Prudential PLC (PUK) 2008 Q3 法說會逐字稿

Hello and welcome to today's Prudential quarter three new business results call. On the call today is Mark Tucker, CEO of Prudential. During this call, all participants will be in listen-only mode and afterwards there will be a question-and-answer session. Mark, please begin.

Hugh, thanks very much. And good morning, everyone, and welcome to Prudential's nine-month IMS call. This morning I'm joined by Tidjane Thiam, our CFO, and Clark Manning, the CEO of Jackson. We're also joined on the line by Leandra Knes, who runs PPMA in Chicago.

As you will have seen from the release this morning, in these very difficult market conditions the Group has delivered a strong operating performance. And our capital position, as Tidjane will talk about in a few minutes, has remained robust.

At the Group level, insurance new business increased by 15%. And net inflows to our asset management businesses for the nine months were just over GBP5b. And I think in both asset management businesses and indeed across all our businesses in the Group, Jackson, in the UK and in Asia, we have benefited from a flight to quality.

Our capital position, as I said, remains robust, with an IGD surplus at September 30 estimated at GBP1.2b. Our prudent and proactive risk management and the approach to capital in general allows us to remain resilient to a further significant deterioration in market conditions, in case of need. And Tidjane will talk about that in a couple of seconds. In addition, the Group's liquidity position also remains very comfortable.

What we'd like to do this morning is briefly take you through the performance by business unit, unit by unit, as we normally do. And before doing so, let me just hand over to Tidjane to take you through in more detail capital, credit and liquidity. Tidjane.

Yes. Good morning. Starting with capital, we have entered this period in a defensive stance and have remained focused on managing prudently and proactively our key exposures.

As Mark just said, our IGD position remains robust, at GBP1.2b at September 30, a decrease of GBP200m in the quarter. This movement reflects a number of small evolutions. First, a strengthening of credit reserves in the UK for about GBP200m, primarily as a result of widening spreads. Then, equity falls for about GBP100m negative and credit-related losses, which I will detail later, for about GBP300m negative.

These negative movements have been offset by positive movements from our operating earnings, the effects of asset liability management and foreign exchange movements, totaling GBP400m positive.

It is important to note that we regularly impose stringent stress testing on our capital position. Those tests confirm that we can withstand significant shocks from today's levels, both in the short and medium term.

Turning to equity risk, most of our equity exposure, as you know, is in the UK with-profits fund and is actively hedged with dynamic rebalancing in place as a continuous process. Our UK with-profits funds had an estate valued at GBP6.2b as at September 30, covering the RCM by more than three times. Our ICA position allows for a further 50% fall in equities from market levels today.

In the US, we have a large and diversified book of business that provides us with substantial natural offsets for the risks in that business. And we hedge the embedded liability options in addition to the fees related to these guarantees. Due to the disciplined pricing of our variable annuity guarantees and our equity hedging, Jackson's hedging gains year to date more than offset the impact of a drop in the US stock market of more than 20% year to date.

Moving on to credit risk, the Group's debt portfolio has performed reasonably well in difficult economic circumstances. As I mentioned earlier, we had credit-related losses of GBP293m in the quarter. This included Lehman for GBP107m, WaMu for GBP86m, Freddie Mac for GBP21m, Fannie Mae for GBP19m, and General Motors for GBP16m.

Of that GBP293m of losses in the third quarter, GBP201m related to Jackson. Of Jackson's losses, GBP32m was from our RMBS and CMBS portfolio, GBP170m from our public fixed income portfolio, and we have seen GBP1m of recoveries to date.

In the US, securities with a mark of less than 80% have increased to GBP668m as at September 30, from GBP270m at the half-year. Those of you who were there remember that I had underlined, when presenting our interim results in July, that this would be a volatile number.

The entire market for fixed income investments has repriced downward, from historically tight spreads of approximately 100 basis points during the first half of 2007, to historically wide spreads of over 450 basis points on investment grade paper.

Today's wider credit and liquidity spreads have resulted in the average investment grade names trading in the mid to high 80s. Since the beginning of the year, prices of bonds in general have moved down by about $0.10. For instance, the price of our A bond -- single A bond index has moved from $1.0115 to the dollar on December 31, '07 to $0.9015 on the dollar with a spread of 553 points currently.

It is important to note that the unrealized loss disclosure of GBP668m below 80% should be evaluated in the context of nearly all longer-term fixed investments being priced at very low historical levels. The increases in unrealized losses that we are experiencing are directly linked to a change in the level of general market prices. These points have been recognized by the NAIC in its recent decision regarding SSAP 98.

In addition, I would like to add that 87% of the below 80% is rated investment grade. That is a very important number for us. 87% of what's below 80% is investment grade.

To understand the future behavior of our US debt securities portfolio, it is important to recognize that of a nearly GBP20b, GBP19.9b book, 93% is investment grade and 7% high yield. When considering the potential for loss from that portfolio, it is helpful to look to history.

Average default rates in a recession are around 10% for high yield and 50 basis points for investment grade bonds. The highest recorded defaults were in the 1930s, when high yields reached around a 15% default rate and investment grade reached around 155 basis points, albeit, you will note, not in the same year. This was in a depression that reduced US GDP by 30% and where unemployment reached 25%. Even assuming such extreme conditions and an average recovery rate of 35%, note this can be comfortably absorbed within our capital surplus of GBP1.2b.

On the US, I would also like to emphasize that our RMBS portfolio is 55% agency related. In terms of the non-agency book, we believe that we have now marked down those prices to a conservative and prudent level.

Moving on to the UK, which is our (inaudible) credit, the UK position is protected by the credit reserves that we are holding. For our annuity business in the UK, as you know and as we said at the half-year, we have taken a 75%/25% split between liquidity and credit risk in the increasing in spreads.

Therefore, our credit allowance is now at 65 basis points on an average single A plus portfolio. But it's 4 times the normal long-term default expectations, 1.5 times the maximum loss ever experienced, which was 43 basis points in that portfolio, and equivalent to a two-notch downgrade of the entire bond portfolio. The level of default represented by this assumption is materially in excess of either our actual or anticipated experience.

The third and final topic I would like to cover is liquidity. We are very comfortable with our liquidity position at both the holding company and subsidiary company level. As you well know, insurance companies are long liquidity. The holding company has cash balances of GBP1.4b and access to significant additional sources of internal liquidity. In addition, we have in place GBP2.1b of committed undrawn bank facilities spread across 16 banks.

So, to summarize, our capital position is strong. We have GBP1.2b of capital surplus after experiencing significant falls in equity markets this year and significantly increasing in corporate spreads, we can withstand significant financial shocks beyond current levels and our liquidity position is strong.

Now, I will hand back to Mark, so that he can talk you through how the business has performed during the quarter.

Okay. Thanks very much, Tidjane.

Let me first start with Asia, where I think it's important to note the business continues to perform resiliently, with overall growth of 9% for the nine-month period. But again, as we've consistently emphasized during this year, you saw an exceptionally successful retirement campaign in the second and third quarters of 2007 in Taiwan. And if you exclude that, as we've done all the way through the year consistently, you'll see growth at an excellent 21%. And again, that, to our belief, at this point in time, is market-leading. Nobody will get close to that growth in Asia.

Substantial dislocation experienced in the markets during the third quarter, following the well-publicized challenges and difficulties at AIG and clearly the extreme levels of stock market volatility, has had an impact and a clear negative impact on consumer confidence, with effect that we've seen particularly on non-single-premium products which were down materially on the same quarter last year, and flat over the nine months.

But I think importantly, and I think as you would understand, and very encouragingly, regular premium new business remains resilient and was up 10% for the year, the nine months of the year to date. And health products, which have been a significant and material focus for Barry and his team, were up 42%. And these product areas are absolutely key to our strategy. They have remained very firmly in place and as you see, indeed strengthened.

Overall performance to the nine-month stage has been strong in many of the markets. We've continued to make good absolute and relative gains. Let me be a bit more micro here. I think we've seen 30%-odd gains in Malaysia, India. We've seen 67%, 68% in Indonesia. We've seen good gains in the year to date in Hong Kong, 30% plus. And we've seen -- the market share statistics that we're getting through in all these countries is showing that we are taking market share. So, even though the market share will be slowing, our relative performance remains very strong.

I think we also -- I mentioned this morning in the press release that as a result of the market dislocation we are unlikely to achieve our ambition to advance by a year the target of doubling 2005 new business profit by 2009. I think the doubling 2009 profit does remain our target and clearly depends upon a return to more normal conditions in Asia, which is our expectation.

If you look beyond these immediate events, it is our view and our economists' view that Asia is the only region in the world that is expected to record mid to high single-digit economic growth rates in both 2008 and in 2009. And this, combined with the strong growth of intra-regional trade, the ongoing development of domestic consumer markets and, importantly, the very low penetration. And I think this -- the demographic factors remain very much in place. The very low penetration of financial products means we remain highly positive about the medium to long-term prospects for Asia and the wonderful position, the prime position that we have in the region.

In this context, and as we've said before in the release and as I've said this morning, we are of course monitoring closely AIG's disposal program and considering what, if any, opportunities may arise that will create additional value for our shareholders. Again, I'm sure this won't prevent any questions, but I think this is very early stage. This is very early days. And I think this is a process that would be remiss of us not to look at and it's our duty to look at. But to give any more information at this stage is just premature.

Moving on to the US, total sales were up 3% for the nine months. And I think in a marketplace where you clearly have seen major, major dislocation and the worst economic crisis since the Great Depression, this is a strong performance. Retail sales down 4%. But having said that, it's important to note that the level of retail sales is the second highest in Jackson's history, which gives an indication of how strong that is and how relatively strong we believe that is.

These achievements demonstrate the continued importance of diversification in the Jackson product portfolio and the resilience of the business model, despite the extreme equity market volatility.

In terms of product trends, pretty much the same as we saw in the first half. Variable annuity sales down for the nine months, but still represented 60% of retail sales, which is good. But importantly, we haven't lost market share position. We remain number four in the VA market in terms of net flows. And overall on the VA side we've experienced a very low level of outflows.

On the FA side, on the fixed annuity side, sales have been enormously strong, continued in the trends we saw in the first half, up 165% in the period. And institutional sales again 41% ahead. And we'll continue to participate in this market on an opportunistic basis, where margins are attractive.

Moving to the UK, let me go on to give you a sense of the performance there, which is excellent overall. We maintained strong growth in the first half of the year, continuing the momentum in the first six months. Retail sales, and I think this is clearly an important figure, retail sales were ahead 14% for the nine months and 19% in the third quarter compared to the same period in 2007.

In individual annuities, there was 10% growth in new business from internal maturing pensions.

We've seen the continued, and this is two years plus now, resurgence of with-profit bonds. With-profit bonds up 174%, continue to perform very well. And I think we've seen and we believe we continue to see and will continue to see strong appetite for diversified investments with guarantees, and also the sustained excellent investment performance of the fund. That fund remains the leading fund in investment performance over almost any time period you want to name.

From the latest market stats, we've got a 37% share of the with-profit bond market as at June 30.

I think also of note, there was strong offshore bond sales, up 41%, lifetime mortgage up 70%-odd. And clearly, we completed the GBP1b Cable & Wireless bulk transaction in the quarter.

Overall, as we've seen across the globe, there is a flight to quality. And the flight to quality is being brought about as consumers look for additional security with trusted and financially strong brands, and our business is in a strong position to benefit from this.

In Asset Management, I think a really tremendous performance from both M&G and from our Asian business. We've achieved over GBP5b of net inflows across our asset management businesses, which is, again, I think is market-leading.

M&G's strong investment performance has led to net inflows of around GBP4.1b, with GBP1.7b coming just in the last quarter. Retail fund performance at M&G is very, very strong, with around 40% of funds delivering top quartile performance over three years. And we've seen net retail fund inflows of GBP1.4b for the nine months and, again, GBP0.5b for the quarter.

On the institutional side, we've seen good flows. And again, the overall investment performance on the retail side is coming through on the institutional side. We've seen net inflows of GBP2.7b, with GBP1.2b in the quarter.

In Asia, we've seen very good performance given the market conditions, recording net inflows of GBP1b.

I think let me come to just summarizing all of that quickly, before handing over to you for any questions that you may have. I think overall a very good result in the context of the current markets and economic uncertainty. As I say, I think when you look at these markets I think you have to look at relative performance as well as absolute performance. And I would -- guarantee is too strong a word, but I would be willing to bet that our investment performance is -- and our performance on the operating side is as good as, if not better, than any of our global competitors. And I think these numbers will demonstrate that.

I think we're well positioned, very well positioned to continue to achieve profitable market share growth and to outperform the competition. Our capital position is strong. We have a GBP1.2b capital surplus. We can withstand significant financial shocks. Our liquidity position is strong. And our dividend which is, we've clearly mentioned, is sustainable. So all of that, I think, points to a very strong position.

And what we'd now like to do is hand back to Hugh and put it open for questions.

(Operator Instructions). And the first question is from Jon Hocking of Morgan Stanley. Please go ahead.

Morning, everyone. I've got three questions, if I may, firstly on Asia. I just wonder if you could comment on current trading, because obviously we're seeing quite a lot of economic turmoil, certainly in some countries like Korea, in the last few weeks. If you can give us some color on what's happening in the last few weeks.

Secondly, on the US business, there's been an awful lot of rating agency comment from Moody's and Fitch in particular in the last few days about looking increasingly at unrealized losses on bond portfolios for annuity writers in the US. I wonder if you could give us some thoughts there, both at the industry level and also for Jackson.

And then finally, on fixed annuities in the States, could you give us some color about where your current crediting rates are on new business and whether with the sort of unprecedented level of corporate spreads you're actually able to back those guarantees with a higher -- a notch higher corporate credit than historically you might have had to do? Thanks.

Thanks, Jon. I think, as usual, can we take this in reverse order and talk about the fixed annuities and crediting rates, etc., and let Clark give you a response to (technical difficulty).

Fixed annuity new business crediting rates are 5% right now. So that is, even on conservative assumptions as to default rates on paper that would be bought right now, that still easily meets our margin targets.

Rating agencies in the US, our ratings are stable with all of them, as far as we know. I think it's important to remember, we're entering -- we entered this part of the cycle with very strong capital ratios. Our RBC ratio in the third quarter is 497%, the industry average. At last year end, at the top cycle, the industry average for our double-A competitors was 450%. So we have very strong capitalization, which is important to keep in mind here. But I don't want to predict future rating agency actions. They come quickly and unpredictably.

Jon, on current trading in Asia, I think much of the same trends as we've been seeing. I think slowdowns in single premium. Annual premium is -- continues to hold up. And health continues to grow. I think it's likely that the general conditions in the last quarter, given all the uncertainties, will continue to either be at third quarter levels or slow further. So I think that would be our sense at this point.

Okay. Thank you.

Pleasure.

We now go over to Greig Paterson of KBW. Please go ahead.

Morning, gentlemen. Three questions. One is I wonder if you can give us or really try and quantify the impact -- the positive impact on margins from the fact that there was a shift towards mix in the third quarter -- towards health in the third quarter. That's one.

Second one. I notice you didn't give IGD sensitivities on lower bond yields, so I wonder if you could just (technical difficulty) those.

And then a third point --

Greig, could you repeat that last one?

IGD sensitivities around lower bond yields. At the half-year you said 150 basis points will cost you GBP550m. I was wondering if we could get an update on that.

And then the third point is you mentioned in the verbiage of the results that you had a VIF of GBP2.7b. Were you implying that you can securitize that or use Fin Re to release that money, if required for capital purposes?

Okay. Let me deal with the first part. I think this is a third quarter new business release. This is not a profit release. And therefore, I think you wouldn't expect to get profit figures. What we try to do is, as you say and as you know, this is a normal one or two-page sales update. What we've tried to do, given the exceptional market conditions, is give you a sense of capital liquidity, etc. Profits, I'm afraid, Greig, will wait until the year end.

In terms of looking at securitization of Fin Re on the VIF, there's no intention. We haven't even looked at that. There's no intention to do that. There are absolutely no signals in putting that in.

Let's let Tidjane talk to you about the IGD sensitivities of lower bond yields.

Yes. Hello, Greig. The numbers are roughly the same. We didn't repeat them, but they are roughly the same that we disclosed at the half-year. And remember, the significant portion of that comes from Asia. And you really have to look at the long-term yields, not at the short-term yields [that we have a movement] are the most relevant [flow] to do your calculations. It's 7b also. It's just a reminder that IGD doesn't take any of that into account. It was just a piece of information to remind everybody of what's in the with-profit fund.

You never thought of overlaying a swap program to try and mitigate that risk? It is the largest risk you're facing on the IGD perspective. Have you looked into that?

Greig, we can take this offline later. We look at different things, as you can imagine, and we do everything that is economically feasible and makes sense.

Right. Thanks.

Now we have Kevin Ryan of ING. Kevin, please, over to you.

Thanks. I wondered if you could say a little bit more about the AIG impact in Asia, and specifically whether you see the ongoing depression on sentiment there continuing, or whether actually you see, as things settle down, an opportunity for Prudential to win more business and maybe take staff off AIG. Thanks.

Good morning, Kevin. I think the situation with AIG in Asia is they're clearly -- from the AIG viewpoint, and I think the AIG senior management understand this well, it is effectively a wasting asset. As time goes on, the value of the asset comes down, given the implications you've just made in terms of -- just in general in terms of sales, in terms of the liability, in terms of staffing, etc. So I think as, as you know, as time goes on I think it will be tougher. And certainly the feedback we're getting at this point in time is that position is clearly well understood by the AIG management and by their advisors.

Thanks.

Okay. We now go over to Raghu Hariharan of Fox-Pitt Kelton. Please go ahead.

Good morning. I have three questions, if I may, please. The first question was on Jackson. I know Clark said the excess -- the capitalization ratio was 497%. I was wondering what the dollar amount of excess capital was in Jackson.

The second question was on IGD sensitivity. If you could give us a sense of what the IGD sensitivity to credit -- the credit defaults are.

And the third question was just some detail. Of the GBP1.8b of unrealized losses, I was wondering if you can give us a split of how much of this is investment grade and how much of this is ABS or MBS. Thank you.

Okay. Thanks, Raghu. I think the -- three seems to be the magic number today, I think. Let me pass to Clark to deal, first of all, with the dollar amount of capital.

Okay. The -- Jackson, as of the third quarter, has about $4.3b of capital surplus and asset valuation reserve, the regulatory definition of capital.

Sensitivities to different RBC trigger points, we have about $400m of capital above a 450% RBC ratio, which, as I said, was the competitor double-A average heading into this cycle. The normal rating threshold quoted, and the rating thresholds aren't absolute, but the normally anticipated threshold to maintain a double-A rating would be in the 300% to 350% RBC ratio range. As of September 30, Jackson is $1.3b above 350% and $1.7b above 300%.

Right, Tidjane will take --

Raghu, I'll take the one on the GBP1.8b. It was 50% investment grade, about 35% RMBS and the balance would be in high yield, to give you a rough estimate. Yes?

And then, if you talk about credit defaults and IGD, the first point is we mentioned the 65 basis points on the UK annuity book. That translates into about GBP900m. So we're very well protected on the UK book. So, basically, your residual exposure is really on the US book.

And I've given you a sense there of the GBP19.9b we have, which is 93% investment grade, on which you can apply, frankly, anywhere between 50 basis points and 150, 150 being the historical high ever, and to which usually we have a recovery rate around 35% which you have to take into account in your analysis as well. And on the 7%, the balance of high yields, you've had about 10%, if you [go through and look at] these numbers, of default. 15% is a historical high. That gives you a sense of the kind of numbers you get to.

Okay. Thank you.

We now go to Andrew Crean of Citigroup. Please go ahead, sir.

Good morning. Three questions, if I could. Firstly, what is the normal default assumption that you price into your products in the US?

Secondly, could you talk a little bit about net flows in your insurance business, and particularly lapse experience recently? And particularly I was interested, actually, in the potential for GIC lapses, where the clients have the option and the right to put the product back to you.

And finally, just a quick question is when you are going to produce your MCV figures at the end of the year.

Okay. Clark, if you do the normal default assumption priced into products, and then [I'll go to that next load].

Normal -- the RMR, risk margin reserve, based on historical default rates in the US, is 23 basis points given our current configuration in terms of the way that we're looking at current pricing. Obviously, things you buy right now have a much greater liquidity premium, part of which is related to defaults. When we're doing our current pricing, we're not really looking at it that way as much as we're looking to invest the money in what we think is in a prudent fashion in an uncertain time, and making sure that we have our normal target margin and then some on the money that we're writing today.

On net flows, net flows are doing pretty well. Our aggregate annuity net flows through three quarters are only off 1.4% over three quarters of last year, implying good persistency. If I look at that by line of business, our average surrender rate, year to date, on fixed annuities is 9% compared to 12% for all of 2007. For our fixed indexed annuities, it's 5% relative to 6% for all of 2007. And our variable annuities is 8% relative to 9% for all of 2007, giving an 8% aggregate versus 9% for all of 2007. So, persistency has been very good.

Part of what you're seeing on the sales side is that the money is locking down if it's in places that the policyholder considers to be secure, and so that hurts you some on the sales side. But on the persistency side, the -- it's beneficial and so on a net flow basis we're still looking very good.

Last but not least, Andrew, we wouldn't expect a question from you without MCV. Let Tidjane give you a sense of where we're at.

Yes. Hello, Andrew. We've read with interest your notes on the topic, and Greig's too. As you know, we're working on the issue actively. We said that we would publish from full year '07 and half-year '08 comparatives ahead of our '08 results. We're still intending to do that. We just don't have a date yet. We'll communicate it as soon as possible.

Could I just follow up with Clark? One of the things I was interested in is getting you to speak about GICs.

Oh, I'm sorry. Yes. On GICs, we have very few, I want to say none but there may be a de minimis amount, with puts on it. Most of the GIC business, virtually all of the GIC business is non-puttable. So it will mature on schedule. So we don't have any liquidity issues that could come out of GIC business.

On the other hand, actually, what we've seen is the ability to buy back some of our GIC paper at pretty good discounts to par, which we've done in a couple of instances, opportunistically. It's helpful from a capital management standpoint, and balancing the amount of cash flow that we want to invest at the current time. So that's actually been helpful rather than in any sense threatening.

Okay. We now go over to Jon Hocking of Morgan Stanley. Please go ahead, sir.

I've just got a couple of follow-up questions, if I may. In terms of currency risk in Asia, I wonder if you could give us some comments given the volatility we're seeing in a lot of currencies at the moment and how you're looking at that for the remainder of the year.

And then secondly, on the VA product, clearly the hedging has performed well to the end of September. How are you thinking about hedging in the current market? What's the exposure to rollover volatility risk on the hedges in place? And are you changing your pricing because of where [VOL] is at the moment?

Clark, do you want to take that one?

Yes. Hedging's performing well. We've had hedging gains through the first three quarters. We in 2007 buttressed our hedging positions, and particularly our vega positions, our volatility positions. And that served us well this year. We buttressed that further in the second and third quarter of this year, because we'd kind of written off the overage of vega hedging exposure that we had, so we wanted to buttress that up further. From a -- so the hedges are performing well.

From a pricing standpoint, we are in the process of repricing some of our benefits, not all of them. Not because they were mispriced in any sense, but because our view of what the long-term volatility is going to be is changed. So any products that fell below that -- below a buttressed long-term view, we're going to reprice and increase the charges on them or else reduce the benefits, in some cases, within the next couple of months.

Can you give us an idea of the new level of volatility you're pricing for, and whether you think competitors are making similar moves?

I don't want to give out pricing parameters in the public. So no, I shouldn't be doing that.

As far as competitors, we are seeing competitors doing repricing. The -- to a -- not all of them yet, but I think we've had about nine major competitors do repricing. I would characterize what they've been doing as more extensive than what we've been doing, because they were priced below what we thought were long-term falls in general coming into this. So we've had -- we're having to balance a few of our benefits, but not all of them. And for those competitors that are moving, we're seeing more sweeping reactions.

Thank you.

Jon, on currency risk in Asia, what we do every year is that we hedge the dividend flows and the capital flows, so that our dividend and cash flow formula is protected. For the rest, we just -- we don't hedge (inaudible). We let things unfold as they do. But you know that most people's currencies are basically US dollar proxies. They're very highly correlated to the dollar.

Okay. Thank you.

Okay. We now go over to Bruno Paulson of Sanford Bernstein. Please go ahead, sir.

Thank you very much. Two questions. Firstly, on liquidity, as you rightly say, as an insurer you're structurally long liquidity. You have the GBP2.4b of commercial paper which in the annual report you say is linked to the short-term interest securities program. I was wondering if you could tell us what that is and what's the -- what's on the other side of that commercial paper.

And secondly, just very quickly, you mentioned a recovery rate you were assuming with loan losses, on the bond losses. The line's so poor, I couldn't quite catch the number either time.

Bruno, sorry, we just missed the second question.

What recov -- Tidjane mentioned that you're assuming a recovery rate on the bond default, a normal recovery rate. And it was either 45 or 35 and I couldn't quite hear it.

35.

It was 35, three, five.

35. Okay. Thank you.

I know my English is not always easy to follow, but it was 35.

The line is pretty poor today.

Okay. Sorry about that.

That's fine.

And on the CP, really it's part of our overall funding. It's not linked to any particular assets, the CP program.

Thanks.

Hello? Did you hear that?

Yes, thank you.

Okay. We now go over to Andy Hughes of JPMorgan. Please go ahead.

Hi, hello. Hi. Andy Hughes. Quick question, if I may, just on the defaults. Obviously, we've seen quite a large number of defaults so far in the quarter. I was just wondering, how should we view the sensitivities of defaults going forward, because obviously you said at the H1, I think it was, that five times the expected defaults was GBP250m. I'm just wondering how we should view that going forward.

And on Jackson National, on DAC impairments, obviously a few of the other UK -- US companies have been impairing their deferred acquisition cost asset. Can you remind me how that's done? Is it quarterly, annually and what the function of that is?

Another question on Jackson as well on the hedging side. Obviously, if the equity market falls you need to hedge more. Does that have an implication on the earnings of Jackson, the fact that you need to hedge more as the equity market falls because of policyholder behavior? Thank you.

Andy, thanks for that. I think with the defaults, easy answer to this, as it was previously, so there's no change there. Let Clark talk to you about defaults and the hedging.

Okay. For DAC, to remind you how our DAC works, we use a mean reversion methodology on our DAC where we keep the annual returns. We adjust the assumed annual returns and the equity markets between, say, gross of fees to between 0% and 15% on a three-year look-back and a five-year look-forward basis. At the mid-year, we said that we were able to absorb another 16% decrease in the equity markets before we got outside of that, so we are now at that threshold.

Our DAC sensitivity, while we were in the mean reversion threshold, was about $4m per 1% drop in the market. Now that we are outside the threshold, that sensitivity is about $8m to $12m per 1% drop in the market. DAC impairment, though, in my mind, means loss recognition where your fees are no longer able to recover your DAC asset. We are still about 40% -- a 40% market drop away from being in a loss recognition situation on our DAC. So, I think that's a pretty good place to be in. We run our DAC models on a monthly basis. I know most of our competitors do so much less frequently.

If you want a more detailed answer, we can give that as well.

Okay.

And then, on a hedging basis, the -- on a hedging basis our sensitivity, capital sensitivity, to about a 20% drop in the market, taking into account both the liabilities and the hedges and the rebalancing that we think we would need to do, is about $100m in aggregate. It's probably easier to just say that than to step through what all the mechanics would be, in the interest of brevity.

Sorry, could you just repeat that last comment? So you're saying that the cost of increasing the hedging is --?

The net policyholder behavior, what the liabilities would do and what the hedges would do for a 20% drop in the market on a regulatory basis, regulatory capital basis, would be about $100m.

Okay. Thank you.

And we now go over to Greig Paterson of KBW. Please go ahead again.

Just looking, just on the DACs point, I just want to reiterate. I was a little confused there. You're saying that you'd need another 40% drop in the market before you write down DAC, or from this point onwards you write down $8m to $10m from every 1% drop? That was question one.

The second one is you've got that 700m of senior debt. I wonder if you just want to talk about when or if you can refinance that as hybrid capital for any hybrid debt.

And the third one is Legal & General and Paternoster are pointing to basically a collapse in bulk annuity sales in the fourth quarter and you had a big number in the third quarter. I'm just wondering if you could maybe broaden on the potential opportunity for yourselves, a monopolistic opportunity of getting with-profits bulk annuities going forward into '08.

I'll start with the hedging part of that. The way that DAC amortization works under FAS 97, when the market is good you decelerate your normal DAC amortization, when the market is bad you accelerate it. So that's due to the normal functioning of the formulas. When we are in -- and taking into account Jackson's situation, when we are in the mean reversion corridor, we accelerate DAC amortization by about 4% for every 1% drop in the market and we decelerate it by about 4% for every 1% gain in the market. When we are outside of that mean reversion corridor, we would accelerate it by 10% to 12% (technical difficulty) $12m for every 1% drop in the market and decelerate it by $8m to $12m for every 1% gain in the market.

DAC impairment as a term is not very precise. I think most people when they talk about DAC impairment are not talking about acceleration of DAC amortization. They're talking about loss recognition situation where you've got to go in and write your DAC down to the present value of the margins remaining in the business, in order to make that DAC recoverable again. The market would need to drop another 40% before we would actually get to a DAC impairment situation whereby our future margins were no longer sufficient to amortize the DAC on our books. I think that's what most people mean, are referring to, when they talk about a DAC impairment.

Let Tidjane talk about senior debt.

Yes. Greig, we have about GBP200m maturing next year, as you know, and we'll look at it then. But fundamentally, we still have significant hybrid debt capacity and that's a lever we keep for IGD. We don't feel that we need it at this stage but it's an additional security, a safety that we have, as you know. IGD capital, it counts for IGD capital, and it's [not something we keep].

Last but not least, on the bulk annuity side. I think what we've seen throughout this year, it's continued to accelerate, is clearly a flight to quality. We've seen the market pricing move towards our own pricing. Our discipline has stayed exactly as it was. And we said we'd only write the business if it makes economic sense to do so.

We have a significant pipeline of possible opportunities. I think we will continue to evaluate and see whether they make economic sense to write them, but there's certainly no shortage in this market of opportunities. But we are staying exceptionally disciplined as to whether we like them or not, depending on the economic circumstances and spreads, etc.

And the with-profit opportunity, given that you're the only ones who can write that?

Yes. I think it's not a dissimilar story. I think pretty much the same story in terms of opportunities. And just given the size of the fund, given the strength of the fund, given the strength of the -- inherited strength, etc., all of that places us in a very good position.

Thanks.

Okay. We now go over to James Pearce of Cazenove. Please go ahead, sir.

Morning, everybody. On acquisitions, I'm just interested to hear how you had planned to fund any acquisitions, given your share price, I think, quite a big discount to embedded value, given the state of the bond market.

Second, could you talk about the prospect of dividends from Jackson this year [up to center]?

And thirdly, can you talk about Prudential Capital a little bit? My understanding was that was what was actually being funded by the CP program. Is that business model resilient in the current environment?

Yes. I think you answered one of those -- in terms of dividends and Jackson, did Jackson already pay their dividend for the year. So that cash has come in and when we've talked to you we've given the exact amounts but I think on schedule and the amounts that we'd expected. So you'll see nothing unusual there [on that theme].

And the outlook remains for continuation of payments?

Absolutely, absolutely. Clark gives -- all the figures that Clark has quoted is taking into account the fact that a continuing stream of dividend there.

In terms of acquisitions, we haven't mentioned any acquisitions. I think what we've said is that we're looking at an opportunity. [We looked at Mayer] Life, and the AIG process. And I think, as I've said clearly, far too early to know, number one, what the opportunities are exactly and then let alone any possible methods of financing. So that's not a question we're into at the moment.

I think in terms of PruCap, it's not CP funded. It's -- we've deleveraged that significantly. That business remains on target this year to produce the levels of profitability that we've seen in the past. Risks at this level continue to be managed carefully and it's in a strong position. So I think all of those are fairly straightforward.

Thanks very much.

Okay. We now go back to Raghu Hariharan of Fox-Pitt Kelton. Please go ahead, sir.

Hi there. I just had a couple of follow-ups, please. In the Asian business, we know it's a fairly new book which sends a lot of volumes over the last three years. I'm just wondering if you can give us a sense of the persistency experience in Asia, looking at both, I guess, AIG which should be a positive and market impact.

The second question was on how you're looking at counterparty risks. I recall from, I think, 2007 that you had a GBP4b CDS, which protects your BBB exposure and your with-profits fund. So, I guess a sense of whether you reassessed the counterparty risk there, and you're okay.

And the last question was around the Taiwanese bond yields. Obviously, the yields are moving downwards and I was wondering whether you're comfortable with where you are in terms of resumptions, whether there might be a cash flow impact. Thank you.

Okay. I think [there's effectively] no cash flow impact in Taiwan. I think --

It's the short-term yield that moved. If you look at the long-term, [at least] sterling and it's a long-term yield that's relevant for us.

Our counterparty, we closed the CDS, I think. I'm not sure whether we announced it. We closed it. We did announce it last year. We did close that.

In terms of persistency, I think we've seen across, I think, nine out of the 12 markets we've seen fairly normalized persistency where we've seen greater levels of -- or higher levels of redemptions than normal is in free marketplaces - India and I can't remember the other two. It's [Jones] -- Hong Kong because of the Philippines, Hong Kong and Singapore. So those would be the three places where we've seen some -- a sensed shift upwards. But in the other places it's -- we're not seeing any material changes.

Thanks very much.

Okay. The final question in the queue at the moment is from Andrew Crean of Citigroup. Please go ahead.

Good morning. Just a more general question. I was interested in your views as to the way Moody's are changing their rating basis to look at unrealized losses. Do you see your core rating agents doing the same thing or will they stick to the economic truth of what is the likely default patterns?

I think my position is very aligned with the one Clark has expressed. It's very risky or difficult at this point in the cycle to predict in any way the rating agencies' behavior. I think Moody's has been expected, what they are doing. The others haven't said anything yet. Our view would be that what matters ultimately is the defaults. We've said there's been a repricing in the market. You've seen the prices go down by 10 points structurally across the board. That's a very significant shift. And to assume that the level of unrealized losses that we're seeing is a predictor of actual losses I think would be wrong, because it's mostly linked to illiquidity.

I think [if you look at] the historical defaults, as I think Tidjane and Clark have both said, it paints a picture. We've got to manage this to economic reality. I think, given our position, it's really unlike the banking sector, where we have both the ability and the intent to hold to maturity. I think the difference is polar.

Okay. Can you look through to the -- I think you were saying that your investment grade bonds are trading at about 86 or 87 to par. What does that imply --?

93.

Sorry?

93.

93? I thought you said -- what was the comment you made about high 80s?

Well, it was just a general point about the market. If you do the maths, if the spread goes from 100 basis points to 450 and you take a five-year duration bond, the price will go down by about 10 points. So it's just that the general market is trading in the mid to high 80s for investment grade. But our (multiple speakers).

Yes. In our discussions, we met with Moody's several weeks ago. They're meeting with everybody right now. And there's been no indication from them directly that they're just going to mark, take our unrealized and mark it through capital. Now, even if they did take our entire below 80 exposure and just marked it through capital on a pre-tax basis with no offsets, no credits for earnings or anything else, they're expressed, in their ratings note on Jackson -- let's say Jackson needs to maintain a 300% RBC ratio to maintain -- to avoid downward pressure on the rating, if you even marked all that through day one, that doesn't get you anywhere near 300%.

But in their discussions with us, they haven't indicated that their approach to -- they are going to take them into account, but that's very different than saying they're going to take your entire unrealized loss and mark it through capital.

(Technical difficulty).

If they took the entire below 80 exposure right now and marked it through capital, we'd still be above 300%.

Yes. We'd still maintain (multiple speakers).

Yes. Still be above 300%.

Great. Thanks very much.

Okay. A final question has jumped in from Youssef Ziai of Royal Bank of Scotland. Please go ahead, sir.

Yes, good morning. I read in the press that the FSA is obviously taking a greater degree of interest in talking to the companies about the solvency position. Two points. Is there anything that the Regulator can do, by perhaps changes in the valuation regulations, solvency regulations, in the short term that could be of help to yourselves and the industry?

And secondly, what's your view on a change away from mark to market that is being talked about? Do you think that would be helpful? Thank you.

On the first one you said, the answer is no. As we are saying, we have a comfortable position. We don't have any need at this stage for any relaxation of any rule. We're very prudent. A narrow threshold [for the] interest rates or valuation rates in the UK. And we take a very prudent approach there, so we feel that we're comfortable.

And on changing away from mark to market, we would not support that. We think that mark to market is the sensible way and we are not supporting of these changes.

Yes. I think the -- your language is right, we have not approached the FSA. The FSA, I think, have spoken to all industry participants on their views on various things, but we have made no approach to the FSA on this.

Thank you.

(Operator Instructions). Okay. That seems to be it for today's call. Can I please pass it back to you?

Thanks very much, Hugh. I think just to thank everybody for listening this morning. As I say, hopefully the team have given you a -- and I have given you greater reassurance, spoke of the changing conditions that we're seeing and the general performance of the first nine months, which has been, as I say, relatively, we believe, market-leading. And then I think Tidjane particularly has given -- and Clark, in the detail, have given you the comfort over the capital and net credit position, which is to say we actively and proactively manage.

So I think we look forward to no doubt catching up in the near future, but thank you for your time and thank you for listening this morning.

This now concludes today's call. Thank you all very much for attending.