Prudential PLC (PUK) 2007 Q3 法說會逐字稿

Hello, and welcome to today's Prudential quarter three new business figures call with Mark Tucker and Philip Broadley. During this call, all participants will be in listen-only mode and afterwards you will have a chance to ask questions. Mr. Tucker, please go ahead.

Thank you. Good morning, everyone, and welcome to our nine-month new business teleconference. Just to say I'm joined by Philip Broadley, our Group Finance Director, this morning, who's come off his sick bed to be here. So if you hear wheezing in the background you know it's Philip.

In -- what I want to do is just say a few words and then hand over to you for any questions you have. I think the numbers we've announced this morning, I think continue to demonstrate real and continued momentum within the Group and really build on the strong growth over the last couple of years.

If you look at the Group's Retail Insurance businesses for the nine months, it was up by a very healthy 28%. And I think if we look at the individual components of that, let me just spend a couple of seconds on that. In Asia, we talked about 48% growth in the interim results being exceptional given it is now our largest business. But we've maintained that level of growth in the third quarter as well, and I think that shows a very strong performance. At the nine-month stage, new business is already ahead of the full year new business written in 2006.

Growth in the third quarter was, again, very broadly based. In both China and India, third quarter on third quarter growth was around 90% as we continue our geographic expansion in those particular markets. We also saw in Indonesia growth of over 17% as agency numbers again grew there. In Taiwan, I think you will recall from what I said previously that we had a very successful launch into the retirement savings market with our 'What's Your Number' campaign in the second quarter, and new business in the third quarter has continued to be strong, ahead almost 70% on the same quarter last year.

In Korea, and I think what we saw in Korea in the first quarter was a relatively slow first quarter for new business, but I think that was in a weaker overall market. But the third quarter has continued on from the strong gain seen in the second quarter, and third quarter on third quarter growth was over 40% and growth was 25% up for the nine months. We saw I think coming through in Korea, two main factors. An agent incentive program, there was success there, and also in the bancassurance side, two local banks coming into the income stream there with new business from Kookmin Bank and IBK, the Industrial Bank of Korea.

Looking across the rest of the region, we've also seen continued momentum in the more mature markets of Hong Kong and Singapore. In Hong Kong, we saw record quarterly sales through bancassurance. There was also very good growth through the agency channel in both markets. In Vietnam, we've seen a welcome return to growth, 33% up over the nine months, and it's encouraging that we've just received final approval to launch unit-linked products in Vietnam which we hope to do over the coming months.

But overall in the region, unit-linked products now account for about 70% of new business, much the same as at the interims.

In terms of longer-term prospects in Asia, you can argue they remain compelling. We see no impediments to sustained profitable growth, and as you know we remain very focused on delivering the doubling of our 2005 new business profits by 2009. I think the last thing to say on Asia is that we will clearly continue to drive hard, but 48% growth again in quarter four, against a very, very strong quarter four in 2006, is unlikely.

Going to the U.S. and Jackson. Jackson has continued to gain profitable share in the variable annuity market. Growth in VAs was 31% at the interims and this increased to 37% in the third quarter. In the latest market data available, Jackson was ranked 11th in terms of gross flows in the half-year 2007 and second in terms of net flows in the second quarter of 2007. I've mentioned a number of times before and I think this is showing through clearly, is that Jackson's business model really does provide a real competitive advantage and we continue to expect to take possible share and, again, do not see any constraints on our ability to grow in any of our key channels.

We have not seen any particular impact on capital behavior following the recent equity market volatility, although there has been an increase in the use of the fixed interest option within the VA product offering. We saw a similar type behavior in 2002, 2003 in not dissimilar circumstances. The underlying growth in demand for VAs to provide income in retirement is a powerful dynamic given the demographic changes that we will see in the U.S. However, we do not totally discount the potential of some impact on sales of VAs in general across the market over the next couple of quarters if there is continuing market volatility.

The fixed index and fixed index annuity -- the fixed annuity and fixed index annuity markets remain relatively subdued and we are pretty much holding our own market positions there as a top ten provider. I think we gave additional figures today, given the recent uncertainty in credit markets. We included in our announcement the indication of IFRS net credit losses, which at the end of September were GBP6m, and this is well, well within the, or well within the current year risk margin reserved for longer term default.

Jackson is continuing, as we've mentioned in the release, to assess bolt-on acquisitions. There's no news or nothing that is imminent here, but alongside this we are in the process of considering securitization as an efficient way of financing future transactions.

Turning to the U.K., retail sales are ahead by 8% over the nine months, with continuing strong performance across individual annuities and corporate pensions, good growth in lifetime mortgages and with-profit based products. I think that we announced earlier this year we've continued to de-emphasize upfront commission individual pensions and unit-linked bonds, and in August we launched a factory-gate priced bond product, which offers both with-profit and unit-linked options. In answer to a question from the media this morning, I said it was just too early to get a strong indication of how that was doing. It's been a slow and steady start.

To anticipate some of the questions that I'm sure you guys will have later, let me just talk about the comments in the pre-budget report concerning potential changes to CGT. I think, as you know, they will lead to, or they have led to some uncertainty in the investment bond market and will continue to do so until they are clarified. While we are less dependent on investment bonds than others, we are in active discussion with the relevant government departments to obtain that clarity.

The bond market remains competitive, but has remained relatively quiet during the period where the process of transferring Equitable Life's in-payment with-profit annuities to us announced in March this year is continuing as planned. And we would still expect to book this in the fourth quarter subject to, as we've always said, to court approval.

Whilst I'm on the U.K. and again possibly anticipating a few questions, we haven't given any updates today in our announcement of the process that is underway to determine whether we utilize greater offshoring or outsourcing to achieve our targeted cost savings, nor on our work related to the inherited estate. We won't be saying anything more on these today. I'm sure that won't stop questions being asked, but we would not be saying anything more than we've said previously. We'll come back to both of these items as we've always said before the end of the year.

In Asset Management, M&G's retail net inflows were GBP2.4b over the nine-month period, and that compares to GBP2.6b for the same period in 2006 and retail net inflows in the third quarter were GBP673m, supported by M&G's ongoing strong investment performance. And this represents an excellent performance in the turbulent markets we have seen recently.

On the institutional side, strong growth has continued in the higher margin areas of leveraged loans, CDOs, infrastructure finance and absolute return, with net flows up threefold. There are, however, a couple of, well, a number of one-off mandate changes and some reorganization of mandates by a few larger clients that saw some outflows in the seg fixed income business. The main reasons here were a client, one of the clients was taken over and money was moved to the U.S. And also there's been a bond to derivatives switch in some of the portfolios, which significantly pulls down the funds under management but increases the profitability of our book. And as always if there's clearly fee levels there are higher, as always we concentrate on revenue and profit, not on fun.

In Asia, net inflows of GBP2.4b for the nine months were up almost 60% and third-party funds under management increased by 32% to GBP16b. India, Japan and Taiwan again remained the main drivers of growth and we continue to see significant medium-term potential across the region. For the asset management side, I think, strong performances across the globe.

So in summary, I think we've said before our strategy remains focused on the growing market for retirement savings and retirement income. Our regional platforms and global capabilities place us in an excellent position for what we believe will mean the capturing of a disproportionate share of this opportunity and of course deliver value to our shareholders.

I think that's all that I wanted to say for now. I'm very happy here, with Philip, to take any questions.

(OPERATOR INSTRUCTIONS). And the first question is from Blair Stewart of Merrill Lynch. Please go ahead.

Hi, good morning everyone, just a couple of questions from me. Firstly, Mark, you talked about there being a greater use of the fixed income bucket within the VA. Could you just give us some more details on how significant that has been, and just talk in very general terms about what impact that has on the margin or the profitability of the VA?

And secondly, it's one of the smaller regions for you in Asia, but I did notice a very strong growth in Japan. Could you just give us an insight as to what's going on there and if there are any exceptional factors when thinking about a base for next year's sales volumes?

Morning, Blair. I think in terms of the fixed income bucket of VAs, it's around about the 28%, the 28% level, and doesn't materially affect the profitability. So I think that is answering the first two questions.

In terms of Japan, again we -- the business there, as you can see from the numbers, continues to grow pretty well from a small base. We'll continue to look at opportunities in Japan and I think just in terms of certainly the pension side going forward. But I think in terms of any dramatic changes, I wouldn't expect that over the next -- we don't see that in the foreseeable future.

Okay. Thanks very much.

Okay. Your next question is from (technical difficulty). Go ahead.

Yes, good morning. Firstly, great set of sales side on the life side, but just I really wanted to focus a bit more on M&G. And you mentioned the institutional outflows there. You mentioned the takeover of a company and the shift to the U.S. Could you be a bit more specific as to what percentage of the outflows that applies to?

And then also talk a little bit about the motivation generally that you're seeing from the clients who are shifting towards derivatives and whether you think there's any industry effect there?

And then finally I guess, and given the outflows, just give us a feel for the revenue impact. You know, you seemed to suggest it might be neutral.

Yes, let me take one and three of that and let me pass to Philip for the second question on the motivation from client side.

I mean the outflows, again, we're not going to break down any further. We've given an illustration. This is not material to the Group's business and it's not material to M&G's business in profitability terms. So I think it's -- the figures we won't disclose any further. And the revenue impact, as I say, is neutral to non-material. Let me give you Philip for your next question.

Yes, the motivation for clients, for particularly the pension scheme trustees around switching from cash instruments to derivatives, is really part of a trend towards more active management of pension scheme liabilities. And therefore thinking about the impact of changes in discount rates and so on, on liabilities and seeking to offset that through use of derivatives. So a number of the large pension scheme advisors are encouraging clients to think in terms of managing the scheme with an asset and liability committee rather than just thinking only of assets. And I think you will see more schemes making use of derivatives.

So that's the industry effect, you would say, rather than M&G specific?

An industry effect, but given M&G's position in the fixed income area, it's well placed to take on those mandates. And as Mark mentioned, the effect that that has is that we get fee income for no disclosed or reported funds under management. And that is a -- that tends to be higher margin business than traditional segregated fixed income.

Thank you very much.

Okay.

Pleasure.

Okay. The next question is from (technical difficulty). Go ahead. Okay. Your line may be on mute. If so, could you un-mute the line? Okay, and there's still silence. We will go over to Greig Paterson of KBW. Please go ahead.

Yes, good morning, everyone. In terms of, just a couple of questions. One is, I notice your corporate pensions line was below at least my expectations and I assume the consensus. Is that a product specific issue or would you just attribute that to, you know, the A Day theme coming out of the system? That would be question one.

And the other one is, in Asia, I notice you've been running out some health product. I noticed that critical illness was rolled out in Hong Kong. I wonder if you could please tell us are there any margin impacts in your different geographic regions that we should know about because of things that happened in the third quarter.

Good morning, Greig. Just a couple of points. On the corporate pensions side, I think the simple answer is that we've been very, very selective in the schemes that we've taken on board and that's been reason for a change of figures.

In terms of the Asia health, again going back in ancient history, we launched a critical -- I launched the first critical illness product there in 1990 I think or some long time ago. So it wasn't critical illness launch in Hong Kong. It was a medical rider which is clearly supplementary to local government and local schemes. I think the impact is positive. These riders generally are more positive than the underlying contract. So if anything it's been -- it would push margins higher, not lower.

There are no other themes in any other geographic regions where there'll be a distinct margin move in the third quarter that we should be penciling in?

No, we've seen, as Barry said, the health initiative is one of the critical initiatives for this year. I think that the guidance we've given previously is that margins are actually around 46%. We're not signaling any change in that.

Right. Thanks.

Okay. Next question is from Raghu Hariharan of Fox-Pitt Kelton. Please go ahead.

Morning all, just two questions. The first question was on Asia. If you could give us a sense of upcoming geographic expansion and/or distribution expansion plans in China? So that's the first question.

The second question was really to check on your comment on bolt-on acquisitions in the U.S. I guess at the interim results stage you guys had said that you had [GBP1b] of excess capital in the U.S. and you were looking at buying back books which you can stick on to your admin platform which is efficient and drive synergies. Is that the same or is the nature of the acquisition you're looking at changed? Thanks.

Let me take that in reverse order. I mean, I think the answer to the second question on bolt-ons is the same. I think we've been talking about bolt-ons for a long time. I think we've been saying prices of properties are high. And Jackson, clearly, given its track record, is very well equipped to be successful. I think we're not seeing any change in appetite on scale and again our return targets remain absolutely the same. I think we're trying to again look at seeing how leverage can help us. But all of this is, I think, with the reason that we've said before, we're not seeing any change in behavior or appetite here at all.

In terms of Asia and China, I think as you know you get two provinces a year in China. We've got those provinces clearly in line. We've got 22 cities now that we are working in across China. We'll continue to expand. I think we'll continue to look at new provinces. We'll continue to look at new cities within provinces. And I think as I've said before, I think you get up to a number of 40 or 50 in terms of cities before I think you get reasonable coverage. And we're clearly -- I think that maybe we've got more licenses than everybody else, more cities operating than anybody else, we've still got a good way to go before getting the coverage that we need.

Okay. Thank you very much.

Thank you.

Okay. Marcus Barnard from Pali International, please go ahead.

Yes. Morning gents. Just a comment to the host, his introductions are very quiet. If he could increase that somehow it would be very useful. That's why Cazenove missed their call -- question.

I've got three questions, if I may. Firstly on agent numbers in Asia. Now I know you haven't disclosed a figure here and you'll probably update us at the full year, but it's a good leading indicator of sales and you have doubled your agent numbers the last 18 months. Has that recruitment continued into the Q3 or has it slowed down in any way, or has it accelerated?

Secondly, on M&G, I'm interested in the exotic businesses of leveraged loans, collateralized debt obligations, infrastructure, etc., etc. Now, you haven't given us exact revenues or margins for M&G, but you do say it's about 50% of gross inflows. I'm assuming that's gross inflows of the wholesale business rather than M&G as a whole. That's 50% of the GBP4.2b of gross inflows. I'm just wondering if the slowdown you're seeing here is having a minor, major or significant impact on your profits or profit growth at M&G.

And the third question is can you just update us a bit on Curian Capital. I've got you down as breaking even next year. I see you've got GBP1.6b of funds under management, but can you just update us on if that's a reasonable assumption where you see breakeven in that business and anything else you can say on that? Okay.

Marcus, I'm just getting my thoughts together. Let me again take that in reverse order. On Curian, I think we remain on track for breakeven next year. I think you can see it has been a very good year and I think the platform is becoming increasingly recognized as one of the top in the U.S. And I think that will -- we remain very excited about opportunities there going forward.

On the M&G and your interest in exotic business, I think the -- it is gross inflows of the wholesale business, you are right, not of the whole business. And fundamentally, I think, the major element there, even though we haven't broken it down, is our own hedge fund that we've launched for clients called Episode, where the inflows from that have been quite considerable in the quarter. And I think it's important to note that business, the other comments you made, that business is slightly higher margin business so that's positive.

In terms of agent numbers in Asia, our growth has been fast. I think we continue to grow the business. We're not giving specific numbers at this stage. You're right, we'll give clearly the full details, but there's been no major change in recruitment behavior that we've seen across the region over the third quarter.

But just to also add, you talked about agent numbers being a driver of profitability, we've also spoken about the fact that we continue to increase the productivity per agent. So within the trends for this year, you're seeing not only the increase in agent numbers but increased productivity from those in the field.

And just going back to the CDO business, the slowdown you're seeing in CDOs and CLOs, you don't expect this to have any major significance on your profits or profit growth?

No, we don't, Marcus.

Okay. Thank you.

Okay. The next question is from Andrew Hughes of JP Morgan. Please go ahead.

Hi. Good morning. Just a couple of quick questions if I may. The first one is, obviously the sales are really strong in Asia, particularly India, amongst other places. I was just trying to contrast that with what's going on on the external funds movement in India which really hasn't moved hugely since Q1 of this year. I think the funds under management on the external equity side in India have basically from GBP1.6b in Q1 have only changed to GBP1.69b in the nine-month point. I'm just wondering what's actually going on and why we're seeing a differing picture appear on that point.

And the second question was really trying to understand your point about moving from -- with M&G moving from assets to derivatives, where the underlying assets were going. Are you saying that you're winning derivative mandates instead of having assets? And why is the derivative business not on top of the existing asset mandates?

Again, let's do that in reverse order. Let Philip take the first part in continuation from his previous comments.

In some senses it's a question better addressed at the advisors of pension schemes. The -- what you may well find happening is that the underlying assets are going into passive funds or into cash pool funds with the derivatives providing protection on top of that. But it may be -- I think you were describing two situations, both of which may apply. It may be that it's an existing client where we take on the derivative management, or it may be money that comes to us to manage a derivative program.

And looking at the sales in Asia, as you say, the life sales have been very strong. I think it is completely de-linked from the investment management sales. I think we remain -- I think it's reflecting the market there. I think the business remains number one or number two in that market and, again, there are no exceptional reasons behind the figures that are there. This is pretty much as the market has done over this quarter, including a look over the full year for the full effect.

Thank you very much.

Okay. The next question is Andrew Crean of Citigroup. Please go ahead.

Morning. Just one question. I wanted to understand what the capital usage is this year, both products rate and [some on]fixed rate in relation to the growth of the business in terms of how much capital's actually being deployed to write this business.

Andrew, good morning, and I hope you feel better. I think as you know well this is a new business sales discussion. You will get all of those figures later on in the year.

Right. So no comment. General comments about whether you're writing capital-light or capital-heavy products?

No. Not a significant difference added to many of the capital positions we said earlier. We'll give you the full details at full year, but I think no material differences.

Grand. Okay. Thank you.

We now go to James Pearce of Cazenove. Please go ahead.

Hi. I heard it this time. Couple of questions. On investment bonds, you talked about your limited exposure based on new business. But given your dominance of with-profit bond market a few years back, I wonder if there's more of a risk of lapses of existing book if IFAs are given an opportunity to churn in-force business. Could you please quantify in that light the percentage of either your liabilities or VIF in the U.K. which does relate to investment bonds?

And then secondly, I was just wondering whether your choice of new Chief Financial Officer in any way reflects an increased interest in European life insurance?

James, I think let me deal with the second question first. It makes no difference to our appetite for European insurance at all. I think European insurance to us is related to the profit pool and the opportunity, not to the people. So I think we're very focused on the three geographical markets in which we currently play. But let Philip give you the simple number for the second -- the first question.

We currently have GBP14b of in-force with-profit bonds. But persistency of that product obviously reflects a number of factors, not least the smooth investment return, the element of guarantee in the product. And any shift out of the product as a result of tax changes will also involve a significant change in those customers' approach to risk. So given the uncertainty over the tax changes, what form they'll will actually take, I think it's too early to comment on any effect it might have on persistency for that product. That is a product that's delivered very strong returns for investors over many years.

And can we take it the VIF is in proportion to the size of the liability? I think, intuitively, it'd be slightly above average in terms of percentage.

Well we haven't disclosed the embedded value by product and we're not going to go into that today. This is, as Mark's commented on an earlier question, a Q3 sales call.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS). Okay, we go over to Bruno Paulson of Sanford Bernstein. Please go ahead.

Hi. This is Bruno Paulson of Sanford Bernstein. In various markets you've talked about -- in Asia talked about VAs and the new health product. I was wondering if you could give us a picture of the scale of the sales across the region in those two areas.

Bruno, hi. I think VAs, clearly the main markets are Japan and Korea. There's -- we've had some in Taiwan as well. Those have been the main areas. I'm not sure we've broken down further into the product side. We certainly -- we'll make sure we do that later in the year. We're happy to do that.

I think in terms of the health side, it is -- I think we've given some figures about Singapore which I think we've seen a tremendous take-up in sales of a new health product supplementary to the medical system there. And we've seen something like 50,000 or so, 50,000 plus policies, which is in a pretty short period. We're rolling out those initiatives across the region. It will not -- I think we're rolling that out in Hong Kong and Malaysia. And I think that's where the focus will be over the next six months or so.

We're looking -- the other place clearly we're looking at to roll these out is India, where that -- I think that will have hopefully -- it needs to be significant enough to hopefully give some upward momentum to margin.

Thank you.

We now go over to Marcus Barnard of Pali International. Please go ahead.

Yes, hello again. Just a quick question on the Prudential investment plan. I know you said it was too early to say how that would do. But can I just ask you about your thinking on this product? What segment of the market do you think it will appeal to? Obviously fee-based advice, but do you really think that's going to be a significant part of the market or are you just hedging your options here?

And also about how you're going to make money on this product. I'm assuming you're just charging a spread over and above the underlying asset management fees which you'll keep for yourself. I'm just wondering if you can quantify is that 10 basis points or so or whatever, and just how that profitability will work through. Is this just as an excess spread over and above asset management fees? Thanks.

Hi Marcus, I think, as we said, it is too early to talk about the volumes coming through there. It is aimed, as you said, at the top end fee-based advisors. I think we launched this product because we felt there was some demand there. I think its profitability is determined much as you set out. It's too early. And I think it's not -- it's a product that I think we think is a valuable product but is not mainstream and we're not -- it's part of the range of products within the future group, but I think it's not -- it doesn't have any materiality effect now or probably over the next 12 plus months.

Okay. Thank you.

The next is from Greig Paterson of KBW. Please go ahead.

Yes. I was wanting to confirm, I think you answered this question earlier on, I wasn't sure. You mentioned that there's been a shift off from new money going into the fixed annuity fund as opposed to the equity fund on the VA. Did you say that had no margin impact?

We did.

Right. Thank you.

(OPERATOR INSTRUCTIONS). Okay. We go back to James Pearce of Cazenove. Please go ahead.

Yes. The last couple of statements you've made, you said something about looking at strategic options in Japan and I noticed that that comment hasn't occurred this time. Has your thinking now changed the view that you had with what you have in Japan or is there any other reason for dropping your comment?

James, sorry if I wasn't -- I answered before a question, a similar question earlier. Sorry you didn't hear that. I think the nature of Japan is, as I said, there is no significance to the fact we've [left it in] the business there. The small business we have continues to grow well. And I think we'll look at opportunities as they come up. There's certainly nothing imminent.

Okay. Sorry. I missed the question before. Thanks a lot.

Okay, with that final question, Mark, can I please pass it back to you for closing comments?

Thank you. I think to emphasize again, I think real and continued momentum across the Group. The 28% growth across the Group Retail Insurance businesses on the back of two strong years of growth I think shows you almost three years of strong growth and I think renewed momentum in the whole of the Group.

Asia, 48% growth. Life sales already exceeded 2006. Long-term prospects compelling. We'll continue to drive hard, 48% for the fourth quarter, as I said, is probably a bridge too far. But I think the -- basically against a very tough comparison last year, but I think we'll continue to drive that hard.

Jackson, 37% growth in VAs. Continue to take profitable market share. Again, we don't see constraints in our ability to grow in our key channels.

In the U.K., retail sales ahead by 8%. Strong performance against -- across individual annuities and corporate pensions. Good growth in lifetime mortgages and with profit-based products. Clearly Equitable to come based in the fourth quarter.

And Asset Management, I think, M&G's second highest net fund inflows in M&G's history. Asia net inflows up 59%.

The strategy we're aimed, as we said before, that we're focused on growing the global market for retirement savings and income, and we believe we've excellently placed to capture a disproportionate share of that.

Thanks for your time listening this morning and we look forward to seeing you soon.

This now concludes today's call. Thank you all very much for attending.