15 Mar 2007

Prudential plc 2006 Full Year Results

New business profit up 20%, exceeding £1 billion for the first time; margin increased

  • New business APE of £2,470 million, up 16%; PVNBP of £18.9 billion, up 12%
  • Total EEV operating profit of £1,976 million, up 15%
  • New business profit of £1,039 million, up 20%, with Group margin of 42% (2005: 41%)
  • Total IFRS statutory operating profit of £893 million, down 7%, includes £145m non-continuing Egg losses
  • EEV shareholders’ funds up 15% to £11.9 billion*

UK business focused on growing highly profitable core and enhancing future value

  • Strong UK new business performance: margin 30%, IRR 15% and strong growth in IFRS and EEV profit
  • Creation of focused Retail Retirement business comprising Individual Annuities, Equity Release and a new approach to Retirement Savings
  • Cost reduction target increased from £115 million** to £195 million
  • Nomination of Policyholder Advocate for potential reattribution of inherited estate

Cash and dividend

  • Overall Group operating cash flow to be positive in 2008
  • New dividend policy reflects the commitment to deliver a growing dividend
  • 2006 dividend increased by 5% to 17.14 pence per share

All figures compared to 2005 at constant exchange rates unless stated; *at reported exchange rates

** Previously announced UK cost savings target of £150 million by 2009 included £35 million in relation to Egg, which was acquired by Citi in January 2007.

Commenting, Mark Tucker, Group Chief Executive said:

“These results demonstrate excellent continued progress in the delivery of the Group’s growth and value agenda.

“Our new dividend policy reflects our confidence in the future and our commitment to providing shareholders with a cash return on the investments we make on their behalf.

“In Asia, the US and UK we have an enviable portfolio of businesses that will continue to deliver growth in profits and create value for our shareholders in the coming years.

“Our UK strategy, following the sale of Egg, builds on a strong performance in 2006 and our industry-leading position in the retail retirement annuity sector, eliminates uneconomic products and sets the scene for an enhanced contribution to future earnings.”

Group Chief Executive’s review

The Group’s strategy is centred on optimising our competitive advantages in life assurance, becoming a leading provider of financial services for the retirement market, and on the further development of our asset management businesses. In implementing this strategy our clear aim is to secure superior growth in value for our shareholders.

In 2006 we continued to focus on developing our position in our chosen markets of Asia, the US and the UK; markets that we believe offer the greatest opportunity for sustained profitable growth.

Total Group operating profit before tax was £1,976 million on a European Embedded Value (EEV) basis, an increase of 15 per cent, and the Group’s return on embedded value was 13.5 per cent (2005: 15.5 per cent). Statutory IFRS operating profit before tax was £893 million (2005: £957 million).

Across the Group’s insurance operations new business increased by 16 per cent to £2,470 million, on an APE basis. Profits on new business exceeded £1 billion for the first time, 20 per cent up on 2005. Average margins across the Group remained strong and were 42 per cent (41 per cent in 2005) and returns on new business have also improved. Operating profit from the insurance businesses was £2,209 million, on an EEV basis, increasing by 28 per cent on 2005, and IFRS operating profit increased by 15% to £1,087 million.

In asset management we delivered record net flows at M&G and in our rapidly growing retail businesses in Asia. Net inflows of £8.6 billion were 66% ahead of 2005 and external funds under management increased to £57 billion (2005: £46 billion). Operating profit from these businesses was £254 million, up 46 per cent on 2005.

Difficult trading conditions in the UK personal loans market led to losses at Egg, the Group’s UK banking business, of £145 million (2005: profit £44 million). In January 2007 we received an offer for Egg from Citi and the business was sold for £575 million in cash, subject to completion adjustments. We expect this transaction to complete by the end of April 2007.

The Group’s cash flow developed strongly in 2006 and its capital position remains robust. Taking into account our plans for sustained high levels of growth and a normalised level of scrip dividend uptake we expect our operating cash flow to be positive in 2008. In light of this the Board has reviewed its longer term dividend policy.

The Board recommends a final dividend of 11.72 pence per share, bringing the full-year dividend to 17.14 pence per share, an increase of 5 per cent over the full year 2005 dividend of 16.32 pence.

The full year dividend is covered 1.52 times by post-tax IFRS operating profit from continuing operations.

The Board will focus on delivering a growing dividend, which will continue to be determined after taking into account the Group's financial flexibility and opportunities to invest in areas of the business offering attractive returns. The Board believes that in the medium-term a dividend cover of around two-times is appropriate.

Insurance operations

The Group’s position in Asia continues to develop rapidly with the region accounting for almost 50 per cent of the Group’s 2006 new business profits. One of the key priorities in the region in 2006 was to continue to build our distribution capability. Agency remains the major channel in the region and during the year we added 115,000 agents, to total 285,000 agents by the end of the year. Building the agency force in a disciplined way in developing markets such as India, China and Indonesia is critical to success, whereas in some of the more developed markets in the region such as Hong Kong and Singapore where agency numbers are more stable, the main focus is on increasing productivity. Non-agency distribution is also developing strongly and accounted for 30 per cent of new business in 2006 (26 per cent in 2005) as we established a number of new and important relationships during the year. As well as experiencing rapid growth Asia became cash positive in 2006, in line with our previous forecast, with a net remittance of £28 million to the Group.

In 2007 and beyond, Asia offers significant potential for profitable growth and we are on track to deliver on our target to at least double 2005 new business profits by 2009. We are in all the region’s major markets and see further opportunity to build distribution, improve productivity and efficiency and increase sales of our market leading unit-linked products. We also see scope to increase sales to our 7 million existing customers; to use our regional and Group expertise to play a key role as the retirement market develops in a number of Asian countries; to extend our direct distribution capabilities and to increase selectively our presence in the Accident and Health product sector across a number of markets in the region.

Our strategy in the US is to focus on the opportunities that exist in the growing retirement market as the US baby boomers retire, with a particular emphasis on variable annuities. We have market leading product flexibility and high levels of product innovation, a focus on advice-based distribution and on maintaining high service levels at low cost. As a result our retail sales in 2006 grew at more than double the rate of the market overall. Variable annuity sales increased by 48 per cent over 2005, and we have achieved compound growth of 45 per cent over a five year period.

In 2007 our aim is to capitalise on the market position that the Jackson team have built, growing distribution and further developing the product range to address both existing and new market areas. For example, in January 2007 we launched a new simplified retirement annuity aimed at mutual fund representatives extending our distribution reach. We remain confident that we can continue to outperform the market and gain profitable market share.

In the UK , retail insurance new business increased by 14 per cent in 2006 and overall new business sales were up 1 per cent. We continued to focus on writing for value across the UK business with average margins increasing to 30 per cent (27 per cent in 2005). Returns on new business improved to 15 per cent and remain high compared with the rest of the UK market.

Notwithstanding this strong performance, we have continued to assess the positioning of our UK insurance operations, examining a broad range of potential options with a clear goal of maximising value for our shareholders. We are confident that there are profitable opportunities for the Group in the retirement income and savings market.

We have significant competitive advantages in the retirement income market, in particular our flow of internal vestings from our back book of personal pensions, and this market remains very attractive. We therefore see retail annuities and equity release and the nurturing of our existing policyholders as key parts of our strategy. In the wholesale annuity market we also have distinct competitive advantages but we will only write business that meets our required returns.

Much of our Wealth and Health business is low margin and our strategy will be to improve returns through a much narrower business, exiting segments that are unprofitable and concentrating our effort only where we have a material and sustainable competitive advantage and where we can achieve returns significantly in excess of the cost of capital. We have withdrawn from provision of front-end commission individual pensions and will also exit front-end commission unit-linked bonds, segments of the market where we do not see that adequate returns can be made.

We believe there is an opportunity in the retirement savings market for us to capitalise on our proven low risk multi-asset investment capabilities. We will bring a new range of products to the market based on these capabilities and with improved returns through a focus on trail, rather than front-end commission. We will concentrate our advice-based distribution activity on the significant number of investors approaching retirement who have substantial assets outside personal or corporate pension plans, or have investments in poorly performing funds, and require inflation protection.

We also see opportunity to develop further our already strong position in the corporate pensions market and we will improve returns by focusing on schemes with higher case sizes and holding costs as volumes grow.

We will participate in the health market through our existing joint venture with Discovery, which will be expanded to include our new Flexible Protection product. A combination of the strength of the Prudential brand in the UK , clearly differentiated products and the operational capabilities of Discovery provide an excellent base to deliver profitable growth in these markets. The joint venture will be led by Discovery.

Actions are in place to realise 65% of the previously announced cost savings target of £115 million* for the UK insurance business. We have increased our annualised target cost savings to £195 million by 2010 and our current estimate is that these savings will lead to a £60 million positive impact on embedded value. Total restructuring costs are estimated to be up to £165 million*.

We have initiated discussions with the regulator on the possible reattribution of the inherited estate of the Group's main with-profits fund in the UK, Prudential Assurance Company. An Independent Policyholder Advocate has been nominated to represent policyholders should a decision be taken to proceed. We will only proceed if there are clear benefits to both policyholders and shareholders. If a decision is taken to proceed a formal appointment of the Policyholder Advocate could be expected to take place later this year.

With a focused strategy in the UK based on our competitive advantages we see opportunities for growth in the retail market at high margins and returns relative to the overall market. In the wholesale annuity market we will write business that meets our required returns and by definition the flows will be lumpy year on year. We are maintaining our 14% IRR target for new business and we expect the UK 's shareholder-backed business to become a net capital generator for the Group by 2010.

Asset Management

Maintaining superior investment performance is the key factor in the continuing growth and success of the Group's asset management businesses. In 2006, the performance of M&G in the UK and Europe and our asset management businesses in Asia has again been very strong adding value to our insurance businesses worldwide, supporting record net inflows and continuing the growth of the Group's external funds under management.

In 2007, we will continue to build on the strong growth over recent years in both M&G and in Asia . In addition, Jackson will enter the US retail mutual fund market for the first time, a significant market that continues to gain momentum, especially among the baby boomers.

Group

As a Group we are continuing to increase the level of co-operation and the exchange of ideas across our businesses.

The Group's asset management businesses are using their global presence, exchanging information to support their investment decisions and to enable the efficient management of over £6 billion of cross border money.

In our insurance businesses, which remain predominantly market specific, collaboration is taking place where there is a commercial benefit. Product development teams are working across the Group to access existing skills and expertise. In distribution, the UK business has utilised the very successful techniques developed by Jackson in the US , to segment the independent financial adviser market, saving time and cost and improving returns.

Work is ongoing to consolidate our technology infrastructure in particular across the UK and the US . A single Customer Service Desktop is now under development and will be launched in 2007.

Central to the management of the Group is capital efficiency and capital allocation. During 2006, we have made significant progress in the assessment of, and management of, risk on a group-wide basis. This understanding provides a solid foundation as we continue to embed decision making on a risk-adjusted basis.

Summary

The Group goes into 2007 with strong momentum. I continue to see tremendous scope for the Group to build sustainable profitable growth and secure superior growth in value for our shareholders.

(* Previously announced UK cost savings target of £150 million by 2009 included £35 million in relation to Egg, which was acquired by Citi in January 2007. Previously announced restructuring costs of £110 million included £25 million related to Egg.)

ENDS

Enquiries:
Media Investors/Analysts
Jon Bunn +44 20 7548 3559 James Matthews +44 20 7548 3561
William Baldwin-Charles +44 20 7548 3719 Valerie Pariente +44 20 7548 3511

Notes to Editors

  1. The results in this announcement are prepared on two bases: 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. The supplementary 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.

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

  2. Annual premium equivalent (APE) sales comprise regular premium sales plus one-tenth of single premium insurance sales.
  3. 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..
  4. There will be a conference call today for wire services at 7.30am (GMT) hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance Director. Dial in telephone number: 0800 358 2705. Passcode: 155439#.
  5. 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
  6. 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 0208 609 0793 and from the US +1 866 793 4279. Passcode: 487687#. A recording of this call will be available for replay for one week by dialling: 0208 609 0289 from the UK or +1 866 676 5865 from the US. The conference reference number is 160470.
  7. 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 today.
  8. High resolution photographs are available to the media free of charge at www.newscast.co.uk on +44 (0) 207 608 1000 or by calling Claire Glover on 020 7548 2007.
  9. Total number of Prudential plc shares in issue as at 31 December 2006 was 2,444,312,425.
  10. Financial Calendar 2007:
    Ex-dividend date 11 April 2007
    Record date 13 April 2007
    First Quarter New Business Figures 19 April 2007
    Annual General Meeting 17 May 2007
    Payment of 2006 final dividend 22 May 2007
    2007 Interim Results / Second quarter New Business Figures 1 August 2007
    Ex-dividend date 15 August 2007
    Record Date 17 August 2007
    Payment of interim dividend 24 September 2007
  11. 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
  12. About Prudential

Prudential plc is a company incorporated and with its principal place of business in England, 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 £250.7 billion in assets under management as at 31 December 2006. 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 2006 PRELIMINARY ANNOUNCEMENT

Results Summary
2006 2005
European Embedded Value (EEV) Basis Results* £m £m
UK Insurance Operations 686 426
M&G 204 163
Egg (145) 44
UK Operations 745 633
US Operations 718 755
Asian Operations 864 568
Other Income and Expenditure (298) (244)
UK restructuring costs (53) -
Operating profit from continuing operations based on longer-term investment returns 1,976 1,712
Goodwill impairment charge - (120)
Short-term fluctuations in investment returns 745 1,068
Mark to market value movements on core borrowings 85 (67)
Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes 207 (47)
Effect of changes in economic assumptions and time value of cost of options and guarantees 59 (302)
Profit from continuing operations before tax 3,072 2,244
Operating earnings per share from continuing operations after related tax and minority interests* 57.6p 56.6p
Basic earnings per share 91.7p 66.9p
Shareholders' funds, excluding minority interests £11.9bn £10.3bn

International Financial Reporting Standard (IFRS) Basis Results*
Statutory IFRS Basis Results 2006 2005
Profit after tax attributable to equity holders of the Company £874m £748m
Basic earnings per share 36.2p 31.6p
Shareholders' funds, excluding minority interests £5.5bn £5.2bn

Supplementary IFRS basis information
Operating profit from continuing operations based on longer-term investment returns £893m £957m
Operating earnings per share from continuing operations after related tax and minority interests* 26.4p 32.2p
2006 2005
Dividends per share declared and paid in reporting period 16.44p 15.95p
Dividends per share relating to reporting period 17.14p 16.32p
Funds under management £251bn £234bn

*Basis of preparation

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. The basis of preparation of statutory IFRS basis results and supplementary IFRS basis information is consistent with that applied for the 2005 full year results and financial statements.

Consistent with previous reporting practice, the Group analyses its EEV basis results and provides supplementary analysis of IFRS profit before tax attributable to shareholders, so as to distinguish operating profit based on longer-term investment returns from other constituent elements of total profit. On both the EEV and IFRS bases, operating earnings per share are calculated using operating profits from continuing operations based on longer-term investment returns, after tax and minority interests. These profits exclude goodwill impairment charges, short-term fluctuations in investment returns and the shareholders' share of actuarial and other gains and losses on defined benefit pension schemes. Under the EEV basis, where additional profit and loss effects arise, operating profit based on longer-term investment returns also excludes the mark to market value movements on core borrowings and the effect of changes in economic assumptions and changes in the time value of cost of options and guarantees arising from changes in economic factors. After adjusting for related tax and minority interests, the amounts for these items are included in the calculation of 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).