4th Q&A Session

Can I invite the speakers up and we'll get started on the Q&A. I wanted to touch on a few points, again, based on what I've either read in some of the reports that you've already written up about our meeting, or I've heard in my discussions with you over the last day or so, just a couple of points. First, there were some scepticism about the impact of RBC in Singapore. I would like to re-enforce that yes, that's happening, but that will actually be good for us, it will allow us to actually release a little bit of capital from our business in Singapore. So it's... you know, we see that being a positive element.
Second, several comments that some of the things that I've said may have indicated that we weren't happy with the margins that we're getting in our Indian business. I would make it clear that the margins we currently get out of India are lower than 54%, but they are higher than the US or the UK, so they are very much in a range that we feel comfortable with. It's just that if we do move up our ownership, it will dilute down our regional average, but still will be very much within an acceptable range for what we are looking for. So, I just wanted to make that clear. We love our India business. Okay?
Now, unfortunately because we overran a little bit with our early speakers, we are going to cut the Q&A just to 15 minutes this time. But if there are other questions, obviously you can catch us in the hallway, or during the next Q&A session. So, I apologise for that, but we've got to catch up a little bit. So, if we could I'd open up the floor.

Question:

Firstly, how much of that (inaudible) shareholders as opposed to policy holder. And secondly, what is your regional staff turnover rate?

Mark Norbom

I'm sorry... Regional...?

Question

Regional staff turnover rate...

Mark Norbom

Okay, I'll pass these on to the experts in a minute. Let me take this opportunity, though, there was a typo on the investment performance chart. The yellow should have represented 0 to 1%, instead of 0 to .1% out-performance. We are not trying to play games with the charts; it's just a typo. Garth, you want to...

Garth Jones

Yes. Those figures there are the values accrued to the Life funds and, as I said previously, when we look at our business, we not only look at the shareholders, we look at our Life funds. We are in the business of having healthy Life funds going forward, not draining them away. So, maintaining healthy, strong Life funds is actually something we believe give us a competitive advantage in itself, as it provides a ready base for running further business. So, if you look to what a (purer?) shareholder value, then it goes to the 19-10, but clearly if you use that business that you write within the Life fund, it enables you to write more and more business and you attach the riders to that business and clearly adds further value.

Mark Norbom

In terms of staff turnover I must assume you mean staff and not agent turnover? Shu you have a range for regional...

Shulamite Khoo

The staff turnover... it varies from market to market. But if you look at the senior team, which is our CEO... this... across our senior team the average service period is 5 years. And that we see as very good for a business that's only 10 years old.

Question

Hi there. Farooq from Lehman Brothers. Just following on from that question on funds – presumably most of your out-performance is coming in the Unit Lined funds from bond based funds, can you just confirm that? And then secondly just a completely different question: on the operational cost efficiencies you've mentioned a 30% return on capital target, presumably you (mean?) rate of return on that project. But you spell out in the short term what kind of annual cost saving targets you my have? Thank you.

Mark Norbom

Kelvin...

Kelvin Blacklock

On the Unit Link performance I think in KL someone highlighted the Singapore managed fund. That's sort of a very large fund, I think, in Sterling terms that would be £7 million. In terms of the total average performance within that, now obviously the Singapore managed fund is going to have a large impact. That's split 70% equities, 30% fixed income. So the contribution from that is a combination of both stock selection, asset allocation and bond investment returns. Generally the ILP's actually, because the par-funds are sort of -if you like- smooth returns. The ILP's tend to be more slightly riskier balanced funds or equity type products, you know, the Singapore (P man?) fund and we've also got an Asian balanced fund in Singapore. So, probably the ILP are more balanced; they are not just bond funds, all of them.

Mark Norbom

Anyway, is there anything else on that point? Because if not, I'll go to the second question. In terms of our Genesis model, what we look for when we are transferring processing over to the Genesis operation, is something in the range of 30 to 40% cost savings. Now, in the first year when you are 'transitioning', a process over you can't get savings like that. In certain market you cannot get savings like that and so we may... for instance in Vietnam we will likely take a different approach. When you have a market that has a low cost base and a relatively high scale we may only pick a system solution. The system is part of the consolidation, and keep the processing in country. Okay? Because you can't really save much on cost if you would transfer that processing. But of course you want to get to common systems and system development in those markets. So, 30%-40% in the long term, in the first year, you know, you have transfer costs that would offset some of that. But I do want to make clear that what we are talking about with Genesis is not just a cost saving target. We are talking about increasing efficiency, we are talking about trying to get the service levels better for our customers, so that we can give more consistent service. We are talking about trying to get common systems, so that we have a common database for our customers, so that we can more easily put out new products. There are other things that we are trying to get out there, you know, frankly, that I think are even more important than the potential cost savings that you might get from transferring some processing. Clive or Krish would you have anything to add to that?

Clive Baker

Yes, just that er... The cost savings, I guess, come from two main areas. They come from processing efficiency by automating to the level that we don't have in all the markets, and also having the standardised process, which will mean that everybody benefits from being more efficient. We also have labour arbitrage, you saw in Malaysia and China, and these are lower cost markets. So these are certainly helping to the cost efficiencies.

Question

Sorry, can I just pursuing that a little bit? In terms of numbers, I mean, 30%-40% cost savings – what does that actually mean in terms of a number? I mean, what are your costs and where we see it, what does it mean in (incomprehensible) margins? I understand obviously, it's not going to be year 1, year 2, being realistic about this, how do we see it and feel it?

Mark Norbom

I don't know... Garth, do you have-...

Garth Jones

Yes, I think the thing to look at there is just, perhaps, to look at Malaysia and Singapore to start off with, I think we gave you some ratios on that, so I'm sure you can work out the maths from some of that... and then figure out how much that involves for the first stage, as Clive was saying, with Malaysia and Singapore.

Question

Gordon Atkin from JP Morgan. Just to follow up on that... – it's really for Clive – when you talked about the Malaysian hub going live in 2005, when you (intend?) to have the backup systems for 12 businesses and a common IT platform. And just to confirm this 30%-40%, are you talk-... you are not talking absolute terms here, are you? You are talking about relative to the size of the business?

Mark Norbom

I would just 1) make the comment the common IT platform will happen over time. As you can imagine, in order to change an IT structure over 12 different businesses, you know, that has to take place over time. So, we are looking at rolling that out over sort of a 3 to 4-year period. Would you have anything else to add to that?

Clive Baker

The 30%-40% are relative, they are looking at IT costs and operations costs. So we are not looking at distribution and we are not looking at our head office corporate costs.

Question

You've talked about the sort of massive fall in number of yields in the area and obviously that's tremendously beneficial to you in terms of selling the excess liquidity generating the demand growth. Can you talk about how low yields... how very low nominal yields are protected against (inaudible) in two ways really. One in terms of sort of liability structure, and two in terms of, obviously, the lower the nominal yield, the greater the impact of the yield production on the returns to the consumer at the end. And just talk a bit what would happen were yields to go to say 2%-3% rather than 4%-5%.

Garth Jones

I think the key to all that is the liability profile at the end of the day and having enough room within your liability profile to deal with that. Clearly, I talked about deterministic scenarios and clearly deterministic scenarios we look at what happens if interest rates fall or what happens if interest rates, also. Clearly, if you look at this as a portfolio and all the rest of it, equities, bonds, and so on. We also look at ways in which we can enhance yield. Kelvin has talked about some of the things we've done with credit spreads. We've also done some things with options whereby we know we're going buying government bonds regularly in the future. So, there are a number of opportunities to enhance yield further. But clearly, the key is having your liability profile right in the first place, and that's all about... when I talked about PRE within the asset allocation, I think that's a key point that we shake the PRE, so that if we do need to reduce our balances for instance, then we can do that without a lot of surprise to our customers.

Question

Just in terms of the sort of yield production, in fact, just in terms of how consumers would -excluding protection for the moment- but just on the investment side, would the... instinctively, if they yield production doesn't shift very much, if the actual yield on the product comes down, and therefore just becomes a bigger proportion of the total return, is there a level a yields that is uncomfortable for the business, or is it just (surely?) protected by all stuff you are able to do?

Garth Jones

I think the way to answer that is to go back to Pete's slide, which talked about the guarantee minimum surrender values. And that's clearly the basis for where it becomes uncomfortable. But, clearly, that then would be an industry issue, number one, and secondly, as I think Kelvin was just alluding to, for where that is a feature, for instance in the par business, what we'll do then is we'll have a much more conservative investment portfolio. We'll invest more in bonds and so on, or in equities, so you know... We're aware of where we need to get to in terms of the absolute floor as defined by the government, but we then have the variable liabilities and assets that go beyond that.

Kelvin Blacklock

I guess it's also a question of sustainability. I mean, Japan last year saw 10-year bond yields go down to 50 basis points, then stay there for very long, and then within the space of 6 months they were back at 2%, so you know in the context of writing longer term life insurance, I mean, clearly, you might see markets move to these kind of levels and I think one of the things we're trying to do in the process is just to try and take advantage of that kind of thing and say: we don't believe it is a sustainable situation for a market to stay at that kind of level for any length of time.

Mark Norbom

Let me just... if I can I'll make just one other comment. I want to get a little bit more at the cost issue and the impact of doing something like Genesis. Over the longer term doing something like Genesis could help protect our margins. This is maybe a better way to put it in perspective. Probably in the range of sort of 3% to 5%. So, when you look at margin erosion, potential margin erosion, either from competitive pressure or regulatory pressure in the long term, you know, it would be in that type of range. It would help us protect. So, I wanted to give just a little bit more context around that number.

Question

Maybe just a short question again on the liability profile. Could you perhaps elaborate bit more on other kinds of guarantees you're actually having on your book and whether you stochastically model the impact of different (SOL?) locations on the value of the kind of options you have, basically having outstanding...

Garth Jones

Obviously we're doing that. That's all part of the stochastic modelling and so on. You can also go out in the market place and price up some of these things if they're short-term. Long-term tends to be more difficult in the market. But, clearly, we allow for that in our overall asset liability match. I think it is a case of looking at the asset liability on a stochastic basis and say: well, what of this, what of that? And then positioning your assets (inaudible).

Question

So if you model the value of those options stochastically, could you give us a feel of how much of the embedded value might be... or needs to be distracted from the value? How big of a problem is that really?

Garth Jones

I think you'll see some of that, I guess, as that comes out of the EUV work, essentially. And obviously we're going through that right now. I think the key thing is to look at how it does pan out over time and really what those... you know, as I say, if you've got a guarantee of minimum surrender value, what is the real cost of that? In some markets it's actually very difficult to quantify, because you don't have a liquid market for a long time. So, it's really about having a view that the yields that are required for the guaranteed minimal surrender value that the authorities are imposing on you at such a level that you're comfortable with them and then... and also taking a view that there is, at the end of the day, a position whereby the regulator is imposing those on you. Will that happen in practise, if that means that the whole market has a (problem?).

Question

Two quick questions. One is it wasn't clear to me in the US you take (the part?) of the money protection against the spikes in rates and obviously the focus in recent years has been low rates, but rates go up and down... Have you done that in Asia to a similar sort of pattern to the US?
And secondly, just to get a feel, you've shown us your out-performance – our you able to give us any sort of feel from within the investment variances in recent years, what proportion of that is market and what benefit you've given in the investment (bearance?) from your out-performance.

Garth Jones

Obviously, the option programmes you're talking about and we obviously liaise with our colleagues in the US on that. We've had a look at that for various portfolio's. We looked at the cost of it and obviously the cost of not doing it. We've taken a view at this point in time that it didn't make sense for us and that is, again, partly around what I was saying about the flexibility and the liability profile. If you Jackson's business, they have less flexibility in their liability profile than we have. Yes, the investment variances will obviously include elements of that out-performance, but it's... you know, it was in the Life funds and it would be in the... it would actually come through in the (LP?) shareholder funds, because of the increased seize of the Linked funds for instance. So you can see it come through in there.

Mark Norbom

Okay, I think, fortunately I think our time is up for this Q&A session, but you can catch some of these people out in the hallway during the break or save your questions for the next session. If we could be back in here at 10.30, so also sort of a 'shortish' break.

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