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Aviva plc (NYSE:AV)

Q3 2010 Interim Management Statement and Analyst Day Presentation Earnings Call

November 4, 2010 09:30 AM EST

Executives

Andrew MossGroup Chief Executive

Pat Regan – CFO

Analysts

Oliver Steel – Deutsche Bank

Greig Paterson – KBW

James Pearce – UBS

Andrew Crean – Autonomous Research

Andy Hughes – Exane

Craig Bourke – MF Global

Nick Holmes – Nomura

Tony Silverman – Standard & Poor's Equity Research

Raghu Hariharan – Citi

Andrew Moss

Right, thank you very much, everybody for being here. Excellent turnout. We’re going to take up little bit of your time this morning.

What we’re aiming to do is talk not just about third quarter, which, of course, if you like, the bedrock of what we’re announcing today. But I want to take a little bit of a time to talk to you about some of the statements we’ve made today about strategy, and if you like, the refresh that we did in the first half of this year.

And then, Mark, later, is going to take to you about the UK business, and that will be a far more operational tour through two businesses, which are now working very well in their own right, but combining as well to make for a more powerful presence here in the UK. So quite different in terms of the way we’re going to approach those two sessions, and we’ll allow plenty of time, of course, as always, for you to ask questions.

So let’s get right down to it, let’s start with the Q3 numbers. I suppose the story is pretty simple. It’s just one of continuing strong delivery building on the 21% increase in profitability however you measure it in the first half of 2010. So just looking at headlines, long-term savings sales up 6%, a 2 percentage point increase in internal rates of return on new business, so writing profitable business across our markets. As I go through, one of the points I want to make to you is, there is no doubt in my mind that in our life markets, in places, we are operating in a hard market right now and taking advantage of that.

In the general insurance and house business, very pleasing to see volumes going up in the business now, really reestablishing that growth path, and the profitability of the business at 97% across the business, 96% in the UK.

And if you want to just look at Q3 in the UK, 93% combined operating ratios. I will have to say that the prospects for our general insurance business because of the actions that we’ve taken across our markets in the last couple of years are better than anytime for the last five years. And that doesn’t underpin some of the targets which we have given you for the short term into 2011 today.

And capital generation, which clearly has been a focus from an investor perspective over the course of the last nine months or so, good turnouts today, we’re right on track to hit that increased guidance at 1.5 billion that we announced at the half year.

Going a little bit deeper into it on the life side, the UK 15% growth year-on-year in the business at a 15% internal rates of return. That’s I think an impressive story for any life business. And when Mark talks to you later, we’ll be pointing out I think just the sustainability and strength of the business that has been created here in the UK life market.

In Europe, sales moderated a little bit in the third quarter intentionally. You know that we were writing a little bit more slightly lower margin with profits, guaranteeing business in Italy, for example that we wanted to in the first half. We have pulled back a little bit on that, but still 9% growth across those markets and sustaining an internal rate of return at our target level of 12%.

North America, basically flat year-on-year in terms of volumes, but that doubling of IRR that we saw in the first half sustained in the third quarter, we continue to reduce crediting rates to customers, we continue to reduce commissions, our competitors are following. And when I talk about hard market conditions in some of our markets, so we’re seeing that the US is a fantastic example of that. And that fueled over a 250% increase in profitability in the first half and we’ve seen that sustained through the third quarter, and I think more to come.

In Asia Pacific, sales up 46%, and as we spread that business over what is essentially a fixed cost base at the moment in Asia Pacific, you can see the internal rate of return going up. And so margins and IRRs going up across the Asia Pacific business, up to 10%, heading towards that 12% target.

In Delta Lloyd, sales in PVNBP terms down a little, market conditions remain relatively difficult, and the profitability of the new business as has been the case for sometime in the Benelux markets, still challenged relative to the returns that we earn elsewhere.

Now, I’m sure you’ve already noted the positive comments that I’ve made about general insurance, and I do think that this is a compelling and exciting picture, actually as we move forward. The graph at the bottom, maybe just starting there, we did take action to move away from unprofitable business particularly in the UK, in the course of the last couple of years. But that period’s over, and we’re growing back into that market.

So we’re really winning, I think, particularly in the direct space, particularly on aggregators in the motor book, for example, and growing into what is becoming a more profitable market in that part of our business. So you can see a 3% growth in the UK. I talked about the 96% combined operating ratio in the UK and the third quarter performance of 93%.

So we are encouraged that that performance is sustainable certainly for this year, and the guidance that we’re giving in terms of targets for next year at 97% or better as a target, I think underlines our confidence in the business as we go forward.

In terms of the balance sheet, pleasing also to see in the third quarter, a significant improvement in net asset value whether you measure it on the IFRS spaces or on the MCEV basis. That’s really because of the earnings in the third quarter, a little bit of help in financial markets, but also the financial effect quantified for the first time of the closure of the UK final salary pension scheme. So a 275 million pound uplift to net asset value because of that change. So it’s pleasing to be able to actually put some numbers around that, we talked about the action earlier in the year.

And on the MCEV NAV, MCEV NAV coming up close to 5 pounds, and we talked earlier in the year about getting you a more of what we call real world MCEV, or plus net asset value, perhaps still planning to do that as we go into the yearend, and that will primarily take into account the effect of our credit earnings capitalized into the embedded value as we go forward. It’s a good progress on that score as well.

So, the third quarter as I said, I guess is the bedrock of what we’re announcing today, but what we wanted to do was spend more time talking to you both about the strategy work that we did in the first half of the year, as well as then focus on that UK business.

To introduce the strategy piece, I think it's just worth taking stock and looking at where we are today, and what we’ve achieved in the course of the last two or three years. And I think by any measure it has been a very significant transformation over the course of the last couple of years.

All of it, I supposed headlined by uniting the group under one brand. And the power of that particularly in the markets where we’ve actually changed the brand and that’s driven sales and revenues and earnings, and Mark will talk about that later in the UK, I think is not going to be underestimated.

But I guess there are two ways to think about what we’ve done. The first is to think about structural and portfolio changes that we’ve made to Aviva, and the second is to talk business-by-business about the operational transformation that we’ve actually seen in the last two years. We have made simple changes in the course of the last couple of years.

That sale of Australia realizing 450 million pounds of capital, in our minds, frankly, that funded the reattribution of the inherited estate and that was a business earning about 40 million pounds of operating profit.

We’ve quite simply reallocated it into something which is earning us about a minimum of 120 million pounds of profit on the earnings from the reattribution. So I think in pure commonsense terms that looked like a small thing to do.

Perhaps more strategically than that, the IPO of Delta Lloyd, I think a very important step as well, a reallocation of capital away from relatively low return market for new business in the Netherlands. And I’ll talk more about our future intentions in relation to Delta Lloyd.

We’ve taken a lot of costs out of the business in the course of the last two years. We had a target of 500 million pounds of costs saves which we announced about 18 months ago, we hit that target a year early, so that was pleasing, and we’re making some more announcements today about more costs that we can take out of the business, as well as more efficiency savings which we will see benefit the bottom line of the company.

I talked already about the effect on net asset value of the closure of the UK final salary pension scheme. But in funding terms, it’s going to save us 50 million pounds or so a year as well as we go forward, so it has that ongoing benefit to add to today’s NAV benefit.

And, of course, through that time we’ve been managing the balance sheet of that company through the financial crisis, and I think we’ve come through it well. The capital position is significantly stronger than it was pre the crisis, we’ve got – there was 1.1 billion pounds of provisions in the annuity books, still untouched at this point, we’ve got off-balance sheet hedges against equity risks still in place, we’ve got off-balance sheet hedges against weakening of Euro in place.

So all of that I think has helped us through that period. But, meanwhile, down in the guts of the business, we’ve been driving at an operational level the business forward in a host of different ways.

What I’m trying to do on the right hand side of the graph is to show you that in those different businesses we’re in different stages in terms of that transformation. UK life actually we’re pretty far on in that. And when Mark talks to you and we perhaps take a look back over four years, we have broadly doubled the profits that come from that business, and we’ll look at the relative profitability of that business versus the competition later, it’s a pretty impressive strong frankly.

The UK general insurance book, yes we’ve cleansed the book, and I think the benefits of underwriting changes that we’ve made over the course of the two or three years are really beginning to flow through. So when Mark talks to you, for example, about bodily injury concerns in the UK motor market, we’ll demonstrate to you that we saw that coming, we provided for it, we changed their underwriting practices, and we are now growing into that market in a profitable way.

In Europe, a year-ago, Andrea set out his stall in terms of his vision to run the European businesses on a pan European business, and we’re making good progress on that. We make a number of points in the press release today around things that we’ve achieved, but we’ve still got quite a long way to go. And while we’ve seen cost reduced, there’s more to come in that regard, but we are seeing income I think driving up across our key European businesses.

And in North America, I’ve already referred to a really fundamental turnaround in profitable. Eagles move from the UK across to the North American business, some really decisive action taken in terms of pricing of both the existing book and new business in the index annuity space, flowing through to earnings, and while there’s more to come, I think there’s really been a step change in that area.

In Asia Pacific, we see value accelerating – I’ll talk about that more in a strategic context – and Aviva investors as well, as we really aim to grow third-party assets in that business. Again the objective of increasing value I think is there, but more work to do for sure, and there’s no doubt that in that particular area the financial crisis has not helped the speed with which we’ve been able to achieve our high ambitions.

Let’s just focus on the cost saving story a little bit though, is important. If you go back to the full-year ’08, just looking at the operating expenses of the Group, 5.75 billion pounds across the Group, big number. At the end of full-year ’09, down to 5.1 billion pounds. The cost savings we’re announcing today will see the overall operating expenses to go below the 5 billion pound mark and we intend absolutely to make that happen. So 500 million achieved, but more to come.

And what’s the results of that? And I think it’s pretty clear when you look at this slide, because you can see both on the life and the general insurance side, the operational jaws of the business opening, the income driving upwards in the life business, and the costs still going up a little bit, but broadly holding flat. So you can see that beginning to flow through.

The life business of this Group is very significantly more profitable than it was three years ago and it has further momentum to go. The general insurance business, even more pronounced. Real absolute cost savings, driving cost down, and again income beginning to rise again, if you look at the half-year ’10. So again, those jaws opening up. So the cost savings are benefitting the bottom line and I think the IFRS profit driver analysis that we’ve given you in the last few months shows the income going up in a number of ways.

So I guess what we have to do was then think, “Okay, if we’re doing all those operational things well, did we need to just take stock and think about the world around us?” And as we came into this year, we absolutely decided that we did need to do that.

So what it changed? I talk about a changing world on here. And I suppose I characterize it on this slide. Three years ago, we were in economic position, I guess where across most of our markets, we’ve seen a decade of strong growth. And that had affected the way our customers thought about life and actually, they had quite high risk capital, they were interested in investment products, they were interested in unit linked products, whether it’s equity linked or property linked, for example, and you can see it in their buying habits. Our investment sales were running ahead very strong at that time.

And I suppose if you look at ours and our competition, you can characterize us as relatively capital rich that fueled by a decade of strong economic growth and relatively benign capital markets, and that has fueled global ambitions, really I think across most of the larger insurance companies across the world. And I regulators, that time Solvency I dominated, and our regulators were proud to talk about light touch regulation.

The GI cycle, another very important element of our business. The reality is it peaked in – I don't know when it was, 2005 maybe, maybe 2006, the very strong years of 2004, 2005, still releasing prior year earnings into the years thereafter. But as went into 2007, it was abundantly clear to me and the management team here that we were going to be under pressure in our general insurance earnings as the cycle turned.

But where are we today? And if you look forward from here, how does it feel the world today? Well, from an economic perspective, for sure, it’s a much more fragmented world, economies have diverged. We see Western Europe clearly looking it appeared relatively subdued growth in the UK, obviously within that is in that position as well. And there’s fiscal tightening tends to dominate into countries like in UK, that has a real effect on our customer base. And as they’ve seen financial markets volatile over the course of the last few years, they had become more conservative.

And you only have to look at what we want to buy today to know that their buying habits have changed, so they do want more guaranteed products. Not necessarily very high rates of guarantee which is an opportunity in itself, I might add, but nevertheless they want security. And companies like us; we can’t get away from the fact that the financial crisis had an adverse impact on our balance sheet.

Not the ravages, but would have been suggested by the market-to-market valuations at the end of 2008 or in March 2009, when corporate bond books across the world were incredibly low valuations. But in reality, still a world where I think we have to treat capital as more scarce and probably as less available in terms of investor appetite for investment. Let’s face it, we’ve seen that in relation to floated ambition of some of our competitors in the course of the last year or so. So I think that means a world where more local and more focused ambitions are likely to be the order of the day.

And the next point, and I don’t want to underestimate this, the regulatory scrutiny that this industry now faces is very, very significant. There is a wash over from the banking world on to the insurance world. You only have to look the worlds that emanate from Canary Wharf about intrusive regulation. And we’re seeing it not just in the UK, but across all of our major businesses.

It’s characterized not necessarily by changes in rules, but the way in which rules are interpreted on a day-to-day basis. And it’s perfectly rational reaction I think to what’s happened in the course of the last two or three years in capital markets. And, of course, Solvency II is coming down the track to back that up. A real opportunity I think for large diverse insurers like Aviva, but nevertheless a change to an economic capital world.

All of these I think present some opportunities for Aviva. And the last point probably more than any, because I think we are passed the low point in the general insurance cycle, Mark will talk about that to a degree later in the context of the UK, and we’re into a slow upturn. So if we look at motor in the UK or household where things are moving up, we see change.

Still the commercial market though doesn’t seem to have a particular catalysts that’s going to drive rates up in a meaningful way in the very short term. So I think some good news there, and if you like, more opportunity to come. But, I guess, we feel good about it because of the actions that we’ve taken in our business that are driving profitability across our general insurance book.

But whichever way you look at it, it is a different world from where we were three years ago. So when we step back which we did at the beginning of this year, and said, “Okay, let’s just take a look on the strategic direction of this company, we set ourselves an objective, and we then set ourselves, we’ve got ask ourselves three key questions, the objective, driving profits and dividend growth, really that simple.”

And the three questions which immediately I think came into our minds were, “Where should we operate? So geographic focus. Should we be a composite or not? And what do we need to be better at?” Because at the end of the day, you’ve got to have the capability to execute against your chosen strategy. I know as a company, we have many strengths and of course we want to build on your strengths, I think that underpins any successful strategy.

So let’s talk about geographic focus, and we wanted to make sure that we didn’t just come at that with a bias, because like any company, we are where we are, we know that this company is being built with great strength in the UK and Europe over a period of a couple of decades, but we wanted to look at it really objectively and so we set ourselves, if you like, a financial lens through which we should look at our businesses.

And this was it, to look at a $100 million contribution to IFRS profits from the business, and – and I stress “and” a 12% return on capital employed or if we had a young business and we do have some young life businesses in the Group, which it takes time to earn a statutory profit, whether within a reasonable timeframe we could foresee that they would be worth $1 billion or more, that franchise value would be there. And that, of course, is a function not just of the performance of the business but it is a function of valuation in different parts of the world, and that’s something which we needed to think about. So that was the lens we took.

And just to be clear what was the starting point, well, today we’re operating in 30 countries across the world, you can see a heavy presence in Europe and in the Middle East to a much smaller extent and 10 countries, still in Asia Pacific, so that’s the starting point, and we started to apply that lens as we looked at prints.

Now, I’ll just with the UK and Europe, let me look through that lens. These are the eight businesses, the eight countries which we believe either met the criteria today or would in the not too distant future. And looking at it critically, clearly the UK and France are in good shape. Ireland and Italy, strong earning businesses.

Very strictly, if you look at the return on capital employed, they’re not hitting the 12% right now. We think they can as we drive the business forward. Poland, very, very strong return on capital business, strong statutory earnings as well. Spain, again, although quite a young business, strong IFRS earnings.

And then, Russia and Turkey, two markets which today are small for us, but we do think offer growth opportunities which can drive the franchise value part of that equation within a reasonable time period. So having looked through that lens, very clear, I think the VISA markets in which we will invests and we’ll deepen our presence to drive profitability in those treasury markets in Europe.

Now, I don’t think that will surprise you, because I talked about the bias that you might think, and would have been in our thinking as we started the process, and we are believers in the prospects for our business in Europe. And this slide starts to show you why. And that’s because the life and pensions – the stock of life and pensions assets in Europe is considerably higher than anywhere else in the world.

And the projected growth in that life and pensions stock of assets over the next four or five years is projected and this is Oliver Wyman's research to grow by more in absolute terms than other parts of the world. In Asia, clearly, the percentage growth in those markets is going to drive up more quickly, but in absolute terms, the opportunity exists here in the European markets.

Now, where’s Aviva actually represented today? You can see that on this graph. But we did some more research recently which we published back in September on what we think the actual pensions gap is across European countries, country-by-country, and we’ve come up with some staggeringly large numbers. Just to be clear, this makes an assumption that people retire with 70% of their final salary, which is actually a pretty handsome way to retire, so it does come up with some very large numbers. But it makes the point that people need to save a lot more money across our European markets. So clearly, for a company like us backed that opportunity.

Now, I’ve mentioned earlier that building on strength is important. And I think in the UK and in Europe, we have very, very considerable strengths today. Start with the UK, what we have in the UK is a scale business, we have 19 million customers in the UK, that’s a third of the population. We touch one in three households in the UK. We have a broad product range intentionally to get to that mass market.

Our market is the middle market. Aviva’s profitability is about the lower large numbers, it’s making a little bit of money, from a lot of people. It isn’t about focusing on high net worth customer basis. To do that, you need multichannel delivery and we’ve got excellent distribution in both the life and general insurance business here in the UK. And it gives us the diversity of both risk and earnings that give us a stable, strong, very sizeable earnings stream. And that’s all being driven forward now under one single brand that is driving growth in our UK business. Mark is going to update later on that.

In Europe, the reality is, we have a different position. What we have is I think a competitive distribution advantage; we have leadership in the bancassurance space in Europe, more than 50 banks that we work with in Continental Europe. And so that gives us well established positions in our chosen markets and we’re now driving the management of that business forward on a pan European basis. If you look at the overall market share, 5.5% across the life business, and more concentrated presence in the GI market, strong of course in the UK and in Ireland in particular.

Well, let me just draw your intention to the two pie charts on these slides. What that is does is just carve our business up by sales, but have a look at it on profit. And I think here is something very important to grasp. And it tells you – I think it tells you quite lot about Aviva’s competitive position. The blunt reality is that there are thousands of businesses competing with us in the savings markets, in our markets.

Whereas, when it comes to writing protection business or annuity business or motor business or household business or insurance small businesses, often we’re competing with three, four, or five key players in our markets. What’s the result of that? We have pricing power, we have a competitive advantage and the margins are wider and we made more money. And we it really says to you very simply is wherein insurance, I’m proud to be so.

We do not believe that we have a competitive advantage in savings. We make money in savings and it gives us flows into some of our risk businesses and there’s a value chain which we take some of the benefit of in that savings business. But taking risk is the way that Aviva makes money.

Now, I’ve talked about eight businesses in Europe, and just let’s talk about Delta Lloyd. Very clear, it hits the targets together, but I don’t really care that its franchise value is more than $1 billion, it’s pretty if that’s the case. And what I’m really interested in is operational improvement in that business. And I think as a publicly listed business we’re beginning to see management really focused on that. And as the majority shareholder in that business, we’ll be the beneficiary of that.

So, right now, we plan to hold that business for value. It’s a net capital contributor to the center of the Group, it pays a dividend, so that’s what we’ll do in the foreseeable future, we’ll hold that business for value.

Now, let’s move across to North America. We have two businesses; we have a general insurance business in Canada and a life business focused on niche parts of the market in the US. Starting with the Canada, this is a great business. I mean it’s number two in the general insurance business in Canada, it consistently earns returns on equity of between 13% and 15%, it’s a consistent, significant, dividend payer to the center of the Group. So it’s a good business to own. It meets the criteria that we set ourselves.

In the US, we meet some of the criteria, and we’re seeing very dramatic increases in the profitability of the business as we manage it now for profit. What it doesn’t hit right now is the return on capital employed criteria, we think it can over the course of the next few years. So focusing on improving that business is very important to us. It’s turned into a net capital contributor, it paid a dividend in the first half of the year. So you’re going to see organic growth with an emphasis on growing the life business.

We think we can become organically a top 10 life player in that business, in the US market, and you’re going to see the equity index business still the focus of our annuity business. We've got no plans to enter the variable annuity market and we’ve been very clear that we don’t intend to make acquisitions in that US market. So driving that business for value, which I think we’re very successfully doing will be the priority.

Let’s move to Asia Pacific, this is an interesting story I think. We’re in two markets as I said. We’ve invested about 700 million pounds in organic investment in Asia Pacific over the course over the eight or so years. And within that portfolio, I think we’ve built some really successful business, the Chinese business, I think the top three foreign life insurer in China, I think just this week we got our license in the 11th province in which we’re operating, the Hainan Province. That takes us up to 45 cities across China in which we’re operating. And whilst it turned into profitability last year and we’ll make IFRS profits this year, it is a young life business, and it will take time for statutory profits to build.

Interesting, if you look at the value of the business today, I mean looking through billion dollar lens, actually I didn’t think it’s going to be very long before that business probably has that sort of franchise value. We invested about 60 million pounds in it in the course of the last years, if we were to sell it today, it will be at a very significant multiple to that investment.

India, as well, I think you have to talk about them, you just take those two countries, you’re talking about 37% of the world’s population. Economies are growing very fast, the demographics are there for insurance penetration to increase. But I have to tell you that the Indian life market right now is a very, very difficult place to operate, given the volatility of the regulatory changes that we’re seeing almost on a week-to-week basis in that market, and nobody is making money in the Indian life market, nobody.

But overtime, you’d have to say, surely it would be an objective of the Government in India to build the life business, not least perhaps, because of the massive infrastructure investment that’s needed in that country. And I think you’ll need to recycle the internal savings in the country that fuel that. So India, yes, I think again in the future, we can hit that franchise value target.

But I think there’s a really critical question in Asia Pacific that we have to ask ourselves and that is will that value be maximized by looking at it country by country, or actually will we maximize by looking at a pan Asian business. And I don’t have to tell you, we’ve just seen a pan Asian business so part of itself in a pretty successful way in the course of the last couple of weeks.

So down on the bottom here, I’ve got a slightly speculative strap line saying, we’re putting 700 million, what’s the value today, maybe three times that? Actually if you apply some of the multiple that AAA saw, we’re more than that, if you were to valuate relative to premium. The reality, of course, is the profitability on our business is lower than that today, but literally week-by-week, we’re seeing both volumes and margins going up across our business and that of course is value accretive.

So I think as a Board, we have got to think quite carefully overtime, about how we continue to develop the value of that business, and whether at some point, given what are, in my opinion it’s a high valuations, the life assets in the Asian region, whether at some point we take money off the table in Asia potentially to redeploy back into our core markets and deepen our presence here in Europe.

Aviva investors, I said earlier if there’s been one business that’s being challenged by the financial crisis in Aviva, I think this is the one. Clearly market valuations of assets have changed dramatically, the fee income therefore has been challenged like many other investment businesses, and we’ve had to go on investing in building capability.

Investment performance has really improved in the course of the last couple of years, we have won some significant third-party mandates, but we really got quite a lot more to do, if we want to get to the tipping point where more than 50% of our income comes from third-party revenues.

Today is between 70% and 80% still from internal insurance based assets that come through the Group. So we know what we want to achieve, we know that we’ve made some good progress, but we also know that we’ve got more work to do. And we’re set on doing that and as we grow third-party assets, earnings will improve in that business.

Now just to summarize then from a geographic prospective, I’ve talked particularly about 12 months, which we think meet that financial criteria, and 80% of our life and general insurance already comes from those markets.

Now I talked earlier about portfolio changes that we’ve made in the business in the last couple of years, and I think there is an important point to make here. There are no sacred cows; we do have an open mind.

If we saw a particular opportunity in a particular market where we could invest to deepen our presence and we saw our opportunity to a reallocate capital away even from one of these markets to deepen our presence in an other of our key markets, we would have an open mind to that. So you have seen portfolio changes in the course of the last couple of years and I predict that you will continue to see that in the course of the next two or three years.

Now let’s get to this question of composite. It seems to be very topical question here in the UK, less so outside of the UK, not a coincidence I think that nine out of 10 of the large European insurers are what we call here in the UK composite insurers.

I think we have a very simple challenge here which is to persuade people that we are excellent in the way that we run our business that we excel in the way that we run our general insurance businesses, but that over and above that, there are benefits to running this two together, whether it’ll be IT benefits, whether it’ll be promoting the brand, whether it’ll be premises, for example. All of these things can be additional ways to drive out the value of the composite.

So we did take a hard look at it in the first half of this year. We looked at a whole host of different ways that we could take the Group forward, of course, including moving just to being a life business across our businesses. But, whichever we looked to see it, we found the answer was more compelling to maintain our presence as a composite insurer.

And bluntly, we don't really give much credence to the word composite insurer, we think that’s what we’re for, we think we’re an insurer we provide protection products, whether it’s in general insurance or life insurance to our customers. And as I’ve made point earlier that’s where we make our money.

This is a split of the IFRS income drivers that Pat gave you a few months ago, back in July. And what it does again is just demonstrate, and this where Aviva makes its money, it makes its money from taking insurance risk and investment risk, and we have to be good at that, and we have to demonstrate to you that we’re good at that, but I think the numbers essentially speak for themselves.

By the way, this also tells the story about our earnings capability in a low-interest rate environment, because you can see our income streams for the most part going up, and that’s not a coincidence either because a lot of those income streams come from taking insurance risk.

Now what are the benefits does the diversification that come with being this broadly-based insurer have, and there are also some structural advantages. And as we move into the Solvency II world, the diversification benefit that you get from running different uncorrelated risks in your business is tangible.

We’re already getting that benefit in the context of the Pillar 2 models operated by the FSA and we absolutely confidently foresee that as a benefit in the Solvency II world. So quantifying that, there is 30% to 40% less capital required to write general insurance new business and would be the case if we were a standalone insurer, and there are cost and efficiency benefits as well.

Mark will talk to you about the amount of money that we already saved today and I’ll let him tell you that number shortly, by running the two businesses together here in the UK. And there’s a cash benefit; the complementary nature of the two benefits.

Cash generation upfront from premiums in the general insurance business compared to the cash outlay often in terms of paying commissions in the life business, those two things are complementary and they work together. And what we’re seeing at the moment particularly on the back of promoting the brand is the benefits we’re really getting by driving the brands across the two businesses.

Let’s be clear, you can’t afford as a life business to promote the brand in the way that we promote the Aviva brand. That is financed by our general insurance business and the need to be right up there in the phase of our general insurance customers day-by-day, week-by-week, night-by-night on the TV in our big markets.

And there are other more subtle benefits as well; it’s not a coincidence that we have just won the life insurance mandate for Santander in the UK. It’s because we have a strong relationship with them on the general insurance side and those relationships count when it comes to winning new business.

Now here’s an interesting question. What do we need to be better at? But I’m sure it’s a long list. But we think there are a number of things that we’re good at today. But we need to be better at to drive the strategy forward really successfully. First of all, marketing and distribution; this company has fantastic marketing and distribution power.

We’ve banked more than 50,000 bank branches around the world in which you can buy Aviva products, hundreds of thousands of individuals, agents, advisors, selling Aviva products around the world. So a leader in bancassurance and underpinned by the brand strength that I’ve already talked about. More to do, of course, technical excellence, pricing, underwriting.

Mark will talk to you about the competitive advantage we’ve got now in the general insurance market in the UK, because of our expertise. And this is a big investment. We have 1,800 underwriters at work in the UK everyday out there putting new business on our balance sheet and pricing renewal business across our SME book here in the UK. Nobody else has that and it’s an investment that drives our earnings in that business.

Operational effectiveness; customer attention, a massive driver of value in our business, whether it’s a life business or the general insurance business, we pay to acquire business, we need to keep it on the book, and we’ve got better and better in that over the course of the last few years.

And on the operational processing side, just quietly over the course of the last few years, significant change made to the business, more straight-through processing, more e-enabled contact with our customers, good for them in service terms, good for us and you as shareholders in cost terms.

And lastly, I think, financial discipline, in itself very, very important. So having a clear framework the capital allocation, and I guess even in the strategic context those lenses that we’re looking through is part of that. Managing investment risk, very important part of the skills that we need in the Group, and looking at gearing and we are hopeful about levels of gearing in the Group. And, of course, I’ve talked you about portfolio changes.

So selective portfolio changes are something that you need to be able to execute, and so you need some M&A capability. As it happens, we haven’t been very acquisitive in the last two or three years. But I’ve put the emphasis there on selective portfolio changes. Now there’s many examples and they’re on the right hand side to this graph – of this chart, which I think show, we’ve got lots to proud about as a company in terms of our capabilities.

I just want to focus on the last one, bottom right, on the financial discipline side. We’re going to do another analyst event, not till January, you’ll be pleased to hear, which is going to focus on our balance sheet. And Pat will be talking about the investment risk in the balance sheet, the way that’s managed, the asset and liability management within the company.

We’ll talk about capital and we are absolutely sure that, frankly what the industry needs and certainly I think it’ll help us as well is a much clearer exposition of the economic capital position of the Group is a really important step that we need to take. Historically, actually, our regulators haven’t gone through this to disclose too much about our economic capital position.

But it seems to me that if I’m sitting in the audience here, it’s a pretty critical piece of information. And I think we’ll lead on it, we’re going to put it out there, obviously with confidence about our position in that respect, but Pat will take that forward on the 20th of January.

Now, in terms of financial discipline as well, it's all very well talking about the longer term strategy, but what we wanted to do today was put out some short-term financial deliverables as well. And here are the full that we focused on today, and given you some guidance for 2011.

The first is the operational capital which clearly has caught a lot of interests in the course of the last year, so delivering at least 1.5 billion pounds of operational capital in 2011. To continue to drive new business profitability in the life side of the business, so that when we make choice to put capital to work, writing new business, we’re confident, we’ve gotten internal rate of return of at least 12%, and looking always to pull that payback down, so 10 years or less on an average. And, frankly, if you look without Delta Lloyd, the actual payback probably comes down more seven or eight years.

The combined operating ratio, you know that we’ve been operating with a 98% meet or beat target in the course of the last five years or so. And I think it’s quite significant that we feel confident enough to talk about 97% or better in the next year. And that’s because of the changes that we made in the business and the earning stream that we think is now coming down the track.

And then cost savings, I talked about it earlier, driving the costs in the Group downwards again in the course of the next couple of years. Where’s that coming from? Broadly half of it will be in the UK. We’re making announcements today about some job reductions in the North American market which will drive costs down there. But there’s contribution as well from Europe and from Delta Lloyd as well in that regard. And don’t discount the efficiency gains as well, putting more income on the book, but processing that business without increasing your costs means that falls through to the bottom line. So that is significant as well, as well as the absolute cost saves.

So let me summarize before we give you the chance to ask me some questions about what I’ve been saying. Very clear, quite stark actually in a sense increasing focus, having looked through that financial lens on deepening our presence in the 12 countries that I’ve talked about, an objective of excelling in our businesses in both life and general insurance.

That has to be the starting point for all of our businesses, but then driving out value over and above that from running the two businesses together. And then building on strength; and the Group has many, many strengths, that’s why it has such a strong earnings stream, that’s why it has so much stronger earnings stream than any of our competitors quoted here in the UK.

So building on those core capabilities to drive the earnings out of, for example, actuarial and pricing expertise. Taking risk, insurance risk. Putting capital to work in those businesses where margins are higher because of the competitive position. And, of course, demonstrating financial discipline; in this case, through a range of short-term targets, but also building that into the strategic framework that we will now follow and drive this business forward.

I’m going to stop there, and what I’d like to do now is ask – Pat’s come up and joining me in terms of answering any questions that you may have. Clearly when it comes to the third quarter in particularly, he is there to answer difficult questions around that. But we are very happy to take any questions on anything that we’ve said.

Question-and-Answer Session

Andrew Moss

Oliver, why don’t we start with you?

Oliver Steel – Deutsche Bank

Thank you. Oliver Steel, Deutsche Bank. And Andrew, you've teased us a couple of times this morning with changing the shape of the Group. And you've also not mentioned any of the countries where you're unlikely to be generating $100 million profit or $1 billion of franchise value. So I'm just wondering sort of perhaps whether you can sort of give us a sort of a little bit more explanation as to how you see this focus developing particularly with the relation to the countries where you're not focusing.

Andrew Moss

Yes, so I don’t mean to tease you, Oliver. I think it’s right to focus on the places where we want to invest and deepen. Look, we have some small businesses in a number of countries, which realistically we’re just not going to meet those criteria. What does that mean? Look, the first thing I think you need is managing them for value.

We still need to make sure that we drive the businesses for profit and to maximize the value of those businesses. It doesn’t mean that necessarily on a block to date, just to be clear. In investment banking parlance, I think people like to talk about scale or sale, but I’m not sure I say quite that clearly, but look, what I’ve said you is, we’ve made some portfolio choices in the past, we’re announcing the fact that we’re exiting Taiwan today.

So at some point if we get opportunities to invests and deepen in our core markets, we will look at whether there are funding opportunities from some of those other markets. It’s really as simple as that. I don’t think you would expect me to be more specific than that. But, right now, we’re over them, some of them are good businesses in their own right and we’ll drive them for value. Greig.

Greig Paterson – KBW

Hi, good morning. Greig Paterson, KBW. You make this point about the GI business being profitable, but there's still quite a few hundred millions of prior year development at a fairly high level at this point. I mean if I remember the paid to incurred ratio has been rising since 2004 quite rapidly and has stabilized now.

I mean what sort of quantitative statistics can you give us to make us feel that we're not going to get a collapse on prior year at this point of the cycle which just happened at every other point on the cycle? Can you give us some comfort around this point?

Andrew Moss

Yes, a good question, Greig, and I’ll ask Pat to comment a little bit on the more numbers-based side of that. I mean, I think the really encouraging stats for us that are coming through at the moment is that the current year earnings are the things that are really supporting the confidence in outlook.

We’re still seeing some releases from prior year’s, nothing like the releases of effectively the super profit that we saw back into the ’03, ’04, ’05 years. We’re back in a much more stable environment. In one or two of our businesses, there are particular focus areas, Mark will talk to you about bodily injury in the UK, and the way that we saw that coming I think. But, Pat, perhaps you want to enlarge a little bit on that.

Pat Regan

Just a couple of things, Greig. The Group reserving policy as policed by David Rogers is very consistent. We've been applying that very consistently right across the Group, nothing has changed on that. We continue to reserve better than better. Mostly we would hope overtime we’d see some positive prior year development on that.

Having said that, clearly, our emphasis has been on our lower reliance on a lower reliance on prior year reserve releases and a better performance on our current year performance which you are seeing coming through the reserves. The Q3 numbers we have posted aren’t based on big reserve releases to get those numbers in any of our regions.

In terms of some of the ratios, the pay to incur you would expect obviously a change, because of a change of the shape of the portfolio over the last couple of years as we play out the claims from the larger portfolio from a couple of years ago. That will as you say stabilize now as we’re in a reshaped portfolio which we’re seeking our ratios around our reserves to premiums and that kind of stuff overall around our classes of businesses again they've stabilized as well.

Andrew Moss

James.

James Pearce – UBS

Good morning. James Pearce from UBS. A couple of questions. On the test that you've set for strategic commitment, could you explain what's magical about a $100 million or $1 billion? I thought the strategy was based on expected returns and growth and risk. And why have you used those benchmarks? And second, could you talk about the margin decline in the context of strong annuity figures?

Andrew Moss

Yes, thanks. And can we start with the margin decline?

Patrick Regan

Sure, yes. Obviously as we lay down our framework, we are focusing on IRR as our primary measure. We've talked a lot about that. We still use MCEV style margins. The MCEV margin has gone up in all of our regions with the exception of the US region, and that is purely a factor of the reduction of risk-free rates.

Obviously they've come down some probably 25%. For our average ratio, the risk-free is probably down from 2.7 down to about 2, and that obviously will impact your MCEV margin, because it’s purely a spread business. The IRRs of that business when you do count your assets, for example, are still at 14% for the third quarter end and year-to-date. So it’s purely that risk-free rates in the US business. Our margins in other regions have gone up.

Andrew Moss

I mean on the first question James, I think the answer to this precisely nothing magical about $100 million or $1 billion of franchise value. But I think it’s a little bit inveigling to always think that just investing in life businesses is always going to give you something to pay back in the long term. And what we wanted to do was just look through, if you like, a more disciplined lens to say, okay look, within a reasonable timeframe, let’s say, the next seven, eight, 10 years are these businesses actually going to translate into businesses that are going to earn cash profits for us.

Now, actually if you take China, the answer is incontrovertibly yes. I think it’s beginning to be a scale business. If you compare it to the UK business, I think somebody in the [inaudible] in the course of I think reverse quarter of this year, we’re doing really well in China, but we sell in the China in a year when it takes us two weeks to sell in the UK. And you do have to just keep things in proportion I think. It’s going to grow fast that business and it’s going to hit in the right targets. But let’s take time on as a case in point.

Now, we haven’t invested a lot of money in the Taiwanese business and the net asset value is something like 13 million pounds. I think there will be some interest in buying it. The intensive management focus, yes, does it really makes sense for us to go on managing a business, which if we do really, really well in 2020, might be earning 1.5 million pounds a year if we’re lucky. I don’t think so. So I guess, as I said, there’s no magic to it. I think it’s pretty pragmatic in a sense. But I think it’s right for us to be disciplined in that way. Andrew.

Andrew Crean – Autonomous Research

Good morning. It's Andrew Crean at Autonomous. Three questions. Just looking at the 30 countries that you operate in versus the 12 that you've sort of targeted for focus, of the other 18 which are obviously feeling a little lonely, eight of them are in Asia, which will no doubt draw comfort from the fact that they're small businesses which can grow. And if we look at the 10 in Europe, excluding Delta Lloyd, it's – essentially it's Eastern Europe. It's Hungary, Lithuania, Romania, Slovakia. The UAE is probably not in Eastern Europe and Luxembourg neither. What is the net asset value of the businesses which are not in the top 12 and are not Delta Lloyd? I just want to get sense really of –

Andrew Moss

No the profit number is not – the 80% we quoted obviously the most of the 20 is Delta Lloyd, as you'd expect from profit figures. So the profit and net asset values are pretty tiny in those Eastern Europe.

Andrew Crean – Autonomous Research

That was the first question. The second question was the UK IRR of 15%, I assume that's including with profits. What's the non-profit IRR?

Andrew Moss

We’ll – Mark will give you into a more detail on all of that.

Pat Regan

There's quite a bit in his prepared remarks presentation.

Andrew Crean – Autonomous Research

And then, on slide eight, just for clarification, this is a third quarter question. I think you said the NAV went up from 3.94, would have gone up by 20 p to 4.14 without the DB pension scheme. I mean, roughly speaking, using consensus estimates, 10 p of that or perhaps more was operating earnings, which leaves only about 10 p for currency and investment markets which is about 2% growth. Now I think the stock markets went up 15%, bond yields came down, corporate spreads came in, volatility was lower, exchange rates against the UK, with the UK sterling weakened. I struggle to see how you only generated 10 p. I would assume that currency would have done that completely.

Pat Regan

The split was obviously we got positive contributions from operating profits, positive contributions from investment variances, a little bit from our taxes as you say and a little bit offsetting the effects positively broadly offset by the pension scheme, obviously we had a lower discount rate as we would imagine of the pension scheme. So the FX in pension scheme were broadly offsetting and so that was the other factor in that.

Andrew Crean – Autonomous Research

So just 2% for investment markets?

Pat Regan

We will obviously give you the full break at yearend. But they're the major parts of both MCEV and IRR.

Andrew Moss

Thanks Andrew. Andy.

Andy Hughes – Exane

A couple of questions from me. It's Andy Hughes from Exane. The first one is on Delta Lloyd. I know you said you're going to give us a view on the strategy later on. I can see it's more than $1 billion of franchise value. But could you get add a bit more to what the strategy is for Delta Lloyd going forward, in the context of the strategy presentation?

And the second question was in terms of the companies – countries sorry, Russia obviously quite a way off in respect to the target. What's going on there? And would you like to update on Turkey, because clearly there's been a lot of speculation? So I guess what I'm trying to get to is in terms of inorganic deals over the next year or so what is the outlook particularly in those two markets you highlighted. Thank you.

Andrew Moss

Sure. Let’s start with Russia. The industry is very young in Russia. Why is Russia of interest, because it has a population of 140 million, it’s a wealthy country, wealth is highly polarized at the moment. I mean, essentially, I guess in the context of our life business, what you are saying is do I expect a middleclass to emerge in Russia over the course of the next 15 to 20 years. And I think that there is a realistic scenario which says that that’s the case.

Now, we started a young life business in the Russian market, we’re number four in the Russian life markets at the moment, not much, to most of that just to be clear, because the industry itself is very, very small. But we do think that the demographics of that market overtime could be very attractive. It’s not without risk, we know that. So the country needs to mature in a number of ways and the risk characteristics of investment in that market needs to be taken into account. Fundamentally it’s not a country we want to rule ourselves out at this point.

Turkey is somewhat different. I mean, we had a strong position in the life and pensions market. And the joint venture we have there is a number one provider of pensions in the Turkish market. We have a general insurance business in Turkey, it’s quite small, it has about 3% market share at the moment, we love it to be bigger. We haven’t – we’re not quite about that. We think it’s a market with a large population, a young population, low penetration of insurance product, and can be very attractive overtime.

So would we look to invests to increase our presence in the Turkish market, incontrovertibly yes. I don’t want there to be any doubt about that. We think that’s attractive. What was the other question? Sorry, I got a bit carried away.

Andy Hughes – Exane

Delta Lloyd.

Andrew Moss

Yes, look, Delta Lloyd, I mean just to underline what I said I think on Delta Lloyd. The IPO of Delta Lloyd was an important event in a number of ways. First of all, it freed our capital and cash in terms of the Group, and monetized part of the holding that we have. So that was fundamentally a reallocation of capital away from that market in the first instance till it makes the rest of the holding more liquid and that in itself is important.

We’ve seen the Delta Lloyd share price clearly move both up and down since the floatation is moving up a little bit at the moment, it’s pleasing to see. But fundamentally, we believe that there is opportunity for operational improvements in that business. And the very fact that it’s listed I think actually puts new disciplines around the business in terms of way that it’s managed and you are seeing the management react about this, there is absolutely no doubt about that, and these are very capable people.

I mean just to be clear, Niek Hoek and his team know their market very, very well, they’re very, very good managers of investment risk which that market, because that market is a very, very important factor, and they have some advantages in that market. They are broadly the only insurance business that didn’t need to raise to capital either through capital markets or from the government bluntly in the course of the last three years. So there is a business there which I think has a franchise which will develop over the course of the next two or three years, backed by cost reductions, some restructuring within the company.

Coming out of Germany, stopping writing new business in Germany, is a pretty important decision to the Delta Lloyd management. And, yes, they’ve taken quite a lot of charge in relation to putting that business into run off. But the sort of strategic decision which being honest I don’t think they would have made two or three years ago. And that’s being bleeding that business for the last few years.

So just by stopping writing business in Germany, that will improve their profitability. There are some things that is just that simple. They got out of the health business. Same thing, they were consistent losses in the health business and they got out of it. These are disciplines which come I think both from discussions with us, I think is fair to say, but also if you like, the rigors of public listing. So that's why we think right now, holding that business for value makes sense for us. Yes.

Craig Bourke – MF Global

Craig Bourke from MF Global. I just wanted to add a bit more on the others questions on where you're looking to grow and how you're seeing the shape of the Group. A lot of your European competitors are talking about shifting the balance towards developing markets. Are we to get from what you're saying today that you'd be quite comfortable, maybe not necessarily but quite comfortable, if your balance shifted back towards developed markets, given what you said about Russia and Turkey? So I'm just wondering if you can clarify that.

And secondly, what is the takeaway we have from the disjoint you showed between the profitability and volumes of risk and savings business? Are you looking to retrench from savings? Particularly I'm thinking on the UK side, where obviously that sort of disjoint would be most marked I guess.

Andrew Moss

Yes, I mean to take that – to take that first one, the point I really wanted to underline there was I think it’s not coincidence and that’s where we make so much money in markets where we have relatively low competition and we have real expertise. And putting on expertise to work is the thing that drives profitability in this Group in a very, very big way. It doesn’t mean that we don’t want to be in the savings market.

The big advantage we have in the savings market is we get to the mass market, because of a distribution that we have. So when Mark talks about his market which he will in his presentation, we’re not targeting the high network individuals, we’re not interested in the SIP market in the same way that some of our competitors are. We’re interested in if you like sort of 40% to sort of 80% of the population, that’s Aviva’s market. And we will continue to target that market in the context of the savings business.

Yes, taking risk has its rewards. We joke sometimes, people talk about capital light business, but we think capital light business tends to be profit light business in the insurance business. I know some of our competitors are proud to call themselves to not be insurers, I’ve sat at dinner tables with them; not an insurance company anymore, well fine, it suits us, thank you very much. We’ll just take more fat business which is higher margin business, fine.

Coming back to your point about markets, I think it’s really important, if you just look at where our earnings come from, these are big mature businesses. And if you’re five, 10, 15 years out, I think that is still a big opportunity for us. We have strength in those markets, but we can get deeper in some of those markets, and we absolutely want to. And we think that that will lead to ongoing cash earnings generation, which will drive the earnings of the Group, give us I think a stable earnings based from which to grow.

In some of these developing markets, I mean I talked about Russia and risk, of course there are risks in Russia, we know the corruption in Russia at the moment. So if you want to make major investments overtime there you’re going to need to get more comfortable with some the risk characteristics of that market.

If I look at some of the Asian markets today, and I look at regulation in those markets, which from a prudential perspective I think has always been strong. And I think – actually I think Asian regulators has done a very good job in the respect. I know that in some of those markets consumer protection regulation is coming down the track in a big way. So if look at the percentage of business in India that’s lapsing in the first year, 30%, 40% in our business, probably more in some others.

Now what does that tell me? It tells me that people are selling business there either people can’t afford or they don’t really need. Now the regulators are looking at that. And we know what’s happened in mature markets over the last 20 years when that’s been the case, missed selling and expense at risk. So Asia is not a one-way bet, it is not a one-way bet, and we see it, we see it in those markets, and it’s no coincidence that we been building big direct sales forces in some of those markets like some of our competitors. We may be right, we may be wrong, but we’ve made choices around some of those things.

If you come back to Europe, they are mature highly regulated markets, where margins I think are pretty secure and where you can be pretty sure of the returns that you’re going to make overtime. We think that’s a benefit. So if it doesn’t mean that we concentrate a little bit back into those areas, yes, we’ll be comfortable to do. Yes.

Nick Holmes – Nomura

Nick Holmes of Nomura.

Andrew Moss

Hi Nick.

Nick Holmes – Nomura

Following on that same theme, I'm just a little bit curious that America is not a focus but more review within the Group. I mean, Asia, I guess, that's one of the most important things you've said today, is about your view of Asia. But America seems stills to be very much a core operation. And I wondered if you could just take us through why it is that you're actually still in America, you're still quite sub-scale. It's got a low ROCE. What is your ambition in America?

And then just a second quick question, was on the annuity default provisions, whether you think that by the end of this year, maybe some of those will be released or whether you think Solvency II is something that might make you want to be a little bit more conservative. Thank you.

Andrew Moss

Well, without wishing to tease on the second question, I don't think Solvency II will be the determinant of our thinking around whether those provisions are needed or not. They haven’t bee all along, they’re simply an estimate of what we thought might have happened when the worst ravages of the credit crisis we were looking at. Pat do you want to – I don’t know want to sort of take your thunder in relation to that.

Pat Regan

No, I mean, obviously we already factor in Solvency II thinking into how we look at the annuity book and indeed the IRR levels we set on that. So we are thinking ahead anyway obviously about the regime that Solvency II will bring in terms of the annuity book. And as Andrew says there’s not linkage to the 1.1 billion provisions.

Andrew Moss

I'm really glad you asked me the question about this, because it is really important, and I guess I’ve told the story before in this room, but I’ll tell it again. We’ve bought a business at the end of 2006 called the AmerUs, we rebranded it as Aviva, we’re now owning it and we drove it relentlessly for top line growth in two years, and we did it very, very successfully. We broadly doubled the size of the business.

And as we came into late 2008, it seemed there they’ve done exactly what they were asked to do, they’ve driven that top line growth, better distribution, the higher rating that we got, because of Aviva’s financial strength and ownership of the business. We weren’t looking at that point for driving it for a real statutory profit. We just wanted to grow the business and then go from there.

Now what happened, at the end of 2008, credit spreads were where they were, the corporate bond book and it’s credit business, let’s be clear, and it’s all about taking credit risk and making credit spreads was in a marketplace, in a very difficult place. We had to grow $800 million of capital into the business, in December 2008.

Now some of that we’ve planned to put in, because we knew we had to finance the growth in the business. But a lot of it was because of market movements and we hadn’t planned on that, now we did it, we have the money, the money across. But, of course, it tempered our appetite for writing more and more and more equity in this annuity business.

And what we’ve done over the course of last year is widen the spreads, reduced the crediting rates to customers, the guarantee rate now on the business is just 1% in that business the reduced commission rates, the competitions followed, actually there’s probably more than we can do even, and that’s why you’re saying it made quite a lot of money. It’s perfectly foreseeable that those businesses in North America could be contributing 20% of our operating profit in a couple of years’ time.

But let’s just go to where I think you're really headed with your question, which is, are we always going to own the business in the US, because if we don’t want to invest further, I guess it begs the question whether we always want to owning it. Well, look, nobody can argue that if we sold it today, we sell it at less than we voted for, I mean that’s just the way the markets moved. So we don't see any mileage in doing that because there's real value that we can create in the business as we do improve the earnings and increase the return on equity which will in turn drive the valuation of the business. And I and Igal are convinced that we have another 12, 18, 24 months of real value to create in that business.

Now, this is not an America-specific comment but it's an important comment. If we see opportunities really deepen, broaden our presence in a particular market, and of course that means selective M&A just to be clear, then – and we see opportunities to fund it by portfolio change that’s part of what we’re paid to do. There’s no doubt about that and we’ll have an open and objective mind about it. But meanwhile, there’s a lot of value to go for in that business. I think it’s coming through and I’m very pleased with the progress. Yes, Tony.

Tony Silverman – Standard & Poor's Equity Research

Yes, Tony Silverman, Standard & Poor's Equity Research. I just had a couple of questions, one sort of broader and one a bit narrower. And just pressing again on portfolio reallocation, might it be fair to say that in reality what you may well end up buying is the other half of the banking partnership's operations, bancassurance operations in Europe. And just taking the flavor of the presentation, would you want to combine that with commitments to sell GI products perhaps through the – more GI products through those partnerships?

And then the second question was just perhaps, it'll be covered in the second half of this morning. But I think it's fair to say that you've blown hot and cold in your attitude to aggregators over the years, looking back.

Andrew Moss

Sure about that.

Tony Silverman – Standard & Poor's Equity Research

I would say it certainly has been seen as a threat to your relationships with policyholders and whatever. But do I take from what has been said this morning, that you sort of feel you've cracked it. One can observe that out there, there is at least one other competitor who appears to make extraordinary margins whilst they're selling 80% of its business through aggregators. And I was just wondering what your targets really are for that channel.

Andrew Moss

Yes, good question. I think I’ll got let Mark answer that one. There’s some really great numbers we’ve got from using the RSC brand on the aggregators now coming through this year, but I will leave it to Mark, if I may, to answer that question.

On the first question – on the second part of the first question, yes, look, we love to sell more general insurance through banks in Europe. And we started selling protection business, life protection business over the course of the last year, and that’s improved margins in some of our bancassurance relationships, and certainly we think there is an opportunity to sell particularly home insurance through banks. And we know that, for example in the UK, that's a really profitable line of business for us. So, yes, that’s an opportunity.

But the broader based question you ask, a very leading question if I may say so, I think is fascinating one. You can’t talk to a bank chief executive at the moment or anytime in the last 18 months frankly, and they’re not thinking, they don’t want to do with their insurance business. And there are a number of drivers for that, Basel III was one of them, but I think it’s going to be an ongoing issue.

Certainly in Continental Europe the idea of running a banking insurance company together it doesn’t really thinking to be sort of a flavor of the month any more or the year or even a decade any more. So, yes, there are potential opportunities are there. I wouldn’t say though just to be clear, that’s not what we’ve necessarily got in mind, that we reallocate that capital order buying majority of wholly-owned stakes in bank insurance businesses, we do see real value in partnership and in most of the bank and insurers having real skin in the game. Whether that’s in joint ventures or whether it’s in commission-only relationships. And I think there will continue to be opportunities.

But I do thing it’s going to be on moving space in the course of the next two or three years for sure. And what’s really interesting I think in a couple of – the last couple of years, I’ve been thinking about it a lot and thinking – well actually is there so much bank insurance assets that are going to come on to the block that actually the insurance market isn’t going to be able to absorb it all. And if that’s the case, then what’s going to happen to prices. I mean, in terms of supply and demand, that should downwards and that's one of the reasons why we’ve held off frankly in investing in bank insurance a lot in the last couple of years.

Tony Silverman – Standard & Poor's Equity Research

That sounds like a fair negotiating position to me.

Andrew Moss

Thank you. Look, I'm really conscious of time and there's lots of other opportunities to ask questions as we go through. It’s now five to 11. So we’ve over run by 10 minutes already. What we’ll do is ask – we’ll just take one or two more and then we’ll stop, because I need to get Mark on the stage within the not too distant future. In the back there.

Raghu Hariharan – Citi

Good morning, Raghu Hariharan from Citi.

Andrew Moss

Hi Raghu.

Raghu Hariharan – Citi

The first question was just on costs. You gave us a top line number on costs, if I can call it that. Can you give us a sense of what will it take for you to achieve those cost synergies? And if I were to assume that or if I were to calculate that your inflation rate is 2% or 3%, you have 5 billion cost base, so that knocks off a 150 million straightaway. And I guess that leaves you about 50 million of headroom on your cost savings. So I'm trying to figure out how much of these cost savings will actually flow through into IFRS profits and roll into your capital generation. That's number one.

The second one was on the diversification benefit. Clearly there's a 30% to 40% diversification benefit, what you've stated as your number. I was just wondering in Solvency II, there's a parallel track going on where they're trying to calculate capital based on zero diversification credit. And I was wondering whether you have a contingency plan, whether – if Solvency II regulations were to come through and they would say it's 20% or 15% or whatever it is, is there a plan B in case you probably need to fund the GI business?

Pat Regan

I’ll take this question. In terms of the cost one, the profit driver stuff we talked about a couple of months ago, actually allows us to show you exactly both in the total costs in the bottom line where we will deliver both the cost saves and the cost efficiencies. So you should look to us to reduce our absolute level of costs by the first 200 million, and we will track that and show how we’ve done that. And the second one is about delivering an additional 200 million to the bottom lines, so a total of 400 million. In terms of how we’ll achieve that, obviously Mark is going to talk later about the UK element of that and there is – got a half of that broadly in the UK.

Delta Lloyd as you’ll remember announced couple of months ago, a EUR100 million they’re going to achieve by the next couple of years. A large of that – a lot of that commitment is streamlining with their organization, so they’re reorganizing their divisions in a much different way to take out essentially some of the layers they currently have. Igal and the team are announcing in Canada today a restructuring program for the North American team both to regional office and particularly the Canadian business, focused on some – less the front office, but most onto the back-office efficiencies there, so it's a combination of all of those things. And so yes, you should look to it to contribute to profit over the next couple of years.

In terms of Solvency II, I think what you’re referring to, I mean no diversification obviously insurance is essentially all about calling of risk and diversification. So I mean there's diversification at every level of our economic capital models. What you then need to do is then calculate that with a legal entity, that’s the bit – the overlay within Solvency II, this is how our legal entity base is, so obviously we’re mindful of that as we’re organization the structures of our Group, so we absolutely have plans on that basis.

Andrew Moss

If you'll forgive us what I'd like to do is break now for coffee. We'd like to do Mark's session and I’m very happy to come back at the end of Mark’s session and Mark’s Q&A for me and Pat come back up and take any further questions that you’ve got at that point. So if we can play it that way, if we can come back at quarter past, that would be fantastic. So thanks for your interest. Thank you.

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