Prudential PLC (PUK) 2008 Q2 法說會逐字稿

Yes, good morning, and welcome to our 2008 interim results presentation. We know this is an exceptionally busy morning in the market and we understand that we are with 15 other companies, our results this morning, and I think we appreciate you being here. I'd like, please, to welcome Tidjane Thiam to his first results meeting and also joining us are my executive colleagues to assist in the question and answers at the end.

I'm delighted to be presenting a strong set of results this morning. The first half of 2008 has been a very good period for Prudential, both in absolute terms and I'm sure, after this reporting season, relative to our peer group, and I'm pretty sure a continuation of the growth momentum that the Group has now sustained over the last three and a half years.

This morning I'm going to talk briefly about the strategic growth drivers that underpin our performance and explain why these will remain appropriate for the long-term. I'll then take you through the Group's headlining new business and profit performance followed by the top line commercial developments in our individual businesses. Tidjane will then go into much more detail on the financials, and then I'll conclude some comments on outlook.

But, first, I want to remind you briefly of our strategy. At Prudential we're focused primarily on the enormous opportunities offered by the rapidly growing pre and post-retirement market around the world. Quite simply, that's where the major growth opportunity in our industry is to be found. We remain confident that we've got all the key ingredients to continue driving sustainable value for shareholders. And those ingredients include our focus on a retirement-led strategy, our international business mix and an unrelenting emphasis on generating profitable growth and an excellent delivery.

Now, we're all well aware that these are times of great uncertainty and volatility and, of course, that makes for an extremely challenging environment. But in spite of that, you can see that we have delivered a strong performance. It's being driven by our clear strategic positioning and the advantages of our business model.

So, the headlines. Growth of new business across the Group is 12% -- was up 12% and new business profit increased by 11%. Our asset management businesses performed exceptionally well in a highly volatile environment, with net inflows of GBP4.1b. EEV operating profit increased by 7% and IFRS operating profit by 13%.

The cash flow part of the Group continued to improve and, overall, the capital position of the Group remains very robust. We estimate the IGD surplus at the half-year stage was GBP1.4b, a [carve up] of some 1.7 times.

Naturally, there's a great deal of focus at the moment on the credit environment and, as I said back at our prelims in March, we came into this environment in a defensive positive. Indeed, we have been actively managing upwards the quality of our credit portfolio over the last couple of years. Because of that, and because of our defensive positioning, it had no material impact on our results. Tidjane will update you further on the credit position and capital, and in some detail, later.

As a reflection of our continuing confidence in the business and in our balance sheet, we are proposing a 5% increase in our interim dividend.

I use this slide of the 2007 year-end presentation, and said then that a good geographic diversification of earnings and risks are absolutely fundamental to the Prudential model. They give us a hedge, particularly in times of economic volatility. We operate businesses in different cycles of maturity and in economies vary in growth and affluence. So you would expect us to deliver stronger overall performance than we could achieve if we were overly dependant on any one market. And I think today our figures demonstrate the success of this diversification.

Without doubt, Asia is our core driver of growth and profit, providing 56% of new business profit and, in fact, nearly 80% of our total new business profit is now generated overseas. I you look at Life EEV operating profit and the scale of our achievements in Asia that I've just mentioned, we can see that the region now accounts for around 40% of our business on this measure. On an IFRS basis the UK business remains a very significant contributor, combining the continued strength and success of the With-Profit fund with a growing contribution from the Shareholder Annuity business.

Finally, a rapid growth achieved in our Asset Management businesses means that they now account for around a quarter, around 25%, of our IFRS profits. We've achieved that performance by maintaining a clear strategy and by delivering excellence in the implementation of our plan across all of our markets.

Let's move on to look at the businesses and, firstly, at Asia. In the first half Asia continued to perform strongly, with new business up 14% and new business profit ahead 15%. And it's important to remember here, and Tidjane will go into more detail, that we achieved significant growth in Taiwan in the first half of 2007; that's over 100% growth that we saw in the same period last year.

Excluding Taiwan, which gives you a better sense of the true underlying growth in the region, new business across Asia grew by an excellent 29% and new business profit increased by 26%. With that in mind, we remain confident of achieving a doubling of 2005 new business profit by the end of 2008; that's a year ahead of our previous target -- previously stated target for 2009.

One factor that continues to differentiate us from the other life insurers operating in the region and one that gives us a great advantage is the unique breadth and depth of our operations. We are not over reliant on any one market. We've got more top-three free market positions than anyone else in Asia, around seven now, and we truly have a Pan-Asian business. There were a number of very strong performances and let me highlight a couple of these.

Indonesia was up 96%, driven by growth in agency numbers and increased productivity. And those of you here that were with us in Jakarta a few months ago would have seen at first hand the power of the agency model and the depth and professionalism of the training in place. Additionally, [capital] products and our significant growth opportunity and accounted for almost a quarter of our new business in the period. And the regulatory and political environment is stable and the market offers a huge opportunity for us as market leader.

And Hong Kong was up by over 50%; really an outstanding result given this is one of the most competitive markets in the world today. But underpinning our growth across the region is the strength of our multi-distribution -- multi-channel distribution model. Across the region we now have over 420,000 agents and the profile of these men and women from the Pru vary by market and vary by country.

For example, in Korea it's typically a 35-year old male graduate, whereas, in Taiwan it's a 40-year old woman with secondary education. Our focus on agency management training, on productivity and on our processes reinforce our position as agency employer of choice for all of these people. And that's been fundamental to our success. It protects the quality of the business we write and our market reputation; all together, a virtuous circle.

We are also unique in the breadth and depth of partnership distribution we have. We've got partnership relationships with over 80 financial institutions in the region. And I was particularly please to announce on Monday a deepening of our successful, very successful, relationship with Standard Chartered Bank. We are extending that relationship to new markets, to Thailand and Japan, and that puts the number now in total markets to eight and we're broadening our product offering to include health.

The proportion of linked business, and this is clearly a critical driver, has remained in line with previous years, despite the current market conditions. And also what has remained in line is the level of regular premium new business, which accounted for about 86% of Asia's APE in the first half. Both these elements demonstrate that we are very much on track and this is very much business as usual.

These two factors give us very good indicators of the powerful, underlying trends and of the savings -- and the strength of the savings culture in Asia. We're also seeing an increase proportion of Health and Protection business, which is 56% this year in line with the work that Barry and his team have been doing and our strategic push in this area.

There's been a lot of debate about the Asian economies in recent months, and I want to give you my perspective on that. The table on the left gives a view of forecast GDP growth in the main Asian markets. As you can see, there is no expectation of a significant or worrying slowdown. Indeed, cooling is desirable in some places to avoid inflationary surges. Asia is clearly not decoupled from what's happening in the West but, by and large, it's becoming more and more capable of supporting growth internally.

In April, Barry and his team talked about the significant growth drivers that we see in the region, including rapid urbanization, a growing mass affluent class, changing family structures and increasing self-reliance for financial well being. These are all dramatic and unprecedented changes and give us a tremendous opportunity to provide a range of financial solutions, given our experience, breadth and depth of operations and, importantly, our proven track record. But Asia is exceptionally well placed to capture a large share of the value that will emerge. We remain very confident in the long-term growth dynamics in Asia.

Moving to the US, the environment in the US is exceptionally challenging but our performance there has been resilient and, indeed, picked up in the second quarter. As we expect at this point in the economic cycle, risk-averse customers are moving from variable to fixed annuities and some of the competitive pricing behavior we're seeing from others is clearly unsustainable.

As we have said before, it is very important to have a set of products that means we can deal with varying economic conditions and the Jackson model, being top 10 in fixed, fixed index and variable annuities has held up very well. We've responded to changes in customer behavior and product innovation, including new GMWBs, an investment option to the VA range, as well as expansion of the fixed annuity product offerings.

Total new business in the US was GBP356m and that made it a record first half. Retail new business of GBP274m was down 4% and new business profit was down 5%, affected by the change in product mix; the switch clearly from variable to fixed.

But importantly here the net flow level, we are continuing to see very good performance across the annuity books. Indeed, the second quarter, the last quarter, saw the highest quarterly net flows in JML in the last five years.

As we look into the second half we expect the VA market to remain challenging, but conditions should remain positive for fixed annuities. VAs will remain our largest product by some distance, but for a return to growth we'll need to see some improvement in the economic -- in the equity markets. And even then there'll likely be a lag in consumer behavior as we've seen before with previous market dislocations. But with the breadth of our product range we believe our performance will be resilient. We will also maintain our pricing discipline and, as we've shown before, we are prepared to lose share if the economics don't work. We will not pursue volume over value.

In the current conditions there are an increasing number of sellers of life back books, the pricing we see at more realistic levels. As we've said before, the back book bolt-ons are a particular target for us, where we can take advantage of our scalable platform to integrate and reduce costs as we did with the Life of Georgia acquisition. There's no material updates here; we are still clearly looking at this market.

Then we move on to the UK. The UK has performed exceptionally well in the first half. We've seen 11% increase in retail new business APE and an overall increase including the wholesale operations of 18%. New business profit was up 19% and the internal rate of return on new business was 15%. These figures demonstrate the discipline and focused delivery of our UK strategy is producing the anticipated and positive financial results.

As you know, our strategy has three key themes. First, to capitalize on our strength in the retirement income market, second, to reshape our approach to retirement savings, to improve returns and take advantage of our with profits capabilities and, third, to reduce the cost base which is -- as we all know, is essential to generating adequate returns.

In retirement income, our leading position in the retail annuity market continues to be supported by the strong internal flows from maturing pensions, and that's contributed approximately 50% of individual annuity sales in the first half. That, combined with our partnership business, gives us a very, very strong base.

We also continue to build successfully in the Lifetime Mortgage market and that's a strategically important market for the future. We believe that at the end of the first half we are market leader, with a market share of about 25%.

Our approach in Wholesale remains consistent and value driven. It's clear that in the bulks markets pricing differentials have narrowed, creating opportunities for us. And during the period we completed a bulk annuity reinsurance contract with Goldman Sachs for the reinsurance of just under GBP300m of Rothesay Life's non-profit annuity liabilities. This is an interesting development for us in terms of bringing alternative risk management solutions to the defined benefit bulk market. However, we'll continue to be selective and will only commit capital when returns meet our demanding criteria.

Moving on to Retirement Savings where we targeted, as you know, major change and we've worked very hard to improve returns. In the current market conditions the Prudential brand in particular, as well as the cautiously managed profile of With Profits, makes us very attractive to more conservative customers seeking capital and income guarantees. Across the retail product range in the UK 46% of new business was With Profits related, and there was particularly strong growth of With-Profit bonds which almost trebled. We also remain the clear market leader in With-Profits annuities.

We are continuing to make excellent progress on delivering our cost savings target. The latest milestone was the commencement of the outsourcing deal signed late last year with Capita, and which went live in April. We've also been in the process of establishing a Group-wide data center based at our facilities in the US. And during the first half of this year the UK business completed the migration of their data center to [Lancing].

And as you already know, we announced in June that we will not be proceeding with the reattribution of the Inherited Estate, having concluded that their current operating model was better suited to the long-term interests of shareholders and policyholders.

Turning now to Asset Management, where as I mentioned earlier we achieved excellent net inflows of GBP4.1b, M&G in particular performed superbly across both the retail and institutional sectors of the market. They've had net inflows of GBP2.4b in total and good flows across all asset classes, with the exception of property. I would expect M&G to have significantly outperformed the market.

Critically, in terms of investment performance, I think this is fundamental to the basis of the success of M&G, is that we've seen this year that half of M&G's branded retail funds measured by funds under management, have performance in the top [decile]. These flagship funds, such as Global Basics, the Recovery Fund, Optimal Income Fund and American Funds were strong performers and over three quarters of our funds were actually in the top quartile which, again, gives you the underlying investment performance, begins that virtuous flow; you have the performance, you'll get the inflows, you'll get the profitability.

On the Institutional side there was again excellent performance, with almost 70% of mandates exceeding benchmark. Operating profit was GBP146m, slightly ahead of that reported in the first half of last year. In these market conditions investment performance is more important than ever and M&G's exceptional track record is serving it well. Their outstanding performance was recently recognized by Investment Week, when it named M&G Best Global Fund Management Group 2008.

We had a successful half year in Asia as well, with net inflows of GBP1.6b; an excellent performance given the 20% plus aggregate fall in the local stock market indices. GBP900m of those net inflows go into longer-term equity and fixed income products.

We continue to extend our product range, including major fund launches in Taiwan, Korea, Japan and a third new fund in China. And the significant falls in equity markets had a modest effect on operating profit, which fell just GPB4m to GBP29m.

We have continued to develop the breadth of this business. In Vietnam we again broke new ground with the launch of the country's first institutional property fund. In Japan, where we are the second largest foreign asset manager, we established a new distribution relationship with Nomura, our third mega distributor relationship. And, lastly, in our more recently established Middle East operations, we have already secured 14 distribution agreements.

What I'd like to do at this point, and to let you hear more about our performance, is hand you over to Tidjane.

Well, good morning. There were suggestions by some of my colleagues that we should provide you with simultaneous translation in English, but we decided against that, so you're just going to have to put with my accent.

I am very pleased to be here today and to present to you my first set of results as Pru CFO. Since I started four months ago now, I have had three clear priorities. The first one is to deliver a strong performance on our key financial metrics. We have made a number of commitments on which we will deliver. The second one, of course, in these volatile times, has been to manage capital. And the third one is to, over time, provide you with enhanced disclosures.

I have had a chance to go around the Group and familiarize myself with our businesses, and my challenge is to make you as enthusiastic about them as I am, with better and simpler disclosures.

So, let's start with how we have delivered on our key financial metrics.

Mark has already given you an overview of this page so, rather than trying to cover it exhaustively, I will simply focus on a few select items; EEV new business profits, IFRS operating profits, Holding Company cash flows and, finally, EEV shareholders' funds.

So let's start with new business profits. On a constant exchange rate basis our new business profits have increased by 11% over the same period last year. Looking at our key markets, new business profit in Asia is up 15%; a very strong performance, given the exceptional level of the 2007 comparative, and I will come back to that. The US experienced a decrease in NBP of 5%, whilst maintaining an 18% IRR, which I consider a resilient performance in a difficult market environment.

And, finally, a truly exceptional delivery in the UK across the board, with NBP up 19% and a strong IRR of 15%. We are in a strong position in the UK with a very good set of results which stand out in this very challenging context of the UK economy. Retail new business profits grew by 10% to GBP124m, and the GBP5m new business profit achieved in Wholesale reflects the bulk annuity contract that we completed with Goldman Sachs. An average new business margin of 30% was achieved, consistent with the same period last year.

I'd like now to cover in more depth both the US and Asia, where there have been some significant evolutions in the first half of 2008 turning, first, to the US.

As you can see from the top end of the slide, we have experienced over H1 '08 a shift in product mix between Variable Annuities, VAs and Fixed Annuities FAs. In the VA segment we are staying true to our value-over-volume philosophy. This contrasts with some of our competitors, who are pricing their products, notably the living guarantees, at what we believe is an uneconomic level.

Going after volume growth is not a strategy we want to follow when there is limited appetite from customers for these products. As a result, VA APE [and] new business profits were down respectively 20% and 15%.

In the FA segment we have experienced some good growth as customers have turned their interest towards these products, which is typical at this type in the economic cycle. APE was up 121%, whilst NBP grew nearly threefold. Overall, Jackson's margins evolution reflects the product mix changes. I want to say that we manage our businesses to generate a strong return on capital and that we are pleased that, in spite of all the changes observed in the US market this year, we have been able to maintain our IRR at 18% from '07 to '08.

Let us now turn our attention to Asia. Mark has already highlighted the strong 2007 sales comparative for Taiwan. What you see on this slide, which I borrowed shamelessly from Barry, is the exceptional impact of our 'What's Your Number?' campaign and of the launch of our new VA product in the second quarter of 2007.

Barry and his team's generated GBP130m of APE in Q2 '07; more than three times the average quarterly '06 sales. Please also note, to your right, that the Q2 '07 results are good, some of our best results, with an increasing market share from 3.2% to 3.7%. So with these exceptional comparative in '07, it is easy to miss the real strength of our current performance in Asia, which I would like now to turn.

So, as you can see, if you exclude Taiwan our businesses in Asia delivered a 29% growth in APE, while new business profit grew 26%. I would like to highlight our achievements in a number of key territories.

In Hong Kong the success of our two new linked products has driven NBP up 63% on the back of a 53% growth in APE, and of margins moving up from 62% to 66%. In China we are also progressing strongly. Both volumes and margins are up on a comparable basis. Remember that we shifted in '08 to a 50% basis versus a 100% before. So volume and margins are up, driven by a 35% increase in the number of agents and an 86% increase in agent productivity. We are pleased to have obtained a preparatory license in the [Fujin] province, one of the wealthier regions, with a population of over 35m people.

India, another important country, had an excellent semester with sales growing 45%, supported by an increase in the number of agents which now total over 280,000 and a 10% increase in their productivity. Margins which were down to 12%, you remember at the year-end, are back up at 16%.

Finally, our Indonesian business continues to thrive with volumes up 96%, NBP up 80% and strong margins. This is another illustration of the value that our current platform and capabilities in Asia allows us to generate when we are a first mover. Our sales force has reached 54,000, an increase of 62%, while productivity improved by close to 10%.

These results should help you understand why we remain confident in the quality and the profitable growth potential of our activities in Asia. Let's move now to IFRS profit.

Group IFRS profit -- sorry, operating profit before tax increased by 13%, one three, to GBP674m. Our performance in Asia within this is worth highlighting, with Asia Life IFRS operating profit up 28%. We are understandably pleased to see our IFRS Life profits in Asia grow. All this NBP growth, IFRS profit growth is very good to have, especially in today's environment, but at the end of the day I firmly believe that what matters is for all of this to translate into cash, so let's talk now about cash flow.

Holding Company cash flow is GBP86m positive; up GBP52m. This is the balance between net inflows of GBP511m and net outflows of GBP425m. Both the UK Life Fund transfer and the M&G transfer have increased, so has the Scrip dividend. Asia has contributed GBP11m net as a result of remittances of GBP148m, which I think is a good number, and investments of GBP137m. Overall, the Group is on track to achieve positive holding Company cash flow this year.

I would like now to finish this section on financial metrics by reviewing the evolution of our EEV shareholders' funds.

You are all familiar with this slide, I believe. As you can see, our EEV shareholders' funds have moved down from GBP14.6b to GBP14.0, GBP13.977, which will round up to GBP14.0b over the first half, which is GBP5.61 per share. This reflects both a strong operating performance and the impact of current market conditions.

You can see in columns B, new business profits, C, in-force profits and, D, asset management, the strength of our business performance. In column F, the GBP1.949b negative short-term fluctuations are a function of current market conditions which have the following impacts.

A negative GBP959m in the UK, reflecting lower than expected returns on the With-Profit funds. We had minus 6.8% versus 4.1% in our assumptions. So that's a difference of 10.9%, and you do the math, it just give you the 9.59; it's quite straight forward.

A negative GBP300m in the US resulting mainly from reduced investment returns on VAs and from the impact of our bond impairments, and I will come back in more detail later to the impairments. And a negative GBP536m in Asia reflecting, primarily, adverse market performance in Taiwan and in Vietnam.

So let's move now on to capital. It is important to take a balanced and holistic approach when managing capital across a Group as large and as diverse as ours. Therefore, we focus on the different -- a series of different measures, all of which we believe are important.

You can see here that we are in a strong position on each of these measures. We take solvency capital, we estimate our IGD surplus to be GBP1.4b, down slightly from the GBP1.6b that we had at the end of '07. We are ranked strong by S&P. Only two of our peers are categorized as excellent; Aviva and ING -- sorry, AXA and ING. There was a bet on this happening. I lost! AXA and ING. We have a strong economic capital surplus, GBP2.8b, and our EEV and IFRS shareholder funds are strong.

In today's environment it is more important than ever to remain solvent, so I would like now to cover in some more depth our IGD position.

I have already mentioned the strength of our IGD capital position. It is worth taking just a few moments to describe the main drivers of IGD for us, Prudential. Got that one right. The first important point is that UK With-Profit funds are ring-fenced from an IGD perspective and there is no pass through the Group IGD position. And when you see the size of the With-Profit fund, setting that aside is an important consideration.

Now if you move on to equity markets, evolutions in equity market impact IGD capital from two channels; the direct shareholder equity exposure and the value of equity linked guarantees embedded in our products. In our case, direct IGD exposure to equities is limited, as most of our equity holdings, as you know outside the UK With-Profit Funds, are for unit linked and VA accounts. Also in the US our hedging program significantly reduces the impact of adverse developments in equity markets.

Another important consideration is credit spreads. The impact of an increase in credit spreads, or in default losses, will depend upon the size and quality of our asset books. And ,finally, exposure to interest rate risk from an IGD perspective is dependant on the extent to which liabilities are duration-matched with the assets supporting them. And you know that IGD, basically, if you have the ability and intent to hold the assets to maturity doesn't penalize you for movement, which is actually I think correct and quite useful.

Interest rates; there's also the level of interest rates guarantee of course embedded in our products which are an important driver. So in this context changes in interest rates mostly impact our Asian and US businesses, as our UK annuity book is mostly run on a matched basis.

In Asia our exposure results mainly from guarantees on traditional shareholder-backed life products. In the US, where most of the debt security portfolio is made of assets held to maturity, the main impact on IGD of interest rates is stemming from the mark-to-market of the FA derivatives.

So that's the logic. Let's look now at the sensitivities and we've run them at the half-year.

Our regulatory capital position is resilient, as you can see, from stresses on equity, credit or interest rates. All sensitivities here are assumed to take effect on June 30, 2008 and no management actions are contemplated in this analysis. And, of course, results are estimated as mutually exclusive events, so these numbers are not to be added.

I think the numbers speak for themselves. We have a strong and resilient position from an IGD perspective, and which allows us to really withstand any set of circumstances we can reasonably imagine today, including a 40% fall in equities from today's levels.

The next area I'd like to cover is our debt securities portfolio. The overall shape of our debt securities portfolio has seen minimal change since year end. Out of the GBP84b in the portfolio, GBP37b is within the UK With-Profit Funds. For the rest of the UK where we have about GBP20b, which corresponds mainly to assets backing our annuity book, the remainder is mainly unit linked in the UK.

Asia's portfolio is mostly invested, as I said earlier, for unit-linked and With-Profit funds and those two areas, unit-linked and With-Profit funds, represent more than two-thirds of the portfolio. So the focus of this conversation really should really be Jackson.

The quality of Jackson's overall investment portfolio is good, having benefited from the actions implemented by our management team led by Clark and Leandra over the past years.

Let me give you some more color on how we manage this portfolio. Jackson, as you can see, has increased over time the quality of the securities it holds. Diversification has also been significantly increased to reduce concentration risk. The top 20 high-yield holdings represent now 36% of our high-yield holdings versus 50% eight years in 2001. So we've changed things quite a bit in that respect.

Also [PPMA] have adopted a modified total return approach, which has allowed them to move away from the buy and hold strategy used previously which could lead to large losses on lumpy positions; a much better approach to risk management. In addition, since the middle of last year PPMA has repositioned its portfolio more defensively, reducing the impact of the subsequent widening of credit spreads. PPMA has gone from four analysts a few years ago to 21. It has strengthened all its processes, relying on its own ratings and putting in place a credit committee, as well as strong peer reviews on all ratings.

So let us have a look at our residential mortgage-backed security exposure. The RMBS bonds represent GBP3.141b in assets at Jackson; a little more than 10% of the overall portfolio. Of these GBP3.141b, GBP254m are sub-prime, GBP723m Alt-A, GBP2.164b are prime. We hold 510 RMBSs, 21 are considered impaired at this point in time. Out of those 15 are Alt-A and six prime. Therefore, we have provided you with some more detail on the Alt-A portfolio for your reference after this meeting.

So let us now turn to our impairments. Please bear with me because this is going to take a while, I'm afraid. Under the Group's application of IAS 39, the majority of Jackson debt securities are classified as available for sale, AFS, and are carried in the balance sheet at fair value. Movements in unrealized gains and losses on AFS securities are recorded directly in shareholders' equity. However, impairment losses are recorded as a charge to the income statement.

Under IAS 39 an asset is impaired only if there is objective analytical evidence that the net present value of future cash flow is likely to be less than the principal. If a cash flow analysis identifies unexpected loss under principal, a shortfall, IAS 39 requires a write-down to include the full mark-to-fair value of the security in addition to the expected economic loss. On this basis our decision to write-down the bond is therefore based on detailed cash flow modeling.

The model used begins with the current delinquency experience of a collateral pool that support the bonds. By applying assumptions about how much of these currently delinquent loans will eventually default, and by multiplying this by an assumed loss severity, we calculate the magnitude of the expected loss for the pool, the collateral pool.

Additionally, to account for the loans that are performing but may later become delinquent and default, we add 1% of the currently performing loans to the defaults. So a total estimated collateral pool loss is then run through a model of the specific bond structure to calculate the expected future cash flows of the bond.

It is this cash flow simulation which indicates whether there is a shortfall on the principal or not. As an additional step we then benchmark what we've done against a Fitch rating approach to confirm that our assessment is correct. We, therefore, believe that our practice on impairment is rigorous.

If we look at the figures from left to right, the 21 bonds I mentioned, the 15 Alt-A and the six prime RMBS bonds impaired in 2008, [half] first half have total expected economic losses of GBP38m. So the result of the cash flow simulation is GBP38m. In addition, considering their market value today we had to mark those bonds to fair value, and that triggered a loss of GBP44m.

There are GBP21m additional write-downs in other securities with most of this, [GBP18m], arising from the corporate bond portfolio. With the additional impact of losses on sales of impaired and deteriorating bonds, GBP5m here, this takes us to a total of GBP108m, which you've seen in your papers.

So on the other side, out of these losses GBP24m impact the operating profit for the risk margin reserve, the RMR charge, to allow for our estimated long-term average defaults. The remaining GBP85m are recorded within short-term fluctuations in investment returns.

A final and important item is the development over time of unrealized losses, which we show you here. What you see is that the total unrealized losses stand at June 30 at GBP989m, versus GBP794m when we updated you at Q1. So we have seen a slight deceleration in the volume of the unrealized losses in Q2. And if you look at the breakdown of the GBP989m, GBP719m are for securities where fair values are 80% or more, so quite a high proportion of that is above 80% today.

It is also interesting to note that if you take the below 80%, the GBP270m, 89% are of investment grade. The value of the bonds that have been below 80%, which we show in the bottom part, at this date, at June 30, for three to six months GBP168m, and for less than three months GBP82m, gives you some indication of the pipeline and of the value at the end of June '08 of what is expected to fall into the more than six-month category later in the year.

And I'd like to stress one thing about that, is that that number, the GBP270m you see there is very volatile. I cannot say that enough times. It is determined by the market level. It's the pricing of the bonds, whether they are 75, 65 something, that number will move. You're aware that July was a very difficult month so this number will move up and down, and this is a snapshot at a given date so you shouldn't draw too many conclusions from the number itself. But it gives you an indication of where things stand at a given date.

So as we close this section on capital, I would like to stress once more Prudential's financial strength. Our capital position is strong by all measures and we have a clear view on our exposure to credit risk, which we believe remains limited at this stage.

To finish my presentation, I only have three more slides; I would like to talk about our disclosures. From the meetings I've had with investors since starting in my role, this is quite clear that there is a significant appetite for an increased emphasis on IFRS disclosure. I personally believe that it is important to achieve a better balance between our key metrics, embedded value IFRS and cash.

Let me now take you through a few examples of the kind of disclosures I'm thinking about. The first one is a slide presenting the development of a pre-tax IFRS operating profit for our US business over a few years. This breakdown of IFRS earnings between underwriting, spread and fee income we believe is insightful and very useful in terms of strategic thinking. Clark and his team use it as a valuable tool to manage our US business, and you can see the evolution over time as the VA business is built, the fee business, and a better balance is achieved. You should expect to see more of this type of analysis in the future.

Now moving on to Asia; I have been working with our teams there, with Barry, Sandeep, [Pete Lloyd] who are all here, to develop more in-depth cash flow analysis at a country level. For every year what we're trying to do is to look at cash flows that are post-[stats], post-solvency margin and, thus, correspond to distributable cash. So in dark blue you see here the projected fee surplus.

In light blue we have a variance against the projected fee surplus, which is important to track to see if your expected In-Force cash flows are growing steadily over time with only small adjustment from expected to actual. These two elements together make a free surplus emerging from the policies enforce at the end of each year and it is good to see it strong and growing.

So, in white, we then show the new business strain for each year as this illustration is for a rapidly growing business. As a consequence, this strain is of course larger than the In-Force profit. The total net cash flows from this specific country are represented then by the red bricks. This type, the red cash flow profile, generally leads to concerns as regards the value of operating in a given market. However, we are confident that as the business reaches maturity and the growth rate abates, the In-Force cash flow will cover new business strain and the business will move into cash-positive territory.

With this type of analysis and disclosure we will be able to make more explicit the value created by many of our growing businesses, and I will come back to you in future meetings with more information along these lines.

Now, if we step back and look more broadly at Asia, back in April we gave you a breakdown of our IFRS numbers by country and said that we would increase our IFRS disclosures. IFRS is complex, as you know. The mix, particularly in Asia, of grandfather rules, US GAAP, etc., etc. And what we have here is a new disclosure.

This slide shows you the IFRS operating profits of the total Asian business for HY '08 and '07 split between the profit from the existing business and the new business strain, which we disclose here and which represents 10% of the APE sales on average, although significant variations will exist between products and countries, of course. This indicates clearly that we are growing our IFRS profits in Asia net of new business strain. We will continue to develop and refine these types of analysis.

Before handing over to Mark to talk about our outlook, I would like to share two final thoughts with you. We are facing a tough environment, however, I believe that our strengths, our strategy, our geographic presence, our brands, our strong and diversified distribution, our capital and, most importantly, our people, will allow us to outperform in this challenging period.

The second thought again is of a more personal nature. As some of you may know, I have had an interest in this Company well before joining it. One thing I have discovered since I joined is that our businesses are even better than I thought. My challenge as a CFO is to find clear and compelling ways to communicate that value to you. This is a challenge I very much look forward to.

So, Mark, over to you now.

Thank you, Tidjane. Let me just spend a couple of seconds on the outlook. This is obviously an extraordinarily challenging time, with a range of distinct factors creating uncertainty for both markets and economics. The macroeconomic environment will doubtless continue to be difficult for some while.

I expect Asian growth to remain relatively strong but beneath the peak levels of recent years. And I believe that the region is now less reliant, as I've said before, on the West than it was a decade or so ago. But, importantly for us, and that was the macroeconomic picture, the fundamentals underpinning our Asian growth remain highly positive.

Jackson will continue to show resilient performance in the short term and I remain confident will outperform over the cycle. And in the UK, you can see from this morning's figures and from the figures of last year, that we are clearly delivering on our strategy. And in Asset Management we are exceptionally well placed to capitalize on the strength of our operations.

Overall, I would expect to outperform all of our competitors. We have a clear agenda and a retirement-led strategy in our business model with its geographic mix and diversification are extremely robust. And, as Tidjane has just taken you through, our balance sheet, capital and cash position have been very resilient. Overall, we believe the prospects for the Group remains positive.

At that point in time, we just end the presentation and what we'd like to do is begin the Q&As. So, let me hand over to you guys.

Andrew?

Andrew Crean at Citigroup. A couple of things I was just thinking about. You've raised the dividend 5% off quite a low yield. A Company yesterday raised it 10% off double the yield. You've got growing and strong cash flows. You've got a strengthening balance sheet. An increasing amount of your UK business is coming from the With-Profit fund which doesn't need shareholder financing. Can you give us some idea as to when you're going to accelerate this dividend from a 5% level?

The second question was on -- I'm not quite sure. Doubling the Asian new business profits in 2008 means that you've got to do GBP490m new business profit in the second half versus GBP336m in the first, which either means you've got a rabbit in your hat or there's something about the words "by the end of 2008". And how -- if it is, if you're going to go for that defense, how do we cross check, given the fact you don't give quarterly new business profit figures? How are we going to cross check whether you've actually hit that target?

I think let me take that in reverse order and let me give two seconds on Asia, I think, before handing over to Barry to give you some detail. I think with a view we had a couple of hatches in the hat rather than necessarily just one or two rabbits. But I think the nature of the business there, I think what you've seen is continued growth over a 14-year period. I don't know of any other companies that have grown at 26%, 27% top line for 14 years, that's per annum growth for 14 years, and we don't believe anything is in place that will stop us doing 20% plus this year.

I think in terms of the detail of Asia and our commitment to that target, I think Barry perhaps could give you some more color of why we're so confident about that.

Sure, thanks, Mark. Two or three things; first of all, specifically on the NBP, if you look historically over the last five years we have generally done around 40% to 41% of the full-year NBP in the first half. So there is a seasonalization to how NBP flows. So if you do the math with that, we're actually getting pretty close. So it does require that we continue to run fast as we have in the past, but let me talk about that a little bit.

To really understand what is happening in Asia you really do have to look at the results with a little more granularity. You need to look at this Taiwan effect that happened. If you look at our growth rate in the first half of 2007, without Taiwan, we grew 29%. If you look at our growth rate in the first half of 2008, without Taiwan, we grew 29%. So the fundamental underlying growth rate of the business is what it was. Again, Tidjane showed you the slides so it's graphically depicted, but I think it's really important to understand that.

Also important to understand that one of the effects of this Taiwan phenomenon was that you might get the impression that May and June of 2008 must not have been very good months in Taiwan. They were the two best months in the history of the Company, save for May and June of 2007, which were off the charts. So there's nothing fundamentally wrong here. This is still an extremely strong story.

Agency growth is 37%; that's the average number of agents which is the principal method you should be looking at. Productivity in that agency force, as was mentioned, continues to improve. You saw our good news earlier this week on SCV. I think that's really good news indeed, not just because of the extension of the existing very successful relationships, but the expansion into new lines of business and into new territories.

You've got Hong Kong, China both growing over 50%. You've got India that grew at 45% with an accelerating growth rate, in fact, in the second quarter over the first quarter. You've got Indonesia approaching triple-digit growth. Vietnam is doing well. Korea, we picked up market share. Again, all of these things I think you've either seen or heard already today. But you amalgamate all that, and I think what it should say to you is that this continues to be a very, very strong story. There are headwinds that are there now that were not there a year ago but, in spite of those headwinds, this is still a very, very strong story. Mark?

Thanks, Barry. In terms of the second part -- thanks, Barry. In terms of the second part, the dividend, I think, Andrew, as you're aware we came out with a dividend policy a couple of years ago to say that we would get to two times cover to feel comfortable. We're not quite at two times cover yet. We're pretty close, but we're not there. And I think the dividend history of the Company, again, we want to be absolutely certain in our minds about sustained growth, and we are.

And I think the cash flows coming out of that, we're confident of cash emergence but we didn't think it was appropriate at half year to be conservative on that and we'll look again at the year end. But I think, again, we are very much focused on the dividend policy which we set at two times and then we'll look again in those circumstances.

Hi, Andy Hughes, JP Morgan. Just I wonder if you could clarify something on the US business. Hopefully, there's no animal analogies here, but --

Sorry, Andy I just couldn't quite hear you.

Hopefully, you can clarify something on the US business without using any animal analogies.

Can't promise that.

But, basically, when I look at the VA margins you report, they seem very high. They're, comparable with AXA, about 40% of APE. And, obviously, if I look at the other guys, Aegon and ING, their margins are a lot lower for 2007, more like 10% of APE. And that is a huge difference. And obviously the concern is in the current market environment, one of the different reasons could be explained by things like distribution, but also it could be also described by the quality of the hedging that's backing these assets. And how long does the bear market have to continue before you have to start revising take-up assumptions on some of the options in the US?

And also VAs elsewhere, for example, Taiwan; I remember that Old Mutual recorded losses on their Asian international business because they couldn't hedge the Asian element of the VA. Could you also talk about how you're hedging that, as well, please?

Clark, you'll take the US?

Yes, we'll start with some animal analogies. As far as the margins on the business go, as compares to competitors, I can't tell you specifically what the differences are between our margins and their margins because that's very difficult to untangle from the information that's out there.

What I can tell you relating to the topics that you raised is that all through the last cycle and all through the last calendar year, or last 12 months, as the financial problems in the US market have rolled out, we have taken a very hard line that we needed to price the benefits that we were giving, particularly the guarantees, at a level where we could hedge them. We've not backed away from that in the face of what has been very intense price competition in the US as people are trying to hold the dollar volume of their VA sales in the face of a market that is just not accommodating to that.

As a result, if you look at the hedge results that we have, on an economic basis we had a gain on our hedging in the first half of the year of about $50m. And the reason is that, leading up into the end of the second quarter of last year when [VOL] was cheap and we were concerned about the valuation of the market, we bought a bunch of options. We basically over-hedged our position. We over-hedged [Vega] and we over-hedged Delta and that served us well.

From an accounting standpoint, you get a bunch of pluses and minuses between our economic hedge results and what flows through the accounting statements, but I think it was about a $45m positive result that flowed through the IFRS statements. And we had a positive effect of cost guarantees in the EEV statements.

And so, while the comparisons are hard to do, and I certainly don't want to talk about any specific competitors, it is very competitive over there right now with people trying to hold volume. We are not playing there. We are not walking away from share. We're not happy about the share we've lost. We've added wholesalers and our activity levels for those wholesalers are at all-time highs, but what we have not done is compromise pricing in any way and what we have done on the hedging side is remain fully hedged. And that's what we're going to do. That is our response to the market and that'll be the response as long as the market remains in its current state of turmoil. So --

Taiwan -- the VA product that we sold in Taiwan was essentially a fairly stripped down product, a very simple product, not -- unlike what's sold in the US where [they're more guaranteed]. So there's effectively virtually no guarantee [a hedge]. Pete, I don't know if you want to add any more detail but I think --

Yes, I think it's worth pointing out the difference between VAs in Asia and VAs in the US. We don't put on the [GMWB] benefits in the same way. The only one specifically in Taiwan is a [GMB] benefit out to retirement date. So essentially it's a decreasing term assurance [at] a very low cost to us. So as you say, that's quite right, it is difficult to hedge and that's why we don't [bother] (inaudible).

I think we've got one down the front here.

Morning, all. Raghu Hariharan from Fox-Pitt Kelton. Just three questions if I may, please. First, on the IGD capital position, I was a bit surprised that the capital requirements are static at GBP2.1b despite such good growth. Can you give us a sense of what the drivers are and if there's any capital [deficiency] or if regulatory requirements have come down because of product mix?

Secondly, the cash flow run rate or targets for Jackson for the full year, if that's possible?

And the third one, I was wondering on the US, how does the Regulator look at impairment of the bond portfolio and how does that impact your regulatory capital? Thanks.

Clark, are you happy to take in reverse order the Regulator view and regulated capital and the cash flow, the clearly --? Not [give] targets, but talking generally?

I get to set my own cash flow for the year, is that what you said?

Give me a break (multiple speakers).

In reverse order, right now the US regulatory standard is that you don't write-down a security until it is cash flow impaired, effectively, until the expected yield on the thing drops below zero. There is a proposal, SAP 98, that'll probably take effect at this year end, would be my guess, that's the latest draft of the thing, that would require a recognition of losses prior to something -- would put in place something similar to an OTTI standard, although it doesn't appear to be an OTTI standard exactly. And we expect that to happen. We model it carefully. As far as its impact on our expected cash flow to the Group this year, it has no effect. Our capital position is very robust.

As far as our cash payment to the Group, within the constraints that Mark would probably put me in, it is projected to increase over last year, a moderate rate of increase, I think reflecting the development of the capital within Jackson. But, beyond that, I know not.

Tidjane?

Just a word on the [gearing]. The two things driving the required capital is fundamentally the business mix, as you said, and FX effects. So there's been a change, it's just the rounding doesn't show it. You get the same number, but the numbers are slightly different. We have a detailed brief of that and we can provide you with the numbers. But the balance is almost zero.

Okay. With whoever's got the microphone is fine.

Yes, good day. Greig Paterson, KBW. Three questions; one is the Standard Chartered deal. I wonder if you could give us an idea what the impact on margins would be on Hong Kong from the new deal. And when the new regions will come on line, will it be the second or third quarter? That's question one.

The second one is market consistent EV; two of your competitors actually are on record saying that UK annuities and US fixed annuities will take a hair cut. Do you have a view on that?

And the third question is --

Is that two questions?

Yes, there was one with two parts and now I'm on -- getting on to the third question. I noticed you did an assumption change in your US VAs and a positive assumption change on your [swap], something to do with higher future margins on VA products. I just thought in this environment that seemed to be odd. I would have thought it would have gone the other way. I wondered if you'd just explain that.

Okay, let's deal in reverse order. Clark, on the assumptions on VAs?

The change was the recognition of the dividends received deduction on the VA. It's something that we put in there. It's always been in place. It's something that should be reflected in the assumption, so we made that change.

MCEV?

MCEV, fixed annuities, Greig, you're asking me if there will be a hit? You know how MCEV works. Fundamentally, you have to assume that you're making the swap rate on those investments. We believe that that's not really reflective of the economic reality and there is a very mechanistic effect due to that. So --

(Microphone inaccessible) can tell you that's the way it works.

That's the way it works. So it [will] give you a negative.

Whether or not it gives the true economic picture, I think is (multiple speakers) --

It will give you a negative margin at the start.

(inaudible question - microphone inaccessible)

Sorry?

(inaudible question - microphone inaccessible)

Sure.

Yes.

(inaudible - microphone inaccessible)

In terms of Standard Chartered, I think Barry perhaps can talk about when they will come on line and there's no economic effect. It won't affect margins at all.

Yes, that's exactly right. And in terms of when the new territories would come on line, given our model which involves identifying, training and putting pretty experienced FSCs in the branch, it takes a few months to get new territories up and running. So it's not the sort of thing where you'd see a dramatic impact, I think, even in the second half of the year. You'll probably see more going into next year.

The thing that would be more likely to have more immediate impact would be the introduction of new health products through the existing territories where we already have well-trained sales people in the branches.

I think the other thing, Barry, with Standard Chartered would be the Bancassurance, the [Sinshu] acquisition in Taiwan will begin to also come through in the second half.

Yes, it's coming. Yes, it absolutely will. In fact, the results on that are improving pretty dramatically month over month in Taiwan.

Jon?

It's Jon Hocking from Morgan Stanley with a very croaky voice. Two questions. Could you just put some scale on the Standard Chartered opportunity Japan, please?

And secondly, in the UK on the bulk annuity business, are you back in this market aggressively now? And can you give some comments on the pipeline you see there, please?

The scale of opportunities in Japan; can we put scale around that? No. I think you wouldn't expect us to. In terms of bulk annuities, let Nick talk about that.

But I think the important thing, Jon, and I think important myth first of all to dispel there is we were never out of that market. We've always been in that market. We've been selective, but we've been in that market. And let Nick talk to you more through that and, particularly, what's happening.

You've stolen my first line, Mark. We always been in the market. We've been active in looking at deals. We've chosen actively not to look at many deals. The rate of activity in the market at the moment is significantly higher than it was in the first half last year. So in terms of our pipeline, if you're interested in the pipeline, the pipeline is much, much, much larger. I could put what I regard as a meaningless value on it.

But the reason why I think it's meaningless is, just because deals are potentially in the pipeline doesn't mean you're actually going to write them. So I could give you a number, you get very exited about it and we could land up writing no business in the second half of the year. Or we could land up writing a significant amount of business in the second half of the year.

Our approach in that market has not changed one iota. We will continue to look at deals. We will continue to maintain our financial disciple in looking at those deals. And we will either write them or not write them on that basis. But the team is extremely active at the moment. Whether that activity turns into actual business, we will see.

Now I think in the context of the UK, I think it's clearly worth noting that you're seeing 18% top line growth and you're seeing margins and IRR maintained, that's a business that's performing exceptionally well across the spectrum.

James, take it right at the back there.

It's James Pearce from Cazenove. First of all, thank you for slide 26, but could you explain why interest rates going up is good for the solvency, is bad for the embedded value?

Second, could you explain the different outcome of your orphan asset negotiations compared to the other unmentionable company?

And, thirdly, --

Sorry, what was the second question, James?

Could you explain why you gave up on orphan assets, whereas, Tidjane's former employers just announced a deal.

And then, thirdly, why is With-Profit good in this bear market, whereas, it was absolutely useless in the last bear market? What are the differences? Why are you not having problems with NVAs and that kind of thing that soured the With-Profit market five years ago?

Yes, take that in reverse order. In terms of With-Profits, I think Nick, do you want to say a few words, or you're happy?

Yes, I'll say a few words about that. I think you're grouping all With-Profits products into one-size-fits-all category, when you talk about their performance. In the last bear market, actually, our products performed pretty well through the last bear market.

I think what's attractive for customers and advisers at the moment is the combinations of smoothing, and in the case of our Pru Fund products that's transparent smoothing mechanism. There are no market value reduction in the Pru Fund product. But also the capital guarantee, which in the first half of the year, about 70% of customers took.

So, actually, what we are finding is that customers and advisers are extremely attracted to those features of our With-Profits products. And I would also I guess make the usual observation that our With-Profits performance has been the best With-Profits performance on a one three, five and 10-year basis, so outstanding performance, strong product features, very attractive in the current markets.

I think maybe just a word here. Just for the reattribution I think was the perfect set up for that, which I think Nick's first line was a one size fits all, or one size doesn't fit all, and that's exactly the same position.

They're different types of fund. Our fund is an open fund, is a growing fund. When you look at the amount of inherited estate as a percentage of the fund, ours is around 10%, whereas, Aviva's was double that. The factors -- all of these different factors and the history of the fund just makes it a very different proposition. And it was our very clear view that it was in the best interest of shareholders and policyholders, the best long-term interest not to go ahead with the attribution. Would you add anything too?

I don't think there's anything -- maybe one other point. Pivotal to our conclusion about the inherited estate was the fact that we don't believe that we have a surplus for distribution within the fund. So we believe that fund is necessary to support the activities of the With-Profits fund and to support the superior investment performance and security that's so attractive to our policyholders. That's attractive to our policyholders; it's also important to our shareholders as well.

I'd also like to add (inaudible).

I said that when we are matched in the ALM sense IGD's neutral. The problem is in the number of place where are not matched. If you take Korea, for instance, what we have on the asset side is mostly DAC which is not an admissible IGD asset. So when the interest rates go up your liabilities will go down, so that it reduces beyond required capital and increases your surplus. And we have a number of places like that. So it's just ALM and interest rate impact on both sides of the balance sheet.

It is purely technical.

Trevor Moss from MF Global. Three questions, please. Having not written much fixed annuity in recent years, I was quite impressed actually by the way you almost seamlessly switched to the selling of FA from VA during the first half of this year and, particularly, in the second quarter. Could you talk a little bit more about how easily that was achieved and what the outlook might be there?

Secondly, you majored on health insurance a little bit at the Asian conference. I wondered if Barry might give us an update of the rollout of that program and how we've progressed in the second quarter.

Thirdly, a slightly different question. I think your shares are trading quite a long way below you sum of the parts, Mark. And I was wondering how long you might be letting the shares trade so far below this number before considering taking some action to address the discount and, indeed, what measures you might consider in that regard?

Okay. I think the shares are trading materially below sum of the parts and they have been for some while. I think what -- the way we look at this I think is, particularly in the insurance side, is quite interesting compared to the banking sector because, if you look at the two, they are increasingly differentiated.

In the banking sector you are seeing almost winners and losers in terms of the share price. You are seeing the RBSs and the HBOSs at 55%, 60% falls, and you're seeing the Standard Chartereds and the HSBC at the other end, 5% 6% 7% falls, and they're beeing quite resilient in this market.

In the insurance sector you're seeing almost no differentiation. And I think it's interesting when you look at the factors that are behind Standard Chartered and HSBC, we have exactly the same ingredients when you look at the openness to emerging markets and the emphasis on emerging markets, the different -- the distribution mix, the non-reliance on any one country. All of these factors to us are almost the same as the banks, as Standard Chartered, HSBC.

I think, increasingly, you see there will be a differentiation as, again, markets begin to see the value of our business and our franchises. So I think we -- in this marketplace I think what we're determined to do is to continue to deliver. I think too, we clearly have a number of ideas and things that we may or may not do in the future, but the focus has got to be on delivery. If we don't have delivery we have nothing, and I view that is the focus.

To do -- to watch share price every day, I think you can get seriously dizzy. I think the basis of what we do is we must concentrate on what we can control. I had a Chief Executive -- I was PA to a good Chief Executive here many years ago, who said to me two things. He said if any Chief Executive thinks they can either control the share price or the media or the analyst community is delusional, and those words ring absolutely true.

In terms of health insurance, Barry.

Sure. In short, it's going very well. I think Mark or Tidjane, one, showed you the 56% growth rate number. It's becoming a larger share of our overall premium production, which is really good news. We're moving very strong and steady in terms of getting product launched in the different territories.

We've had a couple of new products in Taiwan. One just launched, early to say what the results will be, but we're very optimistic about that. Health products just launched in Japan about a month ago; very optimistic about that.

To remind you of the impact this has, if you go back and look at Singapore where we launched our first new generation product which was now about 14, 15 months ago, the margins coming out of Singapore have moved up materially in a very significant and helpful way. So we're on a steady course and, so far, that's just all good news.

Clark, it's been -- I think we had three sessions with Clark with no animals, so think (multiple speakers).

You're pushing your luck. Fixed annuities. We -- almost all of what we sell in the US on fixed annuities is annually re-setable product so we can reset the credited rate every year. As a result, what we compete against are typically short-term certificates of deposit.

Over the last several years with the flat yield curve we could not be competitive with, say, one-year CDs. And, as a result, we didn't sell much. As the curve has steepened the sales naturally flow into the product. It doesn't want to flow into equity product right now because of the perceptions of equity market volatility. So it wants to flow into fixed.

We left wholesaling force in place, we kept the relationships intact, it was a very frustrated wholesaling force for several years but we held every thing together and so the sales just naturally flow into the fixed annuities in the sort of equity environment with this shape of the yield curve.

Youssef Ziai from RBS. Two questions, please. One is on China, when we visited with you in Asia, we were told that pensions business had prospect of opening up in China. I wondered if you could perhaps update us on that.

And, secondly, I'm thinking vis a vis you arrangements with Standard Chartered Bank. Given where your share price is, if there was another bank which was capital strong and wanted to have a go at you, is there a financial penalty in breaking the Standard Chartered agreement, and is that a large penalty?

I think, with the latter I think we don't talk about the detailed terms, so I'm not going to give you any sense of the commercial terms. You would expect us, as you would expect Standard Chartered, to protect the position.

But I think that what I can say is we have an exceptional relationship that's been going on. This is -- we're now in our tenth year of this relationship and we see this continuing, as we've announced, well into the future. But commercial terms, I don't think you'd expect us to give.

Barry, in terms of China and pensions.

Pensions, well, there are going to be enormous opportunities and, in fact, there's already a lot of work going on to pursue those opportunities. No big announcements yet, but there's absolutely no doubt that there's going to be, not just in China, but in a number of Asian markets, there's going to be some large scale pension opportunities. And we've got a very highly qualified and experienced team on the ground that's pursuing opportunities now. So we're very optimistic about that.

Blair, we get to you eventually.

Thanks very much. It's Blair Stewart from Merrills. I've got three quick questions. Perhaps could you give us an idea of how far you are away from the market in MVA [write up] pricing in terms of what your charges are relative to the average in the market? You talked about some irrational pricing.

And secondly, I think, Mark, you were quoted on the newswires as saying you expected margins in Asia to be -- to finish the year around the current levels. I don't know if that was a misquote or you were referring to product-by-product margins, maybe perhaps clear that up. Because I think there was an indication that margins are seasonally stronger in H2.

And, thirdly, you talked about the impact on your solvency from a certain level of defaults versus expectations. Could you comment on that in respect of what happened last time, particularly in the US, and what your expectations are going forwards for that?

In terms of the VA side, Clark, do you want to take VA pricing compared to competitors?

The benefits all differ slightly, so I can't say this product, this identical product, we're this much different. But when we run our pricing models against some of what are the current hot benefits out there, we're generally 20 to 40 basis points off of those. Sometimes in a couple of instances more, but that's a general range. And that wouldn't be off of every benefit in the market. It's off of some of the hot ones right now.

Yes, and I think again I wouldn't be the first Chief Executive to say they were misquoted during the conference call. I think I said at or around current levels. And, you're right, there is seasonal factor in the second half. We would expect that to kick in again. There's no reason why that wouldn't kick in.

In terms of solvency, Tidjane, you happy to --?

I guess so. What we've done is quite stringent because we've applied those defaults across the board, across market. And you'll see that generally between the long-term trend and the worst of the cycle, the credit cycle, you'll get three to five times the credit defaults you had before.

So I think the five times is comparable with what we have in the US last time Clark, is that correct? It think we went from 2% to 10%, the numbers I have in mind. So it's a pretty extreme event.

And I think, [Tidjane], of the regulatory capital, the LGD position we had in going 2002, 2003 was FCD then wasn't it? It was clearly significantly lower than it is today. I think in 2005, my numbers may be wrong, we had 600 to 800. Today it's --

We were twice stronger than this figure, but we're starting from a stronger position. And as I've explained the way we manage all that is also fundamentally different so the impact will be different.

If think it was five times 220m, yes.

[Quantitatively].

And [Andy] we give you a second time round as well as a first.

[Toby Tilden] Standard & Poor's Equity research. Just like to come back on the bulk purchase annuities in the UK where you mentioned you had a very busy pipeline, but it may turn out to be no different. Are you finding you're getting to the second round of these bulk transactions more frequently than, say, six months ago? I think the noise in the industry is that you are, so I wonder if you could perhaps give us some color on that.

And the -- I'd also like to ask if there may be any opportunity -- what you're -- give us some color on fixed index annuities in the US? And perhaps whether the possible requirements for distributors to be registered with the SEC may, for example, present any opportunities? Thank you.

Clark, you want to start on the potentials?

I think you have to keep the FIA market in the US in context. There were in the first quarter, the last [gateway] of industry statistics available, there were $63b of annuity sales; fixed index annuities were $6b of this. Variable annuities is really where it's at, at $42b.

Fixed indexed annuities are under a lot of market conduct pressure in the US right now. There was a Dateline show; Dateline is one of these news magazine shows and you have the camera crew busting in on an FIA sale. And it's really, really bad for perceptions of the product. And the SEC is responding to that and some of the pressure coming from the Attorney Generals of some of the States related to that product type. And I think we have seen this coming and we've talked about something like this coming.

Our focus has been in the broker dealers and in the banks, selling products that is more straightforward than the products sold in the general agency segment of the market. And, as a result, our position has been we're number one in the broker dealers and right now we're number two in the banks. We bounce back and forth between number one and number two in the banks. And so we like those positions given us.

We've been filing all of our sales material with FINRA to get it reviewed by them who -- so that it basically meets FINRA standards. We've been holding seminars with broker dealers about how they would properly supervise FIA sales in light of the bulletin 0550 that in which they advised broker dealers to -- strong advised brokers to supervise fixed indexed annuity sales by registered representatives. So we've positioned ourselves I think very strong on this and have good positions in what is really just a sliver of the FIA market.

What will happen as a result of this? My guess would be the market will shrink. The business that's being written non-registered today, I don't see this flipping over to the written register because the reps that write it, while they maybe registered, can they really write similar products through a broker dealer. I'm skeptical there; that's not what our strategy is built around.

So if I had to guess, my guess would be it's going to take a couple of years but this requirement for registration will probably go through in some form. And that'll be good for our position and the banks and the broker dealers, and we'll have a larger share in a smaller market. But it's not our primary focus.

Nick, anything further I think on the bulk side?

We reiterate the point that we haven't changed our return criteria, so nothing changed in terms of what we're doing. I guess what's happened is partly good old fashioned supply and demand.

If you look back to the first half of 2007 there were an awful lot of people who had capital that they wanted to deploy and there weren't actually that many deals to write. Whereas, now, there are a significant number of deals out there.

Some people have rather hastily deployed their capital and I think the -- perhaps we're reaping the benefit of that in that some of the competition are maybe now looking at the returns that they achieved on the deals that were written during the course of the last year. So hare and tortoise, and I think we are -- we have been very cautious in this marketplace and maybe that caution is being rewarded.

We are reaching the second round of more transactions. That isn't, as I say, because we've changed our return criteria. I think, interestingly, what's happened we've seen in a number of situations there is a real appetite to do business with the Prudential, to do business with a strong brand that is saleable to pensioners and also a business that has very strong financial security.

Can I just add a word on that? Because, as a new CFO, you can imagine I'm not keen to move any hurdles. And what I've seen with Nick and his team is that the deals they are bringing absolutely match the hurdle rates we have. So it's probably something going on in the market, [priced] evolution but there are good deals and beating our hurdles.

Andrew.

Andrew Crean from Citi again. I just wanted to clarify, Tidjane, you talked about margins on and MCEV basis in US fixed annuities being negative. I don't think you answered the UK annuities part of Greg's question?

And just going on from that, I notice that, since a year ago, your assumed corporate bond spread in the UK is now gone up from 70 to 170 basis points. The liquidity premium in swaps is probably only 50 or 60. What will be the impact -- and I assume also there'll be a problem in the US where you're assuming spreads of 175 basis points. What will be the impact of market consistent on your EV as well on that UK annuity question?

I think -- although I think it's a very interesting question, actually, I think the liquidity problem went from 84 to 101. But, anyway, the point is we are committed to disclosing the MCEV in due course. (inaudible) 25 basis point increase in the spread and we considered 75% of that, 17 basis point as liquidity, 25 as credit. And alleviate 17 to the 84 which was 101.

That's what we've done and it's in the papers. But the point is we will communicate in due course on the impact of MCEV, so you would not expect me to go any further here today. But in due course we will present all these impacts, but as whole I think it's not really productive to pick at individual products and try to have the discussion now. But we will in due talk about it in an adequate level of detail.

I think, again, Andrew, we're focused on running the business on an economic value basis, on the economics, not the accounting. So I think we will come back and do that in some depth, but I think we've got to have a clear focus. I think -- Dave, was there anything else you want to add to that? No, fine.

It's Matt Lilley from Lehman. Just on the margins in Asia, you showed the year-on-year comparisons and they're very similar. But, as Blair mentioned, they are down a bit country by country from the full year, so Hong Kong was down 7 percentage points, Korea down 4, Taiwan down 7. If that is seasonality, what is it? Is it lower volumes or different products? And what will happen in the second half of the year I guess?

Well, I think day to day there's a mix and I think this -- I saw that as one of your questions that you sent out this morning so I'm glad you asked it, and we're of course well prepared to answer it. I think the basis, Matt, it is a mix.

As Barry said earlier, you've seen margins in UK -- in Hong Kong go up and there's general movements throughout the portfolio during the year. Overall at that 46% margin, we expect that to be at or around I think was the terminology, not to recommit myself to anything, but I think we expect it to continue to move up. And we manage, I think we manage in the individual countries. We don't manage that overall margin.

Andy.

Hi, it's a sort of follow up questions from Andrew and Greg's questions on MCEV. You've mentioned that the economics are important and not the accounting. But obviously if you look at your current accounting treatment it looks as if there's not a lot going on in terms of the US credit impact, because you've got a buy-and-hold strategy in the US, the market value of the bonds fall, it doesn't really impact the EV at all.

But when you move to MCEV, and potentially when this new regulatory change is implemented in the US, things will change. Will that change your appetite to buy and hold? Will you then become more sensitive to managing your embedded value or will you just tolerate spread movements and the impact on the embedded value?

Clark, are you happy to take that or --?

In the US, the regulatory accounting is book value accounting. So MCEV pre se won't do anything on it. The SAP 98 will have some impact of surplus from the OTTI marks. The OTTI marks look -- let's say, it's not clear that fair value is going to be the standard in the US, though right now the SAP 98 doesn't appear to me moving towards fair value. It's the standard -- just a tighter standard than recovery of principal.

But that will have some impact on surplus. But if you look at our current surplus position, current surplus RBC ratio, risk based capital ratio, is [5.35]. If we look at our largest competitors, their average RBC ratio 4.50 and their median RBC ratio is 3.83. If we disgorge a $1b out of our surplus, our RBC ratio's 4.19. So we have a very strong capital position in this, so if we have to absorb some of these losses, fine.

As far as the appetite for fixed annuities in the US, if the accounting conventions became so awful that you had to start carrying a buffer on regulatory capital to take into account just surplus swings, well, at the end of the day true are economics are cash flow, and cash flow is defined by regulatory accounting. And so that would have an impact.

Right now, the accounting is such that we're able to look through to what we think the economics are, and that'd be our position. And the stuff that's on the table right now I don't think it really changes our posture towards our various lines of business.

Greig?

Is there an outstanding question? Sorry, mine was just a point of clarity. If I'm not mistaken, on the US statutory results solvency regime, even if your do impair under this OTTI, don't you only smooth it over a number of years into the surplus number and, hence, it's quite a significant buffering effect. Am I correct in that understanding?

It depends on the characterization of the loss, whether the characterization of the loss is as credit or interest rate related. And if you take a credit impairment on a bond that you hold, my understanding of -- and, again, SAP 98 isn't anything but a proposal right now, so we're speculating about speculation. But the as is right now as I understand it, if it's credit impairment you'll mark it through your asset valuation reserve, which is typically counted as capital. You normally look at capital in the us on a regulatory basis; it's capital, surplus and asset valuation reserve.

If you sell a bond, if it's not been downgraded more than two NAIC categories where that equals a -- would equal a notch, two notches from rating agency category like from A to BB. If it's gone down two notches at least, then it goes into AVR. And if it has not gone down two losses, it goes into IMR, interest maintenance reserve. Interest maintenance reserve is amortized over the remaining life of the security as if you had continued to hold it. AVR is a charge -- an AVR charge is a time-specific charge through that reserve.

That should help me.

You asked for that! Can I just have a final question?

(inaudible question - microphone inaccessible).

Bob wanted to give his Prudential anorak to Clark, so I think it was [all right]. And again, thank you for coming today. We appreciate your time and we'll see you soon.