Prudential Plc

Half Year 2024 Results

Wednesday, 28th August 2024

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Prudential Plc - Half Year 2024 Results

Wednesday, 28th August 2024

Introduction

Patrick Bowes

Chief of Investor Relations, Prudential

Introduction

Good morning. Good afternoon, everyone. Thank you for joining us.

I am delighted. I am joined by our CFO and CEO, and I will pass over to Anil to give us some opening remarks.

Opening Remarks

Anil Wadhwani

Chief Executive Officer, Prudential

Introduction

Thank you, Patrick.

Good morning. Good evening, everyone. Very warm welcome to our results call.

I am Anil Wadhwani, CEO of Prudential Plc, and I am delighted to provide you with an update on our first half 2024 results.

Delivering Value, Cash and Earnings

Building on last year's exceptional growth of 47%, our new business profit for the first half grew by 8% to $1.5 billion. Excluding economic effects. This growth was both high-quality as well as well-diversified. We improved our new business profit margin through product and repricing actions and reported an encouraging 9% growth in operating profits supported by our large and growing in-force portfolio. Our gross operating free surplus generation was very much in line with what we had expected.

We continue to focus on cash returns to shareholders following the $2 billion buyback programme which we launched in the month of June. We are pleased to announce our first interim dividend for 2024 of $188 million, up 9%, which aligns with our dividend policy and previous guidance.

Operational improvements leading to value creation

We are one year into our five-year strategy, and we are seeing encouraging early results from our capability investments as well as disciplined management of financial and operational performance. Let me start by sharing a few illustrations of where we are seeing operational improvements.

Starting with customer, we successfully launched our enhanced customer digital platform PRUServices, building in self-service capabilities and other enhancements. We have seen improved customer registrations and satisfaction, and now plan to deploy this in nine markets over the next 12 months.

We have focused on driving quality agency through strategic recruitment, training and lead generation empowered by our agency digital platform PRUForce, which has now a 90% adoption

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rate amongst our active agents. Going forward, one of our primary focus will be to encourage and drive greater module usage with our agents.

Our bancassurance business continues to provide us the balance in our channel mix. We are encouraged by the momentum in the first half, and are focused on driving further increases in our share of Health & Protection mix.

In Health, we have implemented a new operating model to improve the quality of our front and back book. We have launched new propositions while undertaking disciplined regular repricing and claims management. And while we are seeing progress across our pillars and enablers, at the same time, I believe we are more effectively identifying issues and taking hard decisions where they are required to ensure we are generating high-quality sustainable growth that will convert into operating free surplus over a period of time.

In Malaysia, we were surprised and deeply disappointed with the Federal Court decision to overturn two previous judgments in our favour at the High Court and Court of Appeal. We have now received the sealed order and are evaluating our options. You will appreciate we cannot say more at this stage.

Key Messages

For the full year 2024, we continue to expect new business profit growth at a rate consistent with the trajectory needed to meet our 2027 new business profit objective.

Our confidence is supported by several key factors. Firstly, we delivered 8% growth in new business profit in the first half of 2024 on the top of 47% achieved in 2023 while increasing our margins. Second, we have seen pickup in sales momentum in June and coming into the start of the second half as the base effects of the first half of 2023 comparators start to ease.

And third, the momentum is broad-based and diversified across markets as well as across our two channels of agency and bancassurance. Looking further ahead, we remain confident in achieving our 2027 strategic and financial objectives, given the encouraging early results from our capability build and the actions we are taking to drive high-quality, sustainable growth and cash generation.

Joining me on the call is Ben Bulmer, our CFO; Lilian Ng, who is responsible for Greater China; Dennis Tan, who looks after Singapore, Vietnam and Thailand; Solmaz Altin, who looks after our other ASEAN markets alongside India and Africa; and Bill Maldonado, who is our CEO for Eastspring.

I would also like to take this opportunity to thank Lilian Ng, given her decision to retire. Lilian has been a veteran of the insurance industry and within Prudential, with significant personal contribution to building our Asia franchise to what it is today. Lilian has played a pivotal role in building our multi-distribution platform and championed transformative growth strategies into our businesses.

In October, we will welcome Angel Ng to Prudential to lead Greater China Wealth & Customer. Angel's operational experience in managing businesses and relationships in Greater China, plus her knowledge of distribution and wealth, will be strong additions to our leadership team. Additionally, I also look forward to onboarding our new Chief Agency Officer next month, Pankaj Banerjee is returning to Prudential and will be reporting to Solmaz to drive our agency strategy forward.

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On that note, I will now hand it over to our CFO, Ben Bulmer, for his comments. Ben?

Financial Results

Ben Bulmer

Chief Financial Officer, Prudential

HY24: Key Messages

Thanks, Anil, and hello, everyone.

Look, there are of course the usual slides, transcripts and videos covering details of the results on our website, so I am just going to limit my comments to the following three points. Firstly, as I have said before, continuing to grow profitable, high-quality new business is key to our 2022 to 2027 NBP objective and our 2027 gross operating free surplus objective. The other building blocks of our gross OFSG objective include our asset management profits and the elimination of adverse operating variances.

We have made material progress over the first half. In particular, I would like to flag the contribution of new business added in the first half of 2024 to the level of expected OFSG in 2027. And that is up 12%, ahead of the 6% growth in new sales.

Now those jaws will accelerate as we move through the remainder of the year as the full effect of the pricing actions taken only at the beginning of the second quarter start to emerge. I expect our actions to increase the rate of OFSG in relation to APE added in 2024 to be far more comparable to 2022 levels. These new business pricing actions, coupled with our ongoing efforts to return to positive net variances, growth in asset management and our ambitions for Agency and Health of course, give us continued confidence in reaching our 2027 objectives.

Secondly, our balance sheet remains in very good shape with a robust capital position and sufficient flexibility. We have continued to deploy capital in line with the high return allocation priorities we have set out, investing in high quality new business, enhancing our capabilities and, as Anil mentioned at the end of June, announcing a $2 billion share buyback.

To date, we have invested $230 million in our $1 billion programme to enhance our capabilities. Over time, these investments will drive improved consistency of execution, increased productivity, improved customer experience and increased operational efficiency, all of which act to accelerate sustainable value creation.

Finally, as I mentioned in March, having completed the IFRS 17 project, we have been actively considering converting to traditional embedded value, or TEV. We will do so from our first quarter 2025 business update, and I believe that the move to TEV will enhance the transparency of underlying growth trends and allow greater comparability with our Asia peers.

This is, of course, an accounting change. It does not affect the economics or actual cash flows earned by the business, and is substantially about discounting. Consequently, of course, it goes to follow there is no change in business strategy, definitions of free surplus, capital management, or our dividend policy.

There is also no change to our NBP group growth objective, which remains a compound growth rate of 15-20% between 2022 and 2027. On a TEV basis, the implied 2027 NBP objective range

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is $3.4-4.2 billion. Finally, our 2027 capital generation objective of gross OFSG of above $4.4 billion is unchanged.

Back to you, Patrick, to run proceedings.

Patrick Bowes: Thank you, Ben. Thank you, Anil. Okay, Operator, over to you to run the Q&A session.

Q&A

Kailesh Mistry (HSBC): Hi, good morning. Good afternoon, everyone. Thank you for taking my questions. A couple of questions and then a couple of clarifications, I guess.

First thing is, on mainland China. I think there is a comment in the release that says that you saw growth second quarter 2024 over second quarter 2023. Could you just provide a little bit more colour on the level of growth of new business, as well as which distribution channels and products?

Secondly, just on Hong Kong, on the MCV business, just a little bit more colour on the movement in the MCV new business. I appreciate it was down 16%, but I think some of this was average case sizes being down, at least, I think around 15%. Is that the main driver? And also, how does the product mix compare with the second half of last year? And are there any signs going into the second half of 2024 of the trends continuing, if that makes sense?

And then just two clarifications. On the new business outlook for 2024, is that ambition excluding economics or after economic effects? And on slide 23, on Ben's comments, should we assume new business OFSG as a proportion of APE at 4.3% going forwards, or do you expect to increase it from 4.3% going forward? Thank you.

Anil Wadhwani: Thanks, Kailesh, and good to hear from you.

So let me kick it off with mainland China. I will then go to MCV, and then I will have Ben offer his comments on both the ambition on an ex-economics basis, as well as your last question, around the 4.3% ratio.

So let me start with CPL first. So the way we saw the CPL business last year basically informed the decisions to drive a different product mix. And as I mentioned on several of the previous calls, that we made certain pre-emptive actions, or we took some pre-emptive actions on repricing to drive a different product mix.

And as we closed out last year, got into the first half of this year, Kailesh, we did see the product mix shift. We saw greater longer-term savings, greater par, as well as greater Health & Protection. Now, on account of the base impact of the first half of 2023 versus 2024, we had anticipated that the growth coming into this year in China mainland will be tough.

However, as we have turned into the second half of the year, we are seeing growth return back to our China mainland business. And I do want to emphasise that the steps that we have taken on account of driving a different product mix is now yielding a significant margin improvement, both in agency as well as in our bancassurance business. So we remain cautiously optimistic, both on the emphasis that we are driving on quality, but, also ensuring that we are driving productivity improvements, both with our banca channel partners as well as with our agency.

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To your second question on MCV, so you are right. And again, I would like you to go back to when the borders opened between Hong Kong and Chinese mainland. And we did see a surge of pent-up demand and specifically coming through in the months of March, April and May, where we saw the ticket size improve quite significantly. It started to normalise at round about the $18,000 levels, I must clarify, in the second half of last year. And as we transition, Kailesh, to this year, that ticket size has very much held up.

The way we are seeing the momentum in MCV is the [ editor's change -"monthly"] traffic is now stabilising at about 2.6-2.7 million. And if you look at the number of products or number of cases that are sold to customers, they are roughly about [ editor's change -"8" ]- -for every thousand.

So I think the opportunity for us is to be able to drive greater penetration while we see the ticket sizes in MCV stabilising. I also would want to emphasise that when we speak to our MCV customers, the demand for the Hong Kong health infrastructure as well as the products that we offer in Hong Kong continues to remain undiminished. And that gives us the confidence to be able to drive growth in the MCV segment as we go through 2024.

In terms of the next two questions, I will turn to Ben, both on the ex-economics and the 4.3%.

Ben Bulmer: Yes, hi, Kailesh. So, briefly, in terms of outlook, yes, absolutely. It is on an ex-economics basis.

On your question that refers to slide 23, pleased with the pricing and product actions we have taken in the first half of the year. As I mentioned in my opening, that was round about the beginning of Q2. So the 12% growth rate I referenced in 2022 will accelerate as we move through the year.

Look, I am determined to drive capital generation velocity across the business, be that through mix, through pricing, through scale benefits. So we will continue to look at opportunities to increase the number. I think for 2024, we are going to get to a broadly comparable level of 2022, but, by no means rest on those laurels.

Kailesh Mistry: Thank you

Larissa Van Deventer (Barclays): Thank you very much, and good morning. Three quick ones if I may.

The first one, it is on the split on Health & Protection versus savings. You made a comment in your presentation, but, could you give us more colour on the split, both in new business sales and new business profit, and how you expect that to evolve?

The second one, could you please give us an update on the spend on the $1 billion, how far you are, and how we should think about that being deployed and for the rest of this year?

And third question. You recently published a China regulatory return. Can you help us understand how you think about capital requirements in China, and how capital in that business may be in the coming year, please? Thank you.

Anil Wadhwani: Thank you for your questions. Let me start firstly to address the $1 billion question, and then I will flip to Ben to talk about the Health & Protection mix specifically and the improvements that we are seeing there. And we will also address then the China question.

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In terms of the $1 billion spend, as of date, we have spent $230 million. So we had indicated last year that our spend was in the region of $130 million. So we have added about $100 million to that.

As we go through the second half of the year, our expectation is that we would invest another about $150-200 million. And as we transition to 2025, the expectation is that the investment will range roughly in the region of about $250-300 million. I think what is equally important is that we are focused on accelerating the execution of the growth drivers and what I mean by that is investing in the quality of our agency through strategic recruitment programme, by generating greater activity for our agents, as well as reskilling our agents to drive greater share of Health & Protection.

We already are seeing some great momentum on bancassurance and something that we intend to build. We continue to believe that it provides us the balance between bancassurance and an agency, something that we like. We have already stood up the health vertical, taking a number of initiatives around new propositions, repricing, use of technology to cut fraud, waste and abuse, and again, some good progress done there. And on customers, again, delighted with the progress that we made in launching our enhanced customer digital platform.

So the early progress seems solid. And again, our focus is to continue to accelerate and replicate some of the best practises that we are getting across the markets of Asia and Africa.

I am going to now turn to Ben for the Health & Protection mix as well as the capital question.

Ben Bulmer: Hi, Larissa. So, Health & Protection NBP was $545 million. So that grew 7% year-on-year. And just to give you a sense, in terms of APE mix, stood at around 22% in line with prior year. Demand for H&P remains strong. We actually had 14 of our markets record H&P APE and NBP growth. So I hope that gives you a sense of the mix.

I think what I would add to that is, historically, I am cognisant that mix has been a lot higher. I think there is opportunity for us as a Group to increase this as we accelerate towards our 2027 objectives. And as you know, Health is one of our important pillars. So as we do that, that should give a tailwind not only to margins, but, also to capital generation.

In terms of your question on China, and I think this was around the reductions in CPL solvency. So we saw rate reductions in China in the first half of the year. The China business consequently has a lower FER and a lower RDR. And ultimately, the effect of that has been to reduce the net assets of the business, but subsequently also the amount of future profits that can be counted as surplus into its solvency calculation.

As you would expect, the business is looking at actions to improve that solvency ratio. On top of all of the activity around repricing and product mix shifts that it has been taking, it is also looking at bonus management and asset-related actions, all of which will take some time to effect. So consequently, it is likely later this year we will make another injection into the business. That possibility was always allowed for within our capital management plans. So no change to the Group's broader capital management plans.

I think, stepping back, China is a very important market for us. We like the growth potential of the market, the economics of the new business we are writing, and momentum is coming back for us. So both us and our partners are very much aligned in our support for the business through the cycle.

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Larissa Van Deventer: Thank you very much.

Farooq Hanif (JP Morgan): Hi, everybody. Thank you very much. I have got three questions.

Starting with slide 22, which shows the new business generation to your OFSG target. It looks like in 2026, I know you are not trying to show the numbers on the chart, but, it looks like in 2026, you are more than doubling the contribution coming in, let us say, 2024. Firstly, is that kind of right, and how much of that depend on you introducing new products?

Second question on traditional embedded value, how will you deal with yield curve movements? I am guessing the risk discount rate will be quite stable. However, how often will you look to change other assumptions within that?

And the third question is really around the Health proposition. Can you give us an example of what is different in this proposition that you are trying to introduce versus what you already do, maybe with some examples? And how close are you to thinking about launching Health, for example, in new markets such as India? Thanks very much.

Anil Wadhwani: Thanks for the question, Farooq, and good to hear from you. Let me start with the third question first on Health, and I am going to ask Solmaz, who leads our Health business, to provide additional comments. And then we will go to the slide 22 question and the TEV, if that is all right with you.

So you are absolutely right, we called out Health as one of our key pillars as we think about driving the 15-20% new business profit growth. However, equally important, converting that and accelerating that growth to cash.

We have now successfully stood up our Health vertical. We have a new CEO who has deep experience in Health, and there are a number of initiatives that are in flight, and I alluded to that in my previous answer. So firstly, we are launching new value propositions across markets of Hong Kong, Indonesia and Malaysia.

We have now introduced discipline repricing both in Indonesia and Malaysia, in addition to the disciplines that we already had in markets like Singapore and Hong Kong. And we are getting a lot more effective by cutting fraud, waste and abuse with the use of technology and really doubling down on claims management, as you would expect. I am just going to stop there and turn to Solmaz, who may have some additional comments to offer.

Solmaz Altin: Yes, thank you, Anil, and thanks for the question. It is indeed that we are doing Health differently than before and also differently than some of our peers. And you ask for examples.

Let me give you one example from Indonesia. It is important to note that in Indonesia, the medical inflation from half year 2023 to half year 2024 was 30%. That is way above a multiple of the normal consumer inflation. And this is nothing that is pertinent to only us. So the whole industry is reeling from that very high unexpected medical inflation on the back of post-COVID and other matters. So we are leading the market as a first one to introduce annual repricing in our medical book, for example.

On top of that, we are introducing new propositions, as Anil mentioned, that have features like claims-based pricing. So we are going to manage that in order to reduce the blow to customers

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that are not claiming as much as those who are claiming more. So we are going to reprice according to the claims behaviour.

This is pioneer work, and we are, the second example, also introducing in Malaysia co-pay products where customers can soften the increase in premium that we are going to again do annually in a repricing fashion by choosing co-pay options that we are introducing in the market.

So what we can say is we are seeing early success of that which is exemplified, for example, by an increase of the health NBP margin by positive double digits half year 2024 to half year 2023.

On your SAHI question, India, we continue to be very interested in the SAHI opportunity in India. We have seen, over the last five years, 25% CAGR growth in the health insurance space, and we are continuing to evaluate organic opportunities to enter into that market.

Anil Wadhwani: Yes, I just wanted to be clear, Farooq, we are not going to go the inorganic route if we were to pursue that opportunity in India. And we have concluded that we will pursue that on an organic basis. And again, Solmaz and team are actively working on the same.

I am going to now turn to Ben, specifically to your question on slide 22 and on the TEV RDR. Ben Bulmer: Thanks. Hi, Farooq. So why don't I start with TEV.

So we use to derive the long-termrisk-free rate, a building block approach across cash rates, inflation, term premium and so on. This is entirely consistent with our assumptions we apply for IFRS reporting. So it is well trodden in terms of process, governance and audit review. Essentially, there is a trend up from current rate towards long term, and that is a three-yearhalf-life application in essence.

Maybe I should say on the RDR. Yes, you are right. I think we would expect broad stability in RDR, and obviously, you have got the risk-free elements in that. However, stepping back, broad brush, looking across our countries typically cover our ERPs and then additional margins for risk by country. However, yes, I would say I would expect stability there.

On slide 22, broadly doubling contribution. No, we are not sort of reliant on introducing lots of new products that we do not already have on the shelf today. Clearly, driving Health & Protection product mix is exactly what we will be looking to do. And continuing to look at our cash flows from all of our products vis-a-vis accelerating capital generation, coming back to the capital velocity point I made earlier.

Patrick Bowes: Thanks, Farooq. And obviously variances.

Ben Bulmer: And variances.

Andrew Crean (Autonomous Research): Morning and well done for transferring over to TEV.

I had three questions, two of them are fairly numeric. So the first one is, could you give us the APE and new business profits for Hong Kong MCV business rather than trying to guess all these things?

Secondly, in China, where I see the margin has gone from 43% in the first half to 36%, then 35% in the first half of this year. Could you give us the split, ideally of sales, new business profits of the banca channel versus the agency channel, and whether you anticipate 35% being a good run-rate moving forward as a margin?

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And then thirdly, this comment you have about momentum in June being good and building into the second half, I suppose a clarification here. You said to Kailesh's question that that was ex-economic basis. However, we do need to forecast these things on the current economic basis. Could you say whether you see there is momentum on the reported new business profits and whether the momentum is really because profits fell off a cliff in the second half of last year as opposed to there being growth second half on first half of this year?

Anil Wadhwani: Thanks for your questions. And so let me start with the third one first, because that is relatively straightforward.

When we mentioned about June, we were talking specifically about sales. Yes, you are right that our focus is always in terms of creating value, new business profit, and equally ensuring that that is converting on an accelerated pace in terms of cash. So I just wanted to clarify that. And our targets, again, just to reiterate, what Ben said earlier has always been on ex-economic basis.

I would now go to your second question on China.

So China, again, the margins have improved both across bancassurance and agency, and we do not see that much difference in terms of margins on an ex-economics basis when it comes to agency and bancassurance in China, partly on account of the steps that we have taken to drive a different product mix, but, partly also because of the regulatory changes with regards to the bancassurance channel last year. And as I mentioned earlier, that as we transition into 2024, we saw higher mix of par, higher mix of Health & Protection, and higher mix of longer- term savings, which were the key catalysts to the margin improvements that we witnessed on banca and something that we would expect to continue in the second half of this year.

In terms of Hong Kong, our new business sales was $955 million and MCV was $540 million out of that and the balance was domestic.

So I hope I have answered your questions, Andrew.

Andrew Crean: Well, just actually coming back on that, the new business profits on MCV business in Hong Kong and when in China, you say you have improving margins in both banca and agency, I cannot see how that is possible as the actual overall Chinese margin went from 43% to 35%.

Ben Bulmer: Maybe I can help, Andrew. Hi, it's Ben.

So on a reported NBP basis, so cum economics, MCV NBP was $384 million out of $651 million. The margin expansion in China that Anil was referring to was on an ex-economics basis and driven really through shifts in product mix. On the agency side, we had a higher mix of whole of life protection and CI products. So our ex-economics margin actually expanded eight points to around 64%.

On the banca side, there was a bit of a margin tailwind from the reduction in commissions that happened last year, but, also, again, the benefits of mix shifts and some pricing actions that have been taken. So our banca margins there again, ex-economics expanded 18 points to 61%. Reported margins, though, are down overall, Andrew, and that is really driven by lower rates and the fact that there is a lot of savings business.

Andrew Crean: Okay, I will pick that up. Thanks.

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Prudential plc published this content on 02 September 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on September 02, 2024 at 02:45:05 UTC.