AXA's (AXAHF) CEO Thomas Buberl on Q2 2016 Results - Earnings Call Transcript

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AXA SA (OTCQX:AXAHF) Q2 2016 Earnings Conference Call August 3, 2016 9:00 AM ET

Executives

Andrew Wallace-Barnett - Head, Investor Relations

Thomas Buberl - Deputy Chief Executive Officer

Gerald Harlin - Chief Financial Officer

Amanda Blanc - Chief Executive Officer, UK and Ireland

Analysts

Jon Hocking - Morgan Stanley

Andy Hughes - Macquarie

Peter Eliot - Kepler Cheuvreux

Nick Holmes - Societe Generale

James Shuck - UBS

Michael Huttner - JPMorgan

Andrew Crean - Autonomous

Paul De’Ath - RBC

Blair Stewart - BofA Merrill Lynch

Andrew Wallace-Barnett

So, good afternoon, everybody, good afternoon, everybody here in the room, good afternoon to all of the people joining by webcast and by telephone. We are really happy to have you here on this summary August 3. And we are delighted to be able to present to you our Half Year Results for 2016. I am joined by Thomas Buberl and Gerald Harlin today. And if you would like to ask questions by telephone or on the webcast, please don’t hesitate, follow the instructions you have been given, but priority will be given to questions from people in the room, and I, with much pleasure, would like to hand over to Thomas to make the introduction.

Thomas Buberl

Thank you very much, Andrew. Good afternoon. We are very pleased to be here and present the half year results to you. In summary, the results that we will be presenting to you are very resilient earnings given a market environment that is difficult and characterized by quite a few headwinds. The second message I would like to get across is that, if you look at the balance sheet, you see that despite those headwinds, the balance sheet remains very strong with a very strong Solvency II ratio. The third message I would like to pass is that, we have a clear focus on profitable business. We want to remain this focused, even though the market is difficult and you will see very clear drivers of this profitable growth, be it in P&C, be it in Capital Life, or in the health business.

If you look at the overall results, on the underlying earnings, you can see stable underlying earnings of €3.1 billion. This again, in an environment that is difficult and that’s also where you see the difference. Life & Savings is up by 4% to €1.9 billion, so a very good development given the interest rates development. Property & Casualty is down by 6% to €1.2 billion, the main reason being that natural events have been significantly higher this half year than they were compared to last year. Those natural events are clearly floods, but also terror attacks if you remember the Brussels terror attack, which has cost us €24 million.

If you look at the adjusted earnings, you will see a drop of 2% to €3.4 billion, the main driver being that we have realized lower net capital gains, and on the net income, a very positive message, plus 4% to €3.2 billion. If we go into the balance sheet and the Solvency ratio, you see that despite the difficulty of the environment, the Solvency rate is at 197% Solvency II ratio, very strong, slightly down from the 200 last year, but that’s clearly explainable due to lower interest rate and due to higher volatility in the markets, but well in our target range. And if you see the sensitivities of the balance sheet, be it on interest rates or on equity markets or on corporate spreads, it’s a very solid balance sheet and we really would like to maintain this resilience on the balance sheet going forward to have a stable business, but also to have a clear follow-up on the dividend policy that we have put in place.

If we look at the businesses, I would like to give three highlights. The first one is on the Life & Savings business. Despite the difficult environment, we have been able to keep very attractive new business profitability at 37%. This is not obvious in such a market and we have continued to move the business mix in a favorable position. The second point I would like to make is on Property & Casualty. We are showing a good growth 3.7%, 4% on the private business, 3% on the commercial business, a very good development, and certainly, this is one area where we want to put a focus to do more. We have particularly seen in the UK that on the commercial side, this has been a success and we want to copy these success recipes and secrets into other markets.

On the Asset Management side, again, a very positive result on flows despite the difficult market condition €19 billion net new flows in the first half, they are of €9 billion in the second quarter is a good result. And if you look this is where it comes from, it shows that AXA is well diversified and benefits from the global footprint, because the majority of these new assets do come from the joint ventures in Asia. If we make specific zoom on health, because health was one of the priorities that we have clearly put out as a growth opportunity at the Investor Day, it’s the first time that we are splitting it out, because in the past, health has been either in Life or in P&C, unless it was separate like in the UK or in Germany. What we see there is that we have very strong geographical footprint, six strong footholds, one of them being in the UK here. A very clear strategy of growth in five markets, one being the Gulf and then four Asian markets, China, Thailand, really upcoming markets.

We see that the revenue growth has been attractive, 3%. And at the same time, we have managed to have a good combined ratio at 95.5%, a business that we clearly want to continue growing in. If we then look at the resilience also from an investment perspective, we are very fortunate that the investment margin has been very high at 74 basis points. This is the higher end of the guidance that we have given at the Investor Day for ‘16 and ‘17.

We are also very proud to see that the investment yield on the portfolio and we take the example here of P&C is at 3.5%. And that our reinvestments given the very difficult environment, is still at 2% and we have not changed our risk appetite. So, we are well in line with the guidance that we have given you at the Investor Day on June 21. Going forward, this makes us very confident that we will deliver the plan and that we want to put all our efforts on delivering this plan. And one of your questions could be are you still in the plan you have given us, because markets have changed. The reason why we did the plan the way we did it was exactly that. We wanted to differentiate what is in our hands and what is not in our hands. In our hands is clearly the question what can we do on growth, what can we do on cost savings, what can we do on margin improvement, what can we do on capital and what can we do on M&A.

Here we have given you a very clear guideline with the measures that we have. We are fully committed to this to deliver those 8% out of what is in our hands. On the other hand, we have the effects that are not in our hands, which are clearly in the interest rate markets, the equity markets, the FX markets here. It’s clear that the interest rates markets have the biggest impact on us and we have given a clear guidance at depending on which scenario, we are in we are either between minus 1% or minus 5%.

After Brexit, the world has changed, but we have anticipated this change in the world already in this scenario, even though we didn’t want to, but we are still well in line within those boundaries, which makes us very confident that we will deliver those 3% to 7% over the plan period and we will do everything, so that you can judge us by the 31 December, 2020, whether we have fulfilled these targets or not. For us it’s clear, we will fulfill them.

Thank you very much. And I would like to pass on now to Gerald.

Gerald Harlin

Thank you. Good afternoon. So let’s move to group earnings. Underlying earnings are flat. P&C Life & Savings plus 4%, P&C is down 6% and it’s due to higher net cat and lower investment income. Asset Management minus 3%, due to lower average assets under management. International Insurance minus 32%, we had some significant positive reserves development last year in AXA Corporate Solution and that’s explained the minus 32%. Holdings, plus 14% due to lower interest rates, we are benefiting from lower interest rates on our debt and lower expenses.

Adjusted earnings now and starting with the net realized capital gains and losses, lower than last year, 301 versus 382. Explained by the same level of realized capital gains for 79, but higher net impairments, we were at 194. We had an impairment level of 194 in the first half of our which 154 in equities. So it’s mostly equities. Keep in mind that the equity markets in Europe were roughly 12% down. At the same time, adjusted ROE, we were at 14.6% versus 16% last year. So we are above. So 12% to 14% range that we fixed ourselves and that we shared with you in – at the end of June, when we presented our plan. The decline is mostly due to the higher average shareholder’s equity.

Let’s move to net income. As far as net income is concerned, it’s a bit more complicated. Let’s start with the middle line with the exceptionals. €626 million, corresponding to the €1 billion gain on the two buildings, the U.S. buildings that we sold. We had a €0.4 billion loss on the disposal of the UK Life business and with the positive €0.1 billion on the disposal of Portugal, so as a whole, its €0.6 billion positive in the net income. This is offset by minus €647 million with three different items. As you know, its pure accounting, but we are first minus €357 million corresponding to the freestanding derivatives and all the swaps that are in front of our debt, our long-term debt, so €357 million. On the ForEx, we are minus €160 million, corresponding to the currency swap in front of our Tier 1 debt, but also on the currency swap in our investment portfolio, all of this are mark to market, whereas the underlying assets are in OCI, that explains volatility. And the last minus €130 million corresponding to mark to market of funds mostly equity funds. Again, I insist on the facts that it’s a pure market FX, it doesn’t mean that it’s realized and it could reverse extremely quickly. So as a whole, net income is plus 4%.

Let’s move to the new business sales. And starting first with the total, so new business APE is down minus 2% and new business margin is stable at 37%. Let’s move to mature markets. Mature markets are down – I am sorry mature markets are down 5%, that’s the first column, down 5% due to the decrease in the unit-linked sales. New business margin is up from 35% to 37% confirming the fact that also our sales in unit-linked were down. We are focusing as we will see later on the most profitable products. On the high growth markets, plus 11% on the top line. I should highlight the fact that it’s explained by plus 28% in Southeast Asia and China. May I remind you that China is growing quite fast, because last year it represented 2% of our APE in the first half, its 6% of the APE. In China as you know, we sold high volumes of single premium with the Chinese New Year. I mean during the two first years – two first months of the year. Since then we are selling regular premium, which means that, as I told you in Q1 phone call, that I told you that in H1 we would have a positive NBV at that time in the first quarter we had a negative NBV coming from China. So it’s positive now. It’s positive due to the accretion of regular premium with a higher profitability.

Nevertheless, the strength of China and the size of the Chinese business makes that it’s dilute NBV as you can see here. But nevertheless, it remains at a high level. And the last point I wanted to share with you is to tell you that that regulation should help us, because the regulator in China wants to curb and to decrease the single premium business, so all should go in the right direction. So that’s it for the Life & Savings new business sale.

More detail by line of business. First, starting with Protection & Health, so Protection & Health is totally, I would say in line with our strategy, with strategies that we exchanged with you when we presented our plan, plus 6% growth in APE. I could say of course all countries, 54% NBV margin plus €3.8 billion of net inflows, so positive. On G/A Savings, we have gross of 22% with a 16% NBV margin on average, but we are growing our G/A capital light. May I remind you that the G/A capital light is products correspond to products which create more AFR than the capital they consume. A few examples of products, some savings products with term guarantees only, some products with market value adjusters, all these kind of products which are capital light because they are end of Solvency II, the level of capital is quite small. So plus 26% on this category of products with plus 16% change, which is quite strong, confirming the fact that although we had a poor start of the year on the unit-linked business, we sold a significant amount of capital light G/A products. As you can see, that also we have minus €0.4 billion G/A Savings net inflows, as far as capital lights are concerned, it’s plus €2.3 billion, confirming that on capital heavy products, we have strong decrease in net flows.

Unit-linked, I mentioned it to you already, minus 18% growth in APE, mostly coming from three countries. Minus 59% in AXA NPS for two reasons; poor equity market and the financial strengths of the bank. And in Hong Kong as well, because you remember that we had very high sales in Q1 last year, following the regulatory change. And in France minus 14% due to the global environment and the poor environment in the equity markets. Net flows positive €0.8 billion and even if we would exclude €0.7 billion GMxB buyout that place at the beginning of the year we would be at plus €1.5 billion net flows.

That must lead moving to underlying earnings by product. So total life and savings products – total life and savings plus tax underlying earnings increased by plus 4 points and on the pretax basis, we are at minus 4 points. But we should say that, this is minus 4 points, but we have two exceptional negative elements, which are shadowed. Starting first with Protection & Health, because maybe you remember that 1 year ago in the first half of ‘15 we had an exceptional positive reserve development in France of €0.1 billion. So second is on the unit-linked side because we had lower management fees in the first half because the market declined significantly in the mid of the first half and recovered since. At today’s level, management fees would have been €0.1 billion higher. So, excluding these two elements and excluding also the last one, which is the negative one-off impact coming from the positive – sorry excluding the higher positive tax one-off which also makes 0.1, makes that excluding these three elements, we would be at plus 4% as well. So, that means that where from the outside, we could consider that the minus 4% life before tax could represent a drag on our normal course of business. It’s not at all the case, because eliminating these three one-offs we are at plus 4% pre and post-tax.

Moving to the P&C business, on P&C, we have a growth of plus 4% with plus 4% on the personal lines and plus 3% on the commercial lines. I propose you to give you more detail. And as you can see here, you are familiar with this slide. First, I would like to say that H1 confirms the good absorption capacity by the market of price increases. That’s what it means. And you can, starting first with the personal lines, you can see here that we have plus 6% price evolution and revenue growth are at plus 4%. UK and Ireland, you can see that we have a price evolution of plus 6% and revenue growth of plus 6.5%, corresponding to a good cycle and improved cycle in the mortar business. In MedLA, plus 19.5% and plus 6.2% in term of revenue growth. It’s due to Turkey, as you remember, we had problem in Turkey. Since then, we had significant reserves negative development last year. And since then, we increased our prices on MTPL and we increased our prices by 160%, which is quite strong. And this translates of course in the revenue growth, but we have also some increases in other countries.

In direct, you will notice plus 6% in price evaluation and plus 6.8% on the revenue growth as a whole for personal plus 6% on price evaluation, plus 4% on revenue growth. On the commercial lines, it’s almost the same story, plus 3.5% price evolution, plus 2.6% in the revenue growth. There is one negative figure on the first line corresponding to France, that’s a construction business, it’s the last – we pruned the construction business and we finalized this exercise middle of the year, that’s why we are at minus 2%, but nothing willing at that side and we can consider that we recovered. The trend we could say is that there is hardening in countries like UK and Spain and there is some price softening in countries like Belgium, Italy and Germany.

So, let’s move to the profitability by business line, so in mature markets, plus 2% with revenues growing by 2%. You can notice that current year combined ratio is going up from 96% to 97.3%, mostly explained by nat cat, as I mentioned before. So, we can consider that natural catastrophes plus the terrorist attack correspond to a bit more than €100 million. That’s a terrorist attack in Belgium. That was a cost of €24 million for the first half. And as a whole, that’s explained the increase of 1.3 points of the current year combined ratio. In high growth countries, we have the top line at plus 11%, with plus 14% in Mexico, plus 38% in Turkey and also in Asia like in Malaysia, so plus 11% on the top line. We mentioned plus 13% on an economic basis, because we have some JVs and it’s a way to take – it’s not captures the revenues, but it’s important to notice that on an economic basis, we are growing by 13% and not 11%.

As far as current year combined ratio is concerned, we move from 99.9% to 102.3%, explained by Turkey, because the price increases were spread over the first half, which means that we didn’t get the whole benefit that we will have in the second half and we have also some increase in acquisition costs. In direct, plus 6% revenues and more or less a stable current year combined ratio, as a whole, plus 4% on the top line and plus 1.3% on the current year combined ratio.

Going into more detail on the underlying earnings, so underlying earnings are down 6% with two reasons. The first one is the combined ratio. That’s more or less what I explained to you, which is the nat cat. You can see in dark, sorry. You can see in dark blue that the nat cat moved up from 0.1% to 0.8%. Current year, the higher reserve developments moved from 1.8% to 2.1% and all year combined ratio moved up from 95.1% to 96%. Investment income at the same time, annualized investment yields were at 3.5% versus 3.7%, so pretty in line with the guidance that we gave you.

Asset Management now. Yes, okay. Asset Management with net flows of €17 billion for AXA IM, plus €2 billion for AB. Average AUM have been hit in both case by the market evaluation, minus 5% as far as the AXA IM is concerned with the drop in equity market plus the exit of France Life. As far as AB is concerned, it’s more positive market effect on fixed income, but a negative in equity and this translates into revenues minus 7% for AXA IM and minus 8% for AB. On the underlying earnings, minus 3% in underlying earnings for Asset Management with AXA IM plus 3% and AB minus 9%, in line with the minus 8% on revenues. We had some performance fees in AXA IM explaining this positive underlying earnings growth.

Let’s move to ALM. The assets under management went up from €552 billion to €598 billion. No big change except the mark-to-market is going up due to the decline in interest rates. You can notice slides that fixed income asset duration slightly increased. We are now at 8.3% on Life and 5.4% in P&C and yield decree is absolutely in line with the expected dilution coming from investment in lower interest rates at 3.4% in life and 3.5% in non-life.

Moving now on the asset allocation and the asset starting first with the govies, we could say that govies as well as on corporate bonds, we have no change on both categories. What is important to mention is the fact that we have an average rating of government and related bonds, which is maintained at AA and for corporate bonds, it’s maintained at A.

Let’s focus on the H1 Investment. We have been investing at an average rate of 2% in line with our previous exchanges. So, we benefited from quite attractive returns on some illiquid, but high-quality assets like ABS and CLOs, like corporate real estate loans. And we expect to invest in the second part of the year due to the decline in interest rate, let’s say, between 1.6% and 1.7%.

Let’s move to investment margin. As you can see here in the middle, we have a resilient investment margin, which moved down from 78 basis points to 74 basis points, well within the guidance that we gave you at the end of June for our strategic plan presentation. And this is explained, the resilience of our investment margin, is explained by the spread of the guarantee rate which remains quite strong and it’s 140 basis points, which confirms the flexibilities that we have. That means that policyholders are contributing to the drop of interest rates. On new business, it didn’t change since last time. So, we have only a very low average level of guaranteed rate on new business at 0.4%.

Moving to shareholder’s equity, shareholder’s equity is up from 68.5 to 74.1. You can see on the right, the main elements starting first with the change in net unrealized capital gains, coming from the drop of interest rates, 6.8. Net income for the period 3.2 and the dividends minus 2.7, it’s a dividend of €1.01 that we paid in May. Let’s move to debt and to the rating. Our debt went up from 17 to 18.6 and at the same time, our debt ratio went up from 26% to 28%. This is completely explained by the €2 billion debt that we issued in H1 in order to refinance some maturities that will be at the end of present, in the second part of the year and also at the beginning of next year. So it’s quite – it didn’t change, I would say the strength of our balance sheet and the fact that we have a low debt ratio

As far as the rating is concerned, at Moody’s as well as Fitch, we had a confirmation that we have equivalent of AA stable. We are still A+ with a positive outlook with S&P. As far Solvency II ratio is concerned, as explained by Thomas before, we are moving from 205 at the end of last year to 197 which is a strong level. You can see on the right, as the keen sensitivity is and you have [indiscernible] between the end of ‘15 and the end of June 2016, operating return plus 8 points, dividend minus 5 points, market impacts excluding ForEx of minus 16 points and we have all the other elements plus 5 points of which is the subordinated debt of €1.5 billion that we issued in March.

I will hand over to Thomas now.

Thomas Buberl

Thank you very much, Gerald. I would like to come to the conclusion and would like to go back to Ambition 2020 again. On June 21, we have presented to you the new Ambition 2020. We are fully out, as the French would say, we are in the implementation. Ambition 2020 is about two things; One, focus, how do we make sure that in an environment of low interest rates of volatile capital markets, how can we really catch up and compensate for the negative effects. We have looked at three levers. One is selective growth, we want to accelerate growth on the commercial P&C. We want to accelerate growth on the health business and we want to accelerate on the capital at Life business.

Second piece is around efficiency and margins. We have clearly stated that we want to launch another efficiency program of €2.1 billion. We are in the implementation of it and we will also focus on improving the margins, particularly where we still have gaps to the competition. And thirdly, we are clearly in a new environment of Solvency II. Capital and cash are playing a different role with different mechanics. We also want to further work on the optimization of capital and cash in this environment. This is about focus. At the same time, we see in the market that our customers are changing. Expectations are changing in terms of the way we interact with them, the way the relationship is going with the customer. We want to actively transform AXA to this new reality.

Transforming means that we need to look for a new customer experience. A new customer experience particularly means that we blend the direct access and the physical axis more together, so the customer is experiencing one AXA and not different AXAs. We have started with this successfully in Spain and will roll it out from there. The second piece is around how do we bring the relationship with the customer to a different level. How do we become from a payer to a partner, a partner meaning that we not only focus on paying the invoice when a claim has happened, but that we also look how can we prevent the invoice by engaging differently with the customer on reducing the risk and on really working together of being a better risk profile. All of this means that we also need to move ourselves, we need to adapt our capabilities, we need to invest in our workforce to really be ready for tomorrow. Therefore, we have also launched as one of the very few companies, a program to really transform the workforce, to really adept our capabilities and invest into ourselves and the people.

This is linked to a very clear guidance on key KPIs. The one is the 3% to 7% increase in underlying earnings per share over the period, which I mentioned earlier. The second one is clearly to deliver cash flows between €28 billion and €32 billion over that period. The third one is to have an adjusted return on equity between 12% and 14% and the last one is around the Solvency II ratio. We want to stay in the corridor between 170% and 230%. You have seen today that we are well in this corridor.

What are the strengths and what makes us confident that we will really achieve this plan. If you look at our balance sheet and look at AXA, it’s a very, very resilient balance sheet. The big challenges of the financial crisis are behind us. We have a weatherproof balance sheet and we have a very diversified portfolio. No other insurer has such a global footprint with these positions, which leads us to the fact that we are confident to really develop these cash flows necessary to provide an attractive dividend story. The second one is that we have moved to very early. We have moved early on the question around Life & Savings away from the traditional G/A business. And we have also moved early when it comes to efficiency gains, because the program of €2.1 billion is the second one, after we have already reached €1.9 billion in the last phase of Ambition AXA.

The third big element for me is the clear vision, how to move from a payer to a partner. How to transform our business towards a different relationship with the customer, there it’s extremely important that we have the right people who can do this and I am very happy to have assembled a renewed and dynamic management team to go together with me on this journey of Ambition 2020.

Thank you very much and we are moving now to the Q&A session.

Question-and-Answer Session

A - Thomas Buberl

It’s difficult to choose, let’s start with Jon.

Jon Hocking

It’s Jon Hocking from Morgan Stanley. I have got three questions please, first on the investment margin, to the top end of the range, just wanted to know how we should think about the buffer, you still got a buffer right there and how we should think about the speed of decline in the investment margin versus the speed of decline on this running yield in the Life portfolio, that’s the first question. Second question, on the reconciliation opening, closing Solvency ratio, I wonder if you could sort of breakout a little bit the key moments in the 16 points of market movements, how much was rates, how much was spreads, etcetera. And then just finally, could you just update us on the ratio sensitivity to 100 bps decline in the UFR rate? Thank you.

Andrew Wallace-Barnett

Gerald, I think these are all questions for you.

Gerald Harlin

As for as, I will start with the last one Jon, on your – we said that we already mentioned that it would be decline of 19 points. It’s still true. Nevertheless, what we will end at is that in the meantime since we presented this, we got the test of pounds pays much more thinking about limiting the drop to 20 points per year, that’s the first point which is quite positive. But at the same time, maybe you are aware that the commission doesn’t so much agree about the revision of UFRs. So that means that I cannot say that we are on the safe side, because there could be some changes, but I don’t expect that UFR will move very soon. So second, the first point is investment margin. So the investment margin remember we said that at the time we presented at the end of June our plan, we said that it would be at 65% to 75% in ‘16 and ‘17. I am still doing exactly same assumption. Why? Because, we are at 74% in the – for the first half and we can expect to have a decline roughly of 10 points, so why because we are managing a relatively long duration, I said also that for the next year, it would be between 55% and 65%. So, it’s still true and I confirm this element even with the new environment it’s something that should be in line. The movements, the market movements, yes, you are referring to the 16 point of market moment. I remind you that, at the end of ‘15, we presented sensitivity analysis that said that we would have an interest – with an interest rates minus 50 bps we would have a drop of the solvency of minus 8 points. You know that in the meantime, especially in Europe and in different countries, we had a drop of more than 70 bps, so that means that most of it, let’s say, 10 points at least correspond to interest rates. And equity markets, you remember that it was minus 6. So equity markets in Europe went down by – it was minus 6%, sorry, I should be more precise, minus 6% for minus 25%. So, we had minus 12% on the euro stocks. We were roughly flat in the U.S. So, let’s say that it’s maybe 2 to 3 points coming from the equities. So, that’s mostly it and then we have residual elements like correlation and so on. That’s what I can – that’s more or less what this minus 16% correspond to.

Thomas Buberl

Let’s move next to John.

Andy Hughes

Thanks so much. It’s Andy Hughes from Macquarie. Three questions I got. The first one, just want to double check, the UFRs or the UFR change is not affected by the 100 bps drop in yields in the first half of the year, that’s basically I think what you said. The second thing is on the reinvestment rate, so obviously, you have got 2% for Eurozone, you have got 2% for Life, where we don’t have 2% is on Slide B60 which is the life reinvestment rates. So, we can see all the life reinvestment rates are much lower than 2% across the Eurozone. So, it is what’s happening, you’ve got a higher reinvestment rate on the P&C in the first half of year and can you explain please why the life reinvestment rates are much lower than the Eurozone reinvestment rate? Are you taking less risk in life, more in P&C? And sorry, the third question is on the U.S., obviously, interstate rates impact the value of the GMIB benefits and you can see the AXA Arizona GMIB reinsurance asset sort of jumping up from the year end to Q1 in the statutory filings from $10 billion up to $12 billion. So, I am just wondering, first of all, how do you think about AXA Arizona in the context of the underlining of captives? And secondly, I guess, does this mean there is more pressure if the policyholder assumptions go against you, the losses could be much more to where interest rates are? Thank you.

Gerald Harlin

Okay. So, let me start with your last point about Arizona. So, you are absolutely right, that means that in the U.S., the whole solvency regime will be revised. We don’t know exactly when. So, that means that there are some quantitative impact studies that will take place. We should know in the fall what could be these rules and then all the entities will – all the industries will have, I believe, 90 days in order to answer these quantitative impact studies. To be clear, no new – we don’t expect any new regime to be in force before ‘17, ‘18, normally it was ‘17, but we don’t see how it could be possible, so most probably it will be ‘18. As you know, for the time being, as far as we are concerned, we had – we are using captive, which correspond to a bit more than 50% of our reserves in the U.S. And the advantage to this is captive, the amount of reserves, as the level of reserves corresponded to the IFRS reserves, which means that it’s quite strong. And when you compare ourselves with all our peers, it’s much, much stronger in term of reserves level. Nevertheless, we could imagine that this regime will lead us to positive, nevertheless. It’s, if we were using this IFRS reserves, it was in order to allow us to have the hedging, because if we were using U.S. GAAP, we would have a mismatch. And as you know, we are hedging, especially all the equity risk is hedged so which is a positive. And the objective of this new regime is really to move towards something which is much closer from the European regimes and their European solvency regime. So, we don’t know what will be the rule. We are one of the best reserved companies and we will see. It might end up for us with slightly higher capital needs, but I cannot tell you and nobody knows exactly what will be the rule and there will be – I anticipate a lot of debates, because again the local companies are not so well capitalized and reserved.

UFR, yes, as far as UFR, no, if your question – if I understood, well understood your question, your question was does it means that the minus 19 would change a lot? I don’t anticipate that it would change a lot. Yes, there are some differential. I refer to the previous calculation, but I don’t anticipate. Now, what is the most important element for, as far as UFR is concerned is really the fact that apparently it will be delayed and anyways that it would be spread over a relatively long period of time. That’s it.

Your second question was about reinvestment rate, P&C life, there is no big – I would say that the biggest difference between P&C and life is the duration. Meaning that the duration is the mix of business in P&C we are mostly in European countries, whereas in Life, keep in mind that we have reinvestment denominated in yen, denominated in Swiss francs which makes that we have an average lower rate in life than in P&C. So that’s purely a currency – for currency reasons that you have this difference. Nevertheless, I could say that presently we are – what is important is the spreads over the risk free rate in each currencies and the spreads. If we would compare it, it’s more or less consistent. So, that means that we apply the same type of asset allocation more or less in most countries. In countries like Switzerland, where you don’t have so much Swiss denominated assets, what we are doing is that we are investing in foreign assets like denominated in dollars, for example, which are swapped into Swiss francs, but swapped on a long-term basis.

Peter Eliot

Thank you. Peter Eliot from Kepler Cheuvreux. First of all, if I could just follow-up on John’s question on the investment spreads, but specifically with regards to German Life, you show that that’s now at 0 basis points effectively. Just wondering if you could just sort of comment on your thoughts whether you are concerned about that at all? Secondly, on the prior year developments, you are tracking the chart shows quite clearly trends where the half year releases are always much more than the full year. I was wondering if you comment on the sort of seasonality or the drivers of that? And perhaps thirdly, on the solvency sensitivities as well as reducing the downside, you seem to have removed the sort of SKU that was there to the downside before the interest rates falling was much more sensitive than interest rates rising. I was just wondering if you could comment on what you have done there around that?

Gerald Harlin

Okay. Let’s start with the investment. So, roughly speaking, you remember that I just told you that we have been investing €45 billion at an average of 2% in the first half. The question was, in your – we invested at 2.1%. In U.S. dollar, we have been investing at 2.6%, and in other currencies, Japanese yen, Swiss francs, on average 1%. We can expect to have the same type of differential until the – for the second part of the year. As I told you, we have been quite successful in achieving on average 2%, because for sure the corporate debt is lower. If everything is equal, we have been investing an average of 2% and the corporate debt average rate is being 1.6% only. But we have been investing in ABS, in mortgage, in infrastructure and so on which are each time relatively small elements, but adding together, it’s quite in the end its increasing the average rate. Last but not least, we have been investing in high-yield, but you notice that I said that we didn’t deteriorate the average portfolio. The only high-yield investments that we made were in short-term duration yield. May I remind you that this type of asset is short-term asset, less than 2 years, which means that we have good visibility in it and just look at the spreads, spreads comprised a lot over the last – at least in the first part of the year, which confirms that there was a strong appetite for this type of asset. Last, third part of your question was about the sensitivities, but I am not sure I understood the question, may be you…

Peter Eliot

The full year sensitivities, your sensitivity to interest rates declining 50 basis points was I think minus 8 points and plus 50 basis points, 2 points or even now?

Gerald Harlin

Yes. But, it’s a matter of complexity. So that means that it’s – when rates are going lower, you can imagine that in our projection, we don’t assume that could go as low as minus 10% that’s small as this that means that in the model generally speaking you take the lowest level minus 50 basis points roughly. So you understand that at one level you are not very far from the lowest point. That’s something quite easy to understand. I tried to summarize it, but that’s the way it works. That’s why we moved on from minus 8 to minus 5 points on the decrease of 50 basis points.

Thomas Buberl

Last question was on prior year development, half year or full year.

Gerald Harlin

Yes. Prior year development, half year, full year we were at – you can see we have may be it’s interesting to go to the slide which is on Page B36. Thank you. You can see here the developments and you have the historic trends. There is no fundamental difference between half year and full year. You can notice that last year we had plus 1%, but keep in mind that we have a negative mainly coming from Turkey. We are 2.1, I would say that more or less we told you that we were between 1 and 2, so we are still within. You can notice as well that in the second part – in the lower part of this slide that we still have a high level of preserving ratio and confirming that our higher yield reserve developments are not at the expense of some level of reserve.

Peter Eliot

First part is on the sensitivity question, if and when you were to some modeling negative rates would that have an impact on that?

Gerald Harlin

It would, first of all, okay. First of all, let me precise two things. In the numerator for sure Solvency II there is numerator available financial resources and the short-term economic capital and eliminator corresponding to the requirement. As far as the numerator is concerned, we model as negative rates that means that if rates are at minus 70 basis points, like in Switzerland, we take minus 70 basis points. So as far as the denominators are concerned, yes we don’t take yet the negative rates because it was a discussion, a complicated discussion at the beginning when we put this in place with the regulators, and look I believe that it’s the same for alliance. But at the same time, if we would model such type of negative rates, it would widen the duration gap. In such a case, we would shorten the duration gap which would offset some part of the negative impact. So I don’t have any calculation, but I could say that, its few points, but I don’t anticipate that it would be something major. We don’t plan to do it this year. But that’s what I can tell you.

Thomas Buberl

Let’s move to the other side.

Nick Holmes

Nick Holmes of Soc Gen. Two questions please. The first on P&C. Wondered, your expense ratio has gone up to 27%, wondered, if you could give us a bit of color and that the reasons for that and whether you would think that you move it back down to 26%. Second question on Life and wanted to ask about unit-linked and your outlook clearly, I mean to be specific, do you think if markets move sideways, this is going to be a constraint on your shift to capital light and how are you going to deal with that? Thank you.

Thomas Buberl

So I give Gerald a quick pause and I will take those two questions. The first one on the expense ratio, if we look into the detail, it comes from a few geographies. It comes from emerging geographies in old MedLA region, particularly on Mexico of the Gulf and some in Italy. It is mainly related to acquisition costs and it follows the old logic, if you want to grow you have to invest and if you want to invest, you need to invest in distribution. So your second question was around will the expense ratio come down. If you remember what I said earlier, we want to save €2.1 billion till 2020, by that definition, and we want to grow selectively. By that definition, yes the expense ratio will come down. The second part is on unit-linked. When you look at the markets today, it’s very difficult market obviously, but the underlying trends of people wanting and needing to save for the retirement has not changed. And this is often a very long-term view. Given those two components that people want to and have to save, that people do not like volatility and that people still wanted to have a yield for their retirement savings, the extremes of the markets are not in fashion anymore. So pure guarantee with no upsides is not what the customer wants, but fewer risk for the customer is also difficult often in these difficult markets. So we expect a shift to the middle where you have unit-linked with guarantee, partial or full guarantee on the premium, so that the customer has both, a certain guarantee, but also an upside on market changes. And you have clearly seen that in the numbers that the biggest increase in the new business production was on the capital light general account and it is also where we put all our efforts in terms of innovation of life products and where way steer the market because that’s what the customers want.

Nick Holmes

Once again I just have a very quick follow up which is the expense ratio you say that, that should reduce, can you give us any feel of a timescale and what your sort of target would be, I mean 26% you have achieved over a period of something like 5 years, do you think you can get it down to 24%, that sort of thing as an extra growth?

Thomas Buberl

Look, I mean the €2.1 billion is a gross figure. So in this, you have avoidance of increase of expenses, so with normal salary inflation and extra reduction in expenses. We are not doing this in a way that we wait till 2019 and then deliver all of it. It’s a program that is year-by-year. Gerald, I don’t know if we have figures where we show exactly how the expensive ratios move?

Gerald Harlin

No. But anyway, keep in mind that we have roughly the 2.1 is roughly 400, a bit more than 400 per year. In the first half, you remember that we started the program in mid of the first half. We are already at 160 out of, let’s say, to a bit more than 200. So we will complied, with it I remind you that we announced that combined ratio should be between 94 and 95 as a target in 2020. And Thomas told you that we confirmed absolutely these figures.

Thomas Buberl

Let’s stay on this side and move one to the left or the right from your side.

James Shuck

Hi. So, James Shuck from UBS. I had three questions if I could. The first one was on the organic capital generation, the Solvency II capital generation, you show 8 points at the first half which is obviously annualizing at the bottom end of your recently low target, which is the 15 to 20 points that you have indicated. My question on that number is has that been updated for current economic assumptions or is that based on 2015 year end assumption? So, that’s my first question. Secondly, I would also like to return to the German life margin spread issue, please. You got 3.5% guarantee. So, the current yield is at 3.5%, so the spread is 0, so obviously, the reinvestment rate is going to come down. So, could you just comment on whether you see the spread turning negative or the size the RfB reserve is and where you are in terms of the duration matching on the German life book, please? And then thirdly, just more conceptual one, one thing about the Solvency II ratio and the sensitivities up here that strikes people is clearly the credit spread sensitivity which is de minimis. There are reasons for that. Obviously, U.S. equivalence is one and the application of the volatility adjuster is the other. At the end of this year, you will have to disclose legal entity Solvency II ratios without any kind of dampeners at all. So, my question is kind of how do you think about credit risk in the context of your Solvency II ratio and can you tell us what the number is, excluding volatility adjuster, please?

Gerald Harlin

Okay. So, the first one is on the solvency and your question was about the organic growth of the organic generation of capital generation.

Thomas Buberl

Capital generation.

Gerald Harlin

And remember what we said, when we presented it, it was in December, we said it would be between 15 and 20 points, here it’s 2 times 8 it’s 16 without any doubt in the low end of the range and taking into account, the low interest rate environment, you can take this as an update. That means that we say that it would be between 15 and 20 depending on the outlook of the interest rates. We are in the low-end of the interest rates, so presently we are roughly in the low end and you can consider that 7 and 8 correspond to the level for the first half and that’s for the full year, it would be around 15.

James Shuck

So, just to be clear, so 8 points is based on interest rates prevailing at H1?

Gerald Harlin

Yes.

James Shuck

Thank you.

Gerald Harlin

The second question is about Germany. Yes, about Germany, I would say that yes, without any doubt, yes we are at 3.5%. You noticed in the past presentations that Germany was the tightest margin, I could say. And, but we are well matched like all entities in the group, I can tell you that in Germany, we have a duration gap which is lower than 1 year and we don’t make lot of margin on it. Why? Because the margin is coming from elsewhere, so margin is coming also from the protection product. So, that’s the way it works. So, I have absolutely no fear on Germany on that side on the ALM side. The last question is about the VA…

James Shuck

Are you able to tell me the size of the RfB reserve, please?

Gerald Harlin

Which one sorry?

Thomas Buberl

RfB, RfB reserve in Germany.

Gerald Harlin

Yes, the RfB reserve, we don’t communicate on the individual reserves in the – we have global reserves and at the group level we should be at €10 billion, but we don’t give this individual number. And the question is on the Solvency II ratio and the credit spread. Anyway the VA, the VA is something which exists. So I remember that we had the question at the time it will be mandatory we will communicate on the Solvency II without this VA, but the VA is not something which will disappear tomorrow. Look – and I believe it’s quite interesting, you have a lot of companies who ask for the – who didn’t apply on day 1 the Solvency II. That’s what we call the transitional. So, imagine that the VA would disappear, one second. Immediately what would happen with all the entities, that means that you will have two regimes; one who applied who ask for transitional and the other one which could be considered as virtuous or relatively virtuous, applying from day 1 Solvency II that would be penalized. So, that’s something that it’s worthwhile being analyzed that’s why personally I don’t have so much fear that VA would disappear so quickly. That’s my view.

So, your question as you said it’s a bit philosophical. My answer is extremely practical, because I believe that it doesn’t make – it wouldn’t make sense. And remember, it was in the spirit of Solvency II, when 2 years, 3 years ago, we were discussing about Solvency II. Maybe you remember that at that time we said look at the matching adjustment, the matching adjustment in the UK which is not limited to the UK, it’s mostly applied in the UK, but also in Spain and the objective was really to match and to have the same spread on assets and liabilities. And I don’t believe that it’s in today’s intention of the regulator to change this.

Thomas Buberl

Maybe just quickly in addition to the German life business, if you remember at the Investor Day, we have also put one big effort around in-force management in the chapter focus on capital management, Germany was one of the few first markets where we have implemented this in a very strict manner. So, this is where we will continue as well to move ahead and the RfB, we do not publish, but the RfB quota has significantly increased in the time when we have been working on in-force management.

Michael Huttner

Thank you. Michael Huttner from JPMorgan. I had four questions, please. One is on Turkey whether you can give us some figures today so we can judge how much improvement could come still there? The second is on cash flow, I still feel I am very new to AXA, there is no figure here and you really published it at the year end and some main targets and I just wonder if you can give a bit of feel of how it’s developing? The same for embedded value and now you might say well, that’s not relevant and I will accept that, but if there is any indication, that’s quite nice. And the reason that I ask that is to tease you a little bit. Your peer at Allianz has written a nice big book where he says MCV and that’s the figure. And the final point is on non-life and this is a bit philosophical. So, your competitor on Friday reported much better numbers in non-life combined ratio. They have a shrinking business. Yours is expanding. And conceptually one always thinks, well if you grow non-life, you tend to initially capture the more volatile drivers or cyclists, isn’t it, and so your business gets a little bit worse. How do you think about that, the combining growth which may not be great with a targeted combined ratio, which at the moment is going a little bit the wrong way? Thank you.

Gerald Harlin

As far as Turkey is concerned, I would say is that we didn’t increase past results over the first half. You remember that we had a drag in our earnings which were more than €200 million last year. I mentioned to you that we increased our prices by 160%, which is quite strong. We can consider that now prices are at the right level. We have a market share which is 15% which dropped and it was a move that was absolutely voluntary. As far as I could say that in the first half, we had combined ratio of 110%, why, because we could not improve increased prices on the first of Jan, unfortunately. So, it’s biggest spread over time and we can expect that the second part of the year will be better. Last but not least, maybe you noticed that there had been some relaxation of the rules, because as far as all these price increases are linked to MTPL and the MTPL business, we had significant part majority of policyholders with bodily injury or their family went to court and there have been some relaxation in the rules that should be applied. So, we will see in the future what will happen. So, that’s what I can tell you.

About cash flows, no, as you know, we don’t publish cash flows in first half. What I can tell you is that, nothing for the time being, in terms of dividend, in terms of remittance ratio and so on and so forth. It makes me feel any problem. We don’t publish embedded value as well and unfortunately, publishing on the 3 August, it will be difficult with embedded value on top. But who knows in the future. So that’s it, but no, without any joke, I just – I encourage you to go to the embedded value report of last year. We can go with offline and you will see the sensitivities and with the sensitivities I believe that you will have a good approximation of where we are today. On non-life, I would say, yes that’s quite obvious. But that’s why I mentioned, look in Direct, we are plus 6%. And nevertheless, in Direct, at plus 6%, we have a current year combined ratio which is quite stable. So it’s quite good. But for sure, I believe it’s quite obvious many times we mentioned, this group is not managed like a runoff and tomorrow it won’t be a runoff.

Thomas Buberl

Runoff is the most profitable activity. Andrew?

Andrew Crean

Hi. It’s Andrew Crean with Autonomous. Two questions, firstly as you get into Solvency II, can we expect any capital optimization plans to improve the coverage ratio in the second half and also could you discuss a little bit about any dividend blockers in any of your subsidiaries or any areas where you will find it difficult to take capital up. And then secondly, the tax rate was 21% in the first half of this year versus 25% first half of last year, what is the long-term tax rate which we should plug in for you, because that’s what delivered the flat performance this year?

Gerald Harlin

Okay. So capital optimization, yes we are always working on capital optimization, Andrew. Remember, I believe that – remember, what I got this question in December when we presented our Solvency II ratio. And I said as far as Europe is concerned, at least Europe, what we want is to limit as much as possible to level absolute capital between 130% and 150% and that’s the local level. We are not there yet. But you can imagine that, in an environment where rates are low, that supervisors are not extremely quick at answering positively to such attempts. Nevertheless, we have different ways to deal with it. It will take time for insurance and so on and so forth. So it’s a never ending move and we will do everything that is possible in order to optimize it. But your question on capital, yes there are some countries where the capital consumption is quite strong, starting first with Japan. Japan is a very nice business, extremely profitable because it’s mostly on Protection & Health. Nevertheless, capital requirements are quite strong, why, because we have a regime which is not at all linked to Solvency II. As you know, in Japan when rates are going up, the level of capital is going up as well, which is a bit counterintuitive. So in Switzerland as well, as you know, the Swiss solvency test is more strong than – the requirement are most strong than in Solvency II. So yes and we are working on it and we are working on different solutions in order to optimize it. And when time will go, we will share with you and exchange with you on all the initiatives, but there is no big bang, there is no initiatives that will be taken in the fall. No, it’s something that will be progressive, but you can be sure that it’s everybody’s, I am seeing on top of my mind.

Thomas Buberl

Tax rate.

Gerald Harlin

Tax rates are decreasing. At the same time, we should take normally some time ago, very often we said it should be between 24%, 25%, but keep in mind that tax rates are declining in different countries. I believe that it’s not finished yet and that we will have other countries where rates will go down. So it’s not – the 21% is not a runoff. So that’s taking into account what we discussed before on the tax runoff excluding this no it’s a normal rate, but we can go into more granularity with you if you want.

Unidentified Analyst

Alright. Sorry Sandeep from Macquarie [ph]. Couple of follow-up questions about reinvestment, still I am trying to get my head around the 2%, I am afraid, I think you said the bond reinvestment rate was 1.6% in the half year. And if I look at the chart and obviously see that couple of bonds probably yielded less given the AA, so the 16% that’s ABS and below investment grade to get you to 2% from the 1.6% and a bit less, it’s got to be around 5%, is that kind of around right and on the CDS increase in the half your, so obviously, at the end of the year, €4.4 billion of net CDS position at the end of the half year it’s gone up to over €8 billion. I am just wondering, is that already reflected in this chart, obviously use synthetic bond investment or is that a kind of additional overlay because that’s almost 10% of reinvestment?

Gerald Harlin

It’s not an additional overlay. You understand that when you have a – it’s a way effectively, you are right to invest in a synthetic bond. So the way it works is that, when you have an existing sovereign, for example, instead of selling this sovereign, realizing a huge capital gain and then which would not represent, because when you are – when we don’t have any mismatch, it wouldn’t mean anything, so it’s better to sell a CDS, that’s what we do, but it’s small at the scale of our group, when you compare it with a €600 billion investment, it’s relatively small.

Unidentified Analyst

I think this increases its price.

Gerald Harlin

It’s increases why? Because it’s increasing why because you have a profilistic. When you have an investment – when you have shocked moves into the interest rates, people first invest in cash, first in futures, next in cash and CDS like this one. They are not so much of illiterate. So from time-to-time when it’s an opportunity for us to gain 10 basis points or 15 basis points, I take this opportunity, we take this opportunity, that’s what it means. And let’s be clear, it’s not leverage at all. Because it’s just the way to optimize it, taking into account and keep in mind, that we have a significant part of 83% invested in fixed income which are still in sovereign bonds and high quality sovereign bonds including bonds and so on and so forth. So don’t expect this figure to move at a very high level because it wouldn’t make any sense. At the same time, there are some shortcomings, we have to pay some collateral, you have to pay margins and so on and so forth. But from time to time when there are sharp moves in the market, it’s an opportunistic move.

Unidentified Analyst

And on the 5% reinvestment math…?

Gerald Harlin

On the reinvestment rate, you are surprised by the investment in the first half, but you know that we have been investing – we don’t invest in – we have on average, I said in corporate bonds, we are single A, so it’s not AA. It’s an investment in corporate bonds which are more in A, BBB+, A. What we are trying to avoid is investing in BBB-, because there would be at risk of downgrade and in such a case, the cost of capital would be huge. I believe that I shared with some of you already on this. We have been in the investment team. We have a group, credit team, which is separated and it’s not at all part of the two group asset managers and this steam of roughly 20 people, they are working and analyzing the risks. So that means that we have 75% of our corporate bonds at risk which are annualized on the periodic basis. We are assessing this internal ratings. Internal ratings is also part of our governance, part of the Solvency II approach. And that’s why and as much as possible, we try to optimize it, so considered as investment in corporate debt in the first half was more in the A, for some of them in BBB+.

Paul De’Ath

Hi, there. Paul De’Ath from RBC. A couple of questions please and firstly, on M&A, obviously it forms part of your Ambition 2020 strategy. Would you be able to give any kind of update on how things are going on the M&A front, what kind of things you are looking at and also whether you are seeing much competition from some of your peers who are also potentially out there looking at some of these targets? And then the second question is semi-related and just your recent deal with Alibaba, that was announced couple of days ago, can you be able to give anymore color on that in terms of how it works, have you had to pay in order to get that distribution or essentially how the financials of that might work going forward and how much of a big deal it might be or you in the future? Thanks.

Thomas Buberl

I will give you a break again, Gerald. So, on the M&A first, we have clearly said we want to invest in M&A. Our budget is €1 billion per year and we want to focus our M&A activities on the areas where we want to grow. We expect this to be smaller to medium size deals, not large deals anymore like it used to be in the past, because our global scale is there. We don’t need the big deals anymore. This market is however very difficult, because it’s very competitive and you see premiums being paid where, yes, one can ask oneself is that still reasonable or not. We are actively looking all the time. We are actively screening from. Yes, one can ask oneself that we will be very selective on what we are engaging and in whatnot.

The second question on Alibaba, Alibaba has obviously looked at for a global insurance partner and has addressed us. Why us? Because, we are, as I said earlier, one of the most diversified insurers with a very, very global presence. The issue that Alibaba has at the moment is that there is many of their customers that are traveling outside of China. They desire protection for their travel, which we can provide. The second issue is Alibaba obviously has a lot of trade relationships with SMEs, both inside and outside of China and they are also looking for protection. This is the initial stage of this agreement. You are asking this question, how does it work, what is the business model and what’s the financial outcome of it? A little bit too early, because as you might have seen in the press release, it’s memorandum of understanding which for us is a very big step, because as you can imagine it was not easy to get to that deal. The next phase now is about the implementation, how does it work, who is doing what and how does the business model work? As soon as we are a little bit further, I am very happy to answer your question when we are at this stage. Blair?

Blair Stewart

Thank you. It’s Blair Stewart from BofA Merrill. I have got three questions too. The first is Hong Kong, can you give an update as to when the new product is up and running and the impact that might have? Secondly, you talked I think in the past, Gerald, about some debt restructuring around possibly buying in some hybrid and issuing senior, has the environment on the backburner for now or is that still a plan? And I guess thirdly, with no other question on Brexit, so that’s the one thing that has changed since you announced your plan, how does that impact your thinking of those aspects that are not under your control that you talked about earlier? Thank you.

Thomas Buberl

Let’s do a shared response. I would take, Hong Kong, Gerald, you take debt restructuring, and luckily, we have got the CEO of U.K. and Ireland here, Amanda Blanc who will comment on the immediate effects on Brexit given that she represents the UK and Irish business. So, our number one, Hong Kong, maybe to give you a little bit of context, Hong Kong is a very big market for us in Asia. We used to be very successful in the unit-linked business. As you know, the regulation has changed at the beginning of last year, which let us to affect that we need to reposition ourselves into a world of a more capital light business. You also know that the competition is very high in Hong Kong and we have already introduced the new product, if you meant by the new product, with the new life product which is in direct competition against the other market runner provided by Prudential. We see success in the sales of this product. But as you can imagine, it takes some time to readjust our agency sales force from a very focused on unit-linked sales force to a sales force focused on general account in a capital light way, but we are on the way and we are very pleased with the initial results that we have seen, which means also that we are going to continue product innovation in the Hong Kong market. Debt restructuring?

Gerald Harlin

On debt restructuring, maybe you can go to Page B61, which is the appendix on the maturities. So, we have in ‘16 and ‘17, both together €3.3 billion roughly of debt maturing, most of them are sub-debt. In the first half, we have been starting this refinancing as I explained. We did it €1.5 billion in Tier 2 at quite an attractive rate. We were at 3.5%. And the point we did €0.5 billion in senior recently in June. For the rest, I cannot tell you it will be really opportunistic. It will depend on the markets and it will depend on the opportunities these days. You might, you know there is such an appetite for high-quality bonds, including subordinated bonds that there might be opportunities that won’t be missed. So, really it will be opportunistic. I cannot tell you exactly what we will do. But going back to your question, Blair, yes we put in place what we said since 20%, 25% of the refinancing of the first half we have done in senior…

Thomas Buberl

Amanda on Brexit?

Amanda Blanc

Okay. So, I guess there are three points. The points that we have already discussed around market volatility and interest rate, which I think have been well covered by Gerald and Thomas already. The second point is around the industry issues, around passporting and freedom of services and all of that sort of stuff and we are obviously actively involved with the association of which insurers on how we interact on those points and get our points across to government. And the third point I guess is the most important point, which is the potential impact on the business of the revised economic assumption. What does it do to our customers, the businesses, the businesses, the import the export? And I guess, we are working through the various assumptions in terms of that from a more positive economic growth assumption to a slightly more negative economic assumption around the confidence that businesses have to invest in their businesses, in people and that individuals have in terms of buying things and we are actively working through that at the moment, but I guess the biggest worry is on the things that we can try and control, which is what are the economic impacts for us as a business.

Thomas Buberl

Thanks, Amanda.

Blair Stewart

Okay. I guess, the question was also directed at kind of why there are knock-on effects interest rates lower for longer, does that lead you to be at the kind of higher end of the drag on interest rates or even worse than that? And in an environment where your earnings are growing at lower pace than perhaps expected or hoped, does that make managing the dividend payout more important for you?

Thomas Buberl

I mean, as I said in my introduction, when we did the plan and when we looked at the financial scenarios, we did include possibility of Brexit, even though we didn’t want to think about it. Now, it is reality and therefore we are still in the range of the plan, which means we still feel very comfortable and do everything to deliver the 3% to 7% growth in underlying earnings per share.

Blair Stewart

I think the question on the dividend and you didn’t answer any of it.

Thomas Buberl

The dividend question is related to that where we also made a very clear guidance. Not clear enough? No. I mean, to be very clear, we have said that the dividend range payout range will be between 45% and 55%. If we are in the range of the plan, today, last year, we were at 47% so at the lower end of this range, there is still potential, upside potential and we will clearly make sure that we have an attractive dividend story, particularly given that we have a very good cash flow per ton between €28 billion and EUR32 billion over the planned period. Any more questions in the room before we may be go to the webcast questions, there might be. No questions? Yes, one?

Unidentified Analyst

So, this is Sandeep from Macquire, so when I look at the filings for Q1 and year end, they basically – 10-K basically showed a utilization of withdrawal benefit assumption in the stock reserves which was in a range zero to 30 sorry, and it’s zero to 16% dropped to zero to 8% in Q1, so what kind of utilization rate are you any reserves for the GMxB fixed product that hasn’t gone through the buyout process remains on the balance sheet. Is it that kind of range or is it significantly higher than that? Thank you.

Gerald Harlin

It’s the same. So that means that it’s in line. Your point is on IB, and it’s if I well understood, it’s on the un-utilization rate – that was higher than the [indiscernible] rate as we know, it’s still very low. We are still – there has been indeed the slight adjustment at the end of last year because we were assuming rate that was higher than the reality. What I can tell you is that for the time being we are still extremely conservative on the way we assumed our amortization rate. But you know this type of elements very often we spoke from the policyholder behavior because but it’s long run and as far as IB, we are doing well and we consider that we are extremely well reserved, but let’s wait in order to see whether we will more consequences in term of preserving on that.

Thomas Buberl

And this is also I mean related to customer behavior. If you look at the customer studies, they are very stable over time because typical pattern of somebody who is retiring is let’s get the cash, let’s divide the cash and then let’s plan what is the annuity I want or what is the freedom on cash, be it for my holiday or be it for the children. So this pattern has not – has been very stable over time. And since customer behavior and customer patents move very slowly over time, we feel confident to stay at where we are today. Chuck?

Unidentified Analyst

So it’s the way of trying to find a little bit more about the dividend. So I think I can’t remember it was the solvency or full year, you kind of said one of your ideas would be to reduce the inter-group debt and so that used part of cash flow for that which would lead possibly to lower progression of the payout ratio and I just wondered if you can give an update on that? Thank you.

Thomas Buberl

Yes, I remember that we said maybe we could reduce internal debt, but it wouldn’t lead to a payout ratio that would be lower. That means that, I cannot I repeat what was said just before by Thomas, we committed on that €28 billion to € $32 billion. So that’s a certain level. If we published it and we said that we confirm our plan. It’s because we are comfortable. We are comfortable with this. So that means that in the end you remember what we presented at the few months ago. We said okay. The remittance ratio will still be bitten 75 to 85. I even said that we could imagine bit more capital reduction in line with the previous question that was raised by Andrew. So it’s still true, but there is no direct coming between this and payout ratio. If your question is do you believe there is a risk that repaying some internal debt would impair the capacity to improve the payout ratio. No, because it’s something completely different. It’s managed on the long run and so on and so forth. There is no threat on that side.

Thomas Buberl

Any further questions, it doesn’t seem to be the case. In this case, I would really like to thank you for coming here today for participating actively with your questions. And I wish you a great summer and hope to see you soon. Thank you.

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