Products

Mark Norbom

Now to the product session of our agenda. As I said earlier this morning, our innovative products and management or our product portfolio continue to be an important part of our growth story, with both our Life and Mutual Fund businesses. And product development is really where a number of these growth strategies, these levellers that I talked about come into play. First: developing products to meet the needs of our customers; innovation is a critical element to maintaining our competitive edge; we focus on being a leader and product innovation and then leveraging this innovation across the region. Product development is also where our margin in many elements in our risk appetite are determined.

I would now like to introduce 4 speakers who will give you a better understanding of how we keep a leading edge with product innovation for our Life businesses. The first speakers you will hear from are Garth, once again, along with Nishit, the Chief Financial Officer from Prudential Singapore. Garth and Nishit will be followed by our Regional Actuary, Pete Lloyd, and the fourth person you will hear from is Ken, who is the Marketing Director of Prudential Hong Kong. So, Garth and Nishit, I'll turn it over to you.

Garth Jones

Thanks, Mark. In this session we'll look in greater at our approach to product management, in particular how we manage the margins in the business on an ongoing basis. Our margin levels are not just an accident, they are something that we actively manage and steer the business towards.

As I mentioned earlier, one of our core strengths is our geographic and product diversity. This allows active management of our aggregate margin and volume position, by actions in individual markets. I've said out four principles here that define our approach, and which we'll talk about further in this session. The key is our focus on long-term sustainability and profitability, not short-term top-line growth at the expense of long-term. Over time, this enables the delivery of consistent, sustainable results, but we may see short-term fluctuations, particularly against the market.

I've used this slide earlier this morning, but for those of you who were asleep I've put it up again. Confirms that this approach has worked in practise and we've consistently delivered attractive margins.

Firstly, let's look at our market view. This is the market. And we've taken here the market space that Prudential Corporation Asia is competing in. Principally, for instance amongst the affluent Indian population in India, rather than the whole market place. So that's why it's in the low sales volume. Market profitability varies considerably from country to country due to a number of complex factors, including regulatory aspects that Pete will touch on later.
Malaysia and Singapore are relatively small markets in a global context, however, market profitability is high. The Taiwanese market, on the other hand, is larger, but market profitability is pulled down by large volumes of low-margin products sold by our competitors.
India stands out as a market where profitability is relatively low, due to a highly competitive financial services market with players from several financial segments actively pursuing a growing target group, including the government, who recently issued some very attractive bonds to the public.

Before we get into our participation in each market, I'd like to show you also how we view NBAP margins generally and how these vary by product line in the market place. This is our view of market profitability. A&H business is normally high margin, however, because this is protection focused, rather than savings and investment based, premium volumes per contract and also in aggregate, are relatively low. Generally these are riders attached to basic Life policies, although some business is sold successfully on a stand-alone basis, for instance by direct marketing.
Regular Premium business is more profitable than Single Premium business. And importantly, new business achieved profits within the market varies with quality. Good persistency needed to deliver value and build up a larger business over time. Traditional business is less profitable than Linked, and in some markets we have seen the profitability of Traditional business fall, particularly where competitors are selling short-term and (down?) products, or where guarantees are provided in a low interest environment.

Turning to Prudential Corporation Asia – this chart shows the cumulative discounted cash-flow for Regular Premium products in Malaysia. For Unit Linked business the timing of charges and expenses is broadly managed and lower regulatory capital is required. As a result, Linked business has a high IRR and capital is paid back very quickly. Traditional business here shows a typical combination of both a Traditional basic plan, and the ANH riders that are attached to it. This combination produces a greater new business strain as greater reserves where established in early years, but the combined package is financially attractive. This has a slower pay-back, however, than Linked business. Key variable is the mix of ANH and Traditional basic plan premiums, hence the level of ANH rider attachments is important. The greater the attachment, the greater the profitability.

Now looking at our position, rather than the market, across the region. This chart shows the sales and profitability of our top-5 markets by sales volume, both in 2001 and for the first half of 2004. The drivers of new business achieved profits have changed considerably since I first introduced this chart in 2001. I will talk about some of the key changes, but before I move on you'll note that the positions of Malaysia and Singapore haven't moved dramatically and our businesses there have maintained their relatively high profitability despite considerable market changes, particularly in Singapore. Nishit will talk about this further.

A major changes been the impact of our strategy in Taiwan, which Chee will explain further on Thursday. Taiwan remains our largest market by sales volume, though it has reduced from 30% of sales in 2001 to 24% of sales in the first half of 2004. The Taiwanese market has evolved considerably in the last few years with considerable significant relaxation of the regulatory environment for products in particular. We pioneered Unit Link business in this market. It was introduced into the market in 2002 and Link business now forms the majority of our sales. Partly as a result of this, we've seen significant improvement in profitability and, as I mentioned earlier, new business margins have grown from 34% in 2001 to 57% in 2004.
Our experience in Taiwan shows how our focus on long-term profitability pays off, with new business growth being slowed, whilst people were being trained in Unit Link business. The temptation to grow top-line growth purely through low-margin products (was) resisted.

Moving on to Hong Kong. The data shown here is for the Hong Kong market as a whole, rather than Prudential Corporation Asia. These charts illustrate the point that consumer preferences for particular types of products do changes according to market conditions. And again, having a balanced portfolio, having a basket of products that you can call on, is critically important. Market level of Unit Linked sales are correlated to stock-market performance with a time lag, as you can see. Traditional Single Premium sales, on the other hands, are adversely correlated with interest rates, without a significant lag, and that is especially for bancassurance distribution.

In Hong Kong, since 2001, sales volumes have increased, however, margins have reduced. At first sight it looks as though we've gone against our strategy of focusing on long-term profitability, however, this isn't the case. Our previous slide showed that market preference in Hong Kong has swung away form Unit Link business toward lower margin, traditional products. We took a decision to participate in this, given our very strong bancassurance operation in Hong Kong. This gave us confidence that material volumes of additional business will be achieved, without cannibalisation of more profitable Regular Premium products. We accepted a trade-off in margin in volume to strengthen our long-term position. We also looked at the impact of our margin levels, new business volumes and capital levels as a whole by increased sales of such products. Sales of Single Premium products in Hong Kong were up 36% in Q3 2004 compared to Q3 2003 and that was principally through bancassurance.

Looking now at North Asia – this is an excellent example of our diversification and focus at long-term profitability at work. You'll recall that we acquired our Japan and Korea operations around the same time in 2001. For a number of reasons that Mike Bishop will talk about later, the pace of development in Korea has been faster than we expected. With sales growth growing in the hundreds of percents per annum. To a certain extend this has taken the pressure off Japan and allowed us to increase our focus there, on delivering long-term profitability be reducing our exposure to less profitable lines and distribution channels. (And currently?) sales in Japan in Q3 2004 were 38%-... on Q2 2004. So this is the portfolio effect at work. As Mark said, you have impacts in one market offset by positive impacts on the other.

Nishit will now show how our product management strategy has been working in Singapore.

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