The Opportunity and Seizing The Opportunity

Mark Norbom

Thanks, Nick. Okay, thank you Kelvin. Thank you, Nick.
So that gives you an overview of the environment that we are operating in and also, give you a little bit more detail about opportunities in China and India, which are two key markets for us. But, I know there is one key question on all of your minds, and that is: is the opportunity for growth in our businesses is strong as it used to be? I want to spend a few minutes and take you through some of the drivers of the growth of our business. I really feel that the same drivers that were responsible for Asia's growth in the past, are stronger than ever today. There are three specific things I'd like to talk about. First and foremost, the sheer size and growth of the market; second, increasing liberalisation in the market to foreign companies; and third, low penetration of medium and long-term savings and protection of products. Let's take a quick where each of these drivers is today.

You know, we talk about the sheer size of the Asian market. But it's this number that really puts it into perspective: 58% of the worlds population resides in the 12 Asian markets where we operate. That's more than 3 billion people. And the markets are not only big, they are still growing. Despite several economic crises, GDP growth rates have been consistently high over the past ten years. This is a simple average: 4.7% GDP growth, strongly outpacing both Europe and the US, and continued strong growth according to the forecasts. Still big, still growing.

This slide is a particularly important one for us. Over the last ten years, Asian markets have liberalised and allowed greater foreign participation and we have seized the opportunities that this trend has presented. We've build a very significant presence throughout Asia, either through green field operations, acquisitions and partnerships. We are now in all the markets where we want to be. Our early presence in these markets and our geographic diversity are very powerful sources of advantage that will be difficult to replicate. And going forward, the government of India has announced that it intend to seek an increase in foreign ownership from 26%, where we currently stand with our ownership, to up to 49%. The government of China has announced that it will increase access to foreign joined ventures starting in December of this year. Asia is globalising and access to insurance and fund management markets will continue to get better and better and we'll be there every time.

The opportunity for our products really strikes me when I look at this slide. Now, this may look a little bit complex. This is a little more detail to the slide presented earlier on the savings patterns, on investment patterns within our markets. All you really need to do is focus on the red part. The red part represents opportunity; the red part is the percentage of personal financial assets held in cash and deposits. UK has about 20% cash in deposits, US about half. Everyone of our markets in Asia has more than 40% in this segment. And with the increasing market development and growth of more proactive wealth management, we see a huge opportunity to migrate the large balances, the red part, held as cash in deposits, to the other asset classes, asset classes that meet our products and services.

The drivers of growth, the main drivers of growth over the past decade are stronger than ever today. The opportunity for growth will continue to be significant in our markets. But seizing that growth is not without several challenges. In many of our markets we face strong established players. In some of those markets the way we choose to take on this challenge, for example in India and China, we partner with local players. In other markets, such as Vietnam or Indonesia, we focus on leading the development of the market with innovative products and multi-channel distribution. Economic volatility is also an issue for us across Asia. Our strategy of building diversity in markets, in products, and in multi-distribution, has helped us handle the region's economic volatility. If we have a down-market, we have 11 other markets that can make up for it. If one of our bank partners goes on strike, like recently happened in Korea, we have others channels that we can get to our customers. An if a new regulation encumbers a product, we have a stock of proven products that we can draw on. Legal and regulatory frameworks for our industry are still developing in Asia and this can create issues, such as the one we had in Indonesia, where despite having 250% of the solvency that is required in the Indonesian market, our business was declared bankrupt, due to a conflict with the consultant. We managed to get the Supreme Court of Indonesia to overrule the Commercial Court; we came out of bankruptcy 45 days later. And in September, due to no small part the efforts of our people on the ground, the Indonesian parliament amended the law, so that nothing like this can happen again. Now, this is what experience and deep roots in a market can do. It can solve issues and it can help change laws, help change regulations.

Also, competition continues to increase. Our strategy to address this is simple. We beat them with market leading innovation, superior multi-channel distribution, and our very strong, well recognised brand. And you'll see many examples of this over the few days. One of the things required to be successful in Asia is the ability to address a number of different types of markets and Asia has the full spectrum of markets, from nascent markets such as Vietnam, the Philippines and Indonesia, where there is a fairly low penetration of insurance. This chart represents penetration of premiums as a percentage of GDP.

To the other end of the spectrum, to Taiwan, Japan and Korea, with highly penetrated markets. Now there are different things that are necessary in order to succeed. In a nascent market it's more about getting first-mover advantage: rapidly building your distribution, particularly the agency force on the ground to access new customers; focussing on core products, core basic products; building brand awareness; and establishing a sound and robust operation platform that you can easily replicate across many cities. In our more developed markets, our success is more a function of our ability to differentiate ourselves from our competitors. So, that would be the strength of our multi-distribution approach; our ability to deliver innovative products; our customer life cycle management, so that we can understand what our customers need at particular points in their life; gaining scale efficiencies, using scale efficiencies across the region; and superior service, so we can address things like persistency and serve our customers even better.

At Prudential we have the experience and understanding at both ends of the spectrum and we have the portfolio of products and distribution that can be tailored to meet the needs of each market. This is the advantage of experience, and this is has allowed us to build up our market leadership positions in Asia. Let's take a look at those leadership positions. Of course, we are not alone in our pursuit of Asia. This chart represents what the environment looked like in the year 2000. The horizontal axis shows the number of markets where these companies licenses; the vertical axis shows the number of top-5 positions in terms of new business sales. In 2000 we showed you how Prudential had overtaken many of the major players in terms of both market presence and market leadership since 1994.
Since 2000 we have moved higher up, both in terms of market position and market presence. We can continue to hold the top position in Asia in the top right hand corner, where our market leadership and our pan-regional coverage are only surpassed by AIG. And we are catching up.

This quote was made by one of your brethren and I really think it captures the essence of Prudential's unique position in Asia. "Winners are likely to be established players who know the culture and have the management strength and depth in the region." We are an established player. We understand the cultures and we have the management strength and depth. So by this definition we are a winner. Our proven operation model, diversity and extensional regional experience, all give Prudential a significant advantage. In combination uniquely position Prudential to seize the opportunity that exists in Asia.

I've shown you why we believe there is a big opportunity ahead and how we are well positioned. Now what I want to do is share with you the plan of how we expect to seize this opportunity going forward.
First our vision for where we want to take the business, is to build the market leading savings investment and protection company for customers, staff, distributors, partners, and of course, last but not least, our shareholders. We want to be in the top 2 in every market where we do business. We want to have the leading brand strength and reputation. We want to have a slide up on the screen if we can. We want to be recognised for our superior service; professional advice; we want the best distribution and most innovative products, tailored to fit perfectly in the markets where we do business. All of this needs to be supported by the very best people, the best management and the financials need to work as well. Our goal is to have the very top growth rate of our competitors and the highest return of any player in the market.

This is what we want to be. What do we have to do to achieve this vision and objective? It's about 3 am in London now, so perhaps a reminder would be helpful. There are 3 drivers that we need to get right to meet our vision and objective. Accelerating profitability, building sustainability and continued strong growth and driving an it all towards strong top-line growth and even stronger bottom-line growth.

Let's start with profitability. Essentially I see profitability derives from driving up the benefits of scale, things like lower cost, leveraging innovation and best practises across the region, combined with maintaining high margins. And those are the two axis on this chart. Some of our businesses are in good shape already, like Malaysia, Singapore and Hong Kong, but we think they can get even better. Others need focus, like Japan. We've put in a new strategy in Japan that's based on financial advisor and bank insurance channels. But we need to keep looking at options for getting more distribution and driving up margins in Japan. Our task is to migrate our individual operations in the direction of the green arrow. One of our key ways to do this is to better integration of our operating models, so we take full advantage of all of the pieces that we have in our business. Let me show you that. Let me show you what I mean. There are three basic pieces to our business. First, the insurance businesses, which are comprised of established operations, already profitable, with a wealth of experience and expertise. These businesses fund the growth and provide the expertise to developing operations where we get much stronger growth. Second: add the asset management side of our business, which has tree basic purposes. Marketing retail mutual funds; managing the investments for the life side of the business, driving value to those businesses; and then developing investment linked products for our insurance side. In return the life businesses grow, and provide scale to the asset management business. Third, our region and Group offices, which provide capital and strategy for growth, drive corporate governance and regional leverage of marketing product and processing. They manage government and partner relations. In return the businesses provide strong growth and increasing capital and income.

Our success today has shown that this model works. But if we really focus on increasing the leverage it's like oil to the machine: it works even better. So, over the next few days, we'll be telling you about we'll be putting focus on areas where we can increase the leverage of the integrate operating model. We are driving expertise from our more established businesses by transferring our people across borders. We're using best practises across functions in the regions. This was the main focus of the meeting we held, the leadership meeting we held in Hong Kong in July of this year. We had 2 days of 150 leaders together, just to share best practises that they have in their markets. We are increasing the focus on product innovation and driving this across the region with something we are developing now called 'the product lab'. We have more than 80 pilots now across the region in something called 'the customer experience program'. This is to find out what our customers need, how to sell them more and how to keep them. And we are driving the regional synergies and systems and processing by consolidating this work in a hub and spoke model that we call Genesis. You will be hearing more about each one of these things over the next couple of days. These initiatives will help us reap the benefits of our advantage of being a scale player in Asia. They'll also to continue help to increase our margin driving our businesses in the direction of the green arrow you saw on the previous slide. All of this is oil to the integrated operating model that drives our profitability.

Now I'd like to talk in a little bit more detail about the second pillar, essential to achieving our vision, and that's building sustainability, building the strength of our foundation. I see three critical elements to this foundation: people, risk management, and brand strength. I just want to spend a few minutes on each one of these areas.

You know, I cannot stress enough the importance of our people, especially our top-notch leaders in ensuring the sustainability of our business. Our strategy for acquiring and developing leaders is simple: we want the best. And to attract the best, we clearly need to have a compelling offer, which the best people want. We believe we can attract these outstanding individuals in Asia for two aspects that we already posses. We are a scale growing and diverse company, a company with outstanding career opportunities. And people know that. Second: our people are proud to work for Prudential. Our success, our people, our people focus, our management style, you know the values input from everyone in the organisation, bring people to Prudential and it keeps them. Let me show you a few examples of what we do for our people.

Before we mentioned transfers between our businesses as a way to leverage the considerable asset that our people represent. Through 9 months of this year we have transferred 57 people, 57 leaders between various business units, and more than 90% of these transfers have been cross-border. We already more than doubled what we did last year and we are only through three quarters of the year. For us the benefits op people transfers are 2-fold. Firstly, it allows us to leverage the phenomenal asset and advantage we have in terms of experience. Secondly it creates stickiness for our staff and management, by offering them more opportunities for growth and development.

But transfers aren't enough. We also need to have a sharp focus on development. Our Asia leadership development program is a perfect example. This is a program I personally championed after recognising that a ready pipeline of leaders will be the most critical element for our growth plans in China. This program is initially focused on where our people needs are the most acute in China; however, it will be rolled out to the other Asian operations as well over time. It's a six-month program, targeting high potential individuals within our business and uses a combination of classroom training and on the job training. The program relies partly on coaching by our own top management team, involving many of the leaders that you'll see over the next couple of days, thus giving our participants excellent exposure to our leadership and their experience. This will ensure a ready pipeline of future leaders for our businesses as we seek to expand.

Another critical area: risk management. Absolutely essential to strengthening the business foundation and delivering long-term sustainability. We must have the ability to manage the very wide range of business risk that can confront a business like ours and the diversity of markets that operate in. And we've made risk management a key focus for our business. We've improved our process, we've established clear accountabilities and our leaders are driving a clear cultural risk management in compliance across all aspects of our business.

I want to spend a minute on compliance. With over 130,000 agents and employees, one of the most critical areas of risk we have to manage is compliance. Trust is critical to our business. We have a 3-proned approach to build what we call a 'culture of compliance' throughout our business. First is prevention. Creating clear guidelines, making it part of top management's communication agenda at every meeting, and training based on case studies where it went wrong. Second: detection. We have over 80 complianced people across our 24 operations with strict instructions to elevate any issues immediately for management attention. And finally: it's inevitable that a business of our scale and diversity of markets will face some compliance issues. But when we do we have no-exceptions approach and we fully co-operate with regulators. So, we see meeting regulations, local compliance rules as just the floor, and we don't want to be on the floor. What we are looking to do is to create a culture of compliance and make this-... actually turn this into a competitive advantage.
The third element of building a foundation for sustainability is brand strength. I'll let our expert Mina take you through the details a little later. But just let me say that there are very few financial services companies in Asia that can boast the brand strength that we have. As a matter of fact, our brand is so loved, that local business want to borrow it for their own use. I guess nobody imitates a loser, and the fact that our logo appears in these unusual situations is further testimony to its strength. And while we are very flattered that these local businesses find our logo irresistible, we also must protect our rights, so these particular examples were supplied by our lawyers. But I don't want you to worry, we are not expanding into eye-wear or sportswear.

Now, I'd like to cover the final pillar essential to achieving our vision, and that's namely continued strong growth. We have a proven track record of operating models in Asia across a range of different types of markets, from the established to the emerging. Our ability to build businesses, our ability to innovate products and distribution, and our focus on what customers really want, will continue to drive our growth across all of our markets, established or emerging. We have a number of powerful examples where we have used our strong regional expertise to develop businesses from a green field start. Our life operation in Vietnam, which you will see later this week, is a great example of first-mover advantage, where we have consistently outflanked competitors and are number 1 by market share. Our India insurance JV with ICICI is a very similar situation. The number 1 private sector company by far. We only own 26% today, but the government of India has announced its intention to increase the foreign ownership up to 49%-... ownership limitation up the 49%. This requires a change in regulations. Not everyone is total agreement, so we are uncertain about the exact timing, but our people on the ground say it will happen. Our relationship with our partners, ICICI Bank are very good, and there is the intention for us to increase our shareholders.

China. We are replicating this success in China, where -I'm very excited to say-... I was with our chairman Sir David Clementi and I met with the regulator, the insurance regulator in China last week, last Thursday, and we received confirmation that we will be granted our fourth city license for Shanghai and expect that operation to open early 2005. The model we are rolling out in China very much seeks to capitalise on the success and learnings from Vietnam and India. We are a builder of businesses. You will hear much more about our China plans on Thursday.

As markets become more developed and we confront more competition, our ability to access more customers and offer them a choice in how they access us, is key to our growth. And since 1995, our Life operations have been steadily introducing multi-channel distribution and progressively diversifying away from a solo reliance on agency, tied agency. The tied agency force continues to be our most important channel and will for the likely future. However, in a number of markets we are seeing a very material contribution from independent financial advisors, bank insurance and direct and telemarketing. We now get 25% of our business coming from these alternate channels, partnership channels. Dan Bardin and his team will take you through this in greater detail later today.

Our innovative products and services continue to be an important part of our growth story with both our Life and our Mutual Funds. Our strong positions in a number of markets, for example our Life Insurance operation in Singapore and Taiwan, is very much a function of our ability to lead the market with product innovation. You will also be hearing more about how we keep this leading edge in this area later today.

We believe that our focus on customer centricity will underpin our continued growth. By segmenting and tightening our target markets, we will be able to focus on the largest and most profitable parts of the markets, and by understanding their lifetime needs we will be able to lengthen and deepen our relationship with our customers. You know, a product can be matched pretty much overnight. But trust cannot be build overnight. When we are always listening, always understanding service promises, consistently delivered, it reinforces positive differentiation and this ultimately translates into trust, preference and profitability.

So to recap our goal in 10 words or less is to deliver profitable and sustainable growth both on the top-line and the bottom-line and to accelerate profitability we need to leverage our regional scale, our expertise and our ability to innovate. To build sustainability, we need to create an even stronger foundation for our business and for continued strong growth, we need to focus on driving our proven success models to all markets. So, I've talked about the levers that we're using to achieve the objective, they are listen on the right side of this chart, they are real and we are using them today.

Okay, back to the key points. I've shared with you our higher level vision and strategy. We've also touched on each one of the key points: the opportunity, our position, our sustainability, and our focus on top-line and bottom-line growth. You know, you don't have to take my word for it. I have 28 other speakers who are going to-... 28 experts to show you how we do this in Asia. And now I want to turn this over to one of those experts, Garth Jones, our Head of Financial and Actuarial to talk about how we've achieved in terms of financial and the focus going forwards. Garth...

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