Earnings Call: H1 2021

Aug 11, 2021

Good morning. I'm Mike Wells, CEO of Prudential PLC. And today we announced our 2021 half year results. Our purpose is to help people get the most out of life. And we do this by making healthcare affordable and accessible and by protecting people's wealth and growing their assets. We want to do this for as many people as possible, which is why we want to build the capacity to serve 50,000,000 customers by 2025. Our Asia focused strategy is expected to support the long term delivery of future shareholder returns. And as we intend to grow new business profit Substantially faster than our market's GDP and achieve long term double digit growth and embedded value per share. We want to achieve our growth trajectory in a sustainable and socially responsible manner by committing to become net carbon neutral by 2,050. We'll achieve this in 3 ways. Firstly, through delivering profitable growth, particularly in the big markets of China, India, Indonesia and Thailand. We want to grow our health and protection business by making healthcare affordable and accessible and we want to grow our customers' wealth in a sustainable way through eSpring. Secondly, through digitizing our products and services. We're making it easier for customers to interact and stay with us in the way that they choose. The key here is we're doing all of this at scale and complementing our existing multi channel capabilities. Thirdly, through humanizing our company and advice channels, We're upskilling our people and networks and providing relevant product and broader advice, enabling a much more inclusive approach to the segments we serve. Because our focus on operational improvements and the disciplined execution of our strategy, We have delivered a long term track record of strong growth in all our key metrics. Our 2021 interim results show this continuing. We reported double digit growth in new business profits, embedded value, IFRS operating profit and operating free surplus. Prudential has the capabilities, operational resilience and capital discipline to continue to generate substantial value for shareholders. So why are we unique? Why are we succeeding? In the markets with the largest economies China, India, Indonesia and Thailand, we see the greatest growth opportunities. We believe we have some unique advantages and opportunities for growth. In China, already the largest life market in Asia and the biggest market in terms of expected growth, Our footprint covers over 80% of the wealth and life premiums written of the country. In India, We're the major investor and a top 3 player in both the life insurance and asset management sectors. We continue to see huge opportunities and potential in India, which is the 2nd largest contributor to Asia GDP growth and an underpenetrated market. Not only do we have a fast growing business, we also have the opportunities for growth there that other firms do not. In Indonesia, we're the number one insurer in the world's 4th most populous nation with the largest economy in ASEAN. We're also number 1 in the fast growing Sharia segment where the size of the opportunity is huge with Muslims making up over 85% of the entire population. In Thailand, we're delivering rapid growth supported by the enhanced TTB Bank Assurance deal, which was effective from the start of this year. Our multi channel distribution strategy means that we can serve our customers in multiple ways and in combinations of ways. So this is through digital in the form of Pulse to our leading agency business the region with around 560,000 licensed agents and as well we can reach our customers through 28,000 bank branches. This combination gives us flexibility and adaptability, all the more crucial in today's volatile conditions and increasingly what our customers want from us. And finally in Eastspring, we have critical mass in terms of assets 54,000,000,000 of funds under management with strong life flows and a top ten position in 7 out of 11 markets. So let me explain how we're developing the capabilities that will support future growth. Firstly, we have broadened our distribution. It is multi channel, flexible and value driven. We've seen strong performances through both our agency and our bank insurance channels in the first half of the year. In agency, we've enhanced the quality of our agents and also improved their productivity. This can be seen in a 77% increase in $1,000,000 roundtables and 19% increase in APE generated per active agent. In bank assurance, we continue to invest heavily in our leading position and have expanded both the number of branches we have access to and the number of partners. We recently expanded our bank insurance operations significantly in Thailand and Vietnam, driving growth in those markets. Secondly, we've been deepening our presence in China, accessing the largest provinces, growing our multi partner bank insurance distribution and then building our agency capability. The outcome of our consistent and long term strategy in China has been strong new business growth in bank assurance as well as agency margins that are up there with the best in the industry. We've outperformed the industry in respect of Gross written premiums both in 2020 and the first half of this year. We've created critical mass and operating leverage through the combination of bank insurance partnerships and the transfer of our agency management skills from elsewhere in the group. And then finally in the digital space, we've established our Pulse ecosystem across the business, seeking to enhance how we reach new customer groups in large numbers and how we run the business. The take up of Pulse has been excellent. It's been downloaded around 30,000,000 times since its launch in 2019. We generated $158,000,000 of APE in the first half of the year, representing around 10% of total sales when markets were Pulse is available. Again, we didn't have this capability 2 years ago. We've delivered a resilient performance in the first half of twenty twenty one Against the backdrop of continued economic and social challenges due to COVID-nineteen and the resulting volatility in consumer activity. Despite the constraints of the environment, our hardworking and dedicated staff and agents have continued to serve our customers and build value for our shareholders, While moving forward with substantial operational and strategic progress, the business is evolving and innovating at pace with new products to cater to the full spectrum of household incomes and customer segments. And we'll continue to strengthen our core capabilities. All of this is being done from a position of strength. Across the group, our people have done a great job of adapting rapidly to new ways of working and to the challenges. At the same time, we've been active in supporting our staff, our customers and our communities. These are testing times for the group. This chart shows the waves of infections in our operating markets over the last 18 months or so. And these have been accompanied by social restrictions and disruption to economic activities in almost all of our markets. The group has responded positively to the challenges. I believe that we have adapted and evolved and accelerated years of development into a very short space of time. We have the talent, tools and capabilities which position us well to capture the significant opportunities ahead of us. So lots of action, innovation and progress executed in the face of COVID related disruption. In terms of financial performance, we've delivered double digit growth in APE and NBP in 9 markets. We've grown health and protection by double digit in 8 markets. Our first half APE and new business profits saw double digit growth over pre COVID levels of 2019 in 7 markets. Clearly, this is a strong position from which we can face into the ongoing volatile and uncertain operating environment with confidence. China, our 2nd largest market for new business profit had a particularly strong Q1 supported by a unique set of circumstances. COVID related disruption was particularly meaningful in the Q1 of the prior year. In addition, we benefited from seasonal sales and product campaigns in the Q1 of this year. Industry wide conditions were tougher in Q2, but we still outperformed. The comparatives however will get more challenging as the year progresses. In Hong Kong, despite very low levels Of Mainland Chinese Visitors, headline MVP was only down 13% and the comparative period included roughly 6 weeks of Mainland Chinese visitor sales. Within this domestic market, new business profit was in fact 16% higher as we showed continued focus on high quality regular premium and protection business. Customer retention rates remain strong at 99% and we continue to provide agents with training and development workshops to refresh their skill set ready for the reopening of the border, which we now expect will remain closed for at least the rest of the year. In Indonesia, overall APE sales fell by 6%, reflecting the continued COVID related disruption. Despite the fall in absolute sales, we've seen a higher number of our more simple standalone protection policies being sold in the period. This is evidence of a crucial building block for the broadening of our customer base and sources of growth in the future. We see scope for adding further forms of distribution. Despite the difficult market conditions in Indonesia and the rising infection rates, We're continuing to execute our strategy through customer segmentation and product innovation. We also seek to increase our digital capability to mitigate the restrictions of COVID on face to face agency sales. The improvements in the capabilities of the Indonesia business over the last year have been excellent. When the operating environment normalizes, we'll be well placed to benefit from the recovering demand for our upgraded products and in our more customer segments than ever before. In Singapore and Malaysia, we had a strong half And there was a bounce back especially in the Q2 given the meaningful COVID impacts in Q2 of last year. In Malaysia, the key highlights with a strong performance in the agency channel and also in the Taco Full market where APE more than doubled. In Singapore, both bank assurance and agency channels have performed very well in driving both APE and new business profit growth. We're launching Pulse Wealth in this market aimed at the rapidly rising high net worth opportunity. In our Growth Markets segment, Thailand delivered material margin improvements our bank insurance channel, driven by our enhanced distribution agreement with TTB from the start of the year. Elsewhere in the segment, India showed a strong recovery through both Q1 and Q2 despite COVID with the benefits coming through in new business profits due to margin expansion and our health and protection products and a shift in mix to retirement products. And Africa continues to grow. We recently expanded our Kenya hub and the East Africa Financial Service Development Initiatives. The ability of our franchise to grow as COVID related restrictions were lifted is evident from the continued momentum in new business sales from the second half of last year and into the first half of this year in many of our markets. China was the largest swing factor recovering first in Q1, given that it was the 1st market to enter lockdown restrictions in January last year. But more recently, our most COVID affected markets include Indonesia, Malaysia, Philippines and most recently Thailand and Vietnam. And I expect a volatile pattern of sales to continue there. In a number of our markets, the comparatives were less affected by COVID and you can see a tougher operating environment coming through in Q2 growth rates and into July. Vaccination rates continue to be low in several markets, but progress has been made in Singapore and Hong Kong vaccination rates Need to be increased materially before the cross border travel with Mainland China can resume. And it's good to see the weekly rates moving up. The outcome of low vaccination rates is sadly higher mortality. And in India and Indonesia, we're seeing increased levels of COVID related claims. However, looking further ahead, we're confident that the demand for our products will continue to grow given the structural growth in our chosen markets and that our expanded offering and increasingly digitalized distribution platforms mean that we're extremely well placed to meet the demand. Now turning to the United States. The demerger timetable has now been announced with the Form 10 effective. Our shareholder vote is being called for the 27th August. A simple majority of more than 50% is needed to pass the resolution and subject to the shareholder approval completion is due on the 13th September. The PLC stock will start trading ex Jackson on the 1st September. After Jackson is drawn down on its now extended term loan, this will give Jackson a pro form a RBC at or close to its target range of 500% to 525% as a listed and independent business. Jackson's marketing period starts immediately with management meeting investors and a sell side teach in is planned for 17th August. We expect the debt refinancing will be launched after the demerger completes subject to market conditions. Jackson is ready for its independence enlisting after extensive preparations and has all the capabilities required to operate as a standalone company. From a PLC perspective, The proposed demerger will complete our strategic transformation to focus exclusively on our higher growth and higher risk adjusted return businesses in Asia and Africa. So in conclusion, my key messages for the successful half year are We had a resilient performance. The pandemic is expected to accelerate digital and health trends, further highlighting the need for increased provision of financial protection and Health. Importantly, COVID has also reinforced the alignment of our business and social purposes with our community, our staff and our stakeholders. We're enhancing capabilities to build on substantial competitive advantages, strengthening our distribution and to build out our digital capability and we're on track for proposed demerger of Jackson in September later this year. Our potential equity raise is intended to enhance our financial flexibility and allow the redemption of existing high coupon debt. And in summary, we are set to be a standalone Asia and Africa business, which is well positioned to capture the long term growth opportunities ahead of us. Hello. I'm Mark Fitzpatrick, the Group CFO and COO of Prudential. In this presentation, I will focus on 3 key components As the proposed Jackson demerger is expected to complete in September, Jackson has been classified as held for distribution and presented as discontinued Within our half year twenty twenty one financials. Accordingly, I will only refer to it briefly in that context. As Mike has indicated, our people, our agents and our partners have performed very well in this half, Culminating in positive results across our financial metrics. Compared with the first half of twenty twenty, We have grown new business profit by 25% and grew OFSG, our primary measure of capital generation for our Life and Management businesses by 9% and our GWS shareholder capital surplus by 7%. We also grew Asia operating earnings by 11% and group IFRS operating profit by 19%. And lastly, in line with our dividend policy, which applies a formulaic approach to 1st interim dividends, The Board has approved a 2021 first interim dividend of $0.057 per share. Turning to my first topic, Growing value. Looking at each of our new reporting segments. New business profit for China, Singapore, Malaysia and growth markets All rebounded very strongly despite COVID related disruption in many of our markets and reflects higher sales from our expanded product offering, Broader routes to market and use of new digital capabilities. In Hong Kong, overall new business profit fell 13% Due to the very low levels of cross border business compared with the prior period. However, in our domestic Hong Kong business, New business profit was up 16%, reflecting our continued focus on high quality health and protection business. Supporting that health and protection performance, our focus on the voluntary health insurance scheme proposition is performing particularly well. We now have a circa 20% market share in a product that appeals to a new lower income bracket. Our banker distribution relationship with Standard Chartered Bank has also pivoted to health and protection business Through tightening of sales criteria. As a result, it increased its new business profit contribution very substantially. We continue to believe there will be demand for Mainland Chinese customers for the Hong Kong health and protection insurance product When the border reopens. But as we've indicated, we believe the border is unlikely to reopen this year. In Indonesia, This is another example of us accessing a broader range of customers. At this early stage, These products have contributed to significant improvement in agent activation, but with materially lowercase size, Which has contributed to some of the reduction in APE and new business profit. Overall, 9 markets in Asia Delivered double digit NBP growth. Overall, our AP was up 17% and new business profit was up 25% To $1,200,000,000 We benefited from both absolute sales growth and the higher new business margin Driven by favorable shifts in product mix and channel as well as higher interest rates in the period. In addition, The growth rates over the first half of this year also reflect the varied timing and nature of COVID related disruption Across various markets in the prior period. Underlying this is our relentless focus on writing high quality business. Over the first half of this year, 88% of our AP was regular premium business and 28% was from Health and Protection Products. We continue to benefit from significant breadth and depth of distribution capability, Spanning agency, banker and digital as well as our diversification by market, all of this allows us to mitigate Some of the COVID disruption. Our virtual distribution capabilities continue to develop, And we have successfully deployed this capability in a number of higher and middle income markets. AP involving Pulse was $158,000,000 in the first half of twenty twenty one. In addition, the remote selling tools, which have now been in place for more than 15 months, are enabling our channels to reach customers Despite COVID restrictions. For example, in Singapore, with its high GDP per capita, 39% of agency And 26% of banker cases were sold virtually, while in the Philippines, which we featured at the Investor Day, 85% of agency cases were virtual. As I explained at our recent Investor Day, the core driver for EEV growth It's the generation of new business profit. The embedded value presented on this chart represents our continued operation And so excludes Jackson. In the first half of the year, dollars 1,200,000,000 of new business profit was the key contributor To the $1,800,000,000 of EEV operating profit before restructuring costs. Within this, The expected return of $900,000,000 was 15% higher than the prior year, reflecting the benefit of underlying business growth and the effect of higher period end interest rates under our active basis EEV methodology. Experience variances and operating assumption changes in the last 6 months were very small at negative $27,000,000 Partly due to COVID related effects, which may persist into the second half of the year. Investment variances were small positive With currency movements contributing to a negative $200,000,000 overall for non operating and other movements. Our group EEV for continuing operations at the end of June was $43,200,000,000 Or $0.1650 per share. As you know, we consider eSpring's ability to add value for the group's life and external customers in Asia As core to our differentiated proposition, Eastspring delivered an encouraging first half performance with funds under management at the end of June Of $254,000,000,000 Investment performance improved in the current year, Driven by the particularly strong relative performance of our value style focused equity teams. Asia Life inflows were $4,500,000,000 and external flows saw higher margin equity inflows offset by lower margin bond outflows. Funds managed on behalf of M and G Plc increased by $400,000,000 From $15,700,000,000 at the end of 2020 to $16,100,000,000 at the end of June 2021, Reflecting positive investment performance. We do, however, expect around $5,000,000,000 of outflows in the second half of the year from these mandates. Operating profits were up 10% to $162,000,000 and fee revenues rose supported by higher revenue margins. At 52%, the costincome ratio was in line with that over 2020. So in summary, NBP is up, EEV is up and FUM is up. We have achieved double digit growth in value across both our Life And Asset Management Businesses over the last 12 months. And we will continue to focus on achieving long term Double digit growth in embedded value per share, albeit this is clearly going to be more challenging in the near term Given the ongoing closure of the Hong Kong China border and the effects of COVID on new business volumes and hence NBP across Asia and Africa. Turning to my second topic now, that of growing our capital. The output of our focus on high quality sales It's a highly predictable emerging surplus from our in force portfolio. As the surplus emerges, We can reinvest to achieve attractive risk adjusted returns and drive further compounding growth. OFSG is our primary measure of capital generation. In this period, the expected in force life insurance return It was 12% higher than in the prior year and operating variances were a small positive of $35,000,000 This took our in force life OFSG to $1,300,000,000 and to $1,400,000,000 with the addition of V Springs earnings. Central costs of $300,000,000 for the 6 month period included the benefit of $180,000,000 per annum of head office expense reductions since 2018, in line with our previous guidance. We expect our central cost to fall further as we aim to deliver an additional $70,000,000 per annum of cost reductions by the start of 2023. In total, the existing businesses therefore generated $1,100,000,000 of capital over the period, Which is available for reinvestment in line with our capital allocation priorities. And these priorities are: 1, organic investment in new business 2, strategic investment to support further growth and then 3, dividends to shareholders. Over the 1st 6 months of the year, we invested $300,000,000 in writing high quality new business, which created $1,200,000,000 Of new business profit, I. E, nearly a 4 times multiplier on our investment. On the right of the slide, You will see a summary of our holding company cash development. Remittances from our continuing businesses were just over $1,000,000,000 And are up significantly from the prior period. This reflects the timing of remittances from individual businesses and is not expected to recur at the same level In the second half of the year, in a change to the presentation of remittances, these are now shown before deducting Asia head office costs, Reflecting our operating model changes to merge our central functions across Hong Kong and London. The corporate activity costs of $216,000,000 therefore relate to the aggregate cash costs of all central functions in both Hong Kong and London Aligned with our IFRS and EEV reporting of central costs, the vast majority of the $267,000,000 nonrecurring item It's for investment in strategic growth initiatives. These include non recurring payments for recent bank distribution agreements for UOB And our bank insurance extension in Vietnam. Our resulting central cash stock at 30 June was $1,400,000,000 And we remain comfortable with cash resources above $1,000,000,000 for our continuing operations, combined with the financial flexibility Afforded by our target leverage range. We are now operating under a new regulatory capital regime, The group wide supervision or GWS regime, which became effective on the 14th May this year. We were well prepared for this And the transition from the previous regime, which was called the Local Capital Summation Method or LCSM, is in line with our expectations. The GWS methodology is largely consistent with the previous LCSM other than for debt. As expected, we benefited from grandfathering of our existing senior debt in addition to the sub debt, Which we already allow for as capital under the LCSM methodology. The addition of our $1,600,000,000 of senior debt Increase the cover ratio by 47 percentage points. The increase in GWS shareholder surplus Over the first half of twenty twenty one to $10,100,000,000 from the estimated year end position is principally driven by operating capital generation of $700,000,000 and resulted in a cover ratio of 3.83% At the end of the period, by design, GWS will incorporate changes in local market capital frameworks as these come into force. So in respect of Hong Kong's RBC framework, we do expect the Pillar 1 rules to be finalized this year. The HKIA is also currently developing plans to enable early adoption and we remain very supportive and we're very keen to adopt an economic Capital regime, which is aligned to our capital allocation framework. This strong capital position is also resilient to external macro As demonstrated by the relatively low sensitivity of the GWS ratio and surplus to the sensitivity shown here. This resilient capital position is a result of our focus on selling high quality recurring premium health and protection business, which is highly capital generative and has lower exposure to market risk. Our shareholder asset exposure is significantly reduced by the proposed USD merger. The shareholder asset exposure of the group's continuing operations It's roughly 4 times smaller than the group position at the end of 2018, which included the U. K. And U. S. Businesses. Lastly, on capital and balance sheet structure. As we have said before, post the proposed USD merger, We will seek debt leverage in the 20% to 25% range on a Moody's basis over the medium term. Our potential equity raise would achieve this with the proceeds expected to be used to repay high coupon debt In order to increase our financial flexibility, so in summary, on my growing capital topic, our capital generative businesses Generated predictable free surplus emergence, funding reinvestment in new business, which creates 4 times the value of the investment. Our GWS capital surplus remains strong and resilient under the new group wide requirements, and we aim to ensure We retain financial flexibility to take advantage of the significant growth opportunities in Asia and Africa, including From our potential equity raise of around $2,500,000,000 to $3,000,000,000 My third and final topic is about how we are growing our earnings. We delivered 11% growth of segment operating IFRS earnings to $2,000,000,000 Growth Markets was our largest single segment followed by Hong Kong and our China JV delivered the highest growth in the period. Overall, 10 businesses delivered double digit growth, and these are businesses at scale. Two markets generated adjusted operating profit of $250,000,000 or above, and a further 5 markets, Including our asset management business, we're above $100,000,000 in the first half of the year. As Mike indicated in his presentation, COVID related experience varies widely. For example, in Hong Kong, We saw less favorable claims experience following the lower level of claims seen in 2020, while in markets like Indonesia, We saw increased level of COVID related claims, including sadly mortality related claims. We expect this trend to continue into the Q4 for those markets with a high number of COVID-nineteen cases. We continue to benefit from in force growth, reflecting the compounding nature of the growth of the Health and Protection business Over recent years and high fee income as equity markets continue to rise. Insurance margin, the underwriting profit from our health and protection business accounts for nearly 80% of insurance income. As such, the $141,000,000 increase in was the primary source of the rise in overall operating profits and the growth here reflects the drivers I've just described. At a group IFRS level, you can see the benefit of our cost actions starting to come through. Our adjusted operating profits rose 19% To $1,600,000,000 driven by a higher segment profit from operations and reduced corporate expenditure. We continue to actively manage expense levels across the group, including, for example, reviewing of property needs and costs Given changes in distribution trends, at the same time, in high potential markets, we will continue to invest for the long term. In respect of restructuring and IFRS 17 costs, as I said at the prelims in March, We see scope for further automation and reshaping of core functions and processes to support growth. We will incur more costs with the ongoing IFRS 17 program. As a result, we continue to expect overall restructuring And IFRS 17 costs to remain elevated in the lead up to implementation of IFRS 17. Thereafter, We expect these costs to reduce. Finally, and probably for the last time, I will comment on Jackson's financial performance. So I'd like to highlight that Jackson delivered $2,200,000,000 of IFRS profit before tax in the first half, Driven by growth in fee income from higher account values and net favorable short term fluctuations driven by higher interest rates. Its new sales of variable annuities were also up 30%. Now in accordance with IFRS 5, as a discontinued operation, Jackson has been remeasured to fair value less cost to distribute. Using this fair value has resulted in a loss on remeasurement after tax of $7,500,000,000 $5,100,000,000 of this remeasurement relates to the group's 88.9 percent economic interest. Following the proposed demerger, the remaining 19.7 percent economic interest will be held at fair value. So from an earnings growth perspective, we saw good growth in operating profits, costs coming down and a good performance from Jackson. So to wrap up, our first half performance again demonstrates how our strategy delivers growth for shareholders In terms of value, capital and earnings, new business profit generation is the core long term driver of EUV growth. Our near term performance will continue to reflect the impact that COVID is making on the various economies, movements of people and lives of our customers. However, with our proven capabilities, diverse and digitally enabled distribution platforms And relentless focus on quality business, we will continue to support our customers and provide them with protection in these uncertain times. We reinvested at attractive margins, generating nearly $4 of value for every dollar invested in new business. At the same time, we continue to focus on central cost and wider operational efficiency, Growing our OFSG and our GWS surplus. Our capital generative business, resilient balance sheet And our financial flexibility support our plans to pursue continued compounding growth in our chosen markets across Asia and Africa.