Taiwan: Managing Profitable Growth

Chee Cheong

Thank you, Dan. Ladies and gentlemen, good afternoon. It is indeed a pleasure to talk about the growth opportunities in Taiwan for Prudential Corporation Asia. I trust that after the next twenty minutes you will have gained an appreciation of the growth opportunities in life insurance in Taiwan, our track record and our different shade of positioning. Finally, that we are very well positioned for the future. This slide provides a snap shot of the life insurance market including key players in two thousand and three. Couple of key points worth highlighting are a wealthy population up close to twenty three million with GDP per capita of £7,300. Taiwan’s leverage market ranked fourth in Asia and eleventh globally. Highly concentrated market with local players controlling 64% of sales and featuring amongst the top five. Prudential Corporation Asia entered Taiwan in 1999, and was ranked eleventh on an APE basis last year.

Turning to my next slide, as you are well aware interest rates have been at historic lows for some time. The environment has created irrational market practices with a short-term bias. Key point worth noting; emergence of single premium type products as well as short-term endowments. These products have fuelled the growth of bank assurance in Taiwan. In essence they are deposit replacements in nature. These developments have put pressure on overall profit margins. It is worthwhile stressing that despite the popularity of such products we have taken a conscious decision not to launch them for profitability and risk reasons. Put simply they cannot meet our profit and risk hurdles. Another phenomenon is hot sales, which tends to occur towards the year-end. Arguable they are pull forward of sales from the following year arising from a reduction in the evaluation interest rate used in product pricing, driven by the regulator. In short the sells tracks revolve around by, before the price rise.

Let us take a closer look at the market. The chart on the left sets out total sells for the last calendar years as well as the first nine months of this year. Total sales grew at an average compound rate of 34% from 2000 to 2003. The chart on the right sets up product mix for the 2000 calendar year as well as the nine months to date. You can clearly see the emergence of short term endowments, unit link products, and interest sensitive annuities. These comprise 7%, 36% and 30% of total sales for the nine months to date. We can draw the following conclusions. Firstly; recent market growth has been fuelled more by single as distinct from regular premium products. Secondly; any distinct shift in product mix, which commence last year, has continued this year. This shift in mix is very pleasing for us. Why do I say that? It’s because Unit Linked products form a core part of our over all strategy.

This slide depicts our business bundle for Taiwan. The mode of entry was through acquisition of Ching Fung Life in 1999. Product strategy is based on first mover advantage in linked markets, focus on profitable segments; a clear market differentiation builds our brand name. On the distribution front, rapid expansion of agency, our primary channel; new models for partnerships. Lastly, but most importantly, the people factor. I am sure you will all agree that a world class strategy and business model is worthless without the right people to implement them. Given the nature of our industry it is imperative for us to value people as our key assets and go for the best talent available. In addition to building a performance-based culture with tools to measure and reward performance is also vital to put plans in place. To not only attract and develop but to retain top talent.

Moving to our product portfolio, firstly we aim to market a comprehensive range of products to meet the growing financial protection and wealth management needs. We also aim to lead the market in product innovation. As you can see we have gained first mover advantage in linked business. We were the first company to launch unit-linked products in Taiwan in November 2001. We have sold over 100, 000 policies in under three years. We achieved synergy on fund options through our sister company, PCSI in Taiwan. Additional points of interest are unit linked life passing rate of 80% is well above the industry average of 52%. Over 50% of our agency force are licensed to sell unit linked products, also well above the industry average of 30%. We have built a strong position in the linked market and avoided low market segments. We achieved this through the implementation of a sound product strategy, predicated on selective participation. Put another way, we will not enter market segments in which we cannot price to compete profitably. The launch of our second-generation product range in June of this year has helped us maintain our first mover advantage. Our 66% product mix, compared to the market’s figure of 36% bares testimony to this. You will also note from the chart that our accident and health product mix for 2004 year to date is also higher than the market. Whilst bank assurance contributed 40% of total market sales the majority came from deposit replacement type products rather than accident and health products. In contrast to the market we have been successful in selling long term health as well as accident products through tele-marketing. This, coupled with the fact that we do not market deposit replacement products have contributed to our position vis-à-vis the market. Let us have a look at distribution. Our primary distribution channel is agency.

This slide shows we have maintained growth in both sales as well as size of agency force. This worth mentioning that the marginal decrease in APE last year was due to the SARS outbreak. Our agency strength as of September stands at close to 10, 800, an increase of 51% over 2000 year end. Our plan to grow our agency force further our primary focus is on building professionalism through investment and training programs for our leaders as well as our agents. This will then translate to continuous sells growth through productivity gains. Turning to our partnerships distribution channel, you will recall I spoke earlier on the emergence of bank assurance in Taiwan. It is indeed a favourable trend for us. We like it because it gives us an opportunity to tap those who prefer dealing with banks rather than the traditional agency channel. More importantly we can leverage Prudential Corporation Asia’s bank assurance expertise and experience gained from its 28 bank assurance relationships across Asia. We have built a different shared model for non- agency distribution. We have established five partnerships with five banks, namely Standard Chartered, Yi Sun Ching Fung, International Bank of Taipei and Gee Sun. Our sales models extend from telemarketing to face-to-face approaches using financial consultants. We take pride in the fact that we have competitive advantage in tele-marketing. Our tele-marketing business model is the market leader in Taiwan. As you can see AP from this channel has grown at an average annual rate of 42% from 2000 to 2003. It is pleasing to see continuous strong growth this year with this channel accounting for 17% of our total APE to date. We have successfully repositioned this channel to marketing longer-term protection, savings and health products. This repositioning has lead to increases in new business to achieve profits both margin wise and also in absolute terms. It is worthwhile spending a few moments on Yee Sung. We chose Yee Sun because it close strategic fit with us. They are a quality partner in respect of bank performance, customer base, distribution network and culture. We worked extremely well as a team to get a partnership up and running with the first sell made in April. Couple of additional points; the relationship is off to a good start and commitment from both parties is second to none. The acquisition of Kow Shung Business Bank has expanded the breath and reach in terms of branch network and customer base. The close to two-fold increase to 100 branches has positive implications for bank assurance sells. We are naturally working very close to them to put plans in place to accelerate sales next year. We have come from nowhere to rank amongst the top five life assurors in Taiwan. We were informed by Commerce Bank Magazine two weeks ago that PCL Life Taiwan was voted one of the best five insurers in Taiwan for a second successive year. In addition the annual survey conducted by Risk Management Insurance Magazine also ranked us number five in the categories of most preferred insurance company and best company for claimed service. These accomplishments are particularly impressive when the top four are well-entrenched players with much longer histories in Taiwan. They include the likes of Cathay Life, Shing Kong and Foo Kong Life. As you can see we are also ranked fifth in brand awareness with a result of 78%. Our Prudential icon is wildly recognised in Taiwan.
Let’s us take a look at our results. This next slide gives us a warm and fuzzy feeling. I trust you share the same feeling. Prudential Corporation Asia has made it’s mark in a developed and highly competitive market in a relatively short tie span of five years. Our strategy has resulted in impressive APE as well as new businesses to achieve profits margin performance. Key points worth noting are a 27% average annual growth in APE from 2000 to 2003. APE for the first nine months of this year is £102 million. This represents a 16% increase over the same period last year, very healthy growth indeed in a flat market. Consequently we have moved up three rungs in market ranking and we are currently ranked number eight. Like wise a strong margin growth in respect of new business to achieve profits. We have achieved profitable growth through the implementation of a strong and sound product strategy. You will recall earlier we will not enter markets in which we cannot price to compete profitably. In other words we only focus on profitable growth and certainly not growth at any cost. At the end of the day we have a strong belief in creating and building long-term value in Taiwan, and that is what life insurance is about. Projections from Deutsche Bank, Thomson Dialogue and Swiss Ree show that Taiwan’s insurance market still has plenty of growth potential. Compound growth rates range from 6% to 14%. Factors pointing to this continued growth are bank assurance development will drive future expansion. Pension reform will present new markets for life insurers. Our strategy focuses on leveraging our current business model for sustainable and profitable growth. On the distribution front we will focus on improvement in agency profitability as well as build on our different shared bank assurance model. On the product front, we have a single minded focus on product profitability. Regarding customers we are making head way in insuring customer centric culture forms a cornerstone of our over all business strategy. Consequently we have put in place several projects with clear deliverables on enhancing customer experience. Lastly, we will build on our advantage brand positioning to access the broader customer set and increase growth in our linked business. Ladies and gentlemen I wish to leave you with the key message, that we are very well positioned going forward. This can be substantiated by the following; we have built a highly different shade of position in the Taiwan market, we have continued to capitalise on our first mover advantage in unit linked products. Our selective product participation strategy is under pinned by profitability considerations. Our well orchestrated multi-channel positioning is the strategic platform for growth. This strategic positioning enables us to extend our market reach. We have built a strong agency platform as well as a growing partnership distribution channel. Differentiation has translated into robust profit performance and strong brand positioning despite difficult market conditions. We recognise the importance of valuing people as our key assets. Consequently our human resources strategy is aimed at building an environment conducive to attracting, developing and retaining top talent. Further, we have a highly experienced senior leadership team with a total of 153 years of not work experience but life assurance experience. We will continue to leverage our current platform to continue driving sustainable and profitable growth. In closing may I reiterate that we have achieved a demonstrable track record in this developed and highly competitive market in a relatively short time frame. All of the above demonstrates we have the right recipe. The final vital ingredient is a passion for success. In our case it is a passion for continued success. We believe we have both passion and drive and are therefore very very confident we can continue soaring to greater heights in Taiwan. Thank you, and good night. Now I would like to hand the podium to Phong, CEO of PCL Life in Vietnam to talk about leveraging the platform in Vietnam.

Huynh Thanh Phong

Good afternoon. In our next twenty minutes I have the pleasure to briefly introduce Vietnam, it’s life insurance market and to outline Prudential past success, and future strategy to leverage the strong platform we have built here. While Vietnam is one of the most poorest countries in South East Asia with more than 81 million people, the insurance market is still in its infancy. Total premium in 2003 was only £245 million pounds, representing less than one percent of GDP penetration. These indicators, whilst modest be regional standards, represents a very fast start for the industry. We have to remember that the very first life insurance policy was sold in Vietnam in 1996, barely eight years ago. Foreign insurers were allowed into the country just five years ago in 1999. Prudential was granted the second 100% foreign owned life insurance license in that year and has since held the number one position in terms of new business market share. In the next few slides I will give a quick over view of he macro condition of the country. Politically, Vietnam has a one party system, the Communist Party Of Vietnam, which dominates all aspects of life in this country. At the centre of the party is a fifteen member politburo and a 115 central committee. These bodies are the final decision makers of all important political and economic matters for the country. Looking forward it is clear that untapped potential of the market remains significant in Vietnam. With a high propensity for saving by the general population and a good reputation as a safe product, life insurance will continue to be chosen by the Vietnamese people as one of the major financial vehicles. In the next five years Vietnam life insurance premium is projected by Swissary to grow from a level of less than 1% of GDP today to reach a level of about 3%. This is probably on the low side. Reaching 3% of GDP Vietnam life insurance penetration will be at a similar level with other countries in the region. In terms of market penetration we have been the most successful so far, capturing more than half of the customers in our target segment, but there our still a large number of potential customers that remains untapped by the industry. Significant opportunities still exist for Prudential’s 72% of the population still to be accessed. With a steady growth of GDP and the rising level of wealth our target customer’s segments are becoming larger in the next five years. Even with the tremendous platform we have built, with the right strategies, Prudential is well placed to gain significant market share in the future. Our first strategy focused on our potential customers and our product offerings. Our initial product portfolio was deliberately simple and only a few high priority needs of the customer are covered, named regular saving and children education saving by families with young children. In the past twelve months we started to introduce several new products covering new needs for additional market segments. However significant market opportunities still remain for other segments such as empty nesters and singles, and other needs such as retirement and protection. Our strategy going forward is to further expand our product line into more target segments and to meet more the financial needs of the Vietnamese people. To be successful with this strategy Prudential must be able to motivate the population to take action to save for these long-term financial needs. I would like to pause here for a moment and play a TV commercial on our new retirement saving plan. It is a challenge to motivate a very young population to think about long term financial needs many years from now based upon our understanding of the local culture. This TV commercial you are about to see is based not on Western concepts of exotic locations or off playing golf. Rather it is grounded in a simple local vision of being able to spend time with one’s family.

[TV Commercial]

This is an example of our effort to access more customers by introducing a brand new product category. Within a few months after launch this new product category already accounts for 15% of our sales. The second prong of our strategies is to level our unparalleled distribution network, countrywide. Our distribution network is already the most extensive in Vietnam but we are planning to extend it even further to reach more potential customers in smaller urban centres. Furthermore as we continue to grow the ‘one size fits all’ approach will not be the most efficient model. In the next stage of development we are segmenting our agency force in order to focus our resources. By focusing our management effort on the top segments of our agency force we will be able to increase our productivity and efficiency. Also as the consumers become more sophisticated these agents will need to be better equipped with more advanced knowledge and training to provide relevant financial advice. This model will also allow us to continue to strengthen the training and management of the large agency force. Significant benefits can still be derived by increasing the productivity and efficiency here. Combined with this enhanced distribution network with more product offerings is the best way to leverage our strong existing platform. Based upon the strong platform we have built over the past five years of our national distribution network of a powerful brand, a comprehensive back office infrastructure, and a high calibre team Prudential is in a unique position to drive the next stage of development for the entire capital market of Vietnam. Our core strategies will be to bring new products to meet the ever-changing needs of the Vietnamese people, and to motivate them to save for their long term financial goals. Prudential will continue to play the leading role in creating new products and markets as we have done successfully in the past. Our core distribution strategies will be to leverage on the strength of our agency force. We will focus our resources on the top segment of our agency force to increase the productivity and efficiency. We will strengthen the training and management for the remaining segments. Our existing infrastructure will also be expanded to provide service to our economically important regions of Vietnam and to maintain our excellent level of persistency. Last, but not least we will continue to build on the already strong working relationship wit the regulator and with all levels of government so that Prudential can continue to be the pioneering foreign financial service company in Vietnam. In summary, after five years we have built a market leading business in this country and created a strong platform. We fully took advantage of being the first in many aspects of the business. These strategies put us in a strong position to take advantage of Vietnam’s continuing economic growth and the rising level of growth of the population. By unlocking the potential of our large distribution network and by expanding our product portfolio to meet the needs of major demographic segments, Prudential will be able to capitalise on the significant growth opportunities for Vietnam for the next five years. With the right strategy we will certainly maintain and build upon our current leadership position in Vietnam. Thank you very much. At this moment I would like to invite my very dear colleague from India, Miss Shikha Sharma.

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