Preliminary Results 2002
Prudential PLC
25 February 2003
Embargo 07:00 hrs GMT 25 February 2003
PRUDENTIAL PLC 2002 UNAUDITED RESULTS
• Achieved operating profit of £1,133 million up 2 per cent
• New business achieved profits up 15 per cent to £774 million
• Over 70 per cent of Group sales and new business achieved profits from
outside the UK
• Total Group insurance and investment sales of £27.6 billion, up 29 per cent
on 2001
• Group new business achieved profit margin up 2 per cent to 40 per cent
Results Summary 2002 2001
£m £m %
New business achieved profits 774 673 15
Achieved basis operating profit* 1,133 1,114 2
Statutory basis operating profit* 432 550 (21)
APE Insurance Sales 1,918 1,765 9
Full-year dividend per share 26.0p 25.4p 2.4
Shareholders' funds - achieved profits basis 7,196 8,150 (12)
* From continuing operations.
The final dividend per share is 17.1p, resulting in a total payment of 26.0p
compared with the total payment of 25.4p in the preceding year.
David Clementi, Prudential's Chairman said: 'We are a major international
financial services group with a strong franchise, excellent people and a
strategy focused on delivering value for our shareholders over the long term.
The results demonstrate profitable growth in a number of our key markets and
have been achieved in difficult conditions.
'Since our interim statement uncertainty in international capital markets has
increased with bond and equity market confidence being adversely affected by
greater political risk and a deteriorating economic outlook. We have seen this
increasing uncertainty reflected in falls in credit ratings across the insurance
industry. Average market levels have progressively declined and, as a result, we
have since September reduced bonus rates on UK with-profit policies more quickly
and to a greater extent than anticipated. This will directly affect the future
cash payments from the UK life fund to the Group.
'Despite the continuing market uncertainty there remain attractive opportunities
for us in growth markets, notably Asia. Accordingly, we must retain our
financial flexibility when determining the 2003 dividend. While recognising the
importance of cash payments to shareholders, the Board believes that it would be
inappropriate to recommit at this time to the current dividend policy. The
dividend will be determined taking into account a number of factors, including
the outlook for modified statutory profits, the cash transfer from the UK life
fund and the balance sheet on an achieved profits basis.'
Commenting on the results, Jonathan Bloomer, Prudential's Group Chief Executive
said: 'In recent years Prudential has undertaken a number of far-reaching
initiatives which have resulted in a group with a diversified range of
international businesses and strong growth prospects. This strategy is
evident in the Group's results for 2002. The Group achieved significant
increases in sales of insurance and investment products and at the same time it
expanded its margin on new business.
'We have demanding growth targets and over the last few years have developed and
grown the Group significantly. We have expanded our Asian business, developed
Egg and shareholder backed businesses in the UK and grown Jackson National in
the US. In doing this we have managed the need for capital while recognising the
importance of distributions to our shareholders.
'2002 was a tough year, with market confidence being adversely affected by
increased political risk and a deteriorating economic outlook. Eight weeks into
this year, it is clear that stock markets around the world continue to be
volatile and consumer confidence has deteriorated.
'In this context, the Group continues to review its growth and cash flow plans.
As in the past, we will invest for value, not simply for top line growth, and we
will allocate capital to those areas of our business where we see the greatest
value creation opportunities. We will therefore continue to invest in our
businesses in Asia, where growth prospects remain high, while we expect to
manage the level of business in the more mature markets of the US and UK to
achieve a balance between value creation and capital consumption.
Our focus on sustainable value
'In 2002 we made good progress towards achieving our goal of doubling the
intrinsic value of the Group over four years. One of the key measures of whether
we are on track is new business achieved profits which, to double in four years,
would need to compound at an annual growth of 19 per cent. In 2002 it grew by 15
per cent. While we believe that 2003 will be a particularly stretching year, our
priority will be to continue to develop and deliver our strategy to build value
across the Group.
Improving sales and margins
'The success of Prudential's strategy is clear from the 2002 preliminary full
year results. Total group insurance and investment sales were £27.6 billion,
an increase of 29 per cent on 2001. On an annual premium equivalent (APE) basis
insurance sales were up 9 per cent to £1.9 billion, reflecting growth of 23 per
cent and 18 per cent in the US and Asia respectively. Approximately 74 per cent
of total group sales came from outside the UK, demonstrating the benefits of the
Group's international diversification.
'The results showed generally improving margins for new business as the Group
continued to benefit from a focus on high margin business. Margins in 2002 for
the US increased from 35 per cent to 39 per cent and in Asia from 59 per cent to
60 per cent. In the UK, margins for long-term business declined slightly, moving
from 30 per cent in 2001 to 29 per cent in 2002. Group new business achieved
profit rose by 15 per cent in 2002 to £774 million.
Building value within our businesses
'The life industry in the United Kingdom is undergoing enormous change. The
performance of the sector over the course of the year has been affected by
concerns including capital adequacy and financial strength in declining equity
markets, pressure on margins, and the uncertainty brought about by the various
regulatory reviews being undertaken into the UK retail savings and pension
industries.
'Prudential's Life Fund remains financially strong and we are well positioned as
people place an increasing emphasis on financial strength and trusted brands
when making decisions about their long-term savings and investments. Our focus
is to grow our UK insurance operations by building the brand, developing our
distribution capabilities through partnerships with banks and major companies as
well as strong relationships with Independent Financial Advisers. We are also
working to improve the service to our customers while at the same time reducing
our cost base, delivering greater economies of scale, and ensuring that capital
is deployed efficiently within the business.
'Elsewhere in the UK, M&G's market position, investment capabilities and brand
strength make it one of the leading fund managers. In the difficult market
conditions we witnessed during the year, the priority for the retail business
has been to continue growing its market share as well as driving down costs
through initiatives such as the outsourcing of administration services. On the
institutional side, M&G continues to benefit from its competitive advantage in
specialist fixed interest and private finance.
'Egg continues to go from strength to strength. The UK business is now
profitable as well as having almost 2.6 million customers and a 5 per cent
market share of credit card balances. This is a strong performance considering
the business was only launched just over four years ago. Egg has now also
successfully launched the first stage of its international expansion in France.
'The long-term demographic trends in the US, an ageing population and increasing
life expectancy, and a relatively low level of social security support for
retirement savings, remain favourable for Jackson National (JNL) which, with its
value-based approach, has positioned itself to take advantage of the
opportunities.
'In what is a very fragmented market with a huge number of players, JNL has
developed into one of the leading life insurers in the US. However, instead of
focusing on becoming a scale player purely in terms of size, it has a
value-based definition of scale, meaning that it only seeks leading positions in
segments of the market that it can serve profitably. This, together with a cost
base below the industry average, modern and highly sophisticated IT systems, and
diversified and flexible products and distribution, mean that JNL is positioned
to benefit from growth in the US savings market.
'Asia is one of the fastest-growing regions for savings in the world, with a
combination of favourable demographic trends and increasing market
liberalisation. In Prudential Corporation Asia (PCA), we have well-established
life insurance and rapidly-growing mutual fund operations across the region.
Our focus has been to grow these businesses organically and supplement this
growth with some small in-fill acquisitions such as the Korean mutual fund
business we bought in the second half of 2002.
'With 22 operations in 12 countries across the region, its multi-channel
distribution capability, strong strategic partners, and customer-focused product
expertise, PCA is very well placed to deliver profitable growth in the future.
Summary
'This strong mix of businesses around the world positions us well for the
future. We are currently experiencing some of the most volatile market
conditions we have seen in decades, but we have a significant advantage in terms
of our international reach, and our diversity of earnings. This will continue to
be the case as we broaden our geographic presence, distribution channels and
range of products.
'We are confident that we are managing the business prudently in the current
market environment and that we will preserve the Group's strong competitive
position and growth prospects for the benefits of all our shareholders.'
The final dividend of 17.1p per share will be paid on 28 May 2003 to
shareholders on the register at the close of business on 21 March 2003.
Shareholders will once more be offered a scrip dividend alternative.
-ENDS-
Enquiries to:
Media Investors/Analysts
Geraldine Davies 020 7548 3911 Rebecca Burrows 020 7548 3537
Clare Staley 020 7548 3719 Laura Presland 020 7548 3511
Notes to Editors:
1. There will be a conference call today for wire services at 7.45am on
020 8288 4700 hosted by Jonathan Bloomer, Group Chief Executive.
2. A presentation to analysts will take place at 9:30am 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 web site,
www.prudential.co.uk
3. There will be a conference call for international investors at 2:30pm
(dial in telephone number: +44 (0) 20 7162 0125, US callers: 1 334 323 6203.
Callers to quote 'Prudential 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: 1 334 323 6222, pass code 130602.
4. A press conference will take place at 11:45am at Governor's House,
Laurence Pountney Hill, London, EC4R 0HH. If journalists wish to attend,
please call the Press Office in advance on 020 7548 3712.
5. High resolution photographs are available to the media free of charge
at www.newscast.co.uk (+44 (0)20 7608 1000).
6. An interview with Jonathan Bloomer (in video/audio/text) will be
available on www.cantos.com and www.prudential.co.uk from 7.00am on
25 February 2003.
7. Annual premium equivalent (APE) sales comprise regular premium sales
plus one-tenth of single premium insurance sales.
8. Total number of Prudential plc shares outstanding as at 31 December 2002 was
2,001,662,348.
9. Financial Calendar:
Ex-dividend date for 2002 final dividend Wednesday 19 March 2003
First-quarter 2003 New Business Figures Thursday 17 April 2003
2003 Annual General Meeting Thursday 8 May 2003
Payment of 2002 final dividend Wednesday 28 May 2003
2003 Interim Results/ Tuesday 29 July 2003
Second-quarter New Business Figures
Third-quarter New Business Figures Thursday 16 October 2003
Payment of interim dividend Thursday 27 November 2003
10. In addition to the preliminary financial statements provided with this
press release additional financial schedules are available on the web site
at www.prudential.co.uk
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 staements
contained in this statement or anyother forward - looking statements we may make.
PRUDENTIAL PLC 2002 UNAUDITED RESULTS
=====================================
Results Summary 2002 £m 2001 £m
================ ======== ========
Achieved Profits Basis Results
UK Insurance Operations 526 620
M&G 71 75
Egg (20) (88)
----------- -----------
UK Operations 577 607
US Operations 265 319
Prudential Asia 516 415
Prudential Europe 14 8
Other Income and Expenditure (including development expenses) (223) (178)
----------- -----------
1,149 1,171
UK re-engineering costs (16) (57)
----------- -----------
Operating profit from continuing operations 1,133 1,114
Discontinued UK general business operations - 72
----------- -----------
Operating profit before amortisation of goodwill and exceptional items 1,133 1,186
Amortisation of goodwill (98) (95)
Short-term fluctuations in investment returns (1,406) (1,402)
Effect of change in economic assumptions (467) (482)
Merger break fee (net of related expenses) - 338
Profit on sale of UK general business operations 355 -
----------- -----------
Loss on ordinary activities before tax (483) (455)
----------- -----------
Operating earnings per share 42.8p 41.9p
----------- -----------
Shareholders' funds £7.2bn £8.15bn
----------- -----------
Statutory Basis Results
Operating profit before amortisation of goodwill and exceptional items 432 622
Profit on ordinary activities before tax 484 385
Operating earnings per share 15.8p 23.3p
Shareholders' funds £3.7bn £3.95bn
----------- -----------
Dividend Per Share 26.0p 25.4p
----------- -----------
Insurance and Investment Funds under Management £155bn £163bn
----------- -----------
Banking Deposit Balances under Management £8.7bn £6.5bn
----------- -----------
Operating profit includes investment returns at the expected long-term rate of
return but 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. Profit on
ordinary activities includes these items together with actual investment
returns. This basis of presentation has been adopted consistently throughout the
Preliminary Announcement.
BUSINESS REVIEW
UNITED KINGDOM & EUROPE
UK Insurance Operations
UK insurance operations continued to implement its programme for change
announced in November 2001: a clear and renewed focus on the brand; emphasis on
profitable growth in the chosen product segments; broadening distribution;
achieving a step reduction in operating costs; and preserving financial strength
over the long term.
'The Plan from the Pru', was launched in September 2002 providing customers
with a financial plan which guides people through the key financial stages of
their lives.
Total new business achieved profit of £222 million was 9 per cent lower than
2001 reflecting a revision to economic assumptions and the challenging UK market
conditions.
In this market the focus has been on areas where Prudential is able to achieve
the highest possible margin and return on capital. Using comparable economic
assumptions, the UK insurance operations' new business margin of 29 per cent is
higher than the previous year. The strategic focus is on annuities, corporate
pensions, with-profits bonds and Individual Savings Accounts. The UK insurance
operations recorded a like-for-like 10 per cent increase in total sales on the
previous year as a result of strong sales of bulk and individual annuities
throughout 2002.
Successful marketing campaigns and an effective pricing policy helped the
business to achieve a significant increase in sales of single premium individual
annuities for the year, which were up 39 per cent to £1.76 billion. Single
premium bulk annuities also performed well with a 23 per cent increase in total
sales for the year to £710 million. The UK insurance operation has retained its
position as a leading player in this market, winning the £389 million C&A
pension scheme account in the final quarter of the year.
While corporate pension sales on an APE basis were down slightly on 2001, total
sales were up 23 per cent, reflecting the move towards single premium products.
Life product sales were down on 2001 with total sales down 5 per cent and APE
sales down 8 per cent to £247 million. However, during 2002, the UK insurance
operations maintained its position as a leading distributor of with-profits
bonds through Independent Financial Advisers.
Prudential believes that with-profits continue to offer an attractive investment
option for investors. It expects to remain one of the leading providers of
with-profits policies in the future and is developing new products, which offer
the advantages of a smoothed investment return, but with increased transparency.
In October 2002 Prudential entered the structured ISA market, launching the
first offer of the Prudential Growth and Income Plan, sales of which were
encouraging. A further series of offers are planned for 2003, the first of which
was launched in January.
Prudential broadened its distribution during the year through a distribution
agreement with Abbey National for an initial four-year period. This arrangement
anticipates proposed changes to polarisation rules that will liberalise sales
channels and allow banks to offer advice on other companies' regulated products
and will allow Prudential's with-profits bonds to be made available for
distribution through Abbey National's extensive high street branch network.
Pre-depolarisation, Prudential has entered into a similar distribution
arrangement that will meet the current regulatory requirements, and will provide
similar benefits. This arrangement was launched on 11 December 2002 and sales
have been encouraging.
Since the year-end Prudential has announced a proposed distribution arrangement
with Zurich Financial Services, which is expected to further broaden
Prudential's distribution, particularly of annuity products.
In November 2001 the company announced a target for cost savings of £175 million
by the end of 2004 and in July 2002 increased this target to £200 million.
These savings arise from the creation of the single customer service
organisation, the rationalisation of support services and a refocusing of IT
investment. Of this amount, it is estimated that £65 million (on an achieved
profit basis) will be attributable to shareholders. Good progress has been made
and £130 million of savings were delivered in 2002 with an annualised value of
£155 million. Prudential remains confident of achieving this important
reduction in operating costs.
In September 2002 the company announced plans to establish an offshore service
centre in India to improve customer contact service and achieve additional cost
savings. The new processing centre will be established in Mumbai and is now
expected to be operational in 2003.
This initiative is expected to incur a restructuring charge of approximately £20
million. The current estimated impact on shareholders would be a charge of £5
million against achieved basis pre-tax profit, spread over 2002 and the next two
years. However, due to the creation of a lower-cost servicing centre, this
charge will be offset by expected annual gross cost savings from 2006 of
approximately £16 million, of which £4 million per annum will be attributable to
shareholders.
As a result of the continuing depressed levels of world stock markets, bonuses
were reduced on conventional and unitised with-profits policies in February
2003. This followed earlier reductions on unitised with-profits policies in
September and December 2002. These actions were taken to protect the strong
financial position of the with-profits fund and to protect the long-term
interests of customers. 2002 was a turbulent year for global equity markets,
with the FTSE 100 falling by 24.5 per cent during the year. However, the
investment return on Prudential's with-profits fund was negative 8.1 per cent in
the year to 31 December 2002 reflecting its diversified investment mix.
In 2002, profits distributed from Prudential's main with-profits fund amounted
to £2.7 billion, of which £2.45 billion (90 per cent) was added to policies as
bonuses, and £273 million (10 per cent) is available for distribution to
shareholders.
We believe that the UK market for long-term savings will continue to be
difficult in 2003. Prudential with its trusted brand and financial strength is
well placed to compete strongly in this environment.
M&G
M&G is Prudential's UK and European fund management business and has over £112
billion of funds under management, of which £94 billion relates to Prudential's
long-term business funds. These funds are invested in a wide range of assets,
including UK and international equities, fixed income, property and private
equity. M&G provides investment management services to both institutional and
retail clients across a wide variety of products, including equities, fixed
income, unit trusts, Open Ended Investment Companies, investment trusts and
Individual Savings Accounts, as well as providing UK-based internal fund
management services to the Prudential group. In the retail market, M&G is one
of the UK's top three fund managers in terms of assets under management as at 31
December 2002, according to figures published by the Investment Management
Association (IMA).
Operating profit, excluding investment income, of £52 million was £2 million
higher than 2001, a significant achievement in the context of depressed equity
markets, where average market levels as represented by the FTSE All Share were
17 per cent lower year on year. This reflects M&G's diversified revenue streams
and disciplined cost management. Operating profit was £71 million in 2002.
In its institutional business, M&G continued to leverage its position as an
innovator in fixed income and private finance during 2002. The institutional
fixed income business won £1.2 billion of net new mandates during the year, with
an additional £0.4 billion of institutional money secured in 2002 but not yet
received. A further £0.2 billion of institutional mandates were received via PPM
South Africa. M&G's private finance group's successful initiatives in project
finance and securitised vehicles raised a further £0.5 billion in net new fund
inflows.
M&G's management of the Prudential Assurance Company's and Scottish Amicable's
long-term funds led to continued outperformance during 2002, generating a
performance fee of £20 million, an increase of £1 million on 2001. Over three
years, Prudential's main With-Profits Fund has generated per annum returns 2.3
per cent higher than its strategic benchmark and 2.5 per cent higher than its
competitor benchmark.
Despite prolonged market uncertainty throughout 2002, M&G's gross retail fund
inflows were up 11 per cent on the previous year and net fund inflows increased
by 79 per cent.
The latest Investment Management Association figures show that M&G has continued
to counter the industry trend by experiencing an increase in gross retail sales
compared to a fall in sales across the industry as a whole. With its strong
performance over a number of funds, M&G also increased its market share by 9 per
cent in the total retail market and 13 per cent in the PEP/ISA market. Market
share of funds sold via intermediaries also increased significantly, by 12 per
cent overall and by 27 per cent for PEPs and ISAs.
During the year, M&G continued to expand its international distribution
capability and now has operations in Germany, Austria, Luxembourg and Italy. M&
G International has continued to work closely on product strategy with
Prudential Corporation Asia to generate fund inflows into M&G's funds.
Following a review of its retail IT systems platform, M&G entered an agreement
with International Financial Data Services (IFDS) in November 2002 to outsource
all of M&G's retail administration. This will deliver significant cost benefits
and ensure M&G has the best IT systems platform to support its retail business.
The migration will be completed towards the end of 2003.
M&G's property and private equity arms, which primarily invest on behalf of the
Prudential Assurance Company, also enjoyed a successful year. The property
business made its first overseas investments and, in the face of continued
difficult markets, the private equity business continued to build its
international capabilities.
Egg
Egg plc is an innovative financial services company, providing banking,
insurance investments and mortgages through its internet site.
In 2002 it had another successful year with operating income up 73 per cent to
£327 million (£189 million 2001). Pre-tax losses were reduced to £17 million
from £88 million in 2001 and the total UK customer base increased by 610,000 to
almost 2.6 million. Excluding the exceptional profit from the sale of 15 per
cent of Funds Direct to Prudential, pre-tax losses of £20 million are included
in the Prudential group results.
In the UK, Egg delivered a profit of £35 million before tax (£76 million loss in
2001). It is growing customer numbers and revenues in an increasingly
competitive marketplace, while at the same time reducing both unit operating
costs and marketing acquisition costs. Net interest income increased by 54 per
cent to £224 million for the period reflecting an increase in the UK net margin
to 2.4 per cent (1.9 per cent). The margin improvement has largely resulted from
changes to product pricing on Egg Card and the maturing of the book over the
past year. Credit quality remains strong and Egg's card portfolio continues to
outperform the rest of the industry, in terms of lower arrears rates according
to benchmarking studies.
Unsecured lending in the UK grew by £936 million leading to a balance of £3.3
billion (£2.4 billion 2001). Personal loans delivered record sales in 2002 with
drawdowns of £829 million, up 98 per cent on 2001 (£419 million). Card balances
grew to £2.3 billion by the year end (December 2001 £1.8 billion).
Other operating income increased by £60 million to £103 million primarily
reflecting fees and commissions earned from the larger credit card book, and the
reduction in cashback on the credit card. There has also been an increase in
commissions earned from selling creditor insurance at point of sale on personal
loans. In 2003 Egg UK's key strategic goals are to continue to maximise value
from its unsecured lending business in what are expected to be challenging
conditions.
Egg launched in France at the beginning of November and in the first two months
69,000 people applied for La Carte Egg of which it expects 27,000 to become
customers. This gives a total customer base in France of approximately 90,000
following the selective migration of customers from the acquired Zebank
portfolio. The French business incurred losses of £46.7 million (€72.4 million)
in 2002. Of this loss, £14.0 million (€21.9 million) was spent on brand and
marketing and £8.7 million (€13.6 million) on development.
In France Egg intends to enhance and extend its product range in line with
developing the business in this market, and the next major product will be a new
loan account, which it plans to launch in the second quarter of 2003. It is
targeting to have in the region of 250,000 -300,000 customers in France by the
end of 2003.
It remains committed to delivering long-term value to shareholders through
building an international business of scale and leading the industry for
innovation in financial services to the ultimate benefit of customers.
Prudential Europe
In early 2002 Prudential reviewed its strategy for the Prudential and Scottish
Amicable branded long-term business within continental Europe. The review
concluded that an organic strategy based on investment in the German and French
markets would be unlikely to meet return on capital targets. Analysis indicated
that the returns achievable from any available acquisition would be too low to
justify the investment of capital.
As a consequence, in November 2002 Prudential agreed to sell its German life
business to Canada Life Financial Corporation (Canada Life) for €129m (£82
million). The sale was completed on 1 January 2003. Irish High Court approval
for the transfer of the relevant life assurance policies to Canada Life is
expected early in the second half of 2003. Prudential will continue to run its
existing operations in France for value, but not push for growth.
APE insurance sales in 2002 were £29 million, 12 per cent ahead of the 2001
result.
UNITED STATES
The US life industry faced another challenging year in 2002, with recession, the
third year of a bear market and a crisis of confidence in corporate governance
resulting in significant disruption to the capital markets. However, long-term
demographic trends in the US remain favourable, and Jackson National Life's
(JNL's) value-based approach and focus on business fundamentals has positioned
it to take advantage of the opportunities that this environment presents.
JNL has strong product manufacturing and administrative capabilities, a low cost
and flexible infrastructure supported by proprietary technology, a
relationship-driven distribution model and effective risk management and
financial discipline.
These strengths have enabled JNL to deliver record sales of £5.8 billion in
2002, up 24 per cent on 2001. Record fixed annuity sales of £2.7 billion during
the year were up 43 per cent on 2001. Variable annuity sales of £1.4 billion
were up 77 per cent on 2001, despite continued volatility of equity markets in
the US. As planned, sales of stable value products of £1.4 billion decreased
by 16 per cent on 2001, reflecting JNL's active management of its capital
position during 2002, which will continue in 2003.
New business achieved profits rose to £234 million in 2002 from £167 million in
2001. This is due to a 23 per cent increase in APE sales, together with an
increase in new business margins from 35 per cent to 39 per cent. Business
in-force achieved profits of £17 million in 2002 were adversely affected by net
bond losses totalling £289 million, resulting in a £133 million charge against
current year operating profits on a five-year averaging basis. These losses
arose out of the challenging credit environment in the US and equated to one per
cent of JNL's total invested assets.
In 2002 JNL revamped its annuity product line in anticipation of the changing
demands of its customers. The change proved successful, with 54 per cent of
annuity sales generated by products introduced during 2002. In particular, 2002
saw the launch of JNL's Perspective II annuity product. The design of
Perspective II allows each investor to select and pay for only the features and
benefits he or she wants. It was developed from concept to completion in just
six months - highlighting JNL's ability to adapt quickly to changing market
conditions.
JNL retained its leading position in fixed annuity sales, ranking seventh in
total individual fixed annuity sales for the year to date 30 September 2002.
Since 1995, the company has continually diversified its product portfolio and
now also has a leading position in variable annuity sales, ranking fourth in
variable annuity net flows and 17th in variable annuity sales for the full year
2002. JNL also has a leading position in equity-indexed annuity (EIA) sales,
ranking sixth for sales of EIAs for the year to date 30 September 2002.
JNL's low cost and flexible infrastructure together with its culture and the
company's realigned service and administrative capabilities contribute to its
competitive advantage. JNL has a cost base that is well below the industry
average.
The company has built its distribution network both organically and through
small acquisitions. Traditionally, JNL has had a strong presence with
independent insurance producers selling life insurance, fixed annuities and,
more recently, equity-indexed annuities. In 1994, JNL entered the bank
distribution channel and has seen very strong sales growth in that area. In
2002, JNL ranked seventh in the US for total annuity sales through banks and
fifth in sales of fixed annuities through banks. In the mid-1990s, the company
began offering variable annuities to independent broker-dealers, and now has a
strong position in that channel. In addition, at the beginning of 2002, JNL
launched a very successful marketing initiative targeting regional
broker-dealers.
This year, JNL is launching Curian Capital LLC, a registered investment adviser
providing a managed account fee-based brokerage application. This platform will
enable advisers to manage clients' assets more efficiently and economically,
bringing a high net worth service to the mass market.
During 2002, JNL achieved a financial milestone, surpassing $50 billion in total
assets (US GAAP), an increase of 75 per cent in just five and a half years.
Looking ahead, JNL is focused on profitable new business in its retail markets,
with its proven ability to offer the customer a variety of retirement products
through multiple distribution channels.
ASIA
Prudential Corporation Asia (PCA) continued to strengthen its position in 2002
as a leader in both the life insurance and mutual fund markets across the
region. Based on preliminary estimates, PCA believes it ended 2002 with top five
market shares in eight Asian life insurance markets, two mutual fund markets and
Hong Kong's Mandatory Provident Fund market. This demonstrates its continuing
success in building a very strong portfolio of businesses across the region.
The economic environment in 2002 was challenging, but PCA nevertheless delivered
a very positive set of results for the year. Insurance sales on an APE basis
were £513 million in 2002, up 18 per cent compared to 2001 and New Business
Achieved Profits (NBAP) of £307 million increased by 20 per cent. PCA's average
NBAP margin on APE insurance sales remained broadly constant at 60 per cent (59
per cent in 2001). Operating achieved profits before tax, head office expenses
and minority interests, were £490 million, up 24 per cent from 2001, and
Modified Statutory Basis profits before tax, head office costs and minority
interests, for the year were £62 million, up from £25 million in 2001.
PCA's primary business is the manufacture and distribution of life insurance and
medium and long-term savings products through agency and third party
distribution channels. A key driver of our success has been the rate at which it
has been able to expand its agency force, and the productivity achieved by its
agents. PCA now has 89,000 agents across Asia and regional teams ensure that
quality training and best practice are applied consistently. The largest
increases in agent numbers in 2002 have been in its recently established
operations in Vietnam and India. During the year PCA also made significant
progress in enhancing agent productivity through sales and product training
programmes in many of its operations. Bancassurance, through distribution
agreements with banks, has continued to provide a material source of new
business. Across the region, PCA now has a total of 18 bancassurance agreements
in 10 countries. Alternative distribution, which includes bancassurance,
produced 21 per cent of insurance APE sales in 2002, compared with 17 per cent
in 2001.
PCA's success in markets across the region is in large part due to its product
innovation, and its readiness to package and market products to meet specific
customer needs. In 2002 PCA continued to leverage its regional leadership in
capital efficient unit-linked products with successful launches in India,
Philippines and regular premium unit-linked products in Taiwan. Additionally,
PCA LIFE Japan secured regulatory approval for variable annuity products,
drawing on technical expertise developed in Jackson National Life in America.
Working with JNL on product design and pre-launch preparations meant a
successful launch in October 2002 was possible, very soon after regulatory
approval was received.
Being a pioneer and leader in the introduction of capital efficient unit-linked
life insurance remains a significant source of competitive advantage in both its
established and newer markets: 30 per cent of PCA's APE sales in 2002 came from
unit-linked life products, up from 23 per cent in 2001.
PCA's operations in Greater China achieved significant growth in 2002. In Hong
Kong its market share on an APE basis for year-to-date 30 September 2002 was
10.4 per cent. Its joint venture with Bank of China International for Hong
Kong's MPF continues to grow well with Prudential's funds under management up 51
per cent over 2001 to £136 million. In Taiwan, Prudential Life's NBAP was up 91
per cent compared to 2001, while APE was up 7 per cent - the increased
profitability reflecting the successful introduction of unit-linked products. In
Guangzhou China, its joint venture with CITIC grew insurance APE sales by 39 per
cent and it has recently applied for a second licence.
The focus of PCA's South Asia operations continues to be its well-established
market presence in Singapore and Malaysia. In 2002 PCA improved its position in
both of these markets. In Malaysia for year to date 30 September 2002 it was
number one for insurance APE sales for the first time, and in Singapore for year
to date 30 September 2002 it was number two for the important regular premium
market. In Singapore a new regulatory regime was introduced in late 2002. While
the full impact of this will be known over time, PCA has thoroughly evaluated
the potential outcomes and consequences and is well positioned to build upon its
strong franchise in 2003 and beyond.
PCA has recently entered the very large and material North Asian markets of
Japan and South Korea through the acquisition of small but operationally and
financially sound local companies. There are clear plans in place to build
significant and sustainably profitable operations over the long term in both
countries. In 2002 very good progress was made with management teams being
strengthened and the product ranges and pricing structures re-based. The focus
is on building distribution and raising brand awareness.
In 2002, PCA continued to pursue its long-term strategy of building a
complementary, material and profitable regional mutual fund business. Progress
to date has been very encouraging with market leading positions in India and
Taiwan, growing operations in Japan, Singapore, Malaysia and Hong Kong and the
recent acquisition of a mid-sized investment trust management company in the
large South Korean market. As at 31 December 2002 total mutual funds under
management have increased to £5.1 billion, up 59 per cent on last year, with
strong net inflows of £1.0 billion.
During 2002 PCA also undertook a comprehensive review of the region's life and
mutual fund markets and updated its strategy to optimise growth and profit
prospects within a rigorous capital allocation framework. The long-term
prospects for the region, and for PCA as a significant force in the market,
remain very positive. Continued successful implementation of Prudential's
strategy should deliver material and sustained profitable growth in the years
ahead.
As would be expected in the current economic environment the majority of the
funds under management are in lower margin fixed income type products. This,
coupled with ongoing investment in the development and start up of this
business, means net MSB profits from PCA's mutual fund business are currently
not material in the Group context.
PCA remains well positioned to participate in Asia's outstanding long-term
growth prospects. It has a strong track record of successful delivery and a
robust business model firmly focused on building businesses in markets and
sectors that combine scale opportunities with secure long-term profitability and
very attractive returns on capital.
FINANCIAL REVIEW
Sales
Prudential has delivered strong growth in sales during 2002 with total group
insurance and investment sales reaching £27.6 billion, up 29 per cent on last
year. Total new business inflows including renewal premiums reached £31.8
billion, 24 per cent ahead of last year.
Total sales of insurance and investment products from outside the UK represented
74 per cent of the Group total of £27.6 billion, reflecting the international
diversification of the Group.
Total insurance sales increased 12 per cent to £12.8 billion. On the annual
premium equivalent (APE) basis sales were up 9 per cent to £1.9 billion,
reflecting an 18 per cent growth in sales in Asia and an increase of 23 per cent
at Jackson National Life (JNL).
Gross investment inflows increased 47 per cent to £14.8 billion. Net investment
inflows were £1.4 billion, including net mutual fund sales in Asia of £1.0
billion.
Achieved Profits Basis Results
In reporting the result on the achieved profits basis Prudential includes the
results of the Group's long-term insurance business determined on this basis.
These results are combined with the statutory basis results of the Group's other
operations, including investment and banking products and other non-insurance
investment management business. Reference to operating profit relates to profit
including investment returns at the expected long-term rate of return but
excludes amortisation of goodwill, exceptional items, short term fluctuations in
investment returns and the effect of changes in economic assumptions.
In the directors' opinion, the achieved profits basis provides a more realistic
reflection of the performance of the Group's long-term insurance operations than
results under the statutory basis. The modified statutory basis (MSB) profit
narrative follows this achieved profits basis narrative.
The achieved profits basis results for long-term business are prepared in
accordance with the ABI guidance for Achieved Profits reporting issued in
December 2001. This guidance requires the economic assumptions used for the
projection of cash flows to be on an 'active' basis, that is primarily based on
appropriate government bond returns at each period end. The effects of changed
assumptions caused by movements in bond returns are reflected in the profit
reported for the year to 31 December 2002.
The active basis is applied to the UK and the US operations, and those countries
in Asia where there are well-developed government bond markets (Japan, Korea and
US$ denominated business in Hong Kong). Assumptions in other Asian countries
continued to be based on an assessment of long-term economic conditions.
In 2002 use of the active basis has resulted in a reduction in the risk discount
rate applied to the UK and US operations from 7.7 per cent to 7.1 per cent and
to 7.0 per cent respectively, and a reduction in the UK investment return
assumption from 7.1 per cent to 6.6 per cent.
In the UK, the risk margin over the risk free rate has been maintained at 2.6
per cent. In the US the ten year Treasury bond rate has fallen by 1.2
percentage points, and the risk margin over the ten year Treasury bond rate has
been increased from 2.6 per cent to 3.1 per cent to reflect the recent
volatility in JNL's operating result.
In Asia the weighted risk discount rate (determined by weighting each Asian
country's economic assumptions by reference to the achieved profits basis
operating results for new business written in 2002) has fallen from 10.1 per
cent in 2001 to 9.6 per cent in 2002. The discount rates used vary from 4 per
cent to 22 per cent.
The overall impact on the group achieved profit result for 2002 from the use of
the revised economic assumptions compared to those used in the prior year has
been to increase new business achieved profit (NBAP) by around £20 million and
to reduce the in force operating result by around £110 million. Achieved profits
shareholders' funds are around £290 million lower than they would have been
under the 2001 assumptions.
Total Achieved Operating Profit
Total achieved operating profit from continuing operations was £1,133 million,
up 2 per cent from £1,114 million in 2001.
This result reflects a 15 per cent improvement in new business achieved profit
from £673 million to £774 million offset by reduced in-force profit down 21 per
cent from £673 million to £533 million.
In addition, results from other continuing operations including development
expenses and other shareholders' income improved from a loss of £175 million in
2001 to a loss of £158 million, principally due to a much reduced operating loss
at Egg and lower development expenses, partially offset by an increase in other
shareholders' expenses. UK re-engineering costs of £16 million compare with £57
million in 2001.
New Business Achieved Profit
Group new business achieved profit from insurance business of £774 million was
15 per cent ahead of prior year, reflecting strong growth in the US and Asia,
partially offset by a fall in profit from the UK insurance operations. The
growth in new business achieved profit reflects a 9 per cent increase in
insurance sales on an annual premium equivalent (APE) basis, together with an
increase in new business achieved profit margin from 38 per cent to 40 per cent.
UK Insurance Operations' new business achieved profit of £222 million is 9 per
cent lower than 2001. This reflects a 5 per cent fall in APE sales in
challenging market conditions and the revised economic assumptions. The new
business margin moved from 30 per cent in 2001 to 29 per cent in 2002 and
reflects the revised economic assumptions. However on a like-for-like basis,
using comparable economic assumptions, margins increased from a restated 28 per
cent to 29 per cent in 2002.
Prudential Europe's new business achieved profit of £11 million is 38 per cent
higher than 2001, reflecting a 12 per cent increase in APE sales and higher
margins, up from 31 per cent in 2001 to 38 per cent in 2002.
The 40 per cent increase in Jackson's new business achieved profit to £234
million was driven by a 23 per cent increase in new insurance sales and an
increase in new business margin from 35 per cent to 39 per cent. The margin
increase primarily reflects an improvement in the fixed annuity spread
assumption for new business and the revision to the discount rate.
For JNL, in determining the assumptions for achieved profits basis reporting the
level of capital required to support the business (the 'target surplus') has
been taken, as in 2001, to be 200 per cent of the Company Action Level Risk
Based Capital, calculated in accordance with the National Association of
Insurance Commissioners risk-based capital standards for life insurance
companies.
Prudential Corporation Asia's (PCA) new business achieved profit of £307 million
is up 20 per cent on 2001 primarily due to strong sales growth across all
regions (APE insurance sales up 18 per cent). The new business margin in Asia
increased 1 per cent to 60 per cent reflecting a favourable shift in sales to
higher margin linked products. NBAP by product type is now in the ratio of 21
per cent traditional products, 43 per cent unit linked products and 36 per cent
accident and health products. The equivalent mix in 2001 was 31 per cent, 38 per
cent and 31 per cent.
In Force Achieved Profit
The UK in force profit (excluding re-engineering costs) of £304 million was down
19 per cent on 2001, principally reflecting lower than expected returns from
business in-force after applying a lower discount rate, a strengthening of
persistency assumptions and negative experience variances.
The negative experience variances include persistency variances principally
arising from pension transfers and early vestings. The level of surrenders has
been restricted through the use of market value adjusters throughout the year,
and is attributable to the volatile market conditions, in particular in the
second half of the year. This is offset, in part, by the benefit from lower
renewal expense assumptions as the benefits of the cost reduction programme come
through.
No adjustment has been made to the mortality assumptions following the CMI
bureau working paper on longevity. Prudential assumes an average 1.84 per cent
annual mortality improvement in our pricing, against the new CMI suggested
mid-point of 1.85 per cent, and reserves on the basis of 2.90 per cent
improvement in mortality.
Europe in force profit of £3 million was £3 million higher than 2001, reflecting
reduced negative variances.
The US in force profit has decreased significantly from £136 million in 2001 to
£17 million in 2002. This is primarily due to defaults and impairments on
corporate bonds, which are included within the operating result on a five-year
averaged basis. The charge to operating profit has increased from £74 million in
2001 to £133 million in 2002, reflecting the continued poor experience of 2002.
The amount charged to operating profit is one-fifth of the gains and losses
incurred in the last five years.
Actual losses in 2002 were £289 million. This includes a number of one-off event
risks where investment grade bonds fell to below investment grade status almost
overnight, for example, WorldCom. The seven largest individual bond losses
accounted for 52 per cent of the total gross losses, of which WorldCom was the
largest at £82 million. The difference between the full year loss of £289
million and the charge recognised through operating profit of £133 million, an
amount of £156 million, is recorded within short term investment fluctuations.
In recent years the US operations have invested in technology and the
development of its systems platform in order to process efficiently higher
volumes of business and this has added to its fixed cost base. With lower total
policy counts attributable to higher average annuity policy sizes and lower life
sales the business is running below capacity, but as the business grows it will
be able to take advantage of lower marginal costs. This has been recognised with
a revision to the unit expense assumption resulting in a charge of £54 million
as previously reported.
Asia in force profit (before development expenses) has increased significantly
from £160 million in 2001 to £209 million in 2002 and includes net favourable
assumption changes and one off adjustments of £101m (2001 was £66m).
PCA actively reviews the assumptions used for achieved profits to ensure that
these remain both realistic and in line with actual experience. The 2002
analysis established that death claim rates were significantly and consistently
lower than had previously been assumed, particularly in respect of linked
business in Singapore where there is now ten years' experience of these
products. Overall the net effect of these reviews was a favourable assumption
change of £42m.
During 2002 further sub-divisions of long-term funds approved by the regulators
allowed the value of shareholders' interest in certain non-participating
policies to be fully recognised for the first time; the one-off impact to
achieved profits of this exercise totalled £59m.
Non-insurance Operations
M&G's operating profit of £71 million compares to £75 million in 2001. Operating
profit excluding investment income, of £52 million was £2 million higher than
2001, a significant achievement in the context of depressed equity markets,
where average market levels as represented by the FTSE All-Share are 17 per cent
lower year on year. This increase reflects the benefits of M&G's diversified
revenues, with fixed income and property offsetting the effect of lower equity
markets, together with disciplined cost management. The result has also been
affected by a £3 million increase in losses from M&G International, which were
£15 million in 2002.
A performance fee of £20 million was recognised in the 2002 result (£19 million
in 2001) due to the life fund beating its strategic benchmark by 2.3 per cent
per annum over the last three years.
Egg's UK banking operations, having become profitable during the fourth quarter
of 2001 generated a profit of £35m before losses on joint ventures of £5m,
excluding the exceptional profit arising from the sale of 15 per cent of Funds
Direct to Prudential. Egg International recorded a £50m loss in 2002 including
£47m relating to the investment in the development of Egg's French business.
National Planning Holdings, the US broker dealer, and PPM America, the US fund
manager, together delivered profits of £14 million, down from £16 million in
2001.
Development expenses (excluding Asia regional head office expenses) were down
from £48 million to £34 million, and comprised £26 million for Asia and £8
million for Europe. The Asian development costs included £20 million in relation
to the development of the Japanese business.
Other net expenditure increased by £59 million to £189 million. This included a
£24m write-down of the group's 15.3 per cent interest in Life Assurance Holding
Corporation Ltd in 2002 compared with a positive revaluation of £12 million in
2001. In addition, funding costs have increased by £12 million over 2001.
Achieved Profits - Result Before Tax
The result before tax and minority interests was a loss of £483 million compared
to a loss of £455 million in 2001.
The loss in 2002 principally reflects the negative adjustment for short-term
fluctuations in investment returns of £1,406 million, including £1,019 million
in relation to the UK, £440 million in relation to JNL and positive £66 million
in relation to Asia.
The UK component reflects the difference between an actual investment return
from the Prudental Assurance's main with-profits fund of negative 8.1 per cent
and the long-term assumed return of positive 6.6 per cent.
The US component primarily includes £156 million reflecting the full charge for
bond write-downs and impairments incurred in 2002 to the extent that it is not
included in operating profit, a £128 million negative variance against long-term
investment returns for equity investments, including private equity holdings,
and £145 million primarily in relation to changed expectations of future
profitability on variable annuity business in-force arising from adverse current
year equity return. This arises due to equity market returns in the year being
lower than the assumed long term rate. This gives rise to lower than expected
year end values of variable annuity assets under management with a resulting
effect on the level of future account values and hence future profitability.
The Asia component is principally due to the appreciation in the value of bonds.
Adverse economic assumption changes of £467 million also contributed to the loss
and include the effect of the changed assumptions on the active basis mentioned
earlier, together with changes to long-term economic assumptions in Asia and the
US. In the US, this includes a revised economic assumption in respect of the
variable annuity long-term return from 8 per cent to 7 per cent, including the
associated guaranteed minimum death benefits (GMDB) effect. The Asian economic
assumption change principally relates to changes in investment return
assumptions.
Amortisation of goodwill was £98 million against £95 million in 2001.
The result also includes £355 million profit arising from the sale of the
General Insurance operations as previously reported in the interim statement.
Achieved Profits - Result After Tax
The result after tax and minority interests was a loss of £145 million after
reflecting a tax credit of £329 million and minority interests of £9 million.
The effective tax rate at an operating profit level was 25 per cent, down from
31 per cent in 2001, primarily due to lower effective tax rates for JNL and
Asia, partially offset by tax rate movements on other non-long term operations.
The JNL rate is lower than in 2001 due to the combined effect of operating
assumption changes for expenses, capital charge effects and an exceptional tax
credit.
The effective tax relief rate at a total achieved profit level was 68 per cent
on a loss of £483 million, primarily due to tax payable on the profit on
disposal of UK general business operations being relieved against capital losses
available to the Group. The effective tax rate at a total achieved profit level
in 2001 was 47 per cent.
Modified Statutory Basis Results - Operating Profit
Reference to operating profit relates to profit including investment returns at
the expected long-term rate of return but excludes amortisation of goodwill,
exceptional items and short term fluctuations in investment returns.
Group operating profit on the modified statutory basis (MSB) of £432 million was
£118 million lower than 2001.
UK Insurance Operations' operating profit (before re-engineering costs) in 2002
was £368 million, £67 million below 2001. This included a reduction of £99
million in the shareholder transfer arising from lower with-profits bonus rates,
partially offset by the impact of higher claims.
The US operations result, which is based on US GAAP subject to adjustments, of
£153 million was £145 million worse than prior year. This fall principally
reflects increases in both the amortisation of deferred acquisition costs (DAC
amortisation), costs in respect of the provision of guaranteed minimum death
benefits (GMDB), and a £121 million charge in relation to averaged realised
gains and losses on bonds. Spread income was higher than 2001 by £29 million,
and reflects the benefit from reductions in crediting rates on the in-force
fixed annuity and life book.
With respect to the methodology for GMDB provisioning, JNL have implemented
early the draft guidance in the US prescribed by the AICPA in their July 31,
2002 draft statement of position: 'Accounting and Reporting by Insurance
Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate
Accounts.' GMDB provisions were reviewed at the year end resulting in a total
charge, including payments during the year, of £43 million.
The increase in DAC amortisation of £106 million includes an increase of £85
million in respect of variable annuity (VA) products and £16 million in respect
of equity-linked indexed annuities. A consequence of the review of GMDB
provisions and the resulting strengthening has been a reduction in the expected
future gross profits from variable annuity products, which has itself resulted
in a higher level of VA DAC amortisation.
When calculating the DAC amortisation the long term return on variable annuity
business is assumed to be 8.4 per cent, gross of investment management and
mortality and expense charges. This assumption is implemented through use of a
mean reversion methodology.
If the mean reversion was eliminated as of 31 December 2002, so that the long
term return on separate account business was assumed to be 8.4 per cent per
annum in all future years, DAC values would be reduced by approximately £32
million. Should these assumptions not be met in future periods a further
increase in VA DAC amortisation may be required.
Prudential Asia's operating profit before development expenses was £88 million
(£44 million in 2001). This includes an £8 million gain arising from the
reorganisation of long term funds approved by the regulators which allowed the
value of the shareholders' interest in certain non-participating policies to be
recognised for the first time. This result is after the significant investment
that has occurred in 2002, as PCA builds high quality customer focused
distribution channels in Japan and Korea. Further significant investment is
planned for 2003. The Group's more established operations in Singapore, Hong
Kong and Malaysia reported further growth in statutory profits, up 43 per cent
to £79 million.
Modified Statutory Basis Results - Profit Before Tax
MSB profit before tax and minority interests was £484 million in 2002, compared
to £385 million in 2001. This increase is due to an improvement in the negative
adjustment for short-term fluctuations in investment returns of £275 million,
together with £355 million of profit relating to the disposal of the UK General
Insurance operations. This was partly offset by lower operating profit and the
inclusion of the American General break fee of £338 million in 2001.
Amortisation of goodwill was £98 million against £95 million in 2001.
Within the improvement in the negative adjustment for short-term fluctuations
the US result has improved from a loss of £368 million in 2001 to a loss of £258
million. The short term fluctuations in Asia principally reflect the five year
averaging impact of an appreciation in bond values. In addition, the 2001 Group
result included a £95 million loss, primarily in respect of the General
Insurance operations.
Modified Statutory Basis Results - Profit After Tax
MSB profit after tax and minority interests was £449 million, including a tax
charge of £44 million. The effective rate of tax on MSB total profit in 2002 was
9.1 per cent primarily due to tax payable on the profit on disposal of the UK
general insurance operations being relieved against capital losses available to
the Group.
Earnings per Share
Earnings per share, based on achieved basis operating profit after tax and
related minority interests but before amortisation of goodwill, were up 0.9
pence to 42.8 pence. Earnings per share, based on MSB operating profit after
tax and related minority interests but before amortisation of goodwill, were
down 7.5 pence to 15.8 pence.
Basic earnings per share, based on achieved basis loss for the year after
minority interests was a loss of 7.3 pence compared with a loss of 11.0 pence in
2001. Basic earnings per share, based on MSB profit for the year after minority
interests was 22.6 pence, up 2.9 pence.
Dividend per Share
The final dividend per share is 17.1 pence, resulting in a full year dividend
growth of 2.4 per cent to 26.0 pence.
Cash Flow
The table below shows the Group holding company cashflow. This is a revised
presentation from previous years, which was in the form of a funds flow
statement. Prudential believes that this format gives a clearer presentation of
the use of the Group's resources than the FRS 1 statement required in the
preliminary financial statements.
2002 2001
£m £m
Cash remitted to group
UK life fund transfer 324 307
(in respect of earlier bonus declarations)
Cash remitted by business units 212 154
_________________________
536 461
Interest (124) (103)
Dividends (509) (494)
_________________________
(97) (136)
Tax received 59 (29)
Equity (scrip dividends and share options) 40 42
Corporate activities 543 283
_________________________
545 160
Capital invested in business units
JNL (321) (69)
Other business units (354) (512)
_________________________
PLC cashflow post dividends (130) (421)
_______________________________________________________________________________________________
Financing required 130 421
_______________________________________________________________________________________________
The Group received £536 million in cash remittances from business units in 2002
(2001: £461 million) comprising the shareholders' statutory life fund transfer
relating to earlier bonus declarations, together with dividend and interest from
subsidiaries. After dividends and interest paid, there was a net outflow of £97
million (2001: £136 million net outflow). The Group also received £543 million
from corporate activities (2001: £283 million) including cash proceeds arising
from the sale of the General Insurance business and exceptional tax receipts.
Together with the proceeds of equity issuance and group relief, this gave rise
to a total net surplus of £545 million (2001: £160 million). In September 2002
the Group provided JNL with £321 million of capital to support high volumes of
fixed annuity writings and to replace capital consumed by bond losses and
impairments This follows £69 million provided in 2001. During 2002 the Group
invested £354 million (2001: £512 million), primarily in its shareholder backed
business in the UK and in Asia, including for the development of the Japanese
business. In aggregate this gave rise to a financing requirement of £130 million
(2001: £421 million) which was satisfied through an increase in core debt.
Gearing
Other than for Egg plc, which is responsible for its own financing, the Group is
financed centrally. The Group's core debt is managed to be within a target level
consistent with a AA debt rating. At 31 December 2002, the gearing ratio,
including hybrid debt, was 23.6 per cent compared with 20.7 per cent at 31
December 2001. Excluding hybrid debt, the gearing ratio was 14.2 per cent.
Although core debt only increased by £93 million during 2002 (after exchange
movements of £37 million) the achieved profits shareholders' funds fell by 12
per cent driven by equity market falls and exchange movements.
Prudential plc enjoys strong debt ratings from both Standard & Poor's and
Moody's. Prudential long-term debt is rated AA- and A2 from Standard & Poor's
and Moody's respectively, while short-term ratings are A1+ and P-1.
Funds Under Management
Insurance and investment funds under management at 31 December 2002 totalled
£155 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.
Financial Strength of Insurance Operations
UK
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. On a comparable basis to 2001 the free asset (or Form 9) ratio of
the Prudential Assurance Company (PAC) long-term fund was approximately 8.4 per
cent at the end of 2002, compared with 12.2 per cent at 31 December 2001. The
reduction during the year principally reflects the significant fall in equity
markets around the world, together with lower bond yields and price earnings
ratios. At the end of 2002 a reorganisation of the life funds saw the transfer
of the Scottish Amicable Life linked fund into the PAC long-term fund.
The valuation has been prepared on a conservative basis in accordance with the
FSA valuation rules, and without use of implicit items. No allowance has been
taken for the present value of future profits and the PAC long-term fund has not
entered into any financial reinsurance contracts. On the 'realistic' basis for
solvency the fund is very strong.
The long-term funds remain well capitalised and the PAC long-term fund is rated
AA+ by Standard & Poor's and Aa1 by Moody's.
The table below shows the change in the investment mix of Prudential's main
with-profits fund:
31/12/98 31/12/01 31/12/02
UK equities 59 39 32
International equities 13 14 13
Bonds 12 28 33
Cash and other asset classes 5 4 4
Property 11 15 18
Total 100 100 100
With-profits contracts are long-term contracts with relatively low guaranteed
amounts, the nature of which permits Prudential to invest primarily in equities
and real estate. However, over the period from 1999 to mid-2001 the fund reduced
its exposure to equities. There was also a re-weighting within equities out of
the UK and into overseas equities. This change in asset mix reflected our view
that equity valuations were high and that other assets, particularly corporate
bonds, were relatively attractive. The change within equities improved
diversification and reduced expected fund volatility. The change in asset mix in
recent years has had a substantial beneficial impact on investment returns. The
broad asset mix will continue to be reviewed as the economic environment and
market valuations change. The fall in equity percentages in 2002 compared to
2001 reflects the decline in value of the holdings during the year.
The investment return on the Prudential main with-profits fund was negative 8.1
per cent in the year to 31 December 2002 compared with the falls in the FTSE 100
and the FTSE All-Share of 24.5 per cent and 25.0 per cent respectively over the
same period.
JNL
The capital adequacy position of Jackson National Life remains strong, with a
strong risk based capital ratio more than three times the NAIC Company Action
Level Risk Based Capital. As a core business to the Group, JNL's financial
strength is rated AA by Standard and Poor's.
JNL's invested asset mix on a US regulatory basis (including Jackson National
Life of New York and excluding policy loans and reverse repo leverage) is as
follows:
2000 2001 2002
____ ____ ____
Investment Grade Public 53% 58% 60%
Investment Grade Private 21% 22% 20%
Non Investment Grade Public 5% 3% 4%
Non Investment Grade Private 5% 3% 3%
Commercial Mortgages 11% 9% 8%
Private equities and real estate 3% 3% 3%
Equities, cash & other assets 2% 2% 2%
Asia
Solvency levels have been maintained at local regulatory levels by the insurance
operations in Asia. Across the region less than 20 per cent of non-linked funds
are invested in equities.
Inherited Estate
In order to support our with-profits business, we hold a substantial amount of
working capital in PAC's long-term fund. Without such working capital, we could
not provide the benefits associated with smoothing and guarantees, or have
investment freedom for the main with-profits fund's assets, for the benefit of
both policyholders and shareholders.
To meet our obligations to existing policyholders, we expect to have to pay out
over time assets equal to policyholders' accumulated 'asset shares' plus any
additional payments that may be required, by way of smoothing or to meet
guarantees. The balance at any time of the main with-profits fund, which is not
expected to be paid out to the current generation of with-profits policyholders
as claim values, represents the major part of Prudential Assurance's working
capital and is called the 'inherited estate'.
To ensure that policyholders' benefits are secure, we are required by
regulations to hold a substantial amount of capital in our long-term fund, so
that we can demonstrate at all times that the fund is solvent and able to meet
its obligations to all policyholders. The inherited estate provides most of this
solvency capital.
In addition, we can use the inherited estate to absorb the costs of significant
events, such as fundamental strategic change in our long-term business and, to
the extent that the UK regulator is content, the cost of providing redress for
past pension mis-selling, without affecting the level of distributions to
policyholders and shareholders. The costs of fundamental strategic change may
include investment in new technology, redundancy and restructuring costs, cost
overruns on new business and the funding of other appropriate long-term
insurance related activities including acquisitions.
The size of the inherited estate, by its nature as working capital, fluctuates
from year to year depending on investment returns, and the extent to which the
capital is required to meet smoothing costs, guarantees and any other unforeseen
events. We estimate that at 31 December 2002, the inherited estate, after taking
into account pension mis-selling costs and anticipated costs of fundamental
strategic change, is around £5 billion.
In the normal course of events the inherited estate is required to support the
in force business, so neither policyholders nor shareholders can have any
expectation that they will receive any distribution of the inherited estate,
other than through the normal process of smoothing and meeting guarantees in
adverse investment conditions.
However, we believe that it would be beneficial if there were to be greater
clarity as to the status of the inherited estate. With that in mind, we have
been considering the principles that would apply to any re-attribution of the
inherited estate to either policyholders or shareholders. Discussions have
been held with the Financial Services Authority to this end. We have not
considered or discussed any actual distribution as our current expectation is
that, for the foreseeable future, the entire inherited estate will need to be
retained within the long-term fund to provide working capital. However, in the
light of current market conditions the amount and timing of any re-attribution
of the estate remains very uncertain.
Conduct of Business
The FSA has required all UK life insurance companies to review their potential
cases of pensions mis-selling and pay compensation to policyholders where
necessary. The Group has met the FSA target for completion of Phase I and II of
the pensions mis-selling review, within the provisions that were established in
the fund in 2000.
The 2001 result included a provision of £25 million in respect of the possible
mis-selling of mortgage endowments. No further provision was required in 2002.
The Group's main exposure is to mortgage endowment products sold through
Scottish Amicable Life PLC (SAL). No provision is required in respect of
mortgage endowments sold by PAC.
Pension Costs
The most recent actuarial valuation of the Group's principal defined benefit
pension scheme was completed in April 2002, giving a fund surplus of £376
million, and no change in the employer funding rate of 12.5 per cent of salaries
was required.
FRS 17, 'Retirement benefits', was issued in November 2000. The Accounting
Standards Board has issued proposals to defer the mandatory full adoption date
of the standard until 2005. If implemented in full, the standard would require
that companies include the whole of any pension surplus or deficit of defined
benefit schemes in their balance sheets and would change the way in which
pension surpluses and deficits are reported. In particular, it would require
assets of the scheme to be valued at their market value at the Company's year
end, while pension liabilities would be required to be discounted at a rate
consistent with the current rate of return on a high quality corporate bond.
If FRS 17 had been fully implemented for 2002 a £1m charge (after tax) in the
profit and loss account, and a loss of £193m (after tax) in the statement of
total recognised gains and losses would have been required.
Shareholders' Funds
On the achieved profits basis, which recognises the shareholders' interest in
long-term businesses, shareholders' funds at 31 December 2002 were £7.2 billion,
a decrease of £954 million from 31 December 2001. The decrease principally
reflects short-term fluctuations in investment returns, together with dividends
declared, the effect of changes in economic assumptions and adverse foreign
exchange movements, offset by operating profits of £1,133 million and profit on
business disposals of £355 million.
Statutory basis shareholders' funds, which are not affected by fluctuations in
the value of investments in the Prudential Assurance Company (PAC) long-term
fund, were £282 million lower at £3.7 billion.
ACHIEVED PROFITS BASIS RESULTS
==============================
Summarised Consolidated Profit and Loss Account 2002 £m 2001 £m
=============================================== ======== ========
UK Insurance Operations 526 620
M&G 71 75
Egg (20) (88)
----------- -----------
UK Operations 577 607
US Operations 265 319
Prudential Asia 516 415
Prudential Europe 14 8
Other Income and Expenditure (including development expenses) (223) (178)
----------- -----------
1,149 1,171
UK re-engineering costs (16) (57)
----------- -----------
Operating profit from continuing operations 1,133 1,114
Discontinued UK general business operations - 72
----------- -----------
Operating profit before amortisation of goodwill and exceptional items 1,133 1,186
Amortisation of goodwill (98) (95)
Short-term fluctuations in investment returns (1,406) (1,402)
Effect of change in economic assumptions (467) (482)
Merger break fee (net of related expenses) - 338
Profit on sale of UK general business operations 355 -
----------- -----------
Loss on ordinary activities before tax (including actual investment returns) (483) (455)
Tax 329 213
----------- -----------
Loss for the year before minority interests (154) (242)
Minority interests 9 25
----------- -----------
Loss for the year after minority (145) (217)
interests
Dividends (519) (504)
----------- -----------
Retained loss for the year (664) (721)
----------- -----------
Basic Earnings Per Share
Based on operating profit after tax and related minority interests before
amortisation of goodwill and exceptional items of £851m (£828m) 42.8 p 41.9 p
Adjustment for amortisation of goodwill (4.9)p (4.8)p
Adjustment from post-tax long-term investment returns to post-tax actual
investment returns (after related minority (48.0)p (48.9)p
interests)
Adjustment for post-tax effect of change in economic assumptions (14.4)p (16.0)p
Adjustment for post-tax merger break fee (net of related expenses) - 16.8 p
Adjustment for post-tax profit on sale of UK general business operations 17.2 p -
----------- -----------
Based on loss for the year after minority interests of £(145)m (£(217)m) (7.3)p (11.0)p
----------- -----------
Average number of shares 1,988m 1,978m
----------- -----------
Dividend Per Share 26.0p 25.4p
----------- -----------
TOTAL INSURANCE AND INVESTMENT NEW BUSINESS
===========================================
Insurance Products and Investment Products
Insurance Products Investment Products Total
2002 £m 2001 £m 2002 £m 2001 £m 2002 £m 2001 £m
======== ======== ======== ======== ======== ========
UK Operations 6,051 5,685 1,157 1,040 7,208 6,725
US Operations 5,757 4,634 - - 5,757 4,634
Prudential Asia 944 1,019 13,661 9,027 14,605 10,046
Prudential Europe 67 78 - - 67 78
----------- ----------- ----------- ----------- ----------- -----------
Group Total 12,819 11,416 14,818 10,067 27,637 21,483
----------- ----------- ----------- ----------- ----------- -----------
Insurance Products - New Business Premiums
Single Regular Annual Premium Equivalents
2002 £m 2001 £m 2002 £m 2001 £m 2002 £m 2001 £m
======== ======== ======== ======== ======== ========
UK Insurance Operations
Direct distribution
Individual pensions 15 14 11 15 12 16
Corporate pensions 660 469 114 131 180 178
Life 59 71 4 4 10 11
Individual annuities 895 663 - - 90 66
Department of Social Security rebate business 215 185 - - 22 19
----------- ----------- ----------- ----------- ----------- -----------
Total 1,844 1,402 129 150 314 290
----------- ----------- ----------- ----------- ----------- -----------
Intermediated distribution
Individual pensions 85 219 34 68 42 90
Corporate pensions 77 82 14 19 22 27
Life 2,190 2,297 18 27 237 257
Individual annuities 860 597 - - 86 60
Bulk annuities 710 575 - - 71 57
Department of Social Security rebate business 90 64 - - 9 6
----------- ----------- ----------- ----------- ----------- -----------
Total 4,012 3,834 66 114 467 497
----------- ----------- ----------- ----------- ----------- -----------
Closed Direct Sales Force distribution - 167 - 18 - 35
----------- ----------- ----------- ----------- ----------- -----------
Total UK Insurance Operations 5,856 5,403 195 282 781 822
----------- ----------- ----------- ----------- ----------- -----------
US Operations
Fixed annuities 2,708 1,899 - - 271 190
Equity linked indexed annuities 254 271 - - 25 27
Variable annuities 1,363 768 - - 136 77
Guaranteed Investment Contracts 292 170 - - 29 17
GIC - Medium Term Notes 1,118 1,504 - - 112 150
Life - - 22 22 22 22
----------- ----------- ----------- ----------- ----------- -----------
Total 5,735 4,612 22 22 595 483
----------- ----------- ----------- ----------- ----------- -----------
Prudential Asia 479 650 465 369 513 434
Prudential Europe 42 58 25 20 29 26
----------- ----------- ----------- ----------- ----------- -----------
Group Total 12,112 10,723 707 693 1,918 1,765
----------- ----------- ----------- ----------- ----------- -----------
Annual Premium Equivalents are calculated as the aggregate of regular new
business premiums and one tenth of single new business premiums.
Investment Products - Funds Under Management (FUM)
Market FUM
FUM Gross and Other 31 December
1 Jan 2002 Inflows Redemptions Acquisitions Movements 2002
£m £m £m £m £m £m
======== ======== ======== ======== ======== ========
UK Operations 10,328 1,157 (899) - (1,997) 8,589
Prudential Asia 3,296 13,661 (12,558) 1,110 (277) 5,232
----------- ----------- ----------- ----------- ----------- -----------
Group Total 13,624 14,818 (13,457) 1,110 (2,274) 13,821
----------- ----------- ----------- ----------- ----------- -----------
ACHIEVED PROFITS BASIS RESULTS
==============================
Operating Profit before Amortisation of Goodwill and Exceptional Items
Results Analysis by Business Area 2002 £m 2001 £m
=============================== ======== ========
UK Operations
Insurance Operations:
New business 222 243
Business in 304 377
force
----------- -----------
Long-term business 526 620
M&G 71 75
Egg (20) (88)
----------- -----------
Total 577 607
----------- -----------
US Operations
New business 234 167
Business in force 17 136
----------- -----------
Long-term business 251 303
Broker dealer and fund 14 16
management
----------- -----------
Total 265 319
----------- -----------
Prudential Asia
New business 307 255
Business in force 209 160
----------- -----------
Long-term business 516 415
Development expenses (26) (19)
----------- -----------
Total 490 396
----------- -----------
Prudential Europe
New business 11 8
Business in force 3 0
----------- -----------
Long-term business 14 8
Development expenses (8) (29)
----------- -----------
Total 6 (21)
----------- -----------
Other Income and Expenditure
Investment return and other 3 51
income
Interest payable on core structural borrowings of shareholder financed (130) (118)
operations
Corporate expenditure:
Group Head Office (36) (39)
Asia Regional Head (26) (24)
Office
----------- -----------
Total (189) (130)
----------- -----------
1,149 1,171
UK re-engineering costs (16) (57)
----------- -----------
Operating profit from continuing operations before amortisation
of goodwill and exceptional items 1,133 1,114
----------- -----------
Analysed as profits (losses)
from:
New business 774 673
Business in force 533 673
----------- -----------
Long-term business 1,307 1,346
Prudential Asia and Prudential Europe development (34) (48)
expenses
Other operating results (124) (127)
UK re-engineering costs (16) (57)
----------- -----------
Total 1,133 1,114
----------- -----------
ACHIEVED PROFITS BASIS RESULTS
==============================
Summarised Consolidated Balance Sheet 2002 £m 2001 £m
====================================== ======== ========
Total assets less liabilities, excluding insurance funds 126,325 133,365
Less insurance funds:
Technical provisions (net of reinsurers' share) 114,994 116,213
Fund for future appropriations 7,663 13,202
Less shareholders' accrued interest in the long-term business (3,528) (4,200)
----------- -----------
119,129 125,215
----------- -----------
Achieved profits basis net assets 7,196 8,150
----------- -----------
Share capital 100 100
Share premium 550 533
Statutory basis retained profit 3,018 3,317
Additional achieved profits basis retained profit 3,528 4,200
----------- -----------
Achieved profits basis capital and reserves 7,196 8,150
----------- -----------
Movement in Shareholders' Capital and Reserves 2002 £m 2001 £m
=========================================== ======== ========
Loss for the year after minority interests (145) (217)
Exchange movements (330) 53
New share capital subscribed 40 42
Dividends (519) (504)
----------- -----------
Net decrease in shareholders' capital and reserves (954) (626)
Shareholders' capital and reserves at beginning of year 8,150 8,776
----------- -----------
Shareholders' capital and reserves at end of year 7,196 8,150
----------- -----------
Comprising
===========
UK Operations:
Long-term business 2,918 3,656
M&G 382 329
Egg 369 380
----------- -----------
3,669 4,365
US Operations 2,732 2,817
Prudential Asia 1,407 1,089
Prudential Europe 108 90
Other operations (including central goodwill and (720) (211)
borrowings)
----------- -----------
7,196 8,150
----------- -----------
ACHIEVED PROFITS BASIS RESULTS
==============================
Basis of Preparation of Results
The achieved profits basis results have been prepared in accordance with the
guidance issued by the Association of British Insurers in December 2001
'Supplementary Reporting for long-term insurance business (the achieved profits
method)'.
Under this guidance, the basis for setting long-term expected rates of return on
investments and risk discount rates are, for most countries, set by reference to
period end rates of return on fixed income securities. This 'active' basis of
assumption setting has been applied in preparing the results of the Group's UK,
US, and European long-term business operations. For the Group's Asian
operations, the active basis is appropriate for business written in Japan and
Korea and for US dollar denominated business written in Hong Kong.
An exception to this general rule is that for countries where long-term fixed
income markets are underdeveloped, investment return assumptions and risk
discount rates are based on an assessment of long-term economic conditions.
Except for the countries listed above, this basis is appropriate for the Group's
Asian operations.
The key economic assumptions are set out below:
2002 2001
UK Operations ===== =====
Pre-tax expected long-term nominal rate of investment
return:
UK equities 7.0% 7.5%
Overseas equities 7.0% to 7.8% 7.5% to 7.8%
Property 6.75% 7.5%
Gilts 4.5% 5.0%
Corporate bonds 5.5% 6.0%
PAC with-profits fund assets
(applying the rates listed above to the investments held by the fund) 6.6% 7.1%
Expected long-term rate of inflation 2.5% 2.6%
Post-tax expected long-term nominal rate of return:
Pension business (where no tax applies) 6.6% 7.1%
Life business 5.7% 6.3%
Risk margin included within the risk discount rate 2.6% 2.6%
Risk discount rate 7.1% 7.7%
Prudential Europe
Risk discount rate 7.1% 7.7%
US Operations (Jackson National Life)
Expected long-term spread between earned rate and rate credited to policyholders 1.75% 1.75%
US 10 year treasury bond rate at 31 December 2002 (2001) 3.9% 5.1%
Risk margin included within the risk discount rate 3.1% 2.6%
Risk discount rate 7.0% 7.7%
Prudential Asia
Weighted pre-tax expected long-term nominal rate of investment 7.1% 7.3%
return
Weighted expected long-term rate of inflation 3.0% 3.0%
Weighted risk discount rate 9.6% 10.1%
The Prudential Asia weighted economic assumptions have been determined by
weighting each country's assumptions by reference to the Achieved Profits basis
operating results for new business written in the relevant year.
ACHIEVED PROFITS BASIS RESULTS
==============================
Notes on the Unaudited Achieved Profits Basis Results
(1) The achieved profits basis results are unaudited. The results for 2001
have been derived from the achieved profits basis supplement to the
Company's statutory accounts for that year. The supplement included an
unqualified review report from the auditors.
(2) Under the achieved profits basis, the operating profit from new business
represents the profitability of new long-term insurance business written in
the year and the operating profit from business in force represents the
profitability of business in force at the start of the year with, for Asia,
the statutory basis results of non-insurance operations. These results are
combined with the statutory basis results of the Group's other operations
including banking, unit trusts, mutual funds and other non-insurance
investment management business. In the directors' opinion, the achieved
profits basis provides a more realistic reflection of the performance
of the Group's long-term business operations than results under the
statutory basis.
(3) The proportion of surplus allocated to shareholders from the UK
with-profits business has been based on the present level of 10%. Future
bonus rates have been set at levels which would fully utilise the assets of
the with-profits fund over the lifetime of the business in force.
(4) The Company completed the transfer of its UK general business operations to
Winterthur and the Churchill Group, its subsidiary, on 4 January 2002 for a
consideration of £353m. After allowing for the costs of sale and other
related items, the profit on sale was £355m before tax.
(5) The final dividend of 17.1p per share will be paid on 28 May 2003 to
shareholders on the register at the close of business on 21 March 2003. A
scrip dividend alternative will be offered to shareholders. The total
dividend for the year, including the interim dividend of 8.9p per share
paid in 2002, amounts to 26.0p per share and the total cost of the dividend
declared in respect of 2002 is £519m.
STATUTORY BASIS RESULTS
=======================
Summarised Consolidated Profit and Loss Account 2002 £m 2001 £m
============================================= ======== ========
Gross premiums written:
Long-term business (note 16,669 15,196
2)
Investment products 14,818 10,067
General business* 329 390
----------- -----------
31,816 25,653
----------- -----------
Operating profit before amortisation of goodwill and exceptional
items:
Continuing operations 432 550
Discontinued UK general business operations - 72
----------- -----------
432 622
Amortisation of goodwill (98) (95)
Short-term fluctuations in investment (205) (480)
returns
Merger break fee (net of related expenses) - 338
Profit on sale of UK general business operations 355 -
----------- -----------
Profit on ordinary activities before tax (including actual investment 484 385
returns)
Tax (note 3) (44) (21)
----------- -----------
Profit for the year before minority 440 364
interests
Minority interests 9 25
----------- -----------
Profit for the year after minority interests 449 389
Dividends (519) (504)
----------- -----------
Retained loss for the year (70) (115)
----------- -----------
Basic Earnings Per Share
=======================
Based on operating profit after tax and related minority interests
before
amortisation of goodwill and exceptional items of £314m 15.8 p 23.3 p
(£460m)
Adjustment for amortisation of goodwill (4.9)p (4.8)p
Adjustment from post-tax long-term investment returns to post-tax
actual
investment returns (after related minority (5.5)p (15.6)p
interests)
Adjustment for post-tax merger break fee (net of related expenses) - 16.8 p
Adjustment for post-tax profit on sale of UK general business 17.2 p -
operations
----------- -----------
Based on profit for the year after minority interests of £449m 22.6 p 19.7 p
(£389m)
----------- -----------
Average number of shares 1,988m 1,978m
----------- -----------
Dividend Per Share 26.0p 25.4p
----------- -----------
* Following the sale of the UK general business operations to Winterthur, all
general business gross premiums written in 2002 were reinsured to Winterthur.
STATUTORY BASIS RESULTS
=======================
Operating Profit before Amortisation of Goodwill and Exceptional Items
Results Analysis by Business Area 2002 £m 2001 £m
=============================== ======== ========
UK Operations
UK Insurance Operations 368 435
M&G 71 75
Egg (20) (88)
----------- -----------
Total 419 422
----------- -----------
US Operations
Jackson National Life 139 282
Broker dealer and fund management 14 16
----------- -----------
Total 153 298
----------- -----------
Prudential Asia
Long-term business and investment products 88 44
Development expenses (26) (19)
----------- -----------
Total 62 25
----------- -----------
Prudential Europe
Long-term business 9 5
Development expenses (8) (29)
----------- -----------
Total 1 (24)
----------- -----------
Other Income and Expenditure
Investment return and other income 3 51
Interest payable on core structural borrowings of shareholder financed (130) (118)
operations
Corporate expenditure:
Group Head Office (36) (39)
Asia Regional Head Office (26) (24)
----------- -----------
Total (189) (130)
----------- -----------
446 591
UK re-engineering costs (14) (41)
----------- -----------
Operating profit from continuing operations before amortisation of
goodwill and exceptional items 432 550
----------- -----------
STATUTORY BASIS RESULTS
=======================
Summarised Consolidated Balance Sheet 2002 £m 2001 £m
==================================== ======== ========
Goodwill 1,604 1,687
Investments in respect of non-linked business:
Equities 30,007 40,948
Fixed income securities 63,200 59,181
Properties 10,766 10,487
Deposits with credit 5,840 4,176
institutions
Other investments (principally mortgages and 5,325 5,110
loans)
----------- -----------
115,138 119,902
Assets held to cover linked liabilities 15,763 17,453
Banking business assets 11,502 8,972
Deferred acquisition costs 3,219 3,204
Minority interests (108) (118)
Fund for future appropriations (7,663) (13,202)
Insurance technical provisions (net of reinsurers'
share):
UK Operations (84,730) (85,583)
US Operations (24,074) (25,055)
Prudential Asia (5,541) (4,941)
Prudential Europe (649) (634)
----------- -----------
(114,994) (116,213)
Deferred tax (696) (2,005)
Debenture loans (note 4) (2,293) (2,244)
Other borrowings (note 4) (2,080) (2,595)
Banking business liabilities (note 5) (10,784) (8,333)
Obligations of Jackson National Life under funding and stocklending (5,098) (3,703)
arrangements
Dividend payable (341) (332)
Other net assets 499 1,477
----------- -----------
Total net assets 3,668 3,950
----------- -----------
Shareholders' Capital and Reserves
================================
Share capital 100 100
Share premium 550 533
Statutory basis retained profit 3,018 3,317
----------- -----------
Shareholders' capital and reserves 3,668 3,950
----------- -----------
Movement in Shareholders' Capital and Reserves
===========================================
Profit for the year after minority 449 389
interests
Exchange movements (252) 52
New share capital subscribed 40 42
Dividends (519) (504)
----------- -----------
Net decrease in shareholders' capital and (282) (21)
reserves
Shareholders' capital and reserves at beginning of year 3,950 3,971
----------- -----------
Shareholders' capital and reserves at end of 3,668 3,950
year
----------- -----------
STATUTORY BASIS RESULTS
========================================
FRS1 Consolidated Cash Flow Statement
2002 £m 2001 £m
======== ========
Operations
Net cash inflow from operating activities# 31 95
----------- -----------
Servicing of finance
Interest paid (180) (147)
----------- -----------
Tax
Tax received (paid) 299 (44)
----------- -----------
Acquisitions, disposals and similar items
Net cash inflow from:
Acquisition of subsidiary undertakings (12) (182)
Merger break fee received - 338
Disposal of UK general business operations 353 -
----------- -----------
Net cash inflow from acquisitions,
disposals and similar items 341 156
----------- -----------
Equity dividends
Equity dividends paid (509) (494)
----------- -----------
Net cash outflow before financing (18) (434)
----------- -----------
Financing
Issue of borrowings 86 640
Movement on credit facility utilised by
investment subsidiaries managed by
PPM America* (165) 404
Issues of ordinary share capital 40 42
----------- -----------
Net cash (outflow) inflow from financing (39) 1,086
----------- -----------
Net cash (outflow) inflow for the year (57) 652
----------- -----------
The net cash (outflow) inflow was
(financed) invested as follows:
Net (sales) purchases of portfolio
investments (83) 1,777
Increase (decrease) in cash and
short-term deposits, net of overdrafts 26 (1,125)
----------- -----------
(57) 652
----------- -----------
In accordance with FRS 1, this statement shows only the cash flows of general
business and shareholders' funds.
* The holders of the credit facility utilised by these investment subsidiaries
do not have recourse beyond the assets of these subsidiaries.
# The reconciliation from statutory basis operating profit to net cash inflow
from operating activities is set out below:
2002 £m 2001 £m
======== ========
Operating profit before amortisation of goodwill 432 622
Add back interest charged to operating profit ^ 190 162
Adjustments for non-cash items:
Tax on long-term business profits (174) (235)
Amounts retained by and invested in (553) (534)
long-term business operations
Increase in net banking assets 72 36
Other items 64 44
----------- -----------
Net cash inflow from operating activities
(as shown above) 31 95
----------- -----------
^ This adjustment comprises interest payable on core structural borrowings,
commercial paper and other borrowings, non-recourse borrowings of investment
subsidiaries managed by PPM America and structural borrowings of Egg. Interest
payable on long-term business borrowings and other trading activities has been
excluded from this adjustment.
STATUTORY BASIS RESULTS
========================================
Notes on the Unaudited Statutory Basis Results
(1) The statutory basis results for 2002 are unaudited. The results for
2002 have been prepared using the same accounting policies as were
used in the 2001 statutory accounts. The results for 2001 have been
derived from those accounts. The auditors have reported on the 2001
statutory accounts and the accounts have been delivered to the
Registrar of Companies. The auditors report was not qualified and
did not contain a statement under section 237 (2) or (3) of the
Companies Act 1985.
(2) An analysis of long-term business gross premiums written is set out
below:
2002 £m 2001 £m
======== ========
UK Insurance Operations 8,435 8,198
Jackson National Life 6,098 5,008
Prudential Asia 1,896 1,793
Prudential Europe 240 197
----------- -----------
Group Total 16,669 15,196
----------- -----------
(3) The statutory tax charge of £44m (£21m) comprises £71m (£63m) UK tax
and £27m credit (£42m credit) for overseas tax.
(4) An analysis of borrowings is set out below:
2002 £m 2001 £m
======== ========
Net core structural borrowings of shareholder financed 2,226 2,133
operations
Add back holding company cash and short-term investments 226 19
----------- -----------
Core structural borrowings of shareholder financed operations* 2,452 2,152
Commercial paper and other borrowings to support short-term
fixed
income securities reinvestment programme 1,241 1,330
Non-recourse borrowings of investment subsidiaries managed by PPM America 365 530
Egg debenture loans 202 124
Scottish Amicable Finance debenture loan# 100 100
Obligations of Jackson National Life under sale and repurchase 0 577
agreements
Other borrowings of shareholder financed operations 13 26
----------- -----------
4,373 4,839
----------- -----------
This total is recorded in the statutory basis summarised consolidated balance
sheet as:
Debenture loans 2,293 2,244
Other borrowings 2,080 2,595
----------- -----------
4,373 4,839
----------- -----------
* Represented by:
Debenture loans and other long-term borrowings 2,032 2,065
Short-term commercial paper borrowings 420 87
----------- -----------
2,452 2,152
----------- -----------
# Scottish Amicable Finance is a subsidiary of the Scottish Amicable
Insurance Fund of The Prudential Assurance Company Limited long-term
business with-profits fund.
(5) An analysis of banking business liabilities is set out below:
2002 £m 2001 £m
======== ========
Egg 9,882 7,465
US Operations 902 868
----------- -----------
10,784 8,333
----------- -----------
Comprising:
Banking deposit 8,666 6,520
balances
Debt securities issued and 2,118 1,813
other liabilities
----------- -----------
10,784 8,333
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This information is provided by RNS
The company news service from the London Stock Exchange