Prudential PLC (PUK) 2007 Q4 法說會逐字稿

Good morning and welcome to our 2007 results presentation. I think as usual this morning we have an illustrious audience, but illustrious front row particularly of the business units and other Chief Executives. So the team is here to answer questions as needs be later.

I'm delighted to be presenting an outstanding set of results this morning. 2007 has been a very strong year for Prudential, both absolutely and relative to our peer group. And our figures show the strong growth momentum that the Group has achieved over the last three years. That was quick.

Clearly Andrew has heard enough, I think. I thought that was a good sign.

This morning I'd like to talk about the 2007 results and in the context also of our three-year performance. I'll also remind you about our strategic growth drivers which remained both powerful and highly positive for the medium and long term. Our results demonstrate clearly that we have delivered on our past promises. And I'm also confident that we are in a very strong position to continue our outperformance in the future.

Our strategy remains clear. We will focus primarily on the enormous opportunities offered by the retirement market around the world. Quite simply, that's where the major growth trends in our industry are to be found. The cycle of asset accumulation and income drawdown will vary by market, but over time it is both repeatable and sustainable. This means we can capture wave after wave of value, based on our financial strength, our trusted brands, our investment and risk management skills and our local product and distribution expertise. We remain very confident that the implementation of our retirement-led strategy, with a tight focus on generating profitable growth and excellent delivery will continue to drive sustainable value for our shareholders.

So on to the headlines. As you can see, all the key financial metrics are up 20% or more. Growth in new business profit was up 22%. EEV operating profit increased by 25%, and IFRS operating profit up 20%. The cash profile of the Group continued to improve and overall the capital position of the Group remains very robust.

Obviously there's currently a lot of focus on the credit environment. And as I said at our new business figures in January we came into this environment in a relatively defensive position. We have been actively managing upwards the quality of our credit portfolio over the last couple of years. Indeed, in the with-profit fund, in the U.K. with-profit fund, we bought significant credit protection. As a consequence of our actions and our defensive positioning, there has not been any significant impact on our results. And, as Philip will tell you later, there are no defaults in our debt securities portfolio.

Reflecting our continuing confidence in the business we are proposing a 5% increase in the final dividend. That means that the full year dividend is also up 5% and our dividend cover is now at 1.9 times.

This slide demonstrates that what we have achieved and delivered in 2007 is a continuation of the momentum derived from our retirement-led strategy. Since 2004, EEV operating profit has doubled, growing at a compound rate of 28% as we have continued to expand and grow our operations. Within the 2007 result, Asia's overall contribution passed GBP1b for the first time. Indeed, life profits from the region have more than doubled over the last three years, benefiting from a combination of high growth, with high margins and increasing scale of the in-force portfolio. Our business in Asia has gone from strength to strength.

We have also seen excellent growth in both the U.K. and the U.S. Life EEV in these two key markets is growing at compound annual rates of 21% here in the U.K., and at 18% in the U.S. over that period. You can add to that M&G growing at 23% compound, and our Asian fund management business growing even faster, at over 50% compound.

And I think you've got to keep in mind that along with growth in EEV profit, we have also achieved a near doubling of IFRS profit in the same three-year period. And this has been achieved with significant contributions from all of our businesses.

Turning to the balance sheet, momentum in operating performance that I've just described is supporting the rapid growth in the EEV shareholders' funds. Since the end of 2004, the balance sheet has expanded by just over GBP6b which represents an increase of over 70%. We are achieving high levels of growth and, most importantly, we are combining that with maintaining average margins at above 40% for the Group as a whole.

We're also achieving high levels of return on our capital. And as I've mentioned on numerous previous occasions, as a senior management team we continue to maintain a very clear focus on value over volume.

Geographic diversifications of earnings and risk are absolutely fundamental to the Prudential model. Over three quarters of our new business profit now comes from Asia and the U.S., and that's clearly a powerful value driver. Looking at life EEV operating profit, the scale of our achievements in Asia, as I've just mentioned, means that the region now accounts for some 40% of our business on this measure.

On an IFRS basis, the U.K. Life business remains a very significant contributor, with the combined strength and success of the with-profit fund, and a growing contribution from the shareholder annuity business. In addition, the rapid growth achieved in our asset management businesses means that they now account for around a quarter of our IFRS profits.

Overall, we have maintained strong momentum in our operating performance, and the cash flow of the Group has continued to strengthen. We have achieved that performance by implementing a clear strategy and by delivering excellence in the implementation of our plan across all of our markets.

What I'd like to do now is briefly remind you of what we've been doing to build and sustain our performance.

Looking first at Asia, well, I trust you will allow me to say that Barry and his team have had an immensely impressive, even spectacular year. The key aim for the Asian business is to grow the absolute level of new business profit. We set a target to at least double 2005 new business profit by 2009, and given the growth we have achieved to date and expect to achieve going forward, we will deliver this target a year early.

We set out our priorities in Asia at the end of 2006 and we are making excellent progress on all fronts. Building distribution power remains key and we will continue to build scale in the agency force. Critically we will also remain very focused on agency management and training to enhance productivity and protect the quality of the business that we write. We also continue to grow the breadth of the non-agency distribution channels, by bringing in new partners. For example, in Korea, we've added new distribution partnerships with the Industrial Bank of Korea and Kookmin Bank. And in Taiwan we extended our regional relationship with Standard Chartered. We have also made good progress in establishing a region-wide relationship to more effectively upsell and cross sell to our existing customers. We will step this up over the coming months. In 2008 we will continue to also build out our retirement business and further develop our position in the health market.

There is a powerful cultural drive in Asia for individuals to save and protect. There's also an ever-growing awareness of the availability of efficient investment vehicles. It's these powerful trends and the scale of the demographics that underpin the future growth of the region. And that's especially true in terms of regular premium business which has been at the core of our development. This, as you know, is very high quality business which we have more than doubled in the last three years. In addition and over time, particularly through the expansion of our non-agency distribution, we are also gaining an ever-increasing share of the single premium market as it develops. Our range of top-class partners and international range of investment-linked products, including local Asian and M&G products have supported our success.

As you know, Barry and his team are very much looking forward to seeing those of you that can make it to Hong Kong and Jakarta in late April. It will be a great trip and it will give you much more insight into our business and its future prospects in the world's fastest growing region.

On to the U.S. where it's been another great year of success for Clark and his team. As you know, the key market we've been focusing on here is the variable annuity market. And you can see from the graph, Jackson has materially outperformed the market. A big part of that outperformance has been in the independent broker dealer channel which, in itself, now accounts for over one third of all VA sales in the U.S. Our flagship product, Perspective II, has been the top-selling product in that channel in each of the last five years. Regional broker dealer business also continues to grow, as does new business through the bank channel.

You know we, and I have said before, that we are not price-led. We have an advice-based proposition and we have a sector-leading wholesale team which we grew by 25% during the year. And importantly, while growing that team, we also increased productivity per wholesaler. Effective servicing by the wholesaler team and supporting our product flexibility requires the right technology base. For Jackson, this technology, with internationally recognized world-class service, is a key and very important differentiator.

Our success in the VA market has changed the shape of the U.S. business. Over the last few years the general account has remained relatively stable and we have been conservative in our approach in the fixed annuity market. Importantly, the growth in the separate account has improved the balance and diversification of our business profile and earning streams. In addition, the Life of Georgia acquisition has added to our life underwriting profits.

What does that mean in overall terms? It means now that 31% of the overall earnings of Jackson is now in fee-based business. Looking back only one year, that percentage would have been around 23%. And spread earnings a year ago would have accounted for 49% compared to 41% today. We are growing the overall IFRS earnings strongly in the U.S., and our greater diversification now gives us a much higher quality and more stable overall earnings profile.

Jackson remains in a very strong position in the U.S. market. The flow of retirement assets will continue to be fuelled by the baby boomer generation. And we remain very confident that, over time, we can continue to take a greater and more profitable share. I have just said that it's a model based on advice and not price-led. And I think if you add to that we have a 17 basis points cost advantage over the top 25 in the peer group, you can see that it's a complete model. Last but not least, it's also important to note that we can deal in all economic conditions. We remained in 2007 top 10 in both the fixed annuity and the fixed indexed annuity markets.

Let's move on to the U.K. Almost a year ago to the day, Nick set out our strategy, the core of which was built around three key themes. Firstly, our acknowledged capabilities and strengths in the retirement income market, with a concentration on risk-based products that offer higher returns and greater visibility over cash flows. Secondly, a reshaping of our approach in the retirement savings market. And finally, taking the necessary action to reduce the expense base. I think surrounding all of this we have been quite explicit, and in all three our strategy is based on value not volume.

Let me take each one in turn. First, looking at retirement income. Our leading position in the retail annuity market continues to be supported by the strong internal flows from maturing pensions, which contributed to around 50% of individual annuity sales in 2007. Combined with our growing partnership business, we have a very strong base for this business. You will have seen in today's announcements that we have made some changes to annuitant mortality, where our position remains conservative. In a few minutes Philip will take some time to go through what we have done and why.

In addition to individual annuities, we are also extending successfully into the lifetime mortgage market, and we have launched an income drawdown product. Our approach in wholesale remains consistent and value-driven. The very significant Equitable deal, indeed, the largest deal seen for many years, played to all our strengths and was an excellent transaction for both Prudential and the Equitable policyholders.

Moving on to retirement savings where we targeted a major change and we have worked hard to improve returns. We have exited the structurally unprofitable areas of the market, such as single premium pensions and commoditized protection, and we have launched our factory gate priced product suite. We have also put a renewed emphasis on cautiously managed investment products. Our action, combined with the volatility in the markets, has meant that we saw a real resurgence in capital-efficient with-profit sales, up 21%, to GBP230m APE across all product types in 2007, and representing a third of overall volumes.

Investment performance in the with-profit fund has been truly excellent and the fund was ranked first in the WM Company survey based on gross investment performance over one, three, five and 10 years. And we believe we have also achieved market-leading performance in 2007.

Corporate pensions is an area where we said we would target an increase in returns through being more selective and reducing costs. The IRR increased to 9% compared to 6% in 2006, and we still need to see further improvement. But this is the right progress.

And on costs we are again making excellent progress. By the end of 2007 GBP115m of the cost savings of GBP195m had been delivered and plans are in place to deliver the additional GBP80m. The outsourcing agreement concluded at the end of 2007 will allow us to remove fixed costs from our operations and to achieve significant operating efficiencies, thereby materially reducing future expense risk.

On the estate and reattribution, our work is continuing. And, as previously announced, a decision will be made by the end of the first half.

2007 was another tremendous year for our asset management businesses. Profits from M&G and Asia combined were up 30% and these have more than doubled over the last three years. External funds under management increased to almost GBP70b.

In tougher market conditions, particularly in the second half, M&G had its second highest inflows ever, following on from a record in 2006. M&G and Michael and his team have built a strong U.K. market position across both the retail and the institutional sectors, based primarily on their excellent long-term investment performance and multi-asset capabilities. And since 2003 they have successfully extended their retail operations into mainland Europe where they now manage around GBP4b.

Asset management in Asia is now also a significant contributor to Group profits, generating over GBP70m in 2007, which is more than 50% up on 2006. External funds under management increased by 39% to GBP17b, with 71 new funds launched across the region, with particular success in India, Korea, Japan and Taiwan. We are continuing to expand our distribution reach, with regional relationships established in 2007 with both Citi and HSBC. And we're also expanding geographically, launching in Hong Kong and the United Arab Emirates this year. Region-wide we have built scale through our trusted brand, our investment management skills and our local product and distribution expertise. The long-term prospects are excellent.

Now, after whetting your appetite and having Andrew back in the room, we'd like you to hear more about these outstanding performance figures and I'd like to hand over to Philip.

Thank you, Mark, and good morning everyone. And first I think I probably ought to begin with an apology because I know that a number of you would rather be at Cheltenham Races today, at least one voice from the front row. But I can assure you my remarks on longevity coming later are every bit as thrilling as a day at the races.

There are three parts to my presentation this morning. In a moment I'll take you through the results. I won't try to summarize everything that's in the press release but I'll, instead, in the first section, review performance against our KPIs, look at the growth in embedded value in shareholders' funds, update you on cash flow at the holding company level, and then look at returns on invested capital.

In the second section I'll talk about three specific topics within the results that I think are of interest. I'll look at Asia, comment on trends in EEV margin, and on the emergence of statutory profits. I'll then go on to talk about our exposure to debt securities and the related credit risk, and then explain the strengthening of our assumptions for longevity in the in-force annuity business.

And the third section of my presentation will be around capital formation within the insurance businesses. That's something I presented on a couple of years ago and I thought it was a good time to return to it and show you how capital's being used.

So first, the KPIs. 2007 was, indeed, an outstanding year for the Group. New business profits rose 22% to just ahead of the sales growth announced at the end of January. And average margins across the Group are steady at 42%. The total embedded value operating profit increased by 25% to over GBP2.5b for the first time. And it's also worth noting that, overall, the effect of variances and assumption changes on the results was positive. Statutory profit was also strong, with the IFRS result up 20% to GBP1.2b. We've seen growth in Jackson's profits as growing level of fee incomes is received from the VA book, and we also saw strong growth in asset management profits in M&G and also in the Asset Management business in Asia.

We'll be finalizing our regulatory returns to the FSA over the next few weeks. But we estimate today that our regulatory capital surplus at the end of the year under the Insurance Groups Directive was about GBP1.4b. That's an improvement of GBP400m over the year. We benefit from the sale of Egg. And it's also worth noting that our regulatory capital position is struck after taking account of realized credit impairments.

I'll talk more about the elements of the operating cash flow in a moment and just say now that our full year dividend is covered 1.9 times against the previously stated target of 2 times cover.

Embedded value shareholders' funds per share have grown from GBP5.45 per share at the half year to GBP5.98 at the end of the year. So total EEV shareholders' funds are now not far off GBP15b. Detailed movement is provided in your schedules but there are a few points on my usual waterfall chart that I'd like to mention.

First, in column B, the new business profits as a percentage of opening embedded value. They're just over 10%, reflecting the relatively high margin of our new business compared to our peer group. Secondly, and alongside it in column C, GBP1.3b of profit from our in-force, steadily increasing as our in-force business is growing. And then, again, one column along, in column D, we generate over GBP300m now of profits from asset management and our other businesses. Fourthly, in column G, there's over GBP700m of profit from economic assumption changes, mostly arising in the U.K. and Asia.

Mark's commented on the growth in embedded value that we've seen over the last three years. Underlying it, there's been a significant gearing to new business, with high growth levels, effective management of our in-force business, with overall positive experience and operating assumption variances, and investment management outperformance against our long-run assumptions.

Here's the usual view of holding company cash flow. Operating cash flow improved by GBP22m on 2006. We had a net operating outflow of GBP82m. And after receiving the cash sale proceeds of Egg, a net inflow of GBP445m. At the end of the year we held cash and short-term investments of just less than GBP1.5b in the holding company. Looking at some of the main items of cash inflow, the U.K. life fund transfer was GBP261m, up from GBP217m the year before. Following the bonus announcement that we made at the end of February this year, we can anticipate a life fund transfer of about GBP280m to be received in the first half of this year. The U.S., M&G and Asia all increased their net remittances to the holding company.

Although we received the benefit of scrip dividend take-up ahead of our expectations, this was more than offset by two other items. There was a reduction in tax relief at the holding company level and also a ruling by the tax commissioners against our treatment of tax on certain interest rate swaps. And we also had an increase in head office costs as we've met all of the costs of investigating the potential reattribution of the inherited estate. Balancing this, the cost of debt service was lower because we have a smaller amount of net debt. The Group remains on target to meet its commitment of a positive operating cash flow in 2008, assuming both a normalized level of scrip dividend take-up and no further adverse change to our tax position.

Now I want to show you the returns being earned on new business written to show how this has progressed over the last few years. Overall, we continue to achieve good returns across the three insurance businesses. Asia is continuing to earn returns over its 20% target for the region. As a reminder, we aim to achieve a target return of at least 10 percentage points over the risk discount rate in each of the markets where we operate. The risk discount rates vary from 5% in Japan to 16.75% in Indonesia and Vietnam, a reflection of the risks in each of the individual country markets.

In the U.S. returns have continued to grow over the last few years, this is mainly as a result of the increasing proportion of variable annuity sales in the business mix. And in the U.K. our focus on the value of new business over volume is demonstrated by the stable returns that are being achieved by our strategy of focused participation. This year, the structure of the Equitable Life back book transaction was such that only a small amount of shareholder capital was required, and this boosted the IRR achieved this year to 18%. But even without that, the IRR would have been 14%, in line with our stated target.

I've also shown on the slide our growth in the new business profits in each of the insurance businesses over the last three years. I'll talk more about Asia in a moment. But in the U.S., new business profit growth of 19% this year was largely driven by variable annuity sales. In the U.K. profits grew 4% on flat sales, so there was a slight improvement in margin. But new business margins within U.K. retail were up 17%, primarily due to higher sales and margin from annuities and with-profit bonds.

Turning now to some specific topics, and starting with Asia. New business profits for the region grew at an impressive 34% over 2006. And the total EEV operating profit reflects not only this increase but also positive overall assumption changes and growth in unwind to register a 34% growth too. IFRS profits continue on a more steady trajectory. But there's more detail that we've provided this time both in the OFR about the IFRS breakdown across the region. But let me make a few comments as well.

The IFRS profits from our insurance business grew by 7%. The mature markets of Singapore, Malaysia and Hong Kong together produced GBP153m of statutory profits, up 15% from last year. And most other countries are now profitable on a statutory basis. But offsetting this there are some operations that made IFRS losses, including GBP43m in India, a relatively new business which I'll talk more about in a moment, and a loss of GBP16m in Japan. In addition to the statutory profit from the insurance businesses, it's also worth noting, as I mentioned, the Asia fund management business contributing GBP72m of statutory profit, up 53% on last year.

Let me talk a bit more about the average margin in Asia. And let me start by repeating a point we've made before. Our Asia insurance businesses are focused on the growth of new business profit in each of the individual country markets. We're not aiming to achieve a target margin for the region as a whole. On the slide, you can see the strong growth on the left-hand side of new business profits in some of our key markets. And the bar chart on the right-hand side of the screen shows the movement between the margin levels from '06 to '07.

The key factor continues to be the geographic mix of new business written. But it's not just a question of more business being written in lower margin countries. Taiwan's growth in sales were at a higher than average margin, and that's had a positive effect. That's been offset by the lower proportion of total sales now coming from the traditional higher margin territories, like Singapore and Malaysia.

The margin in India has reduced as we've rebased the expense assumptions for India to incorporate the effect on unit costs of the current expansion into rural areas. And the resulting margin level leads to a reduction in new business profits for the period. But to put this into context, the Indian business opened 593 new branches in 2007. And the business as a whole sold over 2.3m new policies, increasing the in-force policy count by over 70% in a year.

Overall, if we'd written 2007 sales for the same margins in each country as in 2006, we'd have had an average margin of 51%, the other 1 percentage point change reflecting some changes to product margin following revised economic and operating assumptions in individual territories.

I thought it might be helpful to illustrate how new business profit turns into both statutory profit and then capital by showing the development of a single country market. And I've chosen Indonesia as many of you, I hope, will be visiting it with us next month. And on the chart you can see the growth in new business profit in the dark blue then IFRS profit alongside, and capital injections and remittances in red below and above the line.

The business in India we launched -- in Indonesia we launched in 1995. It sells primarily unit-linked business which is very capital efficient. The sales growth has been strong. New business profit trends have also been attractive. The business became profitable on a statutory basis relatively quickly and, as you can see, it's now generating significant EEV and IFRS profits. And the growth in profitability is such that the release of capital from the back book is now more than sufficient to support new business being written. From startup to 2001, we invested GBP18m in the country. And since 2004 we've been able to repatriate GBP49m. We've therefore had a return of more than twice our initial investment, and we've been able to create the market-leading business in a country that has considerable further potential, as you'll see next month.

Credit risk is an inevitable feature of our business. And let me, over the next few slides, set out our exposure to debt securities across the Group, explain how we account for the changing value of debt securities, particularly looking at Jackson, and also confirm our limited exposure to certain types of security that have been of concern to the market as a whole. There's a lot more information on the subject published today. We provided extensive breakdown of our investment portfolio by asset type and quality. Normally this would all be in the annual report, but we brought forward its publication, including a special section on it in your analyst pack and on the websites. I won't go through all the detail now but I hope this material will give you an understanding of the relatively high credit quality of the portfolios.

In summary, we have just under GBP84b of debt securities across the Group as part of our total investments of GBP204b. They're held in each region and also some by M&G. And this chart just gives a breakdown of the securities held in each of the businesses. But it's important to note that in the U.K. that two thirds of the debt securities are held in the with-profits funds.

If I can try to summarize our accounting for debt securities in a sentence, it's that all such assets are carried at fair value. And one way or another, the changes in fair value of assets backing shareholder liabilities are reflected in shareholders' funds in our statutory accounts. The great majority of our assets are publicly traded, and 92% of our debt securities as a whole across the Group have been valued using market bid prices. Within the U.S., 85% of Jackson's debt securities were similarly valued at market bid, and where we use internal models, these are calibrated to market data.

Of the 8% of the Group's total portfolio valued using models, most assets are private debt securities held for the long term by the with-profits fund, PRIL, the annuity business or Jackson. As part of their year-end work, our auditors have tested our valuations and have not proposed any adjustments to our carrying values. It's also worth stressing that no securities in the portfolio defaulted in 2007. And when earlier this year Standard & Poor's downgraded over 6,000 sub-prime bonds, we were pleased to note that Jackson held none of these issues. We've in fact only had two downgrades on sub-prime holdings of about GBP9m. Jackson's actual credit losses amounted to GBP78m last year. And let me now show you how we account for those.

Jackson's income statement reflects bond write downs on securities that are judged to be other than temporarily impaired at the balance sheet date, together with realized losses on sales of impaired and deteriorating bonds. These amounts are offset by any recoveries that are made from sales of written-down bonds above their carrying value. And much of the realized losses that this year arose from a deliberate repositioning of the portfolio away from certain BBB issues that we judged poorly priced for the risk.

And this total charge of GBP78m is taken in the profit for the year. GBP48m of it is in the operating profit, that's the long-term defaults charge, and the remaining GBP30m is included in short-term fluctuations and investment returns. We then take the movement for unrealized losses on unimpaired securities direct to shareholders' equity. This year there's an unrealized value movement in reserves of GBP244m, reflecting the impact of widening credit spreads, partially offset by reduced U.S. interest rates.

In the balance sheet, we have unimpaired securities whose fair value in aggregate is GBP136m less than their book value. This includes GBP439m of unrealized losses, offset by GBP303m of unrealized gains on securities trading at or above par. And so while the focus is understandably on securities trading below book value, it's important not to lose sight of the fact that for every dollar of securities fair valued below book, we have $0.80 of securities fair valued above book. And also Jackson holds all of its securities with the intent and the ability to hold them for the longer term.

Finally on this topic, I thought it would just be worth confirming our exposure to sub-prime and Alt-A securities and also our very limited exposure to the monolines. On sub-prime and Alt-A, the position really hasn't changed from our last update to you at the half year. Jackson's got less then GBP240m of sub-prime mortgage securities all of which are in AAA issues. The underlying mortgages in these securities are all fixed-rate and secured by first charges on the properties. We've GBP660m of exposure to Alt-A, 77% of which are in AAA issues, and 17% in AA. There's a very small exposure in the insurance portfolios of our Taiwan and Japanese insurance companies.

Direct monoline exposure, GBP27m. Our shareholders' funds in the U.K. have GBP422m of securities where there's a wrap guarantee. That's mainly in PFI investments. There's GBP155m of similar exposure in Jackson. But in all cases the original decision to purchase a security and our decision to hold it rests on our underlying assessment of the issuer. We've never relied on the monoline guarantee itself.

The Group's exposure to CDOs totals GBP377m. Most of it's in Jackson. 65% of this exposure is AAA rated, and there's a GBP4m direct exposure to sub-prime ABS.

Moving on from credit to longevity, where clearly annuitant mortality's a key risk for the U.K. business. We've long recognized the uncertainty surrounding future rates of annuitant mortality improvement as one of the key risks to both profits and solvency in the U.K. annuity companies. We've therefore set our overall assumptions on a cautious basis. And we've been earmarking emerging strength in other assumptions against the risk of mortality improving faster than expected.

As we've looked at the emerging trends, we've come to the view that the unadjusted medium cohort basis is no longer a reasonable best estimate assumption for mortality improvement. And the results at this year end therefore include a strengthening of longevity assumptions. The financial effect on in-force business is neutral as we've reallocated the various implicit margins held elsewhere in our basis that we've discussed on previous occasions.

So let me take you through now what we observe. The graph shows the rate of annual mortality improvements that have been observed for two groups of males born in 1937, i.e. the men who celebrated their 70th birthday last year. You see the rate of improvement in mortality of the male population in England and Wales as a whole, that's the red line, and in blue you see the data of the continuous mortality investigation population for that smaller group who hold life policies.

And what the lines are showing are how much better the 1937 birth group's mortality has been relative to the people born in 1936 who reached the equivalent age one year earlier. If we now add in, in the next line the CMI data for pensioners, i.e. those who are receiving an annuity. And you look at the three lines together and you can begin to see indications that the rate of improvement is falling. And it's for this reason, combined with the fact that the medium cohort has provided a reasonable explanation of our own portfolio experience and that of pensioners generally in the wider market, that we continue to base our assumption on the medium cohort which is projected to do that.

Now, while we believe that the rate of improvement will continue to fall, we do not believe that the rate will ultimately fall to zero as the medium cohort extrapolates. So to counter it we've underpinned the medium cohort basis by a 1.75% floor in the annual improvement in male mortality assumed in EEV, and a stronger floor of 2.25% on IFRS.

Because the population data shows what you might have heard us refer to before as the rectangularization of longevity, whereby more and more people live to 80 or 90, but there's no obvious extension to the overall life span, we believe that rates of improvement will be less marked for older lives. Our improvement assumptions therefore reduce to zero on a straight-line basis between ages 90 and 120. And you can see that on the far right-hand side of the graph.

So this strengthening from our previous business is equivalent -- basis is equivalent to an additional 1.5 years of life for a male aged 60, i.e. taking our average life expectancy for the typical annuity customer up to 26.7 years. We've done the same thing, by the way, in terms of strengthening our assumptions for female improvements in mortality and applied the same approach to our defined benefit pension scheme.

The costs of strengthening the longevity assumptions have been fully met from a release of margins held in our other assumptions. The effect's neutral on an EEV basis and actually gives rise to a positive release under IFRS. The principal margin releases includes, for example, one from our allowance for defaults which we've set at very prudent levels in line with the very poor experience we had in 2001 and 2002, also from expenses, where a release of reserves is possible following recent achieved expense reductions, and also from the reserves against more complex benefit structures. We believe the resulting assumptions going forward remain adequate in relation to our expected experience.

My third main topic is capital usage and formation. You may recall these three red boxes, the free surplus, required capital and value of in-force from my presentation a couple of years ago when I explained the movement between them. Very briefly, when we write new business we have to set aside capital to back it. And we move capital out of free surplus into required capital. And additionally we lose capital from the free surplus for the cost of acquisition of business, including commissions. Offsetting this, the value of new business is incremental to the total value of in-force.

As the liabilities of our policies increase over time, the level of required capital to back the business increases, and that comes from further transfers from free surplus. Each year there's also a transfer of profit from in-force and we have the benefit of earning investment income on our capital. Expected claims and surrenders give rise to a release of required capital and also the transfer of profit from in-force to free surplus.

So if we turn all of that into numbers, and again the detail here is in your schedules, last year we used just over GBP500m of capital in acquiring new business. We had a transfer of in-force value to free surplus of nearly GBP1b and an overall increase in our free surplus of GBP743m. So this, I hope, gives you a sense of the strong capital generation within our insurance businesses that funds the growth in capital efficient new business that we write across the Group.

Well that's it from me, well almost. In a moment I'll hand back to Mark to conclude and share the Q&A. But as this is my 16th and last results presentation, perhaps you'll permit me to end with a couple of personal comments.

First to thank all of you on buy and sell side for the conversations we've had over the last eight years. They've been challenging. They've been thought-provoking. But I've never lost sight of the fact that I'm merely an agent for the shareholders. So your opinions have been interesting and they have influenced what we've done.

All too often though I have to say we've spent a lot of time talking about the never-ending quest for definitive insurance accounting standard, something to which we seem no nearer eight years on. And, as a result, the time we spend talking about accounting can be almost as long as the time we spend talking about strategy which is a great pity because the strategic story is a great one.

As you've heard today, all of the businesses have contributed to performance. Asia's growth over eight years has been spectacular. The business is five times the size now in APE terms than it was in 2000.

The management team has an unrelenting focus on value and a determination to deliver more. So it's been a great pleasure to work with Mark and these guys in the front row over the last eight years. And it's been a privilege to be Prudential's Finance Director.

Mark?

Thank you, Philip. And I think I also can't let the moment pass and without, I think, on behalf of the Prudential Board, particularly thanking Philip for all his energies and efforts and support over the last eight years. We know we will miss his great contribution, his insights and also his immensely different sense of humor. But I think both here and clearly day to day. But I think clearly from all of us we wish Philip all the best for the future and great success.

Moving on to outlook. There's clearly an ongoing nervousness and volatility in the markets and it's pretty clear that we're entering a period of slower economic growth, particularly in the U.S. and the U.K. However, notwithstanding this, we believe that our retirement-led strategy and our business model with its geographic mix and diversification, are very robust and will continue to deliver sustainable value.

The fundamentals underpinning economic growth in Asia remain powerful and as I said earlier, we will deliver the doubling of new business profit a year early. Our record of outperformance in the U.S. is set to continue through the cycle. And in the U.K. our value driven strategy has delivered market-leading returns and we have already de-emphasized those lines which might have been more sensitive to market conditions.

Clearly our asset management businesses are more directly influenced by market movements but they too are well placed to capitalize on their strong market positions and even stronger investment performance track records.

Critically for us the demographic, economic and social factors driving our business will continue and in my view we are ideally positioned to capture a bigger share of that growth. We have a clear agenda to do that and to my mind and the mind of the Board and my executive team, the prospect for the Group remains positive.

What I'd like to do is end at that point and stop now for questions. So we have the executive team here and we're happy to take questions. We have two ladies able to ask I think, and again please if you could give your rank and serial number it would be helpful.

Thanks very much. Two questions in the spirit of Philip's disclosure, one on strategy and one on accounting. The first one on strategy I guess is on Asia. And you're obviously bringing forward your target in Asia, could you give us an update about how the business in Asia is progressing at the moment given the economic conditions? Presumably you're quite positive about that.

And the other question is regarding the accounting treatment. It seems quite odd to see such a big economic variance and a positive risk discount rate movement in risk margin spread reducing at a time when the debt market value's moved as well. So I'm just wondering how you look at the profitability of the business because presumably the embedded value discount rate now is quite low relative to some of the economic assumptions that are being used in there. So it would just be quite good to get your view about how you view the profitability of the business you're writing.

Okay. I'm happy to take that. Let me begin I think by saying -- and then let Barry say a few words -- but let me begin by saying with Asia I think the clear sign of our confidence and belief in that market is by announcing the bringing forward of those targets. I think we have to achieve something like a 20% growth in new business profits this year and clearly consequent sales on top of that. So we remain very positive. It's a diversified model and it's a business that is firing on all cylinders. Barry, have you --

You might assume that given the fact that we have historically and continue now to rely heavily on unit-linked business to drive the life business, that volatility in the capital markets might have some impact on those sales. But the reality is, and I think we've talked about this before and it's a very important point to understand, is that 86% of our business that we write is essentially fairly modest premium, recurring premium business. People are saving for the long term. They are not particularly focused on which fund they choose. They tend in any event to choose a more balanced fund versus something that's more speculative in nature. And that continues to be the case.

To the extent that we have seen any significant impact in the first quarter, it has been really around the funds that people choose or in some instances people switching from fund A to fund B. But in terms of the volatility having an impact on the life business, the distribution dynamic and the nature of the product really mitigates that to a very large degree.

Philip, on the accounting side?

Very interesting actually because it's, I think it's still as much a strategy question as an accounting one actually because it's about what decisions that you're making for the long term. When as you say discount rates, credit spreads arguably at the end of the year and today are somewhat, let's say, differently priced from where you might expect them to be over the long term, and you may want to ask some of the business unit heads to talk about what they're doing, Mark. But the views we're taking about participation in U.K. annuities or institutional business in the U.S. or whatever are based around the long term fundamentals that we think those products have.

Must be the most difficult person to get it to. Just talk I think.

(inaudible - microphone inaccessible). I just have two questions if I may. On the annuities strengthening, reserve strengthening in the U.K., I'm just wondering, could you give us a sense of proportionality? What is the size of your annuity VIF, and so GBP312m is what proportion of that VIF?

And I was just wondering, just to again get a sense of proportionality, what's the average duration of your annuitant, if you're willing, in your portfolio and how does this assumption change extend that kind of duration?

And lastly about, in terms of price competition and considering that across the U.K. insurers you have different insurers on different bases, how does that affect your new business competitive position, considering that annuities are such a key component of your strategy?

Sorry, that was the first question in three parts. The second question was just on --

And they're not related at all, yes?

No.

We might as well pause there whilst we still remember them.

Yes. Can we come back because I think it's sensible, I think. Philip, David?

Well the average duration of the typical annuitant is probably the 70-year-old, but I think if I recall correctly that popped up on the slide.

David, do you want a [pop at it]?

Some life expectancies just to give you a sense of this. The -- we're assuming a 65-year-old male will live to about age 87 on a realistic basis through our in-force business. And just on a survival curve, about 40% will live to age 90, 25% will live to age 93 and about 7% will live to age 100. And for females it's clearly stronger than that. So we'd assume about 25% of females live to age 96 and probably 12%, 13% live to age 100. Now that's just the in-force realistic assumption.

When we move to Pillar I we have to be prudent. So we add a further year to two years to that. And when we write new business we also assume stronger assumptions than the in-force because in the new business market you have the effect of anti-selection from the enhanced annuity market. So about 20% of business now is enhanced so these are the impaired lives, you can get a better deal from their impairment. And it does mean that you have to take a stronger assumption for new business than your in-force. So again we add a year or two for that as well and there's a lot of science behind it but it's that sort of order of numbers.

So hopefully that gives you a sense of the scale of the longevity assumptions. We based all this on all the statistics that Philip was showing you. Those little lines of the -- that he opened with, it took about three months to produce those. But we then do -- having done all the statistics we do apply these common sense tests to just what is the age profile of the annuities -- annuitants in the survival time model.

What is it as a proportion of the VIF?

I can't answer that offhand I'm afraid given that it didn't change the VIF in total because we add all the margins that we've been, we've told you about in previous sessions that we held back deliberately and accumulated. We've ended up with the same VIF as we had in the first place.

Perhaps the U.K., we could ask Nick to take the second part of that or the third part of that.

It's a good question. Our -- I guess I should start rather than commenting extensively on other people's strategies, I should comment on our own in the annuities market, which is to be economically rational. So we look at what the long term returns are that we can achieve on our annuity business and price accordingly. I have to say that some of the people who are pricing aggressively in the individual annuity market are probably making a loss on an [MCE] basis right now and potentially quite a significant loss. We have chosen to be pretty disciplined in the individual annuity market and we will continue to be so.

In the wholesale market, I think there is probably an even wider diversity of economic approach if I can call it that. From an approach which says we will only write business where it's economically rational to do so based on prudent longevity assumptions and sensible investment assumptions, through the other end of the scale to what I might perhaps just dignify as a kind of hit and hope approach.

You have a, I'd say a fourth question, but you would say second.

Sorry. Next time around I'll keep it down to two. Just in the U.S. business I was just wondering, Clark, given that there's huge volatility in the investment markets, one of the hedges that you can't -- one of the activities that you can't hedge is policyholder behavior. So can you give us a sense on your GMWB products what are you seeing and how are your hedges performing? Are you happy with the kind of assumptions you have and how actuals are performing? Thanks.

In the GMWBs, it's early on in the cycle but I'd say we've not noticed any change in policyholder behavior. What we have seen historically is that about 25% of the people who purchase a GMWB actually start making withdrawals from it in the near term and that hasn't, that has not changed materially.

Our pricing assumptions are that when the benefit goes in the money that people will exercise by beginning their withdrawals fairly efficiently. That over about a two-year period you get to a substantial proportion of the people making withdrawals and making those withdrawals in an efficient fashion. I don't actually -- we do that to be conservative. That's not necessarily what I expect because if you think about it, your typical pensioner holding a GMWB, their goal is not to maximize the value of the option against the company. Their goal is to have a stable income stream. But we price that way because one does not like to take risks on unobserved data.

As far as how the hedges are performing, hedges are performing well. We were fairly conservative on a wide range of fronts at Jackson last year, particularly going into the second half of last year. And therefore we have -- we measure our hedging position against the present value of expected benefits plus the expected value of the fees on those benefits, which is more conservative than what industry practice is. And we over-hedged that position. We actually had a short position relative to the market at year end of about $250m on that position just because we didn't like the outlook. You're welcome.

Thanks very much. It's Blair Stewart from Merrill Lynch. Two questions. With the deterioration in credit markets since the end of the year could you comment as best you can on what that's meant so far this year for you in terms of mark to market effects?

And secondly you've made comments in the past, Mark, about being interested in theory of making bolt-on acquisitions in the U.S. Has the volatility in markets put you off that or are you still looking at that?

Philip, do you want to take the first part? You --

I will but I shall be looking at Clark as I do it. It's about GBP200m if you were to mark it?

You were going to call me up for bolt-ons anyway I suspect.

It's a U.S. takeover again.

If you look at where the mark on our portfolio was at late in February, it was, the gross losses in the portfolio were approximately $1.2b. The net losses, if you offset gains, were about $80m. And so what you see is some deterioration. I think that works out to in the gross loss position about GBP200m worth of deterioration but nothing shocking relative to a $46.5b portfolio given the state of the markets. We'd like our investment positioning relative to the market quite a bit.

Clark, $800m or $80m?

$80m. Did I say $800m? The -- $80m. We had a net loss position of $80m as of late February. The -- I would have retracted the statement about liking our position if it was $800m.

The -- relative to bolt-ons, I actually think given the volatility in the market that's a help for bolt-ons. So we've been looking at stuff fairly continuously over the last couple of years and the problem is that the pricing cycle for properties, for insurance properties, is very tied to the business cycle, it's very pro-cyclical. And so things have been very expensive.

And I've said in the past we'll look at 10 things for every thing that we buy because we're very happy to walk away if we don't like the returns while price to book ratios in the U.S. have been high. What has happened right now is price to book ratios are much lower. Some people are conceivably looking to dispose of properties because of their capital situation and there's not a lot of money around chasing those and there's not leverage to apply in those calculations for banks, private equity firms that may want to purchase those. So actually the pricing cycle is working to our benefit.

If you look at the nature of the cash flows we would be looking for, life insurance stable cash flows, that's really going to be not affected very much by the cycle that we're in right now. So I'm not making any announcements but I think that the cycle is actually helpful for what we want to do on bolt-ons given our return thresholds.

Effectively business as usual. Jon?

Jon Hocking from Morgan Stanley. I've got three questions. In terms of hedge costs in the U.S., what are you seeing in terms of hedge costs? Are we in a situation where that's going to have to be priced on to customers and what impact on demand could that have?

Secondly in Asia what proportion of new business profits are coming from healthcare? I wonder if you could give us some guidance on how that's going to pan out?

And then just finally in terms of the implicit margins in the U.K. annuity business, what proportion, crudely, have we seen released today? I don't think that question's going to be answered but I'll ask it anyway.

Hedge costs, Clark?

What you're seeing right now is that long term vol in the U.S. has increased from a long term average of maybe around 21% to where you're seeing at the 10-year point on the SMP500 maybe 28% to 29% right now. So that's been a pretty good increase. We don't hedge exactly at the 10-year so what we're seeing is probably about 25% vol right now in what we have. And we're comfortable with our pricing relative to that vol. If it ends up being a permanent change in vol, which I do not expect because there's just no actual realized volatility that supports that pricing level, then we and everybody else are going to have to move our pricing up somewhat. But we're pretty comfortable with our pricing right now.

Proportion of our new business profits from health products, Barry?

We -- as you know we put a lot of emphasis starting in 2007 on health insurance and we're making very good progress. To answer your question, in terms of APE, which is a number I know right off the top of my head, it's a little over 10%. The NBP number would probably be slightly higher than that, or would undoubtedly be slightly higher than that, and I'll tell you why using a specific example.

As part of this healthcare initiative the first part that we launched was a new product in Singapore, which launched last May. Historically, prior to the launch of that product in Singapore, we've been selling an average of a few hundred policies a month. Between mid-May when the product was launched and the end of the year we sold about 65,000 policies. The margin on those products is very strong and as a result of that initiative, and the sales continue not quite at that frothy level but at a very strong level, you actually saw the margins in Singapore tick up. Even in an environment where there was on the life side there was more business shifting from recurring premium, which is higher margin, to single premium, which by its nature is a little lower margin.

So hopefully the -- I guess the bottom line is that we are making progress already in growing health business. The margins are strong and you can already seen some examples in the business where it is having a specific impact.

(inaudible) traditionally it's been around just under 10%, accident and health would have been about 10% of the portfolio. And I think the initiatives -- it seems like Barry has been here longer, but Barry's only been here 15, 16 months. I think initiatives particularly put in place last year are beginning to come through materially and we've sold overall with new products about 130,000.

Yes, in the launches, the three -- the principal markets where we launched in addition to the Singapore example I gave you were India and Hong Kong. India came online I think in September, Hong Kong in November, and it's approaching 150,000 policies those three markets sold. Having a good impact in India as well.

It's just beginning in a sense.

It's just getting started, just getting started.

(inaudible - microphone inaccessible) should be 20% of volumes in five years?

That's a forecast.

It should actually grow as a proportion?

It should grow as a proportion. Yes it should, absolutely. Implicit margins?

Implicit margins. As I said Jon, we think they remain adequate and I think what I'd suggest is if David just gives you a view of, for example the default margin, you get a sense of how comfortable and how prudent we think we remain.

Yes on defaults on the annuities we take -- we start with the overall corporate bond yield, gross yield. We then take off expected defaults, which we take to be between 100% and 200% of Moody's data since 1970. And the 100% to 200% depends on credit rating because we assume the future will be worse than the past. We then take another allowance for risk by actually adding on the excess of the 95th percentile of Moody's data over the last 30 years over the median so that we move into the tail of the Moody's data.

And that would be the normal sort of assumption we'd hold. And at this year end we have actually seen quite a big widening in spreads and so our assumption is that there will be some downgrades during the course of 2008. So for the purpose of this year end we've got an additional reserve that starts with each bond from the worst of its current rating according to Fitch, Moody's and S&P, and then we assume that the entire portfolio downgrades. Now I should stress that's not what our investment managers tell us is going to happen. That just gives you a sense of the sort of things that actuaries do in terms of setting margins. So that's a flavor of the strength of that particular assumption.

Greig?

Good morning. Greig Paterson, KBW. One is a request. I always get your Asian equity sensitivities wrong. I wonder if you could do those by country so that we've got more clarity on how those turn out?

The second one is in the U.S. I wonder if you can give us some idea on what year to date trading has been like in the VA market?

And thirdly a question, your chief actuary mentioned that your average duration is 22 years for a 65-year-old male. Friends Provident and Aviva are using 23.5 years. Does that mean we can expect another significant adjustment in 2008?

David, are you happy to take that last part? (inaudible).

No, as I said we're very happy with the work we do on mortality in terms of setting our assumptions. We use a combination of statistical methods and common sense. I've given you the common sense part of it.

On the statistical methods we use all -- many of you will have seen the report that came out from the CMI listing hundreds of different methods and we've used most of those. The Lee-Carter method, the P-spline method. P-spline is this penalized regression method where you take lots of cubic polynomials, fit them together and you get a very nice smooth surface that you can fit to your past mortality and then you project that forward. We look at causes of death. So we've seen the fantastic improvement in heart disease over the last 10 years. We do believe that the effect of that will start to fade and that's purely a mathematical thing. There are now far fewer people dying of heart disease therefore as that continues to improve the overall impact on mortality will be far lower.

So we do all of this analysis and we've now made our assumptions explicit and we're very comfortable with those. So we're not anticipating any immediate change I have to say.

Clark, I think just to give a sense of some of the product mix shift and perhaps why VAs may be different this time in the cycle than last time.

Yes. I think we like our position coming into this year. We like our position a great deal because we have a great deal of momentum, share gains in all channels. I think we had the largest absolute gain in market share in the industry last year. So coming into this year we're in very good shape.

Now, obviously, VAs trade relative to the market so when the market is as bad as it's been recently that's going to have some knock-on effects in the VAs I think. But what us and other observers have also flagged is that the impact of guarantees may make it a little less cyclical industry than it has been historically. By the same token if you look at expected purchaser behavior and the shape of the yield curve, typically if you get a steeper yield curve that's going to be a better environment to write fixed annuities at reasonable margins.

Yes I think the important point to emphasize as well, Clark, is that we are top 10 in all three.

We are top 10 in all three. So -- well we're number 11 in VAs, but top 10 in the channels in which we participate just to be precise.

James Pearce from Cazenove. David's mentioned a common sense test a couple of times. I'm struggling to understand the common sense of assuming higher investment returns this year when equities are down and your opening government bond yield assumptions are lower?

And the second question for Philip inevitably is about accounting. Can you give us your thoughts about why the earnings growth is so much faster than the dividend growth? And why both IFRS and embedded value earnings are such poor indicators of shareholder cash flows?

Do you want to start Philip?

I could. I was going to suggest we might take all the other questions first and I'll use the remaining time to try and -- to give my last ever comments on insurance accounting. The IFRS -- EEV/IFRS cash lag, well first of all there is no one version of IFRS. So those who seek to compare the European peer group using current IFRS accounting are comparing historic French GAAP to historic Dutch to historic German. And also in a number of territories in Asia which are accounted for using U.S. GAAP. So IFRS is not a single consistent framework. And as I think many of you know, there are all sorts of adjustments to it in terms of deferred acquisition costs and so on. Which means it doesn't give an indicator of -- it's not a particularly good indicator of cash flow. Not least because in our case also the shareholder transfer from the U.K. life fund remains a very important contributor of cash.

In terms of trying to plot our own dividend profile in the future, a number of you I know have attempted to model the holding company cash flow over the medium term using some of the indicators that I've given at past results sessions. And I think that that's probably the best way of trying to interpret how the operating cash flow may improve. Bear in mind also we have said that we want to get to a target dividend cover of 2 times and we were at 1.9 at the end of the year. So I think that's, that will probably the shortest way of trying to say how you can best look at the expected cash flows and how that might translate into dividend.

I think to add to that clearly the -- as you know James, it's effectively a timing difference. And I think we still have very substantial opportunities to grow this business and we'll take those opportunities. So --

I'll just make two comments. If you -- I've given you a specific profile of Indonesia today, which is not unrepresentative of territories in Asia and the progress from capital going in, new business profit, IFRS coming out. And also if you were to go back over the several years now that I've been disclosing the IFRS profit of Hong Kong, Malaysia, Singapore together and look at that trajectory, you'd also get a sense as to how that lags by a number of years the new business profits coming out from those territories. And I dare say the guys will be talking more about that specifically in Asia next month.

The first -- sorry, the first part of your question, James, I'm not sure.

I just want to understand why it's common sense to assume higher investment returns this year given what equity markets are telling us and given lower opening government bond yields?

Well I think on that you might be arguing for return to achieved profits with passive assumptions. Because what we have done is to take what is observed in the market and the embedded value is derived from that. But perhaps we can talk about that one later, James.

Yes, it's fairly mechanical. Please.

Christian Dinesen from Merrill Lynch. If we can return to the credit theme for a moment please, the very helpful update you gave year to date of a $1.2b gross loss and $80 net loss, you didn't have any defaults in '07. Was there any defaults in those numbers?

And the second question is if you are going to do a release of margins held in other assumptions to include defaults, perhaps you could -- comparing to your '01/'02 experience, perhaps you could give us a little bit of a maybe quantification or explanation why you think that that's justified at this moment in time? At least when you work in the credit market it doesn't look all that much better. Is there for example a portfolio with a higher average rating? Maybe you could give us an indication of the amount of money you've spend on credit hedging or something that gives us an explanation of how you see it differently to '01/'02 please?

No defaults in '07 and I think no defaults year to date in '08?

Correct.

On the second part of the question, the release of margins related to investments amounts to GBP48m of the GBP312m. So it's a relatively small part. And I refer you back to the explanation David gave of the reserve for credits based on Moody's rates since 1970, 100% of that level for BBBs, up to 200% of observed default experience in AAAs because we don't there've been enough of them. So there's strength in those reserves plus all the additional margins that David mentioned. So putting all of that together I think gives you a sense of the reserves that we have which do anticipate or which are modeled on the basis of tail events rather than best estimate events of credit default.

I think it would be worth Clark maybe spending a couple of seconds on that as well to give you a sense, particularly because of the U.S. experience.

Yes. What I'd actually like to do here is we have with us today Leandra Knes who runs PPMA, our investment management affiliate in the U.S. that manages Jackson's general account. And I think she could give you a sense of how we're running the portfolio.

Great. Thank you Clark. Really if I can cut to the chase, my background is as an analyst as well. And so if I was sitting in your shoes I would be asking why will the next credit cycle not be the same as 2001/2002 was for the United States. And I can assure you we have taken a number of steps that we are confident will serve us well. The first is before 2001 we actually were organized analytically in a way where we did not have dedicated credit analysts. Our portfolio managers were part time and credit analysts were part time. The same people essentially.

So in a 2001 reorganization we now have 21 dedicated credit analysts with an average years of experience of 12 years per analyst. They cover between 40 to 50 names each, and each and every credit that goes into the Jackson portfolio is actually underwritten by an investment committee. So in other words there's a credit committee rating and internal rating. So while we certainly look at agency ratings there is reliance on the internal ratings done by the analysts. So that's one.

Also in this reorganization we set up a world class quantitative analysis group. I actually took a person from Merrill Lynch on this and he really brought us into a stage where regarding attribution, rich/cheap analysis etc., I can boast a little, we feel we're really leading edge. So that's the second thing which is a positive change. Thirdly we went to a modified total return way of managing the portfolio. Prior to 2001 we were far more buy and hold. On total return, as you well know, when you start to see a diminution in credit worthiness you tend to trade out. So we certainly are not holding the large lumpy positions we did in 2001. Last but not least, we manage now to an index. That has been extremely positive because as you know it promotes diversification as well as sizes or position sizes far more appropriately vis-a-vis our peers. And as you know U.S. insurance is a relative game.

So in summary I'd like to say we are far more confident that these measures will serve us well throughout any potential credit downturn.

Bruno Paulson, Sanford Bernstein. Two questions, the first in one and a half parts. On the IFRS in the U.K., if you strip out the with-profits and the mortality changes you had about GBP100m of profit in '07. What I was wondering is how that was split between the profit off the growing annuity book and the rest, and how fast the profit on the annuity book is evolving.

And linked to that the U.K. non-with-profits took up GBP140m this year, which I think was a bit lower than you originally expected. What's the likely track of the U.K. absorbance of capital over the next few years? And I'll come back with part two.

The capital injections into the U.K. remain on track to continue to decrease and to be neutral by 2010. So by 2010 the shareholder business will be self-financing.

We haven't broken down the IFRS, but the majority of that IFRS profit is indeed from the annuitant activity, annuity activity. Given the profiles of that business and how it is growing and becoming self-financing you'd also expect the IFRS profit growth from the annuity, from the shareholder annuity business to grow steadily from here.

And the second question, arguably so controversially, given that the spreads on a lot of asset classes have blown out a long way, largely or partly due to liquidity concerns, and the fact that you're in a strong capital position having no liquidity constraints, is there any appetite to exploit the current very distressed prices in a lot of asset classes? For instance by selling the -- closing out the CDS position you took last summer.

Not particularly controversial in terms of the fact that we are looking at opportunities in -- to invest new money at current prices. Looking at colleagues in the front row as to anyone wants go give anything away on that.

I think it's -- there's this piece and sensitivity we are taking some positions and quite serious positions. But I think that's, given we have potential to move markets, I think that's commercially too sensitive to go into any depth about.

The microphone is just next to a questioner.

That's right, I am so sorry.

It just would be easier just to pass it along.

Thank you, Hani Sabbagh from Viking. On the $1.2b of gross unrealized losses, I wonder if you'd just give us some more details on those with regards to what percentage of the value of affected assets that is, what the maturity or what the duration of the unrealized losses they are and what the ratings of those assets are?

That all really, all the answers to all of those questions are in the 30 pages that have been published. So to try and do that now would really just be reading stuff from a list. It is all there and if there are things that are missing then do come back to us, and --

I guess the main question is just given the rule of the -- 20% rule and the six months to get the impairments --

Philip Broadley Sorry, I can't --

Given the rules of 20% impairment for six months where you have to have to take them through the earnings, how close are some of those unrealized losses to being impaired?

Clark can't wait to answer.

As of late February we had about $300m trading below 80 under the OTTI rules. We need to consider, if stuff remains trading below 80 for more than six months we need to consider it for impairment. So if the markets remain locked up we think the current pricing of a lot of that stuff represents exceptional value. But if the markets remain locked up then we'll have to start looking at that stuff mid-year and then the third quarter. It's a relatively contained number in the context of the portfolio. Dollars, I was reminded.

Good morning, Andrew Crean at Citi. A couple of questions, first where is your embedded value now, and where would it be under market consistent embedded value? So if I -- I hope you did expect me to ask that question. And also the new -- how would the new business profits fair under market consistent?

The other question was strategically on Asia. You are clearly growing faster there and its becoming a bigger proportion of your business. Clearly it's an area where there is quite a bit of debate about the valuation of Asian businesses. Would you do anything structural, consider anything structural in terms of trying to show the value to the market, i.e. sort of minority floats or anything? Or is it just a question of (inaudible) grinding away with visits to the Asian operations?

I think, Andrew, as you would expect the answer to your first question is short. I think clearly we've been working hard at the [MCV], but we said we'd come back later this year and we will give those figures in depth later this year. We are not giving any individual figures at this point in time.

In terms of Asia I think I wouldn't be alone as a Chief Executive in being frustrated about the value of Asia within our share price. I think we -- part of the effort, the elements we are trying to do is clearly increase disclosure. We have the visits of the analyst community to Hong Kong and Jakarta next month. And we will continue to look at things to be able to raise the profile and ensure the value comes out in some way. I think we have absolutely no plans at this point in time for a separate Asian listing.

And embedded value now?

Embedded value now. I am not sure doing any sort of -- trying to do an embedded value on a daily basis is terribly meaningful. If you look on from the end of the year to now there would be some more new business profit, there will be some more in-force, there would be some more profitability from the asset management businesses. And I -- and so my columns B, C and D would have been, would have had some additions. And I guess column G would be lower. But the sensitivities are there in the schedules if you want to try and estimate that. It's not something we've sought to do for publication.

Yes, I just had a -- it's Tony Silver at Standard & Poor's Equity Research. You had a slide, as usual, showing capital generation, and I was wondering if that's led to, what change that has led to in your core borrowings, which is a number you've -- which appears in your annual report. I might have missed it here, wondered what that was now.

Secondly it is, you've provided a figure in the past on what the deduction from embedded value would be if you assumed level interest rates in Taiwan. And there is something about that here, but I didn't see that particular figure. I wondered if you had that.

And finally there just coming back to Asia and strategy, there has been comments around about Chinese partners being potentially interested in you. And I think Mark you commented on this in an interview at Davos. But I just wondered if conceivably there are any attributes that a partner would have, an additional partner, that would interest you. For example a Chinese bank with a big retail network.

Sure, let me take that in reverse order Tony. I think in term of potential partners, clearly I won't speak of and won't comment on sort of market rumor or speculation on any individuals. I think if you look at it from our point of view what can a strategic partner bring? They can bring cash and capital, which we don't need. And they can bring perhaps connections and then potentially a customer base. We have a successful and expanding business in Asia particularly and we remain very confident of the growth there. So at this point in time hopefully that gives you a sense of where we are.

In terms of deductions for embedded value, for embedded value interest rates in Taiwan there's been no material change to the figures we've been giving previously. And so it's up around the same levels.

The core borrowing is to be found in note P on page 28, Tony, which I am sure you've had an opportunity -- haven't had the opportunity to get to yet. It fell by just over GBP100m at the -- in terms of borrowings offset by the holding company cash I mentioned. So it actually fell from GBP1.5b at the end of last year to just over GBP1b this year. The 2007 debt, senior debt matured and we didn't (inaudible).

Do we have one last question?

Yes, Marcus Barnard from Pali, just a couple of things. Firstly, your Asian money market funds, in light of the credit crunch can you say what's going on there? Is there more activity, more redemptions more money going in or is it about the same?

And secondly I think in note 28 or note P on page 28, you are about 6% geared from memory. Is that a figure you are comfortable with? I know you are under-geared because you sold Egg. But can you see yourself doing something to change that gearing figure? Or is it something you are happy to run with?

Take the gearing first, Philip.

Unlikely to be doing anything in the current markets. But as I've said on a couple of previous occasions we do have capacity to raise subordinated debt. Our plans will continue to be to replace the senior debt as it falls due or to refinance that maturing debt with fresh hybrid, but not obviously in the short term.

Barry, money market funds.

We have seen more movement of money to money market funds out of equity funds, particularly in India. But it's important to understand that that's sort of a natural dynamic this time of the year in India as you approach tax season at the end of this month. So it might be a little more exaggerated than we might normally see, but yes we are seeing that.

Other markets, there is some modest movement to the money market from equity. But the equity actually in terms of the net inflow of the equity is actually still pretty strong, so we are pretty optimistic.

Now we get, at that point with no other questions, thank you very much for coming and listening this morning. The executive team will be here, so any questions you would continue to like to ask we will be around. Thank you.