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Edited Transcript of RSA.L earnings conference call or presentation 28-Feb-19 8:30am GMT

Full Year 2018 RSA Insurance Group PLC Earnings Presentation

London Mar 3, 2019 (Thomson StreetEvents) -- Edited Transcript of RSA Insurance Group PLC earnings conference call or presentation Thursday, February 28, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Scott Egan

RSA Insurance Group plc - Group CFO, Chief Executive of UK & International and Director

* Stephen A. M. Hester

RSA Insurance Group plc - Group Chief Executive & Director

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Conference Call Participants

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* Andreas de Groot van Embden

Peel Hunt LLP, Research Division - Financials Analyst

* Andrew John Crean

Autonomous Research LLP - Managing Partner, Insurance

* Andrew Sinclair

BofA Merrill Lynch, Research Division - VP

* Barrie James Cornes

Panmure Gordon (UK) Limited, Research Division - Insurance Analyst

* Dhruv Gahlaut

HSBC, Research Division - Analyst

* Dominic Alexander O'Mahony

Exane BNP Paribas, Research Division - Research Analyst

* Edward Morris

JP Morgan Chase & Co, Research Division - Equity Analyst

* Fahad Usman Changazi

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Equity Analyst

* Greig N. Paterson

Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst

* Ivan Bokhmat

Barclays Bank PLC, Research Division - CEEMEA Banks Analyst

* James Pearse

RBC Capital Markets, LLC, Research Division - Assistant VP

* James Austin Shuck

Citigroup Inc, Research Division - Director

* Jonathan Peter Phillip Urwin

UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst

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Presentation

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [1]

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Good morning. Hopefully my mic's working. Good morning. Thank you very much for joining us all. Format of this morning will be exactly as normal. I will go through a few things, Scott will go through the numbers and then we'll do Q&A. A number of my colleagues as always are here mostly on the front row and I'd like to pick out, in particular, Charlotte Jones who you all have read is becoming our new CFO. We've managed to get an upgrade in my view. And so she is here to see what she can improve upon the next time. Welcome, Charlotte.

So just running obviously through the headlines, which most of you will have already seen. Our -- at the headline level, our pretax profit is up 7%, our dividends are up 7%, but the underlying results are down for the first time since 2013, driven essentially by higher weather costs and by large loss challenges in our Commercial Lines businesses. And so that gave the underlying earnings per share of 34p and the underling return on tangible equity of 12.6%. I know lots of financial institutions would die to have a 12.6% return on tangible equity, but obviously we aspire to do better and intend to do better.

Capital position is in good shape which we'll talk more about both in relation to Solvency II and the pension settlement. And we continue to have an impressive record of improving competitiveness in cost terms.

We also are today hopefully, not surprisingly, reaffirming all of our key targets. We, notwithstanding the disappointments of last year, believe that our business is capable of doing exactly the performance that we believe it was capable of doing in the past. We just got to make that happen, of course. And it's worth saying, although we'll spend most of our time today on the things that we need to particularly improve, the right across the group, there are many, many things going on that are making us a better company, a more competitive company and capable of higher performance in the areas that we talked about before, relating to customers underwriting and costs.

We will talk about the results in part regionally but in part also drawing the distinction between Personal Lines and Commercial Lines. And our Personal Lines businesses are in pretty good shape, although of course they did take a weather knock last year but fundamentally in pretty good shape. The principal issues for us in terms of last year's performance that we need sharp corrections to were the Commercial Lines, which you can see had a negative combined ratio overall.

We have done -- taken a lot of action. We've announced a lot of action, and we'll go through that with you. And 2 of the, if you like, the headline pieces of that action, the exits that we've announced in our London market business and some new reinsurance programs we've taken out. Had those been in place a year ago, of course they weren't, our earnings per share would have been 42p which is about the same as last year if you adjust for FX. And that's despite the rest of our business being hit by weather and large losses away from the exit portfolio. So I think it gives us a platform to build higher from.

Let's just then run through, if you like, in more detail some of those elements. And as I said, I think the key feature from our standpoint was disappointing underwriting results last year. And as I mentioned that was partly weather above its normal trends and partly Commercial Lines and especially London market losses which, of course, is a market-wide phenomenon, not just us. We were hit maybe harder than some because of our concentration within the London market on Marine which was probably the worst area, but be that as it may.

Away from those 2 issues which we'll come back to, we believe that the overall strategy is valid, both when we look at our own operating plan and we look at the best-in-class competitors in each of our markets. We believe that both of those things support our targets and our ambitions.

And we also would note, and you'll see it in the slides, that if you go back over the last 5 years, in what I call repeatable competitiveness, both in terms of expense ratio and attritional loss ratio, we have improved the fundamental competitiveness by 7 or 8 points of combined ratio, which is I think a really, really important platform from which we need to build and get a better job done in terms of our volatile items.

And so in response to the challenges, what are our responses? Our basic response is we're sticking to our roadmap, we're sticking to our plan and our strategy and we intend to keep improving the company. But we are on top of that, taking specific actions -- have taken specific action to address the areas of particular weakness that we saw last year. That's around portfolio exits, additional reinsurance purchases we'll talk about. We made management changes, we take the U.K. obviously, that Scott who will now run the U.K. but we also have new heads in the last year both our Commercial Lines businesses and then new underwriting director in the U.K.

And then in the rest of the company, because Commercial Lines underperformance was not just London market, although it was mostly London market, there's a whole bunch of other things happening on repricing and re-underwriting in what you might call an intense business as usual manner.

I wouldn't dwell on the next 2 slides but simply to repeat this is our strategy and this is the basis, on which we are trying to build out performance. And it remains the case, clearly these slides don't change by very much year-on-year. That RSA has got a well-balanced business, roughly 60% Personal Lines, 40% Commercial Lines, well-balanced by geography. Clearly Scandinavia, likely to be over the medium term half or so of our profits and by distribution channel.

And as I also mentioned this slide is again one we show every year that simply because one may not be eye-catching, there is a permanent amount of intense activity throughout our company trying to improve what we do bucketed around customer service, underwriting and cost efficiency and that continues a pace.

So now walking through if you like some of the key indicators in those 3 areas. On customer, what I would say is as follows: when we are happy with the P&L, we have shown the ability of making our customers happy too and growing our business. When we're not happy with the P&L, we've also shown a determination to reprice, re-underwrite and exit which has the opposite effect in terms of customer volumes. But we think that, that's the right orientation.

And so you'll see by and large we received -- enjoyed customer growth in volume terms and also in retention terms in the Personal Lines areas where the P&L was good but one exception being the U.K. where we were repricing mostly in household for attritional weather losses last year with some success. And in Commercial Lines where we've been struggling, we've been taking action in reflection of that struggling and you see that in the volumes. So I think we are comfortable that when we want to appeal to customers by and large we do appeal to customers, and they do like doing business with us, and we do enjoy very good relationships, and good qualitative ones as well as quantitative ones.

It remains the case that the cost is a fundamental and repeatable driver, and I think we continue to do a good job on that. You can see that track record has continued into 2018. The bumps in the road tend to be when the top line adjust faster than the cost line. That obviously happened in the U.K. last year and indeed will happen through the London market exits next year in the U.K. But fundamentally I think that we are closing in on and capable of getting to our targets on cost and that's a really important element.

The attritional loss ratio broadly now has been flat for the last 2 or 3 years having improved dramatically from the levels of 2013 and before. That's not bad. And indeed I think the potential in order to get to our best-in-class level 4 attritional loss ratio is not huge from here. But I do believe that there's something like 1% to go for on attritional loss ratios whether we get all of that next year or whether it takes another couple of years, but it's that sort of order. And you can see, in particular, last year, although we had a broadly flat level in total, Personal Lines came down and Commercial Lines went up. And that was part of the underperformance of Commercial Lines that showed itself more in large losses in weather but some in attritional and so in particular we need to correct that element.

So just moving as I say into -- just showing you a cut by type of business and then we'll move into the regions later. Our Personal Lines businesses are about 60% of the group. You'll see the geographic spread here. And I would say best-in-class performance levels translate -- would translate to about a 90% core given our make up. And you'll see -- in fact, we did 90% in 2017. It was higher last year. That's entirely a weather matter. If we get normal weather patterns, I think we can get back to 90% or thereabouts.

Beneath the covers, of course, there are more complex stories away from those big generalizations. But I'm pleased to note overall we grew 5% in Personal Lines and that growth was driven by our most profitable areas particularly in Scandinavia and our direct business in Canada Johnson.

There are challenges in Personal Lines. Motor is a challenge for most places in Personal Lines in terms of claims inflation and, of course, weather has produced challenges, in particular, in Canada. And therefore where needed, we continue to rate and in particular in Canada. Canada is probably the hardest of the markets that we participate in. Everyone is rating up and we're doing so too. I think it's worth noting, I suspect we'll be the second best performer in Canada this year even though our performance is down. Intact will be the best I would imagine. If we look at the auto line, which they have talked about, Intact's combined ratio in auto was 100% last year. Ours was 99%. They will probably improve a bit faster than us this year. I think we should be better than 99% but not in our target level. We are more property weighted than they are. They are more auto than us which is why in a bad weather year we tend to go down by more than them and in a good weather year, we'll go up by more than them. But they represent the gold standard that we would aspire to in Canada.

Commercial Lines, obviously, as we discussed is where we had our headaches last year. And you'll see the geographic breakdown on the left and, of course, a chunk of our Commercial Lines businesses is what we would call international business even though we badge it under the U.K. and international division. And there you'll see the combined ratio of 102%. That was driven year-on-year by large losses but given the 2017 had a very heavy weather penalty, weather didn't get any better from 2017. So relative to what you would normally expect there was also a big weather component. You'll know that last year I think was the first -- the fourth worst year on record for what you call global weather events, hurricanes and so on. And you've seen that in the international bits of all other reporters. So a lot of this was market oriented but nevertheless give us more volatility than we wanted to have.

And so we've taken a bunch of action. We'll go through those actions in terms of portfolio exits and reinsurance and away from those, a lot of BAU action which I've mentioned in terms of pricing, re-underwriting business and management changes and so on, and so forth. And you'll see there the pro forma core, which is just pro-forma for exits. I hope we can do significantly better in core from that from our other actions as well.

So going through the big actions, portfolio exits, we put here the London market business which was GBP 300 million, if you like, when we started the surgery, should end up about half that level. I say about half because with Scott having just come into the U.K. he obviously has a right to decide whether he wants to draw the line precisely where it's -- was otherwise was going to be drawn and so we'll report back at the half year if that changes. But broadly at the moment, the plan is to half the size of our London presence. And you'll see broadly the areas of that will -- that is taking place in, and you'll also see the impact that would have made on the combined ratio. Of course, even after those exits, last year would have been a loss-making year in the London market reflecting the overall international environment, although it may be that we can make underwriting improvements that would do better than that, that are not exit portfolio but are capability improvements.

Away from those exits, the main exits in the London market, there's a few other exits. We have over the last 3 or 4 years been eliminating what we call generalist MGA schemes in the U.K. There was about GBP 80 million done over the years '14 to '17, another GBP 65 million to complete that process going through in '18 and '19. And for the purpose of the pro formas, those exits -- those generous exits, we've added up to the London market ones to give you the pro-forma.

In addition to that, we are exiting an element of our Renewable Energy business in books through Codan and Denmark which is our interconnected business lines which lost a steady GBP 4 million last year which is why Scandi had a poor second half. We will exit those. We will exit those. We wouldn't write any more business in those. We're not including that in our pro formas just for the sake of record. So you can decide if you want to improve it -- include it or not. And then there's a bunch of other things that we're exiting in our European branches. Again, we haven't put those in the pro formas because those are, if you like, more surgical than individual in nature. But we announced yesterday, for example, exiting Germany which is a relatively small business for us anyway.

On top of the portfolio exits, we have made some changes to reinsurance. The change that we made a few years ago, the Group Volatility Cover has served us well and in the last 2 years we've indeed called upon it. But what we experienced last year was an unusual amount of volatility in losses that fall above GBP 1 million but below GBP 10 million and the GVC has protected us above GBP 10 million. Normally those have evened themselves out and they probably will normally but they didn't last year. And so we felt motivated to buy some more insurance in the below GBP 10 million. And so in each one of our 3 regions we now have aggregate covers. You can read the detail at your leisure which should dampen volatility in the sub-GBP10 million and would have saved us net of the premiums we're paying to get it about GBP 30 million last year. Although in a normal year, we wouldn't expect them to kick in because we'd expect our larger weather experience to be better.

So moving away, if you like, from that lens, let me just update on a regional lens and clearly Scott will do this more thoroughly in terms of the year's financials. Scandinavia remains, in my view, a jewel in our crown. Although the combined ratio was worse than 2017, it's still strong. If you average '17 and '18, you get results that are in line with best-in-class in Scandinavia. And importantly, what I'll call the fundamental improvement of our competitiveness which has been driven dramatically by the controllable expense ratio, continues to march very pleasingly in the right direction. And so the powerhouse of our Scandinavian business as indeed other people Scandinavian business is Personal Lines. That had an excellent year last year, both in terms of growth and profitability. What held us back last year was Commercial Lines. We've talked about the exits that was one fire. We talked about in the first half, which I think is the first more than GBP 10 million loss we've had in last 5 years, which we think is random volatility, and we've got a reinsurance aggregate cover.

So our view is that our combined ratio ambitions for Scandinavia is there or thereabouts, and in normal years should be operating at or around our combined ratio ambitions that would of course.

In Canada, again, clearly a disappointing year in financial terms and I think you'll see that in all Canadian results. The aggregate cover, which we didn't have last year, but we'll have going forward, would have saved us roughly 1% of combined ratio as you'll see. But basically, by far, the biggest delta year-on-year was a bad weather year in Canada, and we are a little bit more weighted to property and a bit less weighted to auto as I mentioned earlier on, which accentuated the relative movement for us versus, for example, Intact.

I think that we are making very good progress. You saw a good growth in Canada. We're very pleased with the Scotiabank deal, which has started writing business in a small way but will start ramping up in the second quarter.

Cost continues to be an outstanding achievement in Canada, as you can see there. And so I would say our main issues in Canada are to take advantage of the hard market and make sure we are rating hard. Part of that is because we want to get motor combined better as everyone does. That's constrained by regulatory pricing but nevertheless a good price increases are going through. Part of it is because on property lines, we want to be able to absorb higher weather charges. In other words, our planning assumption going forward for weather is higher than in the past. And therefore, we're trying to make room on the attritional loss ratio line to fund some of that. And then in Commercial Lines although there aren't, if you like, segment exits, there is very aggressive re-underwriting activity going on in certain bits of the commercial lines area. And not just us, I think market wide, which I believe will produce improvement.

So again, I think our view of Canada is that we are maybe not as comfortably at or around our best-in-class potential as we are in Scandinavia, but we're pretty close to it. Provided that the bounce back that we're expecting this year happens. Obviously, we don't control the weather but certainly in Commercial Lines we need to see evidence. So we need the pricing increases to help us out on attritional lines, which we believe they will.

And then finally the U.K. & International. Of course, the headline on the slide on the left will show you actually that we have, contrary to sometimes the way we feel about it, improved the business but not as much as we expected to do. And the business really, and obviously Scott can speak to this in Q&A a little later to the extent that we want to delve into it, about 75% of the business is domestic which actually made a small profit -- underwriting profit last year and the underwriting losses all came from the international component that we book in there. Although some bits of the international component, Ireland and Middle East, had exceptionally strong results and hopefully illustrates the progress that we made particularly and relative to Ireland in recent years.

Personal Lines was held back by weather something like 4.5 points held back. But the key things that we were trying to achieve last year in terms of pricing to get over the escape of water issues and household attritional line indeed similar for Pet, those attritional loss ratios have improved at least as much as we hoped. I think may improve further this year as that action feeds through still into this year. And so our primary headache is Motor, which fortunately is the smallest of our businesses in financial terms, in Personal Lines. And obviously, we need to keep working on that.

Commercial Lines, even away from the London market, although the domestic Commercial Lines business was nicely in profit, nod at our targets. It doesn't require huge amounts of pricing action but it does require selected underwriting actions which are going through. I think cost would have been fine, were it not for the top line shrinkage. And so over the next 2 or 3 years, we need to figure out how to catch costs up with the top line but there will definitely be a lag. And we have, needless to say, high hopes with Scott to help us in all of these areas.

And so when I, if you like, sum up all the 3 regions, we have left our combined ratio ambitions intact in part because the market suggest that those are indeed best-in-class performance ambitions in part because our own assessment of either where we are or where we can get, supports those ambitions. But just, as I said, a year ago, we think we're pretty close in Scandi and Canada and we're less close in U.K. & International in terms of the likely timescales for accomplishment of those things. And obviously, all of this subject to the normal caveats around volatile items which we don't control.

So with that, Scott, over to you.

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Scott Egan, RSA Insurance Group plc - Group CFO, Chief Executive of UK & International and Director [2]

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Good morning, everyone. I hope you can cope up with me one more time before, as Stephen said, you got an update for Charlotte. So I will try and do my best and obviously be best-in-class in my last ever presentation as CFO.

So before we dive in, a headline that we're obviously reporting today, EPS up 21%, dividend up 7% and the return on tangible equity of 12.6%. However, as Stephen has said, beneath the headlines underwriting profit reduced by 1/3 and while half of this was due to adverse weather, we're disappointed to be reporting the first during the year since 2013.

This translated to a reduction in underlying earnings per share from 43.5p in 2017 to just over 34p in 2018 with sterling strength presenting a headwind of around 4% year-on-year.

Our Personal Lines business has been performing strongly overall and premiums are growing the most profitable lines. We represent nearly 60% of the group's premiums and delivered an excellent combined ratio of 92.4% despite an increase in weather losses year-on-year of GBP 88 million or nearly 2.5 points.

Commercial Lines across all regions had a challenging year partly due to higher large and weather losses but also where we could have underwritten better. Our top line is contracting as you've seen as we take the remediating actions.

So in terms of normal slides, I'll start with an overview of the numbers before going through the P&L and capital in a bit more detail. Group net written premiums were up 1% on an underlying basis with growth across our Personal Lines businesses partly offset by lower premiums across Commercial.

I've mentioned the underwriting profit of GBP 250 million was down to 33% or a GBP 127 million at constant FX. This was due to around GBP 76 million of our best weather and higher large losses in Commercial Lines.

On a pro forma basis, adjusting for U.K. portfolio exits on 2019 reinsurance changes underwriting profit was GBP 344 million. This gives a sense of the scale of the actions we've already taken to address the U.K. challenges, in particular. Operating profit of GBP 517 million was down 19% at constant FX due to the lower underwriting profit and a slight decrease in investment income due to the continuing low yield environment.

Profit after tax was up 16% due to the absence of restructuring charges or interest costs and a lower effect of tax rate translating to the 21% increase in headline EPS with underlying EPS down 19% at constant FX. On a pro forma basis, this would've been c.42p and in line with 2017 at constant FX.

Our return on tangible equity of 12.6% is slightly below our target range of 13% to 17%. And finally, TNAV was up 4% with profit after tax partly offset by fair value mark-to-market movements, investments in intangible assets and, of course, dividends. I'll now go through some of the areas in a bit more detail starting with premiums.

As we did at half year, we prepared this slide excluding the impact of 2018 reinsurance changes allowing you to compare on a like-for-like basis. Total premiums were up 1% at constant FX and we're pleased to report top line growth in all regions and Personal Lines. Our Commercial Lines as I've said has done large in response to underwriting and pricing actions. In other words we're up where we're most profitable and we're down where we're taking action.

Briefly walking through each region and [talents], starting with Scandinavia. The positive change in Personal Lines have continued with premiums up 6% at constant FX. Retention remains strong at 82% despite rate being ahead of both last year and our plans. Personal Lines premiums in Sweden, our most profitable business, were up 8% while policy count grew 2%.

In Denmark, motor premiums were up 4% and policy counts grew 2%. And in Commercial Lines, premium and volumes were down as we rated ahead of last year. And specifically in Denmark, premiums contracted by 2% as we took underwriting actions mainly in our property and technical lines.

Coming to Canada. Personal Lines premiums were up 6% in 2018 with Johnson delivering organic growth of 4%. Retention remained the best-in-class levels with Johnson and personal broker at 90% and 89%, respectively.

In both auto and household, we carried rate above our plans and last year. However, recognizing there is more to do on auto. Into 2019, we are targeting somewhere between 6% and 9% of rate across our auto business, varying of course by province.

Commercial Lines premiums grew by 3% and we had a (inaudible) 5% in a currently hardening market particularly in the more recent months. And finally, Personal Lines premiums in the U.K. were up 4% with policy counts up 2%. Household premiums grew 16% driven by our partnership with Nationwide which generated premiums of around GBP 170 million in its first full year of trading. Top line contracted on the wider household book as we waited to mitigate the escape of water issues which represented in half 2 last year. Along with our claims management actions, this reduced the attritional loss ratio by more than 4 points in 2018, and we expect further gains in 2019. We therefore now expect to return rate to more normal levels. In the motor, premiums were down 10% as double-digit rate impacted retention and new business in a competitive market. And finally in Commercial Lines, premiums were down 6% mainly due to our exit from the remaining generalist MGA schemes, underwriting decisions on some large individual risks and the start of the specialty and wholesale exits we announced in November. This has been well covered by Stephen in his slide, so I'll now turn to the underwriting results. The group combined ratio was 96.2% for 2018, up just over 2 points. Volatile items were around 2 point worse than last year with weather accounting for half of this.

On a pro forma basis, the combined ratio was 94.6% despite the weather challenges and large loss volatility in the Commercial Lines portfolios.

The attritional loss ratio was broadly flat when adjusted for 2018, reinsurance changes, increases in Scandinavia and Canada were broadly offset by improvements in the U.K. and international region. All regions are targeting attritional loss ratio improvements in 2019. Quickly looking at the headline underwriting performance in each of our regions. In Scandinavia, the combined ratio increased by just under 4 points to 86.8%. Personal Lines reported an excellent 78.9% despite lower prior year development. While Commercial Lines increased by around 7 points to 97.9% due to higher large losses, which I'll cover in the next slide.

The combined ratio in Canada was up around 3.5 points to 97.6% net of GVC recoveries, driven by significant weather experience and elevated large losses partly offset by further progress on expenses. When we pro forma for the new 2019 reinsurance, the combined ratio reduces further to 96.7%.

And finally, the U.K. & International combined ratio improved slightly to 101.4% or 97.4% on a pro forma basis. U.K. Personal Lines was up just under 3 points to 102% driven by weather, which was just over 4 points higher than 2017, and partly offset by an improved attritional loss ratio.

While U.K. Commercial Lines improved by 2.5 points to 105.7%, losses remain elevated in our London market business. And finally, Ireland and Middle East reported excellent results again with combined ratios of 90% and 83%, respectively.

Now taking a closer look at the loss ratio movements. In Scandinavia, the loss ratio was just over 4 points higher than last year. Large losses were almost 9% compared to a 5-year average of just over 6%. This was dominated by specific segment in our technical lines business which we are exiting and a single large commercial property fire loss which i have flagged at half year. We expect more normal large loss trends in 2019. The attritional ratio increased in commercial property and in Norway generally, but improved in Personal Lines in both Sweden and Denmark.

The loss ratio was up about 6 points in Canada, adverse weather was responsible for half of this and industry estimates per insured damage for the severe weather events of 2018 are just under GBP 2 billion, which will be the fourth highest loss year on record.

Higher large losses particularly in Property classes contributed 1.7 points to the loss ratio and finally the attritional loss ratio increased by just over 1 point and reflected midsize losses in household and commercial auto claims inflation. Lastly, the U.K. and international loss ratio was just over 1 point better than 2017. The attritional ratio improved with U.K. household down more than 4 points. Large losses also reduced, although they remain elevated as I've said in London market business. These improvements were partly offset by adverse weather. The U.K. and Ireland if you remember experienced the beast from the east, at a cost of around GBP 50 million and the hot and dry summer weather in the U.K. produced an increase in subsidence claims. Very briefly, turning to the volatile items. I've mentioned that it impacted us negatively by just over 2 points, I've covered most of the items in the slide, so I won't repeat them again. But just a quick comment on prior year development at 2.6%. It was broadly in line with last year and as usual was widely spread across accident years and lines of business. We continue to plan on PYD at roughly half this level, otherwise always I'm very happy to accept when that turns out to be conservative.

Turning to costs. We continue to report excellent progress in costs beating our target of more than GBP 450 million in savings since 2013 a year early. Controllable cost reduced by 4% compared to last gross of inflation with the controllable expense ratio now down by over 4 points since 2013. Our target remains to get this below 20% for each region.

Two specific regional comments, firstly in Canada an already low cost ratio improved again, our savings and staff costs linked to productivity improvements, more than offset higher software and amortization costs. While the controllable cost ratio is expected to remain below our target level of 20%, these higher software amortization charges linked to a investment in Guidewire will increase it slightly in 2019.

Second, as flagged half year in Q3 the U.K. and international controllable cost ratio increased. This was as a consequence of a premium contraction as we take pricing and underwriting action to improve performance. For these reasons, we expect the ratio to increase again in 2019. And for that to modestly increase the group ratio as well. We remain focused on rightsizing the business and catching up the progress in the coming years.

As I said on here before, our focus and mindset for costs across all regions is now on continuous productivity improvement.

On investment income, no change to our investment strategy. The portfolio remains dominated by high quality fixed income with around 90% of our bonds A-rated or above. An investment income of GBP 322 million was below 2017 but slightly higher than our guided range. The average income yield was 2.3% while the average reinvestment rate in the bond portfolio of 1.6% was marginally up than last year.

Based on current forward yields an FX, we're forecasting investment income in the range of GBP 285 billion to GBP 300 million in 2019, up slightly on the projections we made a year ago. 2020 and 2021 are also included in the slide for your information. And a final one on the pull-to-par, you'll see from the slide that we expect the pull-to-par element on unrealized gains to largely unwind by the end of 2020 with a capital impact of around GBP 60 million in 2019, completely consistent with our previous guidance.

Moving on to non-operating items, no new news here. Interest cost almost half following the debt restructuring actions over the last 2 years. Other nonoperating items largely fell away as planned so earnings flowed more quickly to the bottom line. And finally the effective tax rate reduced to 23%, reflecting really the profit mix and our guidance remains unchanged with an underlying tax rate of around 20%. Turning now to capital and pensions and starting with pensions. We're pleased to successfully include a triennial valuation process for our U.K. themes. The group has committed to continue paying contributions of GBP 65 million per annum with a further GBP 10 million per annum top up subject to a capital ratios. We expect to continue paying at this level until the schemes are fully funded on a lower-risk basis.

In addition to the regular contributions, the group made an additional one off payment over December and January of around GBP 65 million with the majority of it being paid in December. All else being equal, these additional payments will bring the deficit level to around GBP 400 million.

Turning to capital, a Solvency II coverage ratio of 170% at year-end is a record and up 7% from the end of 2017. On an IAS 19 basis, which we use of course for accounting and capital ratios the GBP 88 million pension deficit at the start of the year became GBP 182 million surplus by year-end. This was mainly due to spread movements, longevity improvements and of course, contributions.

We generated 22 points of capital from earnings during the year. Net capital expenditure on bond pull-to-par accounted for 8 points while dividends accounted for 12 points.

Market movements drove 5 points of increase in our coverage, which will loan a favor should always be seen as more volatile. This was driven in large part by widening credit spreads, improving the pension positions as I've already noted. And as a reminder, Solvency II dictates that you can only include pension schemes surpluses up to their marginal share of the SCR. Beyond this, we cannot include them in the ratio, but they are there effectively as a shock absorber for future market movements before impacting the ratio. At year-end one of our U.K. pension schemes was at its cap and the other was close to it. This is also important from a rating agency capital perspective from which all surpluses are excluded.

And finally, you can see that our capital quality has improved with our Core Tier 1 coverage increasing by 9 points to 107%. This is important because as you know, we regard Tier 3 capital category as lower quality.

And finally, on dividends, we've announced today a proposed final dividend of 13.7p, which gives a total dividend for 2018 of 21p and represents an increase of 7% from 2017. This represents a 62% payout of underlying EPS and a 50% payout of pro forma EPS.

Our dividend policy is unchanged, targeting 40% to 50% normal payout levels, with additional payouts possible where prudent to do so and supported by real capital generation. If we decide to pay out above the 40% to 50% range, other than in response to volatility, we would expect this -- that to be decided at the end of the year and executed either through stock buybacks or a special dividend.

So to conclude, our Personal Lines business is performing strongly overall and premiums are growing in the most profitable lines. Commercial Lines is a key focus with extensive action underway, particularly in the U.K. Costs, as always, will be a focus, but particularly in the areas where underwriting actions are reducing business volumes. And we're pleased to have reached agreement on a more stable long-term funding plan for the main U.K. pension schemes. All of this is underpinned by a strong balance sheet. Our ambitions for the group are high and unchanged and we look forward to delivering good progress against them in 2019.

Thank you. I'll hand back to Steve.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [3]

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Thank you very much, Scott. So let's go straight into Q&A. If you could obviously wait for the mic to be driven and identify yourselves. Let's start up here.

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Questions and Answers

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Andrew Sinclair, BofA Merrill Lynch, Research Division - VP [1]

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Andrew Sinclair from BofA Merrill Lynch. Three for me, if that's okay. Scott, you're clearly moving from group CFO to head of the U.K. Just wonder if you could give us your thoughts on what you're looking at there?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [2]

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This wasn't fate by the way but we were prepared for that question.

Give us your other two. [And then we'll see if it's] a little bit embarrassing, you might get.

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Andrew Sinclair, BofA Merrill Lynch, Research Division - VP [3]

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Secondly, with your U.K hat on, I wonder if you can talk a little bit specifically about the London market. It's halved in size. When does that become subscale? Are you the best owners of that operation going forward? And thirdly, just on the reinsurance protection increases, what's the P&L cost of those in a normal year? I realize it gives you the protection in volatile years.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [4]

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I'll, ask Scott to speak to the slide in the second but just to pick up on the second 2. I think in terms of the London market presence, I'm not sure I really think of it very clearly in scale terms because the London market is made up of many hundreds of very narrow specialist portfolios and your total size is completely irrelevant, which you can see by the relative success of some quite small syndicates in Lloyds and so and so forth. It's really, what are your specialties and can you sustain the expertise? And so that's why London market strategy was not to say, "Let's cut everything by half." But it was to exit entirely subsegments so that we could sustain the right level of underwriting expertise in a smaller business because the remaining portfolios aren't necessarily smaller, they are just a narrower range of specialties where we feel we can do it. But I think, so per se, I'm not worried about size, but it does remain the case that if it doesn't make money, we should stop doing it. And so clearly, we have to prove that we can, or we have to make some more adjustments. Can you remind me of your third question, as well? Yes, reinsurance. Reinsurance, I would say in a normal year -- thank you, Kerry.

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Scott Egan, RSA Insurance Group plc - Group CFO, Chief Executive of UK & International and Director [5]

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The market effect for reinsurance, is it.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [6]

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Reinsurance, will net cost us nothing in a normal year, because the extra expense of the aggregate programs was broadly offset by savings in our main cat programs where we actually reduced costs.

I'm sorry, no you, Scott. Scott, over to you.

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Scott Egan, RSA Insurance Group plc - Group CFO, Chief Executive of UK & International and Director [7]

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A little bit -- here's one we prepared earlier. So let me -- this is my disclaimer point. So look, I'm 2 weeks into the role. Obviously, I know the business. And I'm really -- have spent the first 2 weeks getting under the bonnet as it were, as opposed to sitting on the roof rack, if that's not a bad analogy. So #1, look, there are 6 areas really that I thought it would be worth touching on when I stood up here today. #1, there is no question we have to restore credibility both within the organization and externally on our ability to underwrite well. And so #1, #1 and #1 is to make sure that we deliver on our U.K. underwriting actions, our claims initiatives, et cetera, and in addition to the exits -- just to give you a sense of scale -- that's well over GBP 100 million of actions that we're taking in that regard, and as I stand here in the sort of mid-Feb, we are doing well against that plan. We are running slightly ahead. And if you remember, because of the way our P&L works -- hey, either walk out or turn your phone off, yes? And part of the way our P&L works is we've effectively already earned around 60% of that for 2019. So I am not complacent, but we are absolutely rigorously focused on making sure that we follow through and keep the focus on every single one of those actions that we set out in our plans. I think the second thing that Stephen said -- and again, I do not want this to be dramatic in any way -- but I do want to get my hands under the bonnet and have a good look at the subsegments and stuff that's within, and I want to make sure that we can align them with the capabilities we have, the outlooks for the market and to make sure that we can in the end make money. I don't want to make any quick, knee-jerk decisions because if you remove yourself from a market, then I think you have to accept to re-enter that market is much more difficult on the basis that you lose credibility and capability. I will look to do that in the first few months that I'm here.

I think the third thing is, obviously, as we take top lines out, you've seen it in the cost ratio in 2018 and I have alluded to already that I would expect the cost ratio to pick in 2019. Please don't think for any second that, that doesn't mean we're not focused on taking costs out and improving productivity, and that's going to be a focus of the team. I hope as a set of general management team across all of the regions we built a credibility and a track record to be able to do that, and so that's going to be a focus as we rightsize the business. But I think there is no way it keeps pace with the top line. It is just the way it is. Fourth thing is, I do not want to lose sight, Middle East and Ireland have delivered fantastic underwriting results. And it wasn't too long ago that we were standing up talking about Ireland and the need to improve it. So, I think, two things: one, we proved we can. It's the second unit always delivered really strong underwriting results and what I want to make sure is that we don't lose focus on any of those parts of the business while we try and address the more problem areas. And the fifth thing is, really one of probably culture mindset, which is I really want to make sure that the U.K. business is really known for and respected for a quality of execution, our focus and agility and our pace. The one thing that as I stand here, that I know already, is I won't head the plans for 2019 in the way that I thought, because something will happen, maybe something comes along. And I am determined, along with the management team, to have a mindset of acting quickly and making sure that we can maneuver around some of those bumps and that's really something that I want to do when we stand up here in probably 18 months time, and hopefully, you can feel and see a difference in how the UK goes about its task. And then finally, I'm targeting a 96% to 97% combined ratio in 2019. As I stand here, that's not easy. It's going to take a lot of hard work, but I'm absolutely determined we have the leadership team to achieve it. I think if we do that, then we establish a platform for 2020 and I think the last part of the slide is I think it gives a credibility once again to the commitment to the best-in-class ambitions of 94%. So 2.5 weeks in, from the roof rack to the engine, those are the areas of course, as we get through any discussion-making processes, we'll update you. But that's where I'm at for the moment.

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Fahad Usman Changazi, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Equity Analyst [8]

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Fahad Changazi from Mediobanca. Apologies if I missed the details in this and where maybe, effectively even the pro forma numbers if you then -- if you exited the business. Can you give an idea about the 5-year average profitability of the businesses you have exited or the large loss load?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [9]

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In the slide I gave earlier on, I showed the 3-year impact.

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Fahad Usman Changazi, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Equity Analyst [10]

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And then just one thing, can you give an update on your EPS starting with the 5, please?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [11]

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As soon as possible. I think -- as I said, we haven't budged on our ambition, our combined ratio ambitions at all. And so it continues to be the case that I think our business is capable of EPS in the 5 and then, we can even in the 6. But what is -- it's just a statement of fact, is our credibility is less good on that today than it was 2 years ago. And so we need to make sure that we reestablish that credibility, and you can't do that by talking about it. You have to do it by delivering. So I think it's most unlikely to begin with a 5 in 2019, unless we have luck coming our way. But I think we are on that trajectory very soon, if not immediately thereafter.

Let's see, at the back there.

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Andreas de Groot van Embden, Peel Hunt LLP, Research Division - Financials Analyst [12]

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Andreas van Embden from Peel Hunt. I was intrigued by your slide #17 and #16, where you sort of give a focus of both the underwriting lines, the Commercial Lines and Personal Lines separately. I just wondered, what will be the hurdle of managing all the international Commercial Lines businesses as an integrated division under RSA with a separate management team and a clear focus per underwriting class as it were, while doing a focus on the regions. Thanks.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [13]

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Thank you for that question. I know there was a -- I read your reports with that thesis. I think the first thing I'd say is that from an underwriting standpoint, we do try to have a global as well as a regional form of management. And Nathan Williams, who is here in the front, is our group underwriting director and has a staff of people centrally in a network globally and all of the underwriters around the world have a dual line of reporting to Nathan as well as to their regional management structure. And that is so that in those areas where there is commonality, it might be commonality of types of risk or commonality of standards of underwriting and training and things like that, we can do it in the same way. That said, I believe the inherent strength of our business is that we are rooted in regional markets and therefore not exposed to the full blast of competition from the Allianz, AIGs, Zurichs of this world who operate, if you like, in the global wholesale lines. And indeed may be one of the reasons why we've done less well in that small part of our business, the London market, because those lines is exactly that. And so when we're writing SME business or mid-market business in each of our regions, those respond to regional knowledge trends, client relationships, not to global management. And I think we would actually lose more than we gained if we moved the matrix. But there is a matrix that operates.

So just down here.

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [14]

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Good morning, Greig Paterson, KBW. Three questions. One is just in terms of your reserving, given the issues you had in the third quarter, I was wondering to what extent you've done some kitchen-sinking in the reserving at the end of the year? Second question, just in terms of the U.K. moat in telematics, I wonder if you can just talk a bit about relations problematic about what sort of rate you're going through, what sort of inflation, sort of a bit of color there. And the third thing is just -- maybe it's my confusion. In terms of the London market, my understanding -- am I correct in understanding that you're going to take 1/2, i.e., GBP 150 million out. And then you mentioned GBP 100 million of additional active [leaderment] cost savings, et cetera, et cetera. I'm getting a bit confused. Can you just give us some more color exactly what you said...

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [15]

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Let me take the first one and I'll ask Scott to take your next 2. So we haven't knowingly kitchen-sinked anything. We never knowingly kitchen-sink it. And so only with the passage of time we will know whether the reserves run off positively or negatively, but there certainly hasn't -- we haven't made any change whatsoever to reserving practice.

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Scott Egan, RSA Insurance Group plc - Group CFO, Chief Executive of UK & International and Director [16]

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So telematics, Greig, we are putting in some double-digit rate increases in telematics. Because I think that's in the direct response to claims inflation that we are seeing. It's why we are seeing a drop off in some of the volumes in our motor book. And in the London market space, the number I was referring to is in addition to the exits, we're taking a number of actions on putting normal rates through the books. In other words, rate for Commercial Lines and Personal Lines. We're taking underwriting actions that can be case specific rather than exit, if you like, and then we would do a number of what I would call claims initiatives to try and mitigate the impact of claims inflation because all of that is gross. There's always an element of claims infection that you have to sort of mitigate in every year. So it's that basket of additional measures that we are pushing very hard on and effectively for every single one of them, we've got really detailed plans by line of business, because it varies greatly in that regard.

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [17]

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You're positioned to (inaudible).

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Scott Egan, RSA Insurance Group plc - Group CFO, Chief Executive of UK & International and Director [18]

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Well, you have inflation, of course, and then you have to earn it through. So I think you have to -- there is a complicated formula by which you'll then see it in the numbers. But I think what is true, which you've seen from what I've said already, our ambition is to improve the U.K. combined ratio from where that is now to something in the 90%s and this is part of that path.

Thank you. In the middle here.

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Ivan Bokhmat, Barclays Bank PLC, Research Division - CEEMEA Banks Analyst [19]

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Ivan Bokhmat from Barclays. I've got 2 questions. So the first one, on the new reinsurance protection that you bought, how should we think about the normalized weather and large losses going forward? Because, presumably, it's coming down. And secondly, on the pension fund deficit. I think the previous number in 2015 was around GBP 360 million on a funding basis. So you paid about GBP 260 million into that, and it's grown to GBP 400 million. Could you just explain why the number went the wrong way and whether the trajectory of these extra top-ups, 65 or 75, should be kind of flat or we should expect another step up later?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [20]

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On your reinsurance or, I guess, your volatile items, I would say if we get large losses to where we think we can, they should average around 9% on a group-wide basis. Now clearly, there's very different percentages business line by business line. But 9% is the group-wide number that would represent for us success -- whether we get there this year or not, we'll have to see. But that's roughly what we would aim for. On weather, I would say again, a group-wide -- the 5-year weather average, even taking account of last year's bad weather is just over 3%. And so at the moment, am I smarter than the 5-year average, I'm probably not, so I would say just over 3% will be a normalized kind of a number. But obviously both of those will have volatility around them that is natural as well as volatility around them that may be man-made in the sense of what we do and don't underwrite. In terms of your pension question, the key thing, and you'll see it in every single U.K. pension scheme reporter, is real interest rates dropped significantly from 2015 to 2018 in the U.K. And real interest rates are by far, the biggest driver of funding deficits. And so you'll see every reporter with a triennial review last year with a substantially bigger, if you like, underlying funding deficit against which there are two things that have gone the right way: one, contributions; and the second is there's now been 2 years of longevity improvements, probably '19 will show some more again. So those tend to be the moving parts on a funding basis as opposed to on the accounting basis.

Sorry, in the back.

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Dhruv Gahlaut, HSBC, Research Division - Analyst [21]

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Dhruv Gahlaut, HSBC. Three questions. Just starting on the reserve margin question, you used to disclose a growth about 5%. Has that number changed lately?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [22]

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It's disclosed again. It's around 5%.

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Dhruv Gahlaut, HSBC, Research Division - Analyst [23]

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Secondly, can I just move to Canada? So Johnson had a good 6% growth. What percentage of Canadian premium and earnings come from Johnson today? And, just to comment on the sustainability of the growth coming from Johnson '19, '20, how do you see that?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [24]

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It's 40% of premiums. And what it is of earnings, depends on the year. Last year it was 100% of earnings but -- I think Johnson can operate at 90% or just above in combined ratio terms in a normal year. Last year it was 94% and change. But that was obviously weather-hit. So it will be, by far, in the same way that Personal Lines in Scandi disproportionately drives our Scandi results, Johnson disproportionately drives -- and there's a reason for both of those, which is that if we are writing direct with customers, intermediaries aren't taking 20% commissions out of the middle. And so that helps customers get a better deal and helps our profitability. And so those markets with bigger direct writing tend to be more profitable.

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Dhruv Gahlaut, HSBC, Research Division - Analyst [25]

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Can I ask you on Norway as well, as in -- it was a challenging year last year, premiums have gone down and there has been higher losses last year on underwriting. What's the future of Norway as in, is it still core, is it still core for you guys?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [26]

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Bear in mind Norway is 2% of our business. So I think everyone had a really tough time in Norway. We're a minnow, but the big guys did. You saw in Gjensidige's results, certainly stripped of PYD. And so there are some specific things going on in Norway, both weather and especially auto claims inflation. We need to get our business in better shape. There's a complete renewal of the technology platform. We need off the back of that to be able to compete more strongly, and so it's, I would say, it's not material to our results and we're trying to get it to the point where we can compete successfully but we're not yet there. Middle, there we go.

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James Austin Shuck, Citigroup Inc, Research Division - Director [27]

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James Shuck from Citi. Two questions from me. Firstly, how close were you to actually doing a special dividend or a buyback at this stage? You have a variable band at 20% to 35% and the pull-to-par of that was 20%. So at the midpoint there should have been some scope and clearly you've got visibility that the pull-to-par impacts will decline quite materially in 2019. Second question is around the solvency position. So if I remember correctly, you were previously targeting to be at the top end of the target range. There's a comment now that you want to be above the top end of that range. So just clarify if I remember that correctly or if there has been a change on that approach. And related to that, could you just update on a full buyout cost of the pension scheme, and if you were to transact at current prices, what would be the impacts on your solvency ratio, please?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [28]

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We haven't updated the buyout ourselves so I don't know. I have no reason to believe it would be materially better than it was the last time we disclosed it a few years ago. I think there's all sorts of gray areas in the middle. But a full risk transfer would be a long way north of GBP 1 billion I would expect, though we haven't updated it. In terms of the capital ratio, the issue is really as Scott laid out, that we disregard for internal purposes the deferred tax element of that. So if you include the deferred tax asset element either tier 3 element, then we do want to operate at the top of the range because we think really that puts us in our range where we disregard that which we do internally. So that was what Scott was getting at. And then on your first question on dividends. I would say that we knew that we were likely to have the financial ability to distribute more than 50% of our earnings even had last year been -- let's call it a normal year for us. And in our plans was that facility. The question that we would have faced had we been in that position is, was the amount of extra distribution worth the candle? In other words, at what point is a special dividend or a stock buyback too silly in its amount of money, and you're better aggregating the latter and whatnot. As it happened, we never got to make that decision because the volatility in the sense took out the room that we otherwise were planning. That was the sort of the only debate around it.

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [29]

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Jonny Urwin, UBS. One question. How -- what's the confidence level on that 96%, 97% combined ratio in the U.K. and how much pressure do you guys feel under to get there?

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Scott Egan, RSA Insurance Group plc - Group CFO, Chief Executive of UK & International and Director [30]

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You probably won't get a definite answer.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [31]

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I think -- we can't have confidence in ascent by which I don't mean we don't have confidence in our actions. I believe we will take our actions, but we are not masters of our own destiny entirely. The market can throw weather and large loss challenges, our competitors can throw things. So it would be absurd to say that, that is entirely under our control. And also we have a poor track record in the last 2 years. And so that's what we're aiming for. We're trying as hard as we can to carry out the actions that should give rise for that outcome. But I can't really, to be honest, say more than that. As to pressure, we want to win. This entire company is being managed with the objective of winning, winning for our customers, and winning for our shareholders. And when we don't win as well as we'd like, we're disappointed, and we try to do something about it which as you can see we are trying to do. Andrew?

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Andrew John Crean, Autonomous Research LLP - Managing Partner, Insurance [32]

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Andrew Crean, Autonomous. Can I ask 3 questions around firstly, what have you done on Ogden? Are you still at minus 0.75 or have you moved? Secondly, what is your view as to your vulnerability on front-book, back-book issues in the U.K. particularly related to bank on buildings, actually your originated household business? And thirdly, you talked about thinking about a long-term average of 9% of large losses, which I assume is a function of your 5-year averages. To what extent should you worry that actually large loss activity is getting increasingly worse and that the 5-year average is understating the potential?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [33]

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Let me ask Scott to take the first two, I'll take your last one if I may. We use the 5-year average when we're talking to you to try, if you like, have a simple expression. In fact, what happens in addition to simple top-down analysis, there is an enormous amount of bottom-up portfolio-by-portfolio analysis and completely different time periods taken. So for example, on something like a liability portfolio, we might take a longer period than 5 years because of the pattern of emergence of liability claims and they're settling. On something like a short tail property portfolio, we might take a 2-year period and indeed give higher weighting to the nearer periods within that 2 years. And so the actual, the underlying build up of our large loss projections is much more granular than just the 5-year average. And the places we've been getting volatility, we weight our forecast on more recent experience. Now that's not completely answering your question because it's possible that things worsen from even more recent experience and you chase your tail a bit, which is also possible of weather. So there are those risks but we try to -- we don't manage simply on looking back 5 years. Scott, you want to take one of those?

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Scott Egan, RSA Insurance Group plc - Group CFO, Chief Executive of UK & International and Director [34]

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Two things. I think I've said this before on Ogden, Andrew, but basically if you remember for us, it wasn't obviously the bigger number as for many of our competitors, that's the first thing. The second thing, since it came in, we have actually been settling claims along the way. They've certainly been settling inside the Ogden estimate as it was originally. And I think that was probably born out of an expectation that it wasn't going to stay there. I think if you look across our footprint, we're probably not far away from zero in terms of an assumption. But obviously we want to be careful and thoughtful and not go ahead of our skis in terms of becoming legislative in that respect. So that's kind of where we're at. But for us, it's not really that big a number. I think in terms of the front-book, back-book placing, this is a really important issue in the market. I think firstly, it's a market behavior, it's not something that's new or unique, it has existed in insurance for many, many years in terms of new business pricing being discounted at renewal. I don't think we're the only industry -- I'm not trying to justify it in any way, that's just the market behavior, and it's the customer behavior alongside that, but I think you also see it in banking, I think you see it in mobile phones, et cetera as well. We try and do the right things by our customers. So we have a set of pricing rules that wrap around front-book, back-book pricing to make sure that we don't push to extremes, I think we also take lenses on things like vulnerable customers, et cetera, which I think we absolutely should. And I think when we write to our customers at renewal, we are also very explicit with them, about their renewal premiums and what their renewal premium was last year and what it is this year. And as part of that literature, we are also clear that the market environment means that if they shop around, they may be likely to find a cheaper premium. So I think a lot of things in there that we try and to do the right thing by the customer. But I think the starting point is the market has behaved in that way for many years and the customers behave within that market in that way.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [35]

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I think it's worth saying that the phenomenon is massively less marked in our international territories. In other words, although everywhere you get some level of new business discount, the difference between new business and renewal prices is much, much lower everywhere else. So it is very much a U.K. consumer market phenomenon, not even particularly a U.K. insurance phenomenon. Barrie?

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Barrie James Cornes, Panmure Gordon (UK) Limited, Research Division - Insurance Analyst [36]

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Barrie Cornes, Panmure Gordon. A couple of questions, if I may. First of all, just looking at the London market, U.K. commercial, just trying to think of it deeper. Do you think, it's a wider question, do you think maybe the pressure -- short-term pressure on costs has resulted in some of the perhaps more experienced and relatively more expensive underwriters leaving the company over the last 5, 10 years, which has resulted ultimately in what's happened on the London market result?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [37]

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Well, that wouldn't be a cost issue. If it were true, that wouldn't be a cost issue because the costs don't lie in a handful of people sitting on a floor 3 -- down here, dealing with London market underwriters. The costs lie with the thousands of people you employ to process and answer phones and shuffle paper and all the different things which productivity is allowing us to streamline. I think you should note that the U.K. Commercial Lines performance has been disappointing for at least a decade. So I'm not sure we're very proud of that, but I'm not sure the evidence is that it's getting worse. It has just generally been disappointing with some volatility around that. And that's why, by and large, we're shrinking.

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Barrie James Cornes, Panmure Gordon (UK) Limited, Research Division - Insurance Analyst [38]

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Okay, and the other question I had was in respect to the U.K. Motor. Can you just go into a bit more detail on what is going on there? Maybe the split between say personal and commercial fleet, if there is a difference?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [39]

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Scott, do you want to take that?

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Scott Egan, RSA Insurance Group plc - Group CFO, Chief Executive of UK & International and Director [40]

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I don't think there is, Barrie, in one sense that the things that are driving it are the kind of parts inflation, it's sort of the odds and ends of things, it's the usual things and I think whether you're in a commercial vehicle or a personal vehicle, I think it's the same. I mean, obviously, we're not a mainstream motor player -- sorry, our mainstream personal motor book isn't that large. A segment that we are obviously a market leader in then is the young driver, but I wouldn't specifically highlight anything different. I think what we've seen is that things like telematics, technology, which can be employed in commercial vehicles and the young driver segment, the personal space that we're in, can be really good influencers of driving behavior. And I think I said before, an interesting stat in the young driver space is that where we interact with a driver on their behavior, whether it be driving too fast or braking too heavily, et cetera, we see a 90% response, i.e., an improvement in driving behavior as a consequence of that. And I think that opportunity exists in the fleet space as well, where the commercial vehicles have that -- or some of them have that technology as well. And I think those are helpful leads to try and influence what is a rising claims costs but I don't think you can fight the underlying drivers of inflation.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [41]

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Right behind you.

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Edward Morris, JP Morgan Chase & Co, Research Division - Equity Analyst [42]

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Edward Morris, JPMorgan. Two questions. First, just on the outlook for premium in the U.K. Obviously there's a few different reasons why premium will come down: one, the market; the rating actions you are taken elsewhere; and also the reinsurance changes. Just could you help us a bit with what the pro forma outlook might be for premium and what might be required for you to deliver a 96% to 97%. And the second question is just coming back to pension. If you can just clarify what the threshold is to make the additional GBP 10 million contribution per year and also the one-off GBP 65 million that you paid, was this a choice on behalf of RSA or if you could just explain the rationale for why that payment was made?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [43]

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Sure, I'll ask Scott to do your first but on the pension, the -- I expect us to pay GBP 75 million a year because I don't expect our capital position to be so weak that -- the opposite, I don't expect our capital position to be strong. And so if you want to pencil something in, you should pencil in 75 a year. Now obviously, the 75 -- whatever we pay only costs us capital in Solvency II terms once we're above the cap, which we might be. But even if we were above the caps, we would count that as shadow capital because it's a loss-absorbing buffer of -- for pension volatility before you get to Solvency II so in a sense we will be looking through some of that impact. And that's really the answer on the 65. It made the overall pension negotiation easier. And it didn't cost us anything in a ratio sense. And so that's why we did it.

Scott, do you want to say anything?

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Scott Egan, RSA Insurance Group plc - Group CFO, Chief Executive of UK & International and Director [44]

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Premiums, can I break it into 2 parts because it may be more helpful. So I think in Personal Lines, I'm trying to look to it when I said -- that I think on our household book, which is the main driver of the Personal Lines Premium, I'm hoping that the core household book will now start to stabilize. Know that we are coming off what I call higher rating actions and returning to more normal levels. Obviously, I need to keep alive because if something happens in claims inflation, then we will react again, but I'm hoping to see that kind of volume shortfall certainly start to stabilize without being exact because I don't know and recognize this is a competitive market. I think in the commercial space, I'd split it into 2 parts. One, on the kind of nondomestic side, I'm obviously still having a look. There is nothing more I can say on that at the moment. I think though, on the domestic side and it's really what Stephen was alluding to, we made good profits on our domestic U.K. commercial business. And obviously, given my background that's a market I know really well, I was a part of it for many years in my career. And so I think we've got really good relationships with brokers. And that's something that I'm looking to kind of build on and cement. So again, I'm not highlighting it as a problem area as I sit here today, given that it made money in 2018, but don't read anything, any words to completion here not because there's not -- I'm all over everything with the team to make sure that we don't go backwards as well on stuff that did make us money.

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James Pearse, RBC Capital Markets, LLC, Research Division - Assistant VP [45]

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James Pearse, RBC. Just one for me. On the U.K. exit, is there any reason why you can't go and make any further exits going forward to accelerate your ambition?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [46]

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No, there's no reason why we can't, other than if we want to.

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Dominic Alexander O'Mahony, Exane BNP Paribas, Research Division - Research Analyst [47]

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Dom O'Mahony, Exane BNP Paribas. Two specific questions, one sort of broader question. First specific question, so you mentioned the U.K. there might be a point to go for the attritional ratio for the group. Just wondering if that's sort of a like-for-like number or sort of a reported number and the reason for that question is clearly, you're shrinking your commercial relative to your personal. Personal is a much lower attritional which has...

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [48]

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It's the other way around. Personal has a higher attritional than commercial.

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Dominic Alexander O'Mahony, Exane BNP Paribas, Research Division - Research Analyst [49]

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Sorry, yes indeed. Yes, exactly. Does that mean actually the ambition is, in a way, greater than 1 point in a sort of like-for-like basis?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [50]

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It gets a bit lost in the noise here. It's not like we're halving size of commercial. If commercial is 40% of the business in round numbers and we're taking, let's say, GBP 200 million of premium out of it or something like that, it doesn't just move the percentages by that much. So is it -- the 1% isn't a precise number and the mix is not a precise number, it's an observation of if you said to me, we're operating at best-in-class levels in each of our 3 regional markets, what attritional loss ratio would represent that. it's about 1% better than where we are. And then we need to have a better performance on the volatile. Well, actually, the 3 volatile items we've over-performed in PYD. Weather is volatile, you can't do much about it, and we underperformed in large. So in a sense we're hopefully, if we look at 2019 as an example, we will have some gain on attritional. We will have some gain in terms of the pro forma exits. We'll have some gain on large, although whether we get in the first year everything we want remains to be seen. Hopefully, the weather is better than at random. And against that there will be some headwinds. There is a bit of investment income headwind, there is some FX headwinds -- more after, depending on how Brexit comes in, which you have to watch out for. And we calculate there'll be some PYD headwind, not because we know anything, just because we planned PYD at half the level it has been. So there's the sort of ups and downs for 2019 and going forward.

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Dominic Alexander O'Mahony, Exane BNP Paribas, Research Division - Research Analyst [51]

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I'm sorry, that takes me to the second question which is about PYD. So clearly, you've sort of -- you've done quite well there. You continue to do well in Canada and Canada has always performed, as long as you've had that disclosure, well above the guidance. There's no specific reason to think that you have any one-offs in '18 or '17 that I should be making sort of a material judgment...

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [52]

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That's why Scott said the PYD is spread across ranks and years and across regions, there's no sort of 1 huge item. But we do plan on it being lower. I think we've been -- I think there will be a year when it is lower. I don't know whether it will be this year or not. But we like to manage our business not relying on it as much as in fact we have in the last couple of years.

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Dominic Alexander O'Mahony, Exane BNP Paribas, Research Division - Research Analyst [53]

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My final question is sort of a broader question. What I think you have been trying to tell us is, I think you at the outer years, there is sort of no change in ambition for the combined ratio and it's actually very helpful to have some timing around it. So in terms of our thinking for what the [PS] numbers are going to be actually, and also because you guided investment income, it must be sort of a question about top line really for us. And that, I guess, comes down to the question of the extent to which you're shrinking commercial versus growing personal. And actually, it looks like personal is growing quite fast across the markets. And you have spoken a lot about the U.K. commercial shrinkage. Looking at the other regions, and I really mean Scandinavia, what gives you the confidence that actually the sort of the latest round of shrinkage of underwriting action repricing is sort of enough or actually do you -- when we think about 2020, 2021 should we be also thinking actually, no, this is not a market that we are going to be growing. If anything, we might still be taking topline down a bit in order to get to those combined ratios.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [54]

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Well, I think what is true is in both Canada or in Scandinavia in the Commercial Lines business, we had bad results last year. And so this year I would expect our top line to modestly shrink in both of those areas in Commercial Lines. But I would expect our personal lines to expand. So I think Canada and Scandi, taken as a whole, will probably increase their premiums this year but there'll be a dampening effect coming from Commercial Lines. But I think that's hopefully that's a 1 year only recovery in terms of pricing and underwriting changes that we want to make. And so I wouldn't necessarily project that forward for long way. But of course, it is, it's a management philosophy that we're inclined to take action, as opposed to sitting and accept inadequate profitability in the same as we are inclined to take action for other reasons. I think frankly, the thing that we don't know the answer to that you have to make a judgment and we'll find out over time is not are our businesses capable of X or Y performance. We believe they are. But is it -- do we get that performance out of them. And in 2016, we hit our ambitions in that year, in 2017 and 2018, we haven't hit overall. Some individual businesses have, but not all. And so there's probably some level of credibility discount that we need to work our way out of, as to whether and how fast we can restore performance. And so that for me that's the thing that's more difficult to judge than where you could get a business if you work hard enough on it.

We might be running out of questions. Any more? Terrific. Well, you know where to find us. Thank you very much for joining us and we look forward to seeing you in 6 months time.

Thank you.