Prudential PLC (PUK) 2005 Q4 法說會逐字稿

Welcome to the Prudential Full Year 2005 New Business Figures conference call. Today I am pleased to present Mark Tucker, Group Chief Executive of Prudential PLC. For the first part of this call, all participants will be in listen-only mode and afterwards there'll be a question and answer session. Mr. Tucker, please begin.

Thank you. Good morning, everyone. With me this morning is Philip Broadley. Many thanks for joining us for our Full Year New Business teleconference. What I would like to do is make a few comments and then Philip and I will be very happy to take any of your questions.

I think, as you've seen from our release this morning, APE sales for 2005 at £2.146b, some 15% ahead of last year. And third party funds under management in M&G and Asia combined increased by 24% to £46.3b.

In the U.K. and Europe APE sales were £900m, up 10% on the previous year. And we saw fourth quarter sales on an APE basis up £200m, which was 26% ahead of the third quarter, with a stronger quarter for corporate pensions in particular but also stronger bond and individual annuity sales.

On individual annuities, pricing in the intermediary market did firm up a little in the fourth quarter. But having chosen to stand back from competitive pricing, as we mentioned earlier in the year, particularly in the third quarter, sales in this channel were down 15% on last year. However, and this is I think a significant area, the sales in the partnership channel more than doubled in the year, and overall sales of individual annuities were 2% ahead of last year. And I think that clearly demonstrates the benefits of having a diversified distribution network.

Overall, we are making very good progress in the partnership channel. In November we launched our distribution partnership with Openwork for the exclusive distribution of with profit and impaired annuities through their 2,200 advisors. And in December we signed a deal with Royal London for pension annuities from vesting Scottish Life policies.

Bulk annuities were 28% ahead of last year. This represents growth in both smaller bulk transactions and back book deals. And I'm sure that you'll recall that we acquired the Phoenix annuity book in the second quarter of this year. And in December 2004 we acquired the Scottish Life book from Royal London.

I think you can see from today's announcement that earlier this month, in the first week of January, we concluded a second bulk annuity transaction with Royal London. And this book covers approximately 59,000 lives and some £650m of assets. There are no deferred annuities in this book and the average book -- the average age of this book is 66. This will produce around £65m of APE that will be allowed to be booked in the first quarter of 2006. So I think you can see there is a strong start to the year.

As I said earlier, corporate pensions had a good fourth quarter, and were up 5% for the year as a whole. We had something like 83 new schemes coming in and an increase in members of existing schemes through our worksite marketing effort.

Unit-linked bonds were £64m APE, up 31% on last year, reflecting our growing presence in the IFA unit-linked bond market. And again, as you know, Nick Prettejohn has now joined the Group. Nick’s been with us a couple of weeks, from the beginning of this year, heading up the U.K. insurance business. And we're working together to ensure that we -- and that he drives profitable growth in our U.K. operations and clearly that's a main focus for Nick.

Moving to the U.S., Jackson National delivered record variable annuity sales during 2005; up 31% on 2004. This result was achieved despite the nine-month market statistic showing a flat VA market overall. And I think Jackson, as you've seen from the numbers, continued to grow market share with 3.5% of total industry new sales. And the VA product within the Jackson portfolio, the main VA product Perspective II, was the second best selling VA product in terms of net flows in the market.

Demand for the fixed annuity products continued to be impacted by interest rate conditions, as we would expect. And as a consequence, sales were down 31% on the year. We said to you on a consistent basis the [JNLs] continued to pursue possible growth and hence have been unwilling to compromise entry spreads in this market.

In fixed index annuities, our approach to working and educating the broker dealers and the increased demand for this type of product has seen sales increase by 44%.

On the life side, we had integration of the Life of Georgia book, which was substantially completed by the year-end. And we remain of the opinion that good return, and I think clearly that is the phrase, good return bolt-on deals are the best way to grow the life book, and thereby diversify the U.S. business further.

Full-year institutional sales of £99m, as opposed to £80m at the half-year, against our estimate of £25m for the second half. And I think, as we said to you before, we participate in this market on a selective basis.

Many of you, and I think the large number of you, have heard the Jackson story in great detail at the November presentations in Lansing in Chicago. It is a very strong story which I won't go over in detail here. But in short, the retirement of the boomers, the '46/'64 generation, is truly an excellent market opportunity in the U.S. And Jackson has the product and distribution capabilities and the efficient platforms to take advantage of these market developments. So we remain optimistic, and I think clearly we left the November meeting upbeat about the opportunities for Jackson National in the U.S.

Turning to Asia. In Asia, growth in the full year was 23% and in the fourth quarter sales were £219m, which was 16% over the same quarter in 2004, which itself - and I think as you may remember - was a very strong quarter. So that's and excellent final quarter in Asia.

Significant growth in a number of markets. In Korea sales have increased by almost 90% in a year and it’s now our second largest market in the region. India and China both showing strong momentum; growing at 63% for India and 47% for China.

Through our partnership at ICICI in India, we are the clear number one private life company. We've got almost a 35% market share among private insurers. And we’ve continued to grow Asian numbers and now have something like 70,000 agents in India.

The CITIC Prudential joint venture in China continues to make excellent progress and we are now operational in all 10 cities where we have licenses, and we’ll look to -- clearly to grow that business.

We also saw strong growth in Indonesia; 52%, as we built the sales force over the year in Indonesia.

In the more mature markets, Singapore showed strong growth of 26%, benefiting from a broader unit-linked range and increased bank distribution.

Hong Kong, which was a pretty soft market during the year, the market was fairly flat during 2005. We delivered a very respectable 7% growth, and I think we felt that was a good result given the market conditions.

In Malaysia, again growth was fairly slow. Our growth was 6% in a flat market. And I think there was, during the year, some disruption to sales activity as newly regulated quotation requirements were introduced for unit-linked products.

In Taiwan we continued the successful growth of our unit-linked products, which accounted for 72% of sales for 2005 as compared to 49% in 2004. Which is clearly -- and Taiwan overall was up 3% year on year. I think the move to the more capital efficient and profitable unit-linked products is clearly the right direction, and that’s a pan-Asian strategy, clearly, that has worked well for us.

In Asia, looking forward, we remain confident of our ability to continue to grow strongly.

Turning now to asset management, where I think you've seen from the figures we've also seen excellent performances across a number of our operations, with M&G, PPMA in America and PCA Asset Management in Asia all having a very strong performance.

Total external funds under management at M&G were £36b, which is up 26% on 2004, whilst our Asian fund management business grew total third party sum by 13% to £10.1b. I think, importantly, M&G saw the strongest retail sales in its history, with £3.8b of gross inflows and significant increases in equity and property sales, whilst maintaining its leading position in fixed income.

Institutional sales of £4.1b. And overall, M&G's net inflows were £3.9b, which was almost double those in 2004.

In Asia, Japanese and Korean asset management businesses each saw net inflows of over £900m and third party funds under management in the region were £10b at the end of the period. This flow was a little offset by net outflows in Taiwan, where the bond market remains a little unsettled.

So if you look across the businesses, or you look at the numbers, the main story coming out, I think, strong numbers driven by growth in Asia and the U.S., record retail sales in M&G, excellent three-year performance. And we're looking forward to carrying all of that into a successful 2006.

So that is a summary takes you through where we are, what we'd like to do now and Philip and I would be very happy to take any questions.

Okay. We will now begin the question and answer portion of this call. [OPERATOR INSTRUCTIONS]. And the first question is from Jon Hocking, of Morgan Stanley. Jon, please go ahead.

Morning, everyone. I just have a few questions, first on the U.K. and second on the U.S. On the U.K. annuity markets, there's a lot of speculation at the moment about new entrants into the bulk annuity market. I wonder if you could give some comments about the competitive landscape there.

Also, on the individual annuity market, in the U.K. there's been a lot of talk about new entrants, particularly Aegon have been quite vocal in recent weeks. If you could give some comments there?

And secondly, on the U.S. market, given the regulatory change surrounding equity-indexed annuities, if you could just give a comment on what you think about distribution and outlook for '06. Thanks.

Let me -- morning, Jon. Just let me take you through the two points. One is -- the two points in the U.K. In terms of the individual annuities, and then I'll get on to the bulk. In terms of individual annuities, clearly competition remains intense between a number of the players and I think we saw sustained aggressive pricing in the second half of 2005.

What we said, and what we said on a number of occasions, is that we'll only stay in the market when we feel that we can generate the returns, and we stood back from the competitive pricing, particularly in the third quarter. I think what was important to us was even though sales in the intermediary channel were down 15%, sales in the partnership and the direct-to-consumer channels grew 114% and 14% respectively, and overall sales were up.

I think what we -- what gives us some comfort there is that we do have substantial vestings business, which we built in recent years, and this enables us to continue writing considerable volumes. While we can resist margin pressure, we can clearly -- there'll be a strong stream always coming through.

Clearly, as you know well, the key determinant of day-to-day pricing is long-term interest rates. And I think the -- we act robustly to change our rates as the interest rates change, and I think we stay very much on top of that and will continue to do so. So I think we -- clearly, with the underlying vestings business we've built, the strong partnership business we're building, with success in both lines, the profitability is there for continuing.

On the bulk side - and Philip may want to add to this - but on the bulk side I think clearly there's talk of competition in the marketplace. As we've said before, we've done a number of deals. The pipeline that we have remains strong. We have expertise in this business. Our understanding and the depth of mortality, the pricing, the people we have; all of that, I think, places us in a strong position. And underlying all of it is, for bulks and the super bulks we’ll only do those deals that meet our economic return criteria.

Philip, anything?

Yes. Just on that, Jon, I'd add that I think we actually quite welcome competition in the bulk annuity market. The level of interest there is at the moment from various new providers of capital. That does tend to suggest that people are interested in the same returns that are available as we've been talking about for some time, and that people are comfortable with the returns against the risk profile.

There's huge capacity in the U.K. -- sorry, huge supply of potential for bulk annuity schemes. The demand from corporate pension trustees through advisors remains very high. And therefore I think it's unsurprising that we're seeing this level of interest.

From our point of view, obviously we've got a well-diversified book now. And that, together with all of the administrative efficiencies that we've got, I think will give us some advantage in terms of pricing and being able to maintain our returns on capital when new entrants will need to, I think, be -- need to maintain higher risk margins as they build their business than we need to do, given the scale we've already got.

Thank you.

Jon, let me come back to you on the U.S. I think the NASD/SEC ruling, which I think you referred to in terms of the FIA market, I think, depending on its final form, which is not there yet, I think we feel could cause those companies with less customer friendly products - and I mean by that excessively high commissions and longer charge period - to lose market share, particularly in the independent broker dealer and regional broker dealer channels.

What we've done, I think, and where I think Jackson is well placed, is we've created FIA due diligence kits and training materials. We've been working hard with our broker dealer partners in terms of education about the products. We feel, if there is going to be a redistribution of market share in the FIA market, then our products, which are very customer friendly, will be very well positioned. And I think we feel, through the broker dealer channel, we could possibly be taking share there. So I think that gives a sense of where we are on the FIAs.

Okay. Thank you very much

Thanks, Jon.

Okay. The next question is from James Pearce of Cazenove. James, please go ahead with your question.

Yes, good morning. On these distribution announcements that you've made, I wonder if you could please quantify the flows of internal vestings that have been coming through Scottish Life historically, and also the flows that the [Nash] network has been generating.

And on the Scottish Life flows, how do you expect the proportion of vesting policies using open market options to change once Pru is installed?

Let me pass that to Philip, James. I think clearly we'll be limited in the degree of specificity, as we've come to expect from you as a [meant], and you'll only get partial answers to that, but we'll give you as good as we can give.

Yes. Morning, James. I'm sorry that I probably won't be able to give you the full answer that you would like. You'll appreciate that there is commercial sensitivity around individual transactions. What I would say is that we do expect both of these distribution agreements to contribute in a meaningful way to the growth in the partnership channel in annuities that you've seen this year and we expect that to continue. Obviously that's why we announced them today. But beyond that, in terms of the actual amount of APE, I can't go today.

Okay. Thanks.

Sorry, James.

Okay. The next question is from [Fatouche], Schroders Investment Management. Please go ahead with your question.

Hi. One question was about what your comments would be on any impact of the Avian Flu on Asian business.

The other question would be do you have debt issuance plans in the next months?

Let me take the second one first - no. I refer you back to what I said in October. We have sufficient capital available to us to fund our current growth plans over the medium term. At the end of the year we had significant amounts from the rights issue proceeds available to us in cash, and some capital which is principally supporting growth for the shareholder-backed business in the U.K.

And, well, I’ll take Avian Flu as well. We lived through SARS, as you’ll recall, a couple of years ago. That -- from an operational point of view, we have very robust plans in place in all of our business units, not just Asia, to deal with the impact of something like Avian Flu on people’s ability to get to work. We lived, as I say, through SARS quite well. Our Head of Group Security is involved with the SSA team in terms of monitoring arrangements and giving advice to the industry as a whole.

Beyond that, I think it’s difficult to comment other than to say that in each of our Asian businesses, as indeed in all of our insurance businesses, we do have reinsurance arrangements in place to cover us from what, in reinsurance terms, would be described as catastrophes.

Does that answer your question?

Yes, thank you.

Okay. Next one is from [Esap Zia] of Williams de Broe. Please go ahead with your question.

Yes. Good morning. I have a question about the shape of your business in the U.K. Does it concern you that 78% of your business is now single premium? Obviously good reasons for that over the last year but are you concerned about medium/longer-term implications of this? How does it affect your profit margins over that period, capital requirements, your distribution strategy? And does it actually make you think about changing that shape organically or by acquisition? Thanks.

Let me take the initial part of that, and then pass to Philip. I think the answer is I think we -- the management of this business is clearly -- we’ve managed the business in this way. We’re comfortable with the mix we have and the way that mix works. We’ll continue to look at the opportunities to adjust that. Again, looking all of the time - and I think I’ve emphasized this and will continue to do so - on a capital efficient and profitable basis, and I think that’s really our focus. The mix will continue to change in different economic conditions.

I’d just add, really, that the mix we’re currently seeing between single and regular premium is a consequence of the [facts] we outlined 18 months ago for the U.K., with a focus on annuities, unit-linked bonds and corporate pension business. That leaves us with a tendency towards single-premium business.

But I think in terms of -- I think perhaps what’s underlying your question is a concern about the persistency and volatility of what flows. But as I’ve commented on before, what’s actually important to us, really, ultimately, is the funds under management or -- of our business. And the advantage, actually, of the annuities business clearly is that the persistency is locked in under regulation. And therefore, we are actually putting in place business that will have a significant -- or does have a great deal of stability and is actually very helpful to us in terms of managing the business over the longer term.

Okay. But presumably where you are today is also a reflection of your past distribution strategy. And therefore my question was whether you’re thinking in terms of changing that distribution strategy, maybe packaged around more multi-ties to try and create a better balance, like maybe Legal and General and Aviva have done, and would that require an acquisition?

No. I think that -- to be clear, I think the -- we will continue to look to get a balanced distribution strategy. We have in the U.K., through the multi-ties, through employee benefits consultants, through our partnership distribution and through our direct channel, we have a multi-distribution model. We’ll continue to focus on building that and we’re looking, from the partnership side, to continue to build Bancassurance relationships. And clearly we’re not commenting on any specific rumors or transactions. We’re not looking at any transactions at this point.

Thank you.

Thank you.

Okay. The next question is from George Aitken of JP Morgan. Please go ahead with your question.

Hi. It’s Gordon. My brother George isn’t here.

I thought you’d changed your name again.

Well, it’s Burns Day, so. Anyway, a couple of questions, please, the first one in Taiwan. Your embedded value assumptions indicate significant increases in bond yields. I’m just wondering why aren’t you writing large volumes of traditional business there.

And secondly, in the U.K., does your appetite for bulks and individual annuities change as a result of the huge inversion of the U.K. yield curve we’ve seen over the last month?

Let me pass to Philip for a comment on both. But let me say, in terms of the focus in Taiwan I think, as we’ve always said, we’ve always emphasized across the region - and this is literally for the last 10 years - we’ve been moving to a more capital-efficient basis and clearly moving to the unit-linked products [LL Batak], and they are profitable products as well. And I think that’s always relying to focus on capital efficiency and profitability, and thereby moving -- we won’t go back to focusing on large volumes of traditional business. I think we want to continue to build our unit-linked business there as effectively as we can.

Philip, I don’t know if you want to talk about the --

Nothing to add to your comments on Taiwan, Mark. On the U.K. annuities market, Gordon, I’d just comment that we back our annuity liabilities, as you know, with a portfolio of corporate bonds. We adjust our pricing, as Mark’s mentioned in answer to an earlier question, very regularly, almost at weekly intervals. And part of what we take into account is the yields that are available to us on the corporate bonds that we want to match.

So it’s the corporate bond market where you need to be looking, and clearly we are adjusting rates and pricing. And you can see that, I think, from the publicly available information on all the various websites, in terms of how the industry is responding to the impact on yields. But we’re maintaining our pricing disciplines in terms of returns through this period.

Can I just follow up on that? Just on that situation in the annuity market, surely you can’t buy assets which have a similar duration to the annuity liabilities?

Well, we’ve spoken about this before. We maintain -- we do maintain, amongst other parameters, a duration match within plus or minus six months, if I recall correctly, of our expected duration. One of the reasons why we like the deals of the type of the one we’ve announced today, where you have an average age of customers of 66, and we’ve done previous ones with ages of 69, 71, is that is actually helping us manage, overall, the duration of our portfolio.

Thanks.

Thank you.

Okay. The next question is from Roger Hill of UBS. Roger, please go ahead.

Hi there. A couple of questions. You said at the interims stage that you thought that margins in the U.K. might come down in the second half. I wondered -- I didn’t see another comment on that. I wondered if you thought that was still the case, and if so which basis that would be on, achieved profit or an EEV basis, on the way through.

And secondly, just on pensions. I just wondered if you could give us some thoughts about what you felt A-Day would be doing for volumes for yourself, and whether you had some thoughts about where the Turner Report might go in terms of the National Pensions and Savings Schemes, and whether that’s a significant threat or not.

Morning, Roger. I’ll take margins and then, Mark, you comment on A-Day. No reason to change today the guidance we gave to you at the time of the half-year. We do expect some overall reduction in margin from the 2004 year-end level for full-year 2005, due to the changing product mix as Prudential in the U.K. builds its shareholder-backed business. And that comment is -- applies equally under the previous APE business as it does to EEV.

Roger, a couple of points on the Pensions A-Day and the Turner Report. I think, on Pensions A-Day, I think overall we view that A-Day is positive for the business and the pensions environment in general. We are seeing significant pre-A-Day activity in the market. But this is really centered around the high net end worth -- the high net worth end of the market, where I think you know advisors are promoting the need to review arrangements because of the lifetime limit and the tax-free cash.

We’re very much focused, as we’ve always been, on value. And both on protecting our existing book of business and using A-Day, really, as a catalyst for establishing ourselves as a provider -- a more fundamental provider of retirement solutions, particularly in the large corporate and individual pensions market. We’ve started a whole series of communications to advisor schemes, customers, etc. We’re gearing this up and, again, looking at product range in future to include the launch of pre and post-retirement customer propositions through 2006.

So I think, overall, we view this as positive and we’re trying to gear up as appropriate.

In terms of the Turner Report, I think the basis of what has happened there, I think we are generally supportive of the report and what it has been focusing on. I think, with regard to NPSS, clearly the challenge over the fund management fee, the basis of whether you can get to 31 basis points, whether that’s economic, and the challenge set down by Stephen Timms to the ABI and to the insurance industry, to see whether we can find an effective solution.

What we’re doing is we’re working closely with the ABI on that to come up with a solution. I think we’d say we welcome the publication and the recognition, both in terms of a stake in private pension provision and the need for customers to build and save, and I think we’d view that we have a role to play there. But I think the work we’re doing is with them, through the ABI at this point as an industry, looking at our response to Stephen Timms’ challenge.

Thank you.

Thanks, Roger.

Okay. Next question is from Dylan Ball of Execution. Dylan, please go ahead with your question.

Yes. Good morning. I was just wondering if you could give us an update on the strategic plan to integrate the U.K. businesses, and what we could expect in terms of cost synergies and/or revenue synergies.

Sure, Dylan, we’re happy to do that. I think we announced this, as you know, with the Egg buyback in the first week of December, and clearly, we are now in the third week of January. We are progressing well the buyback. As you know, we now own around 96% of Egg as of this morning, so the buyback has gone well. We are looking at ways, and I think clearly until that is finished and effective and the offer period is over, then we can’t take all the synergies out.

We’ve announced the de-listing of Egg. And again, all of this will be -- is good progress, and I think we’ll be in a better position to update you in two months, in March, when I think the transaction is complete. But the work, the underlying work and the planning, is going on and I think, as we said, the buyback itself was looking at £40m synergies in 2007. And we gave no revenue synergy numbers because the deal, I think we said, is fundamentally being done on a cost basis.

Right. But would there be any synergies coming from M&G as well? Should we look for something over and above this £40m?

I think that’s clearly -- the £40m figure we’ve given is the only public figure. We will continually look for ways to optimize that.

Great. Thanks a lot.

Thank you.

Okay. At this stage there are no further questions in the queue. [OPERATOR INSTRUCTIONS]. Okay. There is a final question from Matt Lilley of Lehman Brothers. Matt, please go ahead.

Good morning, everyone.

Good morning.

I’ve got a couple of questions, just on margins in the U.K. First of all, can you just confirm, Philip, that you said that you’re expecting the reduction in margins in the U.K. just to be down to mix rather than deterioration in individual products?

And then, secondly, on individual annuities in the U.K. You said the competition in the open market had been quite intense and the pricing was difficult. To what extent are you able to resist that pricing pressure in your own internal vestings and partnership business?

Well, to the first part, I said that I saw no need today to change the guidance we gave back at the half-year, which was around product mix. And so you can draw from that the conclusion that the consequence of what we’ve been doing and the actions we’ve been taking and how we’ve been pricing our products, particularly annuities in the second half of the year, hasn’t fundamentally altered our approach to the return on capital we’re seeking from individual product types.

On the second part, Matt, I think the -- I think we have a strong ability to resist the margin pressures there. We have the relationships and we clearly want to look after our customers, but I think we -- they understand the nature of these markets and what is happening. And we price fairly and equitably, and we price as the yield curve moves.

Okay, thanks.

Thank you.

Okay. The next question is from Gordon Aitken of JP Morgan. Gordon, please go ahead.

Hi. Sorry, me again. Yes. Just you’ve shown very strong growth in the U.K. in defined contributions schemes in Q4. Just on average, what are you charging on these schemes? Is it at the 1.5% cap, stick with the cap? Or if not, what are you charging?

It varies, Gordon, and it’s difficult to give a precise figure around the context of a call that is on New Year sales. We’ll update you more about profitability and margins in March.

I think what we’re saying, Gordon, is it’s around the 1.5% level. And just to say we preferred your cousin George.

Thanks.

Okay. At this stage there are no final questions, so I’ll pass it back to you for closing comments.

Thanks very much. I think, just to end, I think if you look at the key themes that we focus on, and I think the -- we focus on five, really. The truly -- the fact that we are a truly global long-term services player, savings player with leading franchises in the three major regions. We look at the fact that we have unrivalled exposure and weighting to Asian sales, and also to the profit growth potential. We look at the solid cash flow generation from the U.S. and from our asset management businesses. And we look, as we’ve said today, at the focusing on developing and enhancing the returns from our U.K. franchise and franchises.

And overall, I think as a business model, as the market focus turns from capital strength and yield to growth potential, we believe we’re exceptionally well-placed for that. And we’re looking forward to 2006. We hope to see you on March 16 and we’ll leave you until then.

This now concludes our conference call. Thank you all very much for attending.