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Prudential (NYSE:PUK)

H1 2012 Earnings Call

August 10, 2012 7:00 am ET

Executives

Cheick Tidjane Thiam - Group Chief Executive and Executive Director

Nicolaos Andreas Nicandrou - Chief Financial Officer and Executive Director

David Collins

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

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

Paul Chadwick Myers - Senior Vice President of Asset & Liability Management

Analysts

Jon Hocking - Morgan Stanley, Research Division

Kevin Ryan - Investec Securities (UK), Research Division

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

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

Andrew Hughes - Exane BNP Paribas, Research Division

Ashik Musaddi - JP Morgan Chase & Co, Research Division

James Pearce - UBS Investment Bank, Research Division

Cheick Tidjane Thiam

Good morning and welcome to our Half Year 2012 Results Presentation. And I'll start -- since I specialize in bad jokes, I'm going to start with my Olympics joke, which is that, "Thank god, there's only 3 million Jamaicans." I checked, it's at least 2.9 million, 2,889,000. Can you imagine what it would be if there were more of them? But anyways, it's great.

So Prudential has produced a strong performance during the last 6 months and is on track to deliver on our 2013 "Growth and Cash" objectives, which we set ourselves at our first investor seminar in 2010. I would like to begin by setting the agenda of this meeting. We will follow the usual format. I will start with the highlights of our results for the first half and will comment on a few key aspects of our strategy, with a focus on Asia. I will hand it over to Nic, who will cover our financial performance in more detail, and I'll come back again to talk about our outlook for the rest of the year, and we will then take your questions. Members of our executive team from across the world are dialed into this results presentation. Barry is on the phone. And collectively, we will try to answer any questions that you may have.

So my first slide will be very -- the usual one. And I'll start with growth, which is the first element of our "Growth and Cash" agenda. We have achieved GBP 1.1 billion of new business profits, which is our key metric, as you know, for life insurance growth, and over GBP 5 billion of asset management net flows.

Moving on to our profitability. IFRS operating profit is up 13%, consistent with our continued emphasis on this metric since 2008. EEV operating profit is flat, and this is largely due to the impact of a lower interest rate environment.

Regarding cash, the other element of our "Growth and Cash" agenda, each of our businesses remitted cash to the center in the first half. Among group remittances, I would like to highlight a $400 million remittance from Jackson. This follows the $0.5 billion remittance from Jackson in 2011 and is tangible evidence of the quality of the growth delivered by Jackson over the last few years.

A strong capital position with an IGD surplus of over GBP 4 billion, estimated at GBP 4.2 billion before dividend; and an interim dividend of 8.4p per share, this is a 5.7% increase on the prior period and, consistent with the past, has been calculated as 1/3 of the prior year full dividend.

So let's now take a look at the performance over a longer period of time than 6 months, starting 5 years ago in 2007. Here, you can see our performance across our 3 usual metrics of new business profit, IFRS operating profit and cash. In managing a life business, of course, there is always a degree of tension between those 3 metrics and it is challenging to move all of them forward in parallel. Over the last 5 years, we have grown new business profit by 19% annually, IFRS profit by 17% and cash remittances by 21%. Such growth rates allow us to doubled in size every 4 to 5 years. And during the last 5 years, NBP has increased 2.3x; IFRS, 2.2x; and cash, 2.6x. This performance has been delivered in a challenging economic end market environment, validating our strategy, our franchisees, our geographic footprint with a limited exposure to the Eurozone and our focus on execution.

I would like at this point to make a few comments about the context in which we have been operating for a while and how we are adjusting to it. The most significant headwind that we have had to face in recent times is clearly the current level of interest rates and the shape of the yield curve. The long-term nature of our liabilities means that we naturally prefer an upward slope in yield curve, as opposed to the current environment with a yield curve that is both at historically low levels and flat. We have been taking a number of actions in this context.

New business is important to us as a growth company but only if it is profitable, which ultimately will be a function of 2 things: the terms set at the point of sale and the quality of the management of in-force over the life of the product. And those are the 2 things in which we concentrate.

Regarding the terms at the point of sale. We are maintaining our discipline. We have not lowered our return or pay back period hurdles for new business. We continuously and proactively address our product pricing and features to ensure we generate adequate returns of -- on capital, and you'll see examples of this during the presentation. So true to our value-over-volume philosophy, as a result, we do not hesitate to walk away from business that does not have the right risk-return profile.

As I just said, insurance is as much about managing the in-force as it is about writing new business. It is therefore our priority to protect the value of the existing book. In this challenging and volatile environment, we are focused, as a result, on cash generation and on containing downside risks. Our assets are defensively positioned, we adopt hedging strategies at a local and central level to ensure that our capital position can cope in the event of tail scenarios.

Diversification is another effective risk management tool. We regularly talk to you about the makeup of our earnings between spread income, fee income and underwriting or insurance income. Since we introduced business process in '08, we have continuously worked to increase our fee and insurance income which are higher-quality earnings with limited market sensitivity. The development of our health and protection business in Asia is at the heart of that approach, as well as the highly profitable and capital-efficient growth of our asset management businesses. And I think we don't talk enough about that and that's a key component of our numbers. We're recently moving on to a U.S. -- and to give you another example, we recently launched Elite Access variable annuity. The variable annuity without guarantees is another example of this approach. And the acquisition of REALIC from Swiss Re, which will further enhance the diversification of our earnings in the U.S., is inspired by the same logic.

The current interest rate environment is a direct result of the policies followed postcrisis and over the large fiscal imbalances that can be observed across the western world. We have been facing and are likely to continue to face a low economic growth in many large western economies. The second set of challenges flagged on this slide after the interest rate environment. In that context, Prudential benefits from a few specific factors which have allowed us to continue to grow, albeit more slowly, in this challenging environment.

The first one, what I'd call our first growth area, is our Asian focus, which gives us exposure to the fastest-growing part of the global economy, at least on a relative basis. The second growth area clearly is in the U.S. where we are benefiting from the demographic wave of baby boomers entering retirement. And the third one, and this may surprise some of you, is in the U.K. where I see M&G, with its leading position, in the fastest-growing part of the U.K. savings market as asset managers continue to generate strong net inflows when the life sector itself has been in negative net flows for a number of years. These 3 growth areas have allowed us to continue to make progress in spite of the weak economic growth that we have all witnessed since '08.

Finally, we are faced by the significant challenge of future regulatory change, namely Solvency II. Much has already been said on this issue. We are lobbying hard to help deliver an outcome that is beneficial for our customers, our shareholders and the industry in general which plays a key role in the economy.

With a balance sheet as large as ours, we could never claim to be immune to the global economy, but we have been able to navigate through the turbulence that we have experienced thus far. We are focused on managing for the challenges described here, low interest rate, flat yield curve, weak economic growth and regulatory uncertainty, to continue to generate adequate returns for our shareholders.

So let's move now to capital allocation.

You are familiar with this slide since '08. We are focused on optimizing both the quantum and the composition of the capital we allocate to writing new business. In the past 4 years, new business strain has increased by 7% while new business profit has more than doubled. At the same time, we have materially rebalanced our investment away from the U.K. to more attractive markets, with our investment in the U.K. now 1/4 of what it was in 2008. And that's one of the key achievements of Rob and his team in the U.K. As we know, there are factors that impact new business strain that are outside our control across the economic cycle, and we have seen this play out in the first half of this year. Strain has increased in both Asia and the U.S. This is largely due to the impact of the lower interest rate environment, which has both a mechanical impact on the strength calculation for reserves and is also driving changes in consumer demand. That said, we are comfortable, in this context, with the IRRs and paybacks earned on the capital invested across our chosen markets. Nic will provide you with more details on our specific IRR and paybacks in the first half for each of our businesses, and you will verify this.

So let's now look at our 2013 financial objectives, starting with Asia because that's the only region why we set growth objectives. And the charting has the IFRS on the top, NBP on the bottom; and half year, H1 in blue, H2 in red, so you can track the evolution. And you can see that we have been able to continue to make progress towards our objective of doubling in 4 years, I'll express it simply. Year-for-year, for the first half, IFRS operating profit has increased by 20% and NBP by 18%.

Moving to the cash objectives. PCA has remitted GBP 126 million to group in the first half of 2012, and that's -- for us, is a significant milestone, and will contribute another significant remittance in the second half of the year. As already mentioned, Jackson has delivered on a net remittance to group of GBP 247 million. And Mike, this is your contribution for the full year. I'm not asking for more, thank you. The U.K. has contributed...

Unknown Executive

[indiscernible]

Cheick Tidjane Thiam

It's on the record. The U.K. has contributed GBP 230 million in net remittances, and similarly to Asia, there will be additional contributions in the second half of the year. And at group level, we're aiming for at least GBP 3.8 billion, net of -- of net remittances cumulatively from 2010 to 2013, and we have delivered 70% of that. So across-the-board, we are on track.

Now I would like to use the rest of my section to talk about strategy and how it is playing out in each of our businesses. The growth strategy as you know, is here. It's accelerated long-term growth in Asia by building out distribution, that's really the core of it, and investing in our brand and operations throughout the region; manage our U.S. business through the cycle by maintaining a disciplined approach to balance sheet and capital management; focus our U.K. business on the areas of competitive advantage and allocate capital only on the basis of return and payback; and driving our asset management businesses for growth by focusing on investment performance and distribution.

You will have noted that the profits of Eastspring, our Asian asset management business, declined in the first half of the year. This was primarily due to the particularly weak equity markets in Asia in the first half as well as investments we made in building our offshore capabilities. And you will see that we've been in positive net flows, but the external asset under management have decreased because of FX and investment market movements. With growing demand from investors both in and outside Asia looking to access Asian growth, the long-term potential of Eastspring, we believe, remains compelling.

So let's now take a closer look at our businesses, starting with Asia. As you can see here, PCA has more than doubled new business profit in 5 years while multiplying IFRS profits and cash by almost 10x and 8x, respectively. The IFRS profits in Asia in H1 was more than double the full year profits in '07, with a clear and direct impact on the group's valuation. Importantly, Asia's cash remittance in H1 was 3x its 2009 remittance. So the profit signature of our Asian business has changed significantly over the last 5 years so that we now have a business that continues to grow but produces profits and cash in parallel. These results are largely explained by our focus on a few key factors: distribution, product development, brand, cash and capital. In 2012, we have continued to build our distribution. We have grown our agency force to over 260,000, excluding India, and we are now selling insurance via over 14,000 bank branches -- I think, 14,500 bank branches of our various bancassurance partners. We have continued to invest in the brand. And our commitment to a number of corporate and social responsibility activities around the core themes of financial literacy, children and disaster relief means that we are viewed as one of the most trusted financial services companies in Asia, and our results supports that very much.

We continually addressed our product suite to meet the changes in consumer demand and the economic context and we have continued to maintain financial and capital discipline. And the cash remittance is good evidence of that. We also use reinsurance more. We are optimizing the new business strain. So on all of the levels of financing capital, we've been very focused.

And finally, the long-term nature of our liabilities means that we have a natural appetite for long-term Asian assets in local currencies. We are a long investor structurally and, therefore, an important player in Asian economies. We have continued to nurture our relationship with governments and regulators, in this context.

Well, these are just general principles, and I'd like to demonstrate this with a few country examples. We'll take out 2 main channels, starting with agency and a few countries. In Indonesia, we have underway a big push in the cities outside Jakarta. And you need to understand that to -- understand some of the numbers coming out of Indonesia. Non-Jakarta business now accounts for around 50% of our sales and over 70% of the new recruits. We held recruitment seminars in over 30 cities, 3-0, and at least 30 times a month. And so I tell Asia, it's hard to do more. 30 times a month. This has helped drive our Indonesian headcount to 180,000 at the end of June.

If we take Hong Kong. We've been driving our new critical illness product for our PRUmyhealth campaign. We're gaining good traction in cross-selling this product to our existing customers and which generates more health and protection income. And we have also launched a new agency recruitment campaign. We've been running in parallel dedicated workshops to help reactivate our inactive managers and producers.

In Singapore, there is a similar focus on increasing the conversion and activation rates of agents. We have launched customer segmentation initiatives to target both lower-tier and high-net-worth clients.

And finally, in Malaysia, we have continued to build out our Bumi capabilities by targeting the areas traditionally operated by non Bumi capabilities by targeting the areas traditionally operated by non-Bumi agents, particularly the east coast of the country. At the end of the period, we had close to 7,500 Bumi agents. And our Bumi training initiatives are helping drive higher productivity in this important growth channel. And we feel it's important to talk about that because sometimes we think that growth in Asia just happens because of -- just in Asia. And there is a lot of execution behind the numbers we show you and the team has to work incredibly hard to produce them. So -- and these are just 4 countries -- for our teams. So it's a lot of work behind the numbers you get.

So moving to the second channel, bancassurance. We have continued to make good progress in the first half. We have 77 banking relationships; as I mentioned, more than 14,000 bank branches. And the performance of the partnerships has been very encouraging. Sales via Standard Chartered have increased by 42% and those via UOB more than doubled, I think they increased 129%. And new business profits from bancassurance sales has increased by approximately 25% year-on-year, which is a good number.

So I'd like now to step back to look at an issue which used to be much debated a few years ago. The debate around Prudential often focused then on whether and when Asia would surpass the U.K. in terms of contribution to the group. Looking at the evolution between '08 and today, so just over 4 years, it's interesting. We can see that, today, Asia, in red here, contributes more NBP than the U.K. And given the growth of our business at a country level, it's a more interesting point. Within Asia, it is a matter of time before the debates shifts to focusing on which individual countries within Asia and when, rather than the region as a whole, will surpass the contributions of some of our more established businesses. In Indonesia, you can see here, a lot of business in Asia is now on par with the U.K. in terms of new business profits. And new business profit, as we know, is a lead indicator of a directional travel for IFRS profits, which is the next slide.

You can see IFRS profits where Asia now generates more profits than the U.K., so a very significant milestone for history of this company for a businesses as young as our Asian business. And within Asia, Indonesia has made considerable progress over the last few years and may be the first individual country in Asia surpassing the U.K. at some point in the future.

We know that NBP, IFRS and cash track each other, with a lag, so we believe that the same dynamics will play itself out for cash generation. And this slide shows clearly the direction of travel, with Asia remittances growing from being a fraction of the U.K.'s 4 years ago to now more than half the level achieved by the U.K.

Before we leave Asia, I thought I would share with you an analysis which I believe captures well what is happening in the region, and that, we used at our management conference in June here in London. So the powerful growth that our businesses there are experiences is a reflection of a historic economic transformation on a very large and unprecedented scale. What I'm showing you here is the evolution over a long period, 1820 to 2010, of the U.S. GDP per capita in constant dollars, so there's no inflation in any of the analysis I'm going to show you. All of this analysis is adjusted, and what we're showing you are real increases in wealth. And quite striking, you see what -- America has done something extraordinary. So what I've done is I've put Asian countries on this. And it's very interesting because, take China, in the 30 years between 1980 and 2010, the Chinese are seeing the same increase in GDP per capita as an American between 1820 and 1940. In other words, the Chinese economy has delivered to its people in 30 years as much as the U.S. economy delivered in 120 years, okay? So in simple terms, today's GDP per capita in China is kind of 1940, Second World War America, and they've gone from 1820 to that over 30 years. That's an amazing achievement.

And we've played with this with other Asian countries, and I think it's quite interesting. So if you look at Indonesia, same format, okay, in 30 years -- and they just published a 6.5% GDP growth in Q2. In 30 years, they've done 70 years, okay? So Indonesia is now U.S. 1910, 1915, First World War, okay? Now if you look at Asian countries at different starting points, in 1980 -- we took China, as well Indonesia. Let's look at Malaysia. We started from higher, and it's wealthier. Look at what they've done in those 30 years, they've done in 70 years. It's what I'd call the acceleration of growth in Asia, and it's quite striking.

And the last one I want to use is Singapore. Now you would think that, once I get to a steep part of the curve, the speed slows. It doesn't. There is an acceleration there. Look at Singapore, 30 years, they covered 60 years of American progress. Okay? So a lot of the belief I have in Asia is absolutely embedded in this chart. So if you bring it together in one slide -- what I've done here, I put all our countries on one slide, and I think it's a fascinating picture. It's saying a lot of our story in Asia. Past and future is here. These countries will develop, these economies will grow and their consumers will become wealthier, with all the attached needs for savings and protection which is what we sell. And our achievements in countries with such different levels of development, as Singapore, which we see at the same GDP per capita as the U.S; Malaysia, kind of in the middle; Indonesia, coming up; Philippines, like I said, we grew 15%, I think, in the Philippines, makes us feel confident that we are well positioned to continue to capture this opportunity at each stage of the development of the economies. And these things, I believe, will be the growth escalator. And if you look at where we are really investing -- now Thailand is an interesting one and we've said we want to invest there, but what we're doing in Philippines and Vietnam has embedded a lot of future growth as things evolve.

So I'll leave now Asia and move to the U.S. We have continued to follow a value-over-volume approach in managing our variable annuities business. Over the last few years, we have continuously made changes to our pricing and product features in order to preserve shareholder returns on our VAs throughout the period of declining interest rates. As a result, in a significantly different environment, NBP has declined, as you can see here on the left, whilst remaining at a historically high level. Had interest rate remained flat on the levels that they were at in 2009, our annuity new business margin, total annuity, would be 23 percentage points higher than what it is today.

Moving at sales. Our VA sales, on right here, are flattening off versus prior periods. And actually, our VA sales in dollars have gone down from 9.5 billion to 9.4 billion compared to the prior year. Some of what you see here is FX and some of it is Elite Access. So -- and our recent launch of Elite Access has been well received by the distributors, and we are incentivizing our wholesalers to drive further sales of this product as we move through the second half of the year and beyond.

Jackson has -- it's a very simple program, only one form of financial objective, and that is its cash remittance objective for 2013. I've already mentioned the net remittance of $400 million or GBP 247 million paid by Jackson in the first half and the fact that it followed the remittance of over $0.5 billion last year. These large net remittances are proof, we believe, that our expansion in VAs over the last few years has been done profitably. And our capital position remains strong. After payment of the remittance, our RBC ratio at the end of the period remained comfortably above 400%.

Following completion of the REALIC acquisition, Jackson will be able to remit even more cash to group, going forward. And we signaled that by increasing our 2013 cash objective from GBP 200 million to GBP 260 million at the time of announcing the acquisition, on which I'd like to say a few words now.

In May, on May 31, we announced the acquisition for -- of REALIC from Swiss Re for GBP 398 million. We have been saying for several years that bolt-on acquisitions of block life -- blocks of life insurance business were attractive to us in the U.S. The open market for life insurance business in the U.S. is highly competitive, with a stronger participation of large mutual insurers, and this makes it difficult to generate attractive returns. However, by acquiring a closed book of life insurance policies at a discount price and by leveraging the efficiency of our scalable operating platform, we can generate attractive returns on capital from such acquisitions.

This acquisition in particular has been signed on very attractive terms for us. We anticipate a return on capital of over 20% and a short payback period. This is competitive with what we generate on organic new business in the U.S. It is immediately accretive to IFRS earnings by around 100 million on a pretax basis but will essentially double the amount of life insurance income that Jackson generates. It is also immediately accretive to embedded value. EV per share will increase by around 18p when the transaction completes. On that basis, we've increased our cash target from GBP 200 million to GBP 260 million, as I just said. And all of these figures are pre-synergies. There is scope for additional cost synergies as we transition the policies on our platform over the next 36 months. So in summary, it is an acquisition in line with our strategy, which has been completed on favorable terms.

So moving to the U.K. In the first half of 2012, the U.K. team continued to focus on disciplined capital management, concentrating only on the lines of business that can generate high IRRs and rapid paybacks. This focus has led to a further reduction in new business strain in the first half, while new business profit remained roughly flat. We completed, as you saw, a single large book annuity deal within the first half of the year. It has been signed on very attractive terms requiring only a small amount of capital investment and delivering a high return and a short payback period. As you know, we compete in this market on a selective basis and will only complete transactions when the financial returns are particularly compelling, which means that we're also comfortable letting the volume of synergies vary, and you've seen us sometimes perform no deal for a half year, and that's fine.

Despite a challenging environment, we have been able to maintain a strong capital position. The strength of our risk-profit fund is a key contributor to our capital position. And at the end of the first half, the inherited estate surplus remained at a healthy level of GBP 6.1 billion. Finally, the U.K. remitted 230 million to group, building on the strong levels of sustained cash delivery that we have seen over the last few years.

Taking asset management and M&G last. M&G's performance for several years now has been strong. Over the last 14 quarters, M&G has been the #1 player in the U.K. retail market, as measured by net flows. At end of June, M&G have taken the #1 position in the U.K. retail market when measured by funds under management. M&G now has GBP 39.3 billion, yes, that's the right number, of U.K. retail funds under management. If we include all retail and institutional business, then M&G's total external AUM stood at almost GBP 95 billion at the end of the first half, and adding in the U.K. life fund takes the number to GBP 204 billion.

This asset growth, combined with operational leverage, has led to a significant increase in profits over the course of the last few years, as you can see on the right-hand side of the slide. Central element of M&G's strategy has been its focus on investment performance because it is the only way to deliver significant value to its clients. At the end of June, M&G's investment performance remained strong, with 63% of our funds above median, and this bodes well for future generations of further positive net flows.

Eastspring Investments, our Asia asset management business, also delivered positive retail and institutional net flows in the period of GBP 0.5 billion, at least GBP 426 million. Eastspring's profits reduced in the period, as I said earlier, due to the market context and investments we are making. But the demand from western and eastern investors remains huge, and we think that our investment in Eastspring will help us maximize our long-term profit potential in the region.

So let's move now to the dividend and, therefore, my last slide for this section. You can see that we've been able to increase the dividend consistently over the last few years despite a challenging economic environment since 2008. Our interim dividend for the first half of 2012 has been declared as 8.4p per share, which is up 5.7%. The strength of our financial performance in the first half has given us the confidence to declare this dividend increase.

So to summarize, in the first half, our businesses have delivered profitable "Growth and Cash". We have been and we remain focused on the execution of our strategy and delivering our 2013 objectives.

And with that, I will now pass over to Nic. Thank you. [indiscernible]

Nicolaos Andreas Nicandrou

I'll take that as feedback. Oh, dear. Thank you, Tidjane. Good afternoon, everyone. In my presentation -- I was coming back up with him. Thank you.

My presentation will follow the now-familiar theme of "Growth and Cash" with a detailed look at the drivers of our overall profitability before concluding with our capital position and balance sheet. We have provided you with the usual disclosures in the pack, with the only change from last year being the retrospective adoption of the new U.S. deferred acquisition costs rules. We trailed the effect of this change within our prelims in March, and I'm pleased to say that the impact from the half year numbers has been in line with the guidance that we gave you at the time.

Let's start with the financial headlines for the first half of 2012, which are summarized on this slide. The strong growth in new business flows this year and the resilient nature of our in-force book have enabled us to maintain the positive momentum in our key financial metrics despite the macroeconomic headwinds. We absorbed the effects of low interest rates to record our highest-ever first half results for both NBP, up 7% to 1-1-4-1 million; and IFRS operating profit, up 13% to 1-1-6-2 million. The impact of lower interest rates is more pronounced on our embedded value profits, but even here, our focus on extracting greater value from our in-force book has meant that the overall profitability was broadly in line with last year at over GBP 2.1 billion.

Turning to cash. Net remittances to group have increased to GBP 726 million and the free surplus generated in the period, after financing growth, was strong at over GBP 1 billion. This overall performance is the result of our relentless focus over the last few years on improving both the quality and the resilience of our earnings, which are now better balanced and more diversified that on early -- than at any point in our history.

Let's start with new business profit, our primary measure of growth in life insurance. In the first half of 2012, we generated the highest level of sales for any 6-month period, and this drove a 7% increase in new business profit to 1-1-4-1 million. This translates into a lower overall margin of 56%, reflecting the significant drop in long-term yields between the 2 periods. Even at these low yields, the products are written -- all the products are written above our cost of capital and we are generating internal rates of return comfortably above 20% in all of our businesses.

In Asia, new business profit increased by 18% to GBP 547 million as we continue to prioritize capital allocation to those products and geographies with the highest returns, measured by reference to IRRs. As we have said before, margins will fluctuate depending on the interplay of various factors, which for the first half of this year have combined to produce a lower margin of 61%. The positive effects of pricing actions and favorable product and country mix have offset the negative effect of higher proportion of sales through banks. The 2-point fall in margin is therefore entirely due to market effects, which are captured through our use of an active basis of setting economic assumptions. At the product level, the economics risk remain extremely attractive with high IRRs and 4 year payback periods.

In the U.S., our new business profit of GBP 442 million represents a small decline of 3% compared to last year, in line with our planned slowdown in the rate of growth of variable annuities. The combination of lower spreads and the 150 basis point drop in yields produced an 11-point drag on the margin. Pricing actions and changes to benefit structures introduced in August 2011 and again in April 2012 produced a 4-point improvement to deliver an overall margin of 61%. Whilst lower than last year, with IRRs of over 20% and payback periods of 2 years, the overall economics of Jackson's business remain very attractive and are comfortably above historic norms.

Finally, our U.K. business has delivered a 4% increase in NBP to GBP 152 million. We wrote a single bulk in the quarter, which met our stringent return criteria, generating wholesale NBP of GBP 22 million on APE of GBP 27 million. At the retail level, NBP increased to GBP 130 million, reflecting stronger book in annuity and with profit sales. The U.K. delivered this result with a lower level of invested capital, improving IRRs further and reducing payback periods to 3 years.

Staying with new business profit, I want to take a moment to explain the key drivers of the movement between the 2 periods and to illustrate the strong underlying progress that we are making on this metric. In the chart on the left, the gray bar represents the 1-0-6-9 million of new business profit we reported in 2011. The next bar down, in light blue, shows the negative impact of the drop in long-term yields, which amounts to GBP 116 million. As you can see

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out on right, this is equivalent to a 6-point -- 6 points on the group margin. This reduction relates principally to Jackson's variable annuities but also includes smaller effects on fixed annuities as well as with profits in both the U.K. and Asia. As you can see, we have taken pricing actions on these and other products aimed at sustaining returns above hurdle rates. These have generated an extra GBP 57 million of NBP, equivalent to 3 points on the margin. Higher sales volumes have increased NBP by a further GBP 131 million, which brings us to the 1-1-4-1 million in 2012.

Not shown on this slide is the contribution to NBP from pure risk products such as health and protection, which in 2012 was GBP 350 million, representing 31% of the reported 2012 total, up from 26% last year. So in summary, we continue to drive this metric forward whilst absorbing the market effects and have improved its quality with a higher content from pure risk business.

Moving to IFRS. Our headline operating profit increased by 13% to 1-1-6-2 million. Profitability on this metric remains a key focus for our business, and it is pleasing to see that it continues to move forward positively, underpinned -- and of course, that strong forward movement is underpinned by a 19% improvement in the life result to GBP 1-1-8-4 million. In the next few slides, I will provide you with some more color on the drivers of the increase, which in other view remain the same as before and comprise the 10% growth in overall shareholder-backed liabilities, driven by the strong life inflows in the last 12 months, the continuing shift towards margin -- in -- higher-margin insurance business and the ongoing widening of income-versus-expense straws [ph].

Looking at the analysis by region and starting with Asia, shown in red, life operating profit has increased by 26% to GBP 406 million. While the majority of the growth has come from our more established operations of Singapore, Indonesia and Hong Kong, I am pleased to report positive contributions from every one of our Asian businesses.

In the U.S., headline operating profit has bounced back up to GBP 442 million this year, reflecting both business growth and the normalization of the DAC amortization charge which was temporarily higher last year for the reasons we summarized at the prelims. The breakout box adjusts for these effects and shows in light gray the new business strain that is now a feature of our U.S. results following the adoption of the new rules. After allowing for these items, Jackson's underlying profits have increased, reflecting higher fee income which offset the expected slowdown and spurred profits.

In the U.K., life operating profit is just ahead of last year at GBP 336 million, which includes a contribution of GBP 20 million from the bulk deal. By way of reminder, last year's bulk contributed GBP 18 million to the comparative.

Turning to the sources of IFRS earnings and starting with the overall shape on this next slide. By increasing both insurance margin and fee income by over 20%, we have made further progress in diversifying our life income and in improving its quality. Insurance margins, shown in red, now accounts for 24% of the total, reflecting the ongoing success of our health and protection strategy in Asia. We regard insurance margin as a higher quality source as it is relatively immune to investment markets. The closed book of term business that we acquired in the U.S. is expected to add an extra 100 million to this source every year.

We have also grown the proportion that is generated by fee income to 29%, shown in the dark blue, driven by the continued growth in separate account balances in the U.S. and our focus on unit-linked business in Asia. Fee income now contributes more to group's earnings than at any time in the past.

Spread income, shown in the middle blue, remains important to our business and we regard its reduced contribution to the total as a positive development as this is our most capital-intensive source. We're pleased with the way in which the shape and the balance for our life income is evolving. The overall quality is improving all the time, and this underlines the confidence that we have in the future prospects of our business.

Let's move to take a closer look at the sources of earnings for each life business, and starting with Asia. You can see in the top left, total income has increased by 13% to 1-0-5-1 million. Administration expenses have also grown in the period but at a slower pace of 3%, highlighting the ongoing benefit we derive from operational leverage in our businesses. Acquisition costs, shown alongside, are up by 23%, reflecting both the growth in new business volumes and a shift in product mix.

Below towards the right, bottom right of the slide, you can see that technical and other margin remains the dominant driver of income in Asia, up 14% to GBP 892 million. This category includes the profits that we make on our health and protection business, which are higher at GBP 256 million due to the growth of the book but also due to positive claims experience. The category also includes the margin that we make from premium deductions to cover costs, which are also higher at GBP 636 million, in line with the growth in Asia's premium income.

In the U.S., Jackson's total life income, on the top left, is up 10% to GBP 945 million, outpacing the 6% increase in expenses, again generating positive operational leverage. The improvement has been achieved despite the 4% contraction in spread income to GBP 349 million. As we flagged at the prelims, the tightening of spreads and our more conservative approach to credit has reduced the spread margin from 262 to 238 basis points. And if interest rates remain at these levels, the margin will continue to trend towards the 200 basis point mark over the next 3 to 4 years.

Moving along to the right, you can see that fee income has increased by 25% to GBP 408 million, and is now the largest contributor to our U.S. result. This increase reflects the growth in separate account balances, which were boosted by the very strong net inflows in the course of the last 12 months. It also reflects higher M&E fees following product repricing actions which has -- which have generated the small increase that you see in the average fee to 108 (sic)  basis points.

The U.K. result is almost unchanged between the 2 periods as the movement in our main sources of income of annuities and with profits were largely offsetting. Spread income, on the left, was up 8% on a GBP 132 million driven by the uplift in average reserves. Income from our with-profits business, shown in the bottom right of the slide, declined by 5%, in line with the reduction in bonus rates declared to policyholders.

Turning to asset management and other businesses where the aggregate operating profit in the first half was slightly lower at GBP 267 million. Here, the main contributors are M&G and Eastspring Investments, whose results are analyzed in more detail on the next slide.

As you can see on the left, M&G has maintained its earnings momentum despite the volatile market conditions, with operating profit higher at GBP 175 million. The strong level of external net inflows, which in the first half of 2012 amounted to 4.9 billion, was a key contributing factor to this performance. As a result, M&G's underlying income, excluding profit-related fees and earnings from associates, was 7% higher at 354 million. This increase also reflects a positive shift in mix towards the higher-margin retail business, generating a 2-point uplift in average fees to 36 basis points.

Moving along to the right, you can see that our strict cost control has led to a 2-point reduction in our cost-income ratio to 53%. As in previous years, we expect the cost base to show a second half bias, so bear this in mind when looking at your full year forecasts. As a reminder, in 2011, there was a 5-point difference between the half year and the full year ratios.

Despite attracting positive external and internal net flows in the period, Eastspring Investments reported a drop in profits to GBP 34 million. Eastspring's lower overall fee income principally reflects the effect of weak equity markets on our third-party revenues. At the same time, costs have increased as we invest in building out our offshore capabilities. As Tidjane has said, the long-term potential of the mutual funds market in Asia is considerable, so we are comfortable increasing our level of investment in order to maximize profitability over the longer term.

Finally, on IFRS. On other income and expenses, nearly all of the difference between the 2 periods relates to the 42 million one-off benefit we took last year from the RPI-to-CPI change for our pension schemes.

Turning to our results on an embedded value basis. As you can see from the chart on the left, total life profit is slightly higher at 2-1-6-4 million, equivalent to an annualized return on opening embedded value of 16%. Asia has become the largest contributor to this result, with EEV operating profit increasing by 13% to GBP 869 million. This has offset the declines reported by our U.S. and U.K. businesses on this metric, which reflect the adoption of lower economic assumptions at end June 2012.

The effect of the lower investment return assumptions on the in-force result is more clearly illustrated in the top right chart by looking at the part of that chart that is labeled unwind. We estimate that, without the negative impact of these assumptions, the GBP 764 million shown for half year 2012 would have been GBP 110 million higher, which is what you would expect as the growth -- as the business continues to grow. As was the case last year, we saw a continuation of the net positive experience compared to our operating assumptions. You can see this in the breakout box on the right which shows GBP 192 million for positive experience profits into 2012, driven by gains in the U.S., and the net overall positive results in both the U.K. and Asia. This outcome is testament and evidences our very strong ongoing focus on extracting value from our in-force book. You can also see that we have made a number of assumption changes this half year, which generated a GBP 70 million benefit. These reflect the findings of our experience reviews completed in the second quarter in Jackson and the adoption of lower tax rates in the U.K.

On this next slide, I'll summarize the movement in items below the operating profits line for both IFRS and EEV. From an IFRS standpoint, the impact of investment variances is relatively modest at positive GBP 0.1 billion post tax. This reflects the absence of impairments on our credit portfolio, which remains defensively positioned, and our very modest direct exposure to the Eurozone. It also demonstrates the ongoing effectiveness of Jackson's VA hedging strategy, and I'll come back to that in a moment. Total IFRS net profit for the period therefore amounted to GBP 1 billion, equivalent to 38p per share. As you can see further down the table, we benefited from unrealized gains on Jackson's fixed income portfolio of GBP 0.2 billion post tax. And after adjusting for exchange and the payment of the 2011 final dividend, retained earnings totaled positive GBP 0.7 billion, increasing our IFRS equity to GBP 9.3 billion.

Switching to EEV in the table on the right. Investment variances were also relatively modest at negative GBP 0.1 billion post tax, with the adverse impact of changes in economic assumptions largely offset by unrealized gains on investments. The total embedded value rose to GBP 20.6 billion at end June 2012, equivalent to 806p per share or 749p per share if you were to exclude goodwill. Once again, our earnings have demonstrated resilience during a period of continued market turbulence, and as a result, our shareholders' funds have moved forward positively.

Before I move on to capital, it is worth dwelling on the growth in shareholders' funds for a while longer. This next slide summarizes the increase in the value that we have generated for shareholders over the last 2.5 years, growing our embedded value per share at a compound annual rate of 16%. Breaking it down further, the red bars show that the value of our in-force book has grown by 13% on an annual basis over the period, driven by the strong addition of new business profit. The fact that this is comfortably ahead of the 8% per annum growth in required capital, in the dark blue bars, highlights our focus on delivering growth in a capital-efficient manner.

The chart also demonstrates the pace at which our business converts in-force value into free surplus, shown in the light blue bars. After adjusting for the dividends paid during this period, free surplus has grown at a much faster 38% per annum since 2009. This trend is tangible evidence of the strength of our business model which delivers high-value growth and monetizes it quickly.

I would now like to turn to cash and capital. Here, we show the evolution of free surplus, which over the course of the period has remained stable at GBP 3.4 billion. As you move from left to right on the slide, you can see the 1-4-0-3 million, which represents the underlying free surplus generated by our existing book, with all 4 businesses now making really material contributions. The 1-4-0-3 is a little ahead of last year despite the lower investment returns, again reflecting the very strong focus that we have on extracting value from our back book.

We have used GBP 364 million to write new business in the first half of 2012, which is equivalent to a reinvestment rate of 26%. We signaled last year that the 2011 new business strain was exceptionally low, so the small increase in 2012 is not unexpected. Market affects were modest overall, which meant that our free surplus stock increased by 22% to GBP 4.2 billion. This in turn allowed our businesses to remit GBP 726 million the first half and still

[Audio Gap]

an overall healthy level of free surplus at 30 June.

As you can see, our highly capital-generative business model enables us to finance our growth and remit cash to group. Maintaining a high level of free surplus stock is a crucial factor in satisfying regulators in the various jurisdictions that we operate that cash can flow freely really despite the continued volatility in the global investment markets.

Tidjane has already updated you on the overall cash position, so I will restrict my remarks in this slide to guidance for the second half. On U.K. and Asia, we highlighted with our prelims that these businesses are expected to repay 145 million between them on contingent loan financing secured in 2009 and 2010. While these repayments will inevitably impact their respective second half remittances, group will still receive healthy underlying contributions from both businesses in 2012. As was the case last year, Jackson made their full year remittance in the first half, so as Tidjane has said, you should not expect anything in the second half. Jackson will fund the acquisition of REALIC using its own resources so there will be no call on central cash for this transaction. Finally, unlike last year, M&G has gone back to paying a first half and a second half dividend. We therefore expect a further remittance in the second half, which would see M&G upstream most of its post-tax earnings.

In concluding on cash and capital, we remain on track to deliver the GBP 6.5 billion of cumulative free surplus and the GBP 3.8 billion of cumulative -- remittances over the 4-year period, '10 and 2013.

Turning to balance sheet. The message here is simple or remain simple. We remain well capitalized and defensively positioned. The group's IGD surplus, which remains for now the key solvency measure, is high at GBP 4.2 billion at the end of June and is equivalent to a cover of 2.7x. And I would remind you that the IGD surplus is calculated after deducting GBP 2.1 billion of allowances for credit defaults on fixed income assets backing our U.K. annuities which have been retained in spite of no defaults in the period. It also excludes the unrealized gains on our U.S. debt portfolio, which amounted to GBP 2.5 billion at end June 2012.

Our overall direct shareholder exposure to the Eurozone is low. We have remained defensive in our approach to credit risk and have retained our conservative stance on hedging. The result of all of this is that our capital, solvency and liquidity measures have remained robust during the first 6 months of 2012.

Before closing, I would like to give you an update on Jackson's capital, cost of hedging and experience in relation to policyholder behavior. On the left, we provide a high-level summary of the key movement in Jackson's total adjusted statutory capital over the period. As you can see, Jackson generated operating profits of $0.5 billion in the first half and paid $400 million to group. You can also see that the line labeled reserves/hedging shows a nil movement in the period. This means that our hedging program has once again fully covered the movements in death and living benefit guarantee reserves. In fact, the impact of the 8% rise in U.S. equity markets trumped the impact of the lower interest rates to reduce the overall level of guarantee reserves. This positive effect was offset by the negative value movements on the equity hedges held to protect us from falls in the S&P500 Index. As a result of all these movements, total adjusted capital at 30 June was higher at $4.1 billion. We have kept in place the permitted practice which has the effect of carrying our interest rate swaps at cost. And this means that $649 million of gains relating to these swaps are not included in the $4.1 billion amount at end June.

A word on guarantees -- on guarantee fees and cost of hedging. In the first half of the year, fees earned from living and death benefit guarantees elected by our customers totaled almost $400 million. This equates to around 120 basis points on our average separate account assets and remains sufficient to cover the costs of hedging the risks associated with these guarantees well into the tail.

In line with our normal practice, Jackson has conducted its annual review of policyholder behavior in the second quarter of the year. This is a highly detailed piece of analysis performed by Jackson's actuaries, and the conclusions of this most recent review have confirmed the high level of prudence that exists within our assumptions.

Touching on a couple of insights from this review. Lapse experience for both in-the-money and out-the-money policies has remained stable year-on-year and continues to track favorably compared to our assumptions. We have in fact introduced further conservatism here by adopting a slightly higher lapse assumption for those policyholders that are out-the-money by more than 20%. Furthermore, the review of withdrawal benefit utilization experience has confirmed that we remain within plus or minus 5 percentage points of our prior year assumptions across all age ranges. The aggregate financial effect of updating the relevant assumptions to reflect our latest experience was broadly neutral. Furthermore, the overall impact on capital of a shock persistency stress for in-the-money policies is similar in magnitude to the one we published with our prelims in March.

Our experience in relation to policyholders' risk appetite, in particular their allocation of the assets to equities, remains favorable compared to our pricing. In pricing, we assume an 82% allocation to equities. In fact, 54% of new deposits and 63% of total deposits are allocated to equity funds, comfortably within our pricing assumptions.

Finally on this slide, I also highlight that, at the end of June 2012 when the S&P500 Index closed at a level of 1-3-6-2, only 17% of our in-force variable annuity policies were in-the-money from issued levels. This is a very simple way of demonstrating the health of Jackson's in-force book before even taking into account the benefits of hedging.

In my final slide, I can confirm that our shareholder exposure to peripheral Eurozone sovereign and banking debt remained small at GBP 344 million. Remember that most of these assets are back in U.K. annuity business where, as I've already said, we continue to carry significant credit default results.

So to conclude: Prudential has delivered a strong start to 2012, with our key financial metrics of NBP, IFRS and cash moving forward positively. We continue to improve the quality, consistency and resilience of our earnings and have maintained a robust capital position, all of which underpins our confidence in the future prospects of our group.

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

Cheick Tidjane Thiam

Thanks, Nic. It's time now to -- sorry, can you raise the podium a little bit? Sir, no, no, not yet. Not yet, not yet. I just want to raise the podium, then I'll say my outlook then I'll go to questions. I'm just trying to...

Unknown Attendee

How's that?

Cheick Tidjane Thiam

Is that possible?

Unknown Attendee

[indiscernible]

Cheick Tidjane Thiam

Okay, forget it.

Okay, so it's time to say a word about our outlook. As you've seen, the group has delivered a good performance in '12 -- in the first half of the year. However, we cannot claim to be immune to the challenging macroeconomic context in which we operate. A track record full of crisis shows that we have managed our business so that it is resilient in terms of economic and financial market stress. The balance sheet remains robust and defensively positioned, and we continue to capitalize on the longer-term growth opportunities for our business.

The growth opportunities are most evident in Southeast Asia where, I believe, the depth and breadth for Prudential's franchise is a source of strength. Our businesses are an integral part of the economic and social transformation that has only just started in that part of the world.

And we will continue to deliver profitable growth for many years to come, long after the current worries that beset the global economy have passed. And this really comes back to the heart of why I am confident that we can continue to grow earnings long into the future and continue to create value for shareholders.

So thank you. We are going to move to Q&A, but we'll just wait to allow all DGs [ph] to join the stage. Can you remove my things? If you -- yes? And you're going to run the Q&A?

David Collins

Yes. Just remember, at the end, we're going to [indiscernible].

Cheick Tidjane Thiam

Good point. Thank you. Okay, Barry, you on the phone? Barry?

Barry Lee Stowe

Yes.

Cheick Tidjane Thiam

Okay, good. So we're ready. [indiscernible] David?

Question-and-Answer Session

Nicolaos Andreas Nicandrou

Okay. We'll start with Jon Hocking.

Jon Hocking - Morgan Stanley, Research Division

Jon Hocking from Morgan Stanley. I have three questions, please. Tidjane, in your presentation, you mentioned the similar impact of new business strain from low rates and you mentioned something presumably high [indiscernible] reserves because of lower liability discount rates. You mentioned consumer behavior. I wondered if you could unpick those 2 things and talk a little bit about what that impact was and what you're doing to offset that? That's first question. Second question, on the fixed annuity business. You mentioned you got a trend to 200 basis points of spread over time if rates stay where they are. Would you comment where spreads on new business your pricing at the moment so [indiscernible] between the back book and new business? And then just sort of on the embedded value numbers. It seems to be more of an impact on new business from low rates on the back book [indiscernible]. I'm just wondering what you're assuming in terms of rates on the back book and how you're going to change those assumptions? And you [indiscernible] rates higher than current yields, et cetera?

Cheick Tidjane Thiam

Thank you, Jon. New business strain. Was few -- I've been in various meetings with me. I used to be annoyed by that trend because I kept saying every year where we can't continue to drive it down, at some point it's going to turn. In a way, I'm glad it did, because it's just kind of a reality check that we can't drive it to 0. It is dependent on the context. Yes, the lower rate increased mechanically the amount of reserves you have hold for any kind of interest rate guaranteed product. So what we've done particularly in Hong Kong where you'll see from the numbers that there's been an impact that were repriced for product that was concerned for the critical illness product, and we repriced it to a level where we were perfectly happy with the performance of the product now. And there's also universal life products in Singapore that we have repriced. So the action we've taken is every time to readjust the pricing and guarantees in the product to be comfortable with the new environment. So you see that, fundamentally, chose in Asia have increasing the strain and in the U.S. too, because with the -- you saw that the FA sales have increased which are more capital intensive. And so reallocation to FA has increased to -- for VAs.

Exactly. About a point about Nicolaos making about the other question to equity, interest gone down and the allocation to FS gone up and that drives the strain as well. Plus, I mean, I don't know, Mike, if you want to comment or ...

Michael Andrew Wells

We've got about 18% of funds now going on the to the dollar cost average bucket, a little more than that on the VA. The balance between that and the number Nic referenced in the equities is some form of debt instrument, typically bond fund. So extremely conservative behavior right now by U.S. investors that's consistent with, again, as we talked about in Asia last year, the gross flows in the U.S. mutual fund business were about the same percentages. Crediting rates. Your comment on the U.S., we're at one. We're as low as it can be and so there's -- spreads are holding up fine on the new sales. But it's -- the consumer effectively has no place to go right now for yields to here.

Cheick Tidjane Thiam

Nic, do you want to take this spreads in FAs and the trends?

Nicolaos Andreas Nicandrou

Yes. I mean, the spreads that we are currently securing on new fixed annuity business are around 140 basis points. You'll see that we've moved our embedded value assumption in terms of calculating the new business profitability to that. Part of that reflects the contraction in spreads. Part of that reflects our -- what I was referring to earlier, the cautious stance. Effectively, we're investing one grade higher in terms of credit rating at the moment. And we're very -- we're happy to sacrifice yield, if you like, for now, to keep the balance sheet in a -- of a higher quality. The back book of course is stronger, and therefore, it averages to the 2 3, to the mid-2 30s to 3 [ph] that I referred to earlier.

Cheick Tidjane Thiam

And the third question was on EV and differential impact of lower rates on new business and...

Nicolaos Andreas Nicandrou

I think candidly, that's down to mix. I mean, I think different products, different countries behave in different ways. The movements that we've seen in equity markets, the movements that we've seen in interest rates haven't been uniform across our businesses in the first half. Some markets, even in Asia, interest rates have gone up, Indonesia, for example. So it's interplay of all of that, that causes that -- the trend that you've summarized. But look, the important issue on in-force that the growth in the book is absorbing it. The -- we continue to drive greater value from our -- as you -- yet again, prudent operating assumptions. And on the new business, we dial up the pricing to where we've dropped the low hurdle rates here. And so it's -- the behavior remains very disciplined.

Cheick Tidjane Thiam

But the impact is quite different. If you think about the profit, what you get is a lower transfer, if you get lower rates. If you have a health and protection, it's the opposite. You're discounting that to lower rates, so the NPV goes up. So actually, in some countries, lower rate benefits us. And what Nic was saying is it's going to be a difficult half year to half year or full year to half year. Half year to half year in Indonesia for instance, rates have gone down, but full year to half year, they've gone up, which is a negative, if you're with me. So it's -- the net impact is quite complicated to a degree. We toyed with doing a slide on that, but we were defeated so we don't have it. Up until yesterday we're trying to show you how the interest rates impact the Asia numbers. So it really is quite complicated.

David Collins

Tidjane, can you pass it back to Kevin and then Nick?

Kevin Ryan - Investec Securities (UK), Research Division

It's Kevin Ryan, Investec. I just got a question on REALIC. In the U.S., I think at the time of the acquisition, you mentioned that the life of the book was around 10 years. Could you confirm that, that memory is right? But also related to that, could you say what we can expect in terms of the cash running off as that book runs down and whether how rapidly the cash coming out is going to run down? Just give us a sense of it, please?

Cheick Tidjane Thiam

Michael and Nic?

Michael Andrew Wells

I think the duration assumption of 10 is pretty -- we think it's a conservative one and appropriate. I think the best way to think of a signature, not to sound indifferent to, in fact, its clients, but it's a bit like the energy business where over time, as -- with the mature book, you're going to get more mortality experience. So that's where you're getting the change. That's -- is more likely to occur in the [indiscernible] out 10 years, you're going to lose more of the policyholders. So it's not as if it goes off a cliff, so to speak. It's a gradual arc. But I think 10 is a fair assumption.

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

Okay. Nick Holmes of Nomura. I wanted to ask about economic financial information. I wondered if you're thinking of giving us more economic information about capital and new business. And the reason I asked this is that you are now extremely unusual in not providing economic information on either of these. And I wondered if I could ask 2 specific questions, which is, with economic solvency, which most other companies are focusing on, could you tell us where you think you are? And can you tell us how important the equivalence debate is for you? And secondly, with new business, and Mike, I apologize about focusing on the U.S., but with the U.S. new value, your EEV margin is just sky high compared to MCEV equivalent margins. Now I wondered whether you could talk us through what you think are the main differences and what you would look like on an MCEV basis?

Cheick Tidjane Thiam

I'll take the first part and probably part of the second, and then, Mike, you can cover. This is a running debate between us. We don't mind being alone as long as we're right. So we don't believe in [indiscernible] so-called market-consistent approaches to valuation of insurance companies and insurance income, we don't, which is why we didn't move to MCEV. We were quite alone in that case. We still think we are right. So Solvency II. The extreme version of Solvency II, I believe, personally, are completely wrong, okay? The versions without any countercyclical premium are completely wrong. And economic capital, it all depends on what you put in it. We would absolutely like to be able to discuss economic capital with you. We've seen in these results seasoned versions of economic capital that are RBC-based. So if that's the yardstick, we think we're very comfortable with that, and we -- I've told you the RBC objective above 400%. And if we move into Solvency regime, that is RBC-based and we call it economic, we'll give you over disclosures you want on that, and that is not a problem. And that is our position. We've been very clear about our belief, theoretical belief, about this debate, where we are, and we don't believe in putting in the market's numbers calculated with methodologies we do not believe in. It's very simple. So we are not going to give you a market-consistent number because we think Solvency, to make a bad and easy analogy, is like oxygen. Okay? You can breathe with 80% of oxygen in the air. It's only when the oxygen rate falls that you feel that you actually need oxygen. Solvency only means anything at times of stress. The big flaw of Solvency II is that it was -- when I used to pushback [indiscernible] in '08 [indiscernible] yes but it works -- look at the June '07 numbers, they are fine. While Solvency in benign conditions is irrelevant. It only matters at times of stress. And it is still my belief at the time of stress, that model [ph] breaks down. So what's the point of moving into a Solvency regime that's going to blow everything up and force you to sell into a depressed market when actually, historically, you've created a stabilizing role in market by being a buy and hold investor. So the whole thing -- if it's like that, it doesn't make sense and I don't see your point in discussing those numbers because we are in stressed markets. And the pure market-consistent approach is, personally, I believe wrong and that's for housing [ph]. And that's how we designed our disclosures and communications to market.

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

Could I just follow-up on that? I mean, not denying, Tidjane, that you might well be correct, nevertheless, what happens if Solvency II is implemented and how does PRU responds to that?

Cheick Tidjane Thiam

If it's implemented with a broad design, we'll move. I mean, it's absolutely incontrovertible. It doesn't [indiscernible] in English, yes. If it's implemented the right way, we'll be perfectly happy to operate in that framework and sell our products and continue. If it's operating in a way that for us doesn't make economic sense, we will not operate on that way. I really think we're winning the debate. I read all the Q&As of all the Qs. I think things have moved. I think that the French spreads have de-correlated from German spreads is helpful. And I think that people have thought about these issues in a very narrow way. I think that stress conditions are very hard to anticipate and markets often move in a way that one wouldn't have expected before. So under stress, suddenly [indiscernible] this doesn't make sense. It hasn't been growing. We're very happy to give you economic capital based on RBC if you want it. That's not difficult to do. What we can tell you is we're fine right now. I said RBC is above 40%. Sorry, it's a very [ph] issue for us because we've been at this for a long time. It's been at time difficult to say what we've been saying. You know where we've been held by events. That's one of the few ways I'm glad about the Eurozone crisis because it's concentrated domains of some of our peers, and that's good. So Mike, do you want to continue on MCEV and new business?

Michael Andrew Wells

I think the issue in the U.S. -- I mean, pro-cyclical regimes get you the wrong thing at the wrong time, okay? If you look at the U.S. model on the equivalence issue, you have 40% of the capital in the U.S. industry destroyed at the peak of the trough, if you will, the crisis. You had all replaced 20, 22 months out. You had no U.S. defaults. So if you're sitting in a U.S. industry, meaning, they look at, say, this model works across cycles. So they don't think they're fixing anything. And so when you get into the dialogue on equivalency, you say, well, now you need a pro-cyclical model that would assume you could raise capital at the bottom. It doesn't sit well with the U.S. industry folks, and I would be in that camp.

Cheick Tidjane Thiam

I think things are moving certainly [indiscernible] -- the we've been told is consistent. We've been told that there will be U.S. equivalence debate under [ph] how, and most senior house levels, that's what we've been told. So that's, from our perspective, positive. David?

Unknown Analyst

I hate to follow-up on this issue about capital because it's getting you hot under the collar, but to be -- honestly, to characterize Solvency II as market consistent is absurd. It's clearly not market consistent in the 2 areas where you might be challenged, which is U.K. annuities and the U.S. annuities. And you've got equivalence on one and you've got to match premium pretty well guaranteed on the other. So I think what Nick's asking and what we're asking is, can we have the economic capital ratio with U.S. equivalence? Because if we don't do it, it does make us feel a bit nervous about the fact that you are hiding something.

Cheick Tidjane Thiam

I really don't think that it is absurd to say that Solvency II is market consistent because we're matching premium up to March 21 we're being told would not happened. So that Solvency II was kind of market consistent. I accept that now we're putting countercyclical measures that would make it look different. But it is designed, in its original design, it was designed to be market consistent. So that's the Solvency II [indiscernible]. And I agree with you, but if you remove that...

Unknown Analyst

I agree that things have moved along. I mean, we just want to know what the situation is. The other question I want...

Cheick Tidjane Thiam

In due course we will give you that information, but sorry, for the time being, our energy has been focused on getting the right answer on the design of the framework. And once that's done, we'll give you all the numbers. I'd be very happy to do so.

Unknown Analyst

Two other questions I have. One is you gave us the amount of VAs which are in-the-money from the issued levels. I assume that's different. And more interesting is, how much is in-the-money from the current benefit base? And so I wonder whether we could have that. And then finally, could I ask on the U.S. fixed annuities? Can you give us an idea on the in-force and on the new business, what are the crediting rates, what are the current guarantee levels and what are your portfolio yield? I think you gave us portfolio yields.

Cheick Tidjane Thiam

Mike?

Michael Andrew Wells

I'll do the second one first. You're roughly in the portfolio, 3 40, 3 50 on the crediting rate. So you're getting down -- and if you're trying to get to how close are the guarantees, which I've talked about before, we're getting near there. I mean, we're -- there's your 40 basis points, 30 basis points from the guarantee thresholds. So you're there. I think again, your -- the other component that's probably important to add to that is you're seeing normal persistencies. You're not seeing any change in withdrawals one way or the other. That helps. You're not seeing -- suddenly withdrawals turned off, you're not seeing withdrawals or surrenders increase. So the book is behaving as a positive [ph] indifferent to the crediting rates currently. We're not seeing anything -- as the rates come down, we're not seeing any change in behavior. On the -- for [indiscernible] on the benefit base versus the in-the-money, and this is -- we're assuming half year number.

Paul Chadwick Myers

What we're trying to get across there on the 17% which is really I'm thinking about the structural profitability of the contract. So M&E fees, which is the bulk of the fees, we're going to collect are basically about pricing assumptions at this point. So that's the takeaway there. Structurally, the way these things work since most of them have high watermarks, you're never going to be far from at-the-money. So virtually, everything is going to be more or less at the money type of guarantee. We don't have any deep out-of-the-money relative to benefit base. Does that answer your question?

Unknown Analyst

[indiscernible] last year and at the end of the year [indiscernible]?

Paul Chadwick Myers

No, it was same number.

Cheick Tidjane Thiam

That was the same basis as with 17 now.

Paul Chadwick Myers

Yes. Just market's gotten better, we've written more of them.

Nicolaos Andreas Nicandrou

And Andrew, on new business, the spreads -- the crediting rates in new fixed annuities were reduced by 25 basis points to around 1.5% if it's coming through as a fixed annuity. And if it's coming through the VA side of things, it's 1%.

David Collins

Greg?

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

Greig Paterson of KBW. I'll try and ask non-traditional questions. Moving to the balance sheet. The first one is, there's been a lot of press about new countries or potential new initiatives. I wonder if you just want to talk about region, Poland region, Nigeria, Brazil and Cambodia. What's going on there? What are you entering or what the plans are? The second question is agent persistency. I noted last year, you had a negative -- if you look at expense and persistence, you had a negative, I think, 20 million [ph]. You then strengthened the assumption by 120, and the run rate is now minus 180. So there seems to be, if you take expense and persistency and times it by 2, that's minus 80. So there seems to be a significant deterioration in your Asian and expense [indiscernible] those 2 items despite assumption changes. I'm just wondering what's going on there? And then a third question. I wonder if you can just give me [indiscernible] to provide the year-on-year growth in APE proactive agent by productivity in your agency ports?

Cheick Tidjane Thiam

New countries. Effectively, there's been a story in the media about Poland. If I take a step back from this, what we look at when we look to invest is really GDP, GDP growth, demography. We like younger population rather than older. Savings behavior, savings rate, is very important. And if you have a market-friendly environment where you can run a business, make a profit, repatriate it, remit those nice remittances we showed you, et cetera, et cetera basic components. If agreed, yes, clearly, Southeast Asia ranks very high. I've referred to the past, the average age in Indonesia, 28 years old, I've seen the curve as soon and GDP per capita, et cetera. But it is not the only place, area, in the world where there are markets that are potentially attractive to us. So Poland is, we believe, an attractive market. The demography is positive. It's by far the youngest country in Europe. It has good economic growth, very sound economic management, good savings behavior, very good savings rate, and it's a country where the form of distribution we like, the agency works. So it has all those characteristics. I'm always tempted to say unfortunately, it is in Europe and don't look like European country by most metrics. Fiscally, it's very responsible, a bit like the Asian countries. So in the end, you're confronted with something, do I want to create more value or do I want to stick to this notion that PRU can only do things in Asia. And I think on balance, we believe it's a good opportunity. We believe we will create value for the shareholders. So we want to go in with profit proposition and we want to build it from the ground up. So it's never going to be material. The network, the numbers we discussed here, it's not material. It's relatively small. So it's small, it's small, but it's interesting. And by the same token, we've talked about it at investment seminar. We are always scanning other markets. The only method of entry we consider is organic. So it's always going to be from the ground up. It's not expensive building agency force. We're sending to Poland one of our Asian leaders who's very good. And he's going to build, I think, a very viable, profitable agency presence in good market is good to have. Now the other countries, I don't know, I mentioned Nigeria and a few others. Nigeria is not exactly on the radar right now. Maybe in the future, but certainly not today. It is my own personal knowledge and it's not something I would recommend. But we've looked at -- we've thought of North Africa in the past. We've mentioned Egypt. We are entering Cambodia right now. That's a promising market, small economies, 14 million people, but we're doing that from Vietnam and incremental from the ground up. So yes, we're always looking at opportunities to do more business and profitability. I think there are some set of opportunities. Asian persistency, Nic?

Nicolaos Andreas Nicandrou

Yes, I'm not sure I [indiscernible] the numbers there. But the experience that we reported in the first half was minus 18. Candidly, when you're talking about 13 countries, you start talking about very small numbers. It continues to be slightly outside the -- where we have moved the assumptions to -- on Malaysia withdrawals . It's still a very active program there, but it's normalizing. But it's still, as I indicated, at the prelims. It wasn't going to revert to near instantly. So we're seeing that come through. And I guess, from time to time, you'll see 1 or 2 areas. Japan, we're close to new business. Again, we're seeing a spike in access there as well. So on embedded, roughly, that is now, gosh, a very, very big number. It's more. You make a good point if you change assumptions and so on and so forth, but I would also point you to the same trend also on the mortality and the morbidity. We made positive assumption changes at the end of last year and some of significant size. And yet, you're seeing a higher mortality morbidity profit coming through in the first half of this year, notwithstanding the moving assumptions closer to the experience that we're seeing. So a number of big moving factors. We continue to monitor them and react to them and that's really the strategic plan.

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

You're putting the appendix with the net flows, that gives you a sense of the persistency also?

Nicolaos Andreas Nicandrou

Net flows is the cash side. It's the cash side of things. That information is there.

Cheick Tidjane Thiam

It's there.

Nicolaos Andreas Nicandrou

Has always been there. I think we had a request last time to help break out some of the items in relation to India, which we agreed. They do distort the trends. They do distort the ins and the outs. So we've added a slide in the pack just to show x India, so you'll get a better understanding, that that's on the net flows.

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

The outflows, does this expense annualized are running at minus 18 million in the first half? That's for one. The second one, if you look at the unit-linked flows in Asia, annualize it as a starting point, it's minus 13% out flows are in this. And I think, if I'm not -- it is minus 13% if you take this horrendous tons of [indiscernible] and divided by the starting balance in unit link. In your pricing assumptions you show on slides over the years, effectively assume that your products stay on the book for like 30 years and other surrender penalties and that sort of [indiscernible]. So I was just wondering, I mean, to me, the implication of the flows is that the duration of the books are 10 years and your modeling assumptions used to be 30 years so I'm just trying to...

Cheick Tidjane Thiam

[indiscernible] premiums and flows? The flows are net of expenses, commissions, et cetera, et cetera. So there's always going to be a significant difference between premiums and flows, right? So we can get into a detail. Whatever fundamental, that's a fundamental thing you're dealing with. You can't just go from premiums to flows. Of course, there will be net of all the cash you've actually spent at which you do spend upfront when you're growing and it is significant. I think that's a big part of this.

Nicolaos Andreas Nicandrou

Yes, I'm happy to outline. But look, my overriding message is that we are net-net as I said in my presentation, net-net Asia on the experience was positive. Actually, it's the first time it's done that, albeit a few million, it's the first time we've done that since pre-crisis, and I think that's a positive development, particularly, when the size of the book and embedded value terms is much, much bigger than it was back in 2007.

Cheick Tidjane Thiam

Barry, do want to say a word. We don't forget you? Barry?

Barry Lee Stowe

Well, Greig, you had also asked about productivity of agency, in terms of measuring APE per agent, is that right? Is that the question?

Cheick Tidjane Thiam

Yes, that was the question, then. Okay.

Barry Lee Stowe

Yes. First of all, I would say that I think measuring productivity by looking at the APE per sale, per agent, it's kind of a blunt instrument because it can lead you to conclusions that aren't necessarily valid. For instance as Tidjane pointed out on one of the slides in this presentation, we've spent a lot of time and effort in Indonesia in the last year in expanding in the areas outside Jakarta such that half of our agents in Indonesia are now in more rural areas. We pretty much got what you could characterize as full geographic coverage in the country, which is quite a task when you consider thousands and thousands of islands, just the geographic logistics. But what the result of that would also be that those rural agents who are in less-economically developed areas outside of Jakarta will typically write a lower average premium. And it's not that it's worse business, it's just that the economic realities of Timor versus Bali or Jakarta are different, and so you would expect people to have lower average premiums. So you will get, if you look at it in real granular detail, it will look at spots within markets or markets where average premiums might be going down in other places where they're going up strongly. Overall, our agency productivity is up 12%, but it's lumpy and you really have to look at it with a little more precision and sit down. And I'm happy always to then have a conversation about that.

Cheick Tidjane Thiam

Can we have some slides back or is it not possible? Can we have the escalator slide with all the Asian countries? Because it's exactly what Barry said. We've had this conversation, Greig. You need to think -- when we add sales, you need to think about where they come from. And we are doing a number of things in our [indiscernible] that will drive the APE per active agent down structurally. If new growth is coming from Indonesia, which is poorer, I think, it's just -- and/or Vietnam or of a booming population in Malaysia or -- it's coming in here. So actually, it's good because it's profitable [indiscernible] but if you take a measure like APE per active agent, it's going to go like that. So when you take the Asia number. So that's why you have [indiscernible] by country by country.

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

[indiscernible]

Cheick Tidjane Thiam

I mean, it's flat. I'm pretty sure it's flat. We can give you the exact number, but I'm pretty sure it's flat.

Nicolaos Andreas Nicandrou

I think he's thinking of the number of agents.

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

[indiscernible]

Cheick Tidjane Thiam

Yes.

Andrew Hughes - Exane BNP Paribas, Research Division

Andy Hughes, Exane BNP Paribas. The first one is on the Asia being on track in terms of growth. When you started a target, were you really expecting the kind of boom in bancassurance that you've seen over the last sort of in these set of sales we've seen here in the previous periods. Because I'm just wondering, if by market by market, the bancassurance bid is actually pulling up the other markets that were due to grow, and when or if the bancassurance sales normalize, and does that mean you're actually below target in terms of where you were before? And the second question was on the U.S. I've seen this stuff about the contingent deferred annuity working party, which I guess it doesn't affect you directly. But there was stuff in there which seems to affect it to do with the interaction as the VA and the AG reserves that you set and the use of voluntary [indiscernible], together with commentary about making sure people utilize benefits a lot more, which I thought it was a real concern. I just want to know what's going on with that. I mean, it's from February this year, so I'm not sure what the progress or what the regulatory pressure on utilization of benefits in the U.S. being how sensitive things would be.

Cheick Tidjane Thiam

Mike, do you want to take the second and I'll come back to ?

Michael Andrew Wells

I think it's -- there's 2 elements that we're talking about. The more important one to us is the state by state, so what does New York and the state of Michigan think. And theirs is more similar to an S&P or Moody's type review, which is specific to contract years, clients or do our the assumptions align with the experience we've seen and the industry information they have from that point of view. We've seen no change. They were focused on that before, and they're focused on that in their reviews of us now. So I don't think there's material change there. I think there's numerous places in the industry where you get -- discussions about reserving. And it just has to do with some of the write-offs you've seen coming from competitors and some of the competitive behavior from some of the firms. But it's not a -- we don't see that as a Jackson issue. We think we're well reserved with our products. And as we mentioned, we've just reviewed our experiences and assumptions and we're quite pleased with them. We've got every rating agency and then the regulators. So I'm pretty comfortable with that.

Andrew Hughes - Exane BNP Paribas, Research Division

[Question Inaudible]?

Michael Andrew Wells

Yes, there is -- that's not -- I appreciate the point. It's a good one. Higher communication, do you get -- it's a sleeping dogs lie argument. Do you get higher or lower returns if the clients are more and more informed? Do you get higher or lower surrender charges if they're more and more informed. There's pretty robust rules now on the communication with shareholders. I'd say the bigger issue for the industry on that direction right now is some of the firms trying to go back and buy back their books or create a lower U.S. exposure by trying to convince clients to transfer -- to sell them back of policy at some premium or exchange. There's a lot of discussion. But that's probably the most noise in that space. Now it's how would you communicate that fairly accurately? It has to be a case-by-case review with the broker-dealers, when do you include them, that sort of thing. And there's a lot of dialogue there. But I haven't heard much candidly on the other topic. That's the -- the buybacks have been sort of the current noise in that space.

Nicolaos Andreas Nicandrou

But remember, we price in reserve for [indiscernible] behavior. So at the end of the day, if you have that discipline, whatever happens from a regulatory respective or otherwise, you should -- you are in a much lower position.

Michael Andrew Wells

And to be clear, the only reason we're a party of any buybacks is because we have broker-dealers that sold product. It's not that we're -- as an insurer interested in that sort of action to be very clear.

Cheick Tidjane Thiam

On the first question, I think we should be clear. The position we always want to be in this world, all products we write create them for all the channels. With bancassurance, this is perfectly fine. The return on capital is comfortably above the cost of capital and in our book, that creates value for our shareholder. So frankly, we're not too stressed about where the group comes from. What we've committed to you is we've taken the online numbers and we've told you multiply them by 2 by 2013. Now the notion that the 409 million of IFRS profit, life IFRS profit don't come from the right source, therefore we missed the target. Baffles me. I think we grew in Asia. We grew profitably. We're hitting the numbers. Nobody knows the future. This is exactly why I refuse to give you targets by channel or by country. When we announced the targets, there's a little get more granularity. And we said no, because we run a large business. We are very confident we can hit those numbers, not knowing what the future macroeconomic conditions will be because we have enough levers that we can pull at different times. So for me, I am not bothered, but in this period, we delivered a lot of [indiscernible] growth. That's one, and two, my fundamental belief the charts were used too much so in the end we have to take them out. But I have this chart which shows you asset ownership in the -- retail financial market by GDP per capita, okay? That is the justification for doing bancassurance. So what you see is that when you cross something like -- depends on the region. Let's say between $3,000 and $6,000 per capita, all that money that is in deposit starts flowing into financial products. And that's the point, that's what you're trying to capture. That's why bancassurance is at the core of our strategy in the region. That's why it is going to continue structurally to grow faster than agency. Because when a middle class -- [indiscernible] Poland in other countries and a middle class appears in the country, first thing they do is they get a bank account. Their money starts in deposits, and as they get wealthier, the bank is ideally positioned to sell them products. This is why it's right for us strategically to get inside the banks because agency has its own growth trajectory. And we see that in Thailand where all the growth is in the banking sector. And you're going to see that in many, many countries, market after market as wealth level rises. You need to cap a roof on agency and the extra roof is going to happen in the banking sector. So we're not surprised at all by the trends. When we did the strategy in '08, '09, we expected agency -- sorry, bank to grow 2 or 3 times with some of the agency. That is going to be the channel. It's not surprising us.

David Collins

Let's go Ashik and then Ed.

Ashik Musaddi - JP Morgan Chase & Co, Research Division

Ashik Musaddi from JPMorgan. Couple of questions on U.S. In 2011, there was a $900 million of warrant reserving in the VAs, $900 million. So can I get some more color on what that was and where does that sit as of first half? Secondly, can you give some color on the what the ROE on the new business VAs that you're writing right now and how does that compare with the back book? Basically, I'm just trying to compare what MetLife has said that their ROE is in the range of 13% to -- 13% or something on the new business VAs after repricing announced? I'm just trying to compare that.

Cheick Tidjane Thiam

Okay, Michael?

Michael Andrew Wells

So just to explain the bonds and reserves in [indiscernible] the RBC works in the U.S., you've got -- there is a -- it's more of a factor-based approach typically at a BBB level type of confidence interval. If you think about the particular credit, that's where credit is, that's where RBC kind of grew in the U.S. And so at that level, you're going to assume in U.S. a well-capitalized insurance company is going to have, call it 400% RBC, which is going to be basically shifting from that BBB lower threshold up to a more AA type of look, right? With AG 43 and C3 Phase II, that's more of what you might consider European solvency regime where it's a CTE, you already in that AA type of framework. And so...

Cheick Tidjane Thiam

Because [indiscernible] look necessarily accrual guidance, 43 is basically the 30% worse scenarios and C3 Phases are 10%. Is that correct?

Michael Andrew Wells

Right. Yes, it's 30%, yes. It's 70 CTE for reserving. It's 90 CTE for capital. Thank you. And the interplay there is that you can get a lot of volatility in that interaction between those 2 because you're not calculating in the exact same basis. So we and others will use voluntary reserves to effect -- because what you're going to set is the reserve level is what it is and then C3 Phase II capital component goes into the denominator, but that's very levered number by its nature. And so you only carry reserve -- or you only carry capital in excess of the reserve. So what we do and what others do is use the voluntary reserves effectively to set reserves equal to capital. So you don't get the leverage effect to have the RBC moving all over the place from period to period. So that particular part that you saw at year end, the $900 million, is now reduced to about $500 million. But it's something that's it's really part and parcel the same calculation. The only thing that's really moving around. In fact, you can think of the way we set reserves is at the C3 Phase II, that 90 CTE level, and the reserve, the AG 43, 70 CTE level kind of gets to be a by-product, okay?

Paul Chadwick Myers

,

And then as we have not given a by vintage ROE targets out or released it out, but generally, we have hit our -- what we said is above 20. And the -- I think from the slide we posted on embedded value, you can see that the last few years have been unusually profitable. That number, if you took that slide back another 10 years or smaller [indiscernible] more in the 40s, okay? So it's -- post crisis, it's gotten more profitable would be a good way to look at it.

Cheick Tidjane Thiam

The company starts have very different starting point.

Paul Chadwick Myers

Yes, we have a very different expense structures and key on the VAs is different guarantees.

Cheick Tidjane Thiam

Some have been starting from low point trying to drive it up for us. We're starting from a very high point.

Unknown Analyst

Ed Housen [ph] at Sanford Bernstein. Would you accept the premise that the group is trading at a discount to the sum of its parts? And if so, could you set out strategic options you've considered to unlock that value?

Cheick Tidjane Thiam

But I say no. Yes. No, we've considered, frankly, every option. We just had a Board Strategic Meeting in June and telling one rule, [indiscernible] We look at absolutely every single recombination, reconfiguration of the group. And I can say from selling Asia to selling the U.S. to selling the U.K., selling inventory, selling the whole group, everything. And the way it works is you look at that, and then you look at what's left. And I think I've been open about that. The real issue for our group for a long time has been IFRS, so we talked about it so much. If you're going to be able to pay a dividend and service some debt, you need a good IFRS cover. And the history of the group this group is that it's from IFRS poor. It came from a place where it was making 700 million, 800 million a year of IFRS, of which 500 million, 600 million came from the U.K. and the reason why we've been on this [indiscernible] to build alternative sources of IFRS and every [indiscernible] inside my head was kind of a 1 billion of IFRS out of Asia, [indiscernible] and when I was saying that we were at 170. So if we will forget, that's 3, 4 years ago, so 1 billion seems really -- now we're doing 400 million in half year on the way there. Once you get to 1 billion, then you can play with reconfiguring for group and have something viable afterwards. First discussion, if you take out the U.K., when you don't have enough IFRS, take out the U.K., it's a disaster, okay? Because you're going to breach that covenants. You get some proceeds which are going to go back to pay debt. And once you have done that, the group that's left cannot be leveraged. If you don't have enough IFRS, it cannot pay a dividend. So you've been downgraded. On the day of announcement of a transaction, you announce that you won't pay dividend anymore and -- but fundamentally, I don't know, you have to [indiscernible] so it doesn't work. And that's why we've been saying way to unlock value is to develop alternative sources of IFRS. Until and unless you have that, all that is just idle talk, and that's there. So once you have -- a lot of IFRS coming from the U.S., that's what we're building. A lot of IFRS coming from the Asia and that's what we're doing. Still have the U.K. with good IFRS. And Michael, there is pure IFRS pure cash fantastic a capital-efficient machine then you can think about, yes, ways to create value by breaking up group. But even once you've done that, it doesn't mean necessarily that you are going to pull the trigger because it's going to depend on market conditions, that feasibility of things, et cetera, et cetera. But that's really we've been on. We need enough cash and enough IFRS from each part of the group to have, once you've done a transaction, a viable company. And in the history of the PRU we have never reached that point. So I think we're getting closer to that point. The direction of travel is good, but we are seeing some way away from that.

James Pearce - UBS Investment Bank, Research Division

James Pearce, UBS. I want to ask about Elite Access. Specifically where you're getting capacity from given the publicity recently about hedge funds shutting down, giving money back and so forth? And also in the scheme of things, I think in the moment about 5% of your account assets have no lifetime benefits on the. Have you got target in access intended to get that percentage of no guarantee diverses up to any particular level.

Michael Andrew Wells

If you compare apples and oranges for a second, James, if you look over the last 3 years, because that's the number we just ran, and you throw a pear [ph] in it, which is the disconnect, which is our initiatives to keep our the percentage of sales going to with living benefit guarantees down. You have seen 20%, 25% of the sales go into product that have effectively no withdrawal benefit, protect guaranty. Elite Access is clearly targeted there. It's -- obviously very pleased with the launch. The capacity is an interesting question. We had a lot more managers apply to be in the product than we felt we could launch with. The enhancements we're making to the product initially which are ongoing now, and their filings, I can't get too specific. We'd go to adding more options to the sub advisor lineup types of options. And it's -- what we're finding is kind of what we hoped -- the consumer in the retail advisor don't see, they're very concerned about diversifying away from how highly correlated assets to equities. They feel like they've got a ton of money in U.S. debt. I'm sure you guys all see pieces on the percentage of funds going into the total return bond funds in the States and they're looking for an alternative there. You need -- I think it's an excellent demonstration of our distribution franchise. It's a hard product to wholesale. It's very complicated, very sophisticated. Service of those types of funds is unique. And I think there's an extension of, for all the years we talked about not having a brand but a business reputation, advisors clearly are comfortable with us bringing something that sophisticated, which I'm obviously very pleased with. I think that's -- we trained our wholesalers for over a year before we launched the product on this and our service people as well. And what we're hearing so far is the firms are extremely hungry for the training we're bringing. There's capacity issues there. There's only so much of it you can do. But its the launch is going very well and the reception from the types of broker-dealers we do business with them hearing directly is very good. Yes, this is one product. It's not intended to be the new Jackson. or -- we're not going -- we are -- it's intended to be another business line that we can run concurrently with everything else we're doing. But I think for the consumer and the advisor, there's nobody in the U.S. you think of as the leader in alt space who has defined complex that's -- there isn't a name there. And so I think we're bringing value to advisor, and I think it's a great product for their consumer. And that seems to be the reception so far. It's -- the sales cycle is a little longer to get people comfortable with it but it's been good.

Cheick Tidjane Thiam

I think probably because we talked about it first in the quarterly call, we probably haven't said enough about it, but reason it's called Elite Access, you correct me, Mike, because it gives access to alternative asset classes that are very hard to access for the basic investor. And also the reason why it's without guarantees that it eliminates the usual basis so you don't have to hedge it. So what we've put to date, that is exactly the things that would create trouble if you wish in your portfolio, very hard to hedge. So it makes perfect sense to offer that without the living benefits. It's a win-win. It's risk reducing for us and it gives the customers access to improve their own [indiscernible]. So it's been -- it's very hard to predict the volume ...

Michael Andrew Wells

It is. Our wholesale group isn't on board yet. We have -- they keep -- their process are very careful now in adding new products. And so we're -- various firms in various stages. No one's ever had a variable annuity without any guarantees before to approve. So more than a few firms have told me, you've given me work I -- we haven't gone down this path before and somewhere a little less appreciative of that than others candidly, but in almost every firm that goes to their Alt area, goes to their VA, goes to their risk committees to get approved. It's very difficult now even with good relationships with the home offices to launch a product quickly in the U.S. and I think that's a healthy element of the business just maturing. I think it's good that firms holistically look at products they add. But the response to it has been good. We're obviously real pleased. And as you saw, the year-over-year growth in the VAs come from it. And that's -- it's an early launch we are I would argue weeks and couple of months in a reasonable scale with it.

Cheick Tidjane Thiam

The last thing I would say about that is it's going to be additive.

Michael Andrew Wells

Yes.

Cheick Tidjane Thiam

It's not a cannibalization of our volume. It is addressing the different buckets of demand, people wanting [indiscernible] not our usual clientele.

Okay, shall we take one last question, if there is one? No? I think the impact of the time we chose for this meeting during the Olympics on a Friday has worked. Thank you very much for your patience, and I wish those of you going on holiday -- a good and happy holiday. See you at the next -- at our the next results.

Yes, sorry, we have not cancelled the investor conference. It's still happening in New York in November. I was just too hungry, so I'm trying to skip this. it's -- No, seriously, it's going to be a good opportunity to talk about Jackson. It's a third one we've done in London wherever it was 2 years ago. We did Asia, it was [ph], a number of you were there last year. Now we're going to the U.S. and we'll have a really good big spotlight on Jackson, and you'll get to us again as many questions as you feel like. So thank you and see many of you in New York in November. Thank you.

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