Prudential plc's CEO Discusses 2011 Results - Earnings Call Transcript

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Prudential plc (NYSE:PUK)

2011 Earnings Call

March 13, 2012 8:30 am ET

Executives

Tidjane Thiam - Group Chief Executive and Executive Director

Nicolaos Andreas Nicandrou - Chief Financial Officer and Executive Director

Unknown Executive -

Michael Andrews Wells - Vice Chairman, Chief Executive Officer and President

Chad Tendler -

John William Foley - Group Chief Risk Officer, Group Treasurer, Executive Director and Chief Executive Officer of Prudential Capital

Rob Devey - Director and Chief Executive Officer of Prudential UK & Europe

Michael McLintock -

Analysts

Raghu Hariharan - Citigroup Inc, Research Division

Andrew Hughes - Exane BNP Paribas, Research Division

Jon Hocking - Morgan Stanley, Research Division

James Pearce - UBS Investment Bank, Research Division

Toby Langley - Barclays Capital, Research Division

Nick Holmes - Nomura Securities Co. Ltd., Research Division

Andrew Crean - Autonomous Research LLP

Blair Stewart - BofA Merrill Lynch, Research Division

Unknown Analyst

William Elderkin - Societe Generale Cross Asset Research

Tidjane Thiam

All right, ladies and gentlemen. Welcome to our full year results presentation. I hope that you had something to eat. I apologize, because I know it's a long day and you've heard you've already done another company's results, but we have, once again, a large number of slides, so I hope that you're sitting comfortably. We'll take them -- take you through them slowly between Nic and I, but it's going to take probably the better part of an hour. So we are going to present first, a highlight of our results for 2011. We will then give you an update on our progress towards our 2013 objectives that we've called growth in cash and talk about the performance in turn, of each our businesses, starting with Asia then Jackson, then the U.K. and M&G. And then I'll hand over to Nic, who will cover the financials in more detail before coming back to talk about the outlook. We will then, of course, take your questions, if you still have any energy left.

The executive team, and a number of key people from our operations across the world are here today and we all look forward to operative dialogue with you. So I'll begin with the headline numbers, which you've seen now, picking out a few. For the first time, we have delivered IFRS profit of over GBP 2 billion. We have EV operating profit of almost GBP 4 billion and EBIT per share now stands at 771p. And we have remitted over GBP 1 billion -- GBP 1,105,000,000 of net cash remittances from the businesses to a center, again, a first in our history.

And the full year dividend has been increased to 0.2519p per share, which is a 5.6% increase following the 20% uplift of last year. It's good to keep in mind that these results have been delivered in an environment that was not benign. We have seen in 2011, significant macroeconomic volatility. We have seen long-term interest rates falling to unprecedented levels, which, as you know, is a particular challenge for insurance companies and Nic will come back to that, and a turbulent year for equity markets. And it's a statistical quirk that the S&P finished, I believe at same level as it began at 1257, but between those 2 points, we saw huge volatility, particularly in the third quarter. So these are good results in a challenging environment.

There are 2 key milestones within the results that I would like to focus on now. One is with our IFRS profits and the other one, with cash. So let's start with IFRS. For the first time in our company's history, our Asian business is the largest contributor to our IFRS profits. This is an important factor in the valuation we make of our business when you focus on price on emitted -- multiples, and the objective we have of doubling the '09 profit by 2013 is, therefore, of strategic importance to us. By this metric, our profits in Asia have almost tripled in the last 3 years. And in 2011 alone, our profits increased by 30%. This growth is the result of a number of actions. Since '08, I have been very clear on our definition of success, putting more emphasis than previously on IFRS and cash, and we've been talking to you about every time EV IFRS on cash in the same breath. We also have taken a more strategic view of our earnings with the analysis of the source of earnings, breaking down into insurance, profits, risk profits, spread profits and fee profits and we've used that to drive the business. We have enhanced our disclosures in parallel and also ensured that the incentives for management teams were consistent with this definition of success. I've said our teams have risen to the challenge and delivered a clear step-up in the IFRS profitability of our business and taken a number of actions, for that variance, driven the transformation of our product mix, we've increased in health and protection, which is well known now, but these are risk earnings, they’re higher quality earnings and relatively insulated from financial market movements and give us resilience.

We have also had an increased focus on new business trend. And before we knew it, we started disclosing IFRS new business trend. We've managed it very proactively. We have driven our growth in policyholder liabilities and we have managed the reinforce book very rigorously to deliver expected profit and cash. You add to that operational leverage and you get this type of curve and all these actions are being implemented across the broad portfolio of our business, so this improvement is broad-based. And I can tell you in 2011, 10 of our 11 countries have seen their IF profits grow. From 9 of them, this involved double-digit growth, from 9 countries in Asia, a double-digit growth in IFRS profits, and 8 countries in Asia had growth in excess of 30%, which leads to this very strong performance. So GBP 784 million in 2011, Asia represents more IFRS profits than our group did as a whole, a few years ago. That is, for us, an important milestone with potentially positive applications -- implications on our valuation.

The second important milestone is really cash and about cash. It's about each of our 4 businesses now contributes material cash remittances to a center. Historically, we have been seen as having one source of cash, the U.K., people who are rude call it a cash cow, and one growth engine, Asia. Our 2011 results show that actually 4 of our businesses, all 4 of our businesses are now materially cash-generative, and I think that's really important. Asia, Jackson and M&G and also 3 of our businesses have significant growth potential, Asia and Jackson and M&G. So on this slide, you can see in blue, the cash remittances received from the U.K. Life and both in red are from all the other businesses. In '06, the blue bar is GBP 45 million. We've got GBP 45 million out of the U.K. after actually making an infusion in the first half. And in the last 3 years, the U.K. has contributed more than GBP 900 million of cash. So you can compare GBP 900 million versus an infusion in '06. It is a transformation. So this focus on cash has allowed us to do very well elsewhere too, G&L Asia and M&G here in red, GBP 800 million in 2011 of cash generation. So if you look at the total, together, in 2011, we have cash remittances above GBP 1 billion, up 18% in the year. And the other point I'd like to make here is that this growth has not been achieved -- sorry, this cash growth has not been achieved at the expense of business growth. That is a central point because we said you can always drive cash if you give up or if you tradeoff between growth and cash. But that is why we have called this strategy growth and cash, so very much inactive [ph] , but it's -- I think it describes very well what we have done, and I have a twist on it, because I say it's growth and cash, but it's cash from everybody, as all my colleagues here know. So it's a very fair policy.

So now let's take a closer look at our progress towards the growth and cash objectives of 2013. They really, for us, more than anything else, summarize what we manage to, what we drive the business to deliver and what we would like to be judged on, okay? So at the end of 2011, we are exactly halfway through our 4-year program, we said '10, '11, '12, '13. So what I'm trying to do here is to give you a halftime update on our progress towards the 6 objectives. And this is when the primarily technological advances, what I feared has happened, and the machine decided to go back to Page 1. So if you bear with me, I'm manually going to bring you back where it should be, and we'll continue. That was always a risk. Okay. Well I have a back-up plan.

[Technical Difficulty]

I want to give you a halftime update, and the update is relatively simple. At halftime we are on target or ahead of schedule for every one of the 6 objectives, so starting with the 3 Asian ones, which are NBP IFRS, and cash, as you know. For the first 2 IFRS and NBP which put here, we have achieved 69% of the target for IFRS and 51% of the target for new business profit. For cash, we have delivered GBP 206 million in 2011 and we are about 2/3 of the way of a target of GBP 300 million by 2013. In the U.S. and the U.K., we have, respectively, to deliver GBP 250 million, Jackson made a particularly large remittance in 2011 with GBP 322 million, which is technically ahead of the 2014 objective, but I'll come back to that later when I look at Jackson. And the U.K. has remitted GBP 297 million and achieved 85% of its 2014 objective. On a group level, we are aiming for GBP 3.8 billion of net remittances cumulatively over 2010, 2013. And at halfway, we are, at halftime, we are 54% of the way, so kind of on track. And to put this number in perspective, imperfected [ph] in the '06, '09 period, we generated GBP 2.5 billion, okay? So GBP 3.8 billion as an ambition is a step change compared to where we were able to produce historically. So this is sound progress, and our focus on capital allocation has played a key role in achieving these results.

Since 2008, we've been talking about a more rigorous and unbiased approach to capital allocation across the businesses, basing our decisions primarily on IRRs and payback periods. We have taken a number of actions which have significantly modified the shape and quantum of our investment in new business, if you look at the left side of this chart. We have reviewed in the U.K. our individual annuities pricing to optimize new business trend. We, of course, our equity release business in the U.K. We have become much more selective about writing both business in the U.K., which introduces a degree of volatility in our numbers but we're happy to live with that. In '09, we introduced a significantly higher IRR corridor, consistent with the IRRs we achieved organically in other businesses, so we won't [indiscernible] to compete with the American companies we have elsewhere to get capital. And we also insisted that both deals should be much less capital-consumptive in absolute terms. Which is why you will see that in some years we've had great volumes and in others not because if there are not such deals, we won’t write the business. So that's discipline. We are, of course, jump [ph] into new business. We have restructured successfully the business in Korea. We have reduced our gig volumes in the US, and in '11, you'll see here, we made further improvements to the DAs and when combined with initiative to save cost, this has further reduced our new business trend, which decreased from GBP 400 million to GBP 200 million whilst writing more business. So always a set of significant cumulative impact.

The quantum of capital that we invest has been reduced, leading to increased capital efficiency, increased new business profits and increased cash generation. At the end of 2010, I believe, and I think unfortunately, I told many of you that we reached a point of maximum capital efficiency. So in 2011, the teams worked very hard to prove me wrong, and to drive further improvement. So we consumed GBP 241 million less than in '08, and delivered GBP 946 million more of profit. This is more of less slowing, more for less. We are comfortable with the shape of this investment in new business. If you look inside the small 553 bar, for the first time, more than half our investment went into Asia, and that's a transformation. And also, you can see that the capital consumption in the U.S. is decreasing at a time when margins are normalizing.

So I would now like to take a few minutes to talk about the businesses in turns and I'll start with Asia. This is AP in Asia over 12 years. We have a track record of year-on-year growth in Asia, and our 2011 performance adds another year to the series. Over the last 20 years, we have expanded our business, and today, our operations in the region are vast. We serve more than 11 million customers who collectively hold over 16 million Prudential policies. We have well-established operations in 11 countries. In Asia and in 6 of these markets on the left here, we are the #1 player. The diversity of our operation in Asia is a source of great strength and that's what I want to insist on in this slide, because it provides us with the scale and resilience to continue to drive a business for profitable growth. The sheer scale of PCA means that inevitably, there will be times when we must overcome local challenges. For instance, in 2009, we faced challenges in Korea. We restructured the business to focus on our proprietary agency distribution, and today in Korea, we have a smaller, but much more profitable business which is now profitable on an IFRS basis, with growing new business profit.

In 2010, you will note that there was a major regulatory reform in India, which had a negative impact on the market. We have been working hard with our partner to address the resulting business challenge, and in the fourth quarter of 2011, our sales in India went up by 33% quarter-on-quarter, marking the return of the business to a more healthy position. So this diversification in Asia allows us to continue to grow profitably at a regional level. Whatever changes we may face in specific markets at any point in time, and that is a unique strength. So you can see from the numbers we are generating more new business profit than the other leading players in the region, together with the highest margins, as shown on this slide. So looking forward, we remain confident in our ability to continue to generate significant and rapidly growing new business profits at high margins.

One reason for that confidence is that we are in the right markets. We are focused on the 7 markets of Indonesia, Singapore, Malaysia, Hong Kong, Thailand, Vietnam and the Philippines, what we refer to often as our sweet spot, and you'll hear that coming back a number of times today between Nic and myself, and you can see here in blue that this focus has paid off very well for us.

But I'd like to take a moment to talk about why the sweet spot and why we believe it is strategically, meaningful by going over a few macro numbers with you. These 7 countries have a cumulative GDP of USD $2 trillion, exactly USD $2,027 billion, now as we say, when we did realize this, we all were a bit surprised. We knew it was a large number but it's really a large number, and a population of 530 million, which would make it the third largest country in the world, if it were a country. And this GDP, which is larger than Canada and is close to France or the U.K. or Italy, would make it a G7 country. So in simple terms, we are #1 in a G7 country. But it's a G7 country that has an interesting characteristic of growing strongly, unlike the other G7 countries. The GDP growth in 2010 investing in this set of countries was USD $361 billion. Putting it in perspective, the GDP growth in the U.S. the same year was GBP 250 billion. These are IMF statistics, right? This is why we are doing well, and this is where we're making so much money. We are the leading insurance company in a set of countries that is already large, attractive and fast-growing, as illustrated by our rank that you can see on the right-hand side.

So taking one of those markets, which is really, which is large here in the red, Indonesia. The country has a population of 238 million. It's the fourth most populous country the world, and is among the 20 largest economies in the world. With an average age, and that's an amazing number of 28 years. So the population is young, set to continue growing to around 265 million in 2020, a net increase of almost 30 million people, with an insurance penetration of 1%. So growth opportunities are vast. They’re also vast in the nascent market of Philippines and Vietnam whereas similarly to Indonesia, we have strong positions. We're now #1 in both Vietnam and the Philippines. Hong Kong and Singapore, on the other hand, are very different markets to Indonesia and Vietnam. They do have relatively small populations, but their citizens very well fit by any standard and their positions as regional financial centers mean that they play a critical role in the region. The opportunities available to us in Hong Kong and Singapore are very significant. So a presence in all these attractive Asian markets alone is not a guarantee of success. Many other companies operating the same markets. A great deal of our progress in the region is due to the fact that we have the right operating model.

So let me start with our products. Demand for savings and protection products in Asia is high, as personal wealth levels throughout the region increase and many countries do not have a well-developed social safety net. Asia's population of high net worth individual take an international definition as people with investable assets over USD $1 million is now more than 3.3 million, the equivalent number for Europe is 3.1 million for the U.S., 3.4 million. So if recent growth rates are maintained, Asia's population of high net worth individuals will soon be the largest in the world. Wealth creation and asset accumulation across Asia, however, are not limited to the very rich. Throughout Asian society, the middle-class population is growing, and is increasingly able to save for a long-term personal maturation and family growth. We have a diverse product range that is well suited to meeting the demands of Asia's rising middle class. And our focus on health and protection insurance helps Asian governments meet their targets for improving the insurance coverage of a population. Health and protection premiums as a percentage of AP, reached 30% during 2011, up 3 percentage points from 2010 and more than 6x in absolute terms, our sales 5 years ago. In addition, our emphasis on regular program policies with over 90% of our AP coming from regular premium encourages the right behavior from our customers. Regular premiums incentivize them to save for the long term, helping them to smooth out the peaks and troughs of the market, while providing us with a resilient source of profitable growth that is less susceptible to market movement than single premium business.

Finally, demand for all these products, of course, foot rates; we will hide the growth correlation to the economic cycle, in particular, interest rates and equity markets. The point here for us is that we have a full suite of products to meet our customers' demands regardless of where we are in the cycle, and this product suite is critical to our competitiveness.

Switchover products; it's even better to sell them and we sell these products successfully because we have, we believe, the right people and the right partners. Many of you saw some of our agents and their enthusiasm a few months ago in KL, in Kuala Lumpur. Well, they are the heart of our business and our business model. We ended 2011 with 228,000 agents. Agency continues to be our largest channel. But Prudential agents differentiate themselves from the competition and are the most productive in the region in terms of new business profit per agent, which has always been the metric by which we drive the network. New agent recruitment activities have delivered continued growth in our total number of agents over the last 12 months, and productivity trends remained favorable. Levels of activity have risen. The product mix sold has become increasingly profitable. Average agency case sizes in the final quarter, in Q4 2011, saw the best month on month increases that we have seen all year, so that overall, the performance of the agency force is strong.

Moving on in blue, to our second major channel, banks, we are working with the right partners. In 2006, our sales through banks contributed just 1/4 of the sales for agency. In 2011, they contributed 46% of the agency sales, of the level of sales of agency and they have more than tripled in 5 years. 2011 was a record-breaking year for our relationship with Standard Chartered, which saw a 30% increase in sale year-on-year, and the relationship with UOB continues to flourish. In 2011, sales more than doubled compared to 2010, so it doubled in 1 year. And the relationship continues to perform well ahead of the levels we had initially planned for. The extension to Malaysia has made a strong start, and with many initiative plans this year, we are confident of further growth in 2012. So the momentum we have across Asia is clear, and has generated the performance shown on this slide, and it is over 4 years, quarter-by-quarter, side-by-side analysis trends is interesting. Because you can see that in red, which is 2011, we had a record performance in each quarter this year, and this was against tough comparators because 2010 was a very good year. We delivered a particularly strong fourth quarter, and there was some speculation on that, particularly strong fourth quarter, with AP of 18% and it's interesting if you look at the red bubbles, you see actually accelerating momentum for the year; 2, 6, 14, 18, quarter-on-quarter. So we believe we have an acceleration in Asia, not a deceleration.

And Q4 '11 was our first ever quarter above GBP 500 million of AP, which is really a number which would take us longer to attend. But that's only volume. We prefer NBP, which is really our main growth metric, and the numbers are very pleasing. You see a 27% increase in NBP in Q4, which we have little to add to that group, good result. And we're also pleased to say that the momentum that we generated over the course of 2011 has allowed us to make, and I'm looking at Barry again, a positive start to 2012, as far as we know.

And as we said in our segment this morning, so, bringing all this together and that will be I think, enough for Asia, summarizing on 1 side and on our 3 key metrics, new business profit, IFRS and cash, you can see that we've made really good progress on each of them and Nic will come back with more detail on some of that. But it's a picture, we're reasonably happy with. So moving now to the U.S. I will -- these are trump [ph] that Mike has used -- I'm talking about over. Mike has used in Kuala Lumpur, which was interesting. Some monthly sales, right, of VAs, and I have updated it because I know that you're looking to see what happened to the monthly sales in Q4 and Q3, so that in May we said that we were taking action on pricing. We said that this would through in August. And you can see from September what has happened there, as a combination of the actions we've taken, but also of the S&P which was under pressure and quite volatile at the time, and we believe that the action we have taken was fully justified because it was reflecting what we believe is a new economic environment and a new interest rate environment. And our teams have been able to implement those actions without triggering any fire sales, which is actually quite an achievement from our U.S. team.

We have always been focused on IRRs, and proactive on pricing and product features, and this is been particularly visible, we believe, for a market turmoil of the last 3 or 4 years. It is worth noting that our IRRs on VAs in 2011 were slightly higher than in 2010, and that's what we managed the business to. So as we move forward, we will continue to take a proactive report setting our prices and product features at conservative levels, and our volumes will reflect both the competitive environment and the behavior of our competitors who have little control over and the performance of the U.S. Equity Markets.

So on the next slide I have just a summary of Jackson's performance over the last few years. On the left, you see the growth in assets that we have achieved as a result of our expansion in VAs, which has led to growth in underlying profits, and this growth has been delivered in a countercyclical manner, as we expanded following the period of stock market turbulence that led to balance sheet problems for many of our peers. This growth has been, we believe, delivered at the right time of economic cycle. To give you a number, at the end of 2011, 63% of Jackson's business was issued at level lower than the S&P was at that time. And with the equity market ready that we have had since then, this situation have only improved further. We will not hesitate to be countercyclical again if and when returns went below our target rates of return. Throughout this period of financial market turbulence and macroeconomic uncertainty, Jackson has maintained our best capital position with an RBC ratio consistently over 400%. Our hedging programs continue to perform effectively and policyholder behavior on VAs is tracking in line with our expectations, and Nic will give you more color on both the RBC and the policyholder behavior later.

So the significant growth that Jackson has achieved, combined with its robust balance sheet focus on value over volume, is now facilitating significantly higher net remittances to group. As I said earlier in my presentation, Jackson made a cash remittance of GBP 322 million in 2011. But if you look at this on an annualized basis over 3 years, they have remitted an average of GBP 450 million over '09, '10 and '11, so they are about 75%, in my mind, of the way to achieve the objective of GBP 200 million by 2013. So it's the relevant number's really GBP 150 million versus GBP 200 million.

So moving now to the U.K. The achievements of the U.K. team in terms of cash and capital management we've wrote over the last few years have contributed significantly to our progress and I wanted to just trade that with one chart on the left. What you have there is in red, new business trend and in blue, new business profit. And that tells a really, really interesting story in the U.K. I've mentioned the repositioning of annuity pricing. I've mentioned the attitude to bulk deals, and you can see what it has achieved. It's at, whilst we have drastically reduced the new business trend, we have been able to produce about the same level of new business profit, which translates into very much improved returns on capital invested and we believe that today we are generating the highest IRRs in the U.K. life sector, thanks to the, thanks to this picture. So over the last few years, the U.K. has maintained a strong capital position, you can see in inherited estate here in red, that's GBP 6.1 billion. It's a backbone, really of our strength in the U.K. and has delivered remittances equivalent to 85% of its cash objective for 2013. And it remains firmly on track to reach its target. And one thing I have to say about the one-offs is that they offer huge value that the U.K. brings to us is really a secure and safe source of cash and you never appreciate that more than in a downturn. And we saw in '08 and '09 the optionality provided to a group by the ownership of the U.K. It was huge, turned to a national [ph] .

So moving now to M&G. M&G continued to perform very, very well in 2011, and which was a challenging year for asset managers. Net flows in the U.K. were GBP 4.3 billion in U.K. retail, and they are industry-leading. The nearest competitor and the #2, generated GBP 1.8 billion net sales last year for less than half M&G's level, and we have the #1 in U.K. retail for the last 13 consecutive quarters and our market share of total U.K. retail sales for 2011 was 22.8% on a net basis, putting us well ahead of the competition. Over the last 4 years, and you'll see that on the right there, '08 to '11, M&G has risen from being the fifth-largest player in the U.K. retail market in terms of funds under management, to being the second-largest, and our corresponding assets have almost tripled over this period to over GBP 35 billion, and is a strong performance.

M&G's strong track record of asset accumulation and investment performance is translating into very favorable returns for Prudential shareholders. This is highlighted by this slide, which shows the evolution of M&G's IFRS operating profit over time. In 2011, M&G reported record profits of 22% to GBP 301 million, which reflected the continued growth in managed assets and improvements in the cost income ratio that you can see in the bubbles at the bottom. And in 2011, M&G contributed 15% of group profits and 19% of net cash and remittances.

And this is my final slide, I'll, I finish on the dividend. As you can see here, we were able to increase the dividend throughout the financial crisis. The blue line is the FTSE over a period. Last year, we rebased the dividend higher by 20%, recognizing the significant improvement achieved in good cash flow. And in 2011, we have declared this morning, a total dividend of 25.19p per share, returning to a prudent rate of dividend growth of 25%.

So before I pass on to Nic, I'd like to summarize my 3 key messages this afternoon for you. Really, first that our Asian platform is now the largest contributor to IFRS profits. Second, that all of our businesses are now delivering material and sustainable amounts of cash to the group, is now in cash from everybody. And third, that we remain on track to achieve our 2014 growth and cash objectives. And with that, I will now pass over to Nic.

Nicolaos Andreas Nicandrou

Thank you, Tidjane. Good afternoon, everyone. I'll stick on low-tech notes. Let's start with the financial headlines for 2011, which are summarized on this slide under our now 2 familiar themes of growth and cash. In 2011, we had built on our strong recent performance. And once again, all of our key growth indicators have moved forward positively. This is the third year in a row that we have reported record profits, and these results has been achieved despite significant market headwinds in the second half of the year.

In terms of cash, we have increased free surplus generation by 16%, and net remittances to group by 18%. This is the most tangible evidence of the progress that we have made in executing our strategy, which has delivered higher earnings and is now translating into more cash. Behind these 2011 headlines are some highly significant trends, which I will highlight as I go through my presentation. These trends illustrate the ongoing improvements in the quality of our earnings, and underlying the confidence that we have in the progress -- and underlying the prospects we have -- underlying our confidence in the prospects of our business as we move forward into 2012. The feature of these results is that they have been delivered against a low interest rate backdrop, traditionally a challenging environment for insurance. The resilience of both our results and capital metrics proves that we have successfully navigated the business in this environment. I will provide you with more color on how we have achieved this in my presentation. But in summary, on new business, we have been fanatical about optimizing the balance between value creation and capital consumption, and have adhered strictly to our IRR hurdle rates. On IFRS, we have made further progress in diversifying our sources of earnings, and have continued to benefit from significant positive net flows. On free surplus in cash, the strong flow from our highly capital-generative business has outpaced the muted effects of the low interest rate environment and the high-level of free surplus stock has allowed cash to move more freely. And finally, on capital, our ongoing hedge effectiveness and our modest shareholder exposure to the Eurozone has ensured that our IGD, our U.K. with profit estate and Jackson's RBC ratio have remained strong.

So let's start with new business profit, our primary measure of growth in life insurance. At a group level, we reported a 6% increase to GBP 2,151 million, equivalent to a margin of 58% in line with last year. We delivered this increase in spite of the lower levels of capital invested in new business which means that our 2011 IRRs were the highest ever achieved. In Asia, new business profit increased by 19% to GBP 1,076 million and our margin advanced by 5 points to 65%. We continue to prioritize capital allocation to those products and geographies that offer the highest returns measured by reference to IRRs. We had a strong finish to the year, with NBP increasing by 27% in the fourth quarter boosted by health and protection, which made up 34% of sales in the quarter. As a result, all 7 of our operations in the Southeast Asian sweet spot delivered record new business profit in 2011. In the U.S., our NBP was up 7% to GBP 815 million, with variable annuities once again remaining our core focus. The 140 basis point drop in U.S. Treasury yields created an 8 percentage point drag on the total margin. The U.S. team defended the product economics by taking pricing actions in late 2010 and again in mid-2011, which meant that the overall margin contraction was contained to just 1 percentage point. Therefore, by remaining disciplined in our approach to balancing risk, value and capital, we have preserved our excellent IRRs, kept margins well above historic levels and increased our overall new business profit.

Turning to the U.K., in 2011, there were fewer wholesale opportunities that met our strict financial criteria, resulting in a lower level of wholesale activity in this area compared to 2010. At a retail level, new business profit declined by 10% to GBP 231 million. This was due to lower volumes of individual annuities in 2011, following changes to the minimum retirement age rules the previous year. Whilst the shift in business mix has translated into a lower retail margin of 32%, the IRR on the business that we backed with shareholder capital is higher than before, above, comfortably above 20% and remains, in my view, best-in-class.

Staying with new business profit, I want to take a moment to illustrate the underlying progress that we have made on this important growth metric. I do this by looking at the key drivers of the movement in NBP between the 2 periods. On the left in the gray column, you have the 2010 NBP translated at constant exchange rates, which as you will appreciate, was based on our view of future investment returns prevailing at that time. One year later, as a result of the drop in long-term yields, our expectation of future investment returns are lower, and this has the effect of reducing the starting point for the year-on-year comparison by GBP 103 million, shown in the light blue bar.

Now in the next 3 blocks, you can see more clearly the underlying drivers of growth in new business profit, which were GBP 193 million from higher sales, GBP 64 million from favorable changes to country product and channel mix, and GBP 77 million from pricing changes implemented to sustained returns above our hurdle rates, which brings the NBP to GBP 2,122 million, excluding bulks in 2011. Not shown on this slide is the contribution to NBP from pure insurance products, which in 2011, was GBP 666 million, representing nearly 1/3 of the total, having grown by 25% year-on-year. So in summary, we have driven this metric forward strongly despite the market effects, and have improved this quality with a higher content from pure insurance.

Moving to IFRS earnings, our headline operating profit was up 7% to GBP 2,070 million. Our life business has reported a headline increase an operating profit of 2%, despite the market headwinds in the second half of 2011 and the previously signposted effect of the U.S. DAC charge. To provide you with a better appreciation of some of the key underlying trends, I analyzed this performance by region and by source in the next few slides.

Looking at the analysis by region and starting with Asia shown in red, life IFRS profit increased by 32% to GBP 704 million. Asia is now the largest contributor to the group's IFRS profit, and for the first time, all Asian life operations have made a positive contribution to the result.

Moving to the U.S., Jackson's headline IFRS operating profit was down by 17%, but as you can see in the breakout box on the slide, this was entirely due to the anticipated accounting impact relating to deferred acquisition costs. We flagged at the half year, that DAC amortization will be temporarily higher than normal in 2011, as we effectively, repay the benefit accrued in 2008 from our use of the mean reversion methodology. For the full year, this repayment amounted to GBP 166 million, and you can see that in the box. Furthermore, in line with our published sensitivities, we incurred an additional DAC charge of GBP 66 million, as the actual equity returns lagged on mean reversion assumption. Stripping out these items, Jackson's underlying gross profits increased by 13%, reflecting the strong separate account asset growth achieved during the year.

In the U.K., the modest increase in life operating profit to GBP 683 million disguises a stronger performance once the contribution from bulk is separated out, as illustrated in the breakout box. Turning to the sources of IFRS earnings, and starting with the overall shape on this next slide, we have continued to make progress in diversifying our earnings base, and then improving its resilience. As you can see on this slide, you can see on this slide that insurance margin, shown in red, is now a greater proportion of the total and is increasing fast in absolute terms. It now accounts for 23% of earnings, contributing nearly GBP 750 million to the IFRS result. This is a high quality source of earnings as Tidjane has said, as it is relatively immune to the investment market volatility. You can also see that fee business in the middle blue has increased by 26%, driven by our focus on VAs in Jackson, and on unit length in Asia. Spread income in the light blue has also increased overall, have now forms a smaller proportion of the total, which is a positive development as this is the most capital-intensive source of earnings.

As we move forward, we expect a proportion from fee income and insurance to increase further over time. Securing a life insurance bolt-on in the U.S. which remains an objective, would augment the insurance element of the earnings, further enhancing its diversity and resilience. Let's move now to take a brief look at the sources of earnings for each of our business, and starting with Asia, you can see in the top left of the slide, that the total life income has increased by 19% to GBP 1,959 million. Expenses have also grown in the period, but at a slower rate of 13%. As a result, we're seeing the strong influence of operational leverage within these results. Below towards the right of the slide, you can see that the technical and other margin is up 19% to GBP 1,676 million. And this source remains the key driver of our Asian income. It includes the profits that we make from our insurance business, which increased by 22% to GBP 477 million, reflecting the growth in the book and positive claims experience. It also includes the margin that we made from premium deductions to cover costs, which is higher at GBP 1,199 million, in line with the growth in Asia's premium revenue.

Moving to the U.S., I referenced earlier the underlying improvement in the performance of the business. And you can see this on the top left in the slide. Jackson reported a 14% in life income to GBP 1,725 million, outpacing the 9% increase in expenses, and like Asia, it is generating positive operational leverage. Spread income shown on the left has increased by 5% to GBP 730 million, and is equivalent to a spread of 258 basis points higher than last year. By taking proactive action to reduce crediting rates across the book during 2011, we have mitigated the effects of lower interest rates. However, a continuation of the current level of interest rates would result in a gradual decline in spread income, bringing this close to the 200 basis point mark over the next 4 years.

Moving along to the right, you can see that fee income has increased by 34% to GBP 680 million. This increase is in line with the growth in Jackson's separate account balances, which in 2011, were boosted by GBP 7 billion of positive net flows. I have already commented on the DAC effect, so I will not repeat this on the slide. I can confirm that as we indicated in the, at the November Investor Conference, we will be adopting the new U.S. DAC accounting rules from next year and we will be restating this year's numbers to reflect the retrospective effects of this change. We have provided you with full disclosure of the before-and-after effects of this change in your packs, so I would refer you do those pages. the impact on our group earnings and on our IFRS shareholder funds is in line with our previous guidance to the market, which I have summarized in the bottom right of this slide for ease of reference.

In the U.K., our main source of income are annuities -- our main sources are annuities and with profits. Spread income on the left was broadly unchanged at GBP 247 million, with higher profits on individual annuities offsetting the lower contribution from bulks. The income from with profits, shown on the right, was lower at GBP 293 million, principally reflecting the business maturity profile.

Finally, on IFRS profits, I want to share with you a slide which illustrates the momentum that we have a group -- as a group, on this metric. By taking total income less total expenses before the effect of DAC, the chart shows how our life IFRS profits would look if we simply expensed all of our acquisition costs in the year in which they were incurred. In effect, this chart gives us an approximation on how our life insurance cash profits looked since 2008. This analysis demonstrates the very strong pickup in life income over this short period, shown in the light blue bars, increasing 1.6x from GBP 2.9 billion to GBP 4.6 billion. This reflects 2 key drivers: one, the strongly positive life flows we have achieved over this period; and two, our very deliberate focus on products and geographies with highly attractive profit signatures, such as health and protection, in Asia. Total expenses shown in the dark blue bars, have also increased, driven by acquisition costs, but at a much slower rate. The net effect is a near doubling of cash profits over these 3 years, reflecting a combination of powerful economics, but also operational leverage. Asia's contribution and momentum shown in red, may surprise some of you, as logically, a fast-growing business needs to recycle cash profits to finance its rising acquisition costs. Factors such as our scale, our proprietary distribution and our disciplined approach to product design have all contributed to the momentum that is depicted for Asia on this basis, and are all important underpins to Asia's ability to continue to deliver both growth and cash.

Moving to our asset management and our other nonlife businesses, these have delivered an 18% in IFRS operating profit to GBP 501 million. M&G is the main contributor to this total, reporting its highest ever profits of 22% to GBP 301 million. As Tidjane had already covered, this achievement reflects continued growth in the value of managed assets and ongoing improvements in the cost income ratio. Other income and expenses, shown on the bottom part of the slide, were broadly unchanged. You can see in the breakout box the ongoing costs incurred to implement the requirements of Solvency II and we anticipate an equivalent level of spend in 2012.

Turning now to the results on an embedded value basis, as you can see from the chart on the left, total life profit is higher by 5% to GBP 4,043 million, equivalent to a return on opening of embedded value of 16%. The increase is again driven by Asia, up 22% to GBP 1,759 million, which is now the largest contributor on this metric, also for the first time. Our U.S. and U.K. businesses reported modest declines in EV profits. This reflects our practice of using the lower-end 2011 economic assumptions to calculate the unwind on the opening embedded value. The 140 and 150 basis point drops in U.S. and U.K. yields have, therefore, depressed the in-force profitability of both businesses in 2011, relative to the previous year. This effect is more clearly illustrated in the top right-hand chart by looking at the part which is labeled unwind. The growth in our business would have ordinarily delivered a GBP 200 million increase, broadly a GBP 200 million increase in the unwind, but the market effects have negated this, resulting in a broadly flat year-on-year trend.

As was the case last year, we saw a continuation of net positive experience compared to our operating assumptions. You can see this in the breakout box on the right, which shows GBP 347 million of experienced profits achieved in 2011. In addition, we have taken a GBP 103 million benefit from factoring a modest proportion of this positive experience into our underlying assumptions.

This next slide analyzes the experience and assumption change profits by business. As you can see, all 3 regions have delivered a net positive result in 2011. In Asia, our overall embedded value remains robust. The main negative in 2011 was the charge relating to persistency and partial withdrawals which amounted to GBP 130 million. In fact, GBP 118 million of this total related to Malaysia, with all other businesses reporting a very modest GBP 12 million negative, which for these businesses, represents a big improvement evidencing the significant progress made on customer retention initiatives. In Malaysia, the negative experience is, in fact, contained to a specific savings rider which offers customers the option to withdraw cash without disturbing the flows of the underlying host product. Over the last 2 years, we have experienced higher-than-anticipated withdrawals on this rider, particularly from the group of customers sitting on high capital gains. We have now adjusted our partial withdrawal assumptions for this group to more closely reflect the actual experience. I should emphasize that whilst the withdrawals from this rider are higher than expected, the existence of this option has delivered better overall customer retention. By way of illustration, 99% of the policies that have a partial withdrawal continue to remain in force.

Turning to the GBP 200 million positive for Asia, GBP 184 million of this reflects the continuation of favorable mortality and morbidity claims experience, particularly in Hong Kong, Singapore, Malaysia and Indonesia. Jackson's experience continues to reflect the positive spread effect of swap transactions entered into last year. It is also pleasing to see that this business has continued to generate other operating profits despite the tough 2011 macroeconomic backdrop. The same is also true of the U.K. where the main benefit came from the impact of reductions in the U.K. corporation tax rate.

Before I move on to capital, I would like to briefly summarize the movements of items below operating profit for both IFRS and EEV. From an IFRS point of view, you see that the impact of the investment variances has been modest during 2011 at negative GBP 0.1 billion after-tax. The ongoing effectiveness of our VA hedging program, coupled with our close matching of annuity assets and liabilities from both a cash and a duration perspective, meant that our 2011 earnings were relatively insensitive to the drops in interest rates. Therefore, our IFRS net profit for the year amounted to a positive GBP 1.5 billion, equivalent to 59p per share. As you can see further down the table, we benefited from unrealized gains on Jackson's fixed income portfolio of GBP 0.3 billion after-tax. And after deducting the cash dividend payments made in the year, our retained earnings amounted to GBP 1.1 billion, increasing our IFRS equity by 14% to GBP 9.1 billion. From an EEV point of view, investment variances were negative GBP 0.8 billion after-tax. This is primarily the result of the flat to negative stock market returns in 2011, which meant that we did not achieve our equity return assumptions. EEV profit for the year was nevertheless a positive GBP 2.1 billion, and after the dividend payment, our retained earnings on this basis were positive GBP 1.4 billion to finish the year 8% higher at GBP 19.6 billion, equivalent to 771p per share. The key message here is the resilience of our total earnings to market volatility which have seen our shareholders’ funds continue to move forward positively.

I would now like to turn to cash in capital. Let's start by taking a look at the evolution of free surplus which, over the course of the year, has increased from GBP 3.3 billion, shown in the gray bar on the left, to GBP 3.4 billion, shown on the right. As you move from left to right, you can see the GBP 2,536 million, which represents the underlying pre- surplus generated by our existing book of business with material contributions from all the businesses. We used GBP 553 million to write new business, which is equivalent to a reinvestment rate of 22% below the 27% rate that we reported in 2010. This reduction reflects both the steps taken to improve capital consumption that Tidjane has already covered, as well as a particularly favorable 2011 geography and product mix. Changes to this mix may cause the rate increase as we move forward. Further along, you can see that market affects had a negative impact of GBP 531 million, which was nevertheless comfortably covered by the operating free surplus generated in the year. Businesses remitted GBP 1,105 million, which meant that pretty much all of the 2011 free surplus generated net of market effects was up-streamed to close the year at GBP 3.4 billion.

The key messages here are: one, that the business continues to be highly capital generative after financing growth and two, that the high stock of free surplus has meant that despite the adverse market impacts, regulators have not restricted the flow of cash to group, which at GBP 1.1 billion, was our highest ever. Last year, we provided you with some new disclosures relating to the undiscounted new business and VIF monetization profiles for each of our businesses. This year, we have repeated these disclosures and in the case of the in-force, we have extended these further to analyze the movement between the 2 year-end profiles.

On this slide, the dark blue bars represent the end 2010 VIF monetization profile as reported last year. The gray bar on the left shows the actual VIF monetized in 2011, which, at GBP 2.1 billion, was higher than the expected GBP 1.9 billion due to positive operating experience. The light blue bars represent the updated profile for the end 2010 in-force, 1 year later. As you can see, it is marginally lower than before by about GBP 0.1 billion each year. This reflects the impact of a 1% to 1.5% downward revision in future expected returns caused by the drop in yields globally. This, in turn, reduces our future profit expectations on unit length, separate account and with profits business where our income is influenced by future investment returns. The point I want to emphasize, though, is resilience. If you consider how big and how significant the interest rate drop has been, the decline in our expected free surplus profile is relatively modest. This reflects the defensive nature of our book, and the fact that a significant proportion of this free surplus relates to insurance, which is relatively immune to market movements. It also reflects the near absence of traditional interest rate guarantee business.

When we now add the fee surplus from the 2011 new business, shown in red, we have an overall profile that is higher than the one that we started with. This picture is a further illustration of the resilience of our model, the momentum of the business and reinforces our confidence in our ability to deliver our 2013 targets.

Looking at the balance sheet, the message here is simple. We remain strongly capitalized and defensively positioned. The group's IGD surplus at the end of December is estimated at GBP 4 billion, equivalent to a cover of 275%. I appreciate that this is a Solvency I ratio, but I'm afraid that at this stage we cannot provide you with a Solvency II ratio, given the fluidity of the draft guidance. Let me reassure you that we're working very hard to shape the right outcome for our business, our customers and our shareholders.

Our central cash resources now stand at GBP 1.2 billion. We have a strong cash and liquidity position and the next call on our debt is not until 2014. We maintain the defensive credit position throughout the group in 2011. In the U.S., net unrealized gains at the end of the year have increased to GBP 2.1 billion, and impairments in Jackson over the course of the year were only GBP 62 million. We have maintained our prudent stance in relation to U.K. annuity credit default reserves, which at the end of 2011, stood at GBP 2 billion. Across the board, our balance sheet is conservatively positioned. Jackson's hedging program continues to perform very effectively and policyholder behavior on variable annuities is tracking in line with our assumptions. And as you know, we have minimal shareholder exposure to European peripheral sovereign and banking debt.

But let's take a closer look at these last few points in the next slides. Jackson maintained a strong RBC since the financial crisis and has ended 2011 with a ratio of 429%. In 2011, we saw volatile equity markets and a significant drop in long-term yields, but our resilient hedging program has helped mitigate the impact of these market effects. The growth in the asset base since 2008 has enabled Jackson to generate higher amounts of capital each year. We started the year with a stacked capital base of $4.4 billion, and through 2011, our capital formation has been strong. Jackson generated sufficient stack profits in the year to cover both the $0.5 billion remittance to group and provide risk capital to support business growth.

The market effects increased the value of our living and death benefit guarantee reserves, but our macro hedging program was effective in mitigating these increases and we closed the year at a broadly unchanged level of TAC capital. Now in reporting our year-end RBC ratio of 429%, we have elected to retain the permitted practice for interest rate swaps which has the effect of carrying these swaps at cost. As a result, $475 million of positive mark on the swap marks on these swaps are excluded from the calculation. If we were to include these positive marks, the end 2011 RBC ratio would increase to 482%, which is broadly in line with the equivalent ratio at the end of 2010.

At the Investor Conference in KL, we said that we would provide you with sensitivities relating to policyholder behavior in our U.S. variable annuity business. Before covering the sensitivities, let me just comment on the current lapse in utilization assumptions. Our philosophy is to both price and reserve conservatively, assuming the policyholders will behave very efficiently. The methods that we used to track and analyze emerging experience, benchmark favorably when compared to those of our peers. And finally, our actual lapse in utilization experience across the VA book continues to track within our pricing and reserving assumptions.

The chart on this slide shows the impact on both IFRS equity and on U.S. statutory capital of stressing policy holder behavior assumptions in a very severe manner. The red bars illustrate the impact of halving the lapse rates for in-the-money policies from our already conservative levels which would mean that the ultimate lapse rates for significantly in-the-money policies are less than 2%, clearly an extremely low level. This would have an indicative impact of $310 million on our IFRS equity and $365 million on U.S. TAC capital. In the blue bars, you see the impact of increasing utilization rates across the board by an absolute 10% to bring these to the 90% level. This would have an indicative impact of $160 million on IFRS equity and $375 million on U.S. statutory.

Therefore, even in the event of an extreme deterioration in policy holder behavior, the impact on capital and shareholders' equity would be manageable. This is because our assumptions are and always have been set at conservative levels and because we have always focused on GMWB living benefits which we believe have significant less risk of adverse policy holder behavior than other forms of living benefit variable annuities.

In my final slide, I'll provide you with an update on our shareholder exposure to sovereign and banking debt in Greece, Ireland, Italy, Portugal and Spain. You can see that our total exposure remains small at only GBP 372 million and I would remind you that these holdings sit primarily in our U.K. annuity business which is carrying 2 billion of credit default reserves.

So in conclusion, Prudential has delivered another strong performance in 2011 across all of our financial metrics. What is particularly pleasing is that behind the headlines, there are some highly significant trends which evidence the quality, consistency and resilience of our earnings and underline our confidence in the future prospects of our business.

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

Tidjane Thiam

Thanks, Nic. Now the group has delivered a good performance in 2011 across all of our businesses. 2011 was a challenging year. And as we look at 2012, there are uncertainties ahead of us. A number of important steps have been taken in Europe to address the challenges on the Eurozone. That said, those challenges will remain a feature of 2012 and are unlikely to be resolved in the next 12 months. However, there are clear signs of economic recovery coming from the U.S., and if confirmed, this would provide a significant boost to all economies. In this context, we have achieved in 2011, 2 important milestones: one, Asia has become the largest contributor to IFRS while continuing to grow strongly; and each of our 4 businesses is now making material net remittances to the group.

However, the last few years, we have built a track record of performance across our key financial metrics and we have here a new business profit, IFRS profit and cash and free surplus here, you see a similar shape. The point I want to make here is that these results have been delivered during 2 very contrasting periods in '05, '06, '07, we had a very benign macroeconomic environment, very favorable to our sector. And in '08, '09, '10, '11, we have had a much more challenging environment to put in perspective the delivery here. And it is testament to the quality of our franchisees and our people that we have been able to continue to grow profitably in the face of such strong economic headwinds. And this gives you, for me, a sense of a potential of this company should the economic conditions improve.

We have good momentum within our businesses, a robust and defensively positioned balance sheet and significant exposure to 1 of the most attractive regions in the global economy, namely Southeast Asia. As we said in our statement this morning, we have made a positive start to 2012. Our business has performed well in challenging times and is well positioned to perform even better as economic conditions improve, and I believe they are doing so.

So thank you very much and over to you now for questions. Thank you.

Question-and-Answer Session

Raghu Hariharan - Citigroup Inc, Research Division

Raghu Hariharan from Citi. Three questions, the first one was, on the credit default reserve impact on your IGD and on your EEV, could you let us know what the impact would be if you had to hold the credit default reserve assumption at the same level, i.e. do not foresee more higher liquidity premium? The second question was really on Hong Kong margins. Hong Kong margins I see fell from 74% to 66%. It could have some color on is that a one-off effect or is that a longer-term trend that you're seeing in Hong Kong, please. The third one is actually for Mike on the U.S. And these are the quest for 3 data points. The first what is, what are the level of lapse rates you're seeing in variable annuities? As you know, most of the U.S. payers and some of the European payers disclose this number. Secondly, what was the change in the net amount of risk year-over-year? And thirdly, what proportion of your VA book is actually within these [indiscernible] period? Sorry, what proportion of your VA book is within the surcharge period?

Tidjane Thiam

Okay. Alright, well, you're counting these as 3 questions. You have a special numerical system. Let's go with IGD [indiscernible]. Nic, you want to take the IGD?

Nicolaos Andreas Nicandrou

I don't have an answer to that question, but all I would remind you is that a GBP 2 billion reserve against the GBP 24 billion investment portfolio that we have in U.K. annuities is roughly equivalent to a default rate of 7.6% across the whole portfolio. I will put you that we're very comfortably reserved for a large variety of scenarios, if not most. So we we're comfortable with the amount that we carry in that regard.

Raghu Hariharan - Citigroup Inc, Research Division

So just on the liquidity premium, because there's an agreed methodology which is 50% of spreads or swaps less faulty bids, which is what AXA, Zurich and all these guys use. So just wondering whether you can actually take credit for the entire, almost the entire rise in spreads over the year into your IGD and into EEV. So that was really the question.

Nicolaos Andreas Nicandrou

Well, look, the amount of credit that we take in our IG deal and our Solvency I numbers in the U.K. is at the end of the day down to our judgment and down to the regulators' judgment as to what the appropriate level is. And we are comfortable as I indicated to you in where we are. In relation to EEV, you know our basis and our views on the market-consistent approach, so we continue to report on the same basis as we always have done in that regard.

Tidjane Thiam

This takes some of us back to '08 and the MCEV debate for those who remember those days. We had a very clear stance. We think those assumptions for us are not appropriate; very comfortable with our position. Served us well through the crisis and we think that we have an appropriate level of prudence. We don't believe that 50% is a fair assessment that we show of credit risk at every point in the credit cycle, when spreads grow to certain levels. You can't just fix [indiscernible] as a percentage of [indiscernible]. We think that's inappropriate. That's a housekeeping [ph] . Hong Kong margins, 74%, 66%.

Nicolaos Andreas Nicandrou

Yes, it's not terribly complicated. It largely has to do with product mix but, Pete [ph], do you want to add some color to it?

Unknown Executive

Yes, I think there's probably 2 things going on. One, there's the economic assumptions which clearly, with lower interest rates, you pull down the assumed bonus rates and therefore the shareholder transfers on the power business and then a bit of product mix in terms of participating versus linked.

Tidjane Thiam

Again, we don't have margin in our KPIs. We drive NBP. Very clearly, when I talk to Barry or Mike or when we discuss his NBP, I want your NBP to go here. After that, your volume and your prices and your mix -- honestly, I couldn't care less. You got your IRR target, you got your NBP target and you drive your business according to that. So frankly, margin's move will not be sensitive to that as long as we deliver on the targets we've given the IFRS, NBP.

Nicolaos Andreas Nicandrou

And one of the dynamics you do see as business moves, if you get a little bit of a shift from linked to the with profits, often that's indicative of a slight strengthening of the bank channel, which is what's happened to Hong Kong. And while it's important to remember that we do attach riders to with-profits business, it's generally not quite as rich a mix as with the length.

Tidjane Thiam

But from a capital perspective, it also has some benefits because it gives me profits.

Nicolaos Andreas Nicandrou

This definition of success is absolute NBP, not necessarily...

Tidjane Thiam

NBP, not margin. The U.S. will lapse rates -- the full question, lapse rates be NAR year-on-year? And, sorry, the further one I keep missing. Oh yes, surrender charge. Mike, you want to take those a shot?

Michael Andrews Wells

Have we disclosed our actual lapse rates?

Tidjane Thiam

No.

Nicolaos Andreas Nicandrou

Again, we can -- we'll happily cover on those. I think they tend to be -- the assumptions that we have are around a 1% to 1.5% mark in the surrender charge period. We then allow for a lapse shock of 20% to 25%. And then broadly after that period, they're broadly half. That's for policies that are out of the money, policies that are in the money, for example, if you take a 30% -- policy that is 30% in the money, we would apply 1/3 of those rates in our pricing and reserving. And then in this stress test that we showed within half those.

Michael Andrews Wells

Maybe I'll going to have Chad give you. He's got the deck in front of us here, that is, the specific numbers. But on the surrender charge issue, I think the thing to think about with competitors is, if you have a dollar-for-dollar withdrawal structure on a contract, you're going to get high utilization surrenders during the surcharge charge period. We have very little of that, was about GBP 3 billion of older stuff, but it's not a -- it's not the product we typically sell. Ours, there's a -- so we don't have that same in-surrender demand you're seeing. I think it was from the competitors. But do you want to give them actual -- given the amount of risk, quickly?

Chad Tendler

Yes, total net amount of risk for the year went up about 2 billion on the VA. And then in terms of your question in surrender charge, it's between 80% and 85% of the book is still on surrender charge.

Andrew Hughes - Exane BNP Paribas, Research Division

Andy Hughes, Hexane BNP Paribas. Up there, I suggest, is a slide missing from the pack. I know you give a lot of slides but there's one I'd like to see explained, which would help me out a lot. I know you're highlighting the growth in Asia as being highly significant in terms of APE. But one of my issues is when I turn to Page 68 of the IFRS disclosures, when you give the inflows premium income for Asia, which, as you point out, is a driver of the profitability under IFRS of certainly the insurance margin, the numbers look very different. Just highlighting the linked one which is GBP 1.1 billion of renewal premium income of last year 2010 and then you reported GBP 1.163 billion, a growth of GBP 33 million last year in premium income. I understand some of this is India but there's a huge difference between what you're reporting as new business premium income, what you're reporting as renewal premium income. I'm just wondering, could you explain what's going on? And the second question is, if I look at these renewal premium income figures and relate them back to the insurance margin of GBP 477 million, and I got a question about how profitable the rider actually is. Because if you're reporting in here GBP 3 billion of premium income across Asia in terms of renewal in force premium and you're making GBP 477 million of interest margin, not a lot of premium income is of course rider. So is there something exceptional about the insurance margin that you've been reporting the past few years? Or is the rider roughly 50% profit on your protection contracts?

Tidjane Thiam

I think you've largely answered your question on the regulatories. But Nic, do you want to take -- it's India. India is basically the...

Nicolaos Andreas Nicandrou

Just to clarify what those disclosures are, they're actually disclosures around the movement of the liability reserves. So that's the first point to make. That's not the same as premium because in arriving, the difference between the actual premium and what we disclosed in that reconciliation reflect charges that we deduct upfront from the products. The specific trend that you highlight in relation to unit linked is explained by India. I appreciate there's 250-odd pages of disclosure, but I can give you the x India numbers would have been GBP 922 million for 2011, GBP 781 million for 2010. And therefore, you'd see there GBP 140 million or 18% increase in line, I guess, with the trends that you're seeing in terms of growth across the business that we sell.

Andrew Hughes - Exane BNP Paribas, Research Division

That's still a lot lower than that GBP 1.2 billion of APE that you're reporting in Asia.

Nicolaos Andreas Nicandrou

The amounts that we report in Asia are spread across a whole host of products including with-profits, including unit linked, including protection. But look, the underlying point is that the business is growing. It's growing fast. The nature of the products that we sell have very attractive profitability characteristics. You've seen that come through not only in the growth of the balance sheet, which we disclosed, not only in the growth of profit but also in cash...

Tidjane Thiam

We can keep it pretty simple. The number you're referring to ex-India grew 18%. So do you have a problem at that level of growth or not? If not, we can move to the next point. So 18% growth. I mean, no, fair question. But we're just saying if it's India, it's been...

Andrew Hughes - Exane BNP Paribas, Research Division

Alright, but relative to the GBP 1.2 billion, it is even 18%...

Tidjane Thiam

I think we can take this offline after this. Still a lot of questions in the room. We had also a question on renewal premiums?

Andrew Hughes - Exane BNP Paribas, Research Division

The question about the margin...

Tidjane Thiam

The margin number, yes, GBP 477 million of -- Barry? The question was on the margins and then what's the real profitability of the Life and Protection business?

Andrew Hughes - Exane BNP Paribas, Research Division

No, just looking at this premium income number and compare it to the insurance margin reporting, so the GBP 477 million compared to GBP 3 billion of renewal premium that you're reporting across Asia, I mean all that GBP 3 billion isn't riders at all. See, riders will be a small proportion of the GBP 3 billion premium income I assume because that's actual premium income. And that’s...

Nicolaos Andreas Nicandrou

And increasing percentage.

Andrew Hughes - Exane BNP Paribas, Research Division

Yes, but that's suggesting to me the rider profitability is very, very high.

Nicolaos Andreas Nicandrou

Again, on the comparison, you need to factor into our comparison the Health and Protections business share of operating expenses and acquisition cost. Then only then can you express to the sums that you are describing an express and underlying return on the premiums that we deliver. So that's the difference in your calculation.

Tidjane Thiam

We're happy to take this offline. At a high-level, we don't disclose returns by products. You can judge the profitability of the business by looking at the capital that goes in there [indiscernible] and how fast the cash comes and what returns relative to global level. And we have never disaggregated that and commented on a line-by-line...

Michael Andrews Wells

It ought to be clear, based upon some of the -- as you say, you look at the strain, you look at the level of profitability, you look at what's happened over the last few years with margins. You look at the cash that's been generated. You look at what has changed in 2011 versus 2005 or 2006, and it's clear that the profile of health and protection of the business is certainly a part of the story.

Tidjane Thiam

We have many worries but not that one. We're very confident that the Health and Protection business in Asia we write. It covers its cost of capital many times, very comfortable.

Jon Hocking - Morgan Stanley, Research Division

Jon Hocking from Morgan Stanley. Three questions on the U.S., please. You mentioned the sort of U.S. deal which we've not heard for a while. I wonder if you could just give us some idea about the appetite there in terms of liability mix, size, how you might finance sets, whether it’s a scenario in which you do something more transformational in the U.S.? Second, in terms of market share, are you signaling in the U.S. of you're in a sort of green line [ph] with the market from here? And within that, is there any more distribution that you're going to add in the U.S.? So is this basically share within distribution for what you go through, you're going to maintain new share and distribution by adding a feature? And then finally, on the lap sensitivity you've given, I see as the contractors are already in the money, if you compare that, if you did that calculation again but just combined it with a market shock, say, S&P down 25%, how would those numbers look? Are they still immaterial numbers?

Tidjane Thiam

Mike, you take the deal...

Michael Andrews Wells

I'm hesitant to sit here and talk about bolt-ons. Just having been here for 16 years. We are charged to, and I think we've been very public, that we'd like to do bolt-on in the U.S. The parameters should be with U.S. capital. It would be life-centric. It would be accretive. It would be competitive with other returns around the group and we are pursuing that objective. But next time I talk about it, I'd love it to be to explain the deal to you and not -- we've been talking about this one for a while, I know. So there are a number of properties in the U.S. that are available for various reasons and we keep looking at them and we'll continue to do so and only do things that makes sense.

Tidjane Thiam

Probably the reason why it's been difficult, it’s exactly what Mike described, we're uncompromising on those criteria. So when you do that -- we’ve looked at many, many things but none has material as -- but our appetite is intact and it's something we would like to do. We think it makes a lot of sense strategically. We have a very short payback deal with very high IRR, so we have an appetite for it. And it could be financeable on Jackson's own resources.

Market share, look, it's always a difficult question for us in the U.S. because as I've said a few times, we drive IRR. We don't really drive volume. Volume in the U.S. is dependent on a number of things. One, where we price our product and how we structure it, the product features to what the competition does. And you've seen from quarter-to-quarter new swings in what they do or in a fire sale going on, major product change, people withdrawing from the market, et cetera, et cetera. And then, the S&P. So frankly, it would take a brave person faced with those uncertainties to give any kind of volume prediction, we are clear on our appetite. We say when the returns that are attractive we have the capital to write for business. But given our lack of control over the actions of our competitors or the S&P, we have to be relatively modest in volume predictions. But our ambition is to be a significant player, provided the market conditions allow us to do that.

Michael Andrews Wells

Jon, the other thing you're going to see is Met has been specific on a premium target or that they're looking to. And we think the balance of the sales that they had and that Sun had, probably distributed more to the top 5 than you see in the top 3. So will be a change from previous conversations and last year. But we're very competitive. We like our pricing. We've got good distribution and a lot of the distribution we had in the last few years is still emerging. It takes a long time to get every branch or some of these warehouses and develop relationships you need over time. And we're very happy with the results there but there's a lot of upside in those for us, so we don't feel we need a distribution relationship change, step change to capture a competitive element of the market.

Tidjane Thiam

Let me summarize the VA story. It's like the best way to be big in VAs is not try to not become big. That's been our experience in the recent past because all those run into trouble, you get a windfall, basically, if you're disciplined. The lapses, yes, you want to...

Nicolaos Andreas Nicandrou

I don't have those numbers, but the only thing I would say is when we set the fees that we charge for the guarantees, we set those to be profitable or at least to cover a large number of scenarios. And then we buy the hedging, if you like, to mitigate the impacts on that. So part of the answer to your question is that in that scenario, the hedging would mitigate quite a lot of the impact that, that would have on both IFRS and on the statutory capital.

Tidjane Thiam

For example, you could absorb -- a lot of the market shock would be mitigated by [indiscernible].

Nicolaos Andreas Nicandrou

And the assumptions, as I said, as we stress it, they are set dynamically from me a lapse Asian perspective.

James Pearce - UBS Investment Bank, Research Division

James Pearce from UBS. I think on under Raghu's method, there's one question. First of all, can you talk about the balance of capital requirements for new business and dividends? It seems you need less and less capital for new business but you're not hitting your pair ratio on the dividend. How should we understand the equilibrium there? Second, some of the Bank of England today is talking about being worried about insurers becoming shadow banks. What does that mean for Pru Capital and stock lending and how do you feel the regulatory environment is developing in the U.K.? And also, could you talk about the effect on European fund flows of LTRO 2, please?

Tidjane Thiam

Capital required and dividend, look, our feelings on the dividend I think has been quite clear. It is ultimately to be able to pay a growing dividend. But we, of course, we have taken to have a policy that is extremely safe. So what we do, we don't look at what we call addressing the static way. But we look at it dynamically and we stress test it very severely. So if you do a static analysis how a dividend may look not generous, considering the improvement in the position of the group, but we always try to keep a draw between, if you wish, the earnings growth rate and the dividend growth rate. And I don't want to go back in history, but it's a very wise thing to try and maintain, to never let the dividend growth rate get ahead of your earnings growth rate. So there's a lag there, if you wish. You've seen that the performance in '07, '08, '09 finally has led to a significant rebasing in 2010 that we calibrated the rebase exactly by looking at the scenarios and computing how safe we will be post-rebase. So that's how we look at it. So I think you should look at it as an upside. I mean, as the group improves, as the position of the group improves, the cash generation improves, the balance sheet improves, the possibility to safely increase the dividend increases. So that's how we look at it. Bank of England shadow banks? Well, that's one for -- I'm looking at John Foley. John, would you like to say a few words about that?

John William Foley

I'm not sure that PruCap falls sort of falls in the definition of shadow banks. Banking are obviously are regulated very well where, I hope, PruCap does and not giving us any hint that that's something that will come under any scrutiny. I think from the point of view of securities lending, I think the general view around the market and amongst the regulatory communities. That's a very positive thing for the market and provides liquidity into the market. So again, I'm not sure that's going to fall foul of any upcoming definitions around shadow bank.

Tidjane Thiam

Yes, so what [indiscernible] referred to was very specific. To get money from share lending and then use of that to invest in very risky activities, and that's not something we do at PruCap. That's not the model. And as John said, the FSA stays very close to that. We just had our RO [ph] review. Looks at all that and is comfortable. And there's a question for Michael in NCRO [ph] and net inflows in Europe.

Michael Andrews Wells

Yes, there has been a noticeable pickup in European fund flows over the last few months.

Toby Langley - Barclays Capital, Research Division

It's Toby Langley from Barclays Capital. I've got one question for Mike, one for Rob and one for Michael. The first one for you, Mike. We noticed last week you launched a new product called Elite Access, and I'm quite keen to know what you think about the prospects of that product are in that market. What do you think of the no load space? A lot of big players, Fidelity, et cetera, in that market? What makes you think you can hold a candle to them or how do you think it will grow going forward? For Rob, ABI guidelines on annuities, open market annuities, how are they going to affect your business? Have you started to suffer at all yet from a much more proactive attitude, shall we say, to the open market option? And then for Michael, why should we not be worried about RDR cost shares and the implications there for your AMC charge on your market-leading position in that market?

Tidjane Thiam

Mike, do you want to talk about Elite's Access?

Michael Andrews Wells

Yes, let me start with a challenge. I think Fidelity is probably our best U.S. competitor, all kidding aside. I think in the retirement space, they create some very good solutions and we still see ourselves, that's our primary role in business. So we do watch what they do carefully. Elite Access is actually not a no-load product, it's a no-guarantee product, and the intent is to give the consumers access to alternative asset class and asset management strategies that aren't available at the retail level. And so it's a fairly unique set of products that it's just launched, it's in the days. But 74% of our selling group has available to them, which just gives you an idea of the firm sign the selling group agreements. Some of the firms have various processes to approve that and I haven't asked their permission to tell you who's in and who's out. I probably should have done that. But 3/4 of them have said yes. And the -- most of the firms we do business with now for the retail consumer recommended allocations have alternative asset classes in that. It’s somewhere between 15% and 30% of the clients' suggested allocation, based on age. And it's very difficult in the U.S. to access those products effectively and conveniently and we're seen as a good source of that. So can we wholesale and support a complicated product to the advisor network? I think we can and I think we give them a run for their money. But to your point about competitors, the no-load space for VAs, we don't think is mature yet and we don't think is a place to play assets or resources yet. I think there's a couple of reasons. They want the guarantees, so effectively, we’re going to let someone have access to our balance sheet but not pick up any of the fee revenue on the assets, which is a business proposition we don't like. And second, the liquidity and volatility you're talking about from a hedging point of view, you really should be hedging those to the day, and you get into some very inefficient models from a hedging point of view in the sense that the clients -- every guarantee you’ve written is liquid, every hour of the day. So that tends to create a more expensive product that's priced correctly. So we're going to let those go for a while, watch that space develop and see how they mature. But we're pretty pleased with -- Elite Access is not supposed to the new product. It's supposed to be broadening our shelf space. And the initial reaction from the advisors is good, they like it. They've never sold anything like it, but they like it.

Toby Langley - Barclays Capital, Research Division

Just coming back with you on that, to fully capture the value chain here, you don't have to ramp up your [indiscernible] product proposition as well?

Michael Andrews Wells

I'm sorry, one more time?

Toby Langley - Barclays Capital, Research Division

Your immediate annuity proposition, you don't have to ramp that up to capture the full value chain?

Michael Andrews Wells

No, we don't have that involved -- it's involved in this product. We still don't -- the interest rate environment, there is some pickup in the Sphere [ph] products in the U.S. but you still don't see retirees in the U.S. buying guaranteed income streams, in a traditional sense. In the sense you would hear when someone retires with a pension plan. What you are seeing now though is quite a few of the competing VA products effectively being a variable immediate annuity cash flow stream. That's the way a lot of clients are accessing that benefit. So next GMIB would be a good example of equity linked via annuity.

Tidjane Thiam

Rob, on the open market option?

Rob Devey

Yes, on the open market option, to your final question first, Toby, we haven't seen any change in terms of the take-up rates. I think we remind ourselves here to what our average annuitant looks like. In terms of annuitant, we got a part of between GBP 15,000 and GBP 20,000 depending on what the markets look like. These are pretty small parts. Typically, they are a long-term Pru customer with very high affiliation with the brand. So I think the changes which we have been involved in, in developing, we are comfortable. We don't think that -- we think it makes that a little bit trickier for our customers and that they are slightly less efficient. We have a very efficient model, so taking small parts and turning them into relatively small annuities. So it becomes slightly less efficient but that's at the margin. We don't think we'll see really any change that comes out of that change. We already know because we tested our customers. 90% of them are aware that they could shop around for annuity.

Tidjane Thiam

Exactly, and Rob seems to make that very clear...

Rob Devey

So we'll increase information. I think we'll decrease convenience for people who are generally -- this is a small part of their life and they would like convenience, but that's fine. We've got other ways around to try and minimize the impact of that for our customers.

Tidjane Thiam

The piloting is a good thing. We're very supportive of what the ABI does. We're very involved and we're understanding this rate environment. And if you wish, hits to annuities from Curie, et cetera. It's important that people feel comfortable they're getting the best value possible. So we're supportive of the industry's efforts. And Michael, RDR and its impact on annuity?

Michael Andrews Wells

Yes, all of them passive funds, all the evidence is that people want to buy performance net of fees. So as long as they're getting performance net of a fee that is superior, that's what they want and that's what they'll pay for. In an ideal world, we would expect to launch share classes that no longer are full of commission to meet. In other words, the charge will come down by the amount of the commission that would otherwise have been paid. So we’re likely to be launched in share classes, carrying fees of 75 and 100 basis points. And we'd expect that to be entirely competitive and we'd be very surprised if premium alpha-driven investment funds will launch at fee rates below that.

Toby Langley - Barclays Capital, Research Division

So you expect retained AMC to roughly being neutral with the way you are now.

Michael Andrews Wells

Roughly.

Nick Holmes - Nomura Securities Co. Ltd., Research Division

Nick Holmes, Nomura. Two questions, the first on for variable annuities. I wondered, can you tell us what you think the economic performance of the hedge program was last year. I believe that your accounting SOP 03-01, or its latest update, is not what you would call an economic measure, but correct me if I'm wrong. And so my question is, other peers in the VA space report economic performance and suffered quite considerable losses last year and I noticed that there is a number of GBP 432 million in your free surplus. This is on Page 45, which you describe as a sort of hedged loss, I think. And my question is, is that actually the economic loss? And a follow-up to that would be, why don't you -- if it is, why don't you put this in operating earnings as the peer group does not in America -- I know they don't in America, but the Continental Europe peer group does. And then the second question is, just on the growth profile for the group, you have given us lots of great targets for Asia, obviously very, very sensible, but what about the rest of the group? Can demand growth targets for the rest of the group? Can you elaborate, can you tell us what sort of growth you would like to see? I mean, 6% new business profit growth, I would suggest, is not actually really very high growth. Is this is a sort of growth that you would expect over the next couple of years or are you targeting significantly higher?

Tidjane Thiam

Okay, I'll take the second 1 later, but let's deal with the VAs and the peer group...

Nicolaos Andreas Nicandrou

You're right that the income statement has -- includes the movement in reserves on an SOP 03-01 basis. But we have -- what you should do is what we have guided you to do in the past. If you wanted to get a good appreciation with what's happening on an economic basis, look at the RBC. And I have explained to you in taking you through that slide, that if you like, the capital at the end of the year was the same as the one at the beginning of the year. And we have 2 things going through. One is the operating profit generation offset by remittances and financing growth and then the increase in guarantee reserves offset by the positive effects of the hedging program. So that's a lens. We have on Slide 72 also repeated some of the disclosure that we gave you last year that said, what would happen if we put all our liabilities on a FAS 157 basis, and you see the effect there, but you have to remember that at that point, we would unlock the assumption in relation to the fees that we can take credit against those additional liabilities. And net-net, if you like, a quasi-economic liabilities of the same as the currently reported GAAP liabilities. On your point on the free surplus, the GBP 432 million, what you're seeing there is what I've described in relation to the RBC, that in effect, we have not given ourselves credit for the positive marks on the swap program. And in the same way as that has reduced the reported RBC, we have retained, if you like, the symmetry and that GBP 432 million also reflects, in essence, the mark -- not recognizing the mark on those market drops.

Tidjane Thiam

The permitted practices helped us a lot during the crisis. Fundamentally, they will protect us against a rise in interest rates. Okay, they're hurting our RBC at this time. We could have gone back to regulator and said, "Okay we want to do away with the permitted practices." But really, pure hedging program, you don't want to be going back and forth with the regulator. When it shoots you on an accounting basis typically. When it doesn't shoot you on accounting basis, you're moving in. So we made a decision of saying we need it in place. We'll take a hit. And if a question comes, we'll explain that that's what it is.

Toby Langley - Barclays Capital, Research Division

So in conclusion, what would you say was the economic performance of the hedging program of the variable annuity book [indiscernible].

Nicolaos Andreas Nicandrou

Sure. I mean through the RBC lens, it was very effective in that it mitigated the impact on the reserves.

Tidjane Thiam

So on growth, I understand a bit your frustration but I’ll also be very open. If you go back to my script, when I presented the 6 targets, I said that's what we ask you to judge us on. And as you rightly underlined there's no growth target other than for Asia. Because we are very confident that that growth will be profitable. If you're able to convince me with the same degree certainty that growth in any of our other areas where we active, we will be profitable, I would then give you a growth target. What we measure group for is for a profit, is to grow our profit. We're very confident of a driving Asia as we are, we are going to grow our profits. You saw FRI [ph] is going up 32%. For the rest, I explained very well the dynamics in VAs. In the rest -- I mean it would be completely self-defeating to set a growth target in VAs. I do not believe -- and I think I said this, on the record, in growth target in cyclical business. I think it was assumed, the business is cyclical. You give yourself a volume target, that's a recipe for disaster because others are watching your behavior. It doesn't make any sense, economically. You will write the business if it's profitable. You will not write it if it is not profitable, and that profitability will be determined by what offers do, very largely. So you have to set your product parameters and then the volume -- you have to set your parameters at a level so that you're comfortable with performance, whatever volume is written. And we have this downward flexibility, that’s why our costs are so low. We never have to chase volume to cover fixed cost, and that's a very good position to be in. I often say, we're like Saudi Arabian oil. They make money out of $5 oil barrel, and all the rest is upside. So it has to be in a position where you're comfortable. And in good times, we'll put all the capital in and write it. But if competition comes back or people will behave irrationally, then, almost if you really think about giving a volume target like one of our competitors did, it's almost an invitation for people to misbehave. Because then you're on the hook. You don't know exactly what you're going to because you've got to hit your volume target and you lose your flexibility. That's very poor management, actually. So we are not going to stand here and give you a growth target in a cyclical activity that we don't control, where volumes are largely dependent on equity market levels. So I will never give you a forecast on equity market levels. That's just silly. So we'll tell you how we operate, the targets we set, the volume will be organizational exports, not ex-party. We're ever going to tell you our target for Q1 is x because we're just putting ourselves on the hook. So we accept that the cost of that is at the top line numbers for the group may not look great. But I think we’ve been very clear with you that we don't think we should be judged by that. That is not the strategy we're following. We want to increase the share percent of the market value of the group at the top line. And we believe that the strategy that we are following will deliver that. It may produce some lackluster top line that [indiscernible] numbers sometimes but we don't really mind. As always, Asia, which is what we focus on for our growth is driving forward. The rest is opportunistic and we're happy to get it when we can. So for the U.K. we don't really have [indiscernible] generations [ph] . For M&G we're a bit again in a cyclical, relatively volatile business, very dependent on markets. You can't set a volume target for an asset manager. Products vary, depending on the economic cycle. Very fundamental thing that is going to do with second half of 2012, I will give you a target for M&G, I don't know. And VAs are within the same category. So, very clear that we are about value, not volume, and we're comfortable with that.

Andrew Crean - Autonomous Research LLP

It's Andrew Crean with Autonomous. Three questions. U.S. spread income variance, which is positive, at what basis points would that be neutral? Is that 175 or 200? That's the first question. The second question, I see you're in the papers protesting about Solvency II, possibly protesting too much, given the length of time on equivalence. But I assume this is relative to the U.S. So in order for investors to be able to judge what sort of potential threat this is to your U.S. business, could you tell us on a quiz 5 reading whether your U.S. business had enough capital in it? And then thirdly, when I read the first page of the statement, it was Asia, Asia, Asia, followed by more Asia and then a couple of reference the U.S. and U.K. Is this -- are you trying to build an Asian shareholder base? And what proportion of your shareholders are now with local agents? Are you going to make special effort this year now that a greater proportion of the business is from Asia to sell the Pru story into Asia?

Tidjane Thiam

Okay so the first one.

Michael Andrews Wells

I got even with 200.

Tidjane Thiam

So Solvency II, as we said, we have been involved in the papers against our will because we've been having -- I can say that with absolutely, a straight face. We've been having those conversations for a while and they never way they were to the papers because there was no upside for us. We're talking to the government forever and the regulators, also. So we were forced into an announcement which we made and we were very clear in the announcement that it is contingency planning, that there is an uncomfortable level on uncertainty over Solvency II and the range of potential outcomes is outside our risk appetite. And that as we get closer to the date, it was prudent to examine other options and we've mentioned domicile as well as the other options. And really, the regulators very aware of that. It's almost something they were asking us to do. They've been saying, as a good regulator should do, “Well what is your Plan B?” Actually, it's not a question that's asked to us. It's asked to every other insurance company. Because I don't know anybody today who is comfortable with the process as it is at this point in time where things fluctuate and change almost on a daily basis, with a solvency regime under which a company of our scale is doing, if you want, have to operate is too uncertain. So moving adoption, I think, is just good planning. And on numbers, at this stage, we don't think it's helpful, given this level of uncertainty and volatility to start...

Andrew Crean - Autonomous Research LLP

I wasn't looking for numbers. Just whether you had sufficient capital to cover...

Tidjane Thiam

The industry agreed not to comment on quiz 5, so I'm not going to break ranks. That's the position that the industry took.

Nicolaos Andreas Nicandrou

[indiscernible] quiz 5 submission and included it on an equivalent basis.

Tidjane Thiam

Yes, so all it tells you is on an equivalent basis, we’re fine.

Nicolaos Andreas Nicandrou

Look, on along an economic capital basis, Jackson is positive. It was at the start of 2011 and it finished but that's along the economic capital which we used it to inform the pricing and the behaviors that we deploy year-on-year. But on Solvency II, I think it's premature. It's just too much fluidity, as Tidjane has said.

Tidjane Thiam

So Asia, Asia, Asia, since you read our release, well, I think we're very clear on the strategy we're trying to follow. We talked about the need to make sure that each of our businesses is viable across an economic cycle, and that's what we're doing. And Asia is effectively doing very well. I mean, the numbers, the macroeconomic numbers I gave there, for me, are staggering. Asia is a continent. It's 77% of the world's population. It's not a negligible part of the world. And I believe that any company that has a real future on a global scale will be saying Asia, Asia, Asia in the future. It is 70% of the world, whether we like it or not, and growing. So I don't think we're saying anything the market or the economy doesn't know. That's a reality that we are all doing. So just a fact of life. And then I don't think it's a particular -- I said about shareholder base or it's just representing what the company is and what company so far has the power to choose its shareholders? So all we can do is produce results and the rest, people will decide to buy our shares or not. We have a very clear strategy. Blair?

Blair Stewart - BofA Merrill Lynch, Research Division

Blair Stewart from BofA Merrill. Three quick thoughts for me. Nic, since you brought up Slide 72, can you just explain again what the adjustment fill fees?

Nicolaos Andreas Nicandrou

Sure. When you do the FAS 157 calculations and you calculate the value, if you like, of the guarantees or the reserve for those guarantees, you're allowed under U.S. GAAP to bring in the fees that you will charge for those guarantees. But you're only allowed to bring in the proportion, a sufficient proportion that doesn't generate a negative reserve. So that's what happens in the calculation of liabilities. So what -- if you were to, therefore, move all of the, if you were to extend -- apologies, Barry. If you were to extend the calculation to the rest of the portfolio, effectively, you need to do the same. And this is the offset that's coming through in the column that you see on Page 72.

Blair Stewart - BofA Merrill Lynch, Research Division

Second question is, given the state of the closing balance sheet in the U.S., what should be our expectations of the dividend paid back to PLC? And the third question is, in one of the slides on Asia, it was noticeable that you are at subscale, given the context of group in Thailand. Just wonder what your strategy there was.

Nicolaos Andreas Nicandrou

Well, we've given you a long-term objective, which is by 2013, to have a dividend of GBP 200 million on a sustainable basis. We don't have anything to add to that particular objective.

Tidjane Thiam

There's no doubt that we're sub-scaling Thailand. Unfortunately, we've managed to double this year, but we went from 1% to 2%, a huge increase but it leaves us still subscale, and we have a huge appetite for growth in Thailand. Varies very irregularly and we’re trying a number of [indiscernible].

Michael Andrews Wells

Yes, it's -- one of the reasons Canada [ph] was sub-scaling Thailand is because, historically, over the last 30 years, it's been an agency-driven market and it's the one place in Asia where we've not built a particular large or strong agency force. So we're working on that. We have, I would reckon, the best, most confident, most experienced, most professional head of agency we ever had in that market who's come onboard in the last year. So we're seeing a material uplift in the number of agents and in the productivity of those agents. It's still very small. So you don't build an agency overnight. You build it over years. So we're keenly aware of that gap. You can address the issue a little more quickly on the banker side if you get the right deals and you execute against those deals effectively, then you can have an impact. As Tidjane said, we have doubled our share, not the greatest trick in the world but we have had doubled that share there and it's largely attributable to banker [ph] generally, to UOB and SCB specifically. And particularly on the execution of the UOB. The UOB is a pretty big bank in Thailand, over 150 branches. We're now basically almost 2 years into the operation of that. We were able to execute very quickly, drive very high volumes of new business, including some months of triple digit growth over the last year. That has not only improved the economics and the scale of our business, but it's gotten the attention of some of the bank partners in Thailand. And so it's not a lot. It's pretty easy for us to get invited into conversations with other bank partners. So I'm optimistic that over the next year or 2, that we'll be able to continue to build out the scale of the distribution platform and that's really what it takes. I mean, we know what to do, we just got to build a distribution platform that is in sync with the scale of our ambition.

Unknown Analyst

Asset [ph] to trends, one is great lost asking questions. It's just on numbers. The first one is, I wonder if you remind us of the percentage contribution to Asian value new business from Standard Chartered in Hong Kong specifically. And when that comes up for renegotiation in 2015, just the mechanics, will you pay a single large lump sum for access for the next 10 years? Or will you take that sum and you'll spread it over 3 or 4, 5 years just in terms of how I should think about forecasting. And the second point is, I noticed the Asian productivity dropped from 8% year-on-year growth in the first half, and then on my numbers, sort of [indiscernible] out your full year number. The growth rate was 2%, year on year in the second half. And Tidjane, at a November conference you said you would -- it would be a challenge to hold on to that. I was wondering if you could give us some sort of objective for 2012 that you might have in terms of your growth in agent productivity, just so I can [indiscernible] for cost purposes.

Michael Andrews Wells

Can I tell you the percentage of NBP that Standard Chartered bank in Hong Kong is as a percentage of PCA? I think the answer to that question is no. But it's good.

Tidjane Thiam

I think you can but you will not.

Michael Andrews Wells

Yes, I can, I can. Fair point, fair point. SCB, it's a strong contributor, but there are many strong contributors across the region and I mean that's just a slightly too granular question. I would also -- I will tell you, I don't like to get too specific about the terms of these agreements, but I will tell your calendar's wrong on when that deal will be renegotiated. In terms of agent productivity, I mean when you get the kind of strong productivity improvements we've had over the last couple of years, it is -- there is not infinite scale to improve productivity. So we do continue to chip away and get better and better and more and more efficient and productive, but that's not an infinite gain. You do get agents to a point where, based upon the demographics of the market, based upon the macroeconomics of the market there's a point that with the product you sell, you're not going to drive premiums higher. Agents, there are still 24 hours in the day of most agents. There is only so much they can do.

Tidjane Thiam

And you touched the limits of numbers, for instance, if you're driving growth in a relatively lower productivity area and there is an entity which we're very happy with, it may drive your productivity down, your average. There's mass. It tells you -- it's like margins, product mix. It is contribute [ph] . It tells you where your growth has been happening. So really if you wanted a meaningful productivity conversation, it has to be on a country-by-country basis. Once you mix Indonesia with Vietnam, with Philippines. There's so much more in different directions but it's not always meaningful.

Unknown Analyst

[Indiscernible] just trying to understand the mechanics [indiscernible] the lump sum front. I was just wondering if you were going to play a lump sum or it will be spread out and paid. And Tidjane, you did slip up about 2 results ago and gave us the date, and it was 2015 on the Standard Chartered, so you're saying that somehow as we -- I mean it's in the Q&A 2 years ago. I was just wondering was that...

Nicolaos Andreas Nicandrou

A typo. Apologies.

Tidjane Thiam

We'll check with Q&A, trying to go back to my memory. But I am far too [indiscernible] probably said something that at least -- because the reality is, we don't communicate on the timing of that. It's not because we love secrecy. But we -- last year, for instance, we saw a lot of meetings telling people that there was no problem with our agreement. At one point, we learned that we were going to lose it. Someone was telling everybody we are going to lose it. This information -- yes because this [indiscernible] love the information around that deal. So we will find that there's no upside in adding to that. We're very happy with it. We have great relationships to Standard Chartered. We added Philippines this year, we’re very happy with. They helped us a lot in Thailand creating a quick event and by communicating around the date is not happening. So really our fundamentals stance at this point, our agreement with Standard Chartered is not to start speculating on the date or the shape that an agreement would take, et cetera, et cetera. But on the meaningful horizon, timing horizon for you, I don't think it's something need to worry about.

William Elderkin - Societe Generale Cross Asset Research

It's William Elderkin from Soc Gen. I have 3 questions on the U.S. space. First of all, can you comment on the profitability of your, say, pre-2008 variable annuity cohorts in the current interest rate environment? Secondly, on Slide 47, where you give the lapse and utilization sensitivities or indication of them, is there any way we can relate that information to your net amended risk disclosures. And thirdly, I think you're reporting IRRs in your business in the U.S. somewhere north of 20%. My impression is, most of your peers in the VA space have perhaps around 15%. Do correct me if I'm wrong. Can you just explain briefly where that excess return is coming from?

Michael McLintock

Certainly. We don't -- let me give you a general statement that I think will answer your first question. We don't have a vintage or block of business that isn't profitable. It is not profitable. So the related question that you may have read competitors, some of them are worried about additional premium going into old contracts, if that’s where you were going. They can go to any of the previously written supplements. We have less than a 3% supplemental payout rate, if you'd like. But we're – candidly, it's not a concern for us that they go into a previous vintage.

Tidjane Thiam

And just to add to that, I know very well that we were driving 95 basis points for [indiscernible] than today. Others were driving 65. We were more than 50% more expensive than the competition. That may explain to you why our profitability is different.

Michael Andrews Wells

And then I'm going to try to come back to you on the second piece. But on the IRRs, there's a couple of things there that I think the primary driver is we still have 25-plus basis points of expensive manage on the entire industry. And on some of the market leaders, that's materially higher than that. So just in -- if you think about how critical 10 basis points are in this business to margin, it's a pretty nice place to start. And that has everything from choosing Lansing versus New York City as a home and all of those sort of related tangible cost in that as well as the efficiency and the technology and things. It's not one single piece, but it is the entire model's output and Chad's got the -- you want to take the second one on NAR to lapse rate?

Chad Tendler

Of those -- the information you've given in that slide on lapsation and utilization sensitivities, is that in any way comparable with the investors' information inside the net amounted risk disclosure?

Michael Andrews Wells

The entire sensitivities in there? Not really.

Nicolaos Andreas Nicandrou

It's a different computation. There are 2 different bases for arriving at [indiscernible].

Tidjane Thiam

All right, well thank you very much for your patience. We've taken you through your usual lunchtime after a long day. So again, we're very positive about the prospects of our business in 2012 and we'll see you in a few months for our next presentation. So thank you.

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