Prudential PLC (PUK) 2006 Q3 法說會逐字稿

Welcome to today's Prudential 2006 Third Quarter new business figures call with Mark Tucker. For the first part of this call all participants will be in listen-only mode and afterwards there will be a question and answer session. Mr. Tucker, please begin.

Thank you, Jim. Good morning everyone and welcome to our nine-month new business teleconference. As usual I'm joined this morning by Philip Broadley, our Group Finance Director. What I'd like to do is make a few comments and then Philip and I will be very happy to take your questions.

All the numbers, I think, just for clarification, all the numbers I will refer to today will be based on APE. Growth in retail sales in our life business -- in our life businesses globally have been strong in the nine months with Asia up 29%, the U.S. up 25% and the U.K. up 11%. Against that we've seen lower levels of wholesale new business in both the U.S., where I think as you know we participate on an opportunistic basis, and in the U.K. where, as we've said before, much of the pricing in the market has not been at the levels where we see that appropriate returns can be made.

On the asset management side, the U.K. and Asia have had an excellent nine months with net inflows up 87% at M&G and increasing by 65% in Asia.

Before talking in a bit more detail about new business, I would like to make a few comments on Egg. Across the banking sector as a whole there is a growing evidence that consumers are reducing their net borrowings and increasingly they are looking to individual voluntary agreements and debt management companies to manage their debt. Clearly we're no exception to that trend. We've seen -- indeed we've seen an acceleration in that over the last months. And based on current experience we now expect Egg to make a loss in the second half of the year, at or around a similar level for the loss reported in the first half.

You saw last week that we have appointed Ian Kerr to succeed Mark Nancarrow as CEO at Egg. Ian will join us in November and has a vast amount of significant and relevant banking experience from his time at HBOS and we truly believe he's a great addition to Nick's team.

Let me talk a little bit more about detail on new business, starting with Asia. As I said, we were 29% ahead with nine out of our 12 operations reporting double-digit growth. We continue to build our distribution capability right across the region and we are encouraged that, as well as the growth on both the agency and the non-agency side, we've seen growth, particularly on non-agency, account for now 30% of our overall new business, up from 27%. So I think -- so a success on both sides but I think it's good to see that we continue to diversify and add distribution.

We have about 240,000 agents across the Asia region now. And through the country's growth in major numbers in India, we now have close to 90,000 and in Indonesia around 28,000. And both are supporting growth in these countries. But in addition I think, as I've just indicated, we've also seen a significant increase in new business from our banking partners. So, all in all, very positive on the distribution side.

In Korea we are growing the number of tied financial advisors. These advisors are very productive and sales through this channel more than doubled in the nine months. Overall, Korea was up around about 66%.

In product terms we launched a number of new savings products in Hong Kong and third quarter growth there was 40%, an immensely strong third quarter in Hong Kong. And we continue to make steady progress in China. More cities, growing contribution from outside Guangzhou and Beijing, and Guangzhou and Beijing are our longest-established operations. And we're continuing to make progress there and continue to push the business forward there and remain excited about its longer-term potential.

In Taiwan, Taiwan's had a solid performance, particularly given a third quarter last year where there was a launch of -- a big launch of a new unit-linked series. It's done well. It's slightly down on this stage last year due to that strong quarter in 2003. But I think importantly for us, the mix remains very good, 60% of assets have returned to unit-linked and the profitability remains -- the margins there remain strong.

I think you know about the announcement that we made with regard to Asia and the -- that Barry Stowe will be joining us as CEO of the Asian operations. Barry has actually already taken up his position. He's been in situ, so to speak, for the last week and he's -- I have every confidence that he will lead our business in Asia onto its next phase of profitable growth. Many of you, and I hope all of you, will get the opportunity to meet Barry in London on December 1 when we will give the market an update on both our life and asset management businesses in the region. And as we've done and as we continue to do, we remain very excited about our positioning and opportunities in Asia.

Turning to the U.S., we continue to perform very well with third quarter sales building on the excellent first-half performance. Again, you traditionally look at this, the second half -- the second quarter is always the -- or is nearly always the best quarter of the year, the third quarter coming off a little bit. But no change in trends, still strong, strong growth in the U.S.

Variable annuity sales were up 48% over the nine months and we're maintaining good momentum here. We also saw a bit of an upturn in fixed annuity sales in the early part of the quarter as interest rates increased but this fell away again as rates reduced again in September. I think overall we feel the market dynamics continue to favor VAs.

We also continue to make ground in the independent broker-dealer channel, with half-year statistics showing Jackson as the number two provider in this channel for variable annuities, with a market share of 10.4%. And, again, that's up from previous levels.

Getting onto the U.K., an encouraging nine months of retail sales, up 11%. Individual annuity sales, where we benefit from our diversified distribution, saw continued strong growth outside the IFA channel with vestings from our partnership showing particularly strong growth.

Growth of with profits annuities also continues and accounted for 14% of individual annuity new business in the quarter.

Corporate pension volumes also continued their positive trend, up 45% on the same quarter last year and 23% over the nine-month period with a continuing shift from defined-benefit to defined-contribution and also to some A-day impact.

On bonds, trends remain pretty much as they were at the end of half-year. With profits bonds continue to grow, albeit from a fairly small base. And unit-linked bonds our sales are lower, as we focus on higher persistency and higher case size IFAs.

In the bulk market the levels of activity have picked up in Q3 and there continues to be opportunities in both bulk and back-book areas. Having said that, pricing, particularly for scheme wind-ups, remains tight. And our position, as we've stated a number of times previously, is that if we cannot see reasonable risk-adjusted returns we won't write the business. That remains in place.

During the quarter we have continued to develop our market position in a number of areas. In July we launched an innovative protection product that includes severity-based serious illness payments. In August we launched a fee-based SIPP. And we're putting in place a specialist sales force to sell our lifetime mortgage product, which should become operational towards the end of this year.

And finally, onto asset management. Based on continuing strong investment performance, M&G saw net inflows in the third quarter of GBP1.5b with strong flows both in the U.K. and Europe. I think it's worth noting that net inflows for the nine months were just over GBP5b. And that's already ahead of the 2005 full year, which I think again you'll remember the 2005 year was a record year in itself. So it's record upon record.

In recent U.K. industry data for the second quarter, M&G had the second-highest level of net retail sales in the U.K.

With Asia net inflows are GBP1.6b for the nine months or up 65% and at record levels.

Our asset management business was recently reported as the second-largest business based on retail funds under management in Asia ex-Japan, which is a tremendous achievement from a [inaudible] base.

We have built a business based on geographic and product diversity and Ajay and his team will provide greater depth and drill down further at a number of key markets at our session on Asia in December.

Overall, we continue to see excellent prospects for continued profitable growth and look forward to the future. But for now, let me hand back to you for questions, which Philip and I will be happy to answer.

Okay. We will now begin the question and answer portion of this call. [OPERATOR INSTRUCTIONS]. And the first question is from James Pearce with Cazenove.

Yes, hi. It's James Pearce from Cazenove. Can you hear me?

Yes, hi James.

All right. Yes, a couple of questions about annuities. First of all, in the U.S. I think the VA number was down a little bit versus Q2 and the slack was taken up by fixed annuities. Is that a trend you expect to continue?

And second, in the U.K. the same sort of thing, if you like, between individual and bulk annuities. I think in Q1 there was a bit of a block in the individual market. Is this just the snap-back or is this new run rate of individual annuities sustainable?

I think with regard to the quarter two/quarter three, James, as I've said, I think if you look back over the last five years you'll see that quarter two is always the best quarter and that quarter three always comes down. We won't see any relative slip on that. The normal base in the U.S. is quarter two, quarter three, quarter four, quarter one in that order in terms of production. And that is -- and that will actually be the same. So I think if you look on a relative basis, no change at all there and nothing to read into that.

On the U.K. on the individual/bulk side, I think the base has been -- certainly on the individual side we move out somewhat with pricing early in the month and have come back in again. But let me hand over to Philip, who can add to that.

The other point I think, James, is if you look at the way in which individual annuity sales through the partnership channels have developed over the last year and how that's building, I think that may help you with your question is that a new trend. Our distribution of individual annuities has widened out over the last year or so.

Okay. And on fixed annuities, is the fixed annuity volume seen to be a good guide for the future?

[It's] inverted yield curve, James, I think you've seen interest rates move different ways in the beginning of the month and the end of it, beginning of the quarter and the end of the month, as rates have moved. And that will continue to dictate the way that the fixed annuities will move in the U.S.

Okay, thanks.

Okay. We now go on to Kevin Ryan of ING.

Morning.

Morning, Kevin.

Sorry, it's a rather bad line at this end. My question concerns Egg. Part of the U.K. strategy for recovery is to sell more products through the Egg network. How is this being affected by a number of your customers clearly going very much off-message and going bust on you? And what are you doing to change the customer basis of Egg?

Well I think again, Kevin, I think it's not words we've used before that -- in terms of recovery. I think the U.K. business, as you can see, is -- on the retail side is going pretty well. It's -- we've said that we'll focus on value over volume and that remains absolutely the case.

In terms of the positioning, this is an issue that is fundamentally around unsecured loans. Again, we're not unique in the industry on this. If you look at the environment in general, I think you would know, I'm sure, that in August credit card users repaid more money than they'd borrowed, which was the first time this has happened since May 1994. So I think the market is changing, certainly on the unsecured loans side. The IVAs have increased, the debt management companies have increased pretty much in line with what is happening.

But let me take -- just take a step back. I think the buyback of Egg was predicated on cost savings and cost synergies and cost synergies alone. There were no revenue synergies put in. We said that we would hope that there would be upsides on the cross-selling and that continues. We only bought back Egg six months ago and that process continues and develops. It's not -- it wasn't -- it didn't predicate -- it wasn't -- our case was not predicated on that. It was predicated on cost savings, which we've -- which we're very much in line with getting.

Thanks.

Okay. We now go on to Marcus Barnard of Societe Generale. Marcus, please go ahead with your question.

Yes. Morning, gents. My question relates to the distribution channels in the U.K. Whilst you've clearly done well in partnership, when we look at your intermediated distribution your sales are down 16% year on year. And this compares against an industry which is -- the U.K. life industry has been growing in the last year. And even if we compare it to the figures from your competitors yesterday, who were up 32%. Where is this IFA business going? Because from where I'm sitting it doesn't look like it's got a future. Can you answer that?

Yes. I think, again, the headline there remains value over volume and the quality of the business and the margins we want to get. But let me hand you for the details to Philip.

Morning, Marcus. Just a couple of specifics on the sales through the IFA channels. The decline is principally in the individual annuity market in terms of the biggest effect on premiums in the nine months with unit-linked bonds behind that. As regards the individual annuity market, the opportunities elsewhere, both through our direct sales to our existing pension customers and the opportunities through partnership, have enabled us to be more selective in terms of our pricing through the IFA channel. And on unit-linked bonds, I think it's a familiar story that you've heard us say before, the -- where commission rates from others are in our view excessive and having the effect of lowering the margins available to us, we're happy not to participate.

So where do you see that going? Is happy not to participate what we should factor in going forward?

Well, I don't think we'd say -- it comes around, Marcus, to we're looking at a value play here and if we're not making the appropriate returns then, no, we won't participate. We want to continue to build that business and we're looking at a significant segmentation of the IFA market. And in that way we feel we will compete in the sections of that market that we feel are most valuable to do so.

Okay, great. Thanks.

Okay. We now go off to Andrew Crean of Citigroup. Andrew, please go ahead with your question now.

Good morning all. I wanted to actually ask another question on the U.K. Your focus on value over volume is laudable but there is a point at which scale begins to hit into you and you've got a fixed cost base to cover. Where, roughly speaking, do you need to go or where would volumes need to go to create significant unit cost problems on sales? How much lower down would you go?

The other thing I just wanted you to comment on was the exodus of people from your U.K. operation over the last year or so. Could you give us a bit of color on what's going on there?

Okay. Let Philip take the first part and let me take the second.

I think on the question of unit costs we set out, as you will recall back at the half-year, the -- our cost reduction plan over the next two years. And within that we do expect to see growth in certain areas of our business. I particularly focused there on the steady growth we expect to see in individual annuity sales coming from our own vestings of pension customers, so that the proportion of annuities written by the shareholder back business will continue to grow as we see pension customers retire.

As to a specific volume target, which I think you're asking me about volume reduction that would put pressure on unit costs, that is -- I won't give you any more guidance other than to say that's not what we're expecting. We are expecting to see growth overall in the retail business continue with a focus on individual annuities and corporate pensions.

Andrew, the second part of that question in terms of people. I think clearly what we've seen with a new CEO coming in and with Nick coming in at the beginning of this year, he's looked to build his team. There were a number of temporary people within that team on interim assignments when Nick came in.

What he's done is, I think, continued to build and strengthen the team. He's brought in a number of very senior people, from people like Gary Shaughnessy to latterly Ian Kerr. Both of Ian on the investment side and with, as I say, on the banking side, with a tremendous wealth of experience and Gary on the investment side. And he's bought in a [inaudible] Director, he's brought in an HR Director. Nick has brought in some immensely strong people.

We've lost a few people, inevitable on a journey like this. We're sad to lose them and we wish them the best. But in terms of building a team I think every opportunity -- every time you lose a person you look to strengthen that and you see that as an opportunity, and that's what we believe.

Andrew, does that answer your question?

That's fine.

Okay.

We now go onto Mark Thomas of KBW.

Morning, everybody. Just a question in terms of Egg and on the accounting side. Please could you quantify the impact, either up or down, on the second half '05, first half '06 and second half '06, of the impact on the impairment charge of the change in collections process at the end of June last year?

Collection process changes actually have very little effect on the accounting under the provisions. Those methodologies are -- during 2005 and 2006 were driven by the more formulaic approach under IFRS, of setting provisions on individually impaired accounts and collectively impaired accounts. And, as a more general point, the impact of those individual voluntary agreements that Mark's spoken about and the increased use of debt management companies, those categories represent typically about 30% of our bad debt charge.

Perhaps I could follow up on that. Under normal IAS accounting, if you defer the restructuring you take a higher charge upfront. But, equally obviously, on the lower minimum payment presumably lower -- a fewer percentage of customers are in arrears, and if your form was driven by arrears, that would actually pull down the charge. Is the business message you're saying is that those two have offset each other, or is there some other message we should actually take from those two trends?

The message that I'm trying to convey is a simple -- is a relatively simple one. And it is that the impact, particularly the increased level of IVAs that we've seen in this quarter, have caused us to change our view of the proportion of assets that will be impaired at the end of the year. And that's why we're making the comments we are today.

Thank you very much. Thank you.

Thanks, Mark.

Okay. We now go on to Craig Paterson of KBW. Craig, please go ahead with your question.

Yes, good morning. In terms of your Asian volumes, they were a little ahead of my expectations, a little below the market. But in my expectations, I had factored in some culling of your agency force. In other words, you've nearly doubled your agency force in some regions. And you made some comments at the mid-year that you were going to focus on productivity, which usually means getting rid of some agents. I wonder if you can give us an update on what your initiatives on productivity are there? Because the way I -- I'm just looking at your numbers. It looks like you're still foot to the floor in terms of -- on your accelerator, in terms of recruiting agents. I don't know if you want to give us a feel for where you are in that process, productivity versus poaching and hiring new agents?

Happy to. I think the agent volumes remain strong. I think we've seen, as I say, increases in agency forces, particularly in India and Indonesia. But I think we've actually had a culling exercise already through a number of those. That's a continuous basis. So there's not -- there's never just a one-off exercise. It's a continuous basis looking at the productivity of agents and both in terms of case size and case count. So that's an ongoing exercise.

I'm not sure why you've come to the calculations you've come to at this particular time, because there's no -- there is no seasonality factor in doing that. We do it all the year, every year. So I think in terms of the initiatives, I think you saw again at the half-year the strong productivity that is there. But I think what you'll see and what I'm sure the guys will talk about in -- on December 1, Greig, is all of these things in much more detail. But absolutely no reason why you've come to the conclusions you've come to, because one's never indicated that's the case.

I was just wondering because your agency force, for instance, doubled in one region from -- it added 400 to 1,600 in Korea. And I was just wondering are those very, very large increases in agents going to continue, or do we expect it to moderate or? I'm just trying to understand the process. That seems to be driving sales in a number of regions, so I'm just trying to understand the process. Is this true?

Well, I think no. I think to a degree it is. But I think what is significant in this is that the other channels, particularly the bancassurance channels, have gone up from 30 -- from 27% to 30% of our overall production. So agency is growing quickly, yes, but bancassurance is taking greater share, is growing faster. So that's equally encouraging to us.

All right. Thanks very much.

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

Yes. A follow-up on annuities and to some extent on Andrew's question about the management in the U.K. Could you just remind us on where we are, in terms of the relative profitability of bulks versus individual annuities? I think in the old days bulks were said to be more profitable but presumably that's flipped over, given your writings in Q3.

And second, unless there's a typo in my printout, you wrote virtually no bulk annuity business in Q3. Is that entirely voluntary, or have the management departures actually affected your capacity to do business in the bulks market, given that the market, according to M&G, was there in Q3?

James.

We're both excited to take the question. Philip's more excited, so I'll let him, otherwise it'll be dangerous.

It's a bit like sports commentators when they have to share one microphone, and they're having a little fight for who can grab hold of it.

I think, first of all on bulk versus individual margins, your assumption is correct that, both as a result of some of the pricing activity we're seeing in the bulk market and also the growing scale of the individual annuity shareholder back business, that the relative margins are changing. So the profitability of individual business has improved relative to bulk.

As to the level of activity in Q3, I would describe that absolutely as voluntary in terms of the business that we're participating in is business we want to. We have -- there's no diminution or let up in our activity in quoting on bulk annuity business. And just to give you an indication, we have quoted on several hundred transactions during the course of this year of varying sizes. And the pipeline, both in terms of bulk deals and back-book deals, remains encouraging.

And we have certainly the people and the positioning to continue that indefinitely.

Okay. Thanks very much.

Okay. We now go on to David Nisbet of Merrill Lynch. David, please go ahead with your question.

Thanks. A couple of questions this morning. The first is on China, where it looks to me as though the sales from your established cities are fairly flat this year against last year. I just wonder whether there are any reasons for that and whether you're able to take any steps to try to revive growth there?

The second question, and I realize this is going a little off piste this morning, but there's clearly been a lot of press speculation over the last few days on what you might do in the U.K. I just wondered, at this stage, whether you could confirm you're still looking at all options for the U.K. business or alternatively say whether you have ruled out any possibility of that at this stage? Thanks.

Hi, David. It's Mark. I think, certainly with regard to the U.K., there's been no change of positioning. We are continuing to look at all options and indeed digging deeper and getting a great -- continued greater understanding. And absolutely no change from the previous position and what we've said.

With regard to China, I think you're right. I think we've seen greater growth from the newer markets and what we've done is a bit of a restructuring in China. Not so much a restructuring as putting in a [sales] guy to -- underneath the teams there, to be able to push and coordinate sales on a more proactive basis across the existing territory as well as the new territories.

So I think we -- growth is good in China. I think it could be better and we're certainly addressing those issues. But I think there's -- there are no concerns and, as I say, it's good, it could be better, and that's what we're focusing on. But I think we've taken some action in terms of stepping up with people and some of the structure.

Okay. Thanks a lot, Mark.

Okay. The next question, which is the last in the queue for the moment, is from Craig Bourke of Exane. Craig, please go ahead with your question.

Morning. Hello. Can you hear me?

We can.

Yes, hi. Just two questions, if I may, first of all on the corporate pensions business. How's that fitting in with your 14% IRR, unless we've had a transformation of the profitability of that type of business? I wonder if you can comment on that.

Sure.

And, secondly, at a risk of going into a sensitive area on these personnel departures, if you're posing this as a consequence of Nick coming in and setting up a new team, are you saying there that this has no relationship to the departures that you -- we saw last year, before Nick came in and set up his team, around the halfway point of last year? Are we looking at two different dynamics going on here?

Craig, you'll have to help me with the halfway point of last year.

Well, I'm talking about some of the people who've left, gone off to become new entrants in the bulk annuity market. Not just the obvious two but also there are other people within those new entrants who are now ex-Pru people over the last few months. So that doesn't seem to -- are we to relate that to the changes of management at the top and the teams being constructed in the U.K. operation?

I think clearly people and the groups -- the guys that went off last year saw opportunities in that marketplace that they are looking to take advantage of. I think we -- there's no implication particularly that's not to do with -- Nick wasn't around then. Mark was running that business then and they were people he recruited and left under him.

So you see that as unrelated to what we've seen recently?

Absolutely. They're totally unrelated and I don't see that at all. I think the current team is in place, is being strengthened. We're writing a vast number of quotes. We have a significant back office experience and expertise. And, as I say, we'll -- when the opportunity is to write that business, we'll write it, but we'll write on our terms and we'll write it to value.

In terms of the corporate pension side, I think we've always -- we've said in the past that the corporate pensions IRR is not meeting our hurdle rate. We said we've got to do something about renewal costs, particularly on that business and the cost base of that business, and that will be -- we're attacking now. And we'll bring that business, we hope, to overall levels of meeting our IRR targets, but we are way off that moment. But overall, as you know, at the half-year IRR was at 13% and up on the previous year.

All right, thank you.

Thanks.

Okay. The next question is from Craig Paterson of KBW. Craig, please go ahead with your question.

Yes, hello again. Two points.

Name you, rename you Greig.

Yes, I know.

It's your brother again. We like him.

Terrible twins.

Slipping under the wires by changing your name but it won't work.

Right. Just two quick questions, one is Egg's profit. What portion comes from PPI? And I wonder if you want to comment on, I just see there's a headline that the Office of Fair Trading is selling off the PPI issue to the Competition Commission. If you come under pressure, or profits come under pressure from the Competition Commission to implement some cap on profits, I'm just trying to feel how sensitive the Egg profits are to that. That's question one.

And the second one, there was an announcement today of Aviva entering the Taiwanese market. I'm wondering if you can give us a feel for what's the competitive ebb and flow there in Taiwan, whether the Aviva entry will -- because they're quite aggressive in the market [interval], whether that will be disruptive to yourselves and, say, other players like ING's sales?

I think, with regard to the latter, it's a big market and I think new entrants to that market, I'm not sure what vehicle -- what vehicle have they come in on?

Bancassurance. They're linking up with one of the banks there; I think it's the fifth biggest bank.

Right. I think there's plenty of scope. It's an under-penetrated market and, as I say, I think we've had a number of years experience there, got a significant and productive sales force, have got a product range, have got relationships with a number of different banks. Will it affect the industry? I think clearly only time will tell on that but it's -- that's fine. We don't believe it will affect the industry materially in any particular way.

In terms of proportions and PPI, Philip, it's been increasingly decreasing.

Indeed. Then I don't think it's a number we've specifically broken out in the past, Greig. In the first half non-interest income, of which PPI will be part, represented 30% of Egg's income as a whole. But it has been a declining part for some time, as a result of changes in sales practice and so on.

And, given the comments we've made before also, about our response to concerns that we have in particularly the loans market, go -- with our plans going forward. And loans as a product and PPI as a product bought by loans customers is a declining part of what we expect Egg's income to be.

All right. So less than 30% would be the takeaway?

It's certainly less than 30% of income in the first half and that is on a downward trend.

Yes. Just a follow-up. Mark, you mentioned that Taiwan was an under-penetrated market. Statistically, I think it's the third most highly penetrated insurance market in the world, if I'm not mistaken - South Africa, Korea, Taiwan.

Yes. I'm not sure that that's -- South Africa, Korea, Taiwan, I've never heard those statistics before. And certainly the U.K., U.S. and Japan would all exceed those three.

All right. Thank you.

Thanks, Greig.

Okay. We'll now go on to a final question from Andrew Crean of Citigroup. Andrew, please go ahead with your questions.

Good morning. Sorry to come back. I have one question. Your 13% IRR, is that including the with-profits business, the with-profits annuity business? Or is that just shareholder back business?

That is the -- that's the IRR on capital which we're deploying in the shareholder back business

So it excludes profits?

It excludes with profits, yes.

Okay, great. Thanks.

Okay.

Okay. There are currently no further questions in the queue. [OPERATOR INSTRUCTIONS]. Okay. That seems to be it for the questions for today. Mr. Tucker, may I pass it back to you for any closing comments?

Thank you. As I say, I think -- let me just repeat what I said previously. I think we do continue to see excellent prospects. I think we've made significant progress on the retail side across our businesses globally. And you've seen record sales in the asset management side. And I think the prospects for continued profitable growth look good, and many thanks for listening.

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