PCA contributed 48 per cent of Group new business achieved profit
The challenging market conditions of 2003, particularly in the first half, affected the financial results we announced in February. While total insurance and investment sales of £31.5 billion increased by 11 per cent at constant exchange rates, our new business achieved profits of £605 million decreased by 18 per cent and our modified statutory basis operating profits decreased 17 per cent to £357 million.
New business achieved profits of £605 million decreased by 18 per cent at CER, reflecting lower sales volumes in the UK and the US, and total achieved basis operating profits of £794 million were down 27 per cent at CER.
With approximately 70 per cent of the world’s retirement assets, the US is a key market for us. In Jackson National Life (JNL), we have one of the few life insurers to have a significant market position across the range of fixed, variable and equity-linked products and when combined with its broad distribution mix, this allows JNL to operate successfully across the economic cycle. Despite equity market volatility and the low interest rate environment during the year, JNL delivered strong results in 2003 with MSB operating profits up 15 per cent at CER. It remained focused on delivering value from retail markets while actively managing capital. Retail sales of £3.6 billion represented JNL’s second best year and over 90 per cent of JNL’s sales during the year came from products launched
Prudential remains exceptionally well positioned to benefit from Asia’s outstanding long-term growth prospects. PCA
At CER, the MSB result was 15 per cent ahead of 2002. In 2003, net losses on bonds, including defaults and impairments, were significantly lower than each of the last two years at £39 million. However, since bond losses are accounted for on a five-year averaging basis within operating profit, the MSB operating result included a £123 million charge in relation to averaged realised gains and losses on bonds, higher than the £121 million charge in 2002.
Private equities and real estate 3 3 4 Equities, cash and other assets 2 2 2
The bonus and investment policy for each type of withprofits policy is the same irrespective of whether or not the assurance applies. Hence removal of the assurance for new business has had no impact on policyholder returns and this is expected to continue for the foreseeable future.
SHAREHOLDERS’ FUNDS On the achieved profits basis, which recognises the shareholders’ interest in long-term businesses, shareholders’ funds at 31 December 2003 were £7.0 billion, a decrease of £153 million from 31 December 2002.
Statutory basis shareholders’ funds, which are not affected by fluctuations in the value of investments in the Group’s with-profits funds, were £335 million lower at £3.3 billion.
INTERNATIONAL ACCOUNTING STANDARDS The European Union (EU) requires that all listed European companies, including banks and insurers, prepare their 2005 financial statements in accordance with EU approved International Accounting Standards (IAS). It is intended that by April 2004 the International Accounting Standards Board (IASB) will have completed its deliberations, and fully issued all International Financial Reporting Standards (IFRS).
It is anticipated that many of the Group's contracts will fall into this category. Where contracts do not contain significant insurance risk, valuation under IAS 39 will be required. The detailed mechanism for how this will apply remains under discussion by the IASB. Prudential’s understanding though is that it is likely that for unit-linked business, which is one of the key types of contract likely to be affected, that continuation of unit-linked liability accounting will, with deferral of acquisition costs in some form, continue to be permitted.
Unit-linked products tend to have higher profits on the achieved profits basis of reporting than traditional non-linked products as expenses and charges are better matched and solvency capital requirements are lower. At the end of 2003 PCA offered unit-linked products in nine of the 12 countries in Asia in which it operates.
However, the products sold by the life insurance industry are by their nature long-term, as it commits to service the products for many years into the future. In many cases policies require customers to continue to pay further premiums in the future. The profit on these insurance sales is generated over a significant number of years and MSB profits do not, in Prudential’s opinion, properly reflect the inherent value of these future profit streams.
Community/Society Our ‘Plan for Life Learning’ consumer education programme is testing a variety of financial education approaches in partnership with major charities and is also informing good practice and public policy development via research and seminar activity. We have established a three-year partnership programme with Citizens Advice called ‘Financial Skills for Life’. This funds nine bureaux to test new models of delivering face to face financial education, as well as supports and co-ordinates existing work in this area undertaken by 65 other bureaux.
DIVERSITY All employees and applicants for roles across the Group are given equal opportunity in all aspects of employment. This principle is embedded in policies and management practices. PCA Life Japan sponsored the first Women in Japan Forum under the theme Balancing Work and Lifestyle. The three hour event attracted over 100 working women with very positive feedback.
Michael McLintock receives an annual incentive award in line with remuneration levels in the investment management industry. For on-target performance based on the profits of M&G, the fund performance of M&G and Group and individual performance, the award is 300 per cent of basic salary, with a maximum award of 500 per cent of basic salary. Any part of the annual incentive award made for performance above on-target is made in Prudential shares. Receipt of these shares is deferred and the shares are normally only released after three years providing he is still in employment. During the deferral period, dividends accumulate for his benefit.
Remuneration policy for executive directors in 2004 For 2004, the Board, on the recommendation of the Remuneration Committee, has maintained the remuneration policy that was applied in 2003 as described above except for a change in the Restricted Share Plan. Until 2004 the plan provided payouts at the end of the respective performance periods when Prudential’s performance was above 60th percentile. The Remuneration Committee has reviewed this and has removed any potential payout for performance below median for any RSP awards in 2004. In all other respects the RSP remains the same as in previous years. In 2004 it is intended that the executive directors receive a grant under the RSP of conditional awards of shares in the Company which will be held in trust for three years. At the end of the three-year performance period, a right to receive shares at no cost to the individual may be granted, dependent on the Company’s performance. No rights will be granted if the Company’s TSR performance as ranked against the comparator group is below 50th percentile. For performance at 50th percentile, an award of 25 per cent of the maximum award is made. The maximum grant will be made only if the TSR ranking of the Company is 20th percentile or above. Between these points, the size of the grant made will be calculated on a straight line sliding scale. In normal circumstances, directors may take up their right to receive shares at any time during the following seven years.
In 2004, it is intended that the same award levels as in 2003 will be made to Jonathan Bloomer, Philip Broadley, Clark Manning, Michael McLintock and Mark Wood.
This graph shows the Company’s Total Shareholder Return performance against a representative sample of our European peer group.
In determining the conditional awards to be made for 2003, the shares were valued at their average share price during the preceding calendar year, and the price used to determine the number of shares conditionally awarded in 2003 was 570.3 pence (2002 – 818.7 pence).
REMUNERATION REPORT CONTINUED FOR YEAR ENDED 31 DECEMBER 2003 46 PRUDENTIAL PLC ANNUAL REPORT 2003
The interests of directors in shares of the Company's listed subsidiary, Egg plc, are shown below, including changes between
Age at service at 31 Dec 2003 20022 20023 B A during 2003 arrangements5
Allocated investment return transferred from the non-technical account 11 7 8
Change in long-term business provision: Gross amount* (3,935) (4,104) Reinsurers’ share (15) 59
Total recognised (losses) gains relating to the financial year* (45) 216
3. SIGNIFICANT ACCOUNTING POLICIES CONTINUED Investments in participating interests A participating interest is a beneficial equity investment where the Group exercises influence over the investee’s operating and financial policies. A participating interest where the Group exercises significant influence over the investee, generally through ownership of 20% or more of the entity’s voting rights, is considered to be an investment in associate. The Group’s investments in associates are recorded at the Group’s share of net assets. The carrying value of investments in associates is adjusted each year for the Group’s share of the entities’ profit or loss.
Balance sheet Present value of future margins relating to advances from reinsurers – – Present value of acquired in-force long-term business 108 133 Other assets, net of liabilities 3,170 3,480
UK and Europe Insurance Operations 7,264 8,675 Jackson National Life 4,369 6,098 Prudential Asia 2,148 1,896
GIC – Medium Term Notes 303 1,118 – – 30 112
7. SEGMENTAL INFORMATION – INSURANCE AND INVESTMENT PRODUCTS NEW BUSINESS CONTINUED Investment Products – Funds Under Management (FUM)
Long-term business operations: UK and Europe* 78 105 Jackson National Life 58 48 Prudential Asia 18 19
At beginning of year 2,001,662,348 100.1 549.7 Shares issued under share option schemes and to employee share ownership trust 765,700 0.0 2.8 Shares issued in lieu of cash dividends 6,748,782 0.4 27.3 Transfer to retained profit in respect of shares issued in lieu of cash dividends (27.3)
90 PRUDENTIAL PLC ANNUAL REPORT 2003 31. SUBSIDIARY UNDERTAKINGS The principal subsidiary undertakings of the Company at 31 December 2003, all wholly owned except Egg Banking plc, were: Main activity Country of incorporation
(vi) The interests of the holders of the Bonds issued by Scottish Amicable Finance plc, a subsidiary of the Scottish Amicable Insurance Fund of The Prudential Assurance Company Limited, are subordinate to the entitlements of the policyholders of that fund.
Compensation of £11m in respect of mis-sold endowment products was paid in 2003 by Prudential Assurance’s main with-profits fund and a further provision of £34m was established in the fund at 31 December 2003. This provision has no impact on the Group’s profit before tax.
BASIS OF AUDIT OPINION We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the directors’ remuneration report to be audited. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.
Post-tax expected long-term nominal rate of return: Pension business (where no tax applies) 6.8% 6.6% Life business 5.9% 5.7%
Based on operating profit after tax and minority interests before amortisation of goodwill and exceptional items 794 (273) 521 6 527 26.4p Adjustment for amortisation of goodwill (98) (98) (98) (4.9)p Adjustment from post-tax long-term investment returns to post-tax actual investment returns (after related
UK and Europe Insurance Operations(i) (122) (233) Jackson National Life(ii) (263) (76) Prudential Asia(iii) (155) (158)
(ii) The £263m charge for 2003 for Jackson National Life primarily reflects the reductions in the projected fund earned and crediting rates on in-force business which result in lower projected policyholder liabilities on which future spread will be earned, together with increases in the risk discount and inflation rates.
(i) Investment in operations reflects increases in share capital. This includes certain non-cash items as a result of timing differences.