Prudential Public Limited Company (PUK)

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Prudential plc (PUK)

Q3 2011 Earnings Call

November 08, 2011 5:00 am ET

Executives

Nicolaos Andreas Nicandrou - Chief Financial Officer and Executive Director

Tidjane Thiam - Group Chief Executive Officer and Executive Director

Analysts

Oliver Steel - Deutsche Bank AG, Research Division

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

Andrew Hughes - Exane BNP Paribas, Research Division

Andrew Crean - Autonomous Research LLP

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

James Pearce - UBS Investment Bank, Research Division

Duncan Russell - JP Morgan Chase & Co, Research Division

Blair Stewart - BofA Merrill Lynch, Research Division

Raghu Hariharan - Citigroup Inc, Research Division

Presentation

Operator

Good morning, and welcome to the Prudential plc Analyst and Investor Conference Call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Tidjane Thiam. Please go ahead. Your line is now open.

Tidjane Thiam

Good morning, and welcome to Prudential's Q3 IMS Teleconference. I am joined by Nic Nicandrou, group CFO; and Mike Wells, CEO of Jackson. Today, we are reporting a strong performance in the first 9 months of 2011 as our positive momentum in the first half has continued in the third quarter.

Importantly, in the current market and economic environment, we are also reporting a strong and robust balance sheet. Our U.S. hedging program continues to perform well, mitigating the impact of a financial market volatility experienced in the third quarter. We have limited shareholder exposure to U.S. sovereigns and banks. All these factors, combined with our strong operating earnings, allow us to report at the end of Q3 an estimated IGD surplus of GBP 3.9 billion.

Looking at our business performance, in the first 9 months of the year, group sales were up 10% on an APE basis, and new business profits were up 14%. Despite the significant macroeconomic challenges that we have seen in the last few months, on a discrete third quarter basis, our sales across the group were up 9%, a good performance in such a context.

Starting with Asia, Asia continues to provide strong growth for the group. New business profit was up 16% in the first 9 months. Moving to the U.S., new business profit increased by 17% in the first 9 months of 2011. As in the first half, Jackson's volume focus in the third quarter has remained on variable annuities, which represented over 80% of our sales. Finally, in the U.K., new business profit was up 1% in the first 9 months.

In the third quarter, sales decreased modestly in comparison to Q3 of last year, but this merely reflects our ongoing value over volume focus. Across the board, our life insurance returns remained attractive, with IRRs in Asia and the U.S. of above 20% and in the U.K. of above 15%.

In asset management, we have delivered close to GBP 0.5 billion of net inflows in the third quarter, excluding movements in money market fronts. This takes us to GBP 3.4 billion of net flows in the first 9 months of the year on the same basis. It is a strong performance, particularly considering how challenging the third quarter was for the asset management industry, with redemption levels in August representing the worst month since October 2008 customers.

So let's now take a closer look at each of our businesses in general. Asia new business sales on an APE basis accelerated in the discrete third quarter, up 14% versus Q3 2010. New business margin at the 9 months stage was 63% flat on what we reported at the half year and up by 5 percentage points on the prior period. I should say at this point that the key driver of the year-on-year improvement in margin is country mix, with unexpected lower sales in India and low margin markets.

Health and protection insurance, which are the main source of the high returns we enjoyed in Asia, represented 31% of APE sales in the third quarter. The size of our agency force in Asia continues to grow, and we ended the third quarter with over 212,000 agents, excluding India. Agency business represents around 2/3 of our sales in Asia, with the remaining 1/3 coming from bancassurance. Just a few comments on bancassurance. Unexpected, bancassurance has outpaced agency over the first 9 months of the year, growing at 34%, driven by the strong performance of our exclusive regional partnerships with Standard Chartered and UOB.

We continue to grow within these 2 overly successful regional partnerships as we have been able to add new countries this year to each of them, with Philippines for Standard Chartered and Malaysia and China for UOB. Asia's strong performance had been delivered despite the significant and well-rehearsed by now challenges of the Indian markets. In India, effectively, APE sales were down 46% in Q3, a continuation of what we saw in the first 6 months of the year.

However, from here, the comparatives for India will start to make more business sense. I am sure you all remember the regulatory reforms intervened in September 2010, so that from October 2011, at last, we will, for the first time, be comparing year-on-year sales, making the same regulatory income. On that basis, we hope to deliver period-on-period growth as we move forward in India.

Moving beyond India and looking at some of the other countries across Asia, 9 out of 12 countries recorded double-digit growth in the third quarter. And Indonesia, Singapore and Hong Kong were particularly strong. Taking these in turn, in Indonesia, our largest Asian market, Q3 sales were up 37% as we continue to drive agent recruitment and training. We will continue to grow the size of our agency distribution in Indonesia, while seeking continual improvement in productivity.

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