some different focus.

Let me come to the U.S. question, very important question, and just go back and just have a historical review of our business in the U.S. We bought in 2006 a business that was focused in the indexed annuity market and indeed the Life market, and we did that very simply because we wanted to have a larger presence in the world's largest savings market. Strategically, we're willing to make that investment to do that. Now it is not rocket science, since that time given the financial crisis, if you look at valuations in the U.S. life market and they have come down significantly.

I mean that is a fact. Nevertheless, this is a business which as you can see from the performance in the first half of 2010 actually has a strong ability to generate statutory earnings. So our priority in that business absolutely clearly now is to grow the earnings of the business, to ask that business to capitalize itself in terms of growth, whereas in 2007 and 2008 we were willing to put the group's capital into the business to grow it. There is significant scope for further growth in the earnings in that business. Igal has been there now for six months.

That has made a difference as people always do in the management of the business. So our priority absolutely clearly is to grow the value of that business through earnings growth, and we believe that there is real scope for us to do that. When we've done that and we'll continue to do that for another two or three quarters, then and only then frankly will I think about what we do with the business going forward. But the one thing I can tell you categorically is that we are not looking to acquire in the U.S. Life market.

Nick Holmes - Nomura

With the growth that you say you are targeting in the U.S., is that IFRS growth or is it cash growth, because they're obviously fundamentally different?

Andrew Moss

Yeah. I think we'll drive the IFRS earnings, cash is a part of it. We actually saw some capital repatriated from the business in the first half of 2010, which is great. And when you add that to the dividend payment capability of the Canadian business, which is strong, actually if you're sitting at the center of the group, in cash terms our North American business is attractive in terms of providing cash to the center of the group.

Oliver Steel - Deutsche Bank

Thank you. Oliver Steel at Deutsche Bank. Can you give us some reassurance that the better cash flow will be coming through this year, that you can maintain positive momentum coming through next year? I mean looking at today's numbers, it is great that you have upped the target. But about 200 million of that seems to be coming at General Insurance capital release. So perhaps you can explain what that is? And then I'm also a bit concerned that in the U.S. you have some of the new business trend that comes back 12 months later. So presumably, you are benefiting from that element of cash flow that comes in from last year's sales but you've got lower new business trend against low sales this year.

Andrew Moss

I think the simple answer yes, but I'll let Pat elaborate on it.

Pat Regan

Yes. I mean I think that overall the trends you've seen are sustainable going forward is the direct answer to your question, whether it be reattribution benefit, whether it be general focus on capital efficiency of products. We do get benefits of a number of things in the U.S., capital structures, product mix, lower volumes. Now we've reset to lower level will give us a sustainable benefit of that compared to '09. In terms of General Insurance, the portfolio cleansing we've done to the lower level of premiums has given us a benefit on the lower capital resource requirement for the GI business. It won't be the driver of that level. Certainly, I would expect the 200 million to be a little bit lower in the second half of 2010.

Colin Simpson - Goldman

Hi. It is Colin Simpson from Goldman. You talk about stability of your Life cash generation, but when you look at your transfer from AVIF sort of tripled in U.K., it has doubled in the U.S., I'm just wondering whether we should expect further volatility or whether MTV is actually planning a posture. Or your UK peer group doesn't seem to have the same level of volatility. And the second question is you refreshed the cash generation target, I just wondered whether you revisited the IFRS, EPS target and obviously you published it but whether you consider and why your thoughts are around that.

Andrew Moss

Sure, Pat, you want to take that?

Pat Regan

I mean no question that compared to our UK pay group we have more volatility in that because of MCEV, there's no question of that. Yes is the answers the first question.

Colin Simpson - Goldman

There isn't really cash there, I mean cash on cash.

Pat Regan

In terms of the emergence of our 900 million, that as we talked about in length in July the 2nd, there is absolutely cash. As we go forward we'll update the 33 billion that we talked about on July the 2nd, so we talk about how real world on discounting cash flow is going forward. As we talked about, we'll also do our other things such as kind of net flows, et cetera. So in terms of the AVIF you get more volatility in some of that with MCEV. In terms of 900 billion we've talked about then, that absolutely is yes.

Andrew Moss

And on targets, I think what we've done on this, given more short-term guidance around a number of things and clearly capital generation is one that's important and there is a great deal about guidance on that today. Combined operating ratio target absolutely remained in place and it's pleasing to see in the first half that we've beaten that quite comfortably and I think our ambition in combined operating ratio terms is not to stop where we are, just to be clear. Now we do think there's more to come out of the businesses that we have in terms of making businesses more efficient. And if and when we see particularly in the commercial market a better rating environment, then we will be a very significant beneficiary of that, let's be clear.

On the earning per share target, I mean its great to see earnings per share of nearly 40p in the first half of the year, and a lot of that is coming through at the operating level. We're beginning to see the fruits of the hard work over the last couple of years coming through. We're still 2.5 years away from the 2012 target. It's an ambitious target; it's being made more difficult over the last couple of years by its movement in financial markets. We have said that consistently. But that ambition drives behavior in this organization, and it's driving the behavior of the organization to make those numbers higher, and I think it's in all of our interests, all of our shareholders, all of our stakeholders' interests to keep driving in that direction.

Colin Simpson - Goldman

All right.

Barrie Cornes - Panmure Gordon

Barrie Cornes, Panmure Gordon. Just one question on the GI reserve release. Is it a one-off move; is that changing philosophy in reserving, can you just give a bit of color on that? That's all.

Andrew Moss

Okay, so last year we had a higher level of reserve release as compared to this year, by the tune of about a 100 million. We still reserve, if you do the maths I am sure you will arrive at the relationship of reserves to premium and all that kind of stuff it still remains strong. Our reserve absolute levels is still the virtue of the same. Just what we are saying is we are very focused on improving the current year combined ratio. We are still having an amount of sustainable prior reserve releases. So our reserving philosophy remains to reserve kind of above next estimate. James?

James Burse - UBS

Could you discuss the effect of Spanish bank consolidation on your distribution metrics?

Pat Regan

Yeah, now good question. There is a lot of movement in the Spanish banking sector. I will ask Andrea to comment on it in more detail. The high level message is we expect a bit of movement, we expect a bit of opportunity as a result of that movement. But let me ask Andrea to comment in more detail.

Andrea Moneta

Yeah, thanks a lot. Just for the big picture, what happens in Spain is more or less what happened in 1991 in Italy. So big pressure for consolidation for the banking sector and we see this as a positive development for the banks. Very clearly, there was both moral persuasion for the bankers paying as well as the special funds for the banks that basically got together. We are seeing from either cold mergers that mean with this above the banks or real the mergers, something like perhaps going down from 44 to 20, 22, so a big step towards consolidation.

As Andrew said, our partners earn clearly very, very strong. We see this as a potentially an opportunity for us because clearly these could open to new branches, opportunity in terms of distribution agreements, and in case some of our partners should merge with other banks, working with other insurance company then our contracts are extremely slid and they are very, very well protected. So international good development for the Spanish banking system, good opportunities for us.

James Burse - UBS

Christian Reeves from Bank of America Merrill Lynch. I had a look at your shareholders' assets, in particular the mortgages, and there's been a 5 percentage point increase in the loan-to-value, falling gilt yields, we can't do much about that, but there is an enhanced valuation methodology. I mean you are unusually invested in this particular asset trust, now things being a little bit better in the U.K., but how much have you sort of stressed this portfolio, 99, loan-to-value is quite high?

Andrew Moss

Yeah great question. Of course, the loan-to-value is just the first part of the actual security we have around this asset. And I'll ask Mark to comment in more detail on it.

Mark Hodges

Yeah. Well, you know it's been I think a high quality portfolio for a number of years. You know the defaults on it were extremely low. We have an enormous provision against you to default. So in terms of begin confident around stresses, that's why that provision was set up this time last year. I think that drift down in terms of loan-to-value is around us just rigorously looking at the values of properties in the portfolio. We are prudent by nature. I think it drifted out by 3% actually from 96 to 99. It's been up at 106 or 107 over the past 12 months. Very importantly, I think the interest service cover remains at 1.3. The actuaries are very; very low less than 1%. And kind of our collection right is extraordinarily high. We're still collecting rents up, kind of, 99% plus as they fall due. So we still think it's a very high quality portfolio and we're not complacent, that's why we have those provisions in place. But it stood up over the last year, 18 months, and we expect it to perform going forward.

Andrew Moss

I mean we still have that real life example of a large potential default about a year ago, and there are three links in the sort of chain of security that we have. Firstly, the property itself, so the loan-to-value element to that; secondly, the security we have over the rental income streams and that's about 1.3 times covered in the portfolio; and then a floating charge over other assets in the property companies to whom we lend. That's why we haven't sustained large losses in this portfolio. As Mark says, we have a very large provision seeking 1.1 billion in total against the annuity book of which I guess about 800 is against the commercial mortgage portfolio. So, we'll see what happens as time goes on, but we feel pretty confident about it. Blair?

Blair Stewart - B of A Merrill

Thanks very much. Blair Stewart from B of A Merrill as well. Just following on from that point, on the CRV loan book, what's your feeling at this stage on how Solvency II may treat that? As the question said, you look unique in terms of size of that book. How does Solvency II treat that in terms of charge versus say the alternative of holding a book of corporate credit, first question? And then the second question is on the non-Life business, you've seen a 4-point improvement in the current year. It's a significant improvement. Can you just talk about how that's been achieved? I know you're seeing some price increases, because there has obviously been a pickup in claims inflation as well. If you could go around that please?

Andrew Moss

Sure. I am going to ask Mark to comment on that in respect to the UK first. I think the broader comment on Solvency II; actually I wouldn't encourage people to look at specific parts of our book in relation to Solvency II. The whole point about Solvency II for Aviva is that it is unique in the UK sector because it is so diverse and that is the main underpinning for why we feel confident and comfortable about Solvency II. Pat, do you want to take the more specific question?

Pat Regan

Yeah. There is nothing, (inaudible). It's a 15% stress, so increased 5. I don't think that gives us a very different answer than versus if we hold a kind of normal long-term corporate loan book, obviously we think we get a better long-term return from a mortgage book versus a loan book.

Andrew Moss

Mark, do you want to tell us about our underlying performance in the General Insurance?

Mark Hodges

I think the story really is one of continuing momentum. If you think about the action we took last year to cleanse the book, you saw that in terms of volumes I think we were very clear why we were doing that, which is around risk selection, and we think we have a greater quality book at business.

You have seen that perform, I think in terms of something like motor, and as an example you are right, we are seeing double-digit increases. I think if you look at the AA kind of stats and the E&P stats for Q2, they are kind of between 11 and 14%. That's certainly in line with what we are seeing. We are now going through the second year of those kinds of rate increases. So you are also right, we have seen some prior-year challenges, but I think because we were quick off the mark last year with those rate increases, had the volume effect, because we are following that up now with further rate of increases, you are seeing it come through in the current year underwriting.

So we are very vigilant. As Andrew has already said and Pat said, it's much more difficult in the commercial book where increases are much lower and again our focus there having cleansed the book is on retention. So we are seeing record levels of retention in our commercial book in the high 80s because we think we got the right risks in the portfolio. So it's combination of those factors plus of course, we have been on top of costs and we delivered that cost target in the GI business. Last year, there's been some residual charge. This year just as we finished one or two items off, but that focus on cost we have gives us we think an advantage as well.

Andrew Moss

Andrew?

Andrew Crean - Autonomous

Three questions I've got. Your running yield on your P&C book is very high 4.8%. Can you tell us about the new money rate, investment income for new? Secondly, now that you are focused much more on cash, will it not be more sensible to give us a dividend recovered by cash for the range, could you do that? And thirdly, just looking at the growth in the Life portfolio, I noticed that transfer on the back book is about 716 million at the first half and addition from new business is just 508 million, which was a just a portfolio which is in sort of decline. Could you comment on that?

Andrew Moss

Okay let me comment on the dividend point. I think we can think about that, Andrew, and I think at end of the day more traditional to look at this against your actual strategy profits. I think the more important thing probably is that the people have confident and I think they should from the numbers we are promising today that the cash of capital generation sits behind that, which funds the dividend and so long as that message is clear to people and probably frankly it's mission accomplished on that. Sorry, what was the first question again? It was...

Andrew Crean - Autonomous

The new money rate on P&C related to...

Andrew Moss

Oh, yes.

Pat Regan

To the return that, we've got about just over 18 billion of excess back in the General Insurance business, of which we earn 440 million of investment income. The asset split is, I forget what page it's in, but it is in there. It's a tiny amount on equity; it's a tiny amount on property, mostly in fixed income. So there is some level of gradual reduction to it, but it isn't to the amount we see dramatic impact to the overall investment returns.

Andrew Crean - Autonomous

New money rate as well.

Pat Regan

What we're earning, I couldn't give you a number off the top of my head. In terms of the AVIF what we said to you on that is a couple of things. We are going to show you net flows going forward. We are going to show you the undiscounted cash flows going forward and obviously we think as we put on kind of overall net sales growth that a 12, 13% IRR, that that is adding to a value of our stock of new business going forward. So, I think kind of over time we would hopefully demonstrate all of those things in terms of what we're adding versus what's actually wrong.

Andrew Crean - Autonomous

Thanks.

Andrew Moss

I mean I guess on the reinvestment on General Insurance and that they have to focus businesses like ours and our competitors on underwriting returns, and we've been saying that for a while and I think we are focused on that, but it has work through it in time. Duncan, did you have a question? So I'll come to you in a minute right there.

Duncan Russell - JPMorgan

Duncan Russell with JPMorgan; and just following up on the bancassurance question and the UK deals, could you comment a bit more on those UK deals structure the economics, how they're structured now versus previous bancassurance deals, the advantages and cost of doing that and whether there is an increase across the Europe and will we see similar sort of transactions with the European bancassurance payers also to monetize their insurance asset due to the Basel III?

Andrew Moss

I think that's a really interesting question for the long-term, and I guess the answer we don't know, but we know lots of banks are thinking about their insurance operations and then tend to talk to us about it because we are sort of pre-eminent in that regard in Europe. I think The Royal Bank of Scotland joint venture and the restructuring of that, which actually yields net asset value for us and takes goodwill off the balance sheet, and hence that advantage is unique in it is very big and then likely Patrick will comment on that.

Pat Regan

Yeah, I think probably starting at the level of strategy and bank distribution, we do see is an important growth area for both the Life and General Insurance businesses here in the UK and I think the advantage of running the businesses together, which is often asked about, in terms of something like the Santander deal, being able to leverage our existing General Insurance relationship and move it across into a life relationship, I think is a good example of now how we can use our breadth. So it's a big area focus. We think we're strong there already, as Andrew said. He listed the names of people we work with. I think it's very impressive, and we would seek to grow I think that area of distribution going forward

In terms of RBS more specifically, it's really about focus. We and they sit down regularly as you would expect, as we do with all of our banking partners, and review progress and review strategy and the conclusion we reached jointly was that they wanted to be entirely focused on distribution. We are very happy manufacturing, as we've done in a number of a other relationships, and we've ended up with this kind of solution to that strategic thought, which as Andrew said, realizes an increase in our net asset value, gives us a long-term distribution deal in the products we think will be most valuable for us over time. So happy with that deal. I think it's commercially attractive, but I actually think its part of that bigger strategy in the UK of making sure that bank distribution is a strong feature of our business.

Andrew Moss

Raghu?

Raghu Hariharan - Citi

Good morning. Raghu Hariharan, Citi. Just two questions please. The first one was in the UK Life business, you are getting very good growth in your risk business, which is unique as compared to your competitors, maybe there is a base effect because 1H '09 was very low, but you are also getting margin improvements. So I was just wondering, in terms of protection, how are you managing to grow and is the increased margin just impact of lower commissions is being paid?

The second question was, you have strong operational results, but if you look at your balance sheet in terms of leverages compared to your peers and if you take the internal leverage, it's probably a bit higher, and you have a higher capital generation target where the internal leverage has actually going up. So I was wondering how do you reconcile that increasing cash flow and better operating results, and whether you think about de-levering a bit of that because that adds volatility when markets are improving.

Andrew Moss

Okay. Let's talk about protection first and I will come to Pat on the second one.

Pat Regan

Yeah, maybe just take protection in the round with what we've done more generally. I mean, obviously we have across the portfolio shifted the mix of business as you know over the last few years. So we are writing a lot less bond business, which were traditionally a lower margin business for us. We have grown as you say the annuity and protection business.

I don't think it's necessarily off a low base but that's to prove over time. I think an interesting example of that is the bulk purchase annuity business where we wrote a reasonable chunk in Q1 but not very much in Q2 and I've said consistently, we have strong disciplines around returns and you can see that in terms of those flows. Protection itself has been an area of focus and there is a number of things going on.

In this very room, I think it was some 3.5 years ago, I talked about a product that we had in the process called Simplified Life, which is also underwritten process online. That's gone from nothing there into doing something like 2,500 units a week through people like Barclays, Post Office in the IFA market and that's 80% also underwritten.

So that helps you to keep your cost under control, that obviously in terms of attractive as a proposition is good. It's from that kind of base that we are growing and obviously with things like Santander deal we announced earlier in the week, we look to continue to grow into that market going forward.

So it's a combination of all of those kinds of issues plus, and I always come back to it, the cost focus that we do process more for less because we have been simplifying out systems infrastructure which allows us to simplify our process. So you've got a combination of all of those things meaning that the margin is going up because of our actions around mix, but actually our actions around the quality of the business as well.

Andrew Moss

I think in terms of the overall balance sheet shape, I talked incredibly high level today, and we will talk about that in more detail later. I think we are overall happy with the capital structures and the hybrid debt structures. They're a very good long-term sustainable low cost source the funds for us. Interest cover is high on those. External gainings were about 30% now. We do have some dates coming up that the scheduled maturities is pretty extended over a long period of time. There is one again due the next year, and higher capital generation does give us more optionality around how we treat some of those, whether you do choose to pay down some of those.

Raghu Hariharan - Citi

Thank you, hi. A couple of questions from me. The first one is on the focus on the year on the commission real estate. Just in terms of the UK portfolio and the 110, it's more than six months due now, and is there anything to say about those assets? Should we expect that they pay soon and return down to the normal or presumably having not impaired and we must expect that they are going to get paid at some point soon? So, is there anything more you can add to the kind of longer dated stuff in the commercial property portfolio? And the second question was on the liquidity premium. I noticed that you have changed the basis obviously adding 400 million to the EV. I was just wondering in terms of the kind of IRRs that you have published, would they look materially different if you used the old basis effectively.

Andrew Moss

Mark, do you want to comment on that?

Mark Hodges

Yeah, I mean on the first one, there's a not lot extra we can say. You are right, we haven't taken an impairment charge. I think that's because, this goes back to the point Andrew made, the quality asset we think doesn't warrant that and therefore there is not much more to say. Interest service cover is good. It's being serviced and in a way we are content with where we are.

Pat Regan

I think you have to say, we haven't seen people that worked in this market for 20 years, and yeah it's there to stay (inaudible) are looking to restructure and we work with them to restructure. And while that's happening, you get a little better look that actually moves into a risk. So that doesn't necessarily translate into loss but it can work into restructure which is in the interest of both parties. Again, I make the point about people, the type of (inaudible) runs that business is extremely well known in the market and he's been working really hard over the last couple of years and doing a fantastic job for us, I've to say. But what he hasn't translated into means losses.

Andrew Moss

Yeah, I mean actual book losses were last year and were of the order of 30 million. I mean that's on the size of portfolio. So it is your indication of the job actually we are doing.

Pat Regan

I think we talked about again in the Q1, I think Craig, asked me about it. We brought the calculation in line with the CFO guidance that came out during the year. So, that's a the change that makes no deficit to the IRR.

Raghu Hariharan - Citi

And remind me, does that actually apply to the commercial real estate loan book as well? Do you basically grow the market value as I said really using the kind of liquidity premium?

Pat Regan

We apply to that, yes, we do. The bigger change I think we just apply to the U.S. I don't think it made a difference in the UK if I remember the tables that back but I don't think it made a big difference in U.K.

Andrew Moss

Maybe the last question because I am conscious that a number of you need to be somewhere else in the not too distant future.

Raghu Hariharan - Citi

Couple of questions. You made a big play on the with-profit guarantee business that you're raising, especially in France. What was the IRR on that business? Is it really worth doing? I noticed the IRRs in France basically about 9, 10%. I am sure that's at the bottom end of that. Secondly, the Santander relationship, if you look at the ROM accounts, I think the sales from that relationship are around 0.1% of your level of AMBP. Have you got plans to expand it?

Pat Regan

No, I think we will be driving that up. Andrew?

Mark Hodges

Yes, you could assume Andrew will certainly...

Raghu Hariharan - Citi

Just it seemed rather a small figure to be announcing.

Andrew Moss

I think we are pretty confident that as with most of our bancassurance relationships when we get into the piece we have got the dramatic effect. On the IRRs?

Andrea Moneta

I think on the IRRs, I mean the way I see it is that when you go over the bank and so you have a basically a mix of products. So you may end up in every product which is not exactly meeting the other rate and you have other products that basically exceeded the other rate. You're having a commercial relationship and what you need to do is to have a product mix that allows you to do a very good business, on the one hand meeting as much as you can the expectations from your partner, the bank; on the other hand the meeting the expectations from the shareholders. And what I can tell you is that in all banks relationship that we have their rate is matched.

Raghu Hariharan - Citi

Thank you.

Andrew Moss

Okay, now, seriously (inaudible) a number of you have to be with one of my competitors in the not very distant future. So, thank you all very much for coming. I think the summary message is I hope clear, and it is that sort of growing from a position of strength. It's great to see the profits coming through. It's great to see the results of all the hard work we have been doing coming through in the numbers tangibly, and that's why we are pleased with that.

So thanks so much for coming. Have a good day.

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