Prudential PLC (PUK) 2010 Q2 法說會逐字稿

Right, everyone, I think we should get under way. Welcome to Prudential's 2010 first half results presentation. I think you will have seen that today the business has by any measure produced an outstanding set of results. I think that performance is a consequence of the continued delivery of our strategy, a strategy which is underpinned by a discipline of rigorous capital allocation, of strong risk management and balanced and transparent metrics. I want to give full credit to the management team of the Pru, not only for steering the company so effectively through the financial crisis, but for ensuring that we emerged as one of the clear winners and very well positioned as you can see to benefit from the return to more normal market conditions.

That the strong results announced today have been delivered against the backdrop of a first half dominated as it was by the AIA transaction, I think demonstrates two important things. The first is that despite the real potential here for distraction caused by the transaction, we have remained very, very focused on the business and delivering the results that we report today.

Secondly, and in a way more importantly, these results evidence that Prudential is a fast-growing, well-capitalized, highly profitable business with excellent growth prospects. This underlines the fact that our desire to acquire AIA was not driven by a need to find a solution to a problem within the Group's businesses. Rather it was a unique opportunity to accelerate our Asian growth. And as such, it was absolutely in line with the Group strategy. And as a Board, we believe that the acquisition would have generated significant incremental long-term and sustainable shareholder value.

Now in the event, as we all know, we were not in a position to conclude a deal. And as we made it clear at the time, we not only regret the passing of the opportunity, but the costs incurred in the process. We've worked hard to minimize these. And you will see some of that detail in today's disclosures.

Now since AIG rejected our revised offer, I along with a number of other Board members, have met with many of our shareholders to discuss the deal, to discuss the current state of the business and to hear their views directly. These discussions have been thorough, they've been open, they've been frank, they've been constructive, and have, of course, been set in the context of the business at large. I can say on behalf of every member of the Prudential Board that we are here to serve our shareholders and of course we recognize that we are fully accountable to them.

Our core purpose remains to deliver long-term, sustainable shareholder value and to outperform our competitors. And I hope you can see from this morning's results and from the presentation that follows that this is precisely what we have done and it's what we have every intention of doing as we go forward.

So it's now my pleasure to hand over to Tidjane and to Nic to take us through the detail of today's results. Tidjane?

Thank you, Harvey, and good morning, everyone. Today I will take you through the highlights of our results for the first half of 2010 and put these in the context of our strategy and operating principles. Nic will cover our H1 2010 performance in some more detail. And I will come back at the end to talk about our outlook for the rest of the year. And as always we will then take your questions. The Executive Team and a number of key people from our operations around the world in Asia, the US, are here this morning and we look forward to a dialog.

So let me begin with some context for these results. As you know, over the past couple of years, we have been focused on rigorously managing the business through clear and consistent operating principles. Our priorities have been to accelerate our growth in Asia, to emphasize growth and sustainable cash generation in the US, to focus on strong cash generation ahead of growth in the UK. And in our management, asset management business, the priority has been to generate strong investment performance to underpin our ability to increase assets under management. The events of the past few months have not diverted us from this strategic and operational focus.

As a result of our actions over the last two years, I am pleased to report a very strong set of results across all our businesses. In fact, they are the best ever on all measures and across all businesses.

I am conscious that the main focus of interest over the past few months has been the AIA transaction. And following Harvey's comments, I too would like to say a few words. It was an opportunity to accelerate our strategy of focusing on high growth markets. And I share Harvey's and the team's disappointment that we could not complete the deal. I recognize the cost of terminating the transaction, and I recognize that they are of concern to shareholders. These costs have been reduced from our original estimate of GBP450m to GBP377m pre-tax and GBP284m post-tax.

As a team, we remain energized by the challenge of leading this Company, which continues, as today's numbers show, to have great profitable growth potential. So let us now move on to the first half of the year numbers, which as I stated earlier, are the best ever on all measures and across all businesses.

Starting with new business, life new business APE was up 28% and new business profit increased by 27% to GBP892m. The average margin across the Group was maintained at 54% and that's important because it repeats the performance of H1 '09 which marked a step change from our 38%, 39% historical to 54%. So we've been able to maintain this.

With this strong new business growth, net inflows in the life business, which are a key driver of IFRS profits, doubled to GBP4.4b. And asset management net inflows over the period were also GBP4.4b. It's a coincidence, that was however the numbers.

Moving to operating earnings, underlying IFRS operating profit, excluding the GBP123m one-off hedge accounting gain in the US, is up 19% at GBP845m. As a progression for the statutory earnings, 19%, considering what we've done on EEV and cash, it's a very satisfactory number and an increasingly important metric for the Group. And Nic will cover in more detail later the makeup of the GBP123m and why we think it should be excluded from the analysis of the underlying.

And finally, looking at the balance sheet, shareholders' funds on an EEV basis increased by 9% to GBP16.7b, or GBP6.57 per share. And as an indicator of our cash and capital generation, which you know we've been using now for two, three years, the free surplus across the life and asset management operations, free surplus increased to GBP3.2b, up from GBP2.5b at the end of '09, and from GBP0.9b at the end of '08. So an increase of over GBP2b in 2.5 years. Our returns on capital are high. The IFRS return on equity is 20% annualized.

So in line with our progressive dividend policy, and considering these results, the Board has decided to increase the interim dividend by 5%, which reflects our confidence in the business and our intention to make sure the dividend grows at a sustainable pace.

But these results are just a snapshot of our performance. To take their full meaning, they must be looked at over a longer period, which is what I would like to do now, looking at five years of performance. Over five years we have achieved double digit growth across all key measures of embedded value, IFRS and cash. We have grown new business profit, NBP, at 17% per annum compound, with a significant pickup since 2008 to over [25%] compound. IFRS profits have grown at 15% compound with a significant acceleration since 2008, particularly in Asia. And we'll come back to that in Nic's presentation.

Underlying free surplus from the back book, net of new business strain, has grown at 40% per annum. And each element of our portfolio has contributed to this progression. Asia and the US have generated strong profitable growth. The UK has produced good cash generation. And our asset management businesses in the UK and in Asia have contributed also strong, profitable growth. So delivering across all these measures over a sustained period is, we believe, a real testament to our strategy, and an indication of a value we have created.

Another way to look at this is to assess total shareholder return, which we're doing on this slide. Over 10 years from 2000 onwards, the total shareholder return we have generated has been above that of our European peers, even if I can't really say that over the beginning of this year. But over the ten years it is a fact. From June 2000 to July 2010 our total shareholder return was 37%, ahead of the average European peer group, and it's defined on the slide with Axa, Allianz and many others. And as you can see, most of better performance has come since 2008. So why, if we try to get under the reasons for this?

Again, our strategic priorities have been clear. Accelerate growth in Asia, build on our strengths in the US, participate selectively in the UK, where we've clearly balanced new business writing with cash and capital, and optimizing our asset management performance. These have remained broadly consistent since 2006. However, since 2008, we'd insisted and defined some operating principles which we have been implementing, I believe, with rigor.

First, we decided to take a more balanced approach to performance management across EV, IFRS and cash, with an increased emphasis on IFRS and cash. And that happened for us in 2008. Second, we have focused rigorously on allocating capital to the highest return opportunities. And third, we took a much more proactive approach to managing risk and capital across the cycle. So let's look at each of these three in turn, starting with the metrics.

Our Group historically, and it wasn't alone in that, I think it's fair to say most of the sector, was too focused I believe on embedded value at the expense of other measures, leading sometimes to growth without real value creation. From 2008 onwards, we were explicit with you that we would manage with a much better balance across EV, IFRS and cash, to ensure value creation over the long term. And we maintain this stance because although we say there was an over-emphasis on EV, we're not saying EV's worthless. That's not at all what we're saying. We think it's important to optimize the three of them.

Since 2008, we have also realigned our management incentive structures. We haven't talked a lot about that publicly, but we have, to reflect this new focus on IFRS and cash and the specific role we assign to each of our businesses. And this has had an impact on our performance, as you'll see later.

We have also increased and improved our transparency and disclosure, devoting considerable efforts over the last two years to improving our IFRS and cash disclosures, and I hope you've seen that, instead of moving to MCV. And I expect this emphasis on IFRS and cash to continue.

Moving on to capital allocation. Life insurance companies have in-force books which generate large amounts of cash. The challenge that we all face is to make sure we allocate capital in the disciplined way and in line with our strategy. Central to this is the Company's understanding and management of its new business trade. We have been explicitly focused on this since 2008 and have updated the market regularly on the evolution of this important KPI. Our focus on capital efficiency has had a significant impact on the way we run our business and on our results.

In H1 2010, as we show here, we generated sales that were 40% higher than in 2006. During that same period, we grew our new business profits by 90%, with an absolute new business strain actually lower than H1 2006. So we almost doubled new business profits whilst reducing the new business strain.

A number of actions taken right across the Group allowed us to achieve this step change. So looking at each of our major businesses in turn starting with Asia.

Asia, as you know, is our preferred destination for capital. This does not mean however that our discipline there is any less strict. As a result, we have closed Japan to new business early this year. And you will see in our numbers that we have significantly reduced volumes in Korea. Like the US, we have restricted GIFs and capital-intensive fixed annuities and focused on more capital efficient VAs. And in the UK we have become increasingly selective in our participation, applying a high hurdle rate to writing bulk annuities, closing our lifetime mortgage business, managing individual annuities for value and refocusing our corporate pensions business.

Another way to assess this evolution is to look at how much post-tax new business profit we have generated for each pound invested in new business across the Group over time. Here again you can see a strong progression since 2005, with a clear inflection from 2008 where this ratio increased from 1.2 to 1.9, an increase of more than 50% in two years. Overall, this ratio has more than doubled over five years.

So let's look more closely at the last three years. During that period we increased NBP by 59% whilst consuming 1% less capital. Our focus on capital efficiency has had consequences for our geographic allocation of capital as well as on our product allocation. If you look at 2008, you can see here that we were investing as much in the UK as we were in Asia in absolute terms.

In 2010, we invested almost four times more capital in Asia than in the UK. Clearly, Asia remains our preferred long-term destination for new business capital. And its share will only continue to grow in the future.

During the last two years we have invested high levels of capital in the US in light of the exceptional returns available to us there at this point in the cycle. But we will not hesitate to lose market share should conditions there change. In terms of products we focused overall the business more explicitly on retail and de-emphasized wholesale businesses. We are now essentially a retail shop, which is where the risk-adjusted returns for our shareholders are the highest. So as you can see, our approach to capital allocation has changed significantly, and the same can be said about risk and capital management.

As you know, we've been proactive in managing our capital position throughout this crisis. We're in a strong absolute and relative position, with a cover of 270%. And we are able to take advantage of the growth opportunities that we see across the board, such as UOB in January. Since the end of 2008, the IGD surplus has increased from GBP1.5b to GBP3.4b despite over the period credit losses of GBP1.4b, and after putting aside an additional GBP1b to take credit reserves in the UK to GBP1.7b. So, overall a net increase of almost GBP2b whilst absorbing in excess of GBP2.4b of negative movements.

Our prudent approach also applies to the dividend which we have been able to grow throughout the crisis and not cut. We continue to monitor our key risks and to take action when necessary. For instance, during the first half of this year, and we'll talk about it later in more detail, we have taken advantage of the more normalized credit market conditions to further derisk in the US, cutting our exposures to RMBS, to high-yield corporates, to European banks and increasing our holdings of US treasuries. We have also undertaken some derisking in the UK credit portfolio and we believe that strengthens our position given the macroeconomic uncertainties we're facing.

So I have covered each of our operating principles; use of balanced metrics, disciplined capital allocation, proactive risk management, and I will now move on to make a few comments about each of the businesses in turn.

Starting with Asia, where as you know, we've built a strong business over a long period, with a broad presence across the region, a large agency force and a trusted brand. As a result, APE, NBP and EV grew strongly. But the IFRS profile always raised questions about the overall value creation of our Asian businesses. Over the past couple of years Barry and his team have made significant changes in the business, sowing the seeds for future value-creating growth. We have put greater emphasis on the high growth, high return markets of Hong Kong, Taiwan, Philippines, Vietnam, Malaysia, Indonesia and Singapore. It's what we call Southeast Asia plus Hong Kong, seven key markets.

We have continued to grow the agency force as well as improve its productivity. We have also increased our bancassurance distribution, renewing and expanding our agreement with Standard Chartered, and signing an agreement with UOB covering Singapore, Thailand and Indonesia, which have contributed very well to the numbers we've seen this morning.

Bancassurance will be increasingly important as Asian customers become wealthier and therefore it is a key area of focus for us. I'm sure you've seen that our bancassurance sales have grown by 42% in the first half.

On product we have moved the mix towards health and protection, supporting overall margins, improving, of course, IFRS earnings in cash.

So as you can see here, the business has enjoyed extraordinary growth, being ten times larger in APE than a decade ago. But the changes we've made in the last two years have also had a big impact on IFRS profits. As you can see here, they are now 3.5 times what they were in 2008. We've cut a number of places where we were taking negatives such as India, Korea and Japan. And we have with the growth of the in-force book, generated increasing flows of IFRS profits. That's really transformational. And these earnings are finally becoming commensurate with the scale of our Asian business.

So if we go a bit further down in Asia. Our focus on the seven countries I mentioned, and Hong Kong has continued to pay off. That's the blue bar here. These markets in blue have achieved 46% growth in aggregate at average margins of 72%, which we believe validates our strategy. And by the way, I believe there is lot of implicit exposure to China in these markets and in this (inaudible) which is a question we often get, and that's a fact.

There are also good performances in Taiwan, as we develop our bancassurance relationships there, and in India and China. A very important dimension of the Asian insurance landscape, of course, is distribution. In aggregate, both the agency and bancassurance channels continued to make very good progress. Average active agents number, that's fundamental statistic for us across the region, excluding India, grew by 15% compared to H1 '09. So that's as much added to your effective capability to distribute, every active agent sells 15% more. And the average APE per active agent has increased 28% in the same period.

And finally, bancassurance, as I said probably too early, continues to grow very fast, with 42% growth of APE, all very encouraging.

So simply Asia offers the highest growth, and the highest return opportunities in the insurance sector, and will do so for a generation or more.

Moving now to the US, Clark and the team there have remained focused on long-term value creation, putting value ahead of volume, maintaining pricing and hedging discipline, and delivering excellent service with a low-cost platform. Over the last ten years we have enjoyed strong growth in VA sales. But as you can see on the bottom left chart, between H1 '07 and H1 '08 our VA sales actually fell by 20%. And that was deliberate. We were willing to accept lower market share in the face of uneconomic pricing behavior which prevailed in the market at that time. We do not run our businesses for volume or for market share, but for profit. We all know that a number of players paid a high price for their actions during that period. And we are simply benefiting today from that market dislocation.

Clearly, distributors are rewarding VA producers who have maintained a consistent availability of the product and their service throughout the cycle.

We have always had stringent return criteria when it comes to adding distribution. We have not changed that. But we are adding more reps, more representatives, and increasing our penetration. We have had a successful launch, as you know, with Merrill Lynch, and we have been building our distribution with Wells Fargo and American Funds.

What is going on now is exactly what we expected to happen at this point in the cycle. We are simply opportunistically capturing as much of this volume as we can at good margins. The high net flows we have seen over the last 18 months are already resulting in an increase in IFRS profits. However, we will not hesitate to back away if uneconomic behavior returns to the market.

There has been speculation about the true drivers of our growth in the VA segment in the US. So what I've done here is that we show you the consistency of Jackson's pricing for GMWBs in red compared to the average of the top 15 competitors across the cycle. And it's interesting to see how much the average moves. This is some clear evidence that the increase, and some would say the surge, in our volumes, is not the result of changes in our approach to pricing, but rather the result of changes in the behavior of our competitors and of our distributors. We have remained constant. Our variable is not price, it's volume. We will lose market share when the pricing is uneconomic, and we will gain market share when people pay the price for having priced uneconomically. It's very simple story, and that's how the cycle unfolds in the US.

So let us now look at the UK. We have seen very strong sales and IFRS profits growth in Asia and in the US. Our approach in the UK frankly is different. The UK is a relatively mature market with lower growth and lower returns on capital. Therefore, we have been selective in our participation, focusing on a few profitable products. We are also in the unique position that we don't need to chase volume, and we are less dependent on third party distribution than our peers. 57% of annuity new business and 39% of corporate pensions new business in the first half of 2010 came from internal customers.

So recognizing the role of the UK within the Group, we have aligned incentives for UK management team with our strategic objectives in this market, for generation of stable cash flows and IFRS profits, and continued capital strength. Rob and the team continue to deliver against these objectives.

And this is sustained by a continuous drive for increased productivity. We have already achieved the original -- we are confident that we will achieve the original GBP195m expense-saving target set out in 2007, in 2010, a few months early. And we will continue to increase our productivity.

So I want to be clear, let me say this again. We have achieved the original GBP195m expense saving from 2007 six months early, let me be clear. And we will continue to increase our productivity beyond that.

All these actions together have led us to produce margins and IRRs that are strong in the context of the UK market.

But equally important, the cash transfer to the Group has increased as the shareholder business has gained scale, and through our greater discipline in writing new business, a swing of over GBP200m in four years. We're positive GBP61m now. So in total, including the with profit transfer, the UK business is a major contributor to the Group's cash generation, capital strength and ratings.

Moving now to asset management, M&G has had another strong half year. These are almost -- they look Asian curve, but are M&G. When Michael showed me these I said, it looks like Asia. But this is a continuation of long track record of success over the last decade for Michael and for the M&G team. What this slide shows you is the average monthly gross, in blue, and net in red, retail sales, which have been positive in all periods, with a real step-up here again in the last 18 months. M&G has been the UK's leading retail fund manager, as measured by net flows, in each of the last six quarters.

A key driver of this of course is sustained investment returns, and the long-term performance of our flagship equity bond and property funds, and a number of emerging funds has been strong. Delivering strong performance across all asset classes, and that's what we're showing you here, equity in red, fixed income in dark blue, property in light blue, is crucial to the M&G model, because it enables us to attract flows at all points in the economic cycle as demand, especially retail demand, naturally moves from one asset class to another.

And finally, asset management in Asia, where I think there is significant untapped potential and upside for Prudential. In Asia we have a solid base, with GBP46b under management across the life and third party business, and with broad market coverage. It is a very attractive market, where rising affluence will drive continued growth. It is a high margin, high return business, and as you know, with low capital requirements. So we will continue to focus on the retail market, which we found very attractive. However, in addition we believe that we can increase our penetration of the fast-growing high net worth segment, which now accounts for around a third of retail fund in the region.

There is also potential in the institutional market, where we have already a presence. This is one of the most attractive growth opportunities for the Group. At the beginning of the year I have appointed Graham Mason, as head of our funds business in Asia, he has moved across from M&G to lead that business and has been making good progress with profits increasing by 71% in the first half to GBP36m, from about GBP20m.

So before I hand over to Nic I would like to make a few points. Our strategy is sound, and we have implemented our operating principles with discipline and good results. Prudential is a high-performing business with IRRs, payback periods and returns on capital that compare favorably to any life insurer globally. We provide excellent exposure to some of the strongest growth markets in the world. We balance this profitable growth with proactive and sound financial management, and are realizing the profits promised from the back-book. We generate a growing and sustainable dividend. And we have grown strongly on all measures over a five-year period and the momentum is very good.

So with this, I'll hand over to Nic.

Thank you, Tidjane. Now I'll have done my usual party piece when I follow Tidjane. Let me say good morning to all of you here this morning. In our sector, sustainable value is created by simultaneously growing new business profits, IFRS earnings, cash and capital. This is exactly what we have done. And as you can see on this slide, we are reporting strong improvements in all of these metrics with all of our businesses reporting higher profits. In the first half, our EEV operating profit was up 35% to GBP1.68b, underpinned by 27% growth in new business profit to GBP892m, as we continued to build on the powerful momentum we created in 2009.

Our headline IFRS operating profit of GBP968m includes the benefit of a net equity hedge accounting gain on our VA book of GBP123m, which will reverse over time. I will cover this in more detail later. But it is appropriate to disregard this gain in assessing our underlying IFRS performance which was up 19% to GBP845m.

Our focus on cash generation from our growing back book coupled with our disciplined approach to new business strain, has delivered an impressive 63% increase in operating free surplus from our life and asset management businesses to GBP947m. This more than covers our central interest and dividend outgoings, and enhances our capital flexibility going forward.

I'd now like to focus on the increase in new business value that our franchises have delivered in the first half of 2010. As you can see, our Group-wide new business profits have grown by 27%, which in absolute terms, is nearly GBP200m higher to GBP892m. We have maintained our overall margin at 54%. And we're pleased to have achieved our strong 2010 volumes growth without giving up any of the margin gains from 2009. We balanced carefully capital consumption and value optimization. And we have remained disciplined operationally in our emphasis on geographies and products, with the highest IRRs and shortest payback periods.

As Tidjane has already covered, this has enabled us to achieve the reported uplift in new business profitability whilst consuming a broadly unchanged amount of capital compared to last year.

In Asia, new business profits rose by 38% to GBP396m and margins improved to 56%. Health and protection products remain the key source of value, accounting for over half of Asia new business profits, and continue to grow strongly.

The 1 percentage point increase in margin is due to a shift in country mix towards the more profitable countries of Southeast Asia including Hong Kong. We have included in your packs our normal disclosures on country-specific margins. Movements between periods at a country level are principally due to changes in product mix.

In the US, average margins have declined to 64% due to the impact of the narrower spread environment in our fixed, and fixed indexed annuities. Nevertheless we have grown new business profit by 24% due to the success of our VA strategy, where margins have been maintained.

In the UK, our value base focused on annuities and with profits, and our withdrawal from equity release, resulted in an 11% growth in new business profit, and a 3 point improvement in margins to 35%. What is even more impressive is that the higher profitability was achieved despite the significant reduction in invested capital, a vindication of our UK strategy and the execution skills of Rob and the team.

The internal rates of return and payback periods in all of our markets, which are summarized on the right-hand side of this slide, remain in my view the best in the sector.

Now let's take a closer look at the US, where there has been the most movement in the year-on-year margin. We held our variable annuity margin at 71%, as the impacts of lower spreads on the guaranteed funds was offset by an increase in the proportion of customers electing guaranteed benefits. As you can see, VA margins are now 22 percentage points higher than the same period in 2008. The step-up in profitability is due to the following three factors, each contributing roughly a third of the increase.

One, the greater proportion of customers seeking downside protection at the point of sale by electing more optional VA benefits. To give you an example, the take-up rate for guaranteed withdrawal benefits in 2010 was 88% compared to 68% in 2008. Two, repricing activity in the form of selective reduction in the level of guaranteed benefits offered by Jackson. And three, the more favorable policyholder behavior on the utilization of these guaranteed benefits.

Looking at fixed and fixed-indexed annuities, margins for these products have declined as a result of the significant contraction in credit spreads that we have seen over the course of the last year or so. The combination of higher capital usage and lower margins has seen us de-emphasize these products in favor of VAs.

Turning to EEV operating profit, this has increased by 35% to GBP1.68b, equivalent to an annualized ROEV of 16%, up from 12% this time last year. Our life businesses delivered an excellent performance. Earnings were higher by 34% to GBP1.75b, with a strong performance from both new business, which I have already covered, and in-force business, up from GBP612m to GBP858m, an increase of 40%.

It was encouraging to see the resilience of our in-force book demonstrated once again as experience variances and assumption changes contributed a small profit within the period. Within this, all of our major businesses reported year-on-year improvements in operating performance. Asia in particular grew by an impressive 60% to GBP633m, and now accounts for well over a third of the total.

Profits from asset management and other businesses were up 43% to GBP217m. This reflects the significantly higher fund values as market levels rose, but also clearly benefited from the continuation of exceptionally strong net inflows over the previous 18 months, particularly in M&G retail, and increased sales of the more profitable equity products.

Turning to other items, net charges have increased to GBP289m due to higher net interest costs of GBP124m, reflecting the additional debt raised in May and July last year to manage our IGD position during the crisis, and costs relating to our Solvency II implementation project amounting to GBP22m. You can expect to see a similar level of Solvency II spend in the second half of 2010, higher still in 2011, tailing off in 2012.

Moving on to take a closer look at the in-force profits from each of our life operations, and starting with Asia, you can see the increase in the unwind and expected returns from GBP248m to GBP300m, reflecting the growing maturity of our back book. And lower overall experience losses and assumption changes of GBP45m and GBP14m respectively. Our focus on customer retention has seen persistency improve. However, it remains negative at GBP49m as we continue to incur experience losses in India, Indonesia, Malaysia and Korea ranging individually from GBP6m to GBP12m. Given the increasing sale of Asia's embedded value at GBP6.7b, these overall experience and assumption changes remain relatively small.

The improvement in the US in force profit to GBP306m reflects a greater unwind due to the application of higher risk discount and earn rates in the US, and includes higher positive experience variances and assumption changes. The improvement here is attributed to higher spread profit which has increased from GBP38m to GBP108m as a result of actions taken by Jackson to lessen its tactically short asset duration position in the general account.

Finally, the higher return in the UK is due to refinements in assumptions related to shareholder-backed annuity business.

I summarize on this next slide the movement in EV shareholders' funds in the period which at June 30 stood at GBP16.7b. This is equivalent to GBP6.57 per share. It is 9% higher than the position at the start of the year and 22% higher than June 2009. Going from left to right and picking out key movements, we can see the GBP1.68b of operating profit, a negative short-term investment variance of GBP227m reflecting the market weakness in the first half of the year, a negative GBP377m representing the finalized costs of the AIA transaction. This is lower than the GBP450m estimate we announced on June 2, and reflects the actual exit cost of the currency hedge which was lower than we had anticipated, and the final settled amounts relating to bank underwriting fees and other adviser costs. After tax deductions the final cost to shareholders is GBP284m.

Further along the waterfall you see the GBP318m cash payment of the 2009 final dividend, which had a lower level of scrip take-up compared to prior years and the positive impact of the 8% appreciation of the US dollar which generated a GBP798m foreign exchange gain.

Before I move on to other metrics, I would like to provide you with a high level geographical analysis of our June 30, 2010 embedded value. Asia's embedded value of GBP6.7b is the largest contributor to the Group and accounts for approximately 40% of shareholders' funds on this basis. The Asian share of embedded value has grown significantly over the last five years, from GBP1.6b to GBP6.7b, representing a compound annual growth rate of 33%. And the 17% annualized ROEV that Asia has delivered in the first six months of 2010 shows that this trend is ongoing and will be the key driver of the Group's embedded value growth over the coming years.

Turning now to IFRS results, we delivered an improved underlying operating performance of GBP845m, up 19% on 2009. Our headline figure of GBP968m includes the benefit of the net equity hedge gain on our VA business, which I explain on this next slide.

This gain arises due to the differences in accounting between the derivatives held to manage equity risk, which are fair valued, and the associated VA guarantee liabilities, a substantial element of which are not fair valued. It is not our practice to hedge VA guarantees on an accounting basis. As Clark explained this time last year, we hedge all VA embedded guarantees together with related fees on an economic basis, through a combination of options and futures after taking into account the natural offsets in the book. We regard this as the most appropriate way to manage these risks, which delivers a technical profit over time, and we accept the inevitable accounting volatility that ensues.

This accounting gain or loss is more pronounced in periods of high equity market volatility, and over the last 18 months has become more significant due to the large take-up rate of GMDBs and GMWBs for life options, the reserving for which is insensitive to market movements. The combination of these two factors has produced a larger than normal IFRS movement of GBP123m in the six-month period.

I'm happy to take questions on this later. But the key point to note is that this is purely an accounting gain as opposed to an economic profit. And it will over time unwind through the profit and loss account with a net cumulative effect being broadly neutral. This is illustrated in the table on the slide, which shows that the accumulated impact on operating profits going back 30 months is a GBP35m net profit. Given the increased materiality of this effect we will be revisiting our accounting treatment in the second half of this year.

So going back to look at the makeup of our IFRS results, excluding this item, the overall performance is underlined by strong profits in our Life businesses which are up 19% to GBP893m. This healthy increase in profits is more pronounced in our Asian and US businesses, which I will cover in more detail on the next slide.

I have already commented on the performance on Asset Management and on other expenses. Clearly both of these also flow through the overall result on this basis.

So, on this next slide I break out the contribution of each business to the Life result from 2008 to 2010. Taken over the last two years all three regions have reported improved profitability, Asia being the most notable which now contributes more than a quarter of the total. Asian profits in the first half of 2010 are higher by 25% at GBP259m.

The improvement continues to be driven by the fast growing in-force book, which continues to benefit from strong positive net flows, lower absolute levels of new business strain despite the sales growth, a richer mix of Health and Protection business and the actions taken to turn the younger businesses into positive contributors to IFRS profits.

Turning to the US, excluding the effect of the net equity hedge gain, IFRS operating profit is higher by 36% to GBP327m. Fee income has increased as the improved equity markets in the later part of 2009 and early part of 2010, coupled with strong inflows into VAs, have led to a 69% increase in average separate account balances.

The US result also benefits from higher spread profits, which arise from the duration -- from the asset duration lengthening I described earlier, and from selective crediting rate reductions implemented this year.

The UK reported IFRS profit of GBP307m is in line with last year with contribution from both with profits and shareholder business broadly unchanged.

Core to the increase in life profits in Asia and the US is the continued growth in the policyholder liability reserves. This next slide shows the roll-forward of liability reserves for shareholder-backed business in the first six months of 2010. As you can see net inflows, which represent premiums received less claims paid, were positive in all of our Life operations, and amounted to GBP4.4b double those in the first half of 2009.

Asian's continued strong net inflows reflect the heavy bias towards regular premium new business and high customer retention. This is an important feature of the Asian market and provides a strong underpin to earnings growth.

Jackson continues to experience minimal outflows on annuities, and in the first quarter of 2010 ranked first in the US sector for variable annuity net inflows. This is a result of strong cycle management by Clark and the team, and the reserve growth that has resulted has driven our earnings higher in the first half.

The other feature of our 2010 Life IFRS results is the more balanced mix of the -- in the sources of income. This is illustrated on this next slide, which depicts both the absolute growth and the contribution of the various IFRS sources of income to the total.

The key point to highlight is the increasing proportion of insurance income, showed by the red bars, demonstrating the success of our Health and Protection wider strategy in Asia. This has improved both the quality and the resilience of our earnings.

The analysis also demonstrates the versatility of our other sources. Income from these sources will ultimately be determined by consumer demand, which is naturally linked to market conditions.

You can see that in the first half of 2009, when equity markets were depressed and fixed income yields were high, we successfully increased our spread income. When the market situation reversed in 2010 we were equally successful in capturing higher fee income on unit-linked funds and separate account balances.

Turning to the movement in IRFS shareholders' funds, at June 30, 2010 these stood at GBP7.2b, 14% higher than the position at the beginning of the year and 52% higher than June 2009.

Again going from left to the right on the chart, you see the GBP968m operating profit, the GBP377m AIA transaction cost which I've already commented on, a GBP419m positive value movement on Jackson's fixed income securities portfolio. And again the impact of dividends paid and foreign exchange translation gain on the IFRS balance.

Moving onto capital and in particular the evolution of free surplus, you can see how our level of capital has increased in 2010. In the first six months of the year, the free surplus held by the Group's Life and Asset Management operations increased by 28% to GBP3.2b.

On the left-hand side you can see the free surplus generated by our back book of almost GBP1.3b, which was higher than the equivalent figure in 2009 and reflects both the growing maturity of our business and the disciplined management of our in-force book which Tidjane has already covered.

The surplus released by the in-force covers the investment in new business of GBP339m shown in the dark blue bar by 3.8 times. During the first half, a total of GBP460m was remitted to Group by these businesses. Our approach here is to remit sufficient amounts to allow the center to meet its operational obligations with a balance held within each business where it can be deployed more profitably.

This is an important distinction, and it is for this reason then when we look -- that when we look at our ability to cover our central outgoings, including the dividends, we use operational free surplus generated by these businesses rather than actual cash remittances. And this is illustrated on the next slide where I have combined the operational flows, from the previous slide, with the central cash costs and the external dividend.

Our disciplined approach to capital conservation and cash generation has seen free surplus after investment in new business, rise by 63% from GBP581m in the first half of 2009 to GBP947m in 2010.

After making the deductions for central cash costs and dividends we have generated an underlying free surplus at an operational level, in excess of GBP0.5b illustrated by the grey box on the right-hand side or the first grey box. This remains positive after deducting the AIA costs paid in the first six months of GBP261, and comfortably covers the remaining unpaid element.

For completeness, I show on this next slide the actual operating holding company cash flows during 2010. In overview and in line with our practice I've only remitted sufficient cash to cover central operating costs. The position is broadly neutral.

Net remittances from businesses shown in the dark blue bars amounted to GBP460m in 2010 and were GBP85m higher than last year's GBP375m figure. This reflects an increase in net remittances from Asia, and from our asset management businesses and includes a positive net contribution of GBP61m from the UK shareholder business. Dividends paid were higher by GBP318m due to the lower scrip take-up.

Alongside the strong performance in the first half of the year we have also delivered an improvement in the quality of our balance sheet. Throughout the period we have maintained a robust capital position. And at the end of June, our IGD capital surplus stood at GBP3.4b equivalent to a coverage ratio of 270%. Our liquidity position at the center remains strong, with over GBP1b of central cash resources and untapped facilities of GBP2.2b.

We continued to derisk the balance sheet during the period. We reduced our overall holdings of bank hybrid debt. More specifically Jackson reduced their exposure in EU and US regional banks by $850m. And the UK shareholder business sold nearly GBP400m of financial debt.

We also improved the quality of Jackson's corporate book by targeting a range of securities, including sub-investment grade corporate bonds and non-agency RMBS. The program size was $1b and as a result only 5% of Jackson's securities are now below investment grade compared to 9% a year ago. Jackson has reinvested these proceeds, and has directed a proportion of new inflows into government securities, and at June 30 held approximately $4b of US Treasury bills.

Our credit position has also improved. The GBP1.8b of unrealized losses that we had on our US debt securities only 12 months ago has now gone full circle, and is now sitting as a GBP1.2b unrealized gain. Impairment levels have slowed dramatically in the last six months now running at 2007 levels, at approximately $50m per quarter.

And we have suffered no defaults in the UK. We have maintained our practice of rolling up any unused default provisions into our reserves, which at June 30, stood at GBP1.7b for our shareholders-backed annuity business.

So in summary we have delivered broad-based profitability, improvements across all parts of our business and on all metrics. We have continued our strong focus on value and capital, significantly increasing our new business profits while consuming broadly the same amount of capital.

The good work that has been done over the last few years in this area is now emerging in our EEV and IFRS results, and is improving the balance and the quality of our earnings. Our free surplus generation has accelerated in the period, and this has enabled us to maintain a robust capital position throughout the first half.

I hope you will agree that these results demonstrate that management has safely led the Company trough the financial crisis and the associated downturn in markets, and is now capitalizing on the opportunities that are emerging.

Thank you for your attention. I would now like to hand you back to Tidjane.

All right, thank you, Nic. In summary the Group has delivered a strong first half in 2010. All of our businesses, Asia, the US, the UK, M&G, Asset Management Asia are performing well and I expect that to continue.

Our strategy, as I said, is sound and we will continue to pursue it with the operating discipline that has delivered excellent results on all measures over a sustained period. We have significant opportunities for profitable growth, and we have the financial strength to take advantage of those opportunities.

We are cautious about the outlook for the Western economies. However, our Asian business gives us a material and powerful presence in the most attractive markets in our industry, and one that will continue to underpin our growth. So, we view the rest of the year with confidence given the momentum that we have seen in the first half of the year.

And as we look further ahead beyond the second half we are well positioned to continue to deliver strong growth and generate strong returns for our shareholders, thanks to our operational focus and strong market positions.

Finally, and before we get into questions, please, a date for your diaries on November 30 and December 1, we will hold an investor and analysts event in London for a more detailed look at our businesses across the Group, so US, UK, Asia and Asset Management. And we would intend this to become an annual event.

So thank you, and over to you now for questions.

Okay, Greig, and I'll go from right to left.

Good morning, Tidjane, Greig Paterson KBW. Three questions, one is in the light of Mark Tucker going to AIA, could you just remind us of the -- when the Standard Chartered distribution deal comes up for renegotiation?

The second question is on the US, you mentioned a while back that at some point the VA, your margins in the VA would come under pressure as competitors get back on their feet. I was wondering if you are seeing any evidence of that in the third quarter.

And the third question is just a sort of -- you have a pretty low dividend yield, you're growing your dividend at 5% per annum. You've spent 18 months, I suppose, convincing the market that you've actually got very, very strong cash flow. If the dividend carries on growing at 5% how does one actually suggest that you invest in the stock? If that's going to happen (inaudible) more, can we expect some kind of upgrade in the future?

Okay thank you, thank you, Greig. AIA the first thing I'd like to say is that we wish Mark well, and he's been in this room doing this in my place for many years, and we wish him well at AIA.

Standard Chartered, it's -- it was eight years, yes, when we signed it with an extension of two.

We don't disclose the specific terms. But it does have years to run and the relationship is obviously very strong, and the results are going very well. I think you will have seen in the --

Hong Kong has recovered very nicely.

Hong Kong has recovered very nicely. And you'll see in the first-half results the bank is up 42%, so it's outpacing the broader regional growth so --. SCB obviously is a material part of that, so we wouldn't have any particular concerns about that, Greig.

Absolutely, and you've seen that something like UOB also diversifies our presence and -- [11m] in five months for an agreement that's just started, and they're already comparing interestingly other positions we have in the region. So we are also going to continue to grow that and diversify that.

Margins in the US, Clark, do you want to talk about that?

As far -- your question was on re-emergence of competition in the US. Six months ago I'd have said there was very little competition in the US except for a couple of targeted large players. We are starting to see some re-emergence now of people coming back into the market, and where pricing had almost over-corrected where it's becoming more competitive now.

None of it is problematic, none of it is anywhere near the line of what I'd consider to be the irrational competition that we saw in the past. But we are seeing people wander back into the market, yes.

And the third one was the dividend, which is probably a question we'll get a lot this morning. I think there are two key points there. The first one is really the opportunities we have in the business. We have -- we always say that we will invest if IRR is above 20% payback around two or three years in Asia.

We believe it's very, very attractive. And it's possibly a discussion for November, December when we have that Investor Day that we can drill down in the IRRs and explain to you why we believe that the first destination of those surpluses should be reinvestment into the business. We have extraordinary investment opportunities. And provided they come back fast and we have those fast, those short paybacks they should be rewarding for the shareholders.

The second one is that we really stress test our dividend. That's something I insisted on when I was CFO, and I think Nic is continuing that. The formula is a sustainable -- increase the dividend at a sustainable pace. What it means is that you adopt a pace that -- how can I, doesn't insolate you but protects you against the volatility of the world economy. And that's what we try to achieve and that's very important.

So when you see us putting out an increased rate it's really robust, okay. The dividend policy is a 2 times cover, but we really work very hard to ensure that the dividend is progressive and remains so. And so it only goes one way not the other way.

So I think that explains possibly some of the gap between what you were expecting and what we have delivered. It's the desire to make sure a good balance between writing new business and making sure that the dividend can continue to progress and is right.

That being said it's possible -- it's a place where I think there is an upside. But we are cautious and there is still a lack of visibility. And for the next 12 months -- and you've just seen what's been announced yesterday. We all see the news, it's better to be cautious and that's the stance we've taken.

Yes, go down to, let's go to --

Yes, Tony Silverman, Standard & Poor's Equity Research, just a couple of questions on Asia. I wonder if you could talk a bit about the background in India and the regulatory changes that have happened in recent months or what the outlook means, what that means for the outlook for you and the market?

Secondly, I'd be interested to hear a bit more what you can say -- you mentioned that China is in -- there is a bit of China if you like implicitly included in some of the Southeast Asian territories. I haven't heard a lot said about that other than such throw-away remarks. I'd be interested to hear what more you can say.

And finally on slide 55, there's an others line, just a small question really but it seems odd to me that that appears to include Singapore, which is your second largest market, or at least it's not mentioned separately on slide 55. I don't know if that's just an oddity, but perhaps you could comment, thanks.

Okay, all right. India just one comment is that we are very happy with the recovery in volumes; I think we were up 56% in volume in India and that's welcome. And the regulatory environment effectively is challenging in a market where margins are still relatively low. So with that introduction, Barry, I'll let you talk about it.

Yes. It's a lot of regulatory change all at once, so we -- it's kind of a shock and awe approach to making regulatory change. Normally things like this are sort of drip-fed, but the changes that they're proposing certainly will have an impact on all of the players there, particularly the multinationals, the foreign JVs.

In the long term, I think the changes are right-headed in that they are focused on trying to drive a market which has been very, very investment oriented with very little feature of protection. They are trying to move it towards protection. That's a good thing. That's something we've been trying to do for a couple of years in our -- single-handedly in our own way with some effect, but not dramatic effect.

And that ultimately, as Tidjane says, the margins in India are amongst the lowest in the world, and the way you drive up the margins are by changing the product mix and offering people more protection.

The fact of the matter is consumers there need the protection as well, because there's not a social safety net. I mean for the all the reasons we write protection in other places it works in India too, it's just none of the companies have ever really focused on it significantly. So in the long run the changes are good.

In the short term they will be challenging to get them implemented. They will require re-engineering in how you distribute the products. You'll tend to see smaller distribution forces but more productive distribution forces. Again, that's not -- the evolution from point A to point B will be complicated, but once you get to point B that's a good place to be.

So we are actually optimistic. And we are particularly optimistic about it because we think that given the planning that we've done already to respond to this, and we have a full operational plan in place to deal with these changes when they arise here in the next couple of months, that what's really going to help is scale.

The largest players will be the most advantaged players in terms of dealing with this. The players like us, and we are perhaps the only foreign JV that's actually in a breakeven position now, where we generated our first step profit in India for the fiscal year ended March 31, so we are in a much stronger and a much more advantaged position to deal with these changes than our competitors.

So I think it's fair to assume that you will see, within the marketplace you'll see new business volumes taper off some for a period of time, but in the long run I think it's good for the market.

(technical difficulty) noise around it do you think influenced the sales profile in recent months?

No, not really because it's -- there's been some noise around it but it's really sort of happened rather suddenly and I don't think people had a clear view into what it was actually going to mean. So I don't think it's had a significant impact over the last few months. Our momentum has been fairly steady over the last nine to 12 months.

And why don't we disclose the Singapore margins?

Well, there's just certain margins -- certain markets where we disclose margins and certain where we historically haven't, and I mean that's something I guess we could always re-look at. But at this point there's --

Is Singapore in others there or just --

Singapore is in others, yes.

It's well spotted.

Yes, others includes everything else.

You can tell between the former CFO and the CFO of Asia is a very lively debate on this issue, it's well rehearsed, we've talked about it many times. But I'm confident that -- having some influence on the debate will get you more open communication on this in the future, but it's well spotted.

(multiple speakers)

The China connection, yes, in my blue bar. Well, that's a very interesting point because -- there is this debate on intra-Asia trade and the integration of the Asian economies to China. And often people talk about China and the rest of Asia. And something the Japanese understand very well (inaudible) they plug themselves into the China operations very smartly. And if you look at a country like Vietnam economically it operates as an additional Chinese province.

And if you look at the degree of integration between a lot of these economies, and the work that the Asians have done, the nature of the trade flows is completely different. Over 65% of the trade now is intra-region. If you look at the 90s and '98 crisis it's exactly the opposite.

So -- and if you run a regression you'll see that the GDP of the other Southeast Asian nations is very highly correlated with the GDP of China. And people haven't really understood that.

Often, we get, well, but you're in the wrong country because you're not in China, all that good growth at 72%, margins at 46%, frankly, is the same thing. That's the thought I was trying to express. But a lot of that is a false debate.

And we are in places where we are getting very good growth. We are benefiting from China. And we have no problem attractive dividends and capital flows, etc., so maybe it's not such a stupid strategy. That's what I was trying to say.

There Jon, Jon, you have been patient, and then I'll go to Blair.

Jon Hocking from Morgan Stanley. I've got three questions please. Can you explain how you get a two-year payback in the US? Just in simple terms here what cash is going out in terms of commission, locked up capital, etc., and what fees are you earning on the products in two years, because it seems a very, very short payback?

Secondly, on the bancassurance in Asia, long run is that a threat to margins? How do you see the margins on bancassurance versus the proprietary channels?

And then just a final question, I may have this wrong but I think from memory you had GBP1.6b of cash at the Hold Co at year-end, you've now got just over GBP1b. Obviously the AIA fees have come out, etc., and the divi's come out. Where do you think that cash position will be at year-end?

Okay, thank you, very good. Payback of two years, I'm going to go to Clark, but how much time do we give you, Clark?

We'll do it in 30 seconds here and we'll do more later. The -- at a high level commission on the product is 7.5%. The initial surrender charge on the product is 8.5%. We get an expense allowance under US regulatory accounting not to exceed the surrender charge on the product. And so that and some of the regulatory required capital in the RBC formula unwinding after the first year of the contract causes the VAs to pay back very quickly.

The aggregate fee structure is about 180 basis points on that, so the fee structure is healthy as well. But I'd say the dominant feature is just that the expense allowances that we get is healthy because the surrender charge is healthy and it's supportable by the fee structure, so we're allowed to take it.

So effectively the -- you can basically cover the commission from the deductions on day one from the product?

Yes, you can.

You are getting basically $0.92 per dollar in (multiple speakers).

Yes, and you pay for that out of fees in your regulatory accounting.

Otherwise it wouldn't work from a kind of cash perspective.

Where do you think VA payback periods were back in '07, '08 for the market, because actually two years just seems very, very short?

For us they've always been relatively short. I mean we increased our surrender charges at one point in time to shorten them. The -- in order to have better recoverability of the acquisition cost, but variable annuities have never been that capital intensive.

Really what has impacted the capital intensity of the US business is the shift from the general account products, which have much longer paybacks, to the variable annuities where the variable annuities are now 75% of our writings. That's the -- that's what you've seen.

All right, thank you. Bancassurance margins, effectively if you look at margins, so NBP over APE bancassurance looks lower. But the returns on capital are good and that's really what we look at.

So this is a discussion we are also having internally, and I think we will meet probably again in November to give you a better sense of that. But it's a value creating business there's no doubt about it. Optically it looks lower margin than agency but it's still good business and it's creating value, it's covering its cost of capital.

Important to remember too that the definition of success is absolute NBP not necessarily margin. We work very hard to keep margins high and to drive the business as hard as we can but it's absolute NBP.

And the bank business is growing faster, but margins still go up because -- it's also important to remember when you look at our bank business it's a little distinctive compared to what most people do which is almost purely deposit stripping through bank staff.

A huge chunk of our business comes from our own staff embedded in the branches who are selling recurring premium, unit-link life product with riders so that supports the margins. That means that while our margins for bank are lower than they are for agency, they're higher than most other competitors' margins are for bank.

And sort of -- I would infer from your question you are assuming that bank will overtake agency as a distribution channel. And while it's coming on very strong in some markets, don't count agency out yet. It's got a long way to run. And it's still also growing very fast, the banks growing a little faster but it's not a big difference.

Our projection it was 37/42 the first half, 37% agency, 42% bancassurance. And it's going to be like that. So 37% in the global world of insurance will take -- that's agency growth in Asia, so both will grow with one growing faster than the other, but agency has a few good years ahead of it.

Cash, yes, GBP1.6b, yes, we've paid the dividend, we've paid UOB, we've paid the AIA cost, it's gone down but we are confident that it's going to rebuild. Nic, you can give more color if you wish.

Yes, the central cash position at the start of the year wasn't quite GBP1.6b it was just shy of GBP1.5b. It had increased last year because of the issuance of hybrid debt, which we said we were issuing to support the IGD position during the crisis.

Having -- we used central funds to finance the acquisition of UOB, in fact, the full reconciliation is given in your packs. It's now sitting at just over GB1b, as I said in my presentation. We are not uncomfortable with that level. Historically, we've managed it in the range of below GBP1b to around GBP1.5b. But, no, we are comfortable with that position.

And there is additional cash in [the] businesses.

Yes.

It's not all the cash we have. Sorry, you want to ask one more or --. Okay, Blair, and then we'll go.

Thanks very much, Blair Stewart, BofA Merrill's. Two questions; one for Clark and one for -- on Asia for Barry. On Asia, given AIA is going to be a listed company in all likelihood under a new CEO, how should we assess the risk of management or agent drift from PCA to AIA? What protections are in place, particularly on the agent side?

And in the US for Clark, we've seen a couple of your competitors taking charges because the hedge costs are above what their able to get in fees. And we've seen some DAC unlocking as well. I just wonder how you can avoid that. You said that your price more or less stays the same when clearly the price of the hedging is going up. Yes, just if you talk around that how you've avoided those losses and what the hedging costs would be at the moment?

Well, what the -- it's more complicated than what was in the chart which you got to boil a lot of information down to one chart. Hedge costs are part of it but the benefits you're provide -- or rather the fees charged for the benefits is part of it, but the benefits that you're providing for those fees is the other part of it.

And what we've been doing is -- we didn't take charges up because we think when the costs of these benefits goes above 100 basis points the salability of them goes way down. Instead what we've done is taken the benefits in, reduced the richness of the benefits as the hedge costs have gone up.

And so we've been doing that in order to keep the benefits hedgeable within that cost. So the -- if you charge an adequate fee you can afford to hedge the economics. And we've always been very focused on charging an adequate fee, so that we are able to hedge those economics.

The -- on the DAC we have the -- as you know we are outside of our DAC corridor, so DAC moves around with the market. Our current sensitivity is about $9m worth of DAC per 1% move in the equity markets. So I think we took a hit yesterday. But we'll stay outside of the corridor for some period of time.

So that will be our DAC sensitivity and it's really, it's just as simple as that on the DAC. We are not anywhere near any recoverability issues. Our K factor on our variable annuities is 63%. So we are nowhere near a recoverability issue where we've actually had to take a DAC charge other than the normal equity market movements.

But I think we disclose the number if we eliminated the mean reversion.

Yes, mean reversion would be the other question, the natural follow-on, and if we eliminated it, it's a $160m charge so it's just not that materially effective and it just -- it smoothes the -- has potential to smooth the DAC period to period.

Can you give an example of how the benefits have come down in the VA product?

Yes, I can. We've taken our -- we used to have for our rollups when people aren't accessing benefits, we used to do a 7% simple interest 10-year rollup and we reduced that to a 6% simple interest 10-year rollup.

We had the -- also we had our -- on one of our more popular benefits, although this change really applied across most of the book, where you could access 5% of the money per annum beginning at age 45 that's now at age 65. These benefits are more expensive at the older issue age as we reduced commissions at some of the older issue ages to increase margin or make these sale at those ages less attractive. So those would be some of the tangible things that we've done.

And there was a question for Barry on AIA and agent retention.

Yes. The downside of fast growth and success and so forth is that people are always crawling all over our team. I think our team is widely viewed as being the strongest in the region. So our guys get phone calls all the time. If it wasn't the AIA it would be AXA or Manulife or pick a name.

I think AIA's listing doesn't necessarily give them -- that doesn't transform things and make it easier for them to recruit. I think, again, it's always somebody, and it's almost constant. And yet we have always been a net importer, certainly of agent talent, and we've not lost any senior people to a competitor, people that we felt were strategically important to the business in years. So it's something that we certainly take seriously.

It's, again, it's the downside of success and, so it's something you have to watch very closely. We have a lot -- our compensation systems are -- there's a big element of our compensation systems historically that have been focused on retention, those remain in place.

But a lot of it is actually about the environment as opposed to compensation. There's a reason why we've been able to attract the people that we've been able to attract. And it's because of the sort of empowered culture that we have, the success of the organization, the energy and ambition of the organization, I don't see those things fundamentally changing. So we'll certainly watch it and -- as we always have, and we'll watch it even more closely in the future. But it's not something that I think we need to be unduly concerned about.

Very good. One of our most effective protections is our growth. As long as agents are successful with a company they are pretty good at NPV calculations, and they understand where their economic interest lies. And then when you see Hong Kong up 37%, India 56%, Indonesia 54%, Malaysia 48%, Philippines 31%, Singapore 45%, Thailand 59%. That's how we keep our agents. They are successful -- successful they make a lot of money there. Okay, Andrew.

Good morning. It's Andrew Crean, Autonomous Research, three questions, firstly, could you comment on your relationships with the FSA? And how seriously you might consider re-domicile to Hong Kong either for an easier capital regime or a better rating?

Secondly, could you talk about, instead of IGD, your internal capital models and how those are fairing particularly in relation to lower interest rates?

And as adjunct to that, could you talk a bit about guaranteed annuity options and the interest rates on your US variable annuities? What are the key sensitivities? Is it to do with allocations between equity and fixed interest buckets or what are the key factors?

Okay, thank you. The FSA we have a good relationship. Clearly it was a factor during the AIA transaction, but to be open the issue there was more, I think, the complexity of the transaction and the issues that had to be resolved rather than a relationship issue between the FSA and us.

So we have a good relationship. Operationally, I speak every two weeks we have a call, which is [muted] and detailed, etc., between myself and the lead regulator of the FSA. Actually do the same thing with the Hong Kong regulator and with others.

So overall the relationship is good and you can imagine the number of issues we discuss at any point in time is very large and it's a good dialog.

Domicile is an important question from a shareholder value perspective. It's something that the Board looks at regularly. We look at the issue very closely. We invest resources in it. So far that review has always concluded that London was the right location for the Group and it's something that we review regularly.

IGD, internal capital models, I'm looking at a combination but maybe we'll take GAOs because that's specific. Clark, if you want to talk about the GAOs and the impact of lower rates and then we can talk about the internal capital model between Nic and (multiple speakers).

-- the impact of lower rates and you're asking, with regard to the VA book and the VA general accounts.

We've moved the VA general accounts to the NAIC's floating interest rate minimum calculation which, in periods of low interest rates like what we have right now, lets you reduce your guarantees if you've structured your products to comply with those. That's like around 1.5% or something like that right now. We are crediting at, or close to, those guarantees.

We've got between 10% and 15% of our VA money in the general account right now. It's a tradeoff between the cost of the money in that general account and the positive impacts it has on the volatility of the accounts due to the reduced equity component.

We've got around 20% of the money right now flowing into those accounts but some of that dollar cost averages out. So it's all in there. It impacted our margins because we're making, obviously, much less margin on that general account business than we were previously, and that was one of the big aggravators in being able to hold our aggregate variable annuity margins where they are at present.

The other place we have guaranteed annuity options are in the UK. Those are in the with-profit fund and the estate which we put on the slide of GBP5.9b is effectively acting as an effective buffer in terms of absorbing any additional guarantee costs, which have increased as interest rates have fallen.

To make sure I understand the question, on internal capital models, you want to know where we are in developing them or what we are promising -- sorry?

I just wanted to know how you -- how great is your coverage on your own internal capital models?

Okay, right.

And how that's moved since interest rates came down.

Well, look, our coverage remains healthy. I mean we haven't published information so the City will require us to do that and therefore that's to come. The point I would, though, make is that this is -- this goes back to the point I was making during my presentation that when you look at the improvement in the balance which is what we have been striving, in the balance of our balance sheet, and the much greater, now, component that comes from pure risk business acts as a diversifier to some of the risks that associate with low interest rates on our spread business. So we -- so it's just to bring that into the equation.

And I -- we've also seen the flexibility we have in crediting rates in places like the US, which has been a big factor I think and I am sure that the sensitivity is actually less than people generally think.

Okay, please, let's go to --

Hi, thanks very much. Andy Hughes at Exane BNP Paribas. A couple of questions if I could. First one on -- following on this exact point to do with the US general account spread business, it stayed about the same amount of money in US Dollar terms for the last sort of five years or so. And it sounds a bit like you're increasing the liquidity in the asset portfolio behind it and reducing the crediting rates, so is the idea to shrink the spread business in the US? And where are we now with crediting rates on the fixed annuity book, etc.?

And the second question was on new business strain in Asia. Obviously, it's quite a lot lower than possibly you might have expected, given the switch towards bancassurance. Is bancassurance in Asia a lower strain product than the other products that you sell? And could you give some background as to why the new business strain is so much lower, as a percentage of premium in Asia this time around? Thank you.

Okay, thank you. Do you want to take the fixed annuity business in the US, Clark?

The general account in the US has been flat for quite some time and that was by design. It wasn't an explicit target to keep it flat but an explicit target to grow our fee-based business at the expense of the general account business. We're not trying to get it into negative cash flow or anything and if you look at net flows on the general account products, they're about flat.

So I think if it stays about where it is, that would be a comfortable range. I wouldn't want it to go into net cash outflow. I -- despite the gain in the portfolio, so I think we're comfortable.

You -- as you're balancing the risks in the US business, you want to keep some spread component there because you're more resilient from a capital standpoint. You're more resilient from a cash flow standpoint. You need the general account to help finance the acquisition costs of the fee-based businesses. So people that have tried to go straight, separate account without general account have run into problems in that regard. Because then you have -- you're dependent on the securitization market for the variable annuity fees and we don't want to get to that.

So not a target to drive it down really from where it is today, we would like to maintain spread income about where it is and then grow the fee income so that we get a better balance that way.

So that's right. And we're always looking for a balance between spread, fee and underwriting. I think that's absolutely right. Business strain in Asia, do you want to take that -- between Barry and Nic?

Let me make a comment and then Nic can comment as well. I mean, on the bank issue specifically, again you have to remember what it is we're writing through banks. Now most people that are focused heavily on bank business are writing, deposit stripping, a two pay, three pay five-year endowment with a guarantee, and they're chewing up a lot of capital in doing that kind of business.

A majority of the business that we write through banks is not deposit stripping product, it is regular premium, recurring premium unit-linked with riders and that's why our margins are higher and that's why our strain is lower in the bank channel. So there's bank and then there's bank, and we just do it a little differently than most and that's why our numbers look a little different than most. I don't know if --

Yes, I mean just to expand on that, there will be differences in strain to reflect, if you like, the size and the shape of -- or the commission payment. But to Barry's point that is more the biggest driver or the biggest influence to the total amount is mix, which tends to be lower -- a higher mix of unit-linked business.

In terms of the reduction in the absolute amount of new business strain, some of that has to do, literally, with stopping writing business in Japan that was consuming a lot of our capital and slowing down the business that we'd been writing in Korea which was also a large drain on that particular metric. And it just goes back to being absolutely clear about where we can deliver the most profit using the least capital in Asia. It's linked to that philosophy and the operating principles that Tidjane described, earlier in this presentation.

Is there some way of working out where the underlying new business strain is moved from last year, excluding the factors in Korea and Japan?

I think we can help you with that, I think offline, but I think the point is really important. For me this whole thing about discipline is it's really binary, okay? And if you lack discipline in some places it hurts you very much. And all we've done on the IFRS, I was shocked when I saw first year, India minus 40%, but 72% we showed for the whole continent, although minus 40% we tolerated just from India.

So locking that down, stopping Japan, I think it's absolutely vital. Korea is IFRS positive I believe for the first time this half year, that's the discipline we are enforcing.

Yes, and China. And when you do that you can see the impact. People always focus on the big things but often it's the small things, if you don't get right -- get them right and if you let them go, who really kill you and hurt your numbers. So it's really that discipline across the board that produces these results.

And again, strain is product before channel. We don't fundamentally sell different products in Asia in banks, because as Barry said we put agents in banks and then sell like an agent. So they end up selling a product mix that's very similar to one we have in agency.

Oliver? No, here in the front. He's been trying for a while so, thank you.

I have to sit near the front to get noticed. Oliver Steel, Deutsche Bank. It's really a question about fungibility of cash flows and capital. I know that you remit to the center only as much as you need to cover the central costs and dividend, but to what extent would you be able to raise that remittance and what changes have you seen over the last, say, six or 12 months in local restrictions on capital and cash transfers?

That's a very important question. I think in the short term the way we run the group is the way you described it. So you bring at the center just what you need to cover your cost, your central cash cost, dividend, etc. And that's not difficult. There are no real impediments to that.

When you try to move more capital, our experience frankly is that it's doable but it takes more time. So my personal belief is that over time, in the medium term capital is very fungible. In the very short term, frankly, it's not because you need to get into conversations with the regulators to pay a dividend from here or there. But generally those conversations are sensible and get resolved.

We got a GBP400m dividend out of Singapore, a special dividend, last year -- pounds, it's a big amount. So it's just what we do. You have to have a good relationship with the regulator, explain what you want to do and if you're not weakening the business and if you're not threatening the solvency of the business, generally you can move the capital. But it's not automatic. It's not like pressing a button.

But overall, I think that free surplus generation, that underlying free surplus generation gives you a good sense of the true capital generation. And that capital is mobile. Over a horizon of 12 to 18 months, it is mobile. Over a horizon of three to six months, no, it's not.

There are no regulatory restrictions in the same way as there were in place when we talked to you about the AIA transaction, beyond ensuring that you have an appropriate risk capital for the business that you are writing and that capital is what we're reflecting in the determination of our embedded value and the cost of capital associated with it.

But it's fascinating. People often talk about Asia. What we've found in '08/'09 at the worst times of the crisis is that we had no tension and no issue with the payment of dividend. We've always been able to upstream the dividends with no real threat or difficulty so that's not a major concern, we think.

Yes, we can go on the left here.

Duncan Russell from JPMorgan. Just going back onto the VA margins, you said that about a third of it was driven by higher take-up of guarantees and a third was driven by lower use of those guarantees. And I was just wondering how comfortable you were with that assumption, which seems slightly contradictory, that people are buying more of the product and using less of it. So could you talk about behavior, policyholder behavior, in that assumption you've got embedded in your pricing, I guess, please?

Yes, Clark.

Well, what we have done which doesn't appear to have been the predominant practice in the US when these things were new, was we set our accounting assumptions for utilization very conservatively. And, because we hadn't seen experience on the tails and now we've seen and been accumulating experience on what we hope are the tails of the tails and what you get is relatively inefficient utilization of the benefit on an economic standpoint.

From a customer standpoint, they're trying to provide for their retirement income and provide some stability. So the patterns you see are reasonable from a customer standpoint but as far as maximizing the value of the options it doesn't tend to maximize the value of the options.

They don't start taking the withdrawal benefits as soon as the value is maximized. They take it when they start to need the money. They don't necessarily, if they have a 5% benefit, they don't take a 5% benefit, they take the money that they need. A lot of them at this point in time aren't taking anything at all.

And so what we did in our assumptions was start to reflect some of that. We didn't reflect all of it but we moved the -- from what we assumed was quite efficient utilization of the benefits to something that was between what we were seeing and where we had been before. So we're quite comfortable with those assumptions and look at that experience pretty carefully.

Okay, thank you, Duncan. Raghu, can we try this side?

Morning, Raghu Hariharan from Citi. Just three questions and two on the US really. The first one was on -- if you could give us a simple kind of benchmark, your US peers, for example, tell us what S&P levels do they think, when the market reaches -- when they have either DAC unlocking or guarantee costs, economically, being much higher and that starts affecting on real earnings and the capital. So if you can give us a benchmark as to what levels of S&P -- or what level does S&P need to reach when you start seeing losses?

Secondly, just trying to go a bit deeper on the VA guarantees, you said you charge about 180 bps of A&C, how much of that would be for the guarantees? How much of that would be for the assets and how --? So say if you charge 80 bps, how have the guarantees performed against the charges that you've taken for the guarantees, since you have seen higher take-up but lower utilization?

The last one was really on Asia, you're seeing a lot of regulatory risk coming through in Asia, I was just wondering, even in the IFRS numbers you've seen reserving changes coming through in Malaysia and economic capital model coming through. You saw a benefit in India. You saw a negative impact in China.

I was just wondering how well prepared are you for regulatory risk changes or regulatory changes across Southeast Asia and in terms of product mix, in terms of agent retention and just in terms of how scalable your products are, as well?

Okay, shall we start with the US, Clark? Okay?

As far as, at what point drop in the -- I know we put some IGD sensitivities out there and so I'll defer to those in terms of the impact of the guarantees on IGD capital.

The -- from a DAC recoverability standpoint, you've got two DAC things going on, and one's the $9m per 1%. So the second part of that question would really be what is the point where you hit recoverability issues there? There we've got a 63% K factor so we're nowhere near it. Chad, do you have any sense of that?

Yes. I would say on that there's (technical difficulty) because we're fully hedged on an economic basis really I'd say there's not really enough (technical difficulty) options, the hedging should cover off effective loss (technical difficulty).

There will be no basis risk on the hedging either, even if the market falls --?

No, no basis risk on the hedging.

Well, I mean there is basis risk just intrinsically in the structure, however, the tendency that the funds that we have tend to be outward generating. So if you look over the last at least four years running we've had a positive outlook (technical difficulty).

And from the standpoint of the 180 basis points that I referenced, that would be 115 basis points for the M&E charge, the standard base M&E charge. That would be about 10 basis points for other administrative charges. That would be about 55 basis points for our share of the asset management fees. That wouldn't include anything for the cost of the guaranteed benefits. That's the cost of the wrapper.

For those who don't know him --- sorry --

The guaranteed benefits would be on top of that.

Yes. For those who don't know him, Chad is in charge of all our hedging and risk management in the US so if you want to talk to him after this meeting, I'm sure you will benefit from that.

Regulatory change in Asia, I think maybe I'll make an opening comment and let Barry continue. We actually really have very, very solid, very good relationships with the regulators in Asia and that got verified during the AIA transaction at various points, where they actually agreed to speed up the process work for us, be extremely cooperative. So that's an asset for us.

As you said, yes, sometimes it's positive, sometimes it's negative. We have a diversification, so we got [GBP63m] out of RBC in Malaysia last year. Negative in India, yes, I mean it varies but overall, we find the environment in Asia reasonably benign, particularly vis-a-vis our industry.

We are seen favorably because we contribute to collect savings. What we do is something every average Minister of Finance likes is to really go into the society and collect all the savings and then transform them into productive investment in the economy because we will go and buy corporate bonds or equity or investment bonds. We deepen their financial market.

With long-term investors, we're talking, -- when you think about FDI, you're trying to attract foreign direct investment of a firm or a country, people who actually raise capital domestically and reinvest it are seen very favorably. So we've never really perceived any fundamental tension and most issues we find are resolved.

On the agent front they are helpful because really most of them they don't like poaching so they contribute to professionalize the industry and this is something we support.

And overall it's worth what it's worth, but when we were doing AIA due to the fact that we were in the position we were, was good news. We were seen as a good player who is easy to regulate and who plays by the rules. But, Barry, you are closer to that so you should comment further.

Yes. I think Tidjane's covered most of the important points on the -- the diversity's important. We don't see anything on the horizon that we think is really punitive towards us. In fact, we actually -- a lot of this stuff, while it -- sometimes there's some complexity in dealing with regulatory changes, it tends to be far less complex for us and far less impactful for us than it is for our local competitors, who don't operate to the same standard we do.

So if they come out and say, well, agents now have to complete total needs analysis forms before -- and that has to be turned in with the application before they can sell a policy and so on and so forth. Well, we already do that. So that's not difficult for us but that's a hurdle that local companies tend not to place on their agents. So it actually works to our benefit because it slows our competitors down.

So, we operate generally speaking to a standard that's higher than what is required or what is considered locally accepted practice. So regulatory changes tend, actually, in the long run to help us, not to hurt us.

The FSA comes every other year and reviews our operations in Asia. They did their last review in January, January 2010. And one of the conclusions they gave, in writing, was that we operate in every single market, ahead of the local regulatory requirements. So that's the positioning we've taken deliberately and that protects us.

But Tidjane, as to the impact on numbers, I mean clearly there can be changes. The impact of changes can be both ways, negative and positive; but the general trend has been one of releasing excessive prudence into reserving, clearly -- and you saw that very clearly last year with a release in profits in Malaysia from the RBC change. That tends to be the general trend from financial impact perspective, but it can be positive and negative.

I'm sorry but we'll take one last question. Yes, maybe, sorry, in the back there, I think you've tried several times so -- I'll -- when the microphone reaches you we'll take one more question and then close. Unfortunately, we've got more -- we've got further commitments today.

This is Craig Bourke from MF Global, a couple of questions. Just on the step change down and the transfer from the with-profit fund, I know we had the bonus cut at the -- in 2009, is there anything else going on that we should be looking at? A change in mix or change in volumes, maturities coming off there that we should look at on that.

Secondly, on the persistency in Asia, I know the persistency now is fairly modest but it does come after a series of downgrades on the persistency assumptions, operating assumptions, before that. What are we looking at now? Are we looking at customer behavior or sales retention issues there?

I'll start with Asia and then we'll go to the UK. As you see, the numbers compared to the embedded values are relatively modest but they exist, they are real. One of the things that happened clearly -- it's something we saw in the UK earlier, especially when people have unit-linked, often, when the market drops they don't sell and it's often once you get a recovery that you see the lapses.

So part of it is just customer behavior, the classical thing, as always, people think they've had the loss, they hold onto their shares and often, in those products when you've recovered in equity market levels and people are back where they were, the retail market tends then to sell and get out. So I think that's been a large part of what you've seen there and underlying issues so it's manageable.

It would concern us if it was really localized, just in one country. You saw Korea last year, this year you saw a mixture of Indonesia and Malaysia and a bit of Korea etc., so it's something that will happen in the large portfolio over time, but it's not a source of concern today.

The UK, Rob, do you want to --?

Yes, I'll pick up on the with-profits transfer. It's entirely driven by the bonus changes in 2009. So it's nothing on the underlying flows or size of the portfolio. And, indeed, the with-profits transfer is slightly higher than we planned for this year because of our performance in 2009, reflected in the 2010 bonuses. Very strong performance in terms of the underlying investment returns on the with-profits fund in '09, led to higher bonuses than we were expecting, so actually it's recovering in terms of the long term trend, faster than we anticipated.

Okay. Well, thank you very much and we have to -- I mean the dialog continues. You know where to find us and we'll see you at Q3 and then at the Investor Day in November which we're looking forward to. Thank you.