Prudential has undergone a drastic transformation in the last three years. The group is now a pure-play Asian insurer with a small presence in Africa. It has primary listings in Hong Kong and London and a secondary listing in Singapore.
“Following the transformation of the business, we are focused primarily on Asia with a small presence in Africa. We are regulated out of Hong Kong and we are adopting the same conduct and capital rules as everyone in Asia,” says Nic Nicandrou, chief executive, Asia & Africa, Prudential, in a recent interview.
To be increasingly Asia-focused and Asia-based, Prudential’s group chief executive, CFO and chief risk officer will be based in Asia. The composition of the non-executive board, which includes Chua Sock Koong, former CEO of Singapore Telecommunications, and Jeanette Wong, former CFO at DBS Group Holdings, is shifting to have a much greater Asia presence. “The directors are either in Singapore, Hong Kong or where there is a significant presence in Asia and the majority of our meetings will be held in Asia,” Nicandrou says.
Last September, Prudential completed the demerger of Jackson Financial, its US business. Shareholders of Prudential were given one share of Jackson’s Class A common stock for every 40 Prudential ordinary shares they held. Prudential still holds 18.4% of Jackson, with plans to sell this stake down to below 10% eventually.
In 2019, shareholders of Prudential were given M&G shares as Prudential’s business in the UK was held through the latter. These divestments leave Prudential with 15 markets in Asia, where Singapore and Malaysia rank among its largest (see chart 1) and eight markets in Africa.
On October 4, 2021, Prudential raised US$2.37 billion ($3.24 billion) in Hong Kong with a new share issue. The proceeds have been used to redeem high coupon debt instruments of US$1.25 billion in December 2021 and US$1 billion in January 2022, with the remaining proceeds contributing to Prudential’s capital and liquidity.
As at Dec 31, 2021, Prudential’s net gearing ratio was 13% following the new issuance and the redemption of various debt instruments. According to its FY2021 results announcement, Prudential’s total leverage ratio is likely to be 21%, which is within its long-term target of 20%–25%.
Some 75% of the funds raised in Hong Kong were taken up by Asian-based investors and Asian-focused investors, which raised Asian investors to about 6% of shareholders from 5% previously. “We would like more Asian investors and we want to increase the percentage of our register owned by Asian or Asian-focused investors,” Nicandrou indicates.
As he sees it, it takes between one and two years to attract a sizeable group of investors and many Asian-focused investors prefer pure-play Asian stocks.
Prudential’s Hong Kong listing is a lot more liquid than its secondary listing in Singapore. However, Nicandrou points out that raising capital out of Singapore is unlikely. “There are no plans to raise further capital but we are encouraging our investors to register their shares in Hong Kong and Singapore if and when they can but it’s their decision where they hold their shares,” he says.
Of note is that Prudential shares bought and sold are fully fungible in London, Singapore and Hong Kong.
Rationale for Asian focus
Last year, an EY report says: “Life insurance penetration for Southeast Asia is low, at approximately 1.2% to 3.4% of GDP across the different countries. This presents a significant untapped potential for the industry to increase its impact and feature more prominently in the region’s growth story.”
Bain & Co believes that penetration rates in Asia, especially in India and China, are low. “Gross written premiums as a percentage of per capita GDP, which is one measure of insurance penetration, signals a significant amount of unmet demand in Asia Pacific’s developing markets. Penetration is less than 5% in India, Indonesia, mainland China and Malaysia, far below the rates in Hong Kong, Singapore and South Korea. Data from other developing markets shows that insurance purchases can increase dramatically as per capita GDP rises. Along with these promising demographic and macroeconomic trends, multinational insurers eager to expand in Asia Pacific can also benefit from deregulation, particularly the easing of restrictions on foreign ownership of local insurers in mainland China, India and other markets,” Bain observes.
For instance, Prudential has a JV partnership with Citic in China which contributed US$342 million to IFRS-adjusted operating profit in FY2021 ended Dec 31, 2021. In India, Prudential has a joint venture with ICICI Bank.
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The rationale behind demerging the UK and US businesses to focus its attention on Asia is simple: A large population with a minuscule percentage of its people insured and shallow safety nets, particularly in India and China. Insurers — and not just Prudential alone — yearn for the opportunity where an emerging middle class start buying insurance for health, children’s education, retirement and so on. In a presentation on the rationale for its de-merger, Prudential points out that its Asian business has access to a population of 3.6 billion, although its customer base is a fraction of that at 19 million.
“Penetration as a percentage of GDP in Asia is around 3% and in Singapore, it’s 8%. We have a bigger contribution per capita in gross written premiums. There is still quite a lot of under-protection,” Nicandrou says. In places like Singapore where the population has access to government health and retirement plans via the Central Provident Fund, retirement portfolios may not be where they need to be compared to the US and Europe.
In Africa, insurance penetration is likely to be only 1% of GDP and state-funded safety nets are almost non-existent. “That is what makes us relevant in these markets,” says Nicandrou.
Getting to 50 million
Nicandrou’s target for Prudential is to get to 50 million customers from 19 million currently. No time frame was mentioned but the geography includes Africa where Prudential plans to grow. “We have 19 million customers which goes to show the amount of runway ahead as we provide more protection, savings and investment solutions to the people in these 23 markets,” he says. He points out that Prudential sold 3.9 million policies in 2021, up 16% y-o-y.
As shown in chart 1, for regular premiums, Prudential has a top 3 position in a majority of the markets it has a presence in. Nicandrou appears confident in reaching his target. “We have a broad product set and we have one of the largest shop windows in terms of distribution, with 540,000 agents and access to 26,000 bancassurance networks in the region. We supplement that with our digital channel and we’re well placed and entirely focused on the opportunity in this market,” he says.
A few years ago, Prudential’s management identified about four new strategies to drive its products and used Singapore as a testbed. First, the company plans to promote its shield products, which became popular during Covid. “We innovated our product and pricing and we grew new businesses by 50%,” says Nicandrou about its shield products in Singapore. Second, Prudential has increased sales of products to high-net-worth individuals (HNWI). Prudential increased its Singapore market share of HNWI products from 8% to 14%.
For its third strategy, Prudential supplemented retirement products with unit-linked insurance plans or ULIP (see glossary on Page 10), which helped to double its unit-linked contracts. Fourth, Prudential increased its presence in group insurance and experienced a 20% growth in sales last year from two corporates. “For group insurance, our focus is the SMEs. There are over 70 million SMEs in Southeast Asia alone and they are responsible for 60% of GDP. We are talking about a lot of employees,” Nicandrou says. “In the last few years, we’ve gone from having none of that [SME] contribution to sales to contributing 7%,” he adds.
Although Prudential was increasing its use of insurance technology or insurtech, the Covid-19 pandemic accelerated the use of technology and the development of Pulse, an AI-powered health app.
During the various lockdowns, agents started e-meeting their customers over Zoom, Teams and the like. No surprise that 80% of agency sales and 50% of sales from bancassurance were done virtually.
Prudential has enabled remote selling across all its markets and products. Previously, regulatory requirements for a “wet signature” meant that products could only be sold when both customer and agent were physically present but this has been replaced by the e-signature with the agent virtually present.
In April 2020, Prudential introduced Pulse. Pulse has expanded into a one-stop shop offering 56 services where customers have access to telemedicine, health and nutrition advice, and where they can make claims.
Simple products such as hospitalisation, accident policies, and covers for single illnesses such as breast cancer are available on Pulse in nine markets. “We launched 46 bite-sized products in nine markets with average monthly premiums as low as US$1. In the first year, we sold about 109,000 policies. Although we’re not a lot in terms of premiums, we are now moving forward to put higher ticket-sized products on Pulse. For example, we are looking to onboard a shield product and a single-pay endowment product,” Nicandrou elaborates.
Pulse is now in 17 of Prudential’s 23 markets and has enjoyed 33 million downloads. Of these, 13 million have registered their names with the company, out of which about 9 million or 70% are new to the Prudential brand.
“As we engage with these customers, we will look to increase the case size. After a customer buys a small product, they may want to speak to an agent to fulfil greater needs. We’ve built tools on Pulse to convert users into leads for agents. This is in place in eight of our markets,” Nicandrou says.
In 2021, more than four million leads were passed on to agents and 48,000 agents completed at least a sale, translating into 11% of sales. More health services are being built on Pulse. In addition, wealth-type services will be available, and customers will have the ability to calculate their own wealth and investment needs on Pulse.
“We are looking to convert Pulse to being the main customer self-service engine for claims in 2H2021 with a further 39 new services. We want to put a lot of the claims processing online and make it simpler for a consumer to process a claim. This feature is already up and running in Indonesia where 85% of our claims are cashless,” Nicandrou says. Eventually, Pulse will store its customers’ policies. Customers will be able to get quotations of premiums on various policies through Pulse. All the correspondence between the company and the customer will be done through Pulse. Indonesia and Malaysia will have an Islamic-compliant version of Pulse.
Growth plus dividends
In 2020, before the demerger of Jackson, Prudential paid out US$1.257 billion in dividends or 16.1 US cents per share, translating into a payout ratio of around 50%. In FY2021, following the demerger of Jackson, the company paid out US$1.496 billion or 17.23 US cents per share, representing a payout ratio of 67% of its net profit from continuing operations.
“In 2017 [before the restructuring], we were a business that was growth-oriented in Asia but income-oriented in the UK. We had a combination of value and growth investors holding us. As we separate the components we’ve positioned Prudential as a growth stock. We have taken several steps through capital-raising and in expressing our dividend policy that allows us to retain more of our annual profits to invest them back in our business to grow them faster. Every dollar in a new contract written generates four times the value, so $1 generates $4 over the life of the contract. So we generate over 30% on the capital we deploy and our shareholders encourage us to invest as much as possible,” Nicandrou elaborates. In sum, dividend payouts may not be as generous as they were in the past.
“In determining the dividend increase, we have regard for growing our business organically and as the opportunity presents itself, inorganically,” he continues.
On the inorganic front, Prudential renewed its bancassurance partnership with United Overseas Bank for 15 years. The company also acquired two asset management businesses in Thailand, signed a new distribution partnership with Thai Military Bank, and invested in growing Pulse.
“If we go back 10 years, the amount we’ve invested in Asia is over US$10 billion. Of this, US$5 billion is the capital we need to write new business, e.g. paying commissions, servicing contracts and putting aside risk capital. The other US$5 billion is used for expanding distribution, acquiring new opportunities and growing greenfield opportunities. The next 10 years may require a bigger outlay than the US$10 billion that we invested in the past 10 years, so when we are thinking of dividends, it is with this in mind,” Nicandrou says.