08 May 2014

Prudential plc First Quarter 2014 Interim Management Statement

• Strong start to 2014 with 29 per cent growth in Group new business profit¹
• Asia new business profit increased 20 per cent on constant exchange rate basis
• US new business profit up 67 per cent on constant exchange rate basis, with profitable sales growth
• UK new business profit 90 per cent higher, reflecting strong contribution from bulk annuities
• M&G net inflows of £1.4 billion with third party FUM up 8 per cent to £129 billion

Tidjane Thiam, Group Chief Executive, said:

"Our businesses continue to perform well and have made a strong start to 2014, with Group new business profit up 29 per cent in the first quarter.

"In Asia, new business profit increased by 20 per cent on constant exchange rates, demonstrating the continued strength of our diversified platform and underpinned by the positive long-term fundamentals in the region.

"In the US, we remain focused on managing our business for value, writing new business at highly attractive economics. Jackson's new business profit was up 67 per cent on constant exchange rates, reflecting the benefit of product and pricing actions, higher sales volumes and the positive impact of higher long-term yields year-on-year.

"In the UK, new business profit increased by 90 per cent during the first quarter of 2014, driven by three bulk annuity transactions, which more than offset a lower contribution from retail business, where overall sales levels continue to be impacted primarily by retirement deferrals. Prudential is committed to working closely with the UK Government and regulators following the announcements made in the first quarter, to ensure that the new savings and investment system that emerges results in appropriate outcomes for British savers, who have been impacted negatively by a long period of exceptionally low interest rates.

"Our asset management businesses have made a positive start to the year, with M&G generating net inflows of £1.4 billion in the first quarter and increasing external funds under management to £129 billion, 8 per cent higher year on year. Eastspring, our Asian asset manager, attracted net inflows of £1.1 billion, an increase of 21 per cent on constant exchange rates, including a large institutional mandate to manage Japanese equities.

"We are pleased to have completed the acquisition of Express Life in Ghana on 27 March 2014, following approval from the Ghanaian National Insurance Commission. We are positive about the long term opportunities created by this acquisition, which marks the entry of Prudential into the nascent African life insurance industry.

"We remain focused on the disciplined execution of our strategy and on capturing the profitable growth opportunities available to us across the Group, particularly in Asia where we continue to grow our multi-channel distribution and build on our strong market positions."

BUSINESS UNIT REVIEW

The actual flows that we collect from our customers in Asia and the US are received in local currency. Recent months have seen significant fluctuations in the value of a number of currencies in our key markets. We believe that in such periods, the best way to assess the performance of our businesses is to look at what they have achieved on a local currency basis. Therefore, in this section, where we comment on the performance of our businesses, we are focusing on the performance of our Asian and US business units in local currency (presented in this release by reference to percentage growth expressed at constant exchange rates) unless otherwise stated, as the translation in UK sterling of our country results will reflect currency effects more than any relevant operational trends.

ASIA
Our Asian life business has made a good start to 2014. New business profit grew by 20 per cent (AER: 3 per cent) to £243 million in the first quarter, driven by higher volumes and the positive effect of higher interest rates, reflecting a more supportive economic environment, particularly in Hong Kong. APE sales increased by 17 per cent (2 per cent on an actual exchange rate (AER) basis) to £507 million. Regular premiums, which accounted for 91 per cent of our first quarter APE, continue to form the bedrock of our growth in Asia, delivering 19 per cent growth (AER: 4 per cent).

We were pleased to announce, during the first quarter, the extension and expansion of our strategic bancassurance partnership with Standard Chartered Bank. The new 15-year exclusive distribution agreement covers 11 Asian markets, broadening and deepening a relationship that was first established in 1998 and has become the most successful and enduring pan-regional bancassurance partnership in Asia. We are confident that the strength and skills of this partnership will continue to provide valuable products and services to millions of consumers across Asia, generating significant value for our shareholders in doing so.

In our 'sweet spot'² markets, new business profit grew by 22 per cent (AER: 4 per cent), outstripping APE growth of 18 per cent (AER: 3 per cent). Both our agency and bancassurance channels saw strong momentum during the quarter with double digit growth in new business profit, led by agency at 25 per cent.

Hong Kong delivered excellent NBP growth of 73 per cent, driven by a 27 per cent increase in APE to £128 million and the positive effect of higher interest rates. APE growth has been led by an increase in agency manpower relative to the first quarter of 2013, and productivity improvements that have seen higher average case sizes, partly as a result of a larger proportion of new business coming from mainland Chinese customers.

In Singapore, we continue to benefit from our well established multi-channel distribution model with both agency and bank partnerships delivering double digit sales growth. Overall, APE grew by 18 per cent to £87 million, with new business profit up 19 per cent consistent with the increase in volumes.

Our market leading life business in Indonesia had a slow start to 2014 with first quarter APE of £86 million, and new business profit, both broadly in line with 2013. January and February sales volumes were adversely impacted by exceptional and prolonged flooding in Jakarta together with the disruption associated with the eruption of Mount Kelud in East Java. However, agency activity normalised in March with APE growth from this channel of 19 per cent.

Our refocused business in Malaysia delivered improvements in both agency activity and productivity to generate APE of £43 million, an encouraging increase of 8 per cent over the prior year. Our Takaful business, in particular, had a strong quarter, with double digit growth in new business profit and APE, reflecting the beneficial impact of a higher number of Bumi agent recruits.

In our other 'sweet spot' markets, new business profit grew by 47 per cent combined, mainly reflecting higher sales volumes. The success of our distribution deal with Thanachart Bank is transforming the scale of our business in Thailand with overall APE growing by 2.7 times to £25 million, of which distribution through Thanachart Bank contributed £13 million. So far, the impact of the country's political situation on our day to day business activity has been limited. Vietnam APE was up 22 per cent in the first quarter driven by increases in agency productivity. In the Philippines total APE declined 8 per cent, although this reflects positive changes in channel mix as we have de-emphasised some lower margin bank distribution and our increased focus on agency has seen APE from this channel grow 19 per cent and our highest ever level of new agent recruits in a single month in March.

Among our other markets, our joint venture with CITIC in China continues to make good progress and APE was up 46 per cent. In India, our joint venture with ICICI is performing well in a challenging market, although APE declined 13 per cent as the industry continues to adjust to regulatory changes. Our niche operations in Korea and Taiwan remain focused on selective participation, with combined APE growth of 11 per cent.

Our Asian asset management business, Eastspring Investments, saw net third party inflows³ for the first quarter of £1.1 billion, up 21 per cent (AER: 5 per cent). These net inflows were driven by a significant new institutional mandate for Japanese equities, and inflows from several new Fixed Maturity Plans (bond funds) launched by our joint venture in India. Third party funds under management at 31 March 2014 were £19.2 billion, up 10 per cent on prior year.

The scale, resilience and diversity of our business platform in Asia combined with the powerful, long-term structural trends of a rapidly growing and wealthy middle class population with significant savings and protection needs continues to underpin our long-term profitable growth prospects in the region.

US
Jackson's post-tax new business profit was up 67 per cent (AER: 56 per cent) to £195 million in the first quarter of 2014. Our business experienced very favourable conditions with the beneficial impact of product initiatives implemented in 2013 and higher interest rates enabling us to write 2014 business at overall new business margins close to post crisis highs.

Jackson continues to focus on the delivery of IFRS operating earnings and cash, led by increased fee income that results from growth in separate account assets under management. Total annuity flows of £2.3 billion in the first quarter of 2014 were 29 per cent higher than the fourth quarter of 2013 (AER: 27 per cent). At the end of the period, Jackson's statutory separate account assets were £68.4 billion, compared to £65.3 billion at 31 December 2013. This is up 29 per cent (AER: 18 per cent) from £52.9 billion at 31 March 2013.

Jackson achieved retail APE of £406 million, representing an increase of 26 per cent (AER: 18 per cent). These sales levels were achieved while continuing to write new business at aggregate internal rates of return in excess of 20 per cent. Including institutional sales, total APE was up 29 per cent (AER: 21 per cent) to £432 million.

Within variable annuities (VA), Elite Access volumes were 36 per cent higher at £0.7 billion, while sales of VA excluding Elite Access increased by 41 per cent to £3.2 billion. The underlying economics of our variable annuity business continue to be very attractive with margins on guaranteed variable annuities in the first quarter close to all-time highs. At the same time, the success of Elite Access, our VA without guarantees, continues to improve the diversification of our product mix, with 30 per cent of our first quarter VA sales not featuring living benefit guarantees (2013: 28 per cent). In line with its pro-active cycle management approach, Jackson continues to actively manage the sales volumes of VA with living benefits to maintain an appropriate balance of its revenue streams and to match the Group's annual risk appetite. The timing of any necessary actions and Jackson's position relative to competitors may create short term volume fluctuations in discrete periods.

Fixed annuity APE of £12 million remained roughly flat compared to 2013, while fixed index annuity APE of £8 million decreased 75 per cent, primarily as a result of product changes implemented in late 2013.

Curian Capital, the specialised asset management company of Jackson that provides innovative fee-based separately managed accounts, had FUM of £6.8 billion at the end of March 2014 compared with £5.8 billion at the same point in 2013.

Jackson's strategy remains unchanged. We continue to price new business on a conservative basis targeting value over volume, and our financial market hedging remains focused on optimising the economics of our exposures over time while maintaining a strong balance sheet.

UK
Our UK business continues to focus on its core strengths of with-profits and retirement solutions. Our business can rely on its strong brand and its vast experience in providing income in retirement to help its consumers transfer their accumulated wealth into dependable retirement income. In the first quarter of 2014, Prudential UK delivered post-tax new business profit of £91 million, up 90 per cent on the first quarter of 2013, primarily as a result of a higher level of bulk annuity activity.

Total APE of £237 million increased 28 per cent, principally due to bulk annuity APE of £73 million (2013: £nil). Retail APE of £164 million was 11 per cent lower than the first quarter of 2013, with reduced sales of individual annuities and corporate pensions partly offset by higher sales of onshore and offshore bonds. Individual annuities APE of £36 million was 35 per cent lower, reflecting the overall downturn in the market which started to emerge through 2013 as policyholders have increasingly chosen to defer retirement. APE from internal vestings was 25 per cent lower at £24 million, and external annuities APE was down 48 per cent to £12 million.

In March 2014, the UK Government announced significant changes to pensions and investments, that from 2015 allow all individuals aged 55 and over to access their entire pension fund as cash, thereby removing the effective requirement to purchase a pension annuity.

The implications of these changes are still uncertain. Our approach is to provide market-based solutions that give consumers choice and flexibility in the ways they save and subsequently draw down income in retirement. We intend to continue to work closely with the Government, regulators and other industry participants to ensure that the new pensions system that emerges in April 2015 produces appropriate outcomes for our customers. Alongside other market participants, we anticipate a disruption to sales, which could be significant, in the individual annuities market as the industry works with all stakeholders to define the new pensions system.

APE sales of onshore bonds were up 9 per cent up to £49 million, including with-profits bonds APE of £45 million which increased by 10 per cent. This represents a robust performance against the first quarter of 2013, which itself included a significant pre-RDR⁴ pipeline. Demand for our non-guaranteed with-profits bond remains strong, attracting customers who are prepared to accept some risk to their capital but still want to benefit from the smoothing offered by a with-profits product.

Corporate pensions APE of £40 million was 25 per cent lower, mainly due to a fall in with-profits sales which have been impacted by changes to government sector pension schemes and constrained economic conditions. Prudential UK remains the largest provider of Additional Voluntary Contribution plans within the public sector where we provide schemes for 70 of the 99 public sector authorities in the UK.

APE from other retail products, principally individual pensions, PruProtect, PruHealth and offshore bonds, increased by 22 per cent to £39 million, with offshore bond sales benefiting from the new business pipeline in advance of the implementation of the RDR regulation in the Channel Islands on 1st January 2014.

In the wholesale market we have continued our selective approach to bulk and back-book buyouts. In line with this approach, we secured three new deals in the first quarter of 2014, generating APE of £73 million and post-tax new business profit of £50 million. We remain well positioned to benefit from our considerable longevity experience, operational scale and solid investment track record, which together represent expertise and capabilities that are increasingly in demand in this market.

M&G
M&G delivered over £1.4 billion of net inflows in the first quarter of 2014.

In Retail, the European business remains a significant driver of growth, with net inflows of almost £1.6 billion. The continued high inflows from European investors have helped offset outflows in the UK highlighting the benefits of M&G's diversified business model. In aggregate, the Retail business delivered £1.3 billion of net sales with funds under management ('FUM') increasing by 12 per cent year-on-year to £69.0 billion as at 31 March 2014. Of this, FUM from European clients total £25.2 billion, up from £18.7 billion at 31 March 2013 and now accounting for 37 per cent of total Retail FUM (31 March 2013: 30 per cent).

M&G's Institutional business saw small net inflows in the quarter as the expected loss of some short-term segregated mandates offset the positive impact of new business. The Institutional business retains a strong pipeline of new mandates which have been won but not yet funded. Institutional external FUM increased to £59.7 billion, up from £57.7 billion at 31 March 2013.

The combination of net inflows and favourable market movements has increased M&G's total FUM to a record level of £248.3 billion, up 4 per cent on the first quarter of 2013. External funds now account for 52 per cent of the total, standing at a new high of £128.7 billion and up 8 per cent year-on-year.

BALANCE SHEET
Our balance sheet remains resilient and conservatively positioned. As at 31 March 2014, our IGD surplus was £4.1 billion, after deducting the 2013 final dividend of £0.6 billion and funding the upfront payments⁵ for the new 15 year exclusive distribution agreement with Standard Chartered Bank. The IGD surplus is equivalent to a cover of 2.4 times and compares to £4.0 billion at 31 March 2013 (after deducting the 2012 final dividend of £0.5 billion).

OUTLOOK
The Group has made a good start to 2014 with strong performance across all our businesses in the first quarter.

We continue to believe that global economic prospects are on balance improving, despite ongoing and emerging geopolitical uncertainties in a number of regions and periodic short-term volatility in investment markets. A more favourable economic growth outlook is positive for the countries in which we operate, our customers and ultimately for Prudential's shareholders. Against this backdrop, the heart of our strategy remains the provision of products and services that meet the specific needs of our customers – in Asia, the increasing demand for protection products that provide security and healthcare to the emerging middle class; in the US, the financial needs of the retiring baby-boomers; and in the UK the provision of savings and retirement income to an ageing population.

We execute this strategy with discipline. We are focused on allocating capital to the highest risk adjusted return opportunities across the Group, with clear prioritisation of earnings and cash over volumes, to generate sustainable long-term shareholder value. We do this while maintaining a strong balance sheet, which is absolutely key to meeting our commitments to our 23 million life customers around the world.

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

Q1 2014 Business Unit financial highlights

ENDS

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