14 Nov 2013

Prudential plc Third Quarter 2013 Interim Management Statement

• Asian growth continues to drive strong Group performance
• Asia new business profit up 20 per cent year-to-date to £990 million
• M&G net inflows of £8.9 billion with third party FUM up 19 per cent to a record £124 billion
• Disciplined execution in the US with new business profit 11 per cent higher at £756 million
• UK retail new business profit resilient despite impact of regulatory changes

Tidjane Thiam, Group Chief Executive, said:

"As we get closer to the end of 2013, the Group has continued to make good progress in the third quarter. In Asia, our life business increased new business profit by 20 per cent in the first nine months. Our growth in Asia is supported by a number of key long-term fundamentals: a fast-growing and increasingly wealthy middle class, a positive demography i.e a young population, rising urbanisation, high savings rates, strong demand for accumulation and protection products and low insurance penetration. Our third-quarter performance illustrates that these positive long-term fundamentals are not affected by short-term financial market fluctuations. The scale and quality of our distribution and our product suite put us in a strong position to capture the savings and protection opportunity in our target Asian markets.

"In the US, we continue to successfully execute our diversification strategy, with nearly a third of our variable annuity sales now accounted for by variable annuities without living benefit guarantees, led by increased sales of our Elite Access product. In the UK, our life business continues to focus on driving value over volume, while M&G has built on the momentum of the first half of the year, generating net inflows of £5.1 billion in the third quarter and increasing external funds under management to £124 billion, 19 per cent higher year on year.

"We remain on track to achieve our 2013 ‘Growth and Cash’ objectives. In Asia, our focus on meeting the long-term savings and protection needs of a rapidly growing and increasingly wealthy middle class remains a key driver of resilient and sustainable profit growth. Our US and UK businesses remain focused on delivering earnings and cash."

BUSINESS UNIT REVIEW

ASIA
Our Asian business has delivered a strong performance for the first nine months of the year, demonstrating the resilience of the business to short-term investment market volatility and its gearing to positive, long-term structural trends. Our businesses continue to perform well underpinned by our diversified geographic footprint, multi-channel distribution platform and the disciplined execution of our strategy to drive both value and volume by focusing on providing regular premium savings and protection products to the region’s rapidly growing middle classes.

New business profit in Asia increased by 20 per cent to £990 million for the first nine months of 2013 and we remain on track to achieve our remaining Asia growth objective of doubling 2009 new business profit to £1,426 million by the end of this year. The increase in new business profit reflects both higher volumes, with APE up 15 per cent to £1,523 million in the year-to-date, and the benefit of favourable changes in country mix, channel mix and economic assumptions following the rise in interest rates, particularly in Hong Kong.

In the third quarter new business APE grew by 20 per cent to £513 million, which is a record for the third quarter. This growth has been broad based, with double digit growth in six of our sweet-spot¹ markets in South-east Asia including Hong Kong, and in nine markets overall. Both our main distribution channels contributed strongly to this performance with third-quarter agency APE growing by 19 per cent and bancassurance APE up by 27 per cent.

In our larger markets, Hong Kong has delivered year-to-date APE growth of 23 per cent mainly reflecting the excellent productivity of our agency force as Hong Kong continues to derive a significant amount of activity from its close links with mainland China. Indonesia APE grew by 22 per cent on a constant currency basis. The decline of the rupiah in the period means that the equivalent reported APE growth is 15 per cent. This strong growth on a constant currency basis illustrates the continuing strength of our agency distribution in this market with low penetration and vast potential.

In Singapore our highly professional and productive agency business grew year-to-date APE by 21 per cent and our bank partners also continue to perform well with collective growth of 17 per cent. APE growth of 4 per cent in the first nine months in Malaysia reflects our strategy to de-emphasise higher volume but lower value top-ups in the second half of 2012. However, the 11 per cent increase in the third quarter is more representative of the underlying growth achieved reflecting our focus on protection products and on strengthening our Bumi distribution capabilities.

Our new, exclusive distribution agreement with Thailand’s Thanachart Bank has had a very encouraging start with 96 per cent of Thanachart’s 600 plus branches being active since the completion of the transaction in May 2013. This strong start has helped deliver £22 million of third quarter APE for Prudential Thailand, accelerating the year-to-date growth to 68 per cent over 2012. In our other South-east Asian markets, the Philippines and Vietnam have delivered strong growth in the year-to-date with APE sales up 24 per cent and 28 per cent respectively. Our new start-up operation in Cambodia is also progressing well, and on 29 October we received regulatory approval to establish a representative office in Myanmar.

In our North Asian markets, China continues to make excellent progress growing year-to-date APE by 48 per cent with equal contributions from both our agency and bank channels. In India the life insurance market remains complex, but we have seen year-to-date APE growth at reported exchange rates of 8 per cent with 14 per cent growth on a constant currency basis. In Korea sales growth for the third quarter slowed as anticipated after an exceptionally strong first half that coincided with changes in tax regulations. In Taiwan, APE declined 35 per cent in the first nine months, reflecting our decision since the second half of 2012 not to provide low-margin guaranteed products. Taiwan’s discrete third quarter growth of 17 per cent reflects an increase in sales through our partner Standard Chartered Bank.

Our Asia asset management business, Eastspring Investments ended the quarter with funds under management (FUM) of £59.7 billion, up 7 per cent over the same time last year. FUM from external parties² rose by 12 per cent to £18.5 billion, benefiting from third party net inflows of £2.0 billion (2012: £1.0 billion) in the first nine months. On 30 September 2013, Eastspring Investments formally announced that it has received regulatory approval to open a London distribution office, in line with its strategy to broaden its reach outside of Asia.

Our project to domesticate our Hong Kong insurance business is approaching its conclusion, with the completion timetable approved by the UK and Hong Kong courts in September 2013. The aim is for the transfer to become effective on 1 January 2014.

Overall, our business in Asia continues to deliver strong and profitable growth driven by our leading positions in the fast growing sweet-spot markets of South-east Asia, our excellent and competitive product suite well suited to our customers’ needs, and the scale and quality of our market leading multi-channel, multi-product platform.

US
Jackson’s new business profit in the first nine months of 2013 increased 11 per cent to £756 million, compared to the same period last year, as we continue to optimise the balance between volume, value, risk, cash and capital. Higher new business profits were achieved this year in spite of the deliberate slow-down in sales of variable annuities (VAs) with guarantees, reflecting the benefit of pricing and product actions taken by Jackson, the contribution from Elite Access and the positive effects of higher long-term yields.

Our focus in Jackson is on delivering earnings and cash, led by growth in separate account assets under management. Total annuity flows in the first nine months of 2013 were £6.5 billion, of which £2.1 billion reflects flows in the discrete third quarter. As a result, at the end of the period Jackson’s statutory separate account assets were £61.2 billion and general account assets were £38.8 billion, up 30 per cent and in-line respectively with the same period in 2012.

In the first nine months of 2013, Jackson achieved retail APE sales of £1,129 million, a 2 per cent increase compared to the same period in 2012. These sales levels were achieved while maintaining pricing discipline and continuing to write new business at aggregate internal rates of return in excess of 20 per cent. Including institutional sales, total APE was £1,202 million, a 6 per cent increase over the same period in 2012.

Total variable annuity APE increased to £1,000 million (2012: £970 million) for the first nine months of 2013. This growth was driven by the rapid progress of Elite Access, a variable annuity product without guarantees launched last year, which contributed £191 million of APE in the period (2012: £40 million). Excluding Elite Access, VA sales of £809 million were 13 per cent lower than the prior year, which is the direct result of our disciplined approach to cycle management in the VA market. The on-going diversification of our business means that 30 per cent of our year-to-date VA sales do not feature any living benefit guarantees (2012: 15 per cent).

Fixed annuity sales of £44 million remained relatively flat compared to 2012, while fixed index annuity APE sales of £84 million increased 6 per cent compared to the same period in 2012.

Curian Capital, the specialised asset management company of Jackson, that provides innovative fee-based separately managed accounts, had FUM of £6.4 billion at the end of September 2013 compared with £5.5 billion at the end of 2012. Curian attracted deposits of £1.4 billion in the first nine months of 2013, a 13 per cent increase compared to the same period in 2012.

In the US, we continue to price new business on a conservative basis targeting value over volume, and our financial market hedging remains focused on optimising the economics of our exposures and therefore accepting a degree of volatility in our accounting results where they are not aligned with the underlying economics. This approach has enabled Jackson to deliver significant profitable growth across the cycle while maintaining a strong balance sheet. Jackson completed a review of policyholder behaviour during the third quarter, which showed that experience continues to emerge generally in line with our assumptions. We are also pleased that earnings in relation to REALIC in the first year of its ownership are in line with our expectations at the time of the acquisition.

UK
During the first nine months of 2013, the UK life and pensions industry continued to experience the effects of significant regulatory change following the implementation of the Retail Distribution Review (RDR) and introduction of the ABI Code on Retirement Choices.

Total new business profit of £204 million was 10 per cent lower than in the first nine months of 2012, reflecting lower sales of bulk annuities in the period. Retail new business profit was 2 per cent above the first nine months of 2012, reflecting the combined positive effects of business mix, pricing actions and higher long-term interest rates.

Total APE sales of £540 million were 12 per cent lower than in the first nine months of 2012, and included a contribution of £15 million from bulk annuities (2012: £41 million). Retail APE sales of £525 million were 9 per cent lower principally due to the anticipated reduction in sales of with-profits bonds following the implementation of RDR and lower corporate pensions sales.

Individual annuities APE sales of £161 million were 3 per cent lower than the prior period. The reduction is due to lower internal vesting sales, which declined 6 per cent to £98 million, reflecting increased customer deferrals which offset the impact of higher average fund values and stable vesting rates. Sales of with-profits annuities increased by 15 per cent to £66 million. The strength of our with-profits proposition continues to drive good demand for our Income Choice Annuity, which offers customers relatively attractive returns in the current sustained low interest rate environment, with the potential for income growth.

APE sales of onshore bonds of £126 million were 22 per cent lower than the first nine months of 2012, driven by with-profits bond APE sales of £114 million which reduced by 25 per cent. The anticipated reduction in with-profits bond sales followed the implementation of the requirements of RDR at the beginning of 2013 and is mainly attributable to the subsequent contraction in adviser numbers, particularly within banks which were previously major distributors of bonds. Sales through financial advisers remained strong, despite disruption caused by the transition to the new distribution landscape.

Corporate pensions APE sales of £138 million were 7 per cent lower than in the same period last year, mainly due to lower incremental sales and fewer additional members joining public sector schemes. We continue to focus on securing new members and incremental business rather than new corporate pensions schemes, where the opportunities to write business on economically attractive terms are limited.

In the Wholesale market, bulk sales totalled £15 million in the first nine months of 2013, including one large transaction completed in the third quarter (2012: two deals, APE £41 million). We continue to maintain our focus on value and only participate opportunistically in capital-efficient transactions that meet our return on capital and payback requirements.

APE sales of other products, principally individual pensions, PruProtect, PruHealth and offshore bonds, of £100 million were in line with the first nine months of 2012.

M&G
Stock markets have continued to make gains during the third quarter with investors favouring risk assets over low-yielding bonds and cash. However, investor sentiment remains sensitive to speculation about the timing and pace of the US Federal Reserve’s intention to unwind its quantitative easing programme.

Against this backdrop, M&G has reported steady inflows for the three months to the end of September 2013. Total net inflows for the quarter were £5.1 billion, taking the cumulative total since the start of the year to £8.9 billion.

In Retail, M&G’s European businesses continue to be the main engine of growth. During the first nine months of the year, net fund flows from Europe reached £6.4 billion, an 82 per cent increase over the same period in 2012. In the UK, retail net flows remain impacted by our proactive decision to slow contributions to two of our market-leading corporate bond funds to protect their investment performance, with inflows of £0.3 billion in the third quarter.

Total net retail inflows for the quarter were £1.1 billion and for the year-to-date amount to £5.9 billion, being 4 per cent lower than at the same stage in 2012, which was itself a record year.

Retail funds under management (FUM) increased by 24 per cent year-on-year to £64.5 billion at 30 September 2013. Of this, FUM from European clients total £22.1 billion, up from £12.3 billion at 30 September 2012 and now account for over a third of total retail FUM.

M&G’s strategy of diversifying its business, not only by country and channel, but also by fund and asset class, continues to be successful. While 12 months ago sales were heavily concentrated in fixed income funds, reflecting investor buying preferences, the third quarter saw an increased proportion of net fund sales being derived from equity funds, multi asset and property. M&G Optimal Income and M&G Global Dividend remain our best sellers, with a total of eight funds attracting net inflows of at least £150 million each in the year-to-date, highlighting the strength and breadth of our overall product portfolio.

The Institutional business posted net inflows of £4.0 billion during the third quarter, resulting in total net inflows for the year of £3.0 billion. Sales of alternative credit products remain strong, especially asset-backed and inflation-linked investment strategies, along with leveraged loan, infrastructure and real estate finance mandates. The Institutional business also has a multi-billion pound pipeline of new business wins which have yet to be funded.

Total FUM have risen to £242.2 billion at the end of September 2013, up 12 per cent year on year. Over the same period, external client assets increased by 19 per cent to £124.3 billion; net inflows contributed 14 percentage points of this growth with the remaining 5 percentage points attributable to market movements.

BALANCE SHEET
Our balance sheet remains resilient and conservatively positioned. As at 30 September 2013, our IGD surplus was £3.9 billion, after deducting the 2013 interim dividend. This is equivalent to a cover of 2.3 times.

INVESTOR CONFERENCE
Prudential plc will be holding an investor conference for analysts and investors on Tuesday 10 December 2013 in London.

OUTLOOK
Our businesses continue to perform well with a particularly strong performance in Asia in the third quarter.

We believe the global economic environment is increasingly supportive for our Group. There is some evidence of a recovery in the US, an increasingly positive outlook for the UK and growth in mainland China is stabilising while the economies in our key Asian markets are continuing to grow, albeit at a lower rate than in prior years. These emerging economies of Asia will continue to grow significantly faster than developed economies³. With healthy fiscal positions and low debt-to-GDP ratios, these countries have several levers they can pull to continue to do well across the economic cycle.

The central point for Prudential is that the long-term structural trends in Asia of faster GDP growth, low insurance penetration, a rapidly growing and wealthier middle class, high savings rates and strong demand from the middle class for protection remain intact and are a key driver of sustainable and profitable growth for the company. Our regular premium offering, with health and protection features, is the right product for the young, emerging Asian middle class, at the right time and in the right place. It satisfies a fundamental need for our customers and helps close the significant ‘protection gap’ present in some of the fast-growing South-east Asian economies with low welfare provision. It also ensures our performance is resilient in times of increased market volatility, as 90 per cent of our business is regular premium, and drives sustained long-term shareholder value creation.

In the UK and US, our performance continues to benefit from our disciplined approach and the prioritisation of earnings and cash over volumes.

We will continue to execute our strategy with discipline. We will do this while maintaining a strong balance sheet, which is absolutely key to meeting our commitments to our 25 million customers around the world.

We remain confident about our prospects for the rest of the year and our positioning for the long term.

1. Q3 2013 Business Unit financial highlights

ENDS

Enquiries:

¹ Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam
² External funds under management for Eastspring excluding Money Market Funds as set out in schedule 3
³ 2014 GDP growth projections as per IMF World Economic Outlook, October 2013: Developing Asia 6.5%; Advanced Economies 2.0%
⁴ New business profits have been calculated by applying the assumptions set out in schedule 5
⁵ Gross and net investment inflows excluding Eastspring Money Market Funds. Investment flows exclude Eastspring Money Market Funds (MMF) gross inflows of £45,464 million (Q3 2012 year-to-date: £39,550 million) and net outflows of £82 million (Q3 2012 year-to-date: net outflows of £217 million)
⁶ Percentages based on unrounded numbers
⁷ Total Funds under management include all external and internal funds
⁸ Excludes Eastspring Money Market Funds

Notes: