Prudential plc (PUK) Q2 2015 Earnings Report, Transcript and Summary

Well, good morning and welcome. I think I know most of you. I’m Mike Wells, the new Group Chief Executive of Prudential. I’m the 21st, if you’re counting, in the 167 year history of the Group, and very pleased to be up here today presenting to you our first half results. I think you will see, if you’ve had a chance to take a look at them, they are very broad based, with all four of our business units contributing at a very material level. I’m assuming you’ve all read this, so I’ll move on to the agenda for the day. We’re going to break this into three parts today. I’m going to give you an overview of the business, and some of the key highlights. Nic’s going to give a very detailed review of the financials, and some topics related to that, and I’m going to come back after, and tell you just some general views I have on where we are capability wise, strategy wise, and execution wise, in the various markets, and some of the issues we’re dealing with. So let’s get right to some of the growth metrics. IFRS profit up 17, new business profit up 12, pre surplus generation up 12, so all the operating metrics in double digits, and of course, supporting the cash metrics. Remittance up 10, and an interim dividend which, again, is technical at this point, it’s third of the 2014 dividend, is up 10 as well to 12.31. Clearly, the performance is not only generating robust operating income, but we’re converting that to cash. And that cash is making its way to the center, and support the dividend. So very pleased with the shape, the structure and the flows in the first half. Center to our delivery is Asia and the consistent performance of Asia. The first half sales in Asia are up 31%. The Asia average now, their quarterly growth year on year is 17% and that is for 23 consecutive quarters. So that is a commendable performance, I think, in any industry by any team, and certainly one we appreciate and value. The other piece, I think, that’s important to look at here is the relative premium focus along the bottom. Again, this is a consistent performance across market cycles. This detaches some of our flows and earnings from some of the short-term disruptions you see. And then the final thing I’d ask you to consider on this page is the absolute performance is strong, and so is the relative performance of the pan-Asian competitors in the market in general. Looking a little closer at the Asian business, the performance has been very broad based and, again, this comes from a pan-Asian model that’s got multiple growth engines. Eight of our regions produced double-digit growth. All of our product categories did; the agency distribution force up 32%, our bancassurance partners up 16%. Someone asked out front, Standard Chartered inside that APE is up 35%. The productivity, the activity of our agency force is up, the size of our agency force is up. This is an institutional industrial-size capability here for us on organic growth and it’s obviously unrivalled in the region and highly, highly scalable. Very impressive. We highlighted some of the specific countries and the successes there. I’ll leave that to you to read in detail but, again, there are numerous stories across the region of success for us and very pleased with their performance. Eastspring, a unique part of our Asian story relative to peers in the region. The valuable synergies, obviously, with our life operation, given the relationship between some of the products and the underlying asset management, and this is a continuing story for us on the development front. Great third-party flows, strong performance, increased growth in capabilities. Our intent here is, this is a relatively young business in maturing markets, is to continue to reinvest in their capabilities and grow the breadth and depth of this team and what they can do in-region. I think it’s critical for where we’re going long term, but I wouldn’t confuse our ambitions long term with their short-term successes. Guy’s team did a great job with this again in the first half of the year and we’ll continue to support that business. And then in total, the consistency in Asia’s ability to convert with, really, its scope and scale to profits and cash I think is unique. You’re talking IFRS profits up 17%, free surplus generation up 16%. You can see the mix there of life and asset management so, again, a good mix by source. You’re talking about, again, I think, a pan-regional franchise that’s in the right markets, currently has the right products, the right distribution partners and, clearly, the right people to execute. Moving to the U.S: the U.S. business has always been about balancing the stakeholders, and it’s, I think, the single thing that Jackson historically has got right. The core of Jackson’s success has come from having very good product for the consumer, but keeping the discipline on the pricing of that product consistent. We’ve had this conversation pre-crisis, post-crisis, where the growth comes from, where the demands come from. I don’t think there is a external metric that doesn’t show Jackson having the best product, the best service, the best wholesaling. You know some of the cost metrics; I’ll get to those in a second. One of the challenges with Jackson has been managing the volumes on the with living benefit product. So for the last three years, as you know, we have actually curtailed sales and tried to manage the impact of our distribution partners carefully. So one of the takeaways from Jackson is not only are the numbers good for the first half, but there’s still, again, excess demand. Elite Access continues to be a good demonstration of their ability to innovate and continues to succeed. How does that look in terms of delivering value to shareholders? A couple of key elements to this, well-built products appreciate for consumers, and you see that capital appreciation in the third bar here from the left. The attractiveness of the product, again, retains clients and attracts new clients. So the cumulative inflows have been excellent and it produces tremendous results, including operating income and cash. This is a scale operation that’s got very, very strong capabilities to deal with change. Let me get to one of the big questions out front before we started and that’s the Department of Labor issue. Lots of noise around this, so there’s hearings going on pretty much as we speak, in a few hours will continue, in DC on a DOL proposal. This actual project started 6.5 years ago. This is not a new idea, a new issue; it was released a little while ago, eight, nine months ago. The attempt is for the Department of Labor to get a fair, balanced advice and product set to clients that have assets in retirement accounts of various types. It’s a worthwhile goal. We have a longstanding good working relationship with the DOL, is very capable well-intended people there. I don’t personally think that this is the iteration that makes it through next year. The current version, and attempt to get a lot of things done, actually adds some complexity to investors, advisors, broker dealers, manufacturers. But some of the clear themes in it, and they’re important, and I think appropriate, higher levels of transparency. Again, that doesn’t conflict with anything Jackson does or any other quality provider in the marketplace. There seems to be a preference towards more levelized commission structures. That’s new. Again, Jackson is agnostic to the commission structure on the product, let’s be clear. If the underlying product has value to the consumer and improves the quality of advice that the advisor provides, the market currently dictates the commission structure. We use multiple commission structures now and, if the appropriate structure under whatever the new DOL rules is more levelized, then Jackson will produce products that meet those needs. The consumer is relatively agnostic to the commission structure, as you can tell by the current sales in Jackson, and our need to cap the excess demand. Jackson innovates faster and better than any of its peers. The best proof statement I could give you would be Elite Access. It has a number of competitors who have cloned it and said we’re going to produce a product like that, that has no guarantees, that provides alternative asset classes to consumers, that allows them to diversify away from total return bond funds, etc. I don’t think there’s another that has critical mass, let alone the success and the growth rate. Elite Access has already dealt with broker dealers in the last two years that have said, without guarantees, we don’t want it on the qualified plan platform, and you’ve seen its growth, two-thirds of which has grown non-qual. So again, from a distribution point of view, it’s simply a different challenge. I don’t think there’s anything in the DOL’s proposal or direction that doesn’t create a disruption in the market, it doesn’t give Jacksons, sorry for the compound sentence, the ability to demonstrate what it’s good at. We as a Group and certainly as Jackson like minor disruptions in markets. They separate the capabilities of the players, and in this case, if you can produce a valuable product, and we do, the clients will pay for it, and they do. And the structure of that is dependent on the market and regulation, and if one of those changes, we’ll adapt. Let me give you one external example to go back and look. The last time the US regulator, and it was SEC FINRA at the time, had a preference on compensation structures around mutual funds, about seven years ago, if you go back and take a look at the B shares, which were the backend loaded, a surrender charge on the back of the sale of mutual funds in the US, at the time, depending n the firm, they were as much as 25% of sales. They’re now about 1% of the industry. As the regulator said, we want to see less of them. The industry has grown 60% since then. The compensation structure is one variable in the value chain. It does not define the value of good products. Now, if a competitor or competitors don’t have excess demands, and don’t have a product that will hold up on its own, regardless of pricing, that’s a different issue for them. That’s not our concern So my view on this DOL issue is, we will weather it well. We’ll come out on the other side, advantaged again. And Jackson has the capabilities, relationship, distribution, to build whatever product is appropriate under that set and adapt faster and more effectively than competitors. Another example of adapting to changing regulation would be our UK business. Again, dealing with changes in the Group’s DNA, and I think that’s an important takeaway from today, last April, material change in the retirement market of the UK, the effect for Jackie’s team: retail sales up 25%, strong demand for existing product, again, led by a quality, high performing with profits chassis. The quality of the underlying product creates optionality in times of change. It’s a key take away from this. Strong demand for existing product, excellent execution of new products from flex drawdown to the ISA products, again, staying selective on bulks, and we’re very well positioned to capture whatever the changes. Now, also in this market, in the UK, we have an announced new look at advice, again, to expand the range and availability of advice, a bit of the opposite work stream we’re seeing on the DOL piece, these are variables, and to look at pensions again. These regulatory and policy changes are a part of what we do, and I am encouraged by the direction on the advice piece and think the pension piece will probably come out with broader fairness. And all those things are good for us, again, allow us opportunities to participate in some more of those markets. Jumping to M&G: an exception historic performance. We have seen, and Michael said numerous times from this very stage, to be cautious about the retail bond flows, they’re cyclical. Some of the money coming out of Europe, etc., you all know the political and rate-related movements of those. So we’ve seen some outflows of retail bond funds. This is a well-diversified institutional and retail money manager with outstanding capabilities what is a very unique and appropriate culture for a proper asset manager to compete on a global scale. And they’re seeing, again, at this size and scale, some elements of the market we’ll participate in, up and down, but the key is the core offering, how good are they at managing money for institutional and retail clients across the risk spectrum, and they’re very good at that. Combined for a moment: in some of my meetings in the City, it’s been interesting the questions about, should we have a UK asset management business in the UK life company, or when are we going to do that, et cetera? We have asset management capability that’s competitive, I think, with the best firms in London and globally in M&G. And if you combine that with our UK business, which, again, can compete with any life company here in the UK or Europe, the combined results, our IFRS profit is up 16%, which, again, competes with any firm or firms combined into that space. So our capabilities in this market rival anyone’s and, again, that matters if the landscape changes or as the opportunities are merged. We’ve got the tools we need to capture those. Sources of earnings and sources, more importantly of Group capital, our discussion lately on capital, Solvency II, et cetera. Let me start by just reminding you sources of capital for the Group, and I’m using in-force free surplus generation for this. 81% of the Group’s free surplus generation comes from outside the UK life business. So when we think about Solvency II, the binding constraint for dividend and capital movement within the Group is local regulation in those markets. In the case of the asset management piece, Michael’s team, that’s less relevant, obviously. But if you’re trying to back into what’s the impact of Solvency II on the movement of cash throughout the Group, you’d still need to look to local regulation. Nic’s going to do a deep dive into Solvency II in his presentation, so I want to leave some of the content to him on the details around this. But for us, it adds another risk and regulatory screen to our metrics we use already as a management team. We are going to maintain the Group’s management and allocations of capital on a multiyear ECap model. We’re not moving to Solvency II as a single metric, but it is for us, and the UK business and with our primary regulator, a regulatory capital model that we’ll respect and manage to and track closely. We submitted, earlier this summer, our IMAP. We work very closely with the regulator; lots of detailed work on that. I think one of the things I’ve learned in the last 90 days or so here in London is just how much work they have to do between now and December. You’ve heard Sam Woods’ comments about both the release of all of the UK companies at once in December; keep in mind, that’s almost 300 firms they’re reviewing between now and then. So I think there’s a tremendous amount of work to be done there. We’re doing everything we can to assist them with ours. We had a lot of dialogs prior to our submission to make sure we incorporated their comments and concerns. And again, Nic will give you a little more color on this in a minute. But I don’t want you to confuse our previous and current conservative comments about disclosure on this with any sort of capital weakness. We just generally think it’s a good policy not to comment too much on regulation and process. Our submission is being reviewed now, and there’s a finite amount of information we want to comment on that, given where we are in the process. Turning to 2017 objectives, obviously, a very strong first half moved these along. And given the numeric nature of them, the underlying Asian free surplus, the Asian IFRS operating profits and the cumulative underlying free surplus, the answers here are mostly numeric, and going further gets into forward-looking statements. So, again, great progress, good percentage gains, good absolute gains against the targets. And then my last slide in this section. I think it’s important to put the first half results in context of the Group’s track record; how are we growing relative to ourselves, and I think that’s a worthy benchmark. I think the numbers, again, are compelling. I think they show the consistency of the Group’s capabilities, our ability to create earnings, create future value and convert those to cash. Obviously, very pleased with the historic trend as well, and I think they set us up well for where we’re going second half of the year and beyond. I’m going to turn it over to Nic now and I’ll come back at the end with some comments on strategy and some of our opportunities. Nic?

Thank you, Mike. Good morning, everyone. In my presentation, I will firstly run through our half-year results, highlighting the drivers of our performance in the period, before I briefly cover the balance sheet and update you on Solvency II. Starting with the financial headlines, the Group has delivered a strong set of results in the period with all of our growth and cash metrics up by more than 10%. The improvement in our overall performance was broad based, with all four businesses growing their respective contribution. By targeting and attracting higher levels of profitable new business flows across the Group, we’re increasing both the scale and the quality of our business, which, in turn, drives the growth in the profit and cash measures that are shown on this slide. This is what ultimately underpins the strong performance so far in 2015, with IFRS operating profit increasing by one-quarter on a reported basis to 1,881 million. Currency effects were positive in the first half and this has added between 4 and 7 percentage points of growth to our underlying performance, of course, depending on the metric. However, in my commentary, I will focus on profitability trends excluding these currency tailwinds as this is a fairer way of looking at our performance, for the reasons that we have previously outlined. Other notable headlines: new business profit was up 12% at 1,190 million, benefiting from a strong profitable sales growth in the second quarter. Free surplus generation was also up 12% to 1,418 million, reflecting efficient deployment and a growing contribution from the back book. And cash remittances were 10% higher at 1,068 million, with sizable contributions from all our businesses. Short-term investment variances were modest in the first half, as the movements in equity markets and interest rates were muted. Our post-tax operating result, therefore, dropped straight through into our shareholders’ equity and solvency metrics, which have also risen strongly. This next slide analyzes the contribution to our IFRS operating profit by business and by source. The table on the left demonstrates the breadth of the 17% improvement on this metric to 1,811 million. Our businesses in Asia, the US and the UK each delivered double-digit growth in the period, collectively contributing over 2 billion at the half-year stage for the first time. I will cover the reasons behind the improvement in performance for each business later. But in overview, for Asia it represents the outcome of consistent additions of high quality, new regular premium business, and an increased contribution from Eastspring. For the US, it reflects increased fee income on higher separate account assets administered on a low cost platform. For the UK, it is driven by the dependable level of earnings from our sizeable back book, as well as the season transfers from with-profits. For M&G, it represents growth in fee revenues and close control of costs. We continue to make improvements in the composition of these profits, shown in the chart on the right. Our objective here is to make our earnings less dependent on the interest rate cycle, and to grow the contribution from the more capital efficient sources. We’re, therefore, pleased with the 20% increase in the insurance result, a source that is not sensitive to investment markets. Fee income from life and asset management also increased by 15% and 8%, respectively, while spread income was lower, the fact that insurance and fees together contribute over three-quarters of our income is an important feature of these results, and is consistent with our strategy of targeting resilient and high quality earnings. As we increase the scale and profitability of our business, we’re also improving the ability to generate capital. In the first half of the year, free surplus generation was up 12% to 1,418 million. The improvement in this metric is underpinned by the increasing scale of our life in-force book, our efficient use of capital, and a growing contribution from our capital life asset management operations. The key driver remains the life expected returns, which rose by 15% to 1,366 million reflecting, once again, the powerful dynamic of adding another cohort of high return, fast payback new business to an already sizeable back book. The continuation of positive experience of 153 million has augmented our cash generation further. In the top right, you can see that all three businesses are making significant contributions to this life in-force result. Asia, where the high return, fast payback dynamic is most evident, is contributing over half of the period-on-period increase. This capital dynamic is also present in the US, but its impact is masked by the reduced contribution from positive spread experience. The higher UK result reflects business growth, enhanced by a 52 million contribution from a longevity reinsurance transaction completed during the period. We remain disciplined in the redeployment of our capital, increasing new business strain by 8% to 434 million. This is analyzed further in the breakout box in the bottom right. The efficiency of this investment has improved in both Asia and the U.S., principally due to changes in sales mix. The investment in the UK remains more modest and is highly capital efficient. My next slide shows how the free surplus flow in the first six months has impacted free surplus stock, on the left, and central cash on the right. Stock has increased overall, driven by our operating performance and the relatively modest market effects. This has, in turn, allowed us to increase remittances to over 1 billion, retaining 5.3 billion of free surplus in our various life and asset management businesses. Once again, all of our businesses have remitted substantial amounts to Group. Jackson has made a sizeable remittance for a second year in a row, reflecting continued positive capital formation at this point in the cycle. The increase from M&G was in line with earnings growth. The Asia remittance includes the one-off benefit of the proceeds from the sale of Japan of 42 million. It also reflects our decision to moderate upstreaming, given current foreign exchange levels and the strong overall central cash position. UK remittance was lower, due to the investment we’re making in response to the 2014 budget changes which we flagged last year. Turning now to our results on an embedded value basis. Our operating profit here was 11% higher at 2,278 million, equivalent to an annualized return of 16%. Lower long-term yields compared to a year ago generated a 50 million drag on the overall EEV result, but this has not detracted from the strong performance of the business on this metric. Asia’s contribution grew at the fastest rate, exceeding the 1 billion mark for the first time at the half-year stage, demonstrating the rapid progress we’re making in capturing the once-in-a-lifetime opportunity in the region. Total new business profit, shown in the top right, was 12% higher at 1,190 million, broadly in line with the overall growth in sales of 13%, with the difference attributed to the small negative impact of lower yields. All three regions continue to write new business at attractive internal rates of return of more than 20%, with fast payback periods. Total in-force profits, shown in the bottom right, benefited from growth in business scale, with expected returns 15% higher at 892 million. Experience profit added 212 million to the in-force result, with the small reduction attributed to a moderation in spread-related profits in Jackson. The fact that experience remains favorable overall reflects the ongoing focus of managing a back book for value and the conservatism embedded in our assumptions. I will now cover the key performance highlights for each business in more detail, starting with Asia. The momentum of our business in the region has accelerated in the first half of 2015, with both life and asset management reporting strong improvements across all of our financial measures. Total new business production in the first half was exceptionally strong, with sales up 31% and new business profit up 30%. There is the usual variability in the individual country’s growth trends that we have come to expect in what are, ultimately, emerging markets. But the overall result, and the fact that eight countries delivered double-digit sales growth, reinforces the importance and the strength of our region-wide platform. The fact that sales in our South East Asian sweet spot, sales through agency, sales of regular premium business, all grew by over 30%, underpins the quality of this performance. The 27% increase in the contribution to NBP from health and protection underscores this further. The improvement in Asia’s IFRS operating profit is principally driven by the life result, which was 15% higher, reflecting the growth in the scale of our business. We measure scale by reference to policyholder liabilities, which grew by 17% year on year, following the addition of another profitable cohort of protection-oriented regular premium new business, to a highly sticky existing book. This dynamic, together with positive claims experience, has pushed our regional insurance margin forward by 20% and has led to an increase in Indonesia’s profits by 21%. The recent H&P sales success enjoyed by Hong Kong has driven a 23% increase in the IFRS profit from this territory. The combined profit from Vietnam, Thailand and Philippines was up 26%, also reflecting the increased share of health and protection sales, which rose to 20% of total sales on a combined basis in these countries. Eastspring has continued to show strong momentum with new highs of net inflows. Full net inflows up 79% to 4.6 billion, funds under management up 28% to 85.3 billion, and IFRS operating profit up 35% to 58 million. Moving to the U.S: Jackson’s first half performance reflects its disciplined, value-based approach to managing the business. New business production was down 10%, as we continue to manage sales volumes with living benefits to maintain an appropriate balance of our revenue streams, and match our annual risk appetite. In line with this approach, we have seen an increase in the proportion of variable annuity sales with no living benefits to 34%, reflecting robust sales of Elite Access. Jackson’s new business profit has moved in line with sales, as the negative effect of lower rates was offset by ongoing pricing and product actions. As I showed you earlier, new business strain here declined by 13%, reflecting favorable changes in business mix, commission actions taken last year, and other product initiatives. The economics of all of our VA products remain very attractive and are close to all-time highs. The fact that IFRS profit rose by 13% demonstrates the point Mike made earlier, that Jackson has not relied on top-line growth to generate higher earnings. What drives Jackson earnings is the overall size of the separate account assets, which have grown year on year, primarily due to positive business flows. Fee income earned on these assets increased by 15%, broadly in line with the 16% growth in average assets managed between the two periods. Spread income has decreased by 6%, as the prolonged low interest rate environment compressed margins up by 14 points to 244 basis points. I will repeat my previous guidance that we expect this margin to trend to 200 basis points over the next two to three years. Finally, we announced the closure of Curian in late July and we expect to incur closure costs of around 30 million over the next six to nine months. Our approach to hedging remains unchanged, in that we continue to utilize the fees that we charge for the guarantees offered to hedge well into the tail. Finally, policyholder behavior is tracking in line with what we expect to see. In the UK, our life business has responded well to the changes brought about by the government’s pension reforms. Although there was a 56% reduction in sales of individual annuities, overall retail sales were 25% higher, with our various product initiatives gaining traction. These center on our established market leadership in risk managed savings and investment products, spearheaded by PruFund, which is now available through a wider range of tax wrappers, following the launch of flex drawdown last December and PruFund ISA in February. The attractiveness of our propositions have seen bond sales grow by 20%, individual pension sales more than double, income drawdown sales more than treble, and ISAs attract funds over a quarter over billion. As a result, total PruFund assets under management increased by over a third to 13.7 billion. These higher sales volumes have driven a 14% increase in retail new business profit to 80 million. Our selective approach to bulks has seen us write two deals in the second quarter on compelling economics, contributing 75 million of NBP. Despite the more modest contribution from new annuity business, total IFRS operating profit increased by 20%, reflecting the resilient performance of our large in-force book. The result includes the impact of actions taken to unlock value, including 61 million from reinsuring the longevity risk of a small proportion of bulk business written pre-2014. Reinsurance is a tool that we have used over the last three years to manage our overall balance of risks, release capital and improve returns. The 231 million remittance continues to be underpinned by seasoned and stable with-profit transfer, which remains both an important and a durable source of cash and capital. In M&G, total IFRS profits grew by 11% to 251 million, reflecting higher revenues on an unchanged cost base. Fee income increased by 6%, in line with the growth in average AuM between the two periods, this AuM growth was the result of strong net inflows and positive market movements throughout 2014 and the early part of 2015. The 4 billion retail net outflows that M&G saw in the second quarter has meant that both third party and total AuM are only just ahead of the mid-2014 levels, and are in fact 3% lower than the equivalent levels at end 2014. This development will moderate fee income progression in the second half of the year. Costs were unchanged, due to proactive actions taken by management on recruitment and other discretionary spend. The resulting 3 point improvement in the cost income ratio to 51%, while pleasing, is unlikely to be sustained at this level. As you know, M&G’s cost base has a second-half bias, which typically drives the ratio up by around 5 points between the mid and end of year points. Furthermore, the investment in infrastructure that I have previously flagged will continue, as this is a necessary underpin to M&G’s client offering and its ability to maintain operational efficiency, going forward. As regards trading, the second quarter net outflows reflect sentiment-driven moves by European retail investors out of fixed income, which has continued in July. M&G’s other retail offerings, such as multi-assets and property, are attracting good net inflows, but not at a level to offset the outflows from optimal income. Institutional net flows were over 1 billion in the first half and there is a healthy pipeline of capital committed by third parties, which has not yet funded pending M&G securing the appropriate investments. Now since the last financial crisis, M&G has become a material contributor to the Group’s overall results, more than doubling its profits in that period. It now has the scale and diverse offering to weather the current retail flow softness and remain a significant contributor to the Group. I will now briefly cover the balance sheet and capital position. The key message here is that our operating earnings have driven increases in our shareholders’ equity and our Group solvency capital. Under IFRS, we have seen small positive short-term investment fluctuations in the period. This comprised unrealized losses on fixed income securities, which were more than offset by positive variances in Jackson, attributed to the net favorable movement of accounting reserves relative to the hedging instruments following the rise in interest rates over the last six months. After the final dividend, shareholder’s funds on June 30 were up at 12.1 billion. Investment variances were also relatively modest on an EEV basis, which, after dividend and foreign exchange, saw shareholders’ equity rise to over 30 billion for the first time. Turning to capital: the estimated IGD solvency has increased to 5.2 billion and represents a cover of 2.5 times. The value of our UK estate is also high at 7.4 billion. Our fixed income portfolio remains conservatively positioned with minimal impairments and no default losses in the period. I would now like to provide you with an update on Solvency II. Mike has already commented on our internal model application process and the timeline for approval. We will share the outcome of this process, once we hear back from the regulator later this year. For this reason, and in line with the approach we adopted last year, we have not provided you with an update on the economic capital position at June 30. I can, however, confirm that the strong capital generation we have seen on other metrics has also come through on the Solvency II basis. I want to take this opportunity to recap on how Solvency II will impact the various parts of our Group, using the pie chart that Mike showed you earlier on the sources of our capital generation as a guide. So working from left to right, and starting with M&G and other asset management, this segment is unaffected by Solvency II. Here, the current capital rules are retained and cash generation will continue to be driven by earnings. Turning to our UK life business, which accounts for 19% of free surplus generation today, here the requirement to hold the risk margin is new and, at today’s interest rates, it represents a significant add on. However, it will be offset by transitionals and the two will broadly run off in sync. The clarification provided by the PRA on transitionals means that capital releases from the existing book will continue to be available to pay dividends or be recycled to finance new business. As transitionals will not apply to new business, going forward, this will mean that the capital intensity of new retail and bulk annuity business will be higher. For Prudential, the former is now modest, generating less than 1% of the Group’s profits, while our approach to bulks has always been selective, with the reinsurance offering a mechanism to secure, or rather to reduce, the new Solvency II strain provided, of course, it is available at a reasonable price. In the U.S., the RBC regime will be considered equivalent; therefore, given that this regime currently determines our capital generation and remittances, Solvency II will not impact Jackson. The fact that under D&A we cannot take credit for diversification between risks in Jackson and elsewhere in the Group will, however, mean that Solvency II underplays our capital strength, as this benefit is real. In Asia, our business has a very significant health and protection bias, a product that is Solvency II friendly. And this produces an overall capital outcome for PCA, which is greater than the 1.4 billion we recognize as free surplus in the region. The whole debate here is how much of the additional -- how much of the 10 billion Asia VIF can be additionally captured under Solvency II? This will need to be calculated using the prescribed Solvency II methodologies and be subjected to a 1 in 200 shock. This calculation involves significant judgment, as the Solvency II methodology was designed with European business in mind and does not travel well. Understandably, given the amounts involved, this has been a key area of discussion with the PRA, but the mood music has been more positive since our March update and the gap between our respective positions has narrowed. Let me be clear: this debate is not about producing an outcome which constrains capital flows from Asia. From the regulator’s perspective, it is about not coming up with an answer which is so positive that it tempts us, somehow or for some reason, to over-distribute. Either way, as this is about what additional credit we can take under Solvency II at Group, the local solvency regimes will remain the biting constraint and our free surplus approach, which in Asia is based on the local regimes, will continue to determine both capital generation and remittances to Group. Therefore, to conclude, for 81% of our business there will be no change to our current approach. In relation to the UK, transitionals will effectively mean that capital generation of the existing business will continue to operate on a broadly similar basis to the one we have today. Capital consumption for new annuity business will be greater but, as you have seen earlier, its contribution to our results is not significant and it can be managed through reinsurance, we are therefore confident that Solvency II will confirm the highly cash and capital generative nature of our business. We believe that the most reliable source of capital is the sustainable delivery of a growing level of high quality earnings. Our performance in the first six months of the year demonstrates exactly this. By operating in markets where consumer demand for our products is both strong and enduring, and by executing our strategy with discipline, we have grown NBP, the key lead indicator of future earnings, by 18% year on year. The capital velocity of the highly profitable business written in recent years, combined with our value-based approached to managing the back book, has enabled us to deliver one-quarter more profit than one year ago and improve its quality. This operating profit has driven a 27% increase in both the free capital held in our businesses and in our Group’s IGD surplus after financing new business and paying dividends. All this reinforces our confidence in the future prospects of our business. And with this, I will hand you back to Mike.

Thank you, Nic. So this is a familiar slide to most of you and there’s a good reason for it. It’s the strategy we’ve been executing on for a number of years now and, obviously, from today’s numbers we think it’s working exceptionally well. There is some underlying themes to it that again I think are well rehearsed in this setting, so I’ll keep them to a minimum. But we’re not in need of a new strategy. That isn’t my objective; it isn’t the management team’s assessment. We think we have one that’s working very well and the focus is going to be on a higher, more detailed execution, increase the breadth and depth of our capabilities, so let me walk you through a little bit of that. We should, at this point, I think, in Pru’s development, enjoy more of the benefits of scope and scale, than our competitors. In each of the markets, as we’ve discussed, we have incredible capabilities. We have everything we need to address what is now expected to be a more self-reliant middle class. And that’s a trend across every market we do business in. That can be in terms of health and protection in Asia, savings at globally, there is an assumption here that middle-class households will be responsible for more of their financial wellbeing. And, again, we’re perfectly positioned in our markets to provide the services; we need to do that. So how do we enhance that capability? In Asia, we continue to scale the agency force, improve the quality, the tools they have and breadth of product. 560,000 now, I’m not sure how many we need. It’s an interesting question; I got asked that in China a few weeks ago. There are lots of metrics that you could say have correlations to agency growth, but we will grow it as fast as we can at the quality level we’re willing to grow at. There isn’t a bulk target here. But there is capacity in the market for materially larger advice providers, including our agency force. Again, this is a market that’s underpenetrated. So you have more demand than you do supply, and that includes the advice side. Same is true on the bank insurance partnerships. Our penetration of these partnerships is still relatively low, though with the exception of Standard Chartered, relatively young partnerships. And meeting with some of these folks, they want more products from us, they want tighter relationships. And the theme here is they want us to stay with their client as they change in their financial lifestyles and where they are on that savings and development curve as a household. We’re incredibly well positioned to do that and we’ve a responsibility in those relationships to provide them the tools and services to maintain those relationships. And no part of the financial service industry understands householder relationships better than banks. I don’t know a bank CEO that can’t tell you the number of product contact points they have with a household. And, again, it’s our responsibility to help them maintain that. In the asset management space, you’ve seen how well Eastspring is doing. It is the leading franchise in the region and it’s a young franchise. And it’s a relatively young region in terms of asset management opportunities. We have to continue to invest in the technology, the people, the processes, the culture, to make sure that we have the place where top managers want to work, where the top talent wants to go and learn the business, and where we can deploy, into new region and markets, people that understand our expectations on the quality and quantity of asset management advice. And we’re very capable of doing that, again, as a Group. On the US side, we have the market leading franchise. So the question is best ways to lever it at; clearly, you start with a back book that’s extremely profitable. The sales levels, the absolute sales levels Jackson’s capable of continue to grow. The breadth of product it can offer again will depend on the opportunities in the market, but [you get] likely to be broader and more. If those of you could have spent time with the team in Jackson, it’s a very capable group. We have very good cost advantages. I’ll get to those in a second. We have technology advantages and, again, we have distribution advantages. So there is a market leading position with all the elements of scale to be levered. That includes bolt-ons . The reason for us to do bolt-ons in the US, has been well rehearsed in these discussions, is because we can service the clients better and create more value for shareholders from the same block of business than most competitors can. We have capacity in the franchise, we have the expertise to do the acquisitions and do the integration. Those, combined, create value for shareholders and a better service experience for clients. So that combination is the reason. Yes, it also diversifies the earnings streams and there’s residual benefits that are good for us. But the core reason is, we own capacity as shareholders in Jackson that can be utilized at cost and technology levels that competitors can’t. So we’ll continue to look at the M&A landscape there actively. And then, again, Jackson’s role will be to adapt to the changes that come at it with the marketplace, and it’s a good track record at that. Same as the UK, both asset management and the life company. We need to adapt to the market we’re in. You’re seeing them doing that now; that will continue. Part of that is we need to build out the UK’s digital capability. This is not a strategic initiative, this is a prerequisite. We’ve got to service clients the way clients want to be serviced. We’ve got to access clients the way clients want to be accessed. So there’s a little bit of catch up on some of the back book technology. I think it would be fair to say, Jackie, that we want to make sure that, again, this goes to service relationships, and those consumers being happy and staying with us longer, which goes to recurring profitability of the book for shareholders. But it also goes to how consumers want to find information about their retirement savings and their products. We’re going to deliver that. On the M&G side, the key here for us is to maintain the culture and quality and capability of this franchise across cycles. That can be across short-term interest rate cycles; that can be across political cycles. This is a very unique firm. Highly capable, great people, highly scalable, and we intend to keep its capabilities where they should be, and to grow it across the cycle as well. The disruptions, I think, we’ll see in the market, we have the capabilities across our key regions to lever them, to get more out of them than competitors. Let’s talk about challenges, the thematic today. We have seen a few. I think it’s fair to say that somewhere in the next -- I’ve been here 20 years, I think in the next 20 years, somewhere over the cycle, you will see interest rate changes, policy changes, equity volatility, rules change, broader, narrower on advice, taxes change on products. It’s all in here; it’s all been a part of the history of the Group. And through each iteration of this, the capabilities of this Group grow. We get better at it. We’ve seen it before and we’ve dealt with it, sometimes successfully, sometimes not. But that institutional learning is here, and our capacities to deal with challenges, I think, rival or are better than anyone’s in the industry. So let’s talk about resilience for a second. Where do I get confidence in our -- let’s assume for a second this is going be a challenging climate and where’s the resilience in the Firm come from? One is the market leading franchises. Asia has first mover advantages. This is a text book example of having got there first, done it right. The people, the products, the relationships, the development of new product, the asset management capability, again, scope and scale, executing at a very high level, now recurring cash flow, as well as the growth in the front end. The U.S., same thing. Market leading franchise, highly talented team, high quality model, cost advantage. Go back to the DOL for a second. Let’s say there is a -- there isn’t now, but let’s say there’s a price element in it, suddenly that middle chart matters a lot. So, again, Jackson’s options to deal with change are broader and better than its counterparts in the marketplace. And we can bring those capabilities to bear on whatever product or service we need to get to consumers. And the last one I would point out is, if you take a look at the productivity of Jackson’s wholesaler relative to its peers, their ability to deliver complex products, and those of you that have been there, know that we’ve grown the number of wholesalers and yet we’ve grown the productivity. The other way to get this number up is reduce the number of wholesalers on the same sales base. We’ve gone the other way; this is a growing team, growing in efficiency. Same trend you’d see in Asia with agency. This is, again, how the Group executes. The UK, three months plus here. Everyone has an opinion about Prudential; every taxi driver has an opinion about Prudential when they tell them where they work. The resilience of the man from Pru and the relationships and their families, their stories are endless and fascinating. But it is, as M&G is, an incredibly trusted brand in the marketplace. You don’t get the -- my statement was wrong, stories, you get how important it was to their parents or what product they have of ours. This is one of the most resilient, well-established brands I have ever seen in financial services. M&G, the reputation institutionally and retail-wise, directionally the same. High quality, long term focused, all of the elements you want for attracting long-term savers. The mix, the middle chart, reason I included this, again, comes back to the quality product issue. I’ve met a number of investors, and it’s certainly clear when you look at the advice providers we have, the with-profits fund structure and the success of that relative to peers, and again we’ve shown you that in previous meetings, on an absolute basis, it gives you a franchise to do other things. Getting the product right for consumers is a big part of the business reputation versus brand argument. If you’re doing a good job, people actually say nice things about you and you don’t need to pay for that. And in the UK, some of the products they’ve delivered, particularly with-profits franchise, you get some amazingly favorable comments from people. They recognize what it’s done and it’s the same sort of argument as you see in the US. You’re de-risking that consumer’s retirement savings. You’re taking them -- often they’re further out the risk spectrum than they may have chosen to be and you’re creating an alternative that smoothes that out and gives them institutional asset management capability and lets them go back about whatever it is they want to do, and again, building off a great product. M&G is diversification by sources of funds, and capabilities I think it’s important to highlight. Both from an internal point of view, retail point of view, institutional point of view, this gives M&G the scale and scope, again, of any global asset manager. From a cost point of view, from a hiring point of view, talent point of view, all those elements. I think the surprise, if you spend time in M&G, is the culture still feels like a small boutique asset manager. The awareness of what other people are doing in the building, the attention of detail, the focus on the sense of ownership, is unique and totally appropriate for an asset management shop. Resilience of earnings: switching now to IFRS income by source; Nic highlighted this. Across the cycle, how resilient are our earnings? Well, one, you can measure by source and I think they’re well diversified. Two, you can measure by currency. If there is a global crisis, unimaginable scale, what are the go-to currencies? Well, they’d be the dollar and the pound, and you’d see a link, the dollar linked products behave accordingly. Again, I think this is -- in the [IFR] currencies markets have done exceptionally well. I don’t think they’re all correlated; I don’t think you’re going to get every market that we have out of the US, including Africa behaving the same way at the same time. But that said, if that’s your starting thesis, that’s the resilience of the earnings from a currency point of view. And then last, and most importantly is what percentage of our earnings are recurring versus coming from new sales? So what happens if we just run the business, sell nothing, that sort of level. For us, it’s a dramatic level that creates creation of capital to reinvest in the business, to pay dividends, to look at new opportunities, often at a time -- if you’re thinking of a very cyclical market when competitors may not have access to that capital. Again, it gives us optionality a key element of our business plan and our capabilities. So the basic summary, I think we have leading franchises in all the markets. We’ve obviously a very strong management team, strongly capitalized and cash generative businesses, and I think we’re well positioned to take on whatever challenges are coming. And again, thematically I think the major challenge that we’re dealing with is getting to investors, and to middle-class households, the solutions they need as they’re handed more of that responsibility. And, again, that’s a global trend for us. There is far more demand in that space than we can provide supply, but we will scale that up, focus on the execution and get more of it. There’s plenty of room for us to lever our capabilities internally as a Group, from technology, from people, from capital management, tools we are using in one area that we haven’t exported in another, you will see all of that, but it’s all, again, at the execution level. The strategy we have is the correct one. And I wanted to finish with a slide that we used earlier and I apologize for bringing it back up, but I think it makes another point. We were talking last night about this. So when I got here -- you see new business profits was 80 million at the half-year, 20 years ago. 50 million of it will be somewhere over here, I’m not pointing to this, that chart, if we brought that line down, right, somewhere around here. It was 80 million, 50 million of it from the UK. There was no M&G. The US business had been bought because it was a very attractive product called single pay whole life, which was a tax free annuity at the time which, by the way, the Federal Government in the US changed, in one day, the tax status of that product and eliminated it. Asia was where we sent people to retire. That was a nice way of saying you had two years left and you were going to go to one of our outposts where folks from the UK were retired, or military were based, or whatever it was. It was not the cutting edge of our growth as an entity. There is a couple of things you should take away from that. The people that created this are here. A disproportionate amount of the performance on those charts comes from people that are either in this room, this team, or in the various buildings and field offices we have today while we’re sitting here. We have built this collectively. It’s a very unique Firm with very unique capabilities and, candidly, it’s why I took this role. So I think we’ve got a lot ahead of us, and I don’t see anything in front of us, disruption-wise or competition-wise. Our challenge here will be to compete with ourselves and our track record. Stop there and take questions. I’ve asked my colleagues, if you would, to join me up on the stage.

All right, just wait for the mike to come to you before you ask the question and then please state your name and you firm’s name. Can I start with Oli?

Yes. Oliver Steel at Deutsche Bank. Two questions, both around the DOL proposals. You said a few months ago, actually I think it might have been Tijane who said a few months ago, that you thought an industry worst case would be down 15% to 20% in terms of sales. How are you feeling about that now? I appreciate it’s still uncertain. And then secondly, it doesn’t sound as if you’re expecting a huge sales fall in your own situation, but if there was a sales pull-back, for yourself, how would you be considering what you would do with the capital thus released from the U.S?

Well, I think, Oliver, there’s a couple of -- I’ll put this to Barry in a second, but let me just give of my time for DOL and the U.S. Let me take a shot at this first. We now know what the details of the proposal are and, again, I don’t think the proposal -- I think it’s unlikely -- predicting politics is not something that I’m paid to do or I don’t think anybody is good at right now in the US. But I think the DOL’s intentions are good and clear. I’m not sure that this current proposal gets them there, and I think that’s been the universal feedback they’ve got from both sides, the IR regulators and the marketplace. So again, they tend to adapt well to new information. So I think we’ll get something different. But if you said, [a lot of life] commissions, that effect, that’s one element. Transparency is not material. We have broker dealers now that have full disclosure of all commissions paid on variable [notaries] and products and, again, that doesn’t change the marketplace any. I think it’s good practice. The question becomes, I think, two things out of the current proposal. If it passed in kind the level -- there’d be a preference for a level of commissions, no question. That’s the only product that would work in the structure. So there’s an element of, what is your current qualified sales? Now, that’s a different question for Jackson versus peers, because we have excess demand for that product than we are willing to fulfill on the marketplace. So you’d have to add that excess demand back on and then say, well, how much of that would have been qualified and then say how much of that would you lose? It’s a little more complex, little more convoluted, really. Some competitors have a different play, so I’ll let them answer for you. I think one of the key things in it is, does your product stand alone, ex commission? And that’s a harsh bright light on some variable annuities. I think ours does well, and I think those of you that talk to advisor firms in the US on some of those tours know that it’s generally viewed as the best client proposition in the marketplace. And I think that’s -- again, we’ll deal with the pricing issues on structured commissions. So the second part, how does it affect sales? It does affect sales; I think it affects the timing of sales in Jackson. So you release some of the leverage you’ve pulled to control volume, depending on how much notice you get on what the structure of the product is, and they’re generally pretty good about that. The regulators in the U.S give you some indication of where they’re going to go. But how fast do we react? We know how fast we can get product to market. We know it’s faster than competitors and, if it’s a simple change, we know we can do it very quickly. If it’s a material new product, that may take better part of a year. But I think the more important issue always, it changes the shape in a year of the sales. So we may have a bigger first half and a flatter, lower second half while we retool, that kind of thing. We’re dealing with that now in the U.S franchise. There is no question, as we turn on and off the core product, you’ve seen each year it changes quarter to quarter, the shape and that’s when -- years ago, first one of these, it was 15 years ago, we talked about the fact we would do most of our sales in the first five months. And part of that was because competitors weren’t tuned up in January and February and we always had a really good start, when we were smaller than them, in the first part of the year and we always tried to take an edge there. Well, that’s changed as we’ve controlled volumes because we have to rebuild those volumes as we’ve turned off product at year-end. So that was a very long intro to what Barry wanted to say, and my apologies, Barry.

I agree with everything he said. Seriously, Mike covered the landscape pretty well, and so I think I can understand why some competitors would be very concerned about this. We are less concerned and, as Mike said several times through the presentation, that has to do with the quality of our team and the platform that they have built, the infrastructure that they’ve built. We do a better job at lower cost and we have a track record. You have seen it time and again with the lead access being one of the most recent examples of this organization thriving on disruption, and actually turning it to commercial advantage. It is a characteristic you see throughout the Group. We’ve done it in Asia; we’ve done it in the UK; we certainly do it in the United States. It wouldn’t be right to say we’re not worried about this, but we think we have it fully in hand. I am encouraged about the outcome of the hearings which began this week and continue. I think a lot of people, including the White House and the Department of Labor, have been surprised at the level of concern that has been expressed about this and the bipartisan nature of that concern that’s been expressed. It doesn’t happen very often in Washington right now. And, to Mike’s point about it being difficult to predict politics, I don’t think, even two weeks ago anyone would have predicted that we’d now have 13 Democratic senators who have come out and made some pretty harsh comments about this. So I absolutely believe that there is scope to change the shape of this. We are working hard to -- we are involved in that shape-changing exercise. We’re spending time in Washington. We’re making the case about how hostile this is to, particularly middle-class Americans, which is exactly -- this is another one of these perverse things where the government comes up with a well-intended proposal to focus on and protect the middle class, and the outcome of what they design would have the exact opposite effect. Because, as Mike alluded to what would happen is advisors would run from qualified money. That could be one of the impacts. So just say, you know what? I’m not going to bother with it. I’m going to the high net worth customers with lots of unqualified money and I can advise them on that and that’s what I’ll do. If you look at middle-class Americans, they are overwhelmingly in qualified money. Most of these people, they don’t have lots of assets outside of their 401K or their IRA or something like that. That’s where the preponderance of their cash is and they’re going to have increasing levels of difficulty getting advice on that. So again, fingers crossed, lot of work to be done, but I think this is more than survivable, more than survivable.

Blair Stewart, BofA Merrill. Three questions please. The first is on Asia; perhaps an update on the Indonesian business which is where sales are quite flat, just an outlook statement there would be great, helpful. And then on Hong Kong, where the opposite is happening and sales are going through the roof; the impact from Mainland China and the disruption there, I guess, could be argued in two ways. It either negatively affects the business or you see even more Mainland business trying to diversify out of the country and the currency. So a Hong Kong update would be really useful, too. On economic capital, Nic, could you comment qualitatively on what’s happened to the economic capital in the first half of the year, given the earnings and the interest rate moves? It would seem that that figure should have gone up, although I appreciate you don’t want to put a number on it. And finally, I think on some of the headlines on the screen, Mike, there was a comment about the Group moving towards the 2 times dividend cover, over time. Could you perhaps clarify that comment, please? Thank you.

Okay. I think, on the dividend cover, that’s one of the easier ones. The statement stands for itself. I think we should maintain 2-plus-times dividend cover and, depending on where we are in the cycle, we’ll allow it to go a bit higher than that. I think one of my bigger surprises, candidly, in the new role was looking at dividend cover and some of the stocks in the FTSE. I think a growing dividend is a key discipline of any good management team, but I also think a proper level of conservatism in our industry is appropriate from a cash and resource point of view. So our role is to balance those two all the time, and I certainly think our dividend cover and our targets are appropriate for it. On Asia, Tony, I’ll go ahead and flip the first Indonesia question and the Hong Kong to you.

Sure. On Indonesia, we are experiencing economic headwinds. GDP is running around 4.7%, which is the lowest rate its run in about four years. And a lot of President Jokowi’s initiatives have really not getting as much traction as quickly as was anticipated. So there are some headwinds and that’s flowing through to consumer sentiment, consumer confidence, as measured, I think, in Q1 was at the lowest rate in two years. What does this mean to the business, and in that regard it feels a little bit like 2009. What we see on the coalface is, we continue to build out the business by growing agency. In the first half of the year, we hired an additional 74,000 new agents. But key metric to look at is cases per active, this is a measure of productivity, and cases per active for the agency force has come down. What this translates into, at point of sale, agents are having a tougher time closing and/or consumers are deferring decisions, and this is reflected in the flat numbers at the half-year. I think the macros remain incredibly compelling: 250 million people, it’s a $1 trillion economy, and the penetration rate is still less than 2%. Again, we saw the change in cases per active in 2009, which had an impact. As the economy rebounded and consumer confidence with that, we moved back into a very solid growth profile. So Hong Kong: first, I think you need to look at Hong Kong in -- the Hong Kong business, Prudential Hong Kong Life, you need to look at in a couple of segments. The domestic business, this is where we are selling to local Hong Kong people, this business at the first half was up 48%. Then, Standard Chartered Bank: as Mike mentioned, we met with Bill Winters last week, the new Group Chief Executive, who’s very appreciative, respectful of the relationship and very bullish on doing more with us. So that segment is also growing well. The Mainland business is growing at a faster rate within that. It’s important to note that we’re not new to the Mainland business. We started this initiative over 10 years ago when we had less than 3,000 agents. We now have, in Hong Kong, over 10,000 agents and survey says it’s the most productive agency force in Hong Kong. The Mainlanders who come and typically buy our products, these are not day trippers, these are people who, on average, come six or seven times a year; they look and sound a lot like Hong Kong people. In fact, the majority of them come from the neighboring province of Guangdong. And to put that in context, Guangdong is about the size of the United Kingdom geographically, but it has 120 million people. So in terms of demand, I think we have quite a significant amount of headroom. We have not seen anything to indicate any slowdown in -- we’re always looking at leading indicators and we’ve not seen anything to indicate a slowdown in the Mainland business at all.

Nic, did you want to…?

On economic capital, qualitatively, we continue to produce a strong operating performance. You’ve seen that come through other metrics. You see the contribution on IGD. But typically, we’ve produced somewhat between 16 points and 20 points each year, so I’ll let you rate that. Market effects were positive, albeit a little negative on the FX because currencies closed a little lower, or sterling was a little stronger than the point at the beginning of the year. We raised some debt. Of course, we paid the final dividend, but we feel good about the formation of solvency through capital in the first-half.

Gordon Aitken, RBC. Just a question, Mike, you said there was no need for a change in strategy. I was just wondering, though, there must be some areas, some products, geographies, distribution channels which you maybe were looking at over a number of years, or looking at now and say, I think we’ll just put a little bit more emphasis on that one and a little bit less emphasis on that. So if you can talk about that. And just in the UK, do you have a panel of reinsurers that you would use? And are they all based in the U.S?

On the reinsurance question, there’s multiple reinsurers we use and they’re based globally; they’re not all based in the U.S. We have a variety of players. And reinsurance is not a new tool for us in the UK, or even in the U.S. It’s opportunistical sometimes and it’s strategic and risk managed with others, so it continues to be available. The bulks that the UK business attracts, if you think of that market it tends to cut into different pieces, some on size, some on credit. And we tend to be the desired home for the larger or credit sensitive, brand sensitive bulks, so that continues. Is that fair, Jackie? There’s not a -- so yes, we’re not seeing anything unusual there. So reinsurance is available to us. We’ve used it, as you’ve seen. There’s not any difference there or any concentration with a given counterparty in it. On strategy, I probably neglected the African team a bit. We’re continuing to expand there. I think it is the next iteration of what we’ve learned and I think, from an earnings point of view, it’s not material to this meeting, but it is a chance for us to take a new market with emerging middle class and digital and emerging bank trends and go in there, with everything we’ve done in Asia and other markets, to produce good solutions for clients and build something that we know is scalable. So there isn’t an appetite to artificially accelerate that, but we’re looking at lots there. From a product point of view globally, it depends on the partner. I referenced this earlier. I think we have to be careful that the well-earned relationships we have, with distributors and with clients, that we don’t let somebody else come in and take as they mature in assets and in demands. So we don’t intend to let that happen. So part of that is some big data work where we take a look at our clients, at some of our relationship clients, and make sure we have the right product set in front of them to keep those relationships. That’s true of agency; that’s true of bank; that’s true in the U.S. that -- I use the term sometimes share of wallet. But there’s also a household share of wallet. If they have made a selection to trust us on something very emotional like protection, and we have asset management capabilities or we have some protection products that they’re not buying, we are the logical place for that advice provider to go again. So I want to make sure we cover that. I don’t want to get in to specifics; I don’t want to brief competitors on this as well. But you’ll see us follow the clients. I think there’s a fair expansion of the strategy. And again, part of that is by channel and part of that is how you do it technology-wise; there’s a lot of elements to that and we’ll keep you abreast on what we’re doing there as we do it.

Abid Hussain, Société Générale. Just one question, please, just coming back to the Department of Labor, what are your options if the Department of Labor decides to abolish the payment of upfront commission, especially given that VAs are a push product?

So B share mutual funds are a push product, I think if you asked their broker dealers at the time. And I think, again, one of the things that define what an advisor sells is our alternatives. So if there aren’t -- and I think one of the pieces of advice that the DOL got I thought was from a regulator was, let’s come up with a set of standards that apply, qualified or non-qualified, which is, we shouldn’t have better advice for qualified money than socially is allowed outside. It’s an interesting discussion; the federal letter [ph] is fascinating to them. But if the commissions are levelized, the question is, does the consumer see value in what we’re offering. We have advisors now that are effectively on a trail. Some of our other share, L share products and things, they could clearly pull those assets out and roll them into a frontend commission product if -- it’s not good business, but if that was their character they could do that to a competitor; they couldn’t do it with us. But you’re not seeing that behavior. I think the product has tremendous value and, if the advisor gets paid differently on it, and that’s the only option in the market for qualified plans, then that’s what will happen. Will there be a change? Yes. Will it require good wholesaling to change it? Yes. Mostly on process; this is very material. These changes have infrastructure implications, so those who’ve done the US tour, those boring tours of the data center and the IT people talking about having one product, that’s a lot easier to address if you need to do a pricing change than if you’ve got dozens, just the reality of technology. So who’ll get there? Who can design a product correctly? Who can get it back into the advisors business? Barry’s team is already working with all of our key distributors on plans, some more detail?

Yes, absolutely. You adapt, in a word what you do is you adapt. As Mike said, we’ve gone through changes in the past that have the potential of being more disruptive than this does. You’ve got a lot of the VA product that moves from the United States already from various different providers through fee only; 25% of the market or something is fee only already. So we survive this, we re-tool and, as Mike said, the process of re-tooling for us is less complicated than it is probably for any of our competitors. We’ve got a high quality platform and we’re more nimble. But the real concern is that, again from a substantive perspective, set aside the commercial impact, it’s bad for consumers. These products exist, they are important. They have a right to exist. Living benefits with guarantees: the living benefit guarantees that we’ve put on these products are extremely important and the further you go down the socioeconomic food chain the more important those guarantees are. These products will exist and I’m convinced, again, back to the political point that what’s going to happen is not going to be extreme. I think there is too much bipartisan acknowledgement that the way this initial draft has been pulled together is, there’s a little overreach here and it has unattended consequences.

Ming Zhu, Canaccord. Two questions, please. First one is on the UK. You’ve had very strong retail new business growth and because of the delaying decisions from the retirees. I just would like to have a picture in terms of going forward, what’s the sustainable growth you think you can achieve, and how much growth you think you need in order for the new business profit to be sufficient to offset the runoff and back book, please? And my second question is on M&G. With the outflow you’ve experienced in your optimal income fund, you’ve guided further outflow in H2. Could you give some sort of feel in terms of when do you think the outflow will normalize, and what actions are you taking in terms of, are you launching new funds for the growth of your focused market in Europe?

Jackie, do you want to take the first part of this question and then Michael the general outlook?

So you’re right, we have had very strong retail growth; on a net basis that’s up 25% half-year on half-year. Actually, if you break it down, the new product and the savings and investments product that we had in situ are generating about 40-odd-% growth being offset by the 56% reduction in retail annuities. In terms of the outlook for the business, we did see some pent-up demand in 2014, as you say. Some customers did delay their decisions more generally. Most of those customers, my view, and it’ll a take a while for the trends to stabilize, most of those customers will be individuals looking for cash. So like much of the industry, we saw a quick uptick in the dash for cash in the few months and that’s starting to slow down quite considerably. Actually, if you look at 2014 and then early 2015, we’d seen such low levels of people actually exiting products across the industry. But I think some of that pent-up demand was really just 2014 demand working its way through the market as a whole. In terms of outlook, if you’re going to look at, in terms of our own positioning against pension freedoms, I think my colleagues have talked about making an opportunity out of change and that’s what we’ve done. We’ve really said, change is coming, how do we best position ourselves? We’ve got the [fabulous] franchise, great retail band, really good investment proposition, huge love amongst our existing customers and external customers. So how do we best position ourselves for that? And so we focused on a range of savings investment type products and we’re having considerable success in those. You would have seen income drawdown, those who are no longer [annuitizing] tend to go into an income draw down product. We issued a flexible version of that drawdown product back end of last year. It is advised only at the moment, there’s a plan to move on to non-advised version later this year, and our sales are up about 228% against the product. We are attracting new customers, new advisors and new intermediaries. Equally, you look at our existing bonds product, 20% growth, individual pensions I think about 125%. So there’s very broad-based attraction around the existing savings and investments products as people change the way in which they look at retirement and they no longer look at it as a point in time but a transitional period. The other thing I would point to is, alongside, there’s been a lot of focus on pension freedom and what it meant for annuities and the reduced need to annuitize. This focused on the ISA allowances and those were obviously raised very significantly. We talked about PruFund ISA so we wrapped in a different savings form to our existing PruFund product, and that’s had an incredibly fast launch. So GBP260 million of assets under management after we launched in February. That’s not just new savings into an ISA form, a lot of that is actually transfer business. And that’s attracting, in majority, actually, money that’s sitting currently in cash ISAs. So actually, if you step back from all of that and say, what is the outlook? I’m very bullish, actually, about the amount of momentum in the business. I think, as the comparatives start pulling back with retail annuity fall off, the first quarter obviously still had the pre-budget changes in it, you will see that growth rate continuing to escalate.

Michael, on funds?

Yes, on optimal income, particularly, the bond bandwagon has run out of steam and we are not alone. You’ll have seen other large players in the market having significant net redemptions from this asset class. It’s very difficult to say when this is going to stop and, to some extent, I could bounce the question back to you, which is, what do you think is going to happen with long-term interest rates and fixed income markers generally because, of course, they started to yield negative returns. And you can construct a range of scenarios from, markets staying roughly where they are, to actually having falling out of bed yields backing up quite significantly and suddenly perceptions of value reemerging. And it’s very difficult to know what is going to come to pass. At the moment, I have to say to you, we don’t see any change in the trend in relation to optimal income. But ,of course, it’s a game at M&G, not only of what happens to funds where net outflows have been experienced, but what also happens with other funds, which are going well; for example, our multi-asset range of funds are performing extremely well, property fund is still seeing a lot of interest. Frankly, our equity fund range is performing disappointingly, on the whole, with some bright spots at the moment. And that’s another question which you have to ask because, of course, we’re living in markets where equities that deliver perceived safe growing income streams are being -- stocks that do that, are being driven to very high value levels which is actually not where we’re playing. And that’s why we’re getting some poor performance in some of our funds. Again, we’d expect that to change at some point, but I can’t say when. So I’m afraid it’s an uncertain picture. We are seeing some good areas of interest away from the Optimal Income Fund, but I can’t actually give you any precise prediction on timing of when this will all come back into balance.

Andy Hughes, Macquarie. Couple of questions, if I could? The first one is on the DOL stuff and what it does for the product. I’m not sure I completely understand what you’re saying because my understanding of the product is it’s kind of reliant, in the U.S, on lapse rates. And so, if you move to a levelized commission structure with much lower lapse rates across the industry, presumably you have to drop what you offer the consumer dramatically under the current product. Second question is on Asia and the trapped capital. I’m trying to understand what that means; is that the reason behind the 2 times coverage on IFRS? What is the statutory surplus coming out of Asia in H1? And what options do you have to access this retained surplus in Asia? I presume you can use it for M&A, but is there any other options to unfree the surplus there? Thank you.

I’ll take the DOL one and, Nic, do you want to take the financials for the [generic] question. Perhaps you could address the dividend piece as well. Andy, there are now registered advisory based with living benefit products in the U.S. One of the larger distributors, Linsco Private Ledger, asked five companies -- five or six companies to build them one. It hasn’t had material traction yet, it requires different pricing, different option strategies, which, again, are not outside of our core capabilities. But there are other structures that -- let’s get the rule and then we can tell you what structures work in it, but on a levelized product you have a couple of new variables but they’re not difficult to -- think of it as a product with its rental charge expired. Similar characteristic, to oversimplify it, is that -- Chad, is he wincing? No, he’s not. Yes, I think that’s the simplest way to think about what it gives us from a liability point of view. So again, it’s not something we haven’t seen before or can’t deal with. Is it the optimal structure for value for the consumer? No. In any product, fixed index annuities, VA, the longer the client gives up liquidity, the more we can provide in the terms of value. And again, that’s a discussion that’s part of the case for the DOL. So we’ll see how that turns out. On dividend cover, it’s not related to Asia. It was a pre-Solvency II, so it’s not a -- do you want to address the [IFRS] context?

Yes, let’s just be clear, there is, subject to a small caveat which I’ll come back to in a moment, there is no trapped capital in Asia. If you look at our free surplus disclosures, you will see that we have, in our life businesses, 2.6 billion of net worth, backing our own levels of required capital of 1.2 billion. The accumulation of local regulatory is under 1 billion; we tend to use a high measure. So all of that 1.4 billion is available, why do we keep it there? We keep it there to fund business; we keep it there because we like nicely capitalized businesses. And I have said before, if you want regulators to allow you to move capital freely then you have to be responsible. When times are good you don’t take everything out so that when times are less good they allow you to take stuff out. That’s the responsible behavior. The only caveat is that there are a small number of businesses, and we’re talking of a couple of hundred million of that 1.4 billion, where the accounting reserves are negative because they are growing, so in the start-up phase they will incur losses. Eventually, profits will come through and remove those losses and, therefore, you’ll have distributable reserves on that basis. But given the very strong growth that we’re seeing in IFRS, within 18 months or so we will grow ourselves out of that little constraint. If we needed to access that very quickly, we could restructure the capital. So there are no constraints, capital can flow freely.

It’s Lance Burbidge from Autonomous. I’m afraid I’ve got some questions on the DOL as well. This is a relatively simple one; you talk, Mike, about releasing the levers to control sales. I just wondered, presumably those levers are increasing the price, so reducing the price presumably would reduce your profitability of new business. And I just wondered, as a follow-on to that, if the price comes down in a market that much, what threat is there for your in-force book, which is obviously the big driver across it currently. And the second one is for Tony on Hong Kong. What is the major driver of Mainland Chinese actually buying a product in Hong Kong? Is it price, is it product that’s better than in China, or is it diversification from a currency perspective?

Okay. So, Lance, on the DOL, some of the in-force levers, if you remember, is we pulled down available guarantees, so that actually increases the profitability of the product, if we were to go back that direction. And, again, not trying to do a primer for what competitors should do in this climate, but if you think about some of the things we’ve done in the last three years, if we reverse some of those, it actually improves the margin on the product. So it’s a little counterintuitive. It’s going to depend on what makes sense for the consumer and the structure we have, but I think that’s directionally the way to think of it. On the in-force, there has not been, in my 30-plus-year career, a retroactive treatment of policy and so, again, that’s an interesting question of would the DOL do that for the first time, possible, highly disruptive. If you think of if I had a real estate partnership in my retirement account, I can’t meet some of the requirements in this for liquidity, dealing advice, etc., so am I supposed to sell an illiquid asset, pay the tax on it. It’s hard to imagine that that will be the intent or the outcome. It’s possible, again, in details but I don’t think it’s the realistic outcome that we’ll get. So this comes back to, why does the quality of product matter? Why does how you service the client matter? Why does having the advisors feel like you protect their reputation? We have a very happy back book. These clients have made a lot of money with us and done far better than they would have any place, and the value of the variable annuity has been demonstrated to them. So we don’t have attention of the clients where they’re, a looking for a way out or, as we’ve told you, we want them out or don’t view any of the relationships as particularly profitable. Measurement of that would be our openness to additional premium in the various vintages. So it is a little more payback for having done the right thing for the consumers across the cycle. It gives us options that, again, I think some folks may be a little more challenged with. But I don’t think you’ll see retroactive legislation. It’s very, very rare in the US. It’s happened one time and, again, in the fund space and it was on share class application and it wasn’t -- it was just an enforcement ahead of policy, just said go back and give your clients whatever you should have, sort of thing, once. And it was a very odd, very political heated climate on who was the proper regulator and we all complied. But that’s the only one I’ve seen in my career. So I’m not anticipating that it’s disruptive for our back book. On Hong Kong, they’re just general -- that’s for Tony. The vast majority of our premium there is recurring. You’re talking about 8,000 to 9,000 average transactions. You want to go -- you’ve all heard the film -- the process is well established, both from a consumer and our side, but can you provide a little color around that.

Yes. I think you might have answered your own question, why are they buying. They’re diversifying away from other assets that they may hold in the Mainland. They are buying other assets as well. It’s not just insurance that they’re buying in Hong Kong, they’re buying real estate and so on and so forth. Do not underestimate the power of a trusted brand to the Mainland Chinese. Our name in Chinese is, which is UK Prudential, and that is a very important component of our value prop to these people and they’ve been -- so, its diversification and it’s a trusted brand.

Okay, great. Well, thank you very much for your time and your attention and appreciate the questions. We’ll see you January 19; we’re going to host an Investor Day. I hope you’ll be able to join us. We’re going to be here in London, give a little more depth into the strategy and some other elements of the business. We’ll be able to give you details on Solvency II at that point. So again, thank you for your time and attention.

Ladies and gentlemen, this concludes today’s call. Thank you for joining, you may now disconnect your lines.