Full year results
Prudential PLC
02 March 2005
PART 1
Embargo: 07:00 hrs Wednesday 2 March 2005
PRUDENTIAL PLC FULL-YEAR 2004 RESULTS
Strong delivery across all of our businesses
• Record new business achieved profits of £688 million, up 23 per cent on
2003
• Strong growth in achieved profit basis operating profit, up 39 per cent on
2003 to £1.12 billion*
• Modified statutory basis profit of £603 million, up 49 per cent on 2003*
• New business achieved profit margin of 37 per cent (2003: 38%)
• Shareholders funds on an achieved profits basis of £8.6 billion
• Record insurance APE sales of £1.85 billion, up 26 per cent on 2003
• Record funds under management of £187 billion, up £22 billion on 2003
• Full-year dividend per share up 3 per cent to 15.84 pence (2003:15.38
pence 1 )
*Operating profit on continuing operations before goodwill, exceptional items
and short-term fluctuations in investment returns.
All figures throughout are on a constant exchange rate basis, unless otherwise
stated.
Commenting on the results, Jonathan Bloomer, Prudential's Group Chief Executive,
said:
'Prudential has built strong positions in three of the most attractive savings
markets in the world. In 2004, each of our three regional insurance businesses
delivered double-digit growth in sales and profits. As a result, we registered
record Group insurance APE sales and a 23 per cent increase in new business
achieved profits.
1 As adjusted, see note 9
The UK market is starting to recover after three years of decline and, as the
rise of 40 per cent in new business achieved profits shows, it is clear that the
changes we have made to the business are enabling us to take advantage of this
upturn.
In Asia, new business achieved profits rose 19 per cent and margins remain
attractive. We see excellent growth prospects throughout the region, especially
in China and India.
In the US, we continue to outperform the market, and in 2004 our business there
returned $120 million to the Group. We expect this to be $150 million in 2005,
and to rise thereafter.
M&G also delivered a very strong performance in 2004, with underlying profits of
£110 million, up 57 per cent on 2003.
We see excellent growth opportunities across the Group.
Our markets and opportunities
The United Kingdom
The UK is the third largest life insurance market in the world, but between 2001
and 2003 it shrank by nearly 6 per cent per annum. During this period, our UK
insurance operation focused on increasing its efficiency, developing its product
range and broadening its distribution base, while maintaining its position as
one of the financially strongest companies in the sector.
It has successfully evolved from a direct-sales operation selling with-profits
products into a company that sells mainly shareholder-backed products through
IFAs, direct to customers, business to business and through partnership
agreements with other companies. In 2004, it achieved strong new business
performance across all these channels, increasing its share of the medium to
long-term savings market to 8.9 per cent (source data: ABI), while maintaining
overall margins, resulting in a 40 per cent increase in new business achieved
profits year on year. Going forward, we expect to see some modest reduction in
the overall UK margin as our new shareholder-backed business builds scale.
Over the next few years, we see new opportunities arising from the move to a
multi-tie distribution model, which we expect to favour financially strong
players like Prudential with a powerful brand and attractive product range.
Prudential UK has made good progress with the new multi-tie networks, winning
places on many of the panels announced to date, and expects these agreements to
begin to have an effect on our performance in 2005, making an increasing
contribution thereafter.
The Rights Issue, announced in October 2004, will allow us to reinvest in the
UK, in order to take advantage of the developments in both our business and the
marketplace. The solid performance of the with-profits fund, which delivered a
return of 13.4 per cent in 2004, has enabled Prudential UK to maintain annual
bonuses and increase policy values for nearly all of its 5.5 million
with-profits customers. We believe the strength and performance of the fund
combined with the beginnings of a recovery in the UK market will benefit
Prudential in 2005.
Prudential UK expects sales this year to grow by about 10 per cent from the base
established in 2004. This compares with the industry expectation for UK market
growth of around five per cent for 2005. It is determined, however, that it will
not grow volume at the expense of value, and has set itself a blended target
internal rate of return on this new business of 14 per cent by 2007, compared
with the 12 per cent it achieved in 2004.
The United States
The US is the largest long-term savings market in the world, with considerable
opportunities for growth. Despite uncertainty in equity and capital markets over
the last few years, Jackson National Life's (JNL) ability to respond quickly to
changes in both consumer demand and the economic climate, enabled it to continue
to grow profitably during this period, and in 2004 it increased new business
achieved profits by 18 per cent, to £156 million.
The business continues to fund its own growth from internally-generated cash,
and in 2004 it also contributed $120 million to the group. This is expected to
increase to $150 million in 2005.
JNL's strategy is to concentrate on organic growth within profitable market
segments, but to use small self-financed acquisitions, such as that of Life
Insurance Company of Georgia, announced in November 2004, to build scale and
reduce unit costs.
JNL is an industry leader in distributing products, and has repeatedly shown
that it can react quickly to market changes and establish strong positions in
new products and new channels. In 2004, for example, nearly 90 per cent of new
sales came from products developed in the last two years. Its Perspective II
variable annuity contract was the best selling contract in the US market last
year (source: VARDS).
In 2005, we expect the US market to grow at about 4 per cent and Jackson
National Life to grow sales at around twice this rate, while keeping its costs
down and delivering above market returns.
Asia
The Asian economies' consistently high growth rates and favourable demographics,
together with the trend towards allowing greater access and ownership to foreign
financial services players, make these markets very attractive for selling
medium to long-term savings and protection products.
Against this backdrop, Prudential has established a strong track record of
success. In the past decade we have expanded across 12 countries and delivered
APE compound growth of 26 per cent per year, while maintaining margins above 50
per cent. In 2004, new business achieved profits rose 19 per cent.
Prudential Corporation Asia is Europe's leading life insurer in Asia in terms of
market coverage and number of top five market positions. We have also
established a complementary regional funds management business in seven markets
and are in the process of setting up a fund management operation in Vietnam.
Our life operations in Asia put in another good performance last year. Following
the restructuring in 2003, the Japanese business has made some progress
establishing new distribution channels, but it will take some time to become
large enough to be a positive contributor to the overall result for the region.
Elsewhere, growth prospects are very good, particularly in India and China, and
the business is already well placed to take advantage of these.
In India, our joint venture with ICICI delivered APE sales growth of 127 per
cent and continues to be the leading private sector player. In 2004, the
government announced its intention to increase the cap on foreign ownership from
26% to 49%. While Prudential remains interested in increasing its stake in the
joint venture, the relevant legislation has not yet been put before the Indian
Parliament.
In China, our joint venture with CITIC is one of the country's leading foreign
players and new business APE growth was 70 per cent last year. We already
operate in three cities and our fourth operation, in Shanghai, will launch in
the second quarter of 2005. We have recently received licences for two further
cities, Dongguan and Foshan, and a licence to write Group Life insurance
business. We expect to continue to develop rapidly as geographic licensing
restrictions in China ease further. We already hold licences for more cities
than any other European life insurer.
We are confident of our ability to grow strongly and profitably in Asia: the
opportunities in our newer markets, coupled with the strength of our larger
operations, should enable us to accelerate our level of sales growth in 2005.
Our Asian business remains on track to become cash positive from 2006.
M&G
M&G is Prudential's UK and European fund management operation, providing high
quality investment management services for Prudential's customers. M&G is also a
leading UK manager of retail investment funds and institutional fixed income and
pooled life and pensions funds.
M&G enjoyed a successful 2004, with external funds under management rising by 19
per cent during the year to £28.7 billion, due to a combination of net fund
inflows from both retail and institutional clients and market gains on existing
funds. M&G has a total of £126 billion in funds under management, up 14 per cent
on 2003.
In recent years, M&G has been developing profitable new income streams while
keeping a tight control over costs. This is a powerful combination, which
resulted in a strong performance in 2004, with underlying profits of £110
million, up 57 per cent on 2003.
We expect M&G to continue to perform strongly in 2005.
Egg
Egg has closed its loss-making French operation and has recently put its Funds
Direct business on the market. It is now firmly focused on its profitable core
UK business, where it achieved underlying profits of £74 million in 2004.
This was a good performance from Egg's UK business, especially given the
increased competition and rising interest rates that have affected the credit
card and personal loan markets. Egg's effective cost management and good credit
quality also contributed to the solid results from its UK operation. At the same
time, it has increased its provision levels to reflect the change in its product
mix following growth in its unsecured lending portfolio, the stage in the life
cycle of its card and loan books and the increasing proportion of personal loans
business.
Looking ahead, Egg will continue to develop its UK operation, building its
unsecured lending business, while expanding its product range to increase
cross-sales to existing customers.
We expect Egg to finance its own growth without requiring capital support from
the group.
Outlook
Prudential has built strong positions in three of the most attractive savings
markets in the world. Each of the businesses is performing well, and is
positioned to take advantage of the opportunities in its respective market. We
are on track to deliver sustainable, profitable growth and to achieve our target
returns on capital in 2005 and beyond.
Dividend
The Board has decided to recommend to shareholders a final dividend for the year
of 10.65 pence per share, which together with the restated interim dividend of
5.19 pence makes a total amount of 15.84 pence. This represents growth of three
per cent on the 2003 dividend of 15.38 pence, after adjusting for the bonus
element of the rights issue. The 2004 dividend is covered 1.2 times by post-tax
modified statutory basis profit for the year after minority interests. We intend
to maintain our current dividend policy, with the level of dividend growth being
determined after considering the opportunities to invest in those areas of our
business offering attractive growth prospects, our financial flexibility and the
development of our statutory profits over the medium to long-term.'
-ENDS-
Enquiries to:
Rebecca Burrows, Group Communications Director 020 7548 3537
Media Investors/Analysts
Clare Staley 020 7548 3719 Mike Kempster 020 7548 3823
Joanne Davidson 020 7548 3708 Marina Lee-Steere 020 7548 3511
1. There will be a conference call today for wire services at 7.45am hosted by
Jonathan Bloomer, Group Chief Executive and Philip Broadley, Group Finance
Director. Dial in telephone number: +44 (0)20 7162 9962. Passcode: 646915
2. A presentation to analysts will take place at 9:30am at Governor's House,
Laurence Pountney Hill, London, EC4R 0HH. A webcast of the presentation and
the presentation slides will be available on the group's website,
www.prudential.co.uk.
3. A press conference will take place at 11:45am at Governor's House, Laurence
Pountney Hill, London, EC4R 0HH. If journalists wish to attend, please call
the Press Office in advance on 020 7548 3712.
4. There will be a conference call for investors and analysts at 2:30pm hosted
by Jonathan Bloomer, Group Chief Executive, Philip Broadley, Group Finance
Director and Mark Wood, CEO UK and Europe. Dial in telephone number: +44 (0)
20 7162 0180, US callers: 1 334 420 4951. Callers to quote 'Prudential
results' for access to the call.
A recording of this call will be available for replay for one week by
dialling:
UK: 020 7031 4064, US: 1 954 334 0342, Passcode 645883
5. High resolution photographs are available to the media free of charge at
www.newscast.co.uk (+44 (0) 207 608 1000).
6. An interview with Jonathan Bloomer (in video/audio/text) will be available on
www.cantos.com and www.prudential.co.uk from 7.00am on 2 March 2005.
7. Annual premium equivalent (APE) sales comprise regular premium sales plus
one-tenth of single premium insurance sales.
8. New business achieved profits represent the present value of the future cash
flows we expect to receive from new business written in the year, less the
costs of acquiring that new business and the cost of holding the capital
required to back it.
9. In order to compare the pre-rights issue dividend with the 2004 dividend, it
is necessary to recalculate the 2003 dividend to take account of the bonus
element in the rights issue, i.e. the value to shareholders of the
difference between the market price and the rights issue price. Full details
of the calculations can be found in the Financial Review.
10. Total number of Prudential plc shares in issue as at 10 February 2005 was
2,375,393,020.
11. Financial Calendar:
2005
Ex-dividend date Wednesday 16 March 2005
Record date Friday 18 March 2005
Annual Report issued Friday 8 April 2005
First quarter New Business Figures Wednesday 20 April 2005
Annual General Meeting Thursday 5 May 2005
Payment of 2004 final dividend Wednesday 25 May 2005
2005 Interim Results/Second quarter New Business Figures Wednesday 27 July 2005
Ex-dividend date Wednesday 17 August 2005
Record date Friday 19 August 2005
Payment of interim dividend Friday 28 October 2005
12. In addition to the preliminary financial statements provided with this press
release additional financial schedules are available on the group's website
at www.prudential.co.uk
*Prudential plc, a company incorporated and with its principal place of business
in the United Kingdom, and its affiliated companies constitute one of the
world's leading financial services groups. It provides insurance and financial
services directly and through its subsidiaries and affiliates throughout the
world. It has been in existence for over 150 years and has £187 billion in
assets under management, as at 31 December 2004. Prudential plc is not
affiliated in any manner with Prudential Financial, Inc, a company whose
principal place of business is in the United States of America.
Forward-Looking Statements
This statement may contain certain 'forward-looking statements' with respect to
certain of Prudential's plans and its current goals and expectations relating to
its future financial condition, performance, results, strategy and objectives.
Statements containing the words 'believes', 'intends', 'expects', 'plans',
'seeks' and 'anticipates', and words of similar meaning, are forward-looking. By
their nature, all forward-looking statements involve risk and uncertainty
because they relate to future events and circumstances which are beyond
Prudential's control including among other things, UK domestic and global
economic and business conditions, market related risks such as fluctuations in
interest rates and exchange rates, and the performance of financial markets
generally; the policies and actions of regulatory authorities, the impact of
competition, inflation, and deflation; experience in particular with regard to
mortality and morbidity trends, lapse rates and policy renewal rates; the
timing, impact and other uncertainties of future acquisitions or combinations
within relevant industries; and the impact of changes in capital, solvency or
accounting standards, and tax and other legislation and regulations in the
jurisdictions in which Prudential and its affiliates operate. This may for
example result in changes to assumptions used for determining results of
operations or re-estimations of reserves for future policy benefits. As a
result, Prudential's actual future financial condition, performance and results
may differ materially from the plans, goals, and expectations set forth in
Prudential's forward-looking statements. Prudential undertakes no obligation to
update the forward-looking statements contained in this statement or any other
forward-looking statements it may make.
PRUDENTIAL PLC 2004 RESULTS
Results Summary
Achieved Profits Basis Results 2004 £m 2003 £m
---- ----
Operating profit before amortisation of goodwill
UK and Europe Insurance Operations 450 359
M&G 136 83
Egg - continuing operations 43 55
- discontinued operations (37) (89)
---- ----
UK and Europe Operations 592 408
US Operations - continuing operations 303 194
- discontinued operations 17 22
Prudential Asia 400 378
Other Income and Expenditure (including Asia development expenses) (208) (208)
---- ----
Operating profit before amortisation of goodwill 1,104 794
---- ----
Analysed as:
Operating profit from continuing operations 1,124 861
Operating loss from discontinued operations (20) (67)
---- ----
Amortisation of goodwill (97) (98)
Short-term fluctuations in investment returns 679 682
Effect of changes in economic assumptions (100) (540)
Profit or loss on the sale or termination of discontinued operations:
Profit on business disposals 48 -
Egg France closure cost (113) -
---- ----
Profit on ordinary activities before tax 1,521 838
---- ----
Operating earnings per share* 37.2p 25.4p
Shareholders' funds £8.6bn £7.0bn
---- ----
Statutory Basis Results 2004 £m 2003 £m
---- ----
Operating profit before amortisation of goodwill 583 357
Profit on ordinary activities before tax 650 350
Operating earnings per share* 19.2p 12.4p
Basic earnings per share* 20.1p 10.0p
Shareholders' funds £4.3bn £3.2bn
---- ----
Dividend Per Share* 15.84p 15.38p
Insurance and Investment Funds under Management £187bn £168bn
---- ----
Operating profit and operating earnings per share include investment returns at the expected long-term rate of return
but exclude amortisation of goodwill and exceptional items. The directors believe that operating profit, as adjusted for
these items, better reflects underlying performance. Profit on ordinary activities and basic earnings per share include
these items together with actual investment returns. The basis of presentation has been adopted consistently throughout
the Preliminary Announcement.
*Earnings per share and dividend per share figures for 2003 have been restated to take account of the Rights Issue in
2004.
In addition, the achieved profits and statutory basis shareholders' funds for 2003 have been adjusted to reflect the
implementation of UITF Abstract 38 on Accounting for ESOP Trusts.
BUSINESS REVIEW
GROUP
Results Highlights
£'m unless otherwise stated 2004 2003 Percentage 2004 2003 Percentage
Change Change
(as reported) (at 2004 (as reported) (as reported)
exchange rate)
Annual premium equivalent 1,846 1,464 26% 1,846 1,557 19%
(APE) sales
Net investment flows 3,589 2,908 23% 3,589 3,031 18%
New business achieved profit 688 561 23% 688 605 14%
(NBAP)
NBAP margin 37% 38% - 37% 38% -
Total achieved profits basis 1,124 807 39% 1,124 861 31%
operating profit *
Total modified statutory basis 603 405 49% 603 424 42%
(MSB) operating profit *
Achieved profits basis 8,596 6,762 27% 8,596 7,005 23%
shareholders' funds *
MSB shareholders' funds * 4,281 3,060 40% 4,281 3,240 32%
* Continuing operations - excluding Jackson Federal Bank (JFB) and Egg's France
business.
In the Business Review and Financial Review, year-on-year comparisons of
financial performance are on a Constant Exchange Rate (CER) basis, unless
otherwise stated.
The Group has delivered a good set of results for 2004, as illustrated by the
double-digit growth of all the key performance measures shown above. This is the
result of strong contributions across all regions.
As a result of healthy sales in the UK, the US and Asia, the Group achieved
record insurance sales and new business achieved profits (NBAP) in 2004. This,
together with the significant increase in contributions from the in-force
insurance business and fund management operations, drove achieved profits basis
operating profits up 39 per cent on 2003.
On the modified statutory basis (MSB), operating profits were up 49 per cent on
last year. This reflects a combination of solid year-on-year growth in profits
in both the insurance and fund management businesses of 40 per cent and 55 per
cent respectively.
Basic earnings per share on an achieved profits basis for the year after
minority interests were 37.2 pence, compared with a restated figure of 25.4
pence in 2003. Following the Rights Issue in October 2004, a restatement of
earnings per share is derived and reported in accordance with the requirement of
Financial Reporting Standard (FRS) 14.
Basic earnings per share, based on total MSB profit for the year after minority
interests, were 20.1 pence, up 10.1 pence from the restated 2003 figure of 10.0
pence.
Impact of Currency Movements
Prudential has a diverse international mix of businesses with a significant
proportion of its profit generated outside the UK. In preparation for the
Group's consolidated accounts, results of overseas operations are converted at
rates of exchange based on the year average, while shareholders' funds are
converted at year-end rates of exchange.
Changes in exchange rates from year to year have an impact on the Group's
results when these are converted into pounds sterling for reporting purposes. In
some cases, these exchange rate fluctuations can mask underlying business
performance. For example, growth in Asia's total MSB operating profits was 83
per cent at reported rates, compared to 103 per cent at Constant Exchange Rates
(CER). This reflects the close relationship between most Asian currencies and
the US Dollar and its depreciation against sterling during the year.
Consequently, the Board has for a number of years reviewed the Group's
international performance on a CER basis. This basis eliminates the impact from
conversion, the effects of which do not alter the long-term value of
shareholders' interests in our non UK businesses.
In the Business Review and Financial Review, year-on-year comparisons of
financial performance are on a CER basis, unless otherwise stated.
Insurance
UNITED KINGDOM AND EUROPE
£'m unless otherwise stated 2004 2003 * Percentage Change
APE sales 817 584 40%
NBAP 220 157 40%
NBAP margin 27% 27% -
Total achieved profits basis operating 450 359 25%
profit
Total MSB operating profit 305 256 19%
* Certain investment mandates previously reported as UK Corporate Pensions
business are now reported as M&G institutional investment flows. This gives rise
to a restatement of 2003 UK APE sales of £32m (from £616m to £584m) and 2003 UK
NBAP of £9m (from £166m to £157m).
Prudential UK and Europe delivered a strong performance in 2004 increasing its
market share in the medium to long-term savings market (excluding collective
investments) by 2.3 percentage points to 8.9 per cent (based on data from the
Association of British Insurers), reflecting not only its brand franchise and
financial strength, but also the significant progress made in broadening its
distribution channels and product range, while maintaining a clear focus on its
customers.
Total APE sales were up 40 per cent on 2003 to £817 million, which included £111
million in relation to a substantial annuity transaction with Royal London which
was concluded in December. Excluding Royal London, APE sales grew 21 per cent to
£706 million. Growth was driven by increased sales of unit-linked bonds (up 219
per cent), bulk annuities (up 62 per cent), individual annuities (up 24 per
cent) and credit life protection products (up 224 per cent).
This increase in new business sales and a new business margin of 27 per cent led
to an increase in new business achieved profits (NBAP) of 40 per cent to £220
million. Total achieved profits basis operating profit increased 25 per cent to
£450 million. The increase in profits from the in-force book was partially
offset by experience and assumption changes. MSB operating profit was £305
million in 2004, an increase of 19 per cent on 2003. This was driven principally
by increased annuity sales now being written through the shareholder-backed
subsidiary, Prudential Retirement Income Limited (PRIL).
New business achieved profit margins, averaged across all products, remained
stable at 27 per cent, however individual product performance varied. Margins on
Business to Business (B2B) corporate pensions fell from 16 per cent to 9 per
cent principally as a result of higher proportions of less profitable
unit-linked products, rather than with-profits products being sold in 2004. In
line with our strategy to develop further our shareholder-backed business, we
have sold an increasing volume of both unit-linked bonds and protection
products. The increased scale of the unit-linked bond business has enabled it to
approach a break-even position in terms of NBAP. Margins on annuities and
with-profits products remained in excess of 40 per cent. As Prudential UK
broadens its product range, the mix of business it expects to write in the
future is likely to lead to some reduction in the overall new business profit
margin. Prudential UK expects this to be offset by higher new business premiums,
a greater proportion of which will be shareholder-backed.
Prudential UK operates through four diversified distribution channels. The
Intermediaries (IFA) channel, which accounted for 34 per cent of APE sales in
2004, distributes a range of medium to long-term savings products primarily
through independent financial advisers and will include sales generated through
multi-ties. The B2B channel, which accounted for 28 per cent of 2004 APE sales,
distributes corporate pensions through work-site marketing in partnership with
consulting actuaries and benefit consultants. The Partnerships channel has
responsibility for developing relationships with banks and other distributors
and accounted for 26 per cent of APE sales in 2004, an increase from 6 per cent
in 2003. The remaining 12 per cent of APE sales was generated by the Direct to
Customer channel which focuses primarily on the sale of annuities to individual
pension customers, although an increasing proportion of this is now being
transacted through IFAs.
Independent financial advisers continue to be the principal channel for the
distribution of life and pension products for insurers in the UK. This channel
is undergoing significant change with the introduction by the Financial Services
Authority (FSA) of new 'depolarisation' rules leading to the establishment of
multi-tie panels. Over the next few years, Prudential UK expects that a
significant proportion of IFAs, which previously operated as whole-of-market
providers, will move to a panel approach whereby they distribute the product
range of a select number of life companies.
Prudential UK has already been appointed to work with Sesame, Millfield, Tenet
and Burns-Anderson on the design of their respective multi-tie propositions. It
has been appointed to the regulated multi-tie panels for Sesame, Millfield,
Burns-Anderson and THINC Destini and has also been appointed as THINC Destini's
single-tie annuity provider.
Depolarisation is also expected to have an effect on the UK bank distribution
market as some banks move to offer their customers products from a panel of
different providers rather than from a single product provider. Prudential UK
has already seen significant growth through its partnership agreements with
Lloyds TSB and Alliance and Leicester for the distribution of credit life
protection products and with Zurich and Pearl for the distribution of individual
annuities. The existing reassurance agreement with Zurich will be replaced in
the second half of 2005 with a direct offer arrangement under which advisers of
Openwork (formerly Zurich Advice Network) will sell Prudential's range of
annuity products to their customers on an exclusive basis, following the
Openwork operational launch.
Prudential UK has also entered into a five-year partnership agreement with St.
James's Place which becomes effective in May 2005 and will allow SJP Partners to
sell exclusively Prudential's annuity products to their customers. On 1 March
2005, Barclays announced its intention to appoint Prudential UK as one of its
nominated product providers as part of the bank's multi-tie approach to
distribution to be launched later this year.
Prudential UK has maintained leading positions in many of its core product areas
including annuities, corporate pensions and with-profit bonds. Nearly all of its
annuity business is now written through PRIL. From July 2004, this included
maturing pensions from the unit-linked and with-profits funds, the latter of
which makes up a large proportion of annuity sales. In addition, shareholder
capital is used to support the annuity business written on behalf of other
insurers (such as the agreements with Zurich and Pearl). Prudential UK is one of
the few insurers to write bulk annuity business and, including the Royal London
transaction, wrote £158 million APE in 2004, representing a 72 per cent share of
the market.
Prudential UK is a market leader in corporate pensions: in 2004, it was the
provider to 20 per cent of FTSE 350 companies, managing more than 4,000 pension
schemes, and it is the market leader in the provision of pension schemes to the
UK public sector. It has enhanced its sales process to include automatic
enrolment and greater use of worksite marketing to support its position.
Despite seeing reductions in sales of with-profit bonds across the market,
Prudential believes that there is still customer demand for products offering a
smoothed investment return; PruFund, a transparent smoothed investment product,
was introduced to the market in September. Savers had invested £10 million (APE
£1 million) in PruFund by the year end.
The Prudential Assurance Company's (PAC) long-term fund remains well capitalised
with a free asset ratio of 14.8 per cent on the former regulatory Form 9 basis,
without taking account of future profits or implicit items. The with-profits
fund delivered a pre-tax return of 13.4 per cent in 2004, compared with a FTSE
All Share (Total Return) of 12.8 per cent. Consequently, Prudential UK announced
in February 2005 that total bonus rates were increased or maintained on all
unitised plans showing that with-profits business continues to deliver
attractive returns for policyholders when provided by a financially strong and
well managed fund such as Prudential.
Prudential UK has also made a significant investment in its unit-linked offering
and this is reflected in the increase in year-on-year sales and market share.
The Flexible Investment Bond, launched late in 2003, and the recently-launched
range of protected bonds continue to build share in the growing IFA unit-linked
bond market.
Throughout the year, Prudential UK has continued to extend its product range.
Two risk management products for defined benefit pension schemes will widen the
solutions available to pension schemes considering bulk annuity buy-outs.
PruHealth, a healthcare product that links health and fitness to the cost of
medical insurance plans, was developed in conjunction with Discovery Holdings of
South Africa, the market leader in the South African healthcare market and
launched in October 2004.
Prudential UK is achieving strong growth, through both new and existing
products, and by developing new distribution opportunities. Having completed the
£200 million cost saving programme, it has maintained a focus on capital
management and has achieved further cost efficiencies. This is reflected in
Prudential UK's ability to maintain overall new business margins in 2004.
Prudential's UK performance reflects the continued impact of its brand, track
record of investment performance and financial strength, as well as its
successful transition from a with-profits and direct sales orientated company
into a competitive, cost effective organisation. The successful diversification
of its distribution channels, new distribution agreements and broadened product
range place Prudential UK in a strong position to continue to gain from
developments in the UK market. Prudential UK expects sales in 2005 to grow by
about 10 per cent from the base established in 2004. This compares with the
industry expectation for UK market growth of around five per cent for 2005.
UNITED STATES
£'m unless otherwise stated 2004 2003 Percentage 2004 2003 Percentage
Change Change
(as reported) (at 2004 (as reported) (as reported)
exchange rate)
APE sales 453 374 21% 453 418 8%
NBAP 156 132 18% 156 148 5%
NBAP margin 34% 35% - 34% 35% -
Total achieved profits basis 303 173 75% 303 194 56%
operating profit *
Total MSB operating profit * 182 125 46% 182 140 30%
* Continuing operations - excluding Jackson Federal Bank (JFB) which was sold in
October 2004
In 2004, Jackson National Life (JNL) delivered record sales despite the
challenges of low crediting rates offered in the fixed annuity market,
relatively flat equity markets during the first nine months of the year and an
evolving regulatory environment.
APE sales for the year of £453 million were up 21 per cent on 2003, with total
retail sales of £368 million, up 12 per cent on 2003. Variable annuity sales
growth in 2004 was 15 per cent compared with market growth of 3 per cent
(Source: VARDS).
New business achieved profit of £156 million was up 18 per cent on 2003. This
increase reflects a 21 per cent increase in total sales, partially offset by a
shift in product mix towards a higher proportion of equity-linked indexed
annuity, life and institutional sales and a small impact from economic
assumption changes.
Total achieved profits basis operating profit on continuing operations of £303
million was up 75 per cent on 2003. Total achieved operating profit on long-term
business of £317 million was up 80 per cent on 2003. This reflects an 18 per
cent increase in new business achieved profits and an in-force profit of £161
million, which was more than three times higher than in 2003. The increase in
in-force profit primarily reflects an improvement in spread income on fixed
annuities, lower economic assumption changes and a £28 million favourable legal
settlement.
Total MSB operating profit on continuing operations of £182 million was up 46
per cent on 2003. The 53 per cent growth in long-term business operating profit
reflects £169 million higher spread income and record variable annuity fee
income due to significant growth in separate account assets. In addition, there
were two one-off items, a £28 million favourable legal settlement and a positive
£8 million adjustment arising from the adoption of SOP 03-01 'Accounting and
Reporting by Insurance Enterprises for Certain Non-traditional Long Duration
Contracts and for Separate Accounts'. This adjustment relates to a change in the
method of valuing certain liabilities.
In 2004, JNL continued its focus on giving its customers greater freedom of
choice by enhancing its product portfolio, distribution network and customer
service.
In March, JNL launched its first variable universal life product and in May it
introduced Fifth Third Perspective, a variable annuity product designed
exclusively for customers of Fifth Third Securities. In the eight months since
launch, sales of this product accounted for more than 65 per cent of JNL's total
variable annuity sales through Fifth Third Securities in 2004. In October, it
added further investment options to its Perspective II variable annuity product
as well as two new optional benefits which customers can actively select and pay
for.
JNL is a top 10 player (as measured by net flows) in the variable annuity
market. Its variable annuity assets grew 36 per cent in 2004 compared to
industry growth of 12 per cent and 'Perspective II' was the best selling
variable annuity contract in terms of net flows in the US (Source: VARDS). The
rate of take up of the fixed account option continued at normal levels, with 29
per cent of the variable premium going into the fixed account, compared with 48
per cent in 2003. JNL offers a range of variable annuity guarantee benefits for
which customers pay.
JNL's APE fixed annuity sales of £113 million in 2004 were down 8 per cent on
2003. It was ranked the seventh largest provider of fixed annuities in the US
(Source: LIMRA).
Institutional APE sales of £85 million were up 98 per cent on 2003. JNL has
taken advantage of attractive issuance opportunities as they have arisen during
the year, and will continue to do so in 2005.
JNL took a significant step forward in 2004, enhancing its customer servicing
and support function through the re-organisation of its customer support centres
to provide standardised procedures, increased operational efficiency and
improved customer service.
Curian Capital, which provides innovative fee based separately managed accounts,
had net investment flows of £387 million in the year. At the end of 2004, 21
months from launch, it had accumulated over US$1 billion (£550 million) of funds
under management. As the business builds scale, we expect operating losses to
reduce.
A key factor in JNL's continuing success is the strength of its
relationship-based distribution model, which is heavily dependent upon achieving
the highest levels of customer satisfaction. In 2004, JNL received two service
awards and was one of only eight companies across all sectors to earn a world
class customer satisfaction award from North America's Service Quality
Measurement Group. It also received the 'highest customer satisfaction by
industry' award for the financial services industry.
In October 2004, JNL completed the sale of Jackson Federal Bank (JFB) to Union
Bank of California for £166 million. JFB's principal area of business was
banking and commercial real estate lending, which no longer aligned with JNL's
strategy.
As part of JNL's continued focus on developing its life business in November, it
announced the purchase, subject to regulatory approval, of Life Insurance
Company of Georgia for £137 million in November. This acquisition will double
the number of JNL's in-force life and annuity policies, add scale to its
operating platform and expand its distribution capability. This will enable JNL
to grow its life business at a higher return and faster rate than achieve
organically. JNL anticipates achieving a minimum internal rate of return after
tax on this transaction of 13 per cent and the capital provided from its
retained earnings will be returned over a pay-back period of about 5 years. The
planning for the integration of the business is on track and full integration is
anticipated within 12 months of closing the transaction. The regulatory approval
process is underway.
The US is the world's largest medium and long-term savings market. Although a
fragmented market, it contains many profitable segments. JNL is a scale player
in its chosen segments and its position as a low cost provider gives it an
expense advantage over competitors. JNL's distribution proposition is strong; it
provides market leading sales support through value-added wholesaling and
marketing support.
The ageing demographics of the US, combined with customers' increasing demand
for professional advice, increase the potential for profitable growth. JNL is
well positioned to capitalise on this given its strength among independent
broker dealers through National Planning Holdings (NPH), its independent
broker-dealer network. In 2004, NPH increased gross sales by 23 per cent and
increased agent productivity.
Following President Bush's State of the Union address and the items contained in
the President's proposed 2006 budget, JNL anticipates a variety of initiatives
to promote further individual choice, greater flexibility and a stronger
orientation toward market-based solutions to savings and retirement. These
proposals will include personal security accounts, as well as tax-free accounts
for savings and simplified retirement accounts.
We expect the US market to grow at about four per cent in 2005 and JNL to grow
sales at around twice this rate as current conditions continue to favour
companies which have a range of variable and fixed annuity product offerings, a
relationship-based distribution model and award-winning service. We expect to be
able to maintain margins at current levels depending on the mix of business
written.
ASIA
£'m unless otherwise stated 2004 2003 Percentage 2004 2003 Percentage
Change Change
(as reported) (at 2004 (as reported) (as reported)
exchange rate)
APE sales 453 374 21% 453 418 8%
NBAP 156 132 18% 156 148 5%
NBAP margin 34% 35% - 34% 35% -
Total achieved profits basis 303 173 75% 303 194 56%
operating profit *
Total MSB operating profit * 182 125 46% 182 140 30%
In Asia, APE sales showed solid growth over 2003, up 14 per cent to £576 million
with particularly high growth rates in India, Korea, Taiwan and China, offset to
a certain extent by lower volumes in Vietnam due to a steadying of the market on
the back of four years of explosive growth following liberalisation and in Japan
where we are implementing our strategy to focus on more profitable products and
distribution channels. Excluding discontinued lines in Japan, growth over 2003
was 20 per cent.
NBAP of £312 million was up 19 per cent on 2003 reflecting a combination of
increased sales and higher NBAP margin. APE increased by 14 per cent on 2003.
The NBAP margin was 54 per cent, compared to 52 per cent in 2003 due to
effective management of country and product mix.
The Asian economies' consistently high economic growth rates and favourable
demographics, together with the trend to allow greater access to foreign
financial services players makes these markets very attractive. However, success
is not guaranteed; there are many regulatory, cultural, competitive and
organisational challenges which favour companies such as Prudential who have a
long history and clear commitment to Asia, a track record of delivery and an
operating model enabling them to 'think internationally and act locally'.
Over the last ten years, building on its long-standing commitment to the region,
Prudential has followed a proven strategy of expanding geographically,
diversifying its distribution, launching innovative, customer focused products
and partnering with leading local institutions. Today, Prudential has operations
in 12 countries and is Europe's leading life insurer in Asia in terms of market
coverage and number of top 5 market positions. It has an agency force of 136,000
that generates around 75 per cent of new business with the remainder of new
business coming from a variety of distribution partnerships, including a number
of leading banks. The face of Prudence is well-known throughout the region and
has similar recognition levels to other leading international financial services
institutions.
This breadth and depth of operations across the region gives Prudential
diversity backed up by collective scale that is a real competitive advantage as
it can leverage expertise and experience in some countries and apply this
elsewhere as appropriate. It is also able to take a longer-term view on the
development of the region as a whole. Prudential Corporation Asia's consistently
impressive NBAP margins illustrate not just the overall attractiveness of the
Asian markets, but more specifically our success in maximising long-term value
creation while effectively managing risk.
During 2004, the strength of Prudential Corporation Asia's business model was
illustrated in a number of ways:
When Prudential acquired its life operation in Taiwan in 1999, the first
priority was to build distribution scale, and, consequently, agent numbers grew
rapidly. In 2003 the focus shifted to broadening the product range and improving
profitability by capitalising on being the first life operation in Taiwan to
launch regular premium unit-linked insurance products through leveraging
successes in markets such as Singapore and Malaysia. During 2004 APE volumes
grew significantly by 23 per cent and the proportion of unit-linked sales is 40
per cent, significantly higher than the industry.
In India, the ICICI Prudential joint venture continues to grow very strongly
with APE up 127 per cent on 2003. With ICICI's strong local presence and
reputation and Prudential's expertise, it is the leading private sector player,
well ahead of its nearest competitors. In 2004, the government announced its
intention to increase the cap on foreign ownership from 26 per cent to 49 per
cent. While Prudential remains interested in increasing its stake in the joint
venture, the relevant legislation has not yet been put before the Indian
Parliament.
The Hong Kong market has seen some significant changes over the last few years
with increasing emphasis on shorter-term single premium products sold through
bank channels. Prudential's innovative bancassurance model, as applied with
Standard Chartered Bank (SCB) in Hong Kong, has proven to be very effective in
enabling Prudential to leverage its top 5 position in a very competitive market
while still retaining a strong core agency channel which produces a higher
proportion of regular premium business.
In Singapore the market is competitive and Prudential remains focused on
profitability rather than pure volume; although new business APE declined by 4
per cent in 2004, new business achieved profit margins increased by 5 percentage
points. Prudential's other long-established market, Malaysia, which celebrated
its 80th anniversary in 2004 recorded APE sales up 15 per cent on 2003.
The Japanese life market remains very challenging and in the third quarter of
2003 we scaled back our operations to focus on higher value distribution
channels and more profitable products. While the operation is now somewhat more
efficient with lower expense levels and has made some progress with establishing
new distribution channels, it will take some time to deliver material new
business volumes and become a positive contributor to Prudential Corporation
Asia's overall results.
However, in its other North Asian Market, South Korea, Prudential continues to
have great success; new business APE growth was 113 per cent in 2004, driven by
developing a multi-channel distribution model including a pioneering cable TV
home shopping channel, bancassurance, proprietary distribution and a strong
general agent (multi-tied) network. In 2004 we successfully launched a
unit-linked insurance product, making Korea the 10th Prudential Corporation Asia
market to offer these capital efficient products.
With over five million life insurance customers, Prudential Corporation Asia now
has the scale to benefit from more standardisation and integration of processes
and the introduction of common systems platforms. In 2004, the first step
towards a more integrated back office was made with the launch of a regional
processing centre, Prudential Services Asia, based in Malaysia's high tech
business park Cyberjaya.
In China, Prudential's joint venture with China International Trust and
Investment Corporation (CITIC) is one of the country's leading foreign players
and APE growth was 70 per cent last year. CITIC Prudential already operates in
three cities, has a new Shanghai operation launching in the second quarter of
2005 and in February 2005 received additional licences for cities in Guangdong
province (Donggaun and Foshan), and has approval to provide Group policies
alongside the core individual life products. It is expected that this rapid
development will continue as geographic licensing restrictions ease further.
The impact of Prudential Corporation Asia's focus on capital efficiency and its
increasing scale can be seen as it is expected to become a net contributor of
cash to the Group in 2006, whilst continuing to fund high growth rates.
We are confident of our ability to grow strongly and profitably in Asia: the
opportunities in our newer markets, coupled with the strength of our larger
operations, should enable us to accelerate our level of sales growth in 2005. We
expect to be able to maintain margin while delivering this growth.
Fund Management
M&G
£'m unless otherwise stated 2004 2003 Percentage 2004 2003 Percentage
Change Change
(as reported) (at 2004 (as reported) (as reported)
exchange rate)
APE sales 576 506 14% 576 555 4%
NBAP 312 262 19% 312 291 7%
NBAP margin 54% 52% - 54% 52% -
Total achieved profits basis 381 328 16% 381 365 4%
operating profit *
Total MSB operating profit * 126 77 64% 126 85 48%
M&G is Prudential's UK and European fund management business and has over £126
billion of funds under management, of which £98 billion relates to Prudential's
long-term business funds. M&G operates in markets where it has a leading
position and competitive advantage, including retail fund management,
institutional fixed income, pooled life and pension funds, property and private
finance. We believe, based on data from the Investment Management Association, M
&G ranks as the third largest asset manager in the UK.
In 2004, M&G's operating profit including performance-related fees (PRF) was
£136 million, an increase of £53 million on the previous year. Underlying
profit, which excludes PRF, increased by 57 per cent to £110 million reflecting
the strengths of M&G's diversified business, disciplined cost management and the
success it has had in developing new sources of revenue. Over the last two
years, M&G's underlying profit has more than doubled even though the average of
the FTSE All Share index in 2004 was at similar levels to 2002.
Performance-related fees in 2004 were £26 million, including £20 million as a
result of several exceptionally profitable realisations by PPM Ventures that are
not expected to recur. M&G also received £6 million of performance fees for the
management of the Prudential Assurance Company long-term and annuity funds,
which continued to beat their strategic and competitor benchmarks during the
year.
M&G enjoyed a very strong year in terms of sales, with gross fund inflows up 54
per cent to £5.8 billion. Net fund inflows were up 48 per cent to £2 billion.
External funds under management, which represent approximately one quarter of M&
G's total funds under management, rose by 19 per cent during the year to £28.7
billion due to a combination of net fund inflows from both retail and
institutional clients and market gains on existing funds.
In M&G's retail businesses, gross fund inflows were a record £2 billion in 2004,
up 61 per cent on the previous year. In the UK, M&G maintained its fixed income
sales and continued to increase fund flows into equity funds on the back of its
strong fund performance. The launch of the M&G Property Fund in March 2004
provided M&G with an additional asset class for the retail market and added a
significant boost to sales. The success of M&G's expansion into Germany, Austria
and Italy was evident in 2004 with gross fund inflows growing fourfold to €611
million (£433 million), compared with the previous year.
In its institutional businesses, M&G continued to reap the benefits of its
position as a leading innovator in fixed income and private finance, with gross
fund inflows increasing by 50 per cent to £3.9 billion during 2004. The
successful strategy of developing new external business lines with attractive
margins, using expertise developed for internal funds, generated increased
revenue streams, especially in the area of non-correlated assets such as
leveraged loans. M&G's private finance business closed two more Collateralised
Debt Obligations (CDOs) during the year, bringing the total number of CDOs
launched since 2001 to six.
M&G's property division, Prudential Property Investment Managers (Pru PIM),
which invests primarily on behalf of the Prudential Assurance Company,
significantly increased its funds under management during 2004 and expanded its
product offering into the retail marketplace with the launch of the M&G Property
Fund alongside the successful expansion of its unit-linked funds. Pru PIM is one
of the largest institutional property fund managers in the UK with over £14.8
billion invested in the property market.
Looking forward, we expect M&G to continue to perform strongly building on its
current position.
Asia Fund Management
£'m unless otherwise stated 2004 2003 Percentage 2004 2003 Percentage
Change Change
(as reported) (at 2004 (as reported) (as reported)
exchange rate)
Net investment flows 1,198 1,416 (15)% 1,198 1,522 (21)%
Total MSB operating profit 19 11 73% 19 13 46%
* - excluding development and Asia regional head office expenses
Prudential Corporation Asia manages £22.5 billion funds under management, a
growth of 24 per cent from 2003, on behalf of the Asian Life businesses, funds
allocated from elsewhere in the Prudential Group to Asia and retail customers'
funds principally in the form of mutual funds. Collectively it is one of the
region's largest international fund managers and has investment product funds
under management of £7.8 billion.
Investment flows are from Prudential's mutual fund operations in seven Asian
markets and include Prudential's 36 per cent share of its joint venture with
Bank of China International (BOCI) in Hong Kong for Mandatory Provident Fund
(MPF) products and unit trusts.
During 2004 Prudential's Japanese mutual fund operation has seen considerable
success with net inflows of £1.4 billion, primarily driven by marketing US bond
funds that leverage the expertise of PPM America.
These strong fund inflows from Japan and good results from Prudential's Korean
asset management business offset the marked decline in Taiwan's bond funds'
assets under management, where industry-wide concerns over the liquidity of some
bond funds unsettled the market during the second half of 2004. As a result,
funds under management in Taiwan reduced by 33 per cent during 2004.
Looking ahead, while Prudential's Asian funds division will continue to add
value to its core internal clients, there are also good opportunities for it to
continue to expand its retail customer base.
Banking
Egg
£'m unless otherwise stated 2004 2003 Percentage Change
Total MSB operating profit *
Egg UK 74 73 1%
Subsidiaries / Associates / Joint Ventures (21) (4) (425)%
Others (10) (14) 29%
---- ---- ----
43 55 (22)%
Net interest income * 287 263 9%
Non-interest income * 210 157 34%
---- ---- ----
* Continuing operations - excluding Egg's France business.
Egg is an innovative financial services company, providing a range of banking
and financial services products through its internet site. The principal
business includes credit cards, deposits, general insurance and mortgages.
Operating profits from the core UK business were £74 million, compared with £73
million in 2003. This represents a solid result considering the increased
competition and rising interest rates that have impacted the credit card and
personal loan markets.
Unsecured lending grew strongly by £1.4 billion during 2004 taking total
balances to £6.2 billion as at the end of 2004, up 30 per cent on last year. The
successful cross-selling of personal loans into their credit card customer base
has been complemented by the MasterCard proposition launched in June, which is
proving popular with Egg's customers and has now achieved almost £140 million in
balances. Overall, Egg's share of the credit card market had increased to 6 per
cent at the end of 2004.
Income arising from the UK of £497 million grew by 18 per cent on 2003, with
non-interest income providing the majority of the increase. Margins were under
pressure throughout the year from increased competition, especially in the first
half, and rising base rates. Despite the rising interest rate and competitive
landscape, net interest income increased by almost 9 per cent on 2003. Other
income also grew impressively, up 34 per cent to £210 million. Record loan
disbursements and good card balance growth, with associated revenue from
cross-sales of payment protection insurance, was the main factor.
Egg's effective cost management and good credit quality also contributed to the
solid results from its UK operation. It has increased its provision levels to
reflect the change in its product mix following growth in its unsecured lending
portfolio, the stage in the life cycle of its card and loan books and the
increasing proportion of personal loans business.
Egg has 3.1 million customers who are defined as 'marketable' based on their
activity levels. Moving forward, Egg will focus on growing lending balances and
fee income through a mix of both acquisition and cross sales rather than by
customer acquisition as the key growth metric.
The operating loss for the discontinued French operation was £37 million
reflecting the results up to the date of the announcement of Egg's intention to
withdraw from the market in July 2004. In 2004, Egg sold its French unsecured
lending, savings and brokerage portfolios and in early 2005 closed the current
account business. The expected total exit costs remain unchanged from the £113
million provision established in July 2004.
Consistent with the intention to focus on its successful UK business, Egg has
sold its investment business to Fidelity at a small loss, which will release
approximately £20 million of capital back to its core banking business in 2005.
It has also put Funds Direct, its investment wrap platform business, up for sale
and provided for a £17 million impairment charge against the full carrying value
of the underlying assets in Funds Direct.
During 2005, Egg intends to undertake a restructuring of share capital and
reserves with a view to eliminating its profit and loss deficit against other
reserves including the share premium account. This restructuring will allow the
payment of dividends as and when sufficient distributable reserves have been
generated and Egg's Board considers it to be in the best interests of the
Company and its shareholders.
Looking forward, Egg's highly attractive unsecured lending portfolio represents
an opportunity to grow further and deliver healthy returns. In addition, it will
continue to build on its strong relationship with customers and their levels of
consideration to buy other products from Egg, as evidenced by general insurance
cross sales in the fourth quarter. To this end, Egg will look to offer a broader
range of products and services in 2005 and beyond.
We expect Egg to finance its own growth without requiring capital support from
the Group.
This information is provided by RNS
The company news service from the London Stock Exchange
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