16 Mar 2006

Prudential plc 2005 Full Year Results

Double-digit growth in all key performance measures

  • Total EEV operating profit from continuing operations of £1,712 million, up 33%
  • New business APE of £2,146 million, up 15%; PVNBP of £16.8 billion, up 11%
  • New business profit of £867 million, up 15%, with Group margin of 41%
  • Total statutory profit from continuing operations of £957 million, up 36%
  • EEV shareholders’ funds up 20% to £10.3 billion
  • Return on embedded value of 15.7% (2004: 13.4%*)
  • Total net inflows for funds businesses of £5.2 billion, with external funds under management of £46 billion, up 23%
  • Full year dividend of 16.32 pence per share (2004: 15.84 pence per share)

All figures compared to 2004 at constant exchange rates unless stated; * at reported exchange rates

Commenting, Mark Tucker, Group Chief Executive said:

“Prudential has had a successful year across all its businesses, and we have delivered double-digit growth in all our key performance measures, with total statutory profit from continuing operations up 36% and total EEV profit up 33%. These results demonstrate the progress we are making in developing compelling positions in the world’s leading retail financial services markets. We have ambitious growth plans in place and I am confident in the outlook for the Group’s future prospects.

“I see tremendous scope to deliver increasing value for shareholders from each individual business operation; and as a Group, we derive both financial advantage and resilience from the diversity of our portfolio of businesses, and the opportunities for collaboration between them.

“In the UK, we have three strong retail franchises in Prudential, Egg and M&G.

“Our UK Insurance business continued to develop its shareholder backed business successfully and increased APE sales by 10% in the year to £900 million, meeting its 14% target for internal rate of return on new business two years early. Egg was successful in testing market conditions, improving its net interest margin against a background of falling base rates and also lowering its cost income ratio. M&G had an excellent year with record gross and net inflows, strong profit growth and investment performance.

“In the US, Jackson National Life is a significant cash generative business with competitive advantage in the key growth sectors in the market. JNL’s strength in variable annuities, its ability to bring products to market rapidly and its positioning in advice-based distribution channels means it is very well placed to take advantage of the significant retirement savings flows expected from the “baby boomer” generation over the coming years.

“We have an unrivalled opportunity in the high growth and high profit markets of Asia. Whilst continuing to focus on our programme of rapid expansion and profit growth, we are also expecting the region to become cash positive in 2006, in line with our previous predictions. We are maintaining momentum in the expansion of our distribution capability. Our proprietary agent distribution force across the region reached 170,000 in 2005 with particularly rapid expansion in agent numbers in India and China.

“Our asset management businesses are providing very good cash flow generation and have strong growth prospects, with the UK and Asia attracting increasing volumes of third party funds. These businesses, together with PPMA, our US asset management business, continued to support their own sales growth and add significant value to the Group’s insurance operations through their excellent investment performance.

“We will grow by taking full advantage of our excellent positions in the world's leading retail financial services markets, continuing to build momentum across the Group and driving profitable growth and value for our shareholders."

Group Chief Executive Review

2005 was a successful year for Prudential.

The Group has continued to expand its insurance business strongly and our asset management businesses have also had an excellent year.

Total group operating profit before tax, on a European Embedded Value (“EEV”) basis, was £1,712 million an increase of 33%. Statutory IFRS operating profit before tax was up 36% at £957 million.

The continuing momentum of the Group can be seen in the growth of insurance premium income in 2005 to £13.8 billion (2004: £12.2 billion) and funds under management of £234 billion at the end of 2005 (2004: £197 billion).

New business sales in our insurance operations increased by 15% to £2,146 million on an APE basis and each of our regional operations achieved double-digit growth. New business profits increased by 15% across the Group to £867 million, and operating profit before tax on the insurance business on an EEV basis increased by 30% to £1,743 million.

In our asset management businesses external funds under management increased to £46 billion up 23%.

A final dividend of 11.02 pence per share has been recommended by the Board bringing the full year dividend to 16.32 pence per share, an increase of 3% from 2004. The full year dividend is covered 1.7 times by post-tax IFRS profit after minority interests. We intend to maintain our current dividend policy, with the level of dividend growth being determined after considering the opportunities to invest in those areas of our business offering attractive growth prospects, our financial flexibility and the development of our statutory profits over the medium to long-term.

Shareholders’ funds, on an EEV basis, grew strongly to £10.3 billion at the end of 2005 (2004: £8.6 billion) and the Group’s return on embedded value was 15.7% (2004: 13.4%) at reported exchange rates.

In May 2005 I set up a team of senior executives with a brief to identify the ambitions and business strategies best suited to maximise sustainable growth in value for the Group’s shareholders over the longer-term.

The key conclusions of the review were that:

  • Demographic trends and the increasing concentration of wealth in the hands of those approaching retirement or already retired presents a major opportunity to establish the Group as a leading provider of ‘financial services for retirement’ by playing to our strengths and areas of competitive advantage.
  • The Group is well positioned in markets that offer highly attractive opportunities for strong organic growth over the next ten years.
  • To exploit these opportunities fully we need to broaden our customer proposition and product range to align them more closely with anticipated retail financial sector profit pools.
  • In addition we must complement our strong and important intermediary links by expanding the proportion of revenue derived from direct customers; and ensure that we build deep lifecycle relationships with our customers.
  • We should also develop the global reach and profile of our excellent asset management businesses.

Consistent with this strategy and to support closer workings between our UK insurance business and Egg we announced the terms of an Offer to acquire the 21.7% of shares in Egg that the Group did not already own.

Each of our businesses has operational autonomy within its market and this is critical to our success, since it is the key to our ability to tailor products and services to meet local market needs. However the review also concluded that there are material synergies that can be achieved through closer working across the Group, consistent with our decentralised approach; and work is underway to identify and capture these, for example by establishing a single global IT infrastructure and support unit with expected cost savings of £20 - £25 million per annum.

Finally, the review concluded we must continue to enhance the effectiveness of our capital management processes, to ensure that investment and capital allocation decisions are focused on those areas of activity that will generate the best returns to shareholders.

Prudential is developing compelling positions in the world’s leading retail financial services markets. I am confident of the outlook for the Group and we aim to deliver significant profitable growth.

UK Insurance and Retail Banking Operations

The Prudential-branded UK Insurance business continued to develop its shareholder backed business successfully and increased APE sales by 10% in the year to £900 million. The internal rate of return on new business written in the year was 14% meeting the target set for 2007 two years early.

We continued in 2005 to increase the scale of our annuity business and at the same time reduce the average duration of the total book.

We have also continued to develop our product range in 2005. In October we entered the lifetime mortgage market, a market that is set to grow rapidly to an estimated £7 billion by 2008. Our innovative product has been designed with the customer, adviser and regulator in mind and initial customer interest has been encouraging. We have also made good progress in unit-linked and off-shore bond sales which grew 31% and 15% respectively in the year.

The A-day proposals offer the opportunity to attract new business as customers increase contributions and consolidate their pension arrangements. We have already launched a new Flexible Retirement Plan and we will undertake a review of our overall individual pensions offering during 2006. In addition, we have established a unit to communicate directly with our existing pension customers.

The UK insurance business has a balanced distribution model with strong positions across all major segments – IFA and multi-tie intermediaries, direct marketing and telesales, Employee Benefit Consultants and a well developed single-tie Partnership channel. We continued to make good progress in diversifying distribution, reaching agreements with a range of providers including Barclays, National Australia Bank, St. James’ Place and with Royal London to provide pension annuities for vesting Scottish Life policies.

In addition, we continued to be successful in gaining access to multi-ties in the year. Prudential is in a strong position to benefit as the IFA market changes over the next 18-24 months and recently achieved a “5 star” IFA service rating for its investment products and “4 star” rating overall, demonstrating strong progress in this important area.

In retail banking, Egg’s UK operations delivered an underlying profit of £60 million (2004: £72 million). Egg was successful in testing market conditions improving its net interest margin against a background of falling base rates and also lowering its cost income ratio. There has been a general deterioration in consumer credit conditions however, Egg’s experience here has been substantially better than the market average.

Following our decision to acquire the minority shareholding in Egg, we have targeted annualised cost savings of £40 million across our UK operations by 2007. During 2006 we will undertake a further review of the cost base in these operations. We also see opportunities for revenue synergies across our UK brands’ five million marketable customers.

Our central focus in the UK is to use the strong franchises that we have to improve returns. We are targeting growth but also managing for value and we will not commit capital if we do not see the individual product returns that we require emerging over a reasonable timeframe.

US Insurance operations

Jackson National Life (JNL), the Group’s US operation, is a significant cash generative business with the market positioning to continue its strong track record of profitable growth in the retirement market.

JNL continued to show strong growth in 2005 increasing new business sales by 13% to £515 million APE with growth in variable annuities of 31%. Both the margin and the internal rate of return on new business moved ahead strongly in the year.

During the year JNL also successfully integrated the Life of Georgia book of business acquired in May, transferring 1.5 million policies on to its low cost flexible platform. We fully expect to beat the 12% return target for the transaction.

JNL’s strength in variable annuities, its ability to bring products to market rapidly and its positioning in advice-based distribution channels means it is very well placed to take advantage of the significant retirement savings flows expected from the “baby boomer” generation over the coming years.

JNL’s priorities are to continue to focus on developing their position in the variable annuity market and to expand the business through bolt-on acquisitions that meet targeted rates of return.

Asia insurance operations

Prudential has an unrivalled exposure and weighting to the high growth and high profit markets of Asia. Prudential Corporation Asia saw new business on an APE basis increase by 23% to £731 million with double-digit rates of growth achieved in Korea, China, India, Singapore and Indonesia.

Profitability on new business and internal rates of return remain high and we will continue to emphasise unit-linked products, which offer higher returns and greater capital efficiency. Unit-linked products accounted for 63% of sales across the region in 2005.

We are maintaining momentum in the expansion of our distribution capability. Agency distribution is the dominant channel throughout the region and 75% of our sales are from this source. Our proprietary agent distribution force across the region reached 170,000 in 2005 with particularly rapid expansion in agent numbers in India and China. We will continue to increase agent numbers in these and other markets as the bedrock on which we build our market share and market leadership positions. We will also maintain a clear focus on improving the productivity of our agent force across the whole region, and this is particularly significant for growth in those countries in which we have been long established.

We see material scope to increase sales volumes through our 40 existing bank distribution relationships and we intend to enter into new partnership agreements. We shall also continue to access direct and broker channels as they develop in individual markets.

As part of our global drive to attain new levels of cost efficiency, in Asia we are developing a ‘regional hub’ basis for sharing back office servicing and call centre facilities to leverage scale advantages beyond the reach of individual business operations. In March 2005 the first regional hub, servicing the Singapore and Malaysian life insurance operations, was launched. We have plans to open an additional hub in China in the second half of 2006, where we already have a regional IT development centre.

I am pleased to report that, whilst continuing our programme of rapid expansion and profitable growth in Asia, we are also expecting the region to become cash positive in 2006, in line with our previous predictions.

Asset Management

Operating profit before tax across our asset management businesses in the UK, US and Asia increased to £195 million up 16%.

M&G in the UK had an excellent year with record gross and net inflows and strong profit growth. In Asia, underlying growth in retail funds under management was 29%.

These businesses, together with PPMA, our asset management business in the US, continued to support their own sales growth and add significant value to the group’s insurance operations through their excellent investment performance.

The priorities in asset management are to continue to target growth in external funds under management by capitalising on a growth in demand for transparent investment products, access to more global products, the continuing rise of open architecture platforms and a rapidly expanding role for cross-border sales off a common platform. We will create value through superior investment performance and to capitalise on international opportunities through greater collaboration.

Balance Sheet and Capital Management

Improving capital efficiency is at the heart of the Group’s commitment to deliver sustainable increases in shareholder value and we will maintain a rigorous approach to capital allocation and deployment.

As of the 16 March, we estimate that the Group’s capital surplus at the end of 2005 on a regulatory basis, as measured by the Financial Conglomerates Directive, was around £825 million little changed from the previous year. In July, we took advantage of good market conditions in the US retail market to raise $300 million of perpetual capital securities, which qualifies as Group regulatory capital. The primary use of the proceeds will be to re-finance a non-qualifying £150 million bond that matures in 2007.

The Group is confident that it has the capital and cash resources to fund its planned organic growth.

In Summary

  • The Group delivered strong results in 2005 across all its businesses
  • We have compelling positions in the world’s leading retail financial services markets and the resources to capitalise on these
  • In the UK, we have three excellent and profitable franchises in Prudential, Egg and M&G on which to build for the future
  • In the US, JNL is a significant cash generative business with the market positioning for profitable growth in the retirement market. It has competitive advantage in the sectors in which it chooses to operate; and the ability to participate in market consolidation through bolt-on acquisitions
  • In Asia we have an unrivalled exposure to opportunities for life insurance sales and profit growth across the region, whilst continuing our programme of rapid expansion and profit growth. We are also expecting the region to become cash positive in 2006
  • Our asset management businesses have significant growth prospects and are providing solid cash flow generation

There is tremendous scope to deliver increasing value for shareholders from each individual business operation, and from the Group as a whole which derives both financial advantage and resilience from the diversity of its portfolio of businesses, and the opportunities for collaboration between them.

ENDS

Enquiries:
Media
Investors/analysts
Jon Bunn 020 7548 3559 James Matthews 020 7548 3561
William Baldwin-Charles 020 7548 3719 Marina Novis 020 7548 3511
Joanne Doyle 020 7548 3708

Notes to Editor

  1. The results in this announcement are prepared on two bases, namely International Financial Reporting Standards ('IFRS') and on the European Embedded Value ('EEV') basis. The IFRS basis results form the basis of the Group's financial statements. In preparing those statements the Company, consistent with other financial institutions with banking businesses, has chosen to adopt the standards IAS32, IAS39 and IFRS4 at 1 January 2005. To assist with comparison of results additional supplementary information on a pro forma basis has been provided that shows the 2004 results as if these standards had been adopted by the Group's insurance operations from 1 January 2004.

    The EEV basis results have been prepared in accordance with the principles issued by the CFO Forum of European Insurance Companies in May 2004 and expanded by the Additional Guidance on EEV disclosures published in October 2005. Where appropriate the EEV basis results include the effects of IFRS.

    Previously, the Group has reported supplementary information on the Achieved Profits basis for its interim and full year financial reporting. The adoption of EEV basis reporting in place of Achieved Profits basis reporting, reflects developments through the CFO Forum to achieve a better level of consistency, an improved embedded value methodology, and one which is applied by the major European Insurance Companies in their financial reporting.

    Period on period percentage increases are stated on a constant exchange rate basis.

  2. There will be a conference call today for wire services at 7.45am (GMT) hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance Director. Dial in telephone number: 0800 358 2182. Passcode: 155439#.
  3. A presentation to analysts will take place at 9.30am (GMT) at Governor’s House, Laurence Pountney Hill, London, EC4R 0HH. An audio cast of the presentation and the presentation slides will be available on the Group’s website, www.prudential.co.uk.
  4. There will be a conference call for investors and analysts at 2.30pm (GMT) hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance Director. Please call from the UK +44 (0)208 609 3355 and from the US +1 866 793 4279. Pin number 487687#. A recording of this call will be available for replay for one week by dialling: +44 (0)208 609 0289 from the UK or +1 866 676 5865 from the US. The conference reference number is 138989.
  5. High resolution photographs are available to the media free of charge at www.newscast.co.uk (+44 (0) 207 608 1000).
  6. An interview with Mark Tucker, Group Chief Executive, (in video/audio/text) will be available on www.cantos.com and www.prudential.co.uk from 7.00am on 16 March 2006.
  7. Annual premium equivalent (APE) sales comprise regular premium sales plus one-tenth of single premium insurance sales.
  8. Present value of new business premiums (PVNBP) are calculated as equalling single premiums plus the present value of expected new business premiums of regular premium business, allowing for lapses and other assumptions made in determining the EEV new business contribution.
  9. The internal rate of return (IRR) is equivalent to the discount rate at which the present value of the post-tax cash flows expected to be earned over the life time of the business written in shareholder-backed life funds is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is the initial capital in excess of the premiums received required to pay acquisition costs and set up the statutory capital requirement. The time value of options and guarantees are included in the calculation.
  10. Total number of Prudential plc shares in issue as at 31st December 2005 was 2,386,784,266.
  11. Financial Calendar 2006:
    Ex-dividend date 22 March 2006
    Record date 24 March 2006
    First quarter New Business Figures 20 April 2006
    Annual General Meeting 18 May 2006
    Payment of 2005 final dividend 26 May 2006
    2006 Interim Results/Second quarter New Business Figures 28 July 2006
    Ex-dividend date 16 August 2006
    Record date 18 August 2006
    Payment of interim dividend 27 October 2006
  12. In addition to the financial statements provided with this press release, additional financial schedules are available on the Group’s website at www.prudential.co.uk

*Prudential plc, a company incorporated and with its principal place of business in the United Kingdom, and its affiliated companies constitute one of the world's leading financial services groups. It provides insurance and financial services directly and through its subsidiaries and affiliates throughout the world. It has been in existence for over 150 years and has £234 billion in assets under management, (as at 31 December 2005). Prudential plc is not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America.

Forward-Looking Statements

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, results, strategy and objectives. Statements containing the words “believes”, “intends”, “expects”, “plans”, “seeks” and “anticipates”, and words of similar meaning, are forward-looking. 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, and the performance of financial markets generally; the policies and actions of regulatory authorities, the impact of competition, inflation, and deflation; experience in particular with regard to mortality and morbidity trends, lapse rates and policy renewal rates; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; and the impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which Prudential and its affiliates operate. This may for example result in changes to assumptions used for determining results of operations or re-estimations of reserves for future policy benefits. As a result, Prudential's actual future financial condition, performance and results may differ materially from the plans, goals, and expectations set forth in Prudential's forward-looking statements. Prudential undertakes no obligation to update the forward-looking statements contained in this statement or any other forward-looking statements it may make.

PRUDENTIAL PLC 2005 RESULTS

Results Summary


2005 2004
European Embedded Value (EEV) Basis Results* £m £m
UK Insurance Operations 426 486
M&G 163 136
Egg 44 61
UK Operations 633 683
US Operations 755 368
Asian Operations 568 464
Other Income and Expenditure (244) (241)
Operating profit from continuing operations based on longer-term investment returns 1,712 1,274
Goodwill impairment charge (120) -
Short-term fluctuations in investment returns 1,001 570
Shareholders' share of actuarial and other gains and losses of defined benefit pension schemes (47) (12)
Effect of changes in economic assumptions and time value of cost of options and guarantees (302) (48)
Profit from continuing operations before tax 2,244 1,784
Operating earnings per share from continuing operations after related tax and minority interests* 56.6p 43.2p
Basic earnings per share 66.9p 53.7p
Shareholders' funds, excluding minority interests £10.3bn £8.6bn


International Financial Reporting Standard (IFRS) Basis Results**

Statutory IFRS Basis Results 2005 2004
Profit after tax attributable to equity holders of the Company £748m £517m
Basic earnings per share 31.6p 24.4p
Shareholders' funds, excluding minority interests £5.2bn £4.5bn


Supplementary IFRS basis information Based on statutory IFRS basis results 2005 Based on pro forma IFRS results 2004
Operating profit from continuing operations based on longer-term investment returns £957m £699m
Profit after tax attributable to equity holders of the Company £748m £602m
Operating earnings per share from continuing operations after related tax and minority interests** 32.2p 22.7p
Basic earnings per share 31.6p 28.4p
Shareholders' funds, excluding minority interests £5.2bn £4.7bn



2005 2004
Dividends per share declared and paid in reporting period 15.95p 15.48p
Dividends per share relating to reporting period 16.32p 15.48p
Funds under management £234bn £197bn

*EEV basis results

The EEV basis results have been prepared in accordance with the European Embedded Value principles issued by the CFO Forum of European Insurance Companies in May 2004 and expanded by the Additional Guidance on EEV disclosures published in October 2005. Previously the Group has reported Embedded Value based supplementary information on the Achieved Profits basis.

Operating earnings per share is calculated using operating profits from continuing operations based on longer-term investment returns, after tax and minority interest. These profits exclude goodwill impairment charges, the post-tax effects of short-term fluctuations in investment returns, the shareholder's share of actuarial and other gains and losses on defined benefit pension schemes, the effect of changes in economic assumptions, and changes in the time value of cost of options and guarantees. The amounts for these items are included in the calculation of EEV basis basic earnings per share.

**IFRS basis results

The basis of preparation reflects the formal adoption of IFRS basis reporting for the 2005 results. This basis of reporting was anticipated in the Company's interim reporting in July 2005 and which, on all substantive matters the basis of measurement and presentation of IFRS basis results included in this announcement is the same as applied at that time.

References to "Statutory IFRS basis" results throughout this announcement reflect results contained in the statutory basis financial statements for 2005. These statements incorporate changes from the basis of preparation for the 2004 financial statements that were included in determining the interim 2005 results. These changes reflect:

(i) Measurement changes arising from policies the Group has applied on the adoption of all IFRS standards, other than IAS 32 (Financial Instruments: Disclosure and Presentation), IAS 39 (Financial Instruments: Recognition and Measurement), and IFRS 4 (Insurance Contracts), from 1 January 2004. The 2005 results include the effect of adoption of those three standards from 1 January 2005.

(ii) Changes to the format of the results and other presentational changes that the Group has applied in its 2005 financial statements in so far as they affect the summary results included in this announcement.

(iii) A discretionary change of policy for the basis of determining longer-term investment returns included in operating profit based on longer-term investment returns.

The pro forma IFRS basis results included in this announcement are included as supplementary information and are not results that form part of the Group's financial statements. The pro forma IFRS results reflect the application of the statutory IFRS changes noted above and the estimated effect on the Group's results for 2004 if IAS 32, IAS 39 and IFRS 4 had been applied from 1 January 2004 to the Group's insurance operations.

Operating earnings per share is calculated using operating profits from continuing operations based on longer-term investment returns, after tax and minority interest. These profits exclude goodwill impairment charges, the post-tax effects of short-term fluctuations in investment returns, and the shareholders' share of actuarial and other gains and losses on defined benefit pension schemes. The amounts for these items are included in the calculation of IFRS basis basic earnings per share.

Jackson National Life Insurance Company

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Prudential plc is an international company incorporated in the United Kingdom, and its affiliated companies constitute one of the world’s leading financial services groups. It provides insurance and financial services directly and through its subsidiaries and affiliates throughout the world, and it has been in existence for over 170 years. Prudential plc is not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America, or the Prudential Assurance Company, a subsidiary of M&G plc (a company incorporated in the United Kingdom).

PPM America

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Prudential plc is an international company incorporated in the United Kingdom, and its affiliated companies constitute one of the world’s leading financial services groups. It provides insurance and financial services directly and through its subsidiaries and affiliates throughout the world, and it has been in existence for over 170 years. Prudential plc is not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America, or the Prudential Assurance Company, a subsidiary of M&G plc (a company incorporated in the United Kingdom).