2nd Q&A
Mark Norbom
OK. We are moving into our second Q and A session, so if I can invite all of the speakers from that segment... those segments, to come up and join us, please?
You know, just a second, while they're all coming up... I think on the product strategy, the last section that you saw, I think that you'll see that... that our approach to products is not random, it absolutely focuses around balancing volume as well as return. We don't follow competitors down the path of lower margin and higher guaranteed products in order to deliver volume. Eh... you don't want to go there, if you start heading down that path, it's very difficult to get away from that. Our underwriting is built on decades of experience out here, as Pete showed, there's in some markets very little information available on an industry basis, so we have to develop a lot of it ourselves, and the longer you're in Asia, the more markets you're in, the more data points you have to operate of off, and as Ken showed, centered around customer needs. So the longer we are in these markets, the more we get to understand our customers, the better segmentation we do of our customer base, the better we understand these customers, and we can deliver the products that meet their needs. So, you know, another very big competitive advantage. OK, with that now I'd just like to open up the floor for any questions for this group.
Dylan Ball, CSFB
Dylan Ball, CSFB. Just a question for Garth, really. What is the impact at the restructuring on Japan, on the embedded value in that region, in terms of costs overruns or profitability of the products on the back-book?
Garth Jones
In terms of the embedded values, there isn't an issue with the back-book, that is business that is not making a lot of money, but is not making a loss either, that's all reflected in the current APE shareholder funds. You're talking about the discontinued business, I assume.
Mark Norbom
Yes. So that hasn't changed... I mean, the changes in our strategy don't change the embedded value of the old book. It's still lower than we'd like...
Dylan Ball, CSFB
But Pete was talking about profitability issues in Japan as well, I was just thinking into the restructuring, I was wondering if there was a link?
Garth Jones
Yes, as we said, the restructuring was around both the distribution channels as much as the products, so once you have the products in run-off, then they're fine. I think it was more around, if you looked at the costs of the new business, and built that into the equation, then the products became loss-making, and we decided that that was an area that we didn't really want to be in. So, that probably helps to paint a better picture.
Robin Savage, Panmure Lazard
Mark, this is Robin Savage from Lazard. I have a question for Mina. A very interesting and remarkable presentation on the brand. Particularly the icon awareness, compared with HSBC. I wonder whether you can share with us how it compares against AIA and your other competitors?
Mina Hsu
AIA has an icon that -... with the name very much embedded in it, with the mountain logo-... we felt that, you know, similarly like AXA, you can very well, you know -... the name is always embedded, so we did not include the AIA, but in other countries, we included the logo, leading players, plus, you know... ING, HSBC and ourselves as the international -... but I actually intend to extract AIA from the logo, and see if the mountain insignia means anything to the consumers in our next wave, because I feel that I should evaluate the logo, even if it means extracting the name which is embedded into it.
Michael Kohler from Deka
I think you mentioned that regulators are moving to other kinds of solvency and regulation models, and I was just wondering if you could give us a feel of how fast the development will go on, and what the capital requirements will be, and with regards to the different products, how those will change and how that -... what impact on profitability that might have, going forward?
Pete Lloyd
Our experience so far of RBC has been fairly neutral. The Indonesian and Japanese regulatory regimes haven't been an issue, particularly in Indonesia where you have linked products anyway. I think that's perhaps one point to note, in that, because a big part of our business is unit linked, the RBC capital requirements tend to very limited there. The only solvency either under traditional solvency regimes or RBC, one being related to the protection element of those businesses. So, that part of the business is almost immune to changes in the solvency regime. The RBC tends to (bite hardest?) on the participating investment type... type products, and given that we write most of those in the life fund business, then that doesn't directly impact the returns to shareholders. As I mentioned, where we write investment business with guarantees, such as we were in Japan and Korea and Taiwan, then there is more RBC impact, but we very much mitigated that by moving away from those products. Singapore is about to move to an RBC regime, but I don't anticipate that making a great deal of difference to our numbers, and I think for protection business in particular will actually result in an improvement. So overall, I think -... I, personally I'd welcome the move to RBC requirements, because I think it makes for a better regulatory control of the market and I think that, for strong players like us, that 's an advantage.
Farooq Hanif from Lehman Brothers
Hi. Quick question from (Name) from Lehman Brothers. What research have you done on customer sensitivity to the charges you have on your products? And the example you gave of regular premium unit link business being quite profitable, because of the matching of charges and expenses, can you give a practical example, maybe in Singapore, of a product, of what kind of charges you're making on that product?
Mark Norbom
You want to take that?
Nishit Majmudar
I think in terms of charges in the Singapore link business, we raise similar to Malaysia. Essentially, there is no capital strain on the link products. The front end are charges 5% below fair spread, which is essentially paid out to the distributors. There is 100 dollar charge on most of our products, which covers the initial expenses, and then there is the renewal charges, mainly through fund management charges, which covers the cost of servicing the policy. So it is generally well matched right through the contract, and most of the margins that we make on the single premium (incomprehensible) is through the annual management charges, so it's reasonably well matched.
Mark Norbom
I think, you know -... the other point is, that's one area where we are extremely careful in terms of transparency, we'd make sure that everybody understands ours fees upfront, both in the insurance and the funds management business. So , that's a critical area.
Question
A couple of questions. First one is, you've mentioned 25% of APE is from non traditional agents. How much of the new business profits actually is from non traditional agency channels, in terms of percentage? Secondly, can -... Pierre mentioned 2 examples of pilot schemes which are now going to be launched, can you tell me what these pilot schemes were? And lastly, of the pre-1998 businesses, the only one which hasn't achieved a top-5 ranking is Thailand. Can you just give us a reason why? Was that by choice, or what the reason for that is?
Mark Norbom
Pierre, you can take -... Garth, you can take the first one on NBAP for the non agent channels?
Garth Jones
Yes, I don't actually have that number to hand, but, you know, what you do find is that the partnership distribution does tend to vary, even within the different types between bancassurance, broker and direct. The direct business is mostly protection and has very good margins, the broker business tends to be quite similar to the agency and the business (consultary?) bancassurance actually varies considerably from a single premium business, which I've said has lower margin, to more regular premium business that we sell through sales people in bank branches to some of the stuff we do through mail shots and so on, and leaflets in branches. So, overall, partnerships distribution will be slightly less profitable than agency distribution, but still at very attractive levels.
Question
OK Pierre, a couple of examples?
Pierre Fenech
Yes, the two pilots that I referred to were the PRUnurture pilots, which are being rolled out in Singapore, and in Hong Kong. What the pilots are -... is using customer scoring, customer data, to drive meaningful approaches by our agents to re-servicing customers. And that, if you want to create what we call a reason to call... really and truly... and therefor to facilitate the agents activity in going back and re-servicing customers. One of the interesting findings, because we tracked this against control groups, just to see the difference that the pilots are generating, one of the interesting findings, is not only the actual customers that they visit increase the product holdings, usually by increasing the level of protection coverage or contribution to their investment style or saving style policies, but it's actually the spend-per-household of that customer, that is brought on through this interaction. I know that my son has a need; I know that my wife has a need, it's that real growth which is quite amazing. So we're launching to full scale operation in those 2 countries, we' re launching two pilots in two other markets. At this stage I would rather not divulge which markets they are, for competitive reasons.
Mark Norbom
OK. I'll make a comment about Thailand, and then Dan, I'll let you make a comment about it as well. Dan ran AIA's business in Thailand for several years, so he'll know that pretty well. But in terms of Thailand, the business that we purchased there, it was an acquisition originally, was fairly small and, frankly, had some significant weaknesses. So we've been focusing on building up the infrastructure, and the operations of that business and indeed, right now we feel like we still have -... we still have a small business there, but we do feel like we have a very good, strong platform, from which to grow our business. The business in Thailand is highly competitive, the AIA is very much entrenched there, typically low persistency, lower persistency then we see in some of our other markets, we have made some progress, we tied into -... Our Standard Chartered Bank relationship extends to Thailand, so we do distribute through Standard Chartered in Thailand now, and have made good progress with that relationship, and we are looking at some other partnerships, which we hope to be able to tell you about shortly as well. Dan, would you... add anything to that?
Dan Bardin
We did buy a small company, and, you know, actually predicted that after another bad start, you know, the Asian crisis 1998 crushed it. And it took a strategy to really cut back costs every way we could. It took us a time to recover... and we ramped it up and... Actually, to be very honest, we picked up some agents that were not productive, and kind of restarted, and we restarted with this multi distribution channel, and we're doing extremely where -... well in the credit life... our bancassurance model is outstanding, a big piece of our business; our agency force, we have some professional agency initiatives to grow agents organically, and that's looking very positive. And most important, we have put together a very strong staff of people that I've known for some time, and so we're being cautiously optimistic, but we're going to build this business a step at a time, to make sure we have the kind of solid foundation for the future.
Greig Paterson from FPK
I think Garth showed a slide earlier, or discussed about the rate of return on new businesses 30%. Can you tell me what happened to your volumes if you were to drop that to 20%, and what would happen to your new business strain, and also, how much funding you'd require to grow the business?
Garth Jones
All very nice hypothetical questions.
Mark Norbom
I think that one thing you have to understand is that the forty-five thousand agents built up over time, and so these forty-five thousand agents aren’t the ones that necessarily generate the million customers. They would have been generated by a much smaller agency force over time, and where we are today with 45,000 agents is driving the volume of the business. Our increase in our agency force is reflected in the increase in the volume of business that we are doing in India. Through the third quarter our volume is up over 150% over last year and a lot of that is driven by the increase in the agent force. Dan, I don’t know if you have a comment on the relative productivity of India versus other markets?
Dan Bardin
The productivity of our India agency force runs very similar in cases per active the number of percentage of active. Mark’s right – it’s been a ramped up that we’ve kind of done in phases so as of late we’ve – this year in particular, we’ve had a pretty dynamic growth of our agents. Same time we also sell through corporate agents as well as our bank assurance. And our bank assurance, I believe we have some 400+ financial sales consultants selling through about five banks. So it is a multi-distribution channel. Our persistency looks very strong, productivity looks sound. The challenge going ahead is going to be to continue, because India geographically not only by population, is a significantly sized country but we’re continuing to monitor. But so far they’ve been able to manage the productivity pretty well.
Question
I think the point you made was agents, the growth in the number of agents, being the key driver of growth and volume – I mean I just, I guess the key to me is just 25 customers per agent. It should be the other way around, shouldn’t it. You know, it should be that you should be getting the customers per agent going up rapidly on the assumption that 25 customers per agent isn’t a viable long term number to get everybody happy. It may well be that it’s enough for you to make money, but for the rest of the system to be comfortable seems – it just seems to be a very difficult number to be the right long term number, to me.
Dan Bardin
If you look at this model, in India’s turn over is a bit higher than our other models so it’s probably let say, in that thirty-five percent range. And with the ramping up I would believe the number of cases – and this is the way you have to look at this – it’s not looking at the total 44,000 agents – look at the active agents, and look at what kind of customer base they’ve built. And especially in Asia the eight twenty rule, where 80% of our productivity comes out of that top 20% and it’s very true across everywhere. And so you really have kind of to reverse that a little bit looking at this model and how we put together these scales agency.
Question
Can I follow up, initially, on another question – when you asked about the product charges I don’t think you said anything about the re-newel charges? They one, one half percent of the funds under management or …?
Nishit Majmudar
I can only answer for the Singapore one, yes. The investment link industry, the insurance products are generally the annual management charges are lower than the unit trust industry so whilst there has been competition Prudential’s annual management charges are some of the lowest in the industry. So it depends upon the asset class, underlying asset class. For example if you are in bonds it’s about fifty basis points, managed funds going to around one hundred points. Then pure equity funds global can go up to one hundred and fifty basis points.
Question
Two other extra questions. One; you mentioned that you got top five positions in many of your markets, could we have some sense of your market share to give some shape here, and also a second question on the split of your reserves, on the traditional business. How much reserves are sort of backing participating as opposed to spread type business?
Mark Norbom
I could just give you at least one indication of our market share and I think actually the market share numbers are public available informations anyway, so I think we can get you better numbers for each one of businesses and we’ll do that. An example, if you take India as an example, there we look at – what we’re really focused on are, our market share of the private sector insurance players. The largest player there is the state owned firm, which has about now 80% of the market. If you look at the remaining twenty percent that’s in the private sectors hands we have about 35% of that private sector share. And that is by far larger than the second placed player. In one of the other markets where we have also have an impressive market share would be Vietnam where our market share is in access of 40% percent and that would include, that would include the state sector as well so certainly the largest private player by far in that market as well. I think we could probably gather the market share numbers for you the other markets that were listed on our slide as well. So I don’t that will be a problem. I’m sorry, the second question was…?
Question
It’s really about the splitter reserves between risk businesses; unit linked business and then within the traditional savings business how much is spread versus sort of participating with profits business?
Mark Norbom
Either Garth or Pete, you want to take that?
Garth Jones
Yeah, I think rather than go into the detail, I think it’s probably simpler to provide you with suitable information as we go through the next few days. I think what’s key to understand is that clearly, for instance if we provide you with the size of our linked funds, then some of that is used to back single premium linked business which is more of a true spread product, and some of it is used to back whole life regular premium unit linked product which is then a balance between protection type and spread so it’s not quite as black and white but I’ll try some information that will give you a better insight into that, and also the size of our life funds.
Barry Corns of Shivers
A couple of questions on brand, if I may? Can you give us a feel how sensitive sales are to brand and what would happen if the brand was damaged in one area. Could it spread across the region, and I suppose what alternatives do you have to the brand if brand damage was at the centre?
Mina Hsu
In terms of the correlation of brand awareness to sales I think we see a very high correlation in terms of high brand awareness to market leadership. You know in places like Vietnam and India, even our newer operation with very high awareness, goes very high, it is correlated. Obviously you also need the foot soldiers. You know after you create the brand awareness you have to have the product and the distribution to back that up. As far as whether the brand damage in one country would effect the others, I think that’s obviously a decision that we decided that prudence would be the unifying icon across the region and that we would rather focus on making that as the logo that they should look for and trust and work, and sign up as customers, then to, you know, worry about whether the down side would be, because if you do fragmented branding then you are also not very effective. So we have not had the issue of a scandal that spreads across the region to the damage of the brand.
Mark Norbom
If I could as an example in the Indonesia, you know our company was declared bankrupt so we were a little bit concerned about what the impact could be on our brand reputation across the region. And as much as we put in place, you know, key messages to all of our partners in other countries there was really not a lot of talk about that and so I don’t think that they really looked at the issue very much in that area. So I don’t think the Indonesian situation didn’t really impact our business in other markets. But our brand is synonymous with trust and if you don’t have that trust, your sales will fall. And so if there’s a huge issue on the brand side, if we get tarnished it would absolutely have an impact across the region. So that’s why it’s very critical that we continue to focus on the area of compliance. And that would be a big push from all of us, from all of the leadership teams to make sure that we have that all in hand.
Question
Couple of questions please? First of all, your traditional product has held up quite well in the new business mix. I think you have targeted that. Can you explain how with profit has remained popular here, compared to say the UK for example, what’s been going on with bonuses and so on to allow that to happen, and secondly, could you say what your new business margin, and new business RIR would be with out the riders, please?
Mark Norbom
Garth, you want to comment on with profits?
Garth Jones
With profits, yeah, I think the key there has been PRE. I think that we’ve actively managed that for a number of years and done that in a way where bonuses were being increased. We’ve made it very clear that they were being increased for a particular reason, strong investment returns and with clarity those were not necessarily going to be continued and there would be further increases in the future. I think we have obviously learnt a lot of lessons from the UK business. You know the key with the with-profits business is people like stability. People like that smoothness and there is always volatility. If you look at the volatility of equity markets in Asia, they are more volatile then they are in the US and UK. And the people like the stability a long-term savings product with-profits plan gives them. In terms of the other question on the detail, I don’t have that again with me but what you can say is clearly if you took the riders away that would reduce your profitability If you looked at the IRR to share holders then clearly all you have to share holders is the profit transfer from the ninety ten fund so the IRR is actually infinite but there is a return within the life fund and we make sure all our products have a good return to the life fund and our buy-in to the life fund so that we continue to grow it rather than drain it.
Mark Norbom
I could give you a feel for that I think. If you look at our accident and health products, which will be representative of the riders, I think of our new business. That’s around twelve to fourteen percent for our APE. And it represents almost double of that, of our NPAP. So I think those numbers are approximately about right. So they do have a very large contribution to the base and they are higher margin than the base product.
Bruno Paulson from Sandford Bernstein
You showed a slide showing how profitable the various geographies were, and it seems the fastest growth market, particularly Korea and India are also the toughest and lowest margin. Is this going to provide a significant drag on the margin going forward?
Mark Norbom
You know I think both of those are somewhat a subject of scale. OK, certainly Korea, that’s the case and as we build our scale there I think we’ll see our margins improve. India is a lower margin market. The new business that we put on our books there is a lower margin then many of our markets, and so I would say as that business grows, and certainly if we move up to forty nine percent in that business so that it becomes a larger weighting in our portfolio, it will have a diluted impact on our overall regional margin rates. But nonetheless the opportunity to grow in India, and grow that business, you know, far out weighs the negative piece that it might bring down to our overall margin rates. Any other comments? I think that covers it.
Greg Patterson from KBW
Just in terms of India you possibly be a victim of your own success. What kind of multiple are you going to pay to increase from twenty-six to forty-nine? I mean do you have s set pricing agreement that we don’t know about. How is that decision going to …?
Mark Norbom
In India the, as I mentioned, the regulations have not yet been finalised. There are legislative changes that actually have to take place for that forty-nine percent limitation to take place. All I can really tell you is that there is the intent, and our partner shares this, for us to move up to forty-nine percent. We have a great relationship with ICIC Bank, and we are in constant discussion with them right but I can’t really tell you more than that right now. Sorry. I think we’re scheduled for lunch if I could just break right now and again we will have many more opportunities for questions and answers and if you could come back here at one forty that would be great. …
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