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Prudential plc (PUK)
Q2 2011 Earnings Call
August 05, 2011 6:00 am ET
Nicolaos Nicandrou - Chief Financial Officer and Executive Director
Chad Tendler -
Michael McLintock -
Unknown Executive -
Barry Stowe - Executive Director and Chief Executive Officer of Prudential Corporation Asia
Rob Devey - Director and Chief Executive Officer of Prudential UK & Europe
Tidjane Thiam - Group Chief Executive Officer and Executive Director
Nick Holmes - Nomura Securities Co. Ltd.
Toby Langley - Barclays Capital
Jon Hocking - Morgan Stanley
Andrew Crean - Autonomous Research LLP
Trevor Moss - Berenberg Bank
James Pearce - UBS Investment Bank
Unknown Analyst -
Raghu Hariharan - Citigroup Inc
Andrew Hughes - Exane BNP Paribas
Greig Paterson - Keefe, Bruyette, & Woods, Inc.
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At our Investor Day, on December 1 of last year, we set out how we intend to deliver growth and cash for our shareholders. This morning, I will give you an update on our progress during the first half of 2011 and there are fundamentally 3 messages that I would like to emphasize. The first one is that we have a clear strategy that we confirmed on December 1, and some of you will recognize with the puzzle we use, which is to accelerate our growth in Asia; to build on our strength in the U.S.; focus even further in our U.K. business; and optimize our asset management business.
That strategy has an explicit focus on Asia. Asia remains a uniquely attractive opportunity for shareholder value creation within our industry. The sovereign debt crisis in the Eurozone and the recent concerns about the U.S. have only continued to reinforce the value of our focus on Asia.
The second point I'd like to make is that our leadership team across the group, well-represented here, today has delivered strong first half numbers. We are all totally focused on execution, supported by our operating principles, in red here, balance metrics, disciplined capital allocation and proactive risk management. This team here is committed to ensuring that our track record of financial performance continues into the future.
And the third message is that we are now 18 months in our 48 months program that we defined '10, '11, '12, '13. Growth in cash and we are on track to achieve the 2013 objectives.
So my presentation this morning, we'll start with a quick overview of the results. I will then take a moment to give you some more color about our businesses, about Asia, the U.S., M&G, the U.K. before saying a word on our progress on the targets, the objectives we set in December.
I will hand it over to Nic, who will provide you more detail on our financials across the group's operations, and I'll come back at the end to provide an outlook and of course, open up to Q&A. Again, our management teams from across the groups are here this morning. Please do take this opportunity, and I've seen some of you doing it already, to ask questions and tap their expertise.
So we are committed to delivering profitable growth and increase in cash. Starting with profitable growth, the first leg of our December 1 commitments. We have achieved in the first half an increase of 20% in new business profit, 25% in IFRS profit, 28% in EEV operating profit.
For the first time for H1 results, we are up 20% or more across all our 3 preferred metrics of profitability, hitting GBP 1 billion on a number of them, and Nic will explain on that later.
Our embedded value per share has increased by 13% to 745p per share. And if I move on to cash, the second leg of our commitments, we have delivered free surplus generation of almost GBP 1.1 billion from our increasingly large bulk [ph] book and 50% increase in net remittances from our businesses, driven by a particularly large contribution from Jackson at GBP 320 million and please note that Jackson has made all its annual remittance during the first half, so don't expect anything equivalent in the second half.
Last but not least, we have declared an interim dividend of 7.95p per share. This is calculated as 1/3 of the prior year's full year dividend and is consistent with our historic formulaic approach to the interim dividend, and Nic will come back to that.
Given the decision made to cancel the scrip dividend option, there is, as you would expect, no scrip dividend. Now this performance is the result of the work we have done over the last few years to change the economics of the group, and I use these words with purpose, to change the economics of the group. Nowhere is this more visible than in the new business profits we are generating from the capital we invest.
It is my long-held belief that life insurance is a cash-generating business. That is only true though when investment in new business is both disciplined and optimized. By disciplined, I mean that the quantum of investment in new business must be well-controlled. And by optimized, I mean that the investment in new business must be allocated in the way that it maximizes IRR and minimizes payback period.
So if you look at our performance from that angle, what you see is that our group new business profits have increased by 90%, i.e. almost double for the group over a 3-year period, while new business trend over the same period was falling in absolute terms by 12%. So we continue to write capital-efficient business across our life operations to generate, as I said in March, more for less.
Another metric on which the transformation of the group is visible is cash. We are showing you here the net remittances from our businesses over a sustained period of time, so '05 to '11. For those who are skeptical about insurance accounting, I know it's shocking but they exist. Cash generation overtime is a key test of whether a strategy is working.
You can see on this slide that the strong trend of increasing net remittances from our businesses has continued in the first half of 2011. As just mentioned, the remittance that we have received from Jackson in the period represents tangible evidence of our profitable and cash-generative expansion in the VA market in the U.S. and leaves the business in a strong capital position plus remittance, because you can imagine that the Michigan regulator would not have allowed it otherwise.
So let's now look at each of our businesses in turn starting with Asia. Asia, as I said earlier, represents a huge growth opportunity, that's not news. And our long track record of top line new business growth confirms this. New business sales group, this APE.
In both -- we have built a leading distribution platform in both agency and bancassurance. However, having significant volume growth and top line market share accounts for a little if one fails to convert such a position into actual returns for shareholders.
Over the last few years, we have deeply modified the economics of our Asian business. PCA is now delivering not only APE growth but growth across all of our key metrics, which are: First, the new business profit, which was up 17% in the first half of the year. As you all know, our NBP growth has been consistently strong over the last few years. And despite increasingly tough comparators, the PCA team continues to drive this metric forward year in, year out.
In the first half, 9 of our 11 markets in Asia delivered double-digit NBP growth, and that's how we incentivize and measure them. Not APE, NBP growth. And excluding India, a market whose challenges are well known, our NBP was up 22%.
Picking out a few markets, Indonesia was up 32%; Singapore, up 25%; Malaysia, up 22% in NBP.
But new business is only one metric. I have always said that it is not appropriate to run a life business on a single metric. The real test for a life insurer is its ability to drive growth across the free metrics of NBP, IFRS and cash.
In 2008, we told you that we would focus more on IFRS and cash, what we have called in our operating principles, more balanced metrics. So what have we achieved since then?
IFRS profits are now more than 4x the level we were at in 2008 and have increased again by 25% in the first half of 2011. So that's quite, a strong progression. And if we move to cash, net remittances, Asia has contributed over GBP 100 million in net remittances to the group in the first half. That is 9x more than in 2008 and there is more to come.
So bringing this all together in one slide, you can see the transformation of Asia's economics since 2008 due to our explicit focus on delivering across all of our key metrics. This profile of financial performance where we deliver both profitable growth and increasing cash is rare in fast-growing companies, like ours, in emerging markets.
So let me now give you some more color about our Asian operations. I do not need to stress again, but I'll do it, the significant opportunity for life insurance that Asia represents. This largely results from the combination of a number of well-known structural factors, low penetration, high GDP growth, high savings rates, positive demography and constructive regulatory environment in many markets, especially in Southeast Asia. As showed on the left-hand side of the slide, actually describing GDP growth and penetration by market. So we are very well-positioned to capture this opportunity with our presence in 13 markets. On the right-hand side here, where we serve now over 12 million customers through a mix of agency and bancassurance.
Those of you who have visited our businesses in the past will agree with me that the best way to understand the scale and depth of our presence in Asia is to touch and feel our operations. It is for this reason that our Investor Conference in 2011 is to be held in Kuala Lumpur, where we will provide you with lots of access to our Asian businesses and management.
As a preview, let's take a look at some of those businesses and see what they've been up to in the first half of 2011. In Indonesia, the market with high GDP growth and low insurance penetration, we are the dominant player in the industry. In '95, we had only 250 agents. Today, we have over 100,000. We have a strong presence in Jakarta and Sumatra. And in the first half of 2011, we continued our rapid expansion into the other regions of the country where our takaful products are very popular with the Muslim population.