Prudential PLC (PUK) 2008 Q4 法說會逐字稿

Good morning ladies and gentlemen. I recognize quite a few faces in the audience. But for those of you who don't know me, I'm Harvey McGrath, Chairman of Prudential and it's a pleasure to have you all here today to participate in this presentation and discussion of the Group's full year results for 2008, which as I think you will have seen from this morning's announcement, are robust in performance terms and robust in capital terms, all in what can only be described as a seriously challenging environment.

I'm going to hand over to Mark and Tidjane to take you through the detail of the those results, but before I do I wanted to say a few words about the other news item that you will have read this morning.

We announced this morning that Mark will be stepping down as Group Chief Executive effective September 30 of this year and that Tidjane will succeed him in that role.

Mark has been with Prudential for some 25 years and he's had a pivotal role in the success of the Group for many of those years. His achievements many of you will be familiar with and it's a long list, but I'd like to make mention of his role as the main architect, organizer and driver of our leading presence in Asia, a very significant contribution indeed.

And over the last four years, as Group CEO, his contribution in transforming the Group's operating performance, the Group's financial strength and, indeed, it has to be said, the level of respect that I think the Group is now held in by our stakeholders.

Over the same period, and significantly, Mark has built a really impressive world class leadership team. And that, obviously, has enabled us to deal with his succession very effectively and very smoothly on a basis that ensures continuity on the essentials of our program and our strategy.

Some numbers, during Mark's tenure as CEO, our compound annual growth rate in EEV has been some 21% and on an IFRS basis, 14%. And as you know, we now derive more than 65% of our earnings internationally.

The Pru is a very different, much stronger and more resilient Group than the one that Mark inherited when he took on the CEO position.

Both the Board and I personally are truly sorry that Mark has decided to leave, but we accept and respect that decision and thank him for ensuring such high quality succession.

You are, of course, going to continue to both see and hear from Mark, because he's not going anywhere until September 30. And he will remain, as you know, firmly in control until that day and you will hear from him at interims in August.

But as from October 1, Tidjane will become Group Chief Executive Officer. I know he is no stranger to all of you. And I am personally very pleased and the Board is delighted to have such an obviously talented successor with proven experience of critical portents to all of the areas of the business in the coming years.

Tidjane, you will recall, joined the Prudential in March 2008 from Aviva, where he was an Executive Director and Chief Executive of Aviva Europe. He had worked for Aviva for six years in their core leadership team in roles including Group Development and Strategy Director.

His professional career started with McKinsey. He spent time both in Paris and London from '86 to '94, serving insurance companies and banks. And you will also be aware he was a cabinet minister in the Cote D'Ivoire. Tidjane is truly a multi-faceted and a very highly talented individual and I look forward to working with him going forward.

But today's focus isn't on succession. It's on the financial results that we've just reported and I'd like to now hand over to Mark and Tidjane, so that they can take you through the results presentation.

There may well be questions about the succession issue. We'd be happy to deal with those after the presentation in the Q&A in the normal way.

Thank you very much and, Mark, over to you.

Thanks Harvey and good morning. It's good to see such a full attendance in an insurance company results session.

Just to let you know that I think we do want you to be comfortable this morning, because this is going to be a long session. I think it's appropriately so I think, given the markets are. The thankful part of this is it's a long session from Tidjane and not from me.

But there are an immense amount of slides that we intend to go through and take you through, in some detail, our financial position. And hopefully, at the end of that, there'll only be one or two questions, but I think let's wait and see.

But before I go through the results, what I would like to add a few words to say that I have hugely enjoyed my career with Prudential to date and my decision to step down was a personal one and was enormously hard. When I look at it, even though I look incredibly young, I've spent my half my life with Prudential, which is not an insignificant amount of time.

However, I do believe that what I set out to do when I came back in my role as Group Chief Executive, the focusing of the business on value drivers in the retirement space; the clarity and I think the competitive nature of the strategy; expanding our international operations; improving the quality of the business through selective disposals; building capital strength; delivering consistent growth across all the key markets; and most critically, and most important to me and I think to the Group of all, was putting a top quality management team in place.

As you've seen from the results this morning, our strategy is demonstrating sustainability. And our capital position is both robust and resilient.

Having a very strong management team in place and an excellent successor in Tidjane, means that there will be continuity and consistency in our out-performance going forward. I think it's important to feel this is a -- this is as it seems: an orderly, managed transition and I think a consistency of a very powerful strategy.

As Harvey said, and as I have reminded my executive colleagues on a number of occasions this week, they haven't got rid of me yet. And I will be around until September. And I don't -- it's not in my nature or my style to play a low-profile, back office position. So I think we will continue to drive the business forward, as we always have, over the next six months.

I think just to record, I think while I remain in a good mood, my thanks to all of you. I'm going to read out what it says here now. In promoting a better understanding of our complex business and for times your rather blunt, but always clear encouragement, thank you for that.

Now I think on to the order for the day.

I want to kick off this morning with a fairly short introduction before handing you to Tidjane to take you through a very detailed financial review. I'll then come back to give you my view on why we have been resilient in 2008, how we have continued to deliver on our strategy and the strength of the business model and then looking, in particular, at the benefits of our approach to diversification. I'll then spend a little time giving you the outlook -- our outlook for 2009.

At the end of that, as Harvey has said, we're happy to take questions and for that I'm joined by my colleagues on the front couple of rows here, where we can answer your questions in as much detail as you would like and give you clearly as much time as you'd like for that.

Let's get into the numbers. I think you can see that our results represent a very strong performance and, importantly, both in absolute and relative terms, in what we know has been an exceptionally challenging circumstances, in particular in the second half of 2008.

On an embedded value basis, new business profit is ahead 8% and we've seen an increase in margins up from 42% to 43%. And as I've said before many times, we have maintained our focus on pursuing profitable growth, not volume target.

EEV operating profit has grown to almost GBP3 billion, including some additional gains in our in-force business. And I think it's important here that this shows that our past assumption basis are holding up well, even in these dislocated markets. Proactive management of the in-force book, particularly in times of market downturn, is clearly just as important as generating new business.

Shareholders funds increased slightly and our operating return on embedded value remained a very healthy 15%.

Our IFRS operating profit also saw growth of 12%, and Tidjane will take you through these numbers in more detail later.

If we turn to the very important subject of capital and cash, you can see that the estimated IGD surplus is GBP1.7 billion, and that's as we reported in February. We reported also that this would increase by GBP800 odd million -- GBP800 million or so on completion of the transfer of the agency back book business in Taiwan. And we expect by June -- sometime in June, the completion of that transfer, which will give a headline IGD figure of GBP2.5 billion.

This is a very resilient and robust position and we believe is one of the strongest in the industry, with a solvency ratio of around 240%.

Through focused management actions, sensitivities to further falls in equity markets and interest rates are low, and don't have a material impact. And our hedging, as you've seen, has been effective. And these we'll talk about over the next two or three hours. There are plenty of options for us to bolster this position further should the need arise.

As you'll see from Tidjane's presentation shortly, the Group has the ability to generate significant amounts of capital. In particular, he will discuss free surplus and cash, both of which are absolutely key.

In this very challenging time, we successfully hit our target of being operating cash flow positive at the holding company level in 2008. And as you'll also have seen, we've increased the final dividend by 5%. And that means that the full year dividend is up by 5% and is covered in line with our dividend policy 2.2 times by IFRS operating profit after tax.

The events of 2008 have put the balance sheets and capital positions of all insurance companies under close scrutiny. No one anticipated the full depth of the banking crisis or, indeed, the speed of onset of recession in the Western economies. Having said all of that, we at Prudential entered the period in a relatively defensive position and we've maintained a rigorous set of operating principles throughout.

Over the past few years we've also, we believe, made a series of clear sighted decisions and proactively moved to improve our capital position. Let me remind you of some of these actions.

In 2007 in the UK, after a strategic review of the market, we exited our high capital strain and uneconomic product lines and put into place major and significant cost-savings initiatives. Over the years we have continued in the UK our prudent approach to both pricing and credit reserving.

In the US, with our strongly held view that value is more important than volume, we deliberately stood back from the very competitive and, in our view, uneconomic pricing in the VA market in the early part of 2008. In addition, our long established hedging program has been highly effective in these turbulent markets.

We've also taken a series of broader based initiatives that have significantly improved the capital position of the Group. In mid-year, after an exhaustive -- an exhausting review, we determined that in order to maintain a strong and robust life fund through the economic cycle, it would not be in the best interest -- long-term interests of policyholders or shareholders to reattribute the inherited estate.

We also identified further and very effective ways to generate more IGD capital. For example, we obtained FSA agreement to recognize a small element of the shareholders' economic interest in the PAC with profits fund.

Additionally, our decisive action on Taiwan will significantly improve the Group's capital position and free surplus, and will also reduce long-term risk for shareholders. We've also deliberately reduced shareholder equity exposure in Asia.

As we've previously stated we did review the AIG assets in Asia and their capacity to create material incremental shareholder value above our organic opportunities. After careful consideration we decided not to proceed with an offer for any of these assets. Our financial discipline and our view of value and price did not meet the criteria.

All of these decisions and actions taken together have significantly improved the Group's capital position and the risk profile. And I think with all of that as an initial context let me now hand you over to Tidjane.

Good morning, I think that becoming a CFO of a life company in March 2008 has proven to be a really interesting decision. Like Mark, I may look young, but I can guarantee you that internally I have aged significantly. They should have a special unit for CFO life insurers, but anyway here we are.

I'm looking forward to the next stage, but in the meantime I have to take you through exactly 39 slides, so brace yourselves. Let's get started.

I have three key messages that I hope you'll take away from my presentation this morning. First, we have delivered a strong operating performance in 2008, whether measured in terms of EEV, IFRS or cash generation. Second, we have managed our capital and risks in a prudent but proactive manner for 2008, not hesitating when necessary to take decisive action, for example in Taiwan. Third, going forward, we are focused on preserving capital and cash in 2009.

What I would like to do now is first present our performance on our key financial metrics in EEV and IFRS, putting a particular emphasis on cash and on the development of free surplus, an important metric for us. I'll then talk about risk and capital management, focusing on two issues that I know are on your mind; first, our solvency and second, our asset quality.

Moving on, we believe that the best way to run our business is to have a balanced approach and to keep an eye on EEV, IFRS and cash. So at the Group level EEV operating profit has increased 17%, IFRS operating profit is up 12%, and you can see at the bottom that holding company cash flow turned from a negative GBP82 million in 2007 to a positive GBP54 million in 2008.

Looking in more detail at the EEV profit we have had a 23% in our in-force profit to more than GBP1.6 billion in 2008. In-force profit as we see it, of course, is a key driver of cash flow and free surplus generation. I will return to this in a few minutes.

The largest component of in-force profits, the unwind, in red here, has increased to GBP1.2 billion in 2008, a 5% increase over 2007. This growth was driven primarily by Asia, Barry and his team, which increased their profits by 28% to GBP434 million, demonstrating the growing maturity and scale of the Asian in-force book.

We have also had operating assumption changes for the year at positive GBP118 million. We have benefitted here from a number of assumption changes in Asia, which underline the quality of our embedded value there.

The second GBP118 million on the page, and that's just a coincidence, reflects the benefit of portfolio rebalancing in the UK. I will come back to this in more detail later; and finally, GBP153 million of other items which brings us to a total of GBP1.6 billion.

Moving on to new business, the 8% growth in new business profits we have achieved compared to a 5% increase in AP sales, tangible evidence of our focus on value over volume, which led to an increase in Group margin at the bottom of the page, from 42% to 43%.

Within this Asia delivered a strong performance again with new business profit up 15% to GBP741 million. This was driven by an increase in both volume and margin with margins moving up from 50% to 54%, underlying the success of our increased focus on protection and health. More detail on the evolution of margin in Asia is in your pack in appendix one.

Moving on to Jackson, the evolution in Jackson's new business profit, up 3%, results from a 7% increase in volumes, which was offset by a shift in product mix from higher margin variable annuities to lower margin fixed annuities, as you would expect at this point in the cycle. This led to a slight decline in margin from 42% to 41%.

In the UK the 1% fall in new business profit is the result of higher sales of our well performing with-profit products, offset by a decline in annuity margins, where we have had, unsurprisingly, to make a higher allowance for credit risk. Overall, margin fell slightly from 30% to 29%.

Turning now to the EEV balance sheet, shareholder funds increased by 2% in the year to just under GBP15 billion. This increase is explained by a combination of factor; positive elements shown in dark blue here, and negative elements in light blue.

Starting first with the positives, we have strong operating performance at GBP2.961 billion. We have the benefit of a mark to market of our own debt for GBP656 million. We have positive tax changes and other items of GBP720 million, which include the tax credit on negative short-term situations; and finally, currency gains of GBP2.010 billion.

The negative items in light blue were the impact of market movements, as reflected in negative short-term fluctuations of GBP5.127 billion, changes in economic assumptions of GBP581 million and a dividend net of scrip of GBP283 million.

Looking more closely within the short-term fluctuations, they include GBP2.4 billion for the UK, of which the majority, GBP2.1 billion I believe, relates to the with-profits fund, GBP1.3 billion for the US and GBP1.1 billion for Asia.

So to summarize on embedded value, we have increased the in-force profit by 23%. We have achieved an 8% increase in new business profits, and have maintained stable shareholder funds in an exceptionally challenging environment.

Let's move now to IFRS. Our IFRS profits have increased 12% in '08 to GBP1.347 billion. At the BU level, Asia Life contributed GBP132 million, whilst Jackson saw a small decline of GBP38 million and the UK a slight increase of GBP21 million. Asia Asset Management experienced a decline of GBP20 million, mostly as a consequence of market volatility.

And finally M&G, my colleague's team deserve a special mention here, they had a truly excellent year growing profits by GBP32 million against a difficult market background, thanks to their continued strong investment performance.

Looking now more closely at our life business in Asia; we have told you that we have an increased focus on IFRS going forward. For a number of countries, particularly in India, as our business matures we have reviewed the treatment of deferred acquisition costs. This led to a positive movement of GBP66 million in DAC and other reserving.

In addition, underlying growth in profit was GBP49 million as the business continues to grow and develop. And lastly foreign exchange movements helped and other items giving us a GBP17 million uplift in operating profit.

Based on all these elements IFRS operating profit has increased by 70% to GBP321 million, bringing closer the growth trajectories in Asia of EEV and IFRS operating profits.

Moving on, you may recall from my half-year presentation in '08, that I've shown a split of US earnings by source. We have now extended that analysis to all our life businesses. I have included the detail of those in your packs in appendix two.

Fundamentally, we see our earnings coming from three sources; insurance income, which is made from underwriting risks and managing claims; fee income, where we receive a fee for managing assets; and spread income, where we make the difference between an earned rate and a credited rate.

Shown here is the income split for Asia where, as you can see, almost three-quarters of our profit is derived from insurance margin, showing the value of our [wider] sales alongside our unit-linked business, and the successful development of our health business. Those earnings are perhaps less sensitive to market movement than you may have imagined and increase the persistency of our portfolio. This underlines the success of our accident and health strategy in the region.

At the half year I also provided some data on the IFRS new business strain for Asia. We have extended this analysis to a full year, but for the sake of time I will not present it, it is in your pack in appendix three.

Moving on to Jackson, you are well aware of the extraordinary movements we have seen in the US in equity markets and in corporate spreads in 2008. Clark, his team Jackson, have managed well for this challenging period.

Operating profits have decreased by 9%, a creditable performance if compared with a 38.5% decrease in the S&P. This movement nets out losses from the decline in investment spread of GBP26 million, offset by hedging gains of GBP57 million, thanks to Jackson's effective hedging program. FX movement of GBP38 million and other items of GBP34 million to give an increase in operating profit up to GBP547 million after allowing for the acceleration in DAC amortization, which we flagged and discussed at Q3. The total IFRS profit fell to GBP406 million.

Moving now to the UK where IFRS profits increased by 12%, again a very good performance from the team there under Nick's leadership. At Q4 we talked about the increase we have decided to make to our credit reserves during the year. You can see the effect of that coming through, impacting profit negatively by GBP413 million as we strengthen the IFRS assumption from 20 basis points to 55 basis points. You probably have in mind the 80 basis points that we discussed at Q4. It is important to explain how we arrived at 55 basis points in IFRS.

The 80 basis points were related to Pillar 1. Pillar 1 is a very prudent reserving basis. For IFRS reporting excessive prudence is not appropriate. So historically, the Company's policy has been to set IFRS default assumptions around halfway between the expected default levels, and it's 15 basis points for us. And the Pillar 1 assumption is 80. So it's an average of 47.5. We set it at 55. So we've been even more conservative than what we've done historically.

I mentioned earlier that I would give you more detail on our portfolio rebalancing. We have said that we would look to take advantage of the opportunities created by the current asset dislocation. We have a fundamental view that the increase in spreads we have observed is only partially linked to an increase in default risk.

Therefore, in the UK we have rebalanced our credit portfolio, in particular, in the Shareholder Annuity Fund. We came into 2008 significantly overweight gilts with an average rating in the fund of AA against a benchmark of A. After rebalancing, the fund now has an average rating of A plus, therefore, remaining ahead of benchmark.

The GBP390 million net benefit you see here is due to a change in yield as a result of this rebalancing after allowing for credit risk. The GI commissions, which we receive following the sale of our GI business in 2002, increased by GBP40 million and finally a number of other items amount to GBP44 million, bridging the gap from '07 to '08.

Finally, final slide on IFRS, our shareholder funds have decreased by 17% to GBP5.058 billion. A number of items have had a positive impact here, our operating profits of GBP1.347 billion, FX gains of GBP631 million, tax and other items of GBP155 million.

These have been offset by the effects of negative market movements as reflected in negative short-term fluctuations for GBP1.783 billion, which include defaults, losses on sales and write-downs on our US debt portfolio of GBP570 million.

Another negative element is the net impact of unrealized losses at GBP1.071 billion and the dividend net of scrip for GBP283 million, which I probably shouldn't describe as a negative. The unrealized losses on the Jackson debt security shown here are after associated DAC and tax.

So to summarize again on IFRS, operating profit is up 12% with a strong contribution from Asia and M&G, and a resilient performance in the US. We are continuing to improve our disclosures and shareholder funds have decreased due to market fluctuations.

Moving on now to cash flow and free surplus I have a first graphic, which shows you the development of the holding company cash flow over the last four years; there are two key points about this slide. The first is that you can see from the dark blue bars in each year that over the period cash remittances to the Group have more than doubled. This is really an important point for us, from GBP417 million to GBP1.033 billion.

Secondly in 2008 we saw a marked increase in capital invested by the Group into the businesses. The main driver from this was Asia where we needed to bolster solvency in a few territories. Overall, net cash to the Group grew to GBP515 million from almost zero in 2005.

The overall net position for the Group was positive GBP54 million, shown in red here, meeting the targets set in 2006. We have been able here, to achieve one of our significant external commitments.

Over the years we have drawn your attention to free surplus and I know that some, or many of you, use it as a useful proxy for capital. So I would like to spend some time on free surplus now for a few slides. You will be familiar with the mechanics of free surplus, which we have tried to summarize here.

First, the generation of free surplus where we take our opening free surplus position, we add the expected profits generated from both the in-force book and our Asset Management business, plus any capital that is released as policies mature.

This underlying free surplus is then adjusted at the bottom for operating variances and assumption changes. This gives us our stock of free surplus, which we can, of course, apply to several uses. We use it to write new business covering acquisition costs and required capital. We use it to remit cash to the Group and we use it to build reserves as a function of our risk appetite.

I would like to underline that these uses of free surplus -- new business, cash, remittances, reserving -- are fundamentally the result of management decisions. And finally, the free surplus can also be used to absorb the impact of market movements.

So let us now look at how these various elements have impacted our free surplus in 2008. Here I have combined the Life and Asset Management businesses to give a view of the sources and uses of free surplus in 2008.

As explained in the previous slide, we started the year with a free surplus -- a stock of free surplus of GBP1.915 billion. During the year the business generated, and this is an important number, about GBP1.680 billion bringing the total free surplus to GBP3.595 billion.

After allowing for market related items of GBP1.068 billion, which are largely out of control -- out of our control, also out of control, this left us with GBP2.527 billion of free surplus, which we then had a choice on how to utilize.

We decided to invest GBP825 million in writing new business during the year. And in addition we took the decision -- we [reached] a decision to increase the UK credit reserve by GBP770 million. This brings us to a free surplus before cash and other items of GBP932 million. So, as you see, there is an arrow at the top which shows you a decrease of GBP983 million during the year, and that's another important number, to end to -- from GBP1.915 billion the starting level.

After allowing for GBP442 million of ForEx and other movement and the GBP515 million that we saw in the previous slide, which was remitted to Group, this left us with a net free surplus of GBP859 million retained within the business.

The key conclusions we draw from this analysis are that our operations generate significant levels of free surplus, close to GBP1.7 billion in 2008 alone. And that overall, in a tough year the free surplus was down GBP980 million, GBP983 million, but also as a result of a number of decisions we made.

So I would like now to look at this evolution, after 2008, over a number of years, because it is interesting. You can see from the first set of bars, the strong growth from the in-force and Asset Management profits, from GBP992 million in 2005, to GBP1.744 billion in 2008.

Next to that, you can see the impact of operating assumption changes and experience variances, and the key point here is that they are small, followed by the underlying free surplus generated, shown in red here, like in the previous slide, besides growing over the last four years, as you can see, to GBP1.680 billion, which is a number you recognize from the previous slide.

The amount we invested in new business in 2008, was GBP825 million, grew quite significantly, from GBP544 million in 2007. This is due to product mix, as we increased sales of US fixed annuities and shareholder backed bulks in the UK.

The light blue shows the significant negative impact the dislocated markets have had on our free surplus position in 2008.

An additional feature of 2008 is the GBP770 million used to strengthen our credit reserve. This should be a one-off, given that we have now provided for a great depression every year for the remaining life of our portfolio of annuities in the UK.

Therefore, in contrast to the preceding years, in 2008, we have seen a decline in our free surplus, before net cash remitted to Group, and other items, of GBP983 million, as I mentioned earlier.

We expect the free surplus generation to continue at a high level. And looking forward into 2009, we expect new business trend to return closer to levels seen in prior years on this analysis. And we will manage our appetite for bulks, individual annuities in the UK, and fixed annuities and [gilts] in the US, carefully.

Given that our free surplus generation remains significant, we are confident that we are in a strong position to manage further volatility introduced by the current economic environment.

But confidence stems in large part, from the quality of our VIF. This chart shows the expected discounted -- not undiscounted, discounted contribution from the in-force Life book, and the pattern of release of required capital, as the in-force book matures, on current assumptions. Some 45% of this is expected to monetize in the next five years. The average payback period, on an undiscounted basis, is in Asia, the US and the UK respectively, four, five and six years.

As we showed you in the previous slide, our track record for operating assumption changes and experience variances is good. We are, therefore, highly confident that these cash flows will materialize.

So to summarize on free surplus, our businesses generate a high level of free surplus, close to GBP1.7 billion, in 2008. The investment we make in new business increased our VIF with attractive payback periods. This gives us the ability to remit significant amounts of cash to Group, GBP515 million in '08. We believe that our VIF is of high quality and will provide -- will continue to provide strong cash flows over the next five years.

Finally, just a final comment on this, all these numbers include Taiwan. It is worth noting that on completion of a transfer, the free surplus will increase by about GBP1 billion. And you will find more information in appendix four in your packs on Taiwan. So free surplus is a key underpin of our cash and capital generation, and will continue to be a focus for us, going forward.

Moving on now to risk and capital; at Q4 on February 20, we talked in some detail about our capital position. So, today, I'd like to focus mostly on two areas. We addressed our solvency, and then talk about our asset portfolio, focusing in particular on credit risk and our debt securities.

Looking at our solvency, there are two considerations for us. It's simple. It's the absolute level of surplus and its resilience, or if you prefer, its sensitivity.

As at December 31 '08, we had an IGD surplus of GBP1.7 billion, and a solvency ratio of 162%. Post the Taiwan transfer, the surplus will move to GBP2.5 billion, a very strong solvency ratio of 240% or about 220%, after allowing for the dividend.

On the right here, you can also see the sensitivities of our IGD position, as at the end of '08. Thanks to an active hedging strategy, we have limited our sensitivity to equity market levels to GBP350 million, for a 40% fall in equities. We have also limited sensitivity to interest rate risk, GBP300 million for a 150 basis point fall in interest rates.

And we have provided as an example here, a sensitivity to 10 times expected credit default, on our entire portfolio, which would be a sensitivity of GBP500 million for the Group. So really, if you think about it, the main exposure of our IGD, particularly after the transfer of Taiwan, will be credit risk. And I will come back to this in a few slides.

On February 20, I gave a bridge in the IGD movement from Q3 to Q4. What I wanted to do here is really to bridge it for the year, which is more significant. So during the course of the year, net earnings contributed GBP800 million, underlining the importance of profitable operations.

The cost of the dividend paid during 2008, net of scrip, was about GBP300 million, which is over 2.5 times covered by earnings, an important consideration for us. An additional GBP600 million was generated by a large number of management actions taken during the year, reflecting our prudent but proactive stance.

Offsetting this were GBP400 million of market related items, GBP800 million for the strengthening of our UK credit reserves, which we've mentioned several times already, and GBP600 million or so for US defaults, impairments and write-downs.

After allowing for FX of GBP200 million, this gave us a total estimated IGD position of GBP1.4 billion, including the GBP300 million for the portion of the shareholders economic interest in future transfers for the UK with-profit fund, for which we have obtained FSA recognition, which take the IGD to the GBP1.7 billion I mentioned earlier, or GBP2.5 billion, after allowing for the Taiwan transfer; therefore, a strong IGD surplus at the end of the year that saw very significant, negative market movement.

You have seen how we've been able to maintain a stable IGD position. I would like to remind you now of the options we have, to manage our capital.

Regarding available capital, as illustrated in the previous slide, we can rely on our earnings. We have the ability to access more of the shareholder economic interest in the with profit fund. We can also use financial reinsurance on other in-force books.

We also manage actively our required capital, through both the level and mix of new business, and by maintaining our pricing discipline. We have employed, and will continue to employ other risk mitigation strategies, such as hedging. So, after solvency, I'd like to talk in more detail now about our asset portfolio.

There is a significant amount of disclosure in your packs, some of which is summarized here. This slide covers our total invested assets, which for the Group, amounted to GBP193 billion, of which 31% or GBP61 billion, relate to shareholders.

Of this GBP61 billion, outside the GBP45.9 billion for debt securities circled here, and the GBP5.3 billion of commercial mortgage loans, the shareholder exposure is limited. So I would like to focus now on those two items; the commercial mortgage loans and the debt securities, where I will mostly talk about the US, which is GBP4.5 billion out of GBP5.3 billion.

The total portfolio of GBP4.5 billion consists of commercial mortgage loans. The exposure is well diversified by property type, as shown here, and by geography, always important in the US, and its average loan size is GBP7.5 million, with no single family occupancy.

We have a strong underwriting discipline. We have an estimated average loan to value, LTV, of 73% as at December 31 '08. In 2008, we have had no foreclosures or restructuring, and there have only been two defaults resulting in a loss, since May 1995. Therefore, overall we believe that our exposure here is contained.

I will now focus on our GBP45.9 billion of debt securities, but before analyzing it in more detail, for our key business units, I would like to update you briefly on our exposure to banks and notably, the Tier 1 hybrid debt, a topic that has generated much interest lately.

Of our total shareholder debt portfolio, 12.9% is in respect of the banking industry. Our total Tier 1 exposure is GBP824 million, which is less than 2% of our debt securities portfolio. Of this, GBP366 -- sorry, I think I said GBP361 on February 20. It's GBP366 million, I have to correct that, is in UK banks. The split by UK bank, is shown at the bottom, and of which I gave you GBP160 million for Barclays, Lloyds and RBS, on February 20.

Now, turning to business units; of the shareholder debt portfolio, GBP45.9 billion, GBP17 billion is in the UK, GBP24 billion is in Jackson, with the remainder in Asia and Asset Management.

Looking first at the UK, so GBP17 billion; this portfolio is high quality, with 86% invested in assets rated A, or above. In addition, and as you know, we have built a GBP1.4 billion credit reserve. This equates to 10% of the credit related assets backing shareholder annuity business, and you know what's coming after this.

This reserve would allow the portfolio to absorb a repeat of a great depression occurring every year for the life of a portfolio, and is equivalent to defaults of 185 basis points per annum, for three years, which is more than 12 times the long term expected default and 45 basis point per annum thereafter. Fundamentally, we believe credit risk in the UK is appropriately reserved, with very little residual exposure in the IGD.

Now, turning to the US portfolio; GBP24 billion, which is made up of GBP16 billion of corporate bonds, GBP4 billion of RMBS, GBP2 billion for CMBS, and GBP2 billion in other items. I will cover these elements in turn later, but first I'd like to talk about the unrealized losses, GBP3.2 billion at the end of 2008. You remember that GBP1.3 billion of this occurred in Q4. I'd just like to remind everybody that out of that GBP1.3 billion, GBP400 million is foreign exchange.

As you can see on the chart, of the GBP3.2 billion, GBP2.2 billion relates to the corporate bond portfolio, of which 82% at GBP1.8 billion, is investment grade.

As we have said before, we really believe here that the accounting does not represent the economic reality. We believe that our portfolio is of good quality, and well managed. The actual default losses were GBP78 million for the year.

We also experienced, as you know, GBP419 million of write-downs, and GBP127 million on losses on the sale of impaired bonds, but this is part of our active management of the portfolio, and of managing down some of our exposures, when we don't like them.

If we were to apply the highest level of default that we have seen in a recession, with a conservative level of recoveries, to this portfolio, it would generate losses of GBP350 million a year. Significantly lower than the GBP2.2 billion of unrealized losses here, and at a level that we can absorb within our IGD surplus, of GBP2.5 billion.

So let us now look at each of the key components of the portfolio, starting with corporate bonds. We have GBP16.5 billion of corporate bonds, which are 92% investment grade, with 41% invested in AAA to A. The remaining 8% of the corporate bond is in high yield, with the vast majority BB rated.

So taking first the investment grade, GBP15.1 billion; the first observation is that concentration risk is low. We have 489 lines with an average of GBP31 million per line. As this chart demonstrates, we have a high level of diversification. A very important consideration at this point in the credit cycle, of course. As mentioned in our Q4 release, our largest sector exposures are in utilities and energy.

If you were to apply the highest level of Moody's historic default rates, in a recession, of 1.6%, to this portfolio, you would generate losses of GBP140 million. In 2008, we experienced three defaults for a total of GBP78 million, on this portfolio, and unrealized losses of GBP1.8 billion.

Turning now to our high yield portfolio, the same approach applies, and the same logic is used. The high yield portfolio is actively managed. It is equally diversified, as shown here. Average holdings are, however, much lower, just GBP8 million across 181 issues, so GBP8 million to the GBP31 million in investment grade.

It is worth noting anyway, that the size of this book is GBP1.4 billion, accounting for only 6% of Jackson shareholder debt portfolio. Applying the highest historic level of Moody's default in a recession of 15.4%, you would generate losses of GBP130 million. In 2008, we saw no defaults on this portfolio, and the unrealized losses were GBP400 million.

Turning now to our structured securities, starting with the CMBS portfolio of GBP1.8 billion, which is performing strongly with no defaults or impairments in the year. 85% of our portfolio is AAA, and less than 1% is below investment grade.

We materially reduced our non AAA purchases after 2004, in response to what we perceived as a significant deterioration in underwriting standards observed in the market. So 96% of the bonds purchased post 2005, are rated AAA. This compares to 85% for the entire portfolio, so we were proactive and conservative.

There is an average credit enhancement across the portfolio, of 30%, and 81% of a AAA portfolio is in senior AAA tranches, which provides additional protection. So, even to the extent that there would be a principal loss, its impact on us is going to be mitigated, because we are the last tranche in line.

Looking now at the RMBS portfolio of GBP4.5 billion, which has an average fair value price of $0.881 to a dollar, it is important to break down this figure. Why? Because our actual ultimate exposure is small, and I'd like to show you why.

Over GBP4.508 billion, GBP2.411 billion, or close to 50% of the portfolio, is agency backed, which as you know, is guaranteed. This has an average fair value price of GBP102.2 million.

Next is GBP291 million invested in sub-prime, which is fixed rate collateral, so no floating rate. And originally, all AAA rated, and in senior tranches, so well protected. Again, average fair value price is high, at GBP82.81 million.

Our pre-2006 vintage, of GBP1.071 billion, has performed very well, with the average fair value price holding well, in the high 80s. So our exposure to the more problematic and well known '06 and '07 vintages, is of GBP735 million.

Two-thirds of this, GBP445 million is in well protected senior tranches, which ultimately, out of this GBP4.5 billion, leaves us with GBP290 million of non senior 2006/2007, which we have written down, to 55.02, with an average of a prime fair value price of 69, and an Alt-A written down to 34.7.

So overall, our structured securities portfolio is small, with the problem areas extensively written down, so we believe that the exposure is now contained.

As I explained earlier, our main exposure within IGD is credit risk. Therefore, I've spent some time describing our credit portfolio, which we believe in the UK is adequately reserved; in the US, as the structured securities exposure, which is contained, and is on the corporate side, with a portfolio of good quality, well diversified, and with low concentration risk.

And this will be my final slide, so thanks for your patience, as there has been a lot to get through. We are investing in improving our disclosures, some of which I have presented today. But there is a lot more in the schedules, and I hope you will find that helpful.

My key messages have been the underlying business is performing strongly. We have been prudent, but proactive, in our approach to risk and capital management, with clear results, with a resilient IGD position, and a reduced level of sensitivity. And finally, I would like to guarantee you that we are taking our cautious mindset through into 2009 and I'll be here to talk about that.

So, let me hand back to Mark.

Thank you Tidjane.

I think much of what you've heard this morning is about the critically important here and now and focused on the balance sheet and capital, and that is, of course, very appropriate.

But it is also very important to us and I think to you to spend a few minutes reinforcing how we continue to deliver on our strategy and the strength of our business model, in particular, as I mentioned before, of the benefits of our approach to diversification.

If we look over a four year period, the Group has sustained significant growth in operating profit, both on the EEV and IFRS basis. We have continued to pursue a strategy focused on the retirement opportunity, but in doing so, we have also made choices. We have chosen to be highly international, but on a carefully selected basis in terms of the countries in which we operate.

We are also systematically selective in our choices of both products and distribution channels. And as a result, we have a level of diversification within the Group that means that we are less at risk from changing market conditions.

These graphics demonstrate the spread of profits across the geographic regions and also the significant contribution from the Asset Management businesses.

The benefits of diversification can also be seen from one of the new areas of disclosure that Tidjane touched on earlier. In his presentation Tidjane talked about IFRS earnings by source in Asia. This chart extends that analysis and consolidates sources of earnings at the Group level across both the Life and the Asset Management businesses.

Beyond that diversification of earnings, our aim is to have a suite of products that delivers value by meeting customer needs, that is highly capital efficient and does not leave the Group overly exposed to the economic cycle. We saw clear evidence of this in 2008.

Asian markets did start to feel the impact of the global financial turmoil in mid-2008 and the region's economic performance has undoubtedly suffered as a consequence of the downturn in demand for its goods in the Western markets.

In that environment, we saw market conditions that were much tougher, particularly in the second half. However, and this is one of our key differentiators, we continued to benefit from our focus on regular premium products, which accounted for 90% -- over 90% of total APE sales in the region.

We were also able to refocus our energies on higher margin health and protection products, which were up 32% and on with-profits products for the more cautious investor. In addition to that, we developed our sharia-compliant products in both Indonesia and Malaysia.

In the US, we took the decision to give up share in the competitive variable annuity market. Jackson's strength across the annuity product range enabled us to anticipate and react to the changes in consumer demand towards fixed annuities. The mix was more capital intensive on lower margin. So as Tidjane said, this is one area where we would likely limit our appetite in 2009.

In the UK, our strategy has been focused on areas of real strength for us. We've benefited from our leadership position in the individual annuity market, from the financial strength of the with-profit fund and, in particular, our excellent and sustained long term investment performance.

We also benefit from diversified distribution. In Asia, for example, we are unique in that we have developed the largest network, the tied agency network of agents, as well as excellent partnerships with Standard Chartered, ICICI and CITIC and many other banks across the region.

In the US, our industry leading wholesaler teams offer genuine added value to the independent financial adviser channel and also focus on the regional broker dealers and banks.

In the UK, we've got a diverse multi-channel approach, including direct sales, financial advisers and partnerships. By removing ourselves from uneconomic product areas in the market, we now have a much lower proportion of IFA and, therefore, traditionally structured commission-related distribution.

The scale and profitability of our Asset Management operations is a clear and powerful differentiator for the Group. In 2008, M&G's performance against the market in the UK has been quite exceptional. This is based on sustained investment performance, with 25% of retail funds in the top decile over three years.

M&G achieved 62% growth in its UK net retail, net inflows as the market fell by 57%. And we also saw the value of our funds under management hold up very well. On the institutional side, 70% of fixed income mandates met or exceeded their benchmarks.

The benefits of our focused strategy and the diversification across our businesses has also enabled the Group to show strong performance against the competition in 2008. In Asia, we are ranked number one in three markets. In Malaysia, where we combine our traditional business with our successful sharia-compliant products, we believe that for the first time in our history, we are the market leader. We are number one.

We are now in the top five position in eight markets across the region and an interesting statistic we will use for the first time here, we believe, ex-Japan, that we've outsold the regional market 2.5 times in 2008 and gained profitable share in many, if not most, of the opportunity -- of the territories that we operate in.

In the US, I have already said that we deliberately gave up share in the VA market and you can see that from this slide. And I've also talked about our ability to react to changing market conditions as demands for FAs increased.

And in the UK, as Tidjane has mentioned, we achieved an excellent relative performance, with retail growth up 10% compared with the overall retail market which was down 10%.

As we look forward, we will continue to implement our clear and consistent strategy and to maintain our rigorous and disciplined operating principles.

First, we will continue to focus on the retirement opportunity, to take advantage of the clear demographic and social trends that are driving the largest financial services profit pools in each region. This makes our revenue streams highly resilient.

Second, we have a highly attractive geographic spread, with exposure to the main growth areas of the retirement market especially in Asia.

Third, our concentration will be on profitable product lines within our chosen markets, as we seek to generate strong returns with short average payback periods.

Fourth, our portfolio of businesses allows us to make efficient choices on where and when we commit that capital.

Fifth, we've consistently refused to pursue volume at the expense of value. And in this environment it's even more important that we remain immensely disciplined on this point.

And last and certainly not least, and it applies right across our management team, we will combine targeting of growth with financial conservatism.

The key messages that I hope you'll come away with following our presentation today are, we are a Group focused on a consistent and compelling strategy. We have a business model that is both well diversified and resilient. And we have a management team that have made and continue to make a series of clear sighted decisions and proactive moves to improve both the capital and the cash position of the Group.

2009 is and will continue to be a very difficult and challenging year for all our businesses. Bearing in mind the uncertainty in the operating environment and as you heard from Tidjane earlier, we've taken a prudent approach to our plans for 2009. This means focusing on balancing new business with cash generation and making it our top and our absolute priority to ensure that our balance sheet, that our capital position and that our cash flow remain robust. As the past year has demonstrated, prudence pays.

Thank you for that and let me hand over to you guys for questions.

Do we have any mics or are we --?

Morning, it's Andrew Crean at Citi. A couple of questions but the first one is, Mark, I've never seen you in such an enthusiastic mood about the Company and yet you're leaving. And it's quite difficult to square those things. Perhaps you could talk about it?

I assume something about the strategic difference in direction, particularly with all the rumors, which are in the papers about what you were trying to do in AIA and how you were going to pay for those things if you achieved that.

And then the second question, could you give us -- a sort of technical question, could you give us in the sensitivity tests what is the impact on your embedded value from spread widenings, 50 basis points to 100 basis points?

Let me deal with the first part, Andrew. I'm sorry that I haven't shared my enthusiasm before. I think anybody that knows me knows that I have been an enthusiastic supporter of the Group for 25 years. So I'm sorry it's taken 24.5 years to get there, but -- and I remain as enthusiastic and committed. And I hold an awful lot of Prudential shares and I intend to continue to hold an awful lot of Prudential shares going forward.

There is absolutely no strategic difference. I think on the basis either, clearly of a new Chairman who -- again Harvey and I knew each other before and I was an immensely keen supporter to Harvey's introduction to the Company. And clearly Tidjane, again, was somebody that I recruited in. There are no strategic differences between us. I think, hopefully they will say the same thing. But I think the basis of the strategy is clear. We've got a clear cut track record of delivery.

I think there's been an awful lot of speculation about AIG. It was a simple decision. And I said to you and many others before, I don't get emotional about acquisitions. If it makes sense in terms of the financials then we look at it. If it doesn't we won't. We couldn't get to a situation where it made sense and we did not put an offer forward. There were no differences at all. It was a purely value equation.

In looking at sensitivity tests for EV, Tidjane, where are we with that? Is there something that we could look at giving?

I'm looking, I think what we've given is for 1%, yes, in the schedules. Yes, it's schedule 12. Yes, it's here with 1%. You've got everything, new business profit, page 24.

Hi, Andy Hughes, JP Morgan, a couple of questions if I may.

Just the first one is about the general view of defaults being the important driver of the business -- the risk to the business. My real concern is not defaults, but impairments of bond assets on the balance sheet because, of course, you've impaired GBP500 million of assets last year and that's 10 times your expected defaults. Could you talk a bit about that and potentially what leverage you have within that?

And then just a couple of clarification questions on the bond disclosures that you gave today; first one, on the financial debt exposure, you talked about the Tier 1 bank debt exposure, what is the rest of GBP5 billion that you disclose on the slide, because obviously some Tier 2 stuff is treated the same way as Tier 1 now in the debt markets.

And the other question was on the Prudential capital unit in the UK, which as GBP2.7 billion of bridging loans and other things on it, which I don't really understand. Is there a credit provision in respect of this business or is it treated as zero? And indeed, how is that to square with the view of being able to cope with the 1930-style recession please? Thank you.

I'll take the bank first; the bank question. The Tier 2 exposure, I can give you numbers, GBP3.513 billion, the total for the Group. We have a breakdown I can give you; UK GBP1.393 billion, US GBP1.198 billion, other GBP921 million, which adds GBP3.515 billion.

Is that lower to --?

This is together. We can also if you -- we can provide a (inaudible) breakdown between upper and lower, but that gives you the two together.

The impairments maybe -- do you want to let Clark address that, yes?

You asked for it.

Excellent, good morning, on the impairments, from the prospective of Jackson's portfolio, all figures being dollars not pounds, we have investments trading below $0.80 on the dollar, $2.8 billion. So that would be the pool that you would look at on the mark to market for potential write-downs.

Our approach to write-downs is we don't have bright line price trigger or a time trigger. What we do is we look at whether we think the investment is impaired. For the structured securities we project out the cash flows and if there's a significant impairment, we mark them to market -- or mark them to fair value.

If -- on other bonds what we're looking at is; how are the credit spreads moving relative to overall credit spreads, where overall credit spreads in the US market here have exploded since 9.30, resulting in average prices across the entire market dropping a great deal.

So we would look at does the spread increase in the bond indicate some sort of credit impairment or does other information in the Company indicate some sort of credit impairment. And that's what gave rise to the write-downs that we took.

I think the question being, what might future write downs be? That's forward looking; can't address it. The market's too volatile to address that directly. We'll continue to look at the structured securities portfolio. Tidjane, in his presentation, flagged the portion of that portfolio that we think is most interesting and that's the Alt-As and non-agency backed prime, '06/'07 subordinated tranches.

And we'll watch the BBBs. And what I'd say about the BBB portfolio, it's first well diversified. Second, it's credit quality is reasonably good in that it's tilted towards the higher end of the BBB spectrum, about 75% of it is BBB or BBB plus. When the portfolio was configured, it was a little higher than that but we -- obviously there's been some rating migration there.

And the largest exposures - the largest sector exposures are in utilities, consumer non-cyclicals and energy. So, what will happen there? I don't know exactly. There'll be some downgrades, there'll be some defaults and we'll take them as we incur them, but that's the general philosophy that we take to those impairments.

Okay, let's pass, I think, just may be to address your third point, Andy, I think is John, who heads up Prudential Capital.

Yes on the free cash book, [bridge] book is used (inaudible) and security over all of those assets (inaudible) and there are no impairments.

John, John, just take a mic?

The bridge book within Prudential Finance is -- continues to perform. We review that book constantly throughout the year. It's performed well during the year. All the assets are performing to their original -- to the original specifications that we signed them on to, and there are no impairments against that book.

(inaudible) margin reserve and where we account for it. We take it for M&G and, for instance, I know we had a loss on Lehman. We've taken it in the operating profit. It was GBP22 million. So we take it.

And the guy over there.

It's Greig Paterson, KBW, three questions. One is if you can give us some color on how Asia's trading currently. It's question one.

The second one, Indian IPO, isn't there a date coming up soon that you have to potentially increase your stake or -- I don't know if you just want to talk around that theme.

And the third thing is you mentioned that financial reinsurance was one of your levers. Friends Provident can tell that because they've hit up against the FX charge cover. I wonder if you could just discuss the headroom you have within that constraint in terms of levers.

And I'll ask a quick fourth one for you, Mark, it's I wonder if you -- the one thing that worries me about you leaving is if you went off to AIA. I just wondered if you want to rule that out for me explicitly now.

The fourth one absolutely, totally and anything else that gives you complete confirmation I will rule that out.

In terms of color Asia, Barry, are you happy to give a few seconds update?

As the presentation said, and as we've had in some private discussions, it's no surprise that the environment is a lot more complicated than it was a year ago. Asia's been impacted just like every other part of the world. When we announced the full year results, and specifically the fourth quarter results, you did see difficulties in October, November in terms of sales results. They came off quite a bit. They came roaring back in December; we had quite a good December.

And without giving you information that I'm not meant to give you until we announce our fourth quarter results, we feel good about the environment in the context of the environment. And we're -- I guess I should say we feel good about our performance in that environment.

You see in the presentation as well the market share movements. I think those tell the story of outperformance, and outperformance is really, I think, the key indicator right now. So while no one is doing as well as they did say in 2007 or maybe in the first quarter of 2008, the reality is we're doing better, we think, than most anyone else and that shows in the numbers.

And even in the markets where it may appear that our market share or -- in fact, our absolute market share did come off a little bit during the course of 2008. When you look at those specifically, such as Korea, while it's true we did lose absolute market share we gained market share amongst the foreign companies, which are the companies that seem to impose more of a value over volume mindset than the local companies who've done some quite uneconomic things.

When you look at India, we did lose a little market share relative to the full market place, but we maintained our number one position. And one of the big issues there is that we refused to participate in the distribution system that's starting to proliferate. It's built on multi-level marketing, where essentially you have unlicensed agents selling your products. These are literally the Amway's of the world who are now selling insurance. We won't do things like that.

In Singapore, again we lost some market share but retained our number one position. And the reason we lost market share there is, because we refused to try to replace the CPF-driven single premium sales with uneconomic single premium sales simply for the point of getting market share. We refocused on protection products where we've gotten big increases. We refocused on recurring premium and that's serving us well.

So you see that story come through in the margins. So it's a tough environment but we feel good about it.

The only other thing I'd add to that, Barry, was I think 2008 first quarter was one of the highest quarters in history.

Yes, 2008 first quarter is our second highest quarter in history and it only fell behind fourth quarter of 2007 literally by about GBP10 million. So it's essentially equal to our best quarter ever.

In terms of the IPO and Indian dates, I think the rules have adjusted, Greig, and there's no -- at this point in time we're not bouncing off any level of issue of having to go to IPO in Indian. That's not on the schedule or the itinerary at the moment.

In terms of reinsurance as a lever --

The point there is that there is a degree of tension between economic capital and solvency capital, as you know. What we fundamentally manage is economic capital. So we try not to do things that are not sensible from an economic perspective for solvency reasons. So I think the limit is really actually our appetite for those types of transactions which really have little economic value and just have a solvency benefit.

But in terms of [the] charge cover I think we -- I don't have the number from the top of my head, but we're not running into any constraint. We looked at a number of structures in Q4 and Q1 and they were implementable. So --

(Inaudible - microphone accessible).

Yes, yes.

Morning, gentlemen, Raghu Hariharan, Fox-Pitt Kelton, three questions. On your IGD capital you've given us the waterfall chart. The second biggest component is GBP600 million of management actions. I was wondering if you could give us some color on what the composition of those management actions are in terms of that GBP600 million.

The second question, also on the IGD capital, was what is the regulatory reserving for defaults in the US, because you are at 18 bps I guess, which is included in your IGD. I was just wondering what the equivalent number was for US for bonds.

The third question was for Clark, I guess, on DAC (inaudible) testing. Could you give us -- obviously there's a big movement in DAC and we want to understand what the levers are. I guess two big questions that I have is what is the sensitivity of DAC to lapses and what is the sensitivity of DAC to credit defaults and/or impairments, because these two things, I guess, will drive impairment of profitability and, therefore, amortization of DAC. Thanks.

Okay. Let's start in reverse order and ask Mr. Manning to talk about DAC.

Primary sensitivity of DAC is going to be the moves in the equity markets and that's what we saw. To the extent that there is defaults, that will be taken into account in the overall amortization schedule of that DAC and it will actually mute the impact of the defaults somewhat in the period in which it occurs.

From a surrender stand point our acquisition costs are very well covered by the surrender charges on the business. So you shouldn't see material moves there.

What hit us last year was the movements in the equity markets and the DAC sensitivities there. As we discussed last year, we had -- we were within the corridor until October of last year, the DAC amortization corridor where we smoothed DAC amortization without going through all the mechanics. And that was accounted for about $170 million of excess amortization until we broke through the corridor in October.

At that point the sensitivity of DAC to movements in the market moved from $4 million to $6 million per 1% move in the market to about $11 million per 1% move in the market. And so, we incurred another $70 million in the last three months of the year outside of the corridor.

The -- our current DAC sensitivities to equities, which is really -- that's the most relevant point, we're out of the corridor, we're way out of the corridor at this point. As of the end of February the market would need to go up 57% to get us back into the corridor. So I'm not even going to give you what the DAC sensitivity in the corridor is, because we no longer calculate it.

Out of the corridor the next trigger point would be; where do you hit recoverability thresholds where your fees are no longer sufficient to amortize your outstanding acquisition costs? For us, as of the end of February, we could incur another 40% drop in the market before hitting recoverability.

Our K-factors, for those who follow those things, was 73%, which is good. The business that we're writing is profitable and our funds are outperforming the equity indices. Equity indices to the end of February were down 19, we were down 14, so about 500 basis points of outperformance; all of which is helping.

So that leaves us with a current sensitivity for DAC of -- it's about $7 million to $8 million per 1 point move in the market today, outside of the corridor between where we go back into mean reversion and where we would hit DAC recoverability thresholds.

If I can just add a point to it?

Gladly.

And also on DAC, we have 5.2 billion of DAC with 4 billion in the US, 1.1 billion in Asia and 0.1 in the UK, so that gives you a sense. And in Asia the 0.1 is about 30% of the VIF, so we think it's well covered too. So in addition to what Clark said in the US, we're in a good position, I think, globally.

IGD, the management actions; it's a lot of various little lines. It goes from changing the interest rate cap in Vietnam to some de-risking of equity in Asia. That's why we haven't detailed it in here. You've got at least 20 actions there.

So it's not lumpy. It's a lot of little things that we do to manage the book as we go forward. And that's a characteristic of IGD as it is today. Clark has [just obtained] the deferred tax assets in Michigan, so what Iowa gave a few months back we've obtained it in Michigan. That will be an additional gain for IGD going forwards so it's got something moving. That's the nature of the beast.

There was a second point.

Yes, it was regulatory credit reserves in the US.

Credit in the US?

Yes.

On our regulatory books we carry the bulk of the investments at amortized cost. We impair them on our statutory books roughly when they're impaired on our IFRS books; same sort of criteria, with the exception that it's a little bit looser on the structured securities. At present there's a SAC98, which would bring it more in line with IFRS, which we expect will come into force this year.

Morning. It's James Pearce from Cazenove. You've got a new Chairman and a new Chief Executive. Have you got a new strategy as well, please?

Second, can you talk about arrears development on the US mortgage book?

And thirdly, could you say how you're investing premiums on fixed annuities now? Are you taking more credit risk in the US like you seem to be doing in the UK? Or are you holding it in cash? Or what are you doing with the money?

As far as the -- what we're doing with the money, we're going up quality right now. The -- we don't want to deploy the capital against lower quality investments and don't want to run the downgrade risk. So we've gone very much up quality in terms of cash flow.

And the commercial mortgage question -- or was that a commercial mortgage question?

Arrears; arrears on mortgages.

The performance on our mortgages has been very good. The -- as of year end we had one mortgage that was in arrears 60 days. By the end of February we'll have at most three in our portfolio. I think that's $33 million worth of book value. So our mortgage portfolio is performing very, very well.

James, I think perhaps we'll let our new Chairman and Chief Executive elect talk themselves and I won't add to that; Harvey, maybe just a few words?

Yes, absolutely. The simple answer is no. No change to the strategy that Mark has recapped and outlined. And I'm pretty confident that that's what the gentleman behind me would also confirm.

I'm nodding to say no.

That's pretty uniform. Okay. Next? Jon?

Jon Hocking, Morgan Stanley. I've got three questions if I may. Firstly could Clark give us a little bit more detail on the performance of the VA hedging program, particularly how it's performed relative to expectations and when hedges roll, etc and how you prepare for that.

Secondly, on the DAC point I see there's 1 billion movement in the shadow DAC in the US, and that seems to be linked to lightening of spreads. So presumably that balance is actually more spread sensitive rather than equity sensitive. I wonder if you could talk about that and how you look at impairments on that number.

And then finally, if you could comment a little bit on what you seeing competitively with AIG in Asia; I think there's lot of room certainly on the P&C side in the States they've been quite aggressive. Are you seeing the same thing on the Life side in Asia?

Let's -- perhaps Barry can, as diplomatically as possible, give a sense of AIG in Asia.

Yes. What I've heard from -- on the AIU side, and I think at DBG in the United States as well is the -- it's the sort of -- particularly in commercial lines the sort of pricing that you've never seen out of AIG; very, very, very aggressive pricing, which undoubtedly you would think would have an impact on their combined.

So I guess the question is, are we seeing similar sorts of activity in Asia? What we're seeing -- you don't see it in the life sector as much in terms of ravaging products, building completely uneconomic products. But what we are seeing is very aggressive compensation to distribution. AIA is very -- in South East Asia is very reliant upon agency distribution and we are -- we do get intelligence about a lot of money being spent in order to try to stabilize a distribution plant in what's obviously a very unstable environment.

Let me be slightly less diplomatic. What I've heard is that they're doubling commissions on most products which, again, would look at the economic viability of those products.

We have to assume that destroys value (inaudible).

Yes. I think you have to. Okay, that's what we've heard. Whether that's --

Interest free loans and things like that.

Clark, on -- your thesis on VA hedging.

We'll start with shadow DAC. The shadow DAC number is a large number, because the mark to market on the assets is a large number. We're not close to any impairments there. If you think about the margins in a fixed annuity contract, we've got a good 100 basis points per annum between the costs and the amortization of the acquisition costs and the earned rate on the assets, and so -- and we're not incurring any real spread pressure. So, it's just the default. So we're not bumping into a shadow DAC recoverability issue.

The VA hedging, IFRS in dollar terms $119 million profit above the line; $101 million pre-tax on the bottom line. On a US regulatory basis we had a profit of about $30 million on the hedge program.

What is it right now? I'm not going to give all the details on the hedge program, because that's proprietary and if I gave too many details it might impact our trading. But we've got right now about $17.5 billion notional on the books, maturities out to 4.5 years, average life of about 1.5 years and a future short position of about $900 million.

What we've been doing is rolling those options positions and adjusting the delta position using futures. And we have been able to do so and stay well within our hedging budget.

The thing I'd emphasize on the hedging though is that the purpose of the hedging is not to make a profit. We went into last year over-hedged and we're very happy about that, and that's showing up in the numbers. The purpose of the hedging program is to hedge the liabilities. So, it's fortuitous that we have profits on it, because of the over-hedged positions in very volatile markets. So we're quite happy with it.

Hi guys. A couple of follow-up questions, but if I may I was more worried about another buyout fund and not an AIA joining so hopefully you're not going to set up a buyout fund, Mr. Tucker.

So, the question on impairments is basically returning to clarification on the previous question; so if the credit spread you see today is partly reflecting future credit migration in terms of a bunch of bonds pulling back to par and a bunch of bonds getting downgraded, the bunch of bonds that get downgraded in your criteria would presumably need to be impaired and the bunch of bonds that fall back to par would be as you currently allow for in your reserves. So I'd be quite keen to get a view point on that and obviously given the current unrealized loss, which is below 80%.

And the other point was I guess about the VA hedging and the take-up rate. You just mentioned $900 million of short futures position against $23 billion of guarantees?

Plus $17.5 billion notional option position.

Right.

And -- yes, the $900 million --

It does make a bit of a difference.

Futures [alone] would leave us fairly excited as to movements in the market. The -- so yes, you have to look at that in combination.

The -- as far as ratings migration, we get some ratings migration. We don't need to impair an investment, because of a ratings migration. What will happen upon a downgrade is that the capital charge associated with it under the US risk based capital ratio calculation will go up. But you don't have to impair the instrument unless you actually think that the credit worthiness of the instrument is impaired or you're not going to get recovery of your cash flows.

Yes, but I guess my question is that the bonds you hold today, a big chunk of them will pull back to par and they'll be fine.

Yes.

And another chunk will get downgraded and the price will fall of those ones that are downgraded and they'll fall below your 80% test.

The 80% -- let me clarify on the 80%. It's not a test. That is -- it's a metric that's widely disclosed in the US to give an idea of what are your unrealized losses that could be subject to impairment in the future.

The bond markets have traded way down. The average index price for BB/B is around 70 right now and it's been lower than that. And it's about 90 for investment grade right now and it's been in the low 80's at times.

The $2.8 million trading below 80 is simply something we watch. It's not a hard test. It's an impairment test. So if it's impaired then we're going to have to impair it and some portion of that will become impaired and have to be impaired through the books; have to be recognized through the books. But our belief right now is looking at that portfolio that the unrealized loss on it and the unrealized loss in the US indices -- credit indices is not reflective of the actual impairments that we would expect out of that portfolio.

And the take a break on withdrawal benefits, I guess was the other bit of the question. How you're hedging the take a break on withdrawal benefits? How are those moving? And how do you expect them to move?

The withdrawal benefits we hedge very conservatively on the withdrawal benefits, when we price the products originally we assumed very efficient election of the withdrawal benefits on the part of the policyholder in the sense that, when they were in the money, they would start taking the withdrawal benefit. And when they started taking the withdrawal benefit that they would take all of it; the -- meaning take the maximum; if it was a 5% withdrawal benefit that they'd take all 5%.

We're now getting some experience in the tails and what we're seeing is that the withdrawals are not at all efficient, which has been helpful to us and what we have also seen in the policyholder behavior front is that their deployment of the assets is much less aggressive than what was assumed in the pricing of the products. We assumed 80% equities and we're looking at 60% -- 85% equities, and we're looking at about 60% equities today, which is helpful.

The hedging is by and large following the pricing in terms of policyholder behavior assumptions, and what we have been doing with the pricing is where we get clear experience in the tails, we adjust those utilization assumptions, but do so on a conservative basis still assuming that over the long haul election becomes more efficient. But so far it has been -- it has worked to our benefit.

The benefit type that's most subject to policyholder behavior is guaranteed minimum income benefits, because you have to do a point in time election on the part of the policyholder and it's a light switch. It's either on or it's off. There's no partial utilization. We have shied away from that benefit type. We have reinsured what we have and we're in the process of pulling it within the next couple of weeks. So --

Bruno Paulson, Sanford Bernstein, sorry to drag Clark up again. On the write-downs, the GBP419 million, can you give us any breakdown? And apologies if it's in the modern version of the bible you gave us this morning. Can you give us a version -- a breakdown of where those GBP419 million came, that's in pounds, apologies?

In answering back in dollars so I don't screw up the conversion rates, the -- it was about $500 million corporate, about $300 in structured securities and about $100 million in preferred and others, that being mostly the GSEs.

One final question, there's been a lot of talk about the continuity strategy and also rumors about AIG, most of which I try to ignore. But there was a very alarming one in the Sunday Telegraph at the weekend that Prudential was contemplating sponsoring Manchester United. Now under current management that would clearly be unthinkable, I trust, and season tickets would have to be forfeited. Can the incoming management, whose affinities are elsewhere in London, also confirming that sponsoring Manchester United is entirely unacceptable and unthinkable?

I think from a socially, ethically, philosophically personal basis it's totally unacceptable. I think from a business basis it's something that we must examine if there is value and we can generate value and a compelling business case for that.

(Inaudible - microphone inaccessible).

Mark, Mark I'll take this one.

I've been found out.

Thank you for it, you know Bruno that I'm Arsenal fan and he hired me. So that tells you how much he thinks about the business --

I lowered my standards immediately.

Exactly.

Okay.

Tony Silverman, Standard & Poor's Equity Research, I'd just like to ask two questions, one on the US again. And I just wondered if you could clarify where -- what the impact if surrenders increased in fixed annuities is? I know you said surrender charges -- penalties, sorry, are good from your point of view. But given the sort of profile of this issue, I just wonder if you could expand on that? Do you keep a liquidity reserve just in case?

And the second question was for Mark really. Despite everything that's been said I'm just sort of not quite there yet as to why you've decided to resign and I wonder, we've covered several things that you probably wouldn't do. Perhaps you could talk a bit about what you would do and what you might be thinking of doing next to get us to an appreciation of why you've decided to resign? Thank you.

Starting with the fixed annuities, if we start with our recent persistency experience. Persistency last year actually improved in fixed annuities. Our surrender rate in '07 was about 12% and our surrender rate in '08 was 10%. So that book is fairly well locked down.

From a liquidity perspective, we've got plenty of liquidity facilities, the -- we've got right now about $1 billion worth of essentially cash on our books. That's a little higher than we normally run about $300 million to $400 million. Plus we have availability of liquidity facility from the Federal Home Loan Banks of -- that would -- in excess of $5 billion that we could access very quickly that we have pledge-able collateral for, some of it already pledged. So from a liquidity standpoint we're quite liquid.

Tony, I think it's -- again, it is very simple. It is not complicated. I think the strength of the business is clear. I think, as I say, I've given 25 years and it will be 4.5 years as Group CEO to the Group.

I think, when I look back what I didn't do effectively when I was in Asia was create succession as well as I would have liked, and I was certain that I wasn't going to do that again when I came back to this job and it was one of the clear criteria. And I put in place what I believed is the succession in the Group and Tidjane is a living example of that.

And the question and the answers are as simple as that. I believe a regeneration of a CEO should happen after a certain time. And I think Tidjane will come in and do a superb job.

As to what I will do I have no idea, I think it's -- I will not be inactive. I will want to do something. I think I have another big job or so in me. But I think the point is now when you're in these sort of jobs you don't have time to think about it and it's totally inappropriate to have any conversations.

So I have not thought about it and not been in any conversations. And what happens in the future happens in the future. But I think the timing for the Group to do it from a position of strength was very important to me and I think this is a great position to do it from.

Andrew -- and Manchester United, of course.

It's Andrew Crean at Citi. Can we go back to the subject of economic capital under (inaudible) four, and how does the Group look on the emerging capital debate? Particularly what I'm thinking about is the capital that you'd require behind things like UK annuities and US fixed annuities, how that compares with the Solvency 1 regime?

Well, we are working on it as you can imagine. Solvency 2 we did request for, like others, and we are looking at it. I don't know if you want to start a discussion on liquidity [primarily] on its treatment. It's similar to some of the discussions I think we've had in the CFO forum on MCEV, and I think the discussions are ongoing. There are regular meetings with the FSA etc. on these topics.

Presumably you actually went through your (inaudible)?

Yes, we've got the figures.

We've got the figures, but we're not disclosing them.

We have them. We're not going to disclose them. We have the figures and I think -- as I say, I think when the basis is so uncertain and when the CFO forum itself hasn't got together in terms of standards, I think we -- at the appropriate time we're happy to talk about them. But I think until there is greater consistency and comparability we're unlikely to release those figures.

I'm not sure the spreads are there. You've got movements to interest rates, but not corporate bond spreads. It was the question I asked right at the beginning.

Sorry could I --

The question I asked at the beginning about corporate bond spreads, I looked again and I can see (inaudible).

It's interest rates. It's not spreads, yes.

What I was asking you was your sensitivity to corporate bond spread?

Okay, well, we can come back to you on that, yes.

Sorry, I miss -- not to ask a question. CFO forum deadline coming up, I suppose, Feb 2010, given the current hullabaloo that's going on within the Committee and the way Aviva's been treated, etc. in the market, would you, if you got to that date and there wasn't any consensus reached would you consider unsigning yourself from the CFO forum? Or is there some loophole in your document that you can just delay it until -- I just wondered your thinking around that?

Right, right, I think we've been an active participant to the CFO forum. We think the CFO forum is a good thing for the industry. We would welcome a joint agreed position on all the issues that are on the table now. We think it would be good for the industry to have a comparable standard.

We decided not to be an early adopter, because we didn't think it was helpful for the industry, for companies to go ahead in a dispersed and inconsistent manner. I think we've been proven right on that. And we keep the same position, which is to work within the forum towards a solution hoping that we will find one.

(Inaudible question - microphone inaccessible)?

I think there's a lot of work ongoing. I wouldn't want to forecast the outcome of that work, but we are active participants.

Can we have one last question? Is there any? Ending on the CFO forum's a bit of a downer.

Okay, well, thank you very much for coming this morning and we'll be around for a bit if you want to talk. Thank you.