23 Feb 2000
Prudential plc 1999 Unaudited Results
- New business achieved profits up 46% at £603 million
- Record in-flow of new funds of over £18 billion
- Underlying operating profit before amortisation of goodwill up 6% to £996 million
- Total dividend up 9.5% to 23p per share
- Plans for an IPO of a minority stake in egg:| to be pursued*
| Results Summary |
1999 |
1998 |
% |
|
£m |
£m |
|
New business achieved profits |
603 |
413 |
46% |
Underlying operating profit before amortisation of goodwill, investment in egg:| and UK re-engineering costs |
996 |
937 |
6% |
Operating profit before amortisation of goodwill |
776 |
860 |
(10)% |
Full year dividend per share |
23.0p |
21.0p |
9.5% |
Shareholders’ funds achieved profits basis |
8,342 |
7,510 |
11% |
Commenting on the results, Jonathan Bloomer, Prudential's group chief executive designate said:
"We have had a busy 12 months working towards delivering our strategic objectives in the UK, the USA, Asia and Europe. We have restructured and re-engineered our traditional operations while investing and developing new businesses. This strategy has helped us to maintain our leadership position in a rapidly changing financial services sector. We are using technology to maximise development and efficiencies across all areas of our business. Our focus on technology gives our customers better access to our business, higher levels of customer service and drives down unit costs.
"In 1999 we have attracted a record in-flow of more than £18 billion of new funds through further diversifying our product range and distribution capability.
"In the UK we have made important progress in developing new business models for our retail insurance business and in growing our IFA operations. We bought M&G and are integrating it successfully with PPM in the UK, allowing us to focus on those areas of fund management where we have unique strengths and competitive advantage: unit trusts, fixed income and pooled life and pension funds. This acquisition has increased the Group's retail and fund management presence greatly and since acquisition M&G has produced a 20% increase in sales over the equivalent prior year period.
"We continue to invest in egg:|. To enhance the future development of this business and to maximise long-term value for our shareholders, the Prudential Board has decided to pursue a plan for an initial public offering (IPO) of a minority stake in egg:| subject to continuing progress in the business and favourable market conditions. It is currently intended that an IPO would take place later this year.
"Further full details of a potential offer have not been determined. However, it is envisaged that any customer offering will be limited to existing egg:| customers as at midnight on 22 February 2000 (and additional eligibility criteria will apply).
"Internationally we have extended our reach. 1999 has been a significant year for our Asian operations. We are the first UK company to be granted life licences in China and Vietnam; we have also made a major acquisition in Taiwan and signed a significant joint venture agreement in Hong Kong. In the US, Jackson continues its strong performance with record sales and profits. At the end of 1999, we formed Prudential Europe and secured strategic alliances in France and Germany, giving us footholds in markets with considerable growth potential.
"We have also experienced some challenges: the issues associated with the mis-selling of pensions in the UK, which have affected the whole industry, are not fully behind us. Rectifying cases has absorbed considerable resource in 1999; there has been an increase in the provision for future costs of £0.6 billion and an increase in cumulative costs paid to date of £0.1 billion. We now estimate the total cost of pensions mis-selling to be £2 billion. We are determined to do whatever is required to ensure that none of our customers loses out and that such a situation will not happen again.
"In the past few years we have consistently delivered superior investment returns to our shareholders. We will continue to maximise the value from our existing businesses and invest for the future. With a strong management team we are ideally placed to continue to deliver long-term out-performance.
"Given the progress Prudential has made during 1999 and our confidence in the future success of the business, we propose that the total dividend for the year is increased to 23.0p per share, an increase of 9.5%.
"The final dividend of 15.3p per share will be paid on 31 May 2000 to shareholders on the register at the close of business on 31 March 2000. Shareholders will once more be offered a scrip dividend alternative."
Media Enquiries
Jeremy Reynolds/Kevin Russell
Prudential Group Media Relations
Tel: 020 7548 3721/020 7548 3723
Analyst Enquiries
Carys Walshe
Prudential Group Investor
Relations
Tel:020 7548 3823
Notes to Editors:
A presentation to analysts will take place at 10:00am 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, during the day.
*Legal disclaimer
This information is not an offer of egg:| securities for sale into the United States, Canada or Japan.
The securities may not be offered or sold in the United States unless they are registered under applicable law or exempt from registration. egg:| does not intend to register any portion of the Offering in the United States or to conduct a public offering of securities in the United States. Money, securities or other consideration are not being solicited and, if sent in response to the information contained herein, will not be accepted
PRUDENTIAL PLC 1999 UNAUDITED RESULTS
Results Summary 1999 £m 1998 £m
_____________________________________________________________________________
Statutory operating profit (based on longer-term
investment returns) before amortisation of goodwill
Retail Insurance Operations 479 421
Group Pensions 36 22
Prudential M&G Asset Management 87 28
egg:| and Prudential Banking (150) (77)
_____________________________________________________________________________
UK operations 452 394
USA 451 411
Asia 15 13
Europe 6 4
Other income and expenditure (78) 38
Re-engineering costs (70) -
_____________________________________________________________________________
Total 776 860
Discontinued operations - 8
_____________________________________________________________________________
Operating profit before amortisation of goodwill 776 868
Amortisation of goodwill (54) -
Short-term fluctuations in investment returns 28 24
Profit on business disposals - 249
_____________________________________________________________________________
Profit before tax (including actual
investment returns) 750 1,141
_____________________________________________________________________________
Earnings per share
Based on operating profit after tax before amortisation
of goodwill 29.1p 33.7p
Based on profit after tax - basic 27.8p 45.3p
Based in profit after tax - diluted 27.7p 45.0p
_____________________________________________________________________________
Dividend per share 23.0p 21.0p
_____________________________________________________________________________
Achieved profits basis shareholders' funds £8.3bn £7.5bn
_____________________________________________________________________________
Insurance and investment funds under management £170bn £128bn
_____________________________________________________________________________
Banking funds under management £8.1bn £2.2bn
_____________________________________________________________________________
Profit before tax includes actual investment returns. The Company believes that operating
profit, which is based on longer-term investment returns, before amortisation
of goodwill better reflects the Group's underlying performance. An abridged
statutory profit and loss account is set out in section 4. Supplementary achieved
profits basis results are shown in section 6.
OPERATIONAL REVIEW
UNITED KINGDOM Retail Insurance Operations
- Retail IFA
Prudential’s Retail IFA business produces and sells Scottish Amicable and Prudential branded products, including the market-leading Prudence Bond.
Underlying statutory profits (before re-engineering costs) from our Retail IFA business increased by 13% to £99 million in 1999 while new business achieved profits increased by 53% to £174 million. This strong growth in new business achieved profits has been primarily driven by increased sales of investment bonds, predominantly the Prudence Bond, which remains one of the UK’s most successful retail investment products with sales of £1.9 billion in 1999.
Central to this growth have been the further improvements that we have initiated in customer service, building on the previous year’s award-winning performance. During the year we have given customers a choice of fund manager and re-engineered the sales force structure to align it better with the product focus of IFAs. The development of our new sales contact centre in Glasgow will lead to even better levels of customer service in the future.
We are continuing to expand our operations at our Craigforth site near Stirling, where the total number of staff employed is now close to 2,300. During 2000, there will be a further small increase, as we transfer the administration of M&G's Life & Pensions business from Chelmsford and integrate it within the existing operations at Craigforth.
Scottish Amicable’s high standards of customer care were recognised in the 1999 Financial Adviser Awards where it received five star awards for customer service in the Life & Pensions and Investments categories. In addition, several products were recognised with industry awards, including Prudence Bond, Home Purchaser (our mortgage endowment product) and our Long-Term Care Bond.
The continued implementation of new technology has been essential in achieving this result: greater use of the Internet, an extranet giving IFAs up-to-the-minute information on policies, plus new call centre technologies and workflow systems. Further developments will give employers direct access to database systems, allowing them to administer pensions on-line.
The range of products designed to meet the changing needs of IFAs continues to expand and a "stakeholder-friendly" group personal pensions product will be introduced on 1 March 2000.
- Retail Financial Services
Prudential Retail Financial Services (PRFS) comprises three business units: Prudential Retail (with its 1,900 strong sales force), Life and Pensions and General Insurance.
PRFS produces and sells a comprehensive range of personal investment and insurance products. It also sells banking products for Prudential Banking with mortgage sales exceeding £600 million in 1999. It has 6 million UK customers, one in six of the adult population. Currently PRFS has 7.1 million life policies in force and 1.6 million personal pension contracts, making us one of Britain’s biggest pension providers.
PRFS also provides around 2 million retail general insurance policies, 1.7 million of which are home insurance policies, making us the UK’s sixth largest home insurer. Continued high levels of customer service have contributed to customer retention rates among the best in the industry.
Sales of insurance and investment products rose by 16% to £1.8 billion despite a 40% reduction in the number of sales force consultants to 1,900. This result reflects the success of our initiatives to increase efficiency and improve consultant productivity. Single premium sales were up 22% at £1.7 billion, reflecting higher sales of with-profit savings products, fuelled by the low interest rate environment. Regular premium sales were down 24% to £146 million, mainly due to lower sales of pension products. Underlying long term business statutory profits rose 9% to £319 million and underlying general insurance profits increased 56% to £61 million. Achieved new business profits on long term business were up 20% to £83 million.
During 1999, we re-engineered the structure of Retail Financial Services to broaden its appeal to customers and to reduce its cost base in anticipation of an even more competitive financial services environment. Significant progress towards this goal has been made through a programme to remove some 5,000 posts over three years, 3,000 of which have been accounted for over the last year.
Our investment in new technology is key to this re-engineering. In addition the move towards remote working, with no branch infrastructure, has been made possible by the introduction of laptop computers as a tool for the sales force. This innovation will make the sales process more efficient and will reduce the administrative burden.
Further developments in point of sale technology will allow us to reduce the amount of time spent form-filling with customers. This will lead to a greater focus on advising customers and increasing productivity. The use of remote channels, especially for top-ups to existing business, will also free up the sales force to concentrate on generating quality new sales.
Prudential Retail has launched a new look website to support its core proposition of face to face advice. General insurance customers can now obtain quotes and take out policies on the Internet, and the opening hours of our administration centres have been extended to allow customers increased access to our services at times that suit them.
- Prudential Annuities
Prudential Annuities is the market leader in the UK pensions annuity industry. We now have over 700,000 customers and more than a 20% share of new business in 1999. Total sales were £2.2 billion and funds under management now exceed £10 billion. New business achieved profits of £21 million were more than double 1998.
In the individual pension annuity market, with- profit sales have shown strong growth and now represent more than 15% of individual sales. Bulk annuity sales in 1999 represented more than half our total sales and were boosted by two big sales totalling £1.1 billion in July.
The pensions annuity market is projected to grow strongly over the next few years. Prudential Annuities is well placed to take advantage of this growth. In addition to having a management team focused solely on the annuity market, we believe our investment expertise in the fixed interest market and the excellent track record of our with profit product will give us sustained competitive advantage.
Group Pensions
Group Pensions is a leading provider of employer sponsored pensions and an increasingly significant part of Prudential’s business. Group Pensions provides the pension arrangements for some 4,500 companies including 85 from the FTSE 500, covering some 500,000 individuals. During 1999, Group Pensions’ statutory profits rose 64% from £22 million to £36 million while new business achieved profits were up 30% to £26 million.
The proposed introduction of Stakeholder Pensions by the Government in 2001, in particular the capping of the annual management charge at just 1%, offers a significant challenge to the pensions industry and a major opportunity to those companies well positioned within it. To participate in this new environment providers will need to find more efficient methods of distribution. Stakeholder, together with the continuing shift towards flexible defined contribution arrangements (away from defined benefit schemes) presents Group Pensions with the opportunity to deliver significant shareholder value through the effective delivery of simple, value-for-money products.
Prudential intends to become a profitable participant in the stakeholder environment. Current initiatives that will deliver this objective include:
- the development of a marketing and distribution platform that exploits current e-commerce technology to its fullest advantage. We have designed this to maximise employee participation by giving them direct access to information about their own pensions (for example through their own company’s intranet), so that they can manage their pension remotely with the benefit of a general education service.
- secondly, we have moved responsibility for the distribution of AVC products to Teachers, University and Local Government employees to a dedicated salaried sales team and away from our commission based sales force. These teams will make presentations and sales to groups of individuals, replacing the more expensive one-to-one distribution. This strategy will not only reduce costs significantly and increase sales but also complement the e-commerce proposition.
Prudential M&G Asset Management
Prudential’s fund management business in the UK is conducted under the umbrella of Prudential M&G Asset Management. The acquisition of M&G in early April 1999 has given us enhanced access to the retail investment market and we are currently carrying out a fundamental reorganisation of our fund management operations.
In the UK we will specialise in those areas of fund management where we have unique strengths and competitive advantage – unit trusts, fixed income and pooled life and pension funds. We have therefore entered into discussions, which are now at an advanced stage, to sell our UK institutional, segregated, balanced and specialist equity business which constitutes around £10 billion of mandates (out of a total Group funds under management of £170 billion).
At the same time we plan to bring PPM and M&G together into a unified business. We will be combining the investment processes and resources of both in a single new management structure under Michael McLintock as chief executive.
We have already successfully completed the merger of the fixed income teams (creating the largest fixed interest team in the UK, with assets under management of £33 billion), as well as the two retail administration centres. In addition we are in the process of moving M&G’s life and pensions business to Craigforth under the management of Scottish Amicable.
- M&G
We purchased M&G to enhance the group’s retail fund management presence. M&G is the oldest and largest retail unit trust manager in the UK and has a very strong brand. Performance in its first eight months since acquisition has been strong, with, sales of £583 million and underlying profits of £56 million both ahead of acquisition assumptions. At the end of 1999, M&G had £21 billion of assets under management.
M&G embraced Individual Savings Accounts (ISAs) from the outset. Taking full advantage of the changes in regulations which allow customers to invest by telephone or Internet, we are one of only a handful of companies that give investors the chance to buy an ISA on-line. Sales of ISAs, through both the intermediary and direct channels, have been good since launch, securing a 5% share of the unit trust ISA market.
During 1999, we introduced innovative products, including the M&G Global Managed Bond Fund and the M&G Global Technology Fund, to strengthen M&G’s reputation in the retail market. In November we reduced the annual management charge on our UK Index Tracker from 0.75% to 0.3% resulting in a six-fold increase in the daily rate of sales.
- PPM
PPM manages £145 billion worldwide, mostly on behalf of Prudential's internal clients. Underlying profit for PPM totalled £43 million in 1999, in line with the previous year. PPM's strong equity weighting helped the Life Fund outperform its competition by an estimated 3% to 4%.
PPM’s principal overseas operations in the US and Asia have been re-aligned to report alongside the local operations to maximise the synergies between the investment process and product manufacturing and distribution.
egg:| and Prudential Banking
In little more than a year egg:| has become established as a household name and one of the UK's most recognised e-commerce brands. Our strategy of offering some of the most competitive and customer friendly products in the market, delivered using the latest in Internet design and technology, has resulted in an egg:| customer base of over 800,000 and deposit funds of £7.6 billion at the year end. This remarkable growth has exceeded the initial business targets and egg:| is regarded as the UK’s leading e-commerce financial services web-site.
The combined Prudential Banking and egg:| mortgage book now stands at £1.7 billion, of which £452 million is egg:| mortgages, and while egg:| personal loans have reached £227 million.
Through egg:| Prudential has been able to reach a new type of customer: one who is financially discerning and computer literate, and who wants to benefit from the combination of the best financial products the market has to offer, and who uses Internet services which fit in with their lifestyle. The scale of growth in the number of customers using our website is spectacular: in July 1999 we had 184,000 visitors to the egg:| website: in January 2000 that figure rose to 1.1 million. In January, 62% of all egg:|’s deposit transactions took place over the Internet. 90% of mortgage applications are via the Internet.
Our hi-tech communication centres in Dudley and Derby continue to take some 60,000 calls and 11,000 e-mail enquiries from customers each week. Our innovative working practices and specially designed employee training programmes all lead to a unique egg:| culture and customer experience.
Building on the success of its core savings and loan products, egg:| launched an Internet credit card in September 1999 which now has over 250,000 account holders. Not only do credit card customers benefit from market-leading rates and a guarantee against Internet fraud but also an on-line shopping zone which offers some of the best value retail consumer products available.
We have previously announced our intention to launch a new on-line unit trust supermarket which will give egg:| customers access to investment funds offered by leading investment houses, as well as an on-line share-dealing service. This service is now in live pilot.
During 1999 our investment in egg:| totalled £150 million and we anticipate a similar level of investment during 2000. Current egg:| plans are to break even in the latter part of 2001 as the benefits of the customer base and cross-buying come through.
The intent to pursue plans for IPO, subject to progress in the business and market conditions, announced today represents the best option for the strategic development of egg:| and for the maximisation of long-term shareholder value of Prudential. It will create greater financial flexibility for egg:|, will facilitate growth by giving it the ability to undertake acquisitions through the use of Internet paper, and it will help to recruit, incentivise and retain high calibre staff.
UNITED STATES
Jackson National Life
Jackson National Life is our principal business in the United States. Its product range encompasses traditional fixed annuities, variable annuities, equity-linked indexed annuities, Guaranteed Investment Contract business and life assurance products.
Jackson National Life continues to go from strength to strength with record profits and sales in 1999. Statutory profits have risen 10% to £451 million (after including a £6 million investment in building JNL’s broker-dealer operations and PPM America) with single premium sales 43% ahead of 1998 at £4.1 billion. Annuity sales of £2.4 billion were 65% ahead of the prior year while GIC sales totalled £1.6 billion.
Sales of variable annuity products were nearly £1.2 billion, more than double 1998's figures and compared with industry growth over the same period of 21%.
Equity-linked indexed annuity sales surpassed expectations and reached £431 million, 52% above 1998 levels. By the end of 1999, JNL ranked as the largest provider of equity-indexed annuities in the United States. Our fixed annuity sales also rose by 23%, keeping us at second in that market.
We have enhanced our distribution capability dramatically with the introduction of new technology in a programme entitled JNL-2-YOU. The programme provides 24-hour access to account balances, premium receipts, net policy values and other information either by telephone or by Internet. This programme will be rolled out across JNL’s full product range, including the full complement of indexed and variable annuity products as well as life insurance and traditional fixed annuities. We also intend to offer on-line transactions.
Not only has new technology improved the service experienced by customers, but it has positive financial benefits: the cost of a typical call from a customer has been reduced from US$5 to between 25-50 cents for a phone call, and 5 cents for an Internet "hit".
ASIA
Prudential Asia
It has been a year of intense activity and significant progress for Prudential Asia. Total insurance and investment sales of £871 million have more than quadrupled compared to the corresponding period in 1998. Within this total, insurance sales more than doubled to £288 million due to the continuing strong performance of the PruInvestor Bond and the PruLink HiSaver Account in Singapore.
Through our partnership with ICICI, we are now the second largest private sector mutual fund company in India with over 68,000 investors and offering a choice of eight open-ended funds. Sales reached £583 million for the year, against gross redemptions of £272 million, reflecting the liquid nature of the money market funds. Total funds under management now total £453 million.
New business achieved profits, which reflects the value added to the group from new insurance business, increased 61% on 1998 to £90 million. Statutory operating profit (before development costs) for 1999 was up by 17% to £27 million; operating profit after development costs totalled £15 million.
In Malaysia, Prudential became the first company to launch a regular premium unit-linked product. Within Hong Kong we have entered into a joint-venture agreement with the Bank of China to provide pension products to residents of Hong Kong through the Mandatory Provident Fund – a compulsory pension scheme to be introduced in 2000 by the Hong Kong government.
In November 1999 we launched a new operation in Taiwan following the acquisition of a majority stake in Taiwan’s Chinfon Life Insurance. Chinfon Life is one of the top ten life insurance companies in Taiwan, with a customer base of over 250,000 and a network of more than 2,100 agents.
We also gained a life licence in China and, in December, signed a joint venture agreement to undertake a life insurance partnership with China International Trust and Investment Corporation (CITIC) in Guangzhou, China. This represents the culmination of several years’ work and will be the first Sino-British life insurance operation in China. With a population of 7 million people in Guangzhou alone, this clearly represents a significant long-term opportunity for us.
During last year, we also gained a life licence in Vietnam, where we already have two operations in Ho Chi Minh City and Hanoi.
EUROPE
Prudential Europe
Our strategy for continental European retail markets involves harnessing existing product resources and tailoring them to individual market needs. Whilst meeting local presentational, fiscal and regulatory requirements, the basic core products will be the same in each market and be produced in a single location.
We will be distributing through a series of non-exclusive strategic partnerships with leading local financial services providers. Our products will be branded or co-branded "Prudential".
In November 1999, we announced partnerships with CNP Assurances in France and Signal Iduna in Germany. In forging links with France's leading life assurer and one of Germany's major insurance providers, we have gained access to local markets and marketing expertise and large scale distribution networks. Our strategic partnerships include the sharing of technical expertise and the consideration of joint ventures both in the respective home markets and elsewhere.
We will launch the first new products for distribution under our strategic partnerships in France and Germany later this year. In the meantime, we continue to develop our German broker business based in Frankfurt where we have already established a leading position in the new but rapidly-growing unit linked market.
Whilst, in the short term, retail savings and investment products are our main focus, in the longer term, the provision of funded pensions both on an individual and a group basis will be a major market opportunity. In addition, we will distribute products through the local equivalents of independent financial advisers and insurance brokers.
GROUP FINANCIAL REVIEW
Modified Statutory Basis Results
Operating profit from continuing operations before amortisation of goodwill totalled £776 million in 1999, a decrease of 10% over prior year. The 1999 result includes an investment of £150 million in egg:| and a £70 million charge for UK re-engineering costs; underlying growth before these items is 6%.
This underlying increase reflects good growth from our US operations and our UK Retail Insurance business. These increases were offset by the funding costs of egg:| and of M&G, which was acquired in the first half of the year.
Our US operations generated a profit in 1999 of £451 million, 10% ahead of prior year reflecting increased spread income due to growth in the liability book, and a slight strengthening of the dollar against sterling (local currency results were up 8% on prior year). Jackson’s after tax return on capital for the year of 17% is again ahead of our long-term target of 15%. However, we would expect 2000’s returns to be closer to our target return.
In the UK, underlying profits from our Retail Insurance operations increased by 14% to £479 million. Within this total, underlying profits from our Retail IFA business of £99 million were 13% above prior year as increased funds under management more than offset the impact of lower annual bonuses. The 14% increase in underlying profits from Retail Financial Services to £380 million reflects a 56% increase in profits from General Insurance to £61 million and a 9% increase in long-term profits to £319 million. The increase in the long term result reflects higher funds under management and an exceptional level of maturities offset by the impact of the rundown in annual bonuses. Despite recent rises in interest rates, expectations are for continued low inflation and investment returns, and we would therefore expect to see a continued downward trend in annual bonus levels. The significant improvement in the General Insurance result reflects better claims and expense experience.
Profits from our Group Pensions business increased by 64% to £36 million in 1999, due to an exceptional level of maturities and increased funds under management. Group Pensions’ current investment in an e-commerce marketing and distribution platform will impact 2000’s result significantly.
Prudential M&G Asset Management's underlying result of £87 million compares with £28 million in 1998 and includes a strong first time eight month contribution from M&G of £56 million. M&G's result is ahead of our original acquisition assumptions. The contribution from PPM of £43 million is in line with last year.
The investment in egg:| and Prudential Banking is £150 million compared with £77 million in 1998. This increase reflects both the success of the venture with the resultant demand for additional capacity, and increased investment in the e-card launch, development of future products and the continued investment in systems. Given the continued development expenditure and proposed new initiatives, we anticipate a similar level of investment in 2000 to that incurred in 1999. Current egg:| plans are to break even in the latter part of 2001 as the benefits of the customer base and cross-buying come through.
The movement in other income and expenditure from income of £38 million in 1998 to a charge of £78 million in 1999 predominantly reflects the cost of funding the acquisition of M&G and the investment in egg:|.
Operating earnings per share was were down 14% on prior year at 29.1 pence. This fall is higher than the 10% fall in operating profit due to the unusually low effective tax rate in 1998 of 25%, compared with 27% in 1999.
Supplementary Achieved Profits Basis Results
On the achieved profits basis of reporting, operating profit from continuing operations was £1,098 million in 1999, 9% ahead of 1998. This is despite the inclusion of the UK restructuring charge of £70 million and increased investment in egg:| and is due mainly to the strong sales performance across the Group. Underlying growth excluding these items was an increase of 21%.
The achieved profits result for our long-term insurance operations was an increase of 27% on 1998 at £1,230 million reflecting a 46% rise in new business profits to £603 million and a 13% increase in in-force profits to £627 million.
Within new business profits, the contribution from our UK businesses was up 44% to £304 million. This increase reflected a 53% increase in Retail IFA new business profits to £174 million due to increased sales and a revised assessment of persistency of our Prudence Bond product, while within Retail Financial Services and Annuities, strong sales growth and a shift to more profitable product lines drove the result up 35% to £104 million.
Overseas, Jackson National Life generated new business profits of £198 million, up 45% on prior year, reflecting record sales volumes and a shift in product mix to relatively more profitable variable annuity and ELI products. Prudential Asia’s contribution of £90 million represents another very strong result, up 61% on prior year, and is primarily attributable to the increase in sales in our established markets, a more profitable sales mix, and our increased stake in Malaysia. Prudential Europe’s contribution was £11 million, up 22% on 1998.
Profit from long-term in-force business of £627 million compares with £557 million in 1998, an increase of 13%. The 1999 result was held back by the shareholders’ charge of £92 million for the increase in the cost of pensions mis-selling in the UK.
We have increased the provision for pensions mis-selling from £1.1 billion to £1.7 billion and now expect the total cost to be £2 billion. The increase in the provision reflects the impact of the revised, shorter, timescale for dealing with Phase II cases, revised settlement and interest rate assumptions and additional Phase II cases.
The returns on average shareholders’ funds for our long-term businesses based on local currency achieved basis operating profit after tax, are shown in the following table:
1999 1998
% %
_______________________________________
UK operations 11 10
Jackson National Life 14 16
Prudential Asia* 18 18
_______________________________________
* Established operations net of development costs
Total operating profit after tax on the achieved profits basis was £762 million and earnings per share were 39.1 pence.
Shareholders’ Funds
Statutory basis shareholders' funds were £3,424 million at the end of 1999, an increase of £175 million from 1998. The increase primarily reflects the retained operating profit after dividend payments.
On the achieved profits basis, which recognises the shareholders' interest in our long-term businesses, shareholders' funds were £8342 million, an increase of £832 million compared with 1998. The increase reflects the operating profits retained in the long-term businesses and strong investment returns. After adjusting for borrowings, approximately 65% of these funds are held in sterling with a further 25% held in US dollars.
The achieved profits basis provides a better indication of the Group's financial strength. It does not, however, anticipate the results of our discussions with the FSA on the unattributed assets held in the main with-profits fund. For the purposes of the achieved profits basis results, it is assumed that only 10% of these assets are allocated to shareholders. Our discussions with the FSA on the unattributed assets continue.
Financial Strength of Insurance Operations
The solvency ratio of free assets to liabilities within the Group's main UK long-term fund at the year end after charging for the pension mis-selling provision is estimated to be 29%, an increase of 8% over prior year. Free assets on an FSA basis are estimated to be £18 billion at the year end. The fund's financial strength has been rated Aaa by Moody's Investors Service. The solvency position of Jackson National Life remains strong with a risk-based capital ratio of over 240% of the regulatory minimum. Adequate solvency levels have been maintained by our insurance operations in Asia.
Funds Flow
In 1999 the Group's operations generated funds after tax of £567 million, compared to £654 million in 1998, and retained funds after dividends wereas £118 million. In 1999, the Group invested £2,598 million in its businesses including £278 million reinvested in Jackson National Life and £1,943 million relating to the acquisition of M&G. We have also invested £262 million in Prudential Banking and egg:| as solvency capital and invested £97 million in Asia, principally in Taiwan. In addition, £310 million was repatriated from businesses in 1999: £190 million of surplus capital from M&G, and £120 million from Prudential Assurance Company, following a review of capital requirements. Overall there was a net cash outflow in 1999 to from the holding company of £2,268 million.
As a result of the above outflow and exchange translation losses of £22 million, the holding company net borrowings at the end of 1999 totalled £1,837 million, compared with £453 million of net cash at the end of 1998.
Shareholder’s Borrowings
Shareholders' borrowings at the end of 1999 totalled £1,915 million including £1,614 million at fixed rates of interest with maturity dates ranging from 2001 to 2029. Of this long-term borrowings balance, £496 million was denominated in US dollars, in order to partially hedge the currency exposure arising from our investment in Jackson National Life. There were also £301 million short-term commercial paper borrowings, all sterling denominated.
The Group successfully launched two bonds during the year: a £250 million 5.5% bond maturing in 2009, and a £250 million 5.875% bond maturing in 2029. The Group also successfully placed £168 million of loan notes due to mature in 2004. The proceeds of these debt issues along with the net cash held in the Group at the end of 1998 were used to finance the acquisition of M&G.
Prudential plc enjoys strong debt ratings from both Moody's Investors Service and Standard and Poor's. Its rated long-term debt is Aa3 and AA+, whilst the short-term ratings of its guaranteed finance subsidiaries are P-1 and A-1+. The Group also retains access to both committed and uncommitted bank facilities.
Treasury Policy
The Group operates a central treasury function, which has overall responsibility for managing its capital funding programme as well as its central cash and liquidity positions. The treasury function is also responsible for the co-ordination of risk management and investment policy across the Group.
To reduce investment, interest rate and currency exposures, and to facilitate efficient investment management, derivative instruments are used. Group policy is that amounts at risk through derivative transactions are covered by cash or by corresponding assets. The accounting treatment of derivative contracts in consistent with that of the underlying assets or liabilities.
The Group transacts business primarily in sterling and US dollars. The currency exposure relating to the translation of reported earnings is not separately managed although its impact is reduced by interest payments on the foreign currency borrowings and by the adoption of average exchange rates for the translation of foreign currency revenues.
Accounting Policies
There have been no changes in accounting policies during the year that impact materially on the results.
| Analysis of new business
by product distributor | Analysis of premiums and profit by product provider |
|
| | | | | | Operating profit
(based on longer-term investment returns) before amortisation of goodwill |
| | | | |
| Single | | Regular | Gross Premiums written |
Results Analysis 1999 1998 1999 1998 1999 1998 1999 1998
by Business Area £m £m £m £m £m £m £m £m
_____________________________________________________________________________
UK Operations
Retail Financial
Services and
Annuities 3,211 1,821 146 192 4,837 3,236 380 333
Retail IFA 2,476 1,779 112 113 3,531 2,754 99 88
Retail Insurance
Operations 5,687 3,600 258 305 8,368 5,990 479 421
Group Pensions 630 544 81 37 1,281 1,434 36 22
Prudential M&G Asset
Management 570 - 13 - 948 - 87 28
egg:| and Prudential
Banking - - - - - - (150) (77)
_____________________________________________________________________________
Total 6,887 4,144 352 342 10,597 7,424 452 394
_____________________________________________________________________________
USA
Jackson National
Life 4,062 2,835 24 28 4,449 3,237 457 411
Broker dealer and
fund management - - - - - - (6) -
Total 4,062 2,835 24 28 4,449 3,237 451 411
_____________________________________________________________________________
Asia
Long-term business
and investment
products 765 114 106 79 1,237 532 27 23
Development expenses - - - - - - (12) (10)
_____________________________________________________________________________
Total 765 114 106 79 1,237 532 15 13
_____________________________________________________________________________
Europe 120 96 27 19 168 126 6 4
_____________________________________________________________________________
Other income and
expenditure
Investment return
and other income - - - - - - 93 189
Interest payable - - - - - - (131) (105)
Corporate expenditure - - - - - - (40) (46)
_____________________________________________________________________________
Total - - - - - - (78) 38
_____________________________________________________________________________
Re-engineering costs - - - - - - (70) -
_____________________________________________________________________________
Total continuing
operations 11,834 7,189 509 468 16,451 11,319 776 860
_____________________________________________________________________________
Results Analysis by Activity
_____________________________________________________________________________
Long-term business 10,639 6,982 489 453 14,826 10,640 943 832
Investment products
and management 1,195 207 20 15 1,307 369 70 28
General business - - - - 318 310 61 39
Banking - - - - - - (150) (77)
Other income and
expenditure - - - - - - (78) 38
Re-engineering costs - - - - - - (70) -
_____________________________________________________________________________
Total continuing
operations 11,834 7,189 509 468 16,451 11,319 776 860
_____________________________________________________________________________
2 Funds Flow
Holding Company Funds Statement 1999 £m 1998 £m
_____________________________________________________________________________
Operating profit after tax
before amortisation of goodwill 567 654
Dividends (449) (407)
Reinvested in businesses (278) (260)
_____________________________________________________________________________
Funds available to holding company (160) (13)
New investment in businesses (2,320) (265)
Capital repatriated from businesses 310 -
Disposal of businesses - 481
New share capital subscribed 34 15
Timing differences and other items (132) (175)
_____________________________________________________________________________
Holding company net cash movement (2,268) 43
_____________________________________________________________________________
Movement in Net Cash Balances 1999 £m 1998 £m
_____________________________________________________________________________
Holding company cash less shareholders' borrowings
at beginning of year 453 405
Holding company net cash movement (as above) (2,268) 43
Exchange translation (losses) gains (22) 5
_____________________________________________________________________________
Holding company cash less shareholders' borrowings at
end of year (1,837) 453
_____________________________________________________________________________
Represented by:
Holding company cash and short-term investments 78 1,826
Borrowings - Holding company (1,760) (1,223)
- Jackson National Life (155) (150)
_____________________________________________________________________________
(1,837) 453
_____________________________________________________________________________
3 Movement in Shareholders' Capital and Reserves
1999 £m 1998 £m
_____________________________________________________________________________
Profit for the financial year 542 880
Exchange movements 48 (50)
Goodwill on disposal of subsidiaries - 28
New share capital subscribed 34 15
Dividends (449) (407)
_____________________________________________________________________________
Net movement in shareholders' capital
and reserves 175 466
Shareholders' capital and reserves at
beginning of year 3,249 2,783
_____________________________________________________________________________
Shareholders' capital and reserves
at end of year 3,424 3,249
_____________________________________________________________________________
4 Abridged Statutory Profit and Loss
Account
General Business Technical Account
(based on longer-term investment returns) 1999 £m 1998 £m
_____________________________________________________________________________
Gross premiums written 318 310
_____________________________________________________________________________
Net premiums earned 302 293
Allocated investment return transferred
from the non-technical account 40 41
Claims incurred (200) (209)
Net operating expenses (93) (86)
_____________________________________________________________________________
Technical result 49 39
_____________________________________________________________________________
Gross premiums written and technical result
relate to continuing operations.
Long-Term Business Technical Account(based on
longer-term investment returns for investments
attributable to shareholders 1999 £m 1998 £m
_____________________________________________________________________________
Gross premiums written
(excluding investment products)
Continuing operations 14,580 10,640
Acquisitions 246 -
Discontinued operations - 423
_____________________________________________________________________________
Total 14,826 11,063
_____________________________________________________________________________
Net premiums earned 14,751 10,993
Investment income (including realised
investment gains) 10,661 8,516
Unrealised investment gains 6,239 3,842
Claims incurred and changes in technical
provisions (22,034) (18,868)
Expenses and tax (2,670) (2,261)
Allocated investment return transferred from (to) the
non-technical account 14 (5)
Transfer to the fund for future appropriations (6,325) (1,609)
_____________________________________________________________________________
Technical result after tax 636 608
_____________________________________________________________________________
Analysed as:
Continuing operations 628 601
Acquisitions 8 -
Discontinued operations - 7
_____________________________________________________________________________
4 Abridged Statutory Profit and Loss Account (continued)
Before
re-engineering Re-engineering
Non-Technical Account costs 1999 £m costs 1999 £m 1999 £m 1998 £m
_____________________________________________________________________________
General business
technical result 61 (12) 49 39
Long-term business technical
result before tax
Continuing operations 926 (41) 885 832
Acquisitions 17 (7) 10 -
Discontinued operations - 8
Investment products and
management
Continuing operations 31 (10) 21 28
Acquisitions 39 39 -
Banking (150) (150) (77)
Other income and expenditure (78) (78) 38
Amortisation of goodwill (54) (54) -
_____________________________________________________________________________
Operating profit based on
longer-term investment
returns 792 (70) 722 868
Short-term fluctuations in
investment returns 28 24
Profit on business disposals - 249
_____________________________________________________________________________
Profit on ordinary activities before tax
(including actual investment returns) 750 1,141
Tax (208) (261)
_____________________________________________________________________________
Profit for the financial year 542 880
Dividends (449) (407)
_____________________________________________________________________________
Retained profit for the financial year 93 473
_____________________________________________________________________________
Basic Earnings per Share
_____________________________________________________________________________
Based on operating profit after
tax before amortisation of
goodwill of £567m (£654m) 29.1p 33.7p
Adjustment for amortisation of goodwill (2.8p) -
Adjustment from post-tax longer-term
investment returns to post-tax actual
investment returns 2.3p 0.8p
Adjustment for profit on business disposals
(1999 tax paid on prior year disposals) (0.8p) 10.8p
_____________________________________________________________________________
Based on profit for the financial year
of £542m (£880m) 27.8p 45.3p
_____________________________________________________________________________
Average number of shares 1,947m 1,942m
_____________________________________________________________________________
Diluted earnings per share
Based on profit for the financial year of
542m (£880m) 27.7p 45.0p
_____________________________________________________________________________
Average number of shares 1,959m 1,955m
_____________________________________________________________________________
Dividend per share 23.0p 21.0p
_____________________________________________________________________________
5 Notes on the Unaudited Results
- The results for 1999 are unaudited and are not the Company's statutory accounts. The results for 1999 have been prepared using the same accounting policies as were used in the 1998 statutory accounts. The results for 1998 have been derived from those accounts. The auditors have reported on the 1998 statutory accounts and they have been delivered to the Registrar of Companies. The auditors' report was unqualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985.
- Acquisitions reported in section 4 relate to the Company's purchases of the whole of M&G Group plc in April and of a majority holding in Chinfon Life Insurance Company of Taiwan in November. Goodwill of £1,527m and £50m respectively arose on the acquisitions and is being amortised on a straight line basis over 20 years.
- Discontinued operations comprise the Company's Australasian operations which were sold in September 1998.
- Costs in respect of re-engineering the Company's UK operations relate principally to redundancy and related property, outsourcing and other costs. These costs have
been allocated to the appropriate caption within the technical and non-technical accounts
- The statutory tax charge comprises £83m (£136m) UK tax and £125m (£125m) overseas tax.
- The average number of shares for 1999 has been reduced by 4 million as a result of a change in treatment of shares purchased under employee incentive plans.
- The general business operating result comprises:
Operating profit
(including
Gross longer-term
premiums Underwriting Investment investment
written result return returns)
1999 1998 1999 1998 1999 1998 1999 1998
£m £m £m £m £m £m £m £m
_____________________________________________________________________________
UK Operations
Home 274 273 35 19 23 21 58 40
Motor 44 37 (3) (7) 6 6 3 (1)
_____________________________________________________________________________
Total 318 310 32 12 29 27 61 39
_____________________________________________________________________________
(h) The 1999 Annual Report
will be posted to shareholders on 24 March 2000.
6 Supplementary Achieved Profits Basis Results
Results Analysis by Business Area 1999 £m 1998 £m
____________________________________________________________________________
UK operations
New business 304 211
Business in force 327 304
____________________________________________________________________________
Total long-term business 631 515
General business 61 39
Prudential M&G Asset Management 87 28
Banking (150) (77)
____________________________________________________________________________
Total 629 505
____________________________________________________________________________
USA
_____________________________________________________________________________
New business 198 137
Business in force 277 231
_____________________________________________________________________________
Total long-term business 475 368
Broker dealer and fund management (6) -
_____________________________________________________________________________
Total 469 368
_____________________________________________________________________________
Asia
_____________________________________________________________________________
New business 90 56
Business in force 35 27
_____________________________________________________________________________
Total long-term business 125 83
Development expenses (12) (10)
_____________________________________________________________________________
Total 113 73
_____________________________________________________________________________
Europe
_____________________________________________________________________________
New business 11 9
Business in force 6 5
_____________________________________________________________________________
Total long-term business 17 14
_____________________________________________________________________________
Other income and expenditure
_____________________________________________________________________________
Investment return and other income 111 202
Interest payable (131) (105)
Corporate expenditure (40) (46)
_____________________________________________________________________________
Total (60) 51
_____________________________________________________________________________
Re-engineering costs (70) -
_____________________________________________________________________________
Total operating profit(based on long-term
investment returns) before amortisation of goodwill 1,098 1,011
_____________________________________________________________________________
6. Supplementary Achieved Profits Basis Results (continued)
Summarised Consolidated Profit and Loss Account 1999 £m 1998 £m
_____________________________________________________________________________
Operating profit (including investment returns
based on long-term rates of investment return)
New business 603 413
Business in force 627 557
_____________________________________________________________________________
Total long-term business 1,230 970
General business 61 39
Prudential M&G Asset Management 87 28
Banking (150) (77)
Other income and expenditure (60) 51
Re-engineering costs (70) -
_____________________________________________________________________________
Total 1,098 1,011
Discontinued operations - 12
_____________________________________________________________________________
Total operating profit before amortisation
of goodwill 1,098 1,023
Amortisation of goodwill (54) -
Short-term fluctuations in investment returns 637 289
Net loss from changes to projected investment
return and discount rates - (106)
Profit on business disposals - 202
_____________________________________________________________________________
Profit on ordinary activities before tax
(including actual investment returns) 1,681 1,408
Tax (519) (371)
_____________________________________________________________________________
Profit for the financial year 1,162 1,037
Dividends (449) (407)
_____________________________________________________________________________
Retained profit for the financial year 713 630
_____________________________________________________________________________
Basic earnings per share 1999 1998
_____________________________________________________________________________
Based on operating profit after tax before
amortisation of goodwill of £762m (£752m) 39.1p 38.7p
Adjustment for amortisation of goodwill (2.8p) -
Adjustment from post-tax long-term investment
returns to post-tax actual investment returns 24.2p 10.3p
Adjustment for changes to projected investment
return and risk discount rates - (4.1p)
Adjustment for profit on business disposals
(1999 tax paid on prior year disposals) (0.8p) 8.5p
_____________________________________________________________________________
Based on profit for the year of £1,162m (£1,037m) 59.7p 53.4p
_____________________________________________________________________________
Average number of shares 1,947m 1,942m
_____________________________________________________________________________
6. Supplementary Achieved Profits Basis Results (continued)
Movement in Shareholders' Capital and Reserves 1999 £m 1998 £m
_____________________________________________________________________________
Profit for the financial year 1,162 1,037
Exchange movements 85 (75)
Goodwill on disposal of subsidiaries - 28
New share capital subscribed 34 15
Dividends (449) (407)
_____________________________________________________________________________
Net movement in shareholders' capital and reserves 832 598
Shareholders' capital and reserves at beginning
of year 7,510 6,912
_____________________________________________________________________________
Shareholders' capital and reserves at end of year 8,342 7,510
_____________________________________________________________________________
Represented by:
Statutory basis capital and reserves 3,424 3,249
Additional reserves on the achieved profits basis 4,918 4,261
_____________________________________________________________________________
Shareholders' capital and reserves at end of year 8,342 7,510
_____________________________________________________________________________
Comprising:
UK operations 5,029 3,911
USA 2,533 2,166
Asia 593 378
Europe 68 46
Other operations (including net shareholders'
borrowings/cash) 119 1,009
_____________________________________________________________________________
Shareholders' capital and reserves at end of year 8,342 7,510
_____________________________________________________________________________
Notes on the supplementary achieved profits basis results
- The results for 1999 are unaudited.
The results for 1998 have been derived from the achieved profits basis results supplement to the Company's statutory accounts for that year. The supplement included an unqualified report from the auditors.
- The results have been prepared in accordance with the draft "Guidance on accounting in Group Accounts for proprietary companies' long-term insurance business" issued by the Association of British Insurers in July 1995 and are provided as a supplement to the statutory basis results contained in this announcement. The results for 1999 have been prepared using the same principal assumptions as were used for 1998.
- The results for UK investment products are now included within Prudential M&G Asset Management. Previously the results were included within the business in force result for UK long-term business. Comparative figures have been restated accordingly.