14 Mar 2008

Prudential plc 2007 Full Year Results

PRUDENTIAL PLC DELIVERS OUTSTANDING 2007 FULL YEAR RESULTS

EEV operating profit up 25%, doubled over past three years

  • New business APE of £2,874 million, up 21%
  • EEV operating profit of £2,542 million, up 25%
  • New business profit of £1,215 million, up 22%, with Group margin of 42% (2006: 42%)
  • Asia new business profit up 34% at £653m
  • Asia is expected to deliver doubling of 2005 EEV new business profit a year early
  • Jackson new business profit up 19% at £285m
  • UK retail new business profit up 17%, with total new business profit up 4% at £277m
  • Asset management operating profit £334m up 28% on last year
  • IFRS statutory operating profit of £1,213 million, up 20%
  • EEV shareholders' funds up 24% to £14.8 billion
  • 2007 dividend increased by 5% to 18 pence per share

All figures compared to 2006 at constant exchange rates

Commenting, Mark Tucker, Group Chief Executive said:

"These outstanding results, with new business profit up 22 per cent to £1,215 million, demonstrate excellent and continued momentum in the successful delivery of the Group's retirement led strategy. Group EEV operating profit has doubled over the past three years.

"Each of our businesses is performing strongly representing a powerful geographic spread to our growth platform. Spectacular growth in Asia has been accompanied by a very strong performance by the US and clear profit growth in the UK. Combined with our excellent performance in asset management across the Group, these results demonstrate the benefits of Prudential's diversified, international strategy.

"That strategy is focused on continued and profitable growth. Our market presence and product capability, coupled with strong management teams, puts us in a great position for continued value creation. Overall, the prospects for the Group in 2008 remain positive. Over the longer-term the demographic, economic and social factors driving our business will continue and we are well positioned to capture a greater share of that growth."

Group Chief Executive's review

In 2007, the Group's operating performance was outstanding building on the very strong momentum established in 2005 and 2006.

The combination of our retirement-led strategy, a clear focus on generating profitable growth and excellence in the delivery of our plans are driving shorter-term performance and also placing the Group in a strong position from which to outperform in the longer-term.

The retirement market offers significant long-term sustainable growth opportunities as the biggest demographic wave in history transitions out of the work-force and into retirement. The Prudential Group has a strong presence in this sector based on our financial strength, our investment and risk management skills, our brands and our product and distribution expertise.

The Group has the flexibility to optimise its capture of the retirement opportunity as it develops in each of our chosen markets and our business model creates significant financial and operational synergies. Within each market our focus is to operate in areas where we see sustainable competitive advantage and in products and distribution channels that have sound and sustainable economics.

Group performance

Group operating profit before tax from continuing operations, on the European Embedded Value (EEV) basis increased by 25 per cent in the year to £2,542 million and has doubled over a three year period. The Group’s return on embedded value was 15.4 per cent (2006: 14.5 per cent).

On the statutory IFRS basis, operating profit before tax from continuing operations was up 20 per cent to £1,213 million, almost doubling over a three year period.

Across the Group's insurance operations new business increased by 21 per cent to £2,874 million, on an APE basis and profit on new business was £1,215 million, up 22 per cent. Average margin across the Group was maintained at 42 per cent (2006: 42 per cent).

Operating profit in the Group's asset management operations increased by 28 per cent, to £334 million in what was an excellent year for these businesses in increasingly challenging conditions.

The cash flow position continued to improve and we are progressing well towards our target of being operating cash flow positive at the Group level in 2008. The Group's operating cash flow in 2007 was negative £82 million. During the year the Group received £527 million from the sale of Egg, the UK internet banking operation, this resulted in an overall Group cash inflow of £445 million.

The Group's balance sheet and regulatory capital position remain robust. In particular, across the Group we have been cautious on credit for some time and we have been increasingly moving the portfolio to a more defensive position. Outside the normal market value movements across the Group related to interest rates and widening credit spreads net credit losses on debt securities in the US were £78 million.

The Board has recommended a final dividend of 12.3 pence per share, bringing the full year dividend to 18 pence per share, an increase of 5 per cent. The dividend was covered 1.9 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

In Asia we continue to power ahead with the region accounting for 54 per cent of new business profits. New business on an APE basis, increased by 44 per cent to £1,306 million and all businesses across the region grew by 15 per cent or more.

New business profit was £653 million, up 34 per cent. Having achieved compound growth of 26 per cent since 2005 we expect to deliver, one year earlier than previously stated, on our target of at least doubling 2005 new business profit by 2009. EEV operating profit in Asia exceeded £1 billion for the first time this year as the business goes from strength to strength.

Growth in our proprietary agency force, greater agency productivity and the continuing development of non-agency distribution, in particular bancassurance, remain central to our success.

The agency force across the region increased by 125,000 to 410,000 during the year and there was significant expansion in India where average agent numbers more than doubled to 238,000. Throughout the rest of the region the average number of agents increased by 10 per cent 112,000. Agency productivity has also moved ahead strongly in a number of markets including Singapore, Hong Kong and Vietnam. The continuing success of our multi-distribution approach led to sales through non-agency channels increasing by 44 per cent and we added a number of important new distribution relationships.

The retirement opportunity in the region is emerging rapidly and we are developing innovative integrated savings and protection solutions to meet consumers' increasingly sophisticated needs. Our retirement campaigns under the banner "What's your number?" have had considerable success in Korea, Taiwan and Hong Kong and we are now rolling this concept out into other markets.

There is also significant scope to develop our positioning in the health insurance market across the region and, with the launch of a number of new products, notably in Singapore and India, sales of health products in the year have increased by 45 per cent.

The US is the largest retirement market in the world and our long-term strategy has been to position Jackson to meet the pre and post-retirement needs of the baby boomer generation. In 2007, variable annuity new business increased by 29 per cent to £455 million, on an APE basis. Jackson has been the fastest growing variable annuity provider in the US over the past six years, clearly demonstrating the success of our strategy and our advice based approach.

The variable annuity product in the US is increasingly being used by the consumer to provide an income in retirement. In 2007, almost two-thirds of Jackson's customers were over 55 and two-thirds of all variable annuity sales included a guaranteed minimum withdrawal benefit. Jackson continues to innovate and develop its market leading Perspective II product, which has been the top-selling variable annuity contract in the fast growing Independent Broker channel for each of the last 5 years.

Overall new business in the US increased by 19 per cent to £671 million, on an APE basis, new business profit also increased by 19 per cent with margins maintained at 42 per cent and an internal rate of return of 19 per cent.

In 2007 we set out our strategy in the UK to focus primarily on the retirement income market based in particular on our strengths in the annuity market but also the developing lifetime mortgage and income drawdown markets. In the retirement savings market we have exited those product areas that are structurally unprofitable and launched a new range of factory gate priced savings products.

Retail new business increased by 4 per cent in a market where the competitive pressures increased still further during the year. In 2007 we also completed the transfer of Equitable Life's £1.7 billion in-force portfolio of with-profits annuities: however in general pricing across the bulk market was not adequate to meet our return on capital requirements and we chose not to write business at uneconomic levels.

The margin at 31 per cent (2006: 30 per cent) remained high in comparison to the overall UK market as did the internal rate of return which was 18 per cent including the Equitable Life transaction and 14 per cent excluding it. Our target internal rate of return in the UK is 14%.

By the end of 2007, £115 million of the cost saving target of £195 million had been delivered and plans are in place to deliver the additional £80 million. A key milestone this year in the UK was the signing of a major contract to outsource a large proportion of its back book and new business policy administration. The outsource agreement will allow us to remove fixed costs from our operations and to achieve significant operating efficiencies with an expected positive effect on embedded value estimated at £60 million by 2011.

The in-force profit for the UK business includes a charge in respect of a mortality assumption change on the annuity business of £312 million which is fully offset by a release of excess margins previously held.

In 2007 we announced that the Group would consider a reattribution of the inherited estate held in the with-profits sub fund of The Prudential Assurance Company Limited. We are continuing to explore the possibility of a reattribution and we aim to be in a position in the first half of 2008 to determine whether this would be in the best interests of policyholders and shareholders.

Asset management

The Group's asset management businesses had another excellent year. Our international investment management expertise continues to add value to our insurance operations and also supported the growth in external funds under management to £69 billion at the end of 2007 (2006: £57 billion).

M&G's net inflows were the second highest on record at £5 billion and profit increased by 25 per cent to £254 million. Our business in Asia continued its excellent growth record with net inflows of £3 billion and operating profit growing to £72 million, up 53 per cent.

Our skills in risk management and our strength across all asset classes in the UK, the US and in Asia combined with our multi-asset allocation capabilities, position us well to meet the diverse needs of our customers for savings, retirement income and protection products.

This is clearly evidenced in the UK where the main with-profits fund, with assets of over £74 billion, was ranked first in 2006 in the WM Company's survey of with-profits funds, based on gross investment performance over 1, 3, 5 and 10 years. In the US, one of the key drivers of our success is our ability to provide customised and highly flexible benefit options within our main variable annuity product that are individually priced for the customer and, in Asia we continue to see success in our targeted unit-linked and protection products.

Priorities for the Group in 2008

Our overriding objective for 2008 remains that of continuing to create value for our shareholders by fully exploiting the power of our retirement-led strategy and continuing to expand the excellent businesses that we have in place today.

Life insurance

In Asia:

  • Expand the agency force and continue to improve productivity
  • Maximise the potential from non-agency distribution and add new partners
  • Further develop direct marketing channels and up-sell and cross-sell
  • Increased focus on retirement services and health products

In the US:

  • Continue to innovate around our key variable annuity product
  • Enhance further our already world-class operating platform
  • Expand retail distribution
  • Selectively participate in the institutional market

In the UK:

  • Build on our strengths in the retirement market and risk products
  • Migrate to factory-gate cautiously managed asset accumulation products
  • Deliver on the cost reduction program including the outsource program
  • Selectively participate in the wholesale market
  • Determine whether it is in the best interest of policyholders and shareholders to pursue a reattribution of the inherited estate

Asset management:

  • Maintain superior investment performance for both internal and external funds
  • Extend third party retail and institutional businesses

Outlook

There is significant volatility and nervousness in markets and it seems clear that there will be a period of less attractive economic growth trends in the US and in the UK than we have seen in recent years. Notwithstanding this, we believe that our strategy and our business model are very robust and will continue to deliver sustainable value.

In Asia, the fundamentals underpinning economic growth remain powerful and our businesses are very well placed to benefit. We expect to deliver, one year earlier than previously stated, on our target of at least doubling 2005 new business profit by 2009.

In the US, our record of out performance is set to continue and our value driven strategy in the UK is on track. In the UK we have already de-emphasised those products which might have been more sensitive to market conditions.

Our asset management businesses, although more directly influenced by market movements, are well placed to capitalise on their strong market positions and investment performance to deliver net flows and profit growth.

Overall the prospects for the Group in 2008 remain positive. Over the longer-term the demographic, economic and social factors driving our business will continue and we are ideally positioned to capture a greater share of that growth.

- ENDS -

Enquiries:

 

Media Investors/Analysts
Jon Bunn +44 20 7548 3559 James Matthews +44 20 7548 3561
William Baldwin-Charles +44 20 7548 3719 Jessica Stalley +44 20 7548 3511

Notes to Editors

  1. In addition to the financial statements provided with this press release, additional financial schedules, including full details of the Group's investments, are available on the Group's website at www.prudential.co.uk
  2. The results in this announcement are prepared on two bases: International Financial Reporting Standards ('IFRS') and European Embedded Value ('EEV'). The IFRS basis results form the basis of the Group's statutory 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.

  3. Annual premium equivalent (APE) sales comprise regular premium sales plus one-tenth of single premium insurance sales.
  4. 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.
  5. 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.
  6. 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: 020 8609 0793. Passcode: 155439#.
  7. 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
  8. A media conference will take place at 11.30am (GMT) at 12 Arthur Street, London, EC4R 9AQ. To attend please call Claire Glover on 020 7548 2007.
  9. 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.
  10. Total number of Prudential plc shares in issue as at 31 December 2007 was 2,470,017,240.
  11. Financial Calendar 2008:

    First Quarter New Business Results 17 April 2008
    Annual General Meeting 15 May 2008
    Interim Results 31 July 2008
    Third Quarter 2008 New Business Results

    21 October 2008

    2007 Final Dividend
    Ex-dividend date 9 April 2008
    Record date 11 April 2008
    Payment of dividend

    20 May 2008

    2008 Interim Dividend
    Ex-dividend date 13 August 2008
    Record date 15 August 2008
    Payment of dividend 23 September 2008
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 since 1848 and has £267 billion in assets under management as at 31 December 2007. 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 2007 PRELIMINARY ANNOUNCEMENT

Results Summary

European Embedded Value (EEV) Basis Results

2007
£m
2006
£m
Asian operations 1,103 864
US operations 635 718
UK operations:
UK insurance operations 859 686
M&G 254 204

1,113 890
Other income and expenditure (289) (298)
Restructuring costs (20) (41)
Operating profit from continuing operations based on longer-term investment returns* 2,542 2,133
Short-term fluctuations in investment returns 174 738
Mark to market value movements on core borrowings 223 85
Shareholders' share of actuarial gains and losses on defined benefit pension schemes 116 207
Effect of changes in economic assumptions and time value of cost of options and guarantees 748 59
Profit from continuing operations before tax (including actual investment returns) 3,803 3,222
Operating earnings per share from continuing operations after related tax and minority interests* 74.9p 62.1p
Basic earnings per share 125.2p 91.7p
Shareholders' equity, excluding minority interests £14.8bn £11.9bn
International Financial Reporting Standards (IFRS) Basis Results*
Statutory IFRS basis results 2007 2006
Profit after tax attributable to equity holders of the Company £1,022m £874m
Basic earnings per share 41.8p 36.2p
Shareholders' equity, excluding minority interests £6.2bn £5.5bn


Supplementary IFRS basis information


2007


2006
Operating profit from continuing operations based on longer-term investment returns* £1,213m £1,050m
Operating earnings per share from continuing operations after related tax and minority interests* 33.8p 30.9p



2007


2006
Dividends per share declared and paid in reporting period 17.42p 16.44p
Dividends per share relating to reporting period 18.00p 17.14p
Funds under management £267bn £251bn
*Basis of preparation, All figures compared to 2006 at constant exchange rates
Results bases

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 2006 results and financial statements.

Operating profit based on longer-term investment returns

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 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 related tax and minority interests. These profits exclude short-term fluctuations in investment returns and the shareholders' share of actuarial 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.

Discontinued operations

The results for continuing operations shown above and throughout this preliminary announcement exclude those in respect of discontinued banking operations. On 1 May 2007, the Company sold Egg. Accordingly, the presentation of the comparative results for 2006 has been adjusted from those published in March 2007.

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).

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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).