Prudential PLC (PUK) 2006 Q4 法說會逐字稿

Welcome to today's Prudential 2006 full year results call. Today, I am pleased to present Mark Tucker. [OPERATOR INSTRUCTIONS]. Mr. Tucker, please begin.

Thanks Hugh, and good afternoon everybody and welcome to our full year conference call. Just to say I am joined by Philip Broadley, our Group Finance Director and Nick Prettejohn, our CEO of our U.K. Insurance Operations here today.

I think you will have seen the press release this morning. So what I intend to do is only make some brief introductory comments and then hand back to you guys for questions.

If you look at our results, I think, you can see from the announcement and, I think, the reaction is that this is an excellent set of results and the business is performing very strongly in all of our markets. We have beaten consensus and exceeded the top end of the analysts' expectations for profitability, for dividend per share and for embedded value.

Indeed we see record levels of profit, including margins and double-digit increases in most of our key metrics. And I think you would have also seen that we've increased our full year dividend by 5%. And [hope to look] at a new dividend policy going forward, a subject which we are happy to return to later.

New business profit was up by 20%, and has exceeded GBP1b for the first time, while EEV operating profit across the Group rose 15%, contributing a significant 28% increase in EEV operating profit from our Insurance businesses and a 46% increase in profit from our Asset Management businesses.

We have delivered exceptional growth in Asia and the U.S. with new business profit up 23% and 25% respectively. As I said, our Asset Management businesses delivered record performances with operating profit up 46%.

As a result of our strong operating performance and the excellent investment management performance, shareholders' funds are up 15% at GBP11.9b. Operationally, we maintain a clear focus on value right across the Group and we see average margins moving ahead and returns -- aggregated margin moving ahead, and returns on new business improving.

The one disappointing note was that Egg where, as you know, conditions rapidly deteriorated in the personal lending market. But as you know, also, we announced the sale of Egg to Citi in January.

In terms of cash and capital the position continues to improve and we now estimate that the Group level operating cash flow will be positive in 2008. In line with our expectations on cash flow we put in place a new dividend policy. We would look to grow the dividend as we move forward and move towards a dividend being covered around two times on an IFRS basis. As a demonstration of our confidence in the future of the Group, we have increased the full year dividend by 5%.

You will have seen from the press release the very strong results we've delivered in the U.K., with our highest ever levels of new business profit in the U.K. We have continuously said we would write bulk annuity business, but only on economic grounds. And, as we've also announced today, a GBP1.8b bulk annuity deal for the Equitable Life Society. It is by far the largest deal concluded in the market recently, and demonstrates the advantages of scale, track record and reputation [that arrive] in this important market.

We continue to assess the positioning of our U.K. Insurance operations and Nick and his team have done that in some detail, examining a broad range of potential options, with a clear goal of maximizing value for our shareholders. We are confident that there are significant and profitable opportunities for the Group in the retirement income and savings market in the U.K.

On that basis we have today set out a very clear strategy for future success, based on a leaner, more focused operation that will generate growth and superior returns.

Fundamentally, again as Nick set out earlier, we have four areas of activity. First our Wholesale business, which includes bulk annuities. The deal announced today is a prime example of our activities in this area, where we will take an opportunistic approach, maintaining strict margin discipline and writing business that meets our required returns.

I think, by definition, the flows on this business are lumpy and year to year, with the size of the bulk, the complication of the [competitive] nature of the bulks takes time to write. But I think the quality of the business written, as demonstrated today, is high.

The second area is Retail, which includes retirement annuities, equity release and retirement savings. We have real strength in annuity, retirement savings are now our focus because they [are now] our multi-asset investment management capability. And you can see from the strength of the continuing powerful performance of our with-profits fund, where we can get significant mileage from. We expect top line growth on the Retail side of around about 5 to 10% in the medium term in line with the market.

With a focused strategy in the U.K. based on our competitive advantages, we see opportunities for growth in the Retail market and high margins and return relative to the overall market. And I think, as you've seen today, demonstrate exactly that; high returns and high margins relative to our competitors in the U.K. market.

The third element is Health and Protection, where I think the main focus is on exploiting the strength of our successful Joint Venture with Discovery, and bringing the current protection product into the Joint Venture. These products, sold together, have been enormously successful with their focus and [much of] the energy in South Africa. And we expect the same model to be successful here. The PruHealth business is growing rapidly, as Nick described this morning, there is around 100,000 lives and we expect that to double over the next year.

The fourth element, and the final element, is Mature Life and Pensions. And we have a unique investments pipeline for the annuity business which is a major asset to the Group. This is Pensions business sold by our direct sales force and through corporate pensions over the last 20/25 years. And it is fundamentally an order book going out for the next 20/25 years.

We will maintain a focus on efficiency and we have announced, today, a target of GBP195m cost savings by 2010. That will ensure that we deliver enhancement of the embedded value of the back book.

A further important announcement today is that we have nominated an independent policyholder advocate. We've nominated Peter Bloxham to represent policyholders in the [decision taken to] proceed, with the re-attribution of our inherited estate, held in the with-profit sub-fund. We will only proceed if there are clear benefits to both policyholders and shareholders. And if a decision is taken to proceed, a formal appointment of the policyholder advocate could be expected to take place later this year.

Importantly, for the measures I've outlined above, we are maintaining our 14% IRR targets for new business, we are seeking GBP195m of cost savings, an increase of GBP80m, enhancing the back book embedded value and reducing cash requirements. Such that we expect the shareholder back business to be cash positive in 2010. We think that's a terrific combination.

Overall, before we go into Q&A, and [as I said] Nick and Philip are here, I am very confident of the outlook for the Group. And we have the plans and priorities to drive growth harder and to increase returns.

Thanks for listening and let me hand back to Hugh, to you guys, to ask whatever question you have.

Okay, at this stage we will begin the question and answer portion of this call. [OPERATOR INSTRUCTIONS]. And the first question is from Andrew Ripper of Merrill Lynch. Andrew, please go ahead with your question.

Good morning to you. Just a question on the U.K. cost initiatives. How certain can you be at this stage, that the GBP195 is achievable?

And in terms of the options available to you, maybe could you discuss for a couple of minutes, the relative merits of going down the outsourcing route, as opposed to what you could achieve in-house please? Is this just a sort of a people exercise? Or is there a lot you can do with the systems in the business?

So it's the two elements of that story, what is the GBP195m and achievability? The second is [sort of] offshoring and outsourcing. And I think the best person to talk about that is [somebody who is known] as Nick.

[Inaudible] a significant amount of work to come up with the GBP195m cost saving targets. We announced, obviously, the GBP150m cost saving target last year that included Egg. We take Egg out that's GBP115m. And we've already put the actions in place to deliver two thirds of that cost -- of those cost savings already.

In thinking about the additional GBP80m. We've done a great deal of work with an internal team and with seven outsource providers, which gives us a lot of confidence that we can reach that GBP80m target.

The issue is what's the best way of doing that? Is it through offshoring, which we've already done successfully? We now have 1,300 people in Mumbai.

Or is it through outsourcing, which obviously has some inherent attractions to it, in the sense as to being able to spread overheads and use best practice systems and so on. So there are some plus's to the outsourcing route, or through internal cost reduction.

Or through some combination of those three approaches. And what we are going to do is spend the next few months working out the best way to achieve those savings.

It's a significant exercise, and we are talking about nearly 8m policies here. So this is a -- it's a substantially larger exercise than anything else that's been announced. And involves the work of around 3,000 people, 2,000 of whom are in the U.K. and 1,000 of whom are in Mumbai.

So it's a significant exercise to go through. We are confident that we can achieve the GBP80m and the issue is what's the best way of doing that? While delivering the customer service that we need to deliver and, in particular, at a time when we are investigating and potentially going through the reattribution process.

[Is this] a systems opportunity, or is it mainly about getting your headcount costs down?

There is a systems opportunity. We believe that we should be able to reduce the number of systems that we have from 22 down to around about five. And we can do that progressively over the next three years. And that's -- so that is at the heart of the process to reduce our costs.

The other major contribution to the cost reduction would be in terms of overheads and, for instance, in the support functions that are associated with Mature Life and Pensions business.

And your intention is to reach a conclusion --

In quarter four.

[What was] the time?

In quarter four.

In Q4.

Yes.

Thanks Andrew.

Okay, if anyone else has any further questions [OPERATOR INSTRUCITONS].

Sounds like Nick has silenced everybody.

It sounds like that. Could I please pass it back to you for any closing comments?

I think that we've been [clear] today. I think the view is that -- our view is that these are outstanding results, that Nick and his team have now got a strong and clear view on optimization of the strengths in the U.K., demonstrated on the Retail side by the results, demonstrated on the Wholesale by the equitable transaction.

And I think the quality of the businesses in the U.S., we've seen 18% growth in the VA markets, where we've growth 48%. We've seen continued growth in Asia, and the performance there is about 50% of our EVV profits and 25% of our [stat] profits, [against] strong performance from our Asian businesses.

The dividend policy again, I think, is a reflection of our confidence in, I think, the growth prospects and the cash flow. And all in all, I think, we are looking forward and are confident of [more] continuing to optimize the opportunities that lie ahead.

Thank you for listening this afternoon, and we look forward to speaking again soon.

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