Prudential starting to 'turn the corner' on China pension business
Prudential is bullish about investment grade bonds, Japan equities and long-term assets such as private equity and infrastructure amid expectations of rate cuts in the US.
The Hong Kong-based life insurer is also "cautiously optimistic" about its insurance and pension business in China, which it expects will hit its annual 5% growth target.
"We are encouraged by China reaching its growth targets, and we have an eye on the US and the inflation environment,” said Prudential’s chief financial officer Ben Bulmer.
Given that the insurer runs global multi-asset strategies across its investment funds, Bulmer said Prudential remains bullish on investment grade credit, Japanese equities, private equity, and infrastructure.
“We set those strategies to match the long-term nature of liabilities and guarantees,” he said at Prudential’s half-year results press conference on August 28.
Prudential uses its asset manager Eastspring, to manage its investments.
Prudential’s total assets stood at $174.7 billion as of June 30, up from $174 billion at the end of 2023.
Mainland China is one of Prudential’s most important insurance markets, having previously contributed the second-largest annual premium equivalent (APE) sales volume after Hong Kong.
In the first half of 2024, Singapore overtook mainland China, with APE sales growing by 17% year-on-year to $450 million, while sales in mainland China shrank by 18% to $324 million compared to the same period last year.
Prudential operates a joint venture, CITIC-Prudential Life Insurance Company, in mainland China.
A slowdown in its private pension business in mainland China contributed to the sluggish sales performance, which creates and sells personal pension products.
The first half saw liquidations of some of CITIC-Prudential’s retirement-target funds -- a type of private pension product -- due to a lack of investors and not reaching a required asset threshold.
PRODUCT SHIFT
China launched its private pension scheme in 2022, aimed at encouraging participation from foreign insurance companies and asset managers.
However, weak investor interest, a bearish stock market and sluggish domestic consumption have slowed uptake.
Private pension fund assets totalled Rmb68 billion in the first quarter, representing a 37.8% fall from its Rmb109 billion peak in 2021, as investors pivoted toward lower-risk products amid the stock market downturn, Morningstar data showed.
China's falling interest rate environment -- currently around 3% -- has also prompted insurers to shift away from short-term guaranteed products and offer longer-duration ones with higher returns over time.
Customers have to adapt to a new market reality where they must forgo short-term liquidity to gain the level of returns they used to enjoy over a longer period.
Prudential has started offering more long-term savings, participating products in health and protection as well as retirement products.
Noting that CITIC-Prudential was one of the first insurers in China to reprice and reposition its products, Chief Executive Officer Anil Wadhwani said the move has started to yield “rich dividends”.
“We believe that we've started to turn the corner in China as we enter the second half of the year, and we remain cautiously optimistic about our growth prospects based on the demand drivers and based on our position in the China market,” Wadhwani said in the press conference.
In December 2023, the insurer announced an additional Rmb1.25 billion ($176 million) cash injection into its 50-50 joint venture CITIC-Prudential.
“I strongly believe that the retirement opportunity in China is quite significant,” Wadhwani said, referring to the country’s increasingly aging population.
NEW WAY OF THINKING
Still, CFO Bulmer noted that educating customers to look at long-term gains and products will play a crucial part in making the pensions business successful.
“There's a broader market trend in China where the industry had been offering fairly short-term products with relatively high guarantees for many years,” he noted.
Because the industry has seen rates fall, insurers are not only repricing downwards but also changing the kind of products being sold, moving away a shorter-term guaranteed product to a much longer-term product where the insurer can increase the return to policyholders over time, he said.
“It's that kind of structural change in the product set that is creating less short-term momentum in sales,” he told AsianInvestor.
“Consumers are trying to get used to a new offering that wasn't there before. Are they really willing to forego liquidity to invest in these much longer-term products? So, there's the re-education piece within the market,” he added.
WELL POSITIONED
About 28% of the Chinese population will be over 60 years old by 2040, due to longer life expectancy and declining fertility rates, according to the World Health Organization.
“That just underpins the opportunity that China presents in terms of retirement,” Wadhwani said.
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“We are also pleased with the fact that the Chinese government is increasingly encouraging participation from the private sector to participate in pensions. Specifically, we see opportunities for further reforms in the pillar three segment.”
“Given our market position - our penetration into 100 Chinese cities - our mix of channels between agency and bancassurance, we are very well positioned to be able to address the retirement opportunity in China.”