Third Q&A session
Mark Norbom
... agents, and with our agent force, and with the turn over we've talked about and the type of growth we want and our agency force - we really have to do this with tens of thousands of people every year. Over the last year we've hired and trained more than forty thousand agents. So we this - we know how to do this, and we leverage our capabilities, we leverage our experience, we leverage our 320 trainers we have to hire these kinds of numbers so we can continue to do that to strengthen what we have.
On our partnership side we've seen, I think, scale breeds success - the bigger you are, the better your brand, the more partners you can attract, and that's very important very important. You saw on Pierre's chart that as you expand your ways of distribution you expand your customer base significantly - so that's a very important way to do this. Both on the agency side and on the partnership distribution side we are leveraging our regional strengths and that really is the secret to being able to grow both sides of the business. You've seen the strength of our business in Hong Kong with SCB, Standard Chartered Bank - a great story. And then it all really comes together in Korea.
Korea is sort of the culmination of our expertise and our innovation to build a business. Mike mentioned that it is our newest business. Korea is now one of our top five businesses. Just entered the top five of our twelve insurance businesses this year so from a small start .The newest business in a developed market we have managed to take that business to be one of top five businesses so ... that's the kind of thing the innovation and the leverage of all of our experiences can lead to so it's exciting. And I understand that we're that we're looking towards home shopping, I think. It brings a smile to my face every time I think about it. But we're going to try the home shopping experience in Thailand as well, I think, within the next month or so I think that's .. You know... we're excited. Hopefully we can give you a similar success story for Thailand.
Now, I also want to get back - I've had a few questions over lunch, and I wanted to get back on a few items and then some questions I don't think we really address adequately, earlier, so I just wanted to touch on those very quickly.
One; I was asked about, could we get a better feel of the solvency requirements in each market. And I've talked with Dorothy and Pete and I've asked if we can put together a summary of that. Apparent it 's a lot more complex than that - you know - you can't just put it on a page or two, and so - what you'll have to do is Pete, Lloyd and Garth - Garth will be around for the next two days, Pete will be around for the rest of the today. You know, if you have specific questions you're going to have to go to those guys and ask them, and they can give you probably more detail than you want to know. They can give you the detail of each one of the markets.
Second: I did a little bit of math. I want to go back to the India example, because of this thing of twenty five contracts per agent was sort of bothering me, so I thought about it based upon what I had seen - I just went through some math. If you assume this million policies we're sold over the life of the business and it started at zero agents and it's at forty-four thousand today so the average number of agents would have been like something like twenty two thousand. So that immediately says your average agent is .. you know .. has issued fifty so that would sort of double the number right there and if you take the eighty-twenty rule that Dan talked about earlier which is that twenty percent of your agents generate eighty percent of your business, and more successful agents would have generated over two hundred policies if you sort of run the math through. And so, you know, our more successful agents are .. you know ... two hundred customers sounds a lot better than twenty-five, I think. So I just wanted to get the math on the table if I could.
In the third area that I would like to just give a few numbers on is the expense ratio numbers. So I had Dan go and pull some specific numbers from our various markets and so .. I'm going to let Dan give you a couple of numbers and give you some context. Now, we don't know exactly what our competitors have for their numbers but we think their largely in line with similar competitors but Dan will give you some numbers and then you can go to our competitors and see if they'll give you the same numbers and then you can make a comparison. OK, Dan.
Dan Bardin
First of all I do want to say, you know, before I get into the numbers here, even though we've grown by a hundred thousand agents I am just as impressed by what we've done with our partnerships and non-agent distribution. I think that is just as powerful a story as what we've done on scale. In as well, I think what we've done through out Asia - where others have struggled with partnerships, and they have struggled with the ability to sell variable or with unit link, we've been able to take these forward. The issue on commissions, I got on the phone with my team back in Hong Kong, and I went through, and are commissions first year - that's for new business - total includes over rides and any kind of volume that would pay, is fifty one percent of first year premium. So I would say that's very much in line with the industry. In fact I would say we are more to the middle. I thought it would be a little to the higher side but I had not looked at that in a while, but it is fifty one percent for all of the life companies combined. As well I think there was some questions about expenses, and I looked at our management related expenses, and this has nothing to do with sells, it is management related only, and that over all runs 7.6 percent but if you look deeper down it is lead by Singapore at 4.2, which is outstanding, Hong Kong, which is 4.9, but just to illustrate how we've taken India to scale so quickly - even at this point where they're still growing at a very rapid rate, India's management expenses are 8.6 percent so that some numbers, I think show that we are building a model that is very cost efficient, and our objectives, and you know I've just finished a five year business plan - I know where we're going with this - the platform will work and we will see us being a very efficient operator going forward.
Mark Norbom
Dan, those percentages were of total premiums, including renewed premiums, right?
Dan Bardin
Yes, when we do our first year, obviously it's our first year but on management related those are your new, plus all your renewed business divided obviously by your management expenses.
Mark Norbom
OK, and that would exclude commissions, and direct sales costs? That will at least give you a little bit of a better idea of our on going costs. OK, now I would like to open it up to more general questions.
Johnny Vo, FPK
I'm Mickey Jor from F B Hagen. You're talking about recruiting forty thousand sells agents in the last twelve months - it must have cost you quite a lot of money to train them, and given that you probably lose half of them in the first year could you tell us what sort of cost profile you build into your product designs to allow for that?
Mark Norbom
Yeah, Dan you're probably best to do that, but I would mention that when we do our training in the higher growth markets - for instance like China, you know I've gone in and watched some of their classes as they were being held. We'll have two or three hundred people some time in some of the classes so we do try and leverage the training factory but Dan do you have any idea from a cost basis what it costs?
Dan Bardin
Well, it is a very efficient model we have. Even with our growth is our regaining scale today our sales related expenses, I'd say, are less than twenty percent. Now sales related expenses are not off total premium - that is off first year premium only. OK? So it is less than twenty percent - that includes training, promotions and all the sales related activities. And that I guess would include - I don't know what else would go in there but it is all inclusive of sales so it is a very efficient model.
Johnny Vo, FPK
Now a quick follow up question on that - but not on that, on agents anyway. We've heard a lot about agent poaching going on from yourselves and by your selves. Could you just please comment on that?
Mark Norbom
Yeah - there are certain markets where that is more common. Hong Kong would probably be the most common market where some of that happens. We would .. we try not to do a lot of that but where it is necessary .. where it is the competitive practise, you know, we do have to do some of that. Where it is necessary for a defensive move in order to protect our share we would again participate in that. When we look at agency acquisition as we like to call it, rather than poaching, when we look at that we very much look at the long term benefit of that because there is an upfront cost and so absolutely want to tie the agent groups to some sort of long term performance plan, and tie the compensation to that plan as well. And we make sure that it makes sense from the long-term point of view and, you know, I guess, Dan, would you like to add some thing to that?
Dan Bardin
Maybe I'll turn this over to James in a minute, but you know in Hong Kong it is sometimes a little bit more like a way of life. You know I've never been big on agency acquisition through my career. I won't say I have not endorsed it. It is usually, I think some of us talked about it last night, if you have a bully that comes a long and wants to push you around. If you let them they'll continue doing so and so, if some one's going to come after to take our agents I take a very dim view of that and so yeah, I strike back. But it is a defensive. For the most part, though, our companies have been built on organic growth. I will say - you know we have been able to hold on to staff very well, pretty well. We have a very strong management team across our companies. Once it's more than open or two then I think it's targeting us and I take the same kind of view. I will go out and make sure we pull somebody back that we need, whether it's an actuary, or whatever. But I will say across Asia it seems that the poaching issue is not a significant as I have seen in the past but Hong Kong .. James, you might want to .. he's had to live through this for the last many many years or so
James Wong
I would say migration of agents is very common in Hong Kong. However we manage it very effectively and I would say through good training programs we have in place our agents don't like to jump ship. So I would say we are quite we are quite well known in the market, that we produce quite a few MDR members, which is by standard is a US sells organisation so the ratio that we train our agents to be top sales is quite well known in the market, so we are quite comfortable with that. Like Dan said we have been approached by our competitors for our top agents and then we have a deferred compensation system to hold them. So we monitor it very closely, and it is very effective.
Mark Norbom
Yeah - I like that, too. 'Agency migration', another alternative to poaching.
Greg Paterson, KBW
Just in terms of your Standard Charter relationship, how long is that .. how long is the contract and at any point can Standard Charter during that contract re-negotiate the margin that they take from you and what terms .. I mean what are the criteria of this re-negotiation. And also on your other tithe relationship, maybe you want to comment on how long those relationships are.
Mark Norbom
Yeah - I really don't want to talk about details of contracts but what I can say is that the Standard Charter relationship is a long-term contract. We have a very good relationship with Standard Charter. We have a steering committee that meets on a quarterly basis. I'm on that steering committee, as well as Mike Denoma, who's head of business for Standard Charter in Asia. So we have a good relationship. We continue to re-new our targets and objectives for the relationship. We are both happy with the progress that it has made and I would expect that to continue for quite a period of time. Pierre, would you have any thing to add to that?
Farooq Hanif, Leehman Brothers
Just following on from that question what really - a bit of a devil's advocate question - but what really is there to stop a company like AIG coming along and speaking to Standard Charter and either getting them to go multi-tithe with them or just grabbing your relationship from you? And also on the question of agents and migration don't the economics of the agent kind of look better if you kind of acquire the agents in-organically? So if you were able to pay them more than their twenty percent commission upfront to for the sales effort, isn't that more attractive than something that should become more prevalent as more companies want to get into the Asian markets?
Mark Norbom
Yeah - I'll make a few comments and then I'll let either Pierre or Dan answer that. What would stop AIG coming along and taking one of our partnerships would be the fact that the longer we are with a partner the longer .. the deeper the relationship goes, the more we become a part of what their customers expect. You know we've had certain relationships that have been started with some of our bank partners because customers have said, listen, we're really interested in Prudential products, and that makes us really proud when it is the customer who draws through a partnership relationship. You know, I suppose some one could pay tens of millions of dollars and steal away a relationship. However, the longer we work with the people, the deeper the relationship gets, the more successful the relationship gets. That will get harder and harder to do, and I think we have a track record for building good deep long term relationships. On the second point about, you know, isn't it better just to acquire agents in-organically? This, in my mind, is 'live by the sword, die by the sword'. If you acquire agents in-organically that means they will probably have a tendency to perhaps jump again. If you get into that pattern you will get other competitors - just as we are defensive - they will get defensive so you could start this little agency purchasing .. agency migration war in a market if you keep doing that. So it's just not something we like to do. We like to build our agency organically because then you build loyalty; you build long-term confidence in the product. You know, those are the agents I think that we would most prefer to look at. So, very much a long term view. Pierre, or Dan do you have anything to add to those two?
Pierre Fenech
Not many comments to add to the question on some body coming in to buy out a partnership, except you are delivering value to the partner and you are constantly seeking new ways of actually creating quantum leaps. 'Better the devil you know, then the devil you don't'. Paying for a partnership doesn't make a partnership work. You actually have to physically deliver, and we have a proven track record. We keep on delivering so that's one thing. The second case is that we continue to do business with a number of different partners in a number of different countries. A lot of competitors have one big partnership in one country, and they have not actually shown the track record we have. I think we should acknowledge that difference. I think we have actually something to be proud of and boast about on that one.
Kevin Holmgren
Just to add on the question of agent growth I think the way to view in-organic growth is really more of a tactical move, or a short-term move. Certainly that cannot be your over-riding strategic initiative to grow that way. I mean the vast majority of your growth is going to be through organic and just using in organic tactically.
Mark Norbom
Plus I think our business is a business of relationship. What happens is as you establish relationship with your agents they become comfortable doing business in your environment. Things that were developing from an infrastructure perspective like SFA will tie the agent to us more so than if they were bought over by another company. Those things are very hard to replicate. In the market place when you're doing business utilizing the system, once the staff, or the people in your agency understand that use, that it's difficult to get them to switch and go .. and try something new. So some of the tactical things we do to really lock the agent into Prudential in the long term, we're using to prevent that agency poaching that goes on. Plus the other thing, the ramp up time for an agent who comes over to the company is difficult. It's not an easy situation. You just can't replicate your business habits and business tactics in the new company. There's a culture, their organisational structures are different so it's not as easy as one would think. So, we see it as a tactical approach but it is very defensive and it's not the way we build businesses.
Question
Hi, may I ask two questions on Hong Kong. One; how have you avoided channel conflicts impacting the agency business given the growth of the bancassurance model and two, could you talk a little bit about what HSBC are doing in Hong Kong, how far they've grown and how they've managed to do it given they don't have many of the advantages you've got with your partnership with Standard Charter?
James Wong
I think to manage the conflict between the punish distribution and the tithe agency. I think the key is training. So when we establish the punish distribution the training on our agents falls .. this message is, let the customer have a choice. The choice of convenience, so the tithe agency may have their way of finding customer's prospects but when you look at the penetration rate in Hong Kong, the Hong Kong government says it is eighty percent - the number of policies in force divided by the population. So therefore when we talk to our agency force the market is big enough, OK. And let the customer have choice and their convenience to take up insurance, and the agency force have bought the concept. So there's no conflict between tithe agency force and banker assurance. Now ..
Mark Norbom
HSBC, I'd rather really not talk about. You know the secrets of their growth, it is, you know. This meeting is on Prudential but they have been able to leverage their bank network that they have in Hong Kong, and their customer relationships.
Question
But just to re-phrase it then does their success without an insurance partner make you anyway concerned about whether the long-term position of having a life company along side a bank doing bank assurance rather than the bank just taking all the profitability is viable over the loner term?
Mark Norbom
I think it would be worth talking about how HSBC's product profile differs from our overall product profile. And so I really do think we have more to offer.
James Wong
Regarding the point we let our bank partners to sell all the policies that are available to our agency force so regarding product there is no difference. We charge the same premium rate and our products, again while it is the common product we offer to our agency force. So therefore there is no conflict on the pricing and only let the customer choice the way they want to take up insurance.
Dan
On channel conflict, let's take direct marketing, and what an SFC and what a bank sells and then an agent. There is probably a thin line between what a direct marketer would do and an agent. Maybe it's a bit broader but it's not the same customer exactly for the SFC. And I've always approached it that it's to the agents advantage that we're multi-channel because the Prudential name is out there in more places as well. One of those direct customers one of these days is going to be pulling up his bill and saying, wow - maybe I'll find an agent and go talk about this unit link product, so I think it actually helps our agency force. So really, I really don't know of any place in multi-channel virtually anywhere, I don't know where we have any channel conflict, which has always been assumed it is complimentary. And so for us it has worked really well. I know others have had channel conflict problems but we just haven't had it.
Mark Norbom
I think we have time for one more. Time wise, I think we have to wrap up.
Question
Two things, one; I think the bank insurance relationship in Hong Kong is fifty percent of your bancassurance. Non-agency business which looks roughly that, given the fact that you do business with Standard Chartered elsewhere what is the proportion, or how important to you, relative to anyone else?
Pierre Fenech
To be able to look at the first part of the question I would have to look at the numbers and come back to you.
Question
I think they're in the pack. It's about sixty ..
Pierre Fenech
Yeah - at this point in time it does not come to my mind. How important is the Standard Charter to us - it is a very important relationship across multiple countries but you have to consider that Standard Charter bank has a completely different profile in different markets. Hong Kong is its primary market so it has a big .. it has a reach of Cancun. We're talking about a million customers. For example Vitech, another Standard Charter bank in Taiwan - it's got a totally different profile. It's predominantly a credit card customer base over there so you can't compare the two markets. Doing a comparison is inappropriate, I believe.
Mark Norbom
It is our most important bank relationship - partner relation, also our biggest. They’re all important but it is our biggest relationship. I think we can give you a little more detail on the size. Pierre will go off and get that number for you.
Question
Finally, I was wondering if you could check some math of mine? When you said management related expenses was 6.7 percent of premiums is that all maintenance expenses?
Mark Norbom
That would be included. In the management expenses it would be essentially everything except sells related so no commission, no sales salaries and so it would be everything. Management, maintenance.
Question
So is there anything else that's apart of that?
Essentially the management expenses includes both the maintenance and the cost of running the business just from the management prospective so if you were to move to a pure run off maintenance the expenses would be even lower.
That comes to about - I mean this is in rough - in order of a hundred and fifty million quid? Which ever is seven-billion life fund asset base. Roughly, I mean - going off the chart it's about two percent. Would that be roughly right for your management related expenses and what is your hope to get that to?
There's a saying, as I said this morning, looking at expenses as a percentage of assets I don't think is necessary the right measure for our business so I think it's a bit of a moot question. What I can say is that what we have seen is that trend trending downwards. Those levels have been trending downwards as our business has been increasing in scale, and we expect that to continue, as we further leverage synergies across the business and increase scale.
Mark Norbom
I guess we have time for one more. We have one more hand up here.
Question
Just very quick, you couldn't break down the one hundred and seventy agents by country?
Mark Norbom
I think we can roughly do that. Forty four thousand in India, thirty eight thousand in Vietnam, about seventy five hundred in China. Those I think are the biggest agency forces. I think if you add those up that equals about, what ..
Question
Malaysia is about seven thousand as well.
Mark Norbom
Malaysia's about seven thousand so you add those up and I think you have close to eight percent of our total agency force. And then the rest would be scattered around. I think Mike told you he has only three hundred and twenty so you can't ask him about the cost of an agency force. He's not going to be an expert on that. OK, we're going to have a short break and then we're going to hear about Malaysia...
Mark Norbom
Ok, we'll get started on our last session for today. I just wanted to make a few comments based on some things I heard over the break. One, I don't think I made it clear but our Standard Charter bank relationship is a contractual relationship so that this is not something that is done on a hand shake in a back room, as are our other bank relationships that we have, that were discussed. So those are contractual relationships. And on the other side we'll get you some more numbers on productivity because there still seems to be a lot of questions floating around about that. You know, I can assure you that we, you know, our productivity is very good in our Asian force and we'll get you some numbers so that you can come to that conclusion on your own, as well. But we might not get those to you until we're in Vietnam. I'm not sure. Probably not this afternoon. Now, Malaysia, our life insurance business in Malaysia is our oldest and one of our most respected life operations. We've just celebrated our eightieth anniversary in Malaysia and we have a comparative younger unit. Our unit trusts operation, which was just started within the past year, right? Year and half now? I'm sorry, three years. Three years a go we got our license. I would like to introduce the two men who are our hosts, actually for our Malaysian leg of our journey and drivers of our success in Malaysia, Keng Hooi, CEO of our life insurance business here and Mark Toh, CEO of our unit trust operations. So I'll turn over to Keng Hooi and Mark.
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