Prudential plc
Q2 2015 Earnings Call Transcript

Published: 12 Aug 2015

[Mike Wells:]

Well, good morning and welcome. I think I know most of you. I’m Mike Wells, the new Group Chief Executive of Prudential. I’m the 21st, if you’re counting, in the 167 year history of the Group, and very pleased to be up here today presenting to you our first half results. I think you will see, if you’ve had a chance to take a look at them, they are very broad based, with all four of our business units contributing at a very material level. I’m assuming you’ve all read this, so I’ll move on to the agenda for the day. We’re going to break this into three parts today. I’m going to give you an overview of the business, and some of the key highlights. Nic’s going to give a very detailed review of the financials, and some topics related to that, and I’m going to come back after, and tell you just some general views I have on where we are capability wise, strategy wise, and execution wise, in the various markets, and some of the issues we’re dealing with. So let’s get right to some of the growth metrics. IFRS profit up 17, new business profit up 12, pre surplus generation up 12, so all the operating metrics in double digits, and of course, supporting the cash metrics. Remittance up 10, and an interim dividend which, again, is technical at this point, it’s third of the 2014 dividend, is up 10 as well to 12.31. Clearly, the performance is not only generating robust operating income, but we’re converting that to cash. And that cash is making its way to the center, and support the dividend. So very pleased with the shape, the structure and the flows in the first half. Center to our delivery is Asia and the consistent performance of Asia. The first half sales in Asia are up 31%. The Asia average now, their quarterly growth year on year is 17% and that is for 23 consecutive quarters. So that is a commendable performance, I think, in any industry by any team, and certainly one we appreciate and value. The other piece, I think, that’s important to look at here is the relative premium focus along the bottom. Again, this is a consistent performance across market cycles. This detaches some of our flows and earnings from some of the short-term disruptions you see. And then the final thing I’d ask you to consider on this page is the absolute performance is strong, and so is the relative performance of the pan-Asian competitors in the market in general. Looking a little closer at the Asian business, the performance has been very broad based and, again, this comes from a pan-Asian model that’s got multiple growth engines. Eight of our regions produced double-digit growth. All of our product categories did; the agency distribution force up 32%, our bancassurance partners up 16%. Someone asked out front, Standard Chartered inside that APE is up 35%. The productivity, the activity of our agency force is up, the size of our agency force is up. This is an institutional industrial-size capability here for us on organic growth and it’s obviously unrivalled in the region and highly, highly scalable. Very impressive. We highlighted some of the specific countries and the successes there. I’ll leave that to you to read in detail but, again, there are numerous stories across the region of success for us and very pleased with their performance. Eastspring, a unique part of our Asian story relative to peers in the region. The valuable synergies, obviously, with our life operation, given the relationship between some of the products and the underlying asset management, and this is a continuing story for us on the development front. Great third-party flows, strong performance, increased growth in capabilities. Our intent here is, this is a relatively young business in maturing markets, is to continue to reinvest in their capabilities and grow the breadth and depth of this team and what they can do in-region. I think it’s critical for where we’re going long term, but I wouldn’t confuse our ambitions long term with their short-term successes. Guy’s team did a great job with this again in the first half of the year and we’ll continue to support that business. And then in total, the consistency in Asia’s ability to convert with, really, its scope and scale to profits and cash I think is unique. You’re talking IFRS profits up 17%, free surplus generation up 16%. You can see the mix there of life and asset management so, again, a good mix by source. You’re talking about, again, I think, a pan-regional franchise that’s in the right markets, currently has the right products, the right distribution partners and, clearly, the right people to execute. Moving to the U.S

[Nic Nicandrou:]

Thank you, Mike. Good morning, everyone. In my presentation, I will firstly run through our half-year results, highlighting the drivers of our performance in the period, before I briefly cover the balance sheet and update you on Solvency II. Starting with the financial headlines, the Group has delivered a strong set of results in the period with all of our growth and cash metrics up by more than 10%. The improvement in our overall performance was broad based, with all four businesses growing their respective contribution. By targeting and attracting higher levels of profitable new business flows across the Group, we’re increasing both the scale and the quality of our business, which, in turn, drives the growth in the profit and cash measures that are shown on this slide. This is what ultimately underpins the strong performance so far in 2015, with IFRS operating profit increasing by one-quarter on a reported basis to 1,881 million. Currency effects were positive in the first half and this has added between 4 and 7 percentage points of growth to our underlying performance, of course, depending on the metric. However, in my commentary, I will focus on profitability trends excluding these currency tailwinds as this is a fairer way of looking at our performance, for the reasons that we have previously outlined. Other notable headlines

[Mike Wells:]

Thank you, Nic. So this is a familiar slide to most of you and there’s a good reason for it. It’s the strategy we’ve been executing on for a number of years now and, obviously, from today’s numbers we think it’s working exceptionally well. There is some underlying themes to it that again I think are well rehearsed in this setting, so I’ll keep them to a minimum. But we’re not in need of a new strategy. That isn’t my objective; it isn’t the management team’s assessment. We think we have one that’s working very well and the focus is going to be on a higher, more detailed execution, increase the breadth and depth of our capabilities, so let me walk you through a little bit of that. We should, at this point, I think, in Pru’s development, enjoy more of the benefits of scope and scale, than our competitors. In each of the markets, as we’ve discussed, we have incredible capabilities. We have everything we need to address what is now expected to be a more self-reliant middle class. And that’s a trend across every market we do business in. That can be in terms of health and protection in Asia, savings at globally, there is an assumption here that middle-class households will be responsible for more of their financial wellbeing. And, again, we’re perfectly positioned in our markets to provide the services; we need to do that. So how do we enhance that capability? In Asia, we continue to scale the agency force, improve the quality, the tools they have and breadth of product. 560,000 now, I’m not sure how many we need. It’s an interesting question; I got asked that in China a few weeks ago. There are lots of metrics that you could say have correlations to agency growth, but we will grow it as fast as we can at the quality level we’re willing to grow at. There isn’t a bulk target here. But there is capacity in the market for materially larger advice providers, including our agency force. Again, this is a market that’s underpenetrated. So you have more demand than you do supply, and that includes the advice side. Same is true on the bank insurance partnerships. Our penetration of these partnerships is still relatively low, though with the exception of Standard Chartered, relatively young partnerships. And meeting with some of these folks, they want more products from us, they want tighter relationships. And the theme here is they want us to stay with their client as they change in their financial lifestyles and where they are on that savings and development curve as a household. We’re incredibly well positioned to do that and we’ve a responsibility in those relationships to provide them the tools and services to maintain those relationships. And no part of the financial service industry understands householder relationships better than banks. I don’t know a bank CEO that can’t tell you the number of product contact points they have with a household. And, again, it’s our responsibility to help them maintain that. In the asset management space, you’ve seen how well Eastspring is doing. It is the leading franchise in the region and it’s a young franchise. And it’s a relatively young region in terms of asset management opportunities. We have to continue to invest in the technology, the people, the processes, the culture, to make sure that we have the place where top managers want to work, where the top talent wants to go and learn the business, and where we can deploy, into new region and markets, people that understand our expectations on the quality and quantity of asset management advice. And we’re very capable of doing that, again, as a Group. On the US side, we have the market leading franchise. So the question is best ways to lever it at; clearly, you start with a back book that’s extremely profitable. The sales levels, the absolute sales levels Jackson’s capable of continue to grow. The breadth of product it can offer again will depend on the opportunities in the market, but [you get] likely to be broader and more. If those of you could have spent time with the team in Jackson, it’s a very capable group. We have very good cost advantages. I’ll get to those in a second. We have technology advantages and, again, we have distribution advantages. So there is a market leading position with all the elements of scale to be levered. That includes bolt-ons . The reason for us to do bolt-ons in the US, has been well rehearsed in these discussions, is because we can service the clients better and create more value for shareholders from the same block of business than most competitors can. We have capacity in the franchise, we have the expertise to do the acquisitions and do the integration. Those, combined, create value for shareholders and a better service experience for clients. So that combination is the reason. Yes, it also diversifies the earnings streams and there’s residual benefits that are good for us. But the core reason is, we own capacity as shareholders in Jackson that can be utilized at cost and technology levels that competitors can’t. So we’ll continue to look at the M&A landscape there actively. And then, again, Jackson’s role will be to adapt to the changes that come at it with the marketplace, and it’s a good track record at that. Same as the UK, both asset management and the life company. We need to adapt to the market we’re in. You’re seeing them doing that now; that will continue. Part of that is we need to build out the UK’s digital capability. This is not a strategic initiative, this is a prerequisite. We’ve got to service clients the way clients want to be serviced. We’ve got to access clients the way clients want to be accessed. So there’s a little bit of catch up on some of the back book technology. I think it would be fair to say, Jackie, that we want to make sure that, again, this goes to service relationships, and those consumers being happy and staying with us longer, which goes to recurring profitability of the book for shareholders. But it also goes to how consumers want to find information about their retirement savings and their products. We’re going to deliver that. On the M&G side, the key here for us is to maintain the culture and quality and capability of this franchise across cycles. That can be across short-term interest rate cycles; that can be across political cycles. This is a very unique firm. Highly capable, great people, highly scalable, and we intend to keep its capabilities where they should be, and to grow it across the cycle as well. The disruptions, I think, we’ll see in the market, we have the capabilities across our key regions to lever them, to get more out of them than competitors. Let’s talk about challenges, the thematic today. We have seen a few. I think it’s fair to say that somewhere in the next -- I’ve been here 20 years, I think in the next 20 years, somewhere over the cycle, you will see interest rate changes, policy changes, equity volatility, rules change, broader, narrower on advice, taxes change on products. It’s all in here; it’s all been a part of the history of the Group. And through each iteration of this, the capabilities of this Group grow. We get better at it. We’ve seen it before and we’ve dealt with it, sometimes successfully, sometimes not. But that institutional learning is here, and our capacities to deal with challenges, I think, rival or are better than anyone’s in the industry. So let’s talk about resilience for a second. Where do I get confidence in our -- let’s assume for a second this is going be a challenging climate and where’s the resilience in the Firm come from? One is the market leading franchises. Asia has first mover advantages. This is a text book example of having got there first, done it right. The people, the products, the relationships, the development of new product, the asset management capability, again, scope and scale, executing at a very high level, now recurring cash flow, as well as the growth in the front end. The U.S., same thing. Market leading franchise, highly talented team, high quality model, cost advantage. Go back to the DOL for a second. Let’s say there is a -- there isn’t now, but let’s say there’s a price element in it, suddenly that middle chart matters a lot. So, again, Jackson’s options to deal with change are broader and better than its counterparts in the marketplace. And we can bring those capabilities to bear on whatever product or service we need to get to consumers. And the last one I would point out is, if you take a look at the productivity of Jackson’s wholesaler relative to its peers, their ability to deliver complex products, and those of you that have been there, know that we’ve grown the number of wholesalers and yet we’ve grown the productivity. The other way to get this number up is reduce the number of wholesalers on the same sales base. We’ve gone the other way; this is a growing team, growing in efficiency. Same trend you’d see in Asia with agency. This is, again, how the Group executes. The UK, three months plus here. Everyone has an opinion about Prudential; every taxi driver has an opinion about Prudential when they tell them where they work. The resilience of the man from Pru and the relationships and their families, their stories are endless and fascinating. But it is, as M&G is, an incredibly trusted brand in the marketplace. You don’t get the -- my statement was wrong, stories, you get how important it was to their parents or what product they have of ours. This is one of the most resilient, well-established brands I have ever seen in financial services. M&G, the reputation institutionally and retail-wise, directionally the same. High quality, long term focused, all of the elements you want for attracting long-term savers. The mix, the middle chart, reason I included this, again, comes back to the quality product issue. I’ve met a number of investors, and it’s certainly clear when you look at the advice providers we have, the with-profits fund structure and the success of that relative to peers, and again we’ve shown you that in previous meetings, on an absolute basis, it gives you a franchise to do other things. Getting the product right for consumers is a big part of the business reputation versus brand argument. If you’re doing a good job, people actually say nice things about you and you don’t need to pay for that. And in the UK, some of the products they’ve delivered, particularly with-profits franchise, you get some amazingly favorable comments from people. They recognize what it’s done and it’s the same sort of argument as you see in the US. You’re de-risking that consumer’s retirement savings. You’re taking them -- often they’re further out the risk spectrum than they may have chosen to be and you’re creating an alternative that smoothes that out and gives them institutional asset management capability and lets them go back about whatever it is they want to do, and again, building off a great product. M&G is diversification by sources of funds, and capabilities I think it’s important to highlight. Both from an internal point of view, retail point of view, institutional point of view, this gives M&G the scale and scope, again, of any global asset manager. From a cost point of view, from a hiring point of view, talent point of view, all those elements. I think the surprise, if you spend time in M&G, is the culture still feels like a small boutique asset manager. The awareness of what other people are doing in the building, the attention of detail, the focus on the sense of ownership, is unique and totally appropriate for an asset management shop. Resilience of earnings

[Unidentified Company Representative:]

All right, just wait for the mike to come to you before you ask the question and then please state your name and you firm’s name. Can I start with Oli?

[Oliver Steel:]

Yes. Oliver Steel at Deutsche Bank. Two questions, both around the DOL proposals. You said a few months ago, actually I think it might have been Tijane who said a few months ago, that you thought an industry worst case would be down 15% to 20% in terms of sales. How are you feeling about that now? I appreciate it’s still uncertain. And then secondly, it doesn’t sound as if you’re expecting a huge sales fall in your own situation, but if there was a sales pull-back, for yourself, how would you be considering what you would do with the capital thus released from the U.S?

[Mike Wells:]

Well, I think, Oliver, there’s a couple of -- I’ll put this to Barry in a second, but let me just give of my time for DOL and the U.S. Let me take a shot at this first. We now know what the details of the proposal are and, again, I don’t think the proposal -- I think it’s unlikely -- predicting politics is not something that I’m paid to do or I don’t think anybody is good at right now in the US. But I think the DOL’s intentions are good and clear. I’m not sure that this current proposal gets them there, and I think that’s been the universal feedback they’ve got from both sides, the IR regulators and the marketplace. So again, they tend to adapt well to new information. So I think we’ll get something different. But if you said, [a lot of life] commissions, that effect, that’s one element. Transparency is not material. We have broker dealers now that have full disclosure of all commissions paid on variable [notaries] and products and, again, that doesn’t change the marketplace any. I think it’s good practice. The question becomes, I think, two things out of the current proposal. If it passed in kind the level -- there’d be a preference for a level of commissions, no question. That’s the only product that would work in the structure. So there’s an element of, what is your current qualified sales? Now, that’s a different question for Jackson versus peers, because we have excess demand for that product than we are willing to fulfill on the marketplace. So you’d have to add that excess demand back on and then say, well, how much of that would have been qualified and then say how much of that would you lose? It’s a little more complex, little more convoluted, really. Some competitors have a different play, so I’ll let them answer for you. I think one of the key things in it is, does your product stand alone, ex commission? And that’s a harsh bright light on some variable annuities. I think ours does well, and I think those of you that talk to advisor firms in the US on some of those tours know that it’s generally viewed as the best client proposition in the marketplace. And I think that’s -- again, we’ll deal with the pricing issues on structured commissions. So the second part, how does it affect sales? It does affect sales; I think it affects the timing of sales in Jackson. So you release some of the leverage you’ve pulled to control volume, depending on how much notice you get on what the structure of the product is, and they’re generally pretty good about that. The regulators in the U.S give you some indication of where they’re going to go. But how fast do we react? We know how fast we can get product to market. We know it’s faster than competitors and, if it’s a simple change, we know we can do it very quickly. If it’s a material new product, that may take better part of a year. But I think the more important issue always, it changes the shape in a year of the sales. So we may have a bigger first half and a flatter, lower second half while we retool, that kind of thing. We’re dealing with that now in the U.S franchise. There is no question, as we turn on and off the core product, you’ve seen each year it changes quarter to quarter, the shape and that’s when -- years ago, first one of these, it was 15 years ago, we talked about the fact we would do most of our sales in the first five months. And part of that was because competitors weren’t tuned up in January and February and we always had a really good start, when we were smaller than them, in the first part of the year and we always tried to take an edge there. Well, that’s changed as we’ve controlled volumes because we have to rebuild those volumes as we’ve turned off product at year-end. So that was a very long intro to what Barry wanted to say, and my apologies, Barry.

[Barry Stowe:]

I agree with everything he said. Seriously, Mike covered the landscape pretty well, and so I think I can understand why some competitors would be very concerned about this. We are less concerned and, as Mike said several times through the presentation, that has to do with the quality of our team and the platform that they have built, the infrastructure that they’ve built. We do a better job at lower cost and we have a track record. You have seen it time and again with the lead access being one of the most recent examples of this organization thriving on disruption, and actually turning it to commercial advantage. It is a characteristic you see throughout the Group. We’ve done it in Asia; we’ve done it in the UK; we certainly do it in the United States. It wouldn’t be right to say we’re not worried about this, but we think we have it fully in hand. I am encouraged about the outcome of the hearings which began this week and continue. I think a lot of people, including the White House and the Department of Labor, have been surprised at the level of concern that has been expressed about this and the bipartisan nature of that concern that’s been expressed. It doesn’t happen very often in Washington right now. And, to Mike’s point about it being difficult to predict politics, I don’t think, even two weeks ago anyone would have predicted that we’d now have 13 Democratic senators who have come out and made some pretty harsh comments about this. So I absolutely believe that there is scope to change the shape of this. We are working hard to -- we are involved in that shape-changing exercise. We’re spending time in Washington. We’re making the case about how hostile this is to, particularly middle-class Americans, which is exactly -- this is another one of these perverse things where the government comes up with a well-intended proposal to focus on and protect the middle class, and the outcome of what they design would have the exact opposite effect. Because, as Mike alluded to what would happen is advisors would run from qualified money. That could be one of the impacts. So just say, you know what? I’m not going to bother with it. I’m going to the high net worth customers with lots of unqualified money and I can advise them on that and that’s what I’ll do. If you look at middle-class Americans, they are overwhelmingly in qualified money. Most of these people, they don’t have lots of assets outside of their 401K or their IRA or something like that. That’s where the preponderance of their cash is and they’re going to have increasing levels of difficulty getting advice on that. So again, fingers crossed, lot of work to be done, but I think this is more than survivable, more than survivable.

[Blair Stewart:]

Blair Stewart, BofA Merrill. Three questions please. The first is on Asia; perhaps an update on the Indonesian business which is where sales are quite flat, just an outlook statement there would be great, helpful. And then on Hong Kong, where the opposite is happening and sales are going through the roof; the impact from Mainland China and the disruption there, I guess, could be argued in two ways. It either negatively affects the business or you see even more Mainland business trying to diversify out of the country and the currency. So a Hong Kong update would be really useful, too. On economic capital, Nic, could you comment qualitatively on what’s happened to the economic capital in the first half of the year, given the earnings and the interest rate moves? It would seem that that figure should have gone up, although I appreciate you don’t want to put a number on it. And finally, I think on some of the headlines on the screen, Mike, there was a comment about the Group moving towards the 2 times dividend cover, over time. Could you perhaps clarify that comment, please? Thank you.

[Mike Wells:]

Okay. I think, on the dividend cover, that’s one of the easier ones. The statement stands for itself. I think we should maintain 2-plus-times dividend cover and, depending on where we are in the cycle, we’ll allow it to go a bit higher than that. I think one of my bigger surprises, candidly, in the new role was looking at dividend cover and some of the stocks in the FTSE. I think a growing dividend is a key discipline of any good management team, but I also think a proper level of conservatism in our industry is appropriate from a cash and resource point of view. So our role is to balance those two all the time, and I certainly think our dividend cover and our targets are appropriate for it. On Asia, Tony, I’ll go ahead and flip the first Indonesia question and the Hong Kong to you.

[Tony Wilkey:]

Sure. On Indonesia, we are experiencing economic headwinds. GDP is running around 4.7%, which is the lowest rate its run in about four years. And a lot of President Jokowi’s initiatives have really not getting as much traction as quickly as was anticipated. So there are some headwinds and that’s flowing through to consumer sentiment, consumer confidence, as measured, I think, in Q1 was at the lowest rate in two years. What does this mean to the business, and in that regard it feels a little bit like 2009. What we see on the coalface is, we continue to build out the business by growing agency. In the first half of the year, we hired an additional 74,000 new agents. But key metric to look at is cases per active, this is a measure of productivity, and cases per active for the agency force has come down. What this translates into, at point of sale, agents are having a tougher time closing and/or consumers are deferring decisions, and this is reflected in the flat numbers at the half-year. I think the macros remain incredibly compelling

[Mike Wells:]

Nic, did you want to…?

[Nic Nicandrou:]

On economic capital, qualitatively, we continue to produce a strong operating performance. You’ve seen that come through other metrics. You see the contribution on IGD. But typically, we’ve produced somewhat between 16 points and 20 points each year, so I’ll let you rate that. Market effects were positive, albeit a little negative on the FX because currencies closed a little lower, or sterling was a little stronger than the point at the beginning of the year. We raised some debt. Of course, we paid the final dividend, but we feel good about the formation of solvency through capital in the first-half.

[Gordon Aitken:]

Gordon Aitken, RBC. Just a question, Mike, you said there was no need for a change in strategy. I was just wondering, though, there must be some areas, some products, geographies, distribution channels which you maybe were looking at over a number of years, or looking at now and say, I think we’ll just put a little bit more emphasis on that one and a little bit less emphasis on that. So if you can talk about that. And just in the UK, do you have a panel of reinsurers that you would use? And are they all based in the U.S?

[Mike Wells:]

On the reinsurance question, there’s multiple reinsurers we use and they’re based globally; they’re not all based in the U.S. We have a variety of players. And reinsurance is not a new tool for us in the UK, or even in the U.S. It’s opportunistical sometimes and it’s strategic and risk managed with others, so it continues to be available. The bulks that the UK business attracts, if you think of that market it tends to cut into different pieces, some on size, some on credit. And we tend to be the desired home for the larger or credit sensitive, brand sensitive bulks, so that continues. Is that fair, Jackie? There’s not a -- so yes, we’re not seeing anything unusual there. So reinsurance is available to us. We’ve used it, as you’ve seen. There’s not any difference there or any concentration with a given counterparty in it. On strategy, I probably neglected the African team a bit. We’re continuing to expand there. I think it is the next iteration of what we’ve learned and I think, from an earnings point of view, it’s not material to this meeting, but it is a chance for us to take a new market with emerging middle class and digital and emerging bank trends and go in there, with everything we’ve done in Asia and other markets, to produce good solutions for clients and build something that we know is scalable. So there isn’t an appetite to artificially accelerate that, but we’re looking at lots there. From a product point of view globally, it depends on the partner. I referenced this earlier. I think we have to be careful that the well-earned relationships we have, with distributors and with clients, that we don’t let somebody else come in and take as they mature in assets and in demands. So we don’t intend to let that happen. So part of that is some big data work where we take a look at our clients, at some of our relationship clients, and make sure we have the right product set in front of them to keep those relationships. That’s true of agency; that’s true of bank; that’s true in the U.S. that -- I use the term sometimes share of wallet. But there’s also a household share of wallet. If they have made a selection to trust us on something very emotional like protection, and we have asset management capabilities or we have some protection products that they’re not buying, we are the logical place for that advice provider to go again. So I want to make sure we cover that. I don’t want to get in to specifics; I don’t want to brief competitors on this as well. But you’ll see us follow the clients. I think there’s a fair expansion of the strategy. And again, part of that is by channel and part of that is how you do it technology-wise; there’s a lot of elements to that and we’ll keep you abreast on what we’re doing there as we do it.

[Abid Hussain:]

Abid Hussain, Société Générale. Just one question, please, just coming back to the Department of Labor, what are your options if the Department of Labor decides to abolish the payment of upfront commission, especially given that VAs are a push product?

[Mike Wells:]

So B share mutual funds are a push product, I think if you asked their broker dealers at the time. And I think, again, one of the things that define what an advisor sells is our alternatives. So if there aren’t -- and I think one of the pieces of advice that the DOL got I thought was from a regulator was, let’s come up with a set of standards that apply, qualified or non-qualified, which is, we shouldn’t have better advice for qualified money than socially is allowed outside. It’s an interesting discussion; the federal letter [ph] is fascinating to them. But if the commissions are levelized, the question is, does the consumer see value in what we’re offering. We have advisors now that are effectively on a trail. Some of our other share, L share products and things, they could clearly pull those assets out and roll them into a frontend commission product if -- it’s not good business, but if that was their character they could do that to a competitor; they couldn’t do it with us. But you’re not seeing that behavior. I think the product has tremendous value and, if the advisor gets paid differently on it, and that’s the only option in the market for qualified plans, then that’s what will happen. Will there be a change? Yes. Will it require good wholesaling to change it? Yes. Mostly on process; this is very material. These changes have infrastructure implications, so those who’ve done the US tour, those boring tours of the data center and the IT people talking about having one product, that’s a lot easier to address if you need to do a pricing change than if you’ve got dozens, just the reality of technology. So who’ll get there? Who can design a product correctly? Who can get it back into the advisors business? Barry’s team is already working with all of our key distributors on plans, some more detail?

[Barry Stowe:]

Yes, absolutely. You adapt, in a word what you do is you adapt. As Mike said, we’ve gone through changes in the past that have the potential of being more disruptive than this does. You’ve got a lot of the VA product that moves from the United States already from various different providers through fee only; 25% of the market or something is fee only already. So we survive this, we re-tool and, as Mike said, the process of re-tooling for us is less complicated than it is probably for any of our competitors. We’ve got a high quality platform and we’re more nimble. But the real concern is that, again from a substantive perspective, set aside the commercial impact, it’s bad for consumers. These products exist, they are important. They have a right to exist. Living benefits with guarantees

[Ming Zhu:]

Ming Zhu, Canaccord. Two questions, please. First one is on the UK. You’ve had very strong retail new business growth and because of the delaying decisions from the retirees. I just would like to have a picture in terms of going forward, what’s the sustainable growth you think you can achieve, and how much growth you think you need in order for the new business profit to be sufficient to offset the runoff and back book, please? And my second question is on M&G. With the outflow you’ve experienced in your optimal income fund, you’ve guided further outflow in H2. Could you give some sort of feel in terms of when do you think the outflow will normalize, and what actions are you taking in terms of, are you launching new funds for the growth of your focused market in Europe?

[Mike Wells:]

Jackie, do you want to take the first part of this question and then Michael the general outlook?

[Jackie Hunt:]

So you’re right, we have had very strong retail growth; on a net basis that’s up 25% half-year on half-year. Actually, if you break it down, the new product and the savings and investments product that we had in situ are generating about 40-odd-% growth being offset by the 56% reduction in retail annuities. In terms of the outlook for the business, we did see some pent-up demand in 2014, as you say. Some customers did delay their decisions more generally. Most of those customers, my view, and it’ll a take a while for the trends to stabilize, most of those customers will be individuals looking for cash. So like much of the industry, we saw a quick uptick in the dash for cash in the few months and that’s starting to slow down quite considerably. Actually, if you look at 2014 and then early 2015, we’d seen such low levels of people actually exiting products across the industry. But I think some of that pent-up demand was really just 2014 demand working its way through the market as a whole. In terms of outlook, if you’re going to look at, in terms of our own positioning against pension freedoms, I think my colleagues have talked about making an opportunity out of change and that’s what we’ve done. We’ve really said, change is coming, how do we best position ourselves? We’ve got the [fabulous] franchise, great retail band, really good investment proposition, huge love amongst our existing customers and external customers. So how do we best position ourselves for that? And so we focused on a range of savings investment type products and we’re having considerable success in those. You would have seen income drawdown, those who are no longer [annuitizing] tend to go into an income draw down product. We issued a flexible version of that drawdown product back end of last year. It is advised only at the moment, there’s a plan to move on to non-advised version later this year, and our sales are up about 228% against the product. We are attracting new customers, new advisors and new intermediaries. Equally, you look at our existing bonds product, 20% growth, individual pensions I think about 125%. So there’s very broad-based attraction around the existing savings and investments products as people change the way in which they look at retirement and they no longer look at it as a point in time but a transitional period. The other thing I would point to is, alongside, there’s been a lot of focus on pension freedom and what it meant for annuities and the reduced need to annuitize. This focused on the ISA allowances and those were obviously raised very significantly. We talked about PruFund ISA so we wrapped in a different savings form to our existing PruFund product, and that’s had an incredibly fast launch. So GBP260 million of assets under management after we launched in February. That’s not just new savings into an ISA form, a lot of that is actually transfer business. And that’s attracting, in majority, actually, money that’s sitting currently in cash ISAs. So actually, if you step back from all of that and say, what is the outlook? I’m very bullish, actually, about the amount of momentum in the business. I think, as the comparatives start pulling back with retail annuity fall off, the first quarter obviously still had the pre-budget changes in it, you will see that growth rate continuing to escalate.

[Mike Wells:]

Michael, on funds?

[Michael McLintock:]

Yes, on optimal income, particularly, the bond bandwagon has run out of steam and we are not alone. You’ll have seen other large players in the market having significant net redemptions from this asset class. It’s very difficult to say when this is going to stop and, to some extent, I could bounce the question back to you, which is, what do you think is going to happen with long-term interest rates and fixed income markers generally because, of course, they started to yield negative returns. And you can construct a range of scenarios from, markets staying roughly where they are, to actually having falling out of bed yields backing up quite significantly and suddenly perceptions of value reemerging. And it’s very difficult to know what is going to come to pass. At the moment, I have to say to you, we don’t see any change in the trend in relation to optimal income. But ,of course, it’s a game at M&G, not only of what happens to funds where net outflows have been experienced, but what also happens with other funds, which are going well; for example, our multi-asset range of funds are performing extremely well, property fund is still seeing a lot of interest. Frankly, our equity fund range is performing disappointingly, on the whole, with some bright spots at the moment. And that’s another question which you have to ask because, of course, we’re living in markets where equities that deliver perceived safe growing income streams are being -- stocks that do that, are being driven to very high value levels which is actually not where we’re playing. And that’s why we’re getting some poor performance in some of our funds. Again, we’d expect that to change at some point, but I can’t say when. So I’m afraid it’s an uncertain picture. We are seeing some good areas of interest away from the Optimal Income Fund, but I can’t actually give you any precise prediction on timing of when this will all come back into balance.

[Andy Hughes:]

Andy Hughes, Macquarie. Couple of questions, if I could? The first one is on the DOL stuff and what it does for the product. I’m not sure I completely understand what you’re saying because my understanding of the product is it’s kind of reliant, in the U.S, on lapse rates. And so, if you move to a levelized commission structure with much lower lapse rates across the industry, presumably you have to drop what you offer the consumer dramatically under the current product. Second question is on Asia and the trapped capital. I’m trying to understand what that means; is that the reason behind the 2 times coverage on IFRS? What is the statutory surplus coming out of Asia in H1? And what options do you have to access this retained surplus in Asia? I presume you can use it for M&A, but is there any other options to unfree the surplus there? Thank you.

[Mike Wells:]

I’ll take the DOL one and, Nic, do you want to take the financials for the [generic] question. Perhaps you could address the dividend piece as well. Andy, there are now registered advisory based with living benefit products in the U.S. One of the larger distributors, Linsco Private Ledger, asked five companies -- five or six companies to build them one. It hasn’t had material traction yet, it requires different pricing, different option strategies, which, again, are not outside of our core capabilities. But there are other structures that -- let’s get the rule and then we can tell you what structures work in it, but on a levelized product you have a couple of new variables but they’re not difficult to -- think of it as a product with its rental charge expired. Similar characteristic, to oversimplify it, is that -- Chad, is he wincing? No, he’s not. Yes, I think that’s the simplest way to think about what it gives us from a liability point of view. So again, it’s not something we haven’t seen before or can’t deal with. Is it the optimal structure for value for the consumer? No. In any product, fixed index annuities, VA, the longer the client gives up liquidity, the more we can provide in the terms of value. And again, that’s a discussion that’s part of the case for the DOL. So we’ll see how that turns out. On dividend cover, it’s not related to Asia. It was a pre-Solvency II, so it’s not a -- do you want to address the [IFRS] context?

[Nic Nicandrou:]

Yes, let’s just be clear, there is, subject to a small caveat which I’ll come back to in a moment, there is no trapped capital in Asia. If you look at our free surplus disclosures, you will see that we have, in our life businesses, 2.6 billion of net worth, backing our own levels of required capital of 1.2 billion. The accumulation of local regulatory is under 1 billion; we tend to use a high measure. So all of that 1.4 billion is available, why do we keep it there? We keep it there to fund business; we keep it there because we like nicely capitalized businesses. And I have said before, if you want regulators to allow you to move capital freely then you have to be responsible. When times are good you don’t take everything out so that when times are less good they allow you to take stuff out. That’s the responsible behavior. The only caveat is that there are a small number of businesses, and we’re talking of a couple of hundred million of that 1.4 billion, where the accounting reserves are negative because they are growing, so in the start-up phase they will incur losses. Eventually, profits will come through and remove those losses and, therefore, you’ll have distributable reserves on that basis. But given the very strong growth that we’re seeing in IFRS, within 18 months or so we will grow ourselves out of that little constraint. If we needed to access that very quickly, we could restructure the capital. So there are no constraints, capital can flow freely.

[Lance Burbidge:]

It’s Lance Burbidge from Autonomous. I’m afraid I’ve got some questions on the DOL as well. This is a relatively simple one; you talk, Mike, about releasing the levers to control sales. I just wondered, presumably those levers are increasing the price, so reducing the price presumably would reduce your profitability of new business. And I just wondered, as a follow-on to that, if the price comes down in a market that much, what threat is there for your in-force book, which is obviously the big driver across it currently. And the second one is for Tony on Hong Kong. What is the major driver of Mainland Chinese actually buying a product in Hong Kong? Is it price, is it product that’s better than in China, or is it diversification from a currency perspective?

[Mike Wells:]

Okay. So, Lance, on the DOL, some of the in-force levers, if you remember, is we pulled down available guarantees, so that actually increases the profitability of the product, if we were to go back that direction. And, again, not trying to do a primer for what competitors should do in this climate, but if you think about some of the things we’ve done in the last three years, if we reverse some of those, it actually improves the margin on the product. So it’s a little counterintuitive. It’s going to depend on what makes sense for the consumer and the structure we have, but I think that’s directionally the way to think of it. On the in-force, there has not been, in my 30-plus-year career, a retroactive treatment of policy and so, again, that’s an interesting question of would the DOL do that for the first time, possible, highly disruptive. If you think of if I had a real estate partnership in my retirement account, I can’t meet some of the requirements in this for liquidity, dealing advice, etc., so am I supposed to sell an illiquid asset, pay the tax on it. It’s hard to imagine that that will be the intent or the outcome. It’s possible, again, in details but I don’t think it’s the realistic outcome that we’ll get. So this comes back to, why does the quality of product matter? Why does how you service the client matter? Why does having the advisors feel like you protect their reputation? We have a very happy back book. These clients have made a lot of money with us and done far better than they would have any place, and the value of the variable annuity has been demonstrated to them. So we don’t have attention of the clients where they’re, a looking for a way out or, as we’ve told you, we want them out or don’t view any of the relationships as particularly profitable. Measurement of that would be our openness to additional premium in the various vintages. So it is a little more payback for having done the right thing for the consumers across the cycle. It gives us options that, again, I think some folks may be a little more challenged with. But I don’t think you’ll see retroactive legislation. It’s very, very rare in the US. It’s happened one time and, again, in the fund space and it was on share class application and it wasn’t -- it was just an enforcement ahead of policy, just said go back and give your clients whatever you should have, sort of thing, once. And it was a very odd, very political heated climate on who was the proper regulator and we all complied. But that’s the only one I’ve seen in my career. So I’m not anticipating that it’s disruptive for our back book. On Hong Kong, they’re just general -- that’s for Tony. The vast majority of our premium there is recurring. You’re talking about 8,000 to 9,000 average transactions. You want to go -- you’ve all heard the film -- the process is well established, both from a consumer and our side, but can you provide a little color around that.

[Tony Wilkey:]

Yes. I think you might have answered your own question, why are they buying. They’re diversifying away from other assets that they may hold in the Mainland. They are buying other assets as well. It’s not just insurance that they’re buying in Hong Kong, they’re buying real estate and so on and so forth. Do not underestimate the power of a trusted brand to the Mainland Chinese. Our name in Chinese is, which is UK Prudential, and that is a very important component of our value prop to these people and they’ve been -- so, its diversification and it’s a trusted brand.

[Mike Wells:]

Okay, great. Well, thank you very much for your time and your attention and appreciate the questions. We’ll see you January 19; we’re going to host an Investor Day. I hope you’ll be able to join us. We’re going to be here in London, give a little more depth into the strategy and some other elements of the business. We’ll be able to give you details on Solvency II at that point. So again, thank you for your time and attention.

[Operator:]

Ladies and gentlemen, this concludes today’s call. Thank you for joining, you may now disconnect your lines.