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. Harvey McGrath, Prudential plc, Chairman . Mark Tucker, Prudential plc, Group Chief Executive . Tidjane Thiam, Prudential plc, CFO . Clark Manning, Prudential plc, President & CEO, Jackson National Life Insurance Company . Barry Stowe, Prudential plc, Chief Executive, Prudential Corporation Asia . Andrew Crean, Citigroup, Analyst . Andy Hughes, JPMorgan, Analyst . Greig Paterson, Keefe Bruyette & Woods, Analyst . Raghu Hariharan, Fox-Pitt Kelton Cochran Caronia Waller, Analyst . James Pearce, Cazenove Group, Analyst . Jon Hocking, Morgan Stanley, Analyst . Bruno Paulson, Sanford C. Bernstein & Company Inc., Analyst . Tony Silverman, Standard & Poor's Equity Research, Analyst
PUK reported full-year 2008 results.
S1. CEO Step-down (H.M.) 1. Update: 1. On 03/19/09, announced that Mark Tucker will be stepping down as Group CEO effective 09/30/09; will be succeeded by Tidjane Thiam. 2. During Mark Tucker's tenure as CEO, CAGR in EEV has been 21%; IFRS basis, 14%. 1. Co. now derives more than 65% of earnings internationally. 3. Effective 10/01/09, Tidjane Thiam will become Group CEO.
S2. 2008 Overview (M.T.) 1. Overview: 1. Strategy demonstrating sustainability. 2. Capital position, robust and resilient. 2. Financials: 1. Strong performance in absolute and relative terms in exceptionally challenging circumstances, in particular, in 2H08. 2. New business profit (NBP), on an embedded value basis, ahead 8%. 3. Margins up from 42% to 43%. 4. Maintained focus on pursuing profitable growth not volume targets. 5. EEV operating profit grew to almost GBP3b, including some additional gains in in-force business. 1. Past assumption basis, holding up well even in these dislocated markets. 6. Proactive management of in-force book, particularly in times of market downturn, is as important as generating new business. 7. Shareholders' funds increased slightly. 1. Operating, on an embedded value, remained 15%. 8. IFRS operating profit up 12%. 3. Capital & Cash: 1. Estimated IGD surplus, GBP1.7b. 1. Will increase GBP800m or so on completion of transfer of agency back-book business in Taiwan. 2. Expects, by sometime in June, completion of this transfer will give headline IGD of GBP2.5b. 3. Solvency ratio, around 240%. 2. Through focused management actions, sensitivities to further falls in equity markets, interest rates are low and don't have a material impact. 1. Hedging has been effective. 3. Has ability to generate significant amounts of capital. 4. Successfully hit target of being operating cash flow positive at holding co. level. 5. Increased final dividend by 5%. 1. Full-year dividend up by 5%; covered in line with dividend policy 2.2 times by IFRS operating profit after tax. 4. Actions to Improve Capital Position: 1. 2008 events put balance sheets and capital positions of all insurance companies under close scrutiny. 2. Prudential into the period in relatively defensive position. 1. Maintained a rigorous set of operating principles throughout. 3. Over past few years, believes Co. made a series of clear-sighted decisions and proactively moved to improve capital position. 4. UK: 1. In 2007, after strategic market review, exited high capital strain and uneconomic product lines. 1. Put into place major and significant cost savings initiatives. 2. Over years, continued Co.'s prudent approach to pricing and credit reserves. 5. US: 1. Stood back from competitive and uneconomic pricing in VA market in early part of 2008. 1. Long-established hedging program has been highly effective in these turbulent markets. 2. Taken series of broader based initiatives that significantly improved capital position. 3. In mid-year, after an exhaustive review, determined that in order to maintain strong and robust life fund through economic cycle, it would not be in best long-term interest of policyholders or shareholders that Co. attributes the inherent of the state. 4. Identified further and effective ways to generate more IGD capital. 1. Obtained FSA agreement to recognize a small element of shareholders' economic interest in PAC With-Profits Fund. 5. Decisive action on Taiwan will significantly improve capital position and free surplus, and also reduce long-term risk to shareholders. 1. It also reduced shareholder equity exposure in Asia. 6. Reviewed AIG assets in Asia and their capacity to create material incremental shareholder value above organic opportunities. 1. After careful consideration, decided not to proceed with an offer to any of these assets. 2. Financial discipline in Co.'s view of value in pace did not meet the criteria. 7. All aforementioned decisions and actions taken together significantly improved capital position and risk profile.
S3. 2008 Financial Review (T.T.) 1. Group Highlights: 1. Strong operating performance in terms of: 1. EEV. 2. IFRS. 3. Cash generation. 2. Managed capital and risks in a prudent and proactive manner, not hesitating when necessary to take decisive actions, for example in Taiwan. 3. Going forward, focused on preserving capital and cash in 2009. 4. EEV operating profit up 17%. 5. IFRS operating profit up 12%. 6. Holding co. cash flow turned from negative GBP82m in 2007 to positive GBP54m in 2008. 2. EEV: 1. 23% in in-force profit to more than GBP1.6b. 1. In-force profit is a key driver of cash flow and free surplus generation. 2. Largest component, unwind, up to GBP1.2b, up 5% over 2007. 1. Driven primarily by Asia, which increased profits by 28% to GBP434m. 3. Operating assumption changes, positive GBP118m. 1. Benefited from number of assumption changes in Asia. 4. GBP118m reflects benefits of portfolio rebalancing in UK. 5. Other items, GBP153m. 2. NBP up 8% vs. 5% increase in APE sales. 1. Group margin up from 42% to 43%. 2. Asia: 1. NBP up 15% to GBP741m, driven by increase in volume and margin. 2. Margin up from 50% to 54%. 3. Jackson: 1. NBP up 3%, resulting from 7% increase in volumes, offset by shift in product mix from higher-margin variable annuities to lower-margin fixed annuities. 2. Slight decline in margin from 42% to 41%. 4. UK: 1. NBP down 1%, due to higher sales of well-performing with-profit products, offset by decline in annuity margins, where Co. had to make higher allowance for credit risk. 2. Margin fell slightly from 30% to 29%. 3. Shareholder's funds increased 2% to just under GBP15b. 1. Positive factors: 1. Strong operating performance at GBP2.961b. 2. Benefit of mark-to-market of own debt of GBP656m. 3. Positive tax changes and other items of GBP720m, including tax credit on negative short-term fluctuations. 4. Currency gains, GBP2.010b. 2. Negative factors: 1. Impact of market movements reflected in negative short-term fluctuations of GBP5.127b. 2. Changes in economic assumptions of GBP581m. 3. Dividend net of scrip of GBP283m. 3. Short-term fluctuations: 1. GBP2.4b for UK; GBP2.1b relates to with-profits fund. 2. GBP1.3b for US. 3. GBP1.1b for Asia. 4. Increased in-force profit by 23%. 5. NBP up 8%. 6. Maintained stable shareholder's funds in exceptionally challenging environment. 3. IFRS Profit: 1. Profits up 12% to GBP1.347b. 1. Asia Life, GBP132m. 2. Jackson, small decline of GBP38m. 3. UK, slight increase of GBP21m. 4. Asia asset management is parent to decline of GBP20m, mostly as a consequence of market volatility. 5. M&G grew profits by GBP32m. 2. Asia Life: 1. Had an increased focus on IFRS going forward. 2. For a number of countries, particularly in India as business matures, reviewed treatment of deferred acquisition costs. 1. This led to positive movement of GBP66m in DAC and other reserving. 3. Underlying growth in profit was GBP49m, as business continues to grow and develop. 4. FX movements and other items gave GBP17m uplift in operating profit. 5. IFRS operating profit increased 70% to GBP321m, bringing close Co.'s growth trajectories in Asia of EEV and IFRS operating profits. 6. Earnings source: 1. Insurance income, made from underwriting risks and managing claims. 2. Fee income, where Co. receives a fee from managing assets. 3. Spread income, where Co. makes difference between earned rate and credited rate. 7. Almost 75% of profits derived from insurance margin, showing value of (indiscernible) sales alongside unit-linked business and successful development of health business. 1. Those earnings are less sensitive to market movements and increase persistency of portfolio. 3. Jackson Life: 1. Operating profits down 9% vs. 38.5% decrease in S&P. 2. This movement nets out losses from declining investment spread of GBP26m, offset by: 1. Hedging gains of GBP57m. 2. FX movements of GBP38m. 3. Other items of GBP34m. 3. Operating profit up to GBP547m. 4. After allowing for acceleration in debt amortization, total IFRS profits fell to GBP406m. 4. UK IFRS profits up 12%. 1. At 4Q08, indicated about increase Co. decided to make to credit reserves during 2008. 2. Increased credit reserve impacted profit negatively by GBP413m, as Co. strengthened IFRS assumption from 20 BP to 55 BP. 1. 80 BP related to Pillar 1, which is prudent reserving basis. 2. For IFRS reporting, excessive prudence is not appropriate. 3. Historically, Co.'s policy has been to set IFRS default assumptions around halfway between expected default levels and it is 15 BP for Co. 4. Pillar 1 assumption is 80 BP. 5. It is an avg. of 47.5 BP; set it at 55 BP. 6. Been even more conservative than historically. 3. Portfolio rebalancing: 1. Would look to take advantage of opportunities created by current asset dislocation. 2. Increase in spreads observed is only partially linked to increase in default risk. 3. Rebalanced credit portfolio, particularly in Shareholder Annuity Fund. 4. Came into 2008 significantly overweight gilts, with avg. rating in fund of AA against benchmark of A. 5. After rebalancing, fund now has avg. rating of A+, remaining ahead of benchmark. 6. GBP390m net benefit, due to change in yields due to this rebalancing after allowing for credit risk. 4. GI commissions, which Co. receives following sale of GI business in 2002, …