First Q&A session

Mark Norbom

Okay, as I mentioned we'll be having numerous Q&A opportunities, so you don't have to ask all of your questions now, but we will be pleased to start out and focussing on the first round of presentations.
I'm sorry, can we get the microphone working?

Roger Hill, UBS

You've set out the opportunities for growth going forward. I wonder what you'd do if you woke up tomorrow and you found (...God?) had given you a billion pounds?

Mark Norbom

Well, you know, I would be hard-pressed to spend it in a way that could deliver the same kind of value that we're currently seeing. One thing I want to make clear, is that our growth in Asia has never been constrained, because of lack of capital. When you look forward, we're in the markets we want to be in, most of our growth going forward will be organic growth, so most likely in terms of acquisitions we'd look for bold-on consolidating acquisitions to our current based business. There maybe a few exceptions, for instance like the opportunity we have in India to increase our share. If I had a billion dollars, I probably spend a little bit of it on that, and then probably I return the rest to our Group office to look for opportunities as well.

Farooq Hanif, Lehman Brothers

Hi, (Name) speaking from Lehman Brothers. Just on the new business strains slide that you showed, I think you indicated something like 25% new business strain as a percentage of the sales. Is that AP sales and could you talk about the components, or what is reserves strain, what (percentage?) is actual expense strain, and the capital (if) that's included. And I've got a second question also on the-... the deposits.

Mark Norbom

I'd like Garth handle that. I think it was 21.5% new business strain?

Garth Jones

Yes, the figure I showed is 21.5% and that represented the average new business strain that we saw in our portfolio in 2003. I don't have the breakdown of that between the various components that you were talking about, but clearly on some of the Protection business you see high-end new business strain as you have to set up reserves for that as a percentage of premium. And we see low-end new business strain on our link business, where are charges and expenses are tightly managed, and you have less regulatory capital.

Farooq Hanif, Lehman Brothers

May I just quickly ask about the chart that you keep showing of investment of assets and deposits (inaudible) saving, you see that that chart remains quite static over the last few years. What do you see as a catalyst ready to get people to switch deposits into your kind of products?

Mark Norbon

Well, I think, you know, again, as markets develop. So, I think you're right. It's a little bit sticky, but as markets continue to develop they get more like what we're seeing in Europe and what we're seeing in the US- people will look for alternatives to invest. They need a feeling of trust about the things that they would invest in. For instance, if you go to a market like Vietnam, which is very undeveloped, it is very difficult to find other things to invest in. So, the financial markets have to develop as well, so that they have good things that they can feel comfortable with. Nick or Kelvin, can you add something?

Kelvin Blacklock

Yes, just in terms of equity markets, I think 10 years ago most of the companies in Asia were not managed for shareholders, such a basic thing in the Western world. I think the quality of corporate governance and the amount of fund managers actually own of these big corporations in Asia make the equity market look so much better. And typically, that risk averseness of customers, I think, will recede in terms of the equity market.

Mark Norbom

A perfect example would be in Japan, where the corporate governance and the attention to shareholders have increased, but it's increased over time. So, I think people are beginning to feel more comfortable about equities.

Peter Davies, Lansdowne Partners

Peter Davies from (Amsdam?). Can I just ask two questions? One, on the experiences variances. Can you talk through the regional differences, and particularly whether the claims and expense ratio's have sort of correlated to maturity, as one might expect, I... less expense overrun in the mature markets. And then secondly, on the new business strain, can you just (square out?) with the charts from the net capital repatriations, where the sort of working capital number is higher than one would infer from 21%

Mark Norbom

Garth, I'll let you take that.

Garth Jones

In terms of the variances, we see good claims experience across the board in a variety of markets and across a variety of benefits. We have strong (remuneriting/numeriting?) standards, and clearly we monitor our claim management processes also very carefully. So, that isn't market dependent. In terms of the expense variances, clearly that does depend on the size of the business, and for the larger businesses we don't have any negative variance there, but it's really in businesses that are developing, where you see that they haven't yet attained sufficient scale and are still moving towards that. That's the variation there. In terms in of the capital then, obviously the example that I've shown is only in terms of the new business in 2003. You have other things that we spend working capital on and other types of business. So, I think that's not the whole picture, there is a whole raft of other things that-... not one in particular, but plenty of different other things that add to that. I think the new business strain would be the largest component by far.

Farooq Hanif, Lehman Brothers

Just to follow up on that. If you included the other things, would the more mature businesses such as Hong Kong and Singapore still be net cash generative for the Group as a whole?

Garth Jones

Yes, I think that was on one of my slides, actually, that showed were they cash generative in 2004, so you see in the top right hand corner of the slide that Malaysia and Singapore are indeed cash generators, and Hong Kong also.

Mark Norbom

Yes, everything above the line, I think on that chart, are net cash generators.

Andrew Cream, Soloman Smith Barney

Couple of questions. The growth from AP coming from the Agency sales force- can you say a little bit about productivity, because you've certainly put on a vast numbers of agents compared with growth ratio in the sales, and I have a slight feeling that productivity per sales person is going downwards.
And secondly, I wanted to follow up on that question about the strain.

Mark Norbom

You know, when it comes to productivity, Dan, I might ask you to make a comment on productivity as well, or Kevin, one of our insurance folks. Er... The productivity of our agents obviously starts at a lower base, so in the area where we are quickly adding agents, your productivity will start at a lower level. But we have a very strong program of training that focuses specifically on productivity, and that is one of the key things that we monitor across all of our agency forces. It is a big area that we focus on. Dan, why don't-... can you add anything to that.

Dan Bardin

Yes, you know, as Garth showed on one slide about that GDP kind of... deteriorated slightly because of the mix over the period of time. Same with our agency. Our agency teams we have measured closely from the last five years. Our activity ratio, that's every agent that produces 1 case in a month, the productivity, which is the number of cases per active, as well. So we measured that very closely and we've managed it through. And... have we've seen it go down slightly? Yes, but we think it's still within a range we think of an quality agency force. And we have a number of things that help drive the activity. Our countries in Asia, a lot of companies will drive their activity by a VIP management, and we're very activity based. We commit a lot of time to training and education. For example, Keng Hooi and his agency force, he's levelled about 7,000 agents and he is growing his business through pro-activity and continuing to keep that pretty much flat. That is the case across a number of our countries right now.

Andrew Cream, Soloman Smith Barney

The growth which you see going forward will it still be driven by agent growth largely?

Dan Bardin

We will have pretty dynamic agency growth, but at the same time we would expect to maintain our productivity.

Mark Norbom

I would add that it's not only Agent growth. We also have 25% of our business coming through other channels and those areas are growing even faster.

Andrew Cream, Solomon Smith Barney

On that, the argument about deposit migration, presumably plays into the hands of the banks, because they hold all the deposits in the first place. Why shouldn't the banks manage that shift without the requirement of a third party, i.e. yourselves?

Andrew Cream (Solomon Smith Barney)

In a lot of areas it just doesn't make sense for banks to enter the insurance business. It's not a good match with one what they do on a day to day basis, and it also represents, I think, a different capital burden then they are used to with their traditional products. So, we found that with rare exceptions, banks have decided not to market. HSBC has gone in on a fairly tough basis into that business and has been fairly successful.

Andrew Cream, Solomon Smith Barney

On the strains, were you talking about... when you were talking about insolvency capital strain. Are you talking about local regulatory, or are you building in also sort of Group financial directive insolvency?

Garth Jones

This is our local position, and it reflects the regulatory capital that we require to have (inaudible)

James Pearce, Cazenove

Your business model, which is high margin, direct sales, regular premium is probably not one that the Group would use elsewhere in the world. Can you just talk about how sustainable that model is, and whether you expect liberalisation of your markets, to actually drive margins down?

Mark Norbom

I think, when you look at the basic fundamentals, which I went through –still fairly low penetration of our products, still very high savings rates in these markets, high growth and there is still plenty of customers that we can go after – we expect that we will be able to, as Garth mentioned in his presentation, be able to maintain our margins, at least over the short and medium term. You know, of course there could be pressure on margins going forward, we look at offsetting that pressure again with our diversity of products going through... introducing new innovative products, which hopefully can help us maintain a margin; going after new customer segments, we'll talk a lot about customer segmentation and how we are going after new pieces of the customer base. And when you look at... if you look around, there really isn't pressure do decrease margins. Regulators, for example, are more focused on creating a sound market, as opposed to driving down pricing. They want to create a sound domestic market, so that's what we're seeing right now. You know... and we'll continue to focus on other elements of margin as well, so hopefully we'll be in a better position. Continue to focus on our claims experiences as we build up our database even more in Asia, we'll talk about how we are going to try to drive down price with our hub-and-spoke model as well. So, there are other elements of margin that we can attack as well. And so, over time those will improve and that will help us keep our margins up as well.

Garth Jones

The cost basis is quite high for businesses, 7% of assets and pretty much unchanged over the last three years. I'm just wondering where you expect that settling. Should we expect the cost base to settle lower than the UK, because staff costs (presumably?) in Asia are must lower. And just breaking that down... the expenses down, can you talk a bit about the commissions you pay, and how they compare by market, by distribution channel and also compared to what your competitors pay?

Mark Norbom

Yes, I'll be happy to. The way we measure our cost basis is the management costs for the business excluding commissions, when we are looking at expense productivity, management cost of the business, divided by our APE. And that appropriately weighs the equation, we feel. And if you look at that, our costs are actually improving and we think compare fairly favourable to competitors. On the commission side, I would say that we are likely to be higher than the competitors in our commissions, because we focus on having a higher quality agency force. So, we are willing to pay a little bit more in order to get the return on quality. Dan, could I pass that to you as well?

Dan Bardin

Mark said that exactly right. On our expense ratio we do take in-... our expense ratio is based upon total premium. We also measure our sales related expenses (on or off?) the APE, so it's done on new business acquisition. At the same time our commissions appear to look higher in cross markets today, because we are not a prolific seller of Single Premium. And that Single Premium does distort over the shorter time, so I think that our agency costs are right in line with a reasonable amount, I think, of our competitors.

Mark Norbom

Yes, and just to clarify on of the points: when you're selling Regular Premium business, you book the commission all year 1, but it's a commission stream that goes out for tens of years, and you have to take that into account when looking at the commission costs and the overall cost base. And we do focus more on Regular Premiums than the competition does.

Analyst

You mentioned a number of agents, 130,000, can you say what percentage of that number is part-timers, and also what is the persistency of agencies (in the force work?)

Mark Norbom

Again, I'll go back to Dan for more on the details... The overall agency force-... the number that we'd showed you: 136,900 was both employees and agents. And I think the number of agents is just about 130,000 now. But let me hand it over to you, Dan, to talk about the other points.

Dan Bardin

You know, this is the issue in Asia, part-timers versus full-timers is a little bit different, I guess, than what you'd see maybe in the UK or US. We would think today probably half of our agents would be part-time. However, that could be distorted, because they may own a small business, or they may be working in an environment that is somewhat seasonal. The real, I guess, way to measure your full-time versus part-time would be on their productivity, and that comes back even to us, as big about half our business, half our agents being full-time as well. But, I've seen agents before where I asked the question: 'are you full-time?' And he says: well I don't know, I run a plant. I said: well, how many cases did you write last month? And he said: 30. I said: well, you're full-time. So, it really comes back to that productivity model. Many others are running family businesses and other things, but they have committed and they've gone through the training and they are very much committed to selling insurance, but it may be impacted by their other business.

Analyst

Persistency?

Dan Bardin

Well, we've shown our persistency variances, as you...

Analyst

Persistency of agents, staying (with you).

Mark Norbom

Well, a lot of the turn-over of our agents is managed. If they don't perform, we'd rather go them out of the agency force. But, we probably see an annual turnover in excess of 30%, Dan, in that range?

Dan Bardin

Yes, you know, the persistency of your agents... Some of the number studies, if you look at the US, over a 5-year period, you have about 100% attrition of your agency force. Ours is slightly higher than that, I think, we're running probably in the 25%-30% of attrition across our agency forces. But we're not that much higher than what you see across the rest of the world.

Mark Norbom

Okay. Anything else? If not, I think... we can... as I've said, we'll have other opportunities for questions and I think right now we'll move into a break and come back, if you can, around 10.30. Okay? Thank you.

Mark Norbom

...talk about these aspects of our model in more detail: how we do it, and how we are doing. First I will introduce Mina, our regional brand and communications director, who will talk about our brand strengths and its importance, and then Mina will be followed by Pierre Fenech, our managing director of corporate marketing, who will share to you more about the customer strategy, customer segmentation and the role it plays in driving our customer centricity. So, Mina, without delay, I give it over to you.

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