Prudential plc

Good morning. I'm Mike Wells. In this video, I'd like to cover three things. First, the progress we're making towards the proposed separation of our U.S. business, Jackson. Second, highlights of how our businesses have delivered in 2020. And third, I will set out our go-forward investment case as an Asian and African-focused business. As we announced in January, the plan is for Jackson to be separated through a demerger. This decision was guided by two priorities that have driven our strategy over the past 12 months. One, to achieve a fully independent Jackson at pace. And two, to best position our investors to benefit from the opportunities of Asia and Africa. The demerger is designed to lead to the earlier creation of a separate, fully independent Jackson than would have been possible through a minority IPO. It would deconsolidate Jackson in a single step. For shareholders, this accelerates the transformation of Prudential into a business purely focused on the exciting growth opportunities in Asia and Africa. We've made considerable progress towards our most important near-term strategic objectives. We've hit many of the key milestones along the path to Jackson's independence. We've completed the transaction with Athene. We've secured the bank commitments for the debt financing. We appointed a new leadership team that positions Jackson for independence. Steve Kandarian as chair, Laura Prescorn as CEO, and Marsha Watson as CFO. Laura and Marsha are two highly experienced professionals with long records of delivering for Jackson. Laura most recently served as chief operating officer and Marsha as chief actuary. Looking ahead to the expected path to completion, the next steps are the regulatory filings, Jackson Management Roadshow, and the regulatory and investor approvals. I hope during this process that many of you have the opportunity to meet this quality management team. Subject to shareholder and regulatory approvals, we look forward to an independent Jackson trading on the New York Stock Exchange in the second quarter of this year. Following the plan to merger, Jackson intends to pursue a focused strategy that prioritizes optimization and stability of capital resources while protecting franchise value. Jackson's financial goals as a standalone company will be designed to maintain a resilient balance sheet in order to provide shareholders with stable capital returns and profitable growth over the long term. Now let's move to the financial highlights and what our Asia business has achieved last year. The macro environment for these results should be considered. It was a time of extreme volatility in equities, foreign exchange, bond markets, geopolitical uncertainty, and the operational impacts of COVID-19. That said, they're very strong results. In 2020, we demonstrate that we have a business which is high quality, compounding, diversified, resilient, and at scale. We continue to focus on high quality health and protection business, and our insurance margins, that's our underwriting profit, grew by 19% to 2.6 billion in 2020. The layering and compounding impacts are powerful. With client retention ratios in the 90s, we've again produced high-quality, resilient growth in premiums. This is despite the very challenging headwinds with respect to new business sales in 2020. This was demonstrated through the in-force base of recurring premium income, which grew by 6 percent to $20 billion. We continue to invest in relationships and to advance service quality and technology. All of these enhance both our new business capability and our ability to service and retain those profitable client relationships. Our geopolitical footprint, our multi-channel distribution, and our broad product mix demonstrate the diversity of our platform. As COVID-related restrictions have lifted, we have seen strong recovery in APE sales from a low in the second quarter. Nine markets and all product lines saw strong sequential APE growth in both the third quarter and the fourth quarter. Free surplus is up 8%, and both Asian earnings and embedded value are up strongly with double-digit growth. What I'm particularly pleased with is that nine of our life businesses had double-digit growth in IFRS profits. Eight of our businesses now produce over $200 million in earnings, and we're seeing increasingly material contributions from markets that not long ago were considered too small to mention separately. I'm also excited that our prospects in Africa, which saw rapid growth in AP sales of over 50%. We've accomplished a great deal over the last year, and I want to share some of our key achievements with you. We believe in a multi-channel approach to distribution. The benefits of this diversification come through in the resilience of our business model, particularly so in 2020. This means being able to successfully operate in all three channels, agency, bank assurance, and digital. And what's exciting for me is that this is an increasingly integrated and flexible approach to servicing our customers. We've stepped up our agent recruitment with recruits up 4%, but we've also improved the quality and productivity of our agents. We've created a culture whereby agents aspire to attain membership in the Million Dollar Roundtable, which is an industry-recognized indicator of quality. The number of our MDRT agents has doubled in size during 2020, and Indonesia is a standout result here. On bank assurance, we continue to invest heavily in our leading position. And last year, we added five new bank assurance partnerships, expanding our reach to around 20,000 bank branches. Most importantly, this includes establishing a 15-year strategic partnership with TMB. And then in the digital space, we've made great strides with Pulse, our digital mobile health ecosystem. Crucially, we control most of the intellectual property and maintain the client relationships directly. There are around 3 billion mobile users in Asia, and Pulse is set up to meet the needs of consumers in this addressable market. TakeUp has been strong with 20 million downloads and 2 million new policies written. We're driving hard our focus on health and protection business with seven of our markets seeing an increase in their health and protection sales mix. Not surprisingly, our surveys show us that the pandemic has increased awareness and demand for health and wellness. Asian consumers are looking for more flexible cover and insurance bundled with value-added services. And the protection gap in Asia is huge. with roughly $400 billion of healthcare costs being settled out of pocket by the consumer. Enhancing the customer proposition is at the heart of everything we do. And we've broadened coverage for new risks, added innovative new features, and last year we launched 175 products, of which over 115 were traditional health and protection products. New protection policies in the fourth quarter rose by 10%. We're also seeking to develop eSpring, a unique capability and a leading asset manager in the region with $248 billion of funds under management. In-flows have recovered in the fourth quarter, and there is strong support from our life businesses with in-house funds under management up 19% in 2020. We continue to enhance its capabilities to better capture the significant opportunities for mutual fund growth in the region. And finally, we're making great progress and deepening our presence in China with our life operations. This is the single biggest opportunity in front of us, where we're able to reach close to 80% of the population and 83% of the GDP of China with our regulatory footprint. We're growing faster than the market in the majority of our 99 cities and 229 sales outlets. The bank channel did exceptionally well during the COVID lockdown, and our agency new business profit was very strong at 85%. The runway for growth here is exciting for us. Our life assets reach close to $22 billion, demonstrating the scale of this important business. A crucial part of our multi-channel model is digital. Pulse is our all-in-one, artificial intelligence-powered digital mobile app. Consumers use it because of its broad suite of value-added services from the best-in-breed health and wealth area. In 19 months since its launch, we are now operating at scale in 15 markets using 11 languages. And with that, we've launched 37 digital products in 2020, winning 1.3 million new customers, of whom 70% are new to Prudential, and most of them are a younger demographic, some 10 years younger than the offline customer base on average. We're using micro products to generate customer leads for our traditional agents. From there, We're able to sell full suites of products, the full premium products. In 2020, we generated 2.2 million leads for our agents, converting 120,000 of those into new business. And that produced 208 million in sales. It's already a valuable contributor to the sales overall. Pulse is not just about customer acquisition. It's also about an end-to-end platform. Consumers are not only able to purchase insurance products directly online, But in a number of our key markets, they're also able to make claims and do policy servicing through Pulse. We're creating a new platform that can keep up with the demands required by many stakeholders while improving workflow efficiency, generating operating leverage through end-to-end integration. So our 2020 Asia and Africa scorecard is just another reference point in our long track record. Our focus on operational improvements and discipline execution created a financial signature of double digit growth over 10 years across all key metrics new business profits earnings and capital generation embedded value perhaps the best proxy for our compounding growth has more than tripled over the decade and doubled in the last five years for a company of our scale with almost a century of history in this region this is particularly impressive achievement prudential has the discipline capabilities and the capital to continue this delivery. So let's now move on to the group post-separation. Our business model will focus on the long-term structural growth opportunities in Asia and Africa, building our market-leading positions and growth levers in our chosen markets. We have a high-quality, diversified portfolio of 26 businesses in 15 markets operating across different maturity spectrums. In the more developed markets, such as Hong Kong and Singapore, we have top three positions. In the largest scale markets of China, India, Indonesia, and Thailand, we have significant operations which represent huge long-term opportunities. Across the region, we have a leading multi-channel distribution platform with around 600,000 agents, a leading position in bank assurance channel, and over 300 life and asset management distribution partnerships. We are also building competitive advantages in digital. We have an innovative and adaptable product skills. Customer centricity is our mantra. And with Pulse, we offer an end-to-end solution which covers health, wellness, fitness, diet, links to hospitals in many markets, all through our in-house ecosystem. And in eSpring, a leading Asia-based asset manager with assets under management of $248 billion, we have an excellent platform giving us access to the fastest growing demand for wealth solutions worldwide. across the entire region. We have a strong track record in effective capital allocation and risk management. And Prudential will be focused on growth with a view towards achieving sustained double-digit growth and embedded value per shares. For shareholders, this means direct and focused exposure to this powerful compounding value creator, creating sustainable growth and operating capital generation in a unique and proven business model. And Mark Fitzpatrick, We'll go into this in more detail in the financial review that follows. So to sum it up, 2020 has been an extremely important year. We've made substantial strategic, operational, and financial progress. The most important near-term objective is the separation of Jackson, and the demerger is on track for completion in the second quarter of 2021. We expect the pandemic to accelerate digital and health trends further by highlighting the need for increased provision of financial protection and health. Importantly, COVID has also reinforced the alignment of our business and social purpose with our communities, our staff, and our stakeholders. Throughout the pandemic, we've demonstrated our ability to act at pace and our flexibility to adapt, and our results show the resilience of our underlying business. We know there's significant latent demand for our services, and our people are becoming ever more effective at working amid social distancing requirements. We have invested almost $10 billion into Asia since 2013, including approximately $5 billion of inorganic investment to grow our distribution and to build our digital capabilities. Our organic new business continues to generate internal rates of return in excess of 35%, with an average payback period of three years. The potential equity raise is intended to further enhance our financial flexibility as a pure-play Asia and Africa business, following the redemption of existing high coupon debt. We see a breadth of opportunities in the region in which to invest. We see scope for further compounding growth with high risk adjusted returns for shareholders as we continue to execute our strategy with discipline and enhance our platform. In summary, we're well positioned for long-term value creation.

Thank you, Mike, and welcome to you all. In this presentation, I will cover four areas. First, our Asia businesses. Secondly, the US. Thirdly, some group-related items. And finally, I will close by covering some of the financial aspects of the Prudential Group following the separation of the US. We are pleased and encouraged by the financial performance of our Asia businesses in 2020, despite the significant impact of COVID-19 and substantial market volatility. Our business has distinct and diverse capabilities across product development, digitally-enabled distribution, and disciplined capital allocation. We have worked to develop these further over 2020, and all of these underpin the financial performance summarized on this slide. We have a high-quality, enforced business. Our sales are mostly comprised of regular annual premiums, and we have a very high customer retention ratio. Our focus on health and protection products resulted in an insurance margin representing 79% of our 2020 insurance income. All of these help to provide stability in volatile markets. We are well diversified across the region and balanced across distribution channels. We are agile and highly innovative, whether through our new and revamped products or our rollout of PULSE. Over the year, we further broadened our offering with 175 new and revamped products. We were also focused on managing our cost base, and we have today announced that we have delivered on the $180 million central cost reduction target. The outworking of these qualities is the resilience of our financial performance. Among these selected performance metrics for the group, I would highlight the following. the 13% growth in our Asia Embedded Value, a 13% growth in Asia IFRS operating profits, and an 8% increase in operating free surplus. These are all driven by the quality and resilience of our in-force book. Although sales in new business profits were lower over the year as a whole given COVID disruption, we saw an encouraging bounce back in the second half with APE sales 20% up on the first half of the year. Other highlights are the growth in eSpring's fund under management to $248 billion after a strong second half recovery. And we are reporting a solid year-end group LCSM shareholder cover ratio of 328%. So, moving on to my first topic, the detail of our Asia results. In 2020, our overall renewal premiums increased 6% to reach $20 billion. Within that, health and protection renewal premiums were up 8%, both demonstrating the value of our compounding model. A 19% increase in our insurance margin, largely earned from health and protection business, supported a $400 million growth in overall IFRS life operating profits. This reflects a continued growth of our in-force business. As we indicated at the half year, we continue to benefit from favorable claims experience, which was partly due to the effects of the pandemic, for example, as elective medical procedures were deferred. Over time, we expect some of this favorable claims experience to unwind. We now have nine life markets with double-digit growth and seven businesses, including eSpring, earning in excess of a quarter of a billion dollars. Although eSpring's IFRS profit growth was more subdued than in prior years, as an integrated part of our business, it continues to benefit from steady net inflows of internal insurance funds totaling $8.5 billion. Internal FUM of $138 billion now accounts for around 60% of total FUM, which at year-end was $248 billion, up 3%, driven by internal net flows and higher equity markets. Against this, we saw third-party net outflows, excluding to M&G PLC, of $10 billion over the year as a whole. Now, this was driven by outflows in the first half, notwithstanding an improved performance in the second half, with half a billion of positive net flows in the fourth quarter. In addition, as we anticipated, we also had outflows of $10 billion in respect to funds managed on behalf of M&G PLC, with further outflows of around $6 billion expected in the first half of 2021. Underlying cost control remains strict, with the 2020 cost-income ratio stable year-on-year at 52%. Turning now to Asia's new business performance. COVID-related disruption varied considerably in both duration and severity across the region, and this pattern has continued into 2021. There is a chart in the appendix summarising these effects. Overall, new sales were down 28%. In large part, this reflects the impact of the Hong Kong-China border closure earlier in the year, which led to an effective halt in Hong Kong cross-border business. Excluding Hong Kong, new sales were only 6% lower despite COVID disruption during the year. Importantly, as COVID restrictions have lifted, we have seen a sustained bounce back in APE quarter on quarter from the low in the second quarter shown on the middle chart. Now, a number of factors contributed to this. First, we are well diversified by market and we benefit from the portfolio effect this brings. While some markets remained under strict lockdown, others were rebounding strongly. Overall, New sales ex-Hong Kong in the second half of 2020 were up 27% on the first half, and six markets delivered growth in the second half of 2020 compared with the second half of 2019. Secondly, we benefited from a diversified and multi-channel distribution platform. Being able to sell through 20,000 bank branches was particularly valuable, In many markets, bank branches tended to remain open as an essential public service. Thirdly, we benefited from tremendous progress in the implementation of our digital strategy. Virtual sales accounted for 27% of bank sales between July and December and 28% of all agency sales from April to December. Our agency force was also supported by leads provided by customers accessing Pulse. which we call online to offline sales. Over the course of the year, we saw a pivot to standalone protection products, reflecting increasing consumer demand. This contributed to a higher health and protection sales mix in seven markets. Finally, a word on our Africa businesses. These delivered an excellent 2020 performance with APE up 51% to $112 million. In terms of outlook, we are encouraged by the sequential quarterly increases in sales in Asia seen from the second quarter of last year. However, our continued success across all our markets will be dependent in part on government reaction to changes in the number and type of COVID-19 cases and the rollout of vaccines. In respect of mainland China-Hong Kong border restrictions, There is at present unlikely to be a lifting of the border restrictions until the third quarter of 2021 at the earliest, but this will depend on a number of factors. We do believe there will continue to be demand for mainland Chinese customers for the Hong Kong product suite once the border reopens. Until then, this will continue to materially restrict our Hong Kong cross-border business. This year, we have further enhanced our NBP and EEV disclosures. We have provided additional EEV sensitivity scenarios, in particular for larger changes in interest rates, which will allow you to compare us better with some of our regional peers. We have also provided NBP and EEV results for each of our main business units, as well as for our growth markets combined. These, along with eSpring, will provide the basis of our new segmental reporting from half-year 2021. New business profits largely followed new sales trends. Excluding Hong Kong, new business profit was 4% lower, and in Hong Kong, new business profit was down 62%. Among our larger markets, China and Malaysia grew NBP, largely reflecting resilient new sales levels, and in China, a more favorable business mix. Within our growth markets, Thailand was up strongly by 38%, reflecting the activation of the substantial bank assurance transaction last year. The addition of each year's new business profits is really the key in our EV build. New business profits of $2.2 billion added 6% to the opening balance. and the 11% increase in the Asia segment EEV value build is underpinned by this new business profit and the $1.9 billion of expected return on our enforced business. Once again, operating experience variances were favorable for the year, underscoring the conservative nature of our assumption setting under EEV. Asia's segment embedded value grew by 13% over the year, to $44 billion, more than doubling over the last five years. As we indicated with our half-year results, after the separation of the U.S. business, Prudential will focus on achieving sustained double-digit growth in EEV per share. This will in turn be supported by growth rates of new business profit, which are expected to exceed GDP growth rates in the markets in which we operate. Moving now to my second topic, the US results. Jackson's new sales development reflects a combination of pricing actions taken in relation to its general account business and a strong sales performance from its core VA business. On a headline basis, US operating profit was 9% lower. Both current and prior year operating earnings were impacted by the effects of Deferred Acquisition Cost, or DAC. And in the current year, we have seen the impact of the reinsurance agreement with Athene, which was affected from the 1st of June 2020. And to provide you with a clear view of the underlying picture, in the right-hand chart, I've deducted the favourable DAC deceleration recorded in 2019 to get to an adjusted base. We saw a moderate increase in fee income, largely reflecting the higher average separate account balance, although this was effectively offset by lower spread and other income. This resulted in pre-DAC 2020 earnings approximately in line with the 2019 adjusted base. I will spend a few moments now going through Jackson's statutory capital development. So starting with the adverse ATRBC point impact from the hedge modelling revision which we announced in January. This was a revision of the hedge modeling used to calculate statutory reserves in capital. It is not related to hedging strategy. They are different. The new VA statutory framework, which Jackson adopted at the end of 2019, recognizes the costs and benefits of hedging in the statutory reserves and capital requirement computations. In the preparation for the planned separation from the group, Jackson conducted a thorough review across all models and assumptions, which concluded in January this year. As a result, Jackson identified a modeling simplification which needed to be revised. This change was reviewed by independent third parties. This modeling simplification reduced the level of hedge credit recognized in the statutory reserves and capital requirements, resulting in a $390 million reduction in surplus. Given this included a $251 million increase in required capital, this magnified the effect on the RBC ratio, leading to an 80-point reduction. I'll now turn to the other components of Jackson's 2020 capital development. As expected, enforced capital generation contributed $975 million to surplus, equating to 100 RBC points. Repricing actions resulted in an intended sharp reduction in FIA and FA new sales, which reduced new business strain to 23 points, roughly a third of the level we incurred in 2019. Other non-operating movements reduced RBC by 108 points and were mainly driven by the impact of falling interest rates, rising equity markets and elevated volatility. The Athene reinsurance transaction and equity investment combined added 92 RBC points. Finally, reflecting more favorable economic conditions and following the recapitalization of Jackson through the debt raise, the team expects Jackson's RBC ratio at the point of separation to be in excess of 450%, though this remains subject to market conditions. My third topic is the group results. where segment profits from continuing operations were 2 percent higher on an IFRS basis. Central overhead expenses are down 20 percent. And we have delivered on the $180 million annual cost reduction target, and this applies in full from the first of January of this year. Of this, roughly $80 million flowed into our 2020 results. As previously announced, costs are targeted to further reduce by about $70 million from the start of 2023. We will continue to review the timing of the full realisation of these further savings following the completion of the USD merger. Combined, these actions will represent a $250 million annual reduction in costs compared to the $490 million cost level in 2018. Interest costs are also down sharply. Looking forward, we are considering raising new equity in order to enhance financial flexibility. Interest costs would reduce commensurately with any deleveraging we undertake. We also expect to refinance a large portion of our remaining debt at lower interest costs in due course, where we have the options to do so. While restructuring and IFRS 17 costs increase, they did not do so by as much as we anticipated. In 2021, we will continue to invest in automation and aligning of core functions and processes to support growth. We will incur more costs with the ongoing IFRS 17 build-out. As a result, we currently expect 2021 restructuring and IFRS 17 costs combined to remain elevated. Thereafter, we expect these costs to reduce Short-term fluctuations and other items are largely driven by the U.S., principally resulting from incurred hedging expenses and adverse IFRS liability movements driven by lower interest rates. These negative effects are partially offset by gains on several corporate transactions, notably the reinsurance transaction in the U.S. in June and the Reinsurance Commission received from a quota share transaction undertaken by our Hong Kong business. This transaction has been done as part of the group's ongoing asset liability management and helps mitigate the effect of the accounting mismatch that exists under the existing regulatory framework in Hong Kong prior to the transition to the new risk-based capital regime. We are well positioned for the transition to the new group-wide supervisory framework. On the current local capital summation method, we ended the year with a shareholder cover ratio of 328%. Excluding the U.S. completely, this ratio would be marginally lower at 323%. We have been operating under the LCSEM framework for a while now, and I'm pleased with the building track record you can see in the left-hand chart. Our updated economic sensitivities are illustrated on the right-hand chart. The Hong Kong LegCo approved the enabling primary legislation in July 2020 and the subsidiary legislation in February 2021. The GWS framework is expected to be effective for Prudential upon designation by the HKIA in the second quarter of this year. As we have previously indicated, the GWS methodology is largely consistent with that applied under our current LCSM regime our initial analysis indicates that all debt instruments, senior and subordinated, issued by Prudential, will meet the grandfathering conditions set by the HKIA. If this is confirmed, the group ex-US shareholder LCSM ratio of 323% would increase by around 50 percentage points. Turning to my fourth and final topic of today's session, following the demerge of Jackson, Prudential will solely focus on the growth markets of Asia and Africa. I'll start with organic capital generation. Our Asia business is highly capital generative, and in 2020, for every $1 invested, we generated nearly $4 of new business profit. The chart illustrates our operating capital generation over 2020 and shows in-force capital generation of $2.4 billion before central overheads. On the right, we show our uses of capital. We will continue to invest in new business while paying dividends under the revised policy we set out in August last year. For clarity, the dividend has been calibrated to right size cost, not current costs, so dividend growth over the next few years will not benefit from expected central cost reductions. The 2020 total dividend proposed, set according to this revised policy, is 16.1 cents per share, equivalent to $420 million. In 2020, our strategic investments mainly related to broadening our distribution reach through new and extended partnerships and enhancing our digital capabilities. This takes strategic capital investment in Asia to almost $10 billion since 2013. And finally, at the bottom of the slide, you will see that our holding company liquidity position remains strong at just under $1.5 billion after having invested $1.2 billion of central resources into Asia growth opportunities during the year. To ensure we are well positioned to take advantage of the Asia growth opportunities ahead of us, we are considering some balance sheet restructuring. Based on our year-end position, excluding the U.S. completely, our Moody's total leverage ratio would be 33%. While this would be manageable, it is clearly above the 20% to 25% range we are targeting over the medium term. Therefore, in order to enhance financial flexibility and de-lever the balance sheet, Prudential is considering raising new equity of around $2.5 to $3 billion following the completion of the Jackson de-merger. We have $2.25 billion of relatively expensive debt, which will be past first call date by the end of July this year, with annual interest costs of about $125 million. If we were to redeem all of this with the proceeds of the potential equity raise, it would put our pro forma end 2020 position towards the lower end of our target leverage range. We have a strong investment case. Prudential is well positioned in a diversified portfolio of attractive markets with substantial opportunities ahead. It's focused on high quality recurring premium business and on meeting the health and protection needs of people in Asia and in Africa. We have a modern distribution platform diversified across agency, bank and digital channels. We have a leading Pan-Asian third-party asset management capability. And we have a strong record of value creation evidenced by doubling of embedded value over the last five years and more than trebling over the last decade. All of this gives us confidence about our abilities to drive future growth. To summarize, our 2020 financial performance reflects the strength of our business model. We expect to complete the separation of Jackson in the second quarter of 2021. In order to enhance financial flexibility and de-lever the balance sheet, we are considering raising new equity of around $2.5 to $3 billion following the completion of the Jackson de-merger. Following the separation of Jackson, Prudential will focus on achieving sustained double-digit growth in embedded value per share I look forward to engaging with you in the coming days and weeks. Thank you.

Ladies and gentlemen, hello and welcome to the Prudential 2020 Four Year Results Call. My name is Maxine and I'll be coordinating the call today. If you would like to ask a question during the presentation, you may do so by pressing star float by one on your telephone keypad. I will now hand you over to your host, Mike Wells, Group Chief Executive to begin. Mike, please go ahead when you're ready.