Prudential plc

Good afternoon from Hong Kong. Could I please first ask that you turn off your phones and any other mobile devices that may make a noise. But welcome. This is the Prudential's 2022 full-year Q&A session, and we're very pleased to see you all. I'd like to hand over to you now to Anil, our new Chief Executive Officer, who's got some opening remarks, and then we'll go to questions from the floor, from the phones, and then from the webcast. Anil, over to you.

Thank you, Patrick. And good evening to everyone in the room. And good morning, good evening for folks who are joining us remotely. I'm Anil Vidwani, Chief Executive Officer of Prudential PLC. And it indeed is a pleasure to welcome all of you to our full year 2022 earnings call. I'm truly excited to be part of Prudential PLC. And I've known Prudential as a competitor. And I've always admired Prudential because I have competed with them in every single market that Prudential operates in. Clearly, Prudential has a lot of strengths. The brand, the rich history of 175 years, great distribution, diversification. The trust and confidence of 18 million customers, clearly a lot of strengths. And as I said, in every single market, they were a formidable competitor. What I get to the table is 32 years of experience in financial services. The last five have been in Asia leading a competitor both on the asset management as well on the insurance side. So I have operating experience in many of the markets that Prudential operates in and have a fair amount of knowledge in terms of both the opportunities and the challenges in the markets of Asia in specific. This evening, this morning, I have the pleasure of introducing my management team. So on my right, James Turner, CFO. Next to him is Dennis Chan, who runs Singapore, Vietnam, and Thailand. Avnish Kalra, next to Dennis, our chief risk officer, chief risk and compliance officer. On my left is Lillian. Lillian Ang runs Greater China. Somaz Alton runs Malaysia, Indonesia, Philippines. Obviously, manages our joint venture partnership in India, Africa, and also is responsible for digital and technology. And next to Somaz is Wai Kong. Wai Kong is our CEO of our captive in-house asset management company, eSpring. And together, we will be responding to your questions, and I really look forward to the interactions this morning, this evening. At this juncture, I also wanted to extend my sincere gratitude to Mark, who is in the room with us. Mark has been absolutely superb in terms of his contribution over the last six years, but more specifically in the last 12 months. And his leadership has been instrumental in putting Prudential in a position of strength as we look to addressing the growth opportunities, specifically in the high-growth, high-potential markets of Asia and Africa. So on that note, I'm going to turn it back to Patrick, and we can get rolling with the question and answers.

Thank you. Patrick. Thank you, Anil. And maybe I'd like to invite the moderator just to give the instructions as to how you can lodge your questions if you're on the phone or on the webcast. Okay, in the absence of that specific instruction, I think it's hash one if you're on the phones to make yourself known on the phones to log your question. We do have a logging system so we will be able to track you. So maybe we can start by going to the floor of the room and if you want to put your hand up and just identify yourself and your organization, we'll hand a mic around and then we'll go and do some questions from the floor in the first instance. Michael was early. Thomas was next. Thomas goes first.

Okay. Thank you. Thomas from Goldman Sachs. A couple of questions. I think mainly on the Hong Kong business. I just want to see what you see on the Hong Kong business in terms of the mainland Chinese business segment and also the domestic segment, how you see that rebound, what you're hearing from the agents. And then maybe... My question for James is the margin, when we look at the margin, obviously first half, second half, last year there's quite a large difference. Just when we're thinking about going forward, which one is the reference point when we're thinking about projections on margin? Thank you.

Thanks for your questions, Thomas. Let me tee it up with the MCV and the Hong Kong business question, and I'll pass it on to James for his comments on NBP margin. But before I answer the MCV question specifically, I just want to kind of step back and provide a bit of context in terms of how did we – how did we create the momentum getting into 2023? And we employed specific emphasis on the needs, on the diverse needs of the Hong Kong domestic customer. And we saw traction on account of that in the second half of the year as compared to the first half. That also led to a high level of agent activation and it put us in a good position as the borders opened up. And Once the borders open up, we have kind of seen the mainland Chinese visitor traffic coming in. It's clearly not at the peak levels that we were accustomed to in 2018, 2019. Our estimate is it's about in the range of about 40% to 45% right now, but it's starting to have a positive impact on the volumes. Now, unsurprisingly, the first set of customers coming in, based on at least what we are witnessing, is more skewed towards the affluence segment. And as a consequence of that, the demand that we are seeing is coming through more towards the savings products. Having said which, I... clearly understand that our emphasis is going to be on providing a diverse set of products to address the diverse set of needs, including those of mainland Chinese customers. And the momentum is going to complement some of the good work that Lillian and team did in the last year on the domestic market. So I'm going to stop there. I'm going to turn it to James to address the new business margin question. And I'll probably also ask Lillian if she has any further comments on the mainland Chinese visitor customer. James.

Thank you, Neil. And thank you for the question. So in terms of the Hong Kong margin, the thing to remember is that we're applying an EV methodology and we're marking to market. And we're marking to market at the year-end rate for the whole year. So it's not at the half year we marked to market at the half year. So it went from 150 bps at the beginning of the year to 300 at the half year. By the year end, that was at 390. But under our methodology, we mechanically revalue the whole year at that year end rate.

Lillian, you want to add anything on mainland Chinese visitor customers?

Thank you, Neil. I think two points I just want to add. Thomas, you mentioned about the domestic segment. What Anil said, in 2022, we've been able to actually grow our market share from half one to half two by doubling. So our half two market share is 10%. And that built actually a very robust platform for us to continue to capture the opportunities of the domestic market. In terms of the MCV segments, the early signs we are seeing, as Neil was mentioning, it's more on the afferent segment. But what is very good to see is that 58% of the MCV are new to Prudential so far in the first two months. So I think we are very well positioned to capture that opportunity.

Thank you, Lillian. Okay, thank you. Who's next? Up. Sorry, Michael. I'm sure you'll be nearly next.

Hi. This is Edwin Liu from CLSA. I have a question on Indonesian markets. So we have seen some weakness in that market for several years, but I think this year we have seen some stabilization. So my question is, would you say we have seen the bottom of the Indonesian market and going forward, would the growth of that business driven more by bank assurance or agency or both? Thank you.

Yeah, that's a great question, and clearly Indonesia is a critical market for us. So I'm just going to offer my opening comments, and I'll then turn to Somas to provide greater color. But Indonesia is a focused market for us, and we've had leadership position in that market. And unsurprisingly so, because we have a vast distribution, specifically on the agency side. And if you combine the conventional and the Sharia business, we have been in a position of strength over many, many past quarters. I'm going to stop there and I'm going to turn it to Somas to provide some further insights. Somas.

Thank you, Anil, and thank you for the question. We did indeed see a strong recovery in Indonesia in the second half. In the second half, APE grew 44% versus first half. And we see that momentum mainly coming from agency channel. Banker was strong in growth throughout the year. So looking forward, we also see the momentum in the first two months continuing and the Agency channel plus the banker channel will be both channels that we're betting on also for the future.

Okay, next.

I was going to allow someone else, but you did get your hand up first. Again, Michael, you'll go.

All right, thanks. Michael Chang, CJSC IRB. I would ask on mainland China. So last year, obviously, a very strong set of performance. I think bank assurance performance in particular stood out. Maybe you could shed some light in terms of the partnerships that were signed last year. I think there were 11 new bank assurance partners, and in the report itself, CMB was mentioned specifically. Could you maybe shed some light on how well diversified is the bank assurance growth? How much of it is concentrated with CITIC and CMB versus the others? And maybe year-to-date, what's the bank assurance sign-up rate like? And also related to mainland China, the Asian channel, I think, is starting to show some signs of recovery. What's the Asian recruitment rates like right now, year to date? Thanks.

Thanks for your questions, Michael. Multiple questions in that. And I'm going to ask Lillian to provide you a greater detail. But let me start by saying that you're absolutely right. We have a multi-formatted channel in mainland China. And as a consequence of that, we were able to deliver 15% new business profit growth last year on the back of 19% sales growth. So that was pretty strong given the environment that we were operating and in some sense underscores the diversified nature of channel mix that we have. You're right in saying that as the COVID measures get relaxed, you are going to see greater emphasis on agency and agency activation. And that is something that we are already witnessing on mainland China. I do want to kind of, before passing to Lillian, emphasize the fact that the structural demand drivers on mainland China are very much intact. So it's really positioned well for medium to long-term growth. And again, given our capabilities on the ground, we feel very optimistic in terms of addressing those customer needs. But Lillian, you may want to provide some greater detail.

Thank you, Anu. In China, I mean, like in most of all our business, we have a diverse multi-distribution platform. So on the bank assurance fund, actually we work with 59 banks across 6,687 branches. And we've been able to increase that outlet by 11% in 2022. And that is supported by also 3,000 insurance specialists. So we are actually blessed. We have a diverse portfolio of working across the... national banks, the commercial banks, as well as the foreign banks. And we're also very blessed that, you know, because we have a shareholder partner in Citic Bank and also a strategic partner in Standard Chartered Bank. So this is how we have the platform we have in Bank Assurance. But having said that, we are also building the quality agency force. within China as well as in the potential life and we've been able to grow our MDRTs to 1,000 and agency productivity has grown 9%. So taking that forward into 2023, we continue to actually ensure we have the relevant customer proposition to serve two areas, mainly protection as well as savings, in particular retirement planning and that is supported by the government agenda as well as support by the regulator on long-term savings and protections.

Lunan, you may want to address the CMB question. I think Michael had it specifically.

So in China, bank assurance is an open architecture. So we've been able to actually engage with, in particular, the Shenzhen branch of CMB, and that's where we have been seeing a lot of growth in that area, in particular in the GBA area.

Right, I think we'll have some diversity. Could we have some questions from the second row, please?

Thank you. Diversity. Hi, management. This is Michelle from Citigroup. So my first question to you, just out of curiosity, what's, you know, after onboarding, what's the top three items in your to-do list? Can you share with us? And second thing, I think... Investors these days, they pay a lot of attention to the SSI. So for our disclosure, out of our $11.5 billion corporate debt in the shareholder-backed debt, I noticed there is 34% belongs to the financial sector. Can you shed some light on how much belongs to North America or other regions? Yeah, thank you.

Thanks, Michelle. Thanks for the question. Again, two-part question. Let me address the top three priorities, and then I will hand it over to James and Avneesh to answer your second question. So this is week three, and I'm still finding my way to the coffee machine. But in terms of priorities, clearly three of them. Obviously, there are going to be many, and I obviously will have to kind of get to that in due course of time. But if I have to simply pick three, it's people and culture. our customers, and our operating performance. And what I can tell is just based on my initial interactions with talent, they are highly committed, highly focused, highly energized to be able to write the next chapter of growth for Prudential. I'm going to stop there, turn it to James first, and then to Avnish.

Michelle, thank you for the question. So the balance sheet, as you know, is very conservatively positioned. And that 34% of our shareholder assets, the way that it's split, that equates to $3.9 billion. Approximately $1.1 billion of that relates to U.S. banking stocks. 97.5% of those are investment grade, 95% are systemically important banks, so the big JP Morgan, Citi, yourselves, etc. And so very conservatively positioned. In terms of the banks that are in the spotlight, so SVB and Signature, our exposure to SVB, I think, was around a million dollars. And that, out of a $23 billion book, I mean, it's less than, you know, we're talking about one or two basis points.

I mean, should you like to add anything?

Just one more thing to add there, that as you would expect from a company of our size, scale, and history, We have a very well-developed credit risk framework, which relies on concentration risk, single-party limits, et cetera, to kind of cover the exposures that we see on a day-to-day basis. So we are well-positioned on that.

Thank you.

Thank you. Just to clarify, I think it was 34% not of our group net assets, just of those investment credits, investment credits, not the group. Okay. I think you had another question. And then I'm going to go to the phones because otherwise they'll... Hi, good to see the management today in person.

My name is Tianjiao Yu from Bernstein. I just want to follow up on the Hong Kong recovery. Can you give us a bit of colour in terms of the agency business? How many agents are you kept now versus 2018's level? And also, I saw on the presentation slide, you have a slide showing the visitors' numbers compared to 2018. I'm just curious, can we use that as a way to gauge how much you can recover this year?

Yeah, thanks for the question. I think Lillian will be best placed to kind of speak to the agency. But I do want to preface it by saying that it's still early days. We only have experience of about seven to eight weeks. And the momentum started in terms of the visitors coming into Hong Kong. We saw distinct momentum pick up in February. And that's continued as we've kind of progressed through February into March. But it's still early days for us to kind of gauge the full impact of it going forward. Lillian, any comments on agencies in specific?

Yes. Obviously, we have about 19,000 agents in our total force. Actually, 80... percent of them actually joined us before the pandemic. So what I'm trying to say is during the pandemic, we've been able to continue to motivate and activate these agents. Now of that 19,000, around 10,000 are actually MCV-focused agents. So a lot of the activities we are seeing in the first two months is actually driven by this group of our agency force.

Can I just follow up with one more on the IFRS 17? There's a guidance on the operating profit reduction. Can you talk us through what's driving that change, mostly from the Inforce book?

Sure. I think I'll turn it to James, but I just want to say that IFRS 17 is an accounting change. It fundamentally does not change our business model, our strategy, our valuation, our operating fee surplus generation. It does not change that. It's an accounting methodology and does not impact our business strategy. But I'm going to turn to James. James, to provide you with greater insights.

Thanks, Anil. And, you know, it also, onto that long list of things, it doesn't change. It also doesn't change our dividend-paying capacity and our dividend policy. And so, really, the key thing to recognize on the IFRS 17 is that our shareholders' equity has increased. And it's increased, and we've given a range on that, between $1.9 and $2.8 billion. And that increase is reflecting profits that we've never recognized under the previous IFRS 4 regime. So, for example, with profits, things like that, our terminal bonuses under IFRS 4, we'd have recognized them when they were paid. Now they're accelerated and brought forward and added to our shareholders' equity. The guidance we've given on the reduction in operating profit from our IFRS 4 operating profit of $650 to $850 million reflects really timing differences again, because as Anil said, this is just accounting. So from a timing difference perspective, there is both a one-off impact. So this year there was approximately $200 odd million. that was recognized as a one-off gain from the introduction of Hong Kong RBC. There's then the new business. So when we sell new business, rather than being able to recognize the profits under IFRS 4 immediately, we have to spread those over the lifetime of the policy. And then the balance really is a consequence of that increase in equity. And it's really that flowing through in terms of we've had those profits. Thank you.

Let's open up the questions on the phones, please. Over to you, operator, to let the first question through, please.

Thank you. Our first question for today comes from Blair Stewart of Bank of America. Blair, your line is now open. Please go ahead.

Thanks very much. I've got two questions. The first question is on agency. You touched on the Hong Kong agency and how much damage might have been done through the pandemic. I seem to remember you having about 24,000 agents in Hong Kong. So it looks to me like you're trying to replenish from the lost agents in the pandemic. And I just wonder if we could expand that discussion across the other main territories, albeit briefly. I recognise there's a lot of territories. But what What's been happening to the agency and to what extent does that need to be repaired? And I'd imagine there's a fair amount of competitive behavior amongst agency as well in terms of your competitors looking to pick up your agents. Sorry for the long question. My second question is on IFRS 17. James, I'm assuming that the quid pro quo of a lower IFRS 17 starting point from an earnings perspective is that we might expect faster growth in profits in future than we might have seen under IFRS 4 could you just add some colour around that I know you're going to give more detail in June but conceptually is that the way we should be thinking

Thank you for your question. I'm going to ask Lillian to answer the agency question. She did mention that we have 19,000 agents, but I think she can provide you a little bit of context in terms of where we are coming from, where are we, and what's our plan to grow our agency for specifically in Hong Kong and then more broadly across the region.

Okay. So, Blair, thank you for that question. I think – What we see in terms of the attrition of the agents in Hong Kong is mainly outside of the industry. Obviously, during the pandemic, it's very challenging to actually acquire customers. As a result, they actually leave the industry. Now, obviously, we will continue. As I mentioned, 83% of the 19,000 we have is actually still with us from 2019. So we're now obviously driving a recruitment to replenish. In 2018, 2019, on average, actually we recruit about 6,000 agents per annum. So this is what we're going to continue to drive to recruitment with the economic activity coming up. And we are seeing a lot of momentum already in terms of recruitment. Now for the overall agency in Asia and Africa, we actually see in 2022, actually recruitment is up by 9%. So the whole, with the economic activity coming back up, other than Hong Kong, I think a lot of the markets actually opened earlier. We are seeing that recruitment drive and the productivity growth has been increased by 6%. So a lot of good momentum in terms of our overall agency in Asia.

Thank you, Lillian. James, if I may pass it on to you for the IFRS question. Sure.

Blair, thank you for the question. I was expecting a lot on IFRS 17. So, look, in terms of that quid pro quo, really the key point to recognize is the CSM, that store of value. And you can see from the information in the deck that that's going to be about circa – $25 billion. And that will really unlock and unwind over time. And we anticipate that that will unlock in the range of kind of 9% to 10% a year. And it's really going to be, given that the total profits from the sale of any product doesn't change, this is really going to be about timing. And what we do know is that profits are smooth. So the profits are recognized over the service that is provided to the customer, which is typically the policy term. And so the way that you've got to think about it is I think that it's going to be about what are we adding to CSM? It's not just going to be about the operating profit. It's going to be about what we add to that CSM balance and that stock of future profit there. But you're right, we're going to sit down in June and have a real big deep dive into IFRS 17. Okay, yes.

Okay, let's keep going on the phones for the next question, please, moderator.

Thank you. Our next question for today comes from Kailash Mistry of HSBC. Kailash, your line is now open. Please go ahead.

Oh, thank you. Thank you very much. Good evening, everyone. So the first question, I guess, is for Amil. He very eloquently highlighted his outside-in observations on Prudential. Perhaps if you could just follow up and just ask him, which market sub-segments are you most excited about for the next three years and why? And what are your thoughts on the Pulse platform that has been built already? Will you be investing further in it? And what areas will you look to improve the proposition? The second question is around Indonesia. I think James mentioned in his slides agency transformation in Indonesia. Can you provide a little bit more color on that, how long it will take, and what are the key objectives? And then just one last one, if I may. In the CFO appendix slides, the reason I'm asking this is there's a lot of noise in the market about the investment maker. So I just wanted to pick up on the slide where it shows the corporate bond by rating profile. Could you just sort of reiterate why there's quite a high proportion in the BBB and below and what has been the default experience over time on that portfolio? Thank you.

Thank you, Kailash. Many questions. So let me try and orchestrate this. Let me start with your first question on which are the markets that I'm most excited about. So if I were to just step back and just look at the diversification mix around geographies that we have, 42% of our new business profits are contributed by Greater China. 53% is contributed by ASEAN, and we have leading market positions in many of the ASEAN markets. And then we have India and Africa. Now, there is growth opportunity in every single market, and that was one of the reasons why we pivoted solely on the high-growth, high-potential markets of Asia and Africa. But if I were to simply pick up two, China obviously is exciting. Just given the sheer size of China and the sheer size of the opportunity that we have there, that is bound to be one of the more exciting markets for us. India, again, similar population as compared to mainland, but a much younger population to that. And again, in both these markets, there is significant underpenetration, as we know, whether it comes to health, wealth, protection, savings, or investment needs. And we believe that given our joint venture partnership across these two markets, we are very well positioned to be able to address those opportunities. On Pulse, and I will kind of steer it back to Somaz, but I do want to preface it by saying Pulse is part of our digital strategy. And the way we think about our digital strategy is to solve for the pain points of the customers. And the moment you do that, the moment you create greater ease, greater convenience for our customers and for our distributor partners, you end up winning market share in my experience. I'm going to stop there. I'm going to turn it to Somaz, and then we'll come back to your Indonesia and the investment mix question. Somaz.

Thank you very much, Anand. Thanks for the question on Pulse. Pulse has been developed over the last few years and is a strong asset in the digital estate of Prudential Group. We will continue to develop Pulse as a key customer servicing and customer engagement app. The technology focus going forward will be on developing tools and systems that will support our distribution, banker and agency channel, to do their business more effectively and more efficiently. The second focus is customer experience, both of in-force customers and then creating potential leads, also then playing back into our distribution forces. So our focus clearly is to create a better customer experience every step we go and then increase operational effectiveness and efficiency going forward.

So you may want to answer the Indonesia question on agency transformation as well.

Yes, thank you very much. Important to note is that we have regained the market leading position in Indonesia this year in 2022. Now, in order to consolidate that position, we embarked on a transformation program, which we call transformation for accelerated growth. It's not only focused on agency. It's one of the focus points. And here we are addressing agency activation, our agency sales management, how we activate our agents and recruitment of agents, of course. But it has more pillars than that. We're also looking into operations and claims, especially focusing again on customer value and shortening the time where customers have to wait for getting their claims paid and things like that, as well as expenses. So it's a comprehensive transformation program in order to consolidate our market-leading position in Indonesia.

Thank you so much. I'm going to now turn to James for the investment mix question.

So, Taylor, it's James. Listen, thank you for the question. As I said earlier, I think that our balance sheet and our shareholder debt position is incredibly conservatively positioned. But let's just take it through the elements that you asked the questions on. So first you asked about what was our total defaults. Our total defaults last year was $75 million in total. In terms of the split, I think what I need to flag, and as you say, you referenced the elements in the CFO appendices, is that of the total shareholder debt of $23 billion, 89% of that is investment grade. 55% of it is A- and above. Of the amount that is below investment grade, that is largely made up of three buckets. The first is, and we do clearly asset and liability matching by country, is we have significant business in Vietnam. As you know, the Vietnamese sovereign debt is not investment grade, and therefore all of the corporate debt, by definition, is below investment grade. And that accounts for 46% of our total non-investment grade exposure. The balance is really between Thailand, which has a triple B investment grade, and similarly, therefore, a chunk of the corporates that we used to back our business in Thailand is therefore below investment grade. And we have some high yield in the U.S., but it's relatively minor in the scale of the $23 billion of total exposure. And as I said in response to one of the earlier questions, our losses have been really small.

Maybe just a clarification, I think on the investment grade and not investment grade, we use independent ratings, don't we?

We do.

Okay. Back to the moderator, just to remind people how to log their questions, please.

Thank you. As a reminder, if you'd like to ask a question, you can press start, followed by one on your telephone keypad. Our next question comes from Larissa Van Deventer from Barclays. Marissa, your line is now open. Please go ahead.

Thank you very much. Just one question. You say that you want to focus on operational performance improvement. Do you see more runway in sales volumes, quality, or margin? And are you able to quantify how much upside you see in the near term, please?

Yes, thank you for the question. I guess the short answer is all of the above. But as I said, I am in week three, and I will be getting to many things. And one of the emphases that I would like to lay is understanding our strategy and operational capabilities. And in the August timeframe, we'll be more than happy to come back to you and share with you a much more granular strategic roadmap. But as I said, the short answer would be quality and quantity and not one at the cost of the other. Thank you.

Thanks, Larissa. I think we can come back to the floor. They've been very patient. We've got a gentleman at the back who's got a question.

Thanks a lot. Leon Chee from Taiwan. One question on Hong Kong MCV and the other on your capital. Firstly, just want to swing back to MCV, appreciate the color just now. You mentioned your headcount, agency headcount movement. We've noticed some news in the media recently talking about the agency hiring plans for Prudential and also your competitors. Well, interestingly, we've seen that actually Anil's old shop actually has a more aggressive plan. than Prudential, especially given they have a much smaller presence than us. So just want to hear anything, any color from either Neil or Lillian on this, on your agency hiring plan in Hong Kong, and particularly on the MCV. Second question on capital. I think the background there is that Prudential went through several restructures over the past few years, and also the sovereignty regime in Hong Kong and also mainland China went through two major changes, but now these are behind us. So starting afresh for now, what will have to happen to make you take any revisits to your capital management plan from here? Yes, these are the two questions I have. Thank you.

Thank you. Thank you for your question. And on Hong Kong MCV, I'm going to ask Lillian to provide you greater color. But let me start by saying that Coming in, I'm already looking at MCV very closely, as you can imagine, and seeing whether we have an opportunity to refresh our plans. We have 10,000 MCV-focused agents, as Lillian mentioned, and I believe there is an opportunity to firstly activate the agents that have gone quiet during the COVID period, as you can imagine, but at the same time, also hire trained quality agents that can focus both on domestic but also on the MCV market. So I'm going to turn it to Lillian who can apprise you of her latest plans.

Yeah, so obviously recruitment is part of what an agency force does. Out of the 19,000 agents, we probably got about 8,000. These are agency leaders who their role is to go out there every day to recruit as well as activate those agents. Now, one thing we need to pride ourselves on Prudential Hong Kong is we do have a platform. So what triggers an agent joining a company is the infrastructure, the platform, the products, the operations, and we believe we have a very robust platform to allow our agents who are onboarded to actually deliver for the customers.

And to your second point, so firstly, you've seen our capital position, which is very strong, right? And we would like to keep it that way because it gives us ample flexibility in terms of addressing the different opportunities. But I'm going to ask James to provide you for the texture on that.

Thanks, Anil, and thank you for the question. So we see our capital allocation policy as a way of maximizing shareholder value and maximizing our shareholder return. And really, we're really crystal clear in three priorities. The first priority always is organic growth and funding that organic growth because we see these amazing opportunities across the region. We've talked about some of them already today. And ensuring that we can absolutely maximise that, that's our first priority. The second is really in terms of strengthening our capabilities, whether it is in customers, whether it's people, distribution, and really adding to our capabilities so we can accelerate that growth. And then third, it's just in terms of if there are strategic opportunities in line with our strategic intent, then clearly we've considered those as well. But the primary focus, stress, is really on funding that organic growth and those organic opportunities.

Yeah, I think that's logical because these are the businesses that we understand. We have a track record. So we would like to deploy capital where we have experience and there is potential to grow further. So I couldn't agree more with James in terms of the way he's articulated it.

Hold on a second, hold on a second.

Sorry, just a follow-up. Other than the potential inorganic that you have already commented, What about returning to shareholders? Do you have any thoughts?

So I think we have entered this new phase. Now we've completed all of the transformations with an incredibly strong balance sheet that is focused really on taking advantage of the opportunities we have in front of us. And you've got to remember that for every dollar that we invest, we get a $4 of return. And those attractive IRRs with really fast payback, that's the best way we see of adding to shareholder value.

Thank you. Let's take another question from the floor, and then I think we've got one or two on the web as well, and then I'll go back to the phones. Michael, you're going to ask for two questions unheard of. Maybe we'll see if anyone else has one. Here we go at the back.

Thanks, Jianli from Muha Thai Securities. I just want to ask, what's your hope view about the interest rate environment in the future? I mean, next one to two years and how will it impact our product mix and investment allocation? That's the first question. Second question, back to the normal period before the pandemic, it's about the Hong Kong agent. What's the normal attrition rate of this agent T6.

Normal attrition rate? All right. Let me first go to a combination of Wai Kong as well as James to talk about our house view. And then William will address the Hong Kong agent attrition question. Wai Kong, you want to go first?

Yes, thank you very much for that question. Obviously, you know, to try and where interest rates are going, especially this year, is going to be very, very challenging. Obviously, we've seen how rates have been rising over the last year or so. We still think that the Fed will probably need to keep a very fine balance, and especially after the events over the last few days, I think that next week's meeting will be pivotal in terms of deciding the cost of things for the rest of the year. So I would just say that I think we've just got to watch that space very carefully.

James, any additional comments? No.

I'd say the only thing I would add is that we have a really diversified portfolio of products with health and protection, ILP, savings, and therefore we have lots of opportunities to really meet all of our customers' long-term needs regardless of the interest rate environment. The other thing is that if you look at our source of earnings, a significant proportion is from health and protection, and that's not really impacted by interest rates. So, you know, Wai Kong's right, I wouldn't like to try to guess where interest rates are going to move, even in the next week, let alone the next year.

Thank you, James. Lillian, anything on the Hong Kong Asian progression?

So in Hong Kong, to become an Asian, they have to go through quite a rigorous examination. And secondly, we also actually put through each of our new Asians, or when they are candidates, go through what we call profiling. to ensure that these are the right people in terms of wanting to do financial advice as a career. Now, with that in place, actually, the attrition rate is actually reduced to about 20% to 30%. But for those that haven't gone through the profiling, obviously, the suitability test will help to get there. So that's probably pre-COVID. As I mentioned, during the COVID, the attrition rates mainly due to they couldn't get enough business to sustain their income.

And that's why we remain optimistic, because the COVID relaxation is going to result into agency activation, which is going to result into income for the agents, which in many ways is going to be the tool for us to drive better retention.

I know you've Bear with me. I'm going to read out some questions on the web. I'm going to do a quick fire one for James. There's four or five which we should run together. It's in the interest of time. It's already quarter to two. Just very quickly, could you repeat the exposure to U.S. banking investment? Some of the individuals had a poor line. That's the first one. Second one is on capital. Any thoughts about the 150% floor that you have in terms of the way that you look at your free surplus ratio on top of the GWS requirements? And is there any color about the individual markets around the 15% overall group growth rate in sales? Those are the first three.

Thank you, Patrick. James, you want to take the first two, and then I'm happy to address the third one.

Okay, so the first one was the U.S. banking exposure, I think. And so what we said is that there's a total in the shareholder debt portfolio of $1.1 billion. 97.5% of that is investment grade. 95% is in systemically important banks.

And the second question was the 150% floor for free surplus.

So in terms of 150%, that's our risk appetite. It's a dynamic risk appetite. What you're seeing is that we have 302% capital ratio, and that's the associated capital ratio regarding that risk appetite. So we're significantly above the level of our risk appetite.

Thank you. And on the third question, we won't get into market-specific dynamics in terms of growth. Suffice to say, as I said, the greater relaxation on account of the COVID measures abating will result into agency activity, and not only in Hong Kong and mainland, but more broadly across Asian markets and we've already signaled to you in terms of the positive impact that we are seeing on account of the MCV or at least the initial flow of the MCV customers coming into Hong Kong.

Okay, thank you. I'll just give you another one and this time a change of markets. It's on Malaysia. It used to be on Malaysia. It looks like they've dropped off. We'll move on. Okay, yes, please. This is from Sudarshan at Sogjen. Can you please provide some color on the new business outlook for Malaysia? Can we expect some recovery after the decline in this year? Do you think there will be a subdued growth in the near future? Thank you.

Somaz, you want to take that? Yes, happy to. It's important to note that we have a prime franchise in Malaysia. We are on a consolidated level, still number one in absolute premium, and we combine the convention and our Takaful footprint. So we're very excited about Malaysia. We have the biggest agency force, and we are a clear market leader in Takaful insurance with a huge potential with about 64% of the population being the Bumi population, and we are the clear market leader there. We have seen strong banker growth in Malaysia over the last year, and the numbers, when you look at it after the medical repricing one-off effect in 2022, we have dropped in AP by about minus 2%. The market overall dropped by 6%, and in conventional by minus 9%. So comparing that, we did actually quite well in Malaysia. In the first two months, looking at the overall guidance in 15%, we will see some momentum in Banca continuing and agency as well.

Okay, I'll keep going. The next one is from Premier Meaton Investors, and it's on mainland China JV. Could you please comment on the changes in the mix of products that you see demanded by customers in the mainland business? Is health and protection losing share here? And would it be to assume that new business margins will reflect the reduction in health and protection demand that we saw last year? Thank you.

Lillian, would you like to address that? The product mix question for mainland China?

I think, obviously, In our business, we ensure we have a comprehensive customer proposition across from savings, protection, as well as retirement planning. So what we are seeing is actually there is still a demand for health and protection. I think subsequent to the change of regulation in critical illness in 2021, we continue to refine our product, our critical illness in 2022. And what we actually have done is actually from a custom proposition is added what we call a critical illness butler. So these are the things that help to address the customer pain points across. And we've seen as a result in actually our GBA area in Guangdong alone, About 20-something percent of our AP is coming from this critical illness product, and that's what helped us to drive an MVP of actually our GBA area by 72 percent. So this is how we focus on protection. The other exciting piece that we are looking at is actually driving our retirement planning proposition, which is, you know, at the back of the pillar three chart. which is to help people to actually save for retirement. In City Prudential, we have around 22 products that actually address retirement planning. And most of them actually qualify for that tax benefit that has been put out by the State Council. So we continue to be very excited and well-positioned to drive protection and long-term saving, and that's where we're going to continue to address the customer needs.

Okay, last two from the webinar, both on margins and interest rate sensitivity. The first one is in terms of sensitivity of new business margin to interest rates. With your sensitivities, can we understand the pace of likely change in margins of interest rates rise again this year? And more holistically, how do you see the impact of rate rises on demand for savings versus protection and lapses on savings products? That's the first one on margins. And the second one on margins is specifically to the MCV market, whether or not what's the margin outlook for this business and the momentum for this business.

James, would you like to take the NBP sensitivity and the rate rises and the impact on lapses?

Okay, so let's start with lapses. I mean, what you've seen in this business now for a number of years is incredibly resilient persistency. It stayed around 89%, 90%, and that hasn't changed. And that's because we're offering long-term products for our customers that they want, ultimately, regular premium that they continue to pay. So we're not seeing any all the way through COVID, all the way through all of the disruption, we haven't seen any disruption to our persistency levels. That's the first point. In terms of sensitivities, you've seen those in the deck. They are clearly, from an MVP perspective, we do have economic sensitivity for the reasons that I mentioned before, but ultimately, the underlying profitability of these products is strong, and this is really just a discounting effect because of our focus on health and protection.

Thank you, James. And before I ask Lillian to comment on MCV margin, historically, as we know, the margin on MCV has been higher. I did mention in my earlier comments that the initial set of demand that we are receiving across the border is coming in the savings product, which tends to be lower margin as compared to health and protection. And if you think about health and protection, those typically take a longer duration in terms of the sales cycle as compared to the savings product. But as I said, the focus for us and for Lillian's team is to ensure that we have the entire range of products addressing the diverse needs of customers across savings, health, wealth, and protection. Lillian, any specific comments on MCV margin?

So we see the margin is driven by a combination of, you know, sales and the products. And also what we are seeing the early stage of MCVs, we see the case size has actually doubled before the COVID. So that is actually have an impact on the overall margin as there's more volume that going to the savings products. But having said that, in terms of the number of policies, actually 50% of those MCV customer continue to take up and health and protection product as well. So we will see that as the year goes, I think we see more a more balanced product mix going forward.

Thank you. Conscious of time, we've got seven minutes, six questions on the phone, and I think if I ask you, there's probably some more on the floor. Let's go back to the floor in the first instance for a last sweep from the floor. Okay, having said that, then there's no hands up. Okay, good. On the phones, let's go to the next caller on the phone, please, moderator.

Thank you. Our next question comes from Farouk Hanif from J.P. Morgan. The line is now open. Please go ahead.

Hi. Thank you very much, and very nice to know that you're here, Anil. Just quickly on India, there have been some regulatory changes impacting the tax benefit of products, but also allowing life insurance to sell more products. Could you talk about your views on the regulatory environment there and how supportive it will be, and whether you would ever consider getting a larger share of that JV as part of strategic investments? And then lastly, quick one, you mentioned Macau taking some time to develop. Could it make any impact in 2023 sales to Hong Kong? What's the timeline? Thank you.

Sorry, I didn't get the second part of the question.

Macau impacting 2023.

The Macau? All right. Thank you. All right. Let me start with the India question. I'm going to ask Tomas to comment on the regulatory changes that he's witnessing. But more broadly on India, India clearly is an exciting market, right? Large population, very similar to China mainland, significant underpenetration. We have a strong joint venture partner in form of ICICI, and they have a good track record in terms of performing in that market. I did mention that I will be reviewing our strategy and our operational capabilities between now and over the next six months, and we will come back to you with a strategic roadmap in terms of how do we want to kind of, you know, grow our business forward in both across Asia as well as Africa. Somaz, you want to comment on the Indian regulations, specifically the tax-related changes impacting, I think it's the ILP product.

Yes, I'm happy to do that. If that was a question, I'm happy to explain that first. And if you have another question with regards to regulatory, I'm happy to follow up on that. Now, in the bill, it's currently only a bill, and the final implication will be only crystallized once the act is passed. Our understanding is that the policies sold until the 31st of March will be outside of the scope. And only policies sold from April 1st, 2023 will be covered. And if the total annual premium paid for not unit-linked policies exceeds 500,000 rupiah, then the difference between the total benefits received and premium paid would be subject to tax, as other income is. And also understanding is that the death benefit would not be considered in this computation. So in this context, as is closed in our results, the AP product mix for the nine months, the financial year 2023, were well diversified with 41% unit linked, about 20% protection, and 6.3% annuities. And there's been several inquiries post the budget announcement. We wish to bring to your attention, though, that the share of business of non-unit link policies with annual premium of above 500,000 rupiah is just approximately 6% of the total AP. So, on a practical level, this business is not expected to go away completely. Hence, the net impact on the business is expected to be trivial. And this is also in line with the announcements made by ICICI pool in this regard.

Thank you so much. And going to the Macau question, I think before I ask Lillian to provide the update on that one, We're firstly delighted to have the Macau license, and what it does is in many ways complements our Hong Kong business as well as our presence in South China across the nine cities in GBA. So we now have coverage across all the 11 cities in GBA, and we believe as the regulation evolves, GBA clearly is an opportunity that we would be keen to to address. So, as I said, we are looking forward to the launch of our business in Macau in quarter two. Leland, any other points?

Absolutely. I think we're now just doing the company registry, opening bank accounts. It will launch in quarter two, so we'll make an impact in 2023. One thing I want to highlight, obviously, Macau, we are there to serve the 680,000 people of Macau. And also, remember, the MCV traffic is about a million a month, so that's another opportunity for us.

I'm conscious that we're more than out of time, but we still have some on the phone. So if I can ask the next callers, you have literally 30 seconds to ask your question. And the answer is they could be two sentences. We will do everyone the honour of actually trying to get through them. Appreciate that there is another firm due to announce results any second now. So there's a lot going on. So we go to the call. Super quick, please.

Our next question comes from Dominic O'Mahony from BNP Paribas. Your line is now open. Please go ahead.

Thanks. I'll try to keep it quick. Just one question then. You give the embedded values by geography. I wonder if you could give us the pre-surface generation, even a rough indication of how much is coming from your bigger markets.

James, do you want to address that?

So we don't give a breakdown by geography, but what you can see is you can see our MVP from the bigger segments. That's in the discussion. So that will give you a flavor of where we're adding the most value. Thank you. Okay.

Next question, please.

Our next question comes from Ria Shah of Deutsche Bank. Your line is now open. Please go ahead.

Yes, thanks. Just one question. The cash remittances looked a bit low in 2022 as a whole and a bit low in the second half in particular. Was there anything particularly driving this?

Yes. So a quick answer, no. It's probably my quickest answer. We've got very robust levels of liquidity. We're at about 2.7 billion at the year end. We've always had a policy of only bringing up to the centre what we need. Clearly, we don't need any more.

Okay. Thank you, James. Very concise. Next question, please.

Our next question is from Nasib Ahmed from UBS. Your line is now open. Please go ahead.

Thanks. Quick one on Jackson. When do you intend to sell it down? And just on inorganic opportunities, where do you see them, if you can list them down quickly?

Thanks. Yes. So Jackson, we've already made a commitment to reduce our exposure to below 10%, which you know we did. We're not going to give comments on the sale of the balance because that would impact its price.

Do you want to address the inorganic as well?

Inorganic, we will always look at opportunities that match our IRRs, but we've been very focused that our capital allocation is primarily focused on organic growth and then filling in capabilities. Keith?

This is a good regime, this one. Right. Next question, please.

Our next question comes from Andrew Baker of Citi. Your line is now open. Please go ahead.

Great. Thanks. Too quick. So IFRS accounting change obviously coming through. Any thought on changing the EV reporting basis? And then just in China, can you help me understand the margin? So 70%. It's from banker, 43% margin. The rest, I assume, is from agency, 65% margin. How do you get to the 44% blended? Thanks.

James, I found 17 changes in EV gap.

So I think the first question was the – and I thought I'd escaped an EVTV question, but EVTV. So, look, the headline is, you know, I hear you. Our focus has been on IFRS 17 and making sure that we get IFRS 17 over the line. And clearly, as interest rates increase, the differences between EV and TV actually reduce.

And Lynn, you want to answer the agency mix question? Would you have the data for that in terms of how the margin squares up to 48%?

In terms of... If you don't have the data, can you come back to that?

Can we come back to you? That's a very specific question. If you don't have the data for that, we might want to come back to that. It's in the appendix. Andrew, we'll come back to you if you don't mind. Okay. Next question, please.

Great. Thank you, guys.

Thank you. Our final question is from Abid Hussain from Pamir Gordon. Abid, your line is now open. Please go ahead.

Oh, hi. Thanks. I'll try to be quick. I have a few questions. One on bank assurance. Is there any high-level color that you can give us on why the margins improved? Is there anything structural there happening on the banker side, or is it a one-off? Second two, the next two on capital. First one, capital sensitivities. The GWS capital is negatively geared to rising rates as it spreads. On rates, is it just simply the discounting effect or is there something else going on? Can you just touch upon that very quickly? And then just finally on capital, your capital ratio is in the 300% from a GWS basis. I know the floor is 150%, but what is the operational target range that you're hoping to run within? Thanks.

James, why don't you answer the capital question and then we can go to the bank assurance question to Lillian.

Okay, so there are two capital questions. The first one, I think, was GWS capital sensitivities and you asked about the discount. Sorry, you asked about interest rates. So, look, wherever you start, we've got a really strong balance sheet. That's 302. You take off any of the single impacts and it's still a very high number. And what I would draw your attention to is what's happened this year. So we started this year at 320%. We've had significant increases in interest rate, huge reductions in equity, volatility, credit spreads increasing, a real combination of stresses. And yet we ended the year equally strong at 302%. So that gives you a sense of how actively we manage this. The second question you asked me was about the capital range at 302 versus the 150 that is our floor in essence. We don't set an internal target ratio of the type that you've just described.

On the value that bank insurance bring, I think obviously bank insurance was actually, given the COVID restriction, was our bigger channel in 2022. But having said that, we also bring in a 15% growth in NBP in terms of value. What's good to know is our two large regional bank partnership bring in, for SCB, bring in about 30% of our value. bank assurance value, and UOB actually bring in 15%, 16% of our value into bank assurance.

And just to add to Lillian's point, if I look at the penetration rates of insurance into the customer base of our bank partners, there is still a lot of runway. Most of the bank partners, our exclusive bank partners, have single-digit penetration into the customer base. So there is a fair amount of runway for us to drive greater customer penetration as far as insurance products are concerned.

We have one final question. Someone had difficulty getting in, and we have indulged that person. So last question, please.

Our last question is from Andrew Queen of Autonomous. Andrew, your line is now open. Please go ahead.

Great, thanks. A couple of questions. Firstly, you talked about changing product mix in Hong Kong being having a disruptive effect in 23. Could you expand on that? And secondly, could you talk about any early thoughts on your CITIC joint venture? The past management team were keen to increase the share. Is that likely to continue as a desire? Is it a sort of middle distance issue or not?

Thanks for those questions, Andrew. So let me get to the specific JV. As I mentioned, China mainland is obviously a big focus area for us, and we are very committed to investing capital in China mainland to ensure that we grow the business further. We have an excellent partner. We have 50% of what is a growing business, as was demonstrated in 2022, and we look forward to working with our partner to see opportunities as to how we can grow our business even further on the mainland. On the change in product mix, as I said, the initial flow that we are getting from the MCV customers coming into Hong Kong is in the savings category. However, Lillian did emphasize the fact that 50% of the policies are savings and 50% of the policies are H&P. And typically, the H&P sales cycle is much longer than the savings product. It's also the kind of profile of customers, Andrew, that we are getting across the border initially. And as I said, it's still early days, and some of this is likely to evolve as we move forward. But our emphasis is to provide diversified product suite to address the diversified nature or the diversified needs, I should say, of our customer base in Hong Kong and elsewhere. Thank you.

Thank you, everyone. And obviously there's a scope for follow-up questions on Monday face-to-face with Andrew if we've rushed and misheard anything. For sure. I'll pass back to you, Anil, to close the call off.

Thank you, Patrick, and thank you, everyone. It's really an exciting time to be part of Prudential, and as I said, hopefully I've been able to convey that excitement in terms of both the growth opportunity but how Prudential is positioned to be able to address these opportunities across the Asian and the African markets. My focus right off the bat would be people and culture, our customers, and our operating rhythm. I'm sure we've been able to kind of answer most of your questions, but if you would like more texture, more color, we would love to engage with you further after this call. Thank you very much for being here. This is great because this is the first time in the last three years that we've done a face-to-face meeting. So I look forward to many of these, and have a good evening. Thank you.