2nd Mar 2005 07:05
Prudential PLC02 March 2005 PART 1 Embargo: 07:00 hrs Wednesday 2 March 2005 PRUDENTIAL PLC FULL-YEAR 2004 RESULTS Strong delivery across all of our businesses • Record new business achieved profits of £688 million, up 23 per cent on 2003 • Strong growth in achieved profit basis operating profit, up 39 per cent on 2003 to £1.12 billion* • Modified statutory basis profit of £603 million, up 49 per cent on 2003* • New business achieved profit margin of 37 per cent (2003: 38%) • Shareholders funds on an achieved profits basis of £8.6 billion • Record insurance APE sales of £1.85 billion, up 26 per cent on 2003 • Record funds under management of £187 billion, up £22 billion on 2003 • Full-year dividend per share up 3 per cent to 15.84 pence (2003:15.38 pence 1 ) *Operating profit on continuing operations before goodwill, exceptional itemsand short-term fluctuations in investment returns. All figures throughout are on a constant exchange rate basis, unless otherwisestated. Commenting on the results, Jonathan Bloomer, Prudential's Group Chief Executive,said: "Prudential has built strong positions in three of the most attractive savingsmarkets in the world. In 2004, each of our three regional insurance businessesdelivered double-digit growth in sales and profits. As a result, we registeredrecord Group insurance APE sales and a 23 per cent increase in new businessachieved profits. 1 As adjusted, see note 9 The UK market is starting to recover after three years of decline and, as therise of 40 per cent in new business achieved profits shows, it is clear that thechanges we have made to the business are enabling us to take advantage of thisupturn. In Asia, new business achieved profits rose 19 per cent and margins remainattractive. We see excellent growth prospects throughout the region, especiallyin China and India. In the US, we continue to outperform the market, and in 2004 our business therereturned $120 million to the Group. We expect this to be $150 million in 2005,and to rise thereafter. M&G also delivered a very strong performance in 2004, with underlying profits of£110 million, up 57 per cent on 2003. We see excellent growth opportunities across the Group. Our markets and opportunities The United Kingdom The UK is the third largest life insurance market in the world, but between 2001and 2003 it shrank by nearly 6 per cent per annum. During this period, our UKinsurance operation focused on increasing its efficiency, developing its productrange and broadening its distribution base, while maintaining its position asone of the financially strongest companies in the sector. It has successfully evolved from a direct-sales operation selling with-profitsproducts into a company that sells mainly shareholder-backed products throughIFAs, direct to customers, business to business and through partnershipagreements with other companies. In 2004, it achieved strong new businessperformance across all these channels, increasing its share of the medium tolong-term savings market to 8.9 per cent (source data: ABI), while maintainingoverall margins, resulting in a 40 per cent increase in new business achievedprofits year on year. Going forward, we expect to see some modest reduction inthe 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 amulti-tie distribution model, which we expect to favour financially strongplayers like Prudential with a powerful brand and attractive product range.Prudential UK has made good progress with the new multi-tie networks, winningplaces on many of the panels announced to date, and expects these agreements tobegin to have an effect on our performance in 2005, making an increasingcontribution thereafter. The Rights Issue, announced in October 2004, will allow us to reinvest in theUK, in order to take advantage of the developments in both our business and themarketplace. The solid performance of the with-profits fund, which delivered areturn of 13.4 per cent in 2004, has enabled Prudential UK to maintain annualbonuses and increase policy values for nearly all of its 5.5 millionwith-profits customers. We believe the strength and performance of the fundcombined with the beginnings of a recovery in the UK market will benefitPrudential in 2005. Prudential UK expects sales this year to grow by about 10 per cent from the baseestablished in 2004. This compares with the industry expectation for UK marketgrowth of around five per cent for 2005. It is determined, however, that it willnot grow volume at the expense of value, and has set itself a blended targetinternal rate of return on this new business of 14 per cent by 2007, comparedwith the 12 per cent it achieved in 2004. The United States The US is the largest long-term savings market in the world, with considerableopportunities for growth. Despite uncertainty in equity and capital markets overthe last few years, Jackson National Life's (JNL) ability to respond quickly tochanges in both consumer demand and the economic climate, enabled it to continueto grow profitably during this period, and in 2004 it increased new businessachieved profits by 18 per cent, to £156 million. The business continues to fund its own growth from internally-generated cash,and in 2004 it also contributed $120 million to the group. This is expected toincrease to $150 million in 2005. JNL's strategy is to concentrate on organic growth within profitable marketsegments, but to use small self-financed acquisitions, such as that of LifeInsurance Company of Georgia, announced in November 2004, to build scale andreduce unit costs. JNL is an industry leader in distributing products, and has repeatedly shownthat it can react quickly to market changes and establish strong positions innew products and new channels. In 2004, for example, nearly 90 per cent of newsales came from products developed in the last two years. Its Perspective IIvariable annuity contract was the best selling contract in the US market lastyear (source: VARDS). In 2005, we expect the US market to grow at about 4 per cent and JacksonNational Life to grow sales at around twice this rate, while keeping its costsdown 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 foreignfinancial services players, make these markets very attractive for sellingmedium to long-term savings and protection products. Against this backdrop, Prudential has established a strong track record ofsuccess. In the past decade we have expanded across 12 countries and deliveredAPE compound growth of 26 per cent per year, while maintaining margins above 50per cent. In 2004, new business achieved profits rose 19 per cent. Prudential Corporation Asia is Europe's leading life insurer in Asia in terms ofmarket coverage and number of top five market positions. We have alsoestablished a complementary regional funds management business in seven marketsand 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. Followingthe restructuring in 2003, the Japanese business has made some progressestablishing new distribution channels, but it will take some time to becomelarge enough to be a positive contributor to the overall result for the region.Elsewhere, growth prospects are very good, particularly in India and China, andthe business is already well placed to take advantage of these. In India, our joint venture with ICICI delivered APE sales growth of 127 percent and continues to be the leading private sector player. In 2004, thegovernment announced its intention to increase the cap on foreign ownership from26% to 49%. While Prudential remains interested in increasing its stake in thejoint venture, the relevant legislation has not yet been put before the IndianParliament. In China, our joint venture with CITIC is one of the country's leading foreignplayers and new business APE growth was 70 per cent last year. We alreadyoperate in three cities and our fourth operation, in Shanghai, will launch inthe second quarter of 2005. We have recently received licences for two furthercities, Dongguan and Foshan, and a licence to write Group Life insurancebusiness. We expect to continue to develop rapidly as geographic licensingrestrictions in China ease further. We already hold licences for more citiesthan any other European life insurer. We are confident of our ability to grow strongly and profitably in Asia: theopportunities in our newer markets, coupled with the strength of our largeroperations, 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 highquality investment management services for Prudential's customers. M&G is also aleading UK manager of retail investment funds and institutional fixed income andpooled life and pensions funds. M&G enjoyed a successful 2004, with external funds under management rising by 19per cent during the year to £28.7 billion, due to a combination of net fundinflows from both retail and institutional clients and market gains on existingfunds. M&G has a total of £126 billion in funds under management, up 14 per centon 2003. In recent years, M&G has been developing profitable new income streams whilekeeping a tight control over costs. This is a powerful combination, whichresulted in a strong performance in 2004, with underlying profits of £110million, 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 FundsDirect business on the market. It is now firmly focused on its profitable coreUK business, where it achieved underlying profits of £74 million in 2004. This was a good performance from Egg's UK business, especially given theincreased competition and rising interest rates that have affected the creditcard and personal loan markets. Egg's effective cost management and good creditquality also contributed to the solid results from its UK operation. At the sametime, it has increased its provision levels to reflect the change in its productmix following growth in its unsecured lending portfolio, the stage in the lifecycle of its card and loan books and the increasing proportion of personal loansbusiness. Looking ahead, Egg will continue to develop its UK operation, building itsunsecured lending business, while expanding its product range to increasecross-sales to existing customers. We expect Egg to finance its own growth without requiring capital support fromthe group. Outlook Prudential has built strong positions in three of the most attractive savingsmarkets in the world. Each of the businesses is performing well, and ispositioned to take advantage of the opportunities in its respective market. Weare on track to deliver sustainable, profitable growth and to achieve our targetreturns on capital in 2005 and beyond. Dividend The Board has decided to recommend to shareholders a final dividend for the yearof 10.65 pence per share, which together with the restated interim dividend of5.19 pence makes a total amount of 15.84 pence. This represents growth of threeper cent on the 2003 dividend of 15.38 pence, after adjusting for the bonuselement of the rights issue. The 2004 dividend is covered 1.2 times by post-taxmodified statutory basis profit for the year after minority interests. We intendto maintain our current dividend policy, with the level of dividend growth beingdetermined after considering the opportunities to invest in those areas of ourbusiness offering attractive growth prospects, our financial flexibility and thedevelopment 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 3823Joanne 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 businessin the United Kingdom, and its affiliated companies constitute one of theworld's leading financial services groups. It provides insurance and financialservices directly and through its subsidiaries and affiliates throughout theworld. It has been in existence for over 150 years and has £187 billion inassets under management, as at 31 December 2004. Prudential plc is notaffiliated in any manner with Prudential Financial, Inc, a company whoseprincipal place of business is in the United States of America. Forward-Looking Statements This statement may contain certain "forward-looking statements" with respect tocertain of Prudential's plans and its current goals and expectations relating toits 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. Bytheir nature, all forward-looking statements involve risk and uncertaintybecause they relate to future events and circumstances which are beyondPrudential's control including among other things, UK domestic and globaleconomic and business conditions, market related risks such as fluctuations ininterest rates and exchange rates, and the performance of financial marketsgenerally; the policies and actions of regulatory authorities, the impact ofcompetition, inflation, and deflation; experience in particular with regard tomortality and morbidity trends, lapse rates and policy renewal rates; thetiming, impact and other uncertainties of future acquisitions or combinationswithin relevant industries; and the impact of changes in capital, solvency oraccounting standards, and tax and other legislation and regulations in thejurisdictions in which Prudential and its affiliates operate. This may forexample result in changes to assumptions used for determining results ofoperations or re-estimations of reserves for future policy benefits. As aresult, Prudential's actual future financial condition, performance and resultsmay differ materially from the plans, goals, and expectations set forth inPrudential's forward-looking statements. Prudential undertakes no obligation toupdate the forward-looking statements contained in this statement or any otherforward-looking statements it may make. PRUDENTIAL PLC 2004 RESULTSResults SummaryAchieved Profits Basis Results 2004 £m 2003 £m ---- ----Operating profit before amortisation of goodwillUK and Europe Insurance Operations 450 359M&G 136 83Egg - continuing operations 43 55 - discontinued operations (37) (89) ---- ----UK and Europe Operations 592 408US Operations - continuing operations 303 194 - discontinued operations 17 22Prudential Asia 400 378Other 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 682Effect 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 25.4pShareholders' funds £8.6bn £7.0bn ---- ----Statutory Basis Results 2004 £m 2003 £m ---- ----Operating profit before amortisation of goodwill 583 357Profit on ordinary activities before tax 650 350Operating earnings per share* 19.2p 12.4pBasic earnings per share* 20.1p 10.0pShareholders' funds £4.3bn £3.2bn ---- ----Dividend Per Share* 15.84p 15.38pInsurance and Investment Funds under Management £187bn £168bn ---- ----Operating profit and operating earnings per share include investment returns at the expected long-term rate of returnbut exclude amortisation of goodwill and exceptional items. The directors believe that operating profit, as adjusted forthese items, better reflects underlying performance. Profit on ordinary activities and basic earnings per share includethese items together with actual investment returns. The basis of presentation has been adopted consistently throughoutthe Preliminary Announcement. *Earnings per share and dividend per share figures for 2003 have been restated to take account of the Rights Issue in2004. In addition, the achieved profits and statutory basis shareholders' funds for 2003 have been adjusted to reflect theimplementation of UITF Abstract 38 on Accounting for ESOP Trusts. BUSINESS REVIEW GROUP Results Highlights£'m unless otherwise stated 2004 2003 Percentage 2004 2003 Percentage Change Change (as reported) (at 2004 (as reported) (as reported) exchange rate)Annual premium equivalent 1,846 1,464 26% 1,846 1,557 19%(APE) salesNet investment flows 3,589 2,908 23% 3,589 3,031 18%New business achieved profit 688 561 23% 688 605 14%(NBAP)NBAP margin 37% 38% - 37% 38% -Total achieved profits basis 1,124 807 39% 1,124 861 31%operating profit *Total modified statutory basis 603 405 49% 603 424 42%(MSB) operating profit *Achieved profits basis 8,596 6,762 27% 8,596 7,005 23%shareholders' funds *MSB shareholders' funds * 4,281 3,060 40% 4,281 3,240 32% * Continuing operations - excluding Jackson Federal Bank (JFB) and Egg's Francebusiness. In the Business Review and Financial Review, year-on-year comparisons offinancial performance are on a Constant Exchange Rate (CER) basis, unlessotherwise stated. The Group has delivered a good set of results for 2004, as illustrated by thedouble-digit growth of all the key performance measures shown above. This is theresult of strong contributions across all regions. As a result of healthy sales in the UK, the US and Asia, the Group achievedrecord insurance sales and new business achieved profits (NBAP) in 2004. This,together with the significant increase in contributions from the in-forceinsurance business and fund management operations, drove achieved profits basisoperating profits up 39 per cent on 2003. On the modified statutory basis (MSB), operating profits were up 49 per cent onlast year. This reflects a combination of solid year-on-year growth in profitsin both the insurance and fund management businesses of 40 per cent and 55 percent respectively. Basic earnings per share on an achieved profits basis for the year afterminority interests were 37.2 pence, compared with a restated figure of 25.4pence in 2003. Following the Rights Issue in October 2004, a restatement ofearnings per share is derived and reported in accordance with the requirement ofFinancial Reporting Standard (FRS) 14. Basic earnings per share, based on total MSB profit for the year after minorityinterests, were 20.1 pence, up 10.1 pence from the restated 2003 figure of 10.0pence. Impact of Currency Movements Prudential has a diverse international mix of businesses with a significantproportion of its profit generated outside the UK. In preparation for theGroup's consolidated accounts, results of overseas operations are converted atrates of exchange based on the year average, while shareholders' funds areconverted at year-end rates of exchange. Changes in exchange rates from year to year have an impact on the Group'sresults when these are converted into pounds sterling for reporting purposes. Insome cases, these exchange rate fluctuations can mask underlying businessperformance. For example, growth in Asia's total MSB operating profits was 83per cent at reported rates, compared to 103 per cent at Constant Exchange Rates(CER). This reflects the close relationship between most Asian currencies andthe US Dollar and its depreciation against sterling during the year. Consequently, the Board has for a number of years reviewed the Group'sinternational performance on a CER basis. This basis eliminates the impact fromconversion, the effects of which do not alter the long-term value ofshareholders' interests in our non UK businesses. In the Business Review and Financial Review, year-on-year comparisons offinancial performance are on a CER basis, unless otherwise stated. Insurance UNITED KINGDOM AND EUROPE£'m unless otherwise stated 2004 2003 * Percentage ChangeAPE sales 817 584 40%NBAP 220 157 40%NBAP margin 27% 27% -Total achieved profits basis operating 450 359 25%profitTotal MSB operating profit 305 256 19% * Certain investment mandates previously reported as UK Corporate Pensionsbusiness are now reported as M&G institutional investment flows. This gives riseto a restatement of 2003 UK APE sales of £32m (from £616m to £584m) and 2003 UKNBAP of £9m (from £166m to £157m). Prudential UK and Europe delivered a strong performance in 2004 increasing itsmarket share in the medium to long-term savings market (excluding collectiveinvestments) by 2.3 percentage points to 8.9 per cent (based on data from theAssociation of British Insurers), reflecting not only its brand franchise andfinancial strength, but also the significant progress made in broadening itsdistribution channels and product range, while maintaining a clear focus on itscustomers. Total APE sales were up 40 per cent on 2003 to £817 million, which included £111million in relation to a substantial annuity transaction with Royal London whichwas concluded in December. Excluding Royal London, APE sales grew 21 per cent to£706 million. Growth was driven by increased sales of unit-linked bonds (up 219per cent), bulk annuities (up 62 per cent), individual annuities (up 24 percent) and credit life protection products (up 224 per cent). This increase in new business sales and a new business margin of 27 per cent ledto an increase in new business achieved profits (NBAP) of 40 per cent to £220million. Total achieved profits basis operating profit increased 25 per cent to£450 million. The increase in profits from the in-force book was partiallyoffset by experience and assumption changes. MSB operating profit was £305million in 2004, an increase of 19 per cent on 2003. This was driven principallyby increased annuity sales now being written through the shareholder-backedsubsidiary, Prudential Retirement Income Limited (PRIL). New business achieved profit margins, averaged across all products, remainedstable at 27 per cent, however individual product performance varied. Margins onBusiness to Business (B2B) corporate pensions fell from 16 per cent to 9 percent principally as a result of higher proportions of less profitableunit-linked products, rather than with-profits products being sold in 2004. Inline with our strategy to develop further our shareholder-backed business, wehave sold an increasing volume of both unit-linked bonds and protectionproducts. The increased scale of the unit-linked bond business has enabled it toapproach a break-even position in terms of NBAP. Margins on annuities andwith-profits products remained in excess of 40 per cent. As Prudential UKbroadens its product range, the mix of business it expects to write in thefuture is likely to lead to some reduction in the overall new business profitmargin. 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. TheIntermediaries (IFA) channel, which accounted for 34 per cent of APE sales in2004, distributes a range of medium to long-term savings products primarilythrough independent financial advisers and will include sales generated throughmulti-ties. The B2B channel, which accounted for 28 per cent of 2004 APE sales,distributes corporate pensions through work-site marketing in partnership withconsulting actuaries and benefit consultants. The Partnerships channel hasresponsibility for developing relationships with banks and other distributorsand accounted for 26 per cent of APE sales in 2004, an increase from 6 per centin 2003. The remaining 12 per cent of APE sales was generated by the Direct toCustomer channel which focuses primarily on the sale of annuities to individualpension customers, although an increasing proportion of this is now beingtransacted through IFAs. Independent financial advisers continue to be the principal channel for thedistribution of life and pension products for insurers in the UK. This channelis undergoing significant change with the introduction by the Financial ServicesAuthority (FSA) of new "depolarisation" rules leading to the establishment ofmulti-tie panels. Over the next few years, Prudential UK expects that asignificant proportion of IFAs, which previously operated as whole-of-marketproviders, will move to a panel approach whereby they distribute the productrange of a select number of life companies. Prudential UK has already been appointed to work with Sesame, Millfield, Tenetand Burns-Anderson on the design of their respective multi-tie propositions. Ithas been appointed to the regulated multi-tie panels for Sesame, Millfield,Burns-Anderson and THINC Destini and has also been appointed as THINC Destini'ssingle-tie annuity provider. Depolarisation is also expected to have an effect on the UK bank distributionmarket as some banks move to offer their customers products from a panel ofdifferent providers rather than from a single product provider. Prudential UKhas already seen significant growth through its partnership agreements withLloyds TSB and Alliance and Leicester for the distribution of credit lifeprotection products and with Zurich and Pearl for the distribution of individualannuities. The existing reassurance agreement with Zurich will be replaced inthe second half of 2005 with a direct offer arrangement under which advisers ofOpenwork (formerly Zurich Advice Network) will sell Prudential's range ofannuity products to their customers on an exclusive basis, following theOpenwork 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 tosell exclusively Prudential's annuity products to their customers. On 1 March2005, Barclays announced its intention to appoint Prudential UK as one of itsnominated product providers as part of the bank's multi-tie approach todistribution to be launched later this year. Prudential UK has maintained leading positions in many of its core product areasincluding annuities, corporate pensions and with-profit bonds. Nearly all of itsannuity business is now written through PRIL. From July 2004, this includedmaturing pensions from the unit-linked and with-profits funds, the latter ofwhich makes up a large proportion of annuity sales. In addition, shareholdercapital is used to support the annuity business written on behalf of otherinsurers (such as the agreements with Zurich and Pearl). Prudential UK is one ofthe few insurers to write bulk annuity business and, including the Royal Londontransaction, wrote £158 million APE in 2004, representing a 72 per cent share ofthe market. Prudential UK is a market leader in corporate pensions: in 2004, it was theprovider to 20 per cent of FTSE 350 companies, managing more than 4,000 pensionschemes, and it is the market leader in the provision of pension schemes to theUK public sector. It has enhanced its sales process to include automaticenrolment 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 asmoothed investment return; PruFund, a transparent smoothed investment product,was introduced to the market in September. Savers had invested £10 million (APE£1 million) in PruFund by the year end. The Prudential Assurance Company's (PAC) long-term fund remains well capitalisedwith 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-profitsfund delivered a pre-tax return of 13.4 per cent in 2004, compared with a FTSEAll Share (Total Return) of 12.8 per cent. Consequently, Prudential UK announcedin February 2005 that total bonus rates were increased or maintained on allunitised plans showing that with-profits business continues to deliverattractive returns for policyholders when provided by a financially strong andwell managed fund such as Prudential. Prudential UK has also made a significant investment in its unit-linked offeringand 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-launchedrange of protected bonds continue to build share in the growing IFA unit-linkedbond market. Throughout the year, Prudential UK has continued to extend its product range.Two risk management products for defined benefit pension schemes will widen thesolutions available to pension schemes considering bulk annuity buy-outs.PruHealth, a healthcare product that links health and fitness to the cost ofmedical insurance plans, was developed in conjunction with Discovery Holdings ofSouth Africa, the market leader in the South African healthcare market andlaunched in October 2004. Prudential UK is achieving strong growth, through both new and existingproducts, and by developing new distribution opportunities. Having completed the£200 million cost saving programme, it has maintained a focus on capitalmanagement and has achieved further cost efficiencies. This is reflected inPrudential UK's ability to maintain overall new business margins in 2004. Prudential's UK performance reflects the continued impact of its brand, trackrecord of investment performance and financial strength, as well as itssuccessful transition from a with-profits and direct sales orientated companyinto a competitive, cost effective organisation. The successful diversificationof its distribution channels, new distribution agreements and broadened productrange place Prudential UK in a strong position to continue to gain fromdevelopments in the UK market. Prudential UK expects sales in 2005 to grow byabout 10 per cent from the base established in 2004. This compares with theindustry expectation for UK market growth of around five per cent for 2005. UNITED STATES£'m unless otherwise stated 2004 2003 Percentage 2004 2003 Percentage Change Change (as reported) (at 2004 (as reported) (as reported) exchange rate)APE sales 453 374 21% 453 418 8%NBAP 156 132 18% 156 148 5%NBAP margin 34% 35% - 34% 35% -Total achieved profits basis 303 173 75% 303 194 56%operating profit *Total MSB operating profit * 182 125 46% 182 140 30% * Continuing operations - excluding Jackson Federal Bank (JFB) which was sold inOctober 2004 In 2004, Jackson National Life (JNL) delivered record sales despite thechallenges of low crediting rates offered in the fixed annuity market,relatively flat equity markets during the first nine months of the year and anevolving regulatory environment. APE sales for the year of £453 million were up 21 per cent on 2003, with totalretail sales of £368 million, up 12 per cent on 2003. Variable annuity salesgrowth in 2004 was 15 per cent compared with market growth of 3 per cent(Source: VARDS). New business achieved profit of £156 million was up 18 per cent on 2003. Thisincrease reflects a 21 per cent increase in total sales, partially offset by ashift in product mix towards a higher proportion of equity-linked indexedannuity, life and institutional sales and a small impact from economicassumption changes. Total achieved profits basis operating profit on continuing operations of £303million was up 75 per cent on 2003. Total achieved operating profit on long-termbusiness of £317 million was up 80 per cent on 2003. This reflects an 18 percent increase in new business achieved profits and an in-force profit of £161million, which was more than three times higher than in 2003. The increase inin-force profit primarily reflects an improvement in spread income on fixedannuities, lower economic assumption changes and a £28 million favourable legalsettlement. Total MSB operating profit on continuing operations of £182 million was up 46per cent on 2003. The 53 per cent growth in long-term business operating profitreflects £169 million higher spread income and record variable annuity feeincome due to significant growth in separate account assets. In addition, therewere two one-off items, a £28 million favourable legal settlement and a positive£8 million adjustment arising from the adoption of SOP 03-01 "Accounting andReporting by Insurance Enterprises for Certain Non-traditional Long DurationContracts and for Separate Accounts". This adjustment relates to a change in themethod of valuing certain liabilities. In 2004, JNL continued its focus on giving its customers greater freedom ofchoice by enhancing its product portfolio, distribution network and customerservice. In March, JNL launched its first variable universal life product and in May itintroduced Fifth Third Perspective, a variable annuity product designedexclusively for customers of Fifth Third Securities. In the eight months sincelaunch, sales of this product accounted for more than 65 per cent of JNL's totalvariable annuity sales through Fifth Third Securities in 2004. In October, itadded further investment options to its Perspective II variable annuity productas well as two new optional benefits which customers can actively select and payfor. JNL is a top 10 player (as measured by net flows) in the variable annuitymarket. Its variable annuity assets grew 36 per cent in 2004 compared toindustry growth of 12 per cent and 'Perspective II' was the best sellingvariable annuity contract in terms of net flows in the US (Source: VARDS). Therate of take up of the fixed account option continued at normal levels, with 29per cent of the variable premium going into the fixed account, compared with 48per cent in 2003. JNL offers a range of variable annuity guarantee benefits forwhich customers pay. JNL's APE fixed annuity sales of £113 million in 2004 were down 8 per cent on2003. It was ranked the seventh largest provider of fixed annuities in the US(Source: LIMRA). Institutional APE sales of £85 million were up 98 per cent on 2003. JNL hastaken advantage of attractive issuance opportunities as they have arisen duringthe year, and will continue to do so in 2005. JNL took a significant step forward in 2004, enhancing its customer servicingand support function through the re-organisation of its customer support centresto provide standardised procedures, increased operational efficiency andimproved customer service. Curian Capital, which provides innovative fee based separately managed accounts,had net investment flows of £387 million in the year. At the end of 2004, 21months from launch, it had accumulated over US$1 billion (£550 million) of fundsunder management. As the business builds scale, we expect operating losses toreduce. A key factor in JNL's continuing success is the strength of itsrelationship-based distribution model, which is heavily dependent upon achievingthe highest levels of customer satisfaction. In 2004, JNL received two serviceawards and was one of only eight companies across all sectors to earn a worldclass customer satisfaction award from North America's Service QualityMeasurement Group. It also received the 'highest customer satisfaction byindustry' award for the financial services industry. In October 2004, JNL completed the sale of Jackson Federal Bank (JFB) to UnionBank of California for £166 million. JFB's principal area of business wasbanking and commercial real estate lending, which no longer aligned with JNL'sstrategy. As part of JNL's continued focus on developing its life business in November, itannounced the purchase, subject to regulatory approval, of Life InsuranceCompany of Georgia for £137 million in November. This acquisition will doublethe number of JNL's in-force life and annuity policies, add scale to itsoperating platform and expand its distribution capability. This will enable JNLto grow its life business at a higher return and faster rate than achieveorganically. JNL anticipates achieving a minimum internal rate of return aftertax on this transaction of 13 per cent and the capital provided from itsretained earnings will be returned over a pay-back period of about 5 years. Theplanning for the integration of the business is on track and full integration isanticipated within 12 months of closing the transaction. The regulatory approvalprocess is underway. The US is the world's largest medium and long-term savings market. Although afragmented market, it contains many profitable segments. JNL is a scale playerin its chosen segments and its position as a low cost provider gives it anexpense advantage over competitors. JNL's distribution proposition is strong; itprovides market leading sales support through value-added wholesaling andmarketing support. The ageing demographics of the US, combined with customers' increasing demandfor professional advice, increase the potential for profitable growth. JNL iswell positioned to capitalise on this given its strength among independentbroker dealers through National Planning Holdings (NPH), its independentbroker-dealer network. In 2004, NPH increased gross sales by 23 per cent andincreased agent productivity. Following President Bush's State of the Union address and the items contained inthe President's proposed 2006 budget, JNL anticipates a variety of initiativesto promote further individual choice, greater flexibility and a strongerorientation toward market-based solutions to savings and retirement. Theseproposals will include personal security accounts, as well as tax-free accountsfor savings and simplified retirement accounts. We expect the US market to grow at about four per cent in 2005 and JNL to growsales at around twice this rate as current conditions continue to favourcompanies which have a range of variable and fixed annuity product offerings, arelationship-based distribution model and award-winning service. We expect to beable to maintain margins at current levels depending on the mix of businesswritten. ASIA£'m unless otherwise stated 2004 2003 Percentage 2004 2003 Percentage Change Change (as reported) (at 2004 (as reported) (as reported) exchange rate)APE sales 453 374 21% 453 418 8%NBAP 156 132 18% 156 148 5%NBAP margin 34% 35% - 34% 35% -Total achieved profits basis 303 173 75% 303 194 56%operating profit *Total MSB operating profit * 182 125 46% 182 140 30% In Asia, APE sales showed solid growth over 2003, up 14 per cent to £576 millionwith particularly high growth rates in India, Korea, Taiwan and China, offset toa certain extent by lower volumes in Vietnam due to a steadying of the market onthe back of four years of explosive growth following liberalisation and in Japanwhere we are implementing our strategy to focus on more profitable products anddistribution channels. Excluding discontinued lines in Japan, growth over 2003was 20 per cent. NBAP of £312 million was up 19 per cent on 2003 reflecting a combination ofincreased 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 toeffective management of country and product mix. The Asian economies' consistently high economic growth rates and favourabledemographics, together with the trend to allow greater access to foreignfinancial services players makes these markets very attractive. However, successis not guaranteed; there are many regulatory, cultural, competitive andorganisational challenges which favour companies such as Prudential who have along history and clear commitment to Asia, a track record of delivery and anoperating 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 productsand partnering with leading local institutions. Today, Prudential has operationsin 12 countries and is Europe's leading life insurer in Asia in terms of marketcoverage and number of top 5 market positions. It has an agency force of 136,000that generates around 75 per cent of new business with the remainder of newbusiness coming from a variety of distribution partnerships, including a numberof leading banks. The face of Prudence is well-known throughout the region andhas similar recognition levels to other leading international financial servicesinstitutions. This breadth and depth of operations across the region gives Prudentialdiversity backed up by collective scale that is a real competitive advantage asit can leverage expertise and experience in some countries and apply thiselsewhere as appropriate. It is also able to take a longer-term view on thedevelopment of the region as a whole. Prudential Corporation Asia's consistentlyimpressive NBAP margins illustrate not just the overall attractiveness of theAsian markets, but more specifically our success in maximising long-term valuecreation while effectively managing risk. During 2004, the strength of Prudential Corporation Asia's business model wasillustrated in a number of ways: When Prudential acquired its life operation in Taiwan in 1999, the firstpriority was to build distribution scale, and, consequently, agent numbers grewrapidly. In 2003 the focus shifted to broadening the product range and improvingprofitability by capitalising on being the first life operation in Taiwan tolaunch regular premium unit-linked insurance products through leveragingsuccesses in markets such as Singapore and Malaysia. During 2004 APE volumesgrew significantly by 23 per cent and the proportion of unit-linked sales is 40per cent, significantly higher than the industry. In India, the ICICI Prudential joint venture continues to grow very stronglywith APE up 127 per cent on 2003. With ICICI's strong local presence andreputation and Prudential's expertise, it is the leading private sector player,well ahead of its nearest competitors. In 2004, the government announced itsintention to increase the cap on foreign ownership from 26 per cent to 49 percent. While Prudential remains interested in increasing its stake in the jointventure, the relevant legislation has not yet been put before the IndianParliament. The Hong Kong market has seen some significant changes over the last few yearswith increasing emphasis on shorter-term single premium products sold throughbank channels. Prudential's innovative bancassurance model, as applied withStandard Chartered Bank (SCB) in Hong Kong, has proven to be very effective inenabling Prudential to leverage its top 5 position in a very competitive marketwhile still retaining a strong core agency channel which produces a higherproportion of regular premium business. In Singapore the market is competitive and Prudential remains focused onprofitability rather than pure volume; although new business APE declined by 4per cent in 2004, new business achieved profit margins increased by 5 percentagepoints. Prudential's other long-established market, Malaysia, which celebratedits 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 of2003 we scaled back our operations to focus on higher value distributionchannels and more profitable products. While the operation is now somewhat moreefficient with lower expense levels and has made some progress with establishingnew distribution channels, it will take some time to deliver material newbusiness volumes and become a positive contributor to Prudential CorporationAsia's overall results. However, in its other North Asian Market, South Korea, Prudential continues tohave great success; new business APE growth was 113 per cent in 2004, driven bydeveloping a multi-channel distribution model including a pioneering cable TVhome shopping channel, bancassurance, proprietary distribution and a stronggeneral agent (multi-tied) network. In 2004 we successfully launched aunit-linked insurance product, making Korea the 10th Prudential Corporation Asiamarket to offer these capital efficient products. With over five million life insurance customers, Prudential Corporation Asia nowhas the scale to benefit from more standardisation and integration of processesand the introduction of common systems platforms. In 2004, the first steptowards a more integrated back office was made with the launch of a regionalprocessing centre, Prudential Services Asia, based in Malaysia's high techbusiness park Cyberjaya. In China, Prudential's joint venture with China International Trust andInvestment Corporation (CITIC) is one of the country's leading foreign playersand APE growth was 70 per cent last year. CITIC Prudential already operates inthree cities, has a new Shanghai operation launching in the second quarter of2005 and in February 2005 received additional licences for cities in Guangdongprovince (Donggaun and Foshan), and has approval to provide Group policiesalongside the core individual life products. It is expected that this rapiddevelopment will continue as geographic licensing restrictions ease further. The impact of Prudential Corporation Asia's focus on capital efficiency and itsincreasing scale can be seen as it is expected to become a net contributor ofcash 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: theopportunities in our newer markets, coupled with the strength of our largeroperations, should enable us to accelerate our level of sales growth in 2005. Weexpect to be able to maintain margin while delivering this growth. Fund Management M&G£'m unless otherwise stated 2004 2003 Percentage 2004 2003 Percentage Change Change (as reported) (at 2004 (as reported) (as reported) exchange rate)APE sales 576 506 14% 576 555 4%NBAP 312 262 19% 312 291 7%NBAP margin 54% 52% - 54% 52% -Total achieved profits basis 381 328 16% 381 365 4%operating profit *Total MSB operating profit * 126 77 64% 126 85 48% M&G is Prudential's UK and European fund management business and has over £126billion of funds under management, of which £98 billion relates to Prudential'slong-term business funds. M&G operates in markets where it has a leadingposition and competitive advantage, including retail fund management,institutional fixed income, pooled life and pension funds, property and privatefinance. We believe, based on data from the Investment Management Association, M&G ranks as the third largest asset manager in the UK. In 2004, M&G's operating profit including performance-related fees (PRF) was£136 million, an increase of £53 million on the previous year. Underlyingprofit, which excludes PRF, increased by 57 per cent to £110 million reflectingthe strengths of M&G's diversified business, disciplined cost management and thesuccess it has had in developing new sources of revenue. Over the last twoyears, M&G's underlying profit has more than doubled even though the average ofthe FTSE All Share index in 2004 was at similar levels to 2002. Performance-related fees in 2004 were £26 million, including £20 million as aresult of several exceptionally profitable realisations by PPM Ventures that arenot expected to recur. M&G also received £6 million of performance fees for themanagement of the Prudential Assurance Company long-term and annuity funds,which continued to beat their strategic and competitor benchmarks during theyear. M&G enjoyed a very strong year in terms of sales, with gross fund inflows up 54per cent to £5.8 billion. Net fund inflows were up 48 per cent to £2 billion.External funds under management, which represent approximately one quarter of M&G's total funds under management, rose by 19 per cent during the year to £28.7billion due to a combination of net fund inflows from both retail andinstitutional clients and market gains on existing funds. In M&G's retail businesses, gross fund inflows were a record £2 billion in 2004,up 61 per cent on the previous year. In the UK, M&G maintained its fixed incomesales and continued to increase fund flows into equity funds on the back of itsstrong fund performance. The launch of the M&G Property Fund in March 2004Related Shares:
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