Prudential plc (PUK) Q3 2011 Earnings Report, Transcript and Summary

Good morning, and welcome to the Prudential plc Analyst and Investor Conference Call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Tidjane Thiam. Please go ahead. Your line is now open.

Good morning, and welcome to Prudential's Q3 IMS Teleconference. I am joined by Nic Nicandrou, group CFO; and Mike Wells, CEO of Jackson. Today, we are reporting a strong performance in the first 9 months of 2011 as our positive momentum in the first half has continued in the third quarter. Importantly, in the current market and economic environment, we are also reporting a strong and robust balance sheet. Our U.S. hedging program continues to perform well, mitigating the impact of a financial market volatility experienced in the third quarter. We have limited shareholder exposure to U.S. sovereigns and banks. All these factors, combined with our strong operating earnings, allow us to report at the end of Q3 an estimated IGD surplus of GBP 3.9 billion. Looking at our business performance, in the first 9 months of the year, group sales were up 10% on an APE basis, and new business profits were up 14%. Despite the significant macroeconomic challenges that we have seen in the last few months, on a discrete third quarter basis, our sales across the group were up 9%, a good performance in such a context. Starting with Asia, Asia continues to provide strong growth for the group. New business profit was up 16% in the first 9 months. Moving to the U.S., new business profit increased by 17% in the first 9 months of 2011. As in the first half, Jackson's volume focus in the third quarter has remained on variable annuities, which represented over 80% of our sales. Finally, in the U.K., new business profits was up 1% in the first 9 months. In the third quarter, sales decreased modestly in comparison to Q3 of last year, but this merely reflects our ongoing value over volume focus. Across the board, our life insurance returns remained attractive, with IRRs in Asia and the U.S. of above 20% and in the U.K. of above 15%. In asset management, we have delivered close to GBP 0.5 billion of net inflows in the third quarter, excluding movements in money market fronts. This takes us to GBP 3.4 billion of net flows in the first 9 months of the year on the same basis. It is a strong performance, particularly considering how challenging the third quarter was for the asset management industry, with redemption levels in August representing the worst month since October 2008 customers. So let's now take a closer look at each of our businesses in general. Asia new business sales on an APE basis accelerated in the discrete third quarter, up 14% versus Q3 2010. New business margin at the 9 months stage was 63% flat on what we reported at the half year and up by 5 percentage points on the prior period. I should say at this point that the key driver of the year-on-year improvement in margin is country mix, with unexpected lower sales in India and low margin markets. Health and protection insurance, which are the main source of the high returns we enjoyed in Asia, represented 31% of APE sales in the third quarter. The size of our agency force in Asia continues to grow, and we ended the third quarter with over 212,000 agents, excluding India. Agency business represents around 2/3 of our sales in Asia, with the remaining 1/3 coming from bancassurance. Just a few comments on bancassurance. Unexpected, bancassurance has outpaced agency over the first 9 months of the year, growing at 34%, driven by the strong performance of our exclusive regional partnerships with Standard Chartered and UOB. We continue to grow within these 2 overly successful regional partnerships as we have been able to add new countries this year to each of them, with Philippines for Standard Chartered and Malaysia and China for UOB. Asia's strong performance had been delivered despite the significant, and well-rehearsed by now, challenges of the Indian markets. In India, effectively, APE sales were down 46% in Q3, a continuation of what we saw in the first 6 months of the year. However, from here, the comparatives for India will start to make more business sense. I am sure you all remember the regulatory reforms intervened in September 2010, so that from October 2011, at last, we will, for the first time, be comparing year-on-year sales, making the same regulatory income. On that basis, we hope to deliver period-on-period growth as we move forward in India. Moving beyond India and looking at some of the other countries across Asia, 9 out of 12 countries recorded double-digit growth in the third quarter. And Indonesia, Singapore and Hong Kong were particularly strong. Taking these in turn, in Indonesia, our largest Asian market, Q3 sales were up 37% as we continue to drive agent recruitment and training. We will continue to grow the size of our agency distribution in Indonesia, while seeking continual improvement in productivity. We continue to believe that we have barely scratched at the surface of the long-term potential market. In Singapore, Q3 sales increased by 40%, and our subset in bancassurance is the main reason for this strong growth. Our partnership with UOB continues to grow from strength to strength, and it alone represents over 20% now of our total sales in Singapore. In Hong Kong, Q3 sales were up 20%, and we have seen growth in both agent and bank channels. Agency sales have benefited from improving levels of agent activity and productivity. And bancassurance has benefited from a particularly strong performance from our partner, Standard Chartered. In summary, Asia continues to show impressive NBP progression and will remain on track to achieve the objectives we gave ourselves for new business profits, IFRS profits and cash generation in the region. So leaving Asia and moving now to the U.S. Jackson has delivered another strong third quarter, with year-to-date new business profits up 17%. The considerable new business growth in variable annuities that Jackson has delivered over the last few years is now leveling out. And in the third quarter, VA volumes were actually lower than those that we booked in Q1 and Q2 -- sorry, Q1 and Q2 of this year. It is largely a result of the weakness since the S&P 500 in the third quarter, but also of actions by our competitors for a quite significant single periods and final [indiscernible] changes that we have produced and flagged to you in Q1 and that became effective on August 29. Our new business margin at the 9-month stage dropped by 5% -- by 5 points from the level at the end of the first half due clearly to a drop in tracker yields seen in the third quarter. Looking into the fourth quarter, it is difficult as ever to say what volumes will be due to the significant and continued stock market volatility and to the fact that there are currently numerous product changes being made by many of our competitors in the marketplace. However, you should be rest assured that our approach will remain the same as ever. We will continue to set the pricing at attractive levels for our shareholders and write whatever volumes clear on that level. Here again for us, it is above value, not volume. So leaving the U.S., moving to the U.K. New business sales were down 4% in the discrete third quarter, mostly due to the end of a partnership annuity agreement, which we highlighted in our Q1 analyst call, and a return to more normal levels of corporate pension sales. New business margin in the U.K. declined from 36% at the half year stage to 34% after 9 months, largely due to lower margins on annuities, reflecting the lower yield curve environment and a slightly more conservative asset mix on annuity new business. Turning now to asset management. In the third quarter, M&G experienced net outflows in the quarter of GBP 288 million, following a long period of consistently positive net inflows. The outflows that we experienced appeared to be a direct consequence of the challenges in continental Europe, as continental European retail investors withdrew over GBP 1.1 billion of funds in the quarter. In the U.K. retail market, M&G continues to perform strongly, with over GBP 1 billion of net inflows in the period consistent with the quarterly run rate we have experienced from U.K. retail investors over the last 2 years of performance, quite different from what we've seen in continental Europe. The most important point for M&G is that investment performance remains strong. 24% of our retail funds are in the top decile over the 3 years to the end of September. And this should ensure that we see a return to positive net inflows in coming periods. External funds under management at M&G were over GBP 87 billion at the end of Q3. Our asset management business in Asia had a strong third quarter, delivering GBP 775 million of net inflows in retail and institutional business. The strong performance in Korean mutual funds was a key driver of our net flows in the quarter. Investment performance remains strong. We have around 2/3 of funds either outperforming their benchmark or in the top 2 quartiles at the end of September. External funds under management in Asia for the core retail and institutional business now totals GBP 19.7 billion. Moving now to the balance sheet. We have provided some additional balance sheet disclosures within the schedule of the IMS today. With our minimal exposure across the group to either Eurozone sovereign or bank, we remain defensively positioned on the asset side of our balance sheet. In addition, Jackson's hedging program has continued to perform well and has mitigated the significant impact from the movements in financial markets experienced in the third quarter. Jackson's approach to VA hedging has always been particularly conservative, which provide us with the necessary balance sheet resilience during periods of market stress. At the end of September, our IGD surplus remained robust at GBP 3.9 billion. So it is now time for me to summarize these results and make a few comments about our outlook. Despite significant macro challenges in the third quarter, Prudential has had a strong quarter. The driver of the macro challenges in Q3 are all well known to you, and I will not expand on that here. However, what is clear is that Asia's relative position in the global economy has only become stronger. While Asia is clearly not immune to a slowdown in the West, Asian economies look set to continue outperforming their Western counterparts for a long time to come. Our geographic mix, combined with the quality of our franchisees, our strict risk management and the financial discipline that we apply across the group, positions us well to continue driving shareholder value. Now, before I open up to questions, I would just like to remind you that in 7 days' time, we will be hosting our annual investor conference in Kuala Lumpur. For those of you attending the conference, we will provide you with detailed insight into our vast operations across Asia. We will also cover specific aspects of Jackson, M&G and the U.K. businesses. You will have very open access to our management teams, and we will bet you will leave our conference with confidence about the short-, medium- and long-term outlook for our company. We very much look forward to seeing many of you out in Malaysia next week. With that, my overview is complete. And, Sophie, please open up the call for questions.

[Operator Instructions] And our first question comes from the line of Blair Stewart from Bank of America Merrill Lynch.

A couple of questions, they're both on the U.S., I'm afraid. I've kept my Asian ones for next week. In terms of just some of the accounting items that we should expect from the U.S., you've already flagged a DAC adjustment. I know you've got various issues with -- how to account for the hedging that crop up from time to time. So I just wonder if perhaps yourself or Mike could give us an update on what to expect for DAC hedge accounting and any other assumption changes that you might make. And then as a follow-on again on the U.S., you talked about the pricing changes. Could you just perhaps give us a flavor of those? Are those actual price -- sorry, or are you just still playing around with the benefits offered? Or have you actually gone in and changed business points at this time?

Okay. Blair, we hope that you'll come back later on Asia. But on the accounting, as you can imagine, we've been working on the issue. So I'll let Nic and Mike come back to you. And on pricing, we have made actual changes in basis. And then Mike will give you some more color.

Okay. Blair, I'll pick up on the accounting. The guidance that we gave at the half year for the DAC movements remained. We said that if for the full-year 2011, the S&P or the markets go down by 15%, you'd expect to see a DAC write-down of 240 million sterling, and if markets go up by 15%, which is unlikely. You'd expect to see a DAC write -- a DAC hit -- a hit of GBP 150 million. And of course, this is on top of the core charge. So that's the range we were at, at the half-year point. And the guidance still stands. On hedging, the accounting remains the same. We've seen some drop in interest rates and drop in equity markets. And therefore, the hedge instruments will show a mark-to-market gain. So in our IFRS P&L, you'll see an increase below the line. And because the reserving is imperfect, the full effect of that won't come through on IFRS. And in relation to assumptions like most of the U.S. companies, all of them we do a review in the third quarter, and there's nothing noteworthy to be reported to you at this stage.

[indiscernible] accounting, Blair or...

Yes, that's great. Looking at the numbers, those numbers were sterling, not dollars. Is that right, Nic?

Yes.

And the pricing changes, Mike.

Blair, the pricing changes that went through were threefold. There is a -- some changes of age bands, which effectively is an increase. So it was a 10-basis-point increase across the C share in shorter duration. We dropped the headline simple like percent bonus. Just -- it was not a heavily-used option, but just decided to get rid of it. And then the other one was, we limited the access on the alt funds, the alternative class funds, to -- in the managed products. Again, these were -- it's like [indiscernible] we don't have any issues on consumer behavior or profitability in those classes, part of it was forward-looking and the assumption that rates couldn't have moved and volatility couldn't have moved. And then the alt class is just so we don't end up with a situation where we end up with more assets in those than we'd like. We like the class, obviously, like the correlation to the S&P is good for our model. But we'd like to see clients -- ideally, I'd like to have everybody have some of it, not -- so we want to make sure it's used correctly and structured for that. But those are the material ones. And they did have an impact as you would expect on our sales in the quarter.

Okay, very good. I think that's everything. So you're saying that there has been a basis point increase. Mike, is that the message?

On the C that the -- when we think of the C share, those under the longer [indiscernible] products are up 10 basis points.

And our next question comes from Duncan Russell from JPMorgan. Duncan Russell - JP Morgan Chase & Co, Research Division: Just coming back onto the U.S. Just wondering, when did you put those changes through in the quarter? So just trying to determine how much of the sales is on the third quarter due to the [indiscernible]. On that topic, if we assume that markets are basically unchanged and interests remain low and the competitive environment remains as it is, what should we expect to the variable annuity progress throughout the remainder of this year and then for 2012 in terms of your moderation strategy? Second question was, in the sales in Asia, I noticed that there's quite a big difference between the growth in the single premiums and the growth in the regular premium product. The single premium products are up 65% year-on-year, and the regular premium products are up 4% year-on-year. I was just wondering if you could comment on that and if what that means if, anything. And then third question was on the bank debt exposures. Very helpful disclosures, so thank you for that. But I couldn't -- I'm missing GBP 770 million of bank Tier 1 and Tier 2 exposures. You said there were GBP 1.3 billion for Europe and the U.K., GBP 450 million for the U.S., out of a total of GBP 2.5 billion, which leaves GBP 700 million missing. Could you just give us some color on where that GBP 700 million is, please?

Okay, well, [indiscernible], Duncan. We'll start then with your -- and thanks for asking a question on Asia. That's appreciated. We'll start on the U.S. with Mike.

Duncan, the changes were effective 8/29. And so I believe...

That's August 29. Sorry, August 29.

Correct. And you saw a -- do not -- if you ask me what's going to happen in the fourth quarter, it depends on, as I mentioned earlier, the S&P and behavior of competitors. But we saw a drop in our VA from GBP 1.5 billion and changed to -- closer to GBP 1.2 billion over the quarter. Those were the changes. Duncan Russell - JP Morgan Chase & Co, Research Division: So assuming any -- assuming no changes of markets, continued difficult markets, would you expect your market share to come down or remain pretty stable?

I think the bigger issue with the market share is competitive behavior now. You have about 7 companies repricing in various directions. So I think it's a very difficult quarter to look out and say how we perform relative to peers. And so I'm going to defer it to the competitive elements on this quarter. Sorry.

Exactly. Duncan, I think it's close to impossible to predict market share in that market. You've seen the swings, I mean, to name them if you like, MetLife and Pru Fin [Prudential Financial], you've seen what's going on, absolutely impossible to predict the market share. I think you should expect, as we said, volumes to moderate. But if I may rephrase it, it wasn't the moderation strategy that's still driving profits and market [indiscernible] volume. But we say that as result of our actions and we said in May, you should expect in the fourth quarter volumes to moderate. And that's a reasonable expectation. Now putting a number on that is close to impossible, okay? Sales in Asia, single premium, a combination of factors. Nic, do you...

Yes, I mean the [indiscernible] that are coming through. I mean, clearly, as we increase our sales through bank [indiscernible] has been a big area of overall increase in our sales. You've seen more single premium come through. That's one effect. And we saw some -- a big increase in Indonesia in this quarter, particularly our bank distribution. In India as well, we've seen in the restructure of the premiums, is now, again, a popular product. And you see that effect coming through. More generally, single premiums was the one area that was not coming out of the 2008 crisis. And it's rebounding. So it's a combination of those that is driving the numbers up.

That's exactly right. We're still catching up from -- single premium went down by 90% in '08, '09. So still 90% down, 55% up, we're still in catch-up mode. And then the debt disclosure, I know Nic and [indiscernible] through those schedules. When we have the end result, can we come back later? What about GBP 770 million missing? You've said GBP 2.5 billion is GBP 1.3 billion, GBP 450 million, and if you add that, you don't get to GBP 2.5 billion. Yes, that was your question, Duncan. Okay, give us some time. Sure, we can find the answer, and we'll come back to you.

And our next question comes from Andrew Crean from Autonomous London.

A couple of questions. Firstly, could you give us a sense of your gross rates in Asia from a competitive point of view, i.e., how you're growing relative to your competition? And then secondly you talked in the U.S. about the effectiveness of your hedging. Could you say anything about whether the cost of that hedging is within your pricing assumptions?

Okay. Andrew, on the competition, I'm going to try and not name the competition by name, if I can say so. We have had, I believe, the best performance in Asia for a company of our scale. Once you correct for territories and accelerate, we don't get [indiscernible] if you put the other companies that have announced on a comparable basis. In terms of countries' footprint, you will find that we have grown more than the competition. So we believe that we're doing fine, and we haven't lost any ground there. On the effectiveness from the hedging investment, cost of hedging, I mean, the cost of hedging has gone up. But we've always been well-positioned in terms of price, and we keep changing the products to take into account increased cost of hedging. So, Mike, I'll let you give more color on that.

Andrew, I guess the starting point says the value of the hedges are ahead of the liabilities. So we're still fully hedged. In the course of the year, we're still within our pricing. I mean, we certainly had some volatility in the third quarter, but we don't rebalance these hedges every day. So we obviously have some room there on timing. But we're still within pricing.

Over the 9 months?

Over the 9 months. And we're -- if you think a 10-year vol running the historic 21 6, and you see the trade this year, low 20s to a high of, I want to say, 27. So we're priced at 25, I think we've been pretty concerned about. So that's the number that we're most sensitive to. And the interest rate hedges on the exercises that we've left in place, and they're at about 42 billion notional.

And our next question comes from Greig Paterson from KBW London. Greig N. Paterson - Keefe, Bruyette, & Woods, Inc., Research Division: Three questions on Asia. First one is just a clarification. You say that agent productivity has increased by 6%, and that's all x India, but the number of agents have increased by 20% and the sales and net channels by 15%, so it's the opposite direction. I was wondering what is that? Is that because of the APE per agent you are showing is just for active agents? In other words, [indiscernible]. I'm not understanding it. Second thing is, I was wondering if you could tell me what regions within Asia are you seeing most competition from AIA? And I wonder if you could give me that flavor for the sort of pipeline of future bank insurance deals so that we can get an idea because obviously that has been supporting sales for a while. I was wondering if you know to what extent you could continue making [ph] deals around.

Okay. To be clear on the productivity, what we look at is the growth in the number of active agents. And then the APE per active. Greg, so... Greig N. Paterson - Keefe, Bruyette, & Woods, Inc., Research Division: So the productivity is just on active agents list?

Yes, so the active manpower has gone up 9%, and the APE productivity has gone up to 16%. Greig N. Paterson - Keefe, Bruyette, & Woods, Inc., Research Division: So the product's total hedging has gone down by 5%. Concerning active agents, it's gone up by 6%?

I'm not sure if that is fair and good. Yes, you're going back from 20%, the 20% net of growth.

No, the 21% increase is the total number of people that we have in the books. So that's, of course, that's the number of registered agents. Not all of them are.

But it continues. It's like stairs, okay. You hire people. And clearly during the period during which you train them, they won't be selling. And therefore, that affects your numbers. So that's just what's going on. The 15% is really what matters because it's the activation. You're actually selling the product of the company. And that's very important, and that's what we drive. One last point on that, you will see that in absolute terms a lot of increase would've happened in Indonesia. So it's really very young and very, very new agents, which will take a while to train. Greig N. Paterson - Keefe, Bruyette, & Woods, Inc., Research Division: And then just are they -- were like competing most with you and then...

We cannot see in our numbers an impact of the competition. All the rationale that we would have given on the present will compete against our sales to grow our distribution remains true. I mean, you can look at our numbers in the last 3 or 4 quarters, you will not see any step change or any marked change, so we feel that we are continuing as before. Greig N. Paterson - Keefe, Bruyette, & Woods, Inc., Research Division: So from a competitive scene, that's something about, in Hong Kong, you 2 are banging head to head against each other, trying to poach agents from each other. I wonder if you can say anything about that.

No, no. That doesn't ring a bell. We've grown 20% in Hong Kong really in a market which we always have to argue that it is not separated or mature, 30% in this economy. It's very, very, very good growth rate, so you can see an impact of competition there. Numbers are really strong. Bancassurance deal, look, we absolutely unfortunately cannot give you an indication because we look at them in terms of value. I'm very pleased with UOB. It's the first deal I signed. It took a long time to negotiate. It's the kind of deal we like, it has all the features we like, so that's really a deal, it's regional. You've seen that we just added 2 countries, and so the Malaysia numbers could really be starting, going to start flowing through the numbers. We're adding now China in [indiscernible]. We're very pleased with that. There are similarly attractive deals we will do then. But really I do not want to give you any forward-looking sense on that. There's a lot of competition on those deals. We believe that fundamentally, what's important is once you have one of these deals is to make the most of it and grow it. And really, I'm very pleased that we got RCB [ph] in the Philippines. It was [indiscernible] 2 days ago. And that's working very well in the countries where we are sort of starting to bring banks by keep investing, opening new branches. UOB is also a very aggressive bank, so we're getting growth on top of -- in new places. There's in an organic growth of our branch network. You also need to keep in mind it's not just about going out and signing new agreements with new partners. We go to the competitive blocks, get new branches. It's also about working with partners who are keen to grow in Asia. That's what our partners are doing. And we both resigned quite a few agreements. If you think about the growth in bancassurance, it's fairly spread between existing and new partners. We've also signed a lot of agreements in 2010, 2011, and those are working. If we committed to any targets, frankly it would probably lead to varied destruction, deliver to sign the wrong deals. Greig N. Paterson - Keefe, Bruyette, & Woods, Inc., Research Division: I'm just asking. I mean, I remember you in half year, your comment about Malaysia or you've got the last deal in [indiscernible]. I was wondering what other markets are there basically all deals are being exhausted and what market is not being exhausted. So I mean, I just got a mental picture.

Country by country, look, we have conversations in Thailand. We have conversations in Indonesia. We have conversations in the Philippines. We have conversations in Hong Kong. And you just sensed, Singapore, not as we speak. Vietnam, we have conversations underway. So just going down mentally through the list, yes, we have conversations across the region. We've been saying that any -- I wouldn't point out any specific market [indiscernible].

And our next question comes from James Pearce from UBS.

A couple of questions. First of all, can you talk about persistency trends in Asia in Q3? Second in the capital discussion, you talked about options that you have based in capital further if necessary. Can you talk about how material those options are? And third, on the notes on sovereign exposure and bank withholdings sort of the [indiscernible] and [indiscernible ,can you just clarify whether they're just shown on a mark-to-market basis or book value or something in between in case?

On consistency in Asia, as I said it's been good, the flows have also remained good. And Nic, I think you can add more.

Sure. I mean if the question is directed at the issue that we exposed at the half year in terms of the surrenders and [indiscernible] withdrawals, they very much continue on a downward trend. So if you express them as a percentage of opening reserves in Q3 '11, it would be lower than what they were in the equivalent quarter in 2010, and they're lower what they were earlier in the year. So we're trending in the right direction in that regard.

Second question was on capital. James, and I think you were thinking, asking if we have further reduction or what?

You talked about reinsurance. You talked about change in product mix and that kind of thing. How material do you think these changes could be. We're talking sort of tens of millions or hundreds of millions, what sort of circumstances would lead you to exercise the options?

I mean, I think just what we're flagging of our statement, James, is unlike most of our peers we continue to have options to optimize, maximize our IGD. We're very comfortable with our level of IGD. You saw that it only came down marginally in the course of the third quarter and that really is in respect to the payment of the interim dividend. Of course, that IGD is after GBP 2 billion now of default provisions, so in the U.K. we can take some significant hits and not impact the IGD. And of course, because it includes the U.S. on an RBC basis, it doesn't include GBP 1.9 billion, one realized gain. We're in a very comfortable position. We do stress, as you'd expect, all our financials for various shocks, and we have levers that we can pull. But at the moment, we're comfortable, and the numbers are resilient notwithstanding.

As you know, just to give them, that our solvency ratio is 260%. So as we said, we're starting from a very high point. We've got way down to go before we pull some of those levers. And I think we should during the crisis, whether it was a fixed transaction that we did for GBP 350 million benefit, there are things in the insurance that you can definitely do because at the end, it's a trade-off between value creation, if you wish, and capital. And you can, under stress, do transactions that may not be optimal for that equation per se [ph], but I think that protects your balance sheet for the long-term. So solvency, I think will be material. I think we can pull those levers and generate material amount. I cannot promise that we have another Taiwan to sell, but I'd give you an IGD benefit that I think we showed during the crisis that we have the imagination and the ability to execute so that's what we were pointing to. You were asking sort of the mark-to-market.

And our next question comes from Andrew Hughes, Exane BNP Paribas.

Quick question on Asia. Obviously, you've reached an active basis, which means discount rates have come down quite a bit and interest rates have fallen so much in Hong Kong and Singapore. And this kind of prompted a couple of questions really. First one, the drop in the Hong Kong discount rates and Singapore's, as well as the equity growth rate, does that have any impact on the margin? And I guess the second question is, if someone was to come to you presumably in Hong Kong with a portfolio discounted at 3.65%, you wouldn't be too enthusiastic about buying it. And so how should we look at the margin in that context? I mean when used as profitability, is that new business margin the guide that you use or is there another metric that you use that's probably more appropriate for the low interest rate environment that we're right in?

Okay. So Nic's answering for sure.

Sure I'm not going to give you the specifics on the margin in Hong Kong given that we don't disclose them by country at the quarterly level. But the general drop in yields in Asia has had a 2% effect on the Asia margin when compared to the third quarter of 2010. So across the piece, because we're on active basis, ultimately some effects come through, and across the portfolio it was 2%. Look on the Hong Kong risk discount rate, I would urge you -- I mean, there are connections here, right? So yes, the discount rate may be low, but so is the end rate. And the 2 moving things. So if you were to apply a higher discount rate, then you would equally justify to apply a higher earn rate. And you saw when we moved all our assumptions at the end of last year, there was a very minimal effect on the embedded value. So we're very remain comfortable with the embedded value of the business. We don't have another mechanism for measuring it. And we're mindful both of the discount rate and the end rate assumptions when we look at the valuation of these businesses.

Another company we simply do not agreed is the approach which would be to mark everything at the price of each transaction in the market. We do not believe that it is appropriate in the long-term business. We'll not move to NPV, and we are fundamentally different.

I guess I struggle a bit when I see the assumption for Singapore, for equity rate for example, which is almost double the discounted rates, and it makes it very hard for me interpret the actual real level of profitability underlying business. But it sounds you do -- that is the way in which you chose you new business profitability. You don't use any other metrics to judge what's appropriate for a level of profitability?

We use internal rates of our deals, but they're on a real world basis as well. So I don't think we're unusual in that regard compared to any company, certainly the ones that report in Asia.

Yes, certainly not in [indiscernible]. You can check the pricing of our products against the competitors and you can see that we're pretty much in line.

And our next question comes from Raghu Hariharan.

Raghu Hariharan from Citi. Just had 3 questions all on the U.S., I'm afraid. The first one was Mike, if you could give us a sense of policy holder behavior, which you said was in line either on utilization rate of GMWBs and/or surrender rates fees? The second question was clearly the sales, the part of the sales growth in U.S. VAs have come through a diversification of your distribution channels. I was wondering whether you could give us a color of in what the margin differential would be on VAs between banks and the products of banks versus independent broker dealers? And the third question is really an update on the RBC ratio, how that's moved in 3Q from the, I think, 4.83% at first half?

So Mike, can you take these?

The policy order behavior is then fairly consistent. The asset allocation numbers, for example, just flat with a conservative. As you can imagine, U.S. consumers are, I think, as concerned about equity markets and where to put money as they have ever been, so we've not seen a change at all in asset allocation. Withdrawals of anything are down, but again, I think that goes back to the U.S. consumer rate now. There's not an obvious place where to go. So we seem to be -- the persistency is very good. The distribution make up 2 things. We're still getting about 20% of our sales from new advisers. And on a by-channel basis, not seeing any material differences. But I want to qualify that by adviser. We track our profitability down to the adviser. An existing producer who's done more trades for us is clearly more profitable than a first-time trade with an adviser, where we're recovering those early meeting costs and things. So the 80% of the sales that came from existing producers is marginally more profitable than the first-time trades. But we always have some number of new producers in the mix, and we're tracking that down to the actual adviser level. For example, in some of the New York-based firms, we have different compensation and arrangements on the total product that get us to similar margins. I would say right now the thinnest margin space in the U.S. is in the major money center banks, and as you're familiar with some of those. And we're not currently distributing there. That's a profitability issue for us, not a relationship issue for us. And on RBC, I don't think we officially gave a second half of RBC, but capital continues to hold up nicely. As you can imagine, with the hedges we have in place, both interest rate and equity, we're very pleased with our capital position.

Yes, we're reporting for the full year and you'll get more color then, but if you're comfortable...

The 4.83% was in end 2010, obviously, number, and as Mike said, the capital summation has been positive. That enabled us, lest we forget the remittance of $530 million earlier in the year. And of course the hedging program is doing exactly as it should, mitigating the effects on the stock reserves that will come through.

And our next question comes from Nick Holmes.

Yes, just coming back on the VA hedge program. I just wanted to understand this better. I don't think you hedge volatility, do you? And therefore, in Q3, it would seem pretty likely that the cost of volatility would have been above your pricing. I mean that's certainly the experience with other VA writers. And I just wanted to be clear what it is precisely you're saying, I mean basically, did you have economic losses in Q3 or not?

Nick, I'll take that. You're correct, the cost, both implied and real vol, in the third quarter, was high. If you want a single metric to look at us on a -- what's the key driver there for us, it's long-term vol. So you're looking at it, you see the trade this year from low 20s to I think the high was 27.8%. We don't buy all the hedges at once. So we have hedges carrying over from various points in the year. So to specifically answer your question, cost of the hedging year-to-date are well within pricing and fees year-to-date. We're fully hedged on the VA block. The hedges in the third quarter were more expensive than the hedges in the first quarter. But again, you're not putting the entire hedge on for the year in the second week of August or something.

So what level of what volatility do you actually price for?

25% on a long-term basis. By long-term Nick, think of it 10-year. You'll have effectively a 20-year liability, so we look at 10-year vol.

And when would it come through in your numbers? I mean vol is higher than that at the moment. When would it actually start affecting your numbers? If vol remains at the current levels, how many quarters would it take?

Let's put that back to Nic. What do you think, a couple?

I mean I think I go back to -- we price for 25% of volatility, and we look at the actual realized, and the actual realized over the last 10 years to the end of Q3 2011 was 21%. So if anything, looking backwards, we've had an experience buffering in that regard. So we're happy with the approach that we adopted.

That's a central point. There's a fundamental difference as you know, Nick, between implied and realized volatility. And all we can do is invite you to look at that over a long period of time, and you will see that you build a hedging program of that scale on the basis of realized volatility, not of implied volatility, which will spike and grow all over the place it over time and doesn't impact the economics of your total portfolio.

But to be clear, Nick, implied vol is still within our targets as well.

Also, yes.

Even though you're not hedging volatility? Because I mean, your pricing is not that different from your competition. And some of them are hedging vol, and you're not. It just seems -- and that they took vol losses in Q3, for example, and it just seems strange.

The side-by-sides are hard to do. We always struggle not to comment on competitors. But start with the fact that most of them have somewhat different guarantees than us. Some are materially different, some are moderately different. And then you have the question of what's their internal assets? Is it a macro hedge? Is it a tactical hedge? And so it's really hard, Nick. I'm not trying to avoid your question, but it's very difficult to say us next to xyz, why did our hedge perform different than theirs?

I think that's a very fair point, Nick. I don't think we'd agree with your assertion that our pricing is not that different from the competition. I think we'd actually disagree with that. So we don't really have to [ph] for the reasons why we really don't believe that's a valid statement. But it's an important discussion. I think we've explained our philosophy. At this point just for the sake of the call, I would suggest that we can pick that up with you. We're very happy to sort of [indiscernible] the issue. We'll be in Kuala Lumpur next week again, available also. But that we think our philosophy is robust, but it has delivered very well in '08, '09, which is a reasonable test of our credibility. And the probability that the implied vol, where it is now, is a good predictor of the future is infinitesimal, and we can back that up with data.

. And our final question comes from Oliver Steel from Deutsche Bank.

Two questions, I mean, given how many have been asked already. The first is you grew your active -- sorry, total agents in Asia by 20%, active agents by 9%. And I'm just sort of wondering what the scope is to increase these number of active agents over the course of, say, the next 12, 18 months? The second question is on M&G. As you said most of the outflows occurred in the Eurozone funds. What proportion of the Eurozone funds is a percentage of the total?

Okay. All right. The active agents, that's the single thing we're the most focused on in Asia. We manage it very, very proactively. Yes, we're pleased with the 9% increase. That's real money, real profitable business, immediately, and we are driving it quite hard. But I wouldn't want to give you a number on where it's going to go, but you can expect us to continue to focus on that and to continue driving us -- driving that up, particularly in the young markets that are relatively under penetrated. That's where you can really actually achieve the level of activity quite significantly. You'll find that in the more advanced market, the activity levels are as high already, the much more difficult if it rises up in the new markets in Asia. So there are Vietnam, Indonesia and so on.

Tidjane, if I can just sort of follow-up on that. I mean, but the total agents up 20%, I mean, that suggests you've actually been sort of -- well, how long does it take for an agent to become active, even following the expansion that you've had at the last investment?

I understand what you're trying to, do but that's really very difficult to do at the region level. Because as I said, the markets are very, very, very difficult. You will see that in some countries, the activity ratio is flat. And you'll see in some countries, it moves very, very significantly. So we're basing on that. We'll cover that in Kuala Lumpur in quite a bit of detail. There will be a presentation on an agency, but anyone -- again we'll give, and they will talk at length about activity of the levers we pull to drive at incentives and so on. So we should be able to cover that then. The Eurozone front, I'm embarrassed, but I don't think [indiscernible]. You know the answer?

It's given on the -- I mean just to, we saw what Tidjane said in his presentation about GBP 1 billion of outflows. That was around 10% of the funds that we have in Europe coming into the quarter, so at June 30, 2011. The percentage of now of the European funds has contributed, it's like to the total retail funds under management at September 30, 2011 is 19%. So if I can come back to Duncan's earlier question on the makeup of our banking debt, we have around GBP 0.5 billion, or GBP 480 million to be precise, of banking debt in both the Europeans, including France. There is GBP 700 million in the U.K. There's just shy of 500 million in the U.S. And then of the remainder, we have around GBP 0.4 billion in other European countries, and they tend to be Northern European countries, and around GBP 0.5 billion in Asia. All this is in billions.

And just to give you additional color on the outflows for Europe, investor redeemed funds totaling EUR 53.8 billion in August, which is just a phenomenal number. I mean, as I said in my remarks, it's the worst since October 2008, but that is true. So that just meets M&G's performance in perspective. So the outflows were in total GBP 292 million. In that context, it's a reasonable performance. Thank you for your questions. We'll be available in about a week. So for those of you will be in Kuala Lumpur, we're very happy to continue these conversations. In summary, we have reported a strong NVP progression in the third quarter, which continues the progression we had reported for our half year. We are reasonably confident for the rest of 2011, whilst acknowledging the challenging environment. And we believe that Asia gives us a unique strength in that respect, and we remain on track to achieve our 2013 objectives. So thank you for your attention. Have a good day, and hopefully see as many of you as possible in KL. Thank you.

That concludes our conference call. Thank you, all, for attending. You may now disconnect your lines.