Prudential plc (PUK) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Prudential's Third Quarter Interim Management Statements Conference Call. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present group Chief Executive, Tidjane Thiam. Please begin your meeting.

Good morning, everybody. I am joined today by Nic Nicandrou, as usual; and also Barry Stowe, CEO of Asia; and Mike Wells, CEO of Jackson who are in town for the committee meeting and have the pleasure of joining us, I believe for the first time, for an earnings call. So Prudential has continued to perform strongly in the third quarter in a turbulent economic environment. In the discrete third quarter, APE grew by 19% to GBP 1 billion, while new business profit for the group grew by 28% to GBP 597 million. Year-to-date, group new business profit are preferred growth metric has grown 13% to GBP 1.7 billion, while APE has grown by 14% to GBP 3.1 billion. Let me underline a few points in these Q3 results before taking you, as usual, for a more detailed review of the performance of each of our businesses. In the discrete third quarter, APE is up 20% in Indonesia, 23% in Hong Kong, 27% in Singapore and 19% in aggregate in Thailand, Philippines and Vietnam, a very strong performance in our key target markets, and keep in mind that some of those numbers are also impacted by FX. I'm sure I will come back to that. In the 6 countries, Indonesia, Hong Kong, Singapore, Thailand, Philippines and Vietnam, NBP was up in the discrete quarter 21% and APE, so sales, was up 22%. We are pleased with that performance, particularly considering that we report our NBP on an active basis. New business profit has continued to grow in the U.S., up 10% to GBP 683 million; and in the U.K., up 17%, to GBP 227 million. Last but not least, our asset management business has achieved record year-to-date net flows of GBP 12.3 billion on the back of a particularly strong performance by M&G in Continental Europe. So overall, we're firmly on-track to deliver our 2013 growth objectives, and cash delivery has been strong as well. Let's take a closer look at each of our 4 businesses in turn. In Asia, first, we have continued to do well in Southeast Asia, with a strong performance in Indonesia, Hong Kong, Singapore, Thailand and the Philippines. Year-to-date, as opposed to discrete quarter numbers I gave you earlier, year-to-date, we have delivered 18% new business profit growth and 21% APE growth in Southeast Asia. You will have noted that APE for Asia in aggregate grew by 6% in the third quarter, that comes purely from the numbers. This is actually the result of deliberate action, not of the market evolution, but of the deliberate actions we have taken on 2 fronts. In North Asia, we have very low interest rates, demand for capital intensity and we believe economically unattractive products is strong at this point in the cycle. We have decided not to provide these products and given up APE willingly to protect our bottom line. This explains the decrease in APE in Korea and Taiwan, 15% and 33%, respectively, who are 2 of our contributors to our regional APE but not NBP. So in short, what we've done is give up a lot of not very profitable APE volume. That is 26%. In Malaysia, one of our sweet spot countries, we are refocusing the business on higher value but lower volume protection product, which led to a 20% decrease in APE compared to Q3 last year where we had a higher volume of products [ph]. And this shows that we do not hesitate to enforce our view of our volume philosophy, including in our so-called sweet countries, even when optically it had a slowdown. Discrete third quarter APE growth, excluding these 3 markets where we took deliberate action, was a strong 19%. I will just take a moment to run you through some of our most attractive markets. In Indonesia, APE sales increased by 27% in reported sales rate in the first 9 months and 20% in Q3, driven by a positive agency growth, but also by an increasing, if still small, contribution from bancassurance, which went from 4% of our sales in '09 to 8% now, and increased by 74% in the period, as our partnership with UOB, among others, continues to gather momentum. In Hong Kong, we delivered APE growth of 19% year-to-date and 23% in the quarter, as we achieved increases in average case sizes, [indiscernible] the agency and the bank channels. The rising wealth of the Hong Kong population and the growing business for mainland customers create a significant opportunity for increasing customer case sizes, and we have initiatives in place to continue to capture this opportunity. In Singapore, where bancassurance is now our longest channel, we delivered APE growth of 33% year-to-date and 27% in the quarter. In Malaysia, as highlighted earlier, we have refocused our agents on more protection business, which is lower case size but higher value. As a result, protection content has gone up from 46% to 59% of APE over the period. We have seen unlimited beneficial impact of this trend with new business profit increasing by 10% in the 9-month period [indiscernible] subsequent decline in APE. And in our more nascent markets, we have performed well, with our businesses in the Philippines and Thailand growing APE by 50% and 40%, respectively, in the first 9 months of the year. As you already know, last week, we announced the acquisition of Thanachart Life and a 15-year exclusive bancassurance partnership with Thanachart Bank in Thailand, which significantly expands our scale in this key target market to over 800 branches across all our partnerships. The strong and profitable growth we are achieving in Southeast Asia, and our proactive management of the business mix in a historically low-interest rate environment, have helped us partially offset the drag from these low interest rates. As you all know, for a number of years, we have consistently used NBP as our preferred growth metric, and are committed to delivering NBP growth. As a reminder, please note that we use active economic assumptions in calculating new business profit, and so the lower interest rate environment immediately feeds through into our new business margins. The 15% growth in new business profits we delivered across Asia, we have been even higher at 23% year-to-date if calculated on a like-for-like basis, i.e. using bonds yields at the end of the third quarter 2011. Across Asia, our performance has been strong with both agency and bancassurance delivering good growth. I am pleased finally to report that we have made a strong start to our fourth quarter, with 16% year-on-year APE growth in October, so 16% for the month, October 2012 or 2011. Across this Asia assessment, I will say that we remain firmly on track to double Asia 2009 IFRS and new business profits by 2014. Moving now to the U.S. Jackson delivered new business profit growth of 10% in the first 9 months. Variable annuities continue to make up the majority of our sales, and we have maintained our prudent approach to both the pricing of the product and the management of the in-force book. VA sales in the first 9 months were up 9 -- 14% to GBP 970 million in APE sales. It's important to note that 5 percentage points of this growth came from our recently launched low-risk Elite Access product, which carries no living benefit or definitive guarantees. Throughout our history in VA, we have always been proactive in getting our pricing and product features to respond to the economic and competitive environment. We continue to see very strong customer demand for our products, and we are now close to our annual risk appetite for guaranteed variable annuities, and this is happening slightly earlier than expected. Therefore, we have taken proactive steps to limit sales of guaranteed variable annuities, and we expect total sales of these products to be between USD 18 billion and USD 18.5 billion for 2012. The diversification of our VA by vintage helps us perform well, we believe, across market and economic cycles, and we remain true to that philosophy. You should also note that we are experiencing strong demand for the non-guaranteed Elite Access product, which is not subject to risk management action. The regional product group has continued to perform well in line with our expectations. In September, we announced the completion of the REALIC transaction and Jackson has begun the process of integrating the business. This transaction, as a reminder, will be immediately accretive to pretax earnings. So overall, a good quarter for Jackson. I am sure for those of you who will be in New York in a few days, we will have a chance to talk to you about the business in a great degree of detail. So leaving the U.S. and moving to the U.K., we [indiscernible] new business profit of GBP 227 million to date, 17% higher year-over-year. This was driven by a more favorable product mix, more annuities and with-profits bonds, less corporate pensions, which led to a 3 percentage points increase in margins. The margin increase was also helped by a single book annuity transaction that we completed in the third quarter. Our key products continue to see strong demand, with individual annuities up 25% and with-profit bonds up 36%. It is possible that some of the increase in our book sales is RDR-related. We have positioned our business for the onset of RDR. That said, a degree of short-term market disruption should be expected in 2013 as advisers adjust our business models to the new regulatory framework. Overall, the U.K. has continued to deliver both profits and cash in line with our stated strategic objectives for the business. Turning now to asset management. M&G has had a record first 9 months delivering net flows of GBP 11.3 billion with our success in Continental Europe, driving more than 1/2 of the retail flows since the beginning of the year. Our retail business continues delivering GBP 6.1 billion of those flows. This is an extremely strong performance. In Asia, this Eastspring Investments reported strong net inflows of GBP 1 billion for the 9-month period. Moving onto the balance sheet. We have minimal exposure across the group to either eurozone sovereigns or banks. The asset side of our balance sheet continues to be defensively positioned. At the end of September, our IGD surplus remained robust at GBP 4.1 billion. So let me now give you our outlook. We continue to deliver strong performance across all of our businesses. The outlook for global growth weakened in the first quarter, with the IMF downgrading growth forecast in its October outlook report. However, emerging markets in Asia are expected to continue growing faster than developed markets, though at slightly lower levels than previously forecast. In this environment, we believe that our business is well positioned to grow profitably, particularly in Southeast Asia where the outlook for long-term profitable growth remains strong due to the emergence of a large and prosperous middle class. Our businesses are in good shape. Our balance sheet remains strong and we continue to proactively manage our business mix to mitigate the impact of low-bond yields by focusing on maximizing value over volume. So we are confident we will deliver our 2013 objectives. So we can now move on to Q&A period. Thank you.

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

Two questions. The first is on the U.S. and the actions you're taking to slow down sales. Can you just give us a level of color on what you've done and how confident you are that they will be successful. I think you've tried to slow sales in the past and perhaps not been as successful as you had talked. And what would the expected impact be on the margins of the business given that you've presumably hiked pricing? The second question is on Asia. Just a general economic question, I think some concerns over China hard landing, some concerns over the economic conditions in Indonesia. Perhaps you can just comment on how your businesses are being affected by those factors in your prognosis?

And I appreciate your points in describing the popular actions to slow down sales -- but Mike is here so...

I'm not sure I appreciate it as much as Tidjane. Blair, if you look at Pru net and the advisors -- the percentage of market share that the 3 of us continue to command is high. And I would point to Prud net sales. Over the last couple of years when you look at our actions. I think we've held on the level of volume we want and not have some of the spikes they've seen. What we've done this time now to be clear is the number of levers we can pull to reduce sales, and part of that is not just sales-related, but be more conservative on pricing. So you saw a filing-based change, which is we -- month before go to regulators, do a product-filing change, which was 25 to 30-basis-point increase in cost of the core features. You've seen a couple, we would consider, notification changes where they don't require filing, but you talked to the broker-dealers ahead of time and give them as much notice as you can within your tolerance so that the increase in sales you're going to get, and on those you've seen us pull products remove the joint option availability. And then now this last move, what you've seen is we have restricted the availability of the product to exchanges from other companies. And I think they'll be very effective at getting us to the targets we want, and we have additional levers we can pull there. We've seen -- we've moved the wholesale activity, et cetera towards the lead access and things. But there's other things we can do, I don't think that would be necessary at this point. And to be clear, a part of the pricing is to -- more to address uncertainty in the market and be cautious on the pricing, not necessarily sales related.

Okay, Blair. Asia sales, generally, economic conditions -- I mean, Barry, you live in the region, you can comment on what it feels like there.

Sure. It doesn't feel as frothy as it did a year ago, but it's still a positive environment. I think our sales results broadly, particularly when you look at the Asian markets, very strong. That wouldn't be happening if we were headed towards a hard landing. I'm personally -- based on what we see and what we feel every day in the business, I wouldn't be one of those who is predicting a hard landing. We are seeing some moderation of growth rates where -- but the business continues to power forward. And then, I think some of that is because I don't think the landing will be as hard as some are suggesting. And some of it is because we happen to be in a sector where we are dealing with a deeply underpenetrated market. 1% penetration rates in places like Vietnam and Indonesia and so forth, so there's still loads of headroom, and there's still this burgeoning, rising middle class. I mean, that dynamic is still real. You asked, I think, specifically about Indonesia. The Indonesia business just continues to go from strength to strength. Recruitment is great. Retention of new agents is the same as it has been, so we're getting real growth. And Tidjane mentioned the October numbers, and if you look at Indonesia, specifically, on a local currency basis in Indonesia, we were up 40% in October. Unfortunately, because of the strengthening of the pound on a sterling basis, that's only 27%, which is still -- I'm not apologizing for 27%, by the way, but I just -- the reality is the state of affairs on the ground is the business are growing at 40%.

Absolutely. So you probably heard us say this year I think recently predicting [ph] soft landing in China, and I think that's our central scenario -- we agree with that. Indonesia, I was privileged to meet with the president when he was here a few days ago. Their last GDP number was 6.2%, so it's lower than before. I've seen a couple opportunity there. And the key thing for us is really that middle class, as Barry said, penetrating that growing middle class. It feels very much a penetration story for us. So we are not completely insulated from the macro, but we can still continue to grow by expanding distribution and increasing penetration.

Our next question comes from the line of Edward Houghton of Sanford Bernstein. Edward Houghton - Sanford C. Bernstein & Co., LLC., Research Division: A couple of quick questions. In Asia, it appears to be the changing mix is largely offsetting the low interest rate environment, but I'm still wondering about the shift to bancassurance, and whether and when we will see perhaps lower margins from bonds feeding through into the numbers. Am I wrong on this or should we expect to see it feeding through? That's the first question. The second is on the net flows into M&G. And I just wondered if you can give us a sense of the growth potential within Continental Europe. What market share do you have currently? And what market share are you targeting by when?

Okay. I think there's a high level comment I'll make -- and I'll let Barry give you more color, is that really, we run the group with return on capital margin. So optically, the margin in the banking channel look lower, but the return on capital is comfortably above the cost of capital. So we believe at absolutely value-creating business, that we'll perfectly happy to -- perfectly happy to wait.

Yes, absolutely. It's -- we talk about margin a lot, and it's an important and useful metric, but it's not the only definition of success that you focus on. One metric, you have unintended consequences. So to your question on banks specifically, and then I'll go back and deal with mix more broadly. But to your question on bank specifically, when you look at the growth rate of bancassurance this year, you are, in fact, today seeing the impact of lower-margin bank business coming into our overall sales portfolio, and yet we've managed to -- and even with the economic assumption changes, because as Tidjane's pointed out, we're on an active basis. We're still managing to hold margins largely flat. So you're seeing that impact now, and I think, you'll continue to see bancassurance grow faster than agency, because as the market evolves, more and more consumers are buying through banks. Banks are becoming more sophisticated in marketing. We're doing a better job of leveraging bank relationships. We're getting more bank relationships as we just did recently with Thanachart. So you'll continue to see that dynamic, but I don't think it has -- you shouldn't assume that, that has negative implications. In fact, broadly since it has very positive implications. With regard to mix, more broadly, yes, you have seen us obviously and we pointed out specifically some things we've done to manage product mix. We've been doing this for several years now with good effect. Much of it has been around promoting health and protection. We still do that. We took some strong actions in Malaysia to get the mix of protection in that market up from 40% of premiums last year to 60% this year. That's more in line, for instance, with where Indonesia is. That's a very good place for us to be. But it's not just promoting health and protection, it's also making calls which impact volume but not value in situations where we see products that simply are beyond our appetite to destroy value. So you've got the bancassurance channel in Korea, which we have virtually closed because [indiscernible] are not rational from our perspective. And likewise, we have -- we've gone -- we've taken some strong action in Taiwan in a similar situation where there's a particular product being manufactured and widely distributed by a lot of banks, and we simply won't play.

I think the point that Barry made on 2 channels is really tenfold. We've said things in '09 in our strategy that we expected the banking channel to grow faster than the agencies channel. That's a the structural feature that every emerging economy has gone through. As the middle class emerges and it becomes a mass market, first, you start with the usual higher and growth categories that serve poor agencies, and then it becomes a mass market, a [indiscernible] market, which you penetrate through banks. So it is just the structure of the economies and their stage of development, and we're reflecting that in our numbers, and that's why we have such a -- and want to have such a strong performance [ph].

And if you have faith in the Asia story over the next generation, then you would view it as a very positive thing that Prudential has been as successful as it has not only in getting access to this distribution, but delivering with it -- executing in this distribution channel with activity and productivity at a level that no one else has matched.

And to be very direct, there's a tracking there. And I think some peers have been cutting back because agency looks highly profitable with high margins and not diversifying in the banking channel. It's the story that some people have made in some countries and end up really shrinking because of most of the growth is in the banking channel. So dilution of margin is not concerned at all for us. We're in a business of creating absolute value for our shareholder and more profit. As long as return on capital is higher than the cost of capital, is a good thing. It's a very dangerous trap for managements to just look at margins, because you'll end up in 1 product -- 1 channel or 1 product, and in the end, you lose -- you lose your place, so we end up [indiscernible] pushing in the banking channel. M&G net flows, Nic was just showing me some statistics. We have year-to-date August 2012 statistics, where if you go to Lipper, they show sales for cross-border groups, so we were second out of 49 groups that are ranked with the market share of net sales of 12.5%. That's at August 2012. So we see potential, but really, I would not like to be cultivating the terms of net flows in asset management, that's beyond my ability.

Our next question comes from the line of Ashik Musaddi of JPMorgan. Ashik Musaddi - JP Morgan Chase & Co, Research Division: Just 2 questions, one Malaysia and one on U.S. So in Malaysia, you have reduced the sales by around 20% in this quarter mainly to focus on protection. And if I heard it correctly, your protection volume in Malaysia now increased to 60%, whereas it was 40% earlier. So should we expect the similar type of growth to happen in Hong Kong, Singapore or are you already there in Hong Kong and Singapore in the similar proportion, given that you have increased your focus on protection? That's the first thing. Second on U.S. When should we expect this sales control to come in, in the U.S.? Is it from fourth quarter or is there any time lag due to change in product mix, due to change in the product structure or something?

I think, part of the answer to Asia is that Malaysia is a unique business compared to everything [ph] else. Barry is going to expand on that.

Yes, so we've told the story ad infinitum about the fact that our preferred product mix -- our preferred product model is a recurring premium unit-linked life product with protection riders. What you may not realize is that Malaysia is unique in that in fact the architecture of the product is kind of upside down compared to the rest of the region. We actually sell the health and protection product and add savings riders to it. So effectively, what was happening was we had gotten to last few years where the savings riders were becoming more and more dominant and what we've done is simply refocus the sales force on driving for more protection -- that we're not -- we haven't done away with the savings riders, obviously, we are a strong participant in the savings market, but we wanted more emphasis on protection. And that's what we've been able to accomplish over the last few months. The adjustment, sort of having been made, that business is now powering forward. Tidjane mentioned that our sales number is 16% for the region in October. Malaysia was up 14% versus 20% in the third quarter. So just to give you some sense that of what's happened there. Should you expect that in an Indonesia or someplace like that? No, as I said, Indonesia is already at close to 60% protection versus savings in terms of new sales mix [ph] . We wouldn't anticipate a similar action. We don't have anything in mind for any of the other markets at this point. The Malaysia situation was a slightly unique situation.

So I think -- let's be very clear. In the movement that I described from 46% protection to 59% is the denominator of that decrease. So the volume -- it's for volume of savings product sales that have decreased, mechanistically increasing the ratio of protection. You could have -- the protection sales have moved widely. It's not -- it's the denominator that has moved. Okay, now the U.S...

On the U.S., the short answer to your question is Q4. The longer answer would be depending on what lever you pull. For example, if you -- and depending on what you want to do with your distribution parts, the more notice you give them, the longer it takes the impact of a change to affect. And often, you get a -- what someone refers to as a fire sale in the transition. The -- some of the notices we gave in the last 60 days are shorter than we'd like for the distribution partners, but they're getting more efficient at selling in those periods, so we've made -- you're straining a little bit the relationships by giving them 4 or 5 days instead of 2 weeks. A sale, if you asked an advisor, on the retail side of your firm, rather company, and these products were the retail consumer typically is a 30- to 60-day process. So you're going to disrupt those sales of product changes at some level anyway. You need to be respectful of that. But the short answer to your question is, all of these changes will affect our fourth quarter numbers, and you'll see it play out there.

Our next question comes from the line of Andrew Crean of Autonomous.

A couple of questions. One on sort of the asset management side. Could you say a little bit about the revenue basis point margins on the business coming in to M&G in relation to the business going out and off the books, so we can get a sense of the overall revenue margin. Also, on fund management, could you talk a little bit more about Curian, which is now at about GBP 6.5 billion on the management, and how that's looking in terms of overcoming expense costs and some profits? And then on the U.S., you've set sort of target for U.S. VAs for this year, 1.8...

[indiscernible] for agent contract, yes.

Yes, is that -- should we sort of take that as a target for 2013 as well?

Andrew, I'll let Nic take the asset management, then Mike will come back on Curian and also with [indiscernible].

Andrew, it's Nic. You're asking about the basis points on the revenue. There's nothing unusual on the retail side. It will be, in terms of the ins and outs, it will be influenced by the type of investments that we attract in the flows. Almost exclusively in the third quarter, the net flows were on the fixed income side that are slightly lower bps than equities. We have roughly between 15% and 20% equities in the first half. On the institutional side, there was a very large scheme, which we referenced in the release this morning, that popped the numbers up, and that is very, very low profitability. So that, hopefully, gives you a sense to check in terms of the impact on earnings.

Okay. Well, first of all, [indiscernible] Curian. [indiscernible]

The Curian is doing well. I think it's dealing with some of the same issues. Your point on fees is well taken. The expectation of U.S. consumers on equities is certainly below what you have seen in a market in the last 12 months, and I've never seen the disconnect higher between the other performance, trailing 12 months and what investors thought they got or perceived as available. So you're seeing large, large, I'm sure you're well aware, large allocations to bond funds and to cash positions with 0 return for the investor. Curian is not immune to that. It's getting a proportional share of the remaining equity piece, sort of consistent with what we've seen in the past and I think outperforming its peers. But it doesn't -- it isn't a broad asset allocation -- those new defensive strategies certainly price comes up in the dialogue, and you've seen their gross sales down a bit. The biggest competition, Andrew coming there, is in some of the fund or ETF-based platforms which, again, I think to your point, has some price aspects. And we have a number of new products in development for Curian to keep it competitive across broad products including those. On the sales goal, really don't, for a lot of reasons, want to give a forecast for next year. There's -- there are forward-looking issues. But I think the one that probably matters most is shareholders on the call is if we maintain the latitude to look at competitive behavior, interest rate, vol, U.S. market, macro policy in the U.S., we can adjust our appetite accordingly. And if we put a number out there that we feel like we have to hit or live with, it takes away some of that optionality, and I'd just as soon not do that.

Our next question comes from the line of Nick Holmes of Nomura.

A couple of questions -- a couple of more questions on this slowdown in growth in the U.S. that you're signalling. How confident are you that you can do this without avoiding a sales collapse? And what I mean by this is that we've seen other companies tried to do this, and you know that the financial planners can be pretty fickle. And it's pretty difficult to manage the balance, isn't it? And if you're stepping away from the market, you can often get a sales collapse, and I wondered how basically you're going to manage this backing away? And then the second question is, what are the implications for group growth? I mean, the U.S. is now so important that your group growth prospects are going to be heavily influenced by this. And maybe, Tidjane, you could give us your views on that.

Fair question. And the first one is something we perhaps you can imagine a lot of growth, too. So Mike?

Nick, I think you're spot on. I think you have to maintain a relationship with your distributors at the broker-dealer level and at the advisor level. They are clearly looking for signals on commitment to the space, on product, on wholesale and pullback, that sort of thing, and we're not doing any of that. We're keeping product in front of them so the wholesalers are in front of them. Will they like more products from us? Yes, we could sell levels this year if we wanted to that would scare all of you on the call, I promise you, at very profitable levels. And we're not, obviously, not doing that. But say, you don't give up the relationship as you manage sales. The other piece of that, Nick, that is absolutely critical is you don't devalue the client proposition to the level that you're not giving them something of quality to sell or that affects your reputation, or is only valuable in terms of the implied guarantee versus accumulation benefit. And that's why you don't just keep pricing levers as the only lever you pull. We still have product out there that is highly competitive with our peers and of quality, and it consolidates very defined need for the baby boomers that we've stopped talking about for the last 3 years but are retiring at 10,000 to 15,000 a day. So I think that's a key balance, in this is -- I've talked to hundreds of reps in the last 60 days, and what you hear repeatedly is they wish we had more product available, that they wish we didn't disrupt the sale they had that started 3 days ago, but they recognize why we're doing it and appreciate how we're doing it.

Mike spent a lot his time managing that, and it's a fair question, but also keep in mind that this time, it's very much an industry phenomenon also.

It is, particularly the 3 leaders.

When we try to do that, it was in isolation. Today, that's pretty much the picture of low blend around, everybody is retreating as we can sell, and that's our expertise.

One last point of color on that, if someone was restricting sales because they didn't like they're back book and they've canceled the product or pulled out, that's a very different issue than if you're trying to manage the volume of a profitable book going forward.

Absolutely. So...

Sorry, can I just ask a follow-up? I mean, surely, it's new products, though, that will really keep you in the game. Isn't it? Like elite access. I mean, is that what your longer-term strategy is going to focus on in choosing new product that have a lower economic risk?

No, we like the product we're writing, but given the overall shape of Jackson's balance sheet, we have a finite appetite. You don't want a bowling ball through the python, 12 to 15 years from now of liabilities, I'm sorry for the analogy there. But that is what you're trying to manage is if you assume you know the level of our conservatism and our assumption. If you assume everyone uses the withdrawals, et cetera, 12 to 15 years now, you don't want a single year that's twice the volume you planned on or something and get a spike, it just changes the nature of your hedging and your servicing and planning in general, so that's part of what you're managing. And I think we have always added new products. We have also always evolved products. I think that's one of the harder thing that's covering us. What are sort of our ability to change the chassis as easily as we can, it makes it hard to compare years liability to another sitting on your side of the desk. Elite Access is a unique proposition. It is a ability for the client to diversify away from U.S. equities without having to buy bond fund, no offense to the bond fund industry, but away from that correlation. And we don't believe that you want to write guarantees on the types of subaccounts we put in by the Elite Access, so it doesn't even have a death benefit. There is a finite amount of appetite for that in the marketplace, but we haven't tested that yet. We still have broker-dealers coming on. We still have 26% of wholesale -- of the reps selling lead access, never did business with Jackson before. The ticket size continues to grow. It's a new product in the space, and it's a longer sales cycle, and people seem to like it.

Okay. Back to your second question, which we've discussed in the past, I think our answer has not varied. But the place we have explicit growth targets, and again, they are profit group targets, not sales group targets, is Asia, if you look at the targets for the group. And I know you're argument has been yes, but the U.S. is a big contributor, et cetera, et cetera, we agree. But we do not have growth targets for the U.S. because we fundamentally believe that, that market in VAs has some aspects of it that are cyclical. And we want to retain the flexibility to flex ourselves if and when necessary, which is also why Mike, for instance, is not giving you a target for next year, because commercially it's too restrictive in terms of what we can and cannot do. If we're on the hook on a given level of sales, it really damages us in the marketplace, so we do not think that it's damaging to the group story, the group growth story to say that. That growth in the group growth story is very clearly Asian growth, that's how we tell the story. So I know you should done better. It's Asian growth and cash, yes. That's how we've labeled a good story. So the fact that in the U.S., things may fluctuate is not a problem. So far, we're very happy with that contribution. Well, Jackson is a phenomenal business to own. It's made a huge contribution to the group in terms of earnings and cash. But in a market that is -- I think you used the word fickle earlier, but in a market where volumes are hard to predict, because you look at our peers, you see that the swings, it's a market where it's absolutely vital to retain the flexibility on volume. It's not a market where you want to be on the hook for sales because you're likely to be swayed then. And the S&P moves, this competition moves, all moving pieces there. And therefore, we think our strategy has been sensible enough [indiscernible]

Just a very quick follow-up, what would you answer if somebody asked you what the 5-year earnings growth improve at group level is going to be? Would you answer that you think it should be double digit?

I would answer but -- I will not answer because it wouldn't make sense for me to answer. I can't predict growth in Asia because there are secular trends underlying what we are doing in Asia. It's about the transformation of an economy, it's about the emergence of a middle-class and I have good visibility on that. The other parts of the group are in business' ability to forecast is nil. So I am not going to give a 5-year growth forecast on the U.K. or U.S. or M&G because that will not be sensible. But you do have a 4-year growth forecast on Asia, which we are very confident in, and we were starting [ph] by this morning.

[Operator Instructions] Our next question comes from the line of Jon Hocking of Morgan Stanley.

I've got 3 questions, please, 2 on the U.S. and 1 on M&G. On the VA business, just wonder whether you could comment on what the impact of the PRU Life [ph] through different distribution channels has had on your ability to manage sales volumes, because I guess some of these relationships, particularly with the broker-dealers are relatively new? And if you actually try to manage sales to a sort of level, so flat year-on-year, for example, does that imply you're actually having to top sales in traditional channels to manage the ramp-up in the new channels? That's the first question. Second question, I just wonder whether you can explain what's happening with the spread methodology in the new business profit. This may have changed earlier but I haven't picked up the change in 2012 versus 2011 in the pack. And just finally if you can comment on what distribution channels are bringing the sales growth in Europe for M&G.

Mike, you want to take the first one?

Yes, so the second part is easy. Jon, in the spread, nothing's changed in that business. The spread in the business is about what you would -- what we've shown you historically. We'll get into more detail for New York. But as you probably see from your retail side, crediting rates on new product are 3 or sub-3 with 1% floors are guaranteed on a 1-1-0-5 [ph] in that range, and so there's not a whole lot of change there from our previous discussion. I think that's not much a -- we'll show you a lot of detail on that in New York, but there's not a lot there that changed. I think channel question is a good one. So over the last 6 years, 20-plus percent of our sales comes from new advisors. And the reason that's key is, even your best relationships, if we went into a Morgan Stanley office where we have good penetration. The more specific reps have a finite amount of a product they want to write. And so you can actually mature a relationship to a point where they wrap thinks I have enough Jackson on the books, or enough PRU or enough Met, so you need new blood. And so, there isn't a material change in -- there isn't a reduction in, say, the independent advisor space to make room in the wires or the regionals, it's pretty uniform across-the-board. I would say the only number I'm pleasantly surprised with is the number of producers in Elite Access that never did business with Jackson. And candidly, that surprised me a little bit. I thought our brand and our relationships would drive that. And as I mentioned earlier, you have quite a few of them that have never done anything with us before. Those products are just in the review field. The review process in some of the New York-based firm is longer to get a new product on. It's a product no one's ever approved before. So some of those relationships are in development and are not far enough along to really give you good metrics on. But what we're seeing generally in the other channels is more than -- as I mentioned before, approaching 30% of the reps who've never done business with us in that one, so that's higher than we've historically seen. So yes, there's no trend though in where reps are -- we anticipate less production and more production. It's pretty uniform across our channel, consistent with the sales volume across the channels.

So roughly how much of your sales now are coming from distribution which you've added sort of post-'08, for example?

I don't have it in front of me. I don't want to guess. I'll give it to you in New York by channel, though, in detail. Are you coming to that one?

Yes.

Let me -- we'll give you a breakdown by year, by channel, so you can see that. But the short answer is, I think I talked before after one of the meetings, we're only interested in adding new relationships, [indiscernible] profitable. That's a challenge with some of the bigger accounts and their structures historically, and so it varies. Until we meet business plans, we don't add them. And right now, there are more firms that would add Jackson than we're interested in doing business with, candidly, because we need to respect who got us here and those relationships. So it kind of comes back to the -- I think the biggest challenge, for example, for your counterparts on the retail side right now is the availability of product they want to distribute in the VA space. That's not unique to Morgan Stanley distribution than it is, Raymond James or our broker-dealers. Everybody wants the same companies or the same quality of company, let's put it that way. So it's -- we are -- one of the ways we're managing volume is not increasing our relationship base.

On the spread methodology, Nic can take it.

There are 2 ways in which we have evolved, if you like, the allowance that we're taking for spread and the change happened at the year end last year. The first way in which we've evolved the methodology, something that we've done before, we simply locking in into lower spreads, so -- and we're reflecting that in what we're bringing in. So this time last year, we're locking in 190 basis points for fixed annuities. Now we're locking in 140 spreads have narrowed, therefore, that has brought what we recognized down, so 50 basis points on fixed annuities and 75 basis points on fixed income annuities. That's not new. It simply reflects the market. The other change that's been made is that we then assume that we -- over the next 5 years, we increase it by 25 basis points. Now, what does that reflect? That reflects that today, we're adapting a more cautious, far more cautious investment strategy in the corporate bonds that we buy to back this new business. And what we're assuming over the next 5 years, we will notch up those investments or we will buy by half a notch on the rating scale. So that's the second change. But candidly, the big effect on margin is the first, the second adds less than 0.5 point on the overall margin of Jackson in the way we report it.

Okay. And the third question was on M&G and the channels. Fundamentally, it's lot of B2B in Europe. We sell through banks. We don't sell directly. And the top 4 countries would be France, Italy, Germany and Spain. And lately, we believe that there's an element of safe haven there. You know that a lot of the money in both countries is looking for a home, and M&G as a British institution, has a good track record and a good brand is well-positioned. So it's not private banks. If you look at the names of the banks we work with. You would recognize and very familiar in Continental Europe, and they offer our products as third-party products to their customers. And it's a plus, frankly, in their relationship with the customers to add that to their in-house products. And we've been a bit helped by the euro crisis and that money is looking for a home outside the Eurozone.

So it's sterling-denominated funds?

Sorry? Yes, yes.

Our next question comes from the line of Gordon Aitken of RBC.

I've got 3 questions, please. First question on, I'm interested in this thing in Malaysia. I mean, talk about an upside-down product. We're familiar with unit-linked products with protection writers, but not so much with protection products with unit-linked writers. Can you just explain to me from a customer point of view what that looks like? That's the first question. Second question is on the U.K. You mentioned short-term-disruption due to the RDR with advisors adjusting their business models. Just what do you mean by that? I mean, are you guiding down on sales? And then final thing also in the U.K. on corporate pension, I mean, obviously, a huge provider of AVC schemes to the public and private sector. Auto enrollment is seeing employers reviewing their entire pensions arrangements, and in many cases, it's pretty messy with several schemes being administered by different insurance companies. You're saying you're not taking on new corporate pension scheme. Just wondering if a sponsoring employer comes to you and says it want to consolidate and use just 1 provider, are you interested in this sort of business?

Okay, all right. So let's start with Malaysia. The way to look at the product that we sell in Asia broadly is that it is virtually always sold as a bundle. So as you -- as I've said and as you've said, the more traditional way of looking that is that this is a chassis of savings product as the base and then you build the protection on top of it. In Malaysia, we do it backwards. From the customers' perspective, the product really illustrates the same, the costs are the same. It doesn't really have an impact on the customer per se. It's really just an architectural thing and how the product is built. So again, you asked the question from the customers' perspective, it doesn't actually make a lot of difference.

Is that okay, Gordon?

Yes, that's fine.

That helped? Okay.

Okay. Yes, the trend in the U.K., what we think is that restricted advice is going to grow fundamentally post-RDR. Long-term, we think all that is probably going to be positive in terms of reducing churn and increasing profitability. But in the journey from where we are to there, we expect a degree of disruption. And frankly, it's very difficult to predict what's going to happen. So we're not guiding down on churn. We're just plugging the uncertainty. We've had no assurance in the U.K. of a number of those changes from stakeholders to all bookings. And all I can say is that generally, we've been surprised. So we're just expressing that we have caution, given the past experience in that sector. Now, your final question was an auto enrollment. I think there was various activity. We will be quite selective before we add to the existing schemes we have, and we'll only do it when it makes sense in terms of profitability, so you should expect us to be quite selective. We've seen a lot of activity in that segment that we always understand from an economic return basis. Mike, your point?

Yes, I mean, our proposition on this isn't to offer -- is effectively to partner with Met. So what we're doing on our existing schemes is we -- an employee of our existing schemes would have the option, if you like, to either come to us or at least like 2 portals, one that goes to NEST and then one that goes to us. There are provided out there that will take the whole thing. But we don't think the economics of that are that attractive. And if it means losing schemes, then so be it. It's entirely consistent with our value over volume. What we have done is we've acted quickly to protect, if you like, the high-value schemes. So auto enrollment in relation to those won't be a drain.

Just to follow up, what are you meaning by you've acted to protect the high-value schemes?

Well, that means, we can expand on that in New York with Rob in the room, but the -- there is a -- we have a dedicated team, if you like, that deals with workplace support, and it goes back to what we were saying. It is -- what you find in a lot of these situations is that customers are not only looking at -- or groups, employers are not looking at pricing dynamics. They're also looking at the service that you provide on the ground and the support that you're giving their employees. So we've upped, if you like, the service proposition in those higher value schemes. But as I said, Rob can expand on that in New York, if you want more information.

Our next question comes from the line of Greig Paterson of KBW. Greig N. Paterson - Keefe, Bruyette, & Woods, Inc., Research Division: Two questions. One is, I know you don't want to provide your Asian bancassurance margin. My question is, if you used a level amortization of your deal acquisition costs like someone like AIA does, what would be the reduction you would see in your bancassurance margin for the year be? The second thing is, I noticed the other day that when you look at the cost of bancassurance deals in Hong Kong, you're actually booking it in the with-profit fund, i.e., it's for the with-profit fund account. I was wondering, when you separate out the Hong Kong inherited estate from the U.K., whether you'll still be allowed to do that in the terms that you agreed to for when Standard Chartered comes up for renewal in 3 or 4 years time, would you be able to book it for the policyholders' account i.e., use the inherited estate as opposed to the cost of the deal going for the shareholders?

Okay. Thank you, Greig. In terms of normal conversation between Nic and you on that theme earlier. But Nic, do you want to take the margin and how we account for...

Sure. I mean the -- I think Greig understands how we account with it. so the upfront distribution payment is amortized in line with the sales volume plan that we have agreed with the distributor banks. So I think that's the logical thing to do. And the protection we have is the fact that the contracts immediately extend if the plan is not delivered in the time.

I wasn't sure what alternative method you're suggesting there...

Straight amortizations, so divide that by... Greig N. Paterson - Keefe, Bruyette, & Woods, Inc., Research Division: I amortized that on a straight-line basis, I just want to -- so you can't really compare the 2 margins in some...

I don't -- we don't have it, because we don't think it's relevant. So that's the answer to that question.

Yes. Barry, you want to talk about Hong Kong and...

Yes, if I understand your question, Greig, it is some of the bank business in Hong Kong flows through the policyholder fund versus shareholder bank business, and will that continue in the event of a domestication of the Hong Kong branch. Yes, you're right, some does flow through because much of the business, actually right -- particularly right now, where par [ph] business is quite popular, there is a fair amount of the SCB business being sold through the par fund [ph] . And, yes, so that would continue in the event of domesticated Hong Kong business because there will continue to be a policyholder fund.

[indiscernible] Greig N. Paterson - Keefe, Bruyette, & Woods, Inc., Research Division: Yes, so -- and when you renew Standard Chartered in controversially 3 to 4 years, the lump sum that you have to pay, it will be financed by the inherited estate and not the shareholders?

We're not-- sorry, we're not going to talk about 2016 [indiscernible] Greig N. Paterson - Keefe, Bruyette, & Woods, Inc., Research Division: That's what was done before. I'm just wondering whether they would be a change in the terms when you [indiscernible] what they have to say.

I can't do that. So thank you, Greig. I think it's time to close the call. So thank you for your questions. Clearly, the global macro environment is turbulent and volatile, with persistently low government bond yields continuing to pose challenges to our industry. In that environment, our presence in the growing and profitable markets of Asia, strength in the U.S. and in the U.K., together with our well performing asset management businesses, give us the flexibility and the resilience to produce relative outperformance. The continued and profitable growth of our market-leading Asian franchises, increasingly positions us towards the most attractive region within the global economy. As a management team, we are committed to continue to deliver strong operational performance for our shareholders. We look forward with confidence for the rest of 2012 and we remain on-track to achieving our 2012 objectives. We look forward to seeing most of you, if not all of you, at our Investor Conference in New York being held on the 28th or 29th of this month. Thank you for your presence and patience this morning.. Sorry, Grief, if we couldn't answer your last question, but I hope you'll be in New York, and we can continue this dialogue. And thank you to all, and have a good day. Thank you.

This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.