07 May 2013

Prudential plc First Quarter 2013 Interim Management Statement

• Positive start to 2013 with continued profitable growth in Asia
• Asia new business profit up 18 per cent to £308 million
• Asset management net inflows up 66 per cent to £3.5 billion
• Strong sales of Elite Access, our new ‘no guarantees’ Variable Annuity product in the US
• UK annuity growth offsets impact of regulatory changes
• Acquisition of Thanachart Life approved and Thanachart bancassurance partnership launched

Tidjane Thiam, Group Chief Executive, said:

“We have made a good start to 2013. Our life insurance business in Asia has continued to deliver profitable growth with new business profit, our primary measure of growth, up 18 per cent. In asset management, M&G has performed particularly well, with external funds under management, a key source of profitability, growing to a record £119 billion, an increase of 28 per cent on the first quarter of 2012, driven by net inflows from its Continental European operations. Net inflows from retail and institutional business at Eastspring Investments in Asia are also showing positive signs, with assets under management above £60 billion for the first time. In the US and the UK, we continue to manage volumes in line with our value-driven approach, and we are encouraged by the performance of Elite Access, our new variable annuity without guarantees which was launched in the US last year.

“Across the Group, our businesses are on track to achieve our 2013 “Growth and Cash” objectives. Against a background of low long-term interest rates and uncertain economic growth, we remain focused on executing our strategy and capturing the long-term profitable growth opportunities available to us, particularly in the growing markets of Asia, where we continue to build on our leading market positions and strong multi-channel distribution capabilities. Across our markets, we remain disciplined in our approach, putting value ahead of volume, as we continue to optimise the balance between risk, returns, capital and cash generation.”

BUSINESS UNIT REVIEW

ASIA
Asia new business profit increased by 18 per cent to £308 million in the first quarter, driven by higher sales of savings and protection products to the growing Asian middle class and a more favourable geographic mix that primarily reflects strong growth in our core target markets in South-east Asia and Hong Kong and a deliberate reduction in Taiwan. In all, eight of our businesses have delivered double digit sales growth in the first quarter. We remain on track to achieve our Asia growth objective of doubling 2009 new business profit in 2013, with new business profit in the first quarter of 2013 2.3 times higher than that in the first quarter of 2009.

In working to meet the needs of the fast growing and increasingly urbanised Asian middle classes, building and strengthening our multi-channel distribution remains a key focus of our strategy. During the first quarter, agency APE (ex India) grew by 16 per cent predominantly due to increases in active manpower and to a lesser extent, due to an increase in average case sizes. We also continue to see good growth in our bancassurance partnerships, with APE growth of 17 per cent, excluding Taiwan where we have chosen not to offer low-return, capital-intensive products through our banking partner E-Sun.

We continue to make good progress in our ‘sweet-spot’ markets¹, with new business profit up 20 per cent, outpacing APE sales growth of 16 per cent. Our two largest businesses, Indonesia and Hong Kong, had a particularly strong quarter, with profitable volume growth driven primarily by increased levels of agent activation in both markets and additionally, in Hong Kong, the benefit of improved case sizes. This performance was achieved despite a material depreciation of the Indonesian rupiah relative to sterling over the period. In Malaysia we remain focused on building our Bumi strategy and our agency refocusing efforts are paying off with one of the highest levels of protection content in the region. In Singapore both agency and bank channels continue to perform well, reflecting further growth in active agents and strong contributions from our banking partners.

In the Philippines we have maintained the momentum of recent years with APE sales up 40 per cent, while in Vietnam APE sales growth of 43 per cent reinforces the long-term potential of the market. In Thailand we completed the acquisition of Thanachart Life as announced on 3 May and have launched our exclusive distribution partnership with Thanachart Bank. We have also successfully launched our new business in Cambodia, where we have a partnership with ACLEDA Bank Plc, the largest retail and commercial bank in the country. We are in the process of opening a representative office in Myanmar.

CITIC-Prudential in China had an excellent start to the year with Prudential’s 50 per cent share of APE up 59 per cent to £27 million. This delivered an all-time record in terms of new business profits. Both the bank and agency channels have performed well, with particularly encouraging results from CITIC Bank. In India, ICICI-Prudential, in which the Group has a 26 per cent joint venture stake, has retained its position as a private sector leader and has continued its efforts to refocus its operations on regular premium savings and protection products.

In Korea, sales were boosted ahead of a tax change that took effect in February, while in Taiwan our value over volume approach saw APE fall.

Our Asia asset management business, Eastspring Investments ended the quarter with record funds under management (FUM) of £62.8 billion, up 18 per cent from £53.4 billion at 31 March 2012, and for the first time over £60 billion. External FUM² increased by 22 per cent to £19.8 billion, from £16.2 billion at 31 March 2012. First quarter 2013 net inflows for the third party and institutional business of £1,071 million (first quarter 2012: £349 million) were driven by strong net flows in Korea, India and Taiwan, new institutional bond mandates secured in Singapore and a first-time contribution from Indonesia. On 17 April Eastspring Investments received regulatory approval to distribute its funds in Europe as it implements its strategy of building distribution of its products in new markets outside Asia, in order to benefit from Western investors’ appetite for Asian exposure.

Overall, our business in Asia continues to deliver strong and profitable growth, driven by our focus on meeting the savings and protection needs of the growing middle-class through high-quality, multi-channel distribution.

US
In the first quarter of 2013, Jackson achieved APE retail sales of £343 million, a 6 per cent increase compared to the first quarter of 2012. Jackson has achieved these sales levels while maintaining its pricing discipline, as it continued to write new business at aggregate internal rates of return in excess of 20 per cent. Including institutional sales, total APE sales were £358 million, an 8 per cent increase over the same period in 2012. We continue to focus on IFRS earnings and cash generation ahead of volume in the highly competitive US market.

New business profits were £22 million lower at £192 million in the first quarter of 2013, reflecting the impact of lower interest rates and spread compression. On a like-for-like basis, adjusting for lower yields and narrower credit spreads since the first quarter of 2012, new business profit would have been flat year-on-year. The effect on new business profit of lower guaranteed variable annuity sales was almost entirely offset by the benefit of pricing actions we have taken over the last 12 months and the contribution from increasing sales of Elite Access.

Growth in assets under management is a key driver of IFRS profit and cash. Total annuity net flows of £2.0 billion in the first quarter of 2013 were 13 per cent higher than the fourth quarter of 2012, and separate account assets also benefited from the 10 per cent uplift in the S&P500 index. As a result, at the end of the period Jackson’s statutory separate account assets totalled £58.1 billion and general account assets totalled £41.0 billion, up 38 per cent and 34 per cent respectively year-on-year.

Total variable annuity APE of £294 million (first quarter 2012: £279 million) benefited from the encouraging performance of Elite Access which contributed £54 million of APE in the period and continues to show strong sales momentum one year after its launch in March 2012. Elite Access is a high IRR product that provides retail customers access to alternative investments in a tax efficient variable annuity wrapper without guaranteed benefits. Excluding the contribution of Elite Access, guaranteed variable annuity APE of £240 million was down 14 per cent mainly due to the impact of pricing actions taken in the fourth quarter of 2012 and our decision to control volumes to match the Group’s risk appetite. This change in product mix is in line with the US strategy we outlined at our Investor Conference in November 2012.

Fixed index annuity APE of £34 million increased 36 per cent from the same period in 2012. We have seen a moderate increase in demand for fixed index annuities as consumers seek to increase their exposure to equity markets following the recent strong performance of the S&P 500. Fixed annuity APE of £14 million decreased 13 per cent.

In the first three months of the year Jackson’s hedging programme and policyholder behaviour continue to perform in line with our expectations.

Curian Capital, a specialised asset management company that provides innovative fee-based separately managed accounts, had FUM of £6.3 billion at the end of March 2013 compared with £5.5 billion at the end of 2012. Curian attracted deposits of £436 million in the first quarter of 2013, up 23 per cent over the fourth quarter of 2012, although down slightly compared to the same period in 2012. Curian’s asset growth continues to benefit from its investment platform development and the significant expansion in 2012 of its wholesaling team and distribution territories.

In the US, our strategy remains focused on generating shareholder value as measured by cash generation and IFRS earnings, while operating within a prudent risk management framework, and maintaining a strong regulatory capital position.

UK
In the first quarter of 2013, Prudential UK generated new business profit of £63 million, a level comparable to that achieved in 2012 for the same period. Our UK business continues to focus on those areas of the retirement savings and income markets where we are able to bring superior value to our customers and where we enjoy a competitive advantage.

Total APE sales of £185 million were 2 per cent lower than the first quarter of 2012, principally due to lower sales of with-profits bonds and individual pensions which were partly offset by higher sales of individual annuities.

Individual annuities APE of £55 million was 15 per cent higher than for the first quarter of 2012, although below volumes seen in the fourth quarter of 2012, which were boosted by sales ahead of the change to gender neutral pricing on 21 December 2012. We continue to see strong demand for our with-profits Income Choice Annuity, with APE increasing by 69 per cent to £22 million. The dual features of this product, namely income security combined with the potential for income growth, are proving increasingly attractive to customers facing the impact of the current low interest rate environment.

Sales of onshore bonds were down 18 per cent to APE of £45 million, largely reflecting the anticipated reduction in sales of with-profits bonds as a consequence of the implementation of the Retail Distribution Review (RDR) regulations at the end of 2012. First quarter with-profit bond sales were 21 per cent lower than the first quarter of 2012 despite benefiting from a significant pre-RDR pipeline. We anticipate market dislocation will persist in the short-term as consumers and distributors adjust to the new environment and we continue to expect this will dampen our sales of investment bonds in 2013, compared to the level of sales achieved in 2012.

Corporate pensions APE of £53 million was 8 per cent higher than the same period last year, mainly due to higher with-profits sales. Prudential UK remains the largest provider of Additional Voluntary Contribution plans within the public sector where we provide schemes for 68 of the 99 public sector authorities in the UK.

APE sales of other products, principally individual pensions, PruProtect, PruHealth and offshore bonds, of £30 million were 19 per cent down on the first quarter of 2012, mainly due to the cessation of contracting out of the state second tier pension for defined contribution pension schemes, which resulted in a £7 million reduction in APE.

We continue to manage our UK business by focussing on our strengths of individual annuities and with-profits products to meet the needs of our 7 million UK customers.

We are pleased to have announced recently the appointment of Jackie Hunt to lead our UK and European business, and we thank Rob Devey for the considerable contribution he has made over the past four years.

M&G
M&G achieved a 38 per cent increase in net inflows to £2.4 billion during the first three months of 2013, reflecting strong performance from retail sales in Continental Europe and driving both total FUM and external FUM to record levels at £238.4 billion and £119.2 billion respectively.

In M&G’s Retail business, net inflows from European investors reached a record £2.9 billion, almost double the £1.5 billion reported in the first quarter of 2012, reflecting strong long term fund performance and a decade of investment in European distribution. The substantially higher inflows from European investors more than offset weaker sales in the UK, evidencing the benefits of M&G’s diversified business model. A significant portion of these UK outflows result from our decision in summer 2012 to slow contributions into two of our market-leading corporate bond funds. Retail FUM increased by 28 per cent year-on-year to £61.4 billion at 31 March 2013. Of this, FUM from European clients total £18.7 billion, up from £10.4 billion at 31 March 2012 and now account for nearly a third of total retail FUM.

Our Retail business remains underpinned by strong and consistent long-term investment performance. Twenty retail funds accounting for 63 per cent of FUM have delivered top or upper quartile returns over the three years to 31 March 2013.

M&G’s Institutional business saw small net outflows for the quarter, with the expected loss of some short-term segregated mandates offsetting the positive impact of new business, including positive contributions from M&G’s Alternative Credit team in particular. The Institutional business has a strong pipeline of new business which has been won but not yet been funded. Institutional external FUM were £57.7 billion at 31 March 2013, up 27 per cent from £45.4 billion at 31 March 2012.

Since the quarter end, M&G has announced that PRUPIM is to be renamed M&G Real Estate. This change reflects its greater collaboration with other parts of M&G as we increasingly offer clients investment strategies with a real estate component.

The combination of net inflows and favourable market movements has increased M&G’s total FUM to a record level of £238.4 billion at 31 March 2013, up 17 per cent from the same time last year. External funds now represent for the first time 50 per cent of the total, standing at a new high of £119.2 billion, up 28 per cent on the first quarter of 2012.

BALANCE SHEET
Our balance sheet remains resilient and conservatively positioned. As at 31 March 2013, our IGD surplus was £4.0 billion, after deducting the 2012 final dividend.

OUTLOOK
We have made a good start to the year and continue to deliver strong performance across our businesses.

The global growth outlook remains uncertain, with on-going efforts to reach a more healthy fiscal balance weighing on the growth prospects of a number of large Western economies. In that context, the emerging economies of Asia are expected to continue growing at a faster rate than most developed markets.

Prudential enjoys leading positions in South-east Asia, where the outlook for long-term, profitable growth remains extremely favourable, given low insurance penetration and a rapidly growing, increasingly urbanised and wealthy middle class. We also benefit from strong platforms in the US and in the UK where we are focused on earnings and cash, implementing our value over volume approach.

Our businesses are in good shape, our balance sheet remains well-capitalised and conservatively positioned and we are confident that we will continue our record of relative outperformance.

1. Q1 2013 Business Unit financial highlights

ENDS

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