Prudential PLC (PUK) 2020 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Prudential 2020 Half Year Results call. My name is Bethany, and I'll be coordinating your call today. (Operator Instructions) I will now hand over to your host, Mike Wells, Group Chief Executive, to begin. Mike, please go ahead.

Bethany, thank you. Hello, everybody. Welcome to the Prudential plc 2020 Interim Results and Strategy Update. This year, we've recorded our full presentation in advance, and it's up on our website with the transcript already. So today, we can use most of the call then to take your questions. And given the nature of our news this morning, we would expect that, that'll take up the full hour at least.

So to give you an idea who's with me, I'm joining you from Lansing, Michigan, the home of Jackson. Also in the U.S., you've got Michael Falcon, CEO of Jackson; Axel André, CFO of Jackson; and in London, we have Mark Fitzpatrick, our Group CFO and COO; and the IR team. In Hong Kong, we have Group Risk Director, James Turner; CEO of our Asian business, Nic Nicandrou; and CFO of Asia, Raghu, is with us as well. And the -- I think out of respect of time, instead of going through a summary of the comments we made on the video, I'm going to go straight to Q&A and just see where we are, and if need to, I'll bridge back to some of the key themes and key things we've accomplished in the first half of this year.

But Patrick, if you're okay, let's just go ahead and go straight to Q&A.

Our first question comes from David Motemaden from Evercore ISI.

Just wanted to maybe just get a little bit of background in terms of what made you think the full separation of Jackson is best achieved through an IPO. That's the first question.

Second, do you foresee the need to inject any additional capital into Jackson to facilitate this transaction?

And then, third, if I may. If I look at the org chart, it looks like Jackson is stacked under PCA. So I'm wondering if the Hong Kong RBC ratio currently benefits at all on a local basis from having Jackson as a wholly owned subsidiary. And if so, is there anything that needs to be put into Hong Kong to help replace that?

Thanks, David. So Mark, I'm going to let you take the last one. On the -- Dave, on the -- so if you think of this journey to Asia, it started with the demerger of M&G Pru. And I think there's a -- in the sell down, obviously, to Athene of 11.1% and now the announcement today.

So what we've said all along is we've maintained optionality in how we execute, and the statements today, we talked about the fact we still could do with demerger if we thought markets required that. That said, what you've seen us do with the Athene transactions, plural, is you've got Jackson's capital levels to a range that we think is appropriate for a standalone entity versus an entity as part of a group. We don't anticipate the need to put capital in Jackson. Actually, you'll have -- if you look at the M&G transaction, there would be some debt activity, some movement back and forth with capital to reduce leverage in the group. All those things coming in the next months to get Jackson ready to be standalone. So the answer to your second question is it's not anticipated.

Mark -- and in the IPO, the advantage to an IPO is that you get more capital for reinvestment in Asia over time. The advantage of the demerger, obviously, would be less of that, but faster. So again, that -- we maintain that option, but the IPO is the route we're pursuing at pace now. Mark, do you want to talk about the regulatory structure of Hong Kong and...

Yes. David, so the LCSM for Asia is 308%. That is not affected in any way by the USP. It's effectively a standalone tranche, if you will. So a separation of that would not change the Asia LCSM number. So that would continue, if we were to do it at the 30th of June, that would still be a 308% number for Asia.

Got it. And if I could just follow up with Mike and maybe for Axel as well. Just the RBC, the 425% -- and the 425% to the 475% range, how should I think about any sort of changes to your hedge strategy within Jackson maybe from more of an option based approach to more of a futures based approach that would help reduce the upfront cost and improve capital generation?

Dave, Jackson's bias is a futures based approach, and that was done at the time, not so much cost-focused as it was counter-party risk focused. So to concentrate the counter-party risk on upmarket and equity, not on down market and equity.

One of the learnings from a previous crisis was the fact that we look back at some of the bank counterparties and realized that some of the risks that an insurer has, they are highly correlated to the same ones. So we wanted to separate that. So the organization uses both. And at higher capital levels, you have more options on hedge strategy. So there's a trade-off there of return on equity, capital intensity, hedge intensity, but it's across that range. Axel, did you want to add any color to that?

I think you're right on, Mike. So essentially, when we're in a more benign environment, we would be hedging more with options. And as we -- as the first quarter unravels, the options, essentially, the put options that came in with the money, we gradually rebalanced more into futures. The profile of the liability was more linear. So the futures were a better match.

And as now we're tracing back, we're using a mix of futures and options.

Our next question comes from Kailesh Mistry from HSBC.

Few on Asia. First one's on Hong Kong. What's your base case for the Board reopening? Is it fourth quarter or 2021? On the domestic business, thank you for the information on Slide 64. It seems to indicate a slowdown in the run rate between first quarter and the second quarter. Is that COVID related? Or is that just a high base because of the launch of QDAP and VHIS this time last year? Specifically, what was the momentum like in July? Because, obviously, the insurance authority approved to say that's par online. Had there been a strong pickup? And also, had there been pent-up demand there?

Second question is just on agency. Obviously, you flagged that there's 7% growth in the agency force, excluding India. Can you provide a little bit more color, especially what was the growth in Hong Kong, China and Indonesia? And then on pulp, there seems to be some very strong progress there with 70% of customers being new and younger than your existing customer set. Can you talk a little bit about average case size business mix compared with traditional business? Or your historic business? And any impact that's had on the IIR that you're writing?

So just a couple of general comments, and Nic, I'll ask you and Raghu to comment as well. So as you've seen consumer interest in health and protection by both in action buying policies and also just in general interest. So there has been increased interest in joining firms that supply those products and we're clearly an attractive player in that space. I'll let Nic tell you some of the more specifics around the growth.

The scale of the growth, just from my point of view, adding 70,000 plus agents in this period is most of our top 10 competitors agents in the region, it's larger than their agency force, right? And not to say all these agents will be successful or productive. We're getting better and better at agency management. It's all virtual now. There's some great tools to improve the likelihood of success. But I just -- I want to add some scale to that. I think it's an incredible effort by the team.

But Nic, do you want to comment on some of the specific questions Kailesh has on Hong Kong? Domestic run rate? The -- I would say -- the other one, Kailesh, we don't have a forecast now given how fluid governments opening and closing borders and travel on COVID. I think it's pretty hard for anybody to credibly predict. What I can tell you, I think in all markets with COVID globally, we are much faster at responding to whatever the opportunity set is. So for example, we didn't have all of our products, as you mentioned, par approved until well into the second quarter virtually. We now have agency up and running with that. We have the leads coming off of pulse. So in a lockdown, we're much more effective week-by-week than we were previously, and therefore, less affected by a lockdown. And we're much faster coming back up to speed when a market opens. And we're assuming that this is the environment we work in for foreseeable few quarters at least. And Nic, do you want to answer the question specifically, please?

Okay. Thanks, Mike. Thanks, Kailesh. We stand ready when the border opens in relation to Mainland China. The -- it's possible that it may not, but once -- if it was to open, then we stand ready to go. And we know when we've seen opening up in other parts of the region, there's a rush to buy. So the minute the border opens, the -- we think there'll be a rush to buy.

We included a slide in the deck on 65 that shows the information around our latest survey on purchasing intentions and why Mainland Chinese customers prefer Hong Kong and really, it reinforces all the structural advantages that Chinese consumers see when they buy product in Hong Kong. So I'm not going to predict when it will open, but we stand ready to take advantage of that.

In relation to the domestic, we had a good first quarter. First quarter, and these are published, stats were down 8%, and we did better than the rest of the market that was down 25%. It was on the back of us. We were doing really well in connection with the qualified deferred annuity plan. Having added up all the information, we secured 17% share of that market. That speaks to the business' ability to leverage an opportunity to innovate, move fast, use the distribution channels, both agency and banker, to deliver growth. VHIS was smaller around the sector in terms of APE, clearly important to check in terms of case count. And we've got a fair share there as well.

In Q2, to your question, there was a slowdown. There were -- there was more social distancing than we saw in the first quarter, particularly as students came back in March and placed the containment measures tightened up. As you know, Kailesh, you're in this market. So that slowed things down a little. Branches, SCB branches, and generally, banks, reduced their capacity as we went into the second quarter. And in fact, capacity wasn't fully restored until the back end of June. So that was another factor.

And to your point, yes, QDAP having been outside its first year, also had, if you like, the uplift that was given to Q1 and the first 4 quarters of this product reduced. So QDAP made up around 28% of our sales in Q1 and only 14% of our sales in in Q2.

The ability to sell virtually really only came in earnest towards the back end of June. It has been utilized in July. Sales in July were kind of roughly at the same level as those in June in terms of comparison with prior year, roughly 1/3 down because we had momentum as the -- with new products and a new push on a number of areas, but we had, effectively, a third reinfection rate here and it's -- so now in Hong Kong, we're experiencing the tighter of all the -- the constraints that we've seen.

Nevertheless, there are -- there remain important opportunities for us. Domestic, we've got a sizable agency force, to your question on agency numbers. Our Hong Kong agency force at 24,500 is up 7% compared to what it was a year ago. Most of that uplift and a lot of their recruitment this year was domestically focused.

We're celebrating our 20th year with SCB, so -- an important relationship. And we've launched Pulse, linking that to your last question. Not only have we -- we've got 400,000 members now, users of Pulse. And the business has done a really good job in using that membership as a lead referral, if you like, to agency and have managed to -- we haven't yet farmed the full amount, but we've managed to convert since the -- since April, around 12,000 -- 12,500 at full premium, full margin. So that's where we are in Hong Kong.

On agency, the increase in the account, it's coming from Hong Kong. We said 7% increase in count relative to a year ago. It's coming in Hong Kong, I referenced that. Indonesia was up 13 agency count year-on-year. Philippines was another area. China was also up. And in most other places, we've kind of held, notwithstanding the fact that for large parts of the second quarter, because licensing is done by government authorities, a lot of licensing was shut. But nevertheless, we -- 72,000 new recruits, mostly from those markets.

On Pulse, the -- okay, there are -- we've done 1.7 million policies. Again, there's a slide in the appendix. 1.5 million of those were kind of offers, very short term, whether it's personal accidents, some short-term life, there were freemium, if you like, some COVID-related covers. So that's that.

We've done about 165,000 cases of small micro insurance or mini-insurance, if you can call it that. Case sizes are around $12 a year, so $1 a month. So that gives you a sense. Now we're able to effectively make money. These are protection policies, and the margins are fine, but literally very small. But we can make profits on $1 a month now, which is something that we couldn't do 2 or 3 years ago.

And the plans to do much more across all 11 markets where we've launched Pulse, we'll do at least 3 digital products per market by the end of the year. And then we had around 28,000 of referrals. This is nurtured leads that were passed on to agents that were followed up face-to-face, so some of them were done virtually. And they translated, as you can see in the slide, around $60 million of APE. That's -- the average case size where it was done in Hong Kong was of the order of $3,000. Where it was done elsewhere, it was $1,000. And these are the full-loaded, if you like, policies that an agent would sell had the referral not come through Pulse, had it come through another channel. So the margins of those are the same as we do through other channels. So high-margin products. So we can do the introductory offers to get a second point of engagement. We can do micro or mini products to -- after the second point of engagement. And then once these feeds are nurtured, they can be passed on to agents using new sophisticated lead management systems and convert it into fully fledged products.

If I may just ask a slight follow-up on that Pulse thing. Your offering is pretty advanced versus some of your competitors across the region. Are there other functions that you feel you need to add to this? Or are you kind of done with that and now it's about acquisition and then cross referral and the rest of the model that you've highlighted?

No. We are only just starting. We are only just starting. The -- we're going to add -- there's a lot -- look, there's a lot more we can do. The next phase of this is, we said earlier that 90% of our products across the region can be sold virtually this is done through a combination of technologies at the moment as we've joined it up together, 2 or 3 different platforms.

By the end of the year, that virtual sale will be able to be done via Pulse with video, with being able to attach documents. That's already up and live in the Philippines. It's just up and live now in Malaysia. So the 38%, to the extent that we have another 38% in a future quarter, will be done through Pulse. So it's becoming a fulfillment tool for the agency as well as a referral tool as well as a tool where people can buy directly.

We're going to be adding a lot more mini-project -- products across the piece. And also, we are trying to bring more aspects of the value chain onto this. So Indonesia, alongside the launch of Pulse, which attracted 3 million downloads earlier in the year. At the same time, we incorporated a minor claims processing for functionality. So we've integrated Pulse with the hospital portals so that -- and issued kind of e-medical cards, which can admit someone on to a hospital. The bill can be submitted electronically by the hospital through Pulse to ourselves. We're connected to 570 of the 1,700 hospitals in our medical network, and we can process a claim in less than a day.

We're also using it for reservicing. Again, in Indonesia and Hong Kong, in-force customers can use it to go in and do inquiries and small servicing on their policies.

Now from here, we will add more services. We'll look at mental health. We'll look at diabetes. We will broaden the direct offering. We'll be tuning up the online to online everywhere. We will integrate PRUworks, which is our SME employee benefit into this. In fact, we will rebrand that to Pulse at Prudential -- I'm sorry, Business at Pulse. We'll be attaching it to other ecosystem. We've done that with OVO. We'll be doing that with UOB. We made another announcement with the -- one of the biggest e-commerce platforms in Thailand today, Central. Again, we will be integrating it with that. And we'll look to see if we can broaden the geographical reach beyond 11 markets that we're in.

So a lot of development and thought is going into this, both offering another growth market for us, but also integrating it with our end-to-end, if you like, with our traditional business model, and through that, gaining efficiency. Sorry, long-winded answer, but it's a big and long answer, but it's an important differentiator for us.

I mean, look, the other thing it gives us and what we've learned through the crisis is that people are now asking for services to be bundled with protection. So the fact that we can offer protection across the piece and now work services to go with it, again, puts us in a unique position.

Our next question comes from John Hocking from Morgan Stanley.

I've got 3 questions, please. Firstly, on Asian new business strain. Can you comment on why that was down at a much lower rate than sales? I think it was down 7% year-on-year. Is it purely the mix shift away from Hong Kong, but it doesn't seem to be something else going on there? So how should we think about that going forward is the first question.

Second question, when are we likely to get some more visibility on the Hong Kong group-wide supervisory regime? Do you expect that by year-end?

And then final question, just looking at Slide 20, where you've got the phasing of the movement restrictions, et cetera. It does seem that a lot of markets have actually gone into a more restrictive phase, either in June or subsequent to the quarter end. You mentioned, obviously, the ability to transact online in Hong Kong, but that seems to be 1 market. Could you comment a little bit about how we should think about the sort of sales tempo 3Q versus 2Q?

Yes. So let me give a general comment on the third one. And then James, I'm going to have you comment on group-wide supervision. And Raghu, how about you discuss new business strain in Asia? Try and get everybody involved in the call today.

So the -- we have 11 markets now, John, that we can transact virtually as we finish the second quarter. So basically, all of our product sets in those markets. And it's a -- and as Nic referred to, one of the other pieces that's gone on is development of technology and tools for the agency force to be able to transact virtually -- in best practice, virtually in things. So again, we're much better at that than we were, and those learnings are shared real time.

I mean, 1 of the -- our pace at being able to develop now and to be able to share something that's working across the region is historic for PRU. One of the agent lead -- one of the pieces of technology that helps an agent work with a post lead to full -- one of the full client relationships that Nic referenced, for example, was developed in a hot house over 3 days. Virtually, people -- not just tech people, people all over the region and our digital team, they finished on a Sunday night. Again, none of these people could be in the same room. And Wednesday, the app was up in the iStore and Google Store, et cetera.

So there's a pace now that's unique. So when I say we're getting better weekly, there's -- that means improvements in the tools as well as sharing what's working. But you have 11 markets now across Asia and the U.S. has virtualized its sales processes, its statements. It's always been an industry leader in its technology platform. That's -- it's clearly using that to its advantage in this environment as well. So this is not just an Asian story for us.

But Raghu, do you want to talk about new business strain? And James, do you want to talk about group-wide supervision, please? Both briefly, we've got to keep the pace going, guys.

Sure thing. I think, Jon, it just reflects 2 things. One is, it reflects a higher product, better product mix. So we have more loan power and protection sales and par sales as a proportion of sales are lower. That's one.

And the second one is just the effect of lower rates. So that explains the strain levels, which have gone from 13% of APE to 18%.

Okay. And on the GWS, the primary legislation enabling the new GWS framework was passed by the LegCo before the end of last season, the last session in July. The subsidiary legislation is required. And with the announcements today to extend LegCo, it remains our expectations that the GWS framework will come into force in Q1 2021.

Can I just come back on the sales point, Mike? You mentioned 11 markets have got the ability to transact virtually. What proportion of the product range? Would it be fair to say that you've got most of your best-selling products with virtual execution capability?

Shall I take that, Mike? So the only -- the reason it's not 100 is Taiwan hasn't approved the use of virtual. It didn't need to because the impact in Taiwan of the pandemic wasn't that severe. So that was one.

And the other 1 that hasn't been -- that hasn't virtualized is the use of linked products in Thailand. A vast majority of what we sell is linked at the moment. So that's the reason it's not 100. So it's 1 market and 1 product type in another market. So -- and the other one is linked products also in Hong Kong, but that's less than 1% share of the industry and less than 1% share of our numbers.

To your question on some markets are increasing restrictions in terms of impact on Q3, I referenced Hong Kong. We're now having the tightest set of restrictions here. In Indonesia -- Indonesia is struggling to contain it so the number of cases now is increasing, as is India. So that situation is live at the moment.

And Vietnam -- actually, part of the reason Vietnam shut and opened up very quickly is because they were decisive at the beginning. The minute they got a few cases, they shut down. So having gone 3 months with almost no infections, when they've had a few, they immediately introduced social distancing. So look, the situation is live and it's volatile, like everywhere else in the world at the moment. And -- but we have more strength. We referenced a few in the call so far in our presentation. And therefore, we should be able to mitigate better than we did immediately at the outset.

The next question comes from Andrew Crean from Autonomous.

Two questions, if I can. Firstly, you were talking about debt capacity at Jackson being between 20% and 25%. And you are saying that Jackson doesn't need capital put into it. By my math, and it may well be wrong, that suggests debt raisings of between $2 billion and $2.7 billion to get to the 25%. Is it fair to say that, that money is earmarked for a pre -- that level of money is earmarked for pre-IPO dividend?

Then the second question, it's do with where you set the dividend going forward. It's really difficult for us to judge the capital position of the company because we just don't have any ideas on LCSM and that sort thing. But I think you said that you've invested $1 billion a year over the last decade. Do you require to invest more than $1 billion a year organically going forward? And also, do you need to reduce your group debt beyond that bit, which will be repaid as a result of the pre-close dividend on Jackson?

Thanks, Andrew. Good questions. Let me start generally. And Mark FitzPatrick, I'm going to ask you to comment on the various debt pieces.

So on the ability to deploy capital organically, Andrew, the -- if you look at even just the last 6 months, you've now got a scale position in Thailand. You've got an increase, as we've been talking, and Pulse and the ability to do business through a digital channel, and we've grown agency, again. You're moving further from par product, as Raghu mentioned, I think, in his comment. So the breadth of products we're selling are incrementally more capital intensive.

Now this is not suggesting we're going to heavy spread-based sort of strategy across the region. That's not the message I want to land at all. But these are products that are non-Par disproportionately. So they are more capital intensive. We published the IRRs. You see we're -- these are very profitable, well received by the consumers, et cetera. So we believe we can deploy more capital organically in Asia. And we don't want -- the dividend policy doesn't want to constrain the organic growth. The inorganic stuff is, as we've talked before, is opportunistic. We have 2 or 3 places we look there. It's increasing. We're in the markets we want to be in. We have a great footprint. It's things that will relate to earnings, does something to improve the actual operating earnings of the firm, that's -- the variety of lenses there, improved distribution first. So a bank deal, for example, or improves capability, which you've seen us do with the Pulse platform.

And those sorts of options are outside of our business plans, and we view them as they approach us one at a time. And so we don't -- we couldn't forecast them because we pursue a lot of that all the time, but we don't know what's going to land when. It's counterparty dependent, basically.

But Mark FitzPatrick, would you comment, please, on the questions on debt pre-IPO dividend, those pieces, as you can.

Yes. So in terms of the debt numbers that you spoke about, I think kind of 20% to 25% leverage based on the Jackson half year IFRS equity. And also, if you add in the additional $500 million from Athene that closed last month in terms of its equity and investment, that would get you somewhere in the $1.8 billion to kind of $2.5 billion debt type range. And effectively, we would expect that, that would be -- that, that would come up to PLC or to the shareholders during the course of kind of the pre-IPO dividend. So that would be then used by group to effectively repay, as we mentioned, repay some of our debt at the center.

We have quite a lot of debt that we can redeem. That is kind of 2020, 2021 call date, so we have the option. And we're looking to be able to do that to be able to repay some of our debt to be able to ensure that our leverage ratio stays at a good and sensible level.

Next question comes from Blair Stewart from Bank of America.

Just a couple of follow-ups. I was also interested in Andrew's questions. Can you tell us what the level of organic RBC build is at Jackson now that it's not paying a dividend back to group? That's the first question, just to give us an idea of where the RBC might land, everything else being equal.

The second question just relates to the equity story, I guess, for Jackson. As we stand today, we've gone from various levels of appetite on sales and new business and also, an objective, I think, for Michael, to improve the stat capital and cash generation. I just wonder where we are on all that. I think those 2 things are linked to my first question.

And my final question is just an observation on Indonesia. It was definitely a standout in terms of IFRS profits growth across the region. It was very strong in all countries, except for Indonesia. I'm sure there's some obvious reasons for that, but perhaps you can just comment on that.

So Blair, we're -- I -- remember where we are with the SEC and a pending S-1. So forecasting RBC would fall into that overlying category. But how about Mark FitzPatrick first, then Michael on -- Mark on what we can say on capital generation, let's call it that. Michael, just a little bit on equity story, and then Nic will come back to you on Indonesia, please, on IFRS.

Okay. So in terms of organic RBC build, effectively, you've heard us say and you've heard, say, for a little while in terms of approximately about the $1 billion, $1.1 billion in terms of organic capital creation. And effectively, post the Athene reinsurance transaction, we've indicated that, that would probably take about $150 million of that level.

So the guidance would probably be kind of somewhere between the $850 million-ish kind of element. So that's on a kind of half, so that's $425 million. So that's about 20 to 25 kind of RBC points in terms of the half that we would ordinarily kind of look at on that particular patch. So can't guide in terms of a forward piece other than that component.

But when you look at the element of the RBC role and you look at the capital generation during the component of the first half, you see that, that's a strong number, and that's a strong contributor in the first half and very much in line with levels that were spoken about in the past.

Sorry, Mark, can you just clarify. Did you say 20 to 25 RBC points, is that in the half year?

Correct. That's in the -- so in the half year, yes. So the -- ordinarily, we would operate at about, as said, about $1 billion in terms of operating capital generation pre-Athene. Post Athene, we're guiding that, that's effectively closer to the $850 million mark per annum. So that's where you get the $425 million for the half year. And at the half year, that's circa kind of 20, 25 RBC points.

So Blair, Michael Falcon here, and thanks for the question. So I'm going to stay away, as Mike said, given the announcement that we've made and SEC rules. I'm going to stay away from forward-looking statements or a projection or indication of what the equity story might be, but I can talk to where we are now and build on what we've said in the past, which is consistent with our view, which is that there's a big demand for protection products around retirement in the U.S., particularly around income and replacement income guarantee as well as principal protection and those are markets that we're in. We're the leading player in variable, and we've demonstrated our ability to quickly lead in other categories. So we don't see any change in terms of the market demand.

In fact, many indications that, that can increase with demographics and certainly, volatility reminds people of why they want and need and use our products to begin with. I think we have excellent capabilities around distribution in that place and a low-cost platform that allows us to effectively and profitably write business and a proven historic ability to price and manage the risks associated with those, so I can't go forward.

Obviously, as we go through the process, at appropriate times, there'll be more information about the nuance of the go-forward strategy as we can get into that detail. But I think the fundamentals that we rely on today are still there, and they're consistent with what's built the company to this point.

In Indonesia, Nic? Thanks, Michael.

Thanks, Mike. Blair, it's -- what you're seeing is the lag effect from past years where we're seeing a decline in sales. So as we picked up last year, then that should change. I guess the other factor is we are investing heavily in that business in terms of automation, retooling, the agency force, in terms of some of the developments we're doing with Pulse.

Indonesia is a little ahead of other markets. So they're doing -- they're developing a lot of things on behalf of the region as we look to developing ones that standardize and use it elsewhere. And we've done a lot of work in the last year to launch -- to refresh the entire product set and launch new ones.

We have 17 new product launches, and all that requires investment in technology to pull through Indonesia. Now all our recruitment is done virtually. So again, that's more investment that we're making in that business.

The -- it's a shame on a number of levels, but certainly, for Indonesia, sales on COVID, but the underlying improvement in that business over the last year, a year and a bit has been phenomenal. And as soon as the -- as soon as things normalize, the -- we see a lot of demand coming back into a business that is much better placed now to fulfill that demand on a number of dimensions.

Thanks, Nic.

I'll now hand back to Patrick for Web questions, if there are any.

Thank you, Bethany. I've got 2 different questions. One from Thomas Wang in Goldman's in Asia. The first part of it is, are you providing any financial support to agents that used to sell to Mainland customers? And do you think you can continue to provide financial support if Mainland customers don't turn in any meaningful way until H2 2021?

And secondly, what's the impact of expense overruns on operating profit and new business profit in H1? That's Thomas Wang's question. So I'll pause there, probably to Nic.

Yes. Agree. Nic?

We are -- yes, we're allowing Mainland customers to defer payments, our normal periods are 60 days to 90 days. Some of them are availing of that, but nothing that impacts our overall figures. You saw the profits grow in Hong Kong strongly.

The other -- the thing, though, that we've seen is -- and we've always knew that -- known that. A lot of Mainland customers that transact with us have other business interests and other sources of income in Hong Kong. So we've seen a switch away or rather a switch up in the electronic payment. So it was around 65% of payments were received electronically. Now is in the high 80%. So yes, it's there to provide relief, but it's -- it starts on the customer side.

Now on agents, the -- there are a number of initiatives that we have in place. Clearly, a lot of them are benefiting from trail commission from sales that they've done in the past. We do have financial support schemes available. They're available to all agents. They need to be, though, underwritten by leaders. We haven't seen a big take-up in those in the last 6 months.

And if -- as I said, they are there for people to use. And on expenses, it's not impacted. It's -- I mean, clearly, some -- not all our sales costs are direct, but it's not giving us any cause for concern or indeed impacting the financials as you see them.

We've got one more. It's one for -- actually, for Nic again, and then a second one for Mark Fitzpatrick from Waverton Investments. The first one is, as business is increasingly done online, has this reduced barriers to entry, in your view, for the market? And for Mark, which is -- could you just run through the differences that existing investors should think about between a minority IPO and a demerger? So Nic first.

I mean a lot of the business that we've -- it's human-supported at the moment. All the virtualization still requires a trained agent or be it via video to engage the prospect, engage with a customer. Yes, there is -- there's more research that is now done online, and there are simple products that are made available and can be made available, and we're doing that as well. It's producing a lot of number of cases, but not necessarily a lot of premium at the moment until such time as further engagement is made.

So no, I don't -- I mean I don't think it's reducing the barriers to entry, not for the fuller policy, the fuller-size policy.

Thank you. Then over to Mark?

So minority IPO and demerger, ultimately, this is going to be driven by our desire to maximize shareholder value in terms of where we're at. Clearly, the element of an IPO, there's an aspect of sell-down proceeds to be able to fund future growth in Asia, and that's a very important consideration.

And also, the aspect of an IPO would actually target Jackson's natural owners for the future on that particular piece. So I can't really go into anything much more than that particular patch. But hopefully, that gives you a sense of how we're looking at it in our primary lens, which is ensuring we maximize shareholder value.

Thank you, Mark. Bethany, that's all from the online. So back to [Beth], I think.

The next question comes from Greig Paterson from KBW.

Good morning, everybody. Can you hear me?

We can, Greig. Good morning.

I actually went and lost the call when Andrew asked the question about the group debt. So I don't know to what degree that was answered. But if it wasn't, I wonder if you could talk to the mechanics of the journey, how one would -- one should think about how much of the group debt will reduce considering money coming up from Jackson organic, inorganic growth, et cetera, and Moody's leverage ratios, fixed costs coverage, et cetera? That's question one.

The second 2 question is one is, I wonder if you could provide us a sensitivity of the RBC ratio to changes in interest rates? And the second one is, you did provide, at the first quarter, an RBC ratio for downgrades. But subsequently, you've obviously transferred the $28 billion of assets over to Athene. So I was wondering to how that sensitivity would have changed post the reinsurance contract?

So Greig, thanks for the questions. We did answer the debt piece. I'll let Mark address that again in a moment, give you a summary.

The -- you have a flooring of rates in RBC, and we did not get -- we gave a greater than number at the half year, just given everything else that we're announcing. We wanted to make sure you knew it's in the target range. And again, we want to see that continue to move up.

So I don't think -- Mark, why don't you do the debt first and then, Axel, why don't you -- quick overview of how the -- where rates are in the U.S., floors and how that affects RBC in general. Let's not get into specifics on Jackson, but I think there's a clear mechanical piece, Greig, that's important in that. Mark?

Okay. Greig, hey. So in terms of the debt, Greig, first and foremost, there aren't any -- we don't have any concerns with the ratings agencies or the ratings headroom. We have been in conversations with the rating agencies and the run-up to today, as you would expect, and would expect to hear something from the rating agencies in terms of them providing some update on today's news imminently to the market.

So I think in terms of the pre-IPO debt that would -- or that Jackson would raise and then dividend up to the group, it's in kind of the area of kind of the -- the $1.8 billion to $2.5 billion debt is in that kind of range to the 20% to 25% leverage, and that would be predominantly used to an element of debt repayment.

We've got lots of flexibility, and that's in terms of the debt that we have and a lot of debt that is available in terms of the call date that is there and that is available. So no issues in terms of the debt and no issue in terms of rating agencies from a debt perspective as well, whether they be Moody's or any of the lot.

So actual impact of the derisking, the credit portfolio with Athene and then the -- why don't you do a little bit on the floor and rates in this RBC model.

Sure. Yes, let's start with the easy ones. On credit, so we disclosed at the end of the first quarter that if we did a hypothetical, that if 20% of the debt portfolio was downgraded by 1 whole letter rating, the RBC ratio impact of that would be 16 points of RBC. That was at the end of Q1, so post the transfer of a significant amount of assets, as part of the reinsurance contract, that sensitivity has decreased now to 12 points versus the 16.

On the rate piece, as Mike said, the RBC methodology has an inherent flooring of interest rates. So the reality is given where rates are today. They're essentially below that floor that's embedded in those scenarios. So from a liability perspective, the reserves and capital requirements have relatively little sensitivity to interest rates at this point in time, whereas on the hedge and asset side, derivative hedges would be mark-to-market. So interest rate derivatives would be mark-to-market. And to the extent that we have some rate protection embedded in fixed income assets, such as long duration U.S. treasuries, as we've mentioned in the past, those. Are carried on the stat balance sheet and book value.

The next question comes from Ashik Musaddi from JPMorgan.

Just a couple of questions, if you can help me. The first one is if I look at the embedded value report, I mean, there is a bit of economic assumption changes in Hong Kong business, and that has resulted in a $3.5 billion of reduction in embedded value. I'm a bit surprised with that big number because if I look at the embedded value of Asia, it's about $35 billion. So even if we say that Hong Kong is about 1/3, let's say $10 billion, okay? So it feels like the interest rate drop has wiped out 1/3 of Hong Kong's embedded value. Can you get some clarity on that? What sort of assumptions were used in the past and what has changed? I mean, it looks like a massive drop.

The second question is on the demerger. I mean you mentioned that the IPO is not successful for market reasons, then you would demerge the U.S. business. What does that mean for capital for Asia? Because on one hand, you're suggesting that you might need that capital that comes from U.S. to help the growth, to accelerate the growth in Asia, but at the same time, if you demerge, then you're not going to get that. So how should we get that?

And lastly, can we get some sensitivities on RBC for equity market as well? I think you gave like clear answers on interest rates, but anything on equity market would be helpful as well.

Okay. Raghu, do you want to explain to Ashik the embedded value changes in the half year Hong Kong?

Sure. The first thing I would do is consider both the, as you know, the short-term flux and the effect of the economic assumption changes together to gauge the total impact. So that's point one.

Second, as you know, we update assumptions on an active basis. So here, what's essentially happened is that the risk discount rates have undershot the fall in risk-free rates. As you know, the U.S. 10-year is down 126 bps risk-free - risk discount rates have only come down 100 bps. So we're holding some for market risk.

And while the FCR has actually overshot the fall in risk-free, right? So the earned rates are lower. To give you a sense, it's about 1.5x the 126 bps fall in risk-free rates. And this is because of 2 reasons.

One, we do not assume a mean-ed version, and this is an important point. And the second -- so we assume June levels stays forever. And clearly, we also do not assume a dynamic rebalancing of the assets. So as bond value go up, proportionately, you have more bonds and therefore, your own rates are lower.

So it's purely a mechanical impact of the assumptions coming through our EV.

And then on demerger, so I think the -- we've been pretty clear on the advantages and disadvantages of both. I don't think we're looking at a scenario where there would be a failed IPO. I would disagree with your choice of language there. I think if we looked at a market and thought we can create more shareholder value via the merger, you still have -- the debt that's been discussed on the call, that transference of an internal dividend, if you will, up to group, and it would be a decision by the Board and management that, that more accretive to value than an IPO given a unique market, certainly as I think we're pretty clear that we think we can do a market -- an IPO in the first half of next year. And we have the work streams, Ashik, that are consistent with an IPO consistent with a demerger on timing and on effort. So we don't anticipate any issues with an IPO, but we're just making sure everyone knows we're maintaining the option, and we have a backup plan if we don't tank the market.

So think of like March of last year -- of this year, that was a difficult environment. We still got off with the largest reinsurance transaction's has ever done, and we got off an equity sale in that climate. So I think we're confident we can do this, but we're also maintaining optionality, which I think is appropriate given the importance of the transaction.

On RBC, Axel, do you want to comment -- I'm not sure what our last public comment is on RBC sensitivity. So I want to -- let's keep to what we've said publicly, please. Keep the SEC and...

Yes. So I think on RBC, I would simply say that we've -- as we've indicated in the past, we're essentially in capital preservation mode. So really, we're on any one day, you'd have us look at interest rates and at equity sensitivities and putting on hedges to reduce, to minimize that sensitivity as much as possible. On any one day, we may be more exposed to the up than to the down. But essentially, we're attempting to stabilize that.

Okay. Got you. Thanks, Ashik. Any last questions? I know we're coming up on a full hour here.

The next question comes from Abid Hussain from Credit Suisse.

I think I've got 3 questions left. Firstly, just coming back to the capital extraction and the debt leverage within the interaction between the U.S. and the group. You said you're going to take out around $3 billion of debt from the U.S.. I mean you're looking to use those proceeds to retire debt, I think, as a group. And I'm just wondering, what is the right level of debt leverage that you are thinking of as a group. I know there is sort of separate conversation that have gone with the rating agencies. But just in terms of group debt leverage, where are you sort of aiming for -- off on that?

And just sort of linked to that, can you just confirm that any debt raise you do project and will count as available capital? So that's the first question.

And then the second question is on the RBC ratio. Just wondering why you feel 425% to 475% is the right level. And how does that compare to peers? So what sort of metric are you sort of thinking of when you step up that level?

And then the final question is on China, more of a broader question, really. I was just wondering if you could perhaps talk through some of the growth initiatives in China and in particular, how so you might reduce the reliance on Hong Kong?

Okay. Thanks, Abid. Mark, I'm going to have you handle the first one and Nic will have some of the initiatives in China.

I think on RBC, let me just make a general statement. And Michael, if you think -- so the range comes from a number of things. It's relative to market in what we see going on there. It's discussion with key stakeholders. So think of rating agencies and others that would opine on the financial strength and commercial rating of the entity. And it's a -- I think we've discussed -- so you're into a new RBC regime, which Jackson adopted early, I've said before, I think it's personally a better regime than the old one, and I think it's more conservative than the old one.

So we think that creates a well-capitalized still high-return on equity business, still generating capital and, again, at very attractive returns and allows Jackson to operate as a stand-alone entity without the group. So that was the lens at which we looked at what capital level we wanted for Jackson as a standalone listed entity. Michael, did you want to add anything to that? Is that...

Mike, I think you captured it right in terms of the mechanics and the direction and how the range is set and come to. I mean our focus -- our principal focus is on economic and economic value creation, economic risk management. We obviously have accounting earnings and statutory capital that are really important measures, and we need to focus on them as well. But there's a number of things that go into it, and the RBC is only 1 component.

Okay. So let's go to, Mark, please, on debt, U.S. group leverage.

So in terms of debt, we are looking at and we plan on holding on to our current AA rating. We think we've got lots of headroom today. Ideally look to use some of the proceeds that come up to reduce the debt, as I've said. So that will be the essence of how we're looking to use that -- the kind of the proceeds from the Jackson debt rate as it comes up. So the AA rating for us, the financial strength rating is very -- is an important piece. We've got that today, and we plan on holding on to that.

And as I said, we've got plenty of scope for that. In terms of the debt raise for Jackson counting as available capital, yes, it does on that particular piece. And as regards to a leverage target, I haven't commented or haven't set necessarily a particular target, but I think it's fair to say that we'll be aiming to make sure that in the medium and long-term that we're comfortably within the leverage range that Moody's sets for that type of rating.

Thank you, Mark. And Nic, do you want to give a little color on the growth we're seeing in China? Maybe a little bit on sequential as well, if you don't mind, just to give them a feel for a recovering market.

Okay. Thanks, Mike. But then before I do that, let me just correct the point. It's not Hong Kong or China, or Hong Kong or China instead of Hong Kong. Hong Kong will compound strongly. The needs are real. On the medical side, we see them now, on the retirement side and the savings. And the same is true in China, but on a much small -- much bigger scale with 1.3 billion people.

So a few comments on progress in China. And to Mike's point, China has been a highlight for us so far in 2020, actually showcasing the power of our franchise, not only in that market, but the potential everywhere else.

Now the resilience in the depth of the crisis, if you like, at the start of the year and our recovery since is really underpinned by 3 things. First is the broad geographic reach. We're in 20 provinces. So not all were affected in the same way at the same time. The second is the balanced channel strategy with 36,000 agents, now 40 bank relationships, giving us access to 4,000 outlets. And the third one is the diverse product strategy.

So we saw sales rebound strongly in the second quarter as restrictions were eased. We grew by 20%. Agency grew by 15% in the second quarter. Three drivers, the first was boosted by the recruitment that we did in the first part of the year. In the first 4 months, we upped our recruitment by 32% through January and April. The higher agency productivity that came from the use of virtual tools, 67% of our sales were virtual. And a higher focus on H&P. H&P mix in agency increased from 40% to 60%, fulfilling demand that was kind of obviously there.

On the banker side, we built on the first quarter growth to deliver a 25% increase in the second quarter, as we made further inroads in not only the existing amount of new relationships. So that's what drove that. The -- looking at how we fared versus competitors, we had a better March through June than the rest of the market.

And when we look at how we've done in each of our provinces, we grew market share in the first half of the year in 17 out of the 20 provinces. NBP fared better. So to a minus 5 overall in AP, we were plus 4 NBP. Agency margins, because of the higher health and protection mix, are now north of 80%, just to give you a sense of how well our agency is now doing with increased productivity, more focused on H&P.

And the bank channel, as I've said before, we manage that on an IRR basis, given that it's selling mostly investment products and IRRs stayed healthy in the 20s with a very short payback period.

So overall, in China, our IRRs are 30% plus and payback period, 3 to 4 years. We are growing the platform. We're looking to enter our 21st province. We've expanded the number of cities by 3. We've expanded the number of sales offices. So it's product initiatives, it's channel initiatives, it's footprint initiatives and it's depth initiatives. And all this thing has made for a very strong progression in all the financial and business indicators of that market.

Great. Thanks, Nic. And we thank Abid for the question. Patrick, back to you.

Yes. Thank you very much, everyone, on the call. For those who still got questions, you know how to get hold of us at the Prudential. And we look forward to speaking to you in due course with -- as we come forward with the next stages. Thank you very much, everyone, and good afternoon.

This concludes today's call, ladies and gentlemen. Thank you for joining us. You may now disconnect.