Good afternoon from Hong Kong. Could I please first ask that you turn off your phones and any other mobile devices that may make a noise? Welcome. This is the Prudential's 2022 Full Year Q&A Session. We're very pleased to see you all. I'd like to hand over to you now to Anil, our new Chief Executive Officer, who's got some opening remarks, and then we'll go to questions from the floor, from the phones, and then from the webcast. Anil, over to you.
Thank you, Patrick. Good evening to everyone in the room. Good morning, good evening for folks who are joining us remotely. I'm Anil Wadhwani, Chief Executive Officer of Prudential PLC. It indeed is a pleasure to welcome all of you to our full year 2022 earnings call. I'm truly excited to be part of Prudential PLC. I've known Prudential as a competitor. I've always admired Prudential because I have competed with them in every single market that Prudential operates in. Clearly, Prudential has a lot of strengths, the brand, the rich history of 175 years, great distribution, diversification, the trust and confidence of 18 million customers. Clearly a lot of strengths. As I said, in every single market, they were a formidable competitor.
What I get to the table is 32 years of experience in financial services. Last five have been in Asia, leading a competitor both on the asset management as well on the insurance side. I have operating experience in many of the markets that Prudential operates in and have fair amount of knowledge in terms of both the opportunities and the challenges in the markets of Asia in specific. This morning, I have the pleasure of introducing my management team. On my right, James Turner, our CFO. Next to him is Dennis Tan, who runs Singapore, Vietnam and Thailand. Avnish Kalra, next to Dennis, our chief risk officer, chief risk and compliance officer. On my left is Lilian. Lilian Ng runs Greater China.
Solmaz Altin runs Malaysia, Indonesia, Philippines, obviously, manages our joint venture partnership in India, Africa, and also is responsible for digital and technology. Next to Solmaz is Wei Kong. Wei Kong is our CEO of our captive in-house asset management company, Eastspring. Together, we will be responding to your questions, and I really look forward to the interactions this morning, this evening. At this juncture, I also wanted to extend my sincere gratitude to Mark, who is in the room with us. Mark has been absolutely superb in terms of his contribution over the last six years, but more specifically in the last 12 months.
His leadership has been instrumental in putting Prudential in a position of strength as we look to addressing the growth opportunities, specifically in the high growth, high potential markets of Asia and Africa. On that note, I'm gonna turn it back to Patrick, and we can get rolling with the question -and- answers.
Thank you..
Patrick
Thank you, Anil. Maybe I'd like to invite the moderator just to give the instructions as to how to you can lodge your questions if you're on the phone or on the webcast. Okay, in the absence of that specific instruction, I think it's hash one if you're on the phones to make yourself known on the phones to log your question. We do have a logging system. We will be able to track you. Maybe we can start by going to the floor of the room. If you want to put your hand up and just identify yourself and your organization, we'll hand a mic around, we'll go and do some questions from the floor in the first instance. Michael was early. Solmaz was next.
Solmaz goes first. Okay.
Thank you. Thomas Wang, Goldman Sachs. A couple questions, I think mainly on the Hong Kong business. Just want to see what you see on the Hong Kong business in terms of the mainland China visitor segment and also the domestic segment, how you see in that rebound, what you're hearing from your from the agents. Maybe a question follow up for James is the margin. When we look at the margin, obviously first half, second half last year, there's quite a large difference. Just when we're thinking about going forward, which one is the reference point when we're thinking about projections on margin? Thank you.
Thanks for your questions, Solmaz. Let me tee it up with the MCV and the Hong Kong business question, and then I'll pass it on to James for his comments on NBP margin. Before I answer the MCV question specifically, I just wanna kinda step back and provide a bit of context in terms of how did we create the momentum getting into 2023. We employed specific emphasis on the needs, on the diverse needs of the Hong Kong domestic customer, and we saw traction on account of that in the second half of the year as compared to the first half. That also led to a high level of agent activation, and it put us in a good position as the borders opened up.
Once the borders opened up, we have kinda seen the mainland Chinese visitor traffic coming in. It's clearly not at the peak levels that we were accustomed to in 2018, 2019. Our estimate is it's about in the range of about 40%-45% right now. It's starting to have a positive impact on the volumes. Now, unsurprisingly, the first set of customers coming in, based on at least what we are witnessing, is skewed towards the affluent segment. As a consequence of that, the demand that we are seeing is coming through more towards the savings products. Having said which, I clearly understand that our emphasis is gonna be on providing a diverse set of products to address the diverse set of needs, including those of mainland Chinese customers.
The momentum is gonna complement some of the good work that Lilian and team did in the last year on the domestic market. I'm gonna stop there. I'm gonna turn it to James to address the new business margin question, then I'll probably also ask Lilian if she has any further comments on the mainland Chinese visitor customer. James?
Thank you, Anil. Thank you for the question. In terms of the Hong Kong margin, the thing to remember is that we're applying an EV methodology, and we're marking to market. We're marking to market at the year-end rate for the whole year. At the half year, we marked to market at the half year, so it went from 150 bips at the beginning of the year to 300 at the half year. By the year end, that was at 390. Under our methodology, we mechanically revalue the whole year at that year-end rate.
Lilian, you wanna add anything on mainland Chinese visitor customers?
Yes
Thank you, Anil. I think two point I just want to add. Solmaz, you mentioned about the domestic segment. I think what Anil said, in 2022, we've been able to actually grow our market share from half one to half two by doubling. Our half two market share is 10%. That built actually a very robust platform for us to continue capture the opportunities of the domestic market. In terms of the MCV segments, the early signs we are seeing, as Anil was mentioning, it's more on the, on, you know, the affluent segment. What is very good to see is that 58% of the MCV new are new to Prudential so far in the first two months. I think we are very well-positioned to capture the opportunity.
Thank you, Lilian.
Okay. Thank you. Who's next? Oh, it's gone in there first. Sorry, Michael. I'm sure you'll be nearly next.
Hi. This is Edwin Liu from CLSA. I have a question on Indonesia markets. We have seen some weakness in that market for several years. I think this year we have seen some stabilization. My question is, would you say we have seen the bottom of the Indonesia market? Going forward, would the growth of that business driven more by bank insurance or agency or both? Thank you.
Yeah. That's a great question. Clearly, Indonesia is a critical market for us. I'm just gonna offer my opening comments, and I'll then turn to Solmaz to provide greater color. Indonesia is a focus market for us. We've had leadership position in that market. Unsurprisingly so, because we have a vast distribution specifically on the agency side. If you combine the conventional and the Sharia business, we have been in a position of strength over many, many past quarters. I'm gonna stop there, and I'm gonna turn it to Solmaz to provide some further insights. Solmaz.
Thank you, Anil, and thank you for the question. We did indeed see a strong recovery in Indonesia in the second half. The second half APE grew 44% versus first half. We see that momentum mainly coming from agency channel. Banker was strong in growth throughout the year. Looking forward, we also see the momentum in the first two months continuing. The agency channel plus the banker channel will be both channels that we're betting on also for the future.
Okay. Next. I was going to allow someone else, but you did get your hand up first. Again, Michael, you'll go.
All right. Thanks. Michael Chang, CGS-CIMB. I'll ask on Mainland China. Last year, obviously a very strong set of performance. I think bank insurance performance in particular stood out. Maybe you could shed some light in terms of the partnerships that were signed last year. I think there were 11 new bank insurance partners. In the report itself, CMB was mentioned specifically. Could you maybe shed some light on, you know, how well diversified is the bank insurance growth? How much of it is concentrated with CITIC and CMB versus the others? Maybe year-to-date, what's the bank insurance sign up rate like? Also related to Mainland China, the agent channel I think is starting to show some signs of recovery.
What's the agent recruitment rates right, like right now year to date? Thanks.
Thanks for your questions, Michael. Multiple questions in that. I'm going to ask Lilian to provide you a greater detail. Let me start by saying that you're absolutely right. We have a multi-formatted channel in Mainland China. As a consequence of that, we were able to deliver 15% new business profit growth last year on the back of 19% sales growth. That was pretty strong, given the environment that we were operating. In some sense underscores the diversified nature of channel mix that we have. You're right in saying that as the COVID measures get relaxed, you are gonna see greater emphasis on agency and agency activation, and that is something that we are already witnessing on Mainland China.
I do want to kind of, before passing to Lilian, emphasize the fact that the structural demand drivers on Mainland are very much intact. It's, it's really positioned well for medium to long-term growth. Again, given our capabilities on the ground, we feel very optimistic in terms of addressing those customer needs. Lilian, you may want to provide some greater detail.
Thank you. Thank you, Anil. In China, I mean, like in most of all our business, we have a diverse multi-distribution platform. On the bank insurance front, actually we work with 59 banks across 6,687 branches. We've been able to increase that outlet by 11% in 2022, and that's supported by also 3,000 insurance specialists. We are actually blessed. We have a diverse portfolio of working across the national banks, the commercial banks, as well as the foreign banks. We also very blessed that, you know, because we have a shareholder partner in CITIC Bank and also a strategic partner in Standard Chartered Bank. This is how we have the platform we have in bank insurance.
Having said that, we are also building a quality agency force within China as well in CITIC- Prudential Life. We've been able to grow our MDRT to 1,000, and agency productivities has grown 9%. Taking that forward into 2023, we continue to actually ensure we have the relevant customer proposition to serve two area, mainly protection as well as savings, in particular retirement planning. That is supported by the government agenda, as well as supported by the regulator on long-term savings and protections, so.
Lilian, you may want to address the CMB question. I think Michael.
Okay
...specifically.
In China, bank insurance is an open architecture. We've been able to actually engage with, in particular, the Shenzhen branch of CMB, and that's where we have been seeing a lot of growth in that area, in particular in the GBA area.
Right. I think we'll have some diversity. Could we have some questions from the second row, please?
Thank you. Diversity. Hi, management. This is Michelle from Citigroup. My first question to Anil, just out of curiosity, You know, after onboarding, what's the top three items in your to-do list? Can you share with us? Second thing, I think investors these days they pay a lot of attention to the SSI. For our disclosure, out of our $11.5 billion corporate debt in the shareholder backed debt, I noticed there is 34% belongs to the financial sector. Can you shed some light on, you know, how much, you know, belongs to North America or other region? Yeah. Thank you.
Thanks, Michelle. Thanks for the question. Again, two-part question. Let me address the top three priorities, and then I will hand it over to James and Avnish to answer your second question. This is week three, and I'm still finding my way to the coffee machine. In terms of priorities, clearly three of them. Obviously there are going to be many, and I obviously will have to kind of get to that in due course of time. If I have to simply pick three, it's people and culture, our customers, and our operating performance. What I can tell is just based on my initial interactions with talent, they are highly committed, highly focused, highly energized, to be able to write the next chapter of growth for Prudential.
I'm gonna stop there, turn it to James first and then to Avnish.
Michelle, thank you for the question. The balance sheet, as you know, is very conservatively positioned. That 34% of our shareholder assets, the way that it's split, that equates to $3.9 billion. Approximately $1.1 billion of that relates to U.S. banking stocks. 97.5% of those are investment grade. 95% are systemically important banks, so the big JPMorgan, Citi, yourselves, et cetera. Very conservatively positioned. In terms of the banks that are in the spotlight, SVB and Signature, our exposure to SVB I think was around $1 million, and that's out of a $23 billion book. I mean, we're talking about 1 or 2 basis points.
Avnish, would you like to add anything?
Just one more thing to add there that, as you would expect from a company of our size, scale, and history, we have a very well-developed credit risk framework, which relies on concentration risk, single party limits, et cetera, to kind of cover the exposures that we see on a day-to-day basis. We are well positioned on that.
Thank you.
Thank you. Just to clarify, I think it was 34%, not of our group net assets, just of those, investment credits.
That's right.
Not the group. Yeah. Okay. I think you had another question. I'm gonna go to the phones 'cause otherwise they'll feel bad.
Hi, good to see the management today in person. My name is Tianjiao Yu from Bernstein. I just wanna follow up on the Hong Kong recovery. Can you give us a bit color in terms of, you know, the agency business? How many agents you capped now versus 2018's level? I saw this on a presentation slide, you have a slide showing the visitors numbers compared to 2018. I'm just curious, can we use that as a, you know, a way to gauge how much you can recover this year?
Yeah, thanks for the question. I think Lilian will be best placed to kind of, you know, speak to the agency. I do wanna preface it by saying that it's still early days. We only have experience of about seven to eight weeks. The momentum started in terms of the visitors coming into Hong Kong. We saw distinct momentum pick up in February. That's continued as we've kinda progressed through February into March. It's still early days for us to kind of gauge the full impact of it going forward. Lilian, any comments on agency in specific?
Yes. Obviously, we have about 19,000 agents in our total force. Actually, 80% of them actually joined us before the pandemic. What I'm trying to say is during the pandemic, we've been able to continue to motivate and activate these agents. Of that 19,000, around 10,000 are actually MCV-focused agents. A lot of the activities we are seeing in the first two months is actually driven by this group of our agency force.
Can I just follow up with one more on the IFRS 17? There's a guidance on the operating profit reduction. Can you talk us through, what's driving that change, I guess mostly from the in-force book?
Sure. I think I'll turn it to James, I just want to say that IFRS 17 is an accounting change. It fundamentally does not change our business model, our strategy, our valuation, our operating free surplus generation. It does not change that. It's an accounting methodology and does not impact our business strategy. I'm gonna turn to James to provide you greater insights.
Thanks, Anil. You know, it also on to that long list of things it doesn't change, it also doesn't change our dividend paying capacity and our dividend policy. Really the key thing to recognize on the IFRS 17 is that our shareholders' equity is increased. It's increased, and we've given a range on that between $1.9 billion and $2.8 billion. That increase is reflecting profits that we've never recognized under the previous IFRS 4 regime. For example, with profits, things like that, our terminal bonuses, under IFRS 4 we'd have recognized them when they were paid. Now they're accelerating, brought forward and added to our shareholders' equity.
The guidance we've given on the reduction in operating profit from our IFRS 4 operating profit of $650 million-$850 million reflects really timing differences again. As Anil said, this is just accounting, right? From a timing difference perspective, there is both a one-off impact. This year there was approximately $200 million that was recognized as a one-off gain from the introduction of Hong Kong RBC. There's then the new business. When we sell new business, rather than being able to recognize the profits under IFRS 4 immediately, we have to spread those over the lifetime of the policy. The balance really is a consequence of that increase in equity, and it's really that flowing through in terms of we've had those profits.
Thank you. let's open up the questions on the phones please. over to you operator to let the first question through, please.
Thank you. Our first question for today comes from Blair Stewart of Bank of America. Blair, your line is now open. Please go ahead.
Thanks. Thanks very much. I've got two questions. The first question is on agency. You touched on the Hong Kong agency and how much damage might have been done through the pandemic. I seem to remember you having about 20,000-24,000 agents in Hong Kong. So it looks to me like you're trying to replenish from the lost agents in the pandemic. And I just wonder if we could expand that discussion across the other main territories, albeit briefly. I recognize there's a lot of territories. But what's been happening to the agency? And, you know, to what extent does that need to be repaired? I'd imagine there's a fair amount of competitive behavior amongst agency as well in terms of your competitors looking to pick up your agents.
Sorry for the long question. My second question is on IFRS 17. James, I'm assuming that the quid pro quo of a lower IFRS 17 starting point from an earnings perspective is that we might expect faster growth in profits in future than we might have seen under IFRS 4. Could you just add some color around that? I know you're gonna give more detail in June, but conceptually, is that the way we should be thinking?
Thank you for your question.
Thank you.
I'm going to ask Lilian to answer the agency question. She did mention that we have 19,000 agents. I think she can provide you a little bit of context in terms of where we are coming from, where are we, and what's our plan to grow our agency for specifically in Hong Kong and then more broadly across the region.
Okay. Blair, thank you for that question. I think what we see in terms of the attrition of the agents in Hong Kong is mainly outside of the industry. Obviously, during the pandemic, it's very challenging to actually acquire customers. We saw they actually leave the industry. Now, obviously, we will continue. As I mentioned, 83% of them we recruit from... Of the 19,000 we have, is actually still with us from 2019. We're now obviously driving a recruitment to replenish. In 2018, 2019 on average, actually we recruit about 6,000 agents per annum. This is what we're gonna continue to drive to recruitment with the economic activity coming up. And we are seeing a lot of momentum already in terms of recruitment.
Now, for the overall agency in Asia and Africa, we actually see in 2022, actually recruitment is up by 9%. The whole with the economic of activity coming back up other than Hong Kong, and I think a lot of the markets actually opened earlier, we are seeing that recruitment drive. The productivity growth has been increased by 6%. A lot of good momentum in terms of our overall agency in Asia.
Thank you, Lilian. James, if I may pass it on to you for the IFRS question.
Sure. Blair, thank you for the question. I was expecting a lot on IFRS 17. Look, in terms of that quid pro quo, really the key point to recognize is the CSM, that store of value. You can see from the information in the deck that that's gonna be about circa $25 billion. That will really unlock and unwind over time. We anticipate that that will unlock in the range of kind of 9%-10% a year. Given that the total profits from the sale of any product doesn't change, this is really going to be about timing. What we do know is that profits are smooth.
The profits are recognized over the service that is provided to the customer, which is typically the policy term. The way that you've got to think about it is I think that it's going to be about what are we adding to CSM. It's not just going to be about the operating profit, it's going to be about what we add to that CSM balance and that stock of future profit layer. You're right, we're going to sit down in June and have a real big deep dive into IFRS 17.
Good. Yes.
Okay. Let's keep going on the phones for the next question please, moderator.
Thank you. Our next question for today comes from Kailesh Mistry of HSBC. Kailesh, your line is now open. Please go ahead.
Oh, hi. Thank you. Thank you very much. Good evening, everyone. The first question I guess is for Anil. He's very eloquently highlighted, you know, his outside in observations on Prudential. Perhaps if you could just follow up and just ask him which markets, sub-subsegments, are you most excited about the next three years and why? What are your thoughts on the Pulse platform that have been all built already? Will you be investing further in it, what areas will you look to improve the proposition? The second question is around Indonesia. I think James mentioned in his slides agency transformation in Indonesia. Can you provide a little bit more color on that, how long it would take, what are the key objectives?
Just one last one, if I may. In the CFO appendix slides, the reason I'm asking this is there's a lot of noise in the market about the investment mix. Just wanted to pick up on the slide where it shows the corporate bond by rating profile. Could you just sort of reiterate why there's quite a high proportion in the triple B and below, and what has been the default experience over time on that portfolio? Thank you.
Thank you, Kailesh. Many questions, let me try and orchestrate this. Let me start with your first question on which are the markets that I'm most excited about. If I were to just step back and just look at the diversification mix around geographies that we have, 42% of our new business profits are contributed by Greater China, 53% is contributed by ASEAN, and we have leading market positions in many of the ASEAN markets. Then we have India and Africa. There is growth opportunity in every single market, and that was one of the reason why we pivoted solely on the high growth, high potential markets of Asia and Africa. If I were to simply pick up two, China obviously is exciting. Just gonna give a...
Given the sheer size of China and the sheer size of the opportunity that we have there, that is bound to be one of the more exciting markets for us. India, again, similar population as compared to Mainland, but a much younger population to that. Again, in both these markets, there is significant under-penetration as we know, whether it comes to health, wealth, protection, savings or investment needs. We believe that given our joint venture partnership across these two markets, we are very well positioned to be able to address those opportunities. On Pulse, I will kind of steer it back to Solmaz, but I do want to preface it by saying Pulse is part of our digital strategy.
The way we think about our digital strategy is to solve for the pain points of the customers. The moment you do that, the moment you create greater ease, greater convenience for our customers and for our distributor partners, you end up winning market share in my experience. I'm gonna stop there. I'm gonna turn it to Solmaz, and then we'll come back to your Indonesia and the investment mix question. Solmaz?
Thank you very much, Anil. Thanks for the question on Pulse. Pulse has been developed over the last few years and is a strong asset in the digital estate of Prudential Group. We will continue to develop Pulse as a key customer servicing and customer engagement app. The technology focus going forward will be on developing tools and systems that will support our distribution banker and agency channel to do their business more effectively and more efficiently. The second focus is customer experience, both of in-force customers and then creating potential leads also then playing back into our distribution forces. Our focus clearly is to create a better customer experience every step we go and then increase operational effectiveness and efficiency going forward.
Solmaz, you may want to answer the Indonesia question on agency transformation as well.
Yes. Thank you very much. Now, important to note is that we have regained the market-leading position in Indonesia this year in 2022. Now, in order to consolidate that position, we embarked on a transformation program which we call Transformation for Accelerated Growth. It's not only focused on agency, it's one of the focus points, and here we are addressing agency activation, our agency sales management, how we activate our agents, and recruitment of agents, of course. It has more pillars than that. We're also looking into operations and claims, especially focusing again on customer value and shortening the time where customers have to wait for getting their claims paid and things like that, as well as expenses. It's a comprehensive transformation program in order to consolidate our market-leading position in Indonesia.
Thank you, Solmaz. I'm gonna now turn to James for the investment mix question.
Kailesh, it's James. Listen, thank you for the question. As I said earlier, I think that our balance sheet and our shareholder debt position is incredibly conservatively positioned. Let's just take it through the elements that you asked the questions on. First you asked about what was our total defaults, and our total defaults last year was $75 million in total. In terms of the split, I think what I need to flag, and you can as you say, you referenced the elements in the CFO appendices, is that of the total shareholder debt of $23 billion, 89% of that is investment grade. 55% of it is A-minus and above. Of the amount that is below investment grade, that is largely made up of 3 buckets.
The first is, we do clearly asset and liability matching by country, is we have significant business in Vietnam. As you know, the Vietnamese business has a Sorry. The Vietnamese sovereign debt has a, it's not investment grade, and therefore, all of the corporate debt by definition is below investment grade. That accounts for 46% of our total non-investment grade exposure. The balance is really between Thailand, which has a BBB investment grade, and similarly therefore a chunk of the corporates that we use to back our business in Thailand is therefore below investment grade. We have some high yield in the U.S., but it's relatively minor in the scale of the $23 billion of total exposure.
As I said in response to one of the earlier questions, you know, our losses have been, you know, really small.
Maybe just a clarification, I think on t reatment to investment grade, and not investment grade, we use independent ratings, don't we? In terms of determining.
We do.
Yeah.
Yeah.
Thank you. Okay, back to the moderator just to remind people how to log their questions, please.
Thank you. As a reminder, if you'd like to ask a question, you can press star followed by one on your telephone keypad. Our next question comes from Larissa van Deventer from Barclays. Larissa, your line is now open. Please go ahead.
Thank you very much. Just one question. You say that you want to focus on operational performance improvement. Do you see more runway in sales volumes, quality or margin? Are you able to quantify how much upside you see in the near term, please?
Yes. Thank you for the question. I guess the short answer is all of the above. As I said, I am in week three and I will be getting to many things and, you know, one of the emphasis that I would like to lay is understanding our strategy and operational capabilities. In the August timeframe, we'll be more than happy to come back to you and share with you a much more granular strategic roadmap. As I said, the short answer would be quality and quantity, and not one at the cost of the other.
Thank you.
Thanks, Larissa. I think we can come back to the floor. They've been very patient. We've got a gentleman at the back who's got a question.
Thanks a lot. Leon Qi from Daiwa. One question on Hong Kong MCV and the other on your capital. Firstly, just wanna swing back to MCV. Appreciate the color just now. You mentioned your head count, agency head count movements. We've noticed some news in the media recently talking about the agency hiring plans for Prudential and also your competitors. Well, interestingly, we've seen that actually Anil's old shop is actually has a more aggressive plan than Prudential. Especially given they have a much smaller presence than us. Just wanna hear anything, any color from either Anil or Lilian on this, on your agency hiring plan in Hong Kong, in particularly on
The MCV. Second question on capital. I think the background there is that Prudential went through several restructures over the past few years, and also the solvency regime in Hong Kong and also mainland China went through two major changes. Now these are behind us. Starting afresh for now, what will have to happen to make you take any revisits to your capital management plan from here? Yes, these are the two questions I have. Thank you.
Thank you. Thank you for your question. On Hong Kong MCV, I'm gonna ask Lilian to provide you greater color. Let me start by saying that coming in, I'm already looking at MCV very closely, as you can imagine, and seeing whether we have an opportunity to refresh our plans. We have 10,000 MCV focused agents, as Lilian mentioned. I believe there is an opportunity to firstly activate the agents that have gone quiet during the COVID period, as you can imagine. At the same time, also hire trained quality agents that can focus both on domestic but also on the MCV market. I'm gonna turn it to Lilian, who can apprise you of her latest plans.
Obviously recruitment is part of what an agency force does. Out of the 19,000 agents, we probably got about 8,000. These are agency leaders who their role is to go out there every day to recruit, as well as activate those agents. One thing we need to pride ourself on Prudential Hong Kong is we do have a platform. What trigger an agents joining a company is the infrastructure, the platform, the products, the operations, and we believe we have a very robust platform to allow our agents who are onboarded to actually deliver for the customers.
To your second point, firstly, you've seen our capital position, which is very strong, right? We would like to keep it that way because it gives us ample flexibility in terms of addressing the different opportunities. I'm gonna ask James to provide you further texture on that.
Thanks, Anil, thank you for the question. Look, we see our capital allocation policy as a way of maximizing shareholder value and maximizing our shareholder return. We're really crystal clear in three priorities. The first priority always is organic growth and funding that organic growth, cause we see these amazing opportunities across the region. We've talked about some of them already today. Ensuring that we can absolutely maximize that's our first priority. The second is really in terms of strengthening our capabilities, whether it is in customers, whether it's people, distribution, and really adding to our capabilities so we can accelerate that growth. Third, it's just in terms of if there are strategic opportunities aligned with our strategic intent, then clearly we'd consider those as well.
The primary focus, stress, is really on funding that organic growth and those organic opportunities.
I think that's logical because these are the businesses that we understand. We have a track record. We would like to deploy capital, where we have experience and there is potential to grow further. I couldn't agree more with James in terms of the way he's articulated it.
Hold on a second. Wait for the mic.
Yeah, sorry. just to follow up. other than the potential inorganic that you have already commented, what about returning to shareholders? Do you have any thought on that?
I think, look, we've entered this new phase. Now, we've completed all of the transformations with an incredibly strong balance sheet that is focused really on taking advantage of the opportunities we have in front of us. You've got to remember that for every dollar that we invest, we get a full dollar of return. At those attractive IRRs with really fast payback, that's the best way we see of adding to shareholder value.
Thank you. Let's take another question from the floor, and then I think we've got one or two on the web as well, and then I'll go back to the phones. Michael, you're gonna ask for two questions. Unheard of. Maybe we'll just see if anyone else has one. Here we go at the back.
Thanks. Jenny from [Securities] . I just want to ask, what's your house view on the, about the interest rate environment in the future? I mean, next, one to two years, how will it impact our product mix and investment allocation? That's the first question. Second question, back to the normal period before the pandemic, it's about the Hong Kong agent. What's a normal attrition rate of this agent team? Thanks.
Normal attrition rate?
Yeah.
All right. let me first go to a combination of Wai-Kwong, as well as James, to talk about our house view. Then Lilian will address the Hong Kong agent attrition question. Wai-Kwong, you wanna go first?
Yes. Thank you very much for that question. Obviously, you know, to try and forecast where interest rates are going, especially this year, is gonna be very, very challenging. Obviously, we've seen how rates have been rising over the last, you know, year or so. We still think that, you know, the Fed will probably need to keep a very fine balance, and especially after the events over the last few days, I think that next, you know, next week's meeting will be pivotal in terms of deciding, you know, the course of things from for the rest of the year. I would just say that, you know, I think we've just got to watch that space very carefully.
James, any additional comments?
I'd say the only thing I would add is that, look, we have a really diversified portfolio of products with Health and Protection, ILP savings. Therefore, we have lots of opportunities to really meet all of our customers' long-term needs regardless of the interest rate environment. The other thing is that if you look at our source of earnings, a significant proportion is from Health and Protection, and that's not really impacted by interest rates. You know, Wai-Kwong is right, I wouldn't like to try to guess the where interest rates are gonna move even in the next week, let alone the next year.
Thank you, James. Lilian, anything on the Hong Kong agent attrition?
In Hong Kong, to become an agent, they have to go through quite a rigorous examinations. Secondly, we also actually put through each of our new agent or the, when they are candidates, go through like what we call profiling to ensure that these are the right people in terms of, you know, wanting to do financial advice as a career. With that in place, actually, the attrition rate is actually reduced to about, you know, 20%-30%. For those that hasn't gone through the profiling, obviously, that, you know, The suitability test will help to get there. That's probably pre-COVID. As I mentioned, during the COVID, the attrition rates mainly due to they couldn't get enough business to sustain their income. Yeah.
That's why we remain optimistic because the COVID relaxation is gonna result into agency activation.
Yeah
... result into income for the agents-
Yeah
which in many ways is gonna be the tool for us to drive better retention.
Anil, if you bear with me, I'm gonna read out some questions on the web. I'm gonna do a quick-fire one for James. There's four or five, which we should run together in the interest of time. It's already quarter to. Just very quickly, could you repeat the exposure to U.S. banking investment? Some of the individuals had a poor line. That's the first one. Second one is on capital. Any thoughts about the 150% floor that you have in terms of the way that you look at your free surplus ratio on top of the GWS requirements? Is there any color about the individual markets around the 15% overall group growth rate in sales? Those are the first three.
Thank you, Patrick. James, you wanna take the first two, and then I'll, I'm happy to address the third one.
Okay. The first one was the U.S. banking exposure, I think. What we said is that there's a total in the shareholder, debt portfolio of $1.1 billion. 97.5% of that is investment grade. 95% is in systemically important banks.
The second question was the 150% floor for free surplus.
In terms of 150%, that's our risk appetite. It's a dynamic risk appetite, where what you're seeing is that we have 302% capital ratio, and that's the associated capital ratio regarding that risk appetite. We're significantly above the level of our risk appetite.
Thank you. On the third question, we won't get into market-specific dynamics in terms of growth. Suffice to say, as I said, the greater relaxation on account of the COVID measures abating, will result into agency activity, and not only in Hong Kong and Mainland, but more broadly across the Asian markets. We've already signaled to you in terms of the positive impact that we are seeing on account of the MCV or the, at least the initial flow of the MCV, customers coming into Hong Kong.
Okay, thank you. Anil, I'll just give you another one, this time a change of markets. It's, it's on Malaysia. It used to be on Malaysia. It looks like they've dropped off. We'll move on. Okay, yes. Please, this is from Sudarshan at Soc Gen. Can you please provide some color on the new business outlook for Malaysia? Can we expect some recovery after the decline in this year? Do you think there'll be a subdued growth in the near future? Thank you.
Solmaz, you wanna take that?
Yes, happy to. It's important to know that we have a prime franchise in Malaysia. We are on a consolidated level, still number 1 in absolute premium, when you combine the convention or Takaful footprint. We're very excited about Malaysia. We have the biggest agency force, and we have, like, we are a clear market leader in Takaful insurance with a huge potential, with about 64% of the population being the Bumiputera population, and we are the clear market leader there. We have seen strong banker growth in Malaysia over the last year, and the numbers, when you look at it after the medical repricing one-off effect in 2022, we have dropped an APE by about -2%. The market overall dropped by 6%, and in conventional by -9%. Comparing that, we did actually quite well in Malaysia.
The first two months, looking at the overall guidance in 15%, we will see some momentum in banker continuing and agency as well.
Okay, I'll keep going. The next one is from Premier Miton Investors, and it's on mainland China JV. Could you please comment on the changes in the mix of products that you see demanded by customers in the mainland business? Is Health and Protection losing share here? Would it be to assume that the new business margins will reflect the reduction in Health and Protection demand that we saw last year? Thank you.
Lilian, would you like to address that? The product mix question for mainland China.
I think obviously, in our business we ensure we have a comprehensive, you know, customer proposition across, from savings, protection, as well as retirement planning. What we are seeing is actually there is still a demand for Health and Protection. I think subsequent to the change of regulation in critical illness in 2021, we continue to refine our product, our critical illness, in 2022. What we are actually have done is actually from a customer proposition is added what we call a critical illness butler. These are the things that help to address the customer pain points across. We have seen as a result in actually our GBA area in Guangdong alone, about 20 something percent of our AP is coming from this critical illness product.
That's what help us to drive an NBP of actually our GBA area by 72%. This is how we focus on protection. The other exciting piece that we are looking at is actually driving our retirement planning proposition, which is, you know, at the back of the Pillar 3 pension. Which is to help people to actually save for retirement. In CITIC Prudential, we have around 22 products that actually address retirement planning. Most of them actually qualify for that tax benefit that has been put out by the state council. We are continue to be very excited and are well positioned to drive mobile protection and long-term saving, and that's where we're gonna continue to address the customer needs.
Thank you, Lilian.
Okay, last two from the web, they're both on margins and interest rate sensitivity. The first one is in terms of sensitivity of new business margin to interest rates, with your sensitivities, can we understand the pace of change, likely change in margins if interest rates rise again this year? More holistically, how do you see the impact of rate rises on demand for savings versus protection and lapses on savings products? That's the first one on margins. The second one on margins is specifically to the MCV market, whether or not, what's the margin outlook for this business, and the momentum for this business?
James, would you like to take the NBP sensitivity and the rate rises and the impact on lapses?
Okay, let's start with lapses. I mean, what you've seen in this business now for a number of years is incredibly resilient persistency. It stayed around 89%-90%, and that hasn't changed. That's because we're offering long-term products for our customers that they want ultimately, regular premium that they continue to pay. We're not seeing any. All the way through COVID, all the way through all of the disruption, we haven't seen any disruption to our persistency levels. That's the first point. In terms of sensitivities, you've seen those in the deck. They are clearly from an NBP perspective, we do have economic sensitivity for the reasons that I mentioned before.
Ultimately, the underlying profitability of these products is strong and this is really just a discounting effect because of our focus on Health and Protection.
Okay.
Thank you, James. Before I ask Lilian to comment on MCV margin, historically, as we know, the margin on MCV has been higher. I did mention in my earlier comments that the initial set of demand that we are receiving across the border is coming in the savings product, which tends to be lower margin as compared to Health and Protection. If you think about Health and Protection, those typically take a longer duration in terms of the sales cycle as compared to the savings product. As I said, the focus for us and for Lilian's team, is to ensure that we have the entire range of products addressing the diverse needs of customers across savings, health, wealth, and protection. Lilian, any specific comments on MCV margin?
We see, you know, the margin is driven by a combination of sales and the product. What we are seeing the early stage of MCV is we see the case size has actually double before the COVID. That is actually have an impact on the overall margin as there's more volume that going to the savings products. Having said that, in terms of the number of policies, actually 50% of those MCV customer continue to take up an Health and Protection product as well. We'll see that as the year goes. I think we see more, a more balanced product mix going forward.
Thank you. Conscious of time, we've got seven minutes, six questions on the phone. I think if I ask you, there's probably some more on the floor. Let's go back to the floor in the first instance for a last sweep from the floor. Okay, having said that, there's no hands up. Okay, good. On the phones, let's go to the next caller on the phone, please, moderator.
Thank you. Our next question comes from Farooq Hanif from JPMorgan. The line is now open. Please go ahead.
Hi, thank you very much and very nice to know that you're here, Anil. Just quickly on India, there's been some regulatory changes, impacting the tax base of products, but also allowing, you know, life insurers to sell more products. Could you talk about your views on the regulatory environment there and how supportive it will be, and whether you would ever consider getting a larger share of that JV as part of strategic investment? Lastly, quick one, you mentioned Macau taking some time to develop.
Could it make any impact in 2023 sales to Hong Kong? What's the timeline? Thank you.
Sorry, I didn't get the second part of the question. Can you just repeat?
Macau impact in 2023.
The Macau? All right. Thank you. All right, let me start with the India question.
Okay.
I'm gonna ask Solmaz to comment on the regulatory changes that he's witnessing. More broadly, on India. India clearly, is an exciting market, right? Large population, very similar to China Mainland, significant under-penetration. We have a strong joint venture partner in form of ICICI, they have a good track record in terms of performing in that market. I did mention that I will be reviewing our strategy and our operational capabilities between now and over the next 6 months, we will come back to you with a strategic roadmap in terms of how do we want to kind of, you know, grow our business forward both across Asia, as well as Africa.
Solmaz, you wanna comment on the Indian regulation, specifically the tax-related changes impacting... I think it's the ILP product?
Yes, I'm happy to do that. If that was the question, I'm happy to explain that first, and if you have another question with regards to regulatory, happy to follow up on that. Now, in the bill, it's currently only a bill, and the final implication will be only crystallized once the act is passed. Our understanding is that the policies sold until the 31st of March will be outside of the scope. Only policies sold from April 1st, 2023 will be covered. If the total annual premium paid for not unit-linked policies exceeds IDR 500,000, then the difference between the total benefits received and premium paid would be subject to tax as other income is. Understanding is that the death benefit would not be considered in this computation.
In this context, as it's closed in our results, the AP product mix over the nine months, financial year 2023 were well diversified with 41% unit linked, about 20% protection and 6.3% annuities. There's been several inquiries post the budget announcement. We wish to bring to your attention, though, that the share of business of non-unit linked policies with annual premium of above IDR 500,000 is just approximately 6% of the total AP. On a practical level, this business is not expected to go away completely, hence the net impact on the business expected to be trivial. This is also in line with the announcements made by ICICI Pru in this regard.
Thank you, Solmaz. Going to the Macau question. I think before I ask Lilian to provide the update on that one, we're firstly delighted to have the Macau license. What it does is, it in many ways complements our Hong Kong business as well as our presence in South China, across the nine cities in GBA. We now have coverage across all the 11 cities in GBA. We believe, as the regulation evolves, GBA clearly is an opportunity that we would be keen to address. As I said, we are looking forward to the launch of our business in Macau in quarter two. Lilian-
Yes.
Any other points?
Absolutely. I think we now just doing the company registry, opening bank accounts. It will launch in quarter two, so we'll make an impact in 2023. One thing I want to highlight, obviously, Macau, we are there to serve the 680,000 people of Macau. Also, remember the MCV traffic is about 1 million a month, so that's another opportunity for us.
I'm conscious that we're more than out of time.
Thank you.
We still have some on the phone. If I can ask the next callers, you have literally 30 seconds to ask your question, and answers, they could be two sentences. We will do everyone the honor of actually trying to get through them. Appreciate that there is another firm due to announce results any second now, there's a lot going on. If we go to the call, super quick, please.
Our next question comes from Dominic O'Mahony from BNP Paribas. Your line is now open. Please go ahead.
Thanks. I'll try to keep it quick. Just one question then. You give the embedded value split by geography. I wonder if you could give us the pre-surplus generation split. Even a rough indication of how much is coming from your bigger markets.
James, do you wanna address that?
We don't give a breakdown by margin, by geography. What you can see is you can see our MBP from the bigger segments. That's in the disclosure. That will give you a flavor of where we're adding the most value.
Yeah, thank you. Okay, next question please.
Our next question comes from Rhea Shah of Deutsche Bank. Your line is now open. Please go ahead.
Yeah, thanks. Just one question. The cash remittances looked a bit low in 2022 as a whole, and a bit low in the second half in particular. Was there anything particular driving this?
James?
A quick answer, no. It's probably my quickest answer. We've got very robust levels of liquidity. We're at about $ 2.7 billion at the year-end. We've always had a policy of only bringing up to the center what we need. Clearly, we don't need any more.
Okay. Thank you, James. Very concise. Next question, please.
Our next question is from Nasib Ahmed from UBS. Your line is now open. Please go ahead.
Thanks. Quick one on Jackson. When do you intend to sell it down? Just on inorganic opportunities, where do you see them, if you can list them down quickly, please.
James.
Jackson, you know, we made a commitment to reduce our exposure to below 10%, which you know we did. We're not gonna give comments on the sale of the balance because that would impact its price.
And then-
You wanna address the inorganic as well?
Inorganic we will always look at opportunities that match our IRRs, but we've been very focused that our capital allocation is primarily focused on organic growth and then filling in capabilities.
This is a good regime, this one. Next question, please.
Our next question comes from Andrew Baker of Citi. Your line is now open. Please go ahead.
Great. Thanks. two quick. IFRS accounting change obviously coming through. Any thought on changing the EV reporting basis?
Just in China, can you help me understand the margin? 70% is from bank, 43% margin. The rest I assume is from agency, 65% margin. How'd you get to the 44% blended? Thanks.
James, IFRS 17 changes and EV, yeah.
I think the first question was. I thought I'd escaped an EEV question. EEV. Look, the headline is, you know, I hear you. Our focus has been on IFRS 17 and making sure that we get IFRS 17 over the line. Clearly, as interest rates increase, the differences between EV and TV actually reduce.
Okay. Lilian, you want to answer the agency mix question? Would you have the data for that, in terms of how the margin squares up to 48%?
In terms of...
If you don't have the data-
Yeah.
Can you come back to that?
Can we come back to you on that?
Yeah. 'Cause that's a very specific question.
Yeah.
We do not have the data for that. We might have one come back to that.
It's in the appendix slide.
It's in the appendix.
We will come back to you, if you don't mind.
Yeah.
Yeah. Okay. next question, please.
Great. Thank you, guys.
Thank you. Our final question is from Abid Hussain from Panmure Gordon. Abid, your line is now open. Please go ahead.
Hi. Thanks. I'll try to be quick. I have three questions. One on bancassurance. Is there any high level color that you can give us on why the margins improved there? Is there anything structural there happening on the banker side or is it a one-off? Second two, the next two on capital. First on capital sensitivities. The GWS capital is negatively geared to rising rates as it is to spreads. On rates, is that just simply the discounting effect or is there something else going on? Can you just touch upon that very quickly? Just finally on capital, your capital ratio is in the 300% on the GWS basis.
I know the floor is 150%, but what is the operational target range that you're hoping to run within? Thanks.
James, why don't you answer the capital question. Then we can go to the bancassurance question to Lilian.
There are two capital questions. The first one I think was GWS capital sensitivities, and you asked about the discounting. Sorry, you asked about interest rates. Look, however you, wherever you start, we've had a really strong balance sheet. That 302, you take off, you take off any of the single impacts, and it's still a very, it's a very high number. And what I would draw your attention to is what's happened this year. We started this year at 320%. We've had significant increases in interest rate, huge reductions in equity, volatility, credit spreads increasing. A real combination of stresses, and yet we ended the year equally strong at 302%. That gives you a sense of how we, how actively we manage this.
The second question you asked me was about the capital range at 302% versus the 150% that is our floor, in essence. We don't set up an internal target ratio of the type that you've just described.
Lilian, bancassurance.
On the value that bancassurance bring, I think obviously, bancassurance was actually our, given the COVID restriction, was our biggest channel in 2022. Having said that, we also bring in a 15% growth in NBP in terms of value. What's good to know is our two large regional bank partnership bring in SCB bring in about 30% of our bancassurance value, and UOB actually bring in 15%, 16% of our value into bancassurance.
Just to add to Lilian's point, if I look at the penetration rates of insurance into the customer base of our bank partners, there is still a lot of runway. Most of the bank partners, our exclusive bank partners, have single digit penetration into the customer base. There is fair amount of runway for us to drive greater customer penetration as far as insurance products are concerned.
We have one final question. Someone had difficulty getting in, and we have indulged that person. Last question, please.
Our last question is from Andrew Green of Autonomous. Andrew, your line is now open. Please go ahead.
Great, thanks. Couple of questions. Firstly, you talked about changing product mix in Hong Kong having a disruptive effect in 2023. Could you expand on that? Secondly, could you talk about any early thoughts on your CITIC joint venture? The past management team were keen to increase the share. Is that likely to continue as a desire? Is it, a sort of middle distance, issue or not?
Thanks for those questions, Andrew. Let me get to the CITIC JV. As I mentioned, China Mainland is obviously a big focus area for us, and we are very committed to investing capital in China Mainland to ensure that we grow the business further. We have an excellent partner. We have 50% of what is a growing business, as was demonstrated in 2022, and we look forward to working with our partner to see opportunities as to how we can grow our business even further on the Mainland. On the change in product mix, as I said, the initial flow that we are getting from the MCV customers coming into Hong Kong is in the savings category.
However, Lilian did emphasize the fact that 50% of the policies are savings and 50% of the policies are HNP. Typically, the HNP sales cycle is much longer than the savings product. It's also the kind of profile of customers, Andrew, that we are getting across the border initially. As I said, it's still early days, and some of this is likely to evolve as we move forward. Our emphasis is to provide diversified product suite to address the diversified nature or other diversified needs, I should say, of our customer based in Hong Kong and elsewhere. Thank you.
Thank you, everyone.
Thank you.
Obviously there's a scope for follow-up questions on Monday face-to-face with Andrew, if we've rushed and misheard anything.
For sure.
I'll pass back to you, Anil, to close the call off.
Thank you, Patrick, and thank you, everyone. It's really an exciting time to be part of Prudential. As I said, hopefully I've been able to convey that excitement in terms of both the growth opportunity, but, you know, how Prudential is positioned to be able to address these opportunities across the Asian and the African markets. My focus right off the bat would be people and culture, our customers, and our operating rhythm. I'm sure we've been able to kind of answer most of your questions, but if you'd like more texture, more color, we would love to engage with you further after this call. Thank you very much for being here. This is great because this is the first time in the last 3 years that we've done a face-to-face meeting.
I look forward to many of these, and have a good evening. Thank you.