SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of March, 2005
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
LAURENCE POUNTNEY HILL,
LONDON, EC4R 0HH, ENGLAND
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82-
Enclosures: Full year results
PRUDENTIAL PLC FULL-YEAR 2004 RESULTS
Strong delivery across all of our businesses
* Record new business achieved profits of GBP688 million, up 23 per cent on
2003
* Strong growth in achieved profit basis operating profit, up 39 per cent on
2003 to GBP1.12 billion*
* Modified statutory basis profit of GBP603 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 GBP8.6 billion
* Record insurance APE sales of GBP1.85 billion, up 26 per cent on 2003h
* Record funds under management of GBP187 billion, up GBP22 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
GBP110 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 GBP156 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 GBP28.7 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 GBP126 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 GBP110
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 GBP74 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 GBP187 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 GBPm 2003 GBPm
---- ----
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 1,104 794
goodwill
---- ----
Analysed as:
Operating profit from continuing 1,124 861
operations
Operating loss from discontinued (20) (67)
operations
---- ----
Amortisation of goodwill (97) (98)
Short-term fluctuations in investment 679 682
returns
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 GBP8.6bn GBP7.0bn
---- ----
Statutory Basis Results 2004 GBPm 2003 GBPm
---- ----
Operating profit before amortisation of 583 357
goodwill
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 GBP4.3bn GBP3.2bn
---- ----
Dividend Per Share* 15.84p 15.38p
Insurance and Investment Funds under Management GBP187bn GBP168bn
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
GBP'm unless 2004 2003 Percentage 2004 2003 Percentage
otherwise stated (as reported) (at 2004 Change (as reported) (as reported) Change
exchange
rate)
Annual premium 1,846 1,464 26% 1,846 1,557 19%
equivalent (APE)
sales
Net investment 3,589 2,908 23% 3,589 3,031 18%
flows
New business 688 561 23% 688 605 14%
achieved profit
(NBAP)
NBAP margin 37% 38% - 37% 38% -
Total achieved 1,124 807 39% 1,124 861 31%
profits basis
operating profit
*
Total modified 603 405 49% 603 424 42%
statutory basis
(MSB) operating
profit *
Achieved profits 8,596 6,762 27% 8,596 7,005 23%
basis
shareholders'
funds *
MSB shareholders' 4,281 3,060 40% 4,281 3,240 32%
funds *
* 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
GBP'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 profit 450 359 25%
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 GBP32m (from GBP616m to GBP584m) and
2003 UK NBAP of GBP9m (from GBP166m to GBP157m).
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 GBP817 million, which included
GBP111 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 GBP706 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 GBP220 million. Total achieved profits basis operating profit increased 25
per cent to GBP450 million. The increase in profits from the in-force book was
partially offset by experience and assumption changes. MSB operating profit was
GBP305 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 GBP158 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 GBP10 million
(APE GBP1 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
GBP200 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
GBP'm unless 2004 2003 Percentage 2004 2003 Percentage
otherwise (as reported) (at 2004 Change (as reported) (as reported) Change
stated 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 303 173 75% 303 194 56%
profits basis
operating
profit *
Total MSB 182 125 46% 182 140 30%
operating
profit *
* 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 GBP453 million were up 21 per cent on 2003, with total
retail sales of GBP368 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 GBP156 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 GBP303
million was up 75 per cent on 2003. Total achieved operating profit on long-term
business of GBP317 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 GBP161
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 GBP28 million favourable
legal settlement.
Total MSB operating profit on continuing operations of GBP182 million was up 46
per cent on 2003. The 53 per cent growth in long-term business operating profit
reflects GBP169 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 GBP28 million favourable legal settlement and a
positive GBP8 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 GBP113 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 GBP85 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 GBP387 million in the year. At the end of 2004, 21
months from launch, it had accumulated over US$1 billion (GBP550 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 GBP166 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 GBP137 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
GBP'm unless 2004 2003 Percentage 2004 2003 Percentage
otherwise (as reported) (at 2004 Change (as reported) (as reported) Change
stated 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 303 173 75% 303 194 56%
profits basis
operating
profit *
Total MSB 182 125 46% 182 140 30%
operating
profit *
In Asia, APE sales showed solid growth over 2003, up 14 per cent to GBP576
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 GBP312 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
GBP'm unless 2004 2003 Percentage 2004 2003 Percentage
otherwise (as reported) (at 2004 Change (as reported) (as reported) Change
stated 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 381 328 16% 381 365 4%
profits basis
operating
profit *
Total MSB 126 77 64% 126 85 48%
operating
profit *
M&G is Prudential's UK and European fund management business and has over GBP126
billion of funds under management, of which GBP98 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
GBP136 million, an increase of GBP53 million on the previous year. Underlying
profit, which excludes PRF, increased by 57 per cent to GBP110 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 GBP26 million, including GBP20 million as
a result of several exceptionally profitable realisations by PPM Ventures that
are not expected to recur. M&G also received GBP6 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 GBP5.8 billion. Net fund inflows were up 48 per cent to GBP2
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 GBP28.7 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 GBP2 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 EUR611 million (GBP433 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 GBP3.9 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 GBP14.8
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
GBP'm unless 2004 2003 Percentage 2004 2003 Percentage
otherwise (as reported) (at 2004 Change (as reported) (as reported) Change
stated exchange
rate)
Net investment 1,198 1,416 (15)% 1,198 1,522 (21)%
flows
Total MSB 19 11 73% 19 13 46%
operating
profit
* - excluding development and Asia regional head office expenses
Prudential Corporation Asia manages GBP22.5 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 GBP7.8 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 GBP1.4 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
GBP'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 GBP74 million, compared with
GBP73 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 GBP1.4 billion during 2004 taking total
balances to GBP6.2 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 GBP140
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 GBP497 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 GBP210 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 GBP37 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 GBP113
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 GBP20 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 GBP17 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.
FINANCIAL REVIEW
SALES AND FUNDS UNDER MANAGEMENT
Prudential delivered strong growth in sales during 2004 with total new insurance
sales up 40 per cent to GBP12.1 billion at constant exchange rates (CER). This
resulted in record insurance sales of GBP1.85 billion on the annual premium
equivalent (APE) basis, an increase of 26 per cent on 2003. At reported exchange
rates, APE was up 19 per cent on 2003.
In 2004, gross written premiums, including insurance renewal premiums, increased
19 per cent to GBP16.4 billion, reflecting the growth of new insurance sales in
2004 and the significant contribution from regular premium business written in
previous years.
Total gross investment sales for 2004 were GBP25.1 billion, up 21 per cent on
2003 at CER. Net investment sales of GBP3.6 billion were up 23 per cent on last
year at CER. The strong growth across a number of markets offset the high level
of redemptions in Taiwan, which was the result of market concern about the
liquidity of bond funds across the Taiwanese mutual fund market.
Total investment funds under management in 2004 increased by 19 per cent from
GBP30.9 billion to GBP37.1 billion, reflecting net investment flows of GBP3.6
billion and net market and other movements of GBP2.6 billion. At 31 December
2004, total insurance and investment funds under management were GBP187 billion,
an increase of 11 per cent from 2003. This marked a record level of funds under
management and the increase was primarily due to the combination of changes in
the market value of investments and the impact of net insurance and investment
sales achieved during the year.
Basis of preparation of results
Prudential is required to account for its long-term insurance business on the
modified statutory basis (MSB) of reporting under UK accounting standards. The
Group's primary financial statements are therefore prepared on this basis and
broadly reflect the UK solvency-based reporting regime and, for overseas
territories, adjusted local or US GAAP. In broad terms, MSB profits for
long-term business reflect the aggregate of statutory transfers from
with-profits funds and profits on a traditional deferral and matching approach
for other long-term business. Although the statutory transfers from with-profits
funds are closely aligned with cash flow generation, the pattern of MSB profits
over time from shareholder-backed long-term businesses will generally differ
from the cash flow pattern. Over time however, aggregate MSB profits will be the
same as aggregate cash flow.
Life insurance products are, by their nature, long-term and the profit on this
business is generated over a significant number of years. MSB profits do not, in
Prudential's opinion, properly reflect the inherent value of these future profit
streams.
Accordingly, in common with other listed UK life assurers, Prudential also
reports supplementary results for its long-term operations on the achieved
profits basis. These results are combined with the statutory basis results of
the Group's other operations, including fund management and banking businesses.
Reference to operating profit relates to profit including investment returns at
the expected long-term rate of return, but excludes amortisation of goodwill,
exceptional items, short-term fluctuations in investment returns and the effect
of changes in economic assumptions.
In the directors' opinion, the achieved profits basis provides a more realistic
reflection of the current performance of the Group's long-term insurance
operations than results on the MSB basis, as it reflects the business
performance during the accounting period under review, although both bases
should be considered in forming a view of the Group's performance.
ACHIEVED PROFITS BASIS RESULTS
The achieved profits basis results for long-term business are prepared in
accordance with the Association of British Insurers' (ABI) guidance for achieved
profits reporting issued in December 2001. This guidance requires that for
countries where capital markets are well developed, the economic assumptions
used for the projection of cash flows are to be on an 'active' basis, which is
primarily based on appropriate government bond returns at each period end. The
effects of changed economic assumptions on the adjusted opening balance sheet
value are reflected in the profit reported for the year and excluded from
operating profit.
The active basis is applied to UK and US operations, and those countries in Asia
where there are well-developed government bond markets (Japan, Korea and
US$-denominated business in Hong Kong). Assumptions in other Asian countries
continue to be based on an assessment of long-term economic conditions. In 2004,
use of the active basis resulted in a decrease in the risk discount rate applied
to the UK insurance operations from 7.4 per cent to 7.2 per cent, and a decrease
in the UK investment return assumption for the UK with-profits fund from 6.8 per
cent to 6.5 per cent. The decrease primarily reflects decreases in the 15-year
gilt yield from 4.8 per cent at the end of 2003 to 4.6 per cent at the end of
2004. The risk margin over the risk free rate was maintained at 2.6 per cent.
The expected long-term inflation rate assumption decreased from 3.1 per cent to
2.9 per cent, reflecting the difference between conventional and index-linked
gilts. These changes are a function of the active basis rather than a change in
Prudential's long-term view of future returns and levels of price inflation.
In the US, the risk discount rate has remained at 7.4 per cent. The level of
capital required to support the business (the 'target surplus') has been taken,
as in 2003, to be 200 per cent of the Company Action Level Risk Based Capital,
calculated in accordance with the National Association of Insurance
Commissioners' risk-based capital standards for life insurance companies.
In Asia, each country has its own specific discount rate. The weighted average
risk discount rate, which is determined by weighting each Asian country's
economic assumptions by reference to the achieved profits basis operating
results for new business written in 2004, was 9.6 per cent in 2004, a decrease
from 10.4 per cent in 2003. The discount rates used in various country
operations range between 5 per cent to 19 per cent. The weighted risk discount
rate declined during 2004 principally due to lower pre-tax expected long-term
nominal rates of investment return and lower weighted long-term rate of
inflation assumptions due to changes in the geographic mix of business in 2004.
The overall impact on the Group's achieved profits basis result for 2004 of
using these revised economic assumptions compared with those used in 2003, was a
reduction in new business achieved profit (NBAP) of around GBP13 million and a
decrease in achieved profits basis shareholders' funds of GBP85 million.
Achieved Profits Basis Operating Profits
Total achieved profits basis operating profits from continuing operations were
GBP1,124 million, up 39 per cent from 2003 at CER. At reported exchange rates,
the result was up 31 per cent. This result reflects a combination of strong
growth in all the insurance and funds management businesses.
Achieved Profits Basis 2004 2003 Percentage 2004 2003 Percentage
Operating Profits (as reported) (at 2004 Change (as reported) Change
exchange (as reported)
rate)
GBP'm GBP'm GBP'm GBP'm
Insurance business
UK and Europe 450 359 25% 450 359 25%
US 317 176 80% 317 197 61%
Asia 381 328 16% 381 365 4%
Development expenses (15) (24) 38% (15) (27) 44%
---- ---- ---- ---- ---- ----
1,133 839 35% 1,133 894 27%
---- ---- ---- ---- ---- ----
Fund management business
M&G 136 83 64% 136 83 64%
US broker dealer and (14) (3) (367%) (14) (3) (367%)
fund management
Asia fund management 19 11 73% 19 13 46%
---- ---- ---- ---- ---- ----
141 91 55% 141 93 52%
---- ---- ---- ---- ---- ----
Banking
Egg (UK) 43 55 (22%) 43 55 (22%)
Other income and expenditure (193) (178) (8%) (193) (181) (7%)
---- ---- ---- ---- ---- ----
Operating profits from continuing 1,124 807 39% 1,124 861 31%
operations
---- ---- ---- ---- ---- ----
Prudential's insurance business achieved significant growth, both in terms of
new business achieved profits (NBAP) and in-force profit, resulting in a 35 per
cent increase in operating profit over 2003 at CER. NBAP of GBP688 million was
up 23 per cent on the prior year at CER and up 14 per cent at reported exchange
rates. In-force profit increased 51 per cent on 2003 at CER to GBP460 million.
At reported exchange rates, in-force profit was up 46 per cent.
Results from fund management and banking business were GBP184 million, an
increase of 26 per cent at CER on 2003. This was mainly driven by the
significant contribution from M&G.
Other income and expenditure was negative GBP193 million compared with negative
GBP178 million at CER in 2003. This reflected an increase in investment return
on centrally held assets and other income offset by higher interest payable and
head office costs.
New Business Achieved Profits (NBAP)
In 2004, the Group has generated record new business achieved profits (NBAP)
from insurance business of GBP688 million which was 23 per cent above 2003 at
CER, driven by strong sales momentum across all markets. At reported exchange
rates, NBAP was up 14 per cent. The average Group NBAP margin of 37 per cent was
slightly down from 38 per cent in 2003. The overall margin has been broadly
maintained over the last two years, reflecting careful management of product mix
within each business and across the three regions.
NBAP from the UK and Europe Insurance Operations was GBP220 million, an increase
of 40 per cent on 2003. This reflected increased APE sales and a balanced shift
in sales mix. This positive movement arose due to increased sales of more
profitable bulk annuities partially offset by reduced sales of high margin
with-profit bonds and increased sales of less profitable executive pensions.
Individual and bulk annuity margins remained strong at 43 per cent and 46 per
cent respectively, partly as a consequence of nearly all annuity business now
being written in Prudential Retirement Income Limited (PRIL), a shareholder
backed business. 88 per cent of annuities business was written in shareholder
backed funds in 2004, compared with 56 per cent in 2003. Previously, a
substantial proportion of annuity business was written in a subsidiary of the
with-profits fund.
PRIL was established in September 2000, initially to write bulk annuity
business. This was expanded to include external individual annuity business and
Prudential-branded internal vestings (annuity business sales arising from
maturing in-force pension books) in September 2001 and July 2004 respectively.
Business to Business (B2B) corporate pensions saw a fall in NBAP margins to 9
per cent principally reflecting a change of mix towards the less profitable
unit-linked products. Margins on with-profits bonds remained stable at 41 per
cent.
As the unit-linked business has gained scale, with sales growing by 219 per cent
in 2004, margins have approached a break-even position.
In the US, JNL's NBAP of GBP156 million was up 18 per cent on 2003 at CER and up
5 per cent at reported rates. This increase was principally volume driven as a
result of high sales levels recorded during the year. The NBAP margin was 34 per
cent in 2004, a slight reduction from 35 per cent in 2003 due to a shift in
product mix and a small impact from economic assumption changes.
Jackson National Life's expense ratio has fallen 3 basis points from 2002 to
stand at 46 basis points at the end of 2004. We believe Jackson benefits from
its considerable expense advantage relative to its principal competitors
enabling it to maintain these attractive margins.
The margin achieved on variable annuity business in 2004 was 37 per cent
compared with 36 per cent in 2003. This improvement is a result of pricing
changes instituted early in 2004. For fixed annuity business the margin declined
by 9 per cent over the last 2 years to 32 per cent at the end of 2004. The
reduction in margin is due to a lower fund earned rate as yields have declined,
however target spreads have been maintained.
In Asia, NBAP of GBP312 million was up 19 per cent at CER on 2003, reflecting a
combination of increased sales and higher NBAP margin. During 2004, APE sales
were up 14 per cent on 2003 and the NBAP margin was 54 per cent, compared with
52 per cent in 2003 at CER. The increase in margin was principally due to a
combination of changes in country mix and product mix being offset by the impact
of assumption changes.
In-Force Achieved Profits
Total in-force profit in 2004 was GBP460 million, an increase of 51 per cent on
2003 at CER. This was driven by the significant increase in the in-force profit
in the US.
UK and European in-force profit of GBP230 million was up 19 per cent on 2003.
The profits arising from the unwind of discount from the in-force book were
partially offset by adverse operating assumption changes and other experience
charges.
A charge of GBP66 million was made reflecting a 40 per cent strengthening of the
persistency assumptions on the closed-book of personal pensions business sold
through the closed direct sales force channel. This assumption change reflects
Prudential UK's experience over the last three years and, post-tax, represents
about 1 per cent of the overall embedded value of the UK business.
Measures to manage and improve the conservation of in-force business have had a
beneficial effect on persistency that Prudential UK expects to maintain or
improve. Consequently, Prudential UK has not changed persistency assumptions for
all other products.
Other charges of GBP34 million include GBP21 million of costs associated with
complying with new regulatory requirements and restructuring.
In the US, the in-force profit of GBP161 million was more than three times
higher than in 2003. This growth reflects improvements from 2003 in net
experience variances to positive GBP33 million (an increase of GBP46 million at
CER), changes in operating assumptions to negative GBP3 million (an increase of
GBP16 million at CER) and changes in other items to positive GBP12 million (an
increase of GBP37 million at CER). Included in other items is a GBP28 million
favourable legal settlement.
The GBP33 million positive total experience variance includes a GBP43 million
positive spread variance (net of risk margin reserve) primarily reflecting a
favourable variance in the fixed annuity portfolio. The assumed spread on new
fixed annuity business is 155 basis points grading to 175 basis points over five
years.
Asia's in-force profit (before development expenses and the Asian fund
management business) increased to GBP69 million in 2004 from GBP67 million in
2003 at CER. This reflects a higher unwind of the discount rate as the in-force
business builds scale and lower experience variances, offset by assumption
changes of GBP56 million. The assumption changes made in 2004 principally
reflect a worsening persistency in Singapore and a revision to expense
assumptions in Vietnam.
Non-insurance Operations
M&G
M&G's operating profit was GBP136 million, an increase of 64 per cent on last
year. This included GBP26 million in performance-related fees (PRF), of which
GBP20 million was generated by PPM Ventures on the exceptionally profitable
realisation of several investments during the year.
Underlying profits of GBP110 million were 57 per cent higher than 2003, achieved
as a result of a strong performance across all of M&G's business lines.
Significant growth was delivered in the areas of fixed income, retail and
property; attributable to the continued development of new business streams and
the recovery in stock markets during 2004. In addition, underlying profits were
also boosted by GBP7 million of one-off provision releases in 2004 that will not
recur in future years.
M&G's revenue growth continues to be combined with careful cost control. In
2004, M&G enjoyed the first full year of savings from the outsourcing of retail
administration at the end of 2003. This, together with the tight management of
overhead across the entire business, has resulted in costs remaining flat for
the last four years.
US broker dealer and fund management businesses
The broker dealer and fund management operations, which includes Curian Capital,
reported a total loss of GBP14 million, compared with a GBP3 million loss in
2003. This primarily reflects increased losses at Curian Capital as the business
continues to build scale.
Asian fund management business
Profit from Asian fund management operations was GBP19 million, up 73 per cent
from 2003, reflecting a combination of increasing scale and profitability in the
retail business, particularly from the joint venture with ICICI in India, and
higher management fees from the UK and Asian life businesses.
Egg
Egg's total continuing operating profit in 2004 was GBP43 million, compared with
GBP55 million in 2003, reflecting an increase in profit from the UK business
offset by a GBP17 million impairment charge on the underlying assets of Funds
Direct.
Egg's UK business delivered a good set of results with a particularly
encouraging performance in the second half of 2004. For the full year, a profit
of GBP74 million was recorded, compared with GBP73 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.
Included in the continuing operating results was a charge of GBP3 million, which
related to the migration and other exit costs associated with the transfer of
the funds supermarket business to Fidelity FundsNetwork. The transfer will
result in annual savings of around GBP3 million.
Following the decision to dispose of its investment in Funds Direct, its
investment wrap platform business, Egg provided for a GBP17 million impairment
charge against the full carrying value of the underlying assets of Funds Direct.
Others
Asia's development expenses (excluding the regional head office expenses)
reduced by 38 per cent at CER to GBP15 million, compared with GBP24 million in
2003. These development expenses primarily related to repositioning the
insurance operation in Japan.
Other net expenditure increased by GBP15 million to GBP193 million. This
reflected an increase in investment return and other income offset by higher
interest payable and head office costs. Head office costs (including Asia
regional head office costs of GBP29 million) were GBP83 million, up GBP16
million on 2003. The increase mainly reflects the substantial work being
undertaken for the implementation of International Financial Reporting
Standards, Sarbanes Oxley and other regulatory costs.
Total Achieved Profits Basis - Result Before Tax
(Year-on-year comparisons below are based on reported exchange rates.)
The result before tax and minority interests was a profit of GBP1,521 million,
up 82 per cent on 2003. This primarily reflects the strong operating profit from
continuing operations of GBP1,124 million and the lower negative effect of
changes in economic assumption of GBP100 million, compared with negative GBP540
million in 2003. The result also benefited from strong investment performance
which was ahead of the long-term investment assumptions.
The UK component of short-term fluctuations in investment returns of GBP402
million reflects the difference between an actual investment return delivered
for the with-profits life fund of 13.4 per cent and the long-term assumed return
of 6.5 per cent.
Short-term investment fluctuations in the US were GBP207 million. This includes
a positive GBP161 million which represents the difference between actual net
bond gains and the five-year average amount included in operating profit, and a
positive GBP24 million in relation to changed expectations of future
profitability on in-force variable annuity business, due to the separate account
return exceeding the long-term return reported in operating profit. In 2004,
actual net bond gains were GBP48 million, compared with GBP39 million of bond
losses in 2003.
In Asia, short-term investment fluctuations were GBP48 million, compared with
GBP1 million last year. This mainly reflects the rising equity markets in a
number of countries and falling bond yields in Singapore.
In the UK, economic assumption changes of negative GBP19 million reflect the
impact of the decrease in the future investment return assumption offset by the
decrease in the risk discount rate.
In the US, economic assumption changes were negative GBP53 million and included
a reduction in the projected earned rate, a reduction in the spread assumption
for equity-linked indexed annuities business in-force prior to 2002 and an
increase in inflation rates.
Asia's negative economic assumption change of GBP28 million primarily reflects a
change in Taiwan as a result of an increase in the discount rate and a change in
the fund earned rate assumption. Amortisation of goodwill was GBP97 million in
2004 compared to GBP98 million in 2003.
Profits on the disposals of Jackson Federal Bank and the Group's 15 per cent
interest in Life Assurance Holding Corporation Limited were GBP41 million and
GBP7 million respectively.
In France, an exit cost provision of GBP113 million was established in July 2004
following Egg's announcement of its intention to withdraw from the French
market. GBP96 million of the provision had been used by 31 December 2004 and it
is expected that the withdrawal can be completed within the provision
established.
Total Achieved Profits Basis - Result After Tax
The result after tax of GBP485 million and minority interests of positive GBP10
million, was a profit of GBP1,046 million.
The effective tax rate at an operating profit level was 29 per cent, reflecting
the lower effective tax rates in the UK and certain Asian territories.
The effective tax rate at a total achieved profit level was 32 per cent on a
profit of GBP1,521 million. The higher effective rate of tax compared with that
at an operating profit level is primarily due to amortisation of goodwill not
being deductible for tax purposes.
MODIFIED STATUTORY BASIS (MSB) RESULTS
MSB Operating Profits
MSB Operating Profits 2004 2003 Percentage 2004 2003 Percentage
Change Change
(as reported) (at 2004 (as reported) (as reported)
exchange rate)
GBP'm GBP'm GBP'm GBP'm
Insurance business
UK and Europe 305 256 19% 305 256 19%
US 196 128 53% 196 143 37%
Asia 126 77 64% 126 85 48%
Development expenses (15) (24) 38% (15) (27) 44%
---- ---- ---- ---- ---- ----
612 437 40% 612 457 34%
---- ---- ---- ---- ---- ----
Fund management business
M&G 136 83 64% 136 83 64%
US broker dealer and fund (14) (3) (367%) (14) (3) (367%)
management
Asia fund management 19 11 73% 19 13 46%
---- ---- ---- ---- ---- ----
141 91 55% 141 93 52%
---- ---- ---- ---- ---- ----
Banking
Egg (UK) 43 55 (22%) 43 55 (22%)
Other income and expenditure (193) (178) 8% (193) (181) 7%
---- ---- ---- ---- ---- ----
Operating profits from 603 405 49% 603 424 42%
continuing operations
---- ---- ---- ---- ---- ----
Reference to operating profit relates to profit including investment returns at
the expected long-term rate of return but excludes amortisation of goodwill,
exceptional items and short-term fluctuations in investment returns.
Group operating profit from continuing operations on the modified statutory
basis (MSB) was GBP603 million, an increase of 49 per cent from 2003 at CER. At
reported exchange rates, operating profit was up 42 per cent on last year.This
reflects strong growth in insurance and funds management businesses.
In the UK, MSB operating profit was GBP305 million in 2004, an increase of 19
per cent on 2003. This included a four-fold increase in PRIL's profit from GBP31
million to GBP124 million. This more than offset the GBP17 million reduction in
the profit from the with-profits fund, which fell due to lower annual and
terminal bonus rates announced in February 2004.
In the US, JNL's operating profit from continuing operations of GBP182 million
was up 46 per cent on 2003. Total MSB operating profit for long-term business
from continuing operations was GBP196 million, up 53 per cent from GBP128
million in 2003.
Growth in the long-term business operating profit reflects JNL's clear focus on
profitability and its ability to deliver improved investment returns. In 2004,
spread income was GBP169 million higher than in 2003 and variable annuity fee
income was at a record level due to the significant growth (47 per cent) in
separate account assets. In addition, there were two one-off items, a favourable
legal settlement of GBP28 million and a positive GBP8 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.
Prudential Corporation Asia's operating profit for long-term business before
development expenses of GBP15 million was GBP126 million, an increase of 64 per
cent on 2003 at CER. At reported rates, operating profit was 48 per cent up on
last year. The majority of this profit currently still comes from the larger and
more established operations of Singapore, Hong Kong and Malaysia, which
represented GBP110 million of the total in 2004, compared to GBP86 million last
year. Five life operations made MSB losses; China, India and Korea reflecting
their rapid building of scale while Thailand is marginally loss making and
Japan's loss reduced significantly over 2003 due to lower new business strain,
reduced management expenses and mark to market gains on investments.
Total MSB Profits - Result Before Tax
(Year-on-year comparisons below are based on reported exchange rates.)
MSB profits before tax and minority interests were GBP650 million in 2004,
compared with GBP350 million in 2003. This mainly reflects growth in operating
profits of GBP227 million and improvement in short-term fluctuations in
investment return, up GBP138 million from last year to positive GBP229 million.
Amortisation of goodwill was GBP97 million in 2004 compared with GBP98 million
in 2003.
Profits on the disposals of Jackson Federal Bank and the Group's 15 per cent
interest in Life Assurance Holding Corporation Limited were GBP41 million and
GBP7 million respectively.
In France, an exit cost provision of GBP113 million was established in July 2004
following Egg's announcement of its intention to withdraw from the French
market. GBP96 million of the provision had been used by 31 December 2004 and it
is expected that the withdrawal can be completed within the provision
established.
Total MSB Profits - Result After Tax
MSB profit after tax and minority interests was GBP428 million, after a tax
charge of GBP232 million.
The effective tax rate at an operating profit level was 30 per cent, a blend of
the effective tax rates of 35 per cent in the US, 33 per cent in Asia and 28 per
cent in the UK. The effective tax rate of 28 per cent on the UK results reflects
the basis of taxation on profits arising from the life fund.
The effective tax rate at a total MSB profit level was 36 per cent on a profit
of GBP650 million. The higher effective rate of tax compared with that at an
operating profit level is primarily due to amortisation of goodwill not being
deductible for tax purposes.
Earnings per Share
Earnings per share, based on achieved profits basis operating profit after tax
and related minority interests, but before amortisation of goodwill, were up
11.8 pence to 37.2 pence. The 2003 figure has been restated from 26.4 pence to
25.4 pence to adjust for the bonus element of the Rights Issue. Earnings per
share, based on MSB operating profit after tax and related minority interests,
but before amortisation of goodwill, were 19.2 pence, compared with a restated
2003 figure of 12.4 pence.
Basic earnings per share, based on total achieved profits basis profit for the
year after minority interests, were 49.1 pence, compared with a restated figure
of 23.4 pence in 2003. Basic earnings per share, based on MSB profit for the
year after minority interests, were 20.1 pence, 10.1 pence up from a restated
2003 figure of 10.0 pence.
Dividend per Share
As outlined in the rights issue prospectus, Prudential has maintained its
current dividend policy, with the proposed 2004 final dividend payment per share
taking account of the bonus element of the rights issue.
The shares issued as part of the rights issue were issued at a discount to
market price (308 pence per share versus a closing share price of 458 pence per
share on the day immediately preceding the announcement of the rights issue). It
is therefore necessary to restate the Company's previously reported earnings and
previously declared dividends per share for this bonus element.
The bonus adjustment is equal to the closing share price on the final day
Prudential's shares traded cum-rights (19 October 2004) divided by the
theoretical ex-rights price (TERP) as outlined in the attached table:
Market price cum-rights (Tuesday 19 October 2004) (pence) A 422.00
Rights issue price (pence) B 308.00
Number of shares pre rights issue (million) C 2,023.29
Number of shares issued through rights issue (million) D 337.22
(A x C) + (B x D)
Theoretical ex-rights price (pence) TERP = ------------------ 405.71
C + D
Bonus adjustment TERP / A 0.9614
The resulting bonus adjustment factor used for restating earnings and dividends
per share using the methodology outlined above is 0.9614.
The final dividend per share for 2003 was 10.3 pence after adjusting for the
bonus element of the rights issue (10.7 pence before the adjustment). The
interim dividend for 2004 was 5.4 pence (5.2 pence after adjustment for the
rights issue).
The Board recommends a full year dividend per share for 2004 of 15.84 pence, an
increase of 3.0 per cent over the full year 2003 dividend of 15.38 pence, after
adjustment 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 financial year after minority interests.
Balance sheet
Explanation of Balance Sheet Structure
The Group's capital on an MSB basis comprises of shareholders' funds GBP4,281
million; subordinated long term and perpetual debt of GBP1,429 million; other
senior debt GBP1,761 million and the Fund for Future Appropriations (FFA)
GBP16.7 billion.
Shareholders' funds include the GBP1,021 million of new share capital allotted
as a result of the rights issue in October 2004.
Subordinated or hybrid debt is debt capital which has some equity like features
and which would rank below other senior debt in the event of a liquidation.
These features allow hybrid debt to be treated as capital for FSA regulatory
purposes. All of the Group's hybrid which qualifies in this way is held at the
Group level and is therefore taken as capital into the parent solvency test
under the Financial Groups Directive (FGD).
The FSA has established a structure for determining how much hybrid debt can
count as capital which is similar to that used for banks. It categorises capital
as Tier 1 (equity and preference shares), Upper Tier 2 debt and Lower Tier 2
debt. Up to 15 per cent of Tier 1 can be in the form of hybrid debt and called
"Innovative Tier 1". At 31 December 2004, the Group held GBP638 million of
Innovative Tier 1 capital, in the form of perpetual securities, nil Upper Tier 2
and GBP921 million of Lower Tier 2 capital. Following the implementation of the
FGD, it is advantageous to the Group from a regulatory capital standpoint to
raise its long-term debt in hybrid form and it is the Group's policy to take
advantage of favourable market conditions as they arise to do so.
The FFA represents assets in the Life Fund which have not yet been allocated
either to policyholders or shareholders and which are not available to the Group
as a whole other than as they emerge through the statutory transfer of the
shareholders' share of the surplus as it emerges from the fund over time.
Asset and Liability Management
Prudential manages its assets and liabilities locally, in accordance with local
regulatory requirements and reflecting the differing types of liabilities
Prudential has in each business. As a result of the diversity of products
Prudential offers and the different regulatory environments in which it
operates, Prudential employs different methods of asset/liability management on
both an in-force and new business basis. Stochastic modelling of assets and
liabilities is undertaken in the UK, the US and Asia to assess economic capital
requirements for different confidence intervals and time horizons. In addition,
reserve adequacy testing under a range of scenarios and dynamic solvency
analysis is carried out, including under certain scenarios mandated by the US,
the UK and Asian regulators.
Weighted Average Cost of Capital (WACC)
Our commitment to our shareholders is to maximise the value of Prudential over
time by delivering superior financial returns. Prudential's weighted average
cost of capital (WACC) is 8.7 per cent, which is based on the net core debt and
shares outstanding at the end of 2004, an equity market premium of 3 per cent
and a market Beta of 1.6. Prudential's core debt at the end of 2004 is net of
the rights issue proceeds which have increased the proportion of the Group's
capital funded by equity and therefore increased the Group's WACC.
Rights issue
The strength of Prudential's businesses and positive developments in a number of
its markets represent an opportunity to enhance its market position and generate
improved returns for its shareholders. A strong financial position at a Group
level will provide increased financial flexibility and allow Prudential to
capitalise on these opportunities as they arise.
In response to these developments the Board took the decision in October 2004 to
launch a 1 for 6 Rights Issue.
The majority of the net proceeds of the rights issue (GBP1,021 million) will be
used to provide capital to support Prudential's growth plans for the UK and to
fund a potential opportunity to increase its ownership from 26 per cent to 49
per cent of its joint venture life insurance business with ICICI in India. The
remainder of the proceeds will be used to ensure that Prudential meets the
parent company solvency test under the EU Financial Group Directive ("FGD") that
became effective from 1 January 2005. The proceeds of the Rights issue have
initially been invested centrally within the Group in fixed interest securities.
Shareholders' Funds
On the achieved profits basis, which recognises the shareholders' interest in
long-term businesses, shareholders' funds at 31 December 2004 were GBP8.6
billion, up GBP1.6 billion from 31 December 2003.
Modified statutory basis (MSB) shareholders' funds, which are not affected by
fluctuations in the value of investments in the Group's with-profits funds were
GBP4.3 billion, an increase of GBP1.1 billion from 31 December 2003.
Internal rate of return (IRR) of insurance operations
United Kingdom and Europe
Prudential allocates shareholder capital to support new business growth across a
wide range of products in the UK. The weighted average post-tax Internal Rate of
Return (IRR) on the capital allocated to new business growth in the UK in 2004
was 12 per cent. This reflected an IRR of 20 per cent for annuity products, 7
per cent for unit-linked bonds, 3 per cent for corporate pensions and 1 per cent
for protection products.
By the financial year ending 2007, Prudential is targeting an IRR of 14 per cent
on the capital required to support new business sold in that year in the UK,
including individual product targets of 20 per cent for annuity products, 8 per
cent for unit-linked bonds, 15 per cent for corporate pensions and 15 per cent
for protection products.
United States
For JNL, the average IRR on new business was 13 per cent which we believe to be
above the returns being earned currently in the US life insurance industry.
Asia
In Asia we have target IRRs on new business at a country level of 10 per cent
over the country risk discount rate. Risk discount rates vary from 5 per cent to
19 per cent depending upon the maturity of the market. These target rates of
return are average rates and the marginal return on capital on a particular
product could be above or below the target.
We have, however, achieved or exceeded the target in each of Asia's markets in
2004 except for Thailand and Japan. In Japan the returns on capital are below
our target, a result of restructuring and withdrawing from some business lines
in 2003. The restructured business needs to build scale to achieve its target.
In Thailand the returns on capital are below our target as this operation is
relatively small. In aggregate, IRR on new business exceeded 20 per cent on
average risk discount rates for 2004 of 9.6 per cent.
Cash Flow
The table below shows the Group holding company cash flow. Prudential believes
that this format gives a clearer presentation of the use of the Group's
resources than the FRS 1 statement required by UK GAAP.
2004 2003
GBPm GBPm
---- ----
Cash remitted by business units
UK life fund transfer * 208 286
UK - other dividends (including special dividend) 100 120
JNL 62 48
Asia 67 48
M&G 84 84
---- ----
Total cash remitted to group 521 586
Net interest paid (144) (127)
Dividends paid (323) (447)
Scrip dividends and share options 119 30
---- ----
Cash remittances after interest and dividends 173 42
Tax received 34 77
Corporate activities (31) 58
---- ----
Cash flow before investment in businesses 176 177
Capital invested in business units:
UK and Europe (189) (23)
JNL 0 0
Asia (158) (145)
Other 0 (5)
---- ----
(Decrease) / increase in cash before rights issue proceeds (171) 4
Rights issues proceeds 1,021 0
---- ----
Increase in cash 850 4
---- ----
* - in respect of prior year bonus declarations
The Group received GBP521 million in cash remittances from business units in
2004 (2003: GBP586 million) comprising the shareholders' statutory life fund
transfer of GBP208 million relating to earlier bonus declarations, together with
dividends and interest from subsidiaries of GBP313 million. The shareholder
transfer in 2005 representing 2004's profits from the PAC with-profits fund, is
expected to be approximately GBP198 million.
Prudential UK Insurance Operations paid a GBP100 million special dividend from
the PAC shareholders' funds in respect of profits arising from earlier business
disposals. A similar amount will also be distributed from PAC shareholders'
funds in 2005. The level of scrip dividend take-up in 2004 (for both the 2003
final and 2004 interim dividend) was greater than the corresponding take-up in
2003, in part due to the change in basis of the election offered to
shareholders. After dividends and interest paid, there was a net inflow of
GBP173 million (2003: GBP42 million).
During 2004, the Group invested GBP31 million in corporate activities (2003:
GBP58 million receipt, arising from disposal proceeds and exceptional tax
receipts).
The Group invested GBP347 million during 2004 in its business units (2003:
GBP173 million). Investment in the UK Insurance Operations amounted to GBP189
million. This amount is expected to increase to around GBP250 million in 2005.
Investment in Asia in 2004 of GBP158 million is expected to remain broadly the
same in 2005. In 2006, based on current plans and expectations, Prudential
expects Asia to be a net capital provider to the Group.
Together with the proceeds from the rights issue of GBP1,021 million, there was
a total increase in cash of GBP850 million (2003: GBP4 million).
Shareholders' Borrowings and Financial Flexibility
As a result of the holding company's net funds inflow of GBP850 million and
exchange conversion gains of GBP49 million, net core borrowings at 31 December
2004 were GBP1,236 million, compared with GBP2,135 million at 31 December 2003.
After adjusting for holding company cash and short-term investments of GBP1,561
million, core structural borrowings of shareholder-financed operations at the
end of 2004 totalled GBP2,797 million, compared with GBP2,567 million at the end
of 2003. This increase reflected the issue of US$250 million (GBP137 million at
transaction rate) Perpetual Subordinated Capital Securities and additional
short-term borrowings of GBP150 million, partially offset by exchange conversion
gains of GBP57 million. Core long-term loans at the end of 2004 included
GBP1,762 million at fixed rates of interest with maturity dates ranging from
2005 to perpetuity. GBP898 million of the core borrowings were denominated in US
dollars, to hedge partially the currency exposure arising from the Group's
investment in Jackson National Life (JNL).
Prudential has in place an unlimited global commercial paper programme. At 31
December 2004 commercial paper of GBP517 million, US$761 million and EUR445
million had been issued under this programme. Prudential also has in place a
GBP5,000 million medium-term note (MTN) programme. At 31 December 2004
subordinated debt outstandings under this programme were GBP435 million and
EUR520 million, and senior debt outstandings were US$18 million. In addition the
holding company has access to GBP1,400 million committed revolving credit
facilities, provided by 14 major international banks and a GBP500 million
committed securities lending liquidity facility. These facilities have not been
drawn on during the year. The commercial paper programme, the MTN programme, the
committed revolving credit facilities and the committed securities lending
liquidity facility are available for general corporate purposes and to support
the liquidity needs of the parent company.
The Group is funded centrally, except for Egg, which is responsible for its own
financing. The Group's core debt is managed to be within a target level
consistent with its current debt ratings. At 31 December 2004, the gearing
ratio, on an achieved profit basis including hybrid debt (net of cash and
short-term investments) was 13 per cent compared with 23 per cent at 31 December
2003.
Prudential plc enjoys strong debt ratings from both Standard & Poor's and
Moody's. Prudential long-term senior debt is rated AA- (negative outlook) and A2
(stable outlook) from Standard & Poor's and Moody's respectively, while
short-term ratings are A1+ and P-1.
Based on the achieved profits basis operating profit from continuing operations
and interest payable on core structural borrowings, interest cover was 8.3 times
in 2004 compared with 6.6 times in 2003 (or 7.0 times based on restated achieved
profit in 2003).
Fund for Future Appropriations
During 2004, the fund for future appropriations, which represents the excess of
assets over policyholder liabilities for the Group's with-profits funds on a
statutory basis, grew to GBP16.7 billion from GBP12.7 billion in 2003. This
reflects an increase in the cumulative retained earnings arising on with-profits
business that have yet to be allocated to policyholders or shareholders. The
change in 2004 predominantly reflects the positive investment return earned by
the PAC with-profits fund as a result of investment gains in the UK equity
market.
Developments in Regulatory Solvency Requirements
The Financial Groups Directive ("FGD"), which affects groups with significant
cross-sector activities in insurance and banking/investment services, came into
force for Prudential from 1 January 2005. Prior to this, since 1 January 2001
Prudential was required to meet the solvency requirements of the Insurance
Groups Directive ("IGD"), as implemented by the Financial Services Authority
("FSA"). The FSA has implemented the FGD by applying the sectoral rules of the
largest sector, hence a group such as Prudential is classified as an
insurance-led conglomerate and is required to focus on the capital adequacy
requirements of the IGD, the Fourth Life Directive and the Insurance Company
Accounts Directive.
The FGD requires a continuous parent company solvency test which requires the
aggregating of surplus capital held in the regulated subsidiaries, from which
group borrowings are deducted, other than those subordinated debt issues which
qualify as capital. The test is passed when this aggregate number is positive. A
negative result at any point in time is a notifiable breach of UK regulatory
requirements. Additionally, the FSA has indicated that it will require public
disclosure of the FGD solvency position from 31 December 2005, for which the
detailed rules on disclosure have yet to be published. In practice, whether
Prudential is classified as a financial conglomerate or insurance group, there
is very little difference in application of the rules. This is because the FSA
has decided to make the test mandatory from 31 December 2006 to all insurance
groups, and requires public disclosure of the group solvency position from 31
December 2005.
Due to the geographically diverse nature of Prudential's operations, the
application of these requirements to Prudential are complex. In particular, for
many of our Asian operations, the assets, liabilities and capital requirements
have to be recalculated based on FSA regulations as if the companies were
directly subject to FSA regulation. Our current estimate of our FGD position is
that at the end of the year we have a surplus of at least GBP800 million.
The European Union is continuing to develop a new prudential framework for
insurance companies, "the Solvency II project". The main aim of this framework
is to ensure the financial stability of the insurance industry and protect
policyholders through establishing solvency requirements better matched to the
true risks of the business. Like Basel 2, the new approach is expected to be
based on the concept of three pillars - minimum capital requirements,
supervisory review of firms' assessments of risk and enhanced disclosure
requirements. In particular, companies will be encouraged to improve their risk
management processes, including making use of internal economic capital models
to enable a better understanding of the business. The emphasis on transparency
and comparability would help ensure a level playing field.
Solvency II is being lead by the European Commission's (EC) Internal Market
Director-General. The EC have directed the Committee of European Insurance and
Occupational Pensions Supervisors (CEIOPS) to provide input on many technical
aspects of the framework. To this end, the EC and CEIOPS have jointly issued
Calls for Advice in order to incorporate broader feedback from industry.
The expected outcome of the CEIOPS working groups is a draft directive for the
Commission. Final agreement on the terms of the new Directive is not expected
before 2007 followed by implementation in 2009.
Financial Strength of Insurance Operations
United Kingdom
A common measure of financial strength in the United Kingdom for long-term
insurance business is the free asset ratio. The free asset ratio is the ratio of
assets less liabilities to liabilities, and is expressed as a percentage of
liabilities. On a comparable basis with 2003, the free asset (or previous
regulatory Form 9) ratio of the Prudential Assurance Company (PAC) long-term
fund was approximately 14.8 per cent at the end of 2004, compared with 10.5 per
cent at 31 December 2003.
The valuation has been prepared, in our opinion, on a conservative basis in
accordance with the current FSA valuation rules, and without the use of implicit
items. No allowance has been taken for the present value of future profits and
the PAC long-term fund has not entered into any financial reinsurance contracts.
Certain reinsurance treaties with a value of approximately GBP49 million, which
were transferred from Scottish Amicable Life when that Company's business
transferred into the PAC long-term fund at the end of 2002, were converted into
a contingent loan during 2004.
The fund is very strong with an inherited estate measured on an essentially
deterministic valuation basis of more than GBP6.5 billion compared with
approximately GBP6 billion at the end of 2003. On a realistic basis, with
liabilities recorded on a market consistent basis, the free assets are valued at
around GBP5 billion before a deduction for the risk capital margin.
The PAC long-term fund is rated AA+ by Standard & Poor's and Aa1 by Moody's.
The table below shows the change in the investment mix of Prudential's main
with-profits fund:
1999 2003 2004
% % %
UK equities 58% 33% 33%
International equities 14% 15% 15%
Bonds 13% 31% 29%
Property 11% 17% 18%
Cash and other asset classes 4% 4% 5%
Total 100% 100% 100%
For the UK main with-profits fund 86 per cent of fixed income securities are
investment grade with 23 per cent rated AA or above. For Prudential Annuities
Limited 98 per cent of the fixed income securities are investment grade with 46
per cent rated AA or above. For Prudential Retirement Income Limited 98 per cent
of total assets are investment grade with 57 per cent rated AA or above.
With-profits contracts are long-term contracts with relatively low guaranteed
amounts, the nature of which permits Prudential to invest primarily in equities
and property. However, over the period from 1999 to mid-2001 the fund reduced
its exposure to equities. There was also a re-weighting within equities out of
the UK and into overseas equities. This change in asset mix reflected
Prudential's view that equity valuations were high and that other assets,
particularly corporate bonds, were relatively attractive. The change within
equities improved the fund's diversification and reduced expected fund
volatility. The change in asset mix in recent years has had a substantial
beneficial impact on investment returns. The broad asset mix will continue to be
reviewed as the economic environment and market valuations change.
The investment return on the Prudential main with-profits fund was 13.4 per cent
in the year to 31 December 2004 compared with the rise in the FTSE All Share
(Total Return) Index of 12.8 per cent over the same period. Over the last ten
years the with-profits fund has consistently generated positive fund returns
with 3, 5 and 10 year compound returns of 6.7 per cent per annum, 3.8 per cent
per annum and 10.3 per cent per annum respectively. These returns demonstrate
the benefits of the fund's strategic asset allocation and long-term
outperformance. During 2004 there was no change to the strategic asset
allocation of the fund. There has been no significant reduction in the level of
the fund's equity holdings during the year or subsequently.
United States
The capital adequacy position of Jackson National Life remains strong, with a
strong risk-based capital ratio of 4.3 times the NAIC Company Action Level Risk
Based Capital. JNL's financial strength is rated AA by Standard & Poor's
(negative outlook) and A1 by Moody's.
JNL's invested asset mix on a US regulatory basis (including Jackson National
Life of New York but excluding policy loans and reverse repo leverage) is as
follows:
2002 2003 2004
% % %
Bonds:
Investment Grade Public 60 58 60
Investment Grade Private 20 19 19
Non Investment Grade Public 4 5 4
Non Investment Grade Private 3 2 2
Commercial Mortgages 8 10 11
Private equities and real estate 3 4 3
Equities, cash and other assets 2 2 1
Total 100% 100% 100%
Asia
Prudential Corporation Asia maintains solvency margins in each of its operations
so that these are at or above the local regulatory requirements. Across the
region less than 20 per cent of non-linked funds are invested in equities.
In the life operations with larger in-force books, both Singapore and Malaysia
have discrete life funds, good investment returns and in 2004 saw their free
asset ratios increase. The Hong Kong life operation is a branch of UK's
Prudential Assurance Company Limited and its solvency is covered by that
operation. Taiwan has Risk Based Capital regulatory solvency margins and
Prudential ensures sufficient capital is retained in the business to cover these
requirements.
Inherited Estate
The long-term fund contains the amount that the Company expects to pay out to
meet its obligations to existing policyholders and an additional amount used as
working capital. The amount payable over time to policyholders from the
With-Profits Sub-Fund is equal to the policyholders' accumulated asset shares
plus any additional payments that may be required for smoothing or to meet
guarantees. The balance of the assets of the With-Profits Sub-Fund is called the
'inherited estate' and represents the major part of the working capital of
Prudential's long-term fund which enables the Company to support with-profits
business by:
- providing the benefits associated with smoothing and guarantees;
- providing investment flexibility for the fund's assets;
- meeting the regulatory capital requirements, which demonstrate solvency;
- absorbing the costs of significant events, or fundamental changes in its
long-term business without affecting bonus and investment policies.
The size of the inherited estate fluctuates from year to year depending on the
investment return and the extent to which it has been required to meet smoothing
costs, guarantees and other events.
The Company believes that it would be beneficial if there were greater clarity
as to the status of the inherited estate and therefore it has discussed with the
Financial Services Authority (FSA) the principles that would apply to any
re-attribution of the inherited estate. No conclusions have been reached.
Furthermore, the Company expects that the entire inherited estate will need to
be retained within the long-term fund for the foreseeable future to provide
working capital and so it has not considered any distribution of the inherited
estate to policyholders and shareholders.
The costs associated with the mis-selling review of Prudential's with-profits
personal pensions have been met from the inherited estate. Accordingly, these
costs have not been charged to the asset shares used in the determination of
policyholder bonus rates. Hence policyholders' pay-out values have been
unaffected by personal pension mis-selling.
In 1998, Prudential stated that deducting personal pensions mis-selling costs
from the inherited estate of the With-Profits Sub-Fund would not impact the
Company's bonus or investment policy. The Company gave an assurance that if this
unlikely event were to occur, it would make available support to the fund from
shareholder resources for as long as the situation continued, to ensure that
policyholders were not disadvantaged.
The assurance was designed to protect both existing policyholders at the date it
was announced, and policyholders who subsequently purchased policies while the
pension mis-selling review was continuing. This review was completed on 30 June
2002 and consequently the assurance has not applied to new business issued since
1 January 2004. New business in this context consists of new policies, new
members to existing pension schemes plus regular and single premium top-ups,
transfers and switches to existing arrangements. The assurance will continue to
apply to any policy in force as at 31 December 2003, both for premiums paid
before 1 January 2004 and for subsequent regular premiums (including future
fixed, retail price index or salary related increases and Department for Work
and Pensions rebates).
The maximum amount of capital support available under the terms of the assurance
will reduce over time as claims are paid on the policies covered by it.
The bonus and investment policy for each type of with-profits policy is the same
irrespective of whether the assurance applies. Hence removal of the assurance
for new business has had no impact on policyholder returns and this is expected
to continue for the foreseeable future.
Defined Benefit Pension Schemes
The Group operates three defined benefit schemes in the UK, of which the
principal scheme is the Prudential Staff Pension Scheme (PSPS). The level of
surplus or deficit of assets over liabilities for defined benefit schemes is
currently measured in three ways, namely the actuarial valuation, SSAP 24, and
FRS 17 bases.
Defined benefit schemes are generally required to be subject to full actuarial
valuation every three years to assess the appropriate level of funding for
schemes having regard to their commitments. These valuations include assessments
of the likely rate of return on the assets held within the separate trustee
administered funds. PSPS was last actuarially valued as at 5 April 2002 and this
valuation demonstrated the Scheme to be 110 per cent funded, with an excess of
actuarially determined assets over liabilities of 10 per cent, representing a
fund surplus of GBP376 million. As a result, no change in employers'
contributions from the current 12.5 per cent of salaries was required.
The employers' contribution is required to be paid as a minimum in future years,
irrespective of assets in the Scheme and, under the current Scheme rules, access
to the surplus through refunds from the Scheme is not available. Accordingly,
the surplus is not recognised as an asset in the Group's financial statements
that would normally, subject to amortisation, be appropriate under the
requirements of SSAP 24 which the Group continues to adopt rather than FRS 17.
The continued use of SSAP 24 is permitted under the provisions of FRS 17 until
2005, at which point the requirements of International Accounting Standards, in
particular IAS 19, will apply.
In the meantime, companies are required to publish details of pension scheme
surpluses and deficits on the FRS 17 basis by way of disclosure.
Under FRS 17 the basis of valuation differs markedly from the full triennial
valuation and SSAP 24 bases. In particular, it would require assets of the
Scheme to be valued at their market value at the year-end, while pension
liabilities would be required to be discounted at a rate consistent with the
current rate of return on a high quality corporate bond. As a result, the
difference between FRS 17 basis assets and liabilities can be volatile for value
movements in assets and a basis of setting inflation assumptions that is
referenced to market expectations implied within index-linked bonds. For those
schemes such as PSPS, which hold a significant proportion of their assets in
equity investments, the volatility can be particularly significant.
If FRS 17 had been fully implemented for 2004, a GBP10 million shareholder
charge (after tax) in the profit and loss account, and a shareholder charge of
GBP6 million (after tax) in the statement of total recognised gains and losses
would have been reported.
Surpluses and deficits on the Group's defined benefit schemes are apportioned to
the Prudential Assurance Company (PAC) life fund and shareholders' funds
depending on an estimation of the activity of the personnel involved. Such
apportionment is necessary to properly reflect the economic interests in and
exposures to the schemes' financial position. The aforementioned volatility can
be illustrated by considering the movements in the surplus and deficit over the
last three years. For the PAC life fund the estimated interest, net of tax, in
the pension schemes' FRS 17 basis financial position has changed from a surplus
at 31 December 2001 of GBP392 million to a deficit at 31 December 2002 of GBP380
million, a deficit at 31 December 2003 of GBP411 million and a deficit at 31
December 2004 of GBP444 million. For the shareholders' fund the estimated
interest, net of tax in the pension schemes' FRS 17 basis financial position has
changed from a surplus at 31 December 2001 of GBP101 million to a deficit at 31
December 2002 of GBP85 million, a deficit at 31 December 2003 of GBP101 million,
and a deficit at 31 December 2004 of GBP109 million. The modest changes in 2003
and 2004 reflect the negative impact of increased inflation assumptions, that
are implicit within the yields on index-linked gilts, being offset by the
positive value movements in scheme assets arising from the strong recovery in
equity markets. The large reduction in 2002 reflects the steep fall in equity
markets in that year.
ACHIEVED PROFITS BASIS RESULTS
Summarised Consolidated Profit and Loss Account 2004 GBPm 2003 GBPm
---- ----
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 (including actual investment returns) 1,521 838
Tax (485) (355)
---- ----
Profit for the year before minority interests 1,036 483
Minority interests 10 2
---- ----
Profit for the year after minority interests 1,046 485
Dividends (362) (320)
---- ----
Retained profit for the year 684 165
---- ----
Earnings Per Share*
Based on operating profit after tax and related minority interests before amortisation
of goodwill of GBP791m (GBP527m) 37.2p 25.4p
Adjustment for amortisation of goodwill (4.6)p (4.7)p
Adjustment from post-tax long-term investment returns to post-tax actual investment
returns (after related minority interests) 21.5p 22.4p
Adjustment for post-tax effect of changes in economic assumptions (3.4)p (19.7)p
Adjustment for post-tax profit on business disposals 1.4p -
Adjustment for post-tax Egg France closure cost (3.0)p -
---- ----
Based on profit for the year after minority interests of GBP1,046m (GBP485m) 49.1p 23.4p
---- ----
Average number of shares 2,129m 2,076m
---- ----
Dividend Per Share* 15.84p 15.38p
---- ----
* Earnings per share and dividend per share figures for 2003 have been restated to take account of the Rights Issue in
2004.
TOTAL INSURANCE AND INVESTMENT NEW
BUSINESS
Insurance Products and Investment Insurance Products Investment Products
Products Gross Premiums Gross Inflows Total
2004 GBPm 2003 GBPm 2004 GBPm 2003 GBPm 2004 GBPm 2003 GBPm
---- ---- ---- ---- ---- ----
UK and Europe Operations 6,538 4,128 5,845 3,797 12,383 7,925
US Operations 4,420 4,066 418 159 4,838 4,225
Prudential Asia 1,172 989 18,845 18,157 20,017 19,146
---- ---- ---- ---- ---- ----
Group Total 12,130 9,183 25,108 22,113 37,238 31,296
---- ---- ---- ---- ---- ----
Insurance Products - New Business Single Regular Annual Premium Equivalents
Premiums 2004 GBPm 2003 GBPm 2004 GBPm 2003 GBPm 2004 GBPm 2003 GBPm
---- ---- ---- ---- ---- ----
UK and Europe Insurance Operations
Direct to customer
Individual annuities 630 657 - - 63 66
Individual pensions and life 19 22 10 12 12 14
Department of Work and Pensions 265 280 - - 27 28
rebate business
---- ---- ---- ---- ---- ----
Total 914 959 10 12 102 108
---- ---- ---- ---- ---- ----
Business to Business
Corporate pensions 153 168 137 127 152 144
Individual annuities 229 223 - - 23 22
Bulk annuities 474 287 - - 47 29
---- ---- ---- ---- ---- ----
Total 856 678 137 127 222 195
---- ---- ---- ---- ---- ----
Intermediated distribution
Life 1,001 818 5 22 105 104
Individual annuities 1,180 828 - - 118 83
Individual and corporate pensions 189 120 25 29 44 41
Department of Work and Pensions 89 103 - - 9 10
rebate business
---- ---- ---- ---- ---- ----
Total 2,459 1,869 30 51 276 238
---- ---- ---- ---- ---- ----
Partnerships
Life 790 293 2 - 81 29
Individual and bulk annuities 1,249 52 - - 125 5
---- ---- ---- ---- ---- ----
Total 2,039 345 2 - 206 34
---- ---- ---- ---- ---- ----
Europe 89 87 2 - 11 9
---- ---- ---- ---- ---- ----
Total UK and Europe Insurance 6,357 3,938 181 190 817 584
Operations
---- ---- ---- ---- ---- ----
US Operations
Fixed annuities 1,130 1,375 - - 113 138
Equity linked indexed annuities 429 255 - - 43 25
Variable annuities 1,981 1,937 - - 198 194
Life 16 - 12 13 14 13
Guaranteed Investment Contracts 180 183 - - 18 18
GIC - Medium Term Notes 672 303 - - 67 30
---- ---- ---- ---- ---- ----
Total 4,408 4,053 12 13 453 418
---- ---- ---- ---- ---- ----
Prudential Asia
China 9 7 16 11 17 12
Hong Kong 255 189 78 83 103 102
India (Group's 26% interest) 5 4 33 16 33 16
Indonesia 38 27 28 31 32 34
Japan 17 9 7 35 9 36
Korea 36 19 60 30 64 32
Malaysia 7 11 61 59 62 60
Singapore 199 181 47 57 67 75
Taiwan 88 28 143 132 151 135
Other 8 7 37 53 38 53
---- ---- ---- ---- ---- ----
Total 662 482 510 507 576 555
---- ---- ---- ---- ---- ----
Group Total 11,427 8,473 703 710 1,846 1,557
---- ---- ---- ---- ---- ----
Annual Premium Equivalents are calculated as the aggregate of regular new
business premiums and one tenth of the single new business premiums.
Investment Products - Funds Under Management
(FUM)
FUM Gross Redemptions Market and FUM
other
1 Jan 2004 Inflows Movements 31 Dec 2004
---- ---- ---- ---- ----
GBPm GBPm GBPm GBPm GBPm
UK and Europe Operations 24,192 5,845 (3,841) 2,509 28,705
US Operations 148 418 (31) 15 550
Prudential Asia 6,596 18,845 (17,647) 38 7,832
---- ---- ---- ---- ----
Group Total 30,936 25,108 (21,519) 2,562 37,087
---- ---- ---- ---- ----
ACHIEVED PROFITS BASIS RESULTS
Operating Profit before Amortisation of Goodwill
Restated
Results Analysis by Business Area 2004 GBPm 2003 GBPm
---- ----
UK and Europe Operations
Insurance Operations:
New business 220 166
Business in force 230 193
---- ----
Long-term business 450 359
M&G 136 83
Egg* 43 55
---- ----
Total* 629 497
---- ----
US Operations
New business 156 148
Business in force* 161 49
---- ----
Long-term business* 317 197
Broker dealer and fund management (14) (3)
---- ----
Total* 303 194
---- ----
Prudential Asia
New business 312 291
Business in force 69 74
---- ----
Long-term business 381 365
Fund management 19 13
Development expenses (15) (27)
---- ----
Total 385 351
---- ----
Other Income and Expenditure
Investment return and other income 44 29
Interest payable on core structural borrowings (154) (143)
Corporate expenditure:
Group Head Office (54) (43)
Asia Regional Head Office (29) (24)
---- ----
Total (193) (181)
---- ----
Operating profit from continuing operations before amortisation of goodwill 1,124 861
---- ----
Analysed as profits (losses) from:
New business 688 605
Business in force 460 316
---- ----
Long-term business 1,148 921
Asia development expenses (15) (27)
Other operating results (9) (33)
---- ----
Total 1,124 861
---- ----
* The results for Egg and US Operations exclude the results of discontinued operations as set out below:
Egg France (37) (89)
Jackson Federal Bank 17 22
---- ----
Operating loss from discontinued operations before amortisation of goodwill (20) (67)
---- ----
ACHIEVED PROFITS BASIS RESULTS
Restated
Summarised Consolidated Balance Sheet 2004 GBPm 2003 GBPm
---- ----
Total assets less liabilities, excluding insurance funds 149,050 136,346
Less insurance funds:
Technical provisions (net of reinsurers' share) 128,083 120,449
Fund for future appropriations 16,686 12,657
Less shareholders' accrued interest in the long-term business (4,315) (3,765)
---- ----
140,454 129,341
---- ----
Total net assets 8,596 7,005
---- ----
Share capital 119 100
Share premium 1,558 553
Statutory basis retained profit 2,604 2,587
Additional achieved profits basis retained profit 4,315 3,765
---- ----
Shareholders' capital and reserves 8,596 7,005
---- ----
Restated
Movement in Shareholders' Capital and Reserves 2004 GBPm 2003 GBPm
---- ----
Profit for the year after minority interests 1,046 485
Exchange movements, net of related tax of GBP12m (GBP18m) (229) (348)
Proceeds from Rights Issue, net of expenses 1,021 -
Other new share capital subscribed 119 30
Dividends (362) (320)
Consideration paid for own shares (4) (3)
Movement in cost of own shares - 1
---- ----
Net increase (decrease) in shareholders' capital and reserves 1,591 (155)
Shareholders' capital and reserves at beginning of year:
As originally reported 7,043 7,196
Prior year adjustment on implementation of UITF 38 (38) (36)
---- ----
As restated 7,005 7,160
---- ----
Shareholders' capital and reserves at end of year 8,596 7,005
Comprising
---- ----
UK and Europe Operations:
Long-term business 4,051 3,424
M&G 312 336
Egg 269 348
---- ----
4,632 4,108
US Operations 2,596 2,490
Prudential Asia 1,738 1,419
Other operations (including central goodwill and borrowings) (370) (1,012)
---- ----
8,596 7,005
---- ----
ACHIEVED PROFITS BASIS RESULTS
Basis of Preparation of Results
The achieved profits basis results have been prepared in accordance with the
guidance issued by the Association of British Insurers in December 2001
"Supplementary Reporting for long-term insurance business (the achieved profits
method)".
Under this guidance, the basis for setting long-term expected rates of return on
investments and risk discount rates are, for countries with developed long-term
fixed income securities markets, set by reference to period end rates of return
on fixed income securities. This "active" basis of assumption setting has been
applied in preparing the results of the Group's UK, Europe and US operations.
For the Group's Asian operations, the active basis is appropriate for business
written in Japan and Korea and US dollar denominated business written in Hong
Kong.
For countries where long-term fixed income securities markets are
underdeveloped, investment return assumptions and risk discount rates are based
on an assessment of long-term economic conditions. Except for the countries
listed above, this basis is appropriate to the Group's Asian operations.
The key economic assumptions are set out below:
2004 2003
UK and Europe Insurance Operations
Pre-tax expected long-term nominal rate of investment return:
UK equities 7.1% 7.3%
Overseas equities 6.8% to 7.8% 6.6% to 7.9%
Property 6.3% 6.6%
Gilts 4.6% 4.8%
Corporate bonds 5.5% 5.8%
PAC with-profits fund assets
(applying the rates listed above to the investments held by the fund) 6.5% 6.8%
Expected long-term rate of inflation 2.9% 3.1%
Post-tax expected long-term nominal rate of return:
Pension business (where no tax applies) 6.5% 6.8%
Life business 5.7% 5.9%
Risk margin included within the risk discount rate 2.6% 2.6%
Risk discount rate 7.2% 7.4%
US Operations (Jackson National Life)
Expected long-term spread between earned rate and rate credited to policyholders 1.75% 1.75%
US 10 year treasury bond rate at end of year 4.3% 4.3%
Risk margin included within the risk discount rate 3.1% 3.1%
Risk discount rate 7.4% 7.4%
Prudential Asia
Weighted pre-tax expected long-term nominal rate of investment return* 6.6% 7.4%
Weighted expected long-term rate of inflation 3.0% 3.4%
Weighted risk discount rate 9.6% 10.4%
The Prudential Asia weighted economic assumptions have been determined by
weighting each country's assumptions by reference to the Achieved Profits basis
operating results for new business written in the relevant year.
* Consistent with prior periods, for the Taiwan operation, the projections
include an assumption of phased progression from current rates to the long-term
expected rates over a remaining period of 8 years. This takes into account the
effect on bond values of rising interest rates.
ACHIEVED PROFITS BASIS RESULTS
Notes on the Achieved Profits Basis Results
(1) The results for 2004 and 2003 have been derived from the achieved profits
basis supplements to the Company's statutory accounts for those years. The
supplements included unqualified audit reports from the auditors.
(2) Under the achieved profits basis, the operating profit from new business
represents the profitability of new long-term insurance business written in the
year, and the operating profit from business in force represents the
profitability of business in force at the start of the year. These results are
combined with the statutory basis results of the Group's other operations
including banking and fund management business. The effects of short-term
fluctuations in in investment returns and the impact of changes in economic
assumptions on shareholders' funds at the start of the reporting period are
excluded from operating profit but included in total profit. In the directors'
opinion, the achieved profits basis results provide a more realistic reflection
of the performance of the Group's long-term business than results under the
statutory basis.
(3) The proportion of surplus allocated to shareholders from the UK with-profits
business has been based on the present level of 10%. Future bonus rates have
been set at levels which would fully utilise the assets of the with- profits
fund over the lifetime of the business in force.
STATUTORY BASIS RESULTS
Summarised Consolidated Profit and Loss Account 2004 GBPm 2003 GBPm
---- ----
Long-term business gross premiums written (note 3) 16,355 13,781
---- ----
Profit on ordinary activities before tax 650 350
Tax (note 4) (232) (144)
---- ----
Profit for the year before minority interests 418 206
Minority interests 10 2
---- ----
Profit for the year after minority interests 428 208
Dividends (note 5) (362) (320)
---- ----
Retained profit (loss) for the year 66 (112)
---- ----
Reconciliation of operating profit to profit on ordinary activities
Operating profit (loss) before amortisation of goodwill:
Continuing operations 603 424
Discontinued operations (note 6) (20) (67)
---- ----
583 357
Amortisation of goodwill (97) (98)
---- ----
Operating profit based on long-term investment returns 486 259
Short-term fluctuations in investment returns 229 91
Profit or loss on the sale or termination of discontinued operations:
Profit on business disposals (note 6) 48 -
Egg France closure cost (note 6) (113) -
---- ----
Profit on ordinary activities before tax 650 350
---- ----
Earnings Per Share*
Based on operating profit after tax and related minority interests before amortisation
of goodwill of GBP408m (GBP257m) 19.2p 12.4p
Adjustment for amortisation of goodwill (4.6)p (4.7)p
Adjustment from post-tax long-term investment returns to post-tax actual investment
returns (after related minority interests) 7.1p 2.3p
Adjustment for post-tax profit on business disposals 1.4p -
Adjustment for post-tax Egg France closure cost (3.0)p -
---- ----
Based on profit for the year after minority interests of GBP428m (GBP208m) 20.1p 10.0p
---- ----
Average number of shares 2,129m 2,076m
---- ----
Dividend Per Share* 15.84p 15.38p
---- ----
* Earnings per share and dividend per share figures for 2003 have been restated
to take account of the Rights Issue in 2004.
STATUTORY BASIS RESULTS
Operating Profit before Amortisation of Goodwill
Restated
Results Analysis by Business Area 2004 GBPm 2003 GBPm
---- ----
UK and Europe Operations
UK and Europe Insurance Operations 305 256
M&G 136 83
Egg* 43 55
---- ----
Total* 484 394
---- ----
US Operations
Jackson National Life* 196 143
Broker dealer and fund management (14) (3)
---- ----
Total* 182 140
---- ----
Prudential Asia
Long-term business 126 85
Fund management 19 13
Development expenses (15) (27)
---- ----
Total 130 71
---- ----
Other Income and Expenditure
Investment return and other income 44 29
Interest payable on core structural borrowings (154) (143)
Corporate expenditure:
Group Head Office (54) (43)
Asia Regional Head Office (29) (24)
---- ----
Total (193) (181)
---- ----
Operating profit from continuing operations before amortisation of goodwill 603 424
---- ----
* The results for Egg and Jackson National Life exclude the results of
discontinued operations as set out below:
Egg France (37) (89)
Jackson Federal bank 17 22
---- ----
Operating profit from discontinued operations before amortisation of goodwill (20) (67)
---- ----
STATUTORY BASIS RESULTS
Consolidated Statement of Total Recognised Gains and Losses 2004 GBPm 2003 GBPm
---- ----
Profit for the year after minority interests 428 208
Exchange movements, net of related tax of GBP12m (GBP18m) (161) (253)
---- ----
Total recognised gains (losses) relating to the financial period 267 (45)
---- ----
Restated
(note 2)
Movement in Shareholders' Capital and Reserves 2004 GBPm 2003 GBPm
---- ----
Total recognised gains (losses) relating to the financial period 267 (45)
Proceeds from Rights Issue, net of expenses 1,021 -
Other new share capital subscribed 119 30
Dividends (362) (320)
Consideration paid for own shares (4) (3)
Movement in cost of own shares - 1
---- ----
Net increase (decrease) in shareholders' capital and reserves 1,041 (337)
---- ----
Shareholders' capital and reserves at beginning of year:
As previously reported 3,278 3,613
Prior year adjustment on implementation of UITF 38 (38) (36)
---- ----
As restated 3,240 3,577
---- ----
Shareholders' capital and reserves at end of year 4,281 3,240
---- ----
STATUTORY BASIS RESULTS Restated
Summarised Consolidated Balance Sheet 2004 GBPm 2003 GBPm
---- ----
Assets Goodwill 1,367 1,504
Investments in respect of
non-linked business:
Land and Buildings 12,367 10,965
Equities 38,426 34,877
Fixed income securities 66,750 64,591
Deposits with credit institutions 6,125 4,088
Other investments 5,987 5,719
---- ----
129,655 120,240
Assets held to
cover linked liabilities 23,830 19,921
Reinsurers' share of technical provisions 1,018 924
Banking business assets 11,995 12,629
Cash at bank and in hand 1,415 1,221
Deferred acquisition costs 2,908 2,952
Other assets* 2,352 2,318
---- ----
Total assets 174,540 161,709
---- ----
Liabilities
Share capital 119 100
Share premium 1,558 553
Statutory basis retained profit 2,646 2,625
Cost of shares held in trusts for employee incentive plans* (42) (38)
---- ----
Shareholders'capital and reserves* 4,281 3,240
Minority interests 71 107
Subordinated liabilities (note 7) 1,429 1,336
Fund for future appropriations* 16,686 12,657
Technical provisions in respect of non-linked business 104,964 101,178
Technical provisions for linked liabilities 24,137 20,195
Deferred tax 1,522 1,154
Debenture loans (note 7) 1,761 1,781
Other borrowings (note 7) 1,483 1,328
Banking business liabilities 11,217 11,681
Obligations of Jackson National Life
under funding and stocklending arrangements 3,308 3,762
Tax 1,017 851
Final dividend 253 214
Other liabilities* 2,411 2,225
---- ----
Total liabilities* 174,540 161,709
---- ----
* The 2003 figures for these lines have been restated
as a result of the implementation of UITF 38.
STATUTORY BASIS RESULTS
FRS1 Consolidated Cash Flow Statement 2004 GBPm 2003 GBPm
---- ----
Operations
Net cash inflow from operating activities 93 88
---- ----
Servicing of finance
Interest paid (207) (172)
---- ----
Tax
Tax received 72 128
---- ----
Acquisitions and disposals
Net cash inflow from disposal of European business - 27
---- ----
Equity dividends
Equity dividends paid (323) (447)
---- ----
Net cash outflow before financing (365) (376)
---- ----
Financing
Issue of borrowings 111 829
Reduction in credit facility utilised by investment subsidiaries managed by PPM America (31) (151)
Issues of ordinary share capital, net of expenses of GBP23m (GBPnil) 1,140 30
---- ----
Net cash inflow from financing 1,220 708
---- ----
Net cash inflow for the year 855 332
---- ----
The net cash inflow was invested as follows:
Net purchases (sales) of portfolio investments 843 (149)
Increase in cash and short-term deposits, net of overdrafts 12 481
---- ----
855 332
---- ----
In accordance with FRS 1, this statement excludes the cash flows of long-term business funds.
The reconciliation from operating profit to net cash inflow from operating activities is summarised below:
2004 GBPm 2003 GBPm
---- ----
Operating profit before amortisation of goodwill 583 357
Add back interest charged to operating profit* 213 189
Adjustments for non-cash items:
Tax on long-term business profits (195) (150)
Amounts retained in long-term business operations and Egg, timing differences and
other items (508) (308)
---- ----
Net cash inflow from operating activities (as shown above) 93 88
---- ----
*This adjustment comprises interest payable on core structural borrowings,
commercial paper and other borrowings, non-recourse borrowings of investment
subsidiaries managed by PPM America and structural borrowings of Egg. Interest
payable on long-term business with-profits fund borrowings and other trading
activities has been excluded from this adjustment.
STATUTORY BASIS RESULTS
Notes on the Statutory Basis Results
(1) The financial information set out above does not constitute the Company's
statutory accounts for the years ended 31 December 2004 and 2003 but is, with
the exception for 2003 of the change in accounting policy explained in Note 2
below, derived from those accounts. Statutory accounts for 2003 have been
delivered to the Registrar of Companies and those for 2004 will be delivered
following the Company's Annual General Meeting. The auditors have reported on
both those accounts; their reports were unqualified and did not contain
statements under section 237 (2) or (3) of the Companies Act 1985.
(2) The Company has implemented UITF Abstract 38 - "Accounting for ESOP Trusts"
in preparing its 2004 results which requires the Company to present the cost of
acquiring shares held in trusts for employee incentive plans as a deduction in
determining shareholders' funds. The effect of the change in policy is to reduce
shareholders' funds at 1 January 2004 from the previously published 31 December
2003 level by GBP38m. Comparative balance sheet amounts have been restated
accordingly. The impact on the profit and loss account is immaterial.
(3) An analysis of long-term business gross premiums written is set out below:
2004 GBPm 2003 GBPm
---- ----
UK and Europe Insurance Operations 9,186 7,264
US Operations 4,717 4,369
Prudential Asia 2,452 2,148
---- ----
16,355 13,781
---- ----
(4) The tax charge of GBP232m (GBP144m) comprises GBP26m (GBP22m) UK tax and
GBP206m (GBP122m) overseas tax.
(5) The directors recommend that the shareholders declare a final dividend for
2004 of 10.65p per share payable on 25 May 2005 to shareholders on the register
at the close of business on 18 March 2005. A scrip dividend alternative will be
offered to shareholders. After adjusting for the bonus element of the Rights
Issue in 2004, the interim dividend for 2004 was 5.19p per share (actual amount
paid was 5.4p per share). The total dividend for the year, including the
recommended final dividend and the adjusted interim dividend, amounts to 15.84p
per share and the total cost of the dividend declared in respect of 2004 is
GBP362m.
(6) In July 2004, Egg announced that it intended to take the necessary steps to
withdraw from the French market at an expected cost of GBP113m. This business,
which has been treated as discontinued operations, incurred losses up to the
date of announcement of GBP37m (GBP89m).
In October 2004, Jackson National Life sold Jackson Federal Bank and realised a
profit on sale of GBP41m before tax. This business, which has also been treated
as discontinued operations, made an operating profit up to the date of disposal
of GBP17m (GBP22m).
In August 2004, the Company sold its 15% interest in Life Assurance Holding
Corporation Limited and realised a profit on sale of GBP7m before tax.
(7) An analysis of borrowings is set out below:
2004 GBPm 2003 GBPm
---- ----
Net core structural borrowings of shareholder financed operations 1,236 2,135
Add back holding company cash and short-term investments 1,561 432
---- ----
Core structural borrowings of shareholder financed operations 2,797 2,567
Commercial paper and other borrowings that support a short-term fixed
income securities reinvestment programme 1,079 1,074
Non-recourse borrowings of investment subsidiaries managed by PPM America
183 214
Egg debenture loans 451 451
UK and Europe Operations long-term business with-profits fund borrowings
144 120
Other borrowings of shareholder financed operations 19 19
---- ----
4,673 4,445
---- ----
This total is recorded in the statutory basis summarised consolidated balance sheet as:
Subordinated liabilities 1,429 1,336
Debenture loans 1,761 1,781
Other borrowings 1,483 1,328
---- ----
4,673 4,445
---- ----
(8) The Preliminary Announcement was approved by the Board of Directors on 1 March 2005.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date 02 March, 2005
PRUDENTIAL PUBLIC LIMITED COMPANY
By: /s/ Clare Staley
Clare Staley
Head of Group Media Relations,