RSA Insurance Group's (RSAIF) CEO Stephen Hester on Q2 2014 Results - Earnings Call Transcript

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RSA Insurance Group PLC (OTC:RSAIF) Q2 2014 Earnings Call August 7, 2014 5:00 AM ET


Stephen Hester – Group Chief Executive Officer and Director

Richard Houghton – Group Chief Financial Officer


Dhruv Gahlaut – HSBC

Tom Dorner – Citi

Thomas Wright – Sanford Bernstein & Co

Ben Cohen – Canaccord Genuity

Andy Hughes – Exane BNP Paribas

Andrew Crean – Autonomous

Will Hardcastle – Bank of America

Oliver Steel – Deutsche Bank

Marcus Rivaldi – Morgan Stanley

Andy Broadfield – Barclays

Stephen Hester

Thank you very much for coming. We are very much hope to have lesser of you today, with holiday season coinciding with other results, but we haven't succeeded so we will put on the presentation.

It's obviously of my, the anniversary week of being here six months and when I can is this, although I knew the company infinitely better than I did, six months ago. Certainly all my beliefs at the beginning of that period are same today and I do believe that we can make a Company of RSA of which we can all be proud and will tell you about, not now. How we are going about that and what we have done in the last six months.

So as convention, I will talk through some of the things that we have been up to, Rich will talk through the financials and then obviously, we'll open up to any Q&A, you may have and although the slides are up here and on the TV sets on the side. You have them all in front of you, in any event.

So we said, in February the things that we were going to do and what I hope as every six months that goes by, we simply stand up and say, yes we are still trying to do the same things and this is what we've done so far and that we don't have too many u-turns or surprises and certainly from my point of view, I don't think that there are in this half year results.

In the U-turns there is of course noise, as is inevitably the case at the beginning of turnaround periods, but fundamentally we said that the next few years is going to be about doing three themes at RSA. The first is to fix our strategy and to become more focused. I think that we, in the last five months have executed that with speed and determination, probably going better than past through the disposals we have announced, than we expected both in time and what we are raising and it's our belief that by the end of 2015, we should be able to complete the strategic component of our task and hopefully therefore there will be some more disposals to announce in the coming months.

I do think, that the majority of what we have to announce we've probably have announced already. And we don't have targets that are going to be surprising to you; we've sort of flagged the areas to expect them.

The second thing, we said we do is to make sure the foundation on which the Company rests and financial terms is the balance sheet is strong, transparent and something you can have and we can have confidence in and again, I think we give ourselves a tick for that work-in-progress that we're ahead of schedule on that.

Of course, the rights issues being the big thing, disposals so far having raised this year twice, what we thought we might raise in a full year albeit, most of that isn't in the first half number of course because the deals didn't close in time, Standard & Poor's recognized that and I think we can from an external standpoint, we are already with a stable platform.

One of the features, so that we talked about in February you'll see more in the numbers today and probably some more at the year end. Is we want to make sure, that the balance sheet is cleaned up, not just with stronger capital numbers, but the items in it? A more believable and more true and secondly, we believe very strongly in transparency and you'll see, I believe with our numbers today, a level of disclosure.

I think that no other insurance company I've seen gives, certainly that we have never given the point of that is partly to build confidence. So that you can see, what's going on and partly to make sure, that our feet are held to the fire because if we don't give ourselves any finding places and make sure that we are accountable for taking action, when things are going wrong and so, that from your point of view, will make us more volatile because we are not smoothing or if we smooth, we'll show you, where we are smoothing and how we are doing it, but the I think, the great understanding that you get, is healthier way of doing business overall, no doubt you'll give us feedback as to whether you agree or not.

The toughest; the most important and the element that takes the longest is of course, once you've got your strategy right and your balance sheet right, is the ongoing business. It's health, it's sustainable cash flows and so on and there I think, we will take at least three years to get that in the shape that we wanted to be in, maybe it's never in the shape you wanted to be in, but the plan has started well and although, there are many multiple dimensions to making our company as successful and effective in its business performance as possible, the three that we have focused on initially are re-pricing and reshaping the portfolio, so it has the best chance of being sustainably profitable and focuses on our own strength and knowledge, taking out cost and making sure that we have the management team to do the above.

There are plenty of other things, that we need to do, but those are key three initial themes which I will talk about. I should say, that everything we are talking about today is in essence the execution of the plan, that we put together in sort of an intensive rush, in February of this year and of which our medium-term targets are based.

We are also in addition to executing that plan, in a process of intensive reexamination at least of our largest businesses to see if it's possible to become more ambitions than that plan, set out and we are using some external help to do that and it's my hope that over the next six months or nine months that does allow us to become more ambitious than is currently in our plan, whether that be on the cost side or the capability in revenue side

Now whether we need that ambition to underwrite feelings in the plan, whether we need that ambition to underwrite setbacks in the market or whether some of that ambition comes, the bottom line I have no idea, but just so you know, that's what we are doing.

Summary of the financials and of course, Richard will go into this in much more detail. In the round, the income line is roughly what we thought it would be, obviously foreign exchange is a distorter, but down 3% on an underlying basis with the down primarily associated with the UK where, as everyone knows we have the most repricing to do, to get our ratios to acceptable profitability and so is that a tad softer than we thought probably, is the market a tad softer than we thought probably, but by you know smallish margins.

The second quarter was a bit better than the first quarter because we had more disruption in the first quarter, but it's sort of all kind of in the noise I think. At the underwriting level this is, one of the, if you like first areas where there are more things to unpack and we believe that the underwriting level, while the headline is obviously pretty poor, that the underwriting level gives us comfort that we are doing the right things, that we are on track, but of course we need to unpack that for you and indeed, it will only be the passage of time that either proves us right or makes us, want to take some additional actions to get in further.

The most important, we think indicator is, the underlying current year profit and with the extra disclosure we are giving you today, you can follow us much better than you've ever been able to do and you can with all the companies for better or worse. Our current year underlying profit is up and it's up because our loss ratio has improved and we believe that the business, we have written in the last six months will allow it to keep improving in the next six months and 12 months, other things being equal.

There of course will be noise up and down with large losses in weather. Overall, it wasn't too noisy. The volatile items in the first half although it was very noisy in some individual territories positively noisy in Scandinavia where nothing went wrong in terms of large things and negatively noisy in the UK, and Canada, and Chile in particular.

I would say there are two areas of negatives on the underwriting side and frankly negative is greater than we expected. I've never done a turnaround that didn't come up with clean-up cost. It ended up being more than you thought, they'd be. This is just, how the world seems to work and the good news is, we have more money from disposals and we thought with adds, I think net-net will end up, head, but the two elements are island where although we did indeed find everything at the end of last year that was going wrong.

We didn't really, accurately enough estimate if you like the ongoing clean-up cost of island and therefore, we've had some losses in the first half, there will be smaller losses in second half. We believe, we ought to be able to get back to profit overall, next year all thereabouts and so I think, this is a short-lived issue, which Richard can unpack a bit more for you and similarly but requiring probably a bigger leap of analysis.

We have taken a significant amount of extra prior year reserving, what manages is, so slightly in the eye of the beholder because it depends what you would think was normal and what was special. Obviously, last year we made £50 million on this line, when you strip out margin moves. So maybe it was £70 million or £80 million of swing from a normal and it's interesting although each reserve strengthening has its own story in the round roughly £80 million of the extra reserve strengthening was identified by ties, what's in the beginning of the year.

You remember, we said up – we stood up and said the ties what's an independent reserving, which came up with the number that was different than ours, but well within the tolerance of our margin. It wasn't in tolerance with our margin, but net-net some of these things that they identify we decided to take, whether it's right or wrong, we'll see in the future.

Below the underwriting line, investment line behaving sort of its what we expected it would, then there's obviously other noise, some gains although not yet the major disposals gains, some reorganization cost for the cost program, some goodwill intangibles write-off which clearly doesn't affect capital and then the balance sheet going up nicely, as you all have seen and again, will be transparent every single time. Are we smoothing results with margin or not, we are not smoothing results?

Overall, although there is some noise in some of the individual businesses. So let me just talk through the individual themes of that actions. We set our own here indicative timeline and you don't sort of measure with arithmetic precisions because it's not meant to be that, but it is really meant to say, will fix the strategy inside two years, will fix the balance sheet probably inside two years, although not until Solvency II is out there, can we know, can we really calibrate where we need to be on then and the moment, we're probably aiming for some levels of conservatism and that's appropriate until you know where all of these things will settle out.

And I think, it will take at least three years to get the operational improvements that we see and clearly during that, there will be some restructuring charges, there will be cost saves that come through and they gradually build as do our underwriting actions were eventually built.

This is not meant to indicate, that our return on equity targets wouldn't be hit by 2017 for those who are worried about it. I hope they will be a hit earlier than that, but anyway this sort of feels like a good way of thinking through the timeline associated with what we are up to.

You know the next page, we said the first initiative is getting the strategy clean-up done. This simply records the deals that we have announced, the gains, the P associated with them, expected closing. I won't go over the slide more than that. And the 2nd Slide, again gives you some information which I don't think we had got quite right for you, last time.

Which is the financials associated with the remaining areas "under review and to be clear" not everything under review will be solved, but a good chunk of it will be, so it gives you some sense of the dimensions of what we are working with. The second theme from the strategy refocusing to capital strength.

We've talked about, if you like the measureable strength of the capital in terms of tangible ratios and so on, what I want to talk a bit more about is quality, just so you have a sense of what we've been doing and what else could be out there that we need to think about, you need to be aware about.

Goodwill, there is some goodwill left on our balance sheet that doesn't feel to be anything significantly vulnerable, anymore with the things we've done, that can always be bits and pieces, but it feels to me like we borrowing some other really unexpected thing that we've got to the end of that clean-up.

Software intangibles, I think it's possible there's another round of software write-offs possible, if we identify cost saving targets that are higher than the ones we have presented to you now. The ones we presented to you now, we have written off the software that's no good. I hope we can go further, go further in our technology plans and that would mean, a more accelerated redundancy and some other intangible write-offs. If we do that, well they need to in turns [ph] with raising cost targets and it won't – cost capital if we do it, it will just be noise in the balance sheet, but just so you can think about that.

The reserve margin we'll keep disclosing it at the moment 5%, feels like the right number. There is no great magic about it, we could move it up or down, but that feels like the right number, but whatever we do, you'll know what we are doing.

Reserve increases; I talked about that a little bit. Do we have much more of that to do before going onto, if you like a normal pattern? I suspect there will be a few items in the second half, hard to judge right now. There is a few things, we are looking at, feels like it will be less than the first half, feels like will be more than zero, but this doesn't feel like a multiyear clean-up exercise, if I can put it that way.

Discount rate, one of the things that we did adjust in February. Obviously, interest rates or yields in the market are even lower than they were back in February in the UK and especially the other place where we've got these liabilities is in Sweden. So it's possible, we move those around again that doesn't hit capital if you do it. If interest rates were to stay low, we might come into some pressure to do that.

I don't think, you should care one way or another really, it's just noise, but just so you understand we keep that under control. Tax assets, it's tangible assets, I don't really believe they're tangible assets, but no less they do count as that, they don't count as capital, so you shouldn't worry too much about them.

We've been reducing our tax assets, is just disclosure on that, in the report and we are not recognizing some of the losses, they're there, there are hidden assets on our balance sheet now, you know I don't want to be in the position where, we've got lots of assets for things that may happen in the future or may not happen in the future.

So we have to keep under review, whether we want to take more write-offs or just simply carry on not recognizing until we got through the clean-up phase don't quite nearly answer, but just flag it. And finally, pensions is the other big area for companies like us to note from a positive standpoint. Our pensions are now net in surplus from an accounting standpoint. They're probably not quite yet in surplus from a so called funding standpoint and they're massively in deficit from a buyout standpoint or what, how you would call it, but the good news is, narrowed the deficit from accounting standpoint.

We have also made the assumptions a bit more conservative by reducing the assumed real return by 10 basis points, over the last six months. Every 10 basis points cost a £100 million just order of magnitude, so you know. Of course, we have to keep that under review, not just the investment mix but also those assumptions and anyone thinking about the core of our balance sheet has to understand, what's there and what isn't.

This Slide you know about, the net tangible assets to net written premium and it feels like that's going in the right direction and will be within our desired zone by the year-end and building through it.

I went over this next point, a little bit in February and I won't reiterate it really at length, but as to try and help you understand how we think about capital and as I described it in February, it sort of like a graphic equalizer of a whole bunch of different measures, that there is no one is governing measures and some are becoming more important than others less and we have to look across all of them in all of them, we are getting into a much healthier position, but the issue is not just where are we with these measures of capital, what we actually do is a process, where we look at A; where are we now and where do we think, we will be over the next couple of years on the different measures of capital we've got.

We secondly, scrabble around and say where are we worried that the regulators or other people might change definitions or which might have an impact on capital ratio because we are in a period still a flux and then we, all the time run a whole series of scenarios of things with reasonable probability of happening, big interest moves, sudden cuts [ph] of one sort or another, spread blowouts and so on.

And try to understand what one or a combination of several would do to us, over a 1-year or 2-year period and that informs the margins over our regulatory and other ratios, that we want to keep around which is a judgmental issue not a mathematical issue and that, then gets us to the point where we start thinking, do you have a sustainable surplus over and above that prudency margin or not, which at the moment as if you like best captured by our guidance of net tangible assets to net written premium, although we will update that as I said, once Solvency II is through and we got through some of the noise of the first bits of the restructuring plan.

So we talked about focusing, the company in strategic terms and disposals. We talked about, strengthening capital. Now let's move on to the business improvements as I said, three focus areas for us at the moment. People, repricing portfolio and cost. So let me deal first with repricing with the portfolio.

It's early day, so this is if you like ambitions and actions rather than necessarily that we've succeeded according to our plans and what this chart tries to do, is it takes all of our significant business lines which in the size of the ball is obviously, how big those business lines are and the left-hand access basically says, how profitable were they, over the last three years.

And the less the profitability, the more you would think, we should be taking action and of course part of the action is about expenses, but part is about pricing and underwriting practice and so if something has not been profitable, you would expect us to be taking action that would lead to an improving trend of current year, underlying loss ratio when you take out the noise of prior year adjustments and the noise of volatile weather and other items.

And very crudely, we've drawn the horizontal line at a 95% in corner, over huge magic to that, but the things, that are higher than that line would be less profitable than you might think, we would want and you might expect us to be wanting to improve the loss ratios and therefore, this sort of graph should in theory have an upward sloping line through it from left to right.

Roughly this graph does and it shows you that in the majority of our portfolios, we do have, we are reporting the beginnings of the reduction in underlying loss ratio, which I hope will accelerate over time and the only areas we haven't quite yet got the right momentum, which I think is only a matter of time, are the ones that lie in the top left quadrant, which I know is a profitable one and where the loss ratio isn't yet going quite in the way, not that we want and as of course we need to refocus action on that.

So take some encouragement from this slide that at least we are taking action in the places, you might expect us to take action and there is the beginning of the sign if that action creating the desired underwriting result and the next couple of page, I wouldn't go through, you can read them. If simply listing a few, in a bit more detailed of the kind of actions that we have been taking across different books, not limiting our actions, obviously just to the UK, right across the world.

And this Chart here, gives if you like a couple of examples of the sort of internal analysis that we do, to check whether our underwriters are in practice in the field carrying through what we want to do and using the one on the left as an example. The actual price, the technical price basically says, are we pricing in line with our perceived risk of a particular policy, our perceptions because could be wrong.

The good news on this particular one is, you can see most of our business, which is the blue bars does lie in the business, that we think is properly priced, but some doesn't on the left-hand side and the red line is the price increases, we've put through in the first half and what unfortunately shows is we are, at least in our own analysis putting through prices increases on the least well price business, as you would expect us to be doing, which hopefully has the desired effect on loss ratios going forward and on the right hand side, just slightly different, but it says exactly the same thing.

So pieces of evidence that suggested, at least our intent and action seems to be addressing, the worst risks and pricing deficits in our portfolio and seems to be starting to turn the ship in the right direction on pricing. So pricing one big area, pricing underwriting. Second, big area is people to do all of this and we've had some success in the first half, this is clearly work-in-progress, but we've been able to fill two of our three business CEO holes.

Patrick in Scandinavia, who was our CFO there stepped up to CEO. Very pleased to have got Steve Lewis, who I think is a terrific guy to run, our UK business has also got a good team, we already have at RSA, which he will inherit and unfortunately he won't join us till the end of the year, so these things just take time, but pleased to have done that.

Paul Whittaker for those who don't know him is sitting in front row down in the audience and is helping out, the bit of oomph from the center at some of many initiatives. So we are beginning to fill in the management team, with new appointments in the area that we need and of course, then there are other appointments that change, the next level down as we go through.

Expenses is then the last key theme of our action. This Slide simply, I think for the first time unpacks our expenses for you, not just the ones that are visible on the P&L, but ones that are hidden in the claims line and the ones that are hidden by income being set against the claims line.

So it shows you, what we actually are spending, this ignores commissions of course, by P&L location, by region, by cost type. I won't go over it, but it's there for you and gives you. If you like a baseline from which to see what we do.

And crudely, over the next three years there will be four changes to that baseline of course, foreign exchange we'll move it around because a lot of those expenses are not in Sterling, we don't know by what amount, at the moment feels like it will move them down, but that can change.

Obviously inflation will go up and down, but we'll tend to move them up. We don't know again by what amount, but at the moment I don't know the blended inflation rate. So now in our, territories is probably 2%, maybe less than 2% more in Latin America clearly.

There will be a bunch of cost that go with disposals, that will come out and then that leaves you with a residual number of cost that we have to take out ourselves other than by selling a company and clearly that's what we are focusing on from the management action standpoint and underpinning the ROE that we've given is our assumption, which of course is baked into plans, not everyone complete the granular, but most of them that we can take out £180 million on a run-rate basis of cost. In addition to all of the other movements, going forward.

And you see, on an indicative basis. I mean, there's 2.5 years yet to go, so not every detail is worked out, things may go a little different than we think, but on an indicative basis, you'll see sort of where geographically we think those cost will come out, what it represents on this chart as a percent of the cost base of the relevant business.

I think, you'll see that it's we are approaching it rationally IE [ph]. We are taking the cost out of the place, where we have the biggest productivity and profitability challenges. There will be restructuring charges associated with it. Will it be 1.5 times and 0.75 times tied to the cost reduction, I don't know, feels about right. If it's just people, it will be a lot less than that, but once you start taking systems and other stuff out and property, then it gets more to that, that sort of the range, that I think most programs of this nature end up costing.

Should we go further than this? Personally, I think yes. You know I think even in our terrific businesses like Scandinavia, we ought to have an ambition that is higher than this. We certainly, ought to have an ambition higher than this in our Head Office, but on the flipside there may be some things that go wrong. The market maybe softer than we think, we may make more sacrifices if that happens of price per volume, which may impact our ratio.

So we will certainly try to do better than this, but at the moment I'm not encouraging you to bank that in the bottom line until we see how the world turns out. And again on the next Slide, you can see some of the individual actions we have taken in the first half as, if you like fact points behind the cost actions.

So in summarizing, what we have been up to. We think that, we are on track early days only five months and if anything airing to the positive on some of the dimensions in the terms of our strategic focus. We think, we are airing to the positive so far. Things can still go wrong, in terms capital build, transparency and because the balance sheet, we think the same and in terms of the operations, we think that we are laying the right foundations, but they are inevitably must be greatest uncertainty because it takes longer for our actions to show through and judgment may or may not be right some issues and we may have to come back to some things and do the better or more if the initial medicine doesn't work as we expect it to do.

But nevertheless, as we sort of stand back at this early stage. It feels, the outside world maybe a bit tougher than it was inherent in our plan. Most markets, lower insurance rates. Most people you talk to in insurance industry on balance our expecting softness through it, further so it maybe that hits our top line and our ability to all the price versus volume tradeoffs.

Of course there are other things in our execution that may go right as well as wrong on the other hand. I believe, that there is more potential than what we've put out here for management action, which should act as a counter balance to some of the things that can go wrong and so putting it all out together, it feels at this early stage that our targets are reasonable and ones, that we ought to be aiming at and have a decent chance of succeeding and along with that, would go obviously the resumptions of dividends, ultimately to our target range, but starting initially at a more modest level.

So that was, what I wanted to go over. Now for the more interesting stuff of going through the numbers and seeing whether the words match the numbers or not and Richard?

Richard Houghton

Well, thank you, Stephen and good morning, everyone. Now to our headline level, it's been a challenging and demanding first half, however our result show, our restricting actions are being implemented swiftly and with conviction as Stephen set out.

This evident in the numbers, you can see on the slide with premium reductions reflecting our portfolio actions, strategic refocus and underwriting discipline. Now the profits reflect further work during the first half to improve the quality of our balance sheet and also the funding of improvements to support our future operating performance.

You've already seen some of the key metrics. So I'll move straight onto the details of today's number. So starting with the top line, first half net written premiums were down 9% at constant exchange to £3.9 billion and 2 point to this reduction were driven by the purchase of the Group, Advance Development Cover in January, which we discussed at our last results. 4 points were driven by the restructuring of the Motability contract which took effect in October, 2013.

So on an underlying basis, premiums were down 3%. Forex had a sizable impact on reported premiums accounting for 7 points of reduction due to the strengthening of Sterling against our major operating currencies during the first half.

The underlying premium reduction of 3% comprises 5 points of volume reduction, partly offset by 2 points of rate increase. You can see from this table that the largest underlying volume reductions are coming in the UK, Ireland and Italy.

In the UK, as Stephen referred, we've taken decision action in Personal Motor, as we focus on pricing for profit as a result, premiums are down 39% year-on-year. During the first half, we've exited our echoice offering. We've significantly reduced the number of Personal Motor brokers we do business with and we've also exited our arrangement with Ford.

In UK Commercial, portfolio actions and pricing discipline have led to a reduction in premiums of 7% excluding the impacts of the Motability. In Ireland, we've applied rigorous price increases as we continue to remediate the book and this has led to a significant reduction in premium volumes.

So this table, highlights the pricing discipline that we have taken right across the Group as we focus on capital return. To mostly, we are quite prepared to reduce business volumes in pursuit of this goal.

Turning now to the operating result, our underwriting profitability includes the impact our £64 million loss in Ireland together with a number of prior year effects including some reserve additions, a more in that in a moment.

Investment income of £223 million is in line with our expectations, but 13% down on last year reflecting the continued pressure of the low yield environment. Central expenses are £27 million, down 27% mainly due to the cessation of start-up cost accounting for Russia. These costs, which were £6 million in first half 2013 are now included in the Russian underwriting result.

When we said at our last results presentation, we want to achieve greater level of transparency and disclosure. So on this Slide, we've laid out current year and prior year underwriting profitability by region. Something that I know, many of you being asking us for.

So whilst, headline underwriting profits were just £2 million. The ex-Ireland results was £66 million and at an underlying level, profitability is broadly in line with our expectations. I will talk about Ireland separately in a minute.

Current year profits excluding Ireland of £87 million compared with an equivalent figure of £80 million for the first half, 2013. Scandinavia has been particularly strong. Whilst the Canadian current year result was heavily impacted by the adverse winter weather during the first quarter.

The UK current year profit was affected by the first quarter floods and some significant large losses in our commercial property book and emerging markets included £14 million for the Chile earthquake in April. The total cost of the Group by the way from Chile earthquake was £19 million with the additional £5 million coming through the Group, alone [ph].

The prior year result excluding Ireland was a loss of £21 million, which compares to a profit in the first half of 2013 and £98 million. However, this £98 million profit in 2013 included £42 million of margin release mainly in Scandinavia and Canada. Whilst, there have been some margin movements to regional levels in the year. In aggregate, of the total group level margin has remained unchanged from the start of the year at 5%.

This Slide shows our usual breakdown of loss ratio. Taken together, weather and large losses are in line with our planning assumptions. With weather of 3.9% around 1% higher than our 5-year averages and large losses of 5.9% around 1% lower.

You can also the margin release that I mentioned a moments ago, that boosted last year's half year prior results. However, the key point I want to draw out is the current year underlying loss ratio, which has improved marginally at a headline level, but if Ireland is excluded than the remainder of the Group has delivered an encouraging 1.2 percentage point improvement.

Now the headline prior year results was a loss of £50 million and this Chart shows some of the component parts. £29 million related to Ireland. We increased reserves in the UK by £10 million for deafness claims, where claims frequency is continue to fall, but slightly slower than anticipated and we have also increased professional indemnity exposures by £20 million particularly in respect of the underwriting years 2009 to 2011.

There was also £10 million of additional claims attributable to the December, 2013 adverse weather in the UK and our UK Marine business contributed an £18 million loss mainly comprising prior period adjustments to estimated premiums.

Finally, we added £19 million pounds to our annuity reserves in Sweden, in anticipation of an upcoming market review of longevity assumptions. So after taking all these items into accounts, the chart shows remaining prior year profit of £56 million. And we continue to expect positive prior year development in the future.

Now let's cover off Ireland, it's been a tough first half with some further clean-ups and active remediation. Although, the nature of our business means it takes time to convert strong rating action into bottom line improvement. We said on the Q1, IMS call at the underwriting loss in Ireland was around £40 million for the first quarter and now just moved to a £64 million loss for the first half.

The current year loss was £35 million, when comprised around £15 million of expected loss, which related to pre-remediation business that was inadequately priced earning through our income statement during the first half, 2014. There is around £13 million of adverse current year underwriting experience reflecting a revised of the emerging loss ratios and it was adverse weather of £7 million, with the weather ratio of 8.6% compared to a 5-year average of 5.8%.

The prior year loss was £29 million, which included £12 million of adverse prior development £10 million of margin build and £7 million of provision for future reinsurance retentions against the reserves.

So despite disappointing first half, we remained committed to Ireland. Work continues to remediate all of our portfolios and improve operating performance under new leadership. On pricing, we have applied strong rate increases so far in 2014 with year-on-year average close increases around 20% in Motor and around 15% in liability. As a result, volumes were down by roughly 20%.

As we're flat at the first quarter in light of the performance in Ireland. We've made a £57 million write down in goodwill and intangible assets. In terms of outlook, we expect further but lower underwriting losses in the second half of this year and our goal as Stephen said is to return Ireland profitability at some point in 2015.

Now this Slide to go with the following three, provides a new level of granularity and transparency in our disclosure. And you can see, we've laid out component part of the underwriting result for Scandinavia and called out some of the drivers and trends.

In the interest of time, I'll just pick out a couple of brief comments on each slide before moving on. For Scandinavia, you can see that within current year, the driver of the result was the improved claims ratio, with large losses significantly better in both last year and the long-term average, negligible well it cost and an improving underlying loss ratio.

Expenses however show opportunity for improvement and the prior year result includes the annuity reserve that I mentioned previously. Turning to Canada, you can see here that the current year was impacted by the adverse weather in the first quarter giving a weather ratio for the first half that was significant above the long-term average.

Last year included the Alberta floods, which was Canada's worst in short weather loss. So you can see significant impact of the cumulative losses from the severe weather of the start of 2014. Large losses were also slightly above the long-term average due to an increased frequency of commercial, property and fire losses.

The underlying loss ratio however improved by just over 1% and finally the expense ratio still includes the benefit of Noraxis which completed the disposal on Noraxis on the 2 July. Now turning to the UK, we split the UK into two. So firstly in UK Personal, the current year result was depressed by the first quarter floods resulting in a weather ratio of 8.1%, which was significantly above the five-year average.

Large losses were slightly better than expectations and the underlying loss ratio improved by around 2% over last year. Finally, UK Commercial, where headline current year ratios are impacted by the changes to Motability arrangements particularly in respect of expenses and commissions and these impact will diminish as the old tranches of the Motability business run off.

Adverse weather losses were broadly offset by relatively benign large loss experience other than in property. The prior year ratios are mainly impacted by the reserve additions, the deafness and professional indemnity claims.

Investment income of £223 million is in line with our expectations, but down 13% on last year. Reflecting a continued impact to the low bond yield environment. So average book yield across the whole portfolio was 3.2% during the first half of 2014, which is 40 basis points lower than for the same period last year. Whilst average duration remains unchanged at 3.8 years.

Below the operating result, net gains of £142 million included £61 million of equity disposal gains, £29 million of gains from the sale of our Swedish Head Office and £28 million of corporate disposal gains which Latvia, which completed on 30, June accounted for approximately £17 million.

One-off non-operating cost of £133 million included £66 million of goodwill and intangible write downs and within that £57 million related to Ireland, whilst the balance related to the UK and Scandinavia. There are also £38 million of redundancy cost in respect of headcount reductions across all regions.

Turning now to capital, tangible equity grew 57% during the first half to £2.6 billion. The main driver of this of course, was the rights issue proceeds. However, there are were also £95 million of fair value gains and available for sale assets and an improvement in the net pension position under IAS 19 to a surplus.

Forex losses reduced tangible equity by £70 million. Allowing for announced disposals not yet completed. Tangible equity 30, June on a pro forma basis was £3.1 billion. We think our capital measures demonstrate good progress. Both of our IGD and Economic Capital measures have benefited from the rights issue proceeds and our IGD surplus has also benefitted from the reversal of a hybrid debt restriction, which took effect of the end of 2013, as we discussed in February.

The announced disposals once completed will give a further boost to these measures and on a pro forma basis allowing for these disposals, the IGD surplus is £1.7 billion giving coverage of 2.2 times of the capital requirement. Whilst the economic capital surplus £1.3 billion giving coverage of 1.5 times.

I'll finish with the outlook for the remainder of the year. Firstly premiums, whilst our guidance of up to 10% reduction in premiums during 2014 is unchanged. Given the strengthening of the Sterling, the reduction on a reported exchange rate basis is likely to be greater than that.

Also given the full year effect of the announced disposals, written premiums are likely to fall further, but more modestly in 2015. We expect underwriting profits to improve in the second half of 2014, driven by further improvements in the current year underlying loss ratio, together with the benefits of the cost saving actions, we've already taken during the first half.

We also continue to expect positive prior year development as a feature of more normal years. There will be gains from the announced disposals as some of these complete during the second half and is likely, that there will be further charges as we continue our restructuring work.

So that concludes my review of the financials and we will now open up for Q&A. thank you.

Question-and-Answer Session

Stephen Hester

Thank you very much. Richard, if you want to just raise your hand and we'll crack through. Do you want to start that? Do you want to pass, why don't try talking because I think it's a small enough room, we can probably hear you. Just speak up.

Richard Houghton

You just mention your name for the benefit of the.

Stephen Hester

Of the webcast, yes. Okay.

Dhruv Gahlaut – HSBC

Dhruv Gahlaut, HSBC. Couple of questions, firstly in terms of cost savings.

Stephen Hester

Actually, Dhruv because we are webcasting, so it's probably best if you speak into the mike and then it comes through afterwards, yes.

Dhruv Gahlaut – HSBC

In terms of cost savings, could you one say as in what should be the net benefit, one assume between your – as in the target of 12% to 15% or how we should be thinking about that. Also in terms of restructuring charges, you've said it's going to be between as in 1.5 times to 1.75 times. Should we expect that to happen in the second half of this year, as in will you be taking that or is it more or something for the next year?

Secondly, in terms of Ontario. Now, you filed in some rate decline there for the next year. Are you expecting claim cost to come down or some benefit to come in or would that mean some underlying margin deterioration on that? Ontario, motor book?

Stephen Hester

Restructuring charges, you're not allowed to take upfront. You have to take them when you take the action. So my guess is, there is a spread over the next three years and probably the more expensive things occurred later, this is an accounting thing.

I think the first part of your question was about, what expense ratio we think will get to or was it or?

Dhruv Gahlaut – HSBC

For the net numbers and 1.8 years and what would be the bottom line in that.

Stephen Hester

Well, 1.8 years is the run rate impact. The things that you might regard is net going in the opposite direction, things like inflation where the foreign exchange goes in one direction or another I don't know over the three years, but besides I think the thing that will go in the opposite directions, inflations which obviously I don't know what inflation is going to be over next three years. You have to make your own assumptions.

And then on Ontario, it's quit hard and I assume you mean Ontario Motor. They obviously are the mandated rate reductions which come through a different times, we had some in the first half, we've also had some in the second half. The bad news of the rate reductions that reduces your income. The good news, it tends to improve volumes because volumes dry up.

You know not many people know that you've got a rate reduction about to come and this is also being done in the context of claims, experience improving. So I think our working assumption is that, taken as a whole. We can continue to have reasonable profitability from our motor booking including in Ontario. Same line.

Tom Dorner – Citi

Hi, it's Tom with Citi. So it's kind of same from obviously. Two questions; first one just from capital environment. It's obviously very pleasing to say that you've got kind of your coverage there, but I was just wondering the actual requirement has gone up and it looks like it increases by further kind of £20 billion following the disposals. Can you just talk through kind of how you kind of what I'm missing there?

And second question just on Ireland, how committed are you to that business. I mean, it seems like you're going to have an awful lot of effort into turning that around, is it going to be worth it in the end?

Stephen Hester

Trying to take, Ireland and then ask Richard to have a crack at economic capital. In an emotional sense, I mean, we all only run businesses that make sense. So we are not committed to do any business in that sort of theological way. I think, our view is that the Irish economy is in the long run a good one and that one should be able to make good money from insurance in that Irish economy and that our market positions even weaken with some loss of volume from our repricing will retain us amongst the top two or three players in the Irish market.

So at the moment, we see no reason to believe that the Irish market times our market position isn't a profitable and attractive place to be and reasonably synergistic with what we do, across the Irish sea on this side of the Irish sea and so for all of those reasons, we think that the rational thing to do is, to hold and develop because in the sense the things that have gone wrong and would now be in any price of disposal and we think, that we can do things right.

So in that sense, I have every expectation that we will be in Ireland for many years to come, but hopefully with a better experience than we currently have.

Richard Houghton

On ECA, I think [indiscernible] I will give you the technical answer and I will give you something more useful as well. So the technical answer is, while the requirement goes up sort of post disposals of Noraxis. Is the original version of ECA predisposal included in the tail, in extreme is the disposal of Noraxis was associated assets coming back in.

Of course, when you Noraxis you no longer have that option in the tail of the model. So I said, that was a technical argument, but thinking about this and as we move towards Solvency II which is of course based on the internal model and how it works, I think it's incumbent unless to give a little bit more explanation to how it works because it is complex, it is sophisticated and it's something we'll have to get more and more fluent in.

I think, as we get more clarity around about. Solvency II through 2015, we will certainly be putting out more detail is to how our internal model works and how it's responding to Solvency II so that would be an undertaking I will give you today.

Tom Dorner – Citi

Thanks very much.

Thomas Wright – Sanford Bernstein & Co

Thomas Wright, Sanford Bernstein. On Canada, it seems like you have taken portfolio actions on the commercial lines, instead of now over and we should expect no growth from here or do you see more actions on Canada. Italy seems to be a market where this underperforming and don't get the right action, so why are you committed to Italy.

And finally investment income given the sharp drop 40 bps year-on-year and considering that your competitive European base underwrite and Triple B bond, so you consider taking more credit risk commencing now in the European insurance market?

Stephen Hester

On Canada, obviously the impact of our current actions take a year to flow through in any event given from return to earned. And I think that we believe we still do have more work to do to get pricing and risk fully aligned. So I don't think we have any new initiatives, but we have a continuation of our existing initiatives on some of our lines, which we believe will also show in improvement in loss ratio.

We believe, that normally our business in Canada should grow, whether in fact it does over the next 12 months. I'll tell you – for me in the next 12 months, it's secondary to getting the right base in Canada, but there is nothing underlying and suggesting that our business has changed in this characteristics, but what I think our business did, maybe grew too much.

A lot of it was acquisitions and so on and we need imperative of getting the basics right to restore the level of profitability that would be acceptable, some of which is about cost action.

Thomas Wright – Sanford Bernstein & Co

Sorry, my question is it related to a specific areas in the commercial lines business?

Stephen Hester

Yes and no. there I would say property has been a headache in Canada. Some of that, is probably just associated with having had bad weather and things like that, which increase liabilities are slipping falls, in front of stores and what have you. As in the UK, some areas of liability have been a headache in the course in the personal book, there is a bunch of stuff around flooding saw and which, on the one hand is seasonal, on the other hand, you better learn if they're going to be more extreme and then we had some specific issues going on, where we didn't do things right, in our lifestyle, what we call our lifestyle which need to be corrected.

Richard Houghton

Should I pick up on the investment income, there was a point about Italy as well. Our investment income, is a very interesting proposition. We are working hard, hard to work out what our options are, in respect to the invest income. I'll just start with year, we said we are going to keep it absolutely plain vanilla.

While the reasons we came out of equity, as you might run with the start of the year, which because of the capital constraints we were under. I think, it is income on to partners, now there is capital constraints are becoming slightly looser that we look that, what the alternative options are, to us. So I'm not singling a massive rush to a different ordering, the investment portfolio, but I think there may be some more opportunities to take potentially a little more risk, in the books, so that's where we are.

Stephen Hester

With the challenge and the rush to yield, spreads have also come in a lot. So what you don't want to do is load up on spread products and find spread blow out again. So that's the cautionary note. All right, let's go. Oh! Sorry Italy.

Italy, I forgot what your question was?

Thomas Wright – Sanford Bernstein & Co

Italy seems to be the only region, where it's underperforming and it didn't get positive rate actions and my question is, why do you stay committed to Italy?

Stephen Hester

Yes, well I think that on obviously Italy is a really difficult market. The economy is probably ones and one of the most difficult we are operating in, at the moment and it's a challenging market, I think for everyone. If you look at our Italian results, they have actually improved from the terrible losses that we had in some years to profitability in the current period.

So I think the team there have been doing a good job, but I think what you're right to say is that Italy is not, can't stay as it is, we have to take some action that will improve it further or won't have it and at the moment. We think, we can improve it further, the management team are working hard on that, but of course it's work-in-progress.

So just behind you, on the – there we go.

Ben Cohen – Canaccord Genuity

Thanks very much, I'm Ben Cohen at Canaccord. I just wanted to ask about the UK business and around with Steve Lewis starting at the end of the year and just wondered whether your views in terms of the scope and scale of that business had changed and maybe you could give us some early indications in terms of how Steve, would see the business.

Particularly in the context of I think, when he was at Zurich they massively reduced their exposure to UK personnel lines and that book was hugely reshaped, do you think that your business needs to be reshaped in a similar sort of way? Thank you.

Stephen Hester

I mean, A; I'm very happy to have Steve and B; inevitably he's got there is not complete restrictions and so we haven't got him into the guts of our UK business nor to see therefore have a developed view, which I could tell you on it all although, clearly we have exchanged more general views about UK insurance.

What I would also say though is, although we can all debate the results. It is a difficult market and I think we have some pretty good teams beneath Steve and Mark Christer and Jon Hancock who run personal and commercial. I think that they are taking all of the initiatives that we should be taking to improve the business.

I hope Steve will help to have charge that process and bring some extra imagination and so on to it, but we are not doing nothing until he arrives. In fact, we are doing a lot in the business already which is responding and you can see in the very determined action that we have taken, that happening.

So at the moment, I don't have a reason to change our views. The business needs less cost, it needs more underwriting discipline both of which we are putting through, but I think that the spread of distribution both direct and broker and broker and affinity in personal is right to have all three, obviously in commercials pretty much all broker.

We've made our picks in terms of times the business we are in and clearly, what we have that Zurich doesn't have is a very strong household presence on the personal side. So I suspect, we don't think much differently about Motor than Zurich thought, but Zurich didn't have the asset of the top three position in UK household, which clearly has got something different and a yet nor did they have our presence.

So my guess is, that it will be an evolution in terms of the strategic direction in the UK from the one that you can see now, but obviously taken as a whole. There is intensive action going on in the UK and that will inevitably continue, the next couple of years and we'll have to keep doing it until we get the right results, but it does feel to me that although there is a lot of noise, that we are already doing, the right things and we will see that coming through and back left.

Andy Hughes – Exane BNP Paribas

Thanks, so much. Andy Hughes, Exane BNP Paribas.

Stephen Hester

Can you speak up, please?

Andy Hughes – Exane BNP Paribas

Sorry, Andy Hughes, Exane BNP Paribas just want to come back on Dhruv's question on cost. I know you're stripping out the disposals from the £180 million cost target, but what about performance the removal of various portfolios within businesses. Is that going to offset the £180 million service, they're right there, so the reduction in UK broker motor business for example and that will, that premium reduction obviously will.

Stephen Hester

So, if we sell a business the premium reduction hopefully is offset by the cost that it taken out, if we simply write less business, then we have to take out cost and so you're absolutely right, that a good chunk of our cost savings, we have to do, to keep our cost ratios just still overtime for a lower volume of premiums now.

I hope by the way that premiums don't perpetually go down, I hope we'll see within this period premium starting to go off again as well, which will offset some of that, but so that's really why I said, I believe that there are more cost savings to come than the £180 million. I think we will end up doing more, what I don't yet know is how much of that more will come to the bottom line and how much will end up being given to customers on rate or reinvested in some other ways.

Andy Hughes – Exane BNP Paribas

And so if you look at cost base, I think you've highlighted on one of the Slide 20, pretty much most of the cost is either IT or staff. Obviously IT investment sounds like it's going to be going up in the near term to achieve the cost saving and so is it fair to say, bulk of the cost savings is going to have to be staff cost and I think about why now versus historically.

I mean this is the change in the view in the UK market particularly that perhaps previous management sat back and maybe weighted a bit longer for the UK market to recover and you're taking the view that the UK market is going to be softer perhaps for a longer period of time and therefore you're taking expense actions and were perhaps maybe delayed, by the Group or is that the right way to think about it?

Stephen Hester

First of all, I think that there will be no cost line that escapes our attention and just as an example, I think that our current purchasing is well behind best-in-class and that we ought, that by a much more aggressive approach to procurement including doing procurement globally, where that helps using our global scale.

There are some significant savings there as an example and I think overall, there are some savings that we had in IT. Although, it may be in somewhere like Canada where IT cost go up and somewhere like the UK, they come down. So I do think it will be all of the lines, will benefit from our attention on cost.

As of whether this was people fiddling in the past, I wouldn't put it like that but clearly the company's priorities were in part about international and global expansion and part about growing the top line making some acquisitions and the company's capital position created a reluctance in dividend payouts, created a reluctance to take restructuring charges and so I think all of that meant that, maybe the core business didn't get quite the amount of intense attention that they should have had and maybe they weren't given the ability to make rational decision, if those rational decisions caused write offs, I don't know.

What I do know, is that we need to save money and we believe, we can save money. We're not alone in that, all of the other insurers you cover will have their own programs and that's where we are.

Andrew Crean – Autonomous

Good morning, it's Andrew Crean, Autonomous. Three questions, if I may. Firstly on Scandinavia, it's unnerving to see the prior reserve releases come into strengthening and actually, on your charts you say the strengthening is 0.6% of premiums in the text, it says 0.1%. I'm not quite sure where the difference is there but, as far as the question is, do we – are we moving into a time now where the business can no longer rely on reserve release coming actually from Scandinavian.

And particularly actually you flagged up a longevity enquiry coming up, that slightly smacks or something where you may have to do more, if you could comment on that? secondly on the expenses side, if you say that your total controllable expenses are £2 billion, if you exclude the businesses which you're going to sell £180 million is only 9% to that and if you're talking about inflation of 2% per year, about two-thirds of that benefit will actually disappear in inflation, right?

You said the expenses are unlikely to change much. On Aviva, I think it's taken its expenses down in nominal terms from £3.7 billion to below £3 billion. And just looking at the quantum of that and wondering why, you can't cut more deeply and then thirdly, I think you said that, you're hoping for a better second half in underwriting terms.

I think consensus forecast prior to today, were around by £330 million of underwriting profit for the year, so I'll call that about £165 million each half. I mean, would you be hoping to be able to sort of have a normal second half against that kind of thinking.

Stephen Hester

Lot of questions in there, on Scandi on our whole Group, I think that it's likely that there will be a greater reliance on cap higher current year profit in the future and lesser on taking money out of the cupboard in the past, where that be genuine prior year releases or whether that be margin releases and we disclose that the full year, a significant amount of margin releases that are being taking place.

So I do think there is a, if you like a strategic shift, a mix shift, but that said I think that I would expect Scandinavia to pick your specific question to normally have positive prior year and for the reserve strengthening. Remember in the first half, we didn't just strengthened reserves, we also strengthened margin, which is disclosed when you get into the chart.

If we hadn't strengthened margin, that would have been positive prior year and we could afford too because Scandi was making so much money and so in fact, just to pick that example. I hope this example, being prudent.

Our data doesn't even support putting extra money away for longevity, our own data, but we are concerned that our own data may not be the same as the property [ph] as a whole and so we are being preemptive about it, in putting something away that I think, a year ago we wouldn't have done and we are just trying to be a bit more conservative, whether that proves to be correct or not in the long run, we'll see it, seemed to be sensible to us.

So I do think, there is a shift in Scandinavia from less to prior year, but I don't, I'm not worried about Scandinavia's profitability at all. Although, there are things in Scandinavia we can do better as everywhere. The expenses, say I think you're right. I think we ought to take out more, I think we will end up taking up more and will have to make that balance in the rest of everything that we do and in terms of second half.

Clearly, we are not going to, we are not in the business of giving hard forecast for volatile things, but we I think it is entirely possible that half of the consensus is indeed what we do in underwriting profit, in the second half. Of course, there are volatile items. It might take it higher or lower and I think there are prior year decisions we've got to make, which may have some impact as well, but we'll see how will those things pan out, but I hate predicting six months ahead, whilst we are still playing with lots of times and whilst we are still figuring out, how reliable our own internal process is, putting through cost increases and writing improvements and getting results.

If we disappoint ourselves in the second half, we will take more pricing action and more cost action to offset it. If things go as we think, that will be terrific. So my view is, there may be in course corrections, but I still think we are in the right place for the out years. Let's see where we are in the second half. Let's see and let's try the right hand side, over there.

Unidentified Analyst

Thank you. Hello, it's [indiscernible] from [indiscernible], a couple of questions if I may. First of all, obviously you have reserve strength. You flanked reserve strengthening in Ireland, the second half. Can we anticipate any further results strengthening from elsewhere or is all the dead being brought out, effectively?

Stephen Hester

No, as I said in my slides there are few areas that are still on the sort of square brackets list as to whether, it might be better to have a more conservative posture and so I don't rule out some more reserve strengthening in the second half. At the moment, it feels like it would be of a lesser amount than the first half and it's not determined either, but I can't rule it out and I think it's better that we get the stuff out of the way, this year especially when we got the benefit of disposal gains coming through, then let is fester.

Unidentified Analyst

Okay, thank you. My second question was in respect of, I think in pack [ph] you mentioned Bolton [ph] M&A when you actually get to position at working at your sustainable excess capital. What sort of areas, you think you might be looking at there, please?

Stephen Hester

Well, there is no M&A in our mind, but I do think that they're if we looked some years out from now. I do think there from time-to-time our rational add-ons, I think it's unlikely that we would do diversifying M&A, but occasionally they're rational add-on, the stuff that Canada is been doing, I think was rational, you could imagine Latin America having some rational add-ons, which we should be prepared to look at, but we are not prepared to look at that until we have much greater confidence in the base of management talent cost effectiveness and management effectiveness of our existing businesses.

So right now, it's an inward focus to make sure that we've got is really good before we think about M&A or giving back capital or whatever, we do with capital.

Unidentified Analyst

I think, my last question is following on from Ben question in UK personal lines. Just wanted, how committed you are to perhaps ex Motability, how committed you're too UK Motor?

Stephen Hester

Well, as I said on a theological basis, I feel no commitment to any of the slides, so this is an entirely a set of rational judgments. At the moment, clearly the motor market is difficult is likely to continue to be difficult, but we think as part of our overall business, but in a lower proportion to our overall business. It's rational for us to compete in the narrow down segments that we are and so therefore, there isn't a threat over our, motor business, but obviously like every single business line.

We have to make sure that our actions, both on costs and on underwriting and on the complementarity to our other business lines have the desired effects, but at the moment we are not signaling a withdrawal for motor. It's one of our biggest segments worldwide, it's obviously much smaller segment in the UK, as befits what the market is offering, but we hope and believe that we can move it to a territory, where it makes sense for us.

Will Hardcastle – Bank of America

Thanks. Will Hardcastle, Bank of America just if you can again, update on given the disposal gain so far, your thoughts on the debt issuance up for renewal year end and also, with you being here six months now and a week, could you give us, any more insight into the one of the legacy that you have thought about personal options on that?

Stephen Hester

Do you want to take first, Richard?

Richard Houghton

Yes, sure. Well, we discussed the debt issue quite a bit, we were £450 million, which is callable towards the end of this year. Our current thinking is that we will be looking to call, but we still have some deliberations to go through, the question will then be how much would we like to reissue, still a massive that we have to discuss further in Q3, but I expect we will be looking to come to market to raise some money, as we call out £450 million, but the amount still to be resolved.

Stephen Hester

You'll see we make reference in one of my slides to, targeting leverage ratios sort of let's say up on the conservative side our competitor universe and so, when you do the pro forma for where our debt is, that would suggest we do a bit of reduction at year end, but after that we are in a pretty solid place now.

I think there are bunch of other stuff, we need to do to our debt. The coupons are way too high, there is other maturities coming in the next few years. So over the next few years, we need to get our debt cost down, but the issue is probably not so much. How much debt, once we've got past this call and more to do with its interest cost.

Richard Houghton

Well again, the comment I made earlier of Solvency II, I think there will be some very interesting things in 2015, as we work through exactly what Solvency II means to corporate structuring of debt and equity. So I'm sure, this is something we will be coming back to throughout next year.

Stephen Hester

On the legacy book, really haven't got any further forward to tell you the truth. I mean, it's not obviously not perfect, if you can magic it away for good value, you would, we've clearly taken accounting loss to get rid of it because it bleeds low levels amounts of money, but at the moment we don't see a market out there, at price that would be advantageous to shareholders in part because in capital terms, risk massively diversify away with our other lines and so you'd actually chew up.

You probably wouldn't net release no capital from getting rid of it. So we will keep looking at it, but at the moment, there doesn't seem to be an easy way out of that one.

Oliver Steel – Deutsche Bank

Oliver Steel, Deutsche Bank. I've three questions following on from Andrew Crean's question about the cost and how much could be eaten away by inflation and in the other hand, his question about disposals or rather portfolio pruning. Would you give us an expense ratio target or indeed would it not be more sensible to give us an expense ratio target rather than absolute gross reduction?

And secondly, a gap in sort of targets that you have set, that which I suspect will be quite important is what sort of underlying loss ratio improvements do you expect to make as a result of the portfolio pruning?

Stephen Hester

Well you've got to give us a small amount of maneuverability, so and you're getting too greedy for target, I'm afraid you're going to got to make dues with the ones you've got, but my view is that the bottom line is our return equity, that's really what billable [ph] is down to, we have to come up with an economic model, that produce in return equity that's attractive and looks good compared with what other people achieved and we've got a whole bunch of different level, leave us to pull and we got to juggle the extent to which we pull them to get that result and I'm not going to write a piece of business with a low loss ratio and high cost ratio.

I'm not going to refuse to do that, if that helps our ROE and vice versa and we have different business lines and different places and doing different things. So that's why A; we don't want to complicate life by if you like the irrelevant targets which are simply building blocks to the proper target, but of course you're right.

Fundamentally, we need to be competitive and so our underlying benchmarking work on cost, tries to establish operation by operation and business line by business line. What best in class on cost in that business line, which ultimately expresses the ratio and how do we get that, sometimes we think we can get there and sometimes, we think we can't.

And similarly, the underlying loss ratios obviously they will change as our view of things, as some of them are more volatile whether another things change, but they need to keep improving to get to the ROE, but I'm not going to tied up, more than we're already tied up.

Marcus Rivaldi – Morgan Stanley

Thank you, Marcus Rivaldi, Morgan Stanley. Three questions please, so on your action plan target timeline. You seem to suggest that you will be in the position the end of this year to have done very detailed work on the existing plan, assessed how far you can go beyond that? So does that mean, that when we come to hit the full year results, you better set out in detail, exactly what the shape expense base is business and look like.

And the second question, please. In terms of your disposals for the second half are they all proceeding as expected any issues around regulatory approvals or anything like that? And all this number question, I think your specialty is now folded into UK commercial, what was the impact of that at half year? Thank you

Stephen Hester

Richard, might answer the last one on disposal closing, so far so good. So the big one has already closed, which is Noraxis. So the remaining big one or the one, I mean there are several we've announced, but the biggest is Lithuania, should feel like fourth quarter. Now I'm not sure, you know there isn't real buck yet.

Hopefully, there won't be one. And your other question was on, year end. Are we going to do anymore target changing or exposure then and I suppose the short answer is, I don't know. If we think, we know more and it's reliable we'll articulate it. Let's see how we go. Richard, did you want to have a bracket [ph] are the European specialty lines treated differently? I think in the first half, than the first half of last year.

Richard Houghton

Yes, all we have done is follow them to UK and Western Europe. So what I don't have is a separate breakout because that's what we've done is including in UK and Western Europe. I can't look at separate numbers and produce those numbers for you.

Andy Broadfield – Barclays

Hi, it's Andy Broadfield from Barclays. And few questions, please. One is related to the management team and the team you're building. If either could cross as a finance skilled team from your own background to be chose to head of Scandi's, Steve Lewis is a finance guy from [indiscernible]. Do you feel you've got enough genuine issuance understanding when the management team?

Stephen Hester

We might need some more RT types, you know builded [ph], sandals, that sort of stuff. So I'm on the looking and if you know anyone like that.

Andy Broadfield – Barclays

Underwriting side, distribution side then I sort of.

Stephen Hester

No, I think it is, I think on the positive side, this company has an immense richness of experience and talented people in the insurance business and we have those people and they're doing very important jobs for us, but obviously whenever we are looking at all of our management teams. We try and make sure, we've got the right mix.

Andy Broadfield – Barclays

Then the second question, just around the cost you talked about people, IT, etc. the two other sort of, I guess difficult ones reinsurance and pension and cost. Where are you on both of those in your thinking?

Richard Houghton

Yes, on reinsurance. Well, we all know what the state of insurance markets are now, extremely soft and we are putting together our propositions to the market for the 11's, the 17's are not a big, the new point for us. So I can't give you any new data points, but it does seem that we are going to be take advantage of those soft rates.

The big question, I suppose maybe will be interested in. it sort of extended, does that softness feed through particularly the high end of the insurance game. Luckily, to us not a game that have dominating our portfolio, but yes I think we will be able to take advantage of the softer reinsurance markets to improve our financial performance going forward. So I think that is useful.

In terms of pensions, we've got some disclosure in the pack. We continue to talk to our trustees and we are looking at the path towards and sort of resolution of the sort of underlying funding position. The next funding valuation point will be March, 2015 and we will be discussing that position with the trustees all the way through 2015, I was expecting 2016.

So it's just an ongoing discussion, we had with them. It's a very large number. It's a very large liability that we carry on the balance sheet, which is why we have to stay close to it. I'm pleased this is surplus to accounting purposes, but as you know that's worth exactly what the accounting standard is worth. The real conversation valuable one, the one with the trustees.

The trustees view is that, they very much appreciate that we are strengthening the covenant. When the covenant is ran by the quality of earnings, the RSA can present going forward. So that's the most important thing to them on our conversations with them and they are assured that we are doing the right things and they can see progress.

So I think that's the best answer I can give you at the moment.

Andy Broadfield – Barclays

So just coming back to the reinsurance. Is there much, you're doing to change the structure or it is just about squeezing the?

Stephen Hester

We are in the point in the year over the next quarter, is that is where we have our big annual debates about it and so I would say, there doesn't feel to me to be anything major, that will likely to do on this structure. They're all sorts of fiddling that we do every year, it doesn't feel like we are out of line in a big way.

Andy Broadfield – Barclays

And just a final question on this one, on Europe and the sale options. My understand is, these are branches that have been, on the European business as in potential thought, dispose it on those. These are branches that make losses, so I was just wondering what the optionality is around those sales, beyond just shutting them down but at your disposals.

Are you able to tell us anything about how those might look, what sort of options you're looking at for those?

Stephen Hester

I mean, taken as I said I think the majority of our operations by number in Europe, are likely to continue to be with us, although not all and I don't want to go further than that, but in Europe and elsewhere in the world, we have some branches and some subsidiaries. The process of sale of branch has some more complexity because obviously you've got legally handover the policies, but it still occur exactly the same and there is no reason, our priority why you can't get a premium for a branch, then why you can't get a premium for a company, if you're selling it or a discount depending on the perceived value, what it is you're selling.

So the branch itself, there's a structure itself, I think is not just a detail of execution, but obviously we're going to be clear. We are not selling things because they produce a profit when we sell them. We are selling them to get a strategic shape to our company that allows us to concentrate our financial management resources in the area, we are likely to have the best impact.

And so as it happens, the things we have sold so far have produced surplus on sale. We will be just as happy to sell something for a deficit on sale. If we thought strategically and financially that made sense and I'm sure there will some sales in that category.

Andy Hughes – Exane BNP Paribas

Hi, its Andy Hughes, Exane BNP Paribas again. I look forward to seeing the bids of the full year results. So the first easy question on Motability. I'm bit confused by the expense ratio. I thought you're getting rebate on the 80% exceeded. Does that not come off your expenses or is that shown in the premium and the second bid was, on the personalized motor.

I obviously got, even earlier than usual this one in, so I thought in respect to the question about personalized motor, this is one about jurisdiction. Are you basically saying, you have a large personalized motor business in Ireland and large personalized motor business in the UK, both of which now have a very high expense ratios and basically you might end up running the UK personalized motor business out of Ireland, is that what the solution is?

Stephen Hester

No, I wasn't – I'll ask Richard to answer first on the first idea, but on the second I wasn't meaning to say that. although as it happens at the moment, we don't exploit cost synergies between Ireland and the UK and I think, one of the things we should do is figure out as between Ireland and UK had to share some cost and expenses and that's on the agenda to figure out in the coming years, but I wasn't specifically referring to that.

Richard Houghton

And under the challenge on Motability is, as I know you know is we've got a combination of the old tranches running through and the new scheme coming through. Now we've referred to what, the premium level would look like, if you strip out the impact to that. what I haven't done going down to the profitability level because to talk very specific that one particular scheme, is not something that would like to get into it, basically granular way because of the commercial ramifications of that, but I can think about for the full year, how we can try and capture, what's happening on the transition from quite a significant loss making proposition to where we'll end up in future years because that's the whole basis of our restructuring.

Well let's say, it is a slightly complex issue because I've got old business and I've got a new scheme running through and it's early days for the new scheme. So apologies, I can't give you a simple answer on that one because there's isn't one.

Andrew Crean – Autonomous

It's Andrew Crean with a follow-up question. Might seem rather a strange question at this point in time but, you're setting out a dividend payout ratio 40% to 50% in the medium term and if you recapitalize the business and if it's business which is unlikely to grow vast mind, why would you, only pay half of your earnings out in dividend.

I mean others are moving to sort of.

Stephen Hester

Well, I to be honest, I don't know whether this is a good comparison, but I quite like what Direct Line is doing is, which is when they have a surplus capital paying it out in one-off was protecting if you like the sustainability of the dividend, albeit I think Direct Line are also paying a high part of ratio, then we are talking about. So given the model that we have, given our reluctance to do as much hidden reserve movement as other insurance companies have done it and as we have done in the past, that would lead to some volatility in financial results and you still have this sort of visceral emotional reaction that people give, if you cut dividend.

So therefore, it put for those reasons I think it's better to have a regular dividend that isn't endangered by volatility and one-off ways of repaying additional capital generation, if that's what you should do. Any other questions?

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