Prudential plc (PRU) Earnings Call Transcript & Summary

Hello, everyone, and welcome to today's Prudential plc Capital Management Update Call. My name is Seb, and I'll be the operator for your call today. [Operator Instructions] I will now hand the floor to Patrick Bowes to begin the call. Please go ahead.

Thank you, Seb. Good morning, good afternoon, and welcome to our capital management update Q&A session. I am Patrick Bowes, Chief Investor Relations for Prudential plc. Together with me here today are our CEO, Anil Wadhwani; and Ben Bulmer, our CFO. I hope you've had a chance to review the RNS' slides and scripts that we published last night on our website. And we provided a brief trading update in the RNS, but we've yet to reach the end of the quarter, so we'll not be commenting any further. The RNS also confirmed that our half year results will be on the 28th of August. We -- I will now pass over to Anil and Ben to kick off with some opening remarks before opening up for questions. Thank you. Over to you, Anil.

Thank you, Patrick. Hello, everyone. I'm delighted to provide a capital management update today. As a result of our strong capital base, the progress that we've made on our strategic priorities as well as the recent clarification of the rating agency's treatment of IFRS 17 CSM, we will return $2 billion of capital to our shareholders through a buyback program over the next 2 years. This represents approximately 8% of our outstanding stock. The share buyback is consistent with our priorities for allocating capital. And with the current share price, we see this as a compelling opportunity to create value for our shareholders. We have importantly retained sufficient capital flexibility to further accelerate organic growth and enhance our capabilities. There is no change to our dividend policy and our expected annual dividend growth of 7% to 9% in 2024. Given our focus on quality growth in both value and cash and on account of the progress of the execution of our strategy, we remain confident in our full year 2024 new business growth and in achieving our 2027 financial and strategic objectives. We expect that the progress towards our 2027 financial objectives will increase the potential for further cash returns to our shareholders. Ben Bulmer, our Chief Financial Officer, will now summarize the key financial aspects of this capital management update. Ben?

Thanks, Anil, and hello, everyone. So look, when we introduced our new strategy in August last year, we set out our capital allocation philosophy. That philosophy remains unchanged. But there's a few developments that have subsequently clarified management's view that there's capital available for return to shareholders. Firstly, as Anil briefly referenced, credit rating agencies have updated their methodologies to reflect the implementation of IFRS 17. We have comfortable leverage headroom even after the $2 billion buyback, and our pro forma Moody's leverage ratio would be 15% as of year-end 2023. Secondly, we now introduce a free surplus ratio and provide additional guidance as to how we think about the deployment of free surplus in the context of our growth aspirations, leverage capacity as well as our capital and liquidity needs. As no doubt you will have seen, the group's free surplus stock, which is our preferred measure of distributable shareholder capital stood at 8.5 billion at the end of 2023. The free surplus ratio we've defined is set as group free surplus plus the EEV required capital of the life business divided by the EEV required capital of the life business. And at the end of 2023, our free surplus ratio was 242%. Based on our current risk profile and our business units applicable capital regimes, we will seek to operate between a range of 175% to 200%. If we project the free surplus ratio to be above that operating range over the medium term and taking into account opportunities to reinvest appropriate returns and allowing for market conditions, capital will be returned to shareholders. So the $2 billion buyback we've announced today is forecast to reduce the free surplus ratio from 242% at year-end 2023 to marginally above 200% on a pro forma basis, and that's taking into account both the buyback and the 2023 second interim dividend. Looking forward, we expect significant acceleration in annual gross free surplus generation from the end of 2025. This will increase our financial flexibility and the potential for further cash returns to shareholders. Back to you, Patrick, for the Q&A session.

Thank you, Ben. So now over to Seb. Please initiate the Q&A process. Thank you.

[Operator Instructions] And our first question comes from Kailesh Mistry from HSBC.

A couple of things. I know you've just announced this share buyback, but the predictable question is would you think about your sort of payout policy after the buyback is completed? Is it fair to say that you would think about it on a payout ratio similar to your nearest peer? Secondly, in terms of financial resources, you highlight a 15% debt leverage on a Moody's basis. What is the additional debt capacity you calculate to maintain the AA rating? And lastly, just on new business trends, you highlight the sales trends in the first quarter -- sorry, in the second quarter are similar to the first quarter. Is there any further color you can provide on business mix and momentum and how that may or may not differ between Greater China and ASEAN?

Thanks, Kailesh. Let me start with the third question first, and then I'm going to hand over to Ben to respond to your first two. So we did put out in the RNS that the quarter 2 trends are similar to the one that we experienced in quarter 1. We are not going to get into specific market details. We look forward to having a much more in-depth conversation on our first half performance in August. But just to come back to what we had said at the quarter 1 results announcement. Against a strong prior period comparator that reflected what we believe was a significant outperformance in 2023, those comparators and base effects will come into play when we discussed the first half 2024 results. But as I said, we are looking forward to having the in-depth conversation on Hong Kong, Mainland China as well as in ASEAN when we speak to you in the August time frame.

Thank you, Anil. Maybe I'll start with the payout ratio. Look, I think as you're rightly referencing, today's announcement is funded by stock. Our focus, as we've said before, in the near term is growth in NBP, and of course, accelerating operating free surplus generation. In terms of the free surplus ratio, as we think how we move across the objective period, I'm expecting to operate very much at the upper end of that ratio. And we've disclosed the profile of our gross operating free surplus generation ultimately progress towards those objectives means increased potential for further cash returns to shareholders. Whilst I expect free surplus generation to generate in the near term, of course, we need to be mindful of our $1 billion investment capability program, and of course, growth in regulatory capital as we layer on successive cohorts of profitable new business. In terms of today, as you know, our dividend policy is linked to growth in operating free surplus generation. That's not changed with today's announcement. And the underpin of 7% to 9% continues to apply in 2024. On your Moody's leverage point, so the 15% pro forma number I gave gives us headroom of slightly north of $2 billion.

The next question is from Edwin Liu of CLSA.

If I may, two questions from me. Firstly, I know this is a $2 billion buyback program. But I guess, if the share price does go up subsequently, would you still fully execute this $2 billion program? Or would it be sort of the threshold that once the share price is above that, probably the program would not be fully executed? That's my first question. Second question is we noted your operating range of 175% to 200%, which is a bit lower than your nearest peer. Could you share some of the consideration behind? And that's the second question from me, yes.

Thanks, Edwin, and appreciate your questions. So I think the answer to the first question, we strongly believe that the stock price makes it highly compelling for us to initiate the buyback program as soon as we possibly can. And we will be in the market quite quickly to take opportunity of where our share price is. And as you would expect, we will continue to monitor our share price. The point being that we are very focused in making commercial decisions that are both focused on returning cash to our shareholders, and at the same time, driving quality value business. But that is something that we will monitor as we believe our share price does not reflect our fair value, as well as takes into account the performance that we have delivered in 2023 as well as back that up with double-digit new business profit growth in the first quarter of this year on an ex economic basis. I'm going to stop there. I'm going to now turn to Ben to talk about your second question.

Thanks. Look, clearly, it wouldn't be right for me to comment on others. What I can say is that our operating range is obviously based on our risk profile and the applicable local capital regimes that we operate in. The range set out provides us capital to accelerate organic growth opportunities and provides a bit of additional resilience. In terms of our in-force book, if we step back, we're very much weighted towards health and protection with profits, style savings products and unit-linked style savings products. And these products, by their very nature, tend to have relatively low first order shareholder exposure to market risk.

Next question is from Laura Li at CGSI.

I have three questions. The first is about the leverage ratio. If there is future M&A, how high is Pru comfortable lifting its Moody's leverage ratio. Is [ not the way ] to target Moody's leverage ratio range? And second is about the required capital plus our operating -- operating free surplus ratio is based on the EEV required capital. What is the required capital and hence the target range surplus ratio deferred between the EEV and achieving this [ , say, in the future ] is adopted? And third question is also about the free surplus targets. Can you give us more opinion on whether PRU may have product needs that such it needs less capital to grow versus industrial average. Is the free surplus target based on your conservative projected future growth rate such as the current 2023 new business profit target? That's all.

Yes. Thanks for your questions. We may come back to you on your second question because you got cut out a little bit, so we may come back to you for your second question. But let me start with the future growth question. You're absolutely right, I think the buyback that we've announced today is an illustration of the financial discipline that we would like to operate under as well as importantly that we are retaining enough financial and capital strength to be able to deliver growth, if not surpass, the 15% to 20% range that we had spoken about when we announced our strategy late August. And we remain confident, as I said, that we have enough financial muscle to be able to pursue the growth opportunities that exist in our Asian and African markets. I'm going to turn to Ben to talk about the leverage ratio. And if you could just kind of once again just clarify the second question.

Yes. I think I caught that. It's Ben here. So yes, on the leverage ratio, so Moody's has set sort of a general default target leverage range of between 5% and 20% for companies targeting a AA rating. And within that, they look to count 50% of the net CSM. We've been waiting for some clarity on this. We've spent time with the rating agencies, all three of them, actually over the last month. As I referenced earlier to Kailesh's question, we're operating at about 15%. We've got just over north of $2 billion to the upper end of that headroom. I think your second question, and tell me if I got this wrong, was would required capital of the operating ratio change materially if we were to look at this through a TEV lens, I can't tell you exact numbers, but I think conceptually it would be very similar. You wouldn't see a change in required capital. And I wouldn't expect the free cash flows to materially change.

The next question comes from Andrew Crean from Autonomous.

I have three questions. Firstly, the mood music today is very different from the full year figures where there was much more talk of inorganic and bancassurance deals. Could you give us a sense, as you look forward over the next few years, to what level of money you're thinking about in terms of potential bancainsurance deals? Secondly, in terms of calculating the capital requirement for the FSG each year, could you tell us what ratio of required capital because clearly, the way you report it, it's on 100% required capital, which is too low. I mean are you -- should we build in sort of 175% or 200% of capital requirements in terms of the real FSG? And then thirdly, a point of clarification. When you say the second quarter new business is similar to the first quarter new business. Do you mean in dollars million terms or in terms of growth rate versus the prior year just as a definitional point.

Thanks, Andrew. Let me take your question third, which is relatively straightforward. So when we spoke about the trends, it was more from a year-on-year growth perspective and not from an absolute dollar perspective. In terms of your first question on bancassurance and inorganic, so let me kind of step back. When we did announce our strategy late August last year, we had been quite explicit that our primary focus would be organic growth, given the profitability and the returns that we continue to see in terms of deploying capital to drive our organic growth. We also mentioned that we were keen to build our capabilities so that we create a much more sustainable value-creating platform over the medium to long term. In terms of bank partnerships, so that we provide an additional level of clarification and color, we would like to pursue bank partnerships that complement the strength that we have in our agency force in some of our key markets. Now while doing this, you could expect that we will be contrasting and comparing this with returns that we would get if we were to return the same capital back to our shareholders. But I think providing a lens of diversification, then you simply have to look at our 2022 performance, which was largely bancassurance-led versus 2023. When the borders opened up, it was largely agency-led. And in terms of the size, Andrew, these are not massive Pan-Asian deals. These will be typically in country, much smaller sizes, but something that I believe will provide us a greater level of diversification as we look at expanding our distribution in some of our key ASEAN markets in specific. But I'm going to stop there and turn to Ben to answer the second question.

So you're right. Our reported basis has 100% of prescribed capital requirements that reflect the regulations in each jurisdiction and I don't think we're unique in that. Of course, for our larger balance sheet, this can be a sort of [ one in 200% ] sort of level. But what we're saying today is we're electing to hold distributable capital in excess of this at 175%. Now dipping below that momentarily doesn't necessarily stifle growth, but I'd likely look to take management actions. So I think as we think about cash distribution going forward, yes, absolutely. Keep in mind the 175% level that we've set out today.

Next question is from Thomas Wang at Goldman Sachs.

A couple of questions. Firstly, you mentioned on the slide, the operating free surplus generation target $4.4 billion. With this buyback, do you feel the need to adjust it because, I mean, rough calculation, that's going to remove $100-plus million or so from 2027 free surplus generation. So just want to quickly check do you feel the need to make more change to that? And secondly, on this excess capital of 75% to 100% target above the required capital, do you have any sort of comfort range in terms of how much of that is that versus equity within the excess capital?

Yes, sure.

If I can kick off on, Thomas, your first question. No, absolutely no change to our OFSG objectives. Across the funding that's earmarked for today's announcement is set in topco in our holdco cash that, given its geography, doesn't impact gross operating free surplus generation quantums, but kind of comes through in the net number. So no change to that. I think I caught half of your second question. If you wouldn't mind just repeating it, sorry.

No problem. Just excess capital on top of the required -- excess free surplus on top of the required capital. Do you have any -- currently, I think, it's $8-plus billion. Within that [ $3.5 billion or so is debt ]. Do you have any sort of comfort range of how much of that will be debt financing going forward?

Well, I think what -- and given the certainty we recently got around leverage ratios, what we're saying is we will likely use that flexibility to pursue select partnership opportunities. I think Anil has touched on some of that. I'm certainly happy doing that. In addition to that, of course, because we've set out a range, there are elements of capital available in that free surplus on the balance sheet that we can use to accelerate organic growth. And we've never been shy of saying that it's our aim, if we can, to exceed the growth targets that we set for ourselves in 2027.

The next question is from Andrew Sinclair at Bank of America.