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Edited Transcript of RSA.L earnings conference call or presentation 1-Aug-19 7:30am GMT

Half Year 2019 RSA Insurance Group PLC Earnings Presentation

London Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of RSA Insurance Group PLC earnings conference call or presentation Thursday, August 1, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Charlotte Claire Jones

RSA Insurance Group plc - Group CFO & Executive Director

* Scott Egan

RSA Insurance Group plc - 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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* Abid Hussain

Crédit Suisse AG, Research Division - Research Analyst

* 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

* Benjamin Cohen

Investec Bank plc, Research Division - Analyst

* Dominic Alexander O'Mahony

Exane BNP Paribas, Research Division - Research Analyst

* Edward Morris

JP Morgan Chase & Co, Research Division - Equity Analyst

* Greig N. Paterson

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

* James Pearse

RBC Capital Markets, LLC, Research Division - Assistant VP

* Jonathan Peter Phillip Urwin

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

* Oliver George Nigel Steel

Deutsche Bank AG, Research Division - MD

* Philip Ross

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

* Sami Taipalus

Goldman Sachs Group Inc., Research Division - Research 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, everyone. Good morning. Thank you very much for joining us. And welcome obviously to RSA's 2019 half year results. I'm delighted to be giving up my temporary role extremely badly undertaken as CFO to Charlotte Jones who is one day formally into the job, although, of course, has been on our Board for more than a year.

And so Charlotte will be joining me in presenting this morning's numbers. We will ask Scott Egan to do a brief cameo at the end since some of you will be interested in what he's been up to in our U.K. business in the first half, and so we'll finish the presentation with that. And obviously a number of my colleagues are here through the front rows and I'm sure you've been talking to him already and can do afterwards and welcome as always to Martin Scicluna, our Chairman, who's on the front row and can answer any questions you have of him as well. But let's get started. So I guess we are -- we're clearly using the adjective solid for our first half results and personally I think that we would be able to claim more expansive adjective than that. But having had a couple of years where the second half didn't meet our expectations, we want to strike a cautious note in case that would happen again although we're not hoping -- we're hoping it won't and we're not believing that it will. But backing up the first half results and I think most important as we look forward is that we are able to report our best current year underwriting profit possibly ever but certainly in the last 10 years and that's without having any of the volatile items being better than our plans and so that's if you like based on solid underpinnings.

And as you've seen from the headlines that has given us a first half, which is normally our seasonal -- seasonally weaker half, hurricanes dependent, combined ratio of 94.3%, 21p per share and a 15% return on tangible equity which is right in the middle of our 13% to 17% range. And I think by financial services standards, it's a pretty decent level, by the standards of our ambitions, not yet where we hope we can get it to. Importantly, we have all of the pricing and underwriting actions that we had scheduled to take in the first half of this year. In every region, we are on or ahead of plan in the actions that we have taken and so obviously over the course of the next year also we hope and believe there's actions we'll continue to earn through our financial statements and should do the things that we wanted them to do. You can see some encouraging early news in attritional loss ratios that which we will unpack. There are some headwinds in prior year and a large losses which we will also unpack. And clearly one of the particular proof points that we needed to produce better evidence on was our U.K. & International division and there we have had shown extraordinarily good combined ratio of 94% in the first half. I don't encourage you to analyze that but nevertheless what we can say is it's a good start for the lucky General who has gone into that business and while we know there's lots of more work to do, we're pleased to be starting on a positive footing. 3% up in dividend, designed to be entirely consistent with our policy and of course, the statutory profit lower than it would ordinarily be with some charges, which we will also unpack for you.

So when I presented to you at the full year results, we really set out in my view 2 priorities for 2019 for RSA. The first was to make sure that the things that were going well, kept going well because much of the company has been performing well. Much of the things that we wanted to do have been going well, and we need to keep that going. And the second is we had to improve and fix some of the things that disappointed last year, which was the first and only year in the last 5 where our underwriting profit declined.

And so by way of brief update on those 2 objectives I think we believe we've made good progress against both of them. In terms of keeping going what has been good you'll see that our Personal Lines businesses, which are about 60% of the company, produced an exceptionally good first half result with a combined ratio under 90% and a strong underwriting profit, all current-year driven and with weather at or around its long-term norms and so not particularly helped by that either. So we're really pleased with that. The other thing that has gone well for us and been a big accomplishment in recent years was cost control, and, again, we extend our record on that, cost very slightly down in absolute terms a bit more down in real terms.

In terms of the fixes. I guess we'll put those into 2 buckets. There were things we needed to stop doing and then the things we needed to improve. The portfolio exits, we said that we wanted to get out of GBP 250 million worth of business from the 2017 baseline. Obviously, a bunch of that was done last year already and it has gone well so far, and we are now 80% of the way through the runoff of all of that business, so the vast bulk of the exits are off our books already.

Related to that and Scott will mention this later with lower volume in our U.K. & International business, you'll see that the cost ratio has gone up and we'll need additional cost program to correct that, which we will be bringing forward in the second half.

Away from that, in our continuing businesses, we had and still have lots of work to do in particular in our Commercial Lines businesses to improve.

An element of the improvement of course was putting in place hopefully some volatility dampeners in terms of reinsurance, which we have done, looked at us at the half year, and we're nowhere close to being in GVC territory, which is good. We probably will be protected in the second half in Commercial Lines in -- well in Canada and in Denmark by our Commercial Lines aggregates because that's where we haven't had such good experience in the first half.

As I mentioned right across at the company, we are at least on plan and in some cases ahead of plan in every region on our repricing and reunderwriting actions. And you can see attritional loss ratios responding but H2 is important for us to see more of that come through.

What I've noticed interestingly in the vast majority of our competitors, particularly the international ones that have reported so far, is that almost every one is seeing lower prior year development this year and in particular, people are seeing -- if you like a follow-through from the 2018 accident year, and we have certainly experienced that and as you'll see, there's something like a GBP 46 million negative swing on PYD that's driven by the 2018 accident year, it's mainly impacting Commercial Lines for us and fundamentally it's because actuaries obviously work on smooth time periods of loss ratios. And so when you have a year that goes sharply to the negative, it's intuitive that they may not catch up with the exact damage of that year in the first go and so it's proven with our case.

I don't believe there's anything there that's a long-term drag. Hopefully we've caught it all in the first half. Could there be a little bit more in the second half? That's possible, but I'm not worried about in the long term. It just tells us that 2018 was a bit worse than even we thought it was not just for us but you can see that across many of the other particularly the big Commercial Lines players, which is where it is concentrated.

So our strategy remains unchanged, won't go over that. What we're trying to do unchange our targets or unchanged. So it's just how well are we executing.

In terms of the -- a customer report card, crudely, in the areas where we're happy with profitability, we're able to serve customers well. We're able to retain them and able to get some modest growth. And in the areas where we have to take significant pricing and underwriting action, that normally involves some sacrifice of volume. There are occasional exceptions to that, Canada would be one where the whole market is significantly hard but that's basically the rule.

Interestingly, what you can, therefore, see is at a group level retention, even at a group level across everything has risen in the year but is particularly risen in the Personal Lines businesses, which we've been doing very, very well.

And in Commercial Lines by and large retention volume has fallen, which is where -- which is bearing the brunt of the actions that we're needing to take. There is a bit of a counterintuitive move in Scandinavia with increased retention in Commercial Lines that was mainly Sweden-driven. I think there were a couple of unusual renewals in there, Denmark, which is where we need to take the most action would not have shown that and will not show it again at the end of the year either.

But so broadly, I think we're comfortable that our customers are right behind us and enjoying what we do for them in the areas that we're happy with it and -- but the market is competitive enough that when we do significant underwriting and pricing actions that are in any way different than the market, we obviously will give up some volume. We try to make sure it's -- the volume that is in shareholders' interest for us to give up.

Attritional loss ratios are of course a very important measure for us and although we've made huge progress over the last 5 years that progress reversed a little bit last year, and I'm pleased to say that it has resumed. I hope that it will look better than this at the year-end because of course the worst period that we're comparing against was the second half of last year. These comparisons are to first half although we've put on the graph also the second half so you can see that comparison. And in both Personal Lines and Commercial Lines, we have attritional loss ratio improvements. We have them in Canada and in the U.K. Less pronounced in Scandinavia and that's partly because in Scandinavia, the key lines, the biggest lines our Personal Lines are already exceptionally profitable and we'd rather have volume than better attritional loss ratios at that level. So the correction we have to make, which I'll come onto in Scandi is in Denmark and is more about large losses and only a bit about attritional.

Cost remains a key target for us. And again, we continue to do reasonably well on that. Scandinavia improving, Canada already at or below our targets. The U.K., actually the costs were flat but of course the ratio went up with a loss of volume. And as I mentioned, we intend to take some corrective action there with a specific program which Scott will talk about.

If we look at the business in Personal Lines and Commercial Lines first and then I'll give you a regional lens.

As I mentioned, taken in aggregate, our Personal Lines business is at 60% of the group, continue to drive our profitability, and we are in aggregate very happy with them and particularly happy with the direct businesses in each of our regions.

And as you can see, very strong profitability, significant improved from last time and you can see the improvements across lots of different lines, attritional loss ratio. Weather has improved from last year although is roughly normal and there's a balance between terrible weather in Canada and good weather in the U.K. and the 2 basically equaled each other in terms of deviance from plan. And so at a group level was not a big deal one way or another.

I mentioned that the businesses that are -- where we're happy with the profitability are also enjoying customer support. And so for example, Johnson, our most important Canadian direct business, good growth, both organic and with Scotiabank just beginning to come online. In Scandinavia, that's also true, in Sweden and Denmark. And also beginning to get a recovery in our U.K. Personal Lines businesses or particularly in the Pet and the home areas.

I would say that we still need to do some important work in Motor in the U.K, which Scott will talk to.

Turning to Commercial Lines, which of course was our big headache last year and still is a headache as you can see still with an unsatisfactory combined ratio of 98.8%.

I think it's important to note that a big amount of that was the swing on prior year development. So our current year combined ratio improved very slightly versus half 1 and of course it's -- all of it is a lot better than half 2 of last year, but we have to get through half 2 of this year before we can feel comfortable. We don't have another really bad third quarter.

When we look at early signals, the attritional loss ratios in our Commercial Lines businesses have started to improve, and we believe will improve further in the second half and into next year.

The prior year development headwind as I say I take to be a temporary thing. The large losses have behaved themselves in the first half in our biggest Commercial Lines area, which is the U.K. & International division, indeed the London market portfolios that remain as opposed to the ones we've exited, we're actually in the first half strongly profitable. Of course, a half doesn't tell you too much, so we'll see how the full year goes.

However, we have had worse than planned large losses in our Canadian Commercial Lines business and our Danish Commercial Lines businesses. We don't believe there's a particular thread or a particular trend or particular businesses that are leading to that, but it is important that the underwriting actions that we've taken take those large loss trends down as well and in the second half would be an important proof point as the different actions we've taken earn through and start being seen in the portfolio.

There's just a slide here, I won't take you through the numbers because you can read them afterwards. But allowing you to track all of the portfolios that we said we would exit the amount of premium that we were coming out of. How far we have got now. What's left to do and where the first half losses were. I think the key headline is that more than 80% or roughly 80% of the earned premium is behind us and therefore to the extent that has been a drag, it should be an increasingly minor drag and the vast majority of it should be done by the end of the year, which is important to us.

We did say that we would update on have we done enough. And I think the tentative conclusion is plus or minus, we have. Of course, there are always fiddling at the edges in terms of things that we may do more. But tentatively, we think we've drawn it in the right place. However, the important caveat to that is that in the remaining London market business that we have, which is largely Marine, we've halved the size of our Marine presence, but we still have a meaningful Marine presence. We need to make sure that the market continues its sharp improvement, which is driven by rate and capacity reduction. If it were not to do, we would go further as well. But for the time being, we feel that the market has responded by enough for us to retain the best bits of what we had. And so that's I would say a tentative conclusion to be relooked at again in the light of how the market trend as a whole continues.

So now, giving a regional lens on how we have done. Scandinavia, of course, at a headline level, our results are disappointing to us by being 11% down and going in the wrong direction relative to our ambition and relative to what we had expected.

That is entirely due to Danish Commercial Lines, our combined ratio in the first half would have been 82.9% ex-Danish Commercial Lines and so Danish Commercial Lines made up all of the difference. That is a business, which we believe can be good. We believe we have taken the right actions. We will be taking more. The problem -- the challenge with Danish Commercial Lines is more than 50% of it renews on 1/1 so you basically only get one shot every year to really change the portfolio. And so we had a crack at the beginning of this year. We'll do a bit more at the end of this year or the beginning of next year. And we're confident we'll get in the right place but we haven't done yet and that in fact is -- has held us back significantly in Scandinavia. But the great majority of the Scandinavian business, Personal Lines business is in fabulous shape. Our Commercial Lines business in Sweden, best results for a very long time and in line with our target, and even Norway, while the absolute levels aren't very good, and it's a very small business, a very substantial improvement from last year and importantly the expense ratio across the region continuing to improve. So there's still some important work to do in Scandinavia but the headline I think is misleading as to how much work we have to do, it's very, very concentrated in part of one country's business.

Turning to Canada. On an absolute basis, we are pleased that our Canadian profit doubled, and we're upset that it's nowhere close to where we want it to be and had planned it to be. I think it might prove to be actually the best result of any Canadian competitor in the first half. We saw Intact out yesterday with a combined ratio of 100% in Canada and as you can see our combined ratio is 97.8% and it's unusual for us to be better than Intact, and so we're rather pleased that we are, although it's only a 6-month period.

Of course -- so we've improved. Terrific. What has held us back relative to our plans, overwhelmingly, weather, which was very bad in Canada although in our case offset by being good in the U.K.

The Canadian market is what you would call a hard market with strong pricing and underwriting going on through all competitors. You're seeing that in the Property lines where broadly people are trying to price for worse weather trends going forward and you're seeing it in the auto lines where the regulatory cycle is allowing us and all of the competitors to take good rate, and our auto lines are in aggregate back in profit as indeed Intact reported although they had a big negative PYD on auto, which was larger than ours in the first half.

We are very pleased of course that attritionals have started to improve, reflecting that rating, although they should improve more as we go into the second half, cost competitiveness continues to be in the right place and the crown jewel -- in the same way that Sweden is our crown jewel in Scandinavia, our crown jewel in Canada is our direct Personal Lines business. Johnson, which is now up to, something like, 40% of our business overall and continue to do very, very well both from a shareholder perspective and a customer perspective.

Our Commercial Lines business as I mentioned has had a poor first half. Some of that is weather, just the luck of the draw, it got hit a bit more by weather, actually than our Personal Lines business had some -- was large losses, which are not yet where they need to be.

And finally, the U.K. & International, which as I mentioned, Scott will talk a little bit more about when I have finished. Clearly, the headline we're delighted with, best-in-class headline of 94% combined ratio. We don't expect to finish the year there but nevertheless really pleased to have it.

Within that, it is very, very driven by current year underwriting improvements and in fact would've been better had prior year not corrected us significantly as we talked about.

Ireland and the Middle East have very much driven the numbers and both of them for different reasons are likely to have worse second halves than first halves. So they're both in aggregate performing at good levels but it's -- this isn't a correct run rate in the first half, not at least in Ireland, they had no weather and very few large losses, which helped a lot.

The U.K. own -- the U.K. stand-alone combined ratio was 96.5%. You might recall a 97% to 98% ambition for this year. So slightly better than our ambition in the first half and basically good weather offsetting bad PYD, which Scott will talk at some more about it.

We're pleased with the start of improvements in attritional loss ratio and cost discipline has been okay, flat costs, but we quite appreciate, there's more to do. But I wouldn't say more about U.K. because Scott will have a go at that.

And then finally, our ambitions slide. Ambitions unchanged. The eagle-eyed among you will see that in Scandinavia and Canada, we at one stage thought it was possible that we could reach the combined ratio ambition this year. We had a '20 to '21 time frame and you'll see we've put that back a year. Why is that? It's because if you start behind the ball with a first half, you probably won't make that up in the second half. And in the case of Canada, that's obviously a weather item and in the case of Scandinavia, it's the Danish Commercial Lines item.

We don't see any of those as, if you like, long-term issues around our ability to achieve the ambition but it probably means we won't achieve it this year.

So if I wrap up my overview, we think that the results suggest that we are on track for the things that we wanted to do. We're particularly encouraged by the current year underwriting trends. We're very encouraged by the powerhouses that we have in our Personal Lines businesses, and we believe that the corrective actions that we're taking are showing early evidence. We think we're doing the right things but of course the proof will be in the pudding and the eating of the pudding to sort of Boris Johnson-ize this presentation. And the key was cake rather than pudding, wasn't it? And so we need some time to see those go through. We're very focused on continuing the progress and having a decent second half. Charlotte, thank you.

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Charlotte Claire Jones, RSA Insurance Group plc - Group CFO & Executive Director [2]

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Thank you, Stephen, and good morning, everyone. I'm delighted to be here to present the first half results and whilst it is only my second day as CFO, my time as non-exec director means that I already know RSA relatively well.

And as Stephen has had, we're pleased to report a solid set of numbers with underwriting actions on track and current year performance significantly improved.

In terms of slides, I will start with an overview of the numbers before walking through the P&L and capital in more detail.

Group net written premiums of GBP 3.3 billion were up 1% at constant FX, down 2% excluding changes in reinsurance. We're pleased with Personal Lines growth in Scandinavia and Canada.

And while Commercial Lines across the group are down, this is largely in response to underwriting and pricing actions.

Group underwriting profit for the first half was GBP 181 million, excluding the exit portfolios with a combined ratio of 94.3%.

Improvements in the attritional loss ratio underpinned very good current year results. Our prior year development was positive but lower than our planning assumption in the first half of 2018. As already said, the principal driver of this were refinements to loss ratio -- sorry, to loss estimates relating to the 2018 accident year.

Operating profit was GBP 308 million, excluding the exit portfolios and within this investment income decreased as bond yields fell further.

Statutory profit after tax of GBP 183 million was impacted by exits as well as nonoperating charges.

Underlying EPS at 20.9p and the underlying return on tangible equity of 15% was within our target range.

And we are pleased to have declared an interim dividend of 7.5p, up 3% from last year and in line with our dividend policy.

Finally, tangible equity increased by 2%. This was driven by profit after tax and fair value mark-to-market movements. These were partly offset by slightly lower pension surplus, investment in intangible assets and the impact of dividends.

I'll now go through some of the areas in more detail, starting with premiums on Slide 24.

Now we've prepared this slide excluding the impact of reinsurance changes to allow you to compare on a like-for-like basis. As I just mentioned, underlying premiums were down 2% at constant FX. Positive trends in Personal Lines continued in Scandinavia where premiums were up 3% underlying to GBP 567 million. We grew the business in our most attractive markets of Sweden and Denmark with rate increases and better retention both contributing.

Swedish Personal Lines premiums grew 3%. Household, motor and personal accident were all up. In Commercial Lines across the Scandinavian business, premiums also grew by 3% to GBP 472 million. Rate action was ahead of our plans and last year in all lines of business. However, the impact on premiums was dampened by a 3% decrease in volumes.

We wrote less new business where we are taking the most action to improve performance, notably in commercial motor and property.

Personal Lines in Canada grew 8% to GBP 546 million. We applied rate of about 7% in auto and nearly 10% in household. This is helping us to tackle ongoing and significant claims inflation and is starting to allow for the heavier weight weather losses expected as a result of climate change. And the hard market conditions Stephen mentioned, meant that retention remained strong at 90% for Johnson and 85% for personal broker.

I'm also pleased to confirm that we started to write new business for Scotiabank in the second quarter. Commercial Line premiums in Canada decreased by 5% to GBP 222 million where a 15% reduction in volumes was partly offset by rate of almost 10%. These lower volumes were in line with our plans and mainly driven by targeted lapses.

Now for the ongoing U.K. Personal Lines business in the U.K., premiums were down 10% in the first half to GBP 488 million. Household was down 8%. Importantly, we have continued to achieve good rate in this business.

Motor and Pet also contracted and while retention improved, new business was impacted as we held our discipline on rate.

On same basis, Commercial Lines in the U.K. were up 2% to GBP 648 million. Rates were -- rate was positive across all major lines. Marine achieved nearly 10% while commercial property achieved 6%.

Now let's turn to underwriting result on Slide 25. The group combined ratio was 94.3% excluding the exit portfolios, and we're pleased with the progress in the attritional loss ratio, while lower commission and more benign weather also contributed.

Against this, the expense ratio increased slightly as expected and PYD reduced compared to 2018 and our planning assumption.

So looking at the headline underwriting performance in each of the regions. In Scandinavia, the combined ratio increased by 1.5 points to 89.1%. Personal Lines remained excellent with the combined ratio of 79%. This was despite higher weather losses and lower PYD.

Commercial Lines increased to just under 104%, weather, large and attritional losses all contributing to this. The deterioration was all in Denmark with Sweden performing well.

The combined ratio in Canada improved by nearly 3 points to 97.8%. Personal Lines improved by over 8 points to 94.5% despite another heavy weather period.

Commercial Lines deteriorated to 105.6% due again to heavy weather, higher frequency of property, large losses and lower prior year development.

Finally, the U.K. & International combined ratio was 96.1% or 94% on an ongoing basis. Within this, the U.K. ongoing business reported COR of 96.5% and Ireland and Middle East reported excellent results again with combined ratios of 83% and 82% respectively. And you should note that these ratios are expected to fall back somewhat while remaining better than target.

Now let's take a closer look at loss ratio movements by region on Slide 26.

In Scandinavia, the loss ratio was about 2 points higher than the first half of last year at 71.9%. The 3 volatile items each added nearly 0.5 point.

Large losses were above the 5-year average driven by Danish Commercial Lines. And while we saw some increase in loss frequency and property and tech lines during the second quarter, our reviews concluded that the risks were well underwritten.

The attritional loss ratio is increased by 0.4 points, also driven by Danish Commercial, primarily in the Motor and property books.

Action plans are in place to improve both and these include repricing, reunderwriting and reducing capacity.

The loss ratio improved by about 1 point in Canada to 70.8%. This is despite the volatile items costing just over a point.

Now while weather was nearly 3 points better than the prior year, it was again above the 5-year average. And as a backdrop to this, in Canada, in short cat losses for the industry, were around $600 million for the first half with spring floods costing over a 1/3 of this.

The large loss ratio remained elevated, mainly in commercial property. Positive PYD was lower than 2018 and our planning assumption.

We're very pleased to be reporting an improvement of 2 points in the attritional loss ratio. This was better across all major lines of business and it reflected the strong rate beginning to earn through.

We will continue to push the rate in the second half subject to regulatory approval where that's needed.

And finally, in the U.K. & International, the loss ratio also improved to 59.9% excluding exit portfolios.

Weather was relatively benign and large losses were a little better than last year and our plans. The attritional loss ratio was better with reductions in Pet, household and commercial property partly offset by increases in Marine and Motor.

Household improved by 5 points, a strong rate earn through. Prior year development reduced compared to the first half of 2018 as loss estimates for the 2018 accident year were refined and while PYD was slightly averse -- adverse overall, it was favorable for the ongoing business.

Now let's look at the impact of what we term volatile items, on Slide 27.

I've already covered most of the impacts of weather in large, so here I would just make a few additional comments on prior year development.

Overall, PYD gave a 0.9-point benefit to the combined ratio excluding the exit portfolios. Whereas for the first half of 2018, the benefit had been 3 points. At 1.2%, the PYD for the second quarter was broadly in line with the planning assumptions, which we've communicated previously. However, as you know, we reported flat PYD for the first quarter, which brings down the first half impact overall.

We saw marginally positive development in each region excluding the impact to the exit portfolios, and as I have already mentioned, the lower PYD this year is driven primarily by the refined loss estimates for the 2018 accident year.

I think it's noteworthy that a number of our competitors have reported similar development especially in international commercial portfolios.

Now moving to costs on Slide 28. Group written controllable costs were down 2% in real terms in the first half and the earned controllable cost ratio was broadly flat at 21.3%.

I will make 2 specific regional comments here. Firstly, in Canada an already low cost ratio improved to 17.6%, better than our plans. It is forecast to increase in the second half, as certain timing differences unwind. And we have previously guided that while the cost ratio is expected to remain below our target level of 20%, higher software amortization charges will increase it over time.

Secondly, we told you in February that the U.K. & International controllable cost ratio was expected to increase due to the premium contraction in the U.K.

We reported 22.8% for the first half which was an increase of 1.3 points.

We're focused on resuming progress towards our 20% target and as Stephen has already mentioned, a new cost program is expected to begin before year-end.

Now moving to investment income on Slide 29. Investment income of GBP 154 million was 4% lower than the first half of 2018 but broadly in line with guidance.

There has been no change to our strategy. The portfolio remains dominated by high-quality fixed income, 91% of our bonds are A rated or above.

The average income yield on the bond portfolios was 2.2% while the average reinvestment yield on the portfolio was 1.3%.

Based on current forward yields and FX, we are forecasting investment income of between GBP 285 million and GBP 295 million in 2019. This is slightly down on the projections made 6 months ago.

Now we've included 2020 and '21 on the slide for your information. These projections represent a more significant decrease in guidance as lower yields earn through.

Balance sheet unrealized gains increased by GBP 181 million during the first half. This was mainly driven by positive mark-to-market on bond holdings due to decline in government yields and tightening credit spreads.

The higher opening balance together with flattening yield curves means that the predicted time for unrealized gains to unwind has increased. If yield curves stay as they are, we now estimate the gains will take around 7 to 8 years to fully unwind, about 850% of this will -- within the next 3 years.

The impact of pull to par on capital generation is forecasted about GBP 40 million for the second half and GBP 70 million for next year.

Now moving on to the nonoperating items on Slide 30. I've only a few things to highlight here. Interest cost increased slightly in line with guidance. This reflects the adoption of IFRS 16 from the 1st of January this year. Other nonoperating items include GBP 17 million for the completion of the U.K. legacy sale and GBP 15 million from a reduction in the discount rate on long-term insurance liabilities in Denmark. Neither of these impact items negatively impact capital.

Finally, turning to capital on Slide 31. Our capital position and quality remained strong at the half year with a coverage ratio of 167% and a Core Tier 1 ratio of 104%.

We generated 13 points of capital from underlying earnings during the first half. Net CapEx and pensions absorbed 5 points of this.

Both major U.K. pension schemes were at their caps at the half year. This means that contributions were not fully eligible from a capital perspective. However, for each scheme, the surplus over the cap acts as a shop absorber -- shock absorber for future market movements before there is an impact on our capital ratio. The impact was exaggerated in the first half of 2019 due to the timing of the pension contributions.

The exit portfolios and the impact of Bond pull-to-par absorbed 4 points of capital generated while market and other movements were neutral overall.

And you should note that the 7-point dividend impact shown here represents a 6-month accrual for a full year notional dividend.

So to conclude, we're pleased with the solid set of numbers for the first half, particularly the current year underwriting result. Our performance improvement actions are on track and their full power should earn through next year.

Our Personal Lines businesses are performing strongly overall and delivered a combined ratio of 90%.

Premiums are growing in the most profitable lines. Commercial Lines continue to be challenging. We still have much work ahead in all our regions before we can deliver at our ambition levels. And costs have come under pressure in the U.K. as premiums have contracted, which impacted the group cost ratios.

A new cost program is expected to begin before year-end. Financial markets continued to provide a headwind. This includes negative impacts from the translation of foreign earnings, lower bond yields and tighter credit spreads, of particular note, the increase in the AFS reserve and its expected impact on pull-to-par.

Finally, our ambitions for the group remained high and unchanged, and we are focused on delivering good progress in the second half. That concludes my run through of the numbers. I'll hand back to Stephen.

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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, Charlotte. Much appreciated. As mentioned, I thought we would just give Scott 5 minutes to update on the U.K. before going broadly into Q&A, which we'll do immediately after that. Obviously, Scott's only been in place for 5 months -- 6 months I suppose given we're at the end of July. And so we're very conscious that the proof is in the pudding and it will take some years for us really to know what the efforts will add up to. But what I can say is from my perspective, he's made a really good start. He's been decisive in terms of organization and team. He's brought a pace and an incisiveness that we needed to our execution. So I'm hopeful but Scott, why don't you speak for yourself?

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Scott Egan, RSA Insurance Group plc - Chief Executive of UK & International and Director [4]

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Thanks, Stephen, and good morning everyone. I've just had my half-year appraisal I think in front of everyone in the room here. So I think -- I won't go back to the numbers because you've heard them all but I guess I just wanted to give you my take on the U.K. and the progress that I think that we've made. I thought the best way of doing that is to put the same slide up that I used at full year and set priorities as I saw them then and give you a bit more color behind each of them.

But I will reinforce what Stephen said. As I stand here, I'm pleased with the progress. I'm actually really pleased with how the team in U.K. and I are reacting to the change. I think you have a number of people right across our businesses who are working incredibly hard to make sure they can get the U.K. business back to where we believe it can be, which is amongst the best in class in our marketplace.

But at the moment, it's about building momentum in that business and that's what I hope I can share with you as we go through the priorities.

So if I start with the first one, which is about our underwriting actions and claims initiatives. For me, the bedrock, no excuses, this is the area that we have to push hardest on and hopefully, you will see the most improvement from, it's what we do.

And at the end of the half year, our rating is ahead of plan. Our claims initiatives and savings are ahead of plan and the underwriting actions that we set ourselves beyond rate are 95% complete around the half year.

So I would say incredibly good performance from the team in terms of delivering those outcomes. In terms of the rate and the underwriting actions, the reason I want to highlight them is I don't want you to think that we're just hammering rate through, there's a sophistication to what we're trying to do below the surface and I think that's best evidenced by things like the retention rate, et cetera that Stephen put up, which hasn't collapsed as we've gone through our changes.

That's not to say everything is perfect, Stephen highlighted it. I think in the first half if I had to highlight a couple of areas, the one I would highlight most would be Motor where I think we've -- we found the Motor market tough. I think in terms of claims inflation across the market, we're seeing around between 5% and 6% covering both [PD] and PI. And for us, as a group particularly in MORE TH>N business and I would call core motor non-telematics business, we haven't got the strategic skill that I think we genuinely need to help build our MORE TH>N business for the future and that is something myself and the team will be working on in the second half of the year.

In terms of the second priority, the portfolio review. Yes, look, I think we are broadly done with the big moving parts but there will never be a day in the U.K. where we're not looking at segments, where we're not looking at products, where we're not looking at areas, where we will continually take actions but I think the actions that we outlined at the end of the year of that sort of magnitude, I think those are behind us for now, but I will caveat it and say things like the areas that have hurt us in the past, things like Marine and things like the London market, I have to be honest and say they will remain under continued vigilance in the second half of the year and beyond. But I think they've done a sterling job in the first half of the year. To give you a sense, our London market combined ratio improved 20 points year-over-year at H1. So a good job but too early to declare success.

You've heard a lot this morning on our thought priority around cost improvements, it's something I've been very open about within the business. The U.K. business cannot survive with a cost ratio of 23%. The group has a regional target of 20% or below and the U.K. can be no exception to that. And therefore, I with the team are targeting structural cost opportunities of around 2% of our combined ratio, and we hope to achieve full run rate on them by 2021.

It's an area that we're working on in terms of the details. I'm not going to say more on that as I stand here now but suffice to say the team are working incredibly hard on that detail and as and when we're ready to communicate that both internally and externally then we will.

The performance of Middle East and Ireland has been exceptional in the first half year. I think you've heard from both Charlotte and Stephen that was driven by strong PYD and benign weather. A more normalized combined ratio for those businesses would be around 90% for me for Middle East and perhaps low 90s for Ireland recognizing that any point in time it could be higher or lower than that.

But again, these are strong combined ratios even on a normalized basis and there's quite exciting things going on in both businesses, particularly around the digital platforms, which go from strength to strength.

The fifth one is really about improving the quality of execution, focus, agility and pace. I think we're at the start of that journey across the U.K. A few examples to the right-hand side. One of the first things that I did on taking on the role was to refresh the exec team. As a reminder, we appointed a new IT director, a new COO, a new head of Personal Lines, a new Finance Director and a new HR director, and all of those appointments were a mixture of both external and internal moves.

That team is forming well. I'm really pleased with how we're tackling things both culturally and operationally.

The second point is around attritional, and I think if I stood back at half-year, I think the improvement that we've seen in attritional across the U.K. business is providing good momentum not only into the second half of 2019 but into 2020. Improvements are between 2% and 3% if you compare it to the second half 2019. And as I say, that is really the evidence point of the breaking ahead of plan, the claim savings and the underwriting actions.

We're starting to see some early beginnings of growth and I wanted to put that up there because I do not want to create an impression that the U.K. is shrinking to greatness. It really isn't. Very early days and I would not budget that it is any more than that, but just to give you a couple of examples, in more-than-home, whilst if you compare it to last year, it is down. More-than-home policy count actually grew in June for the first time in 2 years year-on-year, which is a really important sort of evidence points of some of the actions that we're doing. Predominantly, that was driven by new business, which is up 180% since the beginning of the year. So again, some really good evidence that the team are really building on the pricing sophistication, and our brand that we have in the marketplace.

And their intention is to refresh the MORE TH>N brand and relaunch towards the beginning of 2020 with the view that hopefully, we can become the profit jewel in the crown of the U.K. business like we have in Scandinavia and like we have in Canada.

And on the commercial side, to give you one example, our regional broker business, which we run and, which is our Heartland of our U.K. domestic commercial. Again, new business is up 18% year-on-year, retention at just below 90% and that's a business that enjoys combined ratios of low 90s. So I think we're growing where it makes sense to grow, and we'll continue to build in that hopefully through the second half of 2019 and into 2020.

And then look, to end, really, which is a really important of staff engagement as you can see at the heart of our business is our people. I keep saying it in every single location I go to, I keep hearing it from our customers and therefore, I will always prioritize our staff and our engagement levels are actually up 4% since the turn of the year, and if I jump across to the customer angle and look at our NPS scores in our Personal Lines business, they're up 5% from half 2 2018. So again, small steps but hopefully small steps that can turn into bigger steps if you can keep the momentum going.

So to wrap it together, I would budget as no more than a promising start. It is a start. It's half-year. I will keep everything crossed as well, since I'm the lucky general and I hope in the second half of the year, that luck will continue. But for now, I think it's a good start, we're hopefully building momentum and the aim from the team is to target the lower end of the combined ratio target that I set when I stood up here at full year results of around 96%.

With that, I'll hand back to Stephen.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [5]

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Thank you very much, Scott, much appreciated. Let's go to Q&A. Over here.

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Questions and Answers

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [1]

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Greig Paterson, KBW. Three questions. One is your Solvency II ratio is above your range. I wonder if you could explain that. Is that because of the rating agency constraint? Or is it to do with the credit spreads -- credit situation, benign credit situation concerns there? And if it's not to do with either of the 2, why don't you move the range because it seems an oddity?

The second question is just a technical one on your credit spreads. There' a fair bit of sensitivity there. I was wondering how you treat the volatility adjust and/or downgrades due -- within your spread assumption to make the scenario realistic.

And the third thing is -- I don't know if I misheard. But when you were talking about the caps on the pension fund for Solvency II, one of the comments was we were at the caps. And then the next comment was we have a buffer, which doesn't mean you're at the caps, you're well in the caps. I wonder if you can just explain the degree to which those caps are biting so we can have a feel for the buffer.

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

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Thank you for those -- the precision of those questions. On our capital ratio, as I've said I think many times before, we are really targeting a credit rating. We're not really targeting a capital ratio. And our credit rating is a mid-single A. We like it like that. It's not on a review either upwards or downwards by any agency. And we think that that is the appropriate level for our company. And I regard, if you like the nominal, the mathematical ratios beneath that as interesting but not terribly relevant compared to that central fact.

We've also said in relation to the Solvency II ratio that a feature of our ratio is that we have some deferred tax assets that are part of that. Personally, I don't think that should be allowed on the Solvency II. It is but I don't think about it. And if you were to extract those, we're within the ranges that we've published. We could move the ratio -- the ranges around. It just hasn't been a priority to do so.

I think on your second question, which was about volatility adjusted, I'm not entirely sure I understood it totally. We don't have -- we don't make use of the volatility adjustment element of Solvency II, which some other companies do. I think it's a bigger issue for life insurers than general insurers. We might 1 day if it ever became relevant. It's not worth a whole lot of money, but I think that was your question if I've understood that correctly.

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [3]

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Because it sounds to me your sensitivity when you assume spreads, we cannot base it on the assumption that X percent of the total are downgrades or...

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

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Yes. So inherent in the Solvency II model are -- and therefore the capital requirement are -- actually, we use the Moody's as the supplier of our volatility engines, if I could put it like that for the purpose of Solvency II. And so we use that black box. And then there is, of course, various assumptions about what happens in different scenarios in terms of downgrades and what have you. So we follow that and that's obviously signed off by all the regulators. I don't think we do anything different than other people do.

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [5]

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But is it sensitivity due to those? Or is it a series of downgrades in the actual scenario?

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

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Well, now you're going well beyond my knowledge. Does anyone know the answer to that, that wants to pipe up? Why don't we come back to you on that?

And then your question on pension. Charlotte, do you want to have a go at that?

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Charlotte Claire Jones, RSA Insurance Group plc - Group CFO & Executive Director [7]

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Yes, I'll have a go at that. So on the caps...

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [8]

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And by the way, if you know the answer on volatility, be my guest as well.

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Charlotte Claire Jones, RSA Insurance Group plc - Group CFO & Executive Director [9]

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I might pass on that one.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [10]

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I told you I'd give you the nasty ones, didn't I?

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Charlotte Claire Jones, RSA Insurance Group plc - Group CFO & Executive Director [11]

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So you calculated by each pension scheme as though it's got -- you look at the contribution to SCR. And then that works out the cap per scheme. At the year-end, we were below those caps. At the half-year, we're above them. So we're now into that shock-absorbing phase for both of the main U.K. schemes. So sort of...

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [12]

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So you're right. When Charlotte said at the caps, she really meant slightly above it.

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Charlotte Claire Jones, RSA Insurance Group plc - Group CFO & Executive Director [13]

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Well, [through] it.

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

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Is it slightly above or...

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

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It was 2% above at the half-year.

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Charlotte Claire Jones, RSA Insurance Group plc - Group CFO & Executive Director [16]

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Yes.

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

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2 points.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [18]

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So in other words -- yes, 2 points. So in other words, our capital ratio would have been 169% had it been all eligible. By the way, as of the end of July, I think that 2% is down about 0.5% because there has been some market movement in July. So bubbles around all over the place. Next question.

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James Pearse, RBC Capital Markets, LLC, Research Division - Assistant VP [19]

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James Pearse, RBC. So the first one just on reinsurance. So can you quantify how far through the aggregates you are on your regional reinsurance programs?

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

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I can. It's in the press release. So you can look it up there. It's not completely in my head, but it's all written down in the press release.

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James Pearse, RBC Capital Markets, LLC, Research Division - Assistant VP [21]

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Fine. Okay. And then the second one on was on the best-in-class ambitions. So I know that you said you pushed back the kind of the range in terms of time frame by a year, which is the current run rate I think you said in Scandinavia and Canada?

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

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Yes.

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James Pearse, RBC Capital Markets, LLC, Research Division - Assistant VP [23]

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On a normalized basis, would you expect to still hit that ambition?

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

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I worry about normalized because that requires me to be certain about what normal is. And so Canada is a really good example that what we have historically assumed as normal weather, we are moving our assumption. And so I would expect us to do significantly better than a 94% combined ratio in Canada, normalized for old weather. But lots of the pricing increase we're putting through is to assume worse weather going forward. And so it's just a tricky answer.

I -- generally, my expectation would be in normal weather for more recent years in Canada, we would be operating as we see -- once the current pricing earns through. So that's why I thought next year, if next year was a new normal year, Canada has a very good chance of hitting the 94% combined ratio. Obviously, that requires some significant improvements. A chunk of that is weather but a chunk of that is really very substantial rate just earning its way through the books, which obviously is true of the whole industry.

And then as I say in terms of Scandinavia, although there's lots of things we want to improve, really the thing that has to change is Danish Commercial Lines to get us into our target. And so again, hopefully, the second half will be better. Hopefully, next year will be better still. And so -- and I think also in Scandinavia, our costs still have another 2 points to fall, which I don't think by the way will happen next year. But we can easily see where we get to our ambitions in those 2 territories. Whether we get there faster or slower is partly down to how we execute and partly down to what the outside world throws at us.

In the U.K., we can see how to do it. We just know it's going to take us longer than in some of the other markets, in part because it's technology dependent and it's also about rebuild of certain competences and so on and so forth. So let's see -- let's go over here.

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Andrew Sinclair, BofA Merrill Lynch, Research Division - VP [25]

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It's Andrew Sinclair from BofA Merrill. Three for me, if that's okay. So firstly and secondly, a couple of questions on the U.K. Scott, you mentioned the U.K. core motor business maybe not having scale. Is that something you'd consider an exit? Or what can you do to build scale of that business in a tougher market?

Secondly, staying in the U.K., you mentioned the 2 points of expense ratio improvement. How much of that is attributed to the exit books just getting rid of the costs related to those versus the rest of the portfolio?

And thirdly, just on Denmark Commercial. Just any color that could be given on the attritional creep that we've had in Danish Commercial, particularly given the comments about dependence on 1/1 renewals.

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

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I'll ask Scott to answer the first 2. But just on Denmark, we say the big issue in Denmark was really large losses. But beneath that, we have had attritionals move out in 2 portfolios: property but really concentrated in real estate, which is basically condominiums and things like that; and in commercial auto. It's interesting, actually. Real estate has hurt us all around the world. I think there's a trend, things like escape of water and so on, for what I call commercially managed housing to have crappy loss ratios from an insurance standpoint. And so actually in that segment, we're having to take action in lots of different places. But -- so those are the 2 places where we need to take some action related to the attritional loss ratio.

And then related to the large loss ratio, there were 2 segments that have been disproportionally hurting us. One is the feedthrough of some of the subsegments of the Renewable Energy book that hurt us last year, which we've said we are exiting that subsegment. But we haven't badged that in the exit portfolio, so that's still in the ongoing. And then our municipal area in Denmark, which is primarily around hospitals, has had some crappy large loss experience. And so we're going to get it out of that. But again, we're not badging that as exits. But Scott, do you want to take the U.K.?

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Scott Egan, RSA Insurance Group plc - Chief Executive of UK & International and Director [27]

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Yes. Two things. So just if I answer the second one first and the 2% is on continued. Okay? So -- and the fixed cost drag on our exiting business is reasonably immaterial.

If I come back to motor, my ambition is to actually build a motor capability and sort of overall proposition that I think works for the U.K. If you remember, a big part of our new investment in technology has been about building a sort of core technology platform that we can then digitize, which in turn I think allows us to at least have some of the tools to compete in the U.K. marketplace. I think having a wider product base in a direct space is actually strategically really important to allow cross-selling leverage across the different products.

So my ambition at the moment is to work out a strategy where we can align our capabilities because we have to build them. We are not at the same level of capability with some of the more sophisticated players and really leverage that carefully off the back of some of the investments we've already made. And that's what myself and the team will be working through in the second half of this year.

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

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Sorry. One thing I should just say because we didn't mention it in our presentation on the subject on motor. The Ogden change, which obviously doesn't hit us so much because U.K. Motor isn't a big bit, but it will hit us probably GBP 14 million, GBP 15 million after tax, and that will be booked in the third quarter. And that was what I meant by the headwind in my statement. Middle.

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Edward Morris, JP Morgan Chase & Co, Research Division - Equity Analyst [29]

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Ed Morris, JPMorgan. Two questions just on that U.K. point. Can you just clarify is this something that you would be looking to do organically? Or is the acquisition...

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [30]

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Yes. Yes, organically.

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Edward Morris, JP Morgan Chase & Co, Research Division - Equity Analyst [31]

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Okay. Organic. And the second question is around some of the below-the-line items. Really thinking about this with reference to how you think about capital management. I appreciate it's a little early in the year to set our expectations on special dividend. But just when you think about that payout range and you think about how you manage capital, are you thinking about it with reference to underlying EPS or statutory EPS?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [32]

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Thank you for the question. So what I would call on a regular dividend, we think about in relation to underlying

(technical difficulty)

In the first half, 2 of the 3 things that sat below the lines don't have a capital impact. So the only thing in the first half that was below the line did have a capital impact was exits. I think that will be a much smaller number than in the second half, touch wood, not appearing in the income statement that has an income as pensions. Pension, this all happens in the first quarter. So the first half, you have to annualize so its impact across the year will not be any higher than we guided at the beginning. And then obviously, we've given out basic guidance on pull-to-par.

Pension is sort of -- we're not quite sure how to treat because pensions may optically burden Solvency II calculation. But if it does, then it creates a buffer about Solvency II, which is available to absorb a negative. So I think pension sits in a gray zone is how we really think about it. We don't intend any of this to be strictly mathematical. And so it remains our ambition to have the capacity in the coming years to do more than just ordinary dividends. But I do think that the market has continued to want to bully us on it and I'm not going to be bullied. And so we will continue to disappoint the bulls in this regard but to stay within our policy. You have one supplementary now.

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Edward Morris, JP Morgan Chase & Co, Research Division - Equity Analyst [33]

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Sorry. Just a brief follow-up. Just when you think about the actions for the U.K. on cost, would you expect that to also come with some exceptional costs?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [34]

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Yes. I do expect there to be some costs to the cost program. We don't -- we haven't finalized the cost program yet so we don't know how much. If you ask me to guess, it would be spread this year and next year. So it would be in 2 bites. And I don't -- if I completely invented a number of GBP 20 million this year, it's not going to be GBP 50 million and it's not going to be nothing. Order of magnitude, okay?

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Unidentified Analyst, [35]

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(inaudible) from Panmure Gordon. Just 2 questions, please. First in the U.K. household, the -- and top line came down 13% year-on-year. 4% is because of the sale of the Oak Home. Are the remaining 9% from the rate increase? I'm trying to get a sense in terms of your top line sensitivity to the rate increase. And what's your guidance going forward please?

And my second question is Scandinavia. Norway is very small for RSA and -- but the underwriting is still a loss even though the loss has halved. What's your strategy in Norway going forward? Would you consider to exit that place or maybe do an acquisition because if you do a bolt-on acquisition, presumably the PEs are pretty high in that region?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [36]

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Thank you very much for your question. Just on the U.K, we significantly lost Household volume in 2017 by pricing well ahead of the market mainly in reaction to escape of water. That has had the desired effect. And our attritional loss ratios in Household have come down very substantially and have now allowed us to be profitable and competitive in the new business market, which is why Scott said that our new business is now significantly above where it was before and is starting to outweigh the drag.

However, when you lose volume on the back book, it takes -- it feeds through for a little bit before your new business can outweigh the renewal gap that you had. And so I would hope that we would in total grow in Household next year over this year. We don't have a firm plan yet, but I would hope that that would be where we would be. But obviously, because the U.K. Personal Lines market is so dominated by price comparison websites, it is one of those hair-trigger markets that you can put on a lot of volume if you want to drop prices, and you can lose a lot of volume if you don't want to drop prices. And predicting what is going to happen for us, given that we want to be disciplined on profitability, requires you to predict the rest of market. And obviously, that's slightly less easy to do.

On your topic of Norway, you're absolutely right to make the observation. We have -- we are completely replatforming our Norwegian business that to -- in Scandinavia in terms that -- the most up-to-date technology. That process will be done by halfway through next year. We're about halfway done now. And we believe that that will do 2 things. It will, one, allow us to start substantially reducing our costs. And our loss ratio is in line with competitors in Norway. The thing that makes our results not in line is entirely costs. And so that intervention will allow us to significantly improve costs albeit not until starting the second half of next year. And secondly, it will give us a greater agility and digital capability than the norm in the Norwegian market, which should allow us to be more commercially competitive.

So those things I think should give us a platform to improve. Are we subscale anyway? Yes, we are. Is there an easy way out of that? No. If there were bolt-ons that made sense post the replatforming, we'd look at them. But our strategy isn't based on it. Guy in the back.

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Oliver George Nigel Steel, Deutsche Bank AG, Research Division - MD [37]

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Oliver Steel, Deutsche Bank. So 2 questions. First is you talked about raising your estimates for weather losses going forwards in Canada. And obviously, you've also done an awful lot of reinsurance programs in Canada and Denmark. You mentioned in the U.K. But I don't see any updated guidance for large losses, weather losses, even at the group level. So I'm just wondering if you wanted to sort of comment on that relative to the numbers that you historically show on a 5-year average. So that's question 1.

Question 2 is sort of a similar issue, I suppose. Specifically on Canada, you're getting very strong rate increases. Are those running ahead of claims inflation? And it's sort of brought us from recognizing obviously that future claims will be volatile?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [38]

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Thank you for that question. I would say on large losses at the moment, we have no reason to change our long-term guidance because we don't think there is inherently a trend in that, that we've spotted. And so our planning assumptions remain the same obviously. They -- at a group level, they can change as business mix changes. But the underlying, we haven't particularly changed anything.

In terms of weather, I would say we also haven't changed any weather assumption outside Canada. In other words, the weather trends away from Canada, even if climate change is happening, are not pronounced enough for us at this stage to feel that we need to change anything.

In Canada, truthfully, we don't know what to change it to because obviously, the inherent in-year volatility dwarves the ability to draw a trend line. And so basically what we're doing is putting through the maximum rate in property lines that we can without losing stupid amounts of volume and seeing where that gets us. So I wish I could give you a more scientific answer than that, but that's the answer that I'm giving you.

Now I've slightly forgotten if there was another nuance to your second part of your question about Canada. Can you remind me what your second part was?

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Oliver George Nigel Steel, Deutsche Bank AG, Research Division - MD [39]

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Yes. The second question was are rate increases in Canada running ahead of your...

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [40]

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Yes. So the first answer is yes. In other words, we -- for example, we have a 2-point improvement in the attritional loss ratio in Canada already and that's with plenty more to earn through. What I don't know is how much of that improvement we're going to spend in higher weather trends going forward. That's a guess, truthfully. Andrew?

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Andrew John Crean, Autonomous Research LLP - Managing Partner, Insurance [41]

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This is Andrew Crean from Autonomous. A couple of questions. Firstly, Charlotte I think said that the U.K. combined ratio would be worse in the second half but better than the target of 96%, 97%. And then Scott said he wanted it to be at the bottom end of the target, 96%. I don't know whether they could have a confab.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [42]

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We've got a market. We've got a market-making process. There's a bid and an offer here.

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Andrew John Crean, Autonomous Research LLP - Managing Partner, Insurance [43]

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The second question, if I get back 2 or 3 years, the investment income guidance was some GBP 60 million -- GBP 50 million, GBP 60 million per annum higher than it is now. And that's when you set the combined ratios. If you're not changing your combined ratio targets, that implies that your return on equity targets are coming down. Is that fair? And what is the quantum of that?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [44]

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Important second point. Our combined ratio targets are set relative to the -- what I'll call our best-in-class ambition. In other words, they're set at the level that we think that would put us in the upper quartile of performance in each of our markets. So they're not set in relation to return on equity target. They're set in relation to what would we achieve if we got our relative performance to the levels to which we aspire.

Now -- and therefore, if over time, all competitors were to say, "Lower interest rates means I need more underwriting income. Therefore, I'm going to rate harder. Therefore, I'm going to have lower combined ratio," then you'd see the market improving its performance and you'd see us move those targets. But that would be where our targets would be -- in combined ratio terms, would be calibrated.

Of course, our current target of 13% to 17% return on equity is massively in excess of cost of capital. And our ambitions imply at least the top end of that target even with a lower investment income. And so I don't think our targets are a threat. But you are, of course, mathematically correct. If it were to be that the world in perpetuity has the interest rates we see now, then all insurers will have lower investment income. And unless they do something in terms of profitability of underwriting, will have a lower ROE even though you'd much rather have an insurance ROE than a banking ROE in that scenario. Here at the front.

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Dominic Alexander O'Mahony, Exane BNP Paribas, Research Division - Research Analyst [45]

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Dom O'Mahony, Exane BNP Paribas. Just one question left. In Canada, the market looks very hard as you say. And the common view from Intact is very positive through the rest of the year. I'm just trying to think about what could bring that to an end. In the past, the Canadian government and particularly the Ontario government has been quite active in legislating to at least reduce claims and thereby reduce rate. What do you see is the outlook there? I mean I think there is chatter about whether there might be something to come there. I'd be interested in your thoughts on that.

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

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Yes. I think we should probably divide Canadian rate into regulated rate and unregulated rate. And so the only regulated rate is in the domestic auto market which, of course, is the biggest of the markets. And there, while each province has its own formula, it's basically linked to return on capital. And so the rate-hardening cycle will end once the insurers are earning an adequate return on capital on their motor books.

Now my guess would be most of us plan to be in that position at some point next year. Some are earlier, some later. Some may not get there. But our rate filings are -- that I could see by the time they've all earned through would give us that sort of run rate next year, call it mid-90s combined, for our auto portfolios. And so the thing that would see it slow down basically is industry profitability.

There are, as you say from time to time, regulatory changes that happen that change claims patterns. And -- but that then with some lags you get an equal and opposite. If you like, change in regulation in terms of the rate you can have. And so that creates leads and lags, but it doesn't change the basic formula. And although there is discussion, the discussion -- all provinces have auto reform in different ways. There is discussion in Ontario. In Ontario, the discussion would be oriented towards lower claims and therefore lower prices. But I don't really care as long as the margin between claims and prices is adequate. But I'm not holding my breath for anything in that regard.

Away from the regulated element -- and obviously, the majority of our premiums are unregulated because all our Commercial premiums is unregulated, and all of our Household premiums is unregulated and all of our travel books and so on are unregulated. There, clearly the issue is what does the market bear. And that is much more driven at the moment by weather and weather pricing.

But again, who knows? Let's see. I think the level of pricing should get us into a good place as we go into next year as an industry or maybe not as we go into next year but as we earn through next year. It's all dependent on continuing to watch the weather line and hope that there are some years where volatility goes in both directions, not just in one. Yes.

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Sami Taipalus, Goldman Sachs Group Inc., Research Division - Research Analyst [47]

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Sami Taipalus from Goldman Sachs. The first one really is for Scott. On the U.K., you talked about more than -- potential jewel in the crown in the future. But how do you think about the U.K. Commercial Lines business? Do you think that could be a jewel in the crown as well? Or are there some structural reasons for why it couldn't?

Then the second question is more broadly on CapEx across the group. You know we're seeing some of your competitors investing quite heavily in their businesses at the moment. Do you think there is a need for further investments within RSA as well? I guess the U.K. would be one potential area for such. But more broadly across the group as well?

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

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I'll ask Scott in a second to answer your first question. On your second, it -- CapEx for us, the only area we really spend CapEx is, of course, on technology. And our working assumption is that every single year, for as long as we can see into the future, we will try and have less people and more computers. And therefore, that means that we will aspire for one to offset the other as it were. In other words, have competitive cost ratios and ideally even better cost ratios in that process. But fundamentally, I would expect us to spend more on technology than our amortization every year for the foreseeable.

The constraint is not really a spending constraint. It is a significant bottleneck that all companies have of how much can you do at once whilst keeping business as usual going in a satisfactory way. And so if we took this year, for example, my guess is we'll spend about GBP 30 million at a group level more than depreciation. It's some number within GBP 10 million of that anyway. And if you took a range of GBP 20 million to GBP 50 million more than depreciation in the coming years, that's probably -- and that's why in our dividend guidance, we say assume that up to 25% of our profits are retained for a combination of pensions and CapEx. In no year will it be precisely 25% but that's the thinking. Scott, do you want to take the first?

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Scott Egan, RSA Insurance Group plc - Chief Executive of UK & International and Director [49]

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Yes. So we [should have] done with -- what was the question? Fair for you, right? Thank you. So just to be really clear why I said the profit jewel in the crown, okay. So there are many parts to the U.K. business which I think are jewels in the crown. But like most direct businesses, the reason that the profit jewel in the crown because there is there's just less people in the team in terms of the distribution channel.

So I do think we can have and do have jewels in the crown in our Commercial portfolio. I tried to give one example, which was our Regional book, where I talked about higher retention, growing new business, et cetera and good combined ratios. But there are many other portfolios in that book as well. And actually, an interesting one is Marine. And our Regional broker is a really profitable book for us and has been for many years. So there are jewels in the crown, but the more than direct thing is really a profit jewel just because of the distribution channel advantage.

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

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But inherent in our ambition for the U.K., you can debate whether we'll hit it or how long it will take us to hit it. But inherent in that is combined ratios in the lower end of the '90s. Let's call it the 94 target in Commercial as well as in Personal. Okay. Next one long.

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Benjamin Cohen, Investec Bank plc, Research Division - Analyst [51]

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Ben Cohen with Investec. I just had a question on the negative PYD on the Commercial from 2018. Could you give a bit more color as to where that came from? And I suppose we're interested in your confidence that you've sort of fully adjusted for those trends. And I suppose then that the last part of that question is looking into 2019 and where you're setting your initial loss specs. How have those changed because of your learning from these reserve increases?

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

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Thank you for that question. And I am going to answer it with a degree of humility because obviously the job of actuaries, a, has some mathematical complexity to it. But ultimately, what they're trying to do is say does the past give you clues in terms of data to the future. And sometimes, it does. Also, sometimes it doesn't. And that's why PYD is an unforecastable line, truthfully speaking, and why we try not to rely on it very much.

The negative PYD from 2018 actually was very broadly spread and of itself had all kinds of diverse reasons. So for example, U.K. subsidence, it was hard to know how much to put aside for subsidence from last summer's hot weather. We ended up having -- and subsidence can show through a lot later when people make claims because they don't realize it until 6 months or 12 months afterwards. And so we've had a bigger tail of subsidence into this year from last year's hot summer than before.

To pick one example -- to pick a different example, in Canada, there were some storms in the last 2 days of December, which we thought we'd captured adequately in terms of losses, but they turned out to cost us a bit more, which hurt us in the first quarter. In our Marine books and in our Construction & Engineering books in Europe, we had a bunch of late-reported claims, which often happens in those and particularly happens on follow lines, which were more than the actuarial assumptions. So in Denmark, there was some stuff on Commercial.

So there was no pattern as to these things except, if you like, what I regard as the common pattern is that how actuaries fundamentally work is that they take rolling averages of losses by line. Short-tail line is a shorter rolling average. Long-tail line is a longer rolling average. And therefore, your latest year is never given a 100% weighting. And that means you will tend to lead and lag market improvements and market dis-improvements. Now some companies mask that through playing around with risk margins and hidden reserves, which we don't do. And so some companies will show a smoother picture. But I promise you the underlying isn't smooth because this is just how the actuaries work.

The second bit of your question is the important one. Okay, if you're having to strengthen 2018 in a bunch of different places, and many of our competitors are doing the same as I mentioned, what's the feedthrough of that into 2019? And so a number of those assumptions have meant that we started behind the eight ball in 2019 loss picks. However, the strength of our actions and our rating actions has meant that we have managed to overcome that disadvantage and end up with attritional loss ratios that nevertheless improved in the first half relative to the first half of last year. And so thank God we took the actions we did. Otherwise, we might not have had that to report.

As to confidence going forward, I can't give you any confidence because none of us can know what the future is and whether the first half patterns are now (inaudible) last year. We can take encouragement from the fact that it was the first quarter where we really experienced the 2018 true-ups and our second quarter PYD was in line with our plans. But -- and so my working assumption is either we've caught it or we've caught most of it. But I can't give you that promise. Behind you.

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [53]

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Jonny Urwin, UBS. Two quick ones, please. So U.K. Home, where is pricing running versus claims inflation? And secondly on capital, could you give us some indication of excess capital on rating agency basis please?

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

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On a rating agency basis, again, the rating agencies in my view don't work like that. In other words, they have a whole series of criteria for rating you, only one of which is a capital model. And the capital model is substantially outweighed by the qualitative models of risk management franchise and so on. And so on the capital model, we are in line with a stable single A. There's obviously a band to that. So we're in a comfortable position on the capital element of it, but that doesn't tell you anything much I think because the capital element, you could be below par for capital if you are above par in the others and vice versa. Scott, do you want to take the Household?

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Scott Egan, RSA Insurance Group plc - Chief Executive of UK & International and Director [55]

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Yes. The Home to be exact science because it differs by peril, et cetera. But we probably see inflation running sort of around the 4-ish-percent rate in the first half-year on our Personal Lines. Home book is running roughly around 5% or 6%.

So again, back to what Stephen said there later on, we've taken a lot of the corrective action. And therefore, what we're trying to do now is toggle between what we think are reasonably good loss ratios, top line volume sophistication, segmentation. That's the game that we're trying to play at the moment.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [56]

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Over here.

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Andreas de Groot van Embden, Peel Hunt LLP, Research Division - Financials Analyst [57]

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Andreas van Embden from Peel Hunt. Just a question of -- around your Commercial Lines business. When I think about the premium split outside of the London market business, could you give sort of a premium exposure to large corporates versus the SMEs across the group? And when you think about underwriting in the next 3 years, are you emphasizing large corporates more or less than SMEs when you think about improving your combined ratio?

The same question is about MGAs and distribution. What proportion of your premiums is MGA driven? And how do the underwriting controls work there from a group level?

And my final question is I understand a lot of the underwriting decisions are made regionally, U.K., Scandinavia, Canada, but just wondered whether there is a separate Chief Underwriting Officer sitting on top of that and making sort of strategic decisions about risk appetite, business mix and how you want to allocate capital purely across the Commercial Lines business.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [58]

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Thank you for those questions. The answer to your last one is there is. He's sitting here between Scott and the Chairman. His office is next to mine, and Charlotte's office is on the other side of mine. So that's -- you can see where our priorities sit. And so we have centrally a whole group of people underneath and -- both for underwriting and claims. We badged the 2 together because if you like the technical disciplines who are setting underwriting standards, who are monitoring portfolio, who are monitoring underwriting quality and who provide training to everyone in the group on a central basis.

So we have centralized standards and set the appetite and so on and so forth. And it's a very important role because while the conditions in each of our markets is different and while our markets are overwhelmingly regionally driven, and therefore we think it's right to decentralize decision making at least in expertise and underwriting standards, you need to have an important central overlay, which we do have.

As to your first 2 questions, I'm sorry to say I don't have at my fingertips the statistic. And we'll try and -- happy to try and get it to you afterwards. But the statistic also has enormous complexity to it for both of the questions you asked because obviously the move from small to large corporate has got many gray areas inside it. And normally in fact, we have SME businesses, mid-market businesses and then high-end businesses. And so the -- and I would say the great majority of our businesses in Canada and Scandinavia are either small or mid- just simply because there aren't that many big companies in the market, but there are some. And Renewable Energy would be an example in Denmark. And in the U.K., there's a bigger element of large companies although that was where we took quite an axe in terms of the London market. But I'm afraid I don't have the precise number.

In terms of emphasis, I would say our emphasis is on the Regional business. It's not on the ocean-going large corporate business where we do that, if you like, as a combination to make sure we don't get erode in our ability to serve mid-market and small.

Mid-market, we like. Small, depends on the country. Small has attractive retention characteristics normally and is a large segment. But it also normally has an extremely high cost to serve because the premium sizes are about the same as individual. But it's not as automated as individual insurance because it has more complexity and it tends to still be broker distributed, which puts a huge, if you like, commission cost in the middle.

And so in some places, small is very attractive to us. Scandinavia is the best example where the great majority of small is done direct so we don't have the commission drag. It's becoming more and more automated and we make really good money, and we're emphasizing that like mad. In Canada, it's in transition. Still doesn't make good money, although as we said, Intact do, we don't, but we are automating like mad. And in the U.K., we're automating but we're I would say furthest behind in getting small profitable in the U.K. But that's really a cost-to-serve issue as it relates to small.

And I think that you're -- what was your middle question? It was about...

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Andreas de Groot van Embden, Peel Hunt LLP, Research Division - Financials Analyst [59]

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MGAs.

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [60]

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It's almost the same answer on MGAs because there is a massive range of flavor of delegates. So MGA is a particular badge. But I think -- the way I think about it is whenever you give any element of your pen away -- and there are many, many different flavors of delegation of authority to people. You have a distribution arrangement you're not completely in control of. And we have hundreds across the group of different kinds of delegated arrangements, as so does every commercial insurer. And some of it is Personal Lines, ranging from quite a lot of delegation to not very much at all.

Our experience has been that -- and we have departments and policies whose existence is to make sure that that is controlled partly from an underwriting standpoint but also from a regulatory standpoint. And that's that particularly important for example in the U.K. nowadays that you make sure people are not doing something under your authority that you wouldn't like, whether that means sanctions or any other thing. And so we have all sorts of restrictions and audits around that and things like that.

What our experience has been is when you really give the pen away, in a sort of an open way, you do badly because the pen is abused. And when you can focus it narrowly on a particular segment which you otherwise wouldn't reach, I don't know, motorcycle owners in British Columbia or something like that, you can get very good results because you're very, very narrow, very specialized in hitting some people in a way that you wouldn't hit through generalized distribution. So that's why we have been shifting our delegated arrangements to Specialty and why GBP 65 million of our exit total was trying to exit what I call generalized MGAs, which is largely complete. Over here.

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Abid Hussain, Crédit Suisse AG, Research Division - Research Analyst [61]

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It's Abid Hussain from Crédit Suisse. Just one question from me please on the Solvency II ratio. Is it possible to translate the Solvency II target range into financial strength rating? So at what point for example might the Solvency II ratio lead to a single-A rating to an A-plus rating or single-A to minus-A rating?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [62]

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It's really hard because the calculations are done differently. I think nowhere within 10 points -- I think our Solvency II ratio could be 10 or 15 points either side of where it is and not mean anything for our credit rating. There's that kind of tolerance in it. If we were at 180, we probably would be pushing an upgrade. I'm not saying 180 rather than 175 or any number, but I'm just trying to give you a sense. We're in a zone which is probably a 20 point-wide zone, which would translate to where our current credit ratings are but it is a deeply imperfect translation. Down here.

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Philip Ross, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst [63]

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Phil Ross at Mediobanca. Just coming back on that last point about solvency range. You have the target 130% to 160% but prefer to operate above it. Is there a chance in future though if the business reforms more reliably or becomes less volatile, you might be in the target range? Or is it the point that range is obviously linked to credit ratings and other such metrics?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [64]

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Yes, I think the credit rating is the only thing we care about. So if we got upgraded to A plus, I would think we had too much capital if that was the reason we were being upgraded. As long as we're at single A, then we're going to think we've got the right amount.

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Philip Ross, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst [65]

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But then if I separated the solvency range, you could see yourself in between that 130%, 160% target?

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Stephen A. M. Hester, RSA Insurance Group plc - Group Chief Executive & Director [66]

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Yes. So if there was some divergence of the methodology such that you had to have either a lot higher or a lot lower solvency for a given credit rating, then the solvency would go up or down because it's the credit rating we're targeting. It's just that's -- that's got so many subjective elements to it that it's hard to have a conversation about it.

Might be running out. How are we doing? Any more frame or -- great. Well, look, thank you for joining us. Obviously, you know where to find our teams for follow-up questions. As I said, I think we believe that we've made a promising start to this year. We believe that we are motoring well in the majority of our business that is strong. We believe we've taken the right actions for the things we needed to correct.

We need to see that feedthrough. We've got fingers crossed in the second half. So we don't want anyone to get carried away. But we do think this company is capable of more and we intend to get it out of the company. Thank you for joining us.