Earnings Call Transcript - PUK Q1 2023

Operator, Operator

Hello everyone and welcome to Prudential's Full Year 2023 Results Q&A Event. I will now hand the floor over to Patrick to begin. Please go ahead.

Patrick Bowes, Moderator

Thank you, Sebastian, and welcome to everyone. We're going to just have a short address by Anil to start and then we'll go straight into questions and answers. Sebastian will explain to those on the call how to log their questions, but I'll pass over to Anil to kick off.

Anil Wadhwani, CEO

Thank you, Patrick. Good morning. Good evening, ladies and gentlemen. Very warm welcome to the 2023 full year results for Prudential. I'm Anil Wadhwani, the CEO for Prudential. And it's indeed my honor and pleasure to welcome you today. Earlier today, we announced our results. We are delighted with the strength of our performance. I thought the results were excellent, both on operational grounds as well as the financial performance that we delivered in 2023. Our sales came in at $5.9 billion for the full year, up by 37%. Our new business profits came in at $3.1 billion, up 45%. Seventeen out of the 22 markets registered new business profit growth, with twelve of them on a double-digit basis. The margins held up, in fact, improving by four percentage points. Our IFRS earnings came in at $2.9 billion, up 8% year-on-year. Clearly, a very strong set of results. Hong Kong led the way, showing a strong rebound following the opening of borders. A pleasing aspect of the Hong Kong growth was that we were able to gain market share, both in the domestic market and in the Mainland Chinese visitor segment. We also gained market share in agency, which is the lifeblood of our company. In China, it was a year of transition; we pivoted to driving a different product mix in China. We took proactive steps early in April 2023, in advance of regulatory guidance, and effectively preparing for changes that were ratified in Q3. Our agency grew by 25%, and due to the actions taken to reposition our bank assurance product mix as we transition into 2024, we feel optimistic about our growth prospects in China. Strong performances were also seen in Malaysia, where we were delighted with sales and new business profit growth. Indonesia has shown four consecutive quarters of new business profit growth, which represents early signs of the transformation work we are leading there. Singapore clearly has a quality franchise, multi-distribution channels, and exhibited a strong rebound in the second half of last year. Overall, I believe that these are excellent results. We have seen sales growth in the first two months of 2024. March and April will have base effects, given the resurgence in those months the prior year due to the opening of borders. We are in the early stages of executing our strategy, and we are already seeing some measurable progress. These factors lead us to be increasingly confident in delivering our financial targets of 15% to 20% growth in new business profit by 2027, as well as accelerating cash generation from our value. We are effectively deploying capital to drive organic, profitable growth while keeping an eye on expanding our distribution footprint through partnerships. I want to thank our people, agents, and partners for their dedication and commitment, as these results would not have been possible without them. Thank you for joining us. I would now like to introduce our management team. On my right is Ben Bulmer, our Chief Financial Officer. Next to Ben is Dennis Tan, responsible for a cluster of our ASEAN markets and also for wealth. Catherine Chia, responsible for human resources, is next to Dennis. And at the far right is Avnish Kalra, our Chief Risk Officer. On my left is Lilian Ng, who runs Greater China along with customer distribution. Next to Lilian is Solmaz Altin, responsible for a cluster of markets in Southeast Asia, India, Africa, and health technology. Lastly, Bill, who we appointed as the incoming CEO of eSpring last year. On that note, back to you, Patrick.

Patrick Bowes, Moderator

Thank you, Anil. We'll turn over to the Q&A in a second. Just a reminder to everyone that proceedings are based on the materials published on the website, so please stay tuned for instructions from Sebastian.

Operator, Operator

Thank you.

Patrick Bowes, Moderator

Okay, we are ready to open up. Michael was first with his hand raised, so he gets the microphone first.

Michael Chang, Analyst

Thanks. My name is Michael Chang from CGS International. I have two questions primarily regarding Hong Kong and China, especially considering the strength there. It looks like 2024 has had a strong start to tourist numbers. Firstly, regarding the 2027 new business profit targets, management said they are increasingly confident. It seems a CAGR of 9% to 15% for new business profit growth is needed to achieve those targets. I'm curious about your thoughts on updating those targets. Under what conditions could those targets be more aligned with your more ambitious internal goals? When could investors expect to see such a situation? Additionally, regarding the China agency business performing well, management has flagged that bank assurance continues to be a drag. Looking at slide 27, the base effects appear to improve in the second half. Could management share some details regarding the bank assurance contribution to new business profit for FY23 and express confidence in its turnaround? When can we expect to see that? Thanks a lot.

Anil Wadhwani, CEO

Thanks, Michael. It's good to see you. You have raised several questions. Let me start with Hong Kong and the performance there. We are pleased with the rebound, having gained market share both domestically and from Mainland Chinese visitors. The momentum has continued in the first two months, but we also recognize the resurgence we saw in May and April last year. We are optimistic about Hong Kong's growth prospects, with the government expecting GDP growth of 3% to 3.5% and welcoming measures to attract international traffic. As for the new business profit growth targets, which were set at 15% to 20%, we don't cap our aspirations. We have the capital strength and flexibility to grow. The results from 2023 suggest encouraging growth in 2024, 2025, 2026, and 2027. Concerning China, we see the demand for long-term savings, retirement, and protection products as highly intact. Economic growth in China is expected to be 5% as it shifts towards a more sustainable, consumption-led economy. Last year, deposit velocity showed growth of 9%, indicating a significant opportunity for insurance firms like Prudential. Although bank assurance has faced some challenges, the agency side has been strong. We've made tough decisions regarding bank assurance and adjusted our product mix in response to regulatory guidance. We believe that these steps have positioned us well for growth. I'll turn it over to Ben and Lilian for any additional comments.

Ben Bulmer, CFO

Hello, Michael. To specifically address your question about the contribution of bank assurance to new business profit in China, that was at 45% in 2023, down from about 69% the previous year. We focused on repricing and shifting our product mix. We managed to increase bank assurance margins through the year, improving significantly. That illustrates the ongoing structural changes in the mix. Looking forward to 2024, we expect those margins to be around 42%. This also holds true for Hong Kong, where we experienced strong margin expansion in the second half of the year.

Lilian Ng, Executive

Adding on Michael's question, we've shifted our focus away from non-par savings products toward annuities and savings with longer terms. Our bank channel contributed to 65% of our banker channel's business in 2023, which in turn made a significant contribution to new business profit. Our 2024 strategy will additionally emphasize health and protection and par savings, which is essential as we build up for the future.

Patrick Bowes, Moderator

Let's go to the next question, Charles. Please proceed.

Charles Zhou, Analyst

Thank you. Charles Zhou from UBS. I have two questions. Firstly, about China. With the ongoing low interest rate environment, can management explain how you plan to manage this situation regarding insurance sales, guarantee rates, product mix, and asset allocation? My second question relates to the ASEAN markets, particularly Indonesia, Malaysia, and Singapore. If I combine these three, the growth doesn't seem as exciting as that of Hong Kong. Could management provide insights into the outlook for ASEAN throughout 2024 and beyond? Thank you.

Anil Wadhwani, CEO

Thanks, Charles. Let me start by discussing how we cope with low interest rates. The fundamental insurance needs remain intact. We foresee regulatory shifts moving towards long-term savings and retirement planning. We are proactively crafting products that align with this market need. Regarding the interest rates, we have already made moves to reprice our guaranteed products well in advance of the adjustments in the market. Our experience allows us to adapt effectively. Specifically looking at ASEAN markets, we recognize these as crucial segments for Prudential. We have established strong market positions across Indonesia, Malaysia, and Singapore, and we are confident about our growth opportunities moving forward through strategic capital deployment and distribution expansion.

Ben Bulmer, CFO

Hello, Charles. To expand further on the low interest rate environment, our capabilities allow us to transition smoothly in varied economic climates. Half to two-thirds of our liabilities allow us to adjust benefits depending on investment outcomes. We've already been taking action to manage our cost of liabilities effectively. The composition of our assets remains diversified, heavily weighted towards fixed income, which provides a good risk-reward balance.

Anil Wadhwani, CEO

Frankly speaking, ASEAN is a critical market for us. Our diversified distribution channels position us well. The demand across these regions is enormous. In Malaysia, for instance, we made significant strides in growth within both conventional and Shariah segments. In Indonesia, we've seen transformative early signs, and in Singapore, we're well-placed with a quality franchise. Hence, I believe that the potential for growth in ASEAN can't be understated.

Patrick Bowes, Moderator

Thank you. I'll take another question from the floor. Edwin, please go ahead.

Edwin Liu, Analyst

Hi. I'm Edwin Liu from CLSA. I have two inquiries—one about Hong Kong and the other regarding ASEAN. For Hong Kong, can we expect that the NBP growth will consistently surpass the group average? What should we anticipate for MCV, particularly regarding high teens growth in the medium term? Also, what insights do you have on pre-pandemic and post-pandemic behavior in terms of MCV customers and agents? Secondly, can you provide clarity on which ASEAN markets offer the most active opportunities in bank assurance, particularly in terms of meeting your IRR requirements?

Anil Wadhwani, CEO

Thank you for your questions. Regarding Hong Kong's growth prospects, we essentially benchmark our growth against our medium-term guidance of 15% to 20% for new business profits. While we do not place constraints on individual market performance, Hong Kong holds significant potential. As for insights on behavioral changes of our MCV customers and agents, we observe strong demand following the pandemic, the market is expanding, and agent recruitment diversifying. Meanwhile, for bank assurance opportunities in ASEAN, we recognize Indonesia and Malaysia as promising locations due to their existing successful strategies. We are continually evaluating market conditions to align our approach. Thank you for your questions, Charles. I'll pass it to Solmaz for additional input on our bank assurance strategy in ASEAN.

Solmaz Altin, Executive

Thank you for the question. We are actively exploring expansion opportunities in the banking distribution channels within ASEAN. In Indonesia, we are pursuing opportunities particularly focused on the Shariah segment. We are already number one in terms of market share in Indonesia, which makes us keen to diversify further. Similarly in Malaysia, which saw an impressive 36% growth in bank assurance last year, our potential there remains high. We are also examining opportunities in the Philippines and regions like Cambodia, Myanmar, and Laos.

Patrick Bowes, Moderator

Let's return to the next question. Farooq, please proceed.

Farooq Hanif, Analyst

Hi everyone, thank you for the opportunity. First, Ben, regarding your comment in the press release about improving the conversion of free surplus generation to cash—could you elaborate on this? At what point do you think you might move away from the 7% to 9% DPS growth target? Given the strong growth observed, I think this is a key topic of interest for the market. Also, regarding the one billion-dollar investment made into the business, what has the first hundred million been allocated to and where should we look for incremental changes? Lastly, about your health proposition, can you indicate where the biggest growth potential lies in earnings and sales, and what the timeline for that might be?

Anil Wadhwani, CEO

Thanks for your questions, Farooq. To begin, returning capital to shareholders is always on the board's agenda. We need to consider what investments would yield higher returns, including organic growth. Next, I will let Ben provide details on operational free surplus generation, the billion-dollar investment, and our health strategy, afterward, I will follow up with specific thoughts.

Ben Bulmer, CFO

Sure, Farooq. When it comes to operational free surplus generation, we are focused on accelerating it, and we've even provided an expected trajectory in our slides. To clarify, while we plan to invest in capabilities initially, the compounding effect of high-quality new business will produce significant returns. Our cash remittance ratio was 80% in 2023, influenced by the need to accommodate debt repayments, but we look at around 70% going forward. As for the $100 million spent of our billion-dollar investment, about half funded distribution platforms and recruitment efforts, which have yielded notable improvements in agency productivity and customer experience.

Anil Wadhwani, CEO

Ben provided a solid overview of our health strategy, demonstrating impressive growth last year and a roadmap to sustain that. Health is a strategic pillar, with long-term goals established for expansion. The extensive demand across our key markets provides ample opportunities. We will continue to innovate and enhance our offerings in the health sector.

Patrick Bowes, Moderator

Thank you, Anil. Let's continue with the next question. Sebastian, you're up.

William Hawkins, Analyst

Thank you for taking my question. Firstly, in terms of growth markets, what's the latest on Taiwan and its outlook? It seems to have performed quite well in the second half of the year. Can you provide the new business profit figures for '23 versus '22? Secondly, regarding medical reimbursement issues referenced in slide 29, could you share insights into the challenges presented and your outlook for the situation?

Anil Wadhwani, CEO

I'm pleased with Taiwan’s performance, driven by a solid value proposition in our offerings. We aim to diversify our product mix, moving beyond established models, as well as introductions of new initiatives. Now I will turn to Ben for insights regarding medical reimbursements.

Ben Bulmer, CFO

On the medical reimbursement side, we've observed increasing utilization rates post-pandemic, paired with heightened medical inflation. We are taking prudent steps to manage and re-price products appropriately across our markets to enhance a robust environment for our health offerings. Activities continue to center around accurate claims management, leveraging technology to optimize costs.

Patrick Bowes, Moderator

Thank you, everyone. We're nearing the end of our time today. I'll take more questions online and then switch back to the room. Sebastian, can you please proceed with the next caller?

Dominic O'Mahony, Analyst

I appreciate being squeezed in. Just one question. I'm looking at the OFSG trajectory on slide 36. It appears tight to reach the target of $4.4 billion. Can you provide clarity on contributions, particularly for the next three vintages? Should we anticipate additional positive variances from improving operating experience by 2027?

Anil Wadhwani, CEO

Thank you for the question, Dominic. Indeed, getting our operating experience back in line with expectations is crucial. We anticipate improvements through enhanced agency productivity and a stronger focus on health. Furthermore, we expect that the 2023 new business cohort will allow adjustments to the mix and continued growth as we move into the future.

Patrick Bowes, Moderator

Thank you, Anil. I want to turn this back to you for closing remarks.

Anil Wadhwani, CEO

Thank you, Patrick. We are pleased with our performance in 2023, which highlights the underlying strength of our distribution and quality of talent at Prudential. We are in the early phases of executing our strategy and are encouraged by our initial progress. We remain confident in achieving our financial and strategic objectives announced last year. Thank you for your time, and we look forward to continued communication.

Operator, Operator

This concludes the conference call. Thank you all very much for joining. You may now disconnect your lines.