Prudential PLC (PUK) 2003 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Prudential Q3 new business results conference call.

At this time all callers are in listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time.

If anyone should require assistance during the conference, press star then zero on your telephone.

Just to remind you all, this conference call is being recorded.

I would now like to hand over to the chairperson Ms. Rebecca Burrows. Please go ahead with the conference. And I'll be standing by.

Great. Thank you. Godo afternoon, everybody. And welcome to our third quarter new business conference call.

Jonathan Bloomer is here with me. And he'll spend a few minutes just running through some key points today. Then we'll move on to questions and answers.

Over to Jonathan.

Rebecca, thanks. And good afternoon.

An overview, as you're all well aware, it's been a difficult year in the market.

In the UK, consumer confidence hasn't yet fully recovered. In the US we still have a low interest rate environment. And in Asia we obviously had the impact of SARS in the second quarter.

But for the last three months or so - several (ph) months - market conditions are beginning to stabilize around the world. We're now seeing signs of that coming through in improvement in the retail market and the emergence of some positive trends - increased sales of corporate pensions and annuities in the UK, good sales of variable annuities in the US, and a return to strong growth post-SARS in Asia.

Total Group insurance investment sales, 23.6 billion - up 12% at constant exchange rates on the first nine months of last year. Group APE insurance sales at 1.2 billion are down 10% at constant exchange rates again, reflecting primarily the UK.

If I just run around the areas of the world that we operate in staring with Asia. The first (ph) nine months of the year our Asian business reported annualized premium equivalent sales of nearly 400 million pounds - up 17% on the same period last year. And really we're (ph) very much back on track with very strong double-digit growth in Asia. Post-SARS, APE sales in the thirds quarter were up 33% over the second quarter of this year, so a very strong bounce-back and it very much put us back on track with the trend overall.

Not only insurance, but investment product funds also increased up to 6.5 billion pounds - up 10% from the 30th of June. And that's strong net inflows during the quarter as well as some positive market movement.

So very comfortable with the way the Asian business is now heading.

Turning to the US, the picture for Jackson very much reflects what I said we'd do with the business back in February. I said then we'd focus on the retail business at the expense of the wholesale business, and we would focus products toward equity-variable annuities as well as in the fixed-income fixed annuity product. And you can see that in the overall mix for the nine months.

Jackson's retail sales at 2.8 billion pounds were 1% higher than last year, which was itself very much a record year. And in this low interest rate environment, and given the bias we've had on sales, fixed annuity sales were down some 37% for the year, but still at 1.2 billion new funds added. On the other hand, excellent variable annuity sales - up 88% to 1.5 billion for the nine months.

A significant proportion of the VA sales actually continue to put money in the fixed income bucket. And about 53% of variable annuity sales went into this option in the first nine months of the year.

In addition, Jackson continued to build on the launch of Curian Capital which moved - continued to increase monthly inputs, launched a new equity-linked equity - annuity product, new term and universal life products. And in fact 92% of Jackson's sales in the first nine months of this year have come from products launched since the beginning of 2002.

Lastly just turning to our UK business and the three brands we operate under in the UK, on the Prudential brand, the sales for the first nine months of the year were 18% down on 2002.

If I take out the effect of with-profit bond sales and the fall in those, actually sales of particularly corporate pensions and individual annuities were strong, and were 6% higher than for the same period last year.

Breaking that down, sales to direct channels 15% higher than last year - strong sales again in individual annuities and corporate pensions, where we have market-leading positions in both areas.

In the IFA, in the independent financial advisors sector, sales were down 38%. That's purely - almost wholly - as a result of the weak with-profit bond market.

In the first half of this year, that market virtually fell off a cliff. But it started to come back in the third quarter. We saw a pickup of 59% increase in sales of with-profit bonds in the third quarter over the second quarter this year. And it does reflect growing confidence and an improvement in confidence by high net worth investors into the with-profit bonds. And it's quite clear there remains a market for a smooth (ph) investment product in the UK.

Now for M&G, gross fund inflows into M&G retail products up 10% on the same period last year. And their institutional business, given its focus on fixed income and private finance, has also done very well with fund inflows of 2.1 billion in the first nine months by percentile over the last year.

For Egg, Egg will announce its third quarter results next Wednesday. So I won't spend any more time on that now.

In summary, though, despite a difficult year, generally markets (ph) with greater stability. We've seen that work through to the retail side. And we've definitely seen signs of recovery in the third quarter.

And our international spread, financial strength, and continued focus on running the business for value positions us strongly to deliver sustainable and profitable growth over the long-term

With that, let me through it open to questions.

Thank you, Mr. Bloomer. If you do have a question at this time, press the number one on your telephone keypad. To cancel a question, press the hash or the pound key.

Once again, that's the number one to register a question, and the hash or pound key to cancel.

Our first question comes from Mr. James Pierce (ph). Please announce your company name and go ahead with the question.

Yes. Good afternoon. It's James Pierce (ph) from Deutsche Bank. I just wanted to ask a question about your strategic positioning in the US. Obviously Jackson including the gate (ph) business is shrinking at the moment, whereas the market is actually consolidating, accentuating your reduction in relative market position.

Obviously you showed your hand a couple of years ago with American General as a buyer. Are you still a buyer? Or could you be a seller in the US market? And could you just fill us in on where you stand in the medium-term, please?

Yes. I mean Jackson's relative position in the market it plays in has not weakened. It's -- on the fixed annuity side, it's the top five writer (ph) of fixed annuities. On the VA side it's certainly top 10. And they've actually been more like eight or thereabouts, which is - which is heading in the other direction in terms of the market and product sit wants to play in.

But notwithstanding that, the -- you know, we've seen recent transactions announced. I've said for a long time that the US market has to consolidate and will consolidate. That stopped for a while. It's now starting again.

With Jackson we will look at whether there is anything sensible for Jackson to do there - something that adds value bolt-on's to its existing product line, or perhaps moves us into another product range.

And we're - you know, over the next period we'll look at those sorts of things as the US market frees up in terms of getting those things done. But that puts us - to be explicit about your end point - doesn't put us on the selling mode.

Presumably given that Jackson is moving towards being self-financing by putting out at wholesale, if you were to do bolt-on's there'd be a financing requirement. Or are you saying that you would wait until Jackson had generated retained earnings to do bolt-on's?

It may - the timing will be more to do with when the right things are around and, you know, sensible things that add value and give us a good return on capital.

The financing we will look at, at the time, depending on where we are and how much it costs and the scale of it.

OK. Thanks.

Thanks.

Our next question comes from Mr. James Pierce (ph). Please go ahead with your question, and announce - I'm sorry. Mr. Roger Hill (ph).

Hello. Roger Hill (ph) speaking, not James Pierce (ph), I'm afraid.

No. It's definitely you, Roger (ph).

It's a very similar question, though. I just wondered if you could give us an idea on the relative capital intensities of the main products in the States and to what extent the variable annuities having lots of money going into the fixed bucket makes a difference? And whether you can clarify if you believe you could actually write more business in the States if you had more capital?

The fixed annuity takes about 6%-7% of premiums capital. The VA about a third of that - about 2%-2.5%. If it goes into the fixed buckets, it takes closer to the 6% for that proportion that ends up in the fixed bucket because it ends up in our general account and therefore as the general account increases. And S&P and Moody's, the rating agencies, are bigger drivers of capital than anything else in the US. You know, we need to back the general account efforts (ph).

So that's a rough - if you like, a rough measure of the major products. If -- to the extent we do institutional, it's similar to the fixed annuity in practice - a similar amount of capital required.

At present in the US, I think our focus is very much on getting the spread we want in particularly the fixed annuity business, and you know to some extent constraining our business with the pricing we put on to ensure we get the right spread to actually add value and get a good return on the business that we do write. And I - in many ways, that's more of a constraint on us than the amount of capital that's there.

I'm sure if we threw (ph) - you know, if we wanted to write more business, and particularly if we were prepared to write it at lower margins, we could write more of it. But the balance we've got a present I think is a good balance in terms of risk managing the US business, aiming for the right return on capital, and where we would allocate (ph) that capital.

But you don't believe that strategically it might be better to go for organic growth with new capital than to make an acquisition?

The - interesting question. I - there was a period, if I go back to '98-'99, 2000-ish, when some of the deals that were done in the US in acquisitions were clearly - the returns on capital we didn't find attractive at that point in terms of what could have been done.

I think that may have changed. And we - at that time it was clearly more of a seller's market. For the present, I think we might be in a bit more of a buyer's market. And the returns on capital from some acquisitions may be at least as good if not better than from organic.

But that's a function of, you know, just where the market is at any point in time.

OK. Thank you.

Our next question comes from Charles Graham (ph). Please go ahead with your question, and announce your company name.

Hello. Charles Graham (ph) from Williams Borough (ph). Good afternoon. Just a quick question.

You said that excluding with-profit bond sales your UK sales would have been 6% higher.

Yes.

Can you actually quantify those numbers?

They're all in ...

They're in the schedule, Charles (ph).

... in the schedule.

Yes. I can follow up with you afterwards if it's easier.

Yes. The details are all there. But if Rebecca takes you through the detail afterwards, it's ...

Yes.

And similarly on IFA sales?

Yes.

Yes. The 59% increase. Is that also detailed?

Yes. One of the schedules ...

OK.

... gives you this quarter against this quarter '02.

Yes. Essentially, Charles (ph), if you take the line that says life in the intermediated (ph) distribution (ph), the vast of majority of that is with-profit. But I'll happily runt through it with you later if you'd like.

OK. So there's a limited amount of with-profit element within pensions and individual pensions?

Well, the with-profit bond is within the life line.

It's within the life line.

Yes.

Right. OK.

There is some with-profit in the others. But ...

But not with-profit bonds (ph).

... the with-profit ...

Not the bonds (ph). OK. And you expressed at the half-year numbers with government policy on 100-0 (ph) versus 90-10 funds. Can you provide an update on sort of government thinking?

Not really. There's nothing else come out. I suspect that the 100-0 (ph) option is still the favored one from the government point of view. And we can manufacture 100-0 (ph). We - when we were doing the Prudence (ph) bond in France, that was 100 - a manufactured 100-0 (ph) for the fund.

So we can do it. Our major concern with it isn't so much whether or not we can build (ph) those. It's much more, you know, if you're going to sell smooth (ph) products, they need quite a lot of capital to back them.

The bulk of capital is in the 90-10 (ph) fund, and most - well it provides (ph) much of the strength of with-profit in the country now is in 90-10 (ph) funds rather than 100-0 (ph). And it seems a bit silly to lock out from using that capital to back products with 100-0 (ph), I suppose (ph). And you can do it with 100-0 (ph). You just have to go around the houses a bit. And it just seems a bit silly really.

Can you make any sort of statement on the outlook for bonuses on the with-profit funds?

No. We don't normally do that. I mean - clearly we didn't have to do any bonus cuts at the half-year.

Yes.

And - which is very positive. Markets since then, if anything, have - well they've certainly has remained stable, and generally headed up a bit, which is helpful. You know, we'll have a hard look at it when we get to the end of the year.

One of the things we try to do - I think increasingly there's a growing awareness of the distinction in with-profit funds. There had been a sort of sense (ph) earlier this year - certainly in external commentators - of all with-profit funds bad, to one that says actually some with-profit funds have got a lot of capital and strength, and managed properly, the bonuses have been handled properly, and have provided good returns to policy holders over time. Some haven't.

And I think that's why we're seeing quite a pick-up in the with-profit bond. People are getting more focused on who is into that category. And one of the things we tried to do was bring bonuses down smoothly over years to get to a point that when markets started to improve we wouldn't be caught still having to try to cut them (ph). So we'll see. But you know, we have tried to manage it in a proper fashion over many years.

OK. Thank you.

Our next question comes from Cutter McCrudle (ph). Please announce your company name and go ahead with your question.

Hello. Cutter McCrudle (ph) from Smith Barney. I had a quick question regarding the transparency on the with-profit bonds. I'd just like a further clarification what exactly is done to make the product more transparent?

Thanks a lot.

OK. One - the first thing we've done is actually start a new bonus series for the with-profit bonds because there was a pricing (ph) concern, particularly amongst the IFA's, that - and this was again more general rather than anything specific to us, but we've responded to it anyway - that anyone putting new money in would effectively be financing - overpaying (ph) the active (ph) shares to older policy holders.

Yes.

And so one way we've dealt with that is said no, we'll start a new bonus series so there's no generational cross-over in that case. Going forward we'll do other work with the with-profit bonds in different elements of it.

I'm not sure the word transparency is very helpful, though. You know, it's a bit like - now if I draw an analogy with the car market, cars have go more and more complex. Their engines have got more and more complex. They make them more and more difficult for you to even see them, much less do any work on them.

And the issue isn't about transparency. It's about understanding what the thing does. And the car manufacturers are very good at convincing people it will get you from A to B safely, and - without breaking down.

And I think what we've got to do with the with-profit product - which is inevitably a concept product - is make clearer what is does and what it doesn't do - what the charges are in it, how it will work, and then make sure what we deliver is what we said it would deliver.

And that's a different approach. It's about making something that's inherently complex simple to the buyer, and rebuilding with buyers the trust that it will do what we say it will do.

Sorry to - if I digress (ph). But I - there's a lot of talk about transparency of with-profit products. It's the wrong approach in my view.

Thank you.

Thanks.

Just to remind you all, if you do have a question at this time, press the number one on your telephone keypad. To cancel a question, press the hash or the pound key.

Our next question comes from Bruce Jarett (ph). Please announce your company name and go ahead with your question.

Yes. Good afternoon. It's Bruce Jarett (ph) from Merrill Lynch. Just a couple of questions, if I may.

The first is, could you speak in very general terms about how the mix of business may or may not have influenced the margin that we can expect?

And also you commented on the attractiveness or otherwise of the US market in terms of acquisitions. I'm just interested to hear your views on the UK market in that respect?

OK. At the intermediate quarters we never talk about margins, just the sales numbers. We only do the margins at the half and full-year.

On the UK, I've said before and I repeat, I don't have any interest in buying blocks (ph) of embedded value in general, or you know, buying closed books of business, or anything like that.

You know, generally, you don't - you don't get anything in terms of brand or distribution or anything else in - with anything like that. And it's a distraction of management time and a use of capital we can use, I think, more productively and strategically in other areas. So it's just not something I have an awful lot of interest in.

OK. If I could just come back on that point. On the UK, I absolutely agree with the points you're making. But I would suspect that an acquisition would potentially open up a further core product area or perhaps enhance distribution capacity.

Is that something that would possibly have interest here?

Well, I'm not sure what core product area you think about that an acquisition would get us into that we couldn't just walk into ourselves if we wanted to.

You know, the reason, for instance, we're not in personal pensions in any big way is because we chose to get out of it. And I wouldn't want to choose to get back into it, with what I think are the current margins in that area.

So, you know - I mean the areas we want to play in, you know whether it's unit trusts through M&G or corporate pensions or annuities, we're already - of not market leading - we're (ph) the number two in the market. So I don't - you know I can't see what any of that would get me into.

Nor particularly distribution would, you know, get you into IFA's more. We're already big in the IFA market. I don't - you know, I can't see what it would - any of it would bring.

Our next question comes from Chris Lamane (ph). Please announce your company name and go ahead with your question.

Yes. Hi. It's Chris Lamane (ph) from Credit Lyonnaise. We - I have two - basically two questions.

The first one is the level of capital needed for the features you are selling in your prospective (ph) two products of Jackson National Life. I would (ph) assume (ph) from previous question that it's 2% -- between 2% and 2.5% for variable annuities.

But is it some changes for this premiums which are allocated to JNL (ph) - the long-term (ph) GMBB (ph) product - features?

The second question is on the proportion of growth you've shown in the variable annuities in the US, could you elaborate a little bit just how much of these accruals (ph) come from prospective JNL (ph) sales?

Thank you.

OK. Virtually all of the variable annuities we sell in the US is with prospectus (ph) two (ph).

OK.

I mean 90% or something is prospectus (ph) two (ph).

It's an unbundled product. So customers decide which of a series of options they want. Most of them they don't pick.

Yes.

And that includes the GMBB (ph) and GMIB (ph).

OK.

Two to 2.5% includes all of the options other than - and sort of general weighting that people pick ...

Yes.

... other than the GMIB (ph), which we reinsure completely.

The GMIB (ph) - sorry? - you reinsure it completely?

Yes.

OK.

We're not interested in carrying it. And we don't carry it.

OK. Thanks.

OK.

Just to remind you all, if you do have a question at this time, press the number one on your telephone keypad. To cancel a question, press the hash or the pound key.

The next question comes from Johnathan Maddux (ph). Please announce your company name and go ahead with your question.

Hello there. It's Johnathan Maddux (ph) from Dresner here.

Hello, Johnathan (ph).

Hi there. Just a couple quick questions back on the US if you don't mind.

At the interim you gave us a useful pricing model for your fixed annuity business that achieved (ph) your target returns on capital. Can you just quickly update us on the competitive pressures on the crediting rates for new business?

And secondly, could you - would you say it's still early to get sizeable (ph) shift into the equity-exposed variable annuity products in the US?

On the fixed annuities, nothing much has changed since we were ...

Yes.

... talking about it at the half-year. I mean spreads in the market have changed a little bit. The pricing in the marketplace is around about 3% for the first year on the fixed annuity - give or take. So fundamentally nothing much has changed on the fixed annuity product really.

On the VA, well you know you can see that the up-tic in sales ...

Yes.

... although there is quite a chunk still going into the fixed bucket. That keeps dropping. It's falling slowly. And therefore there, you know, quite a lot of money now going into exposed units.

Yes.

And that seems set (ph) while the market - I mean the NASDAQ is up 19% this year. So while that's there and there's more retail confidence in the equity markets, I think we expect to continue to see strong growth in VA's and a steadily - steady form in the proportion going into fixed buckets.

Quite a lot of what goes into the fixed bucket only goes in for a year or so, and then drips out back into equities over a period of time.

Thank you very much.

Thanks.

Our next question comes from Gordon Akins (ph). Please announce your company name, and go ahead with your question.

Hi. It's Gordon Akins (ph) from JP Morgan. Just a couple of UK questions.

The means-tested pensions credit was introduced about 10 days ago. And isn't this going to act as a disincentive to save? And I'd just quite like to hear your reaction on that.

And secondly on the annuity business that you wrote in the third quarter, can you say what proportion of that was written in the 90-10 (ph) fund, and what was written in the 0-100 (ph) fund?

I mean - I don't know. Pension policy in this country is in such a state that - certainly it's not going to have - encourage anybody much to save in pensions.

Although there's been a very fairly narrow band - there is a band of people for whom the right advise would be spend the money now and don't save it. And that's been there for some time as an issue. It's a - you know, it's a relatively low-income band that would fall into that. But there is a group of people for whom the right advice would be don't bother to save. Spend it.

Outside of that, there are lots of people who do and will save for the longer term. Quite a lot won't save it in a pension policy. Increasingly I think people look to a range of assets to save in for their retirement, period.

There are too many restrictions in many ways about pensions. And a lot of people say I'll buy a series of ISES (ph). I'll put it into mutual funds. I'll buy property.

And a large amount, I'm sure, of what is effectively retirement money has gone into property in the UK in the recent past - and still is going in that direction.

We don't - we don't have a very coherent pension system - not unusual, nor do most countries.

As for the annuities, off the top of my head - and I'll get Rebecca to follow up with you with the exact number on the spread - but we - on the split between with-profit funds and shareholder funds. But we've carried on doing what we typically do, which is that pension policies that people had with us and annuitized with us typically stay in the with-profit fund because that's where the pension policy was written.

Annuities that we write via IFA's on open market options from other people's pension policies typically are shareholder-backed. And that's the broad slip (ph) of the business in the way we are portioned (ph).

Thanks.

Mr. Bloomer, we appear to have no further questions. I hand the conference back to you.

Fine. Thank you very much. Thank you for the questions.

I'd say (ph) very much some signs of confidence recovering in the retail market in - here and in the equity market in the US and very much a bounce-back from SARS in Asia.

So from that - after a difficult period, it's good to see that element - those elements coming through.

With that, thank you very much.

Thank you.

Ladies and gentlemen, thank you for your attendance today. This concludes today's conference. You may now disconnect your lines.

Thank you.