Prudential Management Discusses H1 2012 Results - Earnings Call Transcript

Prudential (PUK)

H1 2012 Earnings Call

August 10, 2012 7:00 am ET


Cheick Tidjane Thiam - Group Chief Executive and Executive Director

Nicolaos Andreas Nicandrou - Chief Financial Officer and Executive Director

David Collins

Barry Lee Stowe - Executive Director and Chief Executive Officer of Prudential Corporation Asia

Michael Andrew Wells - Vice Chairman, Chief Executive Officer and President

Paul Chadwick Myers - Senior Vice President of Asset & Liability Management


Jon Hocking - Morgan Stanley, Research Division

Kevin Ryan - Investec Securities (UK), Research Division

Nick Holmes - Nomura Securities Co. Ltd., Research Division

Greig N. Paterson - Keefe, Bruyette, & Woods, Inc., Research Division

Andrew Hughes - Exane BNP Paribas, Research Division

Ashik Musaddi - JP Morgan Chase & Co, Research Division

James Pearce - UBS Investment Bank, Research Division


Cheick Tidjane Thiam

Good morning and welcome to our Half Year 2012 Results Presentation. And I'll start -- since I specialize in bad jokes, I'm going to start with my Olympics joke, which is that, "Thank god, there's only 3 million Jamaicans." I checked, it's at least 2.9 million, 2,889,000. Can you imagine what it would be if there were more of them? But anyways, it's great.

So Prudential has produced a strong performance during the last 6 months and is on track to deliver on our 2013 "Growth and Cash" objectives, which we set ourselves at our first investor seminar in 2010. I would like to begin by setting the agenda of this meeting. We will follow the usual format. I will start with the highlights of our results for the first half and will comment on a few key aspects of our strategy, with a focus on Asia. I will hand it over to Nic, who will cover our financial performance in more detail, and I'll come back again to talk about our outlook for the rest of the year, and we will then take your questions. Members of our executive team from across the world are dialed into this results presentation. Barry is on the phone. And collectively, we will try to answer any questions that you may have.

So my first slide will be very -- the usual one. And I'll start with growth, which is the first element of our "Growth and Cash" agenda. We have achieved GBP 1.1 billion of new business profits, which is our key metric, as you know, for life insurance growth, and over GBP 5 billion of asset management net flows.

Moving on to our profitability. IFRS operating profit is up 13%, consistent with our continued emphasis on this metric since 2008. EEV operating profit is flat, and this is largely due to the impact of a lower interest rate environment.

Regarding cash, the other element of our "Growth and Cash" agenda, each of our businesses remitted cash to the center in the first half. Among group remittances, I would like to highlight a $400 million remittance from Jackson. This follows the $0.5 billion remittance from Jackson in 2011 and is tangible evidence of the quality of the growth delivered by Jackson over the last few years.

A strong capital position with an IGD surplus of over GBP 4 billion, estimated at GBP 4.2 billion before dividend; and an interim dividend of 8.4p per share, this is a 5.7% increase on the prior period and, consistent with the past, has been calculated as 1/3 of the prior year full dividend.

So let's now take a look at the performance over a longer period of time than 6 months, starting 5 years ago in 2007. Here, you can see our performance across our 3 usual metrics of new business profit, IFRS operating profit and cash. In managing a life business, of course, there is always a degree of tension between those 3 metrics and it is challenging to move all of them forward in parallel. Over the last 5 years, we have grown new business profit by 19% annually, IFRS profit by 17% and cash remittances by 21%. Such growth rates allow us to doubled in size every 4 to 5 years. And during the last 5 years, NBP has increased 2.3x; IFRS, 2.2x; and cash, 2.6x. This performance has been delivered in a challenging economic end market environment, validating our strategy, our franchisees, our geographic footprint with a limited exposure to the eurozone and our focus on execution.

I would like at this point to make a few comments about the context in which we have been operating for a while and how we are adjusting to it. The most significant headwind that we have had to face in recent times is clearly the current level of interest rates and the shape of the yield curve. The long-term nature of our liabilities means that we naturally prefer an upward slope in yield curve, as opposed to the current environment with a yield curve that is both at historically low levels and flat. We have been taking a number of actions in this context.

New business is important to us as a growth company but only if it is profitable, which ultimately will be a function of 2 things: the terms set at the point of sale and the quality of the management of in-force over the life of the product. And those are the 2 things in which we concentrate.

Regarding the terms at the point of sale. We are maintaining our discipline. We have not lowered our return or paid back period hurdles for new business. We continuously and proactively address our product pricing and features to ensure we generate adequate returns of -- on capital, and you'll see examples of this during the presentation. So true to our value-over-volume philosophy, as a result, we do not hesitate to walk away from business that does not have the right risk-return profile.

As I just said, insurance is as much about managing the in-force as it is about writing new business. It is therefore our priority to protect the value of the existing book. In this challenging and volatile environment, we are focused, as a result, on cash generation and on containing downside risks. Our assets are defensively positioned with our hedging strategies at a local and central level to ensure that our capital position can cope in the event of tail scenarios.

Diversification is another effective risk management tool. We regularly talk to you about the makeup of our earnings between spread income, fee income and underwriting or insurance income. Since we introduced this process [ph] in '08, we have continuously worked to increase our fee and insurance income which are higher-quality earnings with limited market sensitivity. The development of our health and protection business in Asia is at the heart of that approach, as well as the highly profitable and capital-efficient growth of our asset management businesses. And I think we don't talk enough about that and that's a key component of our numbers. We're recently moving on to a U.S. -- and to give you another example, we recently launched Elite Access variable annuity. The variable annuity without guarantees is another example of this approach. And the acquisition of REALIC from Swiss Re, which will further enhanced the diversification of our earnings in the U.S., is inspired by the same logic.

The current interest rate environment is a direct result of the policies followed postcrisis and over the large fiscal imbalances that can be observed across the western world. We have been facing and are likely to continue to face a low economic growth in many large western economies. The second set of challenges is flagged on this slate after the interest rate environment. In that context, Prudential benefits from a few specific factors which have allowed us to continue to grow, albeit more slowly, in this challenging environment.

The first one, what I'd call our first growth area, is our Asian focus, which gives us exposure to the fastest-growing part of the global economy, at least on a relative basis. The second growth area clearly is in the U.S. where we are benefiting from the demographic wave of baby boomers entering retirement. And the third one, and this may surprise some of you, is in the U.K. where I see M&G, with its leading position, in the fastest-growing part of the U.K. savings market as asset managers continue to generate strong net inflows when the life sector itself has been in negative net flows for a number of years. These 3 growth areas have allowed us to continue to make progress in spite of the weak economic growth that we have all witnessed since '08.

Finally, we are faced by the significant challenge of future regulatory change, namely Solvency II. Much has already been said on this issue. We are lobbying hard to help deliver an outcome that is beneficial for our customers, our shareholders and the industry in general which plays a key role in the economy.

With a balance sheet as large as ours, we could never claim to be immune to the global economy, but we have been able to navigate through the turbulence that we have experienced thus far. We are focused on managing for the challenges described here, low interest rate, flat yield curve, weak economic growth and regulatory uncertainty, to continue to generate adequate returns for our shareholders.

So let's move now to capital allocation.

You are familiar with this slide since '08. We are focused on optimizing both the quantum and the composition of the capital we allocate to writing new business. In the past 4 years, new business strain has increased by 7% while new business profit has more than doubled. At the same time, we have materially rebalanced our investment away from the U.K. to more attractive markets, with our investment in the U.K. now 1/4 of what it was in 2008. And that's one of the key achievements of Rob and his team in the U.K. As we know, there are factors that impact new business strain that are outside our control across the economic cycle, and we have seen this play out in the first half of this year. Strain has increased in both Asia and the U.S. This is largely due to the impact of the lower interest rate environment, which has both a mechanical impact on the strain calculation for reserves and is also driving changes in consumer demand. That said, we are comfortable, in this context, with the IRRs and paybacks earned on the capital invested across our chosen markets. Nic will provide you with more details on our specific IRR and paybacks in the first half for each of our businesses, and you will verify this.

so let's now look at our 2013 financial objectives, starting with Asia because that's the only reason why we set growth objectives. And the charting has the IFRS on the top, NBP on the bottom; and half year, H1 in blue, H2 in red, so you can track the evolution. And you can see that we have been able to continue to make progress towards our objective of doubling in 4 years, I'll express it simply. Year-for-year, for the first half, IFRS operating profit has increased by 20% and NBP by 18%.

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