5th Q&A Session

Question

if you run through to which regions you're still selling with profit products and which are still actively selling as a first question. Second one, if you could just remind us of what your percentage ownership is of each one of the regions?

Mark Norbom

Our percentage ownership is -... in all of our insurance businesses is 100% except in India, where it is 26%, and China, where it is 50%, and then the - ...I guess there would be the Bank of China, pensions as well - ... 30, 36% - ... Sorry? Vietnam 100%. And Malaysia, it's a little longer story, but... OK? Oh, and the other question - with profits, products, I don't know.... Maybe Garth is better with that... but, I mean, we sell investment link products, but it's not...

Garth Jones

The traditional width profits life funds we have in Malaysia, Singapore and Hong Kong is a branch of PSC UK, and we have a life fund in India. So... Malaysia, Singapore, Hong Kong are 90 - 10, and India is 92.5 - 7.5.

Question

Two questions. We heard about the number of markets that have got very tremendous growth prospects, and you might be opening up very quickly, if regulations allow you... can you just confirm that all of that growth is going to be financed locally out of Pru Corporation Asia, and basically, how you look to move capital from the centre of Asia region, if you like, to the operations, and... Second question is, on the incentives, incentivisation of staff if you like, eh... does it actually reflect group practices, or is it more Asia Corporation... Prudential Asia practice, and do you have a pension scheme for your staff in Asia region and is that a final salary or a money purchase scheme?

Mark Norbom

Pension scheme... OK... let me take a crack at a few - ... at one or two of those. In terms of financing our growth, in 2005 - ... Let's talk just about the organic growth, OK? In 2005, we will still be getting some of the capital from Group, OK? We will not be totally self-sufficient in terms of our capital generation. By 2006, we will have enough capital generation in our markets to not only fund our organic growth, but also to return a little bit back to Group, OK? And the way that works is each country sort of has its... either out-flow or in-flow, and it's bought in through the region, and the Group co-ordinates that as well, and then for the countries that need capital, it would be... it would be repatriated out, so it's sort of a flow, if you have the extra money, they repatriate... you... it flows in through, through the region, and in to group and then, if you need capital, it flows the other... it flows the other way, so... is that sufficient on that point?
Er... OK, and then your... I'm sorry, your second question was...?

Question

Whether you incentivisation practice was group-buyed or regional?

Mark Norbom

And do you mean incentivisations for agents, or for employees?

Question

For employees.

Mark Norbom

It varies by market... I don't know where Shu is? It obviously varies by market, but in terms of the top management, our structures would be very similar to Group where there would be... you know, base salary and then an annual bonus structure, and then a longer term 3-year incentive structure also, on top of that, in place... So, it's very much similar to what we do across the group, OK? And then the third one was about pension, and this is also for employees. Whether we have a standard pension program... that would vary by market, right? Shu, our pension?

Shulamite Khoo

Yes, all the pension plans are according to the -... firstly the regulatory requirements in each market, accordingly - ... and then - ... and all plans will be approved at a group level, and in addition for internationally mobile employees, we have an international pension plan, and that's also approved at a group level.

Question

But are these - ... or, any or some of them, are these money purchase or final salary pension schemes?

Shulamite Khoo

These are all defined contribution plans.

Question

Can I just please ask on the capital point, if you look to projections beyond 2006, does your current view tell you that, basically once you start repaying some capital back to the centre, that that's likely to continue? That's not just a one or two year event, and then the growth would require you to have some capital from the centre....

Mark Norbom

Hi... You know, I would go back and I would look at the example that Garth went through in detail, you know... the J-curves, where your user capital, in a typical structure, is a typical business and then you start becoming a generator of capital. As all of our businesses get more mature, they will be more and more in the generating of capital range. So we would not only expect that to continue, but we'd expect that to increase over time.

Question

Thanks. Just a question for the panellists. One of the... The common feature that came out, I think, across several of the presentations was that one of the ways you differentiated yourselves and got a particularly high market share was the combination of unit linked and a strong emphasis on the protection and incentive for the consumer to protect themselves against the future liabilities. Can you just explain the extent to which that sort of competitive advantage is durable? I mean, instinctively, you know, it's a well proven path that you've shared in lots of markets, it's one that other more mature markets have got. And now you're dealing - ... you're competing with some fairly, you know... fairly big players, you've got a lot of experience in insurance... You just try and flesh out a bit what it is about the way you do it, that prevents other people doing and enabled you to have such an high market share, and just go into it a bit more... depth.

Mark Norbom

I'm happy to hand it over to you. You know, I do think there are significant lags on the unit linked side. I mean, that the types of products, the types of investments you can put in there can get quite creative. So, there is still a great deal of innovation you can do with the basic structure of the unit linked. But perhaps... Shikha, do you... can you?

Shikha Sharma

Was the question: how do we continue to compete and gain market share on the unit link products?

Question

Well, you know, just... You have such high market shares in some of the unit linked products, and I'm thinking, we've got the shares in Taiwan and China in particular, that, you know, given how profitable it is, one would expect other people to try and offer a similar product. What is it within the product that stops other people doing that, is kind of the topic question?

Shikha Sharma

If I just give you a new example: when we started out, we were seen purely as a product innovator in the first year, and we've gotten a whole range of products and obviously everybody decided to copy them, and today you cannot sustain a product advantage for more than 2 to 3 months, you will have the other players coming in with a similar product. But I think what has given us sustainable competitive advantage, despite product copying happening by the other players, is the fact that they don't have the same brand strength, they don't have the same distribution, they don't have the same servicing capability, and that, I think, takes much more time to build and deliver, so this is not just about product, it's much more than that. And also the retention of our distribution. We've invested a whole lot in terms of training our distribution, and they see that differential value out from us, they would stay loyal to us; it's all of those things count really.

Nishit Majmudar

Maybe I can just add to - ... I think innovation doesn't stop here, you know. Our job is: continue to think and think how we can differentiate ourselves. But one of the things that can be sustainable is training. Our agents are, I think, across all the regions, are, I would say, is a better trained group of people - ... You can see it from the productivity, you know, they are higher productive people. And more importantly, when we look at these agencies, even if they are trained, do they get enough, do they earn enough? If they earn enough, then it... there is a business for them to build, a good carry-out, they will stay in the business and with the training that they have, the way they present themselves itself is a differentiation in the market, because it's the way you sell it. And, take one example of Unit Linked. With the crisis in unit linked, you know about (incomprehensible) not in China, the whole market drops by about... almost close to... in the year of the crisis, almost like 40% drop in the unit link product, but we were - ... marginally dropped a small, single digit, because it's affected by the others, and then of course we pick it up. It's the way - ... If you go through in details of how do we train our agents, and the way we sell unit link products, is very different from others, and we really sell it in the right way. So I think that itself - ... I think training our professional agents is a way to actually - ... you know, not easy for people to catch up, if you can continue. Our NEM program is an example. Because it is the type of agency force that we have. Malaysia is way one class above all the rest, I mean, it's known to be the best. I came from Malaysia, I know. I was a competitor to Prudential those days, I know. Because in the market, when you face a Prudential agent, it's someone that is heard to beat, very hard to beat. So it is something that will give us a sustainable lead.

Chee Cheong

Just in relationship the point on helping us sustain a Unit Link product, sure, we sell a significant proportion of Unit Link products in Taiwan, but there is still a (incomprehensible) off-side. Three reasons: One, you may recall I said 50% of my agents have got unit link licenses. Can you imagine if we had 100% of our sales force licensed on Unit Linked? The potential of sales to Unit Linked products, that's one. Second, it's quite difficult to replicate with our second generation, we lead the market in terms of bringing in a (cost of?) insurance rider, and you need to have the systems behind to... implement and initiate those kinds of innovations, so it's not that easy to replicate. And thirdly, in terms of margins, it helps us, why does it help us? Because with the launch of our second generation unit link product, we have seen rider attachment ratio's increase market lead, and that's going to help us in terms of our bottom line. So those are three reasons why we believe we can sustain, it's not easy to replicate, but at the end of the day, you may have the right product, sure. Now you need to keep ahead, with things always changing, and you need to make sure your competitors don't catch up with you, but more importantly the competition is more in distribution in Asia, rather than products, but if you have a good product, sure, it helps you along the way.

Question

Just looking at unit trust versus unit link products, how do you differentiate the proposition between those two? I mean, for example in some European markets it's because of tax, and also: would you rather sell unit linked or unit trust? I mean, what's the sort of relative profitability in, sort of, embedded value terms, or whatever... how you (express) that.

Mark Norbom

You know, I can say that we would rather sell unit link, because we get higher margins on that business. But, Ajay, maybe you can talk about, you know, how the unit trust customers are really different, and after a different... different product...

Ajay Srinivasan

I think it really stems from this whole thing we spoke about customers in distribution, because the customer requirements are different and therefor the unit link meets different needs from our unit trust. So you're not really catering for the same need - point one. And point two - I think the distribution channels tend to be completely different. So again, if you're looking to access a customer to different channels, you give them the channel they're the most comfortable with. So I don't think the comparison is really ... really one that the customer looks at in the way you describe.

Captain Chia

I may add... because if I hear it correctly is that how do you differentiate between the unit link product and also the Unit Trust? In the first place, I think that there is a misconception here. A Unit Linked insurance product is a life insurance policy, it is not an investment product. It is a Life insurance product. In China we have on average five riders attached to a Unit Link product. It is a typical insurance solution provided for someone who needs the insurance solution. It does not cater for the investment. So I think that kind of differentiation is very, very critical here. And that also makes us one of the players that do not face the problem of miss-selling. Because our Unit Linked insurance product is a Life insurance product, it is not an investment product.

Mark Norbom

I think just get a microphone... somewhere... maybe...

Question

All right. I just have two questions, on the Japanese Mutual Fund business. The first (incomprehensible) I've seen, basically all your asset fund management are coming from the US high yield product, so I am wondering, first, is there some kind of currency hedge within a product, and if not, are your customers aware of the risk they are taking? And what would happen if they were to loose money, what would happen to net flows and what would happen to your brand image? And secondly, we've heard a lot about customer centric approach, and I was just wondering, you identified the older generation as your target customer in Japan, and you identified them as preferring regular income and low to medium risk, so why are you launching now an Indian product which is single country, foreign currency, equity backed in an emerging market, so it doesn't seem to fit that kind of profile. Could you just tell me a bit how you're going forward in these selections?

Ajay Srinivasan

Yes, OK. Your first question was on the forex hedge, I think. There are two types of products in Japan, so there are the income-paying funds that have a hedge, and they're well known to customers that they have a hedge, and there are a whole lot of other funds where there isn't a hedge, and we don't hedge the currency risk for our customers, so they take the currency risk, because they're betting on the increase yield they get, they're willing to take the currency risk. So I think, they know what they're buying, and it's very open as to what they're doing. Your second question was around the Indian equity fund being more risky and going to the same customers. I think it goes to your first point, which is, we were looking to diversify our product risk, and our risk in the business with a single product, so to come up with another product, we wanted to come up with something that was different and innovative. And the Indian fund, you may say that it's single country, but... there's not another single Indian fund in Japan, so it's a... it is a unique proposition, and it caters, I think, to the investment requirements of a lot of people who are not necessarily 65 and 70 years old, but slightly younger.

Question

What kind of product approach were you having (incomprehensible) not what your customer (incomprehensible) targeting really needs, isn't it?

Mark Norbom

You know, the Japan market is very crowded, and so you do have to focus on differentiation, and I think that's one of the things we talked about, in developed markets, it's differentiation that can get you a niche. And, you know, we started the Japan business, you know, when there are a lot of competitors out there, started from a small base and we've been able to be very competitive with a couple of good, differentiated products.

Question

All right. I'll just throw a bit of a side angle to you. How acquirable is this business? You know, if someone took over the Pru at the centre, I mean it just looks like... the motivation within the staff and there's a sense of solidarity... You think it's like a poison pill in the sense that if someone took you over, it would actually destroy.... the culture would be destroyed and the value of this business would... would drop. I don't know if you'd make some comments in that regard?

Mark Norbom

I... You know, frankly, we don't really think about that, all that much. We... run our business, we're proud of being a part of Prudential , and we just... we run our business, that's what we focus on, running and growing our business, so we don't really think too much about being acquired, or whether we're a poison pill, or anything like that.

Question

In South-Korea, I think you've been linked with a couple of acquisition - ... acquisition targets recently. Do you still have ambitions to do M&A in Korean asset management, and if so, how would you fund them? And while we're on the subject, do you have any other markets where you might do niche acquisitions, and how would you fund those?

Mark Norbom

The Korean opportunity was actually a fairly unique opportunity. There are a lot of competitors looking at entering Asian markets and so generally, what we find is when there's a significant acquisition opportunity, it's very pricey. In the case of the Korean opportunity, we thought that we could get a good transaction, we could have used that to nicely and quickly build a significant scale in our funds management business. The fact is: if you look across our businesses, though, there are very few places where we need to enter new markets, and so I don't anticipate that we would be finding any significant acquisitions. We may find some small, add-on acquisitions that can be easily consolidated into our base, we don't have to do any for market entry, those are... the kind of acquisitions that we might do, would be smaller and would not require a great deal of capital, in my mind. The one exception is of course the India -... buying up the share there, possibly, but I don't anticipate... Most of our growth will be from organic growth, going forward, that's what we really focus on. OK. I'm afraid I am going to have to tie it up. I know there's some people who do have to catch air-planes, so I have to... I want to make some closing comments, and then we'll get a few words from Jonathan as well.

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