02 Nov 2001

Prudential announces structure and strategic direction for its UK insurance operations

Prudential plc announced today further details of the future structure and strategic direction of its UK insurance operations. This follows a review of the business by Mark Wood, Chief Executive of Prudential’s UK and European insurance operations, who joined the Group in June 2001.

The key highlights of today’s announcement include:

• Focus on revenue growth through a targeted product range with an emphasis on high-growth medium and long-term savings, and investments;
• Translating the potential of Prudential’s scale UK insurance business into superior profitability;
• Building strong multi-channel distribution (direct, corporate, affinities, and intermediaries);
• Decision to pursue a single brand strategy for life and pensions (includes full integration of Scottish Amicable’s operations under the Prudential brand, with a full commitment to the IFA channel);
• Simplification of organisational structure for UK insurance operations;
• A step reduction in operating costs (annual gross cost savings from 2004 of £175 million);
• Prudential’s UK long-term fund remains strong (Form 9 ratio of 13 per cent as at 30 September 2001); and
• A strategic alliance for General Insurance in the UK.

Commenting on today’s announcement, Mark Wood said: “Our focus going forward will be on delivering profitable growth by providing good value and secure savings, pensions and investment products to our customers. Prudential has an outstanding business and brand in the UK and when combined with our financial strength, I believe that we are extremely well placed for the future.”

A targeted product range

In the UK, Prudential has very strong positions in a number of product areas and the focus going forward will be on high-growth medium to long-term savings and investments. These include:

• Annuities - Prudential continues to lead the annuities market with a total market share in terms of total sales of just under 25 per cent. It has a fully established bulk annuity business with a market share of 39 per cent. Prudential is fully committed to this market and will actively compete as the defined benefit market (estimated to be £700 billion) changes and schemes continue to pursue the buy-out option.
• With-Profits Bonds - Prudential manages over £15 billion of funds for more than 500,000 With-Profits Bond customers, and has around 25 per cent of the market by funds under management. Market share is being regained because of the strength of the Prudential product offering and brand.
• Group Pensions – Prudential’s concentration has been on securing schemes with access to large numbers of employees and where premium income will materialise quickly, resulting in more profitable business. It now has corporate and stakeholder designations that give it access to around 3.5 million lives, including the recently announced joint management of the NHS stakeholder and AVC schemes.
• ISAs – The profile of Prudential’s existing customer base lends itself to significant cross- selling opportunities in this area. The Prudential-branded range of ISAs is currently being developed and extended, and a series of marketing campaigns is being planned to target Prudential’s existing customer base, particularly maturing policies.

By concentrating on higher growth areas of the market and by increasing market share within these areas, Prudential expects to generate annual growth in new business that exceeds its estimate of market growth by up to 50 per cent. Prudential also believes that managing this mix of business will ensure that its UK new business margin will be among the best in the sector.

Prudential forecasts that its 2001 new business margin for pensions will be 11 per cent and for annuities 32 per cent, contributing to an overall UK margin of 32 per cent.

PruLab

A new function, PruLab, has been established to research and develop new and innovative life and savings products. Prudential will be directing £50 million of resources into this business over the next five years.

Strong distribution

Prudential has established a multi-channel distribution capability to meet the changing needs of its customers. Four distribution channels have been created:

• Direct to its customers, through which customers are served and advised by the internet and telephone. During the year, Prudential has built up a strong capability in response to growing demand for telephone, and increasingly, internet sales;
• Business to Business, through which Prudential’s strong base of corporate pensions customers can be targeted through workplace cross-selling;
• Affinities, whereby Prudential will develop partnerships with banks, retail brands and other distributors; and
• The intermediary channel, which was significantly strengthened by the acquisition of Scottish Amicable in 1997, accounted for over 60 per cent of Prudential UK insurance operations’ sales in the first nine months of the year. Prudential remains fully committed to the intermediary channel and will upgrade the quality of its product and service proposition.

Brand

In order to fully exploit the brand leadership of the Prudential name, particularly in its target market, Prudential will move to a single brand for its life and pensions business in the UK. The Prudential brand is a significant competitive advantage and there will be an increase in advertising spend of £20 million in 2002 to help promote this key asset.

As a result of this single brand strategy, the Scottish Amicable brand will no longer be used and all new business will be branded ‘Prudential’ (Scottish Amicable’s in-force book will also be re-branded). The transfer of Scottish Amicable Limited’s in-force book, which is subject to Court and regulatory approval, is expected to release £100 million of shareholder solvency capital and reduce ongoing shareholder capital requirements by around £25 million per annum.

Scottish Amicable’s offices at Craigforth will remain one of the key customer service locations for the life and pensions business.

Structure

Prudential’s UK insurance operations will in future operate as one integrated business as was announced on 13 September. This will improve operational effectiveness by removing duplication as well as achieving greater customer focus by providing a seamless service from product manufacture to distribution.

As part of this single integrated business structure, all support functions (Operations including IT, Finance, Risk and Compliance, Marketing, Human Resources, Communications and Actuarial) will be centralised.

Staff Numbers

As a result of these changes, Prudential anticipates that after allowing for a number of redeployment opportunities, total headcount will reduce by 2,100 by the end of 2003. Of this total, it is expected that 1,000 will be compulsory redundancies, principally from within central back-office and support functions.

Following these job reductions, and the 1,200 staff in the General Insurance business who will transfer to Churchill under the terms of the strategic alliance being announced separately today, Prudential’s UK insurance operations will employ 6,200 staff by the end of 2003.

Costs

The Group expects to incur a restructuring charge of £170 million by the end of 2003 as a result of these changes. The estimated impact on shareholders will be a charge of £70 million against achieved basis pre-tax profit, of which £40 million will be charged in 2001 (£15 million in 2002 and £15 million in 2003).

However, due to the creation of the single customer service organisation, the rationalisation of support services and a refocusing of IT investment, Prudential expects to achieve annual gross cost savings from 2004 of around £175 million, of which £20 million (on an achieved profit basis) will be directly attributable to shareholders in 2002 (increasing to £45 million in 2003, and to £55 million in 2004 and thereafter). This is in addition to the gross cost savings of around £135 million Prudential expects to achieve from 2002 following the closure of the direct sales force earlier in the year, of which £15 million will be directly attributable to shareholders.

Prudential projects that the effect of the changes announced today will be to reduce its expense ratio to less than one per cent by 2004.

General Insurance

In a separate statement, Prudential announced today that it has agreed to transfer its UK personal lines general insurance business to Winterthur Insurance. The transaction includes the formation of a strategic alliance to offer Prudential-branded general insurance products in the UK. General insurance will continue to be an important part of Prudential’s branded customer offering in the UK and this strategic alliance is consistent with its strategy of focusing on its core medium and long-term savings businesses.

- ENDS -

Enquiries to:

Media Group

Geraldine Davies 020 7548 3911
Steve Colton 020 7548 3721

Investor and Analysts

Rebecca Burrows 020 7548 3537

UK Insurance Operations

James Murray 020 7334 6363
Clare Staley 020 7334 6023

Notes to Editors:

1. A presentation to analysts will take place at 8.30am on Friday 2 November at Laurence Pountney Hill, London EC4R 0HH.

2. A webcast of the presentation (including slides) will be available on the Group’s website, www.prudential.co.uk/plc.

3. A broadcast of an interview with Mark Wood (in video/audio/text) will be available on www.cantoscomms.com and www.prudential.co.uk/plc from 9.00am on 2 November 2001.

4. A Newswires Conference Call will take place at 9.45am (Dial in number: 020 8288 4700 – Chair: Geraldine Davies).

5. A Conference Call for Press will take place at 3.15pm (Dial in number: 020 8288 4700 – Chair: Geraldine Davies)

6. Prudential’s UK insurance operations are currently structured into three key areas: Prudential Financial Services (responsible for all direct distribution of Prudential-branded products); Prudential Intermediary Business (responsible for all distribution of products via the Independent Financial Adviser channel); and Prudential Insurance Services (responsible for all administration of in-force products under the Prudential brand, together with the General Insurance business).

7. In the first half of 2001, total achieved basis operating profit (before UK re-engineering costs relating to the closure of the direct sales force) for the UK insurance long-term businesses was up 15 per cent to £377 million. This represented 56 per cent of total Group achieved basis operating profit of £677 million.

8. The UK insurance business recorded sales of £627 million in the first nine months of 2001 on an APE basis (annual premium equivalent). This was an improvement of 12 per cent on the same period in 2000 and represented 31 per cent of Group sales on an APE basis.

9. The annual gross cost savings of £175 million that Prudential expects to achieve from 2004 is broken down as follows:

10. The UK long-term fund remains strong (Form 9 ratio of 13 per cent as at 30 September 2001). Over two years ago, Prudential began reducing its investment allocation away from equities, and therefore, following the market falls after 11 September, it has not needed to make any change to the life fund’s asset mix.

The Form 9 ratio of 13 per cent represents the excess of the assets of Prudential Assurance Company’s long term business over its long-term business liabilities (both assets and liabilities being determined on the statutory basis) expressed as a percentage of the liabilities. This excess is equal to around three times the long-term business required minimum margin. It is calculated on the basis of resilience test 2 and contains no implicit items.

The asset mix of the with-profits fund as at 30 June 2001 was as follows:

Prudential’s year-end embedded value will have moved with market values. A one per cent change in equity values will change the embedded value by approximately £25 million.

11. The new business margin is defined as new business achieved profit divided by APE (annual premium equivalent) sales.

12. The total expense ratio is defined as total operating expenses (FSA returns Form 41) divided by total admissible assets as defined by the FSA.

13. Headcount of Prudential UK Insurance Operations since 1995 (year average):

1995 – 17,710 1998 – 15,729
1996 – 16,487 1999 – 13,695
1997 – 17,265 2000 – 11,241

In February 2001, Prudential announced that following changes to its direct sales channels and customer service operations in the UK, 2000 jobs would become redundant within the sales force, sales support operations and in central back-office and administration support functions. These job reductions are taking effect over a 12 month period and are in addition to the headcount reductions being announced today.

This communication may contain projections or other forward-looking statements relating to the Prudential Group that involve risks and uncertainties. Readers are cautioned that these statements are only projections and may differ materially from actual future results or events. Readers are referred to the documents filed by the Prudential Group with the SEC, specifically its most recent filing on Form 20-F, which identifies important risk factors that could cause actual results to differ from those contained in the forward-looking statements, including, among other things, risks relating to market fluctuations and volatility, significant interest rate changes, credit exposures, cross border transactions and foreign exchange fluctuations, impaired liquidity, competition and legal liability. All forward-looking statements are based on information available on the date of this announcement and the Prudential Group does not assume any obligation to update such statements unless otherwise required by applicable law.