Prudential plc (PUK) Q2 2011 Earnings Report, Transcript and Summary

Good morning, everyone. Welcome to our 2011 Half-Year Results Presentation. I hope that Prudential is going to make its small contribution to try and lift your moods this morning. At our Investor Day, on December 1 of last year, we set out how we intend to deliver growth and cash for our shareholders. This morning, I will give you an update on our progress during the first half of 2011 and there are fundamentally 3 messages that I would like to emphasize. The first one is that we have a clear strategy that we confirmed on December 1, and some of you will recognize with the puzzle we use, which is to accelerate our growth in Asia; to build on our strength in the U.S.; focus even further in our U.K. business; and optimize our asset management business. That strategy has an explicit focus on Asia. Asia remains a uniquely attractive opportunity for shareholder value creation within our industry. The sovereign debt crisis in the Eurozone and the recent concerns about the U.S. have only continued to reinforce the value of our focus on Asia. The second point I'd like to make is that our leadership team across the group, well-represented here, today has delivered strong first half numbers. We are all totally focused on execution, supported by our operating principles, in red here, balance metrics, disciplined capital allocation and proactive risk management. This team here is committed to ensuring that our track record of financial performance continues into the future. And the third message is that we are now 18 months in our 48 months program that we defined '10, '11, '12, '13. Growth in cash and we are on track to achieve the 2013 objectives. So my presentation this morning, we'll start with a quick overview of the results. I will then take a moment to give you some more color about our businesses, about Asia, the U.S., M&G, the U.K. before saying a word on our progress on the targets, the objectives we set in December. I will hand it over to Nic, who will provide you more detail on our financials across the group's operations, and I'll come back at the end to provide an outlook and of course, open up to Q&A. Again, our management teams from across the groups are here this morning. Please do take this opportunity, and I've seen some of you doing it already, to ask questions and tap their expertise. So we are committed to delivering profitable growth and increase in cash. Starting with profitable growth, the first leg of our December 1 commitments. We have achieved in the first half an increase of 20% in new business profit, 25% in IFRS profit, 28% in EEV operating profit. For the first time for H1 results, we are up 20% or more across all our 3 preferred metrics of profitability, hitting GBP 1 billion on a number of them, and Nic will explain on that later. Our embedded value per share has increased by 13% to 745p per share. And if I move on to cash, the second leg of our commitments, we have delivered free surplus generation of almost GBP 1.1 billion from our increasingly large bulk [ph] book and 50% increase in net remittances from our businesses, driven by a particularly large contribution from Jackson at GBP 320 million and please note that Jackson has made all its annual remittance during the first half, so don't expect anything equivalent in the second half. Last but not least, we have declared an interim dividend of 7.95p per share. This is calculated as 1/3 of the prior year's full year dividend and is consistent with our historic formulaic approach to the interim dividend, and Nic will come back to that. Given the decision made to cancel the scrip dividend option, there is, as you would expect, no scrip dividend. Now this performance is the result of the work we have done over the last few years to change the economics of the group, and I use these words with purpose, to change the economics of the group. Nowhere is this more visible than in the new business profits we are generating from the capital we invest. It is my long-held belief that life insurance is a cash-generating business. That is only true though when investment in new business is both disciplined and optimized. By disciplined, I mean that the quantum of investment in new business must be well-controlled. And by optimized, I mean that the investment in new business must be allocated in the way that it maximizes IRR and minimizes payback period. So if you look at our performance from that angle, what you see is that our group new business profits have increased by 90%, i.e. almost double for the group over a 3-year period, while new business trend over the same period was falling in absolute terms by 12%. So we continue to write capital-efficient business across our life operations to generate, as I said in March, more for less. Another metric on which the transformation of the group is visible is cash. We are showing you here the net remittances from our businesses over a sustained period of time, so '05 to '11. For those who are skeptical about insurance accounting, I know it's shocking but they exist. Cash generation overtime is a key test of whether a strategy is working. You can see on this slide that the strong trend of increasing net remittances from our businesses has continued in the first half of 2011. As just mentioned, the remittance that we have received from Jackson in the period represents tangible evidence of our profitable and cash-generative expansion in the VA market in the U.S. and leaves the business in a strong capital position plus remittance, because you can imagine that the Michigan regulator would not have allowed it otherwise. So let's now look at each of our businesses in turn starting with Asia. Asia, as I said earlier, represents a huge growth opportunity, that's not news. And our long track record of top line new business growth confirms this. New business sales group, this APE. In both -- we have built a leading distribution platform in both agency and bancassurance. However, having significant volume growth and top line market share accounts for a little if one fails to convert such a position into actual returns for shareholders. Over the last few years, we have deeply modified the economics of our Asian business. PCA is now delivering not only APE growth but growth across all of our key metrics, which are: First, the new business profit, which was up 17% in the first half of the year. As you all know, our NBP growth has been consistently strong over the last few years. And despite increasingly tough comparators, the PCA team continues to drive this metric forward year in, year out. In the first half, 9 of our 11 markets in Asia delivered double-digit NBP growth, and that's how we incentivize and measure them. Not APE, NBP growth. And excluding India, a market whose challenges are well known, our NBP was up 22%. Picking out a few markets, Indonesia was up 32%; Singapore, up 25%; Malaysia, up 22% in NBP. But new business is only one metric. I have always said that it is not appropriate to run a life business on a single metric. The real test for a life insurer is its ability to drive growth across the free metrics of NBP, IFRS and cash. In 2008, we told you that we would focus more on IFRS and cash, what we have called in our operating principles, more balanced metrics. So what have we achieved since then? IFRS profits are now more than 4x the level we were at in 2008 and have increased again by 25% in the first half of 2011. So that's quite, a strong progression. And if we move to cash, net remittances, Asia has contributed over GBP 100 million in net remittances to the group in the first half. That is 9x more than in 2008 and there is more to come. So bringing this all together in one slide, you can see the transformation of Asia's economics since 2008 due to our explicit focus on delivering across all of our key metrics. This profile of financial performance where we deliver both profitable growth and increasing cash is rare in fast-growing companies, like ours, in emerging markets. So let me now give you some more color about our Asian operations. I do not need to stress again, but I'll do it, the significant opportunity for life insurance that Asia represents. This largely results from the combination of a number of well-known structural factors, low penetration, high GDP growth, high savings rates, positive demography and constructive regulatory environment in many markets, especially in Southeast Asia. As showed on the left-hand side of the slide, actually describing GDP growth and penetration by market. So we are very well-positioned to capture this opportunity with our presence in 13 markets. On the right-hand side here, where we serve now over 12 million customers through a mix of agency and bancassurance. Those of you who have visited our businesses in the past will agree with me that the best way to understand the scale and depth of our presence in Asia is to touch and feel our operations. It is for this reason that our Investor Conference in 2011 is to be held in Kuala Lumpur, where we will provide you with lots of access to our Asian businesses and management. As a preview, let's take a look at some of those businesses and see what they've been up to in the first half of 2011. In Indonesia, the market with high GDP growth and low insurance penetration, we are the dominant player in the industry. In '95, we had only 250 agents. Today, we have over 100,000. We have a strong presence in Jakarta and Sumatra. And in the first half of 2011, we continued our rapid expansion into the other regions of the country where our takaful products are very popular with the Muslim population. We continue to innovate too to differentiate ourselves from the competition. I got an example from our Asia PCA team and we have just introduced PRU Hospital Friend private hospital offering in June. It is a great example of our innovation and it is putting our own people into the hospitals to support both our customers and our agents and we're doing that in 2 hospitals now with great success. This is not only the talking point of our clients but it is the envy of our competitors' agents. So I take China, which is my second example. We face a completely different situation. China is clearly a market with great potential. However, it is currently dominated, as we know, by strong local players. We'll not let that affect us too much because we are in China for the long gain. We operate there via our joint venture with CITIC. And we have a 10% market share among the foreign insurers. Our distribution mix is split evenly between bancassurance with CITIC bank and agency. And with our agency force now exceeding 13,000, we are making good progress across the 33 Chinese cities in which we are present. In the first half of this year, we have launched a new agency recruitment drive called the Apollo program. And we are optimistic that this will spur agency growth in the coming periods. Moving now to 2 markets where we have been present for longer periods, Singapore, where we started in 1931, and Malaysia in 1924. Singapore is a very wealthy city with higher insurance penetration than many parts of Asia, where our results continue to defy conventional wisdom with high levels of profitable growth. APE was up 37% in the first half of the year. We have highly effective multichannel distribution and are the market leader for a regular premium unit-linked business. Our partnership with UOB Bank has made a strong start and has grown 210% in 2011. We also have excellent partnerships in that market with Standard Chartered, Maybank, SingPost in addition to UOB. And we were expecting [ph] that the additional bancassurance businesses in Singapore would simply be the fifth largest insurer in the country. And it's not in the script but we got the confirmation this morning, Barry, that we got the June statistics from the association in Singapore. And I'm pleased to confirm that we are #1 in Singapore over the first 6 months of 2011. In the first half of 2011, we've continued to innovate. It's been a key source of value creation, and new products contributed 20% of new business profit. We were the first to launch an early stage crisis cover plan, excuse me. And this product has supported both new customer acquisition, as well as repeat sales, which we know are very profitable from existing customers. We expect the continued success from new products rollouts in the second half of the year. To finish in Malaysia, which I guess is somewhere between Indonesia and Singapore in terms of development, we are also the #1 player with 14,000 agents and over 1 million customers. In the first half of the year, you probably saw that we extended our UOB relationship to Malaysia and it has been a particular highlight. Like in Singapore, we made a fresh start with UOB. Within 8 weeks of signing, we had 7 products fully up and running in 46 branches. We officially launched on May 1, and our first 2 months of APE achieved 150% of our target. And I'm sure, we'll see further progress with this exclusive relationship in the second half of the year. So that was just a very quick whistle stop tour for a few of our Asian businesses. Our Investor Conference later on this year will give you much greater insights and will be an opportunity to do credit to incredible activity happening across our businesses in Asia with Barry and his team. So moving now to the U.S. Over the last decade, Jackson has delivered significant growth in assets driven largely by the successful expansion in variable annuities, whose assets are shown in dark blue on the slide. This asset growth has translated into significant growth in profits, and the trend for our growing assets and profits has continued in the first half. At the end of June, our total assets had increased to over USD $105 billion, driven in the period by $7 billion of separate account net inflows. Across our key metrics, Jackson has delivered a good performance. New business profits have been growing at a compound rate of 34% since '07 and are at 27% in the first half. Moving onto IFRS. IFRS profits have been growing also at a compound rate of 14% since 2007 and are up 14% in the first half, driven by the underlying asset growth that I just talked about. And finally for cash. Jackson has delivered a net remittance of GBP 320 million. Without question, this is the most noteworthy feature of Jackson results that we are reporting today. It is the largest net remittance that Jackson has ever paid to Prudential, and it confirms Jackson's ability to make significant contributions across the cycle. I believe Jackson and our U.S. strategy passed the test of cash generation, that I mentioned earlier as a key test in our sector, with flying colors. And again, Jackson keeps a very strong capital position and balance sheet after this large cash transfer. So bringing it all together on this slide, you can see that our philosophies was same as in Asia. We are to drive our 3 metrics, NBP, IFRS and cash. So I'll move now to the U.K. In the U.K., as you know, of our markets, we put value ahead of volume. We have focused our business on the parts of the market where we have a clear competitive advantage with profits and annuities. We have been relentless in writing only high IRR, short-payback business, and this has produced strong results for our shareholders. A lot of the improvement that we have delivered in terms of capital efficiency and return on new business investment at group level has been as a result of the actions the U.K. team has implemented in this new more focused approach. The new business strain, I believe, is the only chart on this slide where you will see a decreasing trend. So across our key metrics, the U.K. has delivered new business profit growing at a compound rate of 8%, just as we were investing 50% less capital in writing new business. And in the first half of this year, NBP has again grown at 8%. IFRS profits is up 8% (sic) [7%] in the first half. And net remittances for the half year at GBP 265 million were maintained at a high level of the prior year. Given that first half remittances predominantly comprised in rate here or the cash from group's profit transfer. It is important to look at the full year numbers to see what transformation of U.K. cash generation, with a shareholder-backed business becoming cash flow positive. As a direct result in the 2.5 years since 2009, the U.K. has cumulatively remitted in excess of GBP 1.1 billion in cash to the group. This is nearly a tripling of the total cash of GBP 411 million, remitted in the previous 4 years between '05 and '08. Bringing this all together in one slide, you can see that as with Asia and Jackson, our U.K. business is delivering direct results across all of our key metrics. And let's be clear, I see our U.K. business as best-in-class, high-single digit growth as delivered by our business is an enviable growth rate in the western world. So let's look now on M&G. M&G continued to perform well in the first half. Assets under management have now reached GBP 203 billion with GBP 93 billion come up from external mandates. Our external assets have grown by GBP 37 billion over the last 2 years with GBP 17 billion out of this GBP 37 billion coming from net inflows. This is an exceptional performance from another one of our teams, the M&G team. M&G's profits in the first half of 2011 have increased by 41%. As with most asset managers, M&G has a high degree of operational leverage. And you can see this in the rapidly improving cost income ratio in the bubbles at the bottom that went from 60% cost/income to 55% between '10 and '11. This strong performance from M&G is often overlooked by many life insurance enthusiasts that follow Prudential. But it is worth pointing out that M&G now contributes over 15% of the group's IFRS results and the profits it produces are very high quality and fully fungible. M&G is a high-performing business and a very valuable part of our group. So in December, we have given you clear objectives from '09 to 2013. Before I end of the section of my presentation, I would like to update you on where we stand. We told you that we would double IFRS and NBP in Asia in 4 years. The quality of our Asian operations gives us confidence that we will achieve these objectives by 2013. You can see that over the first 18 months of the plan period H1 '10, H2 '10, H1 '11, the run rates at which we are growing IFRS and NBP are ahead of a 19% annualized rate that we need in order to achieve the objectives. Put it simply, we are on track to double Asia in 4 years. Cash generation overtime is a reasonable test of the effectiveness of our strategy. Conscious of that we set a number of cash generation objectives for the group on December 1. You can see that here too, we are making good progress towards our targets. And as at the end of the first half, we are 43% of the way there. Nic will give you more color on this very soon. But overall, we remain on track to achieve 2013 growth and cash objectives. So thank you very much. And with that, I would like to hand it over to Nic for a more detailed run through on our numbers.

Thank you, Tidjane, and good morning, everyone. Now I have presented our results on 3 previous occasions. And each time I've been in the fortunate position of reporting to you strong growth. Well, this time is no exception. Today, I will divide my presentation into 2 parts, growth and profitability, and then move on to cash and capital. As summarized on this slide, the financial headlines for the first 6 months of the year. I will not dwell on these as I will be covering them later in my presentation. I will, however, point out 2 notable achievements. One, that this is the first time at the half year that our new business profit, our IFRS operating profit and our free surplus generated have all exceeded the GBP 1 billion mark and that our EEV operating profit has exceeded the GBP 2 billion mark. And two, that the double-digit growth rates also extend to the balance sheet with both our EEV and IFRS shareholder's funds at record levels. These results provide tangible evidence of the progress that all of our businesses are making towards delivering our strategy. So starting with growth in our top line, life insurance sales have grown by 10% to GBP 1,824,000 of APE. This increase has been achieved despite the impact of the regulatory change in India, which continues to disrupt the market as a whole. If we were to exclude this affect, sales in 2011 would be 16% higher, reflecting a 21% APE increase in the 7 fast-growing high profitable markets of Southeast Asia, including Hong Kong, and a 32% increase in our U.S. variable annuities. Turning to new business profit. At a group level, this amounted to GBP 10.69 million, representing an increase of 20% over the same period last year and 53% over the GBP 700 million achieved in 2009. This growth was achieved even though we invested less capital than last year, reflecting our operational discipline of directing our investment into those products and those geographies with the highest return characteristics. On this metric, the impact of the market disruption in India is more muted as the contribution of this business to NBP is comparatively modest. In both half year and in both the half year and the second quarter of 2011, we achieved record sales volumes in U.S. variable annuities, in Hong Kong, in Singapore, in Malaysia, in Indonesia, in the Philippines, in Vietnam and in China. These are amongst our highest margin businesses and it is for this reason that both the half year and the second quarter new business growth rates are above 20%. This next slide provides you more color on NBP for each of our life businesses. The group's overall new business profit of GBP 1,069 million shown in the top row translate into a margin of 59%, which represents a 5-point margin expansion compared to last year. We continue to write new business on attractive economics with IRRs above 20% in each of our businesses and short payback periods. These remain in my view, best-in-class and represent a tangible example of a disciplined approach to balancing value creation and capital consumption. In Asia, new business profit rose by 17% to GBP 465 million. Our focus on those products and geographies that offer the highest value, which we measure by reference to internal rates of return, have seen margin rise by 7 points from 56% to 63%. Health and protection, which in the first half of 2011 reached 31% of total sales, being 29% in the first quarter and 32% in the second quarter, remains a key source of value accounting for over half of Asia's new business profit. In the U.S., our new business profit is up 27% to GBP 458 million with our growth coming entirely from variable annuities as Jackson continues to benefit from a strong position in the independent broker-dealer channel. The 4-point improvement in overall margin to 68% is due to the higher proportion of variable annuities, which accounted for 88% of our sales in 2011 compared to 80% last year. The margin of our variable annuity business is 2 points higher at 73%, reflecting the benefit of minor pricing changes made in October last year. New business profit in the U.K. increased by 8% and the margin advanced to 36%. Consistent with our policy of only pursuing wholesale opportunities that meet our strict financial criteria, the U.K. completed one bulk annuity contract in the first half. The key numbers of this contract are APE of GBP 28 million, NBP of GBP 24 million and new business strain of GBP 8 million. At the retail level, we wrote lower volumes of individual annuities this year following changes to the legislation on minimum retirement age in 2010. Now whilst the shift in business mix has translated into an overall lower retail margin, which in 2011 was 32%, the overall IRRs on the new business that we back with shareholders' capital is higher than this time last year at over 20%. Turning to life insurance net inflows. These have increased by 19% to GBP 5 billion, evidencing good organic growth. The effect of these net inflows when combined with a positive investment markets in the first half have driven the value of our policy holder liabilities up by GBP 6.4 billion to GBP 128.6 billion despite a GBP 1.5 billion adverse foreign exchange effect. This increase in the liability base is equivalent to an annualized growth rate of 11% or 14% if we back out the effects of foreign exchange. The trend that you see in the chart on the right is what underpins the significant progress that we have made over the past 3 years in driving our life IFRS profit forward. In asset management, we reported total net inflows of GBP 3.3 billion, which as expected, are beginning to normalize following the exceptional performances in 2009 and 2010. The strong inflows in M&G's retail offering continue to provide a solid underpin to the amounts shown on this slide. Our total external funds under management are up by GBP 3.8 billion to GBP 115.2 billion, the higher levels of external funds shown on the right underline the improvement in our asset management IFRS profit that we are now reporting. Moving to our IFRS result. Our headline profit here was up 25% to GBP 1,058 million. This has been a key area of focus for us and it is pleasing to see that both life and asset management businesses are moving forward strongly. You can see the improvement in the life result on the top of the slide and I will come back to this shortly. Profit in asset management and other businesses increased by 29% to GBP 280 million. As you can see in the box, M&G is the main contributor to this total. Here, as Tidjane has already commented, profit increased by GBP 50 million to GBP 172 million due to the strong asset growth and the improvement in the cost income ratio. Now when you come to forecast the full year cost income ratio, please bear in mind the seasonal nature of our costs which last year this ratio increased by 3 points between the half and full year stages. Asia asset management also delivered a healthy increase in profit from GBP 36 million to GBP 43 million, again due to the higher asset base and strong discipline on costs. Here the cost income ratio also declined from 62% last year to 59% this year. Other income and expenses shown at the bottom of the slide were lower at GBP 246 million. This is caused by the inclusion in these results of a one-off benefit of GBP 42 million which represents a reduction in our future pension scheme commitments following the government's adoption of CPI for statutory minimum pension increases. Our solvency to spend of GBP 27 million will continue on this run rate for another 12 months and tail off thereafter. Turning to the IFRS life results. Profit was higher at 15% to GBP 1,024 million with all 3 businesses reporting increases. As you can see, Asia grew fastest at 25% with the U.S., up 13% and the U.K. up 8%. This relative growth shape is entirely consistent with what we are aiming to deliver. Also noteworthy is the fact that in the first 6 months of 2011, all 3 businesses are reporting profits which are broadly equivalent. I would now like to look at the life result of each business using the sources of earnings disclosure that we introduced with our 2010 preliminary results. Starting with Asia, as you can see in the top-left of the slide, the total life income has increased by 18% to GBP 926 million. Expenses have also grown but at a lower rate of 9%, and you can see that in the middle. So with income expanding faster than expenses, there is a strong positive draws affect contributing to our earnings growth. Below towards the right of the slide as highlighted, you can see that technical and other margin is up 16% to GBP 785 million, and this source remains the key driver of our Asian income. The margin on revenues, shown underneath, has increased by 18% to GBP 560 million. This represents deductions from premiums to cover costs and the increase here is in line with the Asia's premium income growth. The insurance margin of GBP 225 million, which represents the profit from our health and protection businesses has also increased, reflecting the growth in the book and the continuation of positive claims experience. Moving on to the U.S. The improvement in the result is principally driven by higher spread and higher fee income. Spread come, highlighted on the left, is 10% higher at GBP 380 million. And you can see in the box immediately below, this is equivalent to a spread of 262 basis points, up from 235 basis points last year. This increase principally reflects reductions in crediting rates. The 2011 total includes GBP 53 million from the portfolio lengthening transactions executed last year, which will also benefit the second half, but at a slightly reduced rate. Moving along to the right, you can see that fee income has increased by 36% to GBP 327 million, reflecting the highest separate account balances, which have risen from GBP 22.5 billion, you can see that underneath, to GBP 33.6 billion. The trend in the basis points fees shown is distorted by the fact that the average reserves are calculated using only the opening and closing balances. So if we refine this calculation, it would produce fees of around 200 basis points for both periods. And this reflects the fact that the pricing for that is unchanged. Total expenses in the top middle are up by 18% due to the higher acquisition costs incurred to secure the 20% growth in sales. These acquisition costs amounted to GBP 485 million and in line with market practice have been deferred in full and will be amortized in future years. This deferral is treated as a credit in our results as shown on the top right of the slide. During the period, we amortized GBP 293 million of previously deferred costs. These are higher than last year, reflecting in part the growth in the book but also the DAC acceleration effect which that we have previously flagged. We said that in 2011, DAC amortization will be temporarily higher than normal as we effectively repay the benefit that we accrued in 2008 from the use of the main reversion methodology. This repayment amounts to GBP 82 million in the first half and is included in the GBP 293 million. I anticipate a broadly similar change in the second half of the year and we have provided you with some additional disclosures in the release to help you forecast the DAC amortization for the rest of 2011 and beyond 2011. In the U.K. the story is simpler, and that the higher IFRS result reflects a rise in our life income and the ongoing benefits of our cost reduction program. Our main sources of income in the U.K. are annuities and with-profits. You can see the increase in the spread income that comes from annuities to GBP 122 million, highlighted on the left, which includes a contribution of GBP 18 million from the bulk deal that we wrote. The income from with-profits, shown on the right, was flat at GBP 154 million as bonus rates was substantially unchanged between the 2 periods. Turning to EEV. Our headline total operating profit of GBP 2,147 million is equivalent to an annualized return on opening embedded value of 17%. The life operations are the most significant component of this total and this slide analyzes the contribution from each business. As you can see from the chart on the left, total life profit is higher at GBP 2,140 million with all 3 businesses reporting increases at or above 20%. We are just as focused on the profitability of our existing book of business as we are in new business, recognizing that it is an important driver of overall profits and ultimately, of cash. We're therefore pleased to see that the in-force profit has increased by 25%, reaching an absolute level of over GBP 1 billion, another first for Prudential at the midyear point. You can see from the top chart on the right higher unwind from our existing book is contributing to this improvement. However, the step-up in performance is principally due to better overall experienced variances and assumption changes. These totaled GBP 246 million, which is further analyzed by business on the next slide. In Asia, the negative variances which followed the financial crisis continue to come down. Persistency in particular has improved and the variance now stands at minus GBP 10 million. The Asia team continues to make good progress in eliminating these negatives which are modest given the scale of the business. In the U.S., spread experience amounted to a profit of GBP 81 million, which includes the positive effect of the portfolio lengthening transactions that I have already commented on. During the period, Jackson's management has successfully operated the business within its pricing assumptions, generating an additional GBP 89 million of profit across a number of sources. And in the U.K., we benefited by GBP 46 million from the reduction in the corporation tax rate to 26%. We have not yet taken credit for the impact of the further proposed tax rate reductions to 23%, which when booked would give us an additional benefit equivalent to 4p per share. I would now like to spend a few minutes on Asian net flows. In 2010, our net flows posted a modest decline due to an increase in partial withdrawals, which are a feature of the business that we write in Asia. Many of our regular premium savings contracts have no fixed maturity date, so partial withdrawals are an effective way of allowing customers to access part of their savings. The blue dotted line in the chart on the left represents the rate of withdrawals, including surrenders, of our shareholder back business expressed as a percentage of opening liabilities. Not shown on this slide, the rate in 2008 was in fact just over 4% for each half. You can see that this rate fell in the first half of 2009, principally reflecting a reduction in the frequency of partial withdrawals through the financial crisis. In late 2009 and through 2010, following 2 years of exceptional equity market performance, we saw a resumption in partial withdrawals as customers took the opportunity to realize some profits from the increased value of their policies. As you can see in the chart, the frequency of partial withdrawals in 2011 is normalizing with the overall rate lower than the previous 18 months at 5.1%. This rate is now back in line with our EEV assumptions across all of our businesses except for Malaysia. I would emphasize that even after a customer makes a partial withdrawal, they continue to pay their annual dividend, including the element -- their annual premiums, apologies, including the element that relates to protection writers. If this wasn't the case, then the level of gross life inflows, represented by the red bars in the chart on the left, would be flat or falling, which is clearly not the case. I would also remind you of our definition of life inflows. These are not the cash premiums that we receive. They are, in fact, the amounts by which we increase our policy holder liabilities after deducting our upfront charges and after extracting our insurance income. In the final analysis, the key point that I would make is that our overall policy holder liabilities continue to grow. You can see from the chart on the right that in the last 30 months, the stock of policy holder liabilities has risen strongly, increasing by further GBP 1 billion in 2011, which ultimately has the effect of driving our earnings forward. We have reproduced the chart showing our annualized lapse rates in Asia, which Barry shared with you in December at the Investor Conference. In fact, we have extended this by 6 months. You can see that our overall lapse rates remain on a downward trend and are now at a level of around 10%. Put differently, we are retaining 90% of our customers, which is an important underpin to the quality of our Asian franchise. I would now like to turn to cash and capital. Let's start by taking a look at the evolution of our free surplus, which over the course of the period has increased from GBP 3.3 billion, shown in the gray bar on the left, to over GBP 3.5 billion, shown in the red bar on the right. As you move from left to right, you can see the GBP 1,390 million, which represents the underlying free surplus generated by our existing book of life business including asset management. All businesses are contributing materially to this amount, with Asia generating a similar level of capital to the U.K. We used GBP 297 million of this amount to write new business, which is equivalent to a reinvestment rate of 21%, below, well below the 27% rate of 2010. Now you should not regard such a low reinvestment rate as the new base. It is artificially depressed by particularly favorable country and product mix, the latter reflecting the lack of customer's appetite for high strain interest-rate sensitive products at this stage of the cycle. The net result is that we have generated an underlying free surplus of GBP 1,093 million which is above the GBP 1 billion mark for the first time at the half-year stage. Further along the slide on the right, you can see the GBP 690 million that was remitted to the center with the balance held in each business, where it can be deployed more profitably. The higher overall free surplus base has the effect of improving both capital flexibility and capital fungibility. This next slide summarizes the net remittances from each business in the first half of 2011 and compares these with those in full year 2009 and 2010. At GBP 690 million, the overall amounts are higher than those we achieved in full year 2009, and we're well on track to meet our 2013 objectives. Stepping through each component, we have received GBP 265 million of cash from the U.K., representing as usual, the shareholder share from with-profits plus a positive GBP 42 million from nonprofit businesses. The U.K. is on track to remit GBP 350 million from 2013, representing a sustainable level of cash without relying on the one-off positive items, which enhanced remittances in 2009 and 2010. Jackson exited 2010 with a strong RBC ratio of 483%, and the capital formation in the first half of 2011 has been strong. This has enabled Jackson to remit GBP 320 million of cash which represents its full year contribution for 2011. The level of remittance from Jackson as, Tidjane has said, reflects the success of a disciplined expansion in variable annuities and also demonstrates the fungibility of Jackson's free surplus. Now we acknowledge that this GBP 320 million remittance is ahead of the GBP 200 million level that we have set for 2013. You should note that these objectives have been set at a level we would view as sustainable through the cycle as opposed to the maximum that may be achievable at any given point in time. We have received GBP 105 million of cash from Asia as PCA moves towards its 2013 objective of remitting GBP 300 million per annum. You will recall that 2010 included GBP 130 million one-off from Malaysia. So at an underlying level, the 2011 remittances are already ahead of those for the full year last year. M&G will continue its practice of remitting substantially all of its post-tax earnings, which in 2011 will be paid in the second half of the year. We're also making good progress towards our cumulative 2010 to 2013 objectives for free surplus and net remittances. You can see that the at the end of June, we were 43% of the way towards achieving both of these objectives. Looking at the balance sheet. The overriding message here on this slide is that the quality of our balance sheet remains strong. The group's IGD surplus at the end of June is estimated at GBP 4.1 billion and is equivalent to a cover of 290%. Our central cash resources now stand at nearly GBP 1.5 billion. In December of this year, we will repay the EUR 500 million Tier 2 notes at the first call date. Earlier this year, we increased our committed liquidity facilities to GBP 2.1 billion and extended the tenure to 2016. Our U.S. credit book continues to be positioned defensively. Net unrealized gains at the midyear amounted to GBP 1.4 billion and impairments in Jackson fell back to only GBP 14 million in the 6 months. Even though we saw no defaults in 2011, we have maintained the GBP 1.8 billion reserve for credit defaults in our U.K. annuity book. With all the macro uncertainty, we remain cautious about the state of the economy and its impact on credit risk. Our holdings of sovereign debt and bank debt in Greece, Ireland, Italy, Portugal and Spain remain modest. This slide provides you with a full analysis of these holdings on the shareholders' balance sheet. You can see that our investment in sovereign and bank debt in these countries amounted to GBP 53 million and GBP 341 million, respectively. And I would remind you that these are principally held by our U.K. annuity business where, as I said a minute ago, we carry sizable credit default reserves. Finally on dividend, the board has approved an interim dividend of 7.95p per share, which is equivalent to a cash payout of GBP 203 million. As in previous years, the interim dividend has been calculated formulaically as 1/3 of the prior year's total dividend. And this translates into an increase of 20%. The group's dividend policy, which is to grow dividend at a sustainable rate from the higher base established at year end 2010, remains unchanged. So in summary, we have maintained our 2010 momentum into the first half of 2011 and we continue to deliver broad-based profitability improvements across all parts of our business on all metrics. The capital-generative nature of our business model, coupled with our cautious approach to balance sheet risk, has created, over the last 3 years, a group which is both stronger and more resilient. Thank you. I will now hand you back to Tidjane.

All right. Thanks, Nic. So I said in the beginning that I wanted to leave you with 3 key messages. One, that we have a clear strategy. We have clear long-term focus on Asia. The second is that we have a strong and deep leadership team. As we went around the businesses, and Nic talked to you about our financial performance and risk management, I hope that we have provided you with some evidence of what this team has achieved. And as a team, I can assure you that we are totally committed to continuing our track record of delivery. So last but not least, 18 months in our 48 months program, we are firmly on track, I believe, to achieve the 2013 objectives. So if I look into the remainder of 2011 and beyond, we have to acknowledge that the recent evolution of the macro context has not been positive. The issues over Eurozone, fiscal deficits, high indebtedness, vulnerable banks all over U.S., high deficits and a few challenges in political decision making are well rehearsed. The scale and the depth of these issues affecting the West are significant. There is a progressive realization that the timescale over which these issues can be resolved is likely to be longer than initially anticipated. This team has navigated with successful challenges of '08 and '09, one of the worst financial crisis ever. So we are alert to the risks surrounding us and manage our exposures proactively. The key point for us, I'm about to close, is that the quality of our individual franchises, our significant presence in the rapidly growing markets of Southeast Asia where more people are joining the middle class than ever before, positions us well to continue delivering relative performance over the medium term. And our focus on execution of financial discipline give me confidence that we can carry forward our performance. So thank you once more for your attention, and over to you for questions. If we just take a few seconds, then my colleagues can join me on the stage, we'll start for questions. Are you going to direct the -- yes? Okay. Great. Greig Paterson - Keefe, Bruyette, & Woods, Inc.: It's Greig Paterson, KBW. I have 3 questions. One is I wonder if you could give us a stab, the GBP 246 million variances on EEV. How much of it is sustainable into the second half so we get a broad idea of the sustainability of that? Second thing is, I mean, obviously with record low bond yields and gilts in the U.K. and U.S. government, I was wondering if you could give sort of a stab the way you see the margins in the U.K. and the U.S., how they'll be influenced into the second half of the year. And the third point is in terms of Asian margins, with accident and health being at 32%, and I think Barry previously said that the range was 25% to 30% and he couldn't see it sustainable above that level, I was wondering should we be penciling a lower Asian margin in the second half of the year as that sort of returns to a more sort of sustainable level?

Greig, So we'll take those 3 questions if it can help you build your model for the second half. The variances, Nic, GBP 246 million?

Sure. I mean, I'm thinking through that. There are a number of one-offs. Clearly, the GBP 46 million in the U.K. tax changes is one-off. As the government approves further reductions, you should see some effects come through and we're giving you some disclosure in the release for those effects. Outside that, the U.K. did have a GBP 28 million which is a yield enhancement from a portfolio rebalancing. That is one-off. In the U.S., I commented on the spread profits. The lengthening transactions beneficial to us in a lower interest rate environment, so you should see that GBP 53 million repeat. As to what experience will do in the U.S., will depend on our ongoing success to operate the business within our assumptions. And in Asia, the numbers are reducing, so I don't have anything to say in relation to that.

Okay. The second one was in the low interest rates. I mean in Asia, it's not really a factor. You've seen the makeup of our earnings. It's a marginal factor. Nic, do you want to say a little on the U.K. margins or Rob and then I'll ask Mike and Chad in the U.S.

On Asia, the other thing I would add is that the economic assumption changes between the 2 periods, had a minus 2% effect. So it's modest. It's been offset by the product mix and country mix clearly, that's why margins have moved up. In the U.K., there is some sensitivity to interest rates. And if we were to factor in the drop that we've seen in the 10 year, really the effect would have been no more than GBP 5 or so million sterling, so it's not -- there is some effect, but it's nonsense.

The U.S., Mike or Chad?

Well, I think the correct starting point with the U.S. piece is we're sort of back with the 10-year was in October of last year. So I think that's not what the sort of the current coverage of the rates would be. It suggests we're at some new point, but we've seen this before. We're still maintaining the interest rate hedges. We don't talk about those as much as the equity piece, but that's about GBP 40 billion notional at this point, so very little impact on the back book. We do reprice the products multiple times through the year based on rates, and that's one of our assumptions. I think the better metric in the U.S. business to look at when we look at pricing is the 20 year. If the clients stay, if they utilize the benefits, that's going to be a more relevant metric for us. And then last, I think the one comment that I just want to clarify is we've talked over the years, there's 3 sort of emerging product concepts: One driven by us; one driven by Met and AXA; and one driven by Prudential U.S. There are very different benefits to the consumer. Ours is the 5% withdrawal of your own money sort of model, proves us of a narrow range of return and portfolio insurance model. And Met and AXA like the GMIB feature. Interest rates affect each of those very differently. There's not an implied fixed income option embedded in our product. So you get to the roll-up rate question that gets more of an equity assumption. There's minor issues on capital calculations, but it's -- that product is not quite as interest sensitive as some of the other models.

All are [indiscernible] sensitive, and I'm sure we'll have a chance to come back.

Yes.

So that's his [indiscernible] Asian margins, Asian fees, it's true that we guided you between 25 and 13. In the past, we have 32%. Don't forget that India is a big factor in our H1 number.

Yes. This morning, I said 25% to 32%. I would still say 25% to 30% is about where it ought to be, but also it's not the only thing that impacts margins from the geography mix.

Geography was really important, as also Nic says overwins were favorable, if you wish, in H1. Product geography having a lot of business in the most favorable geographies. And pre-crisis, India had 3% of APE and H&P, okay. It's moved to 16% in the first half, but it's still way below the 25% in the first we're talking about in Asia. And we treat that as an upside actually over time when we say -- when we can get it to move in the direction of the other market. We think that, that H&P in India is going to increase, but it's still below. So actually losing India volume is good and losing India volume, which is pulling HSP mechanistically increases your H&P content in your Asian APE trust, but just mechanistically. Next?

Jon Hocking from Morgan Stanley. I've got 3 questions, please. Your net accumulative remittance target looks like you've already gone a long way there.

Sorry, which target?

Your net accumulative remittance of GBP 3.8 billion, you seem to be, almost a year, potentially ahead of schedule. What's the GBP 320 million from the U.S. factored into that? Was that a positive surprise relative to what you're expecting when you set that target? Secondly, can you comment a little bit on economic capital? Most of your peers gave some view of why they settled an economic capital model. You're slightly giving us your IGD number. And if you comment about the sort of rates [indiscernible] that would be helpful. And then just finally, could you comment a little bit on the distribution mix in Asia and what you're seeing in the agency channel and the bank channel?

Okay, very good. Under the remittances, when I was going over the targets, I was tempted to say and I have myself say, don't start asking if we can do this earlier because we will not move the targets. We're still in a very uncertain world. Seriously, don't you look at what happen today. We're doing well. We're happy with our progress so far, but I don't need to stress that we live in an uncertain world. There's a lot of uncertainty. On the 320, no, we weren't really surprised. It was factored in our thinking. We have insisted for this half year is that the growth in Jackson would be cash generative. We had questions. Sometimes we would go to the [indiscernible] Would come relatively quickly. We've been a travel business. We've been writing and that is what's going through, that we can both strengthen the RBC, come out in a good position and have excess if you wish cash flowing back to the center. Actually, we're pleased with that. But again, if you look at the chart where it is -- you also see that '09 and '10, I think it's GBP 49 million and GBP 18 million to a GBP 320 million. So the 200 again is a target across the cycle. As Nic said, it's a sustainable target. It's not the maximum. And as for cycle, the moves, you wouldn't take that to move. Economic capital, Nic, do you want to?

You're right, John. We haven't published that information. Really the reason, we focus on IGD is because that is what actually bites in reality. That is what we are regulated on at the moment until the Solvency II comes in. Internally, of course, we managed the business on an economic basis and we are comfortably in the type of ratios that we expect to be at this stage of the cycle. But I'm not going to -- I mean as I said, we haven't given that information.

The reality is, unless we go to a great level of granularity and economic capital under so many tax, economic capital. Unless we really lift the hood and show you really what there is. Giving you a number in isolation I think is potentially misleading. You just have to got Solvency II. And when the growth pro-cyclicality where we're really having there. We don't claim, but it's also in the economic capital model. We can have widely different targets and I don't believe that the numbers that are out right now are comparable in any way or in order to do with them, the ones that are disclosed by companies because we just don't know how they are computed or even just by being called economic capital. So in due course, Solvency II is implemented and when we know what it is, we'll be very happy to share with you. But we are at a time of uncertainty. I'm not saying if there is one use in the current markets is that you may get some of the designers of Solvency II to think again. That's all I'm willing to say on that. So distribution agency.

Yes. The distribution in Asia, the mix changed a little bit versus first half of last year with bank going up from 27% last year to 30% this year. Tidjane touched on the very strong performance from UOB. The outperformance, if you will, in the bank channel was -- there was also a strong contribution from SCB, which grew significantly faster than the business in total across the region. Having said that, agency also performed very well. Again, there's really 2 factors as you know. We've discussed this a lot in the past that drive the agency performance. Some instances depending on the market. You really focus on growing scale and others who are focused less on scale, more on productivity. We got improvements in both scale and productivity in the first half. So I would say the distribution platforms in general, the short answer is they're both very robust, both performing above expectation, and such will continue to do so.

Nick Holmes of Nomura. I had a few questions on Jackson. A couple of rather tedious questions, clarification. First one, but then followed, I hope, by something more interesting. The first 2 questions are with the ALM transactions, which created the GBP 53 million one-off benefit, which you say will recur to some extent in H2, what are your plans for 2012? Is this the end of that? Then secondly on DAC, is it correct steps you have eliminated the mean reversion or you will do by the end of this year, which means that your equity growth assumption will be 8.4%? Those were the 2 points of clarification. And then just a more interesting question, which is what steps, if any, are you thinking of taking to curve the U.S. growth, which you've commented the competition is not increasing and the greatest are very strong. And I wondered are you going to take further measures in that respect?

Okay. Thank you, Nic. I'll take the last one at the end, but we can start with ALM transaction.

I think Chad, our CFO is here, so I'll let him go ahead and deal with the ALM question on the...

Do you have a mike?

With respect to those particular transactions, they do clear [ph] over a number of years. As Nic alluded to earlier, [indiscernible] transaction, the actual rates [indiscernible] would go up, that would diminish the value of debentures. But [indiscernible] stayed well. We continue the benefit from that. And that's sort of the dynamic that's going on with that. In terms of that converting [indiscernible] we haven't eliminated [indiscernible] mean reversion technique. All we're saying is that 2008 running off is a big[indiscernible] year with that. What we're saying there is we've moved back within the mean reversion [ph] quarter that already exists so that we won't be dealing with the 15% cap any more. It will be dependent on where the market is on a go-forward basis. So we'll continue to get the dampening of movements due to the mean reversion technique and there will be less movements in terms of unlocking period to period because we're back within the quarter.

And so the equity growth assumption going forward is what?

Well, it will be between 0 and 15, okay, depending on -- because we're back within the cap. So it will be market dependent.

And where is it now? I mean it was 15%, wasn't it?

Yes, It was 15% coming into the year. What we've shown in the appendix, you'll see is if the market stays flat for the rest of the year, it will fall at around 5%.

It is appendix 67, that's the page you're looking for. We gave you.

I've seen this a couple of times written out. Our equity assumption is 8.4 in the mean reversion. It's a cap and the other thing that I think is lost on mean reversion, a couple of things: One is a standard U.S. procedure, okay, all of our competitors do this and it seems to draw more attention; second, we put in place in the year when the equities were exceptionally strong to flatten the impact of a good year. It was never -- there is not -- Clark gave a number, I think, his last meeting here, what it would cost us to true this up and what the impact is, and it's still not material. But it is -- you do want a dampening effect we think on this noncash. It's not -- it does what it's supposed to do and that there's a pretty clear articulation of it on Page 66, 67.

We've done our best to really give you every year of a period, a 3 -year or about a 5-year, what year is in, what year is out. And you see there, within 2011, 2008 falls out. And because 2008 was so negative, okay, it has an impact then on what you're planning your mean reversion. We've given you a 5% that Chad was referring to. It's not intuitive, but it's a common method in the U.S. of -- I mean that sometimes if our view in business was viable because we're assuming 15% equity returns and isn't that a bit aggressive. Well, that's not to say no. We're assuming 8.5, but the mean reversion allows you to grow up to 15% before you hit your, like I said, your duration.

So you are still at 15% using that technique?

It would be 15%. The actual number won't be 15%.

It has already come down, it's well below 15%. That effect was an GBP 82 million charge as we had anticipated it would be. The steer -- just to simplify the whole thing, the steer is that you should see a similar amount and each will then come back to a much more modest range. So hopefully, you won't regard this particular assumption as aggressive, which is isn't. It was never designed to be aggressive or prudent. It was just designed to dampen an effect. But once we get [indiscernible] out the way, this will normalize and hopefully, we won't be having these questions.

And just the last thing -- just to make sure we're clear on the life of a normal contract, the recovery of the DAC is effective in timing, but not amount. There is no attempt to defer it out to 30 years. I mean over our product assumption period, all of the DAC is recoverable. So it's not -- we're not pricing for 40-year DAC or something. That's not -- I want to make sure this is -- it's a timing issue, not an amount issue on DAC.

On the fourth question, our general positioning on VAs. It's relatively simple. It is a cyclical market. I think I've used those words several times talking publicly. It's a cyclical market where sales are a function of our actions, but also of a number of factors we don't control. The first one is the S&P. We don't control, a major factor. And the second one is the behavior of the competition. So every time we look at this, what we do is we set a combination of broad characteristics, which is price and risks that we're very comfortable with. And we've always said our sales will be whatever clears, whatever the market will be willing to take at that combination of risk and price, but we only set those 2 factors in the position that we're entirely comfortable with. So what happened when the competition, if you wish, took longer to reduce the growth, then we focus [indiscernible] again, we've [indiscernible] used the word opportunistic. We move opportunistically again and when we signal it, it was an intention to take advantage of that to potentially increase the margin or reduce the risk. And I have said this, but I think it was unheard. Those changes take a long time to go in. And as I said, they have not happened. So I was always surprised and I would read speculation about the impact of the changes on our sales in Q2, and I said that we potentially expect Q2 to be at the same level, to be at the same rate Q1. I said that too at that time. So those changes haven't happened yet. And frankly, it's close to impossible to foresee what exactly pipeline are we going to have. So all we did is flag. But logically, other things being equal, it could lead to a slowdown later in the year and that's what we did. But we are in a relatively comfortable position where, frankly, it's a bit indifferent to us because either we make more money or we have less risk. So in many cases, it's a win-win for us. And these favorable conditions actually put us in a very comfortable situation as our priority in that market, unless you want to say more, Michael?

I just think you've seen -- I think we've flagged this a couple -- it's kind of during the crisis. You've seen us fight the [ph] quality. It's a little entertaining this week in the U.S. releases of our competitors. We're now referred to as one of the big 3. And a number of us, over the 15, 16 years I've been here, the question of scale of Jackson, remember used to come up occasionally. And so that's -- for me that's a funny piece to read. But there's a rational sort of methodology and sort of there is a calming of the major players and the look of the business I think in the space. And we've seen that concentration. We told you that would happen in the top 5 or 6 plus players. So it's not as price-led market. It wasn't going into it. It's not as fragmented. Certainly, movement of one of the major [indiscernible] is currently repricing of product that will draw market share away from Prudential and us. That's fine. Again, we're not in this for a quarter-to-quarter. We'd never projected, Tidjane has never asked for top line sales growth or market share metrics. So I think we're in excellent place. I was with our wholesalers last week and they would tell you they're working as hard as they have ever worked for the sales this year and it's not an easy climate to generate sales, and that they are in fact earning them. So I think there is a -- it's a good competitive landscape and some of the uncertainty in the U.S. continues to drive investors towards products that have some form of annuity income later. So fundamentally, it's all good for us.

I have a point about the market being price driven is very, very important. We've done well because we have the rating, because we have a capital to write for products and because we were there for distribution, what we have extended hugely and there are some slides in there. That's what people don't get. The sales have increased because our presence, our footprint has increased several fold and that's how we increased the sales, not by mispricing it or [indiscernible] because it's not really price sensitive. If anything, we've reduced the [indiscernible] poorer and poorer and poorer at the same price. So we have several implicit repricings. So we see 95 basis points. And we're here, we haven't changed our price. I think we have because the 95 basis point buys you a very, very different content over the last 2 or 3 years. So price is not the reason why our sales have gone up. If you are not credible in that market, you can charge 30 basis point. But with 95, you won't sell anything. People are making investments for 10, 15 years. It's not price driven.

James Pearce from UBS. A couple of things. Since you have reentered the wholesale market in the U.S., is that a turn in the water or can we expect you to revert your old levels of GICs? And second on M&G, we had a high watermark in M&G. You've got everything going in the right direction. Can we expect that to be maintained or even to improve further from here both in terms of fee to funds [ph] and cost income ratio?

Okay. Mike, on GICs, and Michael for...

We're being extremely optimistic in the GIC space. We have the same team we've always had. I think we've explained this to you guys over the past. It's a small crew, less then 1/2 dozen people who both handle the distribution and management of that book. The institutional price we've written this year have been outstanding margins. What you're seeing on the buyers side of that, James, is there are so few high-credit quality issuers that it's not a particularly price-sensitive market right now. Most of the buyers are looking for diversification. So we're not looking to ramp that business up materially, but we like it -- at a certain price, we'll do it. And the volumes are not as you see like historic levels but there's a little bit to be done at very high margin.

Michael, high watermark for LNG?

Yes, I hope not, but 2 things to say. The first is that the cost income ratio in the second half, I think Nic flagged the point anyway. It's flatter than the first half, so with some cost in the second half that we'll be catching up that we haven't seen in the first half. So I would certainly expect the cost income ratio to up in the second half. The second factor I'd say is that the result in the first half of this year particularly reflects the exceptional, exceptionally strong fund flows we've had over the last 2 years or so. As Tidjane has said, we've been expecting those fund flows to level off and actually reduce from the very peak levels that we've seen. And therefore, the rate of accumulation I would expect to slow somewhat. And given also there's a bit of cost catch up, we will be going forward much more dependent on market levels to come through to demonstrate our profit growth. But we would certainly be expecting, hoping to continue to see healthy net fund inflows going forward.

Trevor?

Trevor Moss from Berenberg Bank. [indiscernible] because I'm going to ask him another question. Two-in-one meeting being probably more than in the last 3 years combined. But anyway, could you just speak a little bit about the business development initiatives you got going on M&G? I noted some reference in the commentary about expansion in Europe and perhaps you could just talk around a little bit what you're doing there and where you see that expansion heading? And just a second question, actually really on India. Obviously, some fairly dramatic changes vis-à-vis regulations and so forth. Can you just explain a little bit about the state of India, Indian insurance market currently, your position within it and where we go from here, what's the sort of trajectory? I noticed some comments I think from Tidjane relating to things looking a little bit better by the end of this year. So perhaps if you could elaborate a little on that, that would be helpful.

Okay. Michael, do you want to?

Yes, sure. We've been operating in Europe for a number of years. We launched in Europe in 2002. The key characteristic of our launch into Europe is that we were selling the same vehicles that we sell in the U.K. I hate the word OIC. I'd rather call them good old unit trust, but that's what it is. It's the M&G OIC. So we've been selling the same product as we sell in the U.K. therefore, with the same performance track record. And it's an incremental story of just gradually moving into fresh European markets over time and the current expansion is sort of north, it's into the Nordics.. We therefore, following that, we'll be operating in most of the major European markets. We see Europe as still and underinvested market with a lot to go for because the banks obviously have a major group out there, which is interesting [ph]. So it's really a story of incremental growth and we still see a lot of opportunity.

We'll do a double lock [ph] on India between the [indiscernible] but we've both been there in July, so we have some pressure, fresh pricing intelligence. Look, the problem with India is that we didn't really like the way the market worked before. If you look at our 2010 numbers, I think the NBP in Asia was 396, now GBP 23 million of that was India. And I think before, 65. In 2011, GBP 10 million is India. So I guess putting it in perspective. We've seen a lot of potential in it, but it's not a huge or is not a material issue for Prudential, I can say. It was definitely -- so within that context, the market was not, if you wish, operating in a healthy manner. For me, I'd say it's year one of insurance in India, okay. We now have a proper market where there is a connection between the charges and the value of other product bring. And when I was in India, the management team there is the first one to say it. They actually got excited, okay. So it has effectively -- and the sales were at 96% unit-linked. It was a market where people were taking a bet on the stock market. As long as [indiscernible] equity was growing 10%, 15% up every year. We're going to remind what they are paying for, 4% of protection charges. But that period is gone and we're now back to a market where we can actually sell protection to people who have redesigned the product suite, have done a really good job at that. The products have been approved by regulator, so we have something now is that we need to reach out to our salesforce. There's also a need to cut the cost very significantly to protect the margins and that process is underway. So it's a huge restructuring. There's a lot going on below the surface this year. And my comment was simply saying that all the way to Q3, you can't really see anything because you're comparing apples and oranges. You are comparing the new world in all the comparatives. It just doesn't make any sense. You're comparing 2 completely different regulatory regimes. Q4 will be the first quarter where you'll be able to have some visibility on how this new market in India is behaving. But we keep a large salesforce and we are a leader. We have [indiscernible] in both market and we're committed for the long term. We'll pay the the price in regulatory changes to winning the Indian market and make, I hope, more than GBP 23 million in the half year. Barry?

Yes, not much more to add other than just emphasize we have basically maintained our ranking in the marketplace. We're still amongst the private companies at the top of the heap. LIC has clearly been the big winner. Their market share has gone up, the total market. And in terms of our relative performance aside from maintaining our market position, as we've said before, I think it shows in the numbers that we were better prepared for this and that we had already gone through a lot of cost rationalization 12, 18 months before this regulatory change. As Tidjane said, that now continues to pace. We continue to close branches that aren't productive or combine them, creating larger branches that cover more geography. The key, again, Tidjane also said it, but I'll emphasize is retooling the salesforce because you have a salesforce that historically was accustomed to selling what looked a lot more like a mutual fund than a life insurance product. And now, we're trying to teach them the self protection, which in the long run is better for consumers and better for them and certainly better for shareholders, but in the near term it is painful.

Can I just a follow-up quickly on that? So when we see the sales figures going through the first half, is that the sort of, let's call it a runoff of old-style products still being sold by -- this is new world?

No. Product changed 9 months ago.

Andy Hugh, Exane BNP Paribas. Three questions, if I may. First one in Asia, next 2 on the U.S. On Asia as you know, it struggle quite a lot with the 8% of undiscounted cash flows beyond 10 years in the future, a [indiscernible] assumptions. And I guess if I look at Singapore, which is the biggest unit-linked market and compare you guys to AAA. On the statutory filings, AIA seems to be assuming that unit-linked contracts are lasting for 7 years in terms of premium income. Yours seems to be 21. I'm wondering what makes you think that these contracts are actually undated in Asia and is that a reasonable assumption to make when you're doing the numbers? On the U.S., one concern is obviously the granting [ph] rates come down a lot for the fixed annuities. So whereas in the past, people bought variable annuities because they wanted equity markets [indiscernible] with protection in its downside. What makes you sure that they're actually still doing that and actually not a different generation of policyholders buying VAs. I noticed that in your numbers today there was more people taking income and lower actual surrenders, which would be consistent with the changing policy or the behavior. I was wondering what that means. And the third one is probably the simplest to answer, is the return to Greg's question [ph] on VAs in the current market environment. I mean simply speaking with interest rates at 10 years below 2.5% and equity market below [indiscernible] quite high. This does not seem to be a good market to sell VAs in and yet you're saying that their hedging costs have not increased. Could you just explain what's going on, please?

Okay, thank you. I'm clear on the second and the third question. The first one, was it Singapore, of your assumptions we make on how long the unit-linked are rested on our book? All right, okay. Do you want to?

First of all, we've been selling unit-linked for more than 7 years and people continue to pay premium, so we know it's more than 7. I recognized you say that AIA is suggesting at 7. I think probably the key feature that we emphasize over and over again but bears repeating again is that unit-linked is an element of the product we sell. We sell unit-linked laden [ph] with production rider so the policies that we sell represent long-term life insurance protection. It just so happens that the savings element that you see in that whole Life product, we happen to give exposure to equity markets where others provide fixed returns or some other mechanism. We have always sold lots of riders with unit-linked. We're selling even more than ever before as you can see by the progression of our results. Since you mentioned AIA specifically, I'll respond specifically. AIA, when they launched unit-linked, their view was it was not appropriate to attach protection riders and did not do so for many years. And I think even now still do so to only a limited a degree, so that's the fundamental difference. I would suggest to you, certainly one of the fundamental differences is that we package our product differently and sell it as Life insurance. Other companies have historically sold it without any protection and have offered it as a shorter term investment product. So ours will behave different because it is structured differently and sold differently.

And we've been doing it a long time. It would show up in the numbers. If you get that wrong, it would show up in the numbers. And I think from memory, I think you have 6 riders per product or something like that.

It varies from market to market. Singapore is quite high. It's between 5 and 6.

So to show you just the importance of the riders and the product package and how people think about unit-linked, I think that's right. Then we have the U.S., the behavior, is there a change in policy on the behavior and.

[indiscernible for Chad upfront, while I'll let him do the one on hedging. But, Andy, I think you're right up in your question, both I think. There is a change in VA policyholder behavior, but I think it's different than the direction you're going. The fixed index -- or I'm sorry, the fixed annuity as you think of in the U.K., the idea that you would take a monthly check and determine as an annuity contract is 2% to 3% of the U.S. fixed annuity market. It's a very, very small piece that does not have retirees, take withdrawals. That is not a product that's commonly purchased for that in the states. The material shift in the U.S. postcrisis is annuities, both fixed -- fixed was off in a surrogate for a time deposit because the consumer couldn't afford to live on the yield on a bank CD and it was a way, consciously or not, to extend duration and to take more credit risk. I don't think the retail retiree always saw it that way, but they're effectively going out to get more yield to live on. That's a deferred annuity where they're spending the crediting rate. That is very different than an annuitized contract, where a part of what they're getting back is a principal over a stated period of time. That's given the absolute levels of time deposits and the absolute levels of fixed annuities is a strain on those retirees. They cannot live on these low levels and so they're moving up the risk spectrum now in the FIA -- in the index contracts and then do equities. That's one shift. The more material shift is precrisis VAs were used as an accumulation product. I agree with that part of your thesis there completely. Postcrisis, they're seen as a very effective income tool. And that was not the case before. And that's a shift from U.S. consumers saying I have x hundreds of thousands of dollars saved for retirement. I'm fine. To watching that get eroded through the last crisis and realizing what I really need is a check a month or some floor on my income. So there's a change in saving behavior. It's still not driving the bulk of the assets from the deep end of that pool here is still mutual fund or similar type assets. There is the annuity -- the VA business is getting a little more of that, those sales than they used to and a little more of the packaged product sales. So there's a -- as an industry, there is an increase in market share of the client wallet. We have, as we showed I think in December, pretty clearly very aggressive, very efficient assumptions on benefit utilization priced into our product. We assume clients will do what's in their best interest across the spectrum. I think we put quite a bit up on that in December on our assumptions and that is how we price and that is how we stand to it. And I'll that Chad comment on the hedging. On the interest rate environment, again, the 20 years are more important to us than the 10. There is no part of our product that keys off 10. The issue with the 10, I think, goes back to that fixed annuity client and their time deposits and their options. So it has a material impact on consumer behavior. They have less reasonable choices. It has less impact on us from a product pricing point of view. And the only point I'll lead into Chad's piece and I'll let him talk about hedging cost is another thing that's missed I think on us is if you think of the product, first, you have the guarantee fee. When we talked in December, we talked about how we spent that fee. Then, you have the M&E fee, the core fee and the product that you would -- we're not going to -- we have no -- we are still within our pricing and the guarantee fees. We still have no more than twice that on the base fee. So if hedging cost shot up, we would continue to hedge and you would erode the profitability of one year's sales over the Jackson book, okay, which is a nice place to be. And the last point I'd make is, and if we were materially wrong over a cycle in the second year of the client contract, we can replace the guarantees. So there's quite a bit of work and look at what risks we could incur in this and I don't want to suggest for a second we're not aware of changing macro issues. We obviously spent a lot of our day looking at how they impact our business, but Chad do you want to talk about the cost of hedging in today's market?

I'll see if I have anymore luck with this this time. So I mean one thing to keep in mind too is that over the -- there's a longer product cycle on VA so we can't just pull a product tomorrow and put a new one out there. So we think about the 6-month type of lead times when we price the products. And so we've got -- we think about what's the likely interest rate environment over that period of time when we look at that. So if you look at today's rate, as Mike mentioned before, we're within the range that we've seen over the last even 12 months. So this is not uncharted territory. This is just -- it's a very sudden move back to where we were 12 months ago, but it's not new. So I'd say from a rate perspective, that's contemplated in the pricing that we have. In terms of the hedging cost, I don't think we've ever said that we're not experiencing higher hedging cost. I mean if you think about the conversation we had last December at the Investor Day, we talked about how we price and the fact that we're pricing out on the tails and then we're going to have to hedge and experience whatever actually happens. I'd say, we're experiencing out on the tails this year as we've continued to over the last couple of years. So hedging cost would be higher than we would anticipate on a more normalized pricing basis, but that's in our numbers already you're seeing. There's nothing -- it's not transparent in the financials.

It's Andrew Crean with Autonomous. Could I ask a question on Asian product profitability from a customer point of view. What's the kind of reduction in yield that a customer might suffer given the charges you have? I'm also kind of thinking of Slide 65 where at the Jackson you give all this about economics, the variable and fixed annuity products. It would be interesting to know how those work in Asia.

Okay. So only one question. We have time to look for it.

It will vary from market to market depending upon how much protection someone has bought. And so I mean the way people tend to look at this is not that I'm paying $1,000 and if $400 goes towards protection, only $600 gets invested, I get a yield on that $600 and oh my gosh, it looks like a terrible yield against the $1,000. People segment in their minds that I understand that I am paying $400 for my health insurance and for my Life insurance. And then there's $600 that goes into the fund and they look at the return on that element of the product, and historically that tends to be very good. If you look at our investment performance today in Asia, if you take a blended 3-year, 5-year performance on the funds that we offer in the unit-linked products, what you'll find is that over 2/3 of those today performed at or above benchmarks or peer funds. So our investment performance is better than it has ever been, but I think customers don't look at it the way you're suggesting they do fundamentally. Actually, we're early. Well, I don't think about it the way you do.

Pete is here.

Yes, do you have a sense, Pete?

I supposed our fund charges vary by the type of assets, on the type of fund people choose to be between 1% and 2% per annum on that component. As Barry said, that varies off to deduction of the charges for expenses and the protection elements of the contract, which can be perhaps 40% or 50% in some cases on a regular premium linked contracts because that's the amount of benefit or amount of premium that is going on average over the term of the contract to protection benefits. These are very, very heavily protection benefits in most countries.

Yes, it varies by country. But in some places, yes, it's half the premium.

So you can't look at simply the premiums going into the contract and then project it, surrender value at age 60, so it's something to calculate a reduction in yield because consumers who've had the benefit of a huge amount of protection benefit on a wide range of different types of benefit over that period.

And the products are sold and illustrated this way. I mean we get people very detailed understanding of how the product will work year in, year out for 20 years, 30 years, 40 years.

So I suggest you continue to.

Yes, you can take it offline [ph] indeed.

I just wanted you to [indiscernible]. He's got it -- he knows it all.

We'll go 3 last questions maybe. We'll start with Raghu.

Raghu Hariharan with Citi. Three questions, 2 on the U.S., one on Asia. Just in the U.S., you mentioned about hedgable risks where you confront on your hedging. I was just wondering on your GMWB, what does bite, if it's not interest rates, is it age-related when the withdrawal actually kicks in and you said policyholder behavior is changing and people are buying more for the accumulation. So is that something that could bite? I know -- I think a year or 2 earlier you had actually had a positive experience variance because you had seen people delaying their withdrawals. The second one really was in U.S. capital efficiency. Capital efficiency has gone from 32% to 20%, which is new business trend upon on premiums. I see there's some commentary around the mix changing, you have high proportion of VAs and there's some commentary on product changes. I was wondering what those product changes are and how does it drive lower strain? The third question really was in China. I know that is one of the Asian markets that you showcased, Tidjane. But if we're looking at the numbers, the new business margins have come down, it's back to breakeven. And we know that the bank is showing this market as challenged because of regulatory changes. I was wondering how you see Prudential is positioned in China and what progress can we see from hereon?

Okay. So we'll start with the U.S. Thank you, Raghu. Mike, do you want to?

So the hedgeable risks and the key risks to your good point on VA are the equity allocation of the client, all right. So with percentage of equity to debt or non-quality assets or a fixed account to which [ph] any accommodation of those. The equity, the absolute levels end of equity performance over that period of time, which obviously would produce that, you get the guarantee, the roll-up in the absence of the equity piece. So what level of are they going to be able to pull that withdrawal out on, and then the efficiency with which they utilize the withdrawals, okay. So what we like about those that, that said is those can be calculated at various stresses. And you can assume fairly Draconian numbers for each. And as we showed in December, we priced them out on a very conservative basis. We also run endlessly, just to be clear, tests of even more efficient than that, which you get in. The short answer on that is what you get into is the product is less profitable if the client utilize more. We don't get into scenarios where we're losing money on business for 100% utilization, 100% equity. That's not the -- a couple of things happen. The further out you go on your scenarios, the longer the money stays with you, right? So you do have the present value of the fee stream. And when the client annuitize it, effectively withdraws the contract and that the most efficient basis in the downmarket there with you are very long time, okay. And again, there's not an interest rate guarantee in that or some other element that you're trying to manage as well. Your question on capital strength -- does that answer your first question? On the capital strength piece, there's a couple of things. Product mix matters materially. In this market, we are not writing a lot of fixed annuities or fixed indexed annuities for a number of reasons. We're fairly defensive. We are talking of the portfolio right now. I think there's a question of writing fixed at this absolute rate level, how persistent that business would be if rate shut up from an absolute level. If rates go from 3 to 6, those clients will leave because it's in their best interest regardless of how good a job we do of taking care of them. And those products that were discussed, I think, is in that illustration reference earlier on 65, are much more capital intensive. So our mix shifting to the VA has a huge impact on lowering our capital in that. We have, as Tidjane referenced, derisked and made the VA product less capital intensive multiple times over the last 3 years by reducing the absolute level of guarantees, by some of the structured changes we made, the fee changes that we made. And also last year, making the fixed contract in the VA more restrictive, less attractive, lower absolute yields, that sort of thing. And that has, again, that's effectively a fixed annuity inside of the VA. So by making that more restrictrive loans, whereas lower on absolute rate, lower on guarantee, eliminating the ability to flip in and out of it, that sort of thing, that lowers the capital strength because the regulators view that as a far less risky asset than if that account was fully liquid and the client could jump in and out and arbitrage your fixed to short-term interest rates, say a money fund. So that's the other major reduction in capital strength.

The other factor is the unit cost that contributes to this strain is lower because we're just selling so much more than we did before. So that operational leverage that you've heard me describe in a number of places also applies in terms of its contribution to the new business strength.

We actually have had a number, I think a pretty good track record of positive variance ports because we are trying to maintain conservative pricing and then hedge for a more conservative, a less optimistic model. I'm not sure I balanced that correctly [indiscernible]. We assume still most clients leave us, not stay with us after stronger periods, those sorts of assumptions. So that comes through in some of the positive variances you've seen as well.

And I think Nic mentioned the mix. We went from 80% VA to 88%. That's one factor. We had the allocation to a phase, moving VAs has decreased quite a bit as a result of the changes we made plus the scale factor. We're going back to [indiscernible] that gives you your movement in inefficiency. Barry, do you want to take China?

It's channel mix. It's the -- basically, the very rapid growth in the bank channel that has had the impact on margins that it has. Margins are still good, but we have very strong relationship obviously with Salic [ph] as you would expect us to, be very disappointed if we didn't. SCB is also a major partner, but we distribute through a number of others as well like ICBC and so forth. And that does have a -- and some of these banks, there is an element of open architecture not so much in our larger relationships. The small relationship does tend to mute the profitability of the business over what we're accustomed to. It's not to suggest that the agency channel however is not doing well. It's just that bank is doing so well. Agency, we're up over 10,000 agents, closer to 12,000. Actually, we're -- we've not been as focused in the first half of the year ongoing the scale, although we do have, as Tidjane mentioned, project Apollo [ph] there to build the agency for us not in a huge way, but in a thoughtful and disciplined way. So the scale of the agency I think in the first half only increased less than 5%, 2% or 3%, but the productivity is up over 20%.

We are -- it's long term, but we are fighting to take already away from margin. We don't like margin. I don't like margin. We don't run the group based on margin or for margin. It's really based on IRR. And if you listened to mixed comment on this margin page, you went back to IRR every time. So what we'd like you to -- accept the IRRs [indiscernible] are good, although margin is telling you is product mix. That's why you went immediately to channel mix. I"m saying all the product value [indiscernible] you're creating and then depending on what the customer does or [indiscernible] the margin will move around. But anyway, at some point, we'll get there. It's one of our medium-term projects so we can really discuss IRRs or margins that went up [ph] significantly. Last one?

It's Toby Langley from Barclays Capital. I've got 3 questions, 2 in Asia and one on the U.S. Looking at the Asia IFRS profit drivers, is the margin and revenues that look to be the single largest driver of the upside in Asian profits in the year and then what I don't think you disclosed is the days of recurring premiums that drives up margin and revenue. So I'm wondering if you could give us a sense of that number and just perhaps articulate how much that changed year-on-year? Secondly on Asia, could you remark -- could you let us know what the first half attachment rate in terms of riders is. I think the year end for the the Investor Presentation, you said there was about 2. Has that changed materially? And then on Jackson, on Slide 70, 71, you gave us some details on crediting rates and charges. As we stand today, have those numbers moved? Are they representative of how you are behaving in the market as we speak?

Okay, thank you, Tobey. IFRS, Nic, do you want to?

Yes. The marginal revenues is the charges that we were able to apply in a number of the territories that we currently operate in the first couple of years of our regular premium contract coming on board. I mean, we don't give you a detailed analysis of the premium income by country or indeed the source. But overall, premiums are going up, and you've seen one of the notes that we disclosed that they've gone up in Asia from around the GBP 3 billion mark this time last year to GBP 3.6 billion, so premium is increasing. It's shifting. If anything, the mix is shifting towards those countries where we do -- we're able to levy charges in the first few years of premium. And that is what's driving the expansion of that particular line. Also within our technical margins, don't forget the very rich profitability that we're able to derive from the health and protection products where, again, our claims cost experience is well within our expectations.

And regular premium is above 90% in general, which I think was one of the questions.

Yes. It's a very healthy proportion. It stickier business as well. So regular premium accounts for the vast majority of our premium income in any given period.

It went up during the crisis because actually contradictory to what people expected in '08, '09, the only thing that collapsed is the rolling [ph] of single premium, which went down by 90%. Luckily, it's only 10% of our sales and that's what you'll see in Asia on equity markets goal, et cetera. It's a single premium. Players who are selling single, premium, potential to be [indiscernible dominated players, and a lot of single premium will be very much affected.

It comes with a much purer investment or intake. It's much wider on single premium products. I mean it's the savings product.

It's one of the things that really makes us so robust and relatively relaxed even in the current environment. The regular premium with riders are very, very resilient, which moves us to the the attachment rate of rider.

Which continues to be very good too. It varies from market to market too. It was actually on the low side. It's usually more than 2, but it does vary by market so it remains very robust. I mean one evidence of that, as you've seen the product mix shift, that's because we have done really well in the first half with health products in fairness. It's also because the unit-linked, because of what's going on India, the unit-linked as a percentage came down because India was virtually 100% unit-linked, as Tidjane said. So that sort of flatters the health and protection, but it continues to be very strong. When Tidjane was running through some of the countries, he pointed out some of the new products that are out. We've had some instances where new health products have represented a pretty significant percentage of the new sales in respective markets. So it continues to go very well.

That's on crediting rate.

I think that the charges, which is more of the question, is that correct? What we're trying to do, I think that chart illustrates a couple things. There was a price war we've talked about numerous times in this room and other meetings that we set out. And so at one point, we were seen as not following the industry, et cetera. And I think that's illustrated there in that guarantee, the charges for this particular guarantee. The other piece of this, I think, that matters is we have over the last 3 years change the benefit offered and try to keep the price relatively constant, okay. So you can reduce the roll-up, you can reduce the age availability, you can ban the ages. There's a variety of things. From an actuarial point of view, you can do that, improve the profitability, derisk it and are still competitive offerings and that's been more of our choice. One of the considerations we look at with the VAs is you don't want a product that is so fee laden that it can't produce investment returns that grow their savings. So our preference in this climate, for example, if our determination was we needed to make some product change, we'd much more likely reduce the benefit than increase the price and it has the same impact for shareholders or that group of stakeholders. But if you think about stakeholders that are -- or the clients that own this, you don't want to rob their -- you want to load the product up so heavy in fees that they can't -- their assets can't grow. They need these assets to grow. You've read a lot bout Americans being undersaved. Some of these products, they initially can get, approaching 4% in total costs with some very good guarantees on them, but that makes it very difficult for equity markets to provide any sort of upside for that. So our preference sort of at this point in the cycle, what you've seen over the last couple of years from a our message [ph] decrease the benefit or decrease the age availability and try to keep it at constant.

Can I just come back? So the chart is still a flat lining if we are to extrapolate through today, is that the right way to see it?

We're not -- directionally, that's how we like it. Now there's other -- again, the other challenge with this one is if you think of our product as a matrix where most contracts are more static, competitors are more static than that, we can turn on on our features. You can choose a bonus. You can choose to have multiple types of guarantees. You can strip the contract of all its guarantees. So it's very hard to give you a single answer on how it would look going forward. I'm not trying to be invasive here. I'm just saying it's more of a grid than it is a single spreadsheet. But conceptually, we like in this point in the market a reduction in the benefit more than an increase in fee, if that helps on any of those lines.

All right. Well, thank you very much. I'm sure there are more questions, but we trade with turn over in December and some of you will be there. So we'll do a shorter version today. The last thing I have to do is to invite you to Kuala Lumpur. It's my pleasure to extend this invitation. We'll have our Investor Day in December and we're already working hard to prepare it. We're going to try and make it really worth it, and Barry and the team will showcase Asia. And depending on how markets, et cetera, well, we may also update you on another part of the group. That's something we haven't completed this day. It's going to depend on what happens to the world between now and then. But at a minimum, you'll get a full review of Asia and we'll all be there. So it's a pleasure again. It was a difficult day to present our results into, but we think this is our best results ever and we're very pleased to present them to you, and then we will see you in November. I hope you [indiscernible]. So thank you. Thank you.