Prudential PLC (PUK) 2019 Q4 法說會逐字稿

Well, good morning, everybody, and thank you for joining us. I know the actual gatherings are getting a little more interesting subject to company policies, so I very much appreciate you being here with us. We've got a full presentation for you today in a couple of different dimensions. 2019, I think, was a fascinating year in terms of global challenges and convergences, health, economic, political, and I think it's an excellent backdrop for how we're positioned coming into this year. So I know it feels like end of the year was a while back, but we want to spend a little time walking you through the successes of the business, its capabilities, its resilience, and then we'll talk a little bit about where we are today.

The structure of the day is I'm going to go through a strategic update, including some of the forward-looking initiatives that we're working on and we've announced. Mark will come up and do a financial update and then, as usual, we'll do Q&A. We have Nic Nicandrou and James Turner, our CRO, joining us from Hong Kong. We have Michael Falcon, our U.S. North American CEO; Axel André, CFO, here with us in the room. Welcome, Axel. And on the phone, we have Chad Myers from our U.S. as well. So we've got the full team available to you to answer your questions in a variety of directions post the presentation itself. So with that, let me go ahead and get started on a quick update on the results.

Again, I think the performance of the group last year in my 26 years is the strongest I've seen, and I would suggest it's -- the environment that we operated in was unique, and the amount of projects, processes, products and things that we accomplished was commendable. I'm extremely proud of the diversity of this success, obviously the scale of the success, and some of the choices that the team has made. I want to spend a little bit of time highlighting that, but obviously, Asia sales and new business were up, which is no small feat given the climate last year; the earnings up 20% to $5.3 billion; our new capital regime, which we transitioned to in Hong Kong, is at 309%, $9.5 billion; Asia NBP up; Asia NBP ex Hong Kong up 29%; and now again, with return on equity metrics still in the mid-20s, very, very strong, on an investment in Asia now that's totaling $7 billion since 2013.

We add to the column on the left the positioning that we're an active portfolio manager of the group's capital and, I think, capabilities, both. You see a summary of where we've chosen to invest, to divest and to partner. Those decisions are all key, I think, to our capabilities and our shape going forward. Today's announcement on the U.S. is the latest on that, but we continued in Asia to invest in distribution and banks, acquired an asset manager. That $7 billion investment I mentioned earlier has now produced a doubling of embedded value. Our -- the percentage of our insurance income is now up to 71% in Asia and doubled the earnings growth across that cycle as well. So very, very broad and resilient returns on the decisions we've made and candidly the products we've chosen not to sell.

The other thing that I'm extremely proud of is inside these businesses now, you see more and more of what we've talked about here for years, which is the attributes of scale. We can add clients faster, more efficiently, better and how they want to be serviced across our Asian marketplaces. So I would define the Asian business now as a combination of growth, diversification and these results demonstrating resilience. The growth is the choice of markets, and it's the choice of channels. It's the choice of consumer products and propositions that you choose to write and those you don't choose to write. Diversification, that's obviously our ability to execute in multiple markets concurrently. I think we're much better. Nic gets a lot of credit for this, for getting the teams to take best practices across geographies. So you're seeing a much faster adoption of some of our agency segmentation, our technology platforms, our operational, our digital cross-region. And that's something, again, that 5 years ago was not in our operating models. And then the resilience is the sheer percentage of earnings now that come from recurring, repeat consumer relationships across the region. And again, it's -- in this sort of climate, that resilience clearly stands out.

Our strategy in Asia is, I think, well-rehearsed with you. The team is responsible to focus on 4 key areas. First, enhance the core. It's been our feeling -- we started with an advantaged position. We need to continue to self-challenge, self-disrupt that. One example would be a complete reboot of Indonesia and its product set and its capabilities, one of our largest businesses just a few years back. We continue to invest in our leadership position in the banca channel. You saw the extension of the UOB relationship last year. You saw entrances in ASEAN, in Vietnam, and other banks. You're also seeing us going into the digital platforms of our bank partners, which, again, are new capabilities for us. Product development, we're refreshing and innovating in a product cycle, 160 new products. Those new products were 16% of new business profits last year. Continuing to focus on the agency force, right, continuing to focus on the quality and the productivity of that agency force and investing in those capabilities as well.

We've highlighted to you why we think health is so critical. And again, in a period of volatile rates, credit cycles, you see there the -- why we think this business is so material. The gap in Asia, roughly $1.7 trillion, $1.8 trillion in need for health products. The team has been phenomenal here, the product innovation, the speed to market, right? The expense management as well as the pricing management both matter, okay? And then now, the digital -- adding a digital dimension to this with Pulse. So this is a proprietary platform. It's an environment where multiple pieces of technology operate together. It's customized for each of the markets, right? We rolled it out in 8 so far and has 1.3 million downloads from what's really a late second half launch. But we continue to work well there. Again, the new products and the group sales now, businesses we weren't in before, Singapore and Indonesia, 13%.

We told you we need to build Eastspring into a bigger, more powerful regional asset manager. So that's been, as we've discussed, investments in technology, infrastructure. Last year, you saw us buy an asset manager in Thailand, right? So expanding markets. Nic was just there for the closing. We anticipate owning 100% of that business soon in a fairly difficult year for asset managers. This is a room, I think, that understands the challenges fully. This is a firm that grew its AUM by 25%, attracted almost $10 billion of external capital, okay? So Eastspring is doing exceptionally well, lots of new management talent, just growing -- and again, we continue to invest in their capabilities and their footprint.

And then finally, China. As I've said many times, we need to succeed in China if we're going to succeed in the region. We continue to add markets. We now have 20 branches in 94 cities. We continue to grow faster than the market, improve productivity of the agency force. We're at 31 bank distribution partners, okay? And the -- we established the WFOE, last year. This business continues to evolve towards the opportunity in China, right? So that's -- it's complemented by its -- the business in Hong Kong and the Greater Bay Area initiative and some of the other more macro issues in Northern Asia. But as a stand-alone, it continues to succeed and continues to get the management focus it deserves.

Okay. Success drivers in Asia. So structural demand, I think, is incredibly well-rehearsed. And I'm not going to tell you the number of Asians that are in the middle class or savings rates or things they -- we've done that for a long time up here with you. We'll take a slightly different approach today. So the structural demands for growth in Asia, right, represent effectively 2/3 of the future growth of the insurance industry in the next decade. Let's just start with that. So if you're not successful in Asia, you're not going to be a growing insurer.

Second market is the U.S., right? So we're -- we've got the markets right. So why can't someone else come in and just replicate what we did by spending more money faster, sort of start with that as a, again, self-disruptor, okay? First off, it takes time, right? The licenses and the businesses we built out, the technology, the distribution partners, right, take decades to build. And we have a long and successful track record of investing in Asia. It also goes to brand and trust of key stakeholders. That's consumers, business partners, regulators, policymakers. All those things enable you to do unique and interesting things. Pulse is a perfect example of that. We needed government support in markets to try something that innovative, okay? And that's a great example of where our history in the markets and our alignment with social and political policy allows you to produce unique outcomes.

The -- you need -- we have an efficient and a U.K.-style with-profits fund in Singapore and Hong Kong, very much like the M&G fund here, our first -- our now ex-subsidiary. Incredibly difficult to build from scratch, very efficient for consumers and the kinds of propositions you can build, very efficient for investors. And its deployment on a capital basis, right, unique to us.

I mentioned Eastspring earlier. Depending on whose metric, we have one of the largest, most successful asset managers. Why does that matter? Accumulation and decumulation products are a part of the maturing demand from these investors and these savers, okay, particularly as yields get lower and lower and lower, okay? We're extremely well positioned to capitalize on that demand and to provide those services that are very high quality.

And then finally, I think when you get into China pre-virus, the dynamics in China were Greater Bay Area initiative, cross-border service, Shenzhen, Hong Kong, how are these markets going to align in servicing clients that move freely between the marketplaces? Those macro issues in Northern Asia, we're incredibly well positioned to take advantage of. We have excellent businesses, right, on both sides. So those sorts of trends, you can't replicate quickly. And we have them. We have the management teams, we have the brands, we have the reputations, the regulatory and political relationships at scale, right, at scale.

The scale also, I think, comes through in the diversification of our success, particularly in times like this, in earnings. So earnings across the cycle, right, you need recurring premium to do that, those existing consumer relationships. It's the quality columns on the right-hand side. How much of your premium occurs if you sell nothing? How resilient is your book through interest rate and equity cycles, those sorts of factors. And we think we've built an incredible business from a shareholder point of view on those metrics. Recurring premium drives our Asia growth, our IFRS profit and our free surplus generation, right? That's a material change from where we were just 5 or 6 years ago.

The renewal base is growing at 16% a year, okay? The new business profit, growing around 13%. We continue to invest in the existing clients, okay, the repeat sales box in the upper right-hand side. I've stood up here many times, and one of the things that's right in front of us is the millions and millions of clients we have with a single relationship, okay? We are getting much, much better at going broader and deeper with our household relationships by bringing new and unique capabilities to their homes that address real risk they have, right? 45% is a -- fantastic. I'd love it to be 100%, okay, but it's a really good outcome given everything else, again, the teams are doing.

Customer retention, we continue to invest in. How do they want to get paid? How do they want to interact with us financially? Do they want statements digitally? What's the experience feel like? How fast do our call services answer the phone? All that sort of back office, not -- less glamorous spend, right, improves the service relationship we have with the consumers. We have excellent service with our consumers now. And that goes to retention, and the retention goes to the growth of those earnings.

On the left-hand side, diversification, you have 8 markets with double-digit growth in new business profits and earnings. You also have 8 markets with now more than USD 150 million of earnings, right? So if there is a slowdown in sales in Northern Asia, and that's the outcome of the year, what we get is further diversification across our footprint, okay? It's a -- this is a very, very resilient model, and the team executing concurrently in all these markets has produced that outcome. How resilient.

So there's the 16% and 13%. The key for us in growing our Asian business is our effective maintaining relationships with consumers who trust us and believe we provide value. That renewal premium compounding 16% is the base of the financial strength of the business, right? Each year, sales are growing, and each year sales are a profitable cohort and an important relations to us financially. But this is where the resilience comes to get -- go cross-cycle if we don't like pricing of a competitor or we have an external event like the virus, right, or a market shock, right? This is the strength of this franchise right here. And you see it in the cash, and you see it in free surplus generation.

Let's drill down to a couple of markets. Hong Kong, $734 million, or earnings, 22% of PCA's overall earnings. This is an excellent example of our playbook and how we execute it. It's also an extreme example of the intensity of the challenges a market can have at once, okay? So effectively, cross-border sales stopped this year. They were -- they slowed through political unrest, and they stopped with the virus and government policy. The business continued to execute well. You see the resilience in the earnings again. Why? Derek Yung and his team, excellent management team. We invested in distribution when things slowed down, so they grew agency by 15% to 24,000. Again, we want to be countercyclical whenever we can. They launched new products, right, pension space, health space, education space. And they grew domestic sales by 8%. Most of their earnings come from recurring premium, which is undisrupted by travel.

Now we also participate socially -- the issues in Hong Kong are different right now than issues in different markets. For example, the virus, if you talk to friends there, is a concern. Unemployment effect on small businesses is a bigger concern. Everyone knows someone with a small business that's being stressed. So we work with the reinsurers, more forgiveness on payment timing, things to make sure that we're alongside our clients in that. This is an incredibly well-run business that's growing through the cycle, right? Earnings there are up 24%. They've adjusted how they're working. The regulators now allowed some sales of products no longer face-to-face. We have the technology to do that digitally. We also have the training of our agents to do that, right? So they'll continue to move forward as -- whatever is being thrown at them from an external environment. It just shows the resilience of the model. They're continuing to add digital. They're continuing to add other capabilities to the business. Nothing has slowed down here, right? But they do have an external strain that they're dealing with, and they're dealing with it, I think, as effectively as any management team in the region.

Indonesia and China. So combined, this is $759 million of our earnings. Again, call it 1/4 of PCA, where it's 37% of the population in the region. So we've got to succeed in both these markets, right? Again, you're not going to be successful in Asia without a major presence in both these markets.

So let's start with China. Pre-virus, a lot of the good macro in China got lost in the noise last year on trade and other issues. I think the one to me that's standout, single most impressive is their almost $10,000 per capita GDP, which is a key goal for the government for a lot of excellent critical reasons. And that's a 39% increase in 5 years in one of the largest populations in the world, okay? That is a staggering number, right? We think post-virus, this market comes back fast. I'm not trying to predict when that changes, but this is an economy that adjusts quickly to external threats and challenges. The Greater Bay Area initiative and other initiatives that were in process were completely disrupted by the current -- by the coronavirus, right? The work didn't go away. It's still in place. And again, those sorts of structural changes cross-border help us. We're looking now where we've applied -- in the process of setting up a data center in Shenzhen, okay, a tech center. We can do that very quickly when things return to normal, as can other businesses, right? Again, there's no -- one of the things about financial services, there isn't a physical plant -- a factory that we're trying to retool up. These are very, very scalable, at-pace operations.

So we think our China business is doing incredibly well. It's growing faster than the market. New business profits up 38%. Earnings up 20% last year. We got 80% of the country's GDP and population under our footprint. I mentioned earlier we keep expanding our bank distribution. We keep improving our agency and scale and productivity. We got a long way to go to catch the size of the agency of some of the larger firms. Measure them in millions. But also, the regulatory direction of travel in China is towards health and protection and some of the products that our teams are used to and focused on our agency model. So we like where we are in this. We'd love to be bigger and faster in China, and they're doing -- we're doing everything we can to accelerate that. But they had another great year outpacing the market, adding new cities, right, and continue to expand the opportunity set in front of us.

Moving to Indonesia. We asked Jens and the team to retool and refresh one of our largest businesses, okay? So 5-plus years ago, 6 years ago, we're standing here, this was a paper-intensive business, right? It was disproportionately cash collection and led by a single product. And it was extremely successful, right? And well-rehearsed from these meetings, the challenges that came with that growth, you now have an incredibly automated back office. You have new distribution, recruiting, segmentation, right, of the agency force, a great agency force, #1 in the country, #1 now in Million Dollar Round Table, create the Elite status, 30-plus percent growth of Elite agents. They're about 1/4 of our APE now. Products across the spectrum from both experience and consumer. The -- with one of their new health products, PRUprime Health, was 40% of APE last year, right?

So this business, it now has digital partners. OVO is the largest digital payment provider in Indonesia. Remember, this is a country where 237 million, depending on the number you use or the data that the -- or the data you're using, million people with about 2 million using credit cards. So there's a big space here for digital payment providers to come in. It's one of the countries that'll have the most impact. So OVO is the largest. We're just launching product with them now. Their payment capability is inside of Pulse, so again giving us the ability to be -- to transact with our consumers, right, that want to on a digital basis in that environment. And now you have 97% of the business submitted last year by Indonesia digital. This is now a highly scalable business with a broad product set, a tuned-up distribution organization, new channels, group product and an excellent management team, okay? But again, the opportunity here is ahead of us, right? This is the start of where Indonesia is going. Penetration of insurance is still about 2.2%. So a long way to go in a country that effectively individuals self-assure, and we've got a number of initiatives to drive our growth in this market.

I was asked to give an update on the virus, and I want to sort of segment this into 3 parts. So our lens on this has been pretty consistent. We look at the impact on our customers, the impact on -- what we're doing in the markets given our scale socially, what's our role as a corporate citizen in that and then how is it affecting -- we get a lot of questions from you, on our staff and our agency force given the sheer size of it.

So from a customer point of view, in every market that we have, any sort of material outbreak, we have scaled up our benefits. As you are probably aware, in most markets, the governments have -- are covering a disproportionate amount of the hospital costs. So we've increased cash coverage in a market like Hong Kong. We've added benefits for -- if you're unemployed in Singapore, if you're quarantined. And they're customized with the demands and the policies in each of the markets we're in. There's been very, very low utilization of those benefits because we've been very fortunate so far that we've not had a lot of our consumers affected by the virus. It's in the few hundreds. And so this has not had a financial impact on us yet.

Socially, aside from making the products' benefits faster, better and available quickly to our consumers, we've also contributed millions in China and other markets to prevention, health, infrastructure, health care support for workers, and I think you would probably hear that from any responsible firm operating in the region, right? So it's our role, at our size and scale, to do those things. We have Prudence Foundation, we have partnerships in China, other things set up to do that, and we can move very quickly to support it.

On the agency and staff side, again, we've been very fortunate we've had very, very few incidents of the virus. But we did fairly early go to our alternative work models, so work at home in some markets, split teams and others, very similar to what I hear from some of the firms in the room on travel policy, on separating key people with similar responsibilities, on how the Executive Committee travels together. All those sorts of things have been in place for a while, and we went to those very quickly. And to date, we've had very, very few incidents of customers or employees or agents having any exposure. And obviously, we're staying very close to the developments.

Some of the most disruptive things, as you're probably well aware, policies around schools and things were -- that we've been dealing with that previously. On political unrest, we're certainly -- those are challenges for us in the markets because that affects working parents, so we've made accommodations for that voluntarily as well as structurally in the organization as well. So we'll continue to evolve our position on this as the issue becomes greater. But so far, I think to be -- it's been a conservative position operationally. Our normal support you'd expect into the communities we're in, and it's had minimal impact on us from a financial point of view or a claims point of view.

Switching to the U.S., if I could. So first, let's talk about what the U.S. did last year and then I'll reference a bit context around the announcement we made today. So one of the keys, the challenges we put to Michael and the team and you heard up here on the review of the strategy was it was critical for Jackson to be able to demonstrate that it could execute on multiple product agendas, right, and multiple financial metrics at once, right? Was this a single product firm? Was that its only niche? Could it demonstrate to external investors and the external market that as the clients' risk preferences change, that Jackson is welcome to compete in those segments of the market? So what you saw was very successful and quick product launches, successful distribution of those products, right, support of those products across the consumer risk spectrum. You saw an expansion of an already strong management team, and you continue to see investment and capabilities added in advisory, fintech and some of the areas that are coming for the future -- for future growth of this business. So -- and again, the numbers stand on their own, an incredibly fast diversification organically. And we've said that, again, the opportunity for Jackson at scale is inorganic as well. But I think we demonstrated to the market that the market wants products from Jackson across a wide range of risks.

Now consistent with the announcement we made today on Jackson, and I apologize for reading this, but it's a -- I learned today there are 3 lawyers in the United States for every 1 doctor, if anyone would like to know, and I understand 1.3 million of them are listening to how I say this next paragraph. Consistent with our announcement today, external capital requires certain prerequisites to be in place. The U.S. team is focused heavily on delivering those. You can see it's demonstrated efficiency and effectiveness on capital management, sales management and risk management. You see regulatory alignment by early adopting the new RBC regime, a more stable, less interest-sensitive regime. We've expanded the management team, increased our operational capabilities, maintained tight management over expenses, and this is designed to manage the growth of distributable operating earnings across cycle. You'll all be aware that given the announcement today, our ability to discuss certain aspects of what we're doing in the U.S. are restricted by regulatory requirements in the multiple jurisdictions where we have listings. Okay. Thank you. It's the first time you guys have ever seen me read. A few of you questioned if I could.

All right. So the key takeaways. Just think back on the year, okay? There are new variables in the marketplace that accelerate all sorts of the challenges we face. And the -- we had multiple markets where -- with political challenges. We had elections in multiple key markets. We had an impeachment in a market. We had changes in political structure. We had protests globally, what was a dramatic movement at the time in rates, right? Very high shape in U.S. equity market, all -- the performance for the group in that setting, I could not be prouder of. I think it shows the mix of businesses strength in very volatile environments. And then the growth in Asia -- and it's easy in these meetings to focus on the financials because that's what we're -- the core reason we're here and what Mark's going to come up and highlight in just a moment. But spend a moment, when you're looking at these materials and talking to our teams and when Nic and James come up in Hong Kong, on the capability difference this firm has now and where we are positioned going into this year, right? We have never been in a better position to capitalize on consumer trends globally and the markets we've chosen globally, okay? And then finally, the Jackson team, the agility, I think the movement in design and structure, managing to 2 regulatory regimes, being one of the early adopters of the new regulatory regime, the build-out of the things that needed to be true for us to say what we said today in the RNS, right, all this was going on while we demerged M&G Pru, okay, and continue to move the shape and structure of this business forward.

So very, very productive, task-filled year where the organic growth of the businesses came from the efforts that you would expect out of the teams we have. So very, very pleased with it. I'm going to turn it over to Mark, and then I'll come back up for the Q&A.

So thank you, Mike, and good afternoon to you all. In my presentation this afternoon, I will address 3 main topics: firstly, the results of our Asia business; secondly, the U.S.; and thirdly, I will provide some commentary on a number of group-related topics.

As you can see on this slide, our 2019 financial performance demonstrates the group's ability to deliver against a challenging market backdrop while executing at pace, including delivering the M&G demerger. The 23% increase in Asia EEV, net of remittances, is a demonstration of the growth potential of our diverse and high-quality portfolio of businesses in Asia. At the same time, our U.S. business has started to deliver on the diversification strategy outlined at our half year results in August.

So on to the first main topic, which is our Asia results. What really stands out in our Asia numbers is the quality and the broad-based nature of these earnings and the balance between the growth of new business and the steady expansion of the in-force book. Now all of these were delivered against a challenging macroeconomic backdrop and political issues in a number of our markets. Asia APE sales increased 4% overall and excluding Hong Kong was 17% higher. The middle of the slide shows the extent of the diversity of our businesses with 6 markets producing double-digit sales growth. In Hong Kong, new sales were 11% lower. And within this, sales from Mainland China were down 21% for the year and 41% in the second half, reflecting lower level of visitors coming to Hong Kong as a result of the protests. However, our domestic Hong Kong business grew 8% in the year, growing by 12% in the second half. Our performance in Indonesia is encouraging and follows a substantial reform of our agency channel and new product launches. Over 2019 as a whole, new sales were up 23% with growth of 41% in the second half, following 4% growth in the first half of the year.

Turning to NBP. Overall, this grew by 2%. But underlying this, our Hong Kong NBP was down 12%, which was broadly in line with the reduction in new sales. Importantly, outside of Hong Kong, our life businesses delivered NBP growth of 29%, and these were well diversified with 8 markets delivering double-digit NBP growth. Following Mike's comments a moment ago, in respect of the impact of the virus, the outbreak has slowed economic activities, and lower levels of new sales in affected markets are to be expected. Year-to-date, we have seen impacts on sales in China and Hong Kong. However, outside of those markets, our major businesses are continuing to see double-digit sales growth.

Over 2019, the embedded value of our Asia businesses increased to $39 billion. This EV growth continues to be driven by the further addition of yet another year of profitable new growth, with $3.5 billion of NBP adding 11% to the opening balance. NBP and 20% growth in post-tax asset management earnings, alongside the in-force result, drove a 19% overall operating return on opening embedded value. The $2.3 billion in-force return includes favorable operating assumption changes and experience variances totaling $0.8 billion, which again illustrates the quality of our business and the prudent assumption basis. This in-force performance and continued focus on capital-efficient, profitable new business contributed to a 13% increase in free surplus generation and the higher net remittance to the group. Within nonoperating and other, we saw favorable fluctuations in investment returns, mainly representing higher bond and equity values in Hong Kong and better-than-expected investment returns in Singapore, Thailand and Taiwan. Note that within our closing embedded value, our Eastspring asset management business is carried at its IFRS net asset value of $1.1 billion, while our share in ICICI Pru in India had a market value of around $2 billion, significantly above that in our embedded value.

2019 was Eastspring's 25th anniversary year and also a very strong year across all of its key metrics, characterized by balanced, high-quality growth. Third-party net flows reached $8.9 billion with Asia Life flows also up strongly. FUM increased to $241 billion, and operating profit was up 18% to $283 million. So we are pleased with both the organic and inorganic growth of Eastspring, as evidenced by the acquisition of TMB Asset Management in 2018 and more recently Thanachart Fund, which added $7.5 billion of AUM. We believe that Eastspring is strongly positioned in an attractive market and that we saw strong investment performance with 60% of funds in the top 2 quartiles, good balance between equity and bond mandates and third-party inflows were positive in our retail and institutional businesses with fixed-income products accounting for the majority of net flows. Flows for the early part of 2020 are continuing this trend. What was also important to me is that these higher asset levels and the underlying investment performance are also accompanied by an equally robust financial performance. Operating revenues before performance fees increased by 14%, and our focus on operating costs resulted in a smaller 8% increase. This positive operating leverage led to an improved cost/income ratio of 52%, which supported the 18% increase in IFRS operating profit.

Turning now to an IFRS lens. Our life insurance result again reflects our ongoing focus on recurring premium health and protection products and the associated continued growth of our in-force business. This contributed to a 12% increase in renewal premiums to $19 billion and, in turn, a 14% increase in life IFRS operating profit. And at a business level, you can again see our track record of long-term investments continuing to deliver. We are generating very solid and broad-based growth from multiple businesses operating at meaningful scale. We now have 8 businesses delivering operating profit of $150 million a year or more, 8 life operations delivering earnings growth of 10% or more, and 5 of these had growth of 20% or more. And this is perhaps best exemplified by Hong Kong, where the in-force resilience was clearly evident with a 24% increase in operating profit notwithstanding a more difficult new sales environment. In Indonesia, the team are making good progress to drive a return to growth. However, this is a work in progress, and these improvements will take time to convert into IFRS profit.

In conclusion on Asia, we're very pleased with the financial and operating performance of the business in 2019. We believe this demonstrates the scale, resilience and quality of our diverse portfolio and the power of our focus on renewal premium life insurance business and our high retention levels at over 90%, which underpins growth of the in-force earnings even in periods of more challenging new sales.

I will turn on to my second main topic, which is the performance of the U.S. business. So some of the headline numbers are driven by market movements, regulatory impacts and accounting asymmetries. Notwithstanding this, the underlying position is that this is a resilient business that is well positioned in a market where there is a growing customer need. By way of context, in 2019, the S&P 500 was up 29%, and the U.S. 10-year treasury yields fell 80 basis points. Consequently, from an economic perspective, our separate accounts performed very strongly, returning 24%. From an IFRS result perspective, favorable DAC accounting effects boosted our reported IFRS operating profit, while negative marks on hedge positions, decreasing yields and accounting asymmetries, depressed the overall IFRS result.

Breaking that down, there are 3 key drivers of the IFRS operating result. Firstly, fee income was effectively flat. This was due to a relatively stable average separate account balance compared with 2018, which is a function of the particular path of the markets over both years. Although we had a favorable starting point going into 2020, given market movements year-to-date, much of the Q4 market uplift and the benefit in the 2019 year-end separate account balance has since unwound. Secondly, spread income fell. This results from lower investment asset yields and lower swap income. The spread margin was also reduced by a full year's consolidation of the assets acquired with the John Hancock transaction in late 2018. At half year, you will remember I indicated I expected the spread margin to trend towards 100 bps based on 30 June 2019 interest rates of 201 basis points. During the year, the team actively repriced products to mitigate some of the impact of the overall reduction in rates and have continued to do so post year-end. Given current market conditions, reinvestment rates on the portfolio and reducing swap income, I expect the total spread margin to continue to compress further. Thirdly, at an operating level, the 24% separate account return was well ahead of the 7.6% assumed within the DAC mean reversion calculation for 2019. This drove favorable DAC deceleration of $280 million, and I've included a slide in the appendix providing you with more details on the associated accounting mechanics.

While collectively, these factors, together with the negative short-term fluctuations, led to an IFRS loss after tax of $380 million, the same interest rate falls have led to gains on bonds and an overall increase in Jackson's shareholder equity in the period to $8.9 billion. By way of a reminder, we hedge the economics and accept the accounting volatility that may result in the IFRS numbers. In particular, when increased equity markets will ultimately deliver increased profitability to Jackson through higher future fee income, the benefit is not recognized in the IFRS results in the short term. This contrasts with the impact of the hedging program decided to provide protection when the markets fall, where rises in equity markets lead to short-term losses in the IFRS results. These losses were then exacerbated by the falls in interest rates.

2019 was a year of transition both with respect to the business taking its first steps in the implementation of this new strategy and the transition to the new NAIC variable annuity framework, which we elected to early adopt. Reflecting these transitions, our year-end RBC ratio was 366%. At end February, it remains within a 340% to 360% range and illustrates the new regime's improved sensitivities in stress scenarios. Now this slide shows the evolution of the RBC position over the year. So we start on the top left with the 458% under the old regime. We have 141 points of in-force generation, 75 points of investment in new business, remittances accounted for 37 points, and the remaining movements related to nonoperating variances and the impact of the NAIC changes. So I'd like to draw out a few points on these.

In respect of new business, you've heard from Mike how we are delivering on our diversification strategy. Fixed annuity, fixed index annuity and the institutional business represents 34% of 2019 new sales, thereby demonstrating the strength of the Jackson franchise. This shift in mix has resulted in a higher investment in new business that has been seen in recent periods. Over time, we expect this to contribute to a more balanced mix of policyholder liabilities, which will enhance statutory capital and cash generation. Nonoperating and other variances primarily reflected net hedge losses. Favorable, rising equity markets led to negative marks on our equity derivatives with a limited offsetting movement in statutory reserves. This also includes the non-admitted DTA impact of 26 points, which we expect to be utilized over the next 2 years subject to market conditions. In addition, we incurred one-off hedge losses of $395 million as a result of needing to manage risks under both the old and new regimes as we went through the transition. This reduced the RBC ratio by 28 percentage points.

Looking forward, our previous guidance of total operating capital generation after new business strain of around $1 billion remains unchanged. In our usual disclosures, you will see a projection of this operating capital generation over the long term and the EEV assumptions for the in-force business. There is a slide in the appendix which illustrates this. For 2019 and future years, we have updated our EEV projections and assumptions to more closely align to the new U.S. capital regime.

Summing up on Jackson, you can see the strength of Jackson's distribution capabilities has enabled it to pivot to new and different products, as demonstrated by the shift in new sales mix over the year. We've implemented the new NAIC variable annuity framework and particularly anticipate its improved sensitivities in stress scenarios. To that end, we've seen the RBC ratio showing considerable resilience so far this year. And finally, as Mike mentioned, our preferred route to introduce third-party finance into Jackson is to seek a listing in the U.S. in due course, subject to market conditions. We have commenced preparations for a minority IPO and can now commence detailed engagement with key stakeholders with a view to ensuring Jackson will have capital strength as a separately listed business to support its continued success. Our plans for the potential listing of Jackson do not extend beyond preparing for this initial offering. Jackson remains a subsidiary, and accordingly, we would continue to support it, as required, in the same way that we support all our subsidiaries.

My third and final topic is on the overall group results for the year. Now these clearly include a number of demerger-related effects, and therefore, the central overhead is not reflective of the expected go-forward position. We signaled during the demerger that we would move towards a leaner operating model and that we would be looking for substantial cost savings by removing inefficiencies and duplication. As such, we expect to reduce central costs by around $180 million by the 1st of January 2021 by adjusting our corporate expenditure to reflect the footprint of the post-demerged business. We expect costs to achieve of approximately 1x annual savings. We commenced work on this initiative before the demerger concluded and are now proceeding at pace. We have already made progress towards this target, completing the first phase of this work, which will deliver annual savings of $55 million from the beginning of next year.

We have a 1-head office, 2-location model with functions based in the most appropriate and effective place for their key stakeholders. By way of example, we have already commenced the relocation of our risk and compliance functions to be closer to our new regulator in Hong Kong, and James Turner, our CRO, is there today. Restructuring costs primarily comprised the much loved IFRS 17, which ramped up considerably in 2019 and we expect to increase further in 2020. As the 2019 interest cost on core structural borrowings include the cost of the debt stack up to the point of demerger, $179 million relates to interest on debt that's been transferred to M&G. As I've mentioned previously, we expect interest costs of around $300 million per year based on the current debt stack. So in total then, we are reducing overall central costs by around $400 million. This will be achieved by savings of around $180 million in corporate costs and over $200 million in respect of interest costs.

We introduced you to the LCSM capital framework with our half year '19 results. The LCSM is expected to transition to a new group-wide supervision framework, which we expect to be finalized later this year. Overall, the group ended the year with an LCSM shareholder surplus of $9.5 billion and a cover ratio of 309%. On a consolidated basis, the ratio was 348% and provides us with confidence as we enter the turbulent markets today. Our businesses are strongly capital generative. This provides considerable capacity to fund investment in growth, both organically and inorganically, and enables us to absorb considerable market movements and supports our dividend policy. Specifically, the $0.8 billion you see in the chart represents our inorganic investment in Asia. This is notably the extension of the UOB bancassurance partnership, which for LCSM includes the full upfront payment, and the Thanachart Fund acquisition during 2019. Now this is the first time we have published the LCSM sensitivities, which show the resilience of our capital position to a range of market shocks. As at the end of February, the LCSM is estimated to be in the 270% to 280% range, slightly better than the sensitivities imply, mainly reflecting the benefit of some management actions.

2019 holding company cash developments really reflect the demerger and associated transition effects. Asia net remittances increased to $950 million, broadly in line with the long-term growth in FSG. Moving down the table, I've really explained how interest cost and central cost management actions will play through in the coming year. And following the demerger, we expect that the central tax shield will decline sharply in 2020 and that it is not expected to recur going forward. Other movements is driven primarily by various demerger items, including the debt substitution, the pre-demerger dividend and the demerger transaction costs. While this line also includes a number of components, which vary from period to period, you should continue to expect an annual outflow of around $200 million in respect of supporting existing bancassurance arrangements. As I said at the half year, we built up the central cash to be able to deal with all the demerger-related movements. With this now completed and appropriately calibrated, that lower level of cash will be held centrally.

Strong cash generation in the business enables us to declare a second interim dividend of $0.2597 per share. This is in line with the 19.6p indicated in the demerger circular translated at the year-end spot rate. This brings the total dividend proposed for 2019 to $0.4626 per share. For 2020, the dividend policy will be applied to the post-demerger 2019 base dividend of $0.3684 per share.

Looking forward, I want to remind you that the post -- that post-demerger, our priority is to deliver on our Asia-focused growth strategy. In the last 2 years, we have increased average annual investment by over 50% to $1.3 billion per year. As such, when setting the level of dividend growth, we will take into account investment opportunities, capital generation capacity, financial performance and prevailing market conditions.

So to summarize, the results of our structurally growing Asia businesses once again demonstrate the benefits of a high-quality, resilient and broad-based business operating at scale. Our U.S. business has taken the first steps in the strategic journey outlined at half year, demonstrating that it can pivot to new and different products. We remain focused on improving our operational efficiency across the group, and we are well placed to capitalize on the growth opportunities and build upon a strong and resilient capital position.

And with that, I will hand you back to Mike to conclude.

I think -- why don't you go ahead and stand up here, [Will]?

Okay.

Michael, why don't you come on up as well, please? So I think from that, what we'd like to do is go just directly to Q&A. We're obviously very pleased with the breadth and depth of the numbers and the activity that's been highlighted for you. Can we -- the technical folks, well, let me see if we can get -- there we go. Nic, James, welcome.

Hi, Mike. Hello, everyone.

Good choice of buildings behind you, well done.

Hi, Mike.

Yes. We thought you might like that.

I do. Is -- Chad, are you with us as well?

I am.

Great. Thank you, everybody. I appreciate the technical support on this. So let's go to the first question, if -- I'm sorry, where's Patrick? I'll let you quarterback this.

Sorry. So now for the Q&A session. As Mike has highlighted in respect of our announcement about the preparation of the minority IPO for Jackson, we're unable to comment on this or provide further details at this time. We'll make further updates to the market in due course, and any offering would only be made pursuant to prospectus. Thank you for your indulgence. With that in mind, I'm happy to open up to questions. I'm going to open up to Hong Kong first just to see if Kailesh or Scott have -- they haven't answered? Okay. So I'll hand over to the first question on this side. [Will], if you can hand -- Greig, if you could just let us know where you work and introduce yourself. Thank you.

Greig Paterson, KBW. Three questions. One is could you just update exactly how you're hedging for interest rates in the U.S.? Previously, you didn't have a hedge. So you -- it was well out of the money. So if you could just explain that.

Second point, if you could just comment on the potential to increase your stake in China. There was no comment anyway about -- that you note in the stated intention.

And the third thing is, I wonder if you could update on the RBC ratio in the U.S. given market movements and interest rate movements that we've seen in the last week. I think that's more relevant than in the Feb.

Okay. So I think hedging for rates. Chad, do you want to give a specific? And Michael, an overview on that and we'll go in that order?

Sure. So with respect to, Greig, the hedging on rates is something that's been long-standing within Jackson. I'd say, as Mark mentioned earlier, under the new regime, we are a little bit less rate-sensitive, requiring a little bit less rate hedging than we previously had. We do have a significant rate hedge on -- you'll recall we previously had a permitted practice on, which muted the impact of interest rate swaps coming through statutory with the new regime. That's not required anymore. And so what you see is a combination of interest rate swaps, swaptions and treasury futures that we use to manage interest rates. And while the new regime is more muted than the prior regime, it still obviously is impacted by interest rates. So we continue to adapt the interest rate positioning to the market. And as rates have dropped, as you might guess, our interest rate position continues to grow.

Michael or Axel, do you want to add anything to that or -- no? Good. Okay.

(inaudible) interest rates (inaudible)

So the answer is we're hedged for it consistent with the strategy that's been in place. And while we're less sensitive at any starting point of capital and interest rate in the new regime to where we would have been in the old regime, we still have rate hedges on. And as rates drop, we add to those positions because we get more sensitive to rates as they drop, right? The dynamics haven't changed. The magnitude of the sensitivity to rates has changed favorably, like we think it's more reflective to the economic value in the new regime versus the old regime. I think you had a question around RBC ratio as well.

No. Just a little bit more detail. Obviously, (inaudible)

So we don't disclose RBC on an interim basis. I think it's, again, more stable in the current environment. We certainly do estimates on the run and at month end and with full sensitivities. We're directionally, I think, somewhat lower than where we were at year-end, but not significantly. And in the context of that, let's think about what drives RBC. There's 2 components. One is the actual TAC that we're carrying, and that's the numerator. And then the denominator, of course, is the capital that's required. As markets have fallen and as rates have fallen, we have the hedging positions that pay off and generate capital. We also have the economics and then the money-ness of the portions of the book that would be more in the money. You have required capital that goes up. And the dynamic that we've seen since year-end is encouraging in that the amounts of capital that we're putting up are in excess of the amounts of capital required. So it may not be at the same 366% dollar per dollar, which would lead to the dilution of that RBC number, but the actual surplus has grown and grown substantially. And that's what we would look to see in terms of the effectiveness of the program. We're protecting capital, and we're increasing surplus at exactly the time when the market is under stress.

And Nic, do you want to comment, please, on China and the JV equity?

Yes. Greig, I mean, look, we -- as you know, we like the business. We would like to have a bigger share of the business if possible. But of course, that requires our partner to be willing to divest for now. As I said, we're both concentrating on delivering value by growing into our footprint. And you see through our results today that we're making great progress in driving the joint venture forward together.

Jon?

Jon Hocking from Morgan Stanley. I've got 3 questions, please. Firstly, on Jackson. Could you help us understand a little bit more about what RBC level you're trying to defend? I think with the change in regime, it's quite arduous to have a number in our heads because previously, we've probably all been thinking around sort of 400% to 450%. So where do you think the competitive number that you need to print is in that business going forward?

And then secondly, I think you've previously spoken about $1 billion of statutory capital generation in Jackson, about 100 RBC points a year. Can you update that for the change in regime and what's happening with markets, et cetera? Are you still accreting that sort of capital every year?

And then just finally, on the Asian business, can you comment on agent attrition? I guess, with the disruption we've seen in Hong Kong and China, you've got agent income down quite a long way. What are you doing to support those agents? Are you actually seeing any income -- any impact on productivity?

Good question. Okay. So again, on the RBC, we're not going to get any more specific than what we've said. I think Mark's given good guidance on capital formation in the materials you've seen. Michael, do you want to add anything to what's...

No, I would say, look, the biggest components to where the RBC were at end of the year, if you look at -- we've given direction in the past that would say we'd ideally want to be between 400% and 450% through cycle. We're obviously slightly below that. The biggest contributor to that is the nonadmitted deferred tax asset and this asymmetry between what happens with the positive effects of the hedging program and what can be reflected in terms of reserve release in the book. And so we get into these floored-out positions that cash surrender value and you can't take the full economic benefit and stat for what may seem obvious reasons. And when you make -- again, they're pro forma, but when you make those adjustments, we're right there in the low 400% range. So I don't think anything changes in regard to that in terms of direction. And I'm not -- we prefer a higher number on RBC, but we're not upset or worried about where we are relative to the 366% at year-end and what we're seeing in terms of the performance of the business so far this year.

On the statutory new capital generation, I think you saw it already in the chart that Mark showed earlier, with net of new business, which had higher friction cost than in the past because we've stepped up our -- in the middle of last year, we stepped up significantly our spread and other businesses relative to what we've done in the recent past. And despite all of that, we generated an excess of $1 billion of operating statutory capital through that, and that's before the Hancock release. So I don't see any change. The majority of our contribution, and that comes from the back book, it's quite stable and continues to perform well. We also put in context of the drop in equities and the change in rates. Again, this business has been written in the VA portion, which I know many of you are quite sensitive to. It's been written over the past decade, there's been quite a steady and quite consistent to actual -- actually, over time, progression of those account values. And the shareholders have -- the policyholders have done well through that, but so have the stakeholders, so as Jackson and Pru in that regard. And so most of these positions are still very in the money in terms of investors, and we have NAV to support the future claims. So it's still a very healthy book, right, despite the recent drop.

Thank you, Michael. The other thing, Jon, on your question relative -- Michael, I think it's fair to say that you still have just a handful of firms that have early adopted the new -- so the full comparison of how does everyone look under this is just, I'd say, spotty. Is that fair? It's just early.

Yes. It's early and people are resetting expectations. A number of firms have early adopted, a number have indicated that they're going to adopt this year. I haven't seen anybody yet choose the 3-year averaging method, but it's possible someone is out there, too.

So the relative question is a little more difficult because of other people's behavior, not ours. Okay. And Nic, could we update on Asian -- particularly, I guess, North Asian attrition given that the only -- you want to talk about what we're doing there and how -- what the activity is around the agent for, say, in Hong Kong and China?

Yes, we can talk about that more broadly than North Asia. Attrition levels are pretty much -- in the first 2 months of this year are pretty much in line across our businesses to where they were in the first 2 months of 2019. We're not seeing a spike. Of course, you have to recall, you have to take into consideration that a lot of agents earn trail for the first few years depending on the contract. Clearly, when it comes to rookie agents, agents that have only joined us in the last 8 or so 6 months, they don't benefit from that. But we do have programs in place where we can give them advances, provided the agency leader stands behind those advances. That facility is available all the time. It's been used sporadically though. So we haven't seen any change in the exits.

In terms of recruitment, we're also seeing no change. Roughly our recruitment numbers in the first 2 months of the year are the same as last year across the portfolio. In Hong Kong, through January and February, we recruited about 450 a month. That's just down a little on the 500 or so. That was our run rate last year. But interestingly, China, our recruitment in February went up 83% as we now deploy the technology that you referenced, Mike, in your preprepared remarks. We're using online profiling tools, online assessment tools, and they're generating an increase in the recruitment. So technology is coming into its own here.

Got a question from David in New York. Operator, will you open the line, please? David?

One question. You gave the update on operating capital generation of $1 billion, but that's for hedge costs. I guess, how should I think about capital generation after hedge costs? And how should I think about your hedge costs going forward following the NAIC rule changes?

Secondly, just wanted to get a sense for just in terms of the change in the business mix, maybe you could give us some sort of sense for what the ideal mix of business would be between VA and non-VA and how that should impact capital generation going forward.

So I can handle it, and I'll -- let me -- I'll turn to Chad in a second for some thoughts on the hedge cost component more specifically. But the way to think of the difference -- the way I think of the difference between the new regime and the old regime is that at any given level of rates, market and capital, the requisite hedge position that we would have on is lower in the new regime than it would have been under the old regime. The -- what we experienced in any given quarter or year is going to be very subject to market conditions and path of market. But Chad, maybe you have something to add about in response to that question, if you could, if you heard it.

Sure. So I guess I would echo what you said, Michael. Under the new regime, there is the expectation that we would have lower hedging costs than the old regime. You will have seen, as we've talked about over the last couple of years for various reasons, including things like floored-out reserves. And on the stat side, there's been a need to do additional hedging to support the statutory limits relative to the economic, which is our preferred place to be. The expectation has been that we would see less of that statutory hedging going forward, which should give us a better position. So David, to answer your question about the $1 billion of operating surplus, we generally would expect to run the hedge program more or less at breakeven, so the $1 billion would come through. We've had additional hedge cost, the statutory piece that I was just talking about. Unfortunately, we haven't really been able to road test the new regime very easily because the market has been so volatile these last many weeks and rates have dropped precipitously as they have. So I'd still say we're better off on a new regime than we were, but this is not really an environment to test the long term -- the theory on the new regime vis-à-vis hedging and additional surplus generation.

And then, David, on product mix, we're not trying to get to an ideal mix there. It's a -- given the size of Jackson, it's a bit more opportunistic than that. And the lens is the capital generation first, how that's deployed. And one of the options, obviously, that's in management's control is how much capital I deploy towards new business expenses. Those are the things. So it's a part -- it's formulaic on available capital, not necessarily on a sales target. Jackson has never had a sales target.

That said, we're not talking about anything in the IPO realm in terms of what a target mix of business would be. Nothing. Just currently, we're being -- the drop in rates has an impact on that spread business. We've taken pricing actions through the balance of last year and several this year. We've increased our cadence of reviewing pricing on spread and the normal review on VA product features as well. And so we'll just continue to do what Jackson has always done, which is to be very proactive on those pricing actions.

Andrew...

Great. If I could just ask one quick follow-up just on the RBC ratio. Michael, I believe you made a point that you expect some of the DTA to reverse over the next couple of years and get you to the 400% range on the RBC ratio. I just wanted to confirm if that would be the case even where we are today with interest rates. And I guess how dependent on statutory earnings is that reversal of the DTA?

So I mean the DTA comes in through a couple of routes. One is the portion that's allowed for -- from IRS, which is spread on certain portions -- DTA originates from a couple of different differences, one of which is the losses, the tax impact to the loss on derivatives. And that's what I'm talking about coming in over a 3-year period. Against that, and that's based on -- not on statutory, but on taxable profits. And those losses are usable in the new tax code indefinitely going forward. So they do get used. I guess the constraint on that would be the taxable income, and Jackson has been a taxpayer and is expecting to continue to be a taxpayer so we can monetize this. The other restriction is that deferred tax asset is capped to 15%. Admission into the TAC is capped at 15% of the non-DTA number. And so it's a combination of the statutory earnings, the operating statutory capital generation and the recognition of taxable income in the U.S., which can be offset by the DTA coming in. And those 2 things combined will play out over the time.

Thanks, Michael. Next question. Andrew?

It's Andrew Crean with Autonomous. Can I ask 3 questions? Firstly, with the current level of 10-year bonds in the States at just over 50 basis points spreads and the hedge cost index over 2 25, what -- can you talk about the outlook for new business volumes and margins and also give something on the spread? You said the spreads will be coming down on general account but by how much?

Secondly, you talked about with a changing mix of policyholders in the U.S., i.e., more general account less separate account, you could generate more cash and capital. Could you give the market some sense of that in terms of the potential for the dividends going forward so we can put some numbers around that?

And then thirdly, in Asia. The margins which -- new business margins that you have in Asia, in China, are much, much lower than AIA in China, which is pursuing a similar strategy in terms of products. Could you tell us why that is and where the control of your business would allow you to materially close that gap in terms of Chinese margins?

So unfortunately, we don't do, as you know, outlooks on IRRs and product sales and mix. And we certainly can't do that with the U.S. pre-IPO rules. So the -- that's -- we can't answer the -- what do we think we're going to sell, what we're going to earn on it next year questions.

Not what you're going to sell but what happens to margins with this macro environment.

Well, I think we've shown what the margins were last year. But again, I don't -- we're not going to forecast what a U.S. margin is with the pre-IPO statement out. I'm not going to get into that space. On the -- again, the pricing actions will defend the pricing in the U.S., as we have across cycle, and if something is not profitable, they won't write it, okay? But we can't -- I don't want to get into a forward-looking statement on what they can and can't do given the current rate market. And Nic, do you want to discuss the differences between our approach in China and AIA's and if control -- if additional control would impact that?

Okay. Look, the margin, and we've said this before, is really the outworking of either channel mix and product mix. And our JV really is equal weighted between the 2 channels, banker and agency and pretty much now equal weighted between health and protection and savings products. So -- but let me just maybe drill behind that a little because we don't just look at margin, we look at IRRs. And when we take the IRRs of the business that we write through all the channels that we write it and through all the products, it's around 35% in China with a payback between 3 and 4 years. So looked at through a proper return metric, the business is attractive.

Now let me address your question specifically on margins. Now when we split it between kind of agency and bank, our agency channel is producing a margin of around 75%. In 2016, the year before I arrived, it was doing 45%. In fact, the year before that, it was doing 30%. So we've seen quite a lot of improvement in that time as we have driven agency to be much more health and protection-focused and we've driven agency to write a richer content of regular premium business. Now there's further headroom -- there's further room even under the current ownership structure to drive that forward as we push for further initiatives, our productivity -- agency productivity initiatives. Mike referenced the improvement that we saw last year. And also, we look to agency to sell longer tenured product.

Now let's turn to banca. As I said, banca is predominantly savings, savings focused. 98% of what it sells is savings related. Margin is not the right measure to look at the profitability of that. And those products that are sold through banks have an IRR in the high 20s with a payback of 4 years. More importantly, and that IRR has improved again over the last 3 years as we've got the bank to sell more regular premium products. So again, compared to 3 years ago, we're selling 3x as much volume through banks and we're doing so at very attractive economics. Now why do we have multichannel and why do we have multiproduct? Because it's the best strategy that we think we can -- we need to drive in order to drive and accelerate the penetration and the access to the -- this huge footprint that we have. And the other reason really we write at the banca product is we need to cover. We need the premium to cover the costs because broadening, if you like, our infrastructure, adding more cities every year, adding more branches every year, adding more sales offices does require an investment before these pay back.

So hopefully, you have a good sense now of looking behind just that single margin figure of what it is that we're doing by channel and, indeed, by product to drive value in this business. And the returns are plenty good enough. And I said, we're doing that together with our partner. We're aligned when it comes to the disciplines that we need to adopt in driving value going forward.

Got a question from Blair, who's stuck in Scotland.

Worst place to be, Patrick. I've got 3 questions, if I may. Firstly, on the group, could you comment on what financial flexibility you have in the business, both from a liquidity perspective and also with regards to access to capital?

Secondly, on the U.S., given what you said about the benefits of having a higher capital base, how should -- how do you think about the conflict of perhaps not paying a dividend to group to build capital in the U.S. instead? That probably ties into my question about financial flexibility.

And thirdly, maybe 2 very quick questions on Asia. In Hong Kong, you talked about nonface-to-face sales. I just wonder if you could quantify or give a bit more color on that. And secondly, with Indonesia returning to growth again from a new business perspective, should IFRS profits growth follow from that?

Okay. So from the group financial flexibility, Mark, do you want to cover that? And the -- I think we were probably okay saying a top down -- impact of no dividend from the U.S. versus what's our dividend policy from the U.S. Do you want to approach it from that angle?

Okay. Blair, in terms of the group piece, in terms of our financial flexibility, we think we are very well positioned. So at year-end, we had $2.2 billion of stock, bearing in mind that was after having paid out a lot in terms of the demerger. And we also had redeemed $500 million of expensive debt earlier in the course of the year. And we made sure that our activities in the market, in terms of the debt market, were really focused on supporting the M&G and substitutable debt during the course of last year. So we're feeling comfortable in terms of liquidity, comfortable in terms of the stock of cash that we have and our ability to be able to access the markets, whether it is through our -- the facilities we have or whether it is through our capital markets in terms of opportunities that we might see over the course of the coming quarters in Asia and the like. So from that perspective, feeling comfortable.

In terms of the aspect of the U.S. piece in terms of the element of capital versus dividend, one of the things you've heard me say consistently for a little while now is that we only bring up the cash that we need at the center. And we're very conscious of the fact that there is inevitably a degree of friction whenever we bring money up to the center, whether it's from Asia in terms of withholding tax or whether it's from the U.S. in terms of the potential DTA angle that we might be missing out on. So it's something that we weigh up, it's something that we look very carefully at. Having said all of that, we are very confident in terms of the capital generation that we have in terms of the U.S., as I mentioned, the $1 billion that we're looking at. When you look at last year, notwithstanding how the market's moved and what happened to the element of rates, you strip out a lot of the one-off effects in terms of the RBC, you strip out the elements in terms of the change to the NAIC regime, you see a business that has got a very mature book that is capable of generating good capital and, therefore, giving us the flexibility and the choice in terms of what we might do vis-à-vis level of remittances from the U.S.

Great. And then Nic, Indonesia, new business profits converting to IFRS and also the nonface-to-face options emerging -- not emerging, developed in Hong Kong?

Okay. Let's start with the nonface-to-face. Look, we have all the technology in place. This is the outworking of the investment that we've made in the last few years to be able to conduct the compliant sale remotely. Even Pulse, which was issued -- which is now launched in Hong Kong, can allow an agent to effectively converse with a customer using that particular app. In fact, we're using that already in Indonesia. So -- but there are plenty of other social apps and other means of being able to connect, through video like we're doing just now. So technology is not the inhibitor. The inhibitor is regulation. And the reason regulation is translated as requiring a face-to-face meeting in Hong Kong is because a big chunk of the market is Mainland China, and you need to be able to prove that the sale is taking place in Hong Kong. Now what's the relief that the Hong Kong Insurance Authority has granted only last week, they said on 2 specific products, this is the qualifying deferred annuity plan and the voluntary health insurance scheme. These are tax-incentivized products that are aimed at the domestic market. They've removed the need to do that face-to-face. It can be done remotely. And we've been able to get that up and running within 2 days of really being granted. Now we're going to push to -- as I said, to be able to do that on our other standard products as well, but that will require some regulatory relief.

But Hong Kong is not the only place that we're looking to do more nonface-to-face sales, in other words, remote sales. The -- in China, where, again, we've invested very heavily in automation, we launched a very simple kind of low-premium product called [Anshin]. It's effectively a cancer product. And it was -- we were able to launch that remotely through WeChat platform, but also our own platform there. And it's met with a phenomenal amount of demand. We have 200,000 literally in less -- now just over a month, consumers buying this -- effectively this product. 45% of those are new to Prudential customers. And although the premium is relatively low on this simple product, we'll have the ability to go back and upsell at a later stage. 200,000 is a lot of customers for our business in China. The whole of last year, we onboarded 220,000, albeit full premium customers. So it's -- the remote technology is -- and the remote selling is being deployed not only in Hong Kong but also in China.

Your question on Indonesia. Look, the structure of our Indonesia product has the profitability coming through in the first couple of years. We've had 5 years of declining sales. And the effect of that is what -- the lag effect of that is what you're seeing coming through the IFRS numbers. In the same way as when sales were coming down, the IFRS profit decline lagged, you're going to have the opposite, the reverse of that, as we go back into growth. We've made some tweaks also to the product pricing in order to make it a little more attractive, putting some of the yield back to consumers, and that would also have an effect. But look, provided we continue to deliver growth, in time, the IFRS profits will come back. And I'm confident that we will from here.

Maybe just one quick follow-up to Mark. Mark, are you able to say what debt capital headroom you might have in the group?

So the debt headroom that we have in the group is about $1.5 billion based off year-end.

Definitely time for the room now. Ashik, do you want to...

Ashik Musaddi from JPMorgan. Just a few questions. So first of all, can you just -- I mean, if I understood correctly, what you're saying is that the recent drop in interest rate, i.e., if interest rates remain here at 70 basis points for 2, 3 years, it will not change your capital generation, that $1 billion number. I mean, is that understanding correct? Because what I'm seeing on the hedge cost index, it has already more or less doubled, and that is not factoring in the most recent drop in interest rates. So your hedge costs could actually more than double. So is my understanding correct that $1 billion will not change if rates remain here for 2, 3 years?

The second thing is, Mark, you mentioned that you only take out cash, which is necessary. So how should we think about potential extra cash from Asia? The reason I'm asking is, again, I mean, you grew the cash remittance by 3% year-on-year in Asia versus earnings of about 10% or 15%. So why was the cash not coming? I mean, keeping in mind that we -- you're still planning to grow 10%, 15%, what would be your max dividend capacity from Asia?

And the last bit is about China. I mean, what's -- your $2.2 billion holding company cash might not be enough to fund the acquisition of CITIC in case your partner is ready. So what are the options available for you to think about funding that? That would be the third one.

Okay. So let's -- so Ashik, I think on your 70 basis points, the -- it is very much equity market dependent. So it just -- it's what scenario do you want to add to that. Do you want rate markets up, down? Is everything going to remain right where it is today? Is short-term vol going to be at 45? There's -- it's not a -- again, it's forward-looking, which we can't do, but in a general, theoretical sense, it also is one metric in the new capital regime. So it's a very difficult question to answer without saying these other assumptions were built in that. So I'm going to ask Michael not to answer that. But you got the answer on the hedging on the rates. And I think you could back into how those hedges would perform and then you choose the equity path that you think is appropriate for that. And that way, we're not providing you an assumption on equities or things. On dividends, Mark, do you want to mention -- I mean, I think you said that you want to...

Ashik, the key element in terms of the level of remittances coming out of Asia, if you think of the payout ratio, it's somewhere in the 50s whether it's in terms of IFRS or in terms of a free surplus generation component. Bear in mind the comment that Mike mentioned -- Mike and I had mentioned early on, in terms of the level of investment for putting into Asia, with the IRRs that Nic spoke about a few minutes ago in terms of the returns, in terms of velocity of those returns, in terms of the speed of payback, in terms of those particular components. And in terms of when I said when we look at our dividend, one of the first things we consider in terms of looking at the dividend component is our investment opportunities that we have. So while Nic and the team continue to look, and with our scale and with our size, we get to see everything of any sizes happening in Asia. The bankers are knocking down our door. But Nic and the team and we are incredibly disciplined. There's lots of things we won't look at if we don't think price is right. And we don't think it's going to be additive, and we don't think it's going to be able to take our business forward in a meaningful fashion. So there's a lot of capacity in terms of Asia on the ground, some of the elements in terms of -- that were announced at the back end of last year. Nic and his team have been able to fund elements of those locally along the way. That's because they have the flexibility there to be able to do that from that particular piece.

And then from a China perspective, I mean, we're in the land of hypotheticals. You've got all options open in terms of what you may or may not do in terms of if something came along. But there isn't anything specific I can say for you at that particular period.

That will be the same issue of compounding. So if you say, is it 1%, the control premium, is it 50%, is it something -- that would define price. I mean, this is a business that sales grew 50-plus percent, new business profits dramatically and earnings dramatically. So as it continues to grow, it continues to grow in value. And it's one of the most unique platforms now, I think, in China for a new player. So it's -- we recognize it's valuable, but we are -- every market option would be open to us with that, okay?

Oliver?

Oliver Steel, Deutsche Bank. My understanding is that when bond yields fall in the States, the RBC ratio reflects that over a period of 1 or 2 years. Is that right? And if bond deals do remain at these levels, what is the ultimate impact on the RBC ratio?

Second question is on the dividend. I think the dividend policy is still progressive. So I just wanted to check that you weren't thinking of cutting the dividend, which seems to be implied by some of the comments you're making about opportunities in IRRs in Asia.

And then thirdly, net flows, Nic, into Asian health and protection policies seem to be about 17% of (inaudible) liabilities. Is that a relevant metric because that has jumped enormously. So I'm just wondering what's driven that and where we should be seeing that as a sort of indicator for future IFRS profits growth from that segment?

So on the forward-looking RBC, go back to the same question, we're not...

If there's a mechanical question about it, maybe Chad can answer because I'm not exactly following, but maybe he understood that and...

Yes. I would say there's no specific lag that comes through actually in the stat regime, at least vis-à-vis VA. It would come through immediately in the discounting mechanism and the reinvestment embedded in the reserves. I'd say the only place it would come through on a normal course base if rates stay down low is through the spread book, so if rates stay low and you've got the reinvestment piece, but we're obviously -- closely manage the duration on the back book there as well. So there's no mechanical dynamic that's got a lag other than just the normal spread dynamics.

Maybe without commenting because we're not going to give forward statements or projection about our business, but a market commentary on low rates for insurance, right? If rates stay at this level or get lower and they're there for sustained periods of time, it would be naive to think that it doesn't have an impact on the insurance market and the annuity market in the U.S. We know it would. But there are mechanisms around that. One is we're managing those risks and the pricing. Two, consumers will have something to say about the demand for products at various rates, and they already are, and you'll see that as market-level data flows through. And three, there's such thing as product innovation. And so if we find ourselves in different rate market circumstances, we have proven that we have the ability to come up with creative solutions for that, that meet consumer needs.

And I think the fundamentals are actually strong. These periods of shock and volatility, particularly long into bull markets, speak to the value of the risk transfer and the insurance we provide. People have 11 years of bull market, and they feel that they don't need to pay for insurance because markets always go up and then they're reminded that they don't. And so there's value in what we do, and the value that we provide is not going away because of low rates or high fix. But the industry will change and evolve, and we'll adapt. And what you can be confident from a Jackson perspective is we're on top of it through dynamic hedging and our strategies. We're paying attention to product feature and pricing. And we increased the cadence of that during times of stress. And we're doing all of the things you would be expecting us to do, and we go forward.

So Nic, flows into health and protection in Asia?

Yes. So in 2019, roughly, health and protection was around 27% of our APE. And remember, this is sort of highly persistent business. So what you see is that layering effect that we've talked about sort of coming in, and you have another cohort of business, which is why the insurance margin coming out of Asia has increased by 14% this year. But I think what is also in the column that you're referring to, it's not just health and protection, it's anything that is not with profit and it's also anything that is not unit-linked. So in that column, this year specifically, we're also including the -- effectively the annuity flows that we generated in the course of 2019 on the back of a very successful queued up launch in Hong Kong, which saw about $162 million of APE come through. That's effectively a non-par-type product. And therefore, the flows will also be reported in the column that you're sourcing your information from. And clearly, annuity is not as profitable as health and protection, but it's plenty profitable.

Okay. Abid?

It's Abid Hussain from Crédit Suisse. I've got 3 questions, if I can. Firstly, coming back to the U.S. capital position, it feels like most of your peers have reported RBC ratios of in excess of 450% and I suspect most investors expect you to rebuild to that sort of level, the 450% level. So relative to where you are as of today, it feels like a sort of sizable gap. Putting that into dollar amount, it feels like the gap is around $1.5 billion in terms of preparing back to the 450% level. What sort of -- any comment around that, that you might make to investors who are sort of thinking along those lines would be very helpful, I think.

And then secondly, sticking with Jackson on the reserve mix. I recall last year that you said that you were seeking to optimize the reserve mix between VA and non-VA and you were seeking to bring the reserve mix down to about 60% VA in order to optimize the net hedge costs. Is that still the case on the new regime? If you can just update on that, please?

And then finally, on China, is there anything that you're looking to do to expand your footprint in China outside of the CITIC JV? Is there anything that you can indeed do? Or is it mainly focused on the CITIC JV?

Okay. So capital position, again, I think we've commented where we were historically, 400% to 450%, I think you're comparing old regime, new regime numbers, which is a difficult comparison to do because it's company by company. So I would suggest until more firms get on the new regime, that side-by-side needs a lot of specific work per firm to try and compare them because we're not reporting under the old regime, we're reporting under the new regime. The -- as far as an absolute level of capital projected forward, that goes back to the pre-IPO statements. We're not going to -- we're going to forecast. And I think we've been pretty granular on what the elements are of RBC that would naturally emerge from the U.S. business. And then, again, not going to discuss a forecasted level per your prospectus.

(inaudible)

I would -- I don't think most have early adopted. But again, we can go off-line and go through who, but I think most of them have guided lower on RBC thresholds. Is that -- would you agree?

Well, not (inaudible)

Again, it depends on the nature of the book and the liabilities they wrote since they've got...

The quality of the book goes...

Yes, alongside of that.

And you have books with more capital, but multiples and multiples of required capital versus our required capital, even though their separate account balance may be lower in total. So I think health and composition of the book is a lot.

And I think the general comment on reserve mix is against the overall liabilities, not sales. They've demonstrated doing it on sales, but if that's more why bolt-ons and further transactions, we get that mix, not -- I think Michael was pretty clear at the half year, you're not going to get there organically.

Also, I want to clarify because we said directionally, we would look to start to get into something that was in the 60s, given that we're in the mid- to upper 70s now. We also -- despite the success we've had in providing a broader solution set to our clients, which is one of the key motivators of the diversification strategy, you had a big run-up in market values and so our separate accounts performed quite well, which more than offset the move. I think we actually ticked up a portion of a percent in percentage mix. So I don't think we set -- I'm quite sure we didn't set a specific target on where we would want to see that mix. But we said directionally, we would look to at least get into the 60s to start. But as Mike said, that takes time and bolt-ons and other.

And I think on the China question, so there is the legal option for foreign firms to own multiple investments in China with percentage limits on second and third things and -- but I think our focus is just -- has been on and continues to be with CITIC. But Nic, do you want to comment further on that?

I mean, maybe just to add some color to what you just said. Under regulation, you're only allowed to control one business, and a 50-50 JV is considered control under that rule. So if we own -- if we had a second presence in the life side, we would have to restrict our ownership to below 33%. And I'm not sure I would want to do something in China I didn't have the ability to control. Now beyond that, what else can we do? Clearly, there's a GBA initiative that we're working with the Hong Kong on both sides, if you like, of the border to see how we can leverage as we go forward. And there's the ability to do Pulse, at least if not whole of China, in some aspects of China before that belonged -- had a contract with another party that's expired. So as we gain traction on that and as we're able to deliver revenues in the rest of Asia, that's a possibility. And of course, on the asset management side, there is -- we've already established a wholly foreign-owned entity. And in the first year, we've either sourced or sub-advised about CNY 1 billion of funds. So that's getting good traction as well. .

Thanks, Nic.

Actually, we've got one from Hong Kong, actually. It's your colleague in Hong Kong. I'll allow him to go. Thomas Wang from Goldman Sachs in Hong Kong Research.

Can you hear me properly?

Thomas, we can hear you. Go ahead, please.

Okay. So 3 questions. The first question is on Asia. Firstly, on kind of margin Nic spoke about -- because I'm seeing margins by -- for the first half and second half as well. Am I right to assume that kind of this year, you reached that 50-50 balance between agency and bankers? So we should think about that margin will be more stable or even go up, as you commented before.

And secondly, you talk about a quick recovery, Mark, despite operating (inaudible). Is there anything you can give us that -- sort of what gives you that confidence that you shall see this recovery?

And finally, on the LCSM, you gave us both interest rates up and downside of the margins. Normally, we have to position margins since they're going down. So just help me to understand why that's the case.

Thomas, I think the -- we didn't hear 2/3 of that. I think we did hear a question about margin in China.

I was just going to hand it to Nic.

But I'd suggest, Thomas, if you want to just give us a call afterwards or an e-mail...

Nic -- Thomas, let me see if I got a couple. You talked about target agency mix. Again, one of the important takeaways from this is we are -- the mix is a by-product of the success of the channels, not a target. So we are not looking to manage one up or down or limit capital available. And then on the quick recovery, I think it's operational, agency training, all those sorts of things. And I couldn't -- I'm sorry, I didn't get the LCSM at all.

The LCSM (inaudible) you've had going down, all the different scenarios.

Thomas, we literally can't hear anything. Probably best if you send me an e-mail and we'll follow up afterwards.

Apologies, Thomas. We're doing so well with the tech right up to then.

Let's get back to Nick.

Nick Holmes at SocGen. Just a couple of questions on timing. The first one is a pretty obvious one. Why are you thinking of this IPO now? You could have done it many, many times in the past. You could have done it in better markets. You could have done it in all sorts of better circumstances. So -- or at least, that's my opinion. So why -- can you tell us why now? What is your rationale?

And then the second question is on the RBC ratio. 366% is a little bit disappointing, it seems to me, when you've had a 10-year bull market. Obviously, you've had low interest rates. But do you think you could have managed that ratio in a different way? Do you think you should have put more capital, more reserve into Jackson?

So to answer your second question, no, I think we -- the decisions we made on capital allocation and on hedging multiple regimes and on diversification, which was 75 points of it, was a conscious decision. The final outcome at year-end is -- does have market elements to it. And we don't -- there wasn't a -- the fourth quarter was a fascinating period of time for interest rates in the U.S. and that's -- it was what it was.

The why now, fair question. So the first Board strategy way -- meeting I can think of -- gentlemen, correct me if I'm wrong, was about 9 years ago where we reviewed group structure, including options in the U.S. and there's a variety of dynamics around approvals, cash flow. You think where Asia has been cash flow, when we talk very proudly about putting $7 billion in Asia. Over that same period of time, the U.S. has created $5.5 billion. So -- in those days, it wasn't creating $900 million a year of distributable cash flow. So there is an alignment of the portfolio in total. There's diversification benefits. There's opportunity in the market, as you saw from the growth of the U.S. business. And then market-wise, 4 firms brought product or equities, 2 public, 2 private, to the U.S. market. And my personal view is disproportionate amount of the capacity for those sorts of risk assets given what they brought and how it was funded and how they had to re-insure those and things, that defined a lot of the market elements. What we're saying is we're preparing for this. If we thought for some reason the market wasn't attractive to it, we can scale it. We can change timing. We have all the same options because there isn't a -- we're not forced into doing this necessarily. This is more of what we think is the most effective path to grow this business. So very different circumstance of someone disposing of a business that's not performing and needs capital.

Johnny?

It's Johnny Vo from Goldman Sachs. Just 3 questions. The first question is, again, while the IPO is the central scenario, I guess, does this preclude any other options for Jackson? That's the first question.

The second question, just in relation to the expenses, Mark. If I look at the group liquidity position and you have the corporate activities line there, would the expenses predominantly come out of that corporate activities line?

And the third question is just in relation to Hong Kong. I mean, Nic, you've been able to toggle between the domestic and the Chinese visitors. If disruption continues, is this sustainable? Can you keep the level of growth because it's been much more resilient than most people have expected.

So let me comment generally on other options. We were very clear at the half year that all options are on the table and very specific in our language, this is our preferred option, okay? So I need to leave it at that. But we're aware of other paths. The -- Nic, I'm sorry, I didn't -- I missed the second one. I was right...

Expenses. Mark, on expenses and...

Mark, on expenses, sources of...

Yes, it will come out of that line in terms of the corporate activity. In terms of the line that you're looking at for the element of the cash inflows, you're looking at the liquidity position post demerger, the element of the corporate activity lines, there's an element of half of that will come out of that line of that 2 60.

And then the China question, I'm sorry.

Yes. So -- I mean, look, we haven't given up on the China opportunity. We think the reasons why the Mainland Chinese, particularly the high net worth by -- in Hong Kong, haven't changed its asset diversification, its currency diversification, its access to the health system here, and its coverage for conditions and illnesses that you just cannot buy at this point in time in China, not least because we don't have a very -- as active or as deeper reinsurance market as you do in Hong Kong where we can take advantage of global coverage.

Now to your question though on the domestic, we put a lot of emphasis on the domestic in the course of 2019. Our Hong Kong business has roughly 13% share of the overall market. But within that, it's 25% share of the Mainland China, a single-digit share of the domestic. So there's no reason why we can't be better, which is why we pushed very hard last year. In fact, our agency-sourced domestic sales went up 20%. So behind that 8% number that Mark referenced for domestic sales, agency was up 20%. And behind the 12% that Mark referenced in the second half, agency was 23% as we pushed hard not only in relation to the QDAP and VHIS products but also more broadly. That emphasis will continue as we go into 2020. I mean, clearly, the Mainland China sales are going to be linked to a number of visitors. And with the restrictions that we've seen from the beginning of February, flow is relatively modest. But the sales on the domestic, we came into 2020 with a velocity that was above where we started 2019. And even though there's been some slowdown, we're feeling good about domestic sales so far this year, and we think there's plenty to go for.

Just conscious, I need to get Mike off to summarize very shortly. We've got one more, and then we will need to take it off-line. Andrew?

Andrew Baker, Citi. It's just one, actually. So in Asia, shareholder-backed, their exposure is about $25 billion, approximately 50% is in corporate bonds. Given slowdown over there, is there anything we should be worried about, concerned about with that shareholder-backed exposure?

So James Turner, I'm going to -- we're going to put you to work. I know you've been enjoying this. Do you want to talk about our bond exposure? Why don't you quickly go through Asia just specific to the question and then just a little more broader overview on our exposures globally?

Okay. So the -- in terms of Asia and corporate bonds, it's a relatively small amount and it is of the -- of that corporate bond exposure, it's got an excellent profile. The piece that is BBB is -- 84% of that is BBB or BBB+. And the whole exposure, in terms of the corporate bonds, a bit like the group's exposure to corporate bonds more broadly is very prudently placed. So I'm happy as well, Mike, if you want to go back to kind of the group and work down between the 2. But if you're looking at Asia's total corporate exposure in terms of credit ratings, then AA and above is 64%, BBB is 19%. And so you've got a total investment grade of 83%. And within that BBB, as I said, over 80-odd percent is BBB or BBB+. And importantly, when you look at the debt exposure that is below investment grade, over half of it relates to sovereign debt in Vietnam. And if you take that out, then again, you get a sense of just how prudently positioned the Asian credit portfolio is. And that does have an impact because it means that the -- we are sacrificing yields for this more prudent position.

Slide 49 of the appendix, if you're really interested.

I think we need to...

I think we're done. Thank you very much, everyone. I see you know how to get ahold of us if you have any follow-up questions, and we look forward to seeing you in the -- with the interims in August. Thank you very much.

Thank you.