Prudential Public Limited Company (PUK)

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Prudential (PUK)

2012 Earnings Call

March 13, 2013 7:00 am ET


Cheick Tidjane Thiam - Group Chief Executive and Executive Director

Nicolaos Andreas Nicandrou - Chief Financial Officer and Executive Director

Michael George Alexander McLintock - Executive Director and Chief Executive of M&G

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

Clark Preston Manning - Former Chairman of Jackson National Life Insurance Company

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

Robert Alan Devey - Executive Director and Chief Executive of Prudential Uk & Europe


Jon Hocking - Morgan Stanley, Research Division

Blair Stewart - BofA Merrill Lynch, Research Division

Andrew Crean - Autonomous Research LLP

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

Colin L. Simpson - Goldman Sachs Group Inc., Research Division

Gordon Aitken - RBC Capital Markets, LLC, Research Division

Andrew Hughes - Exane BNP Paribas, Research Division


Cheick Tidjane Thiam

Well, good morning, everyone, and welcome to our 2012 results presentation. I've done a few of these now, but we've never had this much trouble getting you into the room, so I'm not sure how to read that, if it's a sign of a lack of interest or anything else. But anyway, I will try to keep you all -- you interested.

We will follow our usual format with 2 presenters, Nic and me. I will start with the highlights of our results for full year 2012 and comment on a few key aspects of our strategy. And I will then hand over to Nic, who will, as usual, cover our financial performance in a degree of detail. And I will come back at the end to talk about our medium- and long-term prospects and, closer to us, the outlook for the rest of the year. And we will then, of course, take your questions.

Members of our executive team from across the world are present in this room or dialed into this results presentation. I think that's said [ph]. And collectively, we will do our best to answer any questions that you may have today.

So starting with the results. Prudential has produced a strong performance in 2012, delivering both profitable growth and cash. At this point of the day, of course, you all have had a chance to look at the results, so I will just pick out some of the highlights.

Starting with new business profits, our preferred metric for growth, we have grown by 14% to GBP 2.452 billion. Moving on to IFRS operating profits for the group. They are, for the first time, above GBP 2.5 billion and have grown by 25%. Since 2008, our IFRS operating profits have doubled, underlining, we believe, the quality of our franchises and the execution of the strategy. Our profitable and fast-growing platform in Asia made a significant contribution to this performance, with Asia EEV new business profit up 18% and Asia IFRS profits close to GBP 1 billion at GBP 988 million, up 26% on 2011. This growing, profitable and increasingly cash-generative business gives us a distinctive growth and profit signature.

Cash remittances grew by 9% to GBP 1.2 billion. And the notable feature this year is that Asia was, for the first time, the largest contributor with net remittances up 66% to GBP 341 million from, I think, GBP 206 million was from last year. Given this performance, the board has rebased our final dividend upwards by 4p to bring the full year dividend to 29.19p. This is a 15.88 -- 15.9 increase over the prior period and this rebase ensures that our dividend tracks more closely the improving performance of the group and that shareholders enjoy real, tangible and growing cash returns.

Our performance in 2012 has moved us closer towards our 2013 objectives. So let us take a look at that. Starting with Asia. Asia, as you know, is the only region where we have given ourselves explicit growth objectives. So starting with growth in Asia, new business profits grew by 18% to GBP 1.266 billion, whilst IFRS profits grew 26% to GBP 988 million, exceeding the level of the 2013 objective, which was set, if you remember, at 930 -- GBP 930 million.

Moving to cash, which is the second leg in our 'Growth and Cash' agenda. PCA remitted GBP 341 million of cash to the group, exceeding here again the level of its 2013 objective. Jackson delivered a net remittance to group of GBP 249 million, and the U.K. contributed GBP 313 million in net remittances.

At group level, we're aiming for at least GBP 3.8 billion of net remittances over the 4-year period from 2010 to 2013, so to date, 3 years into that 4-year period, we have delivered 85% of that cash target, so 3/4 of the way. Across-the-board, this is an encouraging performance.

Our 2012 numbers are good evidence that the strategy outlined in this familiar chart now for you since 2009 is working. This strategy is underpinned by a set of operating principles that we implement with discipline. I would like to take a moment to talk to you in more detail about each of these principles in turn, the focus on customers and distribution, the use of balanced metrics, capital allocation and our proactive risk management. So let's start with the one that we put at the center of this pictorial, which is the focus on customers and distribution.

Quite simply, customers are the ultimate source of value for a company like ours. Delivering lasting and sustainable value to customers is key to driving shareholder returns. The emerging middle class in Asia represents today about half of our global customer base and is growing strongly. Baby boomers in the U.S., the aging middle class in the U.K. provide us with 2 additional large customer bases. As a life insurer, we simply help our customers to save for retirement and to protect themselves and their families against a number of risks, such as illness or death. Meeting our customers' needs means that these customers will stick with us, and if satisfied, become our advocates with potential new customers. This virtuous circle drives net flows, which I really believe is the lifeblood of an insurance company, and you'll hear a lot about this today. Over the last 4 years, we have attracted over 36 billion in net flows, 36 billion in net flows globally. And our persistency of this business is good. That's the dynamic. That's the driving force behind the results that we have been able to achieve. It's our ability to capture and retain net flows.

Now in that gain, distribution, of course, plays a key role in our ability to reach, to attract and retain these valuable customers across regions. Our customer franchise and our unique distribution reach drives strong and sustainable financial performance, translating over time into cash and returns for shareholders.

So turning now to our overall operating principles, I'll start with balanced metrics and a valid disclosure estimate because it really goes together. We have been enhancing our financial discoveries -- disclosures, sorry, consistently for a number of years now, with really 3 things in mind. The first is to explain to you clearly how we make money. And this led us to introduce our various sources of earnings disclosures in mid-'08, for those of you who remember.

Second, then, to show you how we allocate capital and with what impact, and we introduced a number of disclosures since mid-'09 on our investment in writing new business, our new business trend. And we have been, since then, explicitly focusing on IRRs and payback periods by region, and Nic will come back to that.

And the third theme has been really to focus on cash and track our cash generation. At the end of the day, cash is for me, over time, the ultimate measure of performance. And to give you better visibility on our cash generation, we introduced our first free surplus disclosures in March '09. Because simply, in business, what gets measured gets done. So all these strategies are not just presentational. They have had a significant impact on how the group is managed. Internally, we use these metrics to reward the right behaviors and to drive financial performance that is aligned with our shareholders' interests. Externally, we believe that these disclosures give you better insight into the key performance drivers of the business so you can better assess our performance and hold us to account. So let's now take a closer look at the business using the lens of some of these disclosures. And I'd like to start with the sources of earnings.

Since '08, I have been consistent in emphasizing 3 key main income streams in our industry: insurance income, fee income and spread income. I've also been explicit about our preference on first 2: insurance income, which generates profits that are above cash and IFRS reach with little correlation with financial markets; and fee income, which, supported by strong net flows, which I referred to earlier, provides growing and capital-efficient earnings with little exposure to interest rates. As you can see from the chart, we have been focused on driving forward with some of these 2 earnings streams that is core to our strategy. Their proportion in our earnings has gone from 39% in 2008 to 57% in 2012 in a total that itself, over the period, has grown by 92%, so almost doubled.

So in 2012, these 2 sources have generated almost 3x more absolute earnings than in 2008. We have tripled in 4 years. In 2012 alone, income from insurance margin grew by 40%, whilst fee income increased by 24%. This is what explains, in large part, why our earnings have not only been resilient, but have grown in spite of a low-interest rate environment. And this underpins our belief that we can continue to grow our earnings sustainably even in a challenging environment.

So moving now to capital allocation, and you're familiar with this chart, too. We have been disciplined about both the quantum of capital invested and its geographic mix over the last 4 years. We have consistently allocated capital to the highest return businesses with the shortest payback periods, in line with our risk appetite. And as you can see, this has had a positive and significant impact, so that over the last 4 years, new business capital investment has declined by 22% while new business profits have doubled.

Turning now to cash generation. Amongst our 3 key metrics, cash is our ultimate yardstick of performance. It allows one to cut through all the debate on the merits of various accounting methods. That is why we have encouraged you to increasingly assess our performance against this metric. This is also why we have emphasized free surplus and highlighted how we translate into cash generation. This focus has paid off, as demonstrated by the strong growth of business unit remittances over the last 5 years and, more importantly, by the significant cash contribution from all 4, and I insist, from all 4 of our business units, which is a situation the group has never enjoyed. The diversification of sources of cash increases the group's resilience and reduces its dependency on any single view.

So let me finish this section with an assurance on our approach to risk management and capital. Our balance sheet is a source of competitive advantage in our industry because it allows us to make good our promises to customers. So it is, therefore, a source of long-term shareholder value creation. We have continuously strengthened our capital position since 2008 in spite of the crisis. We have taken proactive management actions to improve our capital position. For example, in '09, we sold our capital-intensive Taiwan agency business, and we attached by book, which improved significantly our IGD capital position. In the U.K., we have established and maintained a GBP 2.1 billion credit default reserves in the annuity business. In the U.S., we have operated consistently above a 400% RBC ratio since the financial crisis started. And in the U.K., the inherited estate stands at GBP 7 billion at the end of 2012 and is a noteworthy source of strength. So at group level, the IGD surplus, current regulatory measure of capital, stood at EUR 5.1 billion at the end of 2012. Now as we all know, IGD was meant to be replaced as part of Solvency II by a more economic view of capital. We now know that Solvency II will not be implemented before 2016.

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