Earnings Call Transcript - PUK Q4 2022

Operator, Operator

Good afternoon from Hong Kong. Could I please first ask that you turn off your phones and any other mobile devices that may make a noise? But welcome. This is Prudential's 2022 Full Year Q&A session and we're very pleased to see you all. I'd like to hand over to you now to Anil, our new Chief Executive Officer, who's got some opening remarks. And then we'll go to questions from the floor, from the phones, and then from the webcast. So, Anil, over to you.

Anil Wadhwani, CEO

Thank you, Patrick, and good evening to everyone in the room and good morning, good evening to those who are joining us remotely. I'm Anil Wadhwani, Chief Executive Officer of Prudential plc. It is indeed a pleasure to welcome all of you to our full year 2022 earnings call. I'm truly excited to be part of Prudential plc. I've known Prudential as a competitor and I've always admired Prudential because I have competed with them in every single market that Prudential operates in. Clearly, Prudential has a lot of strengths: the brand, the rich history of 175 years, great distribution, diversification, and the trust and confidence of 18 million customers. Clearly, a lot of strengths. What I bring to the table is 32 years of experience in financial services, with the last five in Asia, leading a competitor on both the asset management and insurance side. So I have operational experience in many of the markets where Prudential operates and have a fair amount of knowledge in terms of both the opportunities and the challenges in the markets of Asia specifically. This evening, this morning I have the pleasure of introducing my management team. So on my right is James Turner, our CFO; next to him is Dennis Tan, who runs the Singapore, Vietnam, and Thailand operations; Avnish Kalra next to Dennis, our Chief Risk and Compliance Officer. On my left is Lilian Ng, who runs Greater China; Solmaz Altin who runs Malaysia, Indonesia, and the Philippines, obviously managing our joint venture partnerships in India, Africa, and also responsible for digital and technology. Together, we will be responding to your questions and I really look forward to the interactions this morning and this evening. I want to extend my sincere gratitude to Mark, who is in the room with us. Mark has been absolutely superb in terms of his contribution over the last six years, but more specifically in the last 12 months. His leadership has been instrumental in positioning Prudential as we look to address the growth opportunities, specifically in the high-growth high-potential markets of Asia and Africa. So on that note, I'm going to turn it back to Patrick and we can get rolling with the question and answer session.

Operator, Operator

Thank you, Anil. And maybe I'd like to invite the moderator just to give the instructions as to how you can lodge your questions if you're on the phone or on the webcast. In the absence of that specific instruction, I think it's #1 if you are on the phones, to make yourself known on the phones to log your question. We do have a logging system there that we will be able to track it. So maybe we can start by going to the floor of the room. If you want to put your hand up, and just identify yourself and your organization. We will hand the mic around and then we'll go and see some questions from the floor in the first instance. Michael was early. Thomas was next – Thomas goes first. Okay.

Thomas Wang, Analyst

Thank you. Thomas Wang, Goldman Sachs. I have a couple of questions, I think mainly on the Hong Kong business. I want to see what you're seeing on the Hong Kong business in terms of the Mainland China visitors segment and also the domestic segment. How are you seeing that rebound and what you're hearing from the agents? And then maybe a follow-up question for James regarding the margin; when we look at the margin, obviously first half and second half last year there was quite a large difference. Just when we're thinking about going forward, which one is the reference point when we're thinking about projections and margin? Thank you.

Anil Wadhwani, CEO

Thanks for your questions, Thomas. Let me address the MCV and Hong Kong business question, and I'll pass it on to James for his comments on NBP margin. But before I answer the MCV question, specifically, I want to kind of step back and provide context in terms of how we created momentum going into 2023. We employed specific emphasis on the diverse needs of the Hong Kong domestic customer. We saw traction as a result in the second half of the year as compared to the first half. That also led to a high level of agent activation and positioned us well as the borders opened. Once the borders opened, we've seen the Mainland Chinese visitor traffic returning, although clearly not at the peak levels we were accustomed to in 2018 and 2019. Our estimate is that it's in the range of about 40% to 45% right now, but it's starting to have a positive impact on the volumes. Unsurprisingly, the first set of customers coming in, based at least on what we are witnessing, skews more towards the affluent segment, and as a consequence, the demand that we are seeing is coming through more for savings products. However, I clearly understand that our emphasis is going to be on providing a diverse set of products to address the diverse set of needs, including those of Mainland Chinese customers, and the momentum is going to complement some of the good work that Lilian and her team accomplished in the domestic market last year. So I'm going to stop there and turn it to James to address the new business margin question and maybe also ask Lilian if she has any further comments on the Mainland Chinese visitor customer.

James Turner, CFO

Thank you, Anil, and thank you for the question. In terms of the Hong Kong margin, it's important to remember that we're applying an EV methodology, marking to market at year-end for the whole year. So it's not that at the half-year, we mark to market at the half-year. It went from 150 bps at the beginning of the year to 300 at half-year, and by year-end that was at 390. However, under our methodology, we mechanically revalue the whole year at that year-end rate.

Anil Wadhwani, CEO

Lilian, do you want to add anything on Mainland Chinese visitor customers?

Lilian Ng, Chief of Greater China

Thank you, Anil. I think there are two points I want to add. Thomas, you mentioned the domestic segment. In 2022, we've managed to actually grow our market share from the first half to the second half by doubling. Our second half market share is at 10%. That built a robust platform for us to continue capturing opportunities in the domestic market. Regarding the MCV segment, the early signs we are seeing, as Anil was mentioning, it's more on the affluent segment. What is very good to see is that 58% of the MCV customers are new to Prudential so far in the first two months, which I think positions us very well to capture these opportunities.

Anil Wadhwani, CEO

Thank you, Lilian.

Operator, Operator

Thank you. Who's next? Oh, go in the first. Sorry, Michael. I'm sure you'll be nearly next.

Edwin Liu, Analyst

Hi. This is Edwin Liu from CLSA. I have a question on the Indonesia market. We've seen stability in that market for several years, but this year we've seen some stabilization. Would you say we have seen the bottom of the Indonesian market? Going forward, will growth in that business be driven more by bancassurance, agency, or both? Thank you.

Anil Wadhwani, CEO

That's a great question. Indonesia is a critical market for us. I'm going to offer my opening comments and then turn to Solmaz for greater color. Indonesia is a focus market for us, and we've had a leadership position there. Looking forward, we also see the momentum in the first two months continuing. Both the agency channel and the banca channel are channels that we're betting on for the future.

Solmaz Altin, CRO

Thank you, Anil, and thank you for the question. We did indeed see a strong recovery in Indonesia in the second half. APE grew 44% compared to the first half. The momentum is mainly coming from the agency channel, while banca was strong in growth throughout the year.

Operator, Operator

Okay. Next, I was going to allow someone else, but you did get your hand up first. Ahead, Michael, you'll go.

Michael Chang, Analyst

Thanks, Michael Chang, CGS-CIMB. I'll ask on Mainland China. Last year, there was a very strong performance, particularly in bancassurance. Could you shed some light on how well diversified the bancassurance growth is, particularly how much of it is concentrated with CITIC and CMB versus the others? Also, year-to-date, what's the bancassurance sign-up rates like? Additionally, related to Mainland China, the agent channel has started to show recovery; what's the agent recruitment rates like year-to-date? Thanks.

Anil Wadhwani, CEO

Thanks for your questions, Michael. Let me start by saying that you're absolutely right. We have a multi-format channel in Mainland China, which allowed us to deliver 15% new business profit growth last year on the back of 19% sales growth, showcasing the diversified nature of our channel mix. As the COVID measures get relaxed, we are already witnessing greater emphasis on agency and agency activation. I want to emphasize that the structural demand drivers in Mainland are very much intact, positioning us well for medium to long-term growth.

Lilian Ng, Chief of Greater China

Yes, in China, we have a diverse multi-distribution platform. We work with 59 banks across 6,687 branches, an increase of 11% in 2022. Our bank partnerships with CITIC Bank and Standard Chartered Bank are significant. We also have been growing the quality agency force within China and have seen agency productivity grow 9%. Looking into 2023, we continue to ensure we have the relevant customer propositions to serve protection and savings, especially in retirement planning.

Anil Wadhwani, CEO

Thank you, Lilian. I think that covers your questions, Michael.

Michelle Ma, Analyst

Hi management. This is Michelle from Citigroup. So, my first question to Anil just out of curiosity: what are the top three items in your to-do list right now? And secondly, I think investors these days pay a lot of attention to the asset side. Out of our $11.5 billion corporate debt in the shareholder-backed debt, I noticed that 34% belongs to the financial sector. Can you shed some light on how much belongs to North America or other regions? Thank you.

Anil Wadhwani, CEO

Thanks, Michelle, for the question. Let me address the top three priorities and then I'll hand it over to James and Avnish to answer your second question. This is my third week in the role, so I'm still finding my way around. But if I were to pick three priorities: people and culture, our customers, and our operational performance. Based on my initial interactions with the talent here, they are highly committed and focused on writing the next chapter of growth for Prudential.

James Turner, CFO

Michelle, thank you for the question. The balance sheet is conservatively positioned. The 34% of our shareholder assets, which equates to $3.9 billion, approximately $1.1 billion of that relates to US banking stocks. 97.5% of these are investment grade and 95% are systemically important banks, such as JPMorgan and Citi. In terms of SVB and Signature exposure, our exposure to SVB was around $1 million out of a $23 billion book, representing less than one or two basis points.

Avnish Kalra, Chief Risk and Compliance Officer

Just to add, we have a well-developed credit risk framework that relies on concentration risk, single-party limits, etc., to cover our daily exposures. So we are well positioned.

Operator, Operator

Thank you. Just to clarify, I think it was 34% not of our group net assets; just of those investment credits, not the group. Okay. I think you had another question, and then I'm going to go to the phones, because otherwise...

Tianjiao Yu, Analyst

Hi. Good to see the management today in person. My name is Tianjiao Yu from Bernstein. I just want to follow up on the Hong Kong recovery. Can you give us a bit of color in terms of the agency business? How many agents have you kept now versus the 2018 levels? Also, in the presentation slide, you have a slide showing visitor numbers compared to 2018. Can we use that as a way to gauge how much you can recover this year?

Anil Wadhwani, CEO

Thanks for the question, Tianjiao. I'll turn it to Lilian to speak about the agency, but it's: it's still early days. We have about seven to eight weeks of experience with the momentum picking up in February, which is expected to continue into March. But I agree that we need more data to fully gauge the impact moving forward. Lilian, any specific comments on agency?

Lilian Ng, Chief of Greater China

Yes. We have about 19,000 agents. In fact, 80% of them joined before the pandemic. During the pandemic, we motivated and activated these agents. Out of that 19,000, around 10,000 are MCV-focused agents, and a lot of activities we see in the first two months stem from this group of agency force.

Tianjiao Yu, Analyst

Can I just follow up with one more on IFRS 17? There's guidance on the operating profit reduction. Can you talk us through what's driving that change, especially from the in-force book?

Anil Wadhwani, CEO

Sure. I'll turn it to James, but I want to emphasize that IFRS 17 is an accounting change and does not affect our business model, strategy, valuation, or our operating free surplus generation. It's just an accounting methodology that doesn't impact our business strategy. James, could you provide further insights?

James Turner, CFO

Thanks, Anil. The key thing to recognize about IFRS 17 is that our shareholders' equity has increased, reflecting profits that we've never recognized under the previous IFRS 4. We've given a range on the shareholder equity increase between $1.9 billion and $2.8 billion. Our guidance on the reduction in operating profit from our IFRS 4 operating profit of $650 million to $850 million reflects timing differences due to one-off impacts recognized as gains and how new business profits are treated. In this context, new business profits will need to be recognized over the lifetime of policies rather than immediately.

Operator, Operator

Thank you. Let's open up the questions on the phones, please. Over to you operator to let the first question through.

Blair Stewart, Analyst

I've got two questions. The first is on agency. You've touched on the Hong Kong agency and the damage from the pandemic. What has been happening to the agency across other main territories? How much needs to be repaired? And is there competitive behavior that you're seeing among competitors trying to pick up your agents? Secondly, regarding IFRS 17, would the lower starting point for earnings mean we should expect faster profit growth in the future compared to IFRS 4? Any color around that would be appreciated.

Anil Wadhwani, CEO

Thank you for your questions, Blair. I'll ask Lilian to answer the agency question. She mentioned that we have 19,000 agents, but I think she can provide context regarding where we are and our plan to grow the agency force, specifically in Hong Kong and more broadly across the region.

Lilian Ng, Chief of Greater China

In terms of attrition, during the pandemic, agents left the industry due to the difficulty in acquiring customers. However, 83% of agents recruited remain with us from 2019. Now we're continuing recruitment to replenish. On average, we used to recruit about 6,000 agents annually in 2018 and 2019, and we aim to recapture that momentum as economic activity increases.

Anil Wadhwani, CEO

Thank you, Lilian. James, could you address the IFRS point?

James Turner, CFO

In terms of the quid pro quo, we anticipate that the CSM, which is an essential store of value, will unlock and unwind over time, which we estimate will be around 9% to 10% a year. While profits will still be recognized over the service provided to customers, under IFRS 17, we see that it allows us to focus on any additions to CSM.

Operator, Operator

Thank you, let me just clarify there. I think we have entered into a new phase. We've completed all of the transformations with a strong balance sheet focused on taking advantage of the opportunities in front of us. And we prefer to invest our capital where we have experience and growth potential.

Dominic O'Mahony, Analyst

Just one question. You give the embedded value by geography; can you provide the free surplus generation, even a rough indication of how much is coming from your bigger markets?

James Turner, CFO

We don't give a breakdown by geography, but you can see our NBP from bigger segments in the disclosures, which will give you a flavor of where we're adding the most value.

Rhea Shah, Analyst

Just one question. The cash remittance looks a bit low in 2022 as a whole and lower in the second half in particular. What was driving this?

James Turner, CFO

A quick answer: no. We have robust liquidity, about $2.7 billion at year-end. We only bring up to the center what we need.

Unidentified Analyst, Analyst

On Jackson, when do you intend to sell it down? And regarding inorganic opportunities, can you list them down quickly?

James Turner, CFO

We made a commitment to reduce our exposure to below 10%, which we did. We're not giving comments on the sale of the balance to avoid impacting its price. We constantly look for opportunities that match our IRRs, primarily focusing on organic growth.

Andrew Baker, Analyst

Any thoughts on the change in the EV reporting basis? And in China, can you help me understand the margin structure?

James Turner, CFO

We have been focused on IFRS 17 recently. The differences between EV and TV will reduce as interest rates increase.

Lilian Ng, Chief of Greater China

In terms of margins, 70% is from banca with a 43% margin. The rest from agency has a 65% margin. The blended margin is around 44%. We can provide more detailed data post-call.

Abid Hussain, Analyst

On bancassurance, why have margins improved? Is there any structural change on the banca side? Also, on GWS capital negatively geared to rising rates, is it just a discounting effect?

Lilian Ng, Chief of Greater China

The bancassurance channel performed well during COVID, increasing its value contribution by 15%. Our two large regional bank partnerships contribute significantly to this value.

Anil Wadhwani, CEO

As many bank partners have low penetration into their customer base, we see significant opportunities to drive growth in this area. Conclusion: This is an exciting time for Prudential, and I hope I've conveyed that excitement regarding growth opportunities and Prudential's strategic position. My focus will be on people and culture, our customers, and operational performance. We appreciate your questions and look forward to future engagements.