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Prudential (NYSE:PUK)

2013 Earnings Call

March 12, 2014 7:00 am ET

Executives

Cheick Tidjane Thiam - Group Chief Executive and Executive Director

Nicolaos Andreas Nicandrou - Chief Financial Officer, Executive Director and Chairman of Disclosure Committee

James Matthews - Director of Investor Relations

Michael George Alexander McLintock - Executive Director and Chief Executive of M&G

Barry Lee Stowe - Executive Director and Chief Executive Officer of Prudential Corporation Asia

Jacqueline Hunt - Executive Director and Chief Executive of Prudential UK & Europe

Analysts

Andrew Crean - Autonomous Research LLP

Jon Hocking - Morgan Stanley, Research Division

Greig N. Paterson - Keefe, Bruyette & Woods Limited, Research Division

Christopher Esson - Crédit Suisse AG, Research Division

Farooq Hanif - Citigroup Inc, Research Division

Andrew Hughes - Exane BNP Paribas, Research Division

Gordon Aitken - RBC Capital Markets, LLC, Research Division

Cheick Tidjane Thiam

Good morning, and welcome to our full year 2013 results presentation. Prudential has delivered a strong performance in 2013 with double-digit growth across all our key performance metrics. We are pleased to announce that we have achieved all 6 of our 2013 'Growth and Cash' objectives. As you know, we've been early in talking about cash, and we have been focusing on that metric since 2008. From a situation of great dependency on the U.K. in terms of cash and earnings in 2007, we are now in a position where each of our 4 businesses is materially cash generative. We have also been able in parallel to generate I believe more growth than any other large-cap insurance company. So we have not only talked about 'Growth and Cash', we have been able to deliver on that promise. And in the end, it is this delivery only that matters. People sometimes are kind enough to refer to the quality of our strategy. I actually think that what is really unique about this company and its team is our focus on execution and our ability to deliver consistently. A few weeks ago at investor seminar, the motto was more of the same. This remains our motto with a little twist this morning, which is more of the same, just better. The renewal announced this morning of our strategic bancassurance agreement with Standard Chartered Bank is a good example of that, more of the same, just better. The previous agreement was already a good one. In the past 15 years, our sales from this partnership have grown by 160x. The new agreement is a clear improvement on the previous one. It is longer, it is deeper and it is broader than the previous agreement. It is longer, this new agreement will run for 15 years -- where's Greg. So Greg, we don't have -- to have this banter, when does it end anymore. 15 years, I can finally take that question with a smile. 2029 it's been going on for a long -- and thank you for your patience, Greg. You've been really -- he has been really good.

Unknown Analyst

This is the point, of course.

Cheick Tidjane Thiam

I know. I'm trying to buy some goodwill here. I know my time will come. It's very transparent. So it's a longer agreement. It's broader. It gives us access to 11 markets in Asia, and it secures exclusive rights to discuss bancassurance agreements in 7 additional markets in the near future. It's also deeper because in a number of markets, we are strengthening our existing relationship as we move to either exclusive or preferred terms. And last but not least, as part of the agreement, we will work with SCB to explore some of the huge opportunities available to us in Africa. Our teams know and respect each other. They work very well together as evidenced by the growth of our business over the last 15 years, I've said 160x. That is why we are confident that this new agreement giving us unfettered access to one of the best banking franchises in Asia, about 800 branches in the new agreement, is a milestone in our development. With that, I will follow today my usual format. I will start with the highlight of our full year results and then, we'll comment on a few key aspects of our strategy. As usual, there will be a focus on Asia, but we will also cover Jackson and our businesses in the U.K., the life businesses and M&G. I will then hand over then to Nic, who'll cover our financial performance in more detail. And I will come back at the end to talk about the outlook for rest of the year and beyond, and we will then take your questions. As always, the executive team from across the group are here and they will do their best to answer any questions you may have. And I'm sure we'll have opportunities to intervene.

So back to 2013. IFRS operating profit grew 17% to GBP 2.954 million (sic) [GBP 2.954 billion], we wanted to reach GBP 3 billion, but we stopped a bit short of that, but GBP 2.954 billion. We've often talked about doubling in 4 years for Asia, well we have actually been able to double the entire group in 4 years. We've gone from GBP 1.4 billion in '09 to close to GBP 3 billion in '13. New business profits grew by 16% to over GBP 2.8 billion, and we win that Asia has achieved the last remaining 2013 objective, you've heard me many times saying it was the most challenging. I believe it was. So it's been the last one in time to be achieved. And we're pleased it was achieved with doubling the NBP to GBP 1.46 billion in spite of significant effects of headwinds, so it's good performance. Now importantly, these earnings have been converted into cash and our key measure of cash generation, free surplus generation, is up by 18% to almost GBP 2.5 billion with, again, material contributions for more business units, and I'll come back to that. Our capital position remains strong. And as we promised, that's another long running debate between us. We have today published for the first time our recurring capital ratio, which is 257% for 2013. Nic will give you much more detail on this in his presentation. And our IGD solvency 1 surplus capital remains unchanged, GBP 5.1 billion. It is this continuing strong operating and financial performance and robust capital position of the group that have enabled the board to re-base our dividend upwards by 15% to 33.57 pence. So in a nutshell, these results demonstrate that the group has been able to deliver on its promise of generating both growth and cash.

Back to the objective we have achieved now all 6 of our objectives. In that process, the financial characteristics of the group have been transformed, and all businesses are now remitting significant amounts of cash and PCA Asia delivered over GBP 1 billion of IFRS operating profit. You'll all familiar with this slide by now. We viewed this many times, but it shows you also the change of scale that has been achieved in that period. Asia has more than doubled in the top there, both NBP and IFRS in 4 years. Asia's cash remittance has increased 10x. Jackson's net remittance has increased more than 7x. And the U.K. has continued to generate large amounts of cash in a challenging contest. So we tried to capture on 1 page then, some of the key developments of 2013. So as always, we'll start by talking about our customers. Our progress in Asia has allowed us to acquire 1.9 million new customers in 2013. I was in Hong Kong last week with Barry, and we did the calculation in our idle time. And we came down, if you take a 24/7 basis to 1 policy every 10 seconds in Asia. Assuming we work 24 hours a day, 7 days a week. So I've given the new challenge to Barry, which is to beat Usain Bolt and break the 10-second barrier. We need to go to 1 every 8 seconds or something like that, even better. We have extended -- thank you. Our distribution reach in Asia, we have a new agreement with Standard Chartered, I've just described. We have conducted the integration of Thanachart in very fast times. Sold our first policy in May, the first day after receiving regulatory approval. And our new Thai business as you'll see later is already making a material contribution to our profits. Across our bancassurance relationships to give you number, NBP in our sweet spot markets grew by 23% in the year, a pleasing result. We have also achieved the long running ambition of the group by domesticating our REITs profits business in Hong Kong, separating the U.K. REIT profit from the Hong Kong REIT profit from. We have entered new markets in Asia. We have launched in Cambodia in February, or January? February?

Unknown Executive

January.

Cheick Tidjane Thiam

January 2013. And we've opened now a representative office in Myanmar. Moving from Asia to the U.S., we have continued to innovate as demonstrated by the success of Elite Access, which generated $4 billion of premiums in 2013, triple the level achieved 1 year before. The REALIC acquisition we announced in May 2012 has been successfully integrated, and you can see its contribution to its numbers. It's been delivering above the expected benefits and has contributed to enhancing and diversifying our revenue stream in the U.S. In asset management, we've continued to expand M&G's presence in Europe, driving European retail funds under management up 64% to GBP 24 billion. And in addition to our well-known portfolio, PCA, Jackson, U.K. Life, M&G, we have entered Africa for a small acquisition in Ghana. We also played an integral part in reaching an agreement with regulators and politicians in November last year on Omnibus II, directive of Solvency II. This agreement provides more clarity, we believe, to you our investors on the capital indications of the new regime. And also ensures that we insurers can continue to play our role in financing the long-term capital needs of the economy. Now this chart for us is just the translation in financial terms of all these actions we have conducted since 2008. And I think every year has been at least as busy as 2013, when you list everything that's been done. 2013 adds 1 more year to our track record built now over several years. And refers to bars on the left, we've let them on this chart because they're interesting. They're empty because we only started measuring our sources of earnings in 2008, and those of you who were in this presentation at the time so at the half year of '08, these results being presented for the first time. And what gets measured, gets managed. We all know that. So since then, our focus on driving growth and fee income and insurance margin has delivered growing scale with improved quality with 31 CAGR for almost 2 categories together, over 5 years. And they've moved from 38% of our earnings from 63% in the total, but itself has more than doubled. So it's been really a very important part of the strategy. In more simplistic terms, just looking at cash, cash straightforward from being highly dependent on the U.K. in '08, which you can see here and even more in '09, the U.K. in '08 was contributing 40% of the group's remittances. We are now better balanced, well diversified group with material contributions from all our 4 business units, something we told you we wanted to achieve. It is hard to overstate the importance of this transformation from a group. Probably, we are able to run it. For our options in terms of profitable growth and investments, I mean those Standard Chartered deal based on internal resources, as well as for cash rewards over time for shareholders. Now achieving the 2017 objectives, of course, represents an important milestone for the company. However, you know us, we never want to be complacent and it is a luxury, sadly, that we cannot afford. I wish we could. As announced, at the investor conference in December, we have set ourselves new and challenging objectives that underline the scale of our continued ambition for this group. We are essentially looking to double Asia from this already larger and higher base is while also aiming to generate cash equivalent to 1/3 of the current market capital of the group. Now of course, we have not given you the balance for '14, '15, '16 because we do not want to forecast the shape of our trajectory. But these will be 4 additional years of hard work, and we are confident that we will get there by 2017, above GBP 1 billion of free surplus generation in Asia, set between GBP 900 million and GBP 1.1 billion. GBP 1.8 billion of IFRS profit and GBP 10 billion of cumulative group free surplus generation over 4 years after funding significant growth.

Now of course, a key consideration when we're looking ahead towards 2017, is the macroeconomic context. We actually believe that the macroeconomic environment today has become more supportive for our group. And actually, largely validates our geographic focus. With the stream of positive economic news that we have recently received in the U.S. and U.K. are good news for our businesses there. Today I was reading, this morning WACD is now at 3.3 for the U.K. So it's all positive. And put simply, if you think about financial risks at Prudential, it is mostly sitting in Jackson and in U.K., and as the U.S. and the U.K. economies continue to recover and as long-term interest rates rise, accordingly, there will be a strong beneficial impact on both the profits of our businesses and their capital strength in the U.S. and in the U.K.

Now moving onto Asia. Of course, some of the currency weakness that we have seen in a few select Asian countries following the Federal Reserve's tapering of quantitative easing will impact our reported financial in 2014, and Nic will provide you a sense of that impact looking at 2013 on spot rates. We'll give you the sensitivities. But looking through here, this ultimate is very small number of high-level comment, which I believe are important. In each country, we must keep in mind that we are fundamentally in local currency. And we have, so to speak, no cross-currency exposure in the business model. When we face the market, we're not a car manufacturer -- manufacturing from a high base country, high-cost country, having to sell into the Indonesian market. We do not import any raw materials. All our inputs and our outputs are local. Our assets and liabilities are matched in local currency. So clearly, the only and the main FX exposure, as we'll know is non-economic. It is purely a translation exposure. The Vietnamese dong, those rupiahs we're collecting, they're sitting there in our coffers. Okay? The only thing that changes is how many pounds that represents. And what matter as in the long-term business that covers is actually the rupiahs and the dongs that we're collecting and the economic fundamentals in those countries. And we believe these are sound in our sweet spot countries, and we have evidence to support that. In effect, growth has proven resilient in our sweet spot countries and on the ground businesses in all these countries are doing well. As a result on a local currency basis, we continue to grow strongly. And all of you remains that over the medium to long-term, currency values are highly correlated with GDP growth. So we are happy to be predominantly in a part of the world that grows faster than the rest of the world. That is the long-term positive of this stuff. Because clearly, Asia continues to be the main driver of global growth. It's, of course, the long-running debate around whether China will grow at 6.5%, 7% 7.5%. A bit marginal difference in China is GDP growth will not matter too much for Prudential, and we have much more data to show you why. And the relatively negative sentiment vis-à-vis Asia that prevails in financial markets today seems to us to be somewhat disconnected from the drivers of the real economies that we see locally via our businesses. Now within this context, what really matters the most to us and to our story is actually what happens to the Asian middle class. It has been at the heart of our strategy for a few years. One of the most visible manifestations of the economic success of our sweet spot countries, sweet spots is Hong Kong, Singapore, Malaysia, Indonesia, Thailand, Vietnam, the Philippines, has been the emergence of a vast and growing insist on both vast and growing middle class with high savings, low levels of household indebtedness and significant needs for production. Frankly, that is an ideal combination for savings and protection company like Prudential. So here, what we have is a simple way of -- I believe capturing the scale and sustainability of the opportunity. I'll ask our team to track the contribution of the middle class for GDP in our sweet spot markets over a long period of time. We have 32 years. As you can see, the Asian middle class's contribution has proven not only extremely resilient over this period in the face of several successive periods of quite significant macroeconomic challenges and upheaval. And we have named a few here. The Asian crisis in '97, '98, the Lehman collapse. What you see is flattening, so you lose all 2 years and then, it starts and comes back again. So please keep that mental image in mind because a little of what I'm going to say further refers to that slide. Our sales across Asia is focused on meeting the needs for protection of that middle class. That straight line over 32 years. The demand for the insurance coverage that we provide to people, protection against illness and accidents in their lives is highly correlated to health care and medical services spending. So we've looked at the behavior of that. What you see here is that it's a nondiscretionary item. It is a good classification from the IMF you have necessities, semi-necessities and discretionary. Health care sittings, the nondiscretionary and semi-necessities, so it's actually quite robust across the economic cycle, and we see that several times this morning. Over the 20 years period told here 1990, 2010, it stays stable. 6% to 7%. That's not a huge movement, but the more interesting thing about Asia is always to look at the absolute numbers that 6% was GBP 28 billion 1990, '10 it's now GBP 92 billion. Okay? It's grown 3.3x, and that is really for us the central theme of the Asian story. And looking forward, they're some really solid projections that it's going to go in the next 20 years to GBP 250 billion. So you've got a triple again. So typical of Asia, it would have gone from GBP 28 billion to GBP 250 billion in that space of time. Now and you've seen the next chart several times. We've used it probably at our '08 Investor Day, if my memory serves me right in Hong Kong but then Barry, the truth will be how to look at expenses. We've been using it time and time again but it's says an important thing. There are large number of customers facing an accident or illness risk for which they may be substantially out of pocket or in other words, a protection gap. And these are great opportunity for insurance companies. It's a great opportunity for an insurance company to come in and offer coverage that will benefit not only those who buy it, but also society at large, whilst generating good return for shareholders. So to summarize, there's a huge and growing unmet demand from protection in Asia. Penetration remains low in a market that itself is going to continue to grow very strongly. So we're starting from a low base in something that itself grows very strongly. So this pie will continue to grow faster than our ability to eat it. The expression I borrowed from Barry, but I think it's very accurate in describing what we face. And I think Barry has a perfect -- he's developing a pin. I saw a draft of it and said, I like pie. It's a red pin. Thank you. I want the first one. So with vast opportunity, of course, has not gone unnoticed. We don't believe that we're the only ones who know this. Anybody who has access to macroeconomic data can run those numbers. And a lot of companies have woken up to the Asian opportunity and are trying to capture it. Indeed, there are more than 200 insurance companies present in Asia today, and the market is constantly seeing a stream of new entrants. So why do we believe that we will continue to be a winner? If I had to give you a one-word answer, I would say, distribution. Having quality and scale in distribution is an absolutely necessary condition, not sufficient, but certainly necessary. For our success in capturing the huge opportunity created by the emergent of this vast middle class. And our philosophy when it comes to distribution it's pretty straightforward and simple. We actually only have one model, it's face-to-face. We believe in face-to-face, needs-based selling and this can be done through 2 different channels: By our agents, or by our financial service consultants in partner bank branches. But fundamentally, it's the same commercial transaction taking place. So starting with agency. This channel, as you see here, is going from strength to strength. We now have over 280,000 agents in our sweet spot markets, and over a 5-year period from '08 to '13, we have tripled the number of agents in this market, while improving their productivity as measured by sales by Asia, by 31%.

Triple agents, 31% more productive. This is why we believe that our agency force is a very significant competitive advantage in and by itself for us. And this is only the beginning. Very significant potential for a long-term sustainable growth of agency distribution in Asia. The education systems of the countries where we operate continue to produce vast numbers of motivated young graduates significantly in excess of our needs. And over the years to come, the multiplier effect of higher headcounts and constantly rising individual productivity will continue to drive higher levels of profitable growth for us allowing us to strengthen and deepen our competitive advantage in our well-established leader position.

Moving away from agency, we remain very optimistic about the growth for our network of bank partners and policy. Banks are essential, at least to our strategy. But because of their long-term nature, they're an art, not a science. So we take a cautious approach. We have been getting lot of questions why don't you do more enough partners well, we take a cautious approach to choosing our partners because we know what it takes for such partnerships to be a truly successful. And we broadly follow 3 principles. The first one is that our partners must have a long-term commitment to our markets and be willing to invest to grow their franchise for good times and bad times just as we do, as that is the recipe for long-term success in Asia. We told you a number of times we're meeting with Asian officials and they tell us, well of course, you Prudential, you're different because in '97, '98, you didn't -- you stayed with us. That means a lot in the context where we operate. We do not want to go with people who will be flavor of the month push emerging markets when you're in another following year. That doesn't interest us. And that shrinks our universe. Second, our partners might be focused on building a successful business in the long term. That's really important. They are banks that understand that the value of a partnership is in building a large growing successful profitable business and in the revenue stream, but over time, this will generate. However, been trying to extract the largest up fund fee possible. These are really interesting fund fees, we'll have a later discussion on that fund fee. We look at the economics of it, it's a small fraction of the economics of the deal. There are banks that understand that and there's -- did you succeed or not. If I knew how long you have been able to build out your proper displays that's where income and revenue stream over 15 years, just for our 15 years versus an initial payment. Okay, so we're only interested in people who understand that because that's what we want we want to build a successful and sizable and material business together. And we believe that if I may dare get an analogy, a partnership is a bit like marriage and auctions are not a great way to choose a spouse. Our partners are banks that share our focus on performance and on the bottom line. But cultural alignment ensures that they will not ask us to do things that do not make sense such as selling products that are unprofitable for us. And frankly, to be candid, we had a few of those situations and we try to get out of it because it just doesn't make sense. You're constantly asked to give money away. That's not what our shareholders pay us for. Okay, and we don't like partners who say "it will be great if you provided our customer with a product that has a minus 20% margin", of course, I'm sure the customers will love it. But that's not what we do as a core business. And it's just a very unproductive setup, which just doesn't work in the long term. So these are the 3 principles we look at, and we apply these consistently and they guide us in selecting our partners. So you've seen UOB in 2010, Thanachart in 2012. These more recent partnerships are performing well. Sales at UOB have quadrupled, sales in inception in 2010. And when we used to talk to [indiscernible] the owner and leader, he would say what I love this life business and I'm convinced there is a huge potential there. I want you Prudential to come in and transform this business. Now that's music to our ears, okay? He never told how to check in, and he didn't care and he's really happy in here. I saw him in Singapore 2 months ago, really happy because the business has quadrupled. Trust me he makes much more money from that than from the initial check. Okay, Thanachart, I will come back later. Now our partnership with SCB is we believe the best example of why these principals matter. It has delivered significant growth since inception. Over the last decade, EPS grew by 19% CAGR and has been multiplied by 6x. And the most important fact about SCB is that in spite of all these growth, our penetration of the SCB customer base is 3%. So that is why we are happy to renew our agreement for another 15 years. The new deal we are announcing today provides huge headwind from growth. In a partnership with a proven track record these are not unproven or a startup between 2 new partners. That we've been working successfully with them for 15 years. So we know what we're buying. And here again, with 3% penetration, this pie will continue to grow faster than our ability to eat it. So we said distribution. The strength of our disruption, the quality of our product design allow us to deliver to customers our product at a very affordable cost. In this slide that you also saw in December, we show you the example of Indonesia to illustrate that we're able to provide health insurance coverage at an affordable cost, 5% of income here. So we've been able to grow strongly over a long period of time due to a combination of factor. I've talked about the strong and growing demand for savings and protection plans, so covered that just now. The unparalleled distribution power that we have in just over on that we'll right put it and a fourth factor, we knew which is our geographic diversification. And the resilience of these sales in '08, '09, when many predicted they would collapse. As well as our group since then are visible in this Slide.

And before I leave the story, just to leave you with one statistic. You have seen in Q4 of '13, we did GBP 602 million of APE. In the all of 2005, we did GBP 568 million. So and that's not such a long time ago. So we did in Q4 of '13, more business than in the whole of 2005. So that's the kind of performance we've achieved at a regional level. So let me now use a few country examples. And I will talk about Indonesia, Hong Kong and Thailand. I am a little bit unfair to all of our territories where people are doing great things. But I'm sure you intend to have lunch, so I've only taken 3 countries. So let's start with Indonesia. Our Indonesian business is in great shape. We have a leading market position with over 197,000 agents. And it's always feel a bit dizzy after I say that. 197,000 agents in the country and access to greater and actually meant for those of you have been to -- who went to Jakarta, Rinaldi -- we also have Rinaldi in Indonesia. It's absolutely an amazing asset team in itself. An access to greater than 700 bank branches. In 2013, we continue to grow sales further. We have extended our reach across the country, and we showed you the maps outside Jakarta. We believe we're offering the right products, at the right time, to the right channels. And at this stage of the development, of that economy in that country demand for savings and protection products is actually very, very strong. And that is why we have achieved such high rider attachments to our policies, our savings and investment products. And as I showed you earlier, product is affordable, costing 5% of the customers income. So not only our products good value, we also provide high levels of customer service, our unique pool hospital friend, concierge service. Much appreciated by customers is now available at 3x more hospitals than in 2012. And we do that profitably in 2013 IFRS profit in Indonesia grew by 22% on a local currency basis. Demonstrating the strength of the fundamentals that are driving our business 25% on the local currency basis. Now that is all fine, but that is the past. And I know something about results for you, mostly interested in the future. So just to say a word about that. By 2013, the middle class in Indonesia, which is now 45 million. Okay, so we have a 1.9 million, 2 million customers out of 45 million is expected to grow to 135 million. So we are not at risk of running out of growth anytime soon in this market. And we will continue to focus on delivering quality products and services to a rapidly expanding customer base. Here, again, the pie will continue to grow faster than our ability to eat it. But not only are we growing in markets with low insurance penetration. We're also making strong progress in so-called and I insist on so-called, because that's not how we call them, mature markets as Hong Kong. Well, over the last 4 years, in these so-called mature markets, we have more than doubled IFRS operating profits in our life business by growing the scale of the business, acquiring new customers and at the same time, retaining existing customers. In 2013, our APE grew by 23% again in these so called mature market driven by increasing demand for our products, the increasing cases sold by agents as well as higher case sizes. It's one reason Standard Chartered Bank are currently so pleasing because it's very strong in Hong Kong and Hong Kong is a great place to be, quite frankly. The strength of our product and service proposition in Hong Kong allows us to achieve customer retention rates in the high 90s. It is directed to profitability. And it's a great place to be where we do very well. Moving on from Indonesia to Hong Kong to Thailand now, which is the second largest economy in Southeast Asia after Indonesia by GDP. Indonesia is about 300, Thailand is about 380. I told you in the past that we were frustrated that we didn't have a material business in Thailand. And that had been a gap in our original strategy. We're very pleased to say that we are now well on the way to achieving this. Our strategy in this market has been to improve our historically underweight position by strengthening our presence and that was deliberate in the fast-growing bancassurance channel as we knew that the agency channel was challenged and the statistic we see every month confirm that. Our partnership with Thanachart, which launched in May last year has simply transformed the scale of our business in a very short period. From integration, to execution, the local team has delivered the plan flawlessly, and we're very pleased that every single employee of Thanachart decided to join us. It was a great compliment. And the retail preparation to conduct it prior to the official close enabled us to sell our first policy on the first day of launch. As can be seen here, this has transformed the business. And we visit to all those countries, and I guess there always has to be the last one, but being to Thailand was always a bit challenging, because Thailand was simply 11th out of 11 countries. So you go there and try to motivate them. But they've jumped in one go from 11th to 6th, it's now a 6th largest country by profit in Asia in 1-year, and that is with only 8 months of contribution from Thanachart. So we'd like to get the business to compete once against the others so we see off Thailand is now it's more status in the PCA meeting. And at the rate it's growing, we're telling the top 4 with respect because great distribution with Thanachart. They're the fifth largest branch network in the country and it's great position to be. So we're very optimistic about the longer-term prospects in Thailand, despite -- and this is all despite the political turbulence that you have all seen in other countries in 2013. Now I've talked about the commercial success that we are enjoying in each of our countries. But the significant part of our story in Asia is also about the growing profit momentum in Asia, and that is growth is increasingly profit and cash rich. From this slide, you can see 2 distinct phase and I'm going to talk about the first phase first. '05 '07, from '05 '07 we are showing you in gray APE and in black, profit. APE grew by a lot, 86%. While unfortunately, IFRS profits over this period grew only by 2%. So it was a lot of growth, but without much profit or without much cash. And they will come to this point later. I'm sure we'll talk about the dividend, but it's very relevant. From 2008 to 2013, APE sales grew by 81% and IFRS profits quadruple. Now this change in the profit signature is the result of all the work being done by Barry, by his teams in each of our local businesses and our focus on delivering growth and caption. This does not exist before. And you can see the progress we have made in recent years, very clearly on this slide. In 2007, most of our businesses in the region, this shows you by profit born if you watch the countries, okay? Below GBP 50 million, GBP 50 million to GBP 200 million, above GBP 200 million of contribution in IFRS profit. In 2007, most of our businesses in the region were in the lower divisions. There were not generating material profits, and only one business, Singapore, generated more than GBP 50 million of earnings. That is not a long time ago. That's 2007, that's yesterday. 3 of our established businesses at the time, Hong Kong, Singapore and Malaysia, the old established businesses in the region, that then contributed 97% of PCA's earnings. So the risk did not exist in terms of profitability. 97% of the profit came from 3 countries.

We've made some progress since then. Our younger businesses is a completely transformed picture. Indonesia, Thailand, Vietnam and the Philippines have together grown their profit 6x since 2007. Yes, Indonesia, Thailand, Vietnam, Philippines, aggregated, have grown their profit 6x since 2007. In the same period, profits from our more established businesses, the historic 3, I mentioned earlier, Hong Kong, Malaysia, Singapore, have actually trebled. So really we haven't done badly at all. We may have trebled, however, thanks to the growth of the rest of the portfolio, they now contribute less than half of our earnings. So when we talk about the diversification, that's what we mean. 3 businesses that used to constitute 97% of our profits, now constitute less than 50%, of a much higher total, because the total profits are also increased in that period. So this is our fundamental answer to those who sometimes are dismissive of the so-called smaller businesses. We have a proven track record of converting the so-called smaller businesses into material contributors over time. Now interestingly, 4 of PCA's local business units, take the top 4 there, Hong Kong, Singapore, Malaysia and Indonesia. If they were listed at U.K. life insurance P multiples, maybe a bit harsh, would be FTSE 100 contenders. But I believe with better profitable growth prospects than many life companies in the U.K. So just hold onto that first.

We are encouraged by many of our newer markets. It is, again, easy to be dismissive of the potential in markets like Myanmar or Cambodia. But we believe that, in time, they will follow on the same trajectory as the likes of Malaysia and Indonesia. Our tried and tested model is replicable and has been proven to work across Asia, and we've been able to transfer it again and again and again.

Now in the next 2 slides that I've used before, but sorry, we making an important one, I just want to reuse it then, please bear with us. They illustrate a fundamental point, the resilience of our sales and the importance of our regulatory end product to our strategy, which is also directly linked to the quality of our distribution. You can only sell regular premium if you have a good sales force. First, single premiums. We know they are volatile across the economic cycle. They dominate in Western insurance markets making the sales of Western life companies are volatile and Asia is no exception. And you can see it on this chart, our single premium sales have been volatile. But the central point we want to make is that the regular premium product have tracked, in red here, have tracked over 2 decades since 1995, very much the middle class aggregate that I showed you earlier, that straight line. These regular premiums contribute, again, 90% of our sales. Regular premium contracts are an ideal vehicle for long-term savings and they remain a product of choice for Asian savers. They address perfectly their growing demand for savings and protection. And have them to make small, but regular contributions, to protect and save for themselves and their families, and Nic will have a few charts showing the flows in our business and you will see the contribution and the strength of that regular premium business to our numbers. And this largely explains why our sales have been resilient across so many economic cycles. But again, in spite of all this growth, the potential for further growth remains very significant as the penetration of these products for which demand is strong, is still low. So this pie will continue to grow faster than our ability to eat it.

Now we often talk about our financial numbers and performance and emphasize it, but financials are only a convenient representation of reality, of what we do, which is to capture a historic opportunity through disciplined execution. We believe that the trajectories shown on these charts can continue long into the future. We have the right team to deliver sustainable long-term profitable growth for our shareholders. Now let me illustrate this point by giving you an insight into how we think internally about our newer markets' long-term prospects.

Now this slide shows you some of the key outputs of one of our internal business plans for one of our smaller markets. Really small. When I say small, you can see here 1,100 agents, 6,000 customers -- sorry for nothing, more than 15,000 policies and APE of GBP 1 million. Now we believe that over the next 15 years, in this market, we will multiply our agency sales force by 100 -- 150x to 200x, grow our customer base by 300x to 400x and issue more than 150x to 200x of policies today in the process, of course, growing this market's APE by 400x to 500x. Now it's still early in the morning, but I know many of you, at this point, are you thinking that this looks crazy. And that you're looking at a slightly deranged financial team.

Well, now, here's a fact. I'm afraid I misled you slightly involuntarily. This slide is not about the future, but about the past. It's not a projection, it's a natural result. We have delivered this performance and the market where we have done this, as you know, is Indonesia. You go 15 years from today, 1998, you realized the amazing transformation that this business has undergone. And this has been repeated by us in other markets in Asia, time and time again. So my apologies for the teasing, but really, this is making an important point. Because we face that disbelief, that skepticism, time and time again when we talk about those exponential curves and the power of compounding. All the mathematicians in the world know the power of compounding. But the human mind can't convert the 0.40 CAGR in 160x. It's just an operation we don't do very well. So that's what we want to illustrate here. We believe we have a proven formula for driving profitable growth. We believe we can replicate our historic success in new markets, while continuing to drive our existing operations to new heights. So why don't we have fun here in this slide. It's a picture of Indonesia at 2 points in time, 14 years apart. Central point, 1998 and then, 2012. You can see here, life insurance premiums have gone up 4x, GBP 2.6 billion to GBP 10.2 billion. But the life insurance penetration is still quite low. After this phenomenal growth that I've showed you, whoa, you're going to run out room, you got to slow down, blah, blah, blah. We have a lot more to go for here. Penetration is barely above 1%. So the pie is growing faster than our ability to eat it. I'll 'repeat it 10x today. That's all you need to understand about the Asian business, the pie is growing faster than our ability to eat it. So stop worrying about how much we're going to eat. Our problem is not to get an indigestion. There's so much pie, that, really, the issue is not, is there enough pie? It's stay disciplined, don't go to fast, that's my firm, this gentleman over there. Say, we go twice faster. It's really about maintaining the quality of the growth and the quality of the distribution. So that we build, not on sand, but we build on solid foundations and we have a profitable sustainable business going into the future.

So the big 3 examples. We can replicate this in Thailand, I've showed you, we're nowhere, we're #9 the small market share. In the Philippines, we have -- we have a number of chances with 8,000 agents now? Yes? 8,460, something like that, the number changes everyday. And in Myanmar, where we don't even have a business. We can replicate this success and just note, that these 3 countries, when there are worries for potential for growth in Asia, have the same population as Indonesia, all right? So we believe that the long-term potential in these markets, in terms of absolute size, is often underestimated. Each of these countries in 10 years from now will be very material for us, whoever is standing here and giving this presentation, take the commitment.

Our 2017 objectives, which we are absolutely focused on delivering, our milestone on this journey. However, the journey will not end in 2017. We aim to deliver that same profitable growth trajectory for well beyond the period that most observers habitually forecast. So to summarize and conclude in Asia, there's 2 messages. One, It's obvious that there are a few short-term challenges for a number of the economies, but we believe, that the fundamental drivers we talked about this morning are intact and that this pie will continue to grow faster in our ability to eat it and for a long time. Two, we are in the unique position to take advantage of a significant opportunity, thanks to the growing scale and quality of our distribution, our main competitive advantage. And thanks to our focus, more importantly, on the execution and delivery and to the quality of our teams. So much for Asia.

Let me now move to the U.S.. Jackson continues to be one of the strongest players in the U.S. life insurance industry. And has delivered high returns on equity while maintaining a conservative balance sheet. The success that we have enjoyed in the VA industry results from the discipline with which we have implemented our strategy and from our focus on writing only value creating business at every point in the cycle. And that has led us, over time, to very interesting discussions at these presentations and that's the central point, writing only value creating business at every point in the cycle. One way to demonstrate the quality of Jackson's in-force book of policies is to look at the vintages based on the equity market levels, as levered by the S&P 500, at which your business was written. As you can see here, over 2/3 of our book was written at levels below 1,400 of the S&P. So 25% lower than current levels. Importantly, our customers are happy. They have seen their account values grow. In 2013 alone, their average account value grew by 23%, and it is a good rule of thumb, in insurance, that delivering value to customers avoids adverse policyholder behavior. Jackson continues to innovate and the growth of Elite Access to over GBP 4 billion of premiums in 2013, has pushed the contribution of nonliving benefit VAs, in red here, to over 30% of total VA sales. The combination of the pricing changes we've done almost every quarter and also in 2013, the rise in long-term interest rates at the end of the year, have pushed our new business margins higher. As shown on the slide, overall margins on VA are at 76%. However, just keep in mind that these margins here from one year to another on this chart, are not entirely comparable because the product mix has evolved significantly in the period due to the rapid growth of Elite Access in the last couple of years. Within the 76%, margins on our guaranteed variable annuity products are at an all-time high. Which is why we are very comfortable writing this business today, in volume. The long term consistent approach that Jackson has taken to the annuity industry in the U.S. means that it is now generating sustainable and significant cash remittances for shareholders which is our ultimate yardstick across the group and across [indiscernible]. So undeniably a good performance from Jackson and thank you, Mike.

So let's now move to the U.K. And there, we'll talk about U.K. Life, and then, M&G. As we showed at the investor conference in December, I'm sorry, but I'm afraid from now on, I'm going to have to use this chart every time I talk about the U.K. life sector. The industry has been generating significant net outflows for the last 5 years. And Nic will come back to that in his chart, regarding our assets, equivalent to almost 14% of industry's assets under management. These assets have largely been flowing to the asset management industry, which has provided simple transparent savings product that meets customer demand. Our strategy, therefore, in shrinking market is to focus on a few products for us for profitable where we have a clear competitive advantage and can deliver genuine value to customers and shareholders. As the left-hand-side chart on this slide shows with-profit product has delivered strong returns over the last 10 years, outperforming its benchmark quite significantly by 49%. This out-performance has translated into good returns for our policyholders with cumulative policies paid over the last 10 years of over GBP 22 billion, as you can see here on the right. And the with-profit capital position remains strong at the end of the year, 2013, and inherited estate was GBP 8 billion. Now moving onto retail annuities. Of course, a lot of attention has been devoted to annuities in the run-up through a thematic review published by VFC [ph] last month. We were, of course, as you would imagine, closely involved in the review work and we support fully the SCA's efforts improve the functioning of the annuities markets. This is a key and important and core product for our pension system and for our economy. No doubt about it. Prudential's annuity product position, actually, we believe, is strong. The chart on this slide shows you some data. The speed of a retail annuity APE in 2013, by type of annuity provided to our customers, just like to make a few points here. First, 37% of our annuity APE comes from the external market. In other words, from customers, who have shopped around and decided to buy an annuity from for Prudential because of the competitiveness of our offering. Second, our enhanced annuity proposition and probably we haven't talked about it enough, is doing well and has grown by 12% in 2013. Good growth. So again, I'm not saying that there's no growth in the U.K., there are issues, there are signals, but if you want, you can grow and profit. And third, of the remaining 60%, okay, if you have 37 and 6, anyway, the remaining 60% of those policies of annuity APE that comes from our existing pension customers, a majority of these, so that's 60%, internal, 80% either have variable guarantees, buy our market-leading with-profit annuities, which have the Income Choice Annuity, which gives them a choice to either take some cash, or take an annuity. Qualify for enhanced annuities or have pension puts less than GBP 30,000 where our rates are quite competitive, and we were quite competitive there because these are people we know well and we feel very comfortable pricing their longevity. When we get outside business, we're always worried about the entire selection and we're just more causes in pricing. And would be great if you can move the debate, probably debate away from pricing because of there are many, many other criteria in buying an annuity. And I'm sure, we've talked about it. But the business runs on numbers, if you look at the value of the embedded guarantee, that guarantees the options, in the old Man from the Pru, followed the people but it's very significant. In the examples I've seen, that the -- valuing that option, they're getting 18% to 50% more value than the average external market price. That's the untold story. Okay? So the 60% of the people are investing internally, we can absolutely demonstrate that 80% are getting a better deal internally than would get from the marketplace. We have all the data, very confident taking that challenge. So on average, our internal customers -- sorry, are not stupid. They shop around, about 80% of them do. They're very aware of the open market option. They make a rational, conscious decision, which, actually, we believe is the right decision, because we have data to support it. They take the best deal for them. This, after 20 years with the Pru, stay with the Pru. And we, actually, give our internal customers annuity rates that are higher than those are available externally. That's the position of this company. So we welcome the FCA thematic review and we're working closely with the regulator and other stakeholders to deliver the best outcome for our customers. Clearly, there are issues there, for instance, we're below 10,000 puts. Yes, there is something to be done there, probably so ABI [ph] made a statement, Monday, about that. There are things that need to be improved. We're not sitting -- standing here, saying, oh, everything's perfect, no. But we're just saying, we need to keep the firm in proportion, and this business has been run very responsibly.

Now like every part of the group, we remain focused on cash generation and the U.K. has done well in that respect in the challenging, again, environment, continuing to deliver tangible value to shareholders as you can see here. In 2013, the U.K. remitted GBP 355 million of cash, it's nothing to sneeze at, achieving its objective of the delivering GBP 350 million by 2013, as we had announced at the investor conference in December. You will remember that Jackie shared with you, in December, again, her early thoughts on the business. She is reporting to the board in the second quarter on the conclusions of her review and we will share any relevant conclusions with you in due course, but to be clear, what you should expect is evolution, not revolution, as Jackie made clear in December in her presentation.

Moving onto M&G, which is where we've seen more growth in the U.K. M&G has grown from its roots as a U.K.-only asset manager to building a large diversified business over the last decade. You can see the results of this strategy on this slide. M&G has not only continued to grow in its home market with retail FUM, funds under management, in the U.K. more than trebling in the last 5 years, but it has also been able to diversify successfully into Europe, where funds under management have grown by almost 8x, 7.60x. This has led to total external retail assets under management growing by 3.5x with higher-margin external assets currently accounting for more than half of the total funds under management, a rare position for an insurance company. This geographic diversification has gone hand-in-hand with diversification, both by asset class and by type of client. As you can see here on the right, the external funds under management is roughly split equally between retail, shown at the top, and institutional, shown at the bottom, with good diversification between equities and fixed income and other asset classes. This lends resilience to the business and positions M&G well, we believe, to perform across economic and market cycles. Underpinning this success is, of course, strong investment performance. And by December '13, 69% of retail funds under management were above median, over a 3-year period, which we believe is an appropriate period to judge performance. And 100% of the institutional segregated fixed income funds were above their respective benchmarks. The successful execution of M&G strategy has resulted in IFRS profits growing by 1.7x over the last 5 years. So here, almost doubling over 5 years. So if I daresay so, Michael and his team have generated Asia-like performance in the European context.

In 2014, M&G's IFRS operating profit grew by 23%, driven primarily by a 22% increase in external retail funds under management. I will just stop here and say a few words. I know, I'm in the U.K. section but I just to say a few words about the Eastspring and asset management in Asia. Eastspring is also making good progress in delivered IFRS profits, which are 9% higher, in constant currency terms, over -- year-over-year. We are focused on building organically a world-class pan-Asian asset management and we remain a leader in our industry in that respect. Our entry for asset management into newer markets where we already have significant life business expertise, such as Indonesia, augurs well for our future growth in asset management across the region. Let me now turn -- in the final section to the operating performance of our 4 business units and how it has translated, over time, into returns, into growth and cash for shareholders.

Over the last 6 years, and you're familiar with this slide, free surplus generation, our key measure of cash, as you know, kind of looks like -- a key measure of cash, as you know, has more than doubled, and dividend payments have more than tripled. And today's up for dividend re-base is the direct result of a strong operating and financial performance of the group. Now I do not want you, please, to read too much into a sequential upwards re-basis of our dividend over the last 2 years. This reflects the strong financial performance of the group in that period. Our dividend policy remains unchanged. We aim to pay a progressive dividend and of the board will consider a periodic re-base, if and only if, and when we can demonstrate a capital and cash headroom following our internal and stringent stress test and those really cover a range of criteria. So we're actually very stringent and not -- do not just look at one metric.

So with that, let me now hand over to Nic who will take you through our 2013 results in more detail.

Nicolaos Andreas Nicandrou

Thank you, Tidjane. And good morning, everyone. Just about, good morning. In my presentation. I will provide you with a detailed look at the drivers of our performance in 2013, with a particular focus on IFRS profit and free surplus generation, the 2 measures that underpin our new 2017 financial objectives. I will also give you an update on our balance sheet and take you through the new economic capital information.

Starting with the financial headlines. We have delivered a strong performance in 2013, building on the positive momentum of 2012 and accelerating through the second half of the year. Our disciplined execution has enabled us to report double-digit increases in all of the profitability metrics shown on this slide. So as you can see, in 2013, new business profit increased by 16%. IFRS operating profit was up by 17%, with all geographic regions delivering over GBP 1 billion for the first time. Embedded value operating profit rose by 29% and free surplus generation was also higher by 18%.

The growth that we have enjoyed over the last few years in Asia and the U.S. means that the proportion of the 2013 results transacted in sterling, ranges between 10% and 40% of each total, depending on the metric. Sterling appreciated markedly in the second half of 2013, but the use of average exchange rates means that the translational effect on our reported results is relatively muted at between 0 and minus 2%. And I will come back to this shortly. Working in the other direction, though, our operating results of benefited from rises in both equity markets and long-term yields. We saw this effect come through the half year numbers and this tailwind persisted through the rest of 2013. Now I will point out the areas where this is most pronounced, as I step through the presentation.

Looking at the contribution to each financial metric from our 4 businesses, you can see that the 2013 improvement has been broad-based. In presenting this slide, I remove the currency distortions in order to give you a clean underlying business performance. Asia has delivered a strong double-digit growth across all measures, highlighting, again, the benefit of our focus on regular premium business with a strong bias towards health and protection, which is less prone to market movements and is underpinned by the favorable long-term structural trends that Tidjane has already outlined. Our U.S. business has delivered another excellent trading performance reflecting the more positive investment markets and economic conditions. These improved results were achieved while managing both the size and mix of VA new business sales, reflecting our approach to balancing value, volume, risk and capital generation at this point in the economic cycle. In a year of considerable market disruption, our focus in the U.K. on value and cash generation over volume has seen us sustain our IFRS profits and grow free surplus generation.

Finally, M&G continues its strong track record of attracting flows and this has driven increases in funds under management, earnings and cash. Our overall performance in 2013 demonstrates the quality of our new business franchise, the resilience of our in-force book and our ability to deliver growth in both earnings and cash. I want to deal with the currency translation effect early in my presentation, as I know this is front of mind for many of you. I mentioned earlier, that we use average exchange rates to translate our local currency results into sterling and that this convention has only had a muted effect in 2013. The full impact of the currency falls that we experienced in 2013 will progressively come through the reported 2014 sterling results. It is difficult to predict what the actual impact will be, as we will only know this as we move through 2014. So what I have illustrated on this slide is the effect that using year-end spot rates would have on our 2013 IFRS and free surplus results, which would have been 6% and 5%, respectively. As the pie charts illustrate, the group's overall reported results are mostly exposed to U.S. dollar currency movements. This is also true of Asia results, where the largest contribution comes from countries whose currencies are either directly pegged or managed by reference to U.S. dollars. Please bear in mind that our exposure to foreign currency is purely translational, reporting the fact that we report our results in sterling. We are appropriately focused on earning local currency businesses in each of our markets and we do not take any transactional cross-currency exposure. As Tidjane has already said, we believe that in the long term, our exposure to currencies in high GDP growth countries will be a source of future value for our business. With that covered, I will now move to our 2013 results, starting with IFRS.

Our IFRS operating profit from Asia has exceeded the GBP 1 billion level for the first time, excluding the one-off gain flagged last year from the sale in our stake in China Life of Taiwan. Asia's reported IFRS life profit was up 17% or 20% on a constant exchange rates. Life profits have benefited from strong contributions by the faster growing markets in Southeast Asia. Taken together, our 4 largest businesses in Indonesia, Hong Kong, Malaysia and Singapore, delivered double-digit growth, producing GBP 748 million of IFRS profit, exceeding the contribution from our U.K. life business for the first time.

Our smaller fast-growing businesses in Thailand, the Philippines and Vietnam have also made encouraging progress during 2013. On a combined basis, they accounted for over half of the increase in Asia's life profits, contributing 12% of the total, up from 6% the previous year. We continue to grow the scale of our life book in Asia, which we measure by reference to policyholder liabilities, as shown on the chart in the top right in your books.

During 2013, the addition of another sizable cohort of regular premium policies, combined with a lower exit rate from in-force, has generated net life inflows of GBP 2.3 billion equivalent to 12% of opening reserves. This is a new high and it is the first time since the crisis that we have seen net inflows above the GBP 2 billion level. What this shows is that in a year where many commentators have expressed fears about the economic outlook for emerging markets, customer behavior on the ground has not been impacted. If anything, retention improved in 2013, as illustrated in the slides charting the surrender and partial withdrawal rates, that are included in the appendix. Invested market and other movements have been net positive contributing further to the growth of our book. While in local currency terms, the stock of the liabilities is not impacted, you can see at the chart the effect of translating this back into sterling. So the dynamic that I have referred to before, of focusing our sales effort on new regular premium business, with a sizable health and protection content, sold to a very sticky customer base is evident, once again.

Turning to the chart in the bottom right. Life income has grown by 14% at constant exchange rates reflecting both the larger scale and the high return nature of Asia's business. Costs have also grown, but at slower rate of 11%. If we now look at Asia's life business performance in more detail, the sources of earnings analysis shown here, confirms most of the key messages from our previous slide. Technical and other margin, shown in the middle, remains a dominant feature of Asia's life income. Within this category, insurance margin grew by 15% to GBP 679 million, reflecting strong growth in health and protection business and a contribution of positive claims experience. Marginal revenue is also higher at GBP 1,562 million. I would remind you that deferral and amortization of acquisition costs is not a significant feature of our Asia results, which means that our accounting earnings are very close to cash earnings.

Turning to the U.S., IFRS operating profit was strongly up at GBP 1.3 billion, driven by a 29% increase in the life result. The 2013 results include a full year contribution from REALIC of GBP 128 million, which compares to GBP 67 million in the previous year. Excluding REALIC, the improvement in the result is primarily due to higher fee income, which has benefited from strong growth in variable annuity account balances. The growth in the scale of Jackson's business is illustrated, again, on the chart in the top right in your books. Policyholders' liabilities have increased to GBP 107.4 billion as net life inflows contributed GBP 9.6 billion. This is the fifth year in a row that life net inflows, in other words, the component that we control, have added more than 10 percentage points of growth to the stock of opening reserves. The strong S&P 500 rally in 2013 contributed a further GBP 8.2 billion. As was the case for Asia, the currency translation effect is only relevant to sterling reporting purposes. As well as being best-in-class from a service perspective, Jackson's operating platform is both scalable and efficient. The benefit of this is evident on the chart in the bottom right, where the positive JAWS [ph] effect is clear with revenues -- revenue continuing to grow at a faster rate than expenses. Turning to the detailed sources of earnings analysis for the U.S., I would like to draw your attention to 3 areas: Firstly, fee income, which has grown by 34% to GBP 1,172 million, in line with the 35% growth in average separate account balances. Fees are marginally lower due to the increased proportion of Elite Access, which has a lower M&E fee. Secondly, insurance margin, which has grown to GBP 588 million reflecting the extra contribution from REALIC's term insurance business, which is delivering the objective of both growing and diversifying Jackson's earnings. Thirdly, spread profits, which are marginally higher at GBP 730 million, as we maintain their overall spread margin through crediting rate actions. We continue to anticipate that spreads will tend towards the 200 basis point level in the near term. We are pleased with the evolution of the shape of Jackson's sources of income, which is delivering improvements in both the quality and the resilience of its earnings.

Moving to the U.K., IFRS operating profit was in line with the previous year at GBP 735 million. The chart, on the left, analyzes the results between what I would call the underlying retail life result in red, the contribution from bulks, the general insurance commission and the one-off profit from the longevity swap we executed earlier in the year. The overall result continues to be driven by our focus on with-profits and annuities. The main change between the 2 years is the lower shareholder transfer from with-profits reflecting the reduction in bonuses. In 2013, life inflows for our shareholder backed business remain negative and have been mitigated but positive investment market movements. The with-profits picture, if I had put that one up would be similar, and both are consistent with the transfers we have observed for the number of years in the U.K. life sector that Tidjane has already illustrated. Now despite these trends, as you can see in the bottom right, we have defended our overall level -- our overall life income levels by focusing on those parts of the market where returns are most attractive and by being disciplined about our new business economics. Expenses, as you can see, were 4% lower.

As I have said before, genuinely attractive investment opportunities are more limited in the U.K. life sector relative to other parts of the business, and this will continue to place downward pressure on our earnings prospects. We remain comfortable with this as it does not detract from the important role that the U.K. plays in our group.

Turning to M&G, IFRS operating profit was 23% higher at GBP 395 million. This strong performance reflects the growth and the scale of the retail business, which is our most profitable segment.

For M&G, the key driver of earnings is the growth in external funds under management. As you can see in this chart, external funds under management are up 13%, reflecting net inflows totaling GBP 9.5 billion and the positive effect of investment market movements, which have added a further GBP 4.6 billion.

Total external funds under management of GBP 126 billion at the end of 2013 represent a new high and our testament to M&G's track record of positive net inflows for the 11th year in a row.

The growth in funds under management has been achieved principally in the retail segment where fee income is highest. As Tidjane has already explained, retail funds under management were 22% higher in 2013, underpinned by a strong sales performance in Europe. The success in retail has driven an 18% increase in underlying fee revenues, which you can see on the chart in the bottom right.

As I indicated this time last year, we're making additional investments in 2013 and 2014 in scaling up the infrastructure of M&G's business. Reflecting this investment, M&G's total costs are higher, but the effect has been absorbed by the increase in revenue, leaving the total cost income ratio unchanged at 59% year-on-year.

I will now move to free surplus, the measure that we use to track cash generation in our business. Starting with the table on the left, our life in-force profit and asset management businesses have generated GBP 3,099 million of free surplus in 2013, representing a 15% increase over 2012.

Now this figure was around GBP 1 billion in 2005. It reached GBP 2 billion in 2009 and has now exceeded GBP 3 billion.

In other words, we have added GBP 1 billion every 4 years. It is our ability to grow free surplus through writing high return, fast payback new business that distinguishes Prudential's business model from that of others.

We continue to take actions to optimize capital consumption and have invested GBP 637 million in 2013 to write new business. This is 3% higher than 2012, reflecting the combination of pricing actions, changes in business mix and the favorable impact of the rising yields through the year. On the right, we analyze the contribution of each business. And as you can see, all 4 businesses are making significant and growing contributions to the total.

My next slide shows how this cash generation has impacted the stock of free surplus and central cash.

Starting on the left, the net free surplus generated in 2013 helps absorb the negative GBP 807 million impact of market movements, including a negative GBP 200 million currency effect and funded cash remittances to group, totaling GBP 1,341 million, representing an increase of 12%. This leaves some GBP 4 billion of free surplus stock, which we can either deploy to finance future growth or can act as a buffer against future economic shocks. As we said in December, over the last few years, we have managed our internal remittance ratio within a corridor. We believe that it is appropriate to retain the flexibility that a range affords, leaving scope to manage the group for fluctuations in economic cycle and to pursue business opportunities. You can see how these remittances have impacted central cash on the right, which, after deducting several costs and external dividends and adding the net proceeds from hybrid insurances, meant that we closed 2013 at GBP 2.2 billion, which is a healthy position.

Before leaving this topic, I wanted to reemphasize the reliability of future free surplus generation by updating you on the undiscounted monetization profile of our life operations.

By now, you will be familiar with these charts. The dark blue bars in the top chart represent the end 2012 life in-force monetization profile as we reported a year ago. The light blue bars represent the updated profile of the end 2012 block of business one year later. These bars are now higher than before, reflecting the positive impact of rises in yields between the 2 periods, which have compensated for the negative currency translation effect.

Now when we add the cash flows from the 2013 new business cohort shown in red, we have an overall profile that is higher than the one we started with, evidence of the powerful capital dynamics of our business model.

I will now cover briefly the EEV basis results before turning to capital. On this basis, life operating profit was up 27% to 5,639 million. As you can see in the chart on the left, the improvement is broad based and is equivalent to a return on opening embedded value of 19%. We estimate that the rise in long-term yields experienced in 2013 has contributed some GBP 450 million to this total.

The chart on the right summarizes the contribution from new and in-force business. New business profit was up 16%, and I will come back to this shortly. In-force profit was 42% higher at nearly GBP 2.8 billion. As shown in the breakout box, the increase reflects a combination of growth in the book, favorable variances and the beneficial effect of higher long-term interest rates. The latter point is evident in the numbers labeled unwind. Approximately, GBP 250 million of the increase in 2013 relates to the positive gearing from the rise in long-term yields.

In 2011 and 2012, when interest rates were falling, I flagged that the unwind had been negatively impacted by GBP 200 million and GBP 83 million, respectively. Therefore, while interest rates are not yet back to 2010 levels, we have recouped most of the drag that we experienced in the unwind on the way down. The drivers of the positive experience variances and assumption changes are summarized on this slide.

In Asia, all factors including persistency, mortality, morbidity, have remained in positive territory, in line with recent trends. This provides yet more evidence that customer behavior has not been impacted by the macroeconomic concerns.

In the U.S, we have seen a continuation of positive -- of the positive contribution from spread, reflecting the success of the actions taken by management to mitigate the low interest rate risk. Other items include favorable persistency of GBP 134 million, which reinforces our prudent approach to assumption setting and to pricing.

In the U.K, both years benefited from the effect of the reductions in U.K. corporation tax rates. The contribution from other is distorted by one-off items, but the underlying position is positive in both years.

Positive experience has been a regular feature of our results since the crisis, a period characterized by significant global macroeconomic uncertainty and market volatility. Our strong performance here confirms both the quality and the resilience of our franchise.

New business profits, shown on this next slide, grew by 16% to GBP 2,843 million. The table on the right analyzes the drivers of this growth, with volume, pricing and mix contributing 9 percentage points of the increase; and higher long-term yields, a further 8 points.

All 3 regions continued to write new business at internal rates of return of more than 20% with short payback periods. In Asia, new business profit was 15% higher at GBP 1,460 million. At constant exchange rates, the increase was 19%, with both agency and bank channels growing NBP at similar pace.

The improved profitability reflects the growth in our 7 sweet spot markets where NBP was 21% higher, driven by health and protection. The rise in yields had a small positive overall effect on NBP, reflect -- benefiting Hong Kong due to its bias towards savings products and dampening Indonesia due its focus on protection, which attracts a lower EEV valuation at higher interest rates even though the profit signature is unaffected.

In the U.S., NBP increased by 24% to GBP 1,086 million. Within this number, the contribution from variable annuities increased from GBP 809 million to GBP 1,023 million. This is despite the 7% decline in sales of VAs with guarantees, the negative effect of which was counted by the positive effect of product and pricing actions; the contribution from elite access; and the beneficial impact of the 130 basis points increase in treasury yields, which added GBP 150 million to the U.S. NBP.

U.K. retail NBP was 3% lower. This is despite the 12% reduction in retail sales, the effect of which was mostly compensated by pricing and product actions and improvements in mix. The economics of the business sold in the U.K. are extremely attractive when you consider that this NBP was delivered by investing GBP 29 million of capital.

Moving now to the rest of the profit and loss account for both IFRS and EEV. In my interim results presentation, I walked you through the mechanics of the IFRS accounting mismatch that is generated from Jackson's hedges when equity markets rise. I will not repeat the explanation beyond reminding you that this arises because hedges are fully mark-to-market and liabilities are mostly marked to cost. Equity markets rallied further since June, so the negative effect of accounting mismatch reoccurred in the second half of the year, although the impact was more subdued. We remain committed to our approach of hedging on an economic basis and are happy to accept the volatility in the accounting results that ensues. In addition, the further rises in interest rates in the second half generated some more negative value movements on our holdings of fixed income securities. Under IFRS, this come through investment variances and unrealized losses on AFS securities. And as you can see, the impact compared to the first half was also much reduced.

The most significant effect in the second half was the negative GBP 0.4 billion arising from translating our U.S. and Asia IFRS net assets at the year-end exchange rates.

Overall, the strength of our operating performance in the second half has been sufficient to absorb all these factors. So after deducting the interim dividend, our IFRS shareholders' equity is slightly higher at GBP 9.7 billion compared to June 2013.

On EEV, investment variances are positive in both halves, reflecting our ability to recognize on this basis the full economic benefit of the improved market returns. Profits for the period, therefore, accelerated in the second half and were only partially offset by the negative currency translation effect of GBP 1.8 billion.

Nonetheless, the strength of our operating performance was such that retained earnings boosted our shareholders' funds by 93p over the course of 2013 to 971p per share.

I have provided you on this slide the usual update on the balance sheet. In short, the overall picture is unchanged. We remain well capitalized and defensively positioned. All of our key underlying solvency metrics have improved. The with-profits estate stood at GBP 8 billion at the end of 2013.

At the start of 2014, following the completion of our domestication product, some GBP 1.2 billion of the estate was transferred to the newly created Hong Kong life entity, leaving both funds well capitalized. The U.S. RBC ratio has improved to 450%, which attests to Jackson's disciplined approach to managing its capital base. Our stance on hedging our U.S. variable annuity exposures is unchanged, and the $1.3 billion fees that we will levy for providing guarantees in 2014 provides an ample budget to hedge.

We have updated the information relating to Jackson's capital formation, capital sensitivities to shocks and customer behavior and have included these in the appendix to your slides.

In my remaining slides, I set out a summary of the group's economic capital position based on our current Solvency II internal model.

We're still 2 years away from having to adopt Solvency II and, notwithstanding the Omnibus II breakthrough, further clarity is needed in a number of areas, which will be provided when the level 2 and level 3 guidance is finalized. Furthermore, the PRA has not reviewed and approved our internal model, and this is a further source of uncertainty. All this to say that these results should be viewed as highly indicative and subject to change but provide you with a first view of Prudential's solvency position on a risk-sensitive basis.

The key assumptions underpinning the calculations are shown on this slide and are set out in more detail in your -- in a new section that we've created in your packs. The results assume U.S. equivalent, incorporating Jackson's surplus over the 250% RBC level, consistent with our approach to free surplus reporting. The 250% level is informed by the results of our internal multi-year economic capital model, which we believe provides a good proxy for the risk capital that we need to carry in this business. Furthermore, the results do not reflect the matching adjusting -- adjustment concept for U.K. annuities, pending further development of the calibration at European level and a decision on whether certain types of securities will be excluded.

As you can see, the economic capital surplus at the end of 2013 is GBP 11.3 billion, equivalent to a cover of 257%. The level of required capital of GBP 7.2 billion, shown in blue, represents the risk capital needed to withstand a 1 in 200-year event over a 1-year time horizon.

Available capital of GBP 18.5 billion, shown in red, represents a more economic view of our group's resources, removing unnecessary prudence from our Solvency I basis technical provisions and disapplying asset valuation restrictions.

The top chart on this next slide provides you with analysis of the risk profile of our business under this new basis. Around half of the group's undiversified risk capital requirement relates to market risk, shown in the red segments in the pie, and the other half to non-market risks, shown in the blue and green segments. The group's most material market risk exposures are to credit risk, principally from the U.K. and Jackson fixed annuity portfolios; and to equity markets mainly from with-profit shareholder transfers in the U.K. and the fund-related charges in Asia. The group's most material non-market risk exposure is to lapse mortality and morbidity risk in Asia and to longevity risk on U.K. annuities.

As you can see, our overall profile is not highly concentrated to any particular risk type. Our modeling shows that some 54% of risks diversify away. And in line with the Solvency II guidance on U.S. equivalent, no credit has been taken for the diversification of benefits between our U.S. business and the rest of the group.

The chart at the bottom of the slide shows the sensitivity to the end 2013 economic capital position to a variety of market shocks. The key message here is that the balance of our risks is such that the impact of these shocks is manageable. So the resilience of the business model, now something that we have commented on in the past by reference to other metrics, is also evident through this risk-sensitive measure.

My final slide on the topic analyzes the movement in the estimated surplus during 2013. I will let you study this analysis at your leisure, but the key takeaways are: one, that the group's operations generated 31 percentage points of solvency cover in 2013; that higher equity markets and rises in long-term yields have contributed a further 12 points of cover; and that all the other effects have broadly netted out. The fact that at an operating level flow is positive should not be a surprise to you.

We write low-strain, high-return, fast-payback business, so the capital generation dynamics should be positive irrespective of the accounting or solvency lens that you may choose to use to assess this. The fact that the stock kick is high should also not be a surprise as a large component of our book in Asia is health and protection, which is Solvency II-friendly.

In addition, the stock includes the shareholders' interest in future with-profit transfers, which is sizable, reflecting the scale of the business. I want to emphasize that economic capital is one of a number of financial metrics that we use to run our business and that it is no more or no less important than other metrics. While this information is new for the market, it is not new for us, and I have been -- and we have been using aspects of economic capital alongside other financial measures to inform our day-to-day decisions.

Therefore, what you should take from this is the fact that it reaffirms what we have always said about the positive cash and capital dynamics of our business.

So by way of concluding remarks, I would like to iterate: one, that the strength of our overall performance in 2013 -- to highlight the strength of our overall performance, which demonstrates the quality of the new business franchise and the resilience of our in-force book and also our ability to continue to deliver to grow -- to deliver growth both in earnings and cash; and two, the improvement in our capital buffers, reflecting both the strong operational performance and the investment market tailwinds.

With that, I will now hand you back to Tidjane.

Cheick Tidjane Thiam

Thank you. Thank you, Nic. So to summarize on 2013, the group has delivered a strong performance with double-digit increases in all our key metrics, as Nic just showed you, and has been able to achieve all our 2013 growth and cash objectives.

Our performance during the 2008 to 2013 period, which culminated in the delivery of our 2013 objectives, has allowed us to transform the financial characteristics of the group, which has now a high-quality and growing earnings base, with all 4 business units contributing materially to cash. This newly acquired diversity of cash and earnings is a key source of strength for the group. This is what has allowed the board, led by the Chairman here this morning, to declare a 15% upwards rebate of our 2014 full year dividend.

Our dividend policy remains unchanged, and we aim to provide a growing dividend to shareholders in a sustainable and prudent manner. Asia remains core to the group's future prospects, but tailwinds of favorable long-term structural trends, a leading business platform and best-in-class execution position us well to deliver an enduring value for both customers and shareholders. Now this is all good news, but I want to reiterate that we are not complacent.

Actually, paranoia and competitiveness are very well shared features in this group, and I don't think Jackie has changed that profile. He just joined us.

So we have embarked on a new set of objectives after delivering the equally challenging 2013 objectives. The group has tremendous growth opportunities. We have the platform, the ability and the discipline to deliver on these opportunities and to create value for both our customers and our shareholders. We are in the right markets, so in the right place, at the right time. And if you allow me a bad joke here, a lot of people talk about being in the right place at the right time. A lot of people will be in Brazil this summer. So they'll be in the right place at the right time. It doesn't mean they'll win the World Cup. So you can only do that if you have the right people, which is why I will finish. We're in the right place at the right time, but we also have the right people. And that's the whole difference.

So I am confident that we will continue to deliver a unique combination of growth and cash over the long term. I thank you, and we are ready to take your questions.

So for the first time, I can say, lady and gentlemen, if you can join us on the podium, we'll start the Q&A session, please.

Question-and-Answer Session

James Matthews

So for your question, please raise your hand, state your name and your firm's name, and then we'll take your questions. So we'll just let everyone settle.

All right, why don't we start with Andrew.

Andrew Crean - Autonomous Research LLP

It's Andrew Crean with Autonomous. Can I ask 3 questions, actually? Firstly, on your cash target of GBP 10 billion over the next 4 years, you're already at run rate. In 2013, you did GBP 2.5 billion. You're projecting that the Asian business will go up by GBP 400 million. So basically, the first question is, is other parts likely to go down? Or is the GBP 10 billion too conservative? Secondly, thank you for the economic capital coverage. It's gone up considerably. How should we judge when you get into a situation of having excess capital, which may not be able to be reinvested and should be returned? And then thirdly, now that you've bidded the REALIC acquisition down, do you have a further appetite for acquisitions in the States?

Cheick Tidjane Thiam

Okay. Thank you, Andrew. On the target, I'll let Nic answer. I'll come back on the economic capital coverage, and Mike will take REALIC. So Nic, do you want to say that GBP 10 billion was too conservative or not?

Nicolaos Andreas Nicandrou

I don't think the GBP 10 billion is too conservative. The -- 2 things I would say. Of course, that GBP 10 billion is after recycling -- is after the investment that we have to make, and you've seen in the presentation today an analysis indeed, quite a lot of detail on the opportunities that exist. So it is after effectively the drag of 4 years worth of growth across all of our markets. As for the 2013 result, it is flattered to a degree by positive experience variances. I mean, we'll work hard to deliver them, Andrew. The team is committed to doing that, but we don't take that for granted. We don't necessarily plan for those. There's been, in the course of 2013, a number of items that are one-off in nature, and that flattered that particular contribution. If you go back 5 years, we've typically been running experience variances of around GBP 200 million, and that's a more realistic level as we move forward. So in short, don't extrapolate from 2013 because of these effects. And also, please bear in mind that the GBP 10 billion is after deducting considerable investment in new business.

Cheick Tidjane Thiam

A really, really important point, and it's a change in the way the group functions. A few years back, there used to be a lot of bias embedded in the plan. Certainly, when we started looking at things closely, so people would assume in the plan that interest rates would go this way or that way. So when very big changes has been to say, look, spot is the big predictor of our future, good planning, financial planning discipline is you just take the spot back. You don't build into your plan any headwind or tailwind, period. So that GBP 10 billion is a clean number. It's proper operational performance. No -- so when we get help, the tailwind that we've had this year, well, it's a plus and that's very nice. But there is nothing in these numbers that assumes any type of help from the markets. And these are very thin targets. Again, as Nic said, it's after funding a lot of growth. The economic coverage, yes. It has gone up for me, and I'll let Nic -- because he's done really all the heavy lifting on this. But I'll just give you maybe a high-level concept while he is preparing his answer. My experience of the group is about -- is actually in a very strong position. And I like it when a measure is consistent with my intuition of the business. How do I think about the group? Where do we profit from? So GBP 8 billion at the end of 2013. You heard us during the crisis say constantly, "There is no way we can burn through that." You can build any financial scenario. You just can't, and that's where in the U.K. you take equity risks. So we're protected in it. The other big risk we carry is the annuity book. We built the credit reserve, which we've discussed many times in the past, it's a complete buffer against credit risks. So we're in a pretty strong position. In Asia, we had a bit of equity exposure. We sold it in '09. There's basically, so to speak, no financial risk. The sovereign is domestic debt, labor in domestic currency. And another bad joke, but -- as a lot of printing machine works, we won't be able to service domestic debt. This is not foreign debt. So we don't feel that we have the biggest exposure there. We move into the U.S. M&G. Sorry, Michael, but we respect -- not worth mentioning, in terms of capital, capital efficiency, capital-light model, there's no big issues there. So you leverage Jackson. And in Jackson, we believe that we're well hedged. So that was the intuitive view of the group. So I'm not disturbed if we answer -- after we run the economic capital model comes back as well. We're in a strong position. In itself, it doesn't feel odd to me. But do you want to...

Nicolaos Andreas Nicandrou

I guess in response to your question, Andrew, I would probably reiterate 2 points that I made in the presentation. One, it's early days. Before, we can embed this in a very formal way. We need the dust so settle. There is still some way to go, as I said earlier, a lot of work that needs to be done. A lot more guidance that needs to be provided. And ultimately, while this is our judgment, it ultimately needs to accord with the judgment of our lead regulators. So let's wait until the dust settles, until we're working with firmer numbers. And at that point, yes. Then we will come up with a range that we want to operate it within. But the second point I would make, again, reiterate from my presentation, is the fact that it is no more or no less important than any other metric. We run our business -- actually, one of the key aspects of our success is that we haven't run our business in one metric. We used a balanced set of metrics. And what you find when you're making decisions under different scenarios, something different bites every time. So it's like trying to assess -- something has to be -- it's like a Rubik's cube trying to look at different lenses and dimension, whether it's rating capital, whether -- at the moment, we have the IGD framework that is still relevant over the next 2 years, whether it's free surplus. Who knows? Whether it's pure cash -- and it's managing that matrix, and different things will bite depending on the decision. So we are -- and that's what we do day in, day out as we come to each decision. So I don't think this will the determinant, if you like, the bright light, when it comes to informing decision AOB 2016 or beyond when it comes in. We'll continue to run the business by reference to a balanced set of metrics, because we think that is the sensible and the disciplined thing to do.

Cheick Tidjane Thiam

The best advise we can give to anybody who are new in the insurance company, don't run it on one metric. It's just such a funny complex animal that you can really always do really, really stupid things going after maximization or optimization of one of those and get yourself in a lot of trouble. So it's almost a religious belief in us that we always look at every possible lens: IFRS, EEV, cash, rating agencies, economic capital. I was very wary of people who say, "Well, we now have the metric by which you need to run the group." That's a recipe for trouble. REALIC further appetite? Yes. Short answer is yes. We like the deal very much. We've talked about both enhancing the earnings and diversifying them. We always have a night to rebalance between fee income and -- which is really driven by the VFA group. The spread income from VFAs, historic low really in a cycle, and the kind of technical income from risk business. But it's Mike who's at the forefront [Audio Gap] of that. You want to update a little bit on...

Michael George Alexander McLintock

The market has changed a bit on the buy side. I mean, you've seen some very clever private equity, one transaction in particular plays. It had a lot of synergies, and I think the regulators have sort of shut that door for what I would say are sort of non-natural owners in the space. The reasons to sell are very similar to what we've always seen. Sometimes, they're technical, the IT doesn't support the -- a back book at a strong competitor, and they want to get rid of it, that sort of thing. I would say, Andrew, the biggest challenge now in those discussions is when you look at the available spread and the rates we have to use in the assumptions. What that does to the pricing discussion early is challenging because we're going to do these the way we've done all of them. Since we've known each other, I think we've done 2 life companies, 2 broker-dealers and a bank, and I think we have done well for shareholders and all of them. But you -- I think we have to do them when they're available at a price we like, not on a schedule -- for example, we don't put them in our business plans. We just assume they're opportunistic, and that doesn't mean we don't have a lot of resources pursuing them.

Jon Hocking - Morgan Stanley, Research Division

Jon Hocking, Morgan Stanley. I've got 3 questions, please. Firstly, on the U.S., that seemed churlish on the operating leverage. The expenses grew 18%. But on the life slide, I think it was 57%. When you break down the drivers, the life expenses are down 5%. I wonder if you could sort of square that circle, please, and just give us an idea of how quickly you expect the expense base to grow relative to revenues going forward. That's the first question. Second question, SCB in terms of penetration, your 3% sounds quite low. Do you have pockets in that deal where the penetration rate is much higher? So can you give us some idea where the distribution or penetration rates are by branch or by territory? And the third question, the economic capital. Just on a few sort of assumptions questions. You say you're not using diversification for the U.S. position, but are you assuming the surplus over 250% RBC can be used as capital elsewhere in the group? Secondly, on that, I think you -- in November, at the investor day, when you gave the basis, the calculation, you said you're going to use quiz 5 in the U.K. funded. It looks like you did something different. And then finally, you're using 10 basis points for the credit risk adjustment. I think that's still 35% in the rules. Do you want to go through these things?

Cheick Tidjane Thiam

Well, thank you, Jon. Operating leverage in the U.S. so it's between Nic and Mike. But Mike, do you want to go...

Michael George Alexander McLintock

You've seen some technical moves, Jon, and some of the guarantees we've pulled down, and I think you'll see there. But as far as the actual acquisition cost, cost to administer a policy, normal operations everything is within pricing, everything continues to come down. We're by far the lowest in the industry. So yes, there isn't a -- having from here or something, but we have a number of initiatives that are driving down costs from here that are continuing to work and we have some things that are sort of a little further out there I think a bit more creative that -- as well. But as far as the year-over-year numbers, you're seeing reduction in expenses per policy on admin. You're seeing reduction acquisition costs all within pricing, none of it materially different than our pricing.

Nicolaos Andreas Nicandrou

I'm not sure -- Sorry, let me just try and answer that. The 5% that you show, you need to go back in the detail in the packs which then breaks that out between acquisition and administration. We just haven't done it because there's a lot of detail on the slide, but the information is in the pack. What you'll then do once you have the 2 components separated out, you will see that acquisition costs are flat to negative. Why is that? Two reasons: one is we're seeing more and more distributors opting for trail commission rather than the upfront commission where you're rewarding them. And that's been an effect that's been coming through for a number of years a lot but is continuing. And the other thing it goes down to what Mike was just saying. When you're taking product actions and when you're making decisions about which products to pull, stop or promote, not promote, we tend to go after the ones that are either highest strain, lowest profitability. And inevitably, high acquisition costs also have higher strain. So that's -- those are the dynamics that you see coming through the acquisition cost line. If you take the maintenance or the recurring cost line, that has grown much more in line with the growth of the business, but there are still some jaws coming through that as you'd expect to see. And I hope that answers your question.

Cheick Tidjane Thiam

Okay. Thank you, Nic. Barry, do you want to -- the way we run the relationship, we have a steering committee on which Barry sits and they meet very regularly and go over the business. Do you want to give some color on the penetration?

Barry Lee Stowe

Sure. The reality is it's been a long relationship, 15 years, the first half of that relationship even though it technically exclude -- included other markets, it was in reality mostly a Hong Kong business and so Hong Kong has always been the main driver and is the -- is where we enjoyed the highest level of penetration. Taiwan is very strong as well. Singapore was kind of a late starter. It actually kicked in with much more efficiency and better results when we renewed it last time back in 2008. So Singapore has come on quite strongly as well. Malaysia is doing much better. We've made progress there. And Thailand, even though the bank is small, less than 30 branches, they've -- we've actually made a lot of progress there over the last 5 years. So Taiwan is pretty good as well. But under the new scenario, obviously, the opportunity to do a lot better where we already are, plus tack on some things like India, like China...

Cheick Tidjane Thiam

India, China, Philippines, Indonesia...

Barry Lee Stowe

Philippines. Philippines bank is very small but you've got to start somewhere.

Cheick Tidjane Thiam

Yes. And then we had 4 questions on the economic capital. Diversification -- will you take diversification? 250% RBC, do we take credit for elsewhere for what's above that? Would you use QIS5 and 10 basis points, is that enough for credit? Or should we be -- Nic that's yours.

Nicolaos Andreas Nicandrou

So we haven't brought in diversification for the U.S. business even though we do believe economically it exists because the rules just say you can't do that. If you're going to use deduction and aggregation, in other words, bring in the U.S. using a different basis, then you can't take credit for the diversification, and that's not included. Why 250%? We used it because that is the output. We have a lot of models. We run them off. We run the business off. We include in those one-off models past experience about credit default losses as opposed to -- based on experience, we factor into those models information around realized equity volatility and when we run that off, it comes out of 250%. To give you some sensitivity, ultimately, for every 50 points of RBC, we could have -- it will come down to a discussion ultimately, what -- should you bring it in at 250%? Or should you use 150%? Should you use 300%? But every 50 points cost around 10 points on the cover. So every 50 RBC points is 10 points on the cover. On credit allowance, yes, we are basing it on QIS5. But we've used a variety of parameters to inform that position. QIS5 is one. We've used our own assessment in terms of what we're including for Pillar 1 and Pillar 2 in the existing ICA, and we've modeled, we've created our own model on our view as spreads widen how much of that we should bring in as the liquidity or as opposed to credit. And so we've modeled that and we brought that in. The outcome is included in your packs. So in the base position, we've taken effectively a liquidity premium equivalent to 46% of the spread at the end of 2013. And we've increased that to 51% in a 1 in 200 scenario. So you can get a sense of how much is brought in. In relation to the 10 basis points, what is this just for the benefit of others who may not be close to the debate. This is effectively an allowance for the credit risk on the risk-free rate. The regulators are saying, the risk-free rate is not credit free and you need to make an allowance. 10 basis points is what was used for QIS5. You're absolutely right, there is debate on that. There are different -- we don't believe it's necessarily. We just don't believe it's necessary. I think -- we think it is inappropriate to calibrate actively, using short-term instruments, what this should be when you have a business that will run off for the next 30, 40 years. And we just think philosophically that is flawed in this context, and we will continue to make those -- the case as we move on to level 2 and level 3. But it is another source of uncertainty.

Cheick Tidjane Thiam

Yes, you probably saw Sergio Bardino's letter page [ph] yesterday mentioning that, and we're now on the page [ph] and we'll continue to lobby. Not everything is resolved. That's why we caveat this communication. It gives you our view. We're not saying this is going to be the outcome of Solvency II. It's one of the areas where we may give [indiscernible]. Yes?

Greig N. Paterson - Keefe, Bruyette & Woods Limited, Research Division

I'm Greig Paterson, KBW. I just want to concentrate on the standard. It's one of deal. I wonder if you could give us a cost. We can obviously work it out end of year when we look at the other intangibles? I just wonder if you can give us a cost? The treatment of the upfront costs on Standard Chartered in terms of IGD and eco-capital, do you raise an intangible then? Can you take credit for it? And just in terms of financing that, I wonder if you could just sort of give us an idea, are you going to raise some debt? Or to what extent can Hong Kong estate finance a portion of the costs?

Cheick Tidjane Thiam

Okay. On the financing, for instance, we -- it's funded with our own resources and there's no really direct contribution from the Hong Kong with-profits fund. It's quite different from the previous deal. But we are in a much different and much stronger position for [indiscernible]. We have GBP 2.2 billion of cash centrally. So we're very comfortable. On the cost, look, to be completely transparent, you know how the situations are. We were all negotiating very late. You saw that the RNS came out after our results, so that should give you an indication of the discussion that have been going on. Of course, in due course, you'll see in our disclosures some of those numbers come true. And you can then make up your mind. But a big point I'll make about that is the one I made during my main presentation that really please consider the upfront payment is a fraction of a financial flows on a deal like this, really a fraction; not even a material fraction. All the value is in the subsequent payments, which frankly you only pay when they sell. These are commissions. So actually, it's quite a bit of derisking in there and big incentive for them to perform, so we get their money with every sale. It's constructed like that. So that's what we have said on the cost. Impact on IGD is going to come through. Nic, do you want to...

Nicolaos Andreas Nicandrou

Yes, I mean, we will follow the same treatment as we have done for UOB, Thanachart, the distribution fee will not be capitalized in either IGD or in the economic capital markets.

Greig N. Paterson - Keefe, Bruyette & Woods Limited, Research Division

Just to follow up, just in terms of the Philippines, we're thinking for a while, I mean that's a big market. You never really talk about it. One of your competitors makes a lot of money out of there. I'm just wondering what your plans are or to sort of try and turbocharge the Philippines?

Cheick Tidjane Thiam

Barry and I are going to fight to jump and answer first. If you remember in December, we actually talked about it. I have a slide on it that showed that profits have been multiplied by 5. We've been growing the agency very, very strongly. I'm saying that because we're both strong believer in the country. It's one of a few countries on the planet that has been upgraded. The sovereign debt of the Philippines has been upgraded, better and better managed, 95 million people. And actually, Barry's too modest to say, that we are #1 in new business in the Philippines, and we don't talk about it enough. So it's not a market we neglect, and we are building there exactly the identical business to Indonesia. We follow the same general agency model. So Barry, can you...

Barry Lee Stowe

Well, I only disagree really with one thing that Tidjane said which is that I'm too modest to say we're #1. Because I'm actually not.

Cheick Tidjane Thiam

[indiscernible] this guy is so modest...

Barry Lee Stowe

Quite happy. They know better than that. Quite happy to shout from the rooftops that we're #1 there. And it's the result of a lot of hard work from Jumbing and the team there. Tidjane's point about the country's balance sheet, family balance sheet is really important. This is increasingly looking like Indonesia some years ago. And geographically, when you think about the logistics of trying to build out a business in the Philippines, it is, again, it's thousands of islands. It's an archipelago just like Indonesia is. So there's complexity in that. And that's why we have lifted many of the ideas that have proven to be so successful in Indonesia, dropped them into the Philippines, localized obviously, as you always have to do. But many of these same principles are now being executed against very well by the team there in the Philippines, and so we've gone from -- we've never had more than about 1,500 agents historically. We're over 8,000 now and moving fast. So a lot of the things that you saw in Indonesia several years ago, you're starting to see in the Philippines. So I would suggest that you should be very optimistic about it.

Cheick Tidjane Thiam

Back to my [indiscernible] and energy, and we also have a great CEO...

Barry Lee Stowe

Yes, Jumbing is great...

Cheick Tidjane Thiam

He's really, really a star. Absolute star. Can I go? Chris?

Christopher Esson - Crédit Suisse AG, Research Division

Chris Esson from Crédit Suisse. Just 2 quick questions, please. Firstly on Thailand. My impression from Thailand is that unit-linked is a product that doesn't have a huge amount of support, and yet it looks like you're IFRS payback has just -- is very fast and certainly the result from Thailand was surprisingly strong. I just wondered if you could provide an explanation for that? And secondly, a market that we haven't really heard about for some time, India, remains a bit of a sleeping giant and I just wonder if you could provide an update on that? And what potentially could happen that would make it a sweet spot market in the future?

Cheick Tidjane Thiam

Okay, thank you, Chris. Thailand, just a word about Thanachart. They are, I think, #1 in auto credit in Thailand?

Barry Lee Stowe

That's it.

Cheick Tidjane Thiam

So when you see Barry nodding, that's what we're selling. We're selling insurance on those [indiscernible], it's very profitable. Good IFRS, good thing...

Barry Lee Stowe

Yes, that's exactly. They are, by far, the #1 auto financed business in the market that operates not just in Bangkok, but all throughout the country as well. So it's a very strong part of their franchise. We have very high penetration rates, attaching the product to that. So that's why you're seeing the economics you're seeing.

Cheick Tidjane Thiam

And that's a start...

Barry Lee Stowe

Yes, absolutely...

Cheick Tidjane Thiam

So we'll do IFRS [ph]...

Barry Lee Stowe

Tidjane alluded to the fast start we got in '02, but I mean -- I think it bears dwelling on a little bit because when we were getting ready to launch this deal, our partners candidly said, well, you changed some products on and so forth. So you need to expect that the sales levels will come down a little bit, but give us 6 months and the team will rally around and then it will start moving back up and we'll get back to where we were and then we'll go forward and it will be a really good deal but you have to be patient, it will take time. And what, in fact, happened was, as Tidjane said, we started selling the first day. We were almost immediately selling in almost 100% of the branches and the trajectory has not kind of dipped and then gone like this. It's actually just gone like this. So even the partner candidly is surprised at how much efficiency we've been able to bring to that deal. It's a very good outcome.

Cheick Tidjane Thiam

It's another great CEO and a great team...

Barry Lee Stowe

Another great CEO...

Cheick Tidjane Thiam

He's done a phenomenal job...

Barry Lee Stowe

A nice, terrific guy...

Cheick Tidjane Thiam

Really remarkable. The Integration, everything. We've been there many times together and it's just a -- it takes more case.

Barry Lee Stowe

No. It's a great team.

Cheick Tidjane Thiam

India. You want to say a few words? India?

Michael George Alexander McLintock

Oh, about?

Cheick Tidjane Thiam

Prospects.

Michael George Alexander McLintock

Yes, well, it's a complicated environment. There's not much we can do about the environment. We can only respond to the environment. So we've seen some political volatility, if you will, effectively that translates into the difficulty in terms of getting some fundamental changes made. We've seen regulatory volatility we call a few years ago. Talk about some significant tax changes that would've been really punitive. So there's always drama but again, we can't control the drama. We can only control how we respond to it. I think we've responded to it brilliantly. The team there, again, we keep talking about the teams but that's our 2 raw materials in this business are capital and people. And we've got plenty of capital and we've got absolutely best-in-class people. So Sandeep Bakshi [ph] who runs that business came out of ICICI is running their retail bank before he came to work with us. He's just been a steady hand, done a great job. What you -- as a result seen from that business is gains in market share in a very volatile environment. So while most of the foreign sector, if you will, has been very disrupted. We've continued to just inch our way up the league tables and gain share, the profit from this business is now very good. May I remind you that we were the first business to generate the profit. We were the first business to pay a dividend as well. We've been taking dividends out of this business over 2 years, about 2.5 years now. And this year we actually got a special dividend now because of the strong financial performance of the business. So these guys are just doing a great job. If the environment improves, does that improve -- then you'd get more investor confidence in the market. I mean there, obviously, be a lot of positive effects of that. I'm not in a position to promise that. What I am in a position to promise is that whatever the environment is, we'll run a best-in-class business.

Cheick Tidjane Thiam

This is actually really, really important point about how we run the portfolio. You've got kind of the ideal positions, that's the sweet spot, famous sweet spot. For various reasons, we're in a really good position, with just right business and grow Hong Kong, Singapore, Indonesia, Malaysia, Thailand, Philippines, Vietnam. Those are the no-brainers, it just happens. Then you've got the slightly more complicated places. And when it's a difficult environment, what we will not do for our shareholders is allow people to destroy value. So something like India that used to be significantly negative, IFRS negative. We've turned into a positive. Another story that Barry is telling us. So it pays a dividend. The same is true of Korea, a very difficult market, but we have really shrunk the business and got it into a place where it does not really actually destroy the value.

Michael George Alexander McLintock

It makes money.

Cheick Tidjane Thiam

It makes money and then you get kind of long-term options like China. Actually, we haven't talked about it but China is up 41% in 2013. And then back to my compounding argument, 41% on top of 30%, on top of 40% and it's becoming material. It's moving up the ranks every year [indiscernible], but it's actually doing well.

Michael George Alexander McLintock

Yes. If you think about it in the context of market, I mean, if we're honest, none of the foreign companies are competing with the [indiscernible] or the China Life's, but remember the numbers that you see for our business are half the business. So you double those numbers and then look at that against the rest of our businesses in PCA and you realized this has actually getting to be a pretty big business. So this is another one why you should watch the space.

Cheick Tidjane Thiam

Starting to march up. Farooq?

Farooq Hanif - Citigroup Inc, Research Division

It's Farooq Hanif from Citi. I've got 3 questions on the U.S. business, actually. I want to go back to your kind of guidance on remittance. I know you got this range, but it just seems to me when you look at the U.S. business, the statutory profits are up, the book is derisking and your RBC ratio is upper end. What's stopping you from raising your remittance ratio? That's question one. Question two, related to that is you had a cash flow operating variance, which is positive, which is ALM-related, spread related. Can you just talk about how that GBP 200 million to GBP 300 million how that could develop going forward? And the last point is going back to Jon's question on the jaws. Is the trend in trail commissions net expense positive. So do we see that actually contributing to jaws going forward?

Cheick Tidjane Thiam

Well, we're really happy to get 3 questions on the U.S. and don't mention hedging. Shows you how the world changes. We're really pleased. Look, anyway, do you want to -- and really, yes, that profit going up, derisking RBC ratio good, this is all actually nice problems to have. Mike, do you want to talk about the...

Michael George Alexander McLintock

So we showed you in December, our percentage of remittance versus percentage of book, including comparing that to U.S. companies and share buybacks, and I think we're at the high-end of anybody's ratios there. If I put my Prudential Board hat on, the general view is there's not a need to put excess capital in the center beyond the levels we need. There is some friction in moving it there. Okay? So the idea is leave it in the business units for resilience, for M&A and things like that. There is a -- in the last 2 years, we've been above or actually 3 years we've gotten an approval from the regulator for a special dividend, that being an excess of the policy rules. And they're pretty reasonable people when the businesses are doing well, and they're growing the way we are and have the earnings and they look close out our hedges and other dynamics. So it's a discussion we have every year and we wouldn't want to give you any guidance on that number going up or down, but we have -- yes, there's -- the capital is more fungible in a pure regulatory measurement, but then there is also tactical issues at the group level to consider on top of that.

Farooq Hanif - Citigroup Inc, Research Division

Just to be clear you're paying below potential regulatory policy level. You're paying...

Michael George Alexander McLintock

Above.

Cheick Tidjane Thiam

Above. That's why we said 3 years, we got 3 times permission to go above. That's what he just said.

Michael George Alexander McLintock

And again, that's just strength of the business, growth of capital, growth of cash flow. I mean if you look at last year, funding the sales, funding the dividend, closing REALIC and still growing net capital. That's a strong discussion with the regulator on the health of the business.

Cheick Tidjane Thiam

So thanks for allowing us to make that point because really that's what sensitivity Mike is alluding to. In the post crisis world, we really have quite advanced discussions with regulators around dividend and rightly so -- absolutely, I have no issue with that but because we tend to be above that threshold, we're not going to start giving you numbers or targets, I think, implicitly force the hand of the regulator. We have to be very mindful of the relationship there. And -- so think about what we tell you as something that takes into account that contract because we've been lately above that.

Nicolaos Andreas Nicandrou

Can I just make one point, just to reiterate something that I said in December, that when it comes to Jackson, using the pure operational free surplus isn't the right reference point. You need to factor the below the line there. And I illustrated back in December that, that is a very good proxy of mimicking what's happening in the underlying total adjusted capital development on the local RBC. And generally, we've paid around the mid-60s, which is not a bad ratio for a business that is growing so phenomenally, has spent the last few years trying to repair the balance sheet to a degree from the earlier crisis and, of course, absorb the acquisition of REALIC. So all that is working well.

Farooq Hanif - Citigroup Inc, Research Division

And the below the line is the hedging question which I didn't asked, basically.

Nicolaos Andreas Nicandrou

Correct. I mean, that is -- that has a -- it is certainly on the stat basis, the hedges will also come through but the reserves, given the cleanliness, if you like, although the clean position of the -- of the book, the reserves are flawed. So you're getting a mismatch coming through that particular ratio, which will sort itself out because the higher fee base will give me you more operating performance going forward.

Barry Lee Stowe

In page 102 in the supplements has the normal realignment to economic capital. We want to make sure we're consistent with the presentation. You asked a question on the impact of that allocation of trail commissions versus the front end commissions. It's coming from a couple of different things. It's coming from distributors. Different firms have different structures and so as the business is a little less independent channel. So you get a more firms that prefer and push towards, not necessarily levelized commission, but at least they'll be in some of the C share products. There is -- so that's just mix of who were selling through. That's in our pricing, so I wouldn't look for that to be an event, either way. The other element you get with that is point in the cycle. And so you tend to have age of advisors and how well the markets doing and how well they're doing they tend -- if the business is going well for retail advisor, they can to be thinking about deferring revenue and growing the value of their book. If it's a difficult time, you tend to see more A share in smaller practice, okay? So those are both factors, but again it's in our pricing. You had a third question, I'm sorry, I missed it.

Farooq Hanif - Citigroup Inc, Research Division

[indiscernible]

Cheick Tidjane Thiam

You're right. So we have some additional experience contribution to free surplus this year compared to last. In part, that's coming through our spread profits. The same effect that you've seen on IFRS and on EEV is coming through that one. The second one is to do with one-off type tax credits that we've received over and above what we were counting and expecting at this point in the cycle. So that's what's driving, if you like, the slight blip. And this is why, when I was answering Andrew's question earlier, I said there are some elements in there that are one-off in nature in that result across our businesses, not just the U.S. Okay? We'll take 2 more because we're well into the lunch hour now and you know where to find us anyway.

Unknown Executive

Before we go, Andy and then Gordon.

Andrew Hughes - Exane BNP Paribas, Research Division

I have 3 questions, if I could. The first one is in the U.S. spread profits. And I think you're still making well over 220 basis points profit on the spread book and certainly that's going to come down to 200 in the short term. Where is the credit rate right now? Where is the reinvestment rate on the U.S. spread book? Just to tell me how far that's going to come down because it doesn't stabilize the 200 basis points. And second question was about the kind of tangible -- movement in tangible NAV of the group and obviously GBP 1.3 billion of net profit but if you look at the Page 57 at the back and goodwill segment, that kind of increased by GBP 1 billion. And so should we ignore kind of tangible metrics on the balance sheet? And the third question was about the kind of SCB transaction and obviously, could you give us some sort of cash flow payback period on that, even if you aren't prepared to disclose it or IRR that will be very helpful.

Cheick Tidjane Thiam

Okay, thank you. Another 3 good questions. We have that, I mean, the numbers on the crediting and the...

Nicolaos Andreas Nicandrou

Yes, I mean crediting rates are running around the 320 basis points level. We are -- I don't have the figure in terms of the reinvestment yield that we get on the maturing bonds. It will be [indiscernible]. 4.25, 4.5.

Unknown Executive

[indiscernible]

Nicolaos Andreas Nicandrou

So that's part of the pressure that we see bringing the number down.

Andrew Hughes - Exane BNP Paribas, Research Division

So it should drop to 1% over time, that spread margin?

Nicolaos Andreas Nicandrou

Well, it depends on mix. Remember, if you make the assumption that we've got our estimates of how long people will keep their money with us wrong, then it should do that. But remember people are saving for a purpose. They're saving because they're in their 60s and there comes a point where they want to de-accumulate. So I don't think the scenario would arise. That's the first point. The second point is that all the new monies coming in is coming in at either 1.5% on the fixed annuity or at 1% if you go fixed annuity option on VAs. So all of these things are working in a way that will -- we've done detailed complex calculation for you and we've translated into a very simple guidance of 200 basis points.

Cheick Tidjane Thiam

Mike, do you want to comment?

Michael George Alexander McLintock

Nic, the key point -- the products being sold, Andy, at this point of cycle, have a 1% floor, okay? So you're at a very different guarantee than you saw pre-crisis. You still have 23 to 25 basis points between our current crediting rates and the floor is on the entire book, so there's still plenty of room to move. And as we've told you we're high in quality, low in duration of the portfolio. Our ability to reinvest or just hold the duration on those positions, I think, is about as good as anybody in the industry. And in the scenario where the compressing -- if spreads never widen, our new sales would affect the equation you're throwing out there as well because you have different math on those.

Cheick Tidjane Thiam

All right, and there was then tangible net asset value, that goodwill, Nic, do you want to...

Nicolaos Andreas Nicandrou

I think we've rehearsed this many, many time. The reality is there aspects of value which generates profits, IFRS profits that are not captured by shareholders equity. We gave the example earlier of the with-profit transfers. That's not -- Accounting convention today prevents us from recognizing that aspect in our results. A lot of what we write in Asia is health and protection. That's like writing GI business. We don't need a lot of tangible net assets to deliver a high return on a GI business. So I think -- so those are some of the dynamics that are coming through which is why you end up with an IFRS basis, equity basis, which is not representative of the income generation power of this organization.

Cheick Tidjane Thiam

On SCB, this is actually an interesting point because there used to be a strategy discussion in the group. The old view in Asia book was that bancassurance was less profitable than agency, so margins were lower. And that actually it wasn't a very desirable business. Well, in the way, we look at finance, good business is business that is written above its cost of capital. We don't run the group on margin. Actually, a lot of companies with high margins cannot grow because they fall into that trap of saying, well, if I do this, is going to dilute my margin and this is something that I fight with a passion because it's just wrong thinking. We are in the business of creating the maximum amount of value for our shareholders. And sometimes that involves going into a business with optically lower margins but you've seen that we've actually de-emphasized margins in all our communications to kind of root out that mentality. If we write the business above the cost of capital, we should absolutely do it. That creates value for our shareholder. So that's really how we approach it. So what I can tell you about the contract, that's been all negotiations. We are very confident that the return on capital will be comfortably -- and we've given the Board this comfort and it's been seen by everybody and the advisor. We'll be comfortably above the cost of capital. So it's going to be significantly value-enhancing for our shareholders. But frankly, there is no mileage -- again, think about shareholder value, not management comfort, in opening the hood of that, given what's going on in that region and the commercial dynamics, absolutely no upside. So it's not as, you know, I hope that we have been very transparent as a management team. Just have to look at thickness of the pack over the years, even more and more we opened -- we want you to understand how the group works and how we make money but from time to time, some of that disclosure can just be completely counterproductive. So in the current environment, you will be able to track our progress. You will see some of it flowing from the IGD as in all the disclosures that are coming later in the year, but we just -- we think we really have a -- how can I say this, a competitive advantage where, in our understanding of those transactions and structuring the payments. And as much as we'd like to answer your questions, we don't want to make that available to the competition. I spent enough time myself reading all their presentation of all the peers, so that they do the same thing. You can easily slip a lot of very valuable commercial information doing that. So that's what limit to the transparency. We're not being difficult because we don't want to discuss things that are going to be played back against us later. One last question? You go three. You go by sets of three. So another three questions, for arithmetic. Okay, Gordon go ahead.

Gordon Aitken - RBC Capital Markets, LLC, Research Division

Just two, Tidjane. Gordon Aitken from RBC. So first question is on the holding company cash. It's gone up to GBP 2.2 billion, it's a big jump from GBP 1.4 billion and as you raise the GBP 700 million of hybrid debt in December. And you've shown today that you don't need the cash to grow the balance sheet is strong. I'm just wondering what that cash will be used for? And second question on the U.K. I mean this week you've announced the GBP 100 million buy-in with the Church of England scheme. I mean the bulk market there's a very good demand. There's really lack of supply and you presumably expect margins to remain very positive in that market. Just what sort of appetite do you have in the bulk market going forward?

Cheick Tidjane Thiam

All right, thank you, Gordon for only 2 questions. Do you want to say a word about the cash balance at the center?

Nicolaos Andreas Nicandrou

Yes, I mean, we touched on that in December. I mean candidly, the one good thing about the low-interest rate environment is that you can raise a very high-quality debt. We've been able to raise very long debt at very attractive prices so we took that opportunity, that opportunity is not going to be available forever. We've locked that in and that gives us, I guess, also all sorts of flexibility as we move forward to either pay some of the debt that we carry or to deploy in other areas.

Cheick Tidjane Thiam

Yes, and just transactions like SCB, which I know you have a lot of interest in the cash payment but we want to have that flexibility and believe me, it's comfortable to be able to go into most types of conversations with no real cash, no real cash constraint. That's very comfortable. Jackie, do you want to talk about the bulks and the recent buying?

Jacqueline Hunt

So Gordon you're absolutely right. I think a recent deal has been publicly announced by a counterparty. In terms of the market itself, I would see it very similarly to how you set it out. I think there's a great deal of demand or opportunity. I think supply has become relatively constrained until we do see some interesting deals coming to the market back end of last year and certainly in the first quarter of this year. I talked into December about the opportunity we had to put this bit more fully. We've got some key competencies, we've got a great brand that's really important to our counterparties and they deal with the business that has a good reputation. We tend to deal at the top end, so above GBP 100 million. That sort of range in large part. These are more complex deals and we have the capabilities to perhaps participate in deals that some others may not. So we see it as an attractive opportunity. We are very disciplined about how we actually use our capacity, obviously, these do bring with them longevity risks and other types of risks that we do want to make sure we get a proper return against. So you should expect to see us participating more aggressively, but within the constraints of very strict capital return hurdles. We certainly won't let go of that particular discipline.

Cheick Tidjane Thiam

Well, Jackie has a very balanced portfolio because she is also in charge of Africa. She's got 2 very different jobs. So thank you, thank you very much for your patience. In this team, many of us have seen GBP 2. I remember seeing GBP 1.95. So to close above GBP 14 is a good day but please keep in mind as we hope we showed you with plenty of potential and upside here. So I leave you with that thought and thank you very much. Thank you.

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