Prudential PLC (PUK) 2007 Q2 法說會逐字稿

Good morning and welcome to Prudential's 2007 interim results presentation. I think you all will have seen from the numbers announced earlier this morning we've got a strong set of results. In Life insurance we've seen excellent growth in Asia, continued strong gains in the U.S. variable annuity market and very good progress with our delivery plans in the U.K. as well as good growth and returns in the retail business. And in Asset Management both M&G and our Asian fund management businesses have excelled again.

I'm going to start off with a few brief introductory comments then Philip will put the numbers in context and then I'll come back and give a broader and wider update on the business. We have here as usual my colleagues from around the Group, Barry, Clark, Nick, Philip, Andy, Sandy, Philip, David and they'll all be very happy to join in the questions as needed at the end.

First and I think this slide clearly demonstrates, the Group has continuing delivery and positive momentum. When you put the half-year figures into the context of the last couple of years you see a continuing trend of strong delivery as we focus on executing our retirement-led strategy. It's a strategy that is already generating both excellent results and creating substantial long-term opportunities.

Over the next two and a half year period you can see the positive growth in profits, not only in terms of EEV operating profit but in IFRS profit as well. These numbers are clearly for continuing operations and so they exclude Egg, which we sold in May.

And finally in the brief introduction, along with this strong growth in profits, the overall cash position remains firmly on the improving trend we've been talking about for some while now.

With that let me hand over to Philip who'll look specifically at the half-year numbers.

Good morning everyone. In my presentation today I'll talk about how we've achieved the strong results shown in this morning's press release. I'll start with some headlines and I'll then explore in more detail. But as Mark has mentioned, all of the main metrics have moved forward strongly. We've seen a 39% growth in total EEV operating profit on continuing operations to over GBP1.3b. IFRS profits on these operations is also up with a growth of 27% to GBP601m. New business premiums were up 12% on the APE basis. New business margins were steady at 40%, giving a growth in new business profits of 12% also to GBP534m. And we had a positive operating cash flow of GBP34m in the first six months of the year. Our interim dividend of GBP0.057 per share represents a 5% growth on last year and is in line with the dividend policy announced in March and it also reflects the continued improvement in the Group's generation of both cash flow and profit.

I'll talk you through sales, new business profit and margin as well as IRR for each of the three insurance businesses starting with Asia. Sales in Asia have powered ahead yet again. APE sales up to GBP619m, an impressive 48% growth on the same period last year at constant exchange rates. And remember that 2006 wasn't a weak comparator either, with the Half One sales having been up 35% on the preceding year. Asia's the largest part of the Group, contributing 46% of the sales in the half.

We've produced a strong growth in the first half of the year in particular from Taiwan which contributed growth of over 100% as a result of the high sales of a new retirement savings product. Sales were boosted there by the initial response to the launch of a retirement campaign What's Your Number and the growth in Hong Kong is also due in part to a similar campaign and improved bancassurance sales. India has also performed well in the half year with growth driven by further agency recruitment.

And looking forward to the second half of the year, while we expect continued strong growth we expect the growth rate over the full year to be lower than that which we've achieved in the first half.

The overall proportion of unit-linked sales across the region continues to increase. It was 72% compared to 68% in the same period last year. And new business profits were up 31% to GBP282m reflecting a fall in margin of 46% that I'll talk about in more detail in a moment.

In Asia we continue to target IRRs at a country level at 10 percentage points ahead of the country risk discount rate. And those vary from 5.3% to 17.5% depending upon the risks in each of the countries. In aggregate we exceeded an IRR on new business capital of 20% against average risk discount rates of 10.1%.

So looking as I said at margins in Asia, we look at returns in each market individually and we seek to maximize growth in new business profits. And we're very pleased with the 31% growth in this half year against our target of doubling the 2005 EEV new business profit by 2009. In the short term we'd expect margins for the full year to be at and remain at or around the current level. We've given the usual disclosure of margins by country in the schedules, you'll find them in Schedule 4, but in summary we've seen new -- strong new business growth at a country level and generally have maintained, or in some cases exceeded, margin at a product level within each country.

If you look then at the elements of the average margin reduction, 4% of the reduction can be explained by changes in country mix. In other words, this year's country mix of sales of last year's margins gives rise to a four percentage point fall in margin to 48%. And additionally we've made some specific decisions to reduce margin temporarily to support new product and channel initiatives, giving rise to a further two percentage point decline. Most significantly, and the largest element of that decline, arises from the launch of the VA retirement product in Taiwan that I referred to earlier, which was accompanied by a 30-day launch offer that generated the strong sales growth and which had the effect of lowering margin in Taiwan for the half year to 42%. However, we're pleased with that overall level of margin and the growth that's been generated by a capital-efficient linked product.

Moving on to the U.S. where Jackson sales have continued to grow, up 20% to just over 350m. The increase was driven by higher sales in variable annuities and in institutional business. Jackson continues to stay ahead in the VA market with its development of product features that meet changing customer demand and they combine this with impressive speed to market.

As you can see, average margins in the U.S. have held steady. Jackson wrote increased levels of VA and institutional business which had a positive effect on the average margin. But at the product level we saw a slight fall in the margin on new VA sales due to the change in take-up on some of the product features. And Mark will talk more about that later.

New business profits grew almost in line with the growth in sales at 18% up over the same period to 144m. And the average IRR on new business written by Jackson was 18%, in line with last year and reflecting the attractive returns on their business.

Looking now at the U.K. and first U.K. retail. U.K. retail sales increased by 10% over the same period last year, driven by sales in individual annuities, with-profit bonds and corporate pensions. Our sales focus in the half has been on the higher margin products in line with the move away from unsustainable low margin products that Nick highlighted in his presentation here back in March. Retail margins are up three percentage points from 29% to 32% and the retail new business profits reflect these dynamics with a growth of 21% to GBP115m for the half year.

In the U.K. wholesale business though the Lloyds TSB Credit Life contract was not renewed and the two large bulk annuity transactions in the first half of 2006 create a tough comparator for the entire U.K. business. As we've stated before, bulk annuity transactions and the flow of them remains lumpy and the timings are uncertain. But we do have the Equitable Life with profits annuity transaction to be completed later this year with APE in the region of GBP170m.

With the low level of wholesale activity recorded in the first half compared to last year overall new business profits are down 22%. But the weighted average post-tax on IRR and the capital allocated to new business in the U.K. was 15%, partially driven by the high proportion of individual annuities. And this is above our target of 14%.

Looking now at the in-force result. Total in-force profits grown strongly. Online has increased by 17% to GBP617m, generally due to higher opening embedded values and increases in risk discount rates, although as the detailed schedules show, in some places the RDR has fallen. You'll see the overall net effect of assumption changes is a positive GBP95m, is primarily related to positive tax changes in Asia and the U.K. and the effect of the change in U.K. corporation tax projected forward gives rise to a GBP67m positive assumption change for the U.K.

Experience variances across the Group are also positive at a net GBP53m. Just picking up two for comment, Jacksons' positive spread variance of GBP53m, a decrease on the same period last year of GBP7m. It includes about 23m of non-recurring items like make-whole payments, mortgage pre-payments and so on.

And secondly the other item in the U.K. includes a number of exceptional items totaling GBP30m, mainly costs associated with new product and distribution development and certain costs associated with complying with continued regulatory change. And perhaps it's also just worth commenting that in the U.K. persistency and expenses are running in line with current assumptions and we're on track to achieve the required cost reductions to support our current expense assumption.

EEV shareholders' funds next and the usual waterfall chart for your reference. EEV shareholders' funds have grown 13% over the last six months and now stand at GBP13.4b. The new business profit as a percentage of opening embedded value was 4.5% reflecting the high growth in our new business profits in Asia and the U.S. And generally the non-operating items also contribute to the growth. Short-term fluctuations in investment return a positive GBP241m and also positive economic assumption changes of GBP253m and the different elements are explained in the OFR. Finally EEV per share was GBP5.45 compared to GBP4.86 at the year end.

Looking next at Asset Management where the businesses go from strength to strength. The graph on the left shows funds under management aggregated for M&G -- external funds under management aggregated for M&G and the Asia Assets Management business. They've grown from GBP57b to GBP63b, an 11% increase driven largely by net fund inflows. And looking at the profits of their two biggest operations, M&G continued its strong performance with a 40% increase in profits to GBP140m. That includes an increase in underlying profits to GBP127m and GBP12m of carried interest from the private equity arm PPM Capital.

M&G's performance is due to strong net new business flows and the successful development of other -- revenue streams from other activities. First half profits were boosted by GBP5m or so of non-recurring items and in the second half M&G also expects to incur some anticipated project costs.

The Asian Fund Management business profit grew from GBP20m to GBP33m, demonstrating the strong momentum of the businesses across the region.

Looking next at statutory operating capital -- sorry, statutory operating profits for the Group as a whole. Total IFRS operating profits grew 27% over the same period to GBP601m. In the U.K. profits grew 22% to GBP251m due to improved terminal bonus rates on with-profit business and growing annuity activity. The 9% growth in operating profit from the U.S. to GBP225m reflects a higher VA fee income resulting from strong sales and also market appreciation.

Asia overall saw a 6% increase in operating profit to GBP109m. There was a fall in the Life business IFRS profit. It's really a reflection of our success and primarily due to the high growth of sales in the region and in particular the expansion costs incurred in India to support its rapid growth. The current pace of growth in India is capital-intensive and its capital requirements are likely to continue. As I've said, M&G's profits were up 40% and total profit from both M&G and Asia Asset Management businesses was GBP173m.

Looking next at cash and the holding company cash flow, and as usual I'll run through the key components. The U.K. Life fund transfer rose in 2007 to GBP261m. This reflects our share of 2006 profits paid in 2007 and we'd expect the Life fund transfer to be paid in 2008 to be at a broadly similar level. Asia has increased the cash remitted back to the Group. We've injected into the region about GBP70m, that's more than offset by GBP86m remitted back, giving the net figure you see on the chart of 16. And you'll see that the capital remittance from M&G has increased in the first half to GBP75m.

In addition we saw a very high take-up of the scrip dividend option earlier this year and that together with the granting of some staff share options gave the Group an additional cash flow benefit of GBP119m.

Jackson has yet to remit cash back to the Group, although a remittance of 300 -- sorry, of $230m is planned for the second half. Clark was getting worried there for a moment.

Looking now at the cash outflows. We've invested GBP69m in the U.K. business in the first half and we expect to continue to invest up to GBP160m in the year -- full year. The U.K. shareholder-backed business still expects to become cash flow positive in 2010, subject to the mix of business written. Tax received represents Group relief surrendered to the holding company and this amount at present effectively nets off the corporate level costs of the Group. And the cash flow relating to the dividend reflects the increased impact of the enhanced dividend growth declared in March. And overall this gives a holding company operating cash flow of GBP34m compared to a GBP94m outflow this time last year.

Finally we received GBP0.5b in cash from the sale of Egg and that further increases the Group's cash position and we remain on target for the Group having a positive operating cash flow in 2008.

The structure and make-up of the Group has real diversification benefits, which both reduce the volatility of our profits and improve our capital position. Diversification is a core focus of Solvency II, the draft directive of which was published in July. The industry has got some way to go in terms of continuing dialog with the regulators in determining exactly how it will be applied but the opportunity for greater capital efficiency within broader-based groups is material and we expect the rating agencies to continue moving towards this approach in their models.

We actively manage our economic capital using our own internal model and from it we determine that we have GBP4.5b of available capital and a fully diversified capital requirement of GBP1.6b giving us an economic capital surplus of GBP2.9b. And we estimate within that total that the benefit we get from geographic diversification is about GBP1.3b. We see this as real balance sheet efficiency which we get from actively managing the diversity of product and market risks to which the Group is exposed.

But that's obviously -- Solvency II is somewhere in the future and a quick word on the regulatory capital position under the current financial conglomerates directive. We expect our regulatory capital surplus under the directive to be in excess of GBP1b at the end of this year.

So in summary, in a strong first half we've seen profitable growth from the U.S., from Asia and from the U.K. retail insurance business. Our fund management businesses continue to perform strongly across the Group and the Group's cash flow positive for the first half of the year before adding the proceeds from the sale of Egg.

And I'll now hand back to Mark to give his view of the opportunities that the Group has.

Thank you Philip. As Philip as shown you, we've delivered an excellent operating performance in the first half. And that performance is based on a strategy that is focused around the opportunities in the global retirement market. The retirement market represents one of the most significant and important global trends in retail financial services. And this slide highlights the scale of that opportunity across the regions in which we operate.

In Asia where we're already generating more than 50% of the Group's new business profit, the potential is huge. Here the retirement opportunity is shaping our thinking more and more, with a growing realization by individuals of the need to save for retirement and of the importance of protection.

In the U.S. Jackson has built a great model to address the needs of pre and post-retirees. And as we explained in March, our strategy in the U.K. is very much centered on our strengths in the retirement market.

In fact we are wonderfully well-positioned to exploit this opportunity to the full, both in absolute terms and relative to our competitors. Our brands have excellent reputations in the retirement space right across the territories in which we operate. Our risk management skills and in particular those around mortality, long-term guarantees and asset risk are core capabilities that stand behind the brand. And all of these skills combined together give us the ability to deliver products that meet the changing needs of consumers.

Of course delivering the specific products to meet customer needs will vary by market. But we've got a huge breadth of thinking, knowledge and expertise to draw on from around the world. We can use that to our advantage in local product development in both the accumulation and decumulation phases. And we've got powerful and diversified distribution to bring those products successfully to market.

So you can see why we regard the retirement market as a huge opportunity and it's a market where we feel we are well-equipped to compete across both our insurance and asset management businesses and indeed to take an increasing and profitable share at the same time creating -- continuing to create a sustained value for our shareholders.

So having said that let's look into a little bit more detail at the drivers behind the numbers that Philip took us through. Turning first to Asia. As you can see on the left-hand chart, new business volumes are double where they were in 2005. On the right-hand side you can see clearly that we have not compromised on the quality of the business as new business profits are up strongly with a CAGR of 32%. You can also see that we're well on track to deliver the target we set last December of at least doubling 2005 new business profit by 2009.

This slide shows where the growth in APE has come from comparing Half One '07 with Half One '06. This, as you can see, is pretty broadly based and clearly demonstrates the breadth of our Asian portfolio. We are not dependent on any one market for growth, even allowing for the exceptional success of our Q2 campaign in Taiwan.

Now I'm not planning to go through each of the bullets but I do want to mention our operations in India. Much has been said and reported about India recently in the context of the ICICI IPO and all I want to add to that weight of information is that while the current scale of the business we have in India is impressive, there is a lot, lot more to come.

The rest of the bullets give you some color around the different drivers of growth and it's this very diversity that makes our Asian operations so unique and so powerful and puts us in a good position for continued strong growth.

I'd just like to give you a quick summary of what's been happening on some of the initiatives that Barry set out on the Asia Day in December last year. Starting at the top, there's nothing really new about building agency scale and improving productivity but they continue to remain very high on our agenda. Agency scale is more of a focus in our geographically larger markets - India, China and in Indonesia in particular. And building our agency forces to cover these huge populations will take a number of years and they've only really just got going.

In other markets the priority is driving productivity through a combination of effective agency management and support together with improvements in agents' training. Successful partnership distribution is a key strength of ours. I've mentioned on this slide the addition of the two new bank agreements -- significant bank agreements in Korea because of their potential materiality. We expect both of these to come on stream later this year. We've also added this year some additional distribution in the region through Citi that came with the Egg deal.

On the new initiatives Barry mentioned back in December we're making some really good progress. I'll talk about retirement in a second or two but first let me cover the other two areas on the slide. The bottom of the slide here. Firstly deepening customer relationships is about bringing a much more disciplined and systematic approach to the cross-selling and up-selling and up-selling of products to our 8.5m customers in the region. Three markets already have specific plans in place, all launching in the next few months.

And second, our expansion of the Accident and Health business. In the first half of 2007 we have launched a number of new products and new business has already increased by over 60%.

So returning to the retirement theme, we've developed a very innovative approach in Asia to meet the growing needs and demands in the retirement market. At this stage it's focused predominantly on the expansion of retirement savings and you will recall from past meetings that we developed the What's Your Number campaign in Korea following in-depth consumer research. This approach really engages individuals about thinking about their retirement requirements. And it also gives the agency force a chance to advise their clients as well as providing the potential for sales in other product areas.

On the back of our success with this in Korea we've launched new campaigns in both Hong Kong and Taiwan over the first four months of this year. In Taiwan that coincided with the launch of a variable annuity product and as the numbers that Philip has shown you earlier demonstrate, the immediate take-up was very strong. It's a fantastic short-term success but it also represents a longer-term growth opportunity for us because we've created some clear differentiation.

This is just one example of the benefit of leveraging our success in one market in the region to create opportunities in other markets. The design and implementation of the variable annuity product to back the launch was supported by the expertise we built in that product in the U.S. market. Our Asian team was able to draw on this world-class expertise to significantly shorten their time to market.

So continuing that U.S. theme, on to Jackson. In the U.S. we are seeing the continuation of our excellent growth record in variable annuities with new business ahead 31% in the first half and that's against an overall VA market that has grown around 8% in the five months to the end of May. You can see that we are more than delivering on our prediction to beat the market but as Philip made quite clear, this is not at the expense of margins or returns. This performance reflects a proposition based on a combination of advice and customer choice, rapid product innovation, world-class service and low costs, not on price. It's a model that has proved exceptionally difficult to replicate and one that clearly differentiates Jackson in the market.

We also continue to build out the distribution capacity of the business and increasing the number of internal and external wholesalers. The number of external wholesalers has increased by 30% since the start of the year.

Alongside this growth in wholesaling teams, productivity also continues to improve. And that's on a base of having already one of the most productive wholesaling teams in the U.S. market.

We've also continued to develop our product proposition and in the last six months we've added 13 new fund options, three new guaranteed minimum withdrawal benefits or GMWBs and our first guaranteed minimum accumulation benefit or GMAB. Continuing innovation is key and we've got the flexibility that allows us to bring new products to market very efficiently.

As well as the excellent growth in VAs, we're maintaining our market position in both fixed and fixed indexed annuities.

I've just said that product innovation in the U.S. remains key and that's because of the rapidly changing nature of the market. If you look at the growing demand for GMWB options on Jackson's products over the period since 2003 you can see there's a change in customer behavior when buying a VA. This option has become dominant as the product has become an integral part of U.S. consumers' retirement planning. GMWBs allow the customer to receive a guaranteed minimum benefit stream. This can be for a minimum number of years or they can continue for life.

Jackson now has a total of over 2,100 benefit combinations and seven GMWB options and all of these options are available from one platform under the Perspective II banner.

As we said before, the fact that we can remove or add benefits under the same overall product structure gives us a real advantage over the competition in terms of speed particularly to market.

Delivering choice at the point of sale is what both customers and advisers want and we've got the skill to price the risks individually and on a market-consistent basis.

So all in all an excellent first six months for Clark and the Jackson team.

In the U.K. we're continuing to make good progress overall. Our focus on value continues to show through in the very strong margins on returns on new business that we reported today and we're well on track to deliver the changes to the business that Nick set out at the prelims in March. The growth in the retail business, as Philip said, is driven principally by our strong retirement income positioning and this growth is underpinned by our internal vestings pipeline that you'll be familiar with, and by our partnership business.

You will have seen this morning that we have agreed a new distribution agreement with Barclays. This agreement is to be the preferred provider of convention annuities into Barclays retail branches in the U.K. for a five-year period. It will go live in the second half and for us is a very exciting and encouraging addition to our growing partnership channel.

In terms of retirement savings, we're getting on with our planned transition away from uneconomic front-end loaded products towards trail-based products that are built around our multi-asset capabilities. We've already withdrawn from the commoditized protection market and from front-end loaded and individual pensions and this month we're going to launch our factory gate priced unit-linked bond.

At the same time our sales of with-profit bonds continue to show healthy growth and this is certainly due in part to a wonderful investment performance. In the recent WM 2006 survey our with-profit fund was ranked first, based on gross investment returns over one, three, five and 10 years, which is a fantastic record.

Last but not least on the wholesale side, the securing of the Equitable deal will give us continuing new business profits from this area and it allows us to be selective about the other business that we write.

As you know, a further reduction in U.K. costs is a key part of our U.K. strategy. By the end of 2007 we will have taken all of the actions to deliver GBP115m of the targeted GBP195m cost savings that we previously announced, and that's in line with our original estimate. We're also making very good progress in determining the best approach to deliver the remaining GBP80m. We've narrowed down the options here and we're currently working with an internal team and two external suppliers to determine the most appropriate mix of offshoring and/or outsourcing. We remain on track to conclude that process around the middle of the fourth quarter.

Our work on the inherited estate and our discussions with the nominated policyholder advocate Peter Bloxham are also continuing in line with plans and again we'll be in a good position to say more on this in the fourth quarter.

Our Asset Management businesses not only continue to deliver value to our insurance operations but they also continue to grow rapidly in their own right. Philip showed you the profit growth earlier. It's a tremendous performance but as you can see here at M&G, revenue growth is coming from across all asset classes and that shows the real diversity of that business.

We saw record net sales in the first half of 2007 with a strong contribution from the overseas businesses here, which accounted for roughly two-thirds of those net retail sales. M&G also continued to develop its higher margin wholesale presence in leveraged loans, structured credit, infrastructure investment and tactical asset allocation. These are all really positive developments as M&G continues to build out its model.

In Asia you can see the significant development of IFRS profits. They were up 65% compared to just 12 months ago. On the right you can see some of the main retail fund launches during 2006 and into 2007. We're operating now in Asia across the whole range of asset classes and across 10 markets in total. And as you can see here, demand has been very strong.

Let me give you a couple of examples of that. In Taiwan our Asian Infrastructure Equity Fund reached its cap of $450 on day one of launch. And in India where our joint venture with ICICI is the number one asset manager in the market, the Equity Derivative Fund has early attracted investment approaching $700m.

As I said, we only expect the appetite to invest in our funds to grow. We're already the second-largest retail fund manager across Asia and we are looking forward to building materially on that success as we go forward. This business is now a real driver of value to the Group.

So in summary, at the outset I talked about the significant opportunity that we see developing in the global retirement market. That focus is driving the continuing strong operating performance of both our insurance and our Asset Management businesses. As we go forward we are both ready and able to capture an increasing and profitable share of that retirement opportunity, right across the territories in which we operate.

Our focus remains firmly on extracting value from the Group as a whole and on delivering long-term sustainable profit growth for our shareholders.

That's all I want to say formally this morning. Again, what I'd like to do now is open up to you guys for any questions you'd like to have.

Morning all. Raghu Hariharan from Fox-Pitt. Just two questions. First on the U.S., obviously you had great success in the U.S. in the integral [broker] channel and with GMWBs. Could you give us a flavor of the competitive environment around the product and the channel and how it affects your strategy?

The second question was on the Indian business. Given that there's an implied market valuation for the ICICI holding company, my questions were 1) do you have to -- if and when the regulation changes do you have to increase your stake from 26% to 49% at market value and if yes would you stick to your stated strategy of doing so?

Let me take that in reverse order and I think I'll ask Clark to talk in depth, I think we have to limit Clark to an hour or so but I think we'll talk about the competitive environment in the U.S., particularly the VA side. In terms of India, I think it's all hypothetical. I think the -- we don't see any immediate signs of legislation changing in India. As and when that occurs we'll clearly make a decision based on the commercial investment reasoning and what we think is creating greater value for shareholders. But until that point it's a hypothetical question. Clark will talk about the U.S.

The competitive environment in the U.S. is pretty intense right now. You're seeing a lot of top of the cycle behavior, very competitively priced product, some GMWB structures and pricing that don't make much sense. Just remembering the general Jackson approach to the market, what we're trying to sell rather than pricing is product flexibility, product innovation, delivery of product for our wholesaling models. From the pricing standpoint, we've not been cutting the margins on our products, on our VA products at all and in fact most of our guaranteed minimum benefits are priced well above the market. We're normally on GMWBs priced about 30 basis points above the rest of the market, sticking to market-consistent type pricing so that we can fully hedge those benefits.

So I think a little bit of a market dislocation like we're seeing right now is probably healthy for that market in terms of reminding people that trees don't grow to the sky.

James, do you want to --?

It's James Pearce from Cazenove. A couple of questions. First of all, you said you're going to have 2.9b of excess capital on Solvency II. Will that actually mean anything in terms of share buybacks? You've been telling us for years that you've got excess capital but will it actually come back to shareholders?

Second, can you talk about the impact of equity market volatility on the cost of hedging for Jackson and whether that cost can be fully passed on?

And thirdly what would the mark to market be for the U.S. bond portfolio? Thanks.

Phil, do you want to talk about the excess capital?

Well Solvency II is not due to come into force until 2012. So we're really talking about excess capital under that model and what we might do with it is probably somewhat distant. But currently the Solvency I regime, the financial conglomerates directive, is what we manage to and we manage to the buffer that I described in my remarks. And if Solvency II were to be implemented on an economic capital model then we would consider then what we might do with the surplus capital that would arise under it. But as I say, I think looking ahead to 2012 for that is someway off probably for modeling at the moment.

James, we're not viewed as -- we don't view ourselves as hoarders of capital. If we have significant excess capital they will be deployed accordingly to shareholders. Clark would you like to talk about cost of hedging?

Well if you think about the incidence of the benefits in terms of the duration of the benefits that we write, we're mostly writing off the longer end of the curve. And if you look at what's happened really to the volatility curve over the last month or so is that it's inverted and so you've seen some increase in vol across the entire curve but most of the effect has been at the shorter end of the curve which is really not where we're in and out of the market anyway.

If long term vols were to go up now we're hedged against -- for our current benefits against long-term vols was there to be some sort of long term -- major increased long-term vols then we would simply reflect that in the pricing of new business.

James, what was the third, sorry, the third element?

What would the impact on the bond portfolio be of the market --?

Market U.S. portfolio minus $300m, mostly interest rate related.

Jon?

Morning, it's Sir Jon Hocking from Morgan Stanley. Can I ask a follow-up question to James on the capital front? What is the actual binding constraints at the moment on your capital position? Is it the FCD or is it rating agencies and how will that change over time?

And secondly on the -- on that point, what is your additional sub-debt capacity you have at the moment do you think?

The binding constraint I would say is and would always be the regulatory capital framework. That is after all always a hard number. We have to maintain currently a surplus, a positive surplus under the FCD, and as I said, the surplus will be in excess of 1b at the end of the year. In terms of sub-debt capacity, that again is a somewhat hypothetical question. Given the cash balances that the Group has at the moment, we have no plans to raise any debt in the market. And as I know from conversations at these meetings before, if one tries to give an indication of capacity that can be interpreted as an observation about debt-raising which as I say we have no plans to do.

Yes, good morning. Greig Paterson, KBW. You made a comment today, I think to the press in a conference call about being interested in acquiring in Asia. And I know you've got organic targets and I was wondering what you define as an organic acquisition versus a non-organic acquisition, if you bolt on a distribution channel or you call that organic and it might slow down the recent cash flow? That's the one question.

Second one in terms of Asia, you mentioned an IRR of greater than amount, I wonder if you could give us or quantify the actual reduction in IRR you've seen over the last two years in your Asian operations?

And then as just a third and last question, about two years ago you pooh-poohed the idea of entering the wirehouses and if I'm not mistaken at the end of the year you got into an arrangement with Paine Webber. I was wondering is that -- some distribution (inaudible), I might be wrong -- I was wondering what the impact on the margin would come from pushing distribution into that area?

Okay. Then again I think in reverse order and I think we entered the wirehouse market with UBS and that was specifically because of UBS's acquisition of Piper Jaffray. It wasn't done in a general looking at the wirehouse market, it was done because we were working closely with Piper Jaffray at the time and I think it was a logical step to take that forward.

In terms of margins, Clark, and volumes?

It's being wholesale using our regional broker dealer wholesaling force and there's no incremental cost, purely experimental. As Mark said, it was following Piper Jaffray after the UBS acquisition. We see UBS as being the least wiry of the wires. It's -- some consider it experimental but zero marginal cost.

In terms of -- it's a clever question, the second question, in terms of the reduction in IRRs considering we've never given the IRRs up or down, we've just said that IRRs remain 20% plus. I think they remain strongly 20% plus and we're immensely grateful for that.

In terms of M&A and I think it's worth talking about our general view there, both in Asia, as you mentioned Greig, and I think the U.S. as well. The situation hasn't changed. I think we've been looking opportunistically for acquisitions, mainly fundamentally bolt-on acquisitions in both territories. We see both in terms of where we believe in terms of the cycle, both absolute and relative, prices are expensive and we've not seen anything of value and we'll continue to look. But that's fundamentally what I've said I think for the last three years. We think in the U.S. particularly we have about $1b of excess capital, we have significant reinsurance capacity, we have -- and again the ability to leverage all of that allows us to think quite flexibly. But fundamentally we're concentrating on bolt-ons.

Andrew Crean at Citigroup. Can I explore a couple of areas but before that could I make a request, can we have a little bit more financial information on your two asset managers in terms of the revenues, because they are important businesses and just having assets and profits is a little limiting.

Two areas I wanted to discuss was firstly cash flow and dividends. You gave a chart last year about the positive cash flows in Asia. That together with the strong profits from Asset Management and the reduction in investment plans in the U.K. should give you very strong cash flows. On that, firstly is that chart on Asia still on track? And secondly given the fact you've got such strong cash flows, couldn't you accelerate the rate of dividend growth ahead of that time?

That was one area I wanted to discuss. The second area was this figure of 1.3b of benefit -- capital benefit from keeping together. Could you explain a little bit more how that's calculated? If the company split up I assume that the Asian business would be under Asian regulations and therefore would have a lower capital crumb. Is your analysis done based on if you split up but still were under the same regulatory regime?

In terms of the first question on cash flow it was a slide that Philip showed last year and I think Philip made the very clear statement that it wasn't a prediction in terms of the growth that -- I think the chart went out from 10% to 50% sales and I think we've seen 50%, effectively 50% sales in the first half this year. That was -- that wasn't a prediction at the time but I think is pretty accurate. And yes, we're totally in line with that. That remains the same. The mix -- I think the mix since then Philip has remained broadly the same.

Yes, a slight increase in unit-linked sales to 72% but that the profile that we showed of the cash generation of Asia at different growth rates remains not a bad predictor of what we think will happen.

In terms of the rate of dividend growth, Andrew, I think what we said in announcing our due dividend policy at the prelims was that our focus was clearly getting to two times earnings. We are continuing along that track with 1.5, 1.6 and I think once we get to those sort of levels I think we begin to have other conversations but I think we're aiming to reach those targets and then look at further flexibility. I think as you've said and I think as you've written we're certainly proceeding well on that track.

Philip, in terms of the 1.3b?

Yes in terms of the capital, I think in your question you were suggesting that Asia is -- if Asia were separate what level of capital would it require.

Regulatory capital requirements in Asia generally are lower than those under our economic capital model. But my view is if you were running the Asia business on a prudent basis you'd want a level of economic capital similar to that which we currently have allocated to it under our AA standard. So the -- that geographic diversification benefit comes from the Group as it's structured today, having the mix of business that it does and runs to a strong economic capital view.

Andrew, is that clicking with you?

Thanks very much. It's Blair Stewart from Merrill Lynch. Two questions please. Just on -- both actually on the U.S. You talked about bolt-on acquisitions, what exactly would you be looking at to bolt onto Jackson? Would that be product or distribution-led?

And secondly on asset quality, is there any change to the risk appetite of the Group in terms of the amount of packaged credit that you buy or the BBB corporate?

Maybe let me start, if I can again reverse that and Philip can maybe give you an overall sense of our exposure in those markets and then Clark can talk specifically about the U.S.

In terms of bolt-ons I think what we've said is that the bolt-ons will be contiguous with the current operations, so it will be something related to what we do. We're not looking to go into a vastly different field but fundamentally it would be consistent with what we're doing today. Philip do you want to --?

We commented a couple of comments in the press release around their asset quality and I think linked to appetite. First in terms of sub prime exposure out of 23b or so of assets in Jackson, 244m of that are asset-backed securities where sub prime is the primary collateral. Those are fixed rate and first lien collateral and with AAA quality and Clark can talk more about that in a moment. There's very limited exposure otherwise to other CDOs across the Group.

And in terms of the risk appetite, we commented also in the release that within the U.K. Life fund we entered into a substantial protection in June. We bought about 4b notional protection in the credit default swap market that obviously has provided some upside to the impact of the recent movements in spread.

As to appetite Clark, do you want to add anything about where new money is going?

Let's see, I'll address a couple of topics related to the assets. Start by amplifying a little bit on what Philip said, my figures being dollars rather than pounds. The -- I think the fixed rate first lien collateral point is important because most of what's gotten in trouble has been floating rate collateral and we have virtually none of that. Of the sub prime exposure that we have, we all know the rating agencies have been looking at this stuff very carefully. Moody's did not downgrade any tranches of any deals in which we participate. And S&P only hit two of the deals in which we participate, obviously not our tranches since we're AAA and still AAA but only -- we only have $25m worth of exposures to deals that any of the tranches have been downgraded by anybody.

The -- if we look at our Alt A exposure and cast the net a little wider, the Alt A exposure that we have, it's about $1.4b and that is all fixed rate collateral. That's about 75% AAA. The rest of it is A and AA except for $3.4m -- $3.7m of BBB. So nothing below investment grade.

The mark to market on the sub prime exposure that we have is about minus $12m and again part of that is going to be interest rate related. So spreads have widened some but the paper that we have has performed pretty well. We viewed this as an up credit trade.

In terms of our purchases and general approach towards assets this year, we've been pretty defensive. We've been pretty defensive for a while. Our view has been that corporate spreads were not sufficient to compensate for the risks in general. As a result we brought our junk exposure down to about 5.1% of invested assets and that's about 75% BB and 25% B. The BBB exposure on our books is about one-third of our invested asset portfolio, carefully selected. We're still a spread lender so we're still exposed to the credit markets but we've been pretty careful in how we do that and have stayed away from the lower credit quality tranches and looked for up credit trades. So --

Thanks very much. Can I just come back on the first question on bolt-ons? Presumably you wouldn't feel the need to buy anything in the annuity space?

Clark, do you want to comment on that?

The -- what we'd be looking for in terms of bolt-ons would be primarily back books where we can lever our administrative capacity at a good cash on cash return. Some distribution may come with that but if distribution is a substantial part of the pricing considerations then in my mind it's no longer a bolt-on by definition.

I would think that there may be some annuities that would come along with a bolt-on but the first place -- I don't want to rule those out but the first place that we would look would be Life insurance I believe. Because with Life insurance you get the additional benefit of the very stable cash flows that come from Life insurance and our assessment is that it's very difficult to write those at a good rate of return in any volume at present that you could actually in a normal market buy those as a back book at a better rate of return than you could write them at.

Now it's been difficult to do in the market until recently because properties have been bid up so much with so much liquidity in the market, so many people chasing property. So we continue to look at a lot and be extremely selective and if we find something good then we would jump at it. And if we don't find anything good then we're perfectly happy to sit on the sidelines until pricing conditions improve.

Good morning, it's Trevor Moss from MF Global. Sorry to return to this topic but just a little clarification, Mark. The definition of bolt-on, is the definition of bolt-on something that can be funded internally from existing resources without needing to go to the equity market? Because my perception would be with your shares I think trading at a significant discount I don't think there'd be a broad welcome to paying an acquisition premium by raising equity at this time. So that was the first question about that.

The answer's yes.

The answer's yes. Thank you. Just a further little question for Clark, because we all like to know about your U.S. business Clark. You've stepped a little bit back though maintained your market share in equity-indexed products over the first half of the year and there's a note in the press release talking about the continuing uncertainty regulatory wise. I wonder if you might just say a few words about what the current situation is there in that market? Thank you.

I think if you look at the -- if you start by looking at the aggregate U.S. annuity market to keep an idea of where we focused, in the first quarter of this year, the last quarter for which statistics are available, there were $42b worth of variable annuities written, about $10b worth of traditional fixed annuities written and about $6b of fixed indexed annuities written. The fixed indexed annuity market shrank by about 10% year over year in that first quarter.

I think the reasons for that, you have some competitors -- some players who are way up, some players who are way down. You're having a lot of dislocations in that market right now. Our approach to that market has always been that we want to be in it, that we focus on the bank and broker dealer channels where we're number one but that's just a sliver of the market. Most of those are written through general agents, master general agent sorts of arrangements, and that we want to be in there on our basis, which has been a very clean regulatory -- a very clean basis from a regulatory standpoint. For instance, we're one of the few companies that files all of its advertising literature with the NASD to make sure that it meets NASD requirements. Important given our broker dealer and bank focus, the quality focus of our business.

I will take whatever market share then that that market gives us consistent with the parameters that I've laid out there. It's not the major part of the U.S. market, probably never will be, but it's a good business that has its point in the cycle when interest rates are low and equity returns are perceived as being risky. So we want to stay in the market. Our share has been about flat. It has fallen slightly. We're the number nine player in that market, which is a scale position, but not a large position, but with roughly a flat market share. And I'm satisfied with that. We'll be there when some of the current dislocations in the market shake themselves out.

Sorry, could I just add on, Clark -- That was very helpful. The dislocations that you're seeing in the agency market, there, that you make reference to with a lot of players very up, a lot of players very down, what do you think is causing that? Is it different views from the management teams over regulatory concerns, or is it other factors?

No, the largest -- It's fairly well known that the largest player in that market, Allianz, is facing some regulatory problems and some law suits right now, and I think that's causing a lot of people to evaluate their business models there very carefully.

I think that, for other players, even if you have a clean business model -- If you're aware of the U.S litigation situation, once the trial lawyers decide to start suing people, they'll sue everybody and let the court system sort it out. So there'll be collateral damage and a lot of noise around the product line. So I think some people may just have had their appetite reduced or their business practice re-evaluated based on some of the regulatory and trial lawyer activity that they're seeing there.

I don't know for sure, on a company by company basis, though, what the considerations may have been that led them to be more aggressive or less aggressive in the product line.

Thanks. It's Matt Lilley from Lehman Brothers. Can you just give us an idea, on a country by country basis, what sort of outlook you have for the second half of the year in Asia?

All right. (Inaudible). Well, we're obviously coming off a very good first half, and would like to think that we have some momentum building in the first half of the year.

I think one of the -- obviously the numbers, top line numbers and bottom line numbers, in Asia for the first half are good. I think what's maybe an even more important part of the story is that it was broad-based, that every market has grown. Some of the issues that we might have felt that we had in the past in terms of productivity of agency or growth of agency, as Mark showed you, that's basically been corrected.

So we're very optimistic about the second half. I think we'll continue to see good results from virtually every market. Wouldn't want to put a specific number on it, because obviously it's a fluid situation, but the information that we disclosed showed that it was a broad-based success in the first half. I would expect it to be broad-based in the second half.

[Tony Sullivan], Standard and Poor's Equity Research. Can I ask one question -- further question on Asia and one on the U.K.? You mentioned the Health insurance business. Is -- Would you give us an idea of what the scale of that is now, in Asia, in terms of (inaudible). And secondly, are these 12-month policies or are they longer term policies, because health insurance covers a wide range of business models?

Secondly, on the U.K., do you have any plans to review the brand? Having positioned yourself as appealing to 50-year-olds plus, how is that going to be renewed? As a sort of fundamental brand question, how are 40-year-olds going to be moved to the Pru brand, if you like, or is it a declining brand?

And finally, just one numbers question, if I may. The offshore bond sales in the U.K. seem to have dropped quite dramatically. I think it's down 40% in a segment which is seen as growth elsewhere. So I was wondering if you could enlighten us a little further on that, please. Thank you.

I think if Barry can take the first and Nick the second. In terms of the -- Barry, the two issues, in terms of the Health business, one is scale and one is whether it's for short or longer term.

The Health insurance is not necessarily a new business for Prudential in Asia. In fact, it has, I think, last year, represented about 10% of our new business. So it's been fairly geographically isolated. One of the things we're doing is broadening the geography of that business and introducing products into places where we've not historically written a lot of health insurance business.

In terms of the nature of the product, there is some short-term business that is written. More commonly, what you will find is business with some sort of long-term guarantee, which makes it very important that you get the technical aspects of the product right. We historically have not written, and have no intention of writing, full-blown reimbursement medical, because that is a pretty complicated business and you wouldn't want to make a lot of significant long-term guarantees around that.

But if you write business that is essentially supplemental in nature to a government health plan, or that provides, on an indemnity basis, sufficient benefits to allow people to seek the sort of care they need, a, that essentially becomes -- is a very compelling product from a market perspective in virtually every market in Asia and, secondly, can be written at quite high margins and, third, is a business that we think will be very successful going forward.

Mark alluded to the Singapore example, where we've just launched a new product. Historically, we've written health business at a pace of, I would say, about 1,000 policies a month in Singapore. This new product that we've introduced, in the middle of May, which is effectively a supplement to a government-funded health plan in Singapore, we've so far written over 20,000 policies and are writing policies at about -- a pace of about 300 a day.

They are not huge premiums. Average premium on that policy would be about SGD200, but it's -- you're able to build a real scale business with that and the margins on that would be amongst the highest that we would produce on any product anywhere in Asia. So it's a -- The health insurance opportunity, it's a very, very strong opportunity for us.

Nick, the brand and offshore bonds?

I think the brand is still a very strong brand in the retirement space in the U.K. market. Indeed, on some metrics, we're actually the strongest retirement brand. As far as particularly the key age groups, 55 plus, are concerned, we come out very strongly in terms of brand identity and spontaneous awareness.

So we will undoubtedly, over the course of the next 12 months and beyond, do some things to continue to reinforce that. And that's particularly important with the intermediaries, because we need to position ourselves very clearly as retirement specialists, focusing on the multi-asset allocation core of our investment products on the one hand, plus the annuities and equity release products on the other.

I think as far as the offshore question is concerned, the first half numbers for 2006 were quite severely distorted by a large, extremely low margin deal with one particular distributor, which I was unable to stop, sadly, which means that the comparison, in volume terms, for 2006 versus 2007 is quite severely distorted by that. I think in the first half of 2007 we have seen some quite significant competitive and pricing pressure in the offshore bond area.

And we have been -- deliberately, against that backdrop, as we have across the rest of the business, been very selective in the business that we have chosen to write. We have refreshed our proposition, particularly in terms of inheritance and trust capabilities. So we think -- For the second half of the year, we are more optimistic about volume, but, again, we will continue to be selective, as we have in the first half.

Can I just come back on the brand? The question was really aimed at the dynamics of brands and their -- the marketing. Those 55-year-olds will have grown up when Pru was in the savings business. One doesn't stay statically in a demographic market, so how -- and they're going to get older, so the question really was aimed at --

That's one certainty!

Yes. How are you going to appeal to the younger -- when the younger people become older, what are your plans for renewing the brand in that sense?

Well, I think the -- We're talking about appealing to essentially the 50 plus age group. And I think, as I said before, we have extremely high spontaneous awareness and association with retirement and pensions in that age group, and that -- You're looking dissatisfied with the answer, but the facts are that, in that age group, we have a very strong brand position and we will continue to invigorate that.

But what I would not see is us, perhaps in contrast to our previous strategy, is attempting to appeal equally to all age groups across the population, because that results in a lack of focus. I don't believe that it is necessary or possible, economically, for us to appeal to all age groups with all products at all times. And our retirement focus means that we will concentrate on that 50 plus age group.

Andrew Crean with Citi. A couple of questions. On the IRR on U.K., of -- which you beat your target, I think, by a point, I think you said you rely quite heavily on annuities. Corporate pensions business, which you remain in, has regionally got an IRR in the single digits and a very long cash flow -- cash payback period. How do you justify retaining that business, particularly against the backdrop of the introduction of the NPSS, which could have an impact on the volumes long term?

And second question, I wanted to know, the 1b of excess capital in the States, what return hurdle do you have on investing that? And what are your thoughts about taking it back to the Group and perhaps using it as a buyback, as a -- If you think you own shares are cheap, would that not be a better idea than buying somebody else's?

Nick, are you happy to take the U.K.?

As far as why do we continue in corporate pensions is concerned, as we said in March, there are two fundamental reasons to start off with. One is it provides a continuing flow of internal vesting to our -- vestings opportunities to our individual annuity business. Secondly, it provides a continuing flow of business into our with-profits fund. So those are two pretty good reasons on their own. But thirdly, we said that we were -- we believe that we could increase the IRR from single-digit, as you say, up to round about our 14% target level for the whole business.

How can we do that?

Well, one is the impact of cost reduction and, in particular, keeping costs the same as volume increases. And I think that strategy's already beginning to show through.

Secondly, it's by being selective in the kind of schemes that we write. So, for instance, in the first half of this year, I think we declined to quote on around 32 schemes in the first half of this year and that's an increase from, I think, 13 schemes in the first half of 2006.

And the major new schemes that we wrote during the first half - that's Rolls Royce, Bird's Eye, Triumph and MFI - were all schemes that actually fit fairly and squarely into our desirable scheme category, whereas, in fact, we wrote no new business last year that actually fitted into -- in the first half of the year that fitted into our sweet spot, if you like, in terms of desirable profile, that's average case size and size of scheme.

So combination of cost reduction and a selective focus in terms of new business, we believe, will mean that corporate pensions should be an attractive offer, an attractive proposition, for shareholders in the future.

It's also relatively non-cash-absorbing. The cash requirement for the corporate pensions business is low. I think it was GBP12m, I think, we quoted in our presentation in March. And I guess the other point is, if we think about our wholesale business and we think about the increasing demands for solutions from employers for defined benefit schemes, what we're finding increasingly is that, as people look at de-risking their pension schemes, they're actually finding that a combination of the bulk annuity and risk-management type solutions on the one hand and moves from DB to DC schemes are an increasingly attractive combination. And actually, we're pretty -- Well, I don't think you can be pretty unique. You either are unique or you're not unique, but I'll say it anyway. We're pretty unique in being able to offer that combination in the way that we do. So I think the corporate pensions business is potentially a very interesting business for us in the future, for a whole combination of reasons.

NPSS, Nick?

As far as NPSS is concerned, we've made it pretty clear to the government that there would have to be a fundamental change in the charging mechanism for us -- and level for us to be interested in participating in that market. So we do not regard it as an opportunity. We, like the rest of the industry, have been concentrating on creating clear blue water in terms -- between NPSS and existing schemes. And from all of the conversations that we have with government in terms of maximum contribution caps and so on, then that clear blue water seems to be being maintained. And there seems to be little intention on the part of governments to jeopardize good schemes as a result of the introduction of NPSS.

So if I can understand the second part of your question. I think the second part, regarding the 1b excess capital, which I think Philip tried in his early presentation to reduce by 100m, to Clark's amazement -- I think the 1b of excess capital, I think we do see opportunities in the U.S., as I say, on a bolt on basis. We do see returns. I think the level for the [log] return was 12.5% and that's on an (inaudible) basis.

So I think we do see opportunities in the U.S. marketplace to close down and we clearly have -- we have the ability to return the money. But I think at the moment we do see some opportunities there and we think there is a productive way of using them.

It's probably also worth adding, if I could, Mark, that that excess capital, whilst it's within Jackson, still counts to the regulatory capital base under the FCD. And if we were to go down your suggested route of share buyback, then that would be a deduction from the regulatory capital surplus and we're very comfortable with the surplus that we currently have and intend to maintain it broadly at that level.

Trevor, again.

Thank you. It's Trevor Moss again at MS Global. Just returning very briefly to Andrew's question about the IRR on Group pensions, I presume that the IRR that you previously quoted was calculated on the same basis of the embedded value, mainly so it would not include new employees that come into the scheme nor any potential income you get from vesting annuities at the end of it. And so on that basis, would you agree that the IRR, taken overall, including that, would be substantially in excess of 12%?

David?

The assumptions you make about the basis of calculation are correct. What the answer would be if you included those, I can't tell you off the top of my head, but it would be a material change, because obviously the extent of new members and so on is quite substantial over the lifetime of a scheme.

Greig?

Sorry. Greig Paterson at KBW again. I recall a conversation I had with our U.S. analyst about your excess capital position when we were trying to figure out if someone could -- what the acquirer would do and whether they could strip out money. I think your ratio was 499 times coverage. And his comment at the time was, 'well, in order for them to maintain their credit rating, they really don't have a lot of excess capital'. So do you have this excess capital in the context of a credit rating? That's question one.

The second one is bulk annuities in the U.K. Well, according to Paternoster, you didn't play in the middle market at all. Swiss has taken the Friends Provident and the Zurich deal. Do -- What are the prospects of you writing a medium size of bulk or large bulk into the future?

And the third point is, in the context of the letter written to the FSA to the chief actuaries around the potential inappropriateness of the medium pro in terms of best estimate basis -- This is just in terms of timings. You only review your mortality basis at the end of the year, so even if you had made a decision to change or not change it, we wouldn't have seen anything at the half- year. Is that correct in terms of time, not that you -- whether you're going to do the change, but just when you do the reviewing?

Okay. Let me give you a summary of those and let -- In terms of excess capital, Clark will give you the details and, in terms of the U.K., let's let Nick carry. But I think, in short summary, the excess capital, as Clark will give you the detailed figures, is excess capital and he'll define that. Prospects of large bulk, let Nick talk about and I think maybe talk about mortality and the FSA letter. So I think Clark can really just talk a little bit about the exact excess capital.

Risk-based capital ratio, it's 630 of this year, (inaudible) is 555%. That is far above the comparables for our peer companies and for AA companies in general. If we look at our capital position in the rating agency capital models, we're well up in AAA land. There's other considerations in setting a rating, but on the capital considerations we're very, very strong.

If you just look at the raw capital ratio, the easiest number to get your arms around, without a statutory [blank] handy, it's increased to -- it's near 10.5% now capital as a percentage of general account liabilities, compared to 7.5% just a few years ago. So that has increased a lot, and we had a double A rating then and a double A rating now.

So the capital position's quite strong, but the risk-based capital ratio, I think, is a good benchmark and the benchmark for double A companies' risk-based ratio is nowhere near 555%.

Nick, talk about the prospects of bulks and the mortality?

Yes. Prospects for bulks. I'm not sure I recognized the rendition of our activity delivered by various pundits who you quoted. We're active across the market in small, medium-sized deals and very large deals.

We are, however, very selective in the business that we actually write. There's a distinction between playing in the market, which means looking at deals, and weighting deals at potentially unattractive levels of pricing. So we have seen large numbers of potential opportunities and we have declined to go down to the levels of pricing that some competitors have done in the marketplace. And that will continue to be our stance, but the flow of potential deals is very significant.

I think I would agree with, I think, what I read of Tim Breedon's comments in --at the Legal & General results, where he said there's a lot of quotation activity out there, but actually the amount of business that's being written is less. What we are seeing is quite a number of trustees and, importantly, a number of companies looking to de-risk at the moment. And that is providing a whole raft of potential opportunities that are perhaps slightly different from the conventional, traditional bulk buy-out opportunity.

As far as our mortality position is concerned, we are constantly reviewing our mortality. Our experience in -- so far this year hasn't caused us to make any changes. We have a permanent six-person mortality unit under the leadership of what we affectionately call Dr. Death, David Belsham here, with four actuaries and two statisticians. We have 3m life years to look at. We have 70,000 deaths. So we have a lot of data with which to analyze mortality and we do that constantly.

Clearly, we'll take a formal view on that in the second half of the year, as we do every year. But for some time, we have maintained the position that the unadjusted medium cohort view of life is not sufficient and, from a pricing and an EV and a pillar one point of view, our assumptions are significantly stronger than the medium cohort. David, do you want to say any more?

No. There's not been any change in assumptions, but we base our mortality on the medium cohort. But having recognized that that's not adequate on its own, we actually hold additional margins in the opening mortality. We have floors on mortality improvement for pillar one and we also hold additional margins in other elements of the basis, earmarked against the eventuality of mortality improving faster than the medium cohort. So the overall effect of that is that the EV assumptions are significantly above the medium cohort, when taken -- when you look at all the assumptions together.

And in fact, our pillar one and pillar two assumptions are above the long cohort, and there's a lot of speculation at the moment about whether it's right to move to the long cohort. In reality, we'd regard the long cohort as the wrong shape. The improvements under the long cohort run down to zero over time. Given that mortality's been improving for the last 150 years, any improvement basis that runs down to zero seems to be implausible.

So we don't propose to move to the long cohort. We prefer to use a sensible basis for improvement, but to underpin that with floors and margins in the opening mortality. So really, this is just a re-expression of the strength that we hold across the basis at the moment.

James and then perhaps one last question after James.

Thanks. A couple of questions. Am I reading too much into your caveats on the Equitable deal, saying if it completes, when it completes, when it's certain and so on. Are you just pleasing the lawyers and you're very confident as you were before?

Second, on Barclays, either could you tell us how business you expect to write through the next year, or could you tell us the amount of maturing pension business and what the typical penetration is on this kind of arrangement and so on?

I think let Nick take that and I think the -- You're clearly not going to get any forecast of numbers, as you would expect. As the deal's just been announced today, in terms of a maturing business, we're clearly going through those discussions with Barclays. But I think -- Nick, is there anything you want to add to that, particularly?

No. I would expect, once the Barclays deal gets up and running, that the APE impact would be in the order of double-digit millions of APE, but beyond that we're into new territory, effectively, with Barclays.

And I think the really interesting thing about the Barclays deal, as in -- as is similarly with the deal we've done with Think Destiny, is it makes full and effective use of the capability we've got in our Pru Direct operation, which was set up in the first instance to fulfill the needs of our internal vestings customers. But we're now actually able to take that expertise and the capability with that Pru Direct operation and provide, effectively, an annuities desk for Barclays and their 800 financial advisors and also for Think. So it is, I think, a powerful extension, effectively, of the proposition that we have in our internal vestings capability.

And then the other question was Equitable. No, the caveat, if there is any, is that this is a legal process on which the Equitable policyholders have to vote, so it's -- Nothing is absolutely certain, but the timetable that's been agreed between ourselves and Equitable would see the transaction completed in December, obviously subject to a positive shareholder vote and court proceedings. But there is nothing at the moment that suggests we won't meet that timetable for any other reason. The deal is, I think, unambiguously, from our point of view, in the best interests of Equitable policyholders and the with-profits fund and Prudential shareholders, so we think it is a good deal for all of the parties concerned.

Just perhaps one last question? Well, thank you very much for coming this morning and we look forward to seeing you again shortly.