Earnings Call Transcript - PUK Q4 2021

Michael Wells, CEO

Welcome, everybody, to our conference call for the 2021 full year results. I'm delighted to be joined today by several members of our leadership team, including Mark FitzPatrick, our Group CFO and COO; as well as Nick Nicandrou, our CEO of Asia and Africa; and James Turner, who is Group Chief Risk Officer. You'll have noticed that we've moved our start time for the results day to be at lunchtime in Hong Kong, and we're delighted that we're joined by a number of Asian-based research analysts who've just started to cover the group. Welcome to all of you. I'll make some short-term remarks, and then we'll go directly to Q&A. I appreciate that several numbers that companies are reporting today, so we'll try to keep this to time for your convenience. Let's start with the external environment. We're all very conscious of the current acute global political issues. Combine this with the ongoing challenges of COVID-19 and its effects, the resulting environment remains highly uncertain. The pandemic has had an ongoing impact on our customers, the communities we serve, and our colleagues, and we continue to support our key stakeholders. Right now, there's a record high number of COVID cases in many Asian markets. Sadly, last year, we lost 52 of our staff and agents to COVID over the year, and our thoughts and prayers are with their families, friends, and colleagues. We've taken and will continue to take further steps to support the emotional, mental, and financial well-being of our people. To be clear, our people have not only risen to the challenges of COVID, but they've delivered incredibly high standards across our footprint. We've also responded for our customers. We've developed and tailored our product ranges, in particular in health and protection, to enable these products to be suitable for a wider range of income gaps, such as our bite-size insurance products and including specific coverage for COVID at very low or discounted rates. As far as strategic priorities, 2021, we completed our strategic repositioning to focus entirely on the long-term opportunities for us in Asia and Africa. This follows the demerger of Jackson in Q3 and the equity raise in Hong Kong in Q4. Looking ahead, we're very excited, in particular, about the four large markets of China, India, Indonesia, and Thailand. All of them are significant structural demand drivers and opportunities to strengthen our growing positions further. As far as 2021 results, let's run through them briefly. We delivered high-quality, resilient growth in 2021, despite the challenges posed by the pandemic. We increased our APE sales by 8%, delivering double-digit growth in 9 of our 14 insurance markets. Outside of Hong Kong, we grew APE sales by 16%. Again, that's driven by our business in Mainland China, India, Malaysia, Philippines, Singapore, and Thailand. We reported 13% growth in new business profits to over $2.5 billion, with our margins improving on better business mix. China is now our largest market for sales, and I'm really pleased with the way the rest of the businesses are developing across Asia and Africa. Our business, as you all know, is based on regular recurring premium income, a focus on health and protection, and high levels of consumer retention, all of which support resilient, compounding growth, as you see in today's results. Our adjusted operating profit for the continuing business was up 16% to $3.2 billion. Again, we believe that's in line with the market's expectations. At the same time, our asset manager, Eastspring, IFRS operating profit was up 10% with funds under management reaching $258.5 billion. Our embedded value grew to $47.4 billion, again, leading to a 7% rise in embedded value per share. We continue to invest for the long term in new products and additional distribution capabilities to further build out our presence as a leading agency and bancassurance player and to access new pools of customers. We also announced a second interim ordinary dividend of $0.1186 per share, creating a total dividend of $0.1723 per share for the full year. As I'm sure you're aware, last month we announced I'll be retiring from my role at the end of March. Given the refocused nature of the business, the Board is conducting a search for a new CEO to be based in Asia, looking at both internal and external candidates. Mark will become interim Group CEO at the end of March, and he'll assist the incoming CEO in completing the transition process as required, and then he'll be stepping down from the Board. We've also announced two internal promotions of James Turner taking over as CFO and Avnish taking over as CRO, both of them experienced, highly valued internal candidates and both of them are already based in Hong Kong. As far as an outlook, we entered 2022 with a strong balance sheet and capital position. The timing of the opening of the Hong Kong border remains uncertain, and we believe COVID will continue to have an impact. Clearly, there are tragic events going on in Ukraine, which could have wider implications for the global economic and market conditions as well as potentially geopolitical relations. However, we think our heavily diversified multichannel approach focused on quality business and operating efficiency is the right strategy for dealing with volatility in any operating conditions, including these. We're confident that our investment in new business, distribution, and product enhancements will continue to meet the long-term needs of the customers and build value for our shareholders over the long term. So let me stop there, and let's go to Q&A. We'll open the mics up, Jordan, if you will, now to take some questions.

Operator, Operator

Our first question comes from Edwin Liu with CLSA.

Edwin Liu, Analyst

Hi, good morning. My name is Edwin from CLSA in Hong Kong. Congratulations on the decent results in a challenging environment. If I may ask two questions. Firstly, on Mainland China, CPL has been able to outperform the industry in terms of gross premium or APE. Could you share a little bit more on how you achieved that? And what is the outlook for this year? And secondly, on Hong Kong, as you pivot to the domestic segment, given there's no MCV, what exactly have you done more specifically on agency and bancassurance channel, respectively? So that would be two questions from my side, one on Mainland China and one in Hong Kong.

Michael Wells, CEO

Thank you, Edwin, for your question and comments. I appreciate it. Let me start with a general statement about Mainland China. Nick, if you could provide some insights on our domestic activities and the progress we've made there as well as in Mainland. Edwin, regarding the gross written premium figures for the market, we saw a 15% increase last year while the overall market declined by 1%. I'm pleased with our year-over-year results in our business and also believe we are gaining market share compared to our peers in China. The combination of bancassurance and agency is yielding impressive outcomes in the market. Nick, would you like to expand on that and update us on how the teams are performing in Hong Kong?

Nick Nicandrou, CEO of Asia and Africa

Okay. Thank you, Mike. Edwin, as Mike said, we’ve delivered both absolute and relative growth in China. We’ve been able to do that because of the model that we operate. We’re a well-diversified business because we spread across 20 provinces and 99 cities. We’re structurally advantaged because we’re multiproduct and also multichannel. Because we’ve entered some of these provinces and cities relatively recently, there's a natural seasoning or maturation that happens every year. Those cities and provinces are getting better and better. Clearly, with new products that have been launched and refreshed with good training on agency, we’re on an intensive agency model with a focus on quality, focus on regular premium business, and heavy health and protection content, all of this came to our advantage. The bank models that we run, again, a lot of the products that we sell are regular premium in nature. We have a very long tenure. We've added more bank relationships, and we’ve massively increased the outlets through which CPL’s products are marketed in this case by more than 60%. All of this played well. We increased our share of the loan, as Mike said. But if you study the appendices to our slides, you’ll see that we’ve done that across clusters such as GBA and Beijing, where our share of market is two or more percent. We’re very pleased with the performance. On outlook, clearly, the year is tougher for us. There are several factors affecting that, not least consumer sentiment and some restructuring that is taking place in the market. Not all of these factors affect us in the same way as the rest of the industry. We do expect the market to slow down in the first half. We saw in the January numbers that the market declined by 0.6 percentage points. We were in positive territory again for all those structural reasons. And whilst I expect some short-term volatility and challenge, I think the structural advantages that I’ve referenced should hold us in good stead and continue to grow share. In Hong Kong, the pivot has been fully to the domestic channel, domestic segment. We have broadened as we focused on that segment proposition. Again, if you look at the slides compared to pre-COVID, we have many more products and riders. Products that we’ve entered in the last three years now contribute over one-third of our APE. That just speaks to how much best of the business is. We’re multichannel in Hong Kong with a very good partnership with SCB, which we have reinvigorated. We’ve seen very strong improvement in sales to SCB, more than 20% last year and the new business profit more than doubling. Again, this part of the structural advantages that we have, our experience of working with banks, but also the improved product set. We are offering now digital services through Pulse, that’s bringing a digital presence with consumers with 800,000 downloads. Generally, whilst the border is still closed, we’re improving, if you like, the quality of the business that we currently have, and you see that through the 9% increase in domestic NBP.

Operator, Operator

Our next question comes from Qingqing Mao with CICC.

Qingqing Mao, Analyst

It's Qingqing from CICC. Congrats on the results. If I can ask to just dive deeper on China a little bit. We can see your resilient growth, which is quite impressive, given the slowdown in the industry. Could you tell us more about what's driving this significant improvement of agency productivity and what's the outlook for this year? That's all for me.

Michael Wells, CEO

Qingqing, thank you. Nick, I'm going to flip it back to you again, if you don't mind.

Nick Nicandrou, CEO of Asia and Africa

Okay.

Michael Wells, CEO

Qingqing, do you have another question? I apologize, but I would like to address the one about China productivity. Is there anything else we can assist with?

Qingqing Mao, Analyst

Okay. And could you tell us what's the outlook for China this year?

Michael Wells, CEO

Okay. Nick?

Nick Nicandrou, CEO of Asia and Africa

Thank you. Can you hear me?

Qingqing Mao, Analyst

Yes.

Michael Wells, CEO

Yes.

Nick Nicandrou, CEO of Asia and Africa

Just making sure you can hear. We have been in China for over 20 years now, applying the same intensive model that we use in other parts of the region. This involves carefully managing the ratios of agency leaders to downstream agents, maintaining a relatively tight ratio of 5:1. This improves both the supervision and support that an agency leader can offer to downstream agents. Additionally, we have implemented many of the programs we call one to MDRT that we use in other areas of Asia, resulting in significant improvements in both the number of MDRTs and the percentage of business they contribute. We also provide extensive training and launched new programs last year aimed at supporting agents, enhancing lead management, and improving activity management systems to boost productivity. Where we have implemented these systems, we have seen a threefold increase in productivity. We plan to gradually roll out similar systems to cover 80% of our footprint in 2022. Hiring has been challenging, as you may have heard from many players in China, largely due to the requisite skills and the availability of candidates. We have upgraded and introduced new virtual hiring processes, with our most recent business opportunity presentation attended virtually by about 4,000 prospects. There is demand, but the challenge lies in how we can convert that. The training we provide is distinct in terms of duration, timing, and delivery. As we enter new cities, we follow the same model, building productive pyramids that become more experienced each year. The market is tough, as indicated by the stats from January. However, the structural advantages I mentioned should allow us to continue to achieve relative outperformance, even if we cannot realize absolute growth. Looking longer term, the prospects are significant due to the low penetration level across the market, the increasing demand for retirement products, and the ongoing need for medical and educational savings plans. We are well positioned to capitalize on these opportunities with a strong brand and solid partnerships.

Operator, Operator

Our next question comes from Sabrina Soh with UOB Kay Hian.

Sabrina Soh, Analyst

I'm Sabrina from UOB, and congrats on the results. So I have two small questions here. I would like to ask, could you share with us the view on Greater Bay Area development, like what are some opportunities that Prudential is aiming to accomplish? And another question about Southeast Asia. What are your plans to revive the business in Indonesia? And what's the outlook for Indonesia?

Michael Wells, CEO

Okay. Thanks, Sabrina. I think, again, I'll give some general comments, and then we'll let Nick add some color to those. But I think on GBA, it's one of the catalysts for us in Hong Kong. Clearly, the border reopening and whatever shape that takes, and we're not forecasting the date on that, we're ready. That’s a combination of training and the communication our agents have had with their clients. You see the persistency of the business in Hong Kong that those mainland Chinese consumers still funding these 20-year relationships they have with us each year. But on GBA in particular, the final shape of it is still being discussed. You clearly see attention now and public positioning from Beijing on its importance, which I think is a great message in terms of the resources that get put behind it. It continues to move forward amid COVID. For us, it's one of the wealthiest parts of Greater China. It's the markets where we operate, with the exception of Macau, and we have roughly 10% market share in it. We start with a great brand, as Nick said, our leadership position. If it’s insurance service or sales, or if it’s wealth management, these are all things, to Nick's earlier comments, that I think we’re incredibly well positioned to capture. We’re in these dialogues, both with commercial trading partners and the government on it, and we see it as a very good thing for the region. It’s not the only cluster model in China, as you're well aware, but it’s one that has a particularly unique benefit to us over the intermediate term. But Nick, any further comment on that? Or do you want to comment on all the work going into Indonesia?

Nick Nicandrou, CEO of Asia and Africa

No, I think you covered the GBA. I'll just emphasize that having the right brand, understanding the needs, maintaining the right relationships and distribution reach, and offering the right products positions us well to succeed. The sales from our joint venture in the GBA area account for more than a fourth of our premium income, as shown in the slides. Additionally, we are responsible for about 20% of the insurance that needed to be written in Hong Kong for Mainland China when the borders were open, which demonstrates that our brand resonates well and we understand the market needs. We're well-equipped to meet those needs. Once the operational rules for Insurance Connect are announced, we'll be able to share more information. Regarding Indonesia, the market is still facing disruptions, being the most affected by COVID. The GDP is just recovering to 2019 levels, and unemployment is between 6.5% and 7%, compared to just below 5% before COVID. The insurance sector was flat in 2021, primarily due to significant money flowing offshore through bank-sourced, unit-linked, and single-premium unit-linked products, which isn't our core business. Our focus is on regular premiums, which saw a slight decline. Overall, the agency in the market and the regular premium business also declined partly because high net worth individuals preferred single premium options and affluent families opted for simpler, protection-focused regular premium products. In response to this situation, we've significantly broadened our product range, introducing standalone critical illness, medical products, hospitalization, and term life insurance, rather than whole of life products. We've issued more contracts in these areas than at any time in our history; despite lower sales, the number of policies we've written has increased consecutively over the last two years. Our business is now stronger than ever, having established a presence in the traditional and group insurance segments, while retaining our leadership in agency and unit-linked products. Once the market stabilizes, I believe our scale, the improvements we've implemented, and our digital reach with Pulse—having 10 million downloads and 4 million registrations, which agents are using to onboard customers—position us superbly. While performance is currently lagging behind our capabilities, rest assured that these capabilities are stronger than ever before.

Michael Wells, CEO

Thanks, Nick. Of course, the development of our Sharia business continues at pace with effectively creating a standalone entity. So lots going on there. I couldn’t agree more with Nick; that positions us well, but it’s been a difficult time in Indonesia. And Sabrina, thank you for your question.

Operator, Operator

Our next question comes from Fulin Liang with Morgan Stanley.

Fulin Liang, Analyst

Very good results. Congratulations. I have three questions, if I may. Two of them relate to Hong Kong. The first is regarding your Hong Kong profit growth year-on-year on an IFRS basis, which is below 10% for the first time in nearly a decade. I am curious about the reasons behind this decline, especially since Hong Kong remains your largest contributor to IFRS earnings. Is this trend something we should expect in the future? The second question is also about the Hong Kong domestic business. I understand that you reported around 430 million in new business profit for the second half of 2021 without much contribution from Mainland Chinese visitors. Is this a sustainable level of business profit going forward? How has the strict local lockdown affected these numbers in 2022? Lastly, we have discussed the potential pent-up demand once the COVID situation improves. From markets that have gradually reopened, such as Singapore, are we seeing any indications of that demand?

Michael Wells, CEO

Let me address a couple of points, and I’ll have Mark discuss the IFRS topics while we give Nick a break. Regarding lockdown, we experienced a peak of 96% global lockdown. Our capabilities were prepared and improved to manage these lockdowns. For example, our agency business is now around 50% virtual selling. In Hong Kong, when the city was closed but not entirely locked down, this tool wasn't utilized as much. However, it is now available, and we can adapt. While it doesn't replace face-to-face interactions, it has become a standard preference for both consumers and agents. Some bank branches in Hong Kong are currently closed, which will have short-term effects. Nevertheless, we have a solid business plan to navigate these challenges, and we know how to execute it. Concerning pent-up demand, we conducted an external survey among Mainland Chinese consumers to gauge their ongoing interest in long-term savings for education and retirement in Hong Kong, as well as accessing medical services while there. The short answer is that yes, they are still interested, with interest levels reflecting those seen before the pandemic. We've included this information in our results appendix for your review. Overall, we believe the demand is there. Across all our markets, we've observed a growing demand for health services each quarter, as people are more aware of the financial risks involved. However, this varies depending on the level of government support available in different markets. In countries where government support for unemployment is minimal or nonexistent, the need is significantly more pronounced. With that, Mark, do you want to address the IFRS component?

Mark FitzPatrick, CFO and COO

In terms of Hong Kong, IFRS operating profit on a constant exchange rate basis is up 10%. We're really pleased with that because it reflects both our long-term focus on regular premium and also the element of health and protection business, and a very strong retention rate, with both domestic and Mainland Chinese customers. The regular premium mix is 85%, and the customer retention number is in the 90s. We're very pleased with this number. There’s nothing untoward to see inside there. We think that Hong Kong, for the last 2.5 years, has been affected either through COVID or protests earlier on. To still have this level of IFRS operating profit growth, I think speaks to that resilience and quality. The great ability that Derek and the team have had in the course of last year to pivot to the domestic business. The one thing we’ve also seen is the medical expenses coming through; we saw a dip in 2020 as people stayed away. During the course of this year, we’re seeing that normalize a little towards the back end of the year. So we’re pleased with the IFRS number in Hong Kong.

Operator, Operator

Our next question comes from Kailesh Mistry with HSBC.

Kailesh Mistry, Analyst

It's Kailesh here from HSBC. I have three questions. The first one is, obviously, in terms of new business value, the health and protection mix fell. Could you just talk us through why that is? I think there were some product adjustments on the savings side. The second thing is just on the Indonesia comments; I think OPAT down impacted by both claims and working persistency. In particular, on persistencies, is there something you've seen in other markets as well, and in particular, Mainland Chinese buying in Hong Kong? The third thing is, obviously, in the second half, there was a slowdown in new business momentum. Can you help us to unpick base effects versus pandemic-related restrictions on that to help us with our forecast going forward?

Michael Wells, CEO

Kailesh, it's great to connect with you. This is Mike. Let me address the last question first, and then I'll hand it over to Mark for the NBP details. The second half in most of our Asian markets experienced the greatest impact from the Delta variant, particularly resulting in a significant number of mortality claims in Indonesia and India. We saw the heaviest lockdowns across our markets, which led to a considerable disruption in GDP for the region. Countries, similar to those in the West, are now in different stages of recovery. As Nick mentioned, some, like Indonesia, are still navigating these challenges and their economic repercussions. We've provided slides with vaccination levels and related information, which I believe serve as a good leading indicator. When examining these figures, it's essential to compare today's vaccination levels to those from a year ago. Currently, we benefit from the insights the medical community has gained over the past year, including advancements like protein-based vaccines, which do not require refrigeration. This is crucial for some markets, as having vaccines that can be shipped without sophisticated refrigeration is a significant advancement. We have better information and improved medical solutions now compared to last year. While the recovery is not perfectly linear quarter to quarter, it positively indicates the state of the markets and their impacts. The second half of last year presented the toughest macro environment we faced, but overall, conditions feel more favorable now in most markets. Does that clarify your question?

Kailesh Mistry, Analyst

I think it makes sense. One of the other things is just to understand the base effects. In my mind, I guess Mainland China was pretty high in the first half, and I noticed that domestic Hong Kong was improving quarter-on-quarter through the year. Are there other base effects that we should be considering? I'm thinking Singapore, Malaysia...

Michael Wells, CEO

Yes. I’d say no for the other markets. In Hong Kong, I’d say no. I think Mainland China, you’ve got to remember the industry enjoyed a unique critical illness sales spike. But you’ve also had policies there actually taking effect now where the government has said to the insurance industry we really want you out of a short-term bank-like savings product. We want you out of shadow banking as a company. You’ve seen that decline of agency in China across the entire industry. What it does is force people to a more professional model. The agents have to learn health and protection. They have to learn long-term savings products instead of short-term bank equivalent time deposit. That’s a transition for a market that, at its peak, had almost 9 million agents. I don’t want to diminish the work those firms are doing to pivot their distribution strategy. But when we look at China, that is the only key. With the rest of the markets, no, there’s no material difference.

Mark FitzPatrick, CFO and COO

In terms of health and protection, looking at the year from an APE perspective, health and protection was about 27% last year and also around 27% in 2020. The sales mix has remained consistent. Overall, health and protection has grown in line with the overall APE growth. The NBP mix has decreased slightly, partly due to the broader product range and the introduction of more standalone and term products, which have different profitability profiles. As noted, in some markets, we are selling more, but with a slightly lower case size, affecting profitability compared to previous levels. However, we are very pleased with the underlying trends in health and protection. We believe it is crucial, and as a result of COVID, there has been an increased demand for health and protection products from customers and the market overall. This has contributed to a notable increase in the number of policies, as highlighted in our presentation today. More individuals are purchasing policies, although they may prefer shorter-term and less complex products, which tend to have lower profit margins.

Nick Nicandrou, CEO of Asia and Africa

Mark, if I can interject; it's Nick here. We’re selling fewer riders that are attached to a whole of life-type contract. This is what we’re finding in one or two markets as people pull back from making the kind of commitments given the backdrop. We’re selling more standalone, which are termed. It could be for five years, ten years, or 15 years. When you look at the profitability of a ten- to fifteen-year contract divided by the first-year premium, it’s going to look optically lower than a rider which is whole of life. But if you look at other metrics — much more meaningful metrics, which are internal rates of return, for example, they are just as attractive, if not more attractive. So in Indonesia, we've seen the biggest transition from people buying effectively linked protection into standalone; the IRRs of the business we’ve written in 2021 are much healthier than we've written in years when there was more rider-based business and less standalone business. The economics on which we’re writing these can be downplayed — the standalone products can be downplayed if you simply looked at margin because they are termed. I hope that makes sense.

Kailesh Mistry, Analyst

Yes, that makes sense. There was just one more question on the persistency and claims. Any other markets materially impacted?

Mark FitzPatrick, CFO and COO

So Kailesh, I think India and Indonesia are the main ones. We haven't seen, and I think for a while now, we’ve been keeping a very close eye on these levels in Hong Kong, especially to your question around Mainland China. We haven’t seen any kind of deterioration in that in terms of business coming across the border. I think that just talks to the value that customers attribute to that. From the survey slides that you’ll see in the deck, that also speaks to the ongoing enthusiasm for people to continue to buy, and when they can, products down in Hong Kong to provide Mainland China customers with support.

Michael Wells, CEO

And Kailesh, I think it’s always been a risk-off trade for the consumer. So I think we feel pretty good about the future resilience of that book.

Operator, Operator

Our next question comes from Andrew Crean of Autonomous.

Andrew Crean, Analyst

A couple of questions. Firstly, I wanted to get a sense of what is happening on the talks with the China JV, whether there are live talks with CITIC and whether there is any sort of timeline around that. I suppose, as a rider when it will probably lead with that. And then secondly, I know you have yet to adopt RBC and C-ROSS II. But could you give us some sense as to what your capital position feels like relative to the comfort zones you'd like to operate in?

Michael Wells, CEO

Yes. Let me address the relationship with CITIC, and then James will discuss China RBC and C-ROSS. There’s nothing new to report. The partnership continues to perform exceptionally well, exceeding market expectations. My perspective hasn't changed. We have publicly expressed our interest in acquiring more, but there are no announcements today. In a previous group meeting, the new chair mentioned the potential for expansion. It's a strong business, although it may not be large enough for CITIC considering their capabilities in China, where they could handle something even larger. No announcements to make, and we do not comment on ongoing discussions. However, we’ve clearly communicated, both publicly and privately, our readiness to engage further at a fair price. We're not willing to overpay, and the model is proving to be effective. As performance becomes more evident, we can expect increased competition. Both of our partners significantly assist in entering new markets and managing the complexities of China’s environment, including political aspects, alongside their distribution roles. We have implemented our best practices across the region, and I'm very pleased with the progress this business has made in recent years. The earnings are compounding, approaching 40% on both IFRS metrics over the last five to six years.

James Turner, CFO

Yes. Look, I’m happy to. Thank you. So clearly, where we are right now, the capital level, we’re very well capitalized. We’ve got pro forma LCSM ratio of 48%. The published results do not reflect the uplift the early adoption of RBS in Hong Kong, nor the impact of C-ROSS II. The impact of both will be shared at the half-year when these regulatory changes have become effective. To give us some flavor directionally, given our health and protection focus, you’re going to see additional surplus arising whenever we adopt RBC regimes. A number of changes across the regime where regulators are looking at RBC regimes. Similarly, the impact of C-ROSS II, as I think we said at the half-year, isn’t expected to be material regarding our surplus. We will go into more details on the impacts at the half-year; that’s directionally where we break positive.

Operator, Operator

Our next question comes from Larissa Van Deventer with Barclays.

Larissa Van Deventer, Analyst

Three quick questions from my side, please. First, you haven't discussed Pulse much. Can you highlight the markets where you're seeing the most benefit and the potential for expansion into other regions? The second question is straightforward: what is the biggest constraint on growth in China? Lastly, regarding the China/Hong Kong border, can you share how much of the lost sales in Hong Kong you think may have been compensated for in Mainland China or in other regions?

Michael Wells, CEO

Yes. Let me address a couple of these, Nick, and then I’ll pass it over to you for more insight on Pulse. Overall, we are experiencing significant growth in the Chinese market, with compounding growth levels that can compete with any company in the sector. Although we are starting from a lower base, which makes comparisons with larger firms less fair, our progress is substantial and beneficial for us and our shareholders. The primary constraint to our growth in China is not the regulatory environment, as we have access to most of it. Instead, it is the pace at which we can develop quality agencies, as cultivating good agents takes time. We currently have about 4,000 wholesalers reaching out to banks and can quickly adapt our distribution of bank products when entering new cities. There are many second and third-tier markets we plan to target next, so our challenge is about executing our strategy rather than a lack of opportunities. Our focus is on building quality agencies before increasing quantity to avoid future compliance and reputational issues, which requires time. The only part of our business plan in China that constrains short-term growth is this aspect. As we become more successful in agency, we find that more agents are interested in working with us, making recruitment easier. There is a positive cycle in this area. Regarding Pulse in China, we are exploring options but have not announced a launch yet. We have introduced our best practices, including virtual hiring, training, and agency development, over the past year and continue to expand on that. For agency productivity, the only limitation is execution. Nick, do you want to comment on Pulse and the border question?

Nick Nicandrou, CEO of Asia and Africa

So let’s start with the border question. To understand what's been lost to local competition within China, you have to look back at who was buying in Hong Kong and why they were doing so. The vast majority of people buying in Hong Kong were high net worth individuals, particularly of a certain age group, 40- to 55-year-olds, or affluent individuals with children under the age of 6 who were looking for educational savings type products denominated in foreign currency. The reason they were buying is exactly that: foreign currency and the ability to invest in U.S. or Hong Kong dollars to tap into returns outside China. The availability of equivalent products in China is not there. Those needs remain. It's difficult to be specific on your question, as the underlying means have not changed, and they’re not served anywhere near in the same way as they are in Hong Kong. We believe once the border opens, the business will return. It’s about the shape rather than the quantum. The fact that we broadened our products now to appeal to the mass market as well with Insurance Connect also gives us another leg. With this new segment, particularly for those who do not need to travel to buy a policy. On Pulse, we’ve done a lot. The focus shifted in the second half of last year to embedding and conversion. The 32 million downloads, 13 million registrations, I think we have plenty of users. It was all about how do we get them to use the services more, extend our services to 56. How do we get them to spend more time; those that are using the services, the amount of time spent increased by about 20% by the regular users. We also connected or hosted tools on Pulse that help with lead management and activity management. The conversion or passing across a Pulse user into a lead and converting that into a phone call is now seamless, and it all happens within the same application. That’s been done across 8 markets, Indonesia and Malaysia led the way, Hong Kong has come on stream. Almost every one of our big agency markets, including Vietnam and the Philippines, Hong Kong and Singapore, are all looking to adopt those tools. We’ve had a fourfold increase in the number of agents now registered to use those tools and a 2.5-fold increase in the numbers that are actually using them. So as we go into '22, we will see further increases there. This is part of the reason why you’ve seen the percentage of APE that comes from users involved in Pulse increase from around 6% last year to 11.5%. In the fourth quarter, it was 13%. Looking through number of cases, those numbers are even higher. We’ve added direct-to-consumer products. We now have 46 products across 9 markets, a lot of them came live in the latter part of last year. Direct-to-consumer sales, so far this year, are primarily concentrated in Vietnam, Philippines, and Indonesia. We expect to see a lot more coming across the rest of the market as we put some marketing efforts behind those. Again, these are all new relationships we will have with Pulse users: a second relationship before we engage our agents. Higher use of services, more direct-to-consumer products, greater efficiency or improving efficiency in terms of converting users to buyers of full premium products, now being spread across more markets than this time last year.

Michael Wells, CEO

Thanks, Nick. We’ve got time for just a couple more questions, and we have opportunities to meet with you over the next few days in various meetings. My apologies if we didn’t get to your question today. We’re also alive to the fact there are a number of firms reporting, and we were asked by a lot of you to stop at the top of the hour. I want to respect that.

Operator, Operator

Next question comes from Blair Stewart with Bank of America.

Blair Stewart, Analyst

I have two questions. The first is about the margins. I noticed that Hong Kong's new business margins are at 134% and Singapore's are at 70%. These are unprecedented figures. What is contributing to this? Are you offering a more valuable range of health and protection products? Is this trend influenced by the pandemic? What factors are driving this increase? My second question is regarding financial flexibility. You've provided details about C-ROSS and RBC, and Mark mentioned earlier the importance of financial flexibility, with leverage currently at 21%. How would you assess your level of financial flexibility in light of your solvency and liquidity?

Michael Wells, CEO

I believe we have never experienced such low sensitivity to interest rate and equity movements in our earnings. Additionally, our financial flexibility has reached unprecedented levels during my tenure. Mark, could you provide more details on both points as we conclude this discussion?

Mark FitzPatrick, CFO and COO

Yes, Blair. I think you’re right; in terms of richer streams of health and protection that come through in both of those components and also with an element in Singapore, additional linked products coming through. In terms of financial flexibility, as you say, our Moody’s leverage ratio pro forma for the debt repayment in January is about 21%. We think we’ve got decent scale in terms of the headroom to get to about 25%. It's kind of just under $1.5 billion headroom from that perspective. In terms of our regulatory capital levels, at the levels we're at, the 4% and 8% again pro forma, it’s not a binding constraint in how we operate and what we do. We think that’s important because that enables us to operate, engages with the regulator on the front foot and be very forward-looking and forward-leaning in terms of the opportunities we might have in front of us. We saw how we deployed that locally in Thailand, recently with the ttb bancassurance deal, partly funded by some surplus in Thailand and partly funded from the center. We continue to be very pleased with the strength of the balance sheet, especially with the turbulent markets that we have, the resilience of that, and the financial flexibility, for the element of inorganic opportunities but also the great organic opportunities. In the last eight years, we’ve invested about $11 billion in Asia and Africa alone, roughly split 50-50 between organic and inorganic. We’ll continue to look to invest hugely in organic and explore carefully inorganic opportunities ahead.

Michael Wells, CEO

Well, I’m going to have to cut it there. I know we’ll see you later in the week, and thank you for the questions. To Mark's point on Thailand, the measurable output of that is you watch a bancassurance channel market share go from 4% to 14%, if you look at the detail in the results. Very happy with that. Thank you very much, everybody, for your questions. I just want to personally thank you for your interest and support in our business in my time as CEO. It's been a privilege for me to serve for the last 26 years with Prudential. I'd like you to take away three things, if you would. We are now, and I'm very pleased to say, entirely focused on Asia and Africa. Clearly, we've delivered high-quality, resilient growth in 2021. I think in this environment, that's a valued and unique statement. We’re extremely confident that the model we built with the diversification of countries, and the multichannel structure is the right one to continue to execute on what's going to be or is likely to be a complex environment for the short term. Thank you again for your time today. We look forward to talking to you all in more detail in the coming days.