24 Jul 2002

Prudential plc 2002 Interim Results and First Half New Business Sales

Highlights:

• Total Group insurance and investment sales of £13.7 billion, up 36 per cent on first half of 2001 (£10 billion).
• New business achieved profits up 16 per cent to £397 million.
• Group margin of 43 per cent (38 per cent for the full-year 2001).
• Over 70 per cent of Group sales and around 65 per cent of new business achieved profits from outside the UK.
• Free Asset Ratio of 11 per cent as at 30 June 2002.
• Total dividend up 2.3 per cent to 8.9 pence per share.

Results Summary:

* From continuing operations and before UK re-engineering costs.

Commenting on the results, Jonathan Bloomer, Prudential's Group Chief Executive, said:

"In the first six months of 2002, we have made a good start to our goal of doubling the value of the Group over four years, and the benefits of our strategy of diversification by product and distribution channel in each of our chosen markets internationally are clear.

"We have, inevitably, been affected by capital markets and our first-half results reflect the impact of falls in equity markets around the world and the difficulties and write-offs in the bond markets. However, our financial strength and capital position allow us to deal with these and benefit from the inevitable flight to quality, and maintain the platform to deliver continued growth in the future. Our strategy, active management of capital, and focus on profitable growth and return on capital have positioned us strongly."

Total Group insurance and investment sales of £13.7 billion were up 36 per cent. Total insurance sales of £6.4 billion were up 6 per cent (insurance sales on an annual premium equivalent (APE) basis were up 2 per cent to £926 million) and net inflows of investment products were up 50 per cent to £826 million.

New business achieved profits increased by 16 per cent to £397 million, principally due to strong growth in Asia and the United States. The Group margin increased to 43 per cent from 38 per cent for the full-year 2001. Achieved basis operating profits decreased by 15 per cent to £543 million. This was due to a fall of 49 per cent in the in-force result, which was adversely affected by a £71 million charge relating to average realised bond losses and a £56 million negative expense assumption charge in the United States.

On the achieved profits basis, we show the effect of short-term fluctuations in investment returns and changes in long-term economic assumptions in order to arrive at a total profit figure. This adjustment is inevitably volatile due to fluctuations in stock markets and in the first half of 2002 it was negative due to the fall in equity markets and bond default and impairment losses we experienced in the United States. Despite this negative adjustment, the Group reported a profit on ordinary activities before tax on an achieved profits basis of £166 million.

We fully expect these sorts of fluctuations given the uncertain economic climate and volatile equity markets we witnessed throughout the first half of the year. However, the underlying performance of the business was strong, reflecting the fact that Prudential is a financially strong company with outstanding businesses and a broad international base.

Dividend

The Board has increased the interim dividend by 2.3 per cent to 8.9 pence per share. We are confident of maintaining a real rate of dividend growth while at the same time having the capital flexibility to deliver our growth plans.

UK Insurance Operations

Our UK insurance business reported good results in the first half of the year. Total sales of insurance products were up 13 per cent (21 per cent excluding sales through closed distribution channels) to £3.1 billion and margins increased to 36 per cent from 30 per cent for the full-year 2001. These results demonstrate the success of the business in focusing on products where we have market-leading presence, scale economics and higher return on capital, as well as building strong multi-channel distribution while continuing to drive down operating costs. The original annual gross cost saving target of £175 million from 2004 that we announced last November is running ahead of schedule and we have increased the target to £200 million.

The performance of the UK life sector over the last few months has been affected by concerns over capital adequacy and financial strength in declining equity markets and the uncertainty brought about by the various regulatory reviews being undertaken into the UK retail savings and pension industries.

Despite the sharp fall in share prices over recent weeks, Prudential remains one of the strongest companies in the life insurance sector and the long-term fund remains well capitalised:

• The Free Asset Ratio ("FAR") as at 30 June 2002 was 11 per cent (12.2 per cent as at 31 December 2001). In arriving at the FAR, no credit has been taken for the present value of future profits or contingent loans. The main UK life fund has no subordinated debt or financial reinsurance.
• The life fund had a balanced asset mix as at 30 June 2002 (details of asset mix as at 31 December 2001 are in brackets):
  • UK equities - 36 per cent (38.6 per cent)
  • International equities - 14.8 per cent (14.4 per cent)
  • Property - 15.6 per cent (14.9 per cent)
  • Bonds - 29.4 per cent (27.8 per cent)
  • Other asset classes - 2 per cent (1.6 per cent)
  • Cash - 2.2 per cent (2.7 per cent)
• We remain comfortable with the allocation of assets in the life fund. We have not been reducing our holding in equities in response to recent falls in equity markets and continue to write business as usual.
• Life Fund performance has remained strong in the first six months, with the fund up over 0.7 per cent against its strategic benchmark and 1.3 per cent against its competitive benchmark. The three-year record remains almost 2 per cent per annum ahead of the strategic benchmark and nearly 3 per cent per annum ahead of competitors.
• The UK life fund is rated AAA by Standard & Poor's and Aaa by Moody's.

Earlier this month, we saw the publication of the Sandler Review into UK retail savings and the Pickering Report on regulation of the UK pensions industry. Prudential fully supports the drive for further simplification of financial services to help close the UK savings gap and we will play an active part in the consultation process. In the meantime, we urge the Government to align these and the other reviews currently being undertaken and to work closely with the regulators and industry to create a single package of measures to help reduce the savings gap.

If this can be achieved, it will clearly increase the size of the long-term savings market and we believe that there will be enormous opportunities for the larger companies like Prudential with financial strength, a strong brand, economies of scale, low cost bases and a diversified product and distribution offering. The strategy that we set out for our UK insurance business last year means that we are ideally positioned, particularly as customers place an increasing emphasis on financial strength and trusted brands when making decisions about their long-term savings and investments.

M&G

M&G has had a good half-year with net retail sales growing strongly (up 59 per cent), a fall in the amount of redemptions, and an increase in retail market share. The business has also won a number of sizeable new institutional fixed income mandates. These results were achieved in difficult market conditions and endorse the strength of M&G's brand, diversified product range and broad distribution base. In March, M&G International commenced distribution of M&G branded mutual funds in the German and Austrian markets.

Egg

Having achieved a break-even position for its UK business in November of last year, Egg reported a profit before tax in the UK for the half-year of £8.7 million. Customer numbers have increased by over 360,000 in the first half, taking the total to over 2.3 million. Egg completed the acquisition of Zebank, the first digital online bank in France, in May and the business remains on track to launch in France later this year.

Prudential Europe

We have completed a full appraisal of the opportunities for our Prudential-branded businesses in continental Europe and have concluded that an organic strategy would at present be too slow and expensive to create value and acquisitions would be necessary to give us scale. It is clear that the returns achievable would be too low to justify any significant investment of capital and that there is little opportunity for short to medium-term growth. We will, therefore, run our existing operations in France and Germany for value but not push for growth.

This decision does not affect either M&G or Egg's operations in Europe, both of which are well positioned to capitalise on the growth prospects in their chosen markets.

Jackson National Life

Jackson National Life ("JNL") recorded a 10 per cent increase in total sales to £2.9 billion and a 26 per cent increase in new business achieved profits to £117 million in the first half, despite the continued market volatility in the US. This was a strong result and is testament to JNL's excellent track record of product innovation and its ability to broaden distribution channels, both of which have continued in 2002.

The considerable uncertainty for markets, particularly the capital markets, that we witnessed in the United States last year has continued into 2002. This has led to further losses on corporate bonds and no one in the US, including JNL, has been immune from these difficult market conditions.

Given the high volume of fixed annuities being written and the credit losses incurred in the first half, we are reviewing the capital requirements for JNL and estimate that a capital injection of around £300 million will be required in the second half of the year.

The long-term demographic trends in the US are compelling and we believe that there are significant growth prospects, bringing with them outstanding opportunities for high quality, efficient businesses like JNL which has a cost base well below the industry average, modern IT systems and diversified products and distribution.

Prudential Corporation Asia

Prudential Corporation Asia ("PCA") has had another six months of impressive growth with new business achieved profits increasing by 27 per cent. Prudential is the leading European life insurer in Asia with 22 operations (nine of which have top-five market shares) in 12 countries. PCA's performance once again endorsed its successful strategy of entering new markets, strengthening and diversifying distribution channels, and launching innovative, customer-focused products.

Although there has been a slowdown in some Asian economies and only modest growth expected in the region as a whole for the remainder of this year, the long-term outlook remains very positive and PCA, with its significant portfolio of businesses, multi-channel distribution capabilities, excellent strategic partners, and customer-focused product expertise, is very well placed to continue delivering profitable growth.

Summary

Prudential has some outstanding businesses across the Group. Trading in the first six months of this year has been strong and our capital strength leaves us very well placed to continue delivering value in the future.

ENDS

Enquiries to:

Notes to Editors:

1. There will be a conference call today for wire services at 7.30am on Tel: 020 8288 4700 hosted by Jonathan Bloomer, Group Chief Executive.

2. 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

3. There will be a conference call for international investors at 2:30pm (dial in telephone number: +44 (0) 20 8781 0598, US callers 1 303 713 7888). Callers to quote "Prudential Interim Results" for access to the call.

A recording of this call will be available for replay for one week by dialling:

UK: 020 8288 4459, US: 1 703 736 7336, access code 672132.

4. A press conference will take place at 11:45am at Governor's House, Laurence Pountney Hill, London, EC4R 0HH.

5. An interview with Jonathan Bloomer (in video/audio/text) will be available on www.prudential.co.uk and www.cantos.com from 7.00am on Wednesday 24 July 2002.

6. Annual premium equivalent (APE) sales comprise regular premium sales plus one-tenth of single premium insurance and investment sales.

7. Prudential reports its investment products based on net in-flows, given the relatively high liquidity of these flows in Asia.

8. The Free Asset Ratio is a common measure of financial strength in the UK for long-term insurance business. It is the ratio of assets less liabilities (before deduction of the required regulatory minimum solvency margin) to liabilities, and is expressed as a percentage of liabilities.

9. Total number of Prudential plc shares outstanding as at 30 June 2002 was 1,996,861,875.

10. Photographs are available at www.newscast.co.uk.

11. Financial Calendar:

This statement may contain certain "forward-looking statements" with respect to certain of Prudential's plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Prudential's control including among other things, UK domestic and global economic and business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in the jurisdictions in which Prudential and its affiliates operate. As a result, Prudential's actual future financial condition, performance and results may differ materially from the plans, goals, and expectations set forth in Prudential's forward-looking statements.

Prudential undertakes no obligation to update the forward-looking statements contained in this statement or any other forward-looking statements we may make.

Note

Operating profit for insurance operations includes investment returns at the expected long-term rate of return. For the purposes of the presentation shown above, to be consistent with the alternative earnings per share, operating profit excludes amortisation of goodwill and the profit on sale of UK general business operations. The directors believe that operating profit, as adjusted for these items, better reflects underlying performance. Total profit includes these items together with actual investment returns. This basis of presentation has been adopted consistently throughout the Interim Report.

Operational review

UK Insurance Operations

In the first half of 2002, the UK insurance business recorded total insurance sales of £3.1 billion, up 21 per cent on the same period last year (excluding sales through closed distribution channels). Sales on the annual premium equivalent (APE) basis were up four per cent to £398 million.

New business achieved profits of £142 million were 19 per cent higher on a like-for-like basis than 2001 (after applying the active basis for setting economic assumptions adopted from the end of 2001) and excluding sales made through closed channels. This was due to a combination of increased new business sales and improved margins, which increased to 36 per cent from 30 per cent for the full year 2001.

These results endorse the strategy we set out in November 2001 and reflect the importance of a strong brand, capital strength and a broad product mix, which takes on an even greater significance at a time of intense market volatility.

We have increased our cost saving target to £200 million per annum by 2004, up from the original £175 million target we set last November. This is the result of a number of initiatives, including IT savings. These further cost savings will have a positive earnings impact, contributing an additional £5 million to both modified statutory basis and achieved profits in 2002, rising to an additional £10 million from 2004 onwards.

Total insurance sales via the intermediary channel were up 18 per cent to over £2 billion, (APE insurance sales were £233 million, up 5 per cent) on the same period last year. Life sales performed particularly strongly, with an increase of 60 per cent, driven by significant sales of Prudence Bond in the first quarter of 2002. One year after the direct sales force was closed, we continued to see healthy sales through our direct distribution channels, where we have developed a strong business to business proposition. Total insurance sales via direct channels increased by 27 per cent on the prior year to over £1 billion, with APE sales up three per cent to £165 million. Direct annuity sales increased 18 per cent to £39 million on the APE basis.

In last year's strategic review of the UK business, we said that our focus would be on high growth medium to long-term savings products, including with-profits bonds, corporate pensions and annuities, which enable us to meet the needs of our customers for lump sum investments, saving for retirement, and income in retirement. We are seeing good results from this strategy, reflected in strong sales of annuities, a healthy pipeline of bulk annuity business, increased sales of group pensions and solid with-profits sales.

Annuities

Total sales of individual annuities increased by 22 per cent to £703 million compared to the same period last year. These sales were achieved despite the challenge of difficult market conditions and a lower interest rate environment. We have a 20 per cent share of this market.

This year we have received an unprecedented level of enquiries into bulk annuities as concerns grow over funding of defined benefit schemes. While sales (£163 million in the first half of 2002) were slow at the beginning of the year, leading to a decrease in sales of 54 per cent compared to the first half of 2001, there have been encouraging signs of an upturn, with a significant level of business being written towards the end of the second quarter. In addition, we have been broadening our distribution in this area and have recently entered into long-term strategic partnerships with consulting actuaries Hazell Carr and with the employee benefits consultancy Jardine Lloyd Thompson, to undertake administration on our behalf and facilitate our expansion into this fast growing and highly profitable market.

Pensions

Total sales of corporate pensions were £510 million, up 41 per cent on the prior year. Our focus is on larger corporate schemes, including Stakeholder, where we can offer quality service within the economics of a one per cent environment. We are the corporate pension scheme provider to one-fifth of FTSE 350 companies and in total manage more than 3,500 pension schemes, and we hold a market-leading position within the public sector market place.

With-profit bonds

Sales of with-profits bonds for the first half of 2002 increased by 47 per cent to £1.2 billion. The half-year performance was strong, although reducing investor confidence in the turbulent equity markets contributed to lower sales of with-profit products in the second quarter compared to the first quarter of 2002. This lower level of sales is expected to continue into the second half of the year. Prudence Bond accounted for £119m of APE sales via intermediaries in the first six months of the year, a 72 per cent increase on the same period last year.

We launched two innovative versions of the with-profit bond in the first half of this year. In January, we launched an enhanced ‘no initial charge' with-profit product to build on the success of Prudence Bond which was enthusiastically received by Independent Financial Advisers (IFAs). This was followed in March by our International Prudence Bond, an offshore version of Prudence Bond, which is the first new product to be sold under the Prudential International name.

The UK insurance operations reported strong results in the first six months of 2002 and we have continued to grow the business successfully in a highly competitive market place. As the UK financial services market continues to change, Prudential, with its strong brand, financial strength and focused product range, is ideally placed to benefit from an increased ‘flight to quality' as customers place greater importance on these characteristics when making their investment decisions.

M&G

Gross retail fund inflows in the first half of 2002 were £549 million, up seven per cent on the same period last year despite difficult market conditions, reflecting the strength of M&G's diversified product range and broad distribution base. Net retail fund inflows improved significantly, up 59 per cent to £210 million. According to figures published by the Investment Management Association (IMA) to May 2002, M&G had bucked the industry trend with a fall in the value of redemptions. In March, M&G successfully rolled over its Recovery Investment Trust into a new vehicle. This was a highly successful rollover, resulting in the retention of £171 million of the original £279 million fund.

Total operating profit for the first six months of the year was £34 million, compared to £40 million in 2001. This reduction was mainly due to the significant fall in stock markets during the past 12 months. M&G has not recognised any performance-related fee in respect of its management of the Prudential Life Fund at the half-year. The performance fee is based on performance over a three-year period. M&G does not accrue any performance fee due until the end of the year.

The latest IMA figures to the end of May show that M&G increased its retail market share further during the first six months of 2002, winning 3.5 per cent of the total £13 billion of retail funds sold during the period, compared to three per cent for the same period last year. This reflected the market's continued recognition of the size and strength of M&G's fixed income team. M&G also significantly increased its market share of ISA sales and PEP transfers over the same period, winning over nine per cent of all direct business and seven per cent of all business sold through intermediaries.

Despite the continued volatility in equity markets during 2002, M&G has consolidated its top decile performance over three and five years in its flagship British Opportunities Fund. The M&G Recovery Fund has also performed well in the first half, delivering top decile returns. In May, M&G completed its global specialist range of funds with the UK launch of the M&G Global Healthcare Fund.

In addition, M&G continued to maintain its successful performance record for management of the Prudential Assurance Company Life Fund. The three year record remains nearly two per cent per annum ahead of the strategic benchmark and almost three per cent per annum ahead of competitors.

M&G's institutional business has continued to build on its strong position in fixed income and the fund management of defined contribution and pooled pension schemes, winning a further net £1 billion in fixed income assets during 2002. M&G's market leadership in fixed income has enabled it to introduce innovative initiatives in the areas of private debt and structured finance.

In March of this year, M&G International's German business commenced distribution and is now selling a range of funds in Germany and Austria, and plans are in place to launch in Italy in the fourth quarter of 2002.

Egg

Egg announced its Interim Results on 23 July 2002. After meeting its commitment to break even in the fourth quarter of 2001, Egg delivered another impressive performance in the first half of 2002. The core UK business reported a pre-tax profit of almost £9 million (Group pre-tax profits increased to £1.2 million), operating income increased by 103 per cent to £154 million and savings balances grew by £1.6 billion. Egg's management is confident that UK profits will continue to grow in the second half of the year.

Customer numbers increased by 362,000 in the first half of 2002, taking Egg's total customer base to over 2.3 million. The acquisition of Zebank, the first digital online bank in France, was completed in May and the business remains on track to launch in France later this year.

Prudential Europe

Total sales were up £1 million to £37 million for the first six months of 2002, while sales on an APE basis were also up £1 million to £13 million. Total achieved basis operating profits of £5 million, before development costs, were consistent with the same period last year, while new business achieved profits also remained constant at £3 million.

Jackson National Life

Jackson National Life ("JNL") reported strong growth in sales and new business achieved profits in the first half despite the continued volatility and intense competition in the US market. These strong results were principally due to JNL's highly rated customer offering which it has developed still further in the first six months of the year. JNL's costs remain among the lowest in the industry and it has a highly rated service and technology capability, which sees it well positioned for continued growth and diversification.

Total sales of insurance products on the APE basis of £298 million were 10 per cent higher in the first half of 2002 than in the corresponding period last year. Single premium annuity sales increased by 19 per cent to £1.7 billion in the first half of this year, significantly helped by sales in the second quarter which outperformed the first quarter by 49 per cent.

Fixed annuities have continued to attract strong sales, showing an improvement each month on sales for the same period last year, and a total increase of 29 per cent to £1.1 billion compared with the first half of 2001. Sales in the second quarter of this year outperformed the first quarter by 46 per cent. These sales figures were achieved in a market in which key competitors have continued to focus on top line growth at the expense of profitability.

New business achieved profits increased 26 per cent to £117 million, driven by the strong increase in insurance sales and an improvement in the new business margin from 35 to 39 per cent over the past six months. These strong results show that despite exceptionally difficult market conditions, JNL has a robust strategy in place, based on a diversified product offering, high quality distribution network and strong cost position.

We have continued to see a high level of bond defaults in the first half of 2002 and JNL, like its competitors, has not escaped the impact of these volatile market conditions. Defaults and impairments on bonds have resulted in realised losses of US$228 million. Losses are accounted for on a five-year average basis and the effect of these losses is to increase the half-year-on-half-year charge by £63 million to £71 million. These losses equated to 0.6 per cent of JNL's total invested assets.

During the first half, JNL made a number of revisions to its product line and these have had a positive impact on sales; more than a third of new retail sales came from products which have been introduced in the last twelve months. In January, JNL launched Perspective II, a new variable annuity product, which is highly competitive in its market and can be individually tailored to each customer's needs with explicit charging for the specific features it offers. This revision to the product line led to sales of variable annuities showing a strong upward trend over the first six months of this year, increasing by eight per cent on the same period in 2001, while second quarter sales outperformed those made in the first quarter by 64 per cent.

During the first half of 2002, JNL has once again shown that it has the ability to adapt to difficult market environments and continues to focus on broadening its product range, enabling it to sell profitable products and meet customers' needs in almost any economic environment. It has a strong management team and is well positioned to capitalise on the opportunities that the world's largest savings market has to offer.

Prudential Corporation Asia

Prudential Corporation Asia ("PCA") delivered another strong performance in the first half of 2002.

Despite the recent economic slowdown in Asia, sales of insurance products on the APE basis for the first half of the year were up three per cent to £217 million. Excluding single premium Central Provident Fund (CPF) related sales in Singapore, which were at exceptional levels in the first half of 2001 due to further government liberalisation of the CPF funds, sales were up 19 per cent. APE sales for the second quarter of 2002 were up 26 per cent on the first quarter.

New business achieved profits of £135 million for the half-year were up 27 per cent on the same period in 2001. The average margin of 62 per cent in the six months to 30 June 2002 increased from 59 per cent for the full-year 2001, reflecting a return to a lower, more normal level of single premium business in Singapore and the managed change in Taiwan's product mix to include more profitable unit-linked products.

Mutual funds under management of £3.8 billion at 30 June 2002 were up 10 per cent on 31 March 2002 (74 per cent up on 30 June 2001), with strong net inflows of £535 million during the second quarter of this year. This was driven principally by Taiwan (£319 million), India (£129 million) and new fund launches by BOCI-Prudential in Hong Kong and PCA ASSET in Japan.

According to latest industry statistics, PCA's market share has increased in most of the markets in which it operates. We have strengthened our top three positions in Malaysia, Hong Kong and Singapore, while in the Philippines we are ranked fourth in the market. In India, we have both the largest private sector life insurance and mutual fund businesses. In Taiwan, Prudential SITE is now the largest mutual fund business with assets under management growing to £2.6 billion. Overall, PCA now has nine operations throughout the region with a top five market share.

PCA's diversified range of businesses means it is not dependent on any one market for growth. Its established operations (Singapore, Malaysia and Hong Kong) averaged an impressive 33 per cent growth in APE sales in the second quarter compared to the first quarter of 2002. In Taiwan, this figure was up 16 per cent following the successful introduction of unit-linked products in January 2002. Japan's APE sales for the first six months of 2002 increased by more than 50 per cent on the same period last year. APE sales in PCA's other operations increased by 32 per cent on the first quarter of 2002 as they continued to build scale in their respective markets.

Agency distribution remains the primary means of accessing customers in Asia and PCA has increased its total number of agents by 18 per cent to 70,000 over the past six months, with the largest increases in India, China and Vietnam. Alternative distribution channels contributed 23 per cent of APE sales over the first six months of 2002, compared to 17 per cent for the whole of last year, and is evidence of PCA's success in continuing to diversify its distribution channels.

Prudential is the leading European life insurer in Asia. It has a very strong track record of delivery and has continued to implement its clearly stated strategy of focusing on profitable growth opportunities across its 22 operations in 12 countries. Developments during the year included the acquisition of ING's life insurance operation in the Philippines; the introduction of new customer financial planning centres in Japan; and the achievement of a more balanced product mix in Taiwan as unit-linked products become increasingly well understood by customers.

Despite the slowdown in some Asian economies, with only modest growth in GDP expected for the region as a whole for the rest of this year, the long-term outlook remains very positive. We are confident that PCA, with its significant portfolio of businesses, multi-channel distribution capabilities, excellent strategic partners and customer-focused product expertise, is ideally placed to continue to deliver profitable growth.

Financial Review

Building on our excellent sales in 2001, Prudential has continued to deliver strong growth with total new business inflows reaching £13.7 billion, 36 per cent ahead of last year.

Total insurance sales increased 6 per cent to £6.4 billion, while sales on the annual premium equivalent (APE) basis were up 2 per cent to £926 million compared to the same period last year. Gross investment inflows increased 82 per cent to £7.3 billion, while net investment inflows reached record levels, up 50 per cent on the prior year. Net mutual fund inflows in Asia were £655 million, an increase of 48 per cent while net investment inflows by M&G were £210 million, a 59 per cent increase over the prior year.

Over 70 per cent of Group sales were generated by our overseas operations in the six months to 30 June 2002.

New business achieved profit (NBAP)

Group new business achieved profit from insurance business of £397 million was 16 per cent ahead of the prior year, reflecting strong growth for JNL and PCA principally due to improved margins. The Group new business achieved profit margin increased from 38 per cent for the year to 31 December 2001, to 43 per cent for the half year, with margins improving in all key territories. During the first half of 2002, 64 per cent of the Group's NBAP was generated from our overseas operations.

UK Insurance Operations new business achieved profit of £142 million was one per cent higher than the equivalent period in the prior year, reflecting decreased sales offset by improved margins. Margins for the UK long-term business improved from 30 per cent for the year ended 31 December 2001 to 36 per cent for the half-year 2002 due to a focus on more profitable products combined with an improvement in product profitability. Prudential Europe's new business achieved profit of £3 million was in line with the prior year.

The 26 per cent improvement in JNL's new business achieved profit to £117 million was driven by a 10 per cent increase in new insurance sales combined with an improvement in the new business margin from 35 per cent for the year ended 31 December 2001 to 39 per cent. This primarily reflects an improvement in the spread on new business combined with a favourable change in product mix and revisions to the economic assumptions at the half year.

PCA's new business achieved profit of £135 million was up 27 per cent on half year 2001 principally reflecting an improvement in the new business margin in Asia. PCA's margin for the first half of 2002 was 62 per cent, up from 59 per cent for the year ended 31 December 2001. The improvement in the margin reflects a favourable shift in country and product mix as we continued our focus on maximising value from our Asian operations. The split of NBAP by product type is now 23 per cent traditional products, 43 per cent unit linked products and 34 per cent accident and health products. This compares to the 2001 year-end when the split was 31 per cent traditional, 38 per cent unit linked, and 31 per cent accident and health.

In-force achieved profit

The UK in-force profit of £190 million was down 20 per cent on the half year 2001, principally reflecting a lower discount rate being applied.

The US in-force result has decreased significantly from a profit of £134 million in the half year to 30 June 2001 to a loss of £23 million. This was primarily due to a £71 million charge relating to defaults and impairments on bonds which is recognised through operating profit on a five year average basis. Actual losses in the half year to 30 June 2002 were US$228 million and include a number of one-off event risks where we have seen investment grade bonds fall to below investment grade status almost overnight, for example, WorldCom where the US business has written down its investment by US$120 million.

The US in-force result was also affected by lower than assumed spread income of £15 million primarily due to additional non-accrual bond interest as a consequence of defaults and impairments on bonds, and a higher than normal level of cash balances. However, we continue to see improvements in our spread, including the benefits from reductions in crediting rates on our in-force book that we have introduced over the last six months. The forward looking spread is currently running ahead of the long term assumption of 175 basis points.

In recent years our US operations have invested in technology and the development of our systems platform in order to process efficiently higher volumes of business and this has added to our fixed cost base in recent years. With the current lower volumes of variable annuity and life sales, the business is running below capacity but as the business grows, it will be able to take advantage of lower marginal costs. We have addressed this at the half-year with a revision to the unit expense assumption resulting in a charge of £56 million.

PCA's in-force profit (before development costs) has increased from £28 million in the first half of 2001 to £34 million in 2002 as the operations continued to build in-force business.

Our European operations generated a £2 million in-force profit before development costs, in line with the prior year.

Non-insurance operations

M&G's profits of £34 million compare to £40 million in the half year to 30 June 2001. This is largely due to the impact of lower equity markets on fee income with the FTSE All-Share Index averaging 350 points (12 per cent) less in 2002 than in 2001. M&G has not recognised any performance-related fee in respect of its management of the Prudential Life Fund at the half-year. The performance fee is based on performance over a three-year period. M&G does not accrue any performance fee due until the end of the year.

Egg's UK operations generated a profit of almost £9 million in the first half of 2002 having moved to profitability late in 2001. Egg International recorded an £8 million loss in 2002 including £6 million relating to investment in the development of Egg's French business. Egg is now an established business with over 2.3 million customers, and is growing rapidly. Egg's results are presented in their own report.

National Planning Holdings, our US broker-dealer, and PPMA, our US fund manager together delivered profits of £10 million, broadly in line with the first half of 2001.

Development costs were £16 million, down from £21 million in the first half of 2001, and included £11 million for Asia and £5 million for Europe. The Asian development costs include £8 million in relation to the development of the Japanese business.

Other net expenditure increased by £18 million to £86 million largely due to higher interest expense and lower investment income. Interest payable on core debt increased from £60 million to £67 million. Group corporate expenses including PCA head office costs were down slightly on 2001.

Achieved profit – profit before tax

Total achieved profit before tax and minority interests was £166 million compared to £364 million for the first half of 2001. This reflected a decline in operating profit from £653 million to £543 million due to the lower profit on in-force business described earlier. The result also reflected an adjustment for short-term fluctuations in investment returns of £661 million which includes £447 million in relation to the UK and £202 million in relation to JNL.

The UK component largely relates to the life fund and reflects the difference between an actual investment return of negative 2.6 per cent and a long term assumed return of 7.1 per cent. The life fund investment return year to date is 0.7 percent above its strategic benchmark. The US component largely reflects the full charge for bond write-downs and impairments to the extent that it is not included in operating profit, and the difference between the expected long-term investment returns for equity-like investments and the actual returns achieved.

Economic assumption changes of £22 million reflect the net impact of revisions to economic assumptions for JNL and PCA.

The £355 million profit on the sale of our General Insurance operations is in line with the profit estimated in our 2001 annual report.

Achieved profit – profit after tax

Profit after tax and minority interests was £201 million after accounting for a tax credit of £34 million reflecting the utilisation of capital losses available to the Group that were acquired during 2001. Minority interests in the Group results were a credit of £1 million.

Modified statutory basis - operating profit

Group operating profit before tax on the modified statutory basis (MSB) was £317 million, £45 million lower than first half 2001. Adjusting for the discontinued General Insurance operations and the direct sales force closure costs in 2001, MSB profit was down 7 per cent (£23 million).

UK Insurance Operations operating profit in 2002 (excluding the discontinued General Insurance operation) was £215 million, £7 million up on 2001. The US operations result of £150 million was £70 million worse than in the prior year, principally reflecting a £63 million charge for the first half of 2002 in relation to average realised gains and losses on bonds, up from £7 million for the first half of 2001.

Prudential Asia's operating profit before minority interests and development expenses was £16 million against a profit of £22 million in 2001, principally reflecting start-up losses in the North Asian insurance operations. The more established operations in Singapore, Hong Kong and Malaysia reported further growth in operating profit, up 7 per cent to £27 million, despite the strong growth in sales which have a negative first year impact on profits on an MSB basis due to new business strain.

During the second half of 2002 and in 2003 significant investment has been planned to build high quality customer focused distribution channels in Japan and Korea as we pursue a strategy of creating material scale in these businesses. As outlined in our 2001 results, we expect the effect of this investment to depress our MSB result for Prudential Asia in 2002 and 2003.

Modified statutory basis - profit before tax

MSB profit before tax and minority interests was £471 million in 2002, compared to £548 million for the first half of 2001. This decline principally reflects lower operating profit and a £152 million adjustment for short-term fluctuations in investment returns. The profit on the sale of the General Insurance business was £355 million and amortisation of goodwill was £49 million against £47 million in 2001.

Modified statutory basis - profit after tax

MSB profit after tax and minority interests was £422 million, reflecting a tax charge of £50 million. The effective rate of tax on MSB total profit in 2002 was 11 per cent, compared to 33 per cent in 2001, due to the utilisation of capital losses available to the Group that were acquired during 2001.

Earnings and dividend per share

Earnings per share, based on achieved basis operating profit after tax and related minority interests but before amortisation of goodwill were down 5 pence to 18.4 pence. Earnings per share on an MSB basis were down 1.7 pence to 11.4 pence.

The interim dividend per share of 8.9 pence represents a growth of 2.3 per cent. We are confident of maintaining a real rate of dividend growth while at the same time having the capital flexibility to deliver our growth plans.

Funds flow

The holding company net funds inflows for the six months was £354 million compared to a net outflow of £25 million in the prior period. Capital remitted from business units amounted to £95 million and capital re-invested in existing businesses during the period totalled £146 million. The dividend declared of £178 million reflects the dividend per share of 8.9 pence.

Looking to the second half of 2002, following the high volume of fixed annuities being written and reflecting the credit losses incurred, we are reviewing the capital requirements of JNL, and currently estimate that a capital injection of around £300 million will be required.

Shareholders' borrowings and financial flexibility

Net core structural borrowings at 30 June 2002 were £1.8 billion, a £0.4 billion improvement on the 2001 year-end position. This improvement principally reflected the net cash inflow of £354 million referred to earlier.

We manage our balance sheet efficiently with regards to both our ratings and capital efficiency. Interest cover has been maintained at the 31 December 2001 level and has improved from the level at the end of 2000. Senior debt has reduced steadily since 1999, despite the funding of our investments across the group, notably Egg and Asia. Our level of gearing has improved relative to the full year as we look constantly for ways to improve the efficient use of our capital.

Although each business unit is expected to meet its own liquidity needs, the Group has access to £1.2 billion committed bank facilities provided by 12 major international banks. These facilities have not been drawn on this year.

Prudential enjoys strong debt ratings from both Moody's and Standard & Poor's. It has a long-term debt rating of Aa3 and AA respectively, while short-term ratings are P-1 and A-1+.

Funds under management

Prudential's funds under management support a range of businesses operating in many geographic areas. Each of the operations formulates a strategy, based on the nature of its underlying liabilities, its level of capital and local regulatory requirements. Where the nature of the underlying liabilities, its level of capital and its local regulatory requirements permit, Prudential seeks to invest its assets predominately in equities and property that have, over longer periods, provided superior returns to fixed interest assets.

Insurance and investment funds under management at 30 June 2002 totalled £159 billion, compared to £163 billion at the end of 2001. This reduction is mainly due to a fall in the market value of investments which more than offset the net sales achieved during the year. The total includes £135 billion of Group investments under management and £24 billion of external funds under management.

Shareholders' funds

On the achieved profit basis, which recognises shareholders' interest in long-term businesses, shareholders' funds at 30 June 2002 were £8,053 million, a decrease of one per cent from 31 December 2001. The decrease principally reflects short-term fluctuations in investment returns and adverse exchange rate movements, offset by operating profits and the profit on the sale of our General Insurance operations.

Statutory basis shareholders' funds, which are not affected by fluctuations in the value of investments in the Prudential Assurance Company (PAC) long-term fund, increased by £158 million since the year end to £4,108 million at 30 June 2002.

Financial strength of insurance operations

A common measure of financial strength in the United Kingdom for long-term insurance business is the free asset ratio. The free asset ratio is the ratio of assets less liabilities to liabilities, and is expressed as a percentage of liabilities. The free asset ratio of the PAC long-term fund was estimated as 11 per cent at the end of June 2002, compared with 12.2 per cent at 31 December 2001. The free asset ratio at the end of June has been calculated in accordance with FSA guidance on resilience tests released on 28 June 2002.

The statutory valuation has been prepared on a conservative basis in accordance with the valuation rules, and without use of implicit items. No credit has been taken for the present value of future profits or contingent loans. The main UK life fund has no subordinated debt or financial reinsurance arrangements.

All the long-term funds remain well capitalised with the PAC long term fund being rated AAA by Standard & Poor's and Aaa by Moody's.

Links to supplementary information about this release:	PDF	Excel
Prudential plc 2002 Interim Results and Independent Review Report
Prudential plc 2002 Interim Results - Schedules
Prudential plc 2002 Interim Results
Prudential plc 2002 Interim Results Independent Review Report
Prudential plc 2002 Interim Results - Schedules