Prudential plc (PUK) Earnings

Management highlights

- **Strategic Focus on Quality Growth:** Emphasis on accelerating the conversion of new business profit into cash, driving high Internal Rates of Return (IRR) and short payback periods. The multi-market, multichannel model is delivering consistent high-quality growth. - **Transformation & Modernization:** A $1 billion investment program in technology, distribution, health, and customer experience is nearing completion. AI adoption, specifically the 'PRUAction 1.0' module in Singapore, has improved agent productivity by over 13%. - **Agency Force Optimization:** Shift from mass recruitment to quality recruitment via programs like 'PRUVentures,' which yields recruits 5-6x more productive than organic hires. MDRT franchise remains #2 globally, with strong pipeline retention. - **Product Mix Adjustment:** In China, there was a significant shift toward Participating (PAR) products (76% in H1), causing temporary margin compression. The focus is pivoting back to Health & Protection (H&P) to optimize margins, targeting a normalized PAR mix of ~60% for the full year. - **Capital Discipline:** Strong capital generation with Gross Operating Free Surplus Generation (OFSG) up 15% and Net OFSG up 41%. Free surplus ratio stood at 209% (or 200% excluding AMC IPO proceeds). Over $7 billion returned to shareholders between 2024-2027. - **Regional Repositioning:** Hong Kong balanced to 50/50 domestic/Mainland visitor mix. India repositioned by gaining control of complementary life and health platforms. China undergoing transformation to conform to new expense regulations and improve product balance.

Guidance

- **2026 Financial Metrics:** Firmly committed to delivering double-digit growth across key financial metrics, including New Business Profit and Earnings Per Share (EPS). - **2027 Objectives:** Confident in achieving the 2027 target of $4.4 billion in Gross OFSG and maintaining a free surplus ratio in the 175%-200% range. - **China Outlook:** Expects to resume positive growth in the second half as regulatory impacts ease and competitors' activities decline from September onwards. Full-year NBP guidance is similar to FY2025 on a constant exchange rate basis. - **Hong Kong Outlook:** Expects double-digit growth for the full year, driven by strong domestic momentum, bancassurance performance, and sustained demand from Chinese Mainland visitors. - **Expense Guidelines:** Expect full-year restructuring costs to be just under GBP 100 million. Central costs remain flat. - **Margin Guidance:** Targeting a full-year margin in China of approximately 40% (down from 43% in FY2025 due to PAR mix shift), with expectations to normalize as H&P mix increases.

Segment performance

The company operates across multiple markets including Hong Kong, Chinese Mainland, ASEAN (Malaysia, Thailand, Singapore, Vietnam), India, and Africa. While specific absolute revenue contributions for each segment are not itemized in the transcript, the following performance highlights were reported: - **New Business Profit (NBP):** Grew by 8% year-on-year. The margin expanded by 2 percentage points to 40%. - **Asset Management:** Underlying profits grew by 20%. The business completed a successful IPO of its Indian operations, generating proceeds of approximately $0.3 billion from the free float requirement. - **ASEAN Markets:** New business profit grew by 13%, with Malaysia showing outstanding agency performance and Thailand having an exceptional first half. - **India & Africa:** Both businesses grew double-digit Annual Premium Equivalent (APE). - **Hong Kong:** Domestic business grew by 22%, contributing 50% of the segment's new business profit, balancing the mix with Chinese Mainland visitors.

Risks & headwinds

- **Regulatory Changes in China:** New expense alignment regulations and shifts in product mix (high PAR volume) have impacted margins and require ongoing adaptation. - **Tax Enforcement Uncertainty:** Potential tax enforcement actions regarding offshore insurance products for Chinese Mainland visitors, though management reports no lapse behavior changes and strong persistency (99% in HK). - **Market Volatility:** IFRS non-operating results were negatively impacted by lower discount rates in China and higher global interest rates, affecting mark-to-market values of bond holdings and present value of future profits. - **Agency Force Dynamics:** Transitioning from mass recruitment to quality-focused models may result in short-term declines in total active agent numbers, although productivity per active agent is increasing significantly.

Analyst Q&A

• Q: Kailesh Mistry asked about Hong Kong’s second-half base case, drivers of margin vs. volume, sustainability of lower new business strain, and whether India AMC IPO proceeds would be reinvested or returned. /

  A: Anil Wadhwani stated that Hong Kong’s domestic business grew 22% with a 7-point margin improvement, driven by quality and bancassurance. Demand from Chinese Mainland visitors remains structurally strong, supporting double-digit growth. Ben Bulmer noted that new business strain should be modeled at 11-12% of APE due to product mix shifts toward more capital-efficient PAR products. Regarding India, proceeds will partly fund the Bharti acquisition and platform investment, with residual proceeds added to free surplus and returned to shareholders via buybacks.

• Q: Andrew Crean sought clarification on whether the 2027 OFSG contribution aligns with 2026 new business growth, MDRT agent numbers, and sources of ROEV improvement. /

  A: Ben Bulmer explained that the 42% H1 OFSG increase reflects one-year lagging and book growth; 2027 contribution will grow with 2026 new business profit. Naveen Tahilyani reported that while total actives declined, the cohort near MDRT threshold maintained last year’s APE contribution, with initiatives like PRUVentures and AI tools driving productivity. ROEV improvement will come from capability investments, positive operating variances, and scale-driven operating leverage.

• Q: Nasib Ahmed asked what drives group double-digit NBP growth given flat China guidance, learnings from Malaysia, and the source of USD 626M short-term variance. /

  A: Anil Wadhwani highlighted growth from Hong Kong, resuming China growth in H2, and strong performances in Malaysia, Thailand, Singapore, and Vietnam. Naveen Tahilyani identified three Malaysia learnings: quality recruitment (PRUVentures), tailored H&P/affluent propositions, and active agent growth, which are being replicated in Indonesia and Philippines. Ben Bulmer attributed the variance to lower discount rates in China and higher global rates impacting bond holdings and H&P CSM, largely non-economic mark-to-market effects offset by positive CSM unlocking.

• Q: Michael Chang requested insights on China seasonality, Singapore margin recovery timing, and modeling OFSG post-2027. /

  A: Anil Wadhwani explained that Q1 is typically strongest in China; Q2 faced headwinds from PAR mix and regulations, but H2 growth shape will differ due to strong 2025 comparators easing in Sept. Singapore margins lagged due to co-payment rules but will recover as newer protection products launch. Ben Bulmer guided that post-2027, OFSG growth will be driven by strong in-force generation, expected transfers, and controlled central costs, with required capital growing early double-digits.

• Q: Farooq Hanif questioned the certainty of 2026 guidance, long-term vision for India, and IFRS 17/CVA items. /

  A: Anil Wadhwani reaffirmed firm commitment to 2026 double-digit guidance despite high comparators and regulatory transitions, with no change to outlook. Naveen Tahilyani outlined India’s strategy: controlling life/health platforms with Bharti/HCL partners to address unmet protection gaps, focusing on quality agency, affluent segments, and digital innovation over 5-10 years. Ben Bulmer noted IFRS 17 CSM growth is strong (+30% since inception), with net investment results normalizing as asset derisking in China and remittance effects stabilize.