Prudential PLC (PUK) 2017 Q2 法說會逐字稿

Well, good morning, everybody. Thank you for joining us. Appreciate this time of year, the pretty much full house. It's -- I know there's other places you could be, probably warmer and drier than we've had this week, so thank you.

Starting out. Invite some folks -- introduce some folks here. Mark FitzPatrick is joining us now is our Finance Director, and I think a number of you know Mark from his previous career. But we are very pleased to have him. There're some other familiar faces. You recognize Nic now as Head of PCA. You'll find a completely different attitude. He has things to say about group home office, he never said when he was there. So -- no it's -- some very familiar faces in the room and the teams continues to grow, I think, in capability and talent and certainly, we see the leverage of working together working very well and hope you see that the results in some -- in the Q&A and some of the presentations today.

I'm going to do a quick overview of some of the strategic issues and highlight. Mark is going to walk through the financials. We'll do the normal Q&A we do when we bring all the heads of the businesses, CRO other folks up and let you ask questions directly the other participants so the format I think is well rehearsed. So I'll get right into it.

So I think strong broad numbers hopefully with the effectiveness of our IR team. There's no material surprises in here before you. We think they're good, clean numbers. Extremely pleased with how broad the base of the performance is, pretty much every business we have is doing well right now and through a variety of climates and challenges they're dealing with, so obviously, very happy with the results. Asia, 8 of the 11 markets, in -- up double digits and both IFRS and NBP is a great outcome in the U.S. and our U.K.-based businesses as well, and are having a tremendous first half of the year. I think the quality of the growth is what I'd ask you to consider as we go through the presentation today. We continue to work on this. We think there's -- the health and protection focus in Asia, the long-term relationship focus of our clients globally. So that income is compounding and recurring is a key theme for us. The capital strength I think comes through. And even on the Solvency II basis, we're north of 200 and you see the absolute growth of capital and our ability to generate capital organically, I think is demonstrated in the numbers. And then the -- we hit the -- our 2017 free surplus generation target. We're through it at GBP 11.1 billion. It was GBP 10 billion those of you who haven't paid attention that was due at the end of the year so hit that a little early and we feel like we're doing pretty well towards the others and I'll come back to that in a second.

Not going to spend a lot of time on our strategy today on a global perspective. You know what our view is. We think we are in markets with multiple growth curves in our favor, demographics -- in some of the social issues, wealth, population, GDP, demand, et cetera. I think those are playing through in their results our teams are producing for you across the globe. In the U.S. the team continues to effectively navigate the regulatory climate. There was more news again today, I'll let Barry address that in the Q&A. But again, the DOL's changes for us are directionally a headwinds and pushes into larger asset pools and you continue to see Jackson succeed in that space. And I'll spend a little time today on what we're doing in the U.K. Just raised a few questions this morning. So I'm going to make sure you leave today understanding what we're trying to do here, but this is very much about unlocking additional value and increasing the sales of the capital-light products we have in that space and the number of relationships available to us through the market and increasing capabilities of these firms. So again, I'll come back to that in time.

Let's jump to Asia. I think this epitomizes what we're doing and trying to deliver, growth of scale. One of the early questions I got back with back and looked at some notes from the couple years into role now and some of the early meetings with you all of in the room individually and collectively. And one of the questions at the time, if you remember, was "can we continue to grow at this size"? That was a fair question and came up a number of times, my first months in the role. I think what you see is we very much can and that's across the group. And quite a bit of our growth now is structural. It comes from a number of things, not just the market demographics but the nature of the relationships we have with clients. So the percentage of recurring relationship with clients is where our focus has been in last few years. That growth has come. I think the quality, the breadth of it, we're being more selective in the regions, products, channels. We're doing business and yet we're still getting the absolute growth and you see that with the growth of NBP. So very happy I think with Asia. Asia Hits these numbers and I think demonstrates what we're trying to do very well. The targets are embedded in this, well rehearsed. And again, I think the -- you can see the performance in how we're doing against those objectives, it speaks for itself. But the compounding effect, I think is a key take away from me in the numbers out of Asia.

The other, I think, that just 2 years of much more extensive travel plus in the region there is -- and I know a number of you have been over multiple times, some of you are based there now, it's very early days for us in the industry in Asia. I mean, I think we're on the front end of the opportunity in most of our markets there. So it's still very much about execution, it's about agility, it's about bandwidth. It's attributes of scalability. Can we get the next relationship faster, better experience for the consumer, more profitable for our shareholder, better value to everybody in the stakeholder base, and we continue to focus on that. And you're seeing that and it varies by market, what that feels like and we have to have the local teams in-market, again, of a size and scale that we can execute to the subtleties in each distinct market there. It's a -- Asia is a not a country, I've said this a couple of times. There are massive distinctions in markets, even inside of the countries we do business in, and I think again, you're seeing us execute in a variety of spaces in these markets quite effectively and I'm very pleased with the team. But the GDP growth numbers is -- I think you can look back in a few years aren't the driver of our sales. When you're in the risk-off business, which we are, volatility is a bit of a tailwind. There is a persistency goes up, sales processes extend, but the overall quality of the business improved because people are concerned. The concerns we find in the region tend to be very personal, very much about family changes, very much about political environment, not necessarily GDP bounced up or down 100 basis points. So it's critical. We have the way to access those clients and that same sort of personal interaction, we're doing that 500,000 plus agents, 10,000 plus branches. We continue to add technology to that to create unique experiences for them and to service the clients the way they want. That can be a claims payment on a Chinese account or deposit in a Weibo, WeChat account to an agent face-to-face and a cash transaction if that's what a client wants in another market. So that flexibility, that agility, I think is key for us to succeed and to continue to succeed at scale, particularly if we decide not to participate in elements of markets.

So what's not here, looking back at same period of time? So we've exited a couple of markets. We've exited a channel. We've exited some products. The -- we're out of the Korean Life, Japanese Life market. We're out of the broker independent channel in Hong Kong. We're out of Universal Life for the most part. And we're still getting the growth, still getting the top, still getting competitive market shares, still doing extremely well in the business without following things that we think are not producing as high a value at this point. So we like the -- we have the scale and we've talked about the portfolio effect for years up here. One of the advantages of it is you can choose which markets you participate in, which segments, which channels that you think provide the greatest value at any given point in time. And we've demonstrated we can go in and out of these channels, we've demonstrated clearly we can go and out of products. So I hope it's not viewed as a capability question. It's very much a choice question for us. And we think the best recurring earnings come from the channels and markets we're in. Clearly, the health and protection focus creates the highest level of recurring earnings, which is one of our key ambitions and we like the growth in those. Hong Kong, again, is a good demonstration of this. As we backed off of the independent agency channel, the team there still produced, our agency team up 31, bank up 22. Health and protection, great growth across the region, NBP up 22. We're very happy with how they're doing given what they're asking them not to do. If you think of it in those terms and we think on a relative basis and absolute basis, it's a great performance.

Long term is the key. So our ability to build recurring revenue for you to build relationships that have value to the consumer and produce reasonable value to our shareholders is absolutely the key. Asia's on its third set of objectives of demonstrating this. You'll see we're in pretty good shape to get to the 2017 year ends. We're feeling good about those at this point. And I think directionally, we are unlikely to give you another set of guidelines for Asia because we think at this point, there's enough facts and enough transparency and the IR team was, as our institutional investor, rated them as one of the best. The level of transparency we think we have with you gives you enough metrics where you can see how we're doing here. And the recurring revenue bases alone give you there the guidelines on predicable earnings as a business units. So just to manage expectations there, we think their numbers now stand on their own. Proof of concept, I think, has been met.

Switching to the U.S., interesting market now. So again, demand is still there, clarity around DOLs still a challenge for your compliance officer at one of the major broker-dealers that's really where it's probably felt the most. So again, I'll let Barry elaborate on last night's movements, but a delay in implementation to 2019. We're doing very well in the interim. There's multiple work streams going on here. Jackson captured 100% of the net flows of the industry again in the first half of the year. There's no reduction in demand for a consumer wanting some surety on what their retirement assets will do. If you look at the appreciation of fine you can see again that the product is performing well for consumers. That performs well then for our shareholders. And the capabilities of Jackson, the -- as we enter the RAA type platforms, it's early, early days. We're just -- it's weeks. They're continuing to add new producers who've never done business with us before. In one of the early RIA products, 25% basically of the producers never wrote a Jackson product before. That goes to wholesaling, that goes to product design that goes to trust and the brand insight of the industry. And we see the direction here on the market is additive. We go from a market of a couple trillion of definable assets as we've worked -- said you now at '17 and we think there's tremendous upside as the regulatory clarity lifts. There's no change in demand when you talk to advisers. I was just back in New York and had a chance see a couple of people there that provide retail advice, and you will not be surprised that consumers are concerned about market volatility and saving for retirement and low interest rates. And it's a very well-rehearsed set of retail consumer concerns and Jackson's products address that extremely well.

So they're building for the future, investing with, along with key partners in what the next iteration of fee-based products will look like. That's key work. And I think that is -- and that's -- I got a quality lens on it that the -- that's -- wasn't historically there and given the quality of Jackson's product is -- surpasses the balance of the industry, it's -- the industry, all of these pressures come towards us and create tailwinds. So very good time for the U.S. business, although a very busy one with no shortage of challenges.

And then on the U.K. market. So we're combining M&G and our U.K. business, and got a lot of questions on this already this morning. And let me just give you the industrial rationale why we would do this. There's a variety of things we see in the marketplace, and you, depending on what companies you own in your portfolios or follow, you're seeing around us. So there is a consolidation of fund managers. There is a blurring of the roles between the insurers and the asset management industry and the U.K.-based, again, these firms service clients internationally, not just in the U.K. but U.K.-based providers. And there's questions about sort of market outlook. And we think we have a unique set of skills to unlock even more value in this market. And so we're going to combine the 2 firms, be clear on a couple of things. This is a capital-light, right, firm-strength oriented model where we see growing into a huge market opportunity. And I'm going to jump forward a couple because I think you know M&G well. You know PRU well. The quick summary on these -- so M&G's performance at 7-plus billion of net inflows, right, GBP 5 billion and change of that -- GBP 5.5 billion of that being retail gives you an idea that you see from an industry data the breadth of the performance and the breadth of the portfolio as we can bring to clients. Again, most of these non-correlated with equity markets and that's what the consumer is buying. You've got the PruFund product up 29% in the first half of the year. And let me jump to where I think that's coming from. So there's -- we see 2 addressable markets here, one, we're playing in actively with M&G, the other we're playing in passively, I would say by default a bit, with PRU U.K. and we want to step up our active participation in that.

So on the left, I'm assuming pretty much everybody in the room is familiar with the size of the U.K. asset management business and the firms based here, so not going to spend a lot of time on the scale the opportunity. It's the second largest asset management market in the world, a well-established fact. The products and portfolios we have, again, are in the total return value, high dividend stock, total return bond fund that more of the non-correlated. So and I get the question "what's the impact of passives"? Our average investor isn't looking for highly correlated market volatility, market returns. There's a place for passives to set that along. We are big believers in active management and we think the key is delivering risk-adjusted non-correlated returns to consumers and institutions and we're doing that now and we think we can continue to do that. So that is the, if you will, the risk-accepting side of this chart where a consumer or an institutions say we like it and we're not going to do anything to disrupt that. Any client of M&G's that's already doing business with them, no change in fund managers, no change in service personnel, we're simply going to up some of the quality of services and breadth of product that's available to them and be able to customize more for them. On the right-hand side is where we think the fly is, if you will, in the market. Socially, product-wise, industry-wise. The cash element of the ISA market, 3/4 of the ISA fund still going to cash. There is no way a U.K. saver can retire on the yield on cash, right, to state the incredibly obvious. They can't even keep up with inflation, right. So these pools of funds, 255-plus billion pounds, right, deserves a home, but these clients and we get them, when we get them to the PruFund and other products, are incredibly risk-averse. They're not interested in volatility, right, and they're looking for ways to -- they're worried about preservation of capital. This is the same comment I heard in New York, I've heard for most of my career, I haven't got time to earn it again, right, and it's a -- clients is closer to retirement and they're very, very concerned. The shocking number to me is when we were researching this, the bottom figure, that 46 billion is clients chasing basis points. If you want a measurement of do they understand they need to earn more? Do they understand the yield they're getting isn't successful? I think this is a really interesting barometer. This is clients moving from cash to cash, okay? So think of the yields available in the market. They are literally chasing individual or single-digit basis points. So the need is there. The consumer knows they have the need. There's a clear opportunity here for us to capture more of this market, and I think as an industry to do a better job in this market to get these investors into capital markets, into real property, into real investments. And we know we're doing that. We're backing it out a bit with a range of products and the success we're having with PruFund. And where we're going with this? PruFund is a good example. It's a collaboration between our 2 U.K. businesses, right. It has industry-leading performance. You have -- it has a very, very unique capability to smooth for clients and it appeals to clients on the right side of that graph.

So I say we're doing this from a position of strength. Spend just a minute on this one. Take a look at the operating performance of these businesses. So net flows are excellent, performance returns are excellent. We think we have every tool we need to address both those markets effectively. So no M&A in the horizon, nothing we need to buy, nothing we need to do, okay, we just need to take the investments we're putting in these firms in technology and back-office and digital and service capability and lever it more. So when we invest over a 3- to 4-year period of time in what we expect the firm to be able to do, we don't want to invest twice at the intersect between insurance and asset management. We want that back, that gives us a higher return on invested capital, and again, back to this -- the pace at which the capital is returned, as all those metrics improve. So this is about efficiency, but it's also about meeting a structural demand. And we think it produces a very capable firm in the process.

How capable? Well, here's the breadth, and again, this is -- to this audience, this is I appreciate for some audience it'll be a complex slide, but to this audience it's a fairly simple slide. But the breadth of what the customers want, we produce at scale, okay, the range of products that manifests itself in, we produce. And the channels that are available to the consumer, we have good positions in. The key here is not to overlap, not to compete with ourselves, not to get in on our own way and to think about ways to address each more efficiently, more effectively again, we think we can do that, okay. So we're not solving a weakness here. This is from strength, okay, and we think we can improve the performance of both firms and that we think we can get more to retail consumers, institutional consumers in the process.

So it should produce an at-scale leading savings and investment provider, with quite a broad range of products and capabilities, digital-enabled, capital-light. To capital-light. A little bit of press about are we going to sell down some of the back book, all of the back book, et cetera. The answer is yes. We're going to look at that, okay, and again let me put this in context. So this is a, as I said before, this is a profitable business for us. It is capital-intensive and it is not one that we're currently writing new business in, nor having intention to write new business in, okay. So we're looking at a couple of different things. How do you derisk some of the positions? There's internal and external options both on that. There's clearly from other results presentations as I understand, a number of players who are interested in participating in some of the -- financial interest in these relationships. We're not -- we don't need to create capital, as you see from the amount of capital, 10 points of capital we created just the first half of the year alone. We don't need to meet any sort of targets domestically. These are highly rated firms. But if the market pricing produces a total shareholder return that we think is competitive, we are fine with derisking this portfolio externally or internally, Okay. And the long-term direction is just not a business that we're staying in. So we're going to look at the options there. The total shareholder lens here is important because what I don't -- we're not looking -- these processes take a little bit of time. Let me go back to some of the realities. These are liability transfers. There's quite a bit of work in them. We will keep you posted as we -- in what we see, but at the end of the day, these aren't fast and we're not solving for some short-term cash solution. So I want to just manage that expectation clearly. There's nothing we're doing in either of these 2 businesses that is going to negatively affect our dividend-paying-capability or earnings and we're not looking to materially change that. If we have access capital, you know we always look at that at dividend time. But the first tiers of this, the early tiers of this, actually unwind efficiencies we have. So these are liability transfers, not asset sales, okay. We'll do it at whatever level we think is an appropriate price long term for our shareholders. We're not looking to give anything away, right? And in the meantime, they're profitable, no capital-intensive and the direction of this business is capital-light. I hope that gives enough direction without giving counterparties enough to price from, okay. There's a little bit of balance there. There's lots of different ways we can structure things. I'm not going to comment on that publicly because I want to let the teams a chance to look at what the various options are in the marketplace, and again, we'll come back to you with that, but we recognize that the direction for us in the U.K. is capital-light and that includes examining how we manage the existing capital of the business, and I committed that to you 2 years ago, and we have the team in place and we have the resources in place to do that.

Okay. With that, I'm going to hand it over to our Chief Financial Officer, Mark FitzPatrick. I promised him that you would be incredibly hard on him, given it's his first presentation, he's less than 4 weeks in the role. So please save very difficult questions for Mark for the end of the presentation. But -- With that, Mark, welcome, and it's yours.

Thank you. Thank you, Mike, and good afternoon to you all. It is a great privilege to be standing here presenting to you on Prudential's financial performance within my first month. Timing has never really been my strong point.

My job in preparing for this event has been made considerably easier, not only through the strength of the first half performance, which the CEOs and Nic deserve credit for, but also by the strong reporting processes and the quality of the finance team that Nic has put in place. I look forward to meeting you all over the coming months.

In my presentation today, I will cover 4 main areas: Firstly, an overview of the key financial highlights; second, discussing each of our main metrics and the drivers of performance in the first half; thirdly, I will provide some very early thoughts on my perspectives of Prudential and it's financial attributes; and finally, I will provide some financial commentary on M&G Prudential.

So on to the overview of the key financial highlights. I am pleased to report that Prudential has made a good start to the year, with positive underlying momentum across all of our major metrics and a strong performance from each of our main businesses. Looking at our key operating metrics, IFRS operating profit increased by 5% to GBP 2.358 billion. New business profit was 20% higher at GBP 1.689 billion, and free surplus generation was up 6% to GBP 1.845 billion.

Now we have seen a continuation of positive currency translation effects from sterling weakness, adding roughly 8 to 14 points of growth, together with the benefit of higher asset balances from net inflows and favorable market movements. We would expect the ForEx benefit to moderate over the rest of 2017, assuming currency rates are unchanged. This performance enabled the businesses to remit GBP 1.23 billion of cash to the center. It's supported an increase in our group solvency to GBP 12.9 billion, and have resulted in an increase in EEV per share of 8% to GBP 15.67 at the period end. The first interim dividend of 14.5p per share follows our usual practice of paying 1/3 of the prior year dividend at the half year, and therefore, reflects the 12% growth in 2016.

So from looking at our key financial highlights, you can see that the ongoing delivery of both the growth and cash, together with a robust balance sheet, remains a highly distinctive feature of Prudential's results. As Mike has just mentioned, the results reinforce the structural growth drivers and the choices about where we play. It demonstrates that Asia continues to underpin our growth and shows that through our disciplined execution, the right decisions we've taken about how to play, culminating in a strong yet defensive balance sheet, that means we're well positioned to deliver long-term value.

Moving on to the secondary of my presentation and commenting on each of our major metrics now and their drivers, I will start with group IFRS operating profit. Here, the overarching message is one of continuity and consistency. Continuity of the earnings enhancing trends you would have seen over many periods before and consistency with our strategy, which is well-known to you. Together, this means that we are growing strongly in the areas you would expect us to. Asia continues to lead, making the largest contribution to the growth in the period, with good progress for both the life business and our asset manager, Eastspring. And as this performance shows you, Asia remains on track to achieve its IFRS objectives by the end of the year.

The U.S., through its fee earnings variable annuity business, remains a key underpin of the group result and continues to drive forward momentum. Although our results benefit from good diversification through a wide range of income sources, our businesses remain focused on improving the quality of growth in their earnings. We continue to do this by targeting income from health and protection in the form of insurance margin and from fees on savings and investment business, all of which have increased by 14%.

In contrast spread income has declined, reflecting our on ongoing deemphasis of new business in this segment and the impact of lower earning spreads, primarily in the U.S. as expected. I've analyzed out in the chart on the left the benefit in the prior period from interest earned on a HMRC receipt and the increase in interest costs in the first half of this year following 2 bond issues in June and September last year. The other includes the impact of the reduction in spread margins and the ongoing runoff of the REALIC book in the U.S. Now if you adjust for the interest costs and the tax and the management actions, you'll see that the IFRS growth rate is actually 9%.

At a business unit level, there is clear progress in the underlying drivers of our earnings, building on the momentum in the second half of 2016. In Asia, our life business earnings were up 16%. It continues to benefit from the quality of the in-force portfolio through the compounding effect of successive new cohorts of recurring income on top of a large sticky base and our successful focus on health and protection business. With an increase of 18% in IFRS earnings from the Asia in-force book and a 24% increase in insurance income, the growth of these key measures remains strong. The performance is broad-based with higher contributions to insurance income from 10 countries, evidencing the earnings power of our portfolio of businesses across the region. It is these positive effects reflecting our successful execution that drive earnings progression in Asia today and underpin the outlook for the business over the years to come.

Our asset management business, Eastspring, has had another good half year. Earnings were roughly up 20%, roughly in line with the 21% increase in average AUM, which has benefited from sustained net inflows and positive markets.

Moving to the U.S. Jackson's life earnings increased by 7%. Profits from variable annuity business remained the key driver of growth, more than offsetting the impact of the expected decline in spread margins. Our view on spread margins remain that we expect to see a trend towards 150 basis point over the next few years. Jackson continues to outperform its peers in the VA market while aligning the business for the post-DOL world. The business continues to attract positive net inflows, supporting a growing level of fee-based income through higher separate account values.

Separate account assets increased a further 9% in the first 6 months, which provides good support for earning prospects in the second half of the year. In the U.K., M&G has seen a good recovery in profits, consistent with a 10% increase in average AUM compared to half year 2016. As M&G's cost base is typically higher in the second half of the year, we expect the cost-income ratio at 53% at the half year stage to move towards 60% at the full year, as we've previously guided. U.K. IFRS life profits were roughly in line with last year with core earnings tracking our previous guidance, including a small reduction due to the impact of the prior year longevity insurance. We continue to benefit from high-quality dependable income from our in-force annuity book and the consistency of contributions from our with-profits portfolio. Our U.K. management team has taken proactive actions in the first half mainly relating to capital optimization, although we expect profits from this source to be reduced in the next of -- in the balance of the year. Following our withdrawal from selling shareholder backed annuities, the contribution from new business in the segment is now minimal.

So across each of our businesses, we continue to drive forward the metrics that build the foundations for sustainable, profitable growth. In the first half, we have delivered a standout new business performance across each of our businesses. Although this is only one period, it demonstrates the combined power of our growth engines when we are all moving together. In recent periods, when rates were declining or at lower levels than they are today, we were able to continue to grow new business, evidencing the many levers of growth the group has at its disposal. You can now see that when rates are rising, we have retained a significant upside that materializes from these significant movements. In Asia, we have achieved strong new business across the region with 8 countries producing at least double-digit new business profit growth.

Our focus on quality remains: Regular premium continues to account for 94% of sales, and new business profit from health and protection increased by 19%. These are characteristics of our growth that you are familiar with but to achieve this period after period requires strength of execution, making the right decisions on product and channel, for example, went to grow and went to moderate growth. Having the breadth and diversification of the platform we have in Asia allows us the strategic flexibility and makes for a stronger business.

In the U.S., Jackson has grown sales in a market that continues to see significant disruption from regulatory change. First half variable annuity sales increased to $9 billion from $8.6 billion, partly reflecting the benefit of Jackson's sales of a surrender offer made by a competitor in the period. The strong increase in new business profit, up 23%, reflects improvements in VA mix and also the positive impact of upward movement in interest rates compared to a year ago when 10-year treasury yields were 82 basis points lower. We took advantage of market conditions to arrive to $2.6 billion of institutional business in the first half but would expect lower levels of sales in this line over the remainder of the year.

The U.K. Life operations continue to generate high levels of new business growth, driven by its position in the retirement segment and the attraction for customers and advisers to the PruFund's smoothed multi-asset returns. Following another strong period of growth, PruFund assets now stand at GBP 30 billion, up from GBP 16.5 billion just 18 months ago.

In asset management, both M&G and Eastspring have seen excellent flows with M&G's retail business delivering record net inflows for the first half and institutional also strongly positive. External funds are now at their highest level ever for both M&G and Eastspring, continuing the evolution of these businesses towards higher-margin income.

Turning now to free surplus generation, which was up 6% to GBP 1.845 billion after investment in new business, this is mainly attributed to growth in expected returns from our life in-force businesses, which increased 10%, reflecting the increased scale of the portfolios, particularly in Asia and in the U.S. Experience continues to be strongly positive, although it is -- though it is lower than the prior year, partly as a result of lower levels of favorable spread variance in the U.S. The contribution from management actions in the U.K. is largely unchanged at GBP 193 million compared to GBP 190 million in half year 2016. Consistent with the recovery in M&G profits in the half year and the growth in Eastspring earnings, our asset management businesses have also added to growth in this metric, up 12%.

Our disciplined approach to capital allocation means that we invest free surplus in new business with strong returns and fast payback periods. I included in the appendix on Slide 37 the historical data that evidences this approach in action, where new business profit is 3x the free surplus we invested in the period. This is a very powerful dynamic and underlines free surplus generation across the group.

Asia continues to be the primary destination for investment of free surplus in new business growth, reflecting the strength of the opportunities available in the region. To give some context to the scale and relative returns achieved, over the past 5.5 years, we've invested GBP 2 billion of free surplus in Asia and in return have secured new business profit totaling GBP 7.8 billion. In the U.K., strain has come down by a quarter, reflecting the lower levels of annuity new business.

My next slide shows how the flow of free surplus generation has increased the stock of free surplus to just under GBP 7 billion, while absorbing currency effects and enabling high level of remittances to the center. Total remittances of GBP 1.23 billion are up 10% overall with cash from Asia up strongly, reflecting business growth and positive currency effects. Jackson, which typically pays its full year dividend at the half year stage, remitted cash of $600 million, up 9% on the 2016 total for the full year. M&G in the U.K. have also delivered a higher combined cash remittance, totaling GBP 390 million.

Organic operating earnings continue to drive forward shareholders' funds and absorb volatility from currency and market movements. In the IFRS table, the negative investment variance of GBP 0.3 billion includes mark-to-market effects on Jackson's equity derivative portfolio, which are consistent with the strong gains in U.S. equity markets over the period. Higher equity markets are positive for the long-term economics of Jackson's VA portfolio, and the business remains committed to hedging on economic basis and approach which remains effective. Overall, on an IFRS basis, market effects were broadly neutral and currency impacts relatively modest. With operating earnings in the first half covering both these and the second interim dividend from 2016. The movements were similar in relative scale and driver on an EEV basis, with operating earnings again dominating.

Now as you know, Solvency II is an imperfect fit for our business given our footprint is predominantly outside the EU. Despite this, our Solvency II capital position has improved. The group shareholder surplus increased to GBP 12.9 billion from GBP 12.5 billion at the start of this year, equivalent to a cover ratio of 202%. As I described on the shareholder fund slide, the generation of capital from organic operating experience is the dominant factor in the movement over the period, and is consistent with our previous guidance of around 20 points of underlying capital generation per annum. This more than offsets negative currency effects in the first 6 months of the year and the payment of the 2016 second interim dividend. In the context of operating capital generation, the additional GBP 0.2 billion for management actions is relatively small. Nonoperating and market effects were neutral overall in the first half of 2017 as the benefit of strong equity market growth was offset by the impact of falling yields in Asia and the U.S. and negative marks on equity derivatives held by Jackson to protect against downside stocks. Our Solvency II position have remained resilient to adverse market effects, which you can see from our public sensitivities. Turning to the balance sheet. We remain well capitalized at both the local level in each of our businesses and at the group, as defined by Solvency II. We derive strength in sources of liquidity, with central cash holdings of GBP 2.7 billion and readily available access to further external sources of credit. Our assets continue to be conservatively managed with a focus on quality.

This is reflected in the 97% weighting of sovereign and investment-grade credit with 0 defaults and minimum levels of impairment in the period. The overall scale and quality of our balance sheet continues to underpin our strategy, providing financial security and flexibility through the cycle.

So in summarizing the first half performance, we have continued to grow the business on all metrics while driving improvements in the earnings profile of the group. Asia remains central to our growth prospects, and we we're seeing progress across all our main businesses. On all bases, operating capital generation is the fundamental source for our balance sheet strength and resilience. Taken together, this underpins the positive financial prospects of the group.

Now for the third part of my presentation. I wanted to share some of my very early thoughts, bear in mind, less than a month, about Prudential and some of its financial attributes. And in considering the role in coming in, I looked at what I'd ideally like to see in a company that would give me confidence and optimism in its financial outlook. And for me, this can be distilled into 3 main areas: it's around scale, it's around growth and it's around resilience. But none of these is sufficient when considered in isolation. It is a combination of these that creates a powerful dynamic and optionality. So there's no point in having scale if you're not going to use it to good effect, and scale should provide opportunities for investment and growth. Similarly, top line growth in insurance is easily achieved. To drive growth in areas that improve the quality and resilience of earnings through a capital-light platform requires discipline, a conservative balance sheet and broad diversification. And this doesn't happen by chance. I'm able to see now firsthand that these attributes are the outcome of having made the right strategic decisions, many years of execution and ultimately driving superior outcomes for our customers. And we see the benefits of these continuing to play out in today's results.

So to finish my presentation, I want to add some financial commentary around today's announcements that we're going to combine M&G and our U.K. insurance business. As Mike has already covered, we'll discuss this in more detail in November. The integration of these operations and investments we are making will lead to new revenue opportunities and a leaner, more financially flexible organization with an improved ability to respond to evolving customer needs. It will also accelerate our shift towards a higher quality earnings stream, focused on growth from income from fee-earning assets and with-profits business. While these are attributes we expect to emerge and sustain more fully in the combined entity, it is not to say that they do not already exist to a significant degree in the businesses as they operate today. We will leverage those existing strengths and capabilities, but we'll also invest to position the business for the future, the cost of which will be shared between the with-profits fund and the shareholders.

In addition to anticipated revenue synergies, we expect to deliver shareholder cost savings of GBP 145 million per annum pretax by 2022, mainly as a result of simplification in legacy infrastructure, systems rationalization and some reduction in overlap of shared resources. The related shareholder back investment cost of GBP 250 million are being funded internally. This will not affect remittances as a minimal impact of upfront costs is easily absorbed that will create long-term value, both from savings we have quantified today and from the revenue potential we expect to emerge.

M&G Prudential begins life from a position of individual strength with both businesses well established, high quality and performing well. In combination, we believe the solo entity will be even stronger.

I'll now hand you back to Mike.

Thanks, Mark. So again, I'll finish with my favorite slide. I think we've added yet another bar to what is, I think a highly competitive set of results historically, and again the relationship of these, I think, is one of the key measurements. You do see the increase in the new business profit and as we focus on that, as Mark alluded to, the capital efficiency, the recurrent nature of the profits, quality of what we're distributing and that comes through and that should be a good indicator of future earnings in the group.

The other thing I want to mention here is, what I hope is also obvious is, the management bandwidth and its ability -- it's increasing ability to do all of these things concurrently. We have some very interesting and exciting things going on in Asia. We have some very interesting and exciting things going on in the U.S. We have some very interesting and exciting things going on in our U.K.-based businesses. And as the group has grown, so has its capability as a management team to not only develop internal talent, but to attract external talent to the task in hand. So I have never in my 21 years seen more horsepower in a firm and I think we are more than capable of managing the challenges that are in front of us and unlocking even more value for you.

So with that, what I'd like to do is, I'd ask my colleagues to join us up on the stage, or at least some of them, and we'll take your specific questions about each business unit or whatever you'd like to get into until they're finished.

Do you want to do the honors?

All right. So we'll do the Q&A as usual. So there's a couple of roving mics. So when the mic gets to you, please do state your name and your firm's name and then fire away your questions. So why don't we start with Jon?

It's Jon Hocking from Morgan Stanley. I've got 3 questions, please. Starting with U.K. business. I can see that both businesses have got some fantastic investment solutions. Being critical, I'd argue that if you look at the sort of mouse trap the group has got in terms of the distribution piece, both in terms of direct intermediary platforms and group, it has been the long-term underinvestment that should we expect the group to start investing in that distribution capability? And you mentioned -- made an interesting comment about not investing twice the intersection of insurance and asset management, and there's a lot of commonality there. So wondered whether this is actually a start of some extra CapEx in the U.K. business? This is the first question. Second, on the U.S. I was just interested to get an update from Barry on what happened overnight with the DOL changes and also what the early traction you're seeing on the fee-based VA product is? And then just finally, in Asia, specifically looking at the Hong Kong market, there seems to be a lot of moving parts in the Hong Kong market in terms of the sort of Mainland capital transfer, product changes, what's going on in bancassurance versus agency, et cetera. I was wondering if you could give an update on what's happening there and how Pru is competing in that space.

Okay, thanks, Jon. Good questions. So John Foley, Anne, do you want to talk about U.K. distribution?

Yes, so in the GBP 250 million that we identified, that includes quite a lot of work on improving the capabilities of our distribution teams and networks. So it's not reengineering any of that stuff. It's about making sure that our colleagues in those activities have the right tools to provide the -- to service the customers in a way the customers want to be serviced, so whether that's digital, face-to-face, over the telephone. This is a changing environment and we need to step up, quite frankly. So that's part of where the investment's going. And I think the other opportunity is clearly cross-selling between the 2 distribution networks. So there will be some investment there in terms of cross-training and identifying the opportunities for selling U.K. -- the traditional U.K. products into Europe and vice versa.

Barry on the U.S. DOL update, and then feedback on the early days of the fee-based product, please.

Yes. Jon, so what happened yesterday was the Department of Labor filed with the Office of Management and Budget its intent to delay the full applicability of the fiduciary rule, which was meant to come in on July, 1 2018, and their intent is apparently to delay it until July 1, 2019. So an 18-month delay, candidly a longer delay than we had anticipated, which I think is cause for encouragement, and here's why. If you listen to the commentary that we've heard recently from both the Secretary of Labor Acosta, as well as the new Chairman of the SEC, Jay Clayton, both have indicated a desire to harmonize the definition of a fiduciary, what that means for investors, ensure that investors with both qualified and nonqualified assets are getting the same sort of advice from advisers who are performing to the same standard regardless of the type of asset. I think one of the problems with the outcome we had with the Obama rule as conceived was that it lacked that harmonization, that the SEC who plays an extremely important role in this space was to a degree kind of locked out of the deliberations around that rule change, and so you ended up with a very unharmonious rule. What this will allow is for us to get to the best possible end game really, which is to have a unified approach, unified rule and correct some of the issues which resulted from the lack of the SEC's involvement in the previous rule principally around enforcement. Department of Labor went with the Trial Bar as the enforcement mechanism because they lack within the Department of Labor any enforcement capability. SEC, obviously, has well-established, highly effective and productive enforcement capabilities. So if you can join the 2 together, ideally in our view, have the SEC act as the enforcement mechanism, that ends up being a very positive outcome for the industry, but more importantly, a very positive outcome for consumers as well. With respect to the fee-based business, actually, in a market, and Mike would know this better than I, in a market where change is adopted very slowly, it's actually getting real traction. And these products are very new. But -- and so the numbers, as we sit here today, aren't yet meaningful, but the trajectory of those numbers looks like a moonshot. And that's incredibly encouraging. And as Mike pointed out on his slides, and I think this is something that I hope you'll ponder, we've talked about the fee-based opportunity not just being sort of a better, more transparent consumer approach, but also being an opportunity for us and for the industry to present these products, to have these products sold by a whole new universe of advisers that -- who operate exclusively on a fee basis, and therefore have been unwilling to sell guarantee products. The fact that 25% of the people, in our case, that are selling these products are completely new to us, come from these RIA or wirehouse fee-based platforms I think is proof of our concept about where these products will go, and is a very encouraging development for us.

Okay. And Nic, Asia, Hong Kong, please, update on the market?

You are right, there are a number of moving parts. I mean, I guess focusing on Hong Kong is no different to the approach that we adopt across the region. Really, we're focused on generation of value, not top line growth, generation of value measured by reference to NBP and to some of the other metrics. Now on a headline level, top line level, yes, our sales were down in Hong Kong, 7%. That was largely driven by the -- our conscious decision to de-emphasize broker. Broker contributed around 20% of sales last year. In Hong Kong, it was down to just over 3% this time around. A number of reasons why we did that, not least, brokers tend to sell predominantly savings-based products, par-type products and predominantly to Mainland Chinese customers. Strategically, we want to -- Hong Kong to do more in the health and protection space, and therefore, de-emphasizing that was consistent with that approach. I guess, the decision also had something to do with a -- had a risk-control angle given the various safe capital control measures. And candidly, we rather -- we prefer to redirect and direct our resources to distribution channels that we control more closely. So x broker, Hong Kong was up 12%. Positive contribution both from agency and from bancassurance, both of them grew. And in fact, a number of cases that we wrote in Hong Kong was much bigger than the 12% uplift, high teens. So that was one of the reasons. The other thing that's happening, as I said a second ago, that more focus on health and protection. You see the health and protection content of our sales in Hong Kong increasing. This time last year, it was 19%. In the first half of 2017, it was up to 23%. In fact, in the second quarter, it rose to 24% and that was part of the reason why you see a very healthy increase in the margin coming from our Hong Kong business from 62% a year ago to 77% this year. In fact, in Q4, it was in the -- in Q3, it was in the 80s. So strong health and protection content, which is why the new business profit from agency and bancassurance is rising in the way that was illustrated in the slide earlier. So lots of moving parts. But kind of net-net, you have Hong Kong rising, increasing its contribution in terms of increasing the new business profit up by 15%, retaining a lot of the business that we've written in the past, which is why the IFRS profitability, which is again driven by health and protection, increasing by 44%. In terms of the various developments over the years, really, they have muted, but not eliminated the demand that Mainland Chinese customers have in Hong Kong for all the reasons that we've rehearsed previously. In terms of the restrictions on how they pay for these premiums, all that's happened is that those have migrated into other channels, and therefore, that's not really the restriction that have been imposed are not having an impact on the way people pay. We've said that before, 80% of our customers have local bank accounts. In fact, 70% of our Mainland Chinese customers also have locally issued credit cards. So you can see that they've been able to accommodate that change relatively seamlessly.

Thanks, Nic.

All right. Let's go to Oliver here, please?

Oliver Steel, Deutsche Bank. Another couple of questions for Nic. So the -- if I look at sales in Asia, I think actually health and protection sales are up 19% and I think you said unit-linked were up 18%. So actually, there has -- there doesn't seem to have been that much of a shift in terms of the focus from unit-linked to health and protection. And then when I look at the net flows, unit-linked net flows have almost dropped to 0, not quite, 1% net inflows, whereas health and protection has improved. So I was just wondering, particularly on the unit-linked side, so how happy you are that those flows should be sort of dropping to such low levels? Is that something you're looking to increase again? Or is that just a function of the change in focus in Hong Kong? Second question on Asia. Outside Hong Kong, I mean, great sales and new business profit increased, but the margin seems to have dropped x China. So what's happening there? And then finally, a little question for Barry. The sales progression you've seen this year in VA, I mean, given that you've now got a delay -- a further delay in the DOL implementation, should we just sort of assume that this sort of directional -- the current trend we're seeing in the first half can continue over the second half -- over the next 12 months?

So Nic, do you want to go first?

Okay. So in terms of the product shift or mix that we've seen -- no, you're right, most of what's come -- what's happened is we've seen business move out of par and to a degree some into unit-linked, although a lot of that is India driven. And a lot going into H&P. I think really, what's happening there, an element is more emphasis on H&P across the piece. And on our part, this is a conscious strategic pivot. But the rest is really to do with preferences. Yes, I'd like to do kind of more unit-linked business where we can, but at the end of the day you have to sell what the consumer wants to buy. In relation to -- on flows, typically, what -- we've had a very strong increase in equity markets across Asia. You saw that at the back end of 2016. You also -- that continued into 2017. Typically, what you find when equity markets are performing well is there's an element of profit-taking by unit-linked customers. That tends to take the form of partial withdrawals. So we've seen an increase in those pretty much as we saw back in 2014. Outside that flows remain strong. And particularly on the health and protection, we are holding on to the business that we're writing. Generally, retention is strong across the portfolio and it will vary country by country, but the annualized retention rate is in the mid-90s. So that's what caused that particular effect. As for kind of the margin composition, look, we -- at the half year, I mean, you can ultimately segment this in how the many ways you want. It is a function of geography, it is a function of distribution channels, it is a function of what products we're selling. The -- you've seen a big uptick in the amount of sales that are coming through bank channels. I think that is a positive. Clearly, the economics there are slightly different coming through agency and that is what is distorting the outside-China, outside-Hong Kong position. But the very interesting thing on the banca is that a lot of big businesses that are writing a lot of bancassurance type sales, a lot of that business is moving to regular premium business. And that's kind of a positive effect. So you get some downward drift because it's banca, but then some upward drift within banca because a lot of it is moving to regular premium. So there's a number of moving parts. But at 56%, really, the margin is across the portfolio is the best that we've posted at a half-year stage. When you take the NBP and you express the strain as a percentage of NBP, again, you see that, that ratio of 25-and-change percent, it's one of the best that we've delivered, which is really a testament to it being focused in the right products and having a lot of capital discipline to back that.

And Barry, the sales projection, given you now have an extension on the time period?

Yes. So for all the reasons I've said earlier on, I mean, this is -- it's an encouraging sign around this rule, but it is still a delay and we're now actually almost 2 years from now, we will find out exactly what the final rule is and how it will be implemented. So there is still some uncertainty in that and so that's unhelpful. But I do think that the distributors of these products will take encouragement from the length of the delay, from the rhetoric coming from both SEC and Department of Labor. So we're hopeful that things will start freeing up. We're hopeful, though -- I think some of the potential for improvement in sales results over the next couple of years will come from the hopefully rapid adoption of the fee-based product which I also alluded to earlier. You have some major distributors, Merrill Lynch is an example, who with the partial applicability that came in on June 9th, they ended all commission sales and focused entirely on fee. That's incredibly disruptive to their platform, but ultimately will be a positive thing. So I wouldn't expect some big spring-back. I think the trends that you saw in the first half of the year will broadly continue, but hopefully with some improvement coming in subsequent quarters.

Oliver, I think the other dynamic is if your earning distribution or compliance at one of the major firms, this is a longer period for you not to have an answer for your advisers. So I think you'll see more developed interim positions emerge than when they were thinking it's a few months left. But again, it's early days. Next -- when we're here together in November, we'll give you direct feedback on what we're hearing from all of our key accounts.

Let's go to Greig, please?

Greig Paterson, KBW. 3 quick questions. One is, I was wondering whether we're having any -- some more movement on the CMI tables and moving those and increasing the longevity reinsurance. Is there some kind of restriction there or something that is preventing you doing more movement in that regard? And the second thing is, I know you're talking generally health and protection. I was wondering -- I mean, what percent are you -- probably somewhere in your release, what percentage of your target sales now from health and protection. I was wondering what you can move -- how far you can move the dial there. I mean, can we take another 10 points on that? Or is it that unrealistic or are we hitting some kind of threshold? And the third question, and this is just on the back of -- there's been a fair bit of press speculation around them breaking up the group. You could comment on that. But I'd also be interested in your thoughts. Are there any structural reasons, maybe the U.K. orphan the States or solvency in Asia or whatever that would prevent in your mind a breakup of the group?

CMI tables, John?

So we're still using 14 as you know. There's sort of no issue, there's no underlying reason why we're not changing to the updated tables, Greig. We take a long hard look at this. I mean, we've talked about it on and off over the years. We have a lot of detail that we review. In part, we use the tables, but we also do a lot of our own analysis. We don't want that to be going up and down. This may be a trend that's here to stay, we'll see, and we'll be cautious, and we will remain cautious on it.

Longevity, reinsurance, on that?

Much the same, really. It's just the same with a flip.

Health and protection?

So as a proportion of sales, it's around 27%. There's a slide somewhere in the appendix that covers that, Greig. I think there's a lot more we can do, pretty much across the piece. In some markets, kind of Indonesia, the health and protection component of what we sell is around 74%, and in other markets, it's less than 10%. There's a huge protection gap across Asia, and there's a lot of initiatives to effectively get working with regulators, if you like, and then finance ministries to find ways of closing that, including the way we distribute the product, how we effectively tackle those that are outside the banking-type network. There's a massive morbidity type of gap as well, and part of what I want to do as we move forward is how do we broaden our participation into the wider health space. And there are a lot of initiatives that are happening there within the business, and there's a lot of ancillary services that we can provide around just purely a critical illness or sort of medical payments. As to expressing that as a percentage on the total, candidly, it will depend by how fast the rest grows. But in absolute terms, the potential is significant and that's an area that we put even more emphasis as we go forward.

And then switching to the -- your structural question, Greig, and sort of fencing the other 2. There are no -- there are absolutely synergies within the group, let's be clear. And they make us efficient and effective. That said, we have always said that optionality is something we can manage and we do. I think the biggest source of it is excellent performance. There's an element of -- we could stand up here today and show you each of these companies providing industry-leading returns in their segment and things that gives us the best possible options. The combination clearly has produced a good outcome. The currency diversification clearly has produced a good outcome and we report to you primarily in constant exchange rates. But it's -- we're not trying to take credit for FX, but you see we pay dividend in pounds and the FX is real. And so there's clearly a value to our geographic footprint and diversification risk and political risk and a variety of other things that come from it. But structurally, to directly answer your question, the inter-linkages are valuable, but as we get bigger, manageable.

We go to Arjan there, back?

Arjan van Veen, UBS. Two questions, if I may. Firstly on M&G, you've had on the institutional side the first 3 quarters of last year we had net outflows inflows in the fourth quarter and then continued strongly this year; and then record retail inflows. Can you give more color so where it's coming from? Also within retail whether there's a margin differential, what's coming in? I think one of the slides related to the performance is good as well. Second question for Nic on Asia. China, again, performing strongly, I think it was up to 58%. Second half last year, we saw doubling of the margin from 20 to 40s and that sustained in this half. So it is bit of an update in terms of where it's tracking in terms of Asian cities you're going into and in the trajectory there?

Anne, you want to take the first one?

Okay, first of all, I'll kick off on M&G. I think the -- starting perhaps with the institutional side. Institutional assets by their nature tend to be quite lumpy in terms of when they come in and go out. And when you roll back 12 months ago, we lost one particularly quite large lump of asset. But actually the underlying trend in institutional has been quite steadily positive for some time and you can see that over the longer-term numbers, which I think is really encouraging. And I think what I would also say on the institutional side is our pipeline of awarded or committed, but not yet invested remains really robust, which is again quite an encouraging lead indicator on that. So on that side of things, a mixture largely real estate infrastructure and fixed income in different varieties, but quite a nice spread on that. On the retail side, on the -- what we think of as the wholesale side, what's been really encouraging, the biggest driver of that has been the Continental European flows. We've seen a steadying of the U.K., which has been a tougher market in the open-ended fund business. But that has steadied now over the last couple of quarters. Very, very strongly positive flows from the European side. And what's been really encouraging with that is it's across a range of strategies. So our traditional homeland of things like optimal income and those fixed income strategies, but also really encouraging we've had some fantastic results in some of the multi-asset range multi-asset products as well. So it's a nice spread, floating-rate product as well has been doing really, really well, again, responding to more uncertainty in the bull market. So I think net-net, it's been the Brits, which has been the most encouraging for us as a business overall.

Asia, Nic, in China?

On China. I mean -- thank you for the question. I mean, I think, China is a great story for us. It's really a story of expanding our footprint and improving the quality of what we're doing. So let me say a little about both. So in China, we're now in 15 provinces out of the 31 provinces in the country and 72 cities. That actually gives us access to around 76% of the GDP of the country and around $940 million population. So a very, very big footprint. We've been growing at a rate of around 6 Tier 1/Tier 2 cities a year since 2005. We've commenced trading in Anhui province in 2016 and we've received approval earlier in this year to go in -- to open a branch in Sichuan with 82 million people, it's the fourth-largest province in terms of population. So today, we're present in all 10 of the top 10 provinces that have the highest premium income ranking in China. And we have a very well-balanced business unlike a number of our competitors. Agency is about 55% of our distribution, bank 35%; and then other means, the balance, and well balanced in terms of product set. So health and protection is around 35% of the mix, par is around 49% and then both kind of unit-linked and nonpar for the rest. More importantly, when we're talking about quality, it's the rate at which we are growing the regular premium business, which is up 57% and it's 93% of the APE mix, which is considerably higher than what we're seeing on average in that market, which is in the low 50s. We're growing our agency force at pace. Recruitment has been stepped up, 43%. So we are hiring 2,500 agents per month. The agency force is just over 34,000. It's up nearly 1/3 compared to this time last year, and the total APE that is coming through agencies is rising at 65% with a very, very strong health and protection content. Bancassurance is also growing with discipline. Again, there's a very high content of regular premium business in bancassurance, running at around 83%. It's growing even faster than agency in the first half as we increase, if you like, the number of active outlets that we're using in the country. So it's great progress, and we have kind of great prospects, not least when you consider that the CIRC has set a target for the industry, penetration target of 4% by 2020. Penetration target today is 2.3%. Now were we to achieve that alongside -- were the sector to achieve that, and by 2020, this would create a size of a life and service industry in China that is equivalent to the one that you have in the U.S. today. So the prospects are significant, but we need to continue to grow with discipline, with quality. And really the interesting discovery for me in the last 3 weeks was actually how modern this business is. It has one of the most efficient EPOS systems across our portfolio businesses, 100% of the business that is written today goes -- is effectively autoprocessed. It takes 30 minutes to issue a policy in China, which is must faster than in many of our other operations, 69% is auto underwritten, 50% of our claims are paid on WeChat and 50% of agency queries are dealt with Chatbox. So a lot of innovation taking place in that particular market alongside what's happening elsewhere in our businesses.

Let's go to Andy here.

Andy Hughes, Macquarie. So quick question on the U.K. So PruFund is now GBP 30 billion. Can you split that between accrued bonuses at the year-end and now and just tell us how much is in the earnings from PruFund? And also, on the U.K., I can see there is UDS of GBP 12 billion now. So I was just wondering whether the orphan estate is or the actual estate level? Presumably, it's grown quite a lot. And maybe a question on the U.K. as well. So PruFund GBP 30 billion is bigger than (inaudible) business, almost as big as unit-linked via it's mixed in with the with-profit business. So it'd be quite good to see that separated out in the future. And then on the merger between M&G and U.K., I think quite culturally very different businesses. So I can imagine people at M&G probably get paid more money than those in the Pru U.K. and do very different jobs. So the rationale is from a cultural standpoint, is that going to work? And the second point is, are you saying that you can use M&G brand to sell insurance in and around Europe? Is that one of the ideas that you came up with?

Well, there's a host of questions there. Thanks for those, Andy. So taking the first ones first, I don't have that breakdown, and I don't think -- looking at my colleagues in the room, we'll have to come back to you on those stats and the breakout of PruFund. The -- I guess, the question around the merger, M&G, culture and all of that good stuff and relative remuneration structures and so on, it is something that we will, apart from the remuneration structures, probably talk about in more detail when we do the investor presentations in November. I think both Mike and Mark made the point that we intend to come back to everybody when we do the investor show in November with more detail around what the objectives are, how we intend to do it, who's going to do it and what some of the digital enablers will be and that sort of stuff. So if you don't mind, I'll just reserve it for then rather than doing any sneak previews.

I think it's fair, Andy, to say that we are very clear we do not want to disrupt any relationships that institutional and retail clients have with the current people who're doing business with, people who run the funds, people who research. This is not a combination of 2 fund management companies where you have 2 of everything. So we don't have some of the structural challenges. Are there different cultures? Of course. Part of the success of M&G is respecting the independence of the fund managers and everyone. John's been group Chief Investment Director. He's worked at M&G, has been on their board. Anne's clearly maintaining her current role, and then some. So, we are very aware of protecting what got us here with the team we have and making sure they are on-board. And I met with them all last night after the close of the market, and I think they -- no one wants change, right? Let's start with that. But they understand the upside, the access to more assets, better service, better technology. They see the overlap. I mean, these are all fund professionals, like yourselves. So they know what's going on in the marketplace. So I think we -- it would be our -- it would be an own-goal if we mess that up. We don't -- there's no intent to do that. There's no intent to disrupt any client relationships.

And if I may kind of just add one very small thing to that, which is the guys and girls have been working together for 18 years. So it's not that this is a bunch of strangers, and we've been working on the PruFund, as a classic example at this time. So I think it's not the same as 2 external businesses. It's really not.

Could I get roughly where the estate is currently? If you could just come back on that bit.

So in terms of the estate, it's GBP 8.6 billion in terms of as June 30, and that's a slight increase over the year-end position of GBP 8.4 billion.

Any idea what's too big?

Not today.

At this stage, no.

Can I go to Andy at the back, Andy 2?

It's Andy Sinclair from BofA Merrill Lynch. 3 questions, as usual. Firstly, on the derisking of the annuities business, just wondered if you could give us an update on both the ability and desire of the with-profits fund maybe to take a portion of that annuities business. And secondly, on Indonesia, I just wondered, Nic, if you could give us a quick update on how things are looking there. A fraction of on APE, but just see what the outlook is for the second half and beyond. And finally, apologies if I missed this earlier. Again, on Asia, on Hong Kong, just wondered if you could give us a split on Mainland China versus domestic Hong Kong business and the two.

Okay, so John, do you want to comment on using with-profits to derisk a back book?

Yes, so there are, obviously, a range of internal options that we're looking at with regard to the annuity book. One of them is, clearly, the with-profit fund. There are, as you would imagine, a number of governance issues around that. So it's something that we are in the process of, but there's nothing to report. But is it an option? It could be. I think that's what I'd say on the with-profit fund, Mike.

And then, Nic, if you would, please, on Indonesia and Hong Kong?

Let me just do the Hong Kong one kind of first. So the -- in terms of the half year. On half year, the local business was up 13% and the Mainland China business was down 16%. But clearly, that -- the broker channel was a big contributor of that. If you exclude broker, you take agency and bank assurance together, the local business was up 22% and the Mainland China business was up 7%, okay? So again, there's a number of distortions that are coming through given how significant, if you like, the broker component was. Now, so in Indonesia, just to give you an update, really, the -- so we continued to focus on quality, kind of building out our distribution reach and maintaining agency discipline, expanding kind of the product proposition and increasing the automation of the business. So just a few points on each. So on the distribution side, we continue to recruit at pace. We've recruited an average around 6,000 agents every month this year. The size of the agency force is now 270,000, up 14%. So we are broadening it. And the productivity of the active agencies is increasing as well. So that's positive. In terms of product developments, we've launched kind of a new product in the market at the beginning of the year. It's on -- as charged product. It effectively covers a broader -- the coverage is broader, and it allows access to sort of hospitalization outside Indonesia. But what it does do as people claim against that, then we're able to tweak the premium almost real time. So that's an interesting innovation, and that's getting quite a lot of traction. That's around 14% of our sales in the first half of the year. In terms of automation, a bit like I was explaining elsewhere in our businesses, we've accelerated the way -- the rate at which we onboard agents. It used to take us 50 odd days. That's now down to 5. So there's a 90% improvement in the turnaround time. We are improving the speed with which we ought to underwrite. That's up to 53% in June this year compared to in the 40s last year. And policy delivery, it's not quite at Chinese level of 30 minutes, but it's down from 17 days to 5 days. So there's a lot of, if you like, improvement under the bonnet. Now sales momentum, which I think was your question, you're right, our sales were up 1% at the half year. They were 3% up in 2Q. And June was a record June, which was encouraging to see not least because Ramadan fell in June this year compared to -- in June this year. Looked at sequentially, the sales in the second quarter were up 15% on the sales in the first quarter. And when you drill down and we look at some of the production as we do of the individual GI offices, the really interesting thing is 156 of those are growing in the first half of this year. That's about -- they produced around 55% of the APE in full year '16, only 39 were growing, and that produced 10% of the APE. So some of the things are working. Banca is getting traction, up 20%, with double-digit growth in both our main relationships. And Sharaih, which is the [tackleford] business, which is a story that is developing interestingly in Indonesia in the same way as it's developing in Malaysia. That's up 10%. So there are -- in terms of outlook, we're not -- w have said before, we're not managing the business for the short term. Our view on the attractiveness of this market has not changed when you consider that there's only 18 million in-force policies in Indonesia at a population of 260 million. Really, the opportunity is still there. We have a first-class team and a very first-class CEO in [Jan Srife] and a business footprint that has 339 sales offices in 169 cities. So I think we are extremely well positioned when the uptick comes and it will.

You go to Nick, please.

Nick Holmes with SocGen. A couple of questions on the U.S., if I may. The first, looking at the longer-term strategic direction of your business, clearly, very conspicuous is the wave of IPOs that we have at the moment. Now I just wondered if you could say anything about whether there might be circumstances in the future that would encourage you to follow suit and refocus the group away from the U.S.? The second question is a little bit easier to answer, perhaps, which is on the products that you're selling in the U.S. at the moment. Wondered if you could explain, I don't quite understand your wish to get away from spread products, but you are selling more wholesale. And unless I'm missing something, I think the wholesale is a spread product. And the second question, Barry, is the guarantees on the variable annuities. What sort of guarantee does the market require at the moment in order to get the very good sales that you're getting?

So I'll just do IPO first, if you don't mind and then flip to Barry. So you've seen -- if you go back to Voya, Nick, we've seen 3 firms basically trying to get rid of GMIB books through structural changes. So you've got Voya, which is ING, Met's book and now Access book coming to market. Been setting up here a lot of years, and we've debated from our podium that there is the benefits to consumers, the benefits to shareholders, GMIB versus the guaranteed withdrawal benefit. I think when you look at the cash that's come out of those business and the cash that's come out of Jackson's earnings, I think that we've won that argument, candidly. The -- they're in an interesting spot now. We give a positive commentary to it. I think the -- given the relative performance of the funds, given the in-the-moneyness and given the guarantees they've written, which are income annuity-based, right, not withdrawal-based, they're effectively now interest rate placed, not equity placed. So they have switched the level of risk from what they had previously to a different dynamic, and that may or may not be within the risk appetite that may be they're spinning or not spinning. That's for their podium, right, not this one. But we have a very profitable business, very well hedged, producing a lot of cash flow that fits the group's risk parameters. I think our biggest challenge in the U.S. long term is with any moderate success in the fee-based business, measured in basis points, how do we diversify some of that risk away at some point? What is our own risk appetite for getting regulatory or otherwise? And is there ever a friction point where you need a certain amount of general account to offset your VA guarantees, the liquidity we need, et cetera, for counterparty work. Those are real issues, but they're quite a ways out in the horizon, and there are quite a few parties interested in sharing in that problem if we have that. There's -- I think one of the most interesting things is firms that want to do that aren't interested in hedging it. So there's a variety of structures you get to, but there's quite a few people who would like the fee stream we have, the customers we have and their asset allocations, but again, we think it's priced correctly. We think it's hedged heavily. And we don't think that something we'd be willing to give away. That doesn't mean we wouldn't entertain a conversation with someone about future relationships if the business got bigger than our risk appetite. And on the -- do you want to mention on the book on the -- excuse me, on the fixed side?

So it's not that we don't want to write fixed. It is that in this interest rate environment, I mean, one of the reasons we're so successful is because of the consumer centricity of our products, and we are obviously and should be extremely uncomfortable putting product on the street that we don't really think does a job for consumers. I mean, Mike alluded to how consumers are struggling trying to invest in cash or any interest-sensitive product right now and get a decent return. We're not manufacturing today a particularly competitive product, because we can't see a way to do it that's good for both shareholders and consumers. We are -- we'd be very happy to build the general account. As Mike said, we can do that in different ways. It would be nice to be growing it a little more organically perhaps. You referred to the GICs that we've done earlier this year. Those are opportunistic. It's tactical. It's not really strategic when we see an opportunity to do that, and we're fortunate we've had a couple of good opportunities this year. We did a reasonable amount of that last year as well. We'll continue to do that. But that's -- what we would like to see is an environment where we could manufacture more general account business and grow it organically. I mean, that would be great. The question on what guaranty is required in the marketplace in order to drive these great sales organic? It's not really any different in terms of the nature of the guarantee or the pricing of the guarantee. In fact, if you look at the risk intensity, if you will, of the guarantee we're selling today and the price at which we're selling it, it's probably some of the least risky business we've ever written. We're getting a good price for a reasonable guarantee. What differentiates us massively is the performance of the product from a consumer perspective, and that's driven by investment freedom. We have -- we are -- in terms of full investment freedom, we're really the only major competitor in the marketplace today that offers approaching 150 different fund solutions for a consumer, allows them to choose from many of those funds and wrap the guarantee around it. Most of our competitors are still saying, hey, we've got 150 funds on the platform, but if you want the guarantee, we're going to narrow you down to a dozen [valve] controlled funds, which by definition are going to underperform the market. So if you look at the consumer outcome we've been able to produce, we've got 15, 16 funds on the platform, I think that's about the right number that, over the last 3 years, have produced 7% returns each year for consumers, and those are, obviously, amongst our most popular funds. Our competitors, I think we have one competitor that has one such fund, no one else has any. That's a massive differentiator and the advisers they get that, so they get to consumer centricity of the problem.

Okay. Can you go to Abid?

It's Abid Hussain from Credit Suisse. Three questions, if I can. Firstly, on the U.K. annuity disposals. What criteria would you use in thinking about back book disposal? Could you dispose the entire annuity book there? And if so, what would you use the proceeds for. And secondly, on the merger, could you just provide some color -- more color on the main sources of cost saves and the time line to deliver that? And separately, are there any capital synergies from the merger as well? And finally, on Malaysia, could you just comment on the foreign ownership limit there and the plans there?

Okay. John, do you want to tell everybody what price to accept for a sale?

Yes, so I knew this would happen. Look, as Mike has explained, we're going through a process of price discovery, I suppose you'd call it, in terms of the back book. So on a spectrum, how much? People have asked, will it be all of it? Will it be GBP 5 billion, GBP 10 billion and so on. We're in price discovery. And when you are doing that and you're selling a liability block, you need to be careful about disclosing what your options are. We have internal options, and we think we have external options, and we're going through a price discovery mechanism right now. Now if that ends up in us doing a transaction, then it will be in a -- first of all, that takes a while. This isn't a 5-minute job. It'll have to go through quite a long process and a legal process. And there will -- it will be done, I suppose, given all the questions we've had on the subject in quite a glare. But it's an economic transaction, which means that, ideally, for the -- our shareholders, we won't be disclosing a lot of our tactics and what we're trying to do, what the competitive environment would be, what we have set the price against, so what's the internal versus external. I'm sure everybody would love to know the answers to those questions, and we won't be giving them, because it just gives us competitive disadvantage, quite clearly. So if I can leave that question. In terms of what will we do with the proceeds, I'll be giving it to Mike.

So I think if there are any proceeds, if that's in fact -- we go on keeping the ifs in front of all this, we'd look at it in the context of other capital we create. I think Mark highlighted again just the sheer level of capital generation the group has now with this level of capital velocity is a key dynamic in that. And you know our view on dividends. It's based on earnings. And the earnings are growing, and we'll earn it, stress it and pay it. And if we have excess capital and we can't find something that produces a kind of returns we're getting for you, then we have no issue on distributing it, okay. But this is not -- what I want to make it clear on the earlier points is, firms have done this to create cash to pay dividend, okay. We don't need to do this to pay cash, to create cash to pay dividend, and we're not doing it with that goal in mind. It's more of a cost of capital, reduce -- make the business more capital-light if in fact we like the transaction. So it's a very clear trade-off of do you like the earnings or do you like the price, and we're just not there yet even to comment. But that's -- as far as proceeds, we'd roll it up into our other capital and look at it in the same context we would any other source. Malaysia, Nic?

On share ownership, I mean, can't really provide an update at this time. Share ownership is a fact of life in many other countries -- in a number of the countries in which we operate in Asia. Malaysia, specifically, yes, we have a very successful business, long-established business. And our priorities as we move forward from here are unchanged in the sense of focusing on capturing the great growth that is available to us in the market and creating value for shareholders. But beyond that, really, there's nothing to say at this stage.

And you asked, actually, 2 questions, we didn't get you. So on the merger, the cost synergies are over 3- or 4-year period of time, and again, this is much more about revenue synergies and more efficient investment, I think of it in those terms, the cost synergies we try to get as soon as we can. But at the end of the day, they're probably in the first 3 years, the majority, and I think that's the same statement every CEO has ever talked about cost synergies has ever said. But that there is an element of we want these numbers to be grounded and good execution, good buy-in and not disrupt any business or any relationship we have. So we're not in a hurry to do this. As you see, these businesses are both succeeding right now. So we're not looking to disrupt that. So this isn't a race in any way. And as far as the capital synergies, modest. The local rules about insurers and asset managers and ownership, you won't see a reduction in regulated entities. There's -- we've got to follow the local rules to the letter. And so there -- M&G is -- generously pays out its earnings, and we expect that behavior to continue. And so there isn't material capital synergy as much as there is capability synergies.

Lance?

It's Lance Burbidge from Autonomous. A couple of questions. Firstly, Barry, on Jackson. The dividend was pretty high, obviously. Must have pleased Mike. Is there anything you can say on the NAIC, and I guess, this is an indication that you're not in the slightest bit worried about it. And I think you kind of answered this already in terms of the competition on the VA space. Are you seeing anyone warming up to actually coming back into the market other than, i suppose Lincoln have already made some moves? And then a very quick one on Korea, given what's going on. Could you update us on the sale process?

On -- yes, the dividend was large, wasn't it?

I think, yes, it was particularly large.

Yes, that's meant to be the full year dividend. So it's -- I think it's -- I'll just move on to the next question, how about that? Yes, let me take Korea, that's easy one. Now the NAIC, I wouldn't say that we're absolutely not worried about it in the slightest. But -- because we're staying very closely in touch with the leadership in NAIC, with whom we have very good relationships, and we're monitoring the situation. I'm not sure the story has changed a lot since last time we discussed this one, as it's still -- the work that's being done tapping in very low level committees. A lot of the actual commissioners don't yet have a lot of line of sight because it's kind of grunt work right now. We remain hopeful based upon the conversations we're having at a senior level that this will end up in the right place. Chad is the one that's kind of front and center monitoring this. I don't know if you want to add any color to it, Chad?

Sure. I mean, as Barry said, we still have long ways to go on this. It does look like time lines are extending at the moment. I think [Oliver One's] got a lot of work they still need to get through. So I mean, earliest dates I've heard, for whatever comes out of it is likely to be 2019 or later. That's assuming it sails right through, that it's a reasonable outcome and there's no back-and-forth once we get out of the junior committees. So it's progressing. But yes, again, not a lot of clarity yet in terms of -- they're still doing a lot of testing on various pieces, which we don't really know until we know.

But that's your -- we're not concerned about. The work so far has pluses and minuses. Clearly, we'd like to influence it to be something that's just more pluses for the industry. It will still be interesting to see if they can get any elements of market consistency into a U.S. regulatory framework. I would say I'm skeptical on that. Still not sure I understand the 98 divided -- minus 70 divided by 4 logic. There's pieces of this that the industry can do a better job, there's no question. But it feels like there's a lot of input in the work, and we're participating in it at a very senior level. Korea?

Look, the Korea completed on May 17. So this is the sale of our life business in Korea, yes, and it was in our first quarter trading statement. And the proceeds are safely sitting in an account in Hong Kong.

Do you want me -- let me -- he had one other question that we missed, one other dimension on -- is any one -- are new competitors emerging in the VA space? Lots of fee-based products have been introduced. Almost everybody, all the usual suspects, have introduced fee-based products. So everybody is sort of making the same bet that, that's the direction of the market. No one -- no hypercompetitive behavior, not like we've seen in the past with someone increasing the more lucrative terms around the guarantees and lowering the prices. AIG is very much in the marketplace; Lincoln, Transamerica, PAC, all of the usual suspects. No one, though, becoming particularly vocal about wanting to write tons and tons and tons. It's just we're all kind of moving in tandem.

We'll do one more. Alan?

Alan Devlin from Barclays. Just a couple of questions. Back in your Capital Markets Day in November, you'd mentioned India was a difficult place to operate. One of your peers recently changed his view on India, getting more optimistic. I wondered what your view on the Indian market is? And just more generally, obviously, Asia has been a stellar performer for Prudential, but wondered if Nic had any comments on any different strategies or emphasis on new geographies or distribution and more products in Asia?

Yes, to be clear, we are very pleased with what we have in India. It's very difficult to be -- to go from where we have to be the market leader in India just given the national champion competitive element there. It's one of our most advanced businesses, technology wise. We have a great partner, and their execution has been outstanding. It is a higher-volume, lower-margin business. It was our only, I think, public criticism of it. And I think there's -- to a degree that's still true. You are seeing some material changes on product mix. Do you want to comment on what's...

Yes, I mean, I think, clearly, the valuation that JV is trading at is quite an impressive one, nearly 3.7x EV, which kind of values our stake at around GBP 1.9 billion. So we're pleased with that. I mean, it's -- look, our ICICI and the PRU JV is doing phenomenally well. Again, the -- in the savings space, there are -- I mean, clearly, a balanced distribution, which is good to see in terms of agency and bancassurance. They're looking to broaden that, haven't got a lot of details on that. But -- and the other thing is there are tentative moves in terms of trying to make some difference in the health space, with some interesting products that have just been launched. But there, we're competing against P&C that have both -- that have structural advantages both in terms of the tax breaks that they get and the ability to get some diversification with P&C-type products. So in the market, the business is doing well. But it is -- it remains in the context of PCA. One of the lower-margin businesses compared to -- because of the low H&P content.

In Asia, what's your? Do you want to go through your?

It's clearly a tough act to follow, yes, definitely. Standing really on the shoulders of giants, Barry. Look, I've spent the last 3 weeks, but even before that traveling around the region. It's early days. I've been in Singapore 3 times, the Hong Kong business twice, China twice. I've been to Malaysia. I've been to the Philippines, Vietnam, Indonesia and the rest to come. Met the 4 major regulators, our 2 major partners and spent 5 days with the top 160 agents in -- across our business footprint. Everything that I have seen really reinforces what I've believed and the positive view that I've had both on the opportunity, and we talked a little about that earlier, but also, our ability to capture it. And that ability to capture it is driven by the capability set that we have across the region, strong, very strong performance, culture and a biased -- healthy bias towards growth, absolute focus on product innovation and on increasing the productivity or distribution. And really, multiple programs to digitize the front-end of the business and automate the back-end, and we can talk more about that in November. The priorities really are not new. I've worked with Mike and the rest of the GEC to establish the priorities in the role that I had previously, which included supporting Mike in strategy formulation. And really, the areas of focus are what Mike talked about back in March. It's about how do we enhance our core operations, be it in terms of product and distribution and segmentation of that, be it in terms of any additional services that we surround those products with and how do we demonstrate the benefit of scale in country and across the region on the operations and the IT side. It's about broadening the participation in health and protection, not only the protection, but the medical end. It's about building our Eastspring, and we haven't talked a lot about that, but there are huge opportunities on the asset management side and a lot more we can do, and it's about accelerating China. So all of that ultimately enabled -- want to make sure that it's enabled by an appropriate IT, appropriate technology, appropriate capabilities. I think we have a lot of good capabilities, but we can build those out further and an operating model that is fit for purpose as we kind of move forward in ways of working. So that's the initial assessment. But we are really impressed by the focus on value delivery, which is underpinned by very robust in-force book on the one end and new business coming in and supplementing that. Growth levers, so many growth levers and really whether it's products, country, asset management and life, and lot of headroom to move forward from here. And again, we get an opportunity to give you even more glimpses of that in November.

So with that, thank you very much for your time today. Hopefully, you got your questions answered. If not, we'll be around for a few minutes after and appreciate the time and support. Thank you.