Earnings Call Transcript - PUK Q1 2022

Operator, Operator

Hello, everyone, and welcome to the Prudential plc 2022 Half Year Results Call. My name is Seb, and I will be the operator for your call today. There will be an opportunity for Q&A. I will now hand the floor over to Mark FitzPatrick to begin. Please go ahead.

Mark FitzPatrick, CEO

Thank you and welcome everyone to our 2022 half year presentation from our offices here in Hong Kong. I’m Mark FitzPatrick, and I'm joined here in person by several members of our leadership team and by a number of our Hong Kong based analysts. From the Prudential team, we have James Turner, our Group CFO, and Avnish Kalra, Group Chief Risk Officer and Compliance Officer. We also have the Managing Directors of our three Strategic Business Groups. Here with us in the room is Lilian Ng, responsible for Chinese Mainland, Hong Kong, and Taiwan, as well as overall distribution capabilities. And then joining us remotely from Singapore is Dennis Tan, who heads up Singapore, Thailand, and Vietnam; Solmaz Altin, who's responsible for the remaining country markets, including Indonesia, Malaysia, and the Philippines, and he also oversees our digital and technology functions. Additionally, we have Seck Wai-Kwong, Chief Executive of Eastspring. I appreciate this is a very busy day for many of you, and we'll close the session just before the top of the hour. But very briefly, before we go into Q&A, just a couple of key points I'd like to highlight from the half year. Firstly, it was a resilient set of results. APE sales were up 9% to $2.2 billion, reflecting diverse sources of growth due to our geographic footprint, product mix, and distribution channels. APE sales in Southeast Asia and Greater China are now both at about $1 billion. New business profit was flat year-on-year when you exclude economic effects, and it was down 5% to $1.1 billion following differences in country and channel mix, and the impact of higher interest rates could be attributed approximately a third to each of those factors. IFRS group operating profit was up 8% to $1.7 billion. Our resilient operational performance is a testament to our multi-channel, digitally enhanced distribution platform and our strong franchise across Asia and Africa, where we are a Top 3 player in 11 Asian life markets. The quality of our business is strong, as evidenced by the high customer retention rate that we published today. We are looking to drive growth through a focus on operational delivery, right in quality health and protection business, and by investment in people. Our management priorities are centered around distribution, digital, and business quality, focusing on people. In distribution, we are expanding our distribution channels and driving higher productivity across both our agency and banca channels. In digital, we are embedding digital into our sales and servicing processes to deliver a superior customer experience and to enhance operational delivery. We continue to build leadership and strength and build the capabilities of our people through ongoing training and development. We are also very pleased to announce two new non-executive directors today. We are confident of continued growth. Customer demand continues to be strong. Our index monthly sales were up 13% in July this year. Our latest Hong Kong border survey, included in the appendix to the slides, continues to show a very high intention to purchase insurance. Importantly, we see that long-term structural growth drivers remain intact, driven by urbanization, growth in the middle class and their corresponding wealth, and rising demand for health and protection. We remain confident that Prudential has the financial resilience, capital strength, and capability to meet the growing health and saving needs of our customers in Asia and Africa. With that, Patrick, I thought we could start the Q&A session. Maybe we can start with questions here in the room in the first instance, please.

Patrick Bowes, Analyst

Thank you. Maybe we can start with Michael.

Michael Chang, Analyst

Thanks for letting me. My name is Michael Chang from CGS-CIMB. I've got two questions. Firstly, it's on the China business. It's definitely better than expected. First half NBP was only down 4%. That's off an extremely difficult base for last year. Could you shed some light on your view of the operating environment on that front? Maybe you can show some figures on trends? How did 1Q and 2Q do as China exits the outbreaks, and how is July performing on that front? What are you doing to continue to outgrow the industry? Secondly, on the Hong Kong business regarding the fifth wave, obviously, it was a tough 1Q, but since then, things have improved in terms of COVID cases. How's the business momentum of the domestic segments since then? Thanks.

Mark FitzPatrick, CEO

Okay, Michael, thank you for that question. Let me start off, and then Lilian, I’ll hand over to you for some extra color, please. So in terms of our business in China, we're very pleased with how it performed this half. A key differentiator in our performance was undoubtedly the multi-channel distribution that we have. We had strength in agency and bancassurance, and also the very broad footprint we have in the Chinese Mainland, encompassing 99 cities and around 6000 outlets. This broad distribution means most of the business continued performing, even if some cities were at various stages of lockdown or restricted movements. This was undoubtedly a very important component. We have also focused on the quality of our agents through additional training, and we've seen significant improvements in terms of the number of cases that each agent is handling and a significant increase in the health and protection policies that we’ve seen coming through. We believe these are important drivers and competitive advantages because it takes time to build up bancassurance relationships, which we have in abundance throughout China. Lilian, would you care to add any comments on the Chinese Mainland and perhaps touch a little on the Hong Kong business?

Lilian Ng, Managing Director

Sure, thanks Mark, and thanks for the question. On the Chinese Mainland, the reason we can continue to outperform is a combination of our wide geographic footprint as well as multi-distribution. We are where the customers are, and we can serve them in the way they prefer, whether it's through our agency or bancassurance channels. Regarding our agency capacity and capabilities, the regulator is focusing more on sales practices, and there is now a draft in place looking at how insurance companies and the sales imagery drive consumer conduct. For our CPL agency force, we are very selective in who we recruit and how we equip them to do the right thing for our customers. Consequently, we have observed an increase in productive and elite agents month on month since the beginning of this year. In terms of bancassurance, our platform's capabilities allow us to hook up with a bank partner quickly and address the double recording requirements following new financial advice regulations. These capabilities enable us to onboard bank partners and their branches effectively while continuing to evolve our product offerings. Overall, we see many opportunities in China and are confident in our capabilities in that area. Moving on to Hong Kong, the domestic segment remains resilient. There are efforts by both the Hong Kong government and the Chinese Mainland government to maintain its status as an international financial center and a healthcare center, which promotes growth in the domestic market. We continue to believe in the pent-up demand from customers as borders open. Our focus is on driving health and protection sales through our agency. The latest data shows that we are now achieving growth in our product mix, adding 11 points to new business margins for our agency product mix. Our partnership with Standard Chartered Bank remains strong, and we are one of the few strategic partnerships to offer a whole range of products, including savings and protection, rather than just savings.

Patrick Bowes, Analyst

Let's move to Thomas next.

Thomas Wang, Analyst

Thank you. A couple of questions if I can, full-on that China question. In terms of distribution, we've seen struggles among many Chinese insurance agencies, particularly with bankers looking for new bancassurance relationships. How do you view the medium to long term balance between the two channels? Secondly, regarding the capital side, could you provide an update on the IFRS 17 implementation and its potential impact on our financials for the next year?

Mark FitzPatrick, CEO

Thank you, Thomas. In terms of distribution in the Chinese Mainland, what we're seeing is a real shift towards quality. The number of agents in the market has decreased, with the regulatory direction from CBIRC emphasizing the need for quality agents as well. This shift plays to our strengths and supports the market space we occupy. Bank distribution will continue to be crucial as well in the Chinese Mainland. We've developed a strong margin of about 40% to 41% from bancassurance, making it a meaningful contributor. As Lilian said, we are well-positioned to link up with new banking relationships significantly. In the Chinese Mainland, we have 55 bancassurance partners and access to over 6100 bank outlets. This scale and capacity are crucial. Both bancassurance and agency will be important in the future, shifting towards a more professional agency force. Regarding IFRS 17?

James Turner, CFO

Thomas, thank you. As the CFO, I want to clarify the timetable and some key points regarding IFRS 17. The impacts are still being defined in several areas. We will provide a market update in Q2 2023 where we’ll discuss the impacts of IFRS 17 and bridge between IFRS 4 and the new accounting basis. It's vital to remember that this is an accounting change; it doesn't alter the economics of our business, our strategy, our dividend, our cash-generating capacity or our capital strength. Ensuring an optimal outcome is a priority for us. The key underlying economics of this business remain unaffected by IFRS 17.

Patrick Bowes, Analyst

Let's pass to Edwin, and then we'll come down the line.

Edwin Liu, Analyst

Thank you. I'm Edwin from CLSA. If I can switch gears to the China market. First, on Singapore, I noticed that last year and for the first half of this year, the Singapore business performed quite well, seemingly better than your peers. Could you share some background behind this strong momentum and should we expect such momentum to continue into the second half? Secondly, regarding the Hong Kong business, I understand economic assumptions may have impacted new business profit for Hong Kong in the first half. Can you share what the new business profit change for the Hong Kong market would have been without such economic assumption changes? Thank you.

Mark FitzPatrick, CEO

Edwin, I’ll start with Singapore, then hand over to Dennis for additional color. In Singapore, the team continues to perform excellently. Our agency has nearly 20% of its base as MDRT, which is continuously strong. The bancassurance channel has been robust with high net worth clients showing significant interest in long-term policies focused on savings and legacy protection. Dennis, a few additional insights on Singapore?

Dennis Tan, Managing Director

Thank you, Mark. In the Singapore context, given the reopening and the endemic nature of COVID, there has been a lot more activity on the ground. We noticed a significant uptick in the second quarter compared to the first. The agency force has been engaged in more face-to-face activities across bank channels and our agency base, helping generate more business. The pandemic accelerated the adoption of our digital tools, so even after reopening, the agency force continues to leverage these digital tools for video engagements and sales, contributing to increased productivity. We definitely expect to see this momentum carry into the second half of this year. Back to you, Mark.

James Turner, CFO

Edwin, in terms of economic impacts for Hong Kong, we estimate about a 25.1% hit to the new business profit margin. This equates to approximately $57 million in terms of NBP.

Patrick Bowes, Analyst

Let's go to Jenny.

Jenny Jiang, Analyst

Hi, management, this is Jenny from Morgan Stanley. Thank you for organizing this onsite event; it's great to see management and peers in person. Two questions: Firstly, on China, what is management's view on the retirement market? With regulatory changes, is there any strategy planning in place for this? Secondly, regarding Indonesia, which used to be a very important market for us but has struggled, could you comment on the current market status and if you think it has turned around? What further actions can be taken with our new Sharia license to strengthen our distribution in Indonesia? Thank you.

Mark FitzPatrick, CEO

Okay, Jenny. There’s a lot to unpack here. Let's start with the channel mix. I’ll comment first and then pass to Lilian, followed by Solmaz for Indonesia. Regarding China’s retirement market, this is a significant opportunity. Pillar three has substantial potential, and it's encouraging to see consumers and regulators emphasizing the need for retirement savings. This need is a global trend. We have a wholly owned asset management company to support our retirement planning service, which will align with new regulations and provide offerings to agents. Lilian, could you add more color?

Lilian Ng, Managing Director

Certainly, Mark. As you mentioned, the pension opportunities in China are indeed vast. Our joint venture ICICI Prudential Life, coupled with our asset management company, positions us well. We were among the first to pilot retirement products in the southern provinces. Recently, the updated regulations allow us to manage pension assets on behalf of other providers, which is an area we feel enthusiastic about and can effectively tap into. Regarding the insurance side, we look at this from a customer-centric approach. We offer retirement savings insurance products alongside value-added services such as engagement with property developers for retirement homes and health management services. This approach allows us to actively cater to customers planning for their retirement needs.

Mark FitzPatrick, CEO

Now, on Indonesia. Indonesia is an exciting market for us, and the team has been working diligently this year. We've launched the world's first standalone Sharia business in April, and it’s progressing well. We're also expanding our agency and product range, resonating effectively with customers, especially with the demands stemming from COVID concerns. We ventured into SME markets recently and are noticing positive signs. Solmaz, could you provide some added insights regarding Indonesia?

Solmaz Altin, Managing Director

Thank you, Mark. Indonesia's insurance market, despite facing challenges from the pandemic, is recovering as the country reopens. We've successfully separated our Sharia business and currently lead the Sharia segment with a 30% market share, supported by 160,000 agents trained to sell Sharia-compliant products. Though APE sales in conventional business have seen a decline, we are optimistic about improvements as we bolster partnerships with bancassurance and enhance product offerings.

Mark FitzPatrick, CEO

Thank you very much, Solmaz. I appreciate the questions, Jenny.

Patrick Bowes, Analyst

Let's go to the operator, and we’ll have a question from the international sell side, if that’s okay.

Operator, Operator

Thank you. Our first question comes from Andrew Baker of Citi. Please go ahead.

Andrew Baker, Analyst

Thanks for taking my question. I have two questions: First, can you provide an update on the Macau license registration process? When that comes into effect, what impact do you expect on both APE and new business profit from Macau? Second, regarding the group-wide supervision ratio, with the changes such as RBC and C-ROSS, when do you think you might provide more information on what you might consider an appropriate target range for that ratio? Thank you.

Mark FitzPatrick, CEO

Andrew, thank you for those questions. I’m glad James will handle the target range issue instead. Regarding the Macau license, we continue to engage with regulators. Once it's approved, we anticipate beginning business shortly thereafter. Macau is not only an area of opportunity itself; it also connects well with visitors from the Chinese Mainland. While the current closure between Hong Kong and the Mainland may diminish that opportunity, once it opens up, we expect significant demand for multicurrency and critical illness protection offered through our branch of the Hong Kong business. James, regarding GWS?

James Turner, CFO

Andrew, thank you. In terms of GWS, we haven't set a maximum limit because the GWS solvency position is key for assessing our regulatory capital and includes elements that can’t be immediately converted into cash. We’ve given you a risk appetite level of 150% as a new addition. This buffer minimizes regulatory intervention probabilities, even after significant movements.

Patrick Bowes, Analyst

Let's have another question from the international callers, please.

Farooq Hanif, Analyst

Hi, everyone. Just to follow up on Andrew's question regarding GWS ratios: What does that risk appetite imply? If we consider free surplus ahead of that, how much do you think is needed for growth, and how much could be available for distribution through dividends or buybacks? Also, regarding July's growth momentum at 13%, could you elaborate on where this is coming from and where growth is accelerating? Lastly, what's your current perspective on dividend growth given the momentum in free surplus? Thank you.

Mark FitzPatrick, CEO

Thank you, Farooq. In terms of GWS and risk appetite, we selected 150% based on extensive internal stress testing, considering risks and potential mitigations for the GWS capital position. Holding this buffer ensures regulatory stability after significant movements. The measures we're taking align with our free surplus of $8.6 billion. There's a slide in the CFO appendix covering that, representing the distributable surplus exceeding the 100% GPCR. It's also key to remember we're not net capital generative, so the capital stock could increase over time.

James Turner, CFO

In terms of growth in July, we observed 10 markets reporting year-on-year growth, indicating a broad strength in performance. Farooq, regarding dividend trajectory, we introduced a new dividend policy last year linked to free surplus growth. You should expect it to increase in line with free surplus growth, as stipulated in our dividend policy.

Patrick Bowes, Analyst

Operator, let's go to another question from the phone.

Greig Paterson, Analyst

Good morning, can you hear me?

Mark FitzPatrick, CEO

Hi, Greig, we can hear you.

Greig Paterson, Analyst

I have two questions. I wonder if you could give us an update on your ambition to increase your stake in the Chinese JV? Furthermore, there seems to be a retail property crisis in China that is escalating. Given supply chain and insolvency issues we experienced last year, will this have detrimental effects on your volumes?

Mark FitzPatrick, CEO

Thank you, Greig. Regarding the stake in CPL, we have expressed our interest to buy more if opportunities arise. Our management is focused on helping CPL grow its business quickly, and the team has outperformed the industry consistently. On the retail property front, there's a broader economic impact on the Chinese economy. Recent inflation prints demonstrated manageable levels, with CPI at 2.7%. Current consumer sentiment isn’t driving up demand severely. Thus, while challenges exist generally, we believe there is still an opportunity to focus on the health and protection sectors, which can cater to customer needs during uncertainties.

Patrick Bowes, Analyst

I have a question on the web, part of which has already been answered. Nasib at UBS asks about opportunities in bancassurance. Which markets do you see as potential opportunities? The second question is for Lilian: How will you manage sales from the Macau branch once the license is approved?

Mark FitzPatrick, CEO

Regarding the bancassurance space, we have maintained that we are looking closely at opportunities, particularly in Indonesia, which has a more balanced market than ours. Currently, our business is predominantly agency-dominated, so we're seeking an opportunity that will enhance our bancassurance presence there. Most of our regional bancassurance deals are established for several years, but we always keep an eye on individual opportunities, ensuring we maintain a disciplined approach without overpaying. Lilian, regarding Macau?

Lilian Ng, Managing Director

As Mark mentioned, we're applying for a branch license for Prudential Hong Kong. Macau will operate as a branch, so much of the infrastructure will be managed through Hong Kong. In terms of our sales model, we will leverage a multi-distribution strategy. We have begun recruiting corporate sales people to service the agency channel proactively. Simultaneously, we are engaging with some bank partners in the region who have branches in Macau, following a successful operational model in our existing markets.

Patrick Bowes, Analyst

Thank you, operator. Let’s go to the next question from Andrew Crean from Autonomous.

Andrew Crean, Analyst

Good morning, everyone. I have three questions, please. Firstly, could you provide insight on sales expectations once the border with China opens resumes relative to 2018 levels? Secondly, could you share growth rates for NBP in China and Hong Kong, particularly for Q1 and Q2 to assess momentum? Lastly, could you clarify how much free surplus is available for acquisition purposes like the JV in China?

Mark FitzPatrick, CEO

In terms of borders reopening, regarding sales volumes prior to 2019, we’ve seen demand, with roughly $100 million per month from new business profit. Research indicates significant appetite for Mainland customers to travel to Hong Kong, especially among high net worth individuals. However, the future of border openings will likely be gradual, starting from the GBA area, which has a massive market size and opportunity. For context, we traditionally had around a million visitors from the Mainland per week at peak, so pent-up demand should be significant. As for the growth rates in Hong Kong and China, I’ll turn it to James for the specifics.

James Turner, CFO

In Hong Kong, growth rates showed an 18% drop in Q1, with a 19% increase in Q2. In China, it was a 62% drop in Q1 but a 41% increase in Q2. Regarding financial flexibility for acquisitions, we won’t state a specific number, but it’s best represented through examples. For instance, our investment into TTB in Thailand was just over $750 million, where about $530 million was from our central resources and an additional $240 million from local resources. Overall, we have $2.1 billion of cash at center and are careful about remitting more than necessary as we focus on our organic growth opportunities.

Patrick Bowes, Analyst

Is there another question from the room?

Jian Li, Analyst

I have two questions regarding Mainland China. There’s market discussion about the overall demand for insurance weakening with agents leaving the industry. What is your observation, and how do you see your competitive advantage evolving in this market? Secondly, regarding Malaysia, what is the opportunity in the Takaful business, and how do you intend to maintain your leadership there?

Mark FitzPatrick, CEO

Thank you for your questions, Jian. Solmaz, could you address the opportunity in Malaysia's Takaful sector? As for China, while the number of agents has reduced significantly, we view this as a shift toward emphasizing quality rather than quantity. This transition aligns well with our strategy since we’ve always focused on long-term health and protection coverage and robust agent training. The necessary regulatory focus aligns with our priorities, allowing us to enhance our competitive edge over the longer term as quality demands increase.

Solmaz Altin, Managing Director

Thank you, Mark. The Takaful segment is growing swiftly in Malaysia, driven by the large Muslim population, which accounts for around 60% of the total demographic. Our company has a commanding 29% market share as the leading Takaful provider. Recently, we launched new health and protection Takaful products, supporting a robust APE mix of 67% in our Takaful business. We continue enhancing our Takaful agency force, which has seen an increase of 15% in the past half year, enabling us to capitalize on the extensive market potential in Malaysia.

Mark FitzPatrick, CEO

I appreciate the questions regarding Takaful, it is indeed a significant opportunity, and we're very excited about our prospects there.

James Turner, CFO

Apologies, I need to correct the growth rates I provided earlier: In Hong Kong, the year-on-year growth rates were a 17% decrease in Q1 and flat in Q2. In China, it was a 7% decrease in Q1, followed by a 68% increase in Q2. Thank you for your patience.

Patrick Bowes, Analyst

Let's go back to Michael.

Michael Chang, Analyst

Yes, it's Michael Chang from CGS-CIMB again. Sorry, James, just on your comment about the second quarter for Mainland China being 68% year on year, could you shed some insights on the split between agency and bancassurance for 2Q? Additionally, what portion of MCV business previously came from the Guangdong region, which could be seen as an easy win once the borders reopen?

Mark FitzPatrick, CEO

Let's address your second question first regarding Macau’s contributions from Mainland visitors. In the past, approximately a quarter of MCV came from the GBA area, and if you include the eastern coastal provinces like Fujian and Jiangsu, this encompasses around 50% of overall business. We anticipate these regions will present significant opportunities post-border reopening.

James Turner, CFO

Regarding H1 in China, the agency was down about 11%, while bancassurance was up 28%. This aligns closely with Lilian’s point, reflecting the ongoing dynamics between the channels.

Patrick Bowes, Analyst

Let’s return to the operator for the final questions.

Dom O'Mahony, Analyst

Hello, folks. I have three questions. First, you highlighted 22 new bancassurance arrangements. Can you identify any significant geographies or arrangements from this? Second, on free surplus generation, the life business has shown strong growth, outperforming expectations. Are there mark-to-market effects within this operating piece? Finally, regarding the insurance margin strength, to what extent have COVID-related measures impacted claims? Thank you.

Mark FitzPatrick, CEO

Certainly, Lilian can provide an overview of the new bancassurance arrangements across geographies that were established. Regarding claims, our insurance strategy focuses on health and protection products that don’t see drastic fluctuations from market variables, but the recording of profits is contingent upon discounting at higher levels. Understanding this interaction is vital in interpreting our insurance margins.

Lilian Ng, Managing Director

For 2022, a large portion of new bancassurance partnerships has emerged in the Chinese Mainland. Specifically, we onboarded 11 new partners in the first half of the year due to the open architecture regulatory framework prevalent in the country. While we're proud of these partnerships, we have also operational flexibility with existing regional bank collaborations.

James Turner, CFO

Regarding the insurance margin, the 17% increase arises from the adoption of the new Hong Kong RBC, accounting for about $200 million in margin increase, resulting from adherence to the new accounting standards. Stripping this out, the underlying increase is closer to approximately 6-7%.

Mark FitzPatrick, CEO

Thank you for your insightful questions, everyone. It's been a productive session, and we appreciate your engagement. We'll continue to monitor trends and opportunities in Asia and Africa.

Patrick Bowes, Analyst

Thank you, operator. I think we can close the call now.