Prudential PLC (PUK) 2016 Q2 法說會逐字稿

Good morning. I'm Mike Wells; I think I know everybody in the room. We're going to follow the same format as the last presentation where you're going to have me go through some high level comments, Nic do a very detailed drilldown on the financials.

I'm going to come back up and give you some comments on outlook in general, and then we'll bring a variety of the senior management team up here to answer Q&A for you. And we have some other of our key associates in the audience as well, so we'll get into any level of detail you'd like in the conversation.

So that said, let's go ahead with the delivery. I was commenting with our colleagues beforehand, it was an interesting first half of the year; no question, lots of different challenges globally. I'm very pleased with our success in delivering both cash and growth. IFRS up 6%, free surplus generation up 10%, the dividend, as you know, is mechanical but up 5%, Solvency ratio 175% which again, as we've said, I think it's a good number.

We've never consider this a particularly good fit for us, given about one-quarter of our business or less is actually in the original targeted Solvency structure and the local regulators use their own capital regimes. But, again, I think from a headline point of view, until this number matures in the industry, it's important we have a strong number and we think that's a strong number.

So we thought it was good, clear results in a fairly tumultuous period, and what I wanted to focus on in the opening today is what I think are going to be three of your key questions. One is the resilience and the relevance of our growth. The second being the positioning for us in markets, whether it's volatility of interest rates or equities, and just competitively in general. And then the third and final piece that comes up a lot is Brexit and its impact on the Group, or little impact on the Group, as the case may be. And then I'll get to more general comments on the business.

But I think what you saw in the first half on growth, the structural model we have, the strategic decision of going with -- the uninsured middle class; we're still seeing two-thirds of our Asian clients not having owned a product before. That's detached from markets, so you don't have a high correlation between those transactions and their view on interest or equity. So that's turning out to be a very, very good piece of our business.

In the US and the UK, more and more it is about our ability to gather assets effectively, perform well for the clients, and price and distribute effectively again. So those are slightly more opportunistic but, given the general demographics in those markets, as you saw from the first-half results, even in a climate like this, consumers are looking to derisk, they're more and more responsible for solutions, so again, it's giving us very predictable and robust growth.

And then the last piece, which I'll get into a little more detail later, is we're continuing to invest for scale. One of the questions I think is fair is that our continuing size, each year we get bigger and bigger and bigger, can we continue to grow? And I'm not sure we spend enough time on all the things we're doing to invest for that growth, but we think we've got plenty going to continue to grow at the rates we've seen historically.

So moving to markets; again, [15%] of the businesses now the revenue is coming from spread-based products. We moved away from these 10 years ago; that was the start, it's taken time. This could be anything from deemphasizing fixed in the US, moving away from bulks in the UK, and moving from [ULs] in the Asian markets.

There is an implication at top line, so a competitor can hold up a graph now and say, we have them beat in this part of this market. I would ask you to consider, when you see those sorts of comments, does Pru have the ability to manufacture that product? And the answer is usually yes, and we probably already had it system-wise and capability-wise. And second, do we have the ability to distribute it? And the answer again, I think, is generally a resounding yes.

So it's a conscious decision for us to participate, and in the case of interest-sensitive products not participate in markets, because we have better uses of capital. If they can or can't make money, depends on the company, and my role is not to tell you which of them can or can't make money, but I can tell you, for us, we have higher uses of capital and I'll show you some of those returns as we see them, and the lenses we're using now.

But I want to challenge the thesis, if someone has it, that we can't capture that market share if we chose to. If we gave the US and the UK, [Tony], the highest priced product in each market, we would be out of capital in about two hours with the distribution firepower we have, and we're clearly not going to do that.

But I think that's a key element in this discussion, is we choose the growth we want, we choose the markets it's in, and we choose the value of those earnings over the volume.

The balance sheet itself, extremely defensive. We have not stretched for yield. We are not into aggressive asset classes. We've been talking for the last four years, if you will, about going up an asset class, managing duration carefully, up in quality. Nic will get you into some detail on this, but disproportionately what we own is investment grade. You'll see that in the shocks, on spread, and we don't think this is what our core business proposition is, and nor do we think it is the right time in the cycle for taking tremendous investments risks.

We have an extremely conservative portfolio, an actively managed balance sheet; you saw that in the first half of the year. And I think, again, we'll let Nic get into some of the details there, but very pleased with the quality of the credit portfolio, quality of the hedging in the US, and quality of underlying assets on the balance sheet in the Group.

A proactive approach the value across the cycle. Interestingly, we were talking before about Solvency II so that's a pro-cyclical regime. We're arguably a countercyclical player, if you look at what we do best; certainly some of the results you see here. And that is a byproduct of our conservatism in different points in the cycle. So I think these sorts of times, these stresses show what we can do.

We certainly can do more than this; again, I'll come back to that in the second half, but I think it shows the nature of the business and what we want to do. But our intent at this size and we have a great growing stable earnings base, 90% of our IFRS earnings now come from existing clients, if you think of it in those terms for stability.

So the incremental things we will do from here, we should be more countercyclical. You should expect that. We should get paid more for that; we should get better pricing; we should be able to create more unique solutions for consumers from that.

And finally on Brexit, our UK participation has been selective. I think that's the key takeaway there. 10% of the M&G's teams assets roughly are in Europe. Poland, if you remember, is a rep office for our UK business. So we are not a European facing insurer by any means and we're certainly not -- the asset management business, we will see what solutions come for those clients to be serviced, effectively, and transact effectively with M&G.

It's a little early in that, but obviously M&G had contingency plans in place and continues to work those. We want to maintain a seamless relationship with those consumers. And it's clear, as Brexit evolves, at least in my view, you'll see clients as you did when we saw a real run-up in our bond fund sales, that want to own pound-denominated products, that London's success will continue as a financial center, because the rule of law, currency, all the various things that have succeeded over a very long period of time.

So we will make shares available to clients as they need in the jurisdictions they want to buy them, in the forms they want to buy them, but that's an evolving process as the rules evolve and we're fully capable of managing that. So Brexit in general for us, minimal strategic and certainly minimal financial impact to the Group.

Go to Asia. So where's the confidence come from and the growth? It's the quality of the growth. Again, I'm going to bring you back to the recurring premium versus single premium, the quality of what's sold, the health and projection focus, and then, absolutely critically, the pan-regional model.

I understand there's been a few questions about this, so let me go through [a couple here]. The blue shadow box on your far right of the screen shows, as it should, that the first half of the year, regardless of what was going on, looks a lot like the history of this business. There's no material change in the shape of the business. A continued focus on health and protection, continued long-term focus on relationships with the clients, as it should be.

Why does the pan-regional model matter? Well, seven of the 11 markets were up double digits in terms of earnings. We can't predict which markets in a portfolio that big will have political turmoil, will have rate movement, will have other options, will have an irrational competitor, all those things are the nature of, including our western markets but certainly our Asian markets.

The footprint we have gives us the ability to be disciplined. It allows us to back off on our product segment, a market, a country if we needed to, and to accelerate if we see the opportunity there being unique. I think you see that in this half's results. It was an interesting period of time, lots going on, pretty broad Asian results and getting to the clients we want with the products we want, with the earnings we want. Again, value over volume, because we have choices.

We're not defined by our limited licenses, limited distribution options, limited product or systems capability. And that's where I think you'll see us continue to succeed across a broad set of economic environments in Asia. We have tremendous optionality there and, again, it's an attribute of scale.

Should translate to earnings for you. It does. Again, the earnings base, strongly driven by existing clients. Not that new business profits and the sales to new clients aren't important. We want to keep adding cohorts of profitable clients to the business year after year after year, as we do in the US business, as we do in the UK business, as we do in M&G.

That is the long-term stability of the earnings of the Group comes from that. But again, not a particularly unique shape in the first half of the year, the historic shape of the business and good year-over-year numbers in an interesting period of time. So very, very pleased with the execution of the team, an extension of what they've been doing for a long time.

Reasonable expectations that that should turn into both growth and cash. So cash and free surplus generation, if you will, both up -- excuse me, our earnings and free surplus generation both up 15%, a good number.

I mentioned seven of 11 countries in double-digit earnings including Indonesia. And markets where we're seeing irrational competition, we're accelerating other parts of the business, getting good earnings growth out of it and good profitability out of it. So again, you see the breadth of the portfolio producing very, very good outcomes for our investors.

Spend time in the region, what you also see is, the footprint allows us to recruit very talented people. Rinaldi brought in a new CEO into Indonesia, an incredible add to the staff. People in the business units can move from one country to another as both their interest and ambitions and skills evolve. So it allows us to recruit talent, it allows regulators to look across the region and say, how do they behave for consumers? Are they a good partner for the social solutions that we bring to the market?

There's tremendous leverage in our footprint in regions and it's not simply earnings based. The learnings we have from one market we apply to another. I thought the most interesting one of these, just personally, it's not material in your models yet, will be some day, is spending some time with the Cambodia team.

You see our learnings from multiple markets in that effectively start-up. I think it's important a firm our size can still do start-ups. You see us doing it in Africa, Laos, Cambodia, other markets. But what you also see is the very familiar business plan, some familiar faces, and very, very good execution very early on in the life of those business plans.

The other place you see it is in the bank relationships. I've mentioned some of you before, the bank relationships are not linear. There's a learning curve. There's a relationship development phase, there is a product development phase. And we're pretty good at accelerating that, just given the sheer experience we have, and Standard Chartered still being the standout bank relationship with, I think, any insurer in that region, and the others we have are maturing nicely.

So what does this produce? Pretty consistent delivery. 2017 targets, the objectives we put out, double earnings still look in line and on target. And then, of course, if you back into that, that implies a tenfold increase in 11 years. So again, these are strong growth rates.

Other subjective comments, and I know a number of you have been there, the businesses feel materially different than they did one year, three years ago, five years ago, 10 years ago. These are maturing into -- these are companies. This is a portfolio of standalone companies run with a similar sense of purpose, similar sense of value, similar risk management. They're maturing very, very evenly and very effectively and it's quite impressive to spend time with these teams.

Jumping to the west, let's go to the US. The main event in the US we've been talking about for the last year is DOL. You have the rules out; you have an April next year implementation.

We said to you at the time this is going to be a sales event, not an earnings event. As you see, VA earnings are up 9%. Jackson pretty much captured all of the net flows in the US VA industry in the first half of the year. That's mostly going to the Perspective II products, their flagship products.

As you can imagine, lead access without a guarantee in this sort of climate is not as popular with clients as a product with a guarantee. And you're also still seeing some of the broker dealers looking at it [as] it should be on their qualified plan platforms.

Jackson has put a number of products and processes in place with its distributors going into DOL, fee-based products. [BCE], as it turns out, the final interpretation of that is a little broader and a little better for the broker dealers. Most of them are looking at that as they can, in fact, charge commission. So we'll have a two-tier approach to this, a traditional product approach and a fee-based product approach.

There's a part of the industry that believes that the rules will get better. That's up side; we're fine with the rules as they are. If they get better, we're fine with that. It certainly could be a little clearer but, that said, we can function with them as written. And the value of the consumer, we'll see if that plays out over time, but we think we can build good products for consumers, both in the fee-based structure and we know we have good products for consumers in the traditional structure and of our VA products.

We also, in the US, are continuing to look opportunistically at bolt-ons and hopefully, at this point in the cycle, there's something we can do but, again, nothing to report at this time. I mentioned net flows, they're excellent. Hedges are holding up well. At this point, as the rules in DOL stabilize, Jackson should see more opportunity.

The UK is probably one of the most interesting stories, I think, for us. This, I think, defines our Group's versatility at this point. Sales now in the life company, post RDR, post pensions reform, post Solvency II, post annuity review, are now higher than they've ever been. Not surprising, the with-profit product in its various forms, the distribution team has done a great job of getting this in front of consumers who are now responsible for funding their own pension.

Living here for -- coming into my second year, lots and lots of conversations with people all around the city about what they're doing with their money, whether they're putting it in their ISAs and things, and I'm shocked at the number of them that are cash, candidly. I hope they look more at investments, but a lot of the bank-sold stuff seems to be cash centric and we're getting a lot of it and that's a great thing.

So I think this product provides asset diversification, good smoothing for the client. It's a good long-term hold, a really appropriate product for long-term retirement savings. And the more volatility we see, the more demand we see for the product.

The team has shifted nicely to a capital-light model, as requested, and as market-driven. John continues to staff out his team. We'll show you more of that in November, given a few folks aren't officially on board with us yet. But I think you'll be pleased at the level of talent he's brought to bear on that business and, again, this is a good example of our ability to pivot.

M&G, controlling costs. The earnings, again, at the guidance levels we gave you at the full year. Clearly, there's been some challenges and outflows for US equity managers in general -- sorry, UK fund managers in general. But M&G continues to work on not only the current climate we're in, the second half was better than first half, but also what they need to be for the next 10 years.

Again, I'm going to ask your indulgence relating to Anne and the team. They've been working on it since January but with Anne on the team, since she's just joined, have a good portion of the November investor meeting and show you where they're going at that point in time. But she'll obviously answer direct questions for you today on where they are at this point in time. But, again, very pleased with what they're doing. Good combination; the two entities give us great capability in market.

We talked about this before. I think it's been a bit more important in this first half; diversification by types of earnings, diversification by currency, diversification by the types of exposures we have and then, of course, the earnings and profits following that model.

We like the footprint; we continue to deemphasize spread. This gives us resilience, it gives us good cushion against some of the right movement, and we think it positions the Group extremely well for this climate.

So I'm going to stop there. Last comment, I guess, before I turn it to Nic, we think, having watched what's going on in the industry, these are good results, both on a relative basis and an absolute basis. I think you guys know my bias is to compare them to ourselves and I think they're consistent with what we've been able to do in the past, as far as client acquisition, profitability, flexibility of the Firm, its ability to adjust to the challenges.

So I'll come back up after Nic and I'll give you some comments on outlook, but if I could ask Nic to come up, please.

Okay. Thank you, Mike, and good morning, everyone. In my presentation I will take you through the half-year results, highlighting the key drivers of our performance in the period, and then I'll cover the Group's capital position.

So starting with the financial headlines; Prudential has delivered another strong performance across our main growth and cash measures, despite the effect of lower rates, and the expected reductions from US spread, UK annuities and M&G retail which I flagged to you back in March.

Our progress in the face of these headwinds was achieved by making the most out of our structural advantages in the countries that we operate, and by executing with discipline and focus.

On a constant currency basis, IFRS operating profit increased by 6% to GBP2,059 million. New business profit was up 8% at GBP1,260 million, and free surplus generation was 10% higher at GBP1,609 million. Currency effects were positive, adding between 3 and 5 points to our underlying performance.

This performance is entirely driven by the outcome of commercial transactions and does not benefit from any changes to our reserve [improvement]. Furthermore, no aggressive actions were taken in any of our businesses to stimulate short-term sales, as we continue to prioritize long-term value creation over volume.

These results demonstrate the benefit of our earnings diversity, by geography, currency and source, and the power of our Asian platform which continues to compound strongly, supported by largely uncorrelated structural drivers.

Our ability to deliver growing levels of profit and cash also provides meaningful protection at times of extreme market volatility. Therefore, even though interest rates fell to unprecedented levels, our Solvency II capital at June 30 was trimmed back by only GBP0.6 billion at GBP9.1 billion.

In contrast, our embedded value, which is a fairer measure of economic value as it has no artificial restrictions and is not subject to excessive regulatory prudence, was up 9% in the first half, to 1,356p per share.

The first-half performance takes us another step closer to the 2017 objectives. Our Asia IFRS operating profit and free surplus generation continued to compound nicely towards the 2017 target levels, demonstrating the ability of the PCA team to successfully execute against the secular opportunity in the region.

The market cyclicality that we have experienced so far in 2016 confirms why targets for our other businesses are not [sensible]. Here, the focus in on remaining disciplined and on balancing the trade-offs between risk, value and capital. Cash generation is the best way of measuring how effective we are at doing this, which is why we have a cumulative free surplus generation target. As you can see, we're also on track to deliver this goal.

The actions we have taken over the years to improve the quality of our earnings, and to manage risk, provide us with meaningful protection, as Mike has already said, against low rates. Therefore, before turning to the results, I would like to take a few minutes to remind you what underpins our resilience to the current market environment.

So starting with earnings on this slide; we have spoken many times of our strategic focus on insurance and fee income, as these sources are less sensitive to the interest rate cycle. In today's environment, this is a significant strength. Compared to 2011, which was the last time that we saw a material drop in rates, we have more than doubled the size of insurance and fee income and increased its share of the total to 76%.

We can also draw more comfort now from the greater diversity in our earnings, with the amount of profit coming from our overseas markets being 2.3 times higher than in 2011, representing nearly 70% of the total.

At the same time, our business growth has not detracted from our careful management of costs, which have grown at a slower rate than revenues. In most of our operations, our flexible and saleable platforms will continue to generate unit efficiencies which will, in turn, help absorb the impact of natural business cyclicality.

Moving to capital; our ability to generate sizeable Solvency II operational capital, and a healthy start of the year position, have enabled us to absorb the effect of markets on this metric, and report a surplus of GBP9.1 billion at June 30. Our financial resources remain strong and provide ample buffers to absorb further downward moves from here.

By taking actions, we have also significantly reduced the sensitivity of our capital ratio. The sensitivities shown here reflect the protection currently in place, and incorporate the effect of actions which have already been taken or are within our control. More can be done, if required.

As I have said before, given our predominant non-EU business footprint, Solvency II is an imperfect fit for Prudential. It, therefore, underplays the strength of the Group, as it excludes sources of real economic value, such as the shareholders' share of estate surplus of [GBP0.4 billion]; the further surplus in the ring-fenced UK with-profit funds of [GBP3.1 billion]; the unrealized gains on Jackson's interest rate swaps of [GBP0.8 billion]; the deduction of GBP1.6 billion of Asian surplus, due to regulatory prudence; and the [GBP2 billion] of economic diversification benefit between Jackson and the rest of the Group.

If we were to incorporate all these items, then our Solvency would materially improve to a level that more closely reflects the true capital strength of the Group.

We continue to manage our balance sheet cautiously. At June 30, the proportion of investment grade holdings in both our US and UK credit portfolios was at 98%. These portfolios are well diversified and subject to strict concentration limits. We continue to prioritize quality over yield, an approach that has been in place for many years and is consistent with our overall philosophy on risk.

In fact, the fact that both portfolios are higher quality, more diversified and with smaller individual exposures means that we are in a better position now than at any point in our recent history to weather credit events.

The balance sheet exposure to product risk is also well managed. In variable annuities, we protect our downside risk with extensive hedges, which continue to perform well. We have updated the charts that show the un-hedged VA cash flows at June 30 and have included them in the appendix slides. These charts compare the net present value of future guarantee fees with the value of future policyholder benefit, which we then stress under a down-rate and a down-equity scenario.

The output, which is summarized on the right, shows that the base position is unaffected by the fall in rates seen so far this year. The down-rate scenario from here does not alter this picture. The down-equity scenario produces an overall negative value, but again, this is not markedly different to the position at the start of the year. In this scenario, of course, gains on existing hedges would turn the number into a positive.

These cash flow projections confirm the ongoing health of Jackson's VA back book. In the [moneyness] has remained largely unchanged since yearend at around 9%.

So in summary, our confidence in our ability to successfully navigate the current market environment reflects the fact that our earnings are high quality and resilient to market cycles, our capital and economic financial resources remain healthy, and our approach to risk management continues to be robust.

So returning to our half-year results; IFRS operating profit was up 6% to GBP2,059 million, equivalent to an annualized return on equity of 24%. I flagged in March that our 2016 earnings would be adversely impacted in the UK, reflecting our reduced appetite for annuities; in the US from the impact of lower yields on spread margin; and in M&G, as a result of net outflows.

These effects have come through as expected, reducing IFRS profit by a combined GBP112 million and will continue to be a feature in the second half.

Our profit improvement in the period was predominantly led by Asia, where earnings were 15% higher, reflecting increased income from insurance business. And by Jackson's fee business, which benefited from stable margins and growth in the large base of variable annuity assets. The half-year results also benefited from an extra contribution to profit of GBP74 million, reflecting the effect of actions taken to improve the UK Solvency, which I will come back to shortly.

While there are a number of moving parts, this first-half picture highlights that our business has the scale, positioning and flexibility to successfully manage through the current cyclical challenges.

I now want to turn to each business in turn. Asia has delivered another excellent set of results, improving all of its growth and cash measures by 15% or more. Our focus on quality delivered a 21% increase in regular premium new business, representing 94% of APE. The result was underpinned by another strong performance from agency, where sales were up 22%, driven by improved productivity.

The strong growth in Hong Kong, Vietnam, Malaysia and China continues to afford us the flexibility to make strategic decisions on a country level. We strike the right balance between protecting our overall long-term economics and short-term sales headline.

New business profit increased at a faster rate of 20%, boosted by favorable changes in country and product mix. The NBP improvement is supported by a 26% increase in the contribution from health and protection business, which accounts for two-thirds of Asia's NBP.

IFRS operating profit and free surplus generation were both up 15%, driven by ongoing growth in the scale of the business and the strong bias towards insurance. At a country level, as Mike has said, we have seen double-digit growth in seven markets, led by Hong Kong, Indonesia and Malaysia.

Eastspring increased assets managed; however, a shift in asset mix meant that revenues were broadly unchanged. Cost control improved margin by 2 points to deliver operating profit of GBP61 million, just ahead of last year.

Finally, underlying cash remittances were higher at GBP258 million, tracking the growth of the book of business.

Now as Mike said, all of the quality drivers which underpin Asia's momentum are intact, which bodes well for our future earnings prospects in the region. Our strategic platforms for new regular premium business, with their high protection content, provides an in-force premium base that is both large and growing. Together with our focus on customer retention, this produces a higher liability base, up 22% compared to a year ago, which includes a sizable insurance risk component.

This forms a stable and highly valuable source of predictable income, both in good times and bad, underpinning the positive performance outlook for our business in the region.

Jackson's results continue to reflect its disciplined value-based approach to managing the business. Sales in the first half were impacted by volatile markets and by the uncertainty which surrounded the Department of Labor ruling. As a result, total VA sales were down 27%, broadly in line with observed market trends.

Elite Access sales were similarly impacted, but were also affected by lower demand from qualified accounts. This product remains the leading investment only VA in the market and drives the 28% non-living benefit mix of our sales.

New business profits fell, due to lower sales and a decline in rates. Nevertheless, the overall margins remain very attractive.

Despite these cyclical headwinds, Jackson maintained the IFRS operating profit at [2015] levels. The contribution from big fee business proved resilient, but was offset by the anticipated effect of lower yields on spread business. Spread margins fell by 27 points, 217 basis points, and if rates remain at current levels we expect this margin to now drift towards the 150 basis point level by 2020.

Jackson remitted another sizable dividend to the Group at GBP339 million. This was lower than 2015 when capital formation was stronger, reflecting the more benign market condition at the time.

Fee income on variable annuity business remains the dominant component of Jackson's earnings. This is driven by separate account asset values which have continued to benefit from net inflows despite the reduction in gross sales in the period.

Combined with a small gain from market movements, the separate account balance increased to GBP138.9 billion, having traded below the start of the year value for most of the first quarter. As a result, fee income was flat compared to last year.

We have extended our analysis of Jackson sources of earnings to now show the profit contribution for each product. This shows that, after deducting direct and allocated costs, profits from fee business increased by 9%, benefiting from lower strain. The increase also confirms what we have previously said, that DOL is a gross sales, not an earnings event.

At a time when asset yields are declining and consumers are becoming more self-reliant, our UK proposition in retail risk-managed products is becoming more popular. Retail sales were 51% higher, with PruFund attracting the lion's share of these sales.

As a result of the onerous Solvency II capital requirements, we have stopped writing bulk annuity business. Indeed, in the current rate environment, the higher Solvency II [trait] has reduced the attractiveness of retail annuities and we have taken steps, starting in July, to scale down our presence in this market.

Our core with-profits and in-force annuity business has delivered stable profits of GBP306 million, in line with 2015.

During the first half of the year, we took actions to support the Solvency position of the UK. These actions delivered a GBP66 million profit from longevity reinsurance transactions, and a GBP74 million profit reflecting the effect of repositioning the asset portfolio.

Our longevity reinsurance program now covers [GBP10.7 billion] of annuity liabilities, which is about one-third of the book. While the value trade-off is appropriate in our minds, these actions will reduce future annual earnings by between GBP10 million and GBP15 million on top of the previous guidance of GBP25 million.

Finally, in line with our normal practice, remittances from the UK in the first half reflected the 2015 with-profit transfer.

The effect of a market-wide retrenchment from equities in the first half, combined with continued withdrawals from optimal income, led to a GBP6.1 billion retail net outflows from M&G in the first half.

I indicated in March that retail business accounted for two-thirds of M&G's total revenue. So the 14% decline in retail AuM was the main driver for the 10% drop in fee income to GBP440 million. Actions on cost mitigated the overall impact on margin to deliver operating profit of GBP225 million, down 10%.

Absent and meaningful recovery net flows the first-half revenue trends will persist for the rest of the year which, together with the usual seasonality on cost, will see the cost income ratio move to around 60% for the full year.

Moving on to cash generation; free surplus after investment in the new business increased by 10% to GBP1,609 million. The life in-force result grew by 14% and was underpinned by the sizable expected return of GBP1,437 million, augmented by positive experience of GBP374 million. The former was dampened by the effect of rates, whilst the latter benefited from UK management actions that I covered earlier.

As you can see in the top right, Asia's in-force momentum provides important support to this metric, and acts as a buffer for the cyclical impacts elsewhere.

New business strain is higher at GBP502 million. In Asia, strain has grown at a slower rate than sales, due to changes in business mix.

The US increase is also mix-related, driven by a higher GIC and lower Elite Access sales. It also reflects the higher proportion of new VA premiums directed to the fix account which was up 4 points to 22%.

In both Asia and the US, the investment in new growth opportunities remains highly capital efficient with returns well in excess of 20% and short payback period.

The new business strain in the UK for 2016 is on the more onerous Solvency II basis. The increase here is driven by retail annuities, despite the modest sales levels, consumed GBP69 million of free surplus, equivalent to 24% of single premiums.

Mindful of the many moving parts this time round, this next slide provides you with some additional details on the movement of the free surplus generation between the two periods. I will leave you to study it at your leisure, but I will draw out a few points.

As you move from left to right, you can see the negative GBP1 million to GBP8 million interest rate effect on this metric, which mostly relates to Jackson; about GBP70 million relates to Jackson. You can also see the positive GBP138 million offset provided by the UK actions, and the additional GBP147 million from our ongoing focus to grow and manage the business for value, which represents the underlying growth driver of free surplus.

You can also see the effect of Solvency II on UK free surplus generation where, in line with our guidance, the expected return from in-force, after amortizing the transitional, was GBP22 million higher in the top row, and where our shift in focus to capital-light products contained the more onerous strain effects of this regime to only GBP31 million.

The negative interest rate effect does not detract from our ability to continue to grow this measure. And as I said at the start, we remain on track to exceed the GBP10 billion cumulative free surplus target for 2017.

The next slide shows how the annual free surplus generation has impacted stock, on the left, and cash on the right. I would remind you that, from this year, the UK insurance contribution to free surplus stock and flow is based on Solvency II.

For the rest of the Group, free surplus continues to be based on local measures as these remain the [biting] constraint. Stock has decreased overall -- sorry, stock has increased overall, driven by the resilient operating performance.

Market effects were more adverse this time reflecting, for the most part, higher negatives in the UK, given the more market sensitive nature of the new regime. After remittances, pre-surplus stock finished higher as I mentioned. Cash, central cash, was also up at GBP2.5 billion.

Completing the overall earnings picture for the period, items outside the operating result have made an overall net positive contribution on EEV and have largely offset on IFRS. In the IFRS table, the negative investment variance of GBP0.9 billion was primarily driven by the asset and liability accounting asymmetry in the US.

This is further accentuated this year as Jackson opted to achieve economic protection against falls in rates by increasing allocations to long-dated treasuries instead of buying more traditional instruments. Unrealized gains on these treasuries are included within the GBP1.1 billion positive shown on the next line, alongside the gains on other fixed income securities. Otherwise, there was no change to Jackson's hedging approach, which remains economically effective.

The net negative investment variance under EEV, which coincidentally is also GBP0.9 billion, mostly reflects the effect of the lower assumed future investment returns on VA M&E fees as, under our methodology, these future returns are actively set.

Given the Group's sizeable non-sterling assets, currency movements contributed positively in the first half under both reporting bases. The effect of adopting Solvency II trimmed GBP473 million off our UK life EEV, reflecting the extra cost of holding higher capital.

The fact that both IFRS and EEV shareholders' funds increased in the period by 13% and 9% respectively is testament to the consistency of our operational delivery and the natural offsets which exist across our businesses.

I summarize on this slide the movement in the Solvency II surplus during the first half of 2016. Our operating performance remains an important and reliable source of capital, contributing GBP1.2 billion to the surplus in the first half. Market effects were negative GBP2.4 billion. Around one-third of this total relates to Asia, reflecting the higher Solvency II risk margin at lower rate. Now unlike UK and European domiciled businesses, transitional relief is not available to us to cushion this effect.

Just over one-third of the market effect relates to Jackson, when the instruments we used to hedge against falls in rates are brought in at book value, which means that the sizeable gains of around GBP0.8 billion made this year have been excluded.

And finally, about one-quarter arises in the UK where lower rates increase the annuity SCR and reduce the contribution from with-profit transfers. At GBP0.9 billion, currency also provided a meaningful positive on the Solvency measure.

As I have already mentioned, we took action in the course of the year to mitigate the adverse effect of lower rates and to improve the sensitivity of our surplus to further market shocks. These included longevity and other liability actions, asset switches, asset duration lengthening, and additional hedging within businesses and at Group.

So in summary, we remain comfortable with the overall capital level. We have the operational and financial growth to mitigate negative market effects, and we are better protected than six months ago against severe shocks from here.

I have provided on this next slide a capital update for our main businesses. The contribution of our Asia operations to the Group's Solvency II surplus has been maintained at GBP5.1 billion, as operating capital generation and currency positives have offset the higher risk margin effect.

However, it is the locally driven free surplus of GBP1.8 billion that remains a relevant measure for cash and capital, which is extremely stable. The US local [stat basis] capital has been impacted by the fall in rates. The permitted practice currently in place means that the offsetting gains on the hedge instruments that we use to protect against falls in rates are not brought into account.

Here, unwinding the permitted practice, which is up for renewal next month, would recapture $1 billion of post-tax hedge gains and restore Jackson's capital to near start of year levels.

In the UK, shareholder Solvency II surplus of GBP2.9 billion has benefitted from the actions that we have taken. With a ratio of 138% Solvency remains within our target range. The UK with-profit Solvency surplus has improved to GBP3.5 billion, equivalent to a ratio of 176%.

I will conclude my presentation by reiterating two key points. The first is, I believe that the most important source of capital is the consistent delivery of a growing level of high quality earnings. This is precisely what we have achieved so far this year, delivering higher IFRS operating profit and improving operating free surplus and Solvency II capital generation.

The second point is the resilience that comes from having a large, economically effective and well diversified balance sheet which is both secure and growing in scale. While we're not immune to the economic and market cycles, we are in a strong position to trade profitably through any environment.

And with this, I will hand you back to Mike.

Thanks, Nic. Appreciate that. Just a little bit on outlook. We obviously feel pretty good about where the Group is and its ability to capitalize on the market and what's going on in this next stage of the cycle. Couple of fundamental reasons; one being strategic.

The behavior of the growing Asian middle class, the behavior of, as someone referred to as the graying middle class in the western markets, and as one getting gray hair I took that slightly personally. But there is a consistency there in behavior, which is this derisking of their financial assets and various concerns directly towards products and services that we provide.

So the footprint we have, the capabilities we have, the services we have, seem to be fitting the major demographic trends. And the more volatility we're getting, the more investors perceive rates harder to live on or asset returns at lower levels and more concerning, the more valuable our solutions consistently seem to be for clients across the globe.

There's been a lot of discussion in the industry about cutting and I want to address this very clearly. This has two issues for us. One, we manage expenses very tightly all the time. Can we get better? Always. Is that a challenge to the team up here? Always. But we're actually investing; investing pretty heavily in this Company. And we view investing in sort of three levels.

Things we do that improve the relationship we have with existing clients, be it service, technology, their access to other products we have, just anything that grows and develops that relationship gets them more likely to buy something, to stay with us longer. Again, to protect the long-term operating earnings we have.

The second area is on scalability. We invest in things that we see improve our marginal costs, improve our capabilities, allow us to do things competitors can't do. That could be in risk, that could be in our asset management platforms, in the life businesses. It's a key element to it because, as we get bigger, we should produce a higher return for our shareholders and we should produce a better product for our consumers. And we're doing both of those, again, at scale in multiple countries.

And the last piece is things we do for innovation, for new opportunities, for new relationships. And that can be anything from a bank relationship, to entering a new market in Africa or Asia, to recruiting a portfolio team for one of the asset managers, be it Eastspring or M&G. All those sorts of things that take us into businesses that we didn't have, or capabilities we didn't have, quickly. M&A in the US and bolt-ons, all of those sorts of things are in that category.

And when we look at what money we've put behind, what capital we're willing to deploy behind the products, the lens is as it's always been. It's on cash payback, it's IFRS-centric. It's on the cash flow signatures; it's on the strain; it's on the interest rate sensitivity.

I want to be very clear. We can get more efficient as a Group, and we'll continue to work on that. But our earnings growth isn't based on us coming up with a material reduction in what we already have, and cutting our way profitability. It's based on growing from here. And again, I want to reiterate; we have more options for capital than we have capital. We could invest more, do more, grow more, if we chose to; we understand the balance required with our shareholders on those metrics.

So what does that look like? How are we using that? What's the discipline of that? Well, we know there's an expectation on the growth, as we do this investment. To do it from an ongoing basis; not one-offs, not we're going to stop and do this for a while and then come back to profitability. We're trying to give you a very high rate of return of growth. We're trying to do that at very attractive returns. The bottom gray box is the return on embedded value.

I'm going to be defensive on the half-year because it bugs me. It's at 14%. 1% of that is interest rates and 1% of that, just to remind you, is front-end loading of expenses in our business model. So that's a little stronger than it looks. But we think these are competitive returns in this market, given where risk-free rates are and alternatives. And again, we think they demonstrate a bit of our scale and our ability to grow at scale.

The other thing I want to hit on just for a minute is, there're a lot of questions in the meetings after full-year results on dividend. Why do we think it's sustainable? Why is it a better dividend if we're not growing at 5% plus the incremental as we did? Where does the confidence come from that? Well, first off, it comes from the fact that, in our view, dividends should be aligned with earnings' growth. Post-crisis, you've seen a lot of our competitors not grow earnings per share and grow dividend per share. And that is not what this management team is going to do, to be very clear.

This is a long-term growth business, growing earnings first and dividends second. And we're doing both as we're growing the value of the Company, so all three of those metrics are moving at pretty effective rates. But the other model, guys, I don't believe is sustainable. If you're growing dividends faster than you're growing earnings, there's only a couple of ways that can end. You either had an awful lot of capital to start with, or you need an event later to recapitalize that.

We don't believe either of those are necessary for us. We're growing earnings in a very strong, predictable manner. And I come back to one of my favorite slides from Jackson days, and certainly from this role. Our earnings in the first half look like they have for the last decade. This is how you should hold us up. We have a responsibility to deliver for you quarter after quarter, but the context of that should be against our own performance. And the context of that should be, how does that growth look? How does that profitability look? How does that cash generation look over the cycle?

The relationships we have with consumers are decades long if we do them correctly. You should get the benefit of that as a shareholder. So I think this is one of the most effective ways to look at it. There's a lot of good slides on the deck, a lot of good slides in the appendix, but if I got one, this would be the one I'd use.

He's smiling. I also like the cash flow testing in the US; that's my second favorite slide. But I do think this is a business where short-term things we can do can increase one of these lines and that's not our objective. Grow growth, grow value, grow dividend.

So let me just finish with a couple of final comments. All this is what we've been doing, all this is -- the team that's been doing it -- all this is the markets we've been in, all the things that you knew before coming in. And again, I think the results on an absolute and a relative level are pretty good. Is there upside? What else could happen? Well, given the Asia numbers and the pace at which they're doubling, any more normalcy in Asia is clearly upside for them.

In the western markets, given our success at gathering assets and managing them, any improvement in market performance, any lighter version of DOL, if that in fact comes to play, is better. A broader capture of assets under that, more [RAA] assets coming to Jackson on that side; not factored in to how we're looking as a business but clearly, part of its capabilities.

The improvements we're making to our UK businesses, scalability, capital-light, positioning them for where that market is going, we see upside there. And again, the general climate for consumers, the blend between the new expectations of what returns are and what expertise they need, is driving them towards the things we're good at and the markets we're good at.

So this is a challenging time; we're not suggesting it's not. But we think we're very well positioned to succeed in what, for a lot of firms, seems to be a very difficult time. And we're growing cash, we're growing earnings and growing dividend.

So I'm going to stop there and then open up for questions, and if I could ask some of my colleagues to join us. We've got a few more in the audience; this is the biggest stage we could find. So we'll hand them the microphone if you need a specific question. Raghu, I'll leave you to the honors of hosting this piece.

So before you ask a question, please do state the name of your firm and your name before firing away.

Jon Hocking, Morgan Stanley. I've got three questions, please; two on the US, and then one on the Group capital sensitivities. First question on the US, just in terms of the net flows you've seen in the VA product in the first half, I appreciate we didn't get the rules on DOL until guess in the second quarter and you're going to relaunch, I guess, in 3Q. How should we think about the outlook for flows for the second half of the year, because we've not really had a normal run rate here, and obviously we didn't get a Q1 update. That's the first question.

Second question, the GICs; I'm slightly surprised you're writing GICs again in size in the US. What is the return on capital of that product, and is this just an expense play, or are you worried about the general account just depleting? That's the second question.

And then just finally on the Solvency II rates down sensitivity; just the GBP2.4 billion that Nic ran through, it sounded like a lot of that was rates and risk margin. But the rate sensitivity you give to the 50 bps down on the right-hand side of that slide looks reasonably small. I just wondered if you could talk through how much of that is assets versus liabilities, and how much of it is risk margin related. Thank you.

So Barry, do you want to take the two US comments, and Nic the Solvency II?

Yes, sure. So the slowdown, it's correct that we did not actually get the rule change until April, but it was highly anticipated. And because there was uncertainty around grandfathering, and where we ultimately ended up with an element of grandfathering, which is helpful, it's not full grandfathering, but because there was uncertainty around grandfathering, the slowdown in production of new business actually started much earlier, back in the second half of 2015. So that's the reason for the flows.

In terms of the GIC, it was opportunistic. This is something we do periodically. Chad, you want to talk about the specific detail, or --?

Sure. So our returns generally speaking, we target about 12% unleveraged return on those types of products. So I think that's generally speaking what we saw. Keep in mind that this used to be a material portion of our overall balance sheet. The ability to actually earn spread has not been there for a while, because financial paper's been relatively pricy, post-crisis, and that's finally started to go away. So we're actually seeing an opportunity now to lever off of our AA rating and actually be able to invest well against that target spread.

Okay. If I come back on the GIC question; what were the GICs, because historically I think you said that you reinvest to make a [grade in] 20% IRR across new business? Is that 12% unleveraged return, is that a return on capital rather than an IRR metric? Or is it the two aren't the same number?

Return on capital, on AA statutory capital.

[So, Nic, do you want to comment on Solvency II]?

Sure. There are other advantages but, as you say, maintaining a stable general account [level] has a lot of benefits across the business; certainly helps with liquidity as well. So we take everything into consideration.

On the sensitivities, you have to appreciate that Solvency II is only very new. The sensitivities we gave you reflected the balance sheet that we had at the time. The balance sheet was not optimized at that point to withstand those sensitivities. We have taken both liability and asset side actions. I referenced one of the liability actions in relation to the longevity, which we'd started doing that in any event in the course of last year.

On the asset side, there's a key thing here, that across our UK business, but also across certainly some of the Asian countries which contribute to the overall Solvency II surplus, we match our assets to the best estimate flows. We don't match the asset to the [1-in-200] cash flow. So when interest rates fall, as they did immediately in the aftermath of the -- on January 1, and then again, you have a mismatch effectively that comes from having shorter assets than the liabilities of the SCR.

So what we've done in the course of the year as we look to optimize the position [as I said] both in the UK and elsewhere, we traded a lot of our excess assets, if you like, and increased their duration. So where did we do that? We did that with some of the excess assets that we had backing our excess capital in the UK. So we switched GBP2 billion of -- extended the duration by something like 15 years. Opportunistically, there was another GBP2.8 billion that we did elsewhere in the Group across the piece, which also gives us economic protection for that.

Other areas is the matching adjustment was quite efficient; we entered the year with a 95% efficiency at the end of -- so there was some ineligible assets. Now, you get to the law of diminishing returns, but we effectively sold GBP400 million of ineligible asset, which gave us some further protection against that.

We did some general asset trading within the matching adjustment constraint, to improve, if you like, the risk and liability -- the risk versus yield position; there was another GBP1.2 billion of that. And of course, we did some more equity hedging, as I said, elsewhere in the Group.

So there's a whole host of actions that, in effect, by June 30 has shifted our matching to not just beyond the best-estimate liabilities, but to be best-estimate liabilities [bust]. Not all the way to the 1-in-200 cash flows, we don't think that's sensible, but enough to bring the sensitivities down.

Andy Hughes, Macquarie. First question, 24% of strain for the single premium for individual annuities?

Yes.

Presumably for bulk annuities it would be even bigger? I know you're outsourcing some of the annuity teams in Mumbai, and I suggest you're probably outsourcing to Mars instead (laughter). That's a huge strain. Is there some improved specific about that? Is there an expense override number, or is that --?

No, there's no expense, and the people that we're transferring is to administer the sizable backlog. So it's what the numbers show; it is what the numbers show. About 17% or so is SCR, the rest is risk margin; 18% to 20%, depending on where the interest rates were in the quarterly [range of] risk margin. We [dulled] our prices as we entered the year, but you come to a point where you run against the constraint of value for money from a customer perspective. So we've moved the pricing as much as we can without giving ourselves problems with the FCA.

Of course, it's without the benefit of any reinsurance. The numbers that we've given you are without that. But even if we [re-run] the numbers, if you assume we reinsure 80% of that at a 4% or so fee, which is a typical fee for these type of reinsurance, you save a little on the strain, you remove the risk margin component, but it still leaves you in the [teens], right?

And you save some capital, but you give away enough of the returns -- it gives you a small IRR pick-up, but is still at, or just above, the cost of capital, which is why we said we have taken action to withdraw. We wrote around GBP27 million of [AP], GBP270 million of single premium. About one-quarter of that comes from open market sales and sales with partnerships. We announced in June that we're stopping selling to the open market, and we've given notice to our partners, effective July 1, that we will not take any annuities.

About half of it comes from the with-profits fund, people vesting, which was reinsured under the shareholder account. We stopped doing that again on July 1. And that leaves us with the guaranteed annuities, which we're trying to find a solution for.

So it is onerous, and that's why [we're still focused], and this is why, in this interest rate environment, you'll see us pull back from retail annuities as well.

Okay. And my second question is about US VAs. Mike, I know you personally love dollar for dollar [withdrawals] and GMIB, and I see some of your competitors had lots of problems in those products. So is that going to impact the competitive landscape for the second half of the year? Are you going to see products on the GMIB side being pulled?

And also on lapse rates; obviously, MetLife brought forward their investigation [of you] and so if lapse rates in your US business come down, it looks like that's probably positive based on your cash flow disclosures. So if DOL drops lapse rates, is that positive? Thanks.

I think on just a general comment, you've got number of experts here in the room on it, so lapse rates, one US competitor wrote off GBP2.1 billion, added GBP1 billion, so there's an element of -- we look at our assumptions at yearend. We don't have and I'm glad we don't have the GMIB exposures, the structures you're talking about. We for a lot of years have stood up here and said that was the wrong product. Wouldn't wish that problem on anybody but some firms have it. I think the bigger issue in the market with DOL. You go from a regulatory standard historically that was suitability of product or you saw in a client suitable for the product suitable for the client, that'd be a good reason for a sell. It's clearly a good reason for a buy. That had all to be justified in the US market; pretty prudent model.

It's basically the same as the reasons why (inaudible) be our best product. It's difficult but you're signing off that this is basically the right product. It'll look much more specific, much more liability. If you're wrong, it's got a different recourse to it.

We think the quality of the VA product that the advisors sell gets even more important, so the performance matters, the flexibility matters. One of the other topics that Andy didn't bring up that we didn't like was the ball control and this has been around. I'll leave you to do your own homework but go back and look at those funds versus the funds we have for our consumers. I've just never been a fan of that model and, again, if you're paying for that and paying for a guarantee, it's always been a question in our mind.

So I think Jackson's got a very good product set for where the market is going and I think, just knowing what some of the broker dealers think, they see that. You're likely to see more concentration of the broker dealers because there's more technical support, more IT support, to go on to these RAA platforms and things. It's a good question during your travels for the heads of the broker dealers, which products are they willing to invest in to have on their platforms, and I think quality will be a major cut. I think we're in good shape on that.

Lance Burbidge, Autonomous. I've got a couple of questions on Jackson as well. In terms of launching of the fee-based version of the product, I wonder, Barry, if you could talk about -- presumably this is attractive for a sales person to sell because they get a recurring fee, which is higher than their commission if the product lasts long enough, but how does that play with the consumers that presumably would be worse off, which is not what DOL was trying to do in the first place?

And going back to something that Mike has talked about in the past which is, as interest rates fall, is there a point where this product, from a guarantee perspective, becomes unattractive from either your perspective or from the customer's perspective? So maybe you could talk about that as well.

And then just on the sensitivity of Solvency II, you, like other companies, don't put negative rates into your sensitivity. I just wondered, Nic, if you've looked at what that does or if there's nothing in that.

The fee-based product will be introduced. The Perspective II version will be introduced in September. What it really does, I think, as much as anything else, it gives an alternative to the broker, to the advisor, that does not want to deal with [BICE and BIC], whatever people call it, that doesn't want to deal with the regulatory complexity of operating under that. So it gives him an alternative that I think, from a compliance perspective, is a little easier.

For a sale that's made that has long duration, there is the prospect that the agent gets paid more. The customer, typically what companies like ours do in order to fund, if you will, the upfront commissions, is you build about 100 basis points in for distribution. So if you accept that the standard fee is going to be about 100 basis points, the customer's really not going to see a material difference.

As we talked before the session, there is the prospect that, as you move towards more fee-based, and if, let's say, 100 basis points gets locked in is the typical fee level, that over time, there'd be pressure on that to get pushed down to 75 basis points or 50 basis points. And that could certainly happen. But I don't think that it's going to disadvantage the consumer in any way. But what it is going to do is give a choice to the financial advisor, which is really important.

In talking with broker dealers, in talking with the wire houses, what we're hearing overwhelmingly is that they will operate under the bp. They accept that; they've gotten their heads around that. Some of them view it as a long-term proposition. Others view it as a bridge and maybe within three to five years they plan to have transitioned completely off of commission-based sales and be totally on fee-based.

So there's no doubt that there's going to be an evolution around distribution in the industry and that, in fact, is what I think regulators are trying to get at because when -- we've spent a lot of time also talking to political leaders, regulatory leaders, people within Department of Labor, SEC, and what comes through overwhelmingly is they think the product is complicated for consumers; the reality is the industry has complicated it. It's really not a terribly complicated product for a consumer to understand. But we need to change the way we talk about it and use different, simpler language which the regulators, they welcome that.

But they love the product itself. They love the idea of a product that provides upside that only equity markets are going to be able to give for the foreseeable future, combined with some level, some modest level, but some level of guaranteed income for life around which someone approaching retirement or entering retirement can plan. So they really like the product, so there's cause for real optimism for organizations who have a track record of being flexible, adaptable and get on the cutting edge of things and that's where I think Jackson is. Does that answer your question?

I think on the interest rate piece, we've got a couple of issues. We have the ability to adjust guarantees down, as you've seen us do and the systems have a flexibility to do that.

And then the accounting point of view, IFRS has a market consistent element in the DRIP rate. The discount rate is defined by the current rate and then the DRIP rate under the equity assumed performance is defined by rate. So you can get quite a ways -- the accounting, as rates get lower, gets quite a ways from what's a reasonable economic set of assumptions.

So that's one of the challenges and that's a discussion as a management team, and with you guys as our investors, how we view that. But at the lower level, the DRIP rate assumptions feel ridiculous that a portfolio with every asset class available basically on the globe can't produce a 100 basis point return sort of thing over 20 years is a bit of a stretch. If you actually believe that, you probably would offer a different product.

So that's where I think you'll see the noise. But again, we're looking at it and we do have the flexibility if we believe the fact of the true economics of lowering the guarantees and we have done that on the withdrawal rate.

Can I answer the question on the floor? Sorry, you're referring to our internal model, which floors interest rates post shocks at zero. So just to be clear, so we start with the deal with the [swap cuts] in the various markets that we operate. We then apply the 1 in 200 shock, in all cases, that stays above zero, and then we apply the 50 basis points from there.

The only place where that drops to below zero is in year one in Singapore and our cash flows in Asia are pretty much across the piece. The average are 10 years plus [out] so immaterial impact. The other place where it drops to below zero is in the UK, between years 0 years today and year five, that's in the minus 50. Our cash flows in the UK are even longer, so we go out 20 years plus. So that impact is immaterial.

[Arjun Vanwin, UBS]. Two questions, if I may? First one on Solvency II capital movements. Firstly, thank you for your detailed disclosure on page 76 on the movements there. The GBP1 billion of underlying organic capital generation represents about 10% of your opening SCR, which annualizes at 20% which is the top end of your peer range. It's also relatively stable compared to the GBP2 billion in 2015, so I'm just looking for a comment on can we use that as a starting point to build forward? There's nothing untoward in that number?

Second question is on Asia in two parts. Firstly, on Hong Kong, obviously, the strong growth has continued there. There's obviously concern around both sustainability of growth and also some regulatory tail risk. So, Tony, if you can give some comments around the growth side, and also particularly on the tail risk, the initiatives from the Hong Kong regulator which I think will help manage that a bit?

On the non-Hong Kong side, we saw obviously some negative growth in this half. That's partly driven -- you've obviously a strong switch towards regular premium. There's some management issues in Indonesia. You've stopped selling Universal Life in Singapore. So I'm just curious, with all these different actions, where do you think -- or are we close to or -- and obviously there's some underlying economic growth headwinds there. Are we seeing some light in terms of where you see that stabilizing and picking up again, given all the different moving parts?

Nic, do you want to take the Solvency II piece and Tony the --?

Thank you. I think your analysis is correct. Clearly, there are some management actions in there; the benefit which you've accounted for them. Look, we have a business that generates capital. When you consider that effectively US comes in on a local basis and you've seen the very strong capital formation from the US that we've reported year after year as the business has grown. There's no reason to believe that its contribution to that number is going to do anything other than what it's done in the past, plus.

Of course, the UK is under Solvency II and we gave you the Solvency II this monetization profiles at the yearend. On an underlying level, you saw GBP300 million or so come through; it's GBP600 million for the year. Okay, we have to trim a little off that. But as we withdraw from -- what works against that is the new business strain which we'll eliminate as we go into the second half and beyond. And of course, we have a positive experience that contributes.

So no, we're confident. In the same way as we are against all the metric that we ask you to judge us against, we're confident that we can continue to have a positive [slow].

Asia. Yes, Hong Kong growth continues strong, up 58% at the half; again, continually driven by Mainland Chinese and correlated quite well with the growth in the agency force which I think is now close to 16,000. In the first half in Hong Kong, we've recruited about 700 to 800 new agents every month, and so that's feeding through nicely.

In terms of the actions from regulators, and there's been a lot of activity in the first half, I think the most interesting ones are declaration put out by the China regulator, CIRC, I think towards the end of Q1/early Q2 that -- they actually put out, I guess to the Chinese citizens on their websites, that was stating if you're going to buy product in Hong Kong, these are a couple of things you need to be aware of.

I view this as good news. Honestly in part, codification of the process, it's okay for the business to continue under certain controls. We did as we've always done; we immediately took those CIRC statements and put them in an additional disclosure at point of sale that the agents and customers had to sign.

Now what the Hong Kong regulator, OCI, has done is taken those standards and created a formal disclosure form that, effective September 1, all Mainland customers purchasing in Hong Kong will have to execute. So based on everything we've seen so far, not materially concerned about the impact and again, and as usual, we're ahead of the curve in terms of implementing those standards.

In terms of the rest of Asia, I think you might have answered the question. Yes, there have been some economic headwinds, probably most notably in Indonesia where GDP has struggled for an extended period of time, and that for us, I think we talked about this in the past, that has flown through into on the coalface.

The consumer sentiment index, which has been depressed -- remember in Indonesia we sell to the middle market, the mass market, not the mass affluent. So household disposable income a little more sensitive than it might be in some of the upper segments, which are typically the people who are actually buying products through bancassurance, not agency. So yes, we have felt some impacts, but we continue to grow the business.

Even though the comparable is not great, if you look at the business, we averaged about IDR370 billion per month of new business in the first half; that's GBP21 million of new business. Margins staying in line and almost GBP200 million of IFRS profit coming through. We also added, on average, 7,000 new agents every month in the first half and I think we acquired 160,000-plus new customers. So 800 new customers a day. I'm a little disappointed that that's not per hour, but we'll get there.

So look at the leading indicators for drivers, for direction, Q2 over Q1 grew by 11%. That's great news. If you look at Q2 over Q1 last year was flat. And the growth coming through APE per active, so agents are actually starting to have a lot more success at point of sale. So I think, when I add on the final macro of Joko's new cabinet, especially with his new Minister of Finance, I think we feel pretty good about maybe the economy is, you guys probably know the economy in Indo better than I do, but it feels like it might have bottomed out, currency is stable, JCI is up 20% year to date, looks a little bit better; as the economy recovers our business will recover.

Oliver Steel, Deutsche Bank. Three questions. First, I'm afraid back to the US; are you able to give us an indication of how much sales from qualifying accounts actually fell in the first half, and an indication of what happened on non-qualifying accounts? And how you see, particularly on the qualifying accounts, how that will develop over the next one/two/three years, if you can?

Secondly, the flows, both at M&G and Eastspring were a bit below my expectations; so Eastspring, can you tell you what's happening there because they were remarkably good last year but less so in the first half? M&G, perhaps an update on particular funds and how much is left in each of these?

And then the third question, perhaps a bit left-field is, you talk about raising the dividend in line with earnings, but obviously, your earnings are benefiting quite a lot from sterling currency weakness and your dividend is paid in sterling, so how are you thinking about sterling relative to your dividend decision?

So Barry, do you want to comment on the qualified accounts first?

Yes. Elite Access, we talked about this outside I think, Oliver, the Elite Access sales from qualified accounts have dropped to essentially zero almost; they've fallen precipitously, as Mike alluded to I think earlier, or maybe it was Nic in the presentation. Most of the broker dealers are now not allowing advisors to sell EA into qualified because they feel like the fee in return for the advantage that you get from the tax wrapper, which obviously you don't get with the qualified, is not a new advantage. So that's been hit very hard.

Overall sales, do we have that number at our fingertips? Qualified; how much qualified is down versus non-qual?

We don't the number at our finger tips in terms of percentage down, but what I would say is that the mix is about the same as it was last year, so you're looking at roughly 65-ish-% is qualified, in the non-EA.

In the non-EA. So EA has been hit very hard. In terms of how we expect it to develop, broadly we think that a recovery is afoot. It's not like it's going to come roaring back in the third quarter or the fourth quarter; I think it's a gradual thing over a series of quarters to return to the historic levels of flows across the industry. But I do think that there is, based on some of the comments I made earlier about the way regulators actually are embracing the product concept and just want to look at distribution, I think is if we're successful in evolving distribution, I think there's a strong prospect that we'll see growth in flows; there need to be.

When you look at the number of baby-boomers that are retiring, the assets that are going to be looking for a home, that fact that interest-rate oriented, our parents and grandparents retired on [CBs] which were paying 10% and 12% interest, but that's not an option. So there are few alternatives for people other than going into equities, and the prospect of a guarantee with the equity upside just, I think, is becoming increasingly appealing. So don't look for instantaneous change in sales levels but, over time, I think there's real cause for optimism.

Oliver, if you think of the problem you're solving for the consumer, it doesn't materially change with the new product structure; you're going to have some assets already in qualified plans rolling over, and you're going to have supplemental savings for retirement. So they may go fee, they may commission, but the fundamental problem we're solving is the same regardless of DOL. I wouldn't, just if I was guessing, I wouldn't think you'll see a material shift in qualified/non-qualified mix in the US.

The exception [effect], that may be in a fee-based Elite Access, you get into a different -- no, even with that you're not going to, I'm just thinking aloud. It should be the same problem you're solving with effectively the same tools, just different optionality in how they're structured, but I think you get the same outcome.

We just happen to have the CEO of Eastspring right here; Guy, you want to comment on flows?

So if we just wind back slightly, second half of last year flows started to slow after China intervened in both currency and stock market. So sentiment in Asia started to shift after a very strong 2014 and, for us, a very strong first half of 2015. You translate it into 2016 and investor appetite for equity product has evaporated largely, its money market, pockets of high yield, all 10 countries that we run money in, in Asia, except two, had positive flow for the first half. So it was confined to Japan where we saw outflow, mainly through dividend distributions in Asia equity income product. And a very short duration product, which is almost money market quasi product in China which management decided to close down, were the two reasons -- were the only two funds that were in outflow in the first half. So eight out of 10 countries, positive flow.

Anne, on M&G, please?

Yes, so I think there's a couple of things to comment on. Two main reasons, I think, why flows have been under pressure over the last 18 months or so. First, was very obviously related to performance, and I think the second biggest driver was around Brexit and uncertainty in Brexit ahead of that. So maybe touching on performance, some challenges over the past 18 months or so. But if you look back over the last six months, over 60% of funds in the retail range are now above medium. So there's a bit of work to do to repair some of the slightly longer-term relative performance, but you can see the direction of travel is right.

And in particular optimal income, which is the single biggest fund there. There we're now seeing, against the European sector, which is the most important sector for that fund, the European share class there, we're now first quartile year to date one year and five years again. So really rebuilt that track record and over three years, again, we're second quartile. So direction of travel very much in the right direction there.

And if you look at the broader context of flows, actually what is quite encouraging is to see that we have got net inflows across quite a few different strategies, both on the retail side and, importantly, on the institutional side as well, in quite a range of different things, real estate, some of the private debt markets and so forth, global macro, multi-asset. So there's a lot of work to do to turn net outflows into net inflows, but we have some of the building blocks already in place there.

I think the Brexit vote, obviously, has relevance in particular to the GBP25 billion or so of assets under management that we manage for Continental European clients. And I think we still don't have perfect foresight in terms of how that's likely to progress, going forward.

So that's the area where we're looking at, focusing really on client service, as we wait to, hopefully, get a little bit more unraveling and visibility on the extent to which, for example, we'll still have European passporting as the Brexit negotiations go down the line. But in the round, that's the picture on that.

And, Nic, do you want to comment on dividend, FX (multiple speakers)?

Dividend, yes. Is it a factor? Yes, it's a factor. Is it more important when we stress test the dividend to the impact on shock? No. Is it more important than when we weigh up the growth opportunities? No, we take the rough with the smooth.

Now that being said, we have always maintained that currency in the parts of the world that we're exposed to, is a tailwind for this business. At the end of the day, over the medium to longer term currency should follow growth in GDP. And if you're operating in countries where GDP's growing faster than the currency in which you're reporting, then over time that will come through into additional [value]. So day in, day out it's a factor but not that significant. Longer term, I think it's vitally a tailwind for us.

Now we've historically hedged dividend payments but we've not hedged earnings, so there is some -- we try to dampen some of that debt.

Blair Stewart, BofA Merrill. Three questions, please. Nic, you talked about the permitted practice in the US; I just wonder if you could expand on that. Is that something that you're looking to explore? And then could you give us what the RBC in the US actually was? I'm thinking if that's a route to getting more cash out of the US; it wouldn't be a results presentation without me complaining about cash coming out of the US (laughter).

Second question on Indonesia, I noticed the profits growth has slowed to 12% growth. Is that simply a function to your investing in the business during a period of time where sales are coming down? I suspect it is.

And thirdly back to management actions, Nic, I was wondering what more can be done, especially to capture some of that surplus that's disallowed. And I'm thinking particularly on the with-profits estate, is there's anything smarter that could be done there. Thank you.

Maybe I'll say one or two things and then pass on to Chad. The permitted practice is something that we carried -- put in place after the last financial crisis. At the time, if you like, the balance of the book was more on the general account, where interest rates up were the predominant risk. The balance of the book is gradually shifting and clearly where interest rates up, the point at which it becomes the permitted practice as a benefit to us is further away. That being said, we've had strong capital formation even with this in place over the years. But it's something that we're looking at. Chad, would you add anything to that?

Yes, I think it's the bulk of the answer right there. So with the permitted practice, we view that as something where interest rates are low enough and we're deep enough in the money, if you will, that there's a pretty good offset up and down with reserves now. So there's logical reason why you might take the permitted practice off and that'll be part of the conversation we would have with the state.

The thing would be it's still -- the reason we've had it on to begin with is were you to have rates move up significantly, then there's going to be an asymmetry between the mark on the swap book and the reserves because the reserves will floor out under stat.

So there's still that tail risk, if you will; if you had a big inflationary environment or something like that where rates started moving back up rapidly, we'd have a disconnect. I think it would be harder for us to get that back on having taken it off. So we wouldn't do so lightly, but it's certainly an active discussion, just given exactly what we're seeing now, a one-sided market against us, even though that economic hedge is in place.

The other thing I would add there is you see the use more of treasuries, as part of the hedging strategy because it's more efficient, less volatile; they're also under stat, [variable] book. So you're getting quite an understatement of the financial strength of Jackson. We haven't ever given RBC other than when we've published at yearend, but it's still in a very acceptable range for us.

Okay. Sorry, there's the 12% growth in Indonesia?

Blair, you're absolutely right, we have been investing in the business. We've learnt, and Mike often talks about, countercyclical opportunities. We've continued to invest; we've expanded new branches; we've hired more agents; we've upgraded our people. And we've invested quite heavily in technology to make the whole process more efficient on the back end than the front end, so obviously that had some impact. I don't know, Nic, if you want to expand on it any further?

Sorry on the with-profit side, we are extremely frustrated that I can't include the with-profits paid into the ratio, not least because we're the only business now that has a sizeable amount. Nevertheless, we had that debate. The rules have been interpreted in the way in which they've been interpreted and we exclude it.

How can we access it? We can distribute it but that wouldn't be what we wanted to do. It's the thing that is providing the working capital and the risk coverage to invest in the way that we do in the with-profit fund which is now attracting the phenomenal flows that we're getting.

There are things you can do from this point, but to get more credit upfront you could monetize the shift, you could hedge the shift further but you're giving up upside. Now, as I said, we will do what we need to do, within reason, but on the with-profit side, it's difficult to bring more credit through onto the ratio.

Nick Holmes, Soc Gen. A couple of questions on the variable annuity book again; I just wanted to follow up on the policyholder behavior assumptions. I know this is an incredibly difficult opaque area, but I wondered if you could try to give us a sense of your level of confidence about your assumptions, not just lapsed but also guarantee utilization. Perhaps, looking backwards, what did the last review tell you and what were you pleased about, what are you worried about?

And then the second question is, I noticed that there was a very large unrealized loss below the operating line. Now this, we all know, is merely a feature of insurance accounting, but I think in your case, quite a lot of it is to do with the hedge program. And I just wondered what is your thinking about communicating the performance of the hedging of your variable annuities.

Are you at all inclined to start reporting an economic type of -- I know that's subjective in itself, but there is one very large European company that does this and it puts it in its operating earnings. Now, is this something that you would be interested in doing in the future, because my sense is that it would be very helpful for people, to understand the true performance of the variable annuity guarantees and hedging. Thank you.

Nick, I'll start with both and I'll lean to a few US colleagues for help. On the hedging, I think there's two elements -- if you remember the New York meeting a number of you were at, and we gave you 11.5 hours everything you wanted to know about Jackson, one of the things that we did there, we showed you some of the internal work we do on cash forecasting. Because of the industry's varying descriptions of metrics, the choices management teams have to define hedging, define risk, part of the reason on those, we've always looked at, if you remember, unhedged, and then we can tell you what the hedge looks like in that shock in terms of value at a given point in time.

Now, we're not getting into a debate of what type of hedge and how is it structured and is that better than Met's or Pru's or Lincoln's, etc. At the various events we'll keep showing you those sorts of metrics because I think, personally, that's the single best way to look at a VA block and how it's going to perform.

If you remember back at that meeting, one of the things we said is, it is not just the PV which, again, that's the easy one for us to summarize for you, but it's also how does a given year's shock look versus your capital [insurance fail for] cash at the end of the day. So those stresses are important and our intention is to keep showing you that. I think that gets you a better look at our hedging than anything -- our non-hedged liabilities.

There was a question that came out of one of the meetings about net amount of risk versus in the money. [If that] risk is a shock event, that's not how our liabilities are structured. It's sort of everybody goes at once sort of model. So for us, it's an incredibly inefficient way of looking at our liabilities. It may fit a life company with pure mortality objectives concentrated in one region. You start to get to is that viable. But for us, with the fact that the guarantee plays out over a decade, shocking it to one day can even structurally occur. They all can't collect.

That's not a particularly good metric. So I do think the cash flow metrics there's some very efficient utilization, is the best way to say if you like the look of what's there. The actual value of the hedges we can mark to market on any given day, and you see some of that below. Some of the below the line this time was interest rate as well, just the severity of the rate movement in the US.

And your other question on policyholder review, there's multiple levels in the US on policyholder review. There's an ongoing intellectual challenge quarterly that is a team that gets together and says, look for any inefficiency, look for any behavior that's changed, look for anything that would suggest that our models are wrong. Look for new combinations.

Anybody on that committee can bring up any combination of variables they want to be run and tested and it's quite detailed. And then we have our formal processes that we follow, as all US carriers do, to review our assumption setting, and we typically do those in the second half of the year.

The challenge you guys have, I appreciate this is investors, is you have firms in the US that have different structures of liabilities and in VA; they have different assumptions. There's a lot of assumptions, to your earlier point, inside our policyholder behavior, it's not just one number. And so when you look at that, you've got to say, do you agree with all the things you're seeing in the marketplace? We've had this discussion with external consultants.

How valid for Jackson is marketplace data that's GMIB-based, or they've gone back and raised the fees, or they've gone back and forced allocation or ball control on versus our clients. It is directionally of some value but we wouldn't build pricing based on it.

I appreciate the -- it's beyond -- it's not just opaque, it's a confusing space that -- but I think Jackson -- you'll see us disclose sensitivities. We've shown before what we think of lapse rates, what our stresses look like in the plan simplifications and we'll continue to give you those.

Mike, can I comment on the reporting as well? Look, I'm aware of what other companies do in this regard, and we thought long and hard, you know our position on accounting disclosure, we thought long and hard about how we best project that. But you hit on two of the key points. The first challenge you run into is what is economic; is it real world or is it market consistent? And there can be different judgments that are applied in that regard, or something in between.

Then you hit the other challenge for which they say do you then depart from US GAAP and bring in the entire guarantee fees into the calculation, or the way you think the reserves, or the element that you brought in on day one, which is when you lock them to produce a zero profit on day one.

We took the view that the more you depart and make judgments from the base US accounting, the less comparable your numbers are with the way everyone else does it. And in the end, we decided that it's better to take that volatility and be more comparable, and answer your question, rather than make judgments that put us out of kilter with the way the rest of the industry is reporting.

So yes, what would we then refer you back to, the cash flow on the one side, and the other thing is the embedded value because ultimately, that does capture all the fees and does factor in the way you move forward, how your hedging program will react. And there are stochastic elements that are run within that to capture some of the variability of some of the assumption. So no, we look at it, but we just thought if we moved it would be just too artificial.

One of today's points that might be interesting to you too is around the policyholder behavior and the validity of the assumptions. And as Mike has said, we're constantly going through the process of reviewing, and we occasionally tweak as a result of that analysis.

But historically, our assumptions have held very, very well, and I would argue that given that we have provided, Mike alluded to this as well, probably the most stable consumer experience of anyone in the industry around these products. And given the scale of our book, I would say that historical data that we produce on our book is probably the most credible data available in the industry.

Alan Devlin, Barclays. Just one question; you mentioned about bolt-on deals I think in reference to the US. I was wondering if you could give some color on what kind of things you are considering, with the Department of Labor is forcing [ED] players potentially out of the market? Thanks.

No, the Department of Labor [doesn't have anything to do] for us for bolt-ons. We wouldn't buy -- we're not looking for VA blocks, for example; we've been pretty clear that that's not something we have an appetite for. What we look for is life, so life policy technical revenue, further diversification, just get a nice [discovering this benefit], there's a lot of things we get.

The last 24 months you've had some interesting new players in the market, private equity, some of the Japanese firms and things and they bid things up, typically what you see is we're in this point in cycle of a little more rational pricing. But you've got some new players, you've got some pension funds, multiple Canadian pension funds have vehicles now.

It's actually a very good liability for a pension fund; if you think about it the cash flow signature of their lives look a lot like cash flow signature of the underlying life span premiums. So there's competition still, but we're looking, we continue to look. For all the years I've stood up here, we're always looking and that was my old role as well.

But if we see something we like we would do it and we're not in it -- there's no obligation or capital allocated specifically for that; it'll be opportunistic as it's always been. But you do own a very low cost platform in the US that can integrate those and produce a return in addition to the return the existing owner is getting, so there's value there.

I've got a couple more questions. I think Nic would be disappointed if I didn't ask [for information of forward] sales in Indonesia, just to double check the persistency in lapses are okay because that would be my main concern. I can see there's not much EV hit from lapses in the numbers, so obviously just double check that.

And the second point on Asia, obviously you're sticking with your growth targets, but Indonesia adds a lot more to the IFRS earnings in the near term than Hong Kong, so is that kind of the mix giving a bit of headwind in terms of growth, going forward?

The third question is on VAs and regulatory change; so AXA hinted they're holding back some cash for potential changes in the US VA rules which may or may not happen. Obviously, they have a big captive and you don't, but they were sounding like they're expecting the VA rules to become more economic, which might lead to higher capital requirements, can you comment on that? Thanks.

No, lapses you're right, you can see the numbers come through. The persistency pretty much across actually the portfolio on the protection side is strong. From time to time, you'll see some spikes; if equity markets aren't performing you see some partial withdrawals, maybe people taking money out. But we've seen nothing different this time round to what we've seen before.

On the impact of Indonesia on the growth rates, I think the answer is that the strength of the platform, don't underestimate the growth in Hong Kong. Yes, a lot of it comes from the success of our with-profits offering [PAL] offering, but the growth within that of health and protection, which as you know has a very attractive IFRS signature, is not to be underestimated, which is we're building some nice momentum in Hong Kong on the back of layering, if you like, more protection business to what was previously there.

Hong Kong was underweight in earnings before, and it's now gradually drifting up to its appropriate weight. So yes, there's some pluses and minuses.

In terms of the regulatory question, Andy, there's always the prospect that regulations evolve over time, but we have always had and continue to enjoy a very positive and productive relationship with Jackson's lead regulator, which is, as you know, the State of Michigan.

There are literally multiple weekly meetings between Jackson and the State and I think they are comfortable a, with the existing regulatory regime under which Jackson operates, and even more so happy with the manner in which we've complied with that regime. So I don't see a huge risk such as you've described.

I just want to thank everybody for a very long session, and appreciate the time and the questions. We'll maybe hang around for a few minutes if anybody want to do one-on-one. Thank you.

If you've missed any part of this call or would like to hear it again, a replay will be available shortly. Thank you for joining today's call.