10 Nov 2010

Prudential plc Third Quarter 2010 Interim Management Statement

CONTINUED STRONG MOMENTUM WITH 9 MONTH NEW BUSINESS SALES OF £2,464 MILLION

  • GROUP-WIDE SALES OF £2,464 MILLION UP 24 PER CENT. NEW BUSINESS PROFIT UP 21 PER CENT
  • ROBUST GROWTH IN ASIA CONTINUES WITH YEAR TO DATE SALES UP 32 PER CENT AND YEAR TO DATE NEW BUSINESS PROFIT UP 34 PER CENT. HIGHEST THIRD QUARTER SALES FOR OUR ASIAN BUSINESS, UP 25 PER CENT
  • SUSTAINED SALES MOMENTUM IN US. YEAR TO DATE SALES UP 33 PER CENT AT ATTRACTIVE MARGINS
  • UK FOCUS ON VALUE OVER VOLUME CONTINUES TO DELIVER HIGHER NEW BUSINESS PROFIT, UP 14 PER CENT
  • ASSET MANAGEMENT NET INFLOWS OF £6.2 BILLION, DRIVEN BY VERY HEALTHY M&G RETAIL NET INFLOWS OF £5.1 BILLION
  • CAPITAL POSITION REMAINS STRONG - IGD SURPLUS ESTIMATED AT £3.4 BILLION1

YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
Group Insurance2, 3

Sales - APE

£2,464m £1,980m 24% £809m £689m 17%
New Business Profit4 £1,345m £1,116m 21%
Margin – APE % 55% 56% (1)pt

Investment Net Inflows

£6.2bn

£13.0bn

(52%)

£1.8bn

£2.9bn

(39%)

Tidjane Thiam, Group Chief Executive said:

“The Group’s performance in the third quarter has been strong. Prudential continues to grow fast and profitably. Group-wide year to date sales are up by 24 per cent and new business profit for the same period is up 21 per cent. This is in line with our stated strategy of allocating capital to the geographies and products with the best profitable growth opportunities. We do this with discipline and a clear focus on capital efficiency as well as balance sheet strength.

Our momentum in Asia has continued with year to date APE sales up 32 per cent to £1,066 million (2009: £806 million). APE sales for the third quarter of £353 million increased by 25 per cent versus the third quarter 2009 (£282 million). This performance was broad based across our markets validating our chosen geographic footprint. New business profit increased by 34 per cent to £621 million in the year to date (2009: £465 million) meaning that Asia represented 46 per cent of total new business profit. We have continued to focus on writing higher quality regular premium business, with 94 per cent of total APE being regular premium, with a significant proportion of health and protection products. The richness of our product mix, combined with changes in country mix, with a lower proportion of our sales in Korea has allowed us to achieve a new business profit margin of 58 per cent which is consistent with last year.

In the US, Jackson delivered year to date APE sales of £850 million, up 33 per cent over the same period in 2009 (£640 million). New business profit grew 10 per cent to £532 million (2009: £482 million). Year to date new business margins of 63 per cent have fallen from the exceptionally high levels achieved in 2009 (75 per cent), when Jackson was able to take advantage of the extreme dislocation then prevalent in the bond markets. We continue to write new business at internal rates of return in excess of 20 per cent. Our focus remains on optimising the balance between value, volume and capital consumption which means that we are still selling large volumes of variable annuities whilst containing fixed annuity sales. We do not target volume or market share, however the unique context created by the difficulties encountered by some of our peers means that Jackson was ranked fourth in variable annuity sales in the first half of 2010 while increasing its market share to 10.55per cent from 8.1 per cent for the full year 2009. We will continue to manage our sales with a primary focus on value over volume.

In the UK, Prudential remains a market leader in its chosen product categories of individual annuities and with-profits. Here too, we continue to focus on balancing writing new business with sustainable cash generation and capital preservation. Total APE sales of £548 million were up 3 per cent on the first nine months of 2009. New business profit grew 14 per cent year to date to £192 million (2009: £169 million). The new business margin improved to 35 per cent in the first nine months of 2010 from 32 per cent in the same period of 2009, primarily due to increased margins on with-profits bond business combined with strong margins achieved on shareholder-backed annuity business.

In asset management, M&G’s net inflows remain very healthy year to date, particularly M&G Retail, aided by ongoing excellent investment performance from M&G’s flagship funds. 2009 was an exceptional year for M&G with heavy investment in our top-performing bond funds to exploit a unique context in fixed income markets. Over the past nine months, M&G has attracted net fund inflows of £6.2 billion (2009: £11.1 billion) including year to date net inflows of £5.1 billion for our retail business which continues to be the number one UK fund manager in terms of quarterly net retail sales. Indeed, M&G’s Retail business in the UK has been number one for net retail sales over seven consecutive quarters, based on data to the end of June 2010. M&G’s total funds under management at 30 September 2010 were £191.2 billion, up 10 per cent on the 2009 year end (2009: £174 billion) and 13 per cent on the third quarter of 2009. In Asia, total funds under management exceed £50 billion for the first time and closed the quarter at £50.3 billion.

We remain well positioned to deliver strong growth and generate strong returns for our shareholders, based on the Group’s proven strategy, our brand and market position in the countries where we choose to operate, the power of our distribution and the quality of our teams. South East Asia, with its high rates of GDP growth, saving habits and low penetration of insurance products, remains the most attractive long-term opportunity in our industry and the primary focus for our growth and investment. This opportunity, supported by our strong position in the US, our focused business in the UK and market leading asset management businesses, means we view our future with confidence and believe that we will continue to outperform our competitors in our chosen markets.”

1. Q3 2010 Business Unit financial highlights

Sales - APE YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
Insurance
Asia6 £1,066m £806m 32% £353m £282m 25%
US £850m £640m 33% £290m £249m 16%
UK £548m £534m 3% £166m £158m 5%
Total Group Insurance £2,464m £1,980m 24% £809m £689m 17%


New Business Profit7 YTD
2010
YTD
2009
% change
on YTD 09
Asia £621m £465m 34%
US £532m £482m 10%
UK £192m £169m 14%
Total Group Insurance £1,345m £1,116m 21%


Margin – APE % YTD
2010
YTD
2009
% change
on YTD 09
Asia 58% 58% -
US 63% 75% (12)pts
UK 35% 32% 3pts
Total Group Insurance 55% 56% (1)pt


Investment Net Inflows YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change8
on Q3 09
M&G £6.2bn £11.1bn (44%) £1.5bn £2.5bn (39%)
Asia Asset Management - £1.9bn (102%) £0.3bn £0.4bn (39%)
Total £6.2bn £13.0bn (52%) £1.8bn £2.9bn (39%)


1.1 Asia Insurance operations

Asia YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
Sales - APE £1,066m £806m 32% £353m £282m 25%
New Business Profit £621m £465m 34%
Margin – APE % 58% 58% -

Economic conditions in Asia during the third quarter 2010 continued to be very positive as Asian economies have performed strongly in a challenging global context. GDP in the region is expected to grow 8 per cent this year. Market conditions for the life insurance industry across Asia have also generally been positive, with the notable exception of India, where the regulatory changes that came into effect in September are expected to significantly reduce new business growth in this market over the short to medium term. Although we believe that the recent changes will have a positive impact on the profitability of the Indian market in the medium term, their short-term impact is very negative.

In this context, Prudential has continued to deliver very strong and profitable new business growth. APE for the third quarter of £353 million increased by 25 per cent over the same period in 2009 and APE of £1,066 million for the first nine months of 2010 has grown by 32 per cent over the same period in 2009. We remain focused on the attractive markets of South-East Asia (including Hong Kong) where our year to date APE sales were up 43 per cent to £693 million. We continue to either increase or hold our market share in all markets except for Korea where we deliberately stayed away from sales of short term interest sensitive products and in Hong Kong where some banks have pursued a volume driven strategy and have been writing significant quantities of what we consider to be lower margin business to secure market rankings.

Total average agency headcount at 154,000 excluding India, has increased by 11 per cent over last year and average APE per agent has increased by 11 per cent reflecting successful productivity initiatives. Both these factors have allowed us to achieve a 35 per cent increase in agency new business. The bancassurance channel represented 27 per cent of the year to date total APE and grew at 36 per cent, a faster rate than agency partly due to the success of our bank distribution agreement with UOB announced earlier this year. We are pleased by the performance of the new UOB distribution arrangements which have delivered APE sales of £22 million this year and which are now active in Singapore, Thailand and Indonesia.

Our continued focus on writing quality business has again delivered a profitable product mix, with regular premium business representing 94 per cent of total APE with a significant proportion of health and protection (25 per cent of APE), where APE sales grew by 22 per cent to £263 million. The proportion of linked business at 43 per cent is consistent with the same period last year. Par business APE sales increased by 46 per cent (30 per cent of APE) as customers’ appetite for stable returns grew during the period. The quality of our Asian new business is reflected in the 34 per cent increase in year to date new business profits to £621 million, equivalent to a margin of 58 per cent. We expect the margin at the full year to be at or around this level.

Policy attrition rates peaked in the first half of 2009. Since then persistency has been on an improving trend and we are actively taking steps to drive further improvements through initiatives such as converting cash premium payments to direct bank account transfers. In the last three months we saw a continuation of the small negative variances experienced in the first half of the year. These are manageable and unsurprising given the depth of the financial crisis.

With the exception of India we expect that the favourable market conditions will persist for the remainder of the year, sustaining our sales momentum. A high 2009 fourth quarter comparator and uncertainty around the market impact of the recent regulatory changes in India will, nevertheless, mean that at the full year although we expect to show strong growth it will not be at the same rate reported in the year to date.

Looking at developments of our sales in each major market:

China


YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
APE £42m £34m 24% £15m £13m 15%

In China, Prudential’s share of new business volumes for the first nine months of 2010, reflecting our 50 per cent ownership of the CITIC-Prudential joint venture, is £42 million up 24 per cent on 2009. CITIC-Prudential’s average agent numbers have declined by 15 per cent compared to the same period last year as we are maintaining our discipline around exiting non-productive agents. Replacing these agents with quality new recruits remains challenging in a highly competitive environment. However, this has been more than offset by a significant increase in average APE per agent of 38 per cent reflecting our focus on quality and productivity management. The bancassurance channel is performing very well with sales up 30 per cent. Our joint venture partner CITIC-Bank in particular is showing strong growth and generating 30 per cent of the total bank new business year to date, however we also work successfully with a number of other domestic banks, including ICBC, and leading international banks. Our multi-channel distribution approach to this market is delivering results, with an approximate split of 50:50 between agency and bancassurance.

Hong Kong


YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
APE £195m £150m 30% £65m £55m 18%

Hong Kong continues to deliver strong, profitable growth with year to date APE of £195 million, an increase of 30 per cent over the prior year. A key driver of this performance is our market leading agency force where average agent numbers for the year to date are up 15 per cent and average APE per agent has increased by 19 per cent.

The bancassurance channel also continues to perform well and is demonstrating strong momentum over the same period last year, with new business volumes up 28 per cent. Sales from our very successful bancassurance agreement with Standard Chartered Bank rose by 28 per cent, benefiting from higher production by bank staff and new product launches.

India


YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
APE £167m £116m 44% £48m £40m 20%

In India, ICICI-Prudential saw resurgence in new business volumes during the first eight months of 2010 following on from the market related decline in 2009. However, from 1 September 2010 the industry is operating under new regulations that will significantly change the market; in summary unit linked policies are now subject to charging caps and lock in periods. Over the medium to long term we believe these changes will have a positive impact on the market as the emphasis will shift from investment products to savings and protection, but in the shorter term we anticipate that new business volumes and margins will decrease sharply as the industry goes through a period of adjustment

At ICICI-Prudential we have planned for the new regulations by downsizing our agency force (reduced by 28 per cent to 176,000 at 30 September 2010 compared to the same date last year) and generally increasing our focus on operational efficiency. Prudential’s share of new business for September 2010 was down 48 per cent on August 2010 and we expect this trend to continue or worsen for the rest of the year.

Indonesia


YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
APE £188m £126m 49% £59m £43m 37%

Growth in Indonesia continues at a high pace with £188 million of new business volume up 49 per cent on the first nine months of 2009. Agency continues to be the predominant distribution channel and our successful agency management system has driven an 11 per cent increase in average agency numbers (to 82,000) and a 13 per cent increase in the APE per agent. Takaful linked products remain a significant contributor at 20 per cent of the new business mix.

Korea


YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
APE £69m £96m (28)% £23m £30m (23)%

The market in Korea remains very challenging. Our unwillingness to compete in the low margin, high capital guaranteed products sector is the main factor behind the 28 per cent decline in new business volumes over the first nine months of 2009 to £69 million. We are focussed on building our proprietary distribution with our high quality agency force and are confident that our business in Korea has now been stabilized with a viable strategy and business model. Persistency experience in Korea continues to be on an improving trend.

Malaysia


YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
APE £129m £84m 54% £52m £32m 63%

Malaysia has delivered an exceptionally strong performance in the first nine months of 2010 with new business APE up 54 per cent over the same period last year. This follows sales growth of 43 per cent during 2009 over 2008. Agency dominates our distribution in Malaysia and average agent numbers for the first nine months of 2010 are up 12 per cent over the same period last year and average APE per agent is up 30 per cent reflecting renewed confidence in the market. New business growth has been enhanced by promotional activity including the cross selling of par products to existing customers generating 19 per cent of new business APE in the period.

Singapore


YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
APE £118m £80m 48% £43m £29m 48%

Singapore also had a very strong first nine months of 2010, with new business volumes up 48 per cent to £118 million driven by promotional activity and increased agency productivity. Average agency headcount for the year to date remains in line with last year despite some aggressive competitor targeting activity in the market. Average APE per agent is up 26 per cent. The proportion of par business increased to 44 per cent year to date compared to 36 per cent for the same period last year.

The bancassurance channel delivered 29 per cent of the year to date new business, up from 23 per cent last year and within this the new UOB relationship is performing very well. It has produced 39 per cent of year to date APE for the bank channel and 11 per cent of the total APE.

Taiwan


YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
APE £95m £77m 23% £25m £26m (4%)

Following our exit from the agency channel in 2009, Taiwan is now successfully focussed on bancassurance distribution principally with partners E.Sun and Standard Chartered Bank. New business volumes of £95 million for year to date are up 23 per cent on the same period last year. We have succeeded in increasing the proportion of protection business in the mix from 13 per cent for the first nine months last year to 16 per cent for the same period this year.

Others – Philippines, Thailand and Vietnam


YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
APE £64m £43m 49% £23m £16m 44%

In the first nine months of 2010 Vietnam delivered a strong result with APE sales up 17 per cent on the prior period driven by an increase in average agent numbers to approximately 33,000. Both Philippines and Thailand delivered record results, up 100 per cent and 82 per cent respectively driven by strong out-performance in bancassurance and a revitalised agency force supported by strong recruitment. Our new distribution relationship with UOB in Thailand is already contributing 40 per cent of the total APE.

Japan

We announced at the start of 2010 that PCA Life Japan was suspending writing new business sales with effect from 15 February 2010. New business sales for Japan in 2010 amounted to £7 million (first nine months of 2009: £40 million). In order to more accurately reflect the results of our ongoing Asian operations, all of the headline financial metrics included in this announcement exclude the contribution from Japan.

1.2 US operations

a) Insurance operations

US YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
Sales - APE £850m £640m 33% £290m £249m 16%
New Business Profit £532m £482m 10%
Margin – APE % 63% 75% (12)pts

The US equity markets continued to experience significant volatility during the first nine months of 2010 while interest rates steadily declined and AA corporate spreads remained flat. Volatility increased during the second quarter before declining in the third quarter to end the period up slightly from year end 2009. Companies that were hit hardest by the market disruption of the last two years are in general still struggling to regain market share as customers and distributors continue to seek product providers that offer consistency, stability and financial strength. Jackson continues to benefit significantly from this flight to quality as its financial strength ratings from the four primary rating agencies have remained unchanged for more than seven years. Our strategy continues to focus on balancing value, volume and capital consumption both for variable and fixed annuities. Jackson sold no institutional products during the first nine months of 2010, as available capital was directed to support higher-margin variable annuity sales.

Jackson delivered record APE retail sales of £850 million in the first nine months of 2010, representing a 33 per cent increase over the same period in 2009. Jackson achieved exceptionally strong new business margins in 2009, largely as a result of our ability to take advantage of extreme dislocation in the corporate bond market. While recovery in the corporate bond market has led to somewhat lower new business margins due to lower spreads in 2010, we continue to write new business at aggregate Internal Rates of Return in excess of 20 per cent.

Total retail annuity net flows of £5.1 billion for the first nine months of 2010 represented a 56 per cent increase on the same period in 2009, reflecting the impacts of the significant increase in sales and continued low levels of surrender activity. Jackson was the third-largest9 seller of individual annuities during the first half of 2010, with a market share of 7.7 per cent, up from fourth and a market share of 5.9 per cent for the full year 2009.

Variable annuity


YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
APE £683m £432m 58% £236m £180m 31%

Variable annuity (VA) APE sales of £683 million in the first nine months of 2010 were 58 per cent higher than the same period in 2009 and higher than any previous full year VA sales. This reflects customers’ and distributors’ continued flight to quality, the equity market rally that began in the second quarter of 2009, the relative consistency of Jackson's product offering, continued disruptions among some of our major competitors and increased distribution capacity. Although we do not target volume or market share, these unique market conditions have meant that Jackson maintained its rank of fourth in variable annuity sales in the first half of 2010 (latest information available), while increasing its market share of new business sales to 10.510 per cent from 8.1 per cent for the full year 2009. Perspective II (which allows our customers to custom build each contract based on their requirements) was again the top selling VA contract in both the independent and bank channels in the first half of 2010, and in the second quarter of 2010 Perspective II recorded the highest quarterly retail sales ever for an individual VA contract.

This largely results from the severe contraction in the supply of VAs observed in the first half of the year, as the sales from some previously important players collapsed with an inversion of the dynamics between manufacturers and distributors: instead of fighting for ‘shelf space’, manufacturers who remained open for business were able to pick and choose between distributors and dictate their terms, at a time when customers continued to have a strong appetite for the product and the guarantees it provides. Margins on variable annuities in 2010 of 67 per cent were lower than those reported in the first nine months of 2009 of 75 per cent, due to lower spread on the guaranteed funds, and lower assumed separate account returns. This was offset somewhat by an increase in the take-up rate on guaranteed benefits – particularly guaranteed minimum withdrawal benefits, leading to an absolute level of margins which remains very attractive.

In October, Jackson launched LifeGuard Freedom Flex, the company’s first customisable guaranteed minimum withdrawal benefit, within its variable annuity line-up. Freedom Flex extends the menu-driven construction that Jackson offers in its variable annuity products, giving investors the ability to build a personalised benefit based on their individual retirement planning objectives while paying only for those options elected.

Jackson will continue its disciplined approach to product design and pricing, even as competitors start to return to more competitive pre-crisis activity and behaviour. This disciplined approach, along with its robust risk management and hedging program and commitment to product innovation, saw Jackson through the financial crisis and continues to provide Jackson with a long term sustainable competitive advantage in its market, despite signs of stronger competition re-emerging in the US VA market.

Fixed index annuity


YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
APE £84m £106m (21%) £24m £48m (50%)

Fixed index annuity (FIA) APE sales of £84 million through the first nine months of 2010 were down 21 per cent from the same period of 2009 as Jackson emphasised sales of the higher margin VAs. Jackson ranked11 fifth in sales of FIAs in the first half of 2010, with a market share of 6.0 per cent, down from fourth and a market share of 7.5 per cent for the full year 2009. FIA margins in 2010 were down from 2009 due to lower spread.

Fixed Annuity


YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
APE £65m £84m (23%) £24m £14m 71%

Jackson’s strategy of managing fixed annuity volumes resulted in 2010 APE sales of £65 million, 23 per cent lower than the same period in 2009. Jackson ranked12 eighth in sales of fixed deferred annuities in the first half of 2010, with a market share of 3.1 per cent, up from thirteenth and a market share of 2.2 per cent for the full year 2009.

b) Asset management

Curian Capital, a specialised asset management company that provides innovative fee-based separately managed accounts, had total assets under management of £3.0 billion at the end of September 2010 compared with £2.3 billion at the end of 2009. Curian generated record deposits of £976 million in the first nine months of 2010, up 93 per cent on 2009.

1.3 UK insurance operations

UK YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
Sales - APE £548m £534m 3% £166m £158m 5%
New Business Profit £192m £169m 14%
Margin – APE % 35% 32% 3pts

In the UK, Prudential continues to focus on balancing writing new business with sustainable cash generation and capital preservation. By competing selectively in the UK’s retirement savings and income markets, it successfully generates attractive returns on capital employed.

The business remains a market leader in both individual annuities and with-profits and has a unique combination of competitive advantages including longevity experience, multi-asset investment capabilities, a strong brand and financial strength.

Total APE sales of £548 million were up 3 per cent on the first nine months of 2009. This performance was consistent with Prudential’s strategy in the UK of not pursuing top-line sales growth as a business objective per se but instead deploying capital to opportunities that play to the core strengths of the business and generate the best returns. This has enabled us to continue growing our profitability.

The new business margin improved to 35 per cent in first nine months of 2010 from 32 per cent in the same period of 2009, primarily due to increased margins on with-profits bond business combined with strong margins achieved on shareholder-backed annuity business.

Sales of individual annuities of APE £160 million were 2 per cent down on the same period last year, mainly due to lower sales of conventional annuities. This was partly offset by strong sales of with-profit annuities which were up 54 per cent at APE £35 million. We continue to actively manage the flow of external conventional annuities to control capital consumption.

Internal vestings sales of APE £93 million were 9 per cent lower than 2009, principally due to the number of customers retiring being lower than in the same period in 2009. Fewer Prudential customers invested in a conventional annuity than in the previous year, but there continues to be a positive shift in the number of Prudential customers choosing to take a with-profits annuity, with sales of APE £12 million up 55 per cent on the first nine months of 2009.

Sales of onshore bonds of APE £110 million were broadly flat compared with the corresponding period last year. With-profits bond sales of APE £96 million were down 5 per cent on the exceptionally strong 2009 comparative. PruFund made up 77 per cent of total with-profits bond sales, with sales continuing to be driven by consumer demand for products offering a smoothed investment return and optional guarantees.

Sales of unit linked bonds of APE £14 million were 60 per cent higher, reflecting the success of our PruDynamic funds, launched in January 2010.

In September 2010, Prudential UK announced a five-year exclusive agreement with Santander to distribute its market-leading investment bonds in the UK. Prudential UK’s Flexible Investment Plan, including PruFund, will be available to Santander's 25 million UK customers in 1,300 high street branches throughout the country. The new agreement will go live in 2011. This agreement gives Prudential UK a new distribution channel alongside its existing IFA distribution, with PruFund Cautious in particular complementing Santander’s existing advised product range, and forms part of our investment to build multi-channel distribution.

Within corporate pensions, Prudential UK continues to focus on driving sales through providing Additional Voluntary Contribution (AVC) arrangements to the public sector and targeting selective growth opportunities from the substantial existing Defined Contribution book of business. Prudential UK has been the sole AVC provider to Teachers Pensions for 20 years and provides AVCs to 65 of the 99 Local Government Authorities in England & Wales. Corporate pensions sales of APE £169 million were 9 per cent above the first nine months of 2009. Existing schemes continue to provide growth opportunities from new members and additional contributions.

Sales of other products of APE £106 million increased by 4 per cent, with sales of the Flexible Retirement Plan, Prudential UK’s individual pension product with customer agreed remuneration, of APE £17 million up 9 per cent.

In August 2010, our joint-venture partner Discovery SA announced the completion of the acquisition of Standard Life Healthcare and its combination with the PruHealth business. As part of the transaction, Prudential UK reduced its shareholding in the combined PruHealth and PruProtect businesses to 25 per cent and sales are included on a proportionate basis from 1 August 2010. Prudential UK’s share of PruProtect sales was APE £14 million, an increase of 57 per cent over the corresponding period last year. PruHealth sales of APE £10 million were 6 per cent higher than 2009. At the end of September 2010 the combined Health business had approximately 700,000 lives insured.

1.4 M&G


YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
Retail business net inflows £5.1bn £5.7bn (11%) £1,742m £1,656m 5%
Institutional business net
inflows /(outflows)
£1.1bn £5.4bn (80%) £(206)m £856m (124%)
Total net inflows £6.2bn £11.1bn (44%) £1,536m £2,512m (39%)

M&G is an investment-led business whose aim is to generate outstanding long-term returns for its third party investors and the internal funds of the Prudential Group.

M&G’s strategy is to attract and retain the best people by providing an environment that nurtures investment talent. This enables us to deliver the level of returns that our clients have come to expect. A core focus on investment performance, combined with a well-diversified business mix and established distribution capabilities, has helped M&G achieve a strong nine months as indicated by sales performance and the growth in funds under management.

2009 was an outstanding year for M&G that saw heavy purchases of our top-performing bond funds from investors seeking to exploit an exceptional opportunity in fixed income markets. Although it was expected that net new business would return to more normal levels this year, net inflows over the first nine months have still reached £6.2 billion, a year on year decrease of 44 per cent. In the third quarter, net inflows were £1.5 billion, down by 39 per cent from the £2.5 billion achieved over the same period last year.

Nevertheless, the Retail Business continues to be highly successful, with year to date net inflows of £5.1 billion, only £0.6 billion behind the record level achieved last year which as mentioned above, was assisted by exceptional market conditions. Maintaining a strong sales performance, and in some highly volatile markets, demonstrates M&G’s strength in depth across all the main asset classes and sales channels. Indeed, M&G’s Retail business in the UK has been number one for net retail sales over seven consecutive quarters, based on data to the end of June 2010.

Our market-leading bond fund range continued to attract a significant share of inflows, accounting for 49 per cent of net inflows over the year to date. The M&G Optimal Income Fund was the best-seller attracting £1.2 billion of net flows. However, against a background of continued recovery in equity markets, net inflows into M&G’s equity fund range have risen to £2.0 billion including £0.8 billion into the M&G Recovery Fund. This equates to 39 per cent of total net flows and is up from 20 per cent in the previous year. The remainder of inflows were into M&G property funds. The asset mix of inflows has fluctuated over the period with equity and property funds dominating the first two quarters before a significant switch towards bonds in the third quarter.

The performance of M&G’s funds has remained excellent. Over the three years to the end of September 2010, 38 per cent of our retail funds have delivered top quartile performance.

In the institutional market, M&G also attracted net new business with inflows of £1.1 billion for the first nine months. This compares with net inflows of £5.4 billion for the same period last year, which benefitted from a single £4 billion fixed income mandate. Excluding this single mandate, net inflows in the institutional market have decreased by 23 per cent year on year.

Investment performance in the institutional business continues to be very strong, with all of our actively managed external mandates at or above benchmark over the three years to the end of September 2010.

M&G’s total funds under management at 30 September 2010 were £191.2. billion, up 10 per cent on the 2009 year end and 13 per cent on the third quarter of 2009. Total external funds under management at 30 September 2010 were £82.9 billion, an increase of 18 per cent since the start of the year and 25 per cent on the third quarter of 2009. This latter increase was the combined result of fourth quarter 2009 flows of £2.4 billion, continued strong flows of £6.2 billion over the first nine months of 2010, and positive market movements.

M&G’s exceptional sales performance in 2009 was not expected to be repeated in 2010. Net sales in 2010 remain positive however, against a background of ongoing excellent investment performance from M&G’s flagship funds.

1.5 Asia Asset Management


YTD
2010
YTD
2009
% change
on YTD 09
Q3
2010
Q3
2009
% change
on Q3 09
Retail and institutional business net inflows £1,734m £127m 1265% £407m £320m 27%
Money Market Funds net(outflows) / inflows (MMF) £(1,766)m £1,764m (200%) £(141)m £115m (223%)

Asia asset management has seen continued strong inflows in the higher margin Retail and Institutional business, an area of strategic focus, with net inflows in the quarter up 27 per cent to £407 million. Our strategy to enhance sales contribution from the offshore client segment has started to deliver. For the quarter, our offshore funds business in Taiwan achieved record net inflows of £351 million.

The quarter also included robust gross inflows into Japan's Asia/Oceania High Dividend Equity Fund of £203 million and successful new product launches in China and Taiwan. The CITIC-Pru's Zengqiang Bond Fund launched by our joint venture business raised £108 million (at our 49 per cent shareholding), while the PCA Global High Yield Bond Fund, introduced in Taiwan, raised £113 million.

Total Funds Under Management (FUM) exceeded the £50 billion mark for the first time and closed the quarter at £50.3 billion. The overall FUM comprised of £21.5 billion from external clients, £24.4 billion from Prudential's Asia life funds and £4.4 billion from the rest of the Group.

Investment performance remained robust with 65 per cent of the funds managed by the Asia Asset Management team outperforming their benchmarks or achieving peer rankings within the top-two quartiles based on an average of one and three-year performance. Specifically, in China, the overall equity funds performance of the CITIC-Prudential team were rated top quartile by a local rating agency relative to its peers over a one and two-year period.

2. Financial Management

The Group remains focused on the proactive management of its balance sheet and risk profile. We continue to impose stringent stress testing on our key capital measures, ensuring we could withstand, both in the short and medium term, significant market shocks.

2.1 Capital Management

Our capital position remains strong. We have continued to place emphasis on maintaining the Group’s financial strength through optimising the balance between writing profitable new business, conserving capital and generating cash. We estimate that our Insurance Groups Directive (IGD) capital surplus was £3.4 billion at 30 September 2010, covering our capital requirements 2.6 times. This compares to £3.4 billion at the end of 2009 and £3.4 billion at the half year 2010 (pre 2009 final and 2010 interim dividends respectively).

The movements within our IGD position since we disclosed our interim 2010 results reflects underlying earnings offset by payment of the interim dividend, investment in new business and foreign exchange movement.

As at 30 September 2010 stress testing of our IGD capital position to various events has the following results:

  • An instantaneous 20 per cent fall in equity markets from 30 September 2010 levels would reduce the IGD surplus by £150 million;
  • A 40 per cent fall in equity markets (comprising an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four week period) would reduce the IGD surplus by £700 million;
  • A 150bps reduction (subject to a floor of zero) in interest rates would reduce the IGD surplus by £350 million;
  • Credit defaults of ten times the expected level would reduce IGD surplus by £550 million.

In addition to our strong capital position, on a statutory (Pillar 1) basis the total credit reserve for the UK shareholder annuity funds also protects our capital position in excess of the IGD surplus. This credit reserve as at 30 September 2010 was £1.8 billion. This represents 43 per cent of the portfolio spread over swaps, compared to 41 per cent at 31 December 2009, and 39 per cent as at 30 June 2010.

2.2 Credit

The Group’s total debt securities portfolio on an IFRS basis is estimated at £111.2 billion at 30 September 2010, excluding holdings attributable to external unit holders of consolidated unit trusts. Of this total, £72.9 billion is in the UK, including £46.4 billion within the UK with-profits fund. Shareholder’s risk exposure to the with-profits fund is limited as the solvency is protected by the inherited estate. Outside the with-profits fund there is £4.9 billion in unit-linked funds where the shareholder risk is limited, with the remaining £21.6 billion backing the shareholder annuity business and other non-linked business (of which 79.5 per cent is rated AAA to A, 18.6 per cent BBB and 1.9 per cent non-investment grade). No defaults were reported in the third quarter of 2010 for UK shareholder backed business.

Asia’s debt securities portfolio totals £9.5 billion, of which £5.6 billion is invested in unit-linked and with-profits funds with minimal shareholder risk and £3.9 billion is held by shareholder backed non-linked business. No defaults were reported in the third quarter of 2010.

The most significant area of exposure to credit risk for the shareholder remains Jackson in the US. Jackson’s fixed income portfolio at 30 September is estimated at £27.3 billion. As reported at 30 June 2010 the net unrealised gain position continues to steadily improve. Jackson’s net unrealised gains have increased to £1.9 billion at 30 September 2010 from £1.2 billion at the end of 30 June 2010.

Gross unrealised losses on securities priced below 80 per cent of book value were £277 million at 30 September 2010 compared to £340 million at the end of 30 June 2010 and £594 million at the end of 2009.

In Jackson, total amounts charged to profits relating to debt securities in the third quarter 2010 were £23 million. This compares to £161 million for the first six months of 2010. The total charged for the first nine months of 2010 was therefore £184 million (first nine months of 2009: £522 million). Jackson did not experience any defaults during the third quarter of 2010. Write downs of impaired securities in the third quarter of 2010 were £26 million, of which £6 million were on Residential Mortgage Backed Securities (RMBS). Write downs on corporate bonds totalled £1 million.

ENDS

Enquiries:

Media Investors/Analysts
Edward Brewster +44 (0)20 7548 3719 David Collins +44 (0)20 7548 2871
Robin Tozer +44 (0)20 7548 2776

Notes:

  1. Asia 2010 and 2009 comparative APE new business sales and new business profit (NBP) exclude the Taiwan agency business disposed of during the second quarter of 2009 and the Japanese insurance operations which we have closed to new business with effect from 15 February 2010.

  2. Annual premium equivalent (APE) sales comprise regular premium sales plus one-tenth of single premium insurance sales and are subject to rounding.

  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. NBP assumptions for the period are detailed in the accompanying schedule 5. All references to NBP margins on pages 1 to 15 of this statement refer to margins on an APE basis, calculated as the ratio of new business profit to APE. New business profits are presented pre-tax.

  5. There will be a conference call today for wire services at 7.30am (GMT) hosted by Tidjane Thiam, Group Chief Executive. Dial in telephone number: +44 (0)20 3140 0668. Passcode: 511722#.

  6. There will be a conference call today for analysts and investors at 9:30am (GMT) hosted by Tidjane Thiam, Group Chief Executive. Dial in telephone number: +44 (0)20 3140 0668. Passcode: 862065#. It will be available for replay until 10 December 2010: UK +44 (0)20 3140 0698, UK toll free 0800 368 1890, US toll free +1 877 846 3918 Reference 374908#.

  7. High resolution photographs are available to the media free of charge at www.newscast.co.uk (+44 (0)20 3137 9137) or by calling the media office on +44 (0)20 7548 2466.

  8. Financial Calendar:
    Investor Day 1 December 2010
    2010 Full Year Results 9 March 2011
    First Quarter 2011 New Business Release 27 April 2011
    AGM 19 May 2011
    2011 Half Year Results 2 August 2011
    Third Quarter 2011 New Business Release 8 November 2011
  9. Sales for overseas operations have been reported using average exchange rates for the period as shown in the attached schedules. Reference to prior year figures in the commentary is on an actual exchange rate basis unless stated. An alternative method of presentation is on a constant exchange rate basis.

  10. 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 through its subsidiaries and affiliates throughout the world. It has been in existence for over 160 years and has £309 billion in assets under management (as at 30 June 2010). 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.

  11. 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 standards 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, whether as a result of future events, new information or otherwise except as required pursuant to the Listing Rules, the Disclosure and Transparency Rules, the Hong Kong Listing Rules or the SGX-ST listing rules.

1 After payment of 2010 interim dividend
2 Asia 2010 and 2009 comparative APE new business sales and new business profit exclude the Taiwan agency business disposed of during Q2 2009 and the Japanese insurance operations which we have closed to new business from 15 February 2010
3 Unless otherwise stated all growth rates are on a sterling basis. Growth rates on constant currency are presented on schedule 1B of the Interim Management Statement
4 For Q3 2010 we have presented year to date new business profit and margin for the period ended 30 September 2010 and the comparative period. The assumptions underlying new business profit are presented in schedule 5 to the Interim Management Statement
5 Source: VARDS/Morningstar
6 Asia 2010 and 2009 comparative APE new business sales and new business profit exclude the Taiwan agency business disposed of during Q2 2009 and the Japanese insurance operations which we have closed to new business from 15 February 2010
7 For Q3 2010 we have presented year to date new business profit and margin for the 9 month period ended 30 September 2010 and the comparative period. The assumptions underlying new business profit are presented in schedule 5 to the Interim Management Statement
8 Percentages based on unrounded numbers
9 Source: Limra
10 Source: VARDS / Morningstar
11 Source: Annuity Specs
12 Source: Limra

Links to supplementary information about this release: PDF
Prudential plc Third Quarter 2010 Interim Management Statement - News Release

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