Prudential PLC (PUK) 2011 Q2 法說會逐字稿

Good morning, everyone. Welcome to our 2011 half-year results presentation. I hope that Prudential is going to make its small contribution to try and lift your mood this morning.

At our Investor Day on December 1, of last year we set out how we intend to deliver growth and cash for our shareholders. This morning, I will give you an update on our progress during the first half of 2011, and there fundamentally three messages that I would like to emphasize.

The first one is that we have a clear strategy that we confirmed on December 1. And some of you will recognize the puzzle we use, which is to accelerate our growth in Asia; to build on our strength in the US; focus even further our UK business; and optimize our Asset Management business.

That strategy has an explicit focus on Asia. Asia remains a uniquely attractive opportunity for shareholder value creation within our industry. The sovereign debt crisis in the eurozone and the recent concerns about the US have only continued to reinforce the value of our focus on Asia.

The second point I'd like to make is that our leadership team across the Group, well represented here today, has delivered strong first half numbers.

We are all totally focused on execution, supported by our operating principals in red here, balanced metrics, disciplined capital allocation, and proactive risk management. This team here is committed to ensuring that our track record of financial performance continues into the future.

And the third message is that we are now 18 months in our 48-month program that we defined, '10, '11, '12, '13, growth and cash, and we are on track to achieve the 2013 objectives.

So my presentation this morning will start with a quick overview of the results; I will then take a moment to give you some more color about our businesses, and about Asia, the US, M&G, the UK; before saying a word of our progress on the targets -- the objectives we set in December.

I will then hand over to Nick, who will provide you more detail on our financials across the Group's operations; and I'll come back at the end to provide an outlook and, of course, open up to Q&A.

Again, our management teams from across the Group are here this morning. Please do take this opportunity, and I've seen some of you doing it already, to ask questions and tap their expertise.

So, we are committed to delivering profitable growth and increasing cash. Starting with profitable growth, the first leg of our December 1, commitments, we have achieved in the first half an increase of 20% in new business profit; 25% in IFRS profit; 28% in EEV operating profit.

For the first time for H1 results, we are up 20%, or more, across all our three preferred metrics of profitability, hitting GBP1 billion on a number of them, and Nick will expand on that later.

Our embedded value per share has increased by 13% to 745p per share.

And if I move onto cash, the second leg of our commitments, we have delivered free surplus generation of almost GBP1.1 billion from our increasingly large back book.

And 50% increase in net remittances from our businesses, driven by a particularly large contribution from Jackson at GBP320 million. And please note that Jackson has made all its annual remittance during the first half, so don't expect anything equivalent in the second half.

Last, but not least, we have declared an interim dividend of 7.95p per share. This is calculated as one-third of the prior year's full-year dividend, and is consistent with our historic formulaic approach to interim dividend, and Nick will come back to that.

Given the decision made to cancel the scrip dividend option, there is, as you would expect, no scrip dividend.

Now, this performance is the result of the work we have done over the last few years to change the economics of the Group, and I use those words on purpose, to change the economics of the Group. Nowhere is this more visible than in the new business profits we are generating from the capital we invest.

It is my long held belief that Life Insurance is a cash-generative business. That is only true, though, when investment in new business is both disciplined and optimized. By disciplined, I mean that the quantum of investment in new business must be well controlled; and by optimized, I mean that the investment in new business must be allocated in a way that maximizes IRR and minimizes pay back period.

So if you look at our performance from that angle, what you see is that our Group new business profits have increased by 90%, i.e., almost double for the Group over a three-year period, while new business strain over the same period was falling, in absolute terms, by 12%.

So we continue to write capital-efficient business across our Life operations to generate, as I said in March, more for less.

Another metric on which the transformation of the Group is visible is cash. We are showing you here the net remittances from our businesses over a sustained period of time, so '05 to '11. For those who are skeptical about insurance accounting, I know it's shocking but they exist, cash generation over time is a key test of whether a strategy is working.

You can see on this slide that the strong trend of increasing net remittances from our businesses has continued in the first half of 2011.

As just mentioned, the remittance that we have received from Jackson in the period represents tangible evidence of our profitable and cash-generative expansion in the VA market in the US, and leaves the business in a strong capital position, post remittance, because, you can imagine, that the Michigan regulator will not have allowed it otherwise.

So let's now look at each of our businesses in turn, starting with Asia. Asia, as I said earlier, represents a huge growth opportunity, that's not news, and our long track record of top line new business growth confirms it. New business sales growth, this is APE, yes.

In both, we have built the leading distribution platform in both agency and bancassurance. However, having significant volume growth and top line market share counts for little if one fails to convert such a position into actual returns for shareholders.

Over the last few years we have deeply modified the economics of our Asian business. This year it's now delivering not only APE growth, but growth across all of our key metrics, which are, first, new business profit, which is up 17% in the first half of the year.

As you all know, our NBP growth has been consistently strong over the last few years and, despite increasingly tough comparators, the PCA team continues to drive this metric forward year in, year out.

In the first half, nine of our 11 markets in Asia delivered double-digit NBP growth. And that's how we incentivize and measure them; not [APE], NBP growth. And excluding India, a market whose challenges are well known, our NBP was up 22%. Picking out a few markets, Indonesia was up 32%, Singapore up 25%, Malaysia up 22% in NBP.

But new business is only one metric. I have always said that it is not appropriate to run a Life business on a single metric. The real test for a life insurer is its ability to drive growth across the three metrics of NBP, IFRS, and cash.

In 2008, we told you that we would focus more on IFRS and cash, what we have called in our operating principles more balanced metrics, so what have we achieved since then?

IFRS profits are now more than 4 times the level we were at in 2008, and have increased again by 25% in the first half of 2011. So that's quite a strong progression.

And if we move to cash, net remittances, Asia has contributed over GBP100 million in net remittances to the Group in the first half; that is 9 times more than in 2008, and there is more to come.

So bringing this all together on one slide, you can see the transformation of Asia's economics in 2008 due to our explicit focus on delivering across all of our key metrics. This profile of financial performance, where we deliver both profitable growth and increasing cash, is rare in fast-growing companies, like ours, in emerging markets.

So let me now give you some more color about our Asian operations. I do not need to stress again, but I'll do it, the significant opportunity for Life Insurance that Asia represents. This largely results from the combination of a number of well-known structural factors, low penetration, high GDP growth, high savings rates, positive demography, and constructive regulatory environment in many markets, especially in Southeast Asia, as showed on the left-hand side of this slide, which is describing GDP growth and penetration by market.

So we are very well positioned to capture this opportunity with our presence in 13 markets, on the right-hand side here, where we serve now over 12 million customers through a mix of agency and bancassurance.

Those of you who have visited our businesses in the past will agree with me that the best way to understand the scale and depth of our presence in Asia is to touch and feel our operation. It is for this reason that our investor conference in 2011 is to be held in Kuala Lumpur, where we will provide you with lots of access to our Asian businesses and management.

As a preview, let's take a look at some of those businesses and see what they've been up to in the first half of 2011.

In Indonesia, a market with high GDP growth and low insurance penetration, we are the dominant player in the industry. In '95, we had only 250 agents; today, we have over 100,000.

We have a strong presence in Jakarta and Sumatra, and in the first half of 2011 we continued our rapid expansion into the other regions of the country where our Takaful products are very popular with the Muslim population.

We continue to innovate, though, to differentiate ourselves from the competition. I got an example from our Asian -- PCA team, and we have just introduced PRU Hospital Friend in June. This is a great example of our innovation, and it is putting our own people into hospitals to support both our customers and our agents. We're doing that in two hospitals now, with great success. This is not only the talking point of our clients, but it is the envy of our competitors' agents.

If I take China, which is my second example, we face a completely different situation. China is clearly a market with great potential. However, it is currently dominated, as we know, by strong local players. We do not let that affect us too much because we are in China for the long gain.

We operate there via our joint venture with CITIC, and we have a 10% market share among the foreign insurers. Our distribution mix is split evenly between bancassurance with CITIC Bank and agencies. And with our agency force now exceeding 13,000, we are making good progress across the 33 Chinese cities in which we are present.

In the first half of this year, we have launched a new agency recruitment drive, called the Apollo program, and we are optimistic that this will spur agency growth in the coming periods.

Moving now to two markets where we have been present for a longer period, Singapore we started in 1931 and Malaysia in 1924, Singapore is a very wealthy city with higher insurance penetration than many part of Asia, where our results continue to defy conventional wisdom with high levels of profitable growth.

AB was up 37% in the first half of the year, we have highly effective multi-channel distribution, and are the market leader for regular premium unit-linked business.

Our partnership with UOB Bank, that made a strong start and has grown 210% in 2011. We also have excellent partnerships in that market with Standard Chartered, Maybank, SingPost, in addition to UOB. And we were [reflecting] that the additional bancassurance businesses in Singapore would simply be the fifth largest insurer in the country.

And it's not in my script, but we got confirmation this morning, Barry, that we got the June statistics from the association in Singapore, and I am pleased to confirm that are number one in Singapore over the first six months of 2011. We're pleased with that.

In the first half of 2011 we've continued to innovate. It's been a key source of value creation, and new products contributed 20% of new business profit.

We were the first to launch an early stage credit -- an early stage crisis cover plan, excuse me, and this product has supported both new customer acquisition, as well as repeat sales, which we know are very profitable, from existing customers. We expect continued success from new product roll outs in the second half of the year.

To finish, in Malaysia, which I guess is somewhere between Indonesia and Singapore in terms of development, we are also the number one player, with 14,000 agents and over 1 million customers. In the first half of the year, you probably saw, that we extended our EURIBOR relationship to Malaysia. It has been a particular highlight.

Back in Singapore, we made a fresh start with UOB. Within eight weeks of signing, we had seven products fully up and running in 46 branches. We officially launched on May 1, and our first two months of APE achieved 150% of our target. And I'm sure we will see further progress with this exclusive relationship in the second half of the year.

So that was just a very quick whistle-stop tour for a few of our Asian businesses. Our investor conference later on this year will give you much greater insight, and will be an opportunity to do credit -- to win credible activity happening across or businesses in Asia with Barry and his team.

So, moving now to the US. Over the last decade, Jackson has delivered significant growth in assets, driven largely by the successful expansion in variable annuities, whose assets are shown in dark blue on this slide.

This asset growth has translated into significant growth in profits, and the trend for growing assets and profits has continued in the first half. At the end of June, our total assets had increased to over $105 billion, driven in the period by $7 billion of separate account net inflows.

Across our key metrics, Jackson has delivered a good performance. New business profits have been growing at a compound rate of 34% since 2007, and are up 27% in the first half.

Moving on to IFRS, IFRS profits have been growing also, at a compound rate of 14% since 2007 and are up 13% in the first half, driven by the underlying asset growth that I have just talked about.

And finally for cash, Jackson has delivered a net remittance of GBP320 million. Without question, this is the most noteworthy feature of Jackson's results that we are reporting today. It s the largest net remittance that Jackson has ever paid to Prudential, and it confirms Jackson's ability to make significant contributions across the cycle.

I believe Jackson and our US strategy pass the test of cash generation that I mentioned as a key test in our sector with flying colors; and, again, that Jackson keeps a very strong capital position and balance sheet out of this large cash transfer.

So bringing it all together on this slide, you can see that [our view of these] are the same as in Asia; we hope to drive the three metrics, NBP, IFRS, and cash.

So I'll move now to the UK. In the UK, as you know, other markets we put value ahead of volume. We have focused our business on the part of the market where we have a clear competitive advantage, with-profits and annuities. We have been relentless in writing only high IRR, short payback business and this has produced strong results for our shareholders.

A lot of the improvement that we have delivered in terms of capital efficiencies and return on new business investment at Group level has been as a result of the actions the UK team has implemented in this new more focused approach. The new business strain, I believe, is the only chart on this slide where you will see a decreasing trend.

So, across our key metrics, the UK has delivered new business profit, growing at a compound rate of 8%. Just as we were investing 53% less capital in writing new business, in the first half of this year NBP has again grown at 8%.

IFRS profit is up 8% (sic - see slide 23), it's the next slide up, in the first half.

The net remittances for the half year, at GBP265 million, were maintained at the high level of the prior year. Given that first half remittances, predominantly comprised in red here, the cash from the with-profits transfer, it is important to look at the full-year numbers to see the transformation of UK cash generation, [with] a shareholder-backed business becoming cash flow positive.

As a direct result, in the 2.5 years since 2009, the UK has cumulatively remitted in excess of GBP1.1 billion in cash to the Group. This is nearly a tripling of the total cash, GBP411 million, remitted in the previous four years, between '05 and '08.

Bringing this all together on one slide, you can see that, as with Asia and Jackson, our UK business is delivering the right results across all of our key metrics. And let's be clear, I see our UK business as best in class. High single-digit growth, as delivered by our business, is an enviable growth rate in the Western world.

So let's look now at M&G. M&G continued to perform well in the first half. Assets under management have now reached GBP203 billion, with GBP93 billion coming from external mandates.

Our internal assets have grown by GBP37 billion over the last two years, with GBP17 billion out of this GBP37 billion coming from net inflows. We seen it as an exceptional performance from another one of our teams, the M&G team.

M&G's profits in the first half of 2011 have increased by 41%.

As with most asset managers, M&G has a high degree of operational leverage, and you can see this in the rapidly improved cost-to-income ratio in the bubbles at the bottom; that we went from 60% cost-to-income to 55% between '10 and '11.

This strong performance from M&G is often overlooked by the many life insurance enthusiasts that follow Prudential. But it is worth pointing out that M&G now contributes over 15% of the Group's IFRS results, and the profits it produces are vey high quality and fully [functional]. M&G's a high-performing business, and a very valuable part of the Group.

So, in December we have given you clear objectives from '09 to 2013. Before I end this section of my presentation, I would like to update you on where we stand.

We told you that we would double IFRS and NPB in Asia in four years. The quality of our Asian operations gives us confidence that we will achieve these objectives by 2013.

You can see that over first 18 months of the planned period, H1 '10, H2 '10, H1 2011, the run rates at which we are growing IFRS and NPB are ahead of the 19% annualized rate that we need in order to achieve the objectives. Put simply, we are on track to double Asia in four years.

Cash generation over time is a reasonable test of the effectiveness of the strategy. Conscious of that, we set a number of cash-generation objectives for the Group on December 1.

You can see that here, too, we are making good progress towards our target and, as at the end of the first half, we are 43% of the way there. Nic will give you more color on this very soon, but overall we remain on track to achieve our 2013 growth and cash objectives.

So thank you very much. And with that, I would like to hand over to Nic for a more detailed run through on our numbers.

Thank you, Tidjane. And good morning, everyone. I have presented our results on three previous occasions, and each time I've been in the fortunate position of reporting to you strong growth. Well, this time is no exception. Today, I will divide my presentation into two parts; growth and profitability, and then move on to cash and capital.

I've summarized on this slide the financial headlines for the first six months of the year. I will not dwell on these, as I will be covering them later in my presentation. I will, however, point out two notable achievements.

One; that this is the first time at the half year that our new business profits, our IFRS operating profit, and our free surplus generated have all exceeded the GBP1 billion mark, and that our EEV operating profit has exceeded the GBP2 billion mark.

And two; that the double-digit growth rate also extends to the balance sheet with both our EEV and IFRS shareholders funds at record levels.

These results provide tangible evidence of the progress that all of our businesses are making towards delivering our strategy.

So starting with growth in our top line, Life Insurance sales have grown by 10% to GBP1.824 billion of APE. This increase has been achieved despite the impact of the regulatory change in India, which continues to disrupt the market as a whole.

If we were to exclude this effect, sales in 2011 would be 16% higher, reflecting a 21% APE increase in the [seventh] fast-growing, highly profitable markets of Southeast Asia, including Hong Kong, and a 32% increase in our US variable annuities.

Turning to new business profit, at a Group level this amounted to GBP1.069 billion, representing an increase of 20% over the same period last year, and 53% over the GBP700 million achieved in 2009.

This growth was achieved even though we invested less capital than last year, reflecting our operational discipline of directing our investments into those products and those geographies with the highest return characteristics. On this metric, the impact of the market disruption in India is more muted, and the contribution of this business to NBP is comparatively modest.

In both the half year and the second quarter of 2011 we achieved record sales volumes in US variable annuities in Hong Kong, in Singapore, in Malaysia, in Indonesia, in the Philippines, in Vietnam, and in China. These are amongst our highest margin businesses, and it is for this reason that both the half year and the second quarter new business growth rates are above 20%.

This next slide provides you more color on NBP for each of our Life businesses. The Group's overall new business profit, of GBP1.069 billion, shown in the top row, translates into a margin of 59%, which represents a 5 point margin expansion compared to last year.

We continue to write new business on attractive economics, with IRRs above 20% in each of our businesses and short pay back periods. These remain, in my view, best in class and represent a tangible example of a disciplined approach to balancing value creation and capital consumption.

In Asia, new business profit rose by 17% to GBP465 million. Our focus on those products and geographies that offer the highest value, which we measure by reference to internal rates of return, have seen margins rise by 7 points, from 56% to 63%.

Health and protection, which in the first half of 2011 reached 31% of total sales, being 29% in the first quarter and 32% in the second quarter, remains a key source of value, accounting for over half of Asia's new business profits.

In the US, our new business profit is up 27% to GBP458 million, with our growth coming entirely from variable annuities as Jackson continues to benefit from its strong position in the independent broker dealer channel.

The 4 point improvement in overall margin to 68% is due to the higher proportion of variable annuities, which accounted for 88% of our sales in 2011, compared to 80% last year.

The margin of our variable annuity business is 2 points higher at 73%, reflecting the benefit of minor pricing changes made in October last year.

New business profit in the UK increased by 8%, and the margin advanced to 36%. Consistent with our policy of only pursuing wholesale opportunities that meet our strict financial criteria, the UK completed one bulk annuity contract in the first half. The key numbers of these contracts are APE of GBP28 million; NBP of GBP24 million; and new business strain of GBP8 million.

At the retail level, we wrote lower volumes of individual annuities this year, following changes to the legislation on minimum retirement in 2010. Now whilst this shift in business mix has translated into an overall lower retail margin, which in 2011 was 32%, the overall IRRs on the new business that we back with shareholders' capital is higher than this time last year at over 20%.

Turning to Life Insurance net inflows, these have increased by 19% to GBP5 billion, evidencing good organic growth. The effect of these net inflows, when combined with a positive investment market in the first half, have driven the value of our policyholder liabilities up by GBP6.4 billion to GBP128.6 billion, despite a GBP1.5 billion adverse foreign exchange effect.

This increase in the liability base is equivalent to an annualized growth rate of 11%, or 14% if we back out the effects of foreign exchange. The trend that you see in the chart on the right is what underpins the significant progress that we have made over the past three years in driving our Life IFRS profit forward.

In Asset Management, we reported total net inflows of GBP3.3 billion, which, as expected, are beginning to normalize following the exceptional performances in 2009 and 2010. The strong inflows in M&G's retail offering continued to provide a solid underpin to the amounts shown on the slide.

Our total external funds under management are up by GBP3.8 billion to GBP115.2 billion. The high levels of external funds, shown on the right underline the improvements in our Asset Management IFRS profits that we're now reporting.

Moving to our IFRS results, our headline profit here was up 25% to GBP1.058 billion. This has been a key area of focus for us, and it is pleasing to see that both Life and Asset Management businesses are moving forward strongly.

You can see the improvement in the Life results on the top of the slide, and I will come back to this shortly.

Profit in Asset Management and other businesses increased by 29% to GBP280 million. As you can see in the box, M&G is the main contributor to this total. Here, as Tidjane has already commented, profit increased by GBP50 million to GBP172 million due to the strong asset growth and the improvement in the cost-to-income ratio.

Now, when you come to forecast the full year cost-to-income ratio, please bear in mind the seasonal nature of our costs, which last year saw this ratio increase by 3 points between the half and full-year stages.

Asia Asset Management also delivered a healthy increase in profit, from GBP36 million to GBP43 million, again due to the higher asset base and strong discipline on costs. Here the cost-to-income ratio also declined, from 62% last year to 59% this year.

Other income and expenses, shown at the bottom of the slide, were lower at GBP246 million. This is caused by the inclusion in these results of a one-off benefit of GBP42 million, which represents a reduction in our future pension scheme commitments following the government's adoption of CPI for statutory minimum pension increases.

Our Solvency II spend, of GBP27 million, will continue on this run rate for another 12 months, and tail off thereafter.

Turning to the IFRS Life results, profit was higher at 15% to GBP1.024 billion, with all three businesses reporting increases. As you can see, Asia grew fastest, by 25%, with the US up 13%, and the UK up 8%. This relative growth shape is entirely consistent with what we're aiming to deliver.

Also noteworthy is the fact that in the first six months of 2011 all three businesses are reporting profits, which are broadly equivalent.

I would now like to look at the Life results of each business, using the sources of earnings disclosure that we introduced with our 2010 preliminary results.

Starting with Asia, as you can see in the top-left of the slide, the total Life income has increased by 18% to GBP926 million. Expenses have also grown but at a lower rate of 9%, and you can see that in the middle. So with income expanding faster than expenses, there is a strong positive jaws effect contributing to our earnings growth.

Below, towards the right of the slide, as highlighted, you can see that technical and other margin is up 16% to GBP785 million, and this source remains the key driver of our Asian income.

The margin on revenues, shown underneath, has increased by 18% to GBP560 million. This represents deductions from premiums to cover costs, and the increase here is in line with Asia's premium income growth.

The insurance margin, of GBP225 million, which represents the profit from our health and protection business, has also increased, reflecting the growth in the book and the continuation of positive claims experience.

Moving onto the US, the improvement in the results is principally driven by higher spreads and higher fee income. Spread income, highlighted on the left, is 10% higher at GBP380 million. And you can see in the box immediately below, this is equivalent to a spread of 262 basis points, up from 235 basis points last year. This increase principally reflects reductions in crediting rates.

The 2011 total includes GBP53 million from the portfolio lengthening transactions executed last year, which will also benefit the second half, but at a slightly reduced rate.

Moving along to the right, you can see that fee income has increased by 36% to GBP327 million, reflecting the higher separate account balances, which have risen from GBP22.5 billion, you can see that underneath, to GBP33.6 billion.

The trend in the basis points fees shown is distorted by the fact that the average reserves are calculated using only the opening and closing balances. So if we refined this calculation, it would produce fees of around 200 basis points for both periods, and this reflects the fact that the pricing for that is unchanged.

Total expenses, in the top middle, are up by 18% due to the higher acquisition costs incurred to secure the 20% growth in sales. These acquisition costs amounted to GBP485 million and, in line with market practice, have been deferred in full and will be amortized in future years. This deferral is treated as a credit in our results, as shown on the top-right of the slide.

During the period, we amortized GBP293 million of previously deferred costs. These are higher than last year, reflecting, in part, the growth in the book; but also the DAC acceleration effect that we have previously flagged.

We said that in 2011 DAC amortization will be temporarily higher than normal as we, effectively, repay the benefits that we accrued in 2008 from the use of the mean reversion methodologies. This repayment amounts to GBP82 million in the first half, and is included in the GBP293 million.

I anticipate a broadly similar change in the second half of the year. And we have provided you with some additional disclosures in the release to help you forecast the DAC amortization for the rest of 2011, indeed beyond 2011.

In the UK, the story is simpler in that the higher IFRS result reflects a rise in our Life income and the ongoing benefit of our cost reduction program.

Our main sources of income in the UK are annuities and with-profits. You can see the increase in the spread income that comes from annuities to GBP122 million, highlighted on the left, which includes a contribution of GBP18 million from the bulk deal that we wrote.

The income from with-profits, shown on the right, was flat at GBP154 million as bonus rates were substantially changed between the two periods.

Turning to EEV, our headline total operating profit of GBP2.147 billion is equivalent to an annualized return on opening embedded value of 17%. The Life operations are the most significant component of this total, and this slide analyzes the contribution from each business.

As you can see from the chart on the left, total Life profit is higher at GBP2.140 billion, with all three businesses reporting increases at, or above, 20%.

We are just as focused on the profitability of our existing book of business as we are on new business, recognizing that it is an important driver of overall profit and, ultimately, of cash. We are, therefore, pleased to see that the in-force profit has increased by 25%, reaching an absolute level of over GBP1 billion; another first for Prudential at the mid-year point.

You can see, from the top chart on the right, higher unwind from our existing book is contributing to this improvement. However, the step up in performance is principally due to better overall experience variances and assumption changes. These total GBP246 million, which is further analyzed by business on the next slide.

In Asia, the negative variances which followed the financial crisis continue to come down. Persistency, in particular, has improved and the variance now stands at minus GBP10 million. The Asia team continues to make good progress in eliminating these negatives, which are modest given the scale of the business.

In the US, spread experience amounted to a profit of GBP81 million, which includes the positive effect of the portfolio-lengthening transactions that I've already commented on.

During the period, Jackson's management has successfully operated the business within its pricing assumptions, generating an additional GBP89 million of profit across a number of sources.

And in the UK, we benefited by GBP46 million from the reduction in the corporate tax rate to 26%. We have not yet taken credit for the impact of the further proposed tax rate reductions to 23%, which, when booked, would give us an additional benefit equivalent to 4p per share.

I would now like to spend a few minutes on Asia net flows. In 2010, our net flows posted a modest decline due to an increase in partial withdrawals, which are a feature of the business that we write in Asia. Many of our regular premium savings contracts have no fixed maturity date so partial withdrawals are an effective way of allowing customers to access part of their savings.

The blue dotted line in the chart on the left represents the rate of withdrawals, including surrenders, of our shareholder-backed business, expressed as a percentage of opening liability.

Not shown on this slide, the rate in 2008 was, in fact, just over 4% for each half. You can see that this rate fell in the first half of 2009, principally reflecting a reduction in the frequency of partial withdrawals through the financial crisis.

In late 2009, and through 2010, following two years of exceptional equity market performance, we saw a resumption in partial withdrawals as customers took the opportunity to realize some profit from the increased value of their policies.

As you can see in the chart, the frequency of partial withdrawals in 2011 is normalizing, with the overall rate lower than the previous 18 months at 5.1%. This rate is now back in line with our EEV assumptions across all of our businesses, except for Malaysia.

I would emphasize that even after a customer makes a partial withdrawal they continue to pay their annual premium, including the elements that relates to protection riders. If this wasn't the case then the level of growth Life inflows, represented by the red bars in the chart on the left, would be flat, or falling, which is clearly not the case.

I would also remind you of our definition of Life inflows. These are not the cash premiums that we receive. They are, in fact, the amount by which we increase our policyholder liabilities after deducting our upfront charges, and after extracting our insurance income.

In the final analysis, the key point that I would make is that our overall policyholder liabilities continue to grow. You can see, from the chart on the right, that in the last 13 months the stock of policyholder liabilities has risen strongly, increasing by a further GBP1 billion in 2011, which ultimately has the effect of driving our earnings forward.

We have reproduced the charts showing our annualized lapse rates in Asia, which Barry shared with you in December at the investor conference. In fact, we have extended this by six months.

You can see that our overall lapse rates remain on a downward trend and are now at a level of around 10%. Put differently, we are retaining 90% of our customers, which is an important underpin to the quality of our Asian franchise.

I would now like to turn to cash and capital. Let's start by taking a look at the evolution of our free surplus, which over the course of the period has increased from GBP3.3 billion, shown in the gray bar on the left, to over GBP3.5 billion, shown in the red bar on the right.

As you move from left to right, you can see the GBP1.390 billion, which represents the underlying free surplus generated by our existing book of Life business, including Asset Management. All businesses are contributing materially to this amount, with Asia generating a similar level of capital to the UK.

We used GBP297 million of this amount to write new business, which is equivalent to a reinvestment rate of 21%; below, well below the 27% rate of 2010.

Now you should not regard such a low reinvestment rate as the new base. It is artificially depressed by particularly favorable country and product mix, the latter reflecting the lack of customers' appetite for high strain interest rate-sensitive products at this stage of the cycle.

The net result is that we have generated an underlying free surplus of GBP1.093 billion, which is above the GBP1 billion mark for the first time at the half-year stage.

Further along the slide on the right you can see the GBP690 million that was remitted to the center, with the balance held in each business, where it can be deployed more profitably.

The higher overall free surplus base has the effect of improving both capital flexibility and capital fungibility. This next slide summarizes the net remittances from each business in the first half of 2011, and compares these with those in full-year 2009 and 2010.

At GBP690 million, the overall amounts are higher than those we achieved in full-year 2009, and we're well on track to meet our 2013 objectives.

Stepping through each component, we have received GBP265 million of cash from the UK, representing, as usual, the shareholders' share from with-profits; plus a positive GBP42 million from non-profit businesses.

The UK is on track to remit GBP350 million from 2013, representing a sustainable level of cash without relying on the one-off positive items, which enhanced remittances in 2009 and 2010.

Jackson exited 2010 with a strong RBC ratio of 483%, and their capital formation in the first half of 2011 has been strong. This has enabled Jackson to remit GBP320 million of cash, which represents its full-year contribution for 2011.

The level of remittance from Jackson, as Tidjane has said, reflects the success of a disciplined expansion in variable annuities, and also demonstrates the fungibility of Jackson's free surplus.

Now we acknowledge that this GBP320 million remittance is ahead of the GBP200 million level that we have set for 2013. You should note that these objectives have been set at a level we would view as sustainable through the cycle, as opposed to the maximum that may be achievable at any given point in time.

We have received GBP105 million of cash from Asia as PCA moves towards its 2013 objective of remitting GBP300 million per annum. You will recall that 2010 included GBP130 million one-off from Malaysia, so, at an underlying level, the 2011 remittances are already ahead of those for the full year last year.

M&G will continue its practice of remitting substantially all of its post-tax earnings, which in 2011 will be paid in the second half of the year.

We're also making good progress towards our cumulative 2010 to 2013 objectives for free surplus and net remittances. You can see that at the end of June we were 43% of the way towards achieving both of these objectives.

Looking at the balance sheet, the overriding message here on this slide is that the quality of our balance sheet remains strong. The Group's IGD surplus at the end of June is estimated at GBP4.1 billion and is equivalent to a cover of 290%.

Our central cash resources now stand at nearly GBP1.5 billion.

In December of this year we will repay the EUR500 million Tier 2 notes at the first call date.

Earlier this year, we increased our committed liquidity facilities to GBP2.1 billion, and extended their tenure to 2016.

Our US credit book continues to be positioned defensively.

Net unrealized gains at the mid-year amounted to GBP1.4 billion; and impairments in Jackson fell back to only GBP14 million in the six months. Even though we saw no defaults in 2011, we have maintained the GBP1.8 billion reserve for credit default in our UK annuity book.

With all the macro uncertainty, we remain cautious about the state of the economy and its impact on credit risk.

Our holdings of sovereign debt and bank debt in Greece, Ireland, Italy, Portugal, and Spain remained modest. This slide provides you with a full analysis of these holdings on the shareholders' balance sheet.

You can see that our investments in sovereign and bank debt in these countries amounted to GBP53 million and GBP341 million, respectively. And I would remind you that these are principally held by our UK Annuity business, where, as I said a minute ago, we carry sizeable credit default reserves.

Finally, on dividend, the Board has approved an interim dividend of 7.95p per share, which is equivalent to a cash pay out of GBP203 million. As in previous years, the interim dividend has been calculated formulaically as one-third of the prior year's total dividend, and this translates into an increase of 20%.

The Group's dividend policy, which is to grow dividends at a sustainable rate from the higher base established at year-end 2010, remains unchanged.

So, in summary, we have maintained our 2010 momentum into the first half of 2011, and we continue to deliver broad-based profitability improvement across all parts of our business on all metrics.

The capital-generative nature of our business model, coupled with our cautious approach to balance sheet risk, has created over the last three years a Group which is both stronger and more resilient.

Thank you. I will now hand you back to Tidjane.

All right, thanks, Nic. So I said at the beginning that I wanted to leave you with three key messages; one, that we have a clear strategy, with a clear long-term focus on Asia.

The second is that we have a strong and deep leadership team. As we went around the businesses and Nic talked to you about our financial performance and risk management I hope that we have provided you with some evidence of what this team has achieved. And, as a team, I can assure you that we are totally committed to continuing our track record of delivering.

So, last but not least, 18 months in our 48-month program, we are firmly on track, I believe, to achieve the 2013 objectives.

So if I look into the remainder of 2011 and beyond, we have to acknowledge that the recent evolution of the macro context has not been positive.

The issues of the eurozone, discount deficit, high indebtedness, vulnerable banks, or of the US high deficit, and challenges in political decision making are well rehearsed. The scale and the depth of these issues affecting the West are significant. There is a progressive realization that the timescale over which these issues can be resolved is likely to be longer than initially anticipated.

This team has navigated, with success, the challenges of '08 and '09, one of the worst financial crises ever, so we are alert to the risks surrounding us and manage our exposures proactively.

The key point, as I'm about to close, is that the quality of our individual franchises, our significant presence in the rapidly growing markets of Southeast Asia, where more people are joining the middle class than ever before, positions us well to continue delivering relative outperformance over the medium term, and our focus on execution of financial discipline gives me confidence that we can carry forward our performance.

So, thank you, once more, for your attention, and over to you for questions.

If you just take a few seconds while my colleagues join me on the stage, we'll start the questions.

Three questions. One is, I wonder if you could give us a stab, the GBP246 million variances of EEV, how much of it is sustainable into the second half, so we've got a broad idea of the sustainability of that?

Second thing is, obviously, with record low bond yields and gilts in the UK and US Government, I was wondering if you could give a stab where you see the margins in the UK and the US; how they'll be influenced into the second half of the year.

And the third point is, in terms of Asian margins, with accident and health being at 32%, and I think Barry previously said that the range was 25% to 30% and he couldn't see it sustainable above that level, I was wondering should we be penciling in a lower Asian margin in the second half of the year as that returns to a more stable -- sustainable level?

Okay, no, thank you, Greig. So we will take those three questions, see if we can help you build you model for the second half. The variances, Nic, GBP246 million?

Sure. [I said to you] that there are a number of one-offs. Clearly, the GBP46 million in the UK tax change is one-off. As the government approves certain reductions, you shall see some effects come through, and we've given you some disclosure in the release for those effects. Outside that, the UK did have a GBP28 million from -- which is a yield enhancement from a portfolio rebalancing; that is one off.

In the US, I commented on the spread profit. The lengthening transactions are beneficial to us in a lower interest rate environment, so you should see that GBP53 million repeat. As to what experience we'll do in the US, will depend on our ongoing success to operate the business within our assumptions.

And in Asia, the numbers are reducing so I don't have anything to say in relation to that.

Okay, the second one was on low interest rates. Asia is not really a factor. You've seen the make-up of our earnings, it's a marginal factor.

Nic, do you want to say a little on the UK margins, or Rob, I don't know? I'll ask Mike, and Chad on the US?

On Asia, the other thing I would add is that the economic assumption changes between the two periods had a minus 2% effect, so it's moderate. It's been offset by the product mix and country mix, clearly, that's why margins have moved up.

In the UK, there is some sensitivity to interest rates. And if we were to factor in the drop that we've seen in the tenure, really the effect would have been normal than GBP5 million or so of sterling. So there is some effect, but it's not [sensitive].

(inaudible) [growth] much.

Yes.

The US, Mike or Chad?

Well, I think the correct starting point with the US piece is we're back to where the [10-year] was in October of last year. So I think that's not what the current coverage of the rates would be; it suggests we're at some new point, but we've seen this before.

We still maintain the interest rate hedges. We don't talk about those as much as the equity piece, but that's about 40 billion notional at this point, so very little impact on the back book. We do re-price the products multiple times through the year, based on rates, and that's one of our assumptions.

I think the better metric in the US business to look at when we look at pricing is the 20-year. If the clients stay, if they utilize the benefits, that's going to be a more relevant metric for us.

And then last, I think the one comment that I just want to clarify is we've talked over the years there's three emerging product concepts, one driven by us, one driven by [Metnaxa], and one driven by Prudential US, that have very different benefits to the consumer. Ours is the 5% withdrawal of your own money model sort of model, [PRU's a narrow] range of return portfolio insurance model, and Metnaxa are like the GMIB feature.

Interest rates affect each of those very differently. There's not an implied fixed income option embedded in our product. So you get to the rollup rate question, that gets more to be an equity assumption. There's minor issues on capital calculations, but it's -- that product is not quite as interest sensitive as some of the other models.

All of that's sensitive. I'm sure we'll have a chance to come back to that, so that's (inaudible) factor, either.

Asian margins, [H&P], it's true that we guided you between 25% and 30% in the past, and we have 32%. Don't forget that India is a big factor in our H1 numbers.

Yes, I would this morning have said 25% to 32%. I would still say 25% to 30% is about where it ought to be. But also, it's not the only thing that impacts margins; remember, you've got the geography mix.

Geography was really important.

It was very important.

As also Nic said, all the [winds] were favorable, if you wish, in H1. Product, geography; we ended up having a lot of business in the most favorable geographies. And pre-crisis, India had 3% of APE in H&P. Okay, it's moved to 16% in the first half, but it's still way below the 25% to 30% we're talking about in Asia

I would treat that as an upside actually over time when we say that we're feeling [the H1] had moved in the direction of the other markets. We think that H&P in India is going to increase, but it's still below.

So actually losing India volume is good, and losing India volume which is poor in [HSP] mechanistically increases your H&P content in your Asian APE, it's just mechanistically. Okay?

I've got three questions, please. Your net cumulative remittance target looks like you're already quite a long way there --

Sorry, which target?

Your net cumulative remittance. At GBP3.8 billion, you seem to be almost a year ahead of schedule, was the GBP320 million from the US factored into that? Or is that a positive surprise relative to what you were expecting when you set that target?

Secondly, can you comment a little bit on economic capital? Most of your peers now give some view of where they sit on an economic capital model. You are certainly giving us the IGD number, if you could comment about the sort of rates and (inaudible) sensitivities there that would be helpful.

And then finally, could you comment a bit on distribution mix in Asia and what you're seeing from the agency channel and the bank channel?

Okay, very good. On the remittances, when I was going over the targets I was tempted to say, and I heard myself saying, don't start asking us if we can do this earlier because we will not move the targets. We're still in a very uncertain world. Seriously, Jon, look at what happened today.

We're doing well. We're happy with the progress so far. But I don't need to stress that we live in an uncertain world; there's a lot of uncertainty out there.

On the GBP320 million, no, we weren't really surprised. It was factored in our thinking. We have insisted in first half years that the growth in Jackson would be cash generative. We have questions sometimes [whether we got to the] IFRS and the cash would come relatively quickly with the nature of the business we've been writing, and that's just what's going through. But we can both strengthen the RBC, come out in a good position, and have access, if you wish, cash flowing back to the center, so we're pleased with that.

But, again, if you look at that chart where it is, you also see that '09 and '10 -- I think it's GBP39 million and GBP80 million to the GBP320 million, so the GBP200 million again is a target across the cycle. As Nic said, it's a sustainable target, it's not a maximum. And as the cycle moves, you would expect that to move.

Economic capital, Nic, do you want to --?

You're right, Jon, we haven't published that information really. The reason we focus on IGD is because that is what actually bites, in reality. That is what we're regulated on at the moment, until Solvency II comes in.

Internally, of course we manage the business on an economic basis. And we are comfortably in the type of ratio that we expect to be at this stage of the cycle, but I'm not going to -- as I said, we haven't given that information.

The reality is, unless we go to a great level of granularity on economic capital, there are so many types of economic capital, unless we really [lift the roof] and show you really what the model is, giving you a number in isolation I think that is potentially misleading. You just have to look at Solvency II, and what the growth pro-cyclicality we really have in there.

We don't claim that it was all economic capital. But we can have widely different target. And I don't believe that the numbers that are out right now are comparable in any way. You know what to do with them, the ones that are disclosed by companies. You just don't know how they are computed other than just being called economic capital.

So in due course, when Solvency II is implemented and when we know what it is, we'll be happy to share with you but we are at a time of uncertainty.

I must say, if there is one use in the current market, it's that you may get some of the designers of Solvency II to think again. That's all I'm willing to say on that.

So, distribution agency, yours (inaudible).

The distribution in Asia, the mix changed a little bit versus first half of last year with Bank going up from 27% last year to 30% this year. Tidjane touched on the very strong performance from UOB, the outperformance, if you will, in the Bank channels. There was also a strong contribution from SCB, which grew significantly faster than the business in total across the region.

Having said that, agency also performed very well. Again, there's really two factors, as you know, we've discussed this a lot in the past, that drive the agency performance. Some instances, depending on the market, you're really focused on growing scale, and others you focus less on scale, more on productivity.

We got improvements in both scale and productivity in the first half, so I would say the distribution platforms, in general, the short answer is they're both very robust, both performing above expectation, and, touch wood, will continue to do so.

I had a few questions on Jackson; a couple of rather tedious questions of clarification, but then followed, I hope, by something more interesting (laughter). The first two questions are, with the ALM transaction, which created the GBP53 million one-off benefit, which you say will recur to some extent in H2, what are your plans for 2012? Is this the end of that?

Then secondly, on DAC, is it correct that you have eliminated the mean reversion, or you will do by the end of this year, which means that your equity growth assumption will be 8.4%? Those are the two points of clarification.

Then just a more interesting question, which is, what steps, if any, are you thinking of taking to curb the US growth, which you've commented the competition is not increasing and the growth is still very strong? I wondered, are you going to take further measures in that respect? Thank you.

Thank you, Nick. I'll take the last one at the end, but we can start with the ALM transaction.

Yes, I think Chad, our CFO is here, so I'll let him go ahead and deal with the ALM question on a [portfolio thing if he's already going].

With respect to those particular transactions, they do play out over a number of years. As Nic alluded to earlier, (inaudible - microphone inaccessible) stay low, we continue to benefit from that. And that's really the [thing] of what's going on with that.

In terms of the (inaudible - microphone inaccessible), we have eliminated (inaudible - microphone inaccessible). All we're saying is that with 2008 running off (inaudible - microphone inaccessible) down year. And that's just --

Speak into it, and it'll work (laughter).

He's a great CFO (laughter).

Life is never boring with Barry (laughter).

What we're saying there is we've moved back within the mean reversion quarter that already exists so that we won't be dealing with the 15% cap any more; it'll be dependent on where the market is on a go-forward basis. So we'll continue to get the dampening of movements due to the mean reversion technique and it'll be less movement in terms of unlocking period to period because we're back within the quarter.

And so the equity growth assumption going forward is what?

It'll be between zero and 15%, depending on either [back or within] the cap. So it'll be market dependent.

And where is it now? It was 15%, wasn't it?

Yes, it was 15% coming into the year. And what we've shown in the appendix, you'll see, is if the market stays flat for the rest of the year it'll fall out around 5%.

It's appendix 67, that's the page I was looking for. We gave you, if you go --

Just to be clear, I've seen this a couple of times written up, our equity assumption is 8/4 mean reversion, not in -- so -- it's a cap. And the other thing that I think is lost in mean reversion, a couple of things, one is a standard US procedure that all of our competitors do this and it seems to draw more attention.

Second, we've put it in place in a year when equities are exceptionally strong to flatten the impact of a good year. It was never -- there's not -- the (inaudible) number I think is last meeting here of what it would cost us to true this up then now what the impact is, and it's still not material. But it is a -- you do want a dampening effect, we think, on this -- on the non-cash as it not a -- it does what it's supposed to do. There's pretty clear articulation of it on page 66 and 67.

We've done our best to really give you every year-over period, the three year by the five year forward, what is in what your result, and you see there that in 2011, 2008 falls out. And because 2008 was so negative, it has an impact then on what you're applying your mean reversion. And we've given you a 5% that Chad was referring to.

It's not intuitive, but it's a common method in the US. Us sometimes, if our VA business was variable because we were assuming 15% equity returns, and we have been that a bit aggressive and say, no, we're assuming 8.5%, but the mean reversion allows you to go up to 15% before you hit your DAC acceleration.

So you're saying you won't do a 15% using that technique?

It could -- it won't be -- the actual number won't be 15% because --

It has already come down; it's well below 15%. That effect was an GBP82 million charge, as we had anticipated it would be. The steer, just to simply the whole thing, the steer is that should see a similar amount, and it will then come back to a much more modest range.

So hopefully you won't regard this particular function as aggressive, which it isn't. It was never designed to be aggressive or prudent. It was just designed to dampen that effect. But once we get '08 out the way, this will normalized and, hopefully, we won't be having these questions.

And just the last thing on that, Nick, just to make sure you're clear, on the life of a normal contract the recovery of the DAC is effective in timing but not amount. There is no attempt to defer it out to 30 years. Over our product assumption period, all the DAC is recoverable. So we're not pricing for a 40-year DAC or something that's not -- I want to make sure, it's a timing issue, not an amount issue on DAC.

Exactly. And on the third question, our general positioning on VA, it's relatively simple. It is a cyclical market, I think I've used those words several times talking publicly, a cyclical market, where sales are a function of our actions, but also of a number of factors we don't control.

The first one is the S&P; we don't control, a major factor. The second one is the behavior of our competition. So every time we look at this, what we do is we set a combination of product characteristics, if you wish, price and risk that we're very comfortable with. And we've always said our sales will be whatever clearance, whatever the market will be willing to take at that combination of risk and price.

But we only set those two factors in a position that we're entirely comfortable with. So what happens when the competition took longer to reduce the growth then we [fault is] again, we've always used the word opportunistic, that we move opportunistically again. And what we signaled at Q1 was an intention to take advantage of that, to potentially increase the margin or reduce the risk.

And I have said this, but I think it wasn't heard, those changes take a long time to go in. And as I think they have not happened. So I was always surprised when I would read [segregation] of the impact of the changes on our sales in Q2, and I said at the time should I expect you to get the same level, to run at the same rate as Q1; I said that at the time.

So those changes haven't happened yet. And frankly, it's close to impossible to foresee what exact impact we are going to have. So all we did is flag that, logically, all the things being equal, they could lead to a slowdown later in the year, and that's what we did.

But we are in a relatively comfortable position where, frankly, it's a bit indifferent to us. Either we make more money, or we have less risk so in any case, it's a win/win for us. And these favorable conditions actually put us in a very comfortable situation as a player in that market.

Unless you want to say more, Mike?

I just think you've seen -- I think we've flagged this coming through the crisis, you've seen this flight to quality. It's a little entertaining that this week in the US, releases of our competitors, we're not referred to as one of the big three. And a number of us, over the 15 or 16 years I've been here, the question of scale [as an actual] number used to come up occasionally. And so, for me, that's a funny piece to read.

But there's a rational methodology in there's a calming of the major players and the look of the business, I think, in this space. And we've seen that concentration. We told you what we thought would happen in the top five or six plus players.

So it's not as price-led a market as it was going into it. It's not as fragmented. Certainly, the movement of one of the majors, [Medis], is currently repricing a product that will draw market share away from Prudential and us. That's fine. We're not in this for a quarter to quarter. We've never projected -- Tidjane has never asked for top line sales growth or market share metrics. So I think we're in an excellent place.

I was at our wholesaler's last week and they will tell you they're working as hard as they have ever worked for the sales this year and it's not an easy climate to generate sales and that they are, in fact, earning them. So I think it's a good competitive landscape, and some of the uncertainty in the US continues to drive investors towards products that have some form of immunity [manager income writer]. So fundamentally, it's all good for us.

I think your point about the market not being price driven is very, very important. We've done well because we have the rating, because we have the capital to write the product, and because we were there for distribution. But we have extended hugely, and there are some slides in there, that's what you don't get.

The sales has increased because our presence, our footprint has increased several fold. And that's how we increase the sales; not by mispricing it, or anything like that, because it's not really price sensitive. If anything, we've reduced -- remember, we've got a poor and poor and poor at the same price. So we had several implicit repricings.

So you see 95 basis points, and we hear, you haven't changed your price. Actually, we have, because the 95 basis point buys you a very, very different content over the last two or three years.

So price is not the reason why our sales have gone. If you are not credible in that market, you can charge 30 basis points. However, 95 you won't sell anything. If you are making an investment for 10/15 years, it's not price driven.

(inaudible)

A couple of things. You seem to have re-entered the wholesale market in the US, is that a turn in the water? Or can we expect you to revert to your old levels of GICs?

And second, on M&G, are we at a high watermark in M&G? You've got everything going in the right direction, can we expect that to be maintained, or even to improve further, from here, both in terms of feed-to-fund and cost-to-income ratio?

Okay, Mike on GICs, and Michael after that.

Yes, we're being extremely optimistic in the GIC space. We have the same team we've always had; I think we've explained this to you guys over the past. It's a small crew, less than a half dozen people, who both handle the distribution and management of that book. The institutional products they're written this year have been outstanding margins.

What you're seeing on the buyers said, James, is there are so few high i-credit quality issuers that it's not a particularly price sensitive market right now. Most of the buyers are looking for diversification. So we're not looking to ramp that business up materially, but we like it. At a certain price, we'll do it. And that volumes are not, as you see, at historic levels but there's a little bit to be done at very high margin.

Michael, high watermark for M&G?

Yes, I hope not, but two things to say. The first is that the cost-to-income ratio in the second half, I think Nic flagged the point anyway, it's flatter than the first half. There'll be some costs in the second half that will be catching up that we haven't seen in the first half, so I would certainly expect the cost-to-income ratio to go up in the second half.

The second factor, as I say, is that the result in the first half of this year particularly reflects the exceptionally strong fund flows we've had over the last two years, or so.

As Tidjane has said, we've been expecting those fund flows to level off, and actually reduce from the very peak levels that we've seen and, therefore, the rate of accumulation I would expect to slow, somewhat. And given also that there's a bit of cost catch up, we will be going forward much more dependent on market levels to come through to demonstrate our profit growth.

But we would certainly be expecting, and hoping, to continue to see healthy net fund inflows, going forwards.

A busy meeting, Mr. McLintock, today because I'm going to ask him another question.

I think I'm going to faint, actually (laughter).

Two in one meeting being probably more than in the last three years combined, but anyway. Could you just speak a little bit about the business development initiatives you've got going on at M&G? I noticed some reference in the commentary about expansion in Europe, and perhaps you could just talk around a little bit what you're doing there and where you see that expansion heading?

And just a second question, actually really on India. Obviously, some fairly dramatic changes vis a vis regulation, and so forth, could you just explain a little bit about the state of Indian insurance markets, currently, your position within it, and where we go from here? What's the trajectory?

I noticed some comments, I think from Tidjane, relating to things looking a little bit better by the end of this year, so perhaps if you could elaborate a little on that, that would be helpful. Thank you.

Michael, do you want to -- ?

Yes, sure. We've been operating in Europe for a number of years; we launched in Europe in 2002. The key characteristic of our launch into Europe is that we were selling the same vehicles that we sell in the UK. I hate the word OEICs; I'd rather call them good old unit trusts, but that's what it is. It's the M&G OEIC.

So we've been selling the same product as we're selling in the UK, therefore, with the same performance track record, and it's an incremental story of just gradually moving into fresh European markets over time, and the current expansion is sort of northwards into the Nordics. We, therefore, following that, we'll be operating in most of the major European markets.

We see Europe as still an underinvested market with a lot to go for because the banks have obviously got a major grip out there with the (inaudible) thing. So it's really a story of the incremental growth, and we still see a lot of opportunity.

We will double up on India between Barrie and me, but we've both been there in July and so we have some fresh intelligence.

Look, the problem with India is that we did not really like the way the market worked before. If you look at our 2010 numbers, I think the NBP in Asia was GBP396 million. Now, GBP23 million of that was India, and I think of the GBP465 million in 2011 GBP10 million is India.

Let us put it in perspective. There's been a lot of attention on it, but it's not a huge -- or it's not a material issue for Prudential, I can say, most definitely.

So, within that context, the market was not, if you wish, operating in a healthy manner. For me, I say it's year one of insurance in India. We now have a proper market, where there's a connection between the charges and the value that the product bring. And when I was in India the management team there is the first one to say that; they're actually quite excited.

So it has effectively -- and the sales were like 96% unit-linked. It was a market were [people were taking] better than the stock market. [I don't know if the equity] was going 10%/15% up every year, but bear in mind that we are paying 3% or 4% for protection charges. But that period is gone and we're not back to a market where we can actually sell protection.

Our people have redesigned the product suite. They've done are really good job at that. The products have been approved by the regulator. So what happening now is that we need to restructure our sales force. There is also a need to cut the costs very significantly to protect the margins, and that policy is on the way. So there is a huge restructuring; there's a lot going on below the surface this year.

And my comment was simply saying that all the way to Q3 you can't really see anything because you're comparing apples and oranges. You're comparing the new world in all the comparatives. It just doesn't make any sense. You're comparing two completely different regulatory regimes.

Q4 will be the first quarter where you'll be able to have some visibility on how this with new market in India is behaving. But we keep a large sales force, and we are leader with ICICI in that market, and we're committed for the long term. We will pay a good price on regulatory [MGs] to win in the Indian market and make, I hope, more than GBP23 million in the half year.

Barry?

Yes, not much more to add other than just emphasize that we have basically maintained our ranking in the marketplace. We're still, amongst the private companies, at the top of the heap. LIC has clearly been the big winner. Their market share has gone up, the total market.

And in terms of our relative performance, aside from maintaining our market position, as we've said before, I think it shows in the numbers that we were better prepared for this and that we had already gone through a lot of costs rationalization 12/18 months before this regulatory change.

Tidjane said that now continues apace. We continue to close branches that aren't productive or combine them, creating larger branches that cover more geography.

The key, again, Tidjane also said, but I'll emphasize, is retooling the sales force. Because you have a sales force that historically was accustomed to selling what looked a lot more like a mutual fund than a life insurance product, and now we're trying to teach them to sell protection, which in the long run is better for consumers and better for them, and certainly better for shareholders. But in the near term, it is painful.

Can I just follow-up quickly on that? So when we see the sales figures going through the first half, is that, let's call it, a run off of old style products still being sold by --?

No.

This is new ones?

Product [gains nine months' ago].

Okay, thank you very much.

I have three questions, if I may; first one on Asia, next two on the US.

On Asia, as you know, I struggle quite a lot with the 8% of undiscounted cash flows beyond 10 years in the future in the lapse rate assumptions, and I guess if I look at Singapore, which is the biggest unit-linked market, and compare you guys to AIA, on the statutory filings, AIA seem to be assuming that unit-linked contracts will last them for seven years in terms of premium income; yours seems to be 21.

I'm wondering what makes you think that these contracts are actually undated in Asia. And is that a reasonable assumption to make when you're doing your numbers?

On the US, one concern is obviously the crediting rates come down a lot for fixed annuities, so whereas in the past people bought variable annuities because they wanted equity market exposure with protection in its downside, what makes you sure that they're actually still doing that, and they're actually not a different generation of policyholders buying VAs?

I notice that in your numbers today there was more people taking income and lower actual surrenders, which would be consistent with a change in policy or the behavior, I'm just wondering what that means.

And the third one's probably a little bit simpler to answer, as I return to Greig's question on VAs in the current market environment. Simply speaking, with interest rates of 10 years below 2.5% and equity market volatility quite high this does not seem to be a good market to sell VAs in, and yet you're saying that their hedging costs have not increased, so could you just explain what's going on, please? Thank you.

Okay, thank you. I'm clear on the second and the third question. The first one, was it --

Singapore.

Singapore and the assumptions we make on how long the unit-linked are [resting] on our book? All right, okay.

First of all, we've been selling unit-linked for more than seven years and people continue to pay premiums, so we know it's more than seven. I recognize you say that AIA is suggesting it's seven.

I think probably the key feature that we emphasize over and over again, but it bears repeating again, is that unit-linked is an element of the products we sell. We sell unit-linked laden with protection riders, so the policies that we sell represent long-term life insurance protection. It just so happens that the savings element that you see in that whole life product, we happen to give exposure to equity markets where others provide fixed returns or some other mechanism.

We have always sold lots of riders with unit-linked. We're selling even more than ever before, as you can see by the progression of our results.

Since you mentioned AIA specifically, I'll respond specifically. AIA, when they launched unit-linked, their view was it was not appropriate to attach protection riders, and did not do so for many years. And I think even now still do so to only a limited degree. So that's the fundamental difference I would suggest to you.

Or certainly one of the fundamental differences is that we package our product differently and sell it as life insurance. Other companies have historically sold it without any protection and have offered it as a shorter term investment product. So ours will behave differently because it is structured differently and sold differently.

And we've been doing it a long time. It would show up in the numbers. If we've got that wrong, it would show up in the numbers. And I think, from memory, you have six riders per policy, or something like that.

It varies from market to market.

But in Singapore.

Singapore it's quite high.

I think it's six-to-one.

It's between five and six.

Yes, so to show you just the importance of the riders in the product package and how people think about unit-linked. I think that's right.

Then we had the US, yes, the behavior, is there a change in policyholder behavior and are they going to --

Bring your mic for Chad upfront, well, I'll let him do the one on hedging. But, Andy, I think to you're -- you're right up on your question both, I think. There is a change in VA policyholder behavior, but I think it's different than the direction you're going.

The fixed index -- sorry, the fixed annuity, as you'd think of it in the UK, the idea that you would take a monthly check and determine that as an annuity contract is 2% to 3% of the US fixed annuity market. It's a very, very small piece that does not have (inaudible) [ease]; take withdrawals. That is not a product that's commonly purchased for that in the States.

The material shift in the US post-crisis is annuities, both fixed -- fixed was often a surrogate for a time deposit because they couldn't -- the consumer couldn't afford to live on the yield on a bank CD and it was a way, consciously or not, to extend duration and take more credit risk.

I don't think the retailer entirety always thought that way, but they were effectively going out to get more yield to live on. That's a deferred annuity where they're spending the crediting rates. That is very different than an annuitized contract where part of what you're getting back is a principal over a steady period time.

That, given the absolute levels of time deposits and the absolute levels of fixed annuities, is a strain on those retirees. They cannot live on these low levels and so they are moving up the risk spectrum now and in the index contracts and into equities. That's one shift.

The more material shift is pre-crisis VAs were used as an accumulation product. I agree with you, that part of your thesis, completely. Post-crisis, they're seen as a very effective income tool. And that was not the case before. And that's a shift from US consumers saying I have X hundreds of thousands of dollars saved for retirement, I'm fine, to watching that get eroded through the last crisis and realizing what I really need is a check a month or some floor on my income. So there's a change in saving behavior.

It's still not driving the bulk of the assets. The deep end of that pool here is still mutual fund or similar type assets. The VA business is getting a little bit more of those sales than they used to, and a little more of the packaged product deals, so as an industry there's an increase in market share of the client wallet.

We showed, I think in December, pretty clearly very aggressive, very efficient assumptions on benefit utilization priced into our product. We assume clients will do what's in their best interests across the spectrum, and I think we've put quite a bit on that in December on our assumptions. And that is how we place and that is how we stand.

And I'll let Chad comment on the hedging.

On the interest rate environment, again, the 20 years is more important asset than the 10 years. There is no part of our product that [keys] off 10 years. The issue with the 10 years, I think, goes back to that fixed annuity client and their time deposits, and their options.

So it has a material impact on consumer behavior. They have less reasonable choices; it has less impact on us from a product pricing point of view.

And the only point I'll lead into Chad's piece, I'll let him talk about hedging costs, is another thing that's missed, I think, on us is -- if you think of the product, first, you have the guaranteed fee, and when we talked in December we talked about how we spend that fee. Then you have the [M&E] fee, the core fee in the product that you -- we're not going to -- we have no -- we are still within our pricing on the guaranteed fees, we still have more than twice that on the base fee, so if hedging costs shot up we would continue to hedge and you would erode the profitability of one year's sales over the Jackson book, which is a nice place to be.

And the last point I'd make is, and if we were materially wrong over a cycle, in the second year of the client contract we can re-price the guarantees. So there's quite a bit of work and look at what risks we could incur in this, and I don't want to suggest for a second we're not aware of changing macro issues. We obviously spend a lot of our day looking at how they impact on our business.

But, Chad, do you want to talk about the cost of hedging and today's market?

One thing to keep in mind, too, is that over the -- there's a longer product cycle on VA, so we can't just pull a product tomorrow and put a new one out there. So we think about the six-month type lead times when we price the products and so we've got -- we think about what's the likely interest rate environment over that period of time when we look at that.

So if you look at today's rates, as Mike mentioned before, we're within the range that we've seen over the last even 12 months. So this is not unchartered territory that's just it's a very sudden move back to where we were 12 months ago, but it's not new. So I would say, from a rate perspective, that's contemplated in the pricing that we have.

In terms of the hedging costs, I don't think we've ever said that we're not experiencing higher hedging costs. If you think about the conversation we had last December at the Investor Day, we talked about how we priced and the fact that we're pricing out on the tails, and they we're going to have to hedge in experience whatever actually happens.

I'd say we're experiencing out on the tails this year, as we've continued to do over the last couple of year, so hedging costs would be higher than we would anticipate on a more normalized pricing basis. But that's in our numbers already; you're seeing it. There's nothing that's not transparent in the financials.

Could I ask a question on Asian product profitability from a customer point of view? What's the kind of reduction in yield that a customer might suffer, given the charges you have? I'm kind of thinking of slide 65, where for Jackson you give all the economics of the variable and fixed annuity products. It would be interesting to know how those work in Asia.

It will vary from market to market, depending upon how much protection someone has bought. The way people tend to look at this is not that I'm paying $1,000 and if $400 goes towards protection only $600 gets invested I get a yield on that $600, and oh my gosh it looks like a terrible yield against the $1,000.

People segment in their minds that I understand that I am paying $400 for my health insurance and for my life insurance. And then there's $600 that goes into the fund, and they look at the return on that element of the product and, historically, that tends to be very good.

If you look at our investment performance today in Asia, if you take a blended three-year/five-year performance on the funds that we offer in the unit-linked products, what you find is that over two-thirds of those today perform at or above benchmarks or peer funds. So our investment performance is better than it has ever been, but I think customers don't look at it the way you're suggesting they do, fundamentally.

I'm just thinking actuarially.

Actuarially (laughter). Well, I don't think about it the way you do.

We've got an actuary; Pete is here.

Do you have a sense, Pete?

I suppose our fund charges vary by the type of assets, type of funds people choose, typically between 1% and 2% per annum on that component.

As Barry said, that though is after deduction of the charges for expenses and the protection elements of the contract, which can be about 40% or 50% in some cases on our regular premium-linked contracts, because that's the amount of benefit -- or amount of premium that is going, on average, over the term of the contract to protection benefits. These are very heavily protection benefits in most of our countries.

Yes, and it varies from country, but in some places, yes, it's half the premium.

You can't look at simply the premiums going into the contract and then a projected surrender value at age 60, say, or something, to calculate a reduction in yield because consumers have had the benefit of a huge amount of protection benefit on a wide range of different types of benefits over that period.

And the products are sold and illustrated this way. We give people very detailed understanding of how the product will work year in year out for 20 years, 30 years, 40 years.

So I suggest you continue --

Yes, could take it off line with Pete.

I just wanted you to recognize -- he knows it all.

Three questions; two on the US, one on Asia. Just in the US, you mentioned about hedgeable risks where you [controlled] on your hedging, I was just wondering, on your GMWB, what does bite? If it's not interest rates, is it aged-related when the withdrawal actually kicks in.

And you said policyholder behavior is changing and people are buying more for [decumulation], so is that something that could bite? I think a year or two earlier you had actually a positive experience variance because you had seen people delaying their withdrawals.

The second one really was on US capital efficiency. Capital efficiency's gone from 32% to 20%, which is -- gives us a strain upon premiums. I see there's some commentary around the mix changing, you have a higher proportion of VAs, and there's some commentary on product changes, wondering what those product changes are. And how does it drive lower strain?

The third question really was on China. I know that was one of the Asian markets that you showcased again, but if you look at the numbers the annuities' margins have come down, it's back to break-even, and we know that the bancassurance market there is challenged because of regulatory changes, I was wondering how you see Prudential positioned in China. And what progress can we see from hereon? Thanks.

Okay, so we'll start with US. Mike, do you want to --?

The hedgeable risks and the key risks, to your point on VA, are the equity allocation on the client, so [representative] equity to debt, or non-quality assets, or fixed account, or any combination of those. The equity -- the absolute level then of equity performance over that period of time, which obviously would produce -- you get to guarantee the roll up in the absence of the equity piece, so what level of are they going to be able to pull that withdrawal out on, and the efficiency which they utilize their withdrawals.

So what we like about those, that set, is those can be calculated at various stresses and you can assume fairly draconian numbers for each. And as we showed in December, we price them up on a very conservative basis. We also run endlessly, just to be clear, tests of -- that are even more efficient than that. And what you get in -- the short answer on that is what you get into is the product is less profitable if the client utilize more.

We don't get into scenarios where we're losing money on business. If they're 100% utilization, 100% equity, that's not the -- you're -- a couple of things happen. The further out you go on your scenarios the longer the money stays with you, so you do have the present value of the fee stream. And when the client annuitizes -- effectively withdraws the contract, the most efficient basis in a down market, there with you a very long time. And, again, there's not an interest rate guarantee in that, or some other element that you're trying to manage as well.

Your question on capital strain -- does that answer your first question?

Yes.

On the capital strain piece, there's a couple of things. Product mix matters materially. In this market, we are not writing a lot of fixed annuities, or fixed indexed annuities, for a number of reasons. We're fairly defensive, [and you talked] in the portfolio right now. I think there's a question arising fixed at this absolute rate level, how persistent that business would be if rates shut up.

So from an absolute level, if rates go from 3% to 6% those clients will leave because it's in their best interest, regardless how good a job we do of taking care of them. And those products, as we discussed, and I think is in that illustration referenced earlier on is it 65, are much more capital intensive. So our mix shifting to the VA has a huge impact on lowering our capital demand.

We have, as Tidjane referenced, derisked and made the VA product less capital intensive multiple times over the last three years, by reducing the absolute level of guarantees, by some of the structured changes we've made, the fee changes we made, and also last year making the fixed contract in the VA more restrictive, less attractive, lower absolute yields, that sort of thing.

And that has -- again, that's effectively a fixed annuity inside of the VA. So by making that more restrictive on withdrawals, lower on absolute rate, lower on guarantee, eliminating the ability to flip in and out of it, that sort of thing, that lowers the capital strain because the regulators view that as a far less risky asset than if that account was fully liquid and the client could jump in and out and arbitrage your fixed to short-term interest rates, say, a money fund.

So that's the other major reduction in capital strain.

I think the other factor is the unit cost that contributes to the strain is lower because we're just selling so much more than we did before. So that is -- that operational leverage that you've heard me describe in a number of places also applies in terms of its contribution to the new business strength of this contract.

One other point. That we actually have had a number of -- I think a pretty good track record of positive variance, where it's because we are trying to maintain conservative pricing and then hedge for a more conservative, a less optimistic model.

I'm not sure I balanced that correctly. To make sure, I'm saying, we assume still most clients leave us not stay with us after surrender periods, those sorts of assumptions. So that comes through in some of the positive variances you've seen as well.

And I think Nic mentioned the mix. We went from 80% VA to 88%, that's one (inaudible) the allocation to FAs within VAs has decreased quite a bit as a result of the returns that we made, plus the scale factor. If you put all that together, that gives you your movement in efficiency.

Barry, do you want to take China?

It's channel mix. It's basically the very rapid growth in the bank channel that has had the impact on margins that it has.

Margins are still good, but we have a very strong relationship obviously with CITIC, as you would expect us to, be very disappointed if we didn't. SCB is also a major partner. But we distribute through a number of others as well, like ICBC, and so forth, and that does have a -- in some of these banks there is an element of open architecture; not so much in our larger relationships, but in the smaller relationships. Those tend to mute the profitability of the business over what we're accustomed to.

It's not to suggest that the agency channel, however, is not doing well. It's just that bank is doing so well. Agency, we're up over 10,000 agents, closer to 12,000 actually.

We've not been as focused in the first half of the year on growing the scale, although we do have, as Tidjane mentioned, project Apollo there to build the agency force not in a huge way but in a thoughtful and disciplined way. So the scale of the agency I think in the first half only increased less than 5%, 2% or 3%, but the productivity was up over 20%.

A good point. We are -- it's long term, but we are fighting to take [everybody] away from margins. We don't like margin. I don't like margin. We don't run the Group based on margin or for margin. We run it based on IRR. And if you listen to Nic's comments on his margin page, he went back to IRR every time. So what we'd like you to accept is that the IRRs of the first are good.

All the margin is telling you is product mix. That's why you want immediately to channel mix. I'm not saying -- I'm -- all the products are value-creating. And then depending on what the customer does, our share of the margin will move around, but we -- anyway, at some point we'll get variance, one of our medium-term projects, so we can really discuss IRRs rather than margins, which are not that significant really.

Yes? Okay, last one.

I've got three questions; two on Asia and one on the US. Looking at the Asia IFRS profit drivers, it's the marginal revenues that looks to be the single largest driver of the upside in Asian profits in the year, and a number that I don't think you disclosed is the base of recurring premiums that drives that margin on revenue, so I'm wondering if you could give us a sense of that number and perhaps articulate how much that'll change year on year.

Secondly on Asia, could you let us know what the first half attachment rate in terms of riders is? I think at the year end, at the investor presentation, you said it was about [2%]. Has that changed materially?

And then on Jackson, I think slide 70/71 you give us some details on crediting rates and charges, as we stand today, have those numbers moved? Are they representative of how you're behaving in the market, as we speak?

Who'll take the IFRS? Nic, do you want to have it?

I'll do that. Yes, the margin on revenues is the charges that we're able to apply on a number of the territories that we currently operate in the first couple of years of a regular premium contract coming on board.

We don't give you a detailed analysis of the premium income by country, or indeed the source. But, overall, premiums are going up, and you'll see in one of the notes that we disclosed that it's gone up in Asia from around the GBP3 billion mark this time last year to GBP3.6 billion.

So premium is increasing. It's shifting. If anything, the mix is shifting towards those countries where we do -- we're able to levy our charges in the first few years of [premium], and that is what's driving the expansion of that particular line.

Also, though, within our technical margins, don't forget the very rich profitability that we're able to derive from the health and protection products, where, again, our claims cost experience is well within our expectations.

And regular premium means it's above 90% in general, which I think was one of your questions.

Yes, in terms of the sales, it's a healthy proportion. It's stickier business as well. So regular premium accounts for the vast majority of our premium income in any given period.

It went up during the crisis because actually, contrary to what people expected in '08/'09, the only thing that collapsed is the volume of single premium, which went up by 90%. Luckily, it's only 10% of our sales, and that's what you see in Asia when equities markets go [etc.] into a single premium.

Now players who are selling single premium, it tends to be bancassurance dominated players sell a lot of single premium, will be very much affected --

With a much purer in debt orientation. You don't put riders on single premium products; it's a savings bonds.

It's one of the things that really makes us so robust, and relatively we are relaxed even in the current environment. Regular premiums with riders are very, very resilient, which moves us to the attachment rate of riders?

Which is -- continues to be very good. It varies from market to market, 2% was actually on the low side; it's usually more than 2%, but it does vary by market. So that remains very robust.

One evidence of that, as you've seen, the product mix shift. That's because we have done really well in the first half with health products, in fairness. It's also, because of what's going on in India, the unit-linked as a percentage came down because India was virtually 100% unit-linked, as Tidjane said. So that sort of flatters the health and protection, but it continues to be very strong.

When Tidjane was running through some of the countries he pointed out some of the new products that are out. We've had some instances where new health products have represented a pretty significant percentage of the new sales in respective markets, so it continues to go very well.

Jackson crediting rates?

I think on the charges, which is more the question, is that correct, what we're trying to do -- yes, I think that chart illustrates a couple of things. There was a price war, we've talked about numerous times in this room, in other meetings that we set out, and so at one point we were seen as not following the industry, etc., and I think that's illustrated there in that guaranteed -- the charges for this particular guarantee.

The other piece of this I think that matters is we have over the last three years changed the benefit offered and tried to keep the price relatively constant. So you can reduce the rollup, you can reduce the age availability, you can band the ages, there's a variety of things from an actuarial point of view you can do that improve the profitability, derisk it, and are still competitive offerings, and that's been more our choice.

One of the considerations we look at with the VAs is you don't want a product that is so fee-laden that it can't produce investment returns that grow their savings. So our preference in this climate, for example, if our determination was we needed to make some product change, we'd much more likely reduce the benefit than increase a price; and it has the same impact for shareholders, as that group of stakeholders.

When you think of our stakeholders that are the clients that own this, you don't want to rob their -- you don't want to load the product up so heavily in fees that they can't -- their assets can't grow. They need these assets to grow. Most -- you've read lots about Americans being under-saved. Some of these products in the industry can get approaching 4% in total costs, with some very good guarantees on them, but that makes it very difficult for equity markets to provide any sort of upside to that.

So our preference at this point in the cycle and what you've seen over the last couple of years from a decreased benefit or decrease the age availability and try to keep the fee at constant.

Can I just come back? The charts are still flat-lining if we were to extrapolate through to today, is that the right way to see it?

We're not a -- directionally, that's how we like it. Now there's other -- again, the other challenge with this one is if you think of our product as a matrix, where most contracts are more static, competitors are more static in that, we can turn on and off features. You can choose a bonus. You can choose to have multiple types of guarantees. You can strip the contract of all that's guaranteed, so it's very hard to give you a single answer on how it would look going forward.

I'm not trying to be evasive here, I'm just saying it's more of a grid than it is a single spreadsheet. But conceptually, we like in this point in the market a reduction in benefit more than an increase in fee, if that helps, on any of those lines.

All right, well, thank you very much. I'm sure there are more questions, but we tried with 10-hour version in December and some of you were there, so we'll do a shorter version today.

The last thing I have to do is to invite you to Kuala Lumpur. As you know, it's my pleasure to extend this invitation. We have our Investor Day in December. We're already working hard to prepare it. We want to try and make it really worth it. And Barry and the team will showcase Asia.

And depending on how markets, etc., evolve, we may also update you on other parts of the Group. That's something we haven't completely decided. It's going to depend on what happens to the world between now and then. But at the minimum, you'll get the full review of Asia, and we'll all be there.

So, look, thank you again. It was a difficult day to present our results into, but we think these are our best results ever, and we're very pleased to present them to you. And we will see you in November, I hope, in Kuala Lumpur. So, thank you. Thank you.