1 Group Financial Highlights 2 Prudential at-a-Glance 3 Our Purpose 4 Chairman’s Statement 6 Group Chief Executive’s Review
Statutory Basis Financial Statements 48 Consolidated Profit and Loss Account 51 Consolidated Statement of Total
Movement in Shareholders’ Capital and Reserves 52 Consolidated Balance Sheet 54 Balance Sheet of the Company 55 Consolidated Cash Flow Statement 56 Accounting Policies 59 Notes on the Financial Statements 73 Auditors’ Report 74 Five Year Review
• Underlying operating profit before amortisation of goodwill up 6 per cent to £996 million
• Total dividend up 9.5 per cent to 23 pence per share
• Plans for an initial public offering of a minority stake in egg:| to be pursued*
Operating profit before amortisation of goodwill 776 868 Amortisation of goodwill (54) – Short-term fluctuations in investment returns 28 24 Profit on business disposals – 249
Earnings per share Based on operating profit after tax before amortisation of goodwill 29.1p 33.7p Based on profit after tax – basic 27.8p 45.3p Based on profit after tax – diluted 27.7p 45.0p
Profit before tax includes actual investment returns. The company believes that operating profit, which is based on longer-term investment returns, before amortisation of goodwill better reflects the group’s underlying performance.
M&G was founded in 1931 and was acquired by Prudential in 1999. It has £21 billion funds under management and is the largest retail unit trust manager in the UK. Its products include unit trusts, ISAs and investment trusts.
At Prudential our aim is lasting relationships with our customers and policyholders, through products and services that offer value for money and security. We also seek to enhance our company’s reputation, built over 150 years, for integrity and for acting responsibly within society.
I am pleased to announce very good results with new business achieved profits (our key indicator of value added for our long-term insurance business) up 46 per cent and a record in-flow of new funds of over £18 billion. Growth in our UK businesses has been strong, Jackson National Life in the US has put in another impressive performance and our Asian business has continued its rapid growth. Given our confidence in the business, the Board has decided to increase the total dividend by 9.5 per cent to 23.0 pence per share.
This year we acquired M&G Group P.L.C. (M&G) – perhaps the most highly regarded name in the retail unit trust field. We have successfully integrated M&G with the rest of the UK business and are capitalising on the synergies that exist between it and our other operations.
Our move into mainland Europe, with the announcement of our new partnership agreements with CNP Assurances in France and Signal Iduna in Germany, is also significant. This provides us with a foothold in markets that will be of increasing importance over the coming years.
There have been, of course, the issues associated with the mis-selling of personal pensions in the UK, which affected the whole industry and are not yet fully behind us. Rectifying cases has absorbed considerable resource in 1999; there has been an increase in provision for future costs of £0.6 billion and an increase in cumulative costs paid to date of £0.1 billion.
We now estimate the total cost of pension mis-selling to be £2 billion. We are determined to do whatever is required to ensure that none of our customers lose out and that such a situation will not happen again.
At this year’s Annual General Meeting we shall be bidding farewell to Michael Abrahams, a director since 1984 and Deputy Chairman since 1991. He leaves with our sincere thanks and best wishes.
I would also like to pay tribute to David Gillmore who died early in the year. Lord Gillmore served on the Board for four years and in that time he made an invaluable contribution to the company especially through his extensive knowledge of Asia.
I have been pleased to welcome to the Board several new members: Bridget Macaskill, Chief Executive Officer of OppenheimerFunds Inc., Rob Rowley, Finance Director of Reuters Group plc, and Mark Tucker, Chief Executive of Prudential Corporation Asia. More recently I welcomed Sir Roger Hurn as a director. I am sure that they will all make a valuable contribution to our activities.
‘We have increased our product range, expanded our distribution capabilities hugely, grown our business in the UK and the US and taken it further into Asia.’
Over the past 12 months we have made considerable progress towards delivering our strategic objectives in the UK, the US, Asia and Europe. We have taken forward our programme of restructuring and re-engineering our existing operations while investing and developing new businesses. This strategy has helped us to maintain our leadership position in a rapidly changing financial services sector. By harnessing new technology we have been able to maximise development and efficiencies across all areas of our business. This focus on technology gives our customers better access to our business, higher levels of customer service and drives down unit costs.
These developments, coupled with our diversified product range and increased distribution capability, have resulted in a record in-flow of more than £18 billion of new funds in 1999.
We continue to invest in egg:|. To enhance the future development of this business and to maximise long-term value for our shareholders, we have decided to pursue a plan for an initial public offering (IPO) of a minority stake in egg:| subject to continuing progress in the business and favourable market conditions. It is currently intended that an IPO would take place later this year.
We are determined to do all that we can to accelerate the growth of egg:| and consolidate its UK market position as the leading internet financial services provider. In order to do this we need to be able to attract outstanding talent, create a currency for purchasing other internet properties and services, increase the transparency of the business and increase accountability. An IPO represents the most effective way of achieving those objectives.
Internationally we have extended our reach. 1999 has been a significant year for our Asian operations. We are the first UK company to be granted life licences in China and Vietnam; we have also made a major acquisition in Taiwan and signed a significant joint venture agreement in Hong Kong. In the US, Jackson National Life continues its strong performance with record sales and profits. At the end of 1999, we formed Prudential Europe and secured strategic alliances in France and Germany, giving us footholds in markets with considerable growth potential.
We continue to make good progress in implementing our managing for value programme across the group. Each business has clear value creation goals with management reward based upon their delivery.
Our industry is going through dramatic change. In the areas of the world in which we are operating we are witnessing rapid consolidation. We have been changing too and are now a very different company from the one I joined five years ago. I believe that we will need to change, to at least the same extent, over the next five years.
One of the most powerful and potent forces of change is our customers. They are taking charge of their own futures in a very visible way. They know that they have to make provision for their own financial security and are tackling the task with energy and intelligence. They need and want value-for-money products which work for them. This puts the onus on us to deliver products which perform, which meet consumers’ needs and which are very easy to understand. We know that our customers can shop around and that they will do so unless we offer the best products and services at the right price.
Not at all surprisingly, governments are very supportive of consumers taking responsibility for their finances. In the UK this has, this year, led to the proposed creation of Stakeholder Pensions. Stakeholder Pensions will be available from 2001 to people on lower incomes, to those who hitherto have been unable to access corporate pension schemes and to spouses who are not active in the workplace. The UK Government also want them to be very affordable. To achieve this, costs have to be reduced both by the producers and by developing industry-based employer groups. At Prudential we are comfortable with this framework and have already invested time and resource to design models which will deliver this proposition to customers. The strides we have made in the development and use of new technology and the economies of scale offered by an operation of our size, lead to a tremendous opportunity for Prudential and its customers to benefit greatly from this new environment.
We are also very aware that our industry has not always been the most dynamic in recent years. The number of new entrants who have come into our market has been a wake-up call to the traditional players. It has opened up the market to greater competition and to new ideas that benefit the consumer. So that we can stay ahead of this competition, we have been very active over the past three years in re-shaping and re-engineering our businesses in the UK and US. We have also sought new platforms in Asia and Europe. We want to be the company people turn to for the right products in whatever way they prefer to be served. One of our big successes has been egg:|: through which we have created and built our own new entrant on a vision of designing products and a service which treats our customers as they want to be treated.
To stay ahead of the curve we have invested considerably in new technology. We were faster off the mark than others in the UK with our investment in egg:| and all parts of the group are making rapid progress in making e-commerce integral to the way we do business. Scottish Amicable and Jackson National Life both have extranets offering intermediaries ‘self-service’. Prudential Group Pensions is developing a distribution system that exploits e-commerce technology. Prudential Retail Financial Services has rolled out laptops to the direct sales force and general insurance customers can obtain quotes and take out policies on-line. In Singapore, our sales force can now use laptops to approve applications and can verify signatures
digitally – one of the first companies in the world to be able to do so. In the US, Jackson National Life has a comprehensive IT programme which has not only increased levels of customer service, but has reduced costs dramatically.
On a personal note, I am delighted to become Group Chief Executive of this remarkable company at such an exciting time in its development. In Sir Peter Davis I have a hard act to follow and I would like to pay tribute to Sir Martin Jacomb who retires at the Annual General Meeting. He has given great guidance and support in a period of dramatic change.
The challenges will be great, but the dedication and professionalism of our staff and the commitment of our Board mean that these are challenges to which I look forward and to which I know we will all rise.
Delivering quality and value egg:| and Prudential Banking In little more than a year, egg:| has become established as a household name and one of the UK’s most recognised e-commerce brands. Our strategy of offering some of the most competitive and customer friendly products in the market, delivered using the latest in internet design and technology, has resulted in an egg:| customer base of 940,000 and deposit funds of £7.6 billion at the year end. This remarkable growth has exceeded our initial business targets and egg:| is regarded as the UK’s leading e-commerce financial services website.
By late February the combined Prudential Banking and egg:| mortgage book stood at £1.7 billion, of which £452 million is egg:| mortgages, while egg:| personal loans have reached £227 million.
Our hi-tech communication centres in Dudley and Derby continue to take some 60,000 calls and 11,000 e-mail enquiries from customers each week. Our innovative working practices and specially designed employee training programmes all lead to a unique egg:| culture and customer experience.
Building on the success of its core savings and loan products, egg:| launched an internet credit card in September 1999 which now has over 250,000 account holders. Credit card customers benefit from market-leading rates and a guarantee against internet fraud. We also offer an on-line shopping zone which offers some of the best value retail consumer products available.
We have previously announced our intention to launch a new on-line unit trust supermarket which will give egg:| customers access to investment funds offered by leading investment houses, as well as an on-line share-dealing service.
Prudential’s UK retail insurance operations comprise three businesses: Retail IFA, Prudential Retail Financial Services and Prudential Annuities.
Scottish Amicable’s high standards of customer care were recognised in the 1999 Financial Adviser Awards where it received ‘five star’ awards for customer service in both the Life and Pensions and Investments categories. We were also voted ‘most admired IFA company’ by readers of Financial Adviser. Prudential Intermediary Division and the IFA Service Centre were again voted best providers by the Bradford and Bingley Building Society, their largest supporting IFA. In addition, several products were recognised with industry awards, including Prudence Bond, Home Purchaser (our mortgage endowment product) and our Long-Term Care Bond.
Sales of insurance and investment products rose by 16 per cent to £1.8 billion despite a 40 per cent reduction in the number of sales force consultants. This result reflects the success of our initiatives to increase efficiency and improve consultant productivity. Single premium sales were up 22 per cent at £1.7 billion, reflecting higher sales of with-profit savings products, fuelled by the low interest rate environment. Regular premium sales were down 24 per cent to £146 million, mainly due to lower sales of pension products. Underlying long-term business statutory profit rose nine per cent to £319 million and underlying general insurance profit increased 56 per cent to £61 million. Achieved new business profit on long-term business was up 20 per cent to £83 million.
During 1999, we re-engineered the structure of PRFS to broaden its appeal to customers and to reduce its cost base in anticipation of an even more competitive financial services environment. Significant progress towards this goal has been made through a programme to remove some 5,000 jobs over three years, 3,000 of which have been accounted for over the last year.
Our investment in new technology will support these efforts and will make the sales process more efficient by reducing the administrative burden. In addition the move towards remote working, with no branch infrastructure, has been made possible by introducing laptop computers as a tool for the sales force. This will lead to a greater focus on advising customers and increasing productivity.
We are also harnessing technology to develop higher levels of interactivity with our customers. We have launched our new-look website to inform customers about our products and to enable customers to arrange visits by financial consultants.
We are currently testing a system which will provide on-line advice in real-time with a consultant and general insurance customers can now obtain quotes and take out policies on the internet.
Prudential Annuities Prudential Annuities is the market leader in the UK pensions annuity industry which is projected to grow strongly over the next few years. We now have over 700,000 customers and more than a 20 per cent share of new business in 1999. Total sales were £2.2 billion and funds under management now exceed
In the individual pension annuity market, with-profit sales have shown strong growth and now represent more than 15 per cent of individual sales. Bulk annuity sales in 1999 represented more than half our total sales and were boosted by two big sales totalling £1.1 billion in July.
Prudential Group Pensions Group Pensions forms an increasingly significant part of Prudential’s business. We are a leading provider of employer sponsored pension schemes, meeting the pension needs of many large companies. We administer 3,200 defined contribution schemes with a total of some 400,000 members, and 275 defined benefit schemes comprising some 130,000 members.
During 1999, Group Pensions’ statutory profit rose 64 per cent from £22 million to £36 million while new business achieved profit was up 30 per cent to £26 million.
The Government’s proposal to introduce Stakeholder Pensions in 2001, and in particular the limiting of fees to a one per cent annual management charge, offers both a major challenge and a significant opportunity. The challenge for providers is to develop more economic methods of servicing and distribution. At the same time, the growth of this new Stakeholder market, together with the continuing shift towards flexible defined contribution arrangements, offers Group Pensions an opportunity to deliver significant shareholder value through simple, value-for-money products and services.
This strategy reinforces our move away from the traditional ‘sell’ approach to a ‘buy’ service that complements our e-commerce proposition.
At the same time we are bringing Prudential Portfolio Managers (PPM) and M&G together into a unified business. We will combine the investment processes and resources of both in a single new management structure under Michael McLintock as Chief Executive.
We have already successfully completed the merger of the fixed income teams (creating the largest fixed interest team in the UK, with funds under management of £33 billion), as well as the two retail administration centres. In addition we are in the process of moving M&G’s life and pensions business to Craigforth under the management of Scottish Amicable.
Overseas, PPM’s principal operations in the US and Asia have been re-aligned to report alongside the local operations to maximise the synergies between the investment process and retail product manufacturing and distribution.
During the year PPMV delivered continued growth in Europe and the Asia-Pacific region with a total of £160 million invested in 13 new private equity transactions in Europe, Asia and Australia. Our London and Paris teams led five European transactions with a combined deal size of £220 million. The Sydney and Hong Kong teams completed eight transactions, including an investment in the management buy-out of Mando Climate Control Corporation, one of the largest private equity deals in Asia in 1999.
M&G We purchased M&G Group P.L.C. (M&G) to enhance the group’s retail fund management presence. M&G is the oldest and largest retail unit trust manager in the UK and has a very strong brand. Performance in its first eight months since acquisition has been strong, with sales of £583 million and underlying profit of £56 million – both ahead of acquisition assumptions. At the end of 1999, M&G had £21 billion of funds under management.
At the time of purchase we stated that we believed that the unit trust market would grow by 21 per cent compound over five years. Those estimates have been already superseded with the market growing by 39 per cent in the first year. This confirms completely our view of retail fund management as a strong growth market.
In the last quarter of 1999, sales through the internet increased dramatically and, as we enter 2000, six per cent of our direct business is sold via the internet. We will be making a substantial investment in our systems over the next three years. The project will create an efficient and uniform system for collective investment vehicle administration and a platform for operating in an electronic environment.
Prudential Europe The single market and the impact of technology and major demographic shifts are bringing about unprecedented change in the savings and investment markets of continental Europe. These, coupled with the lowering of barriers to cross-border trade within the EU, mean that we have been able to create a new business model to develop the opportunities that are emerging for retail financial services in continental Europe.
In November 1999, we announced partnerships with CNP Assurances in France and Signal Iduna in Germany. In forging links with France’s leading life assurer and one of Germany’s major insurance providers, we have gained access to local markets and marketing expertise and large scale distribution networks. Our strategic partnerships include the sharing of technical expertise and the consideration of joint ventures both in the respective home markets and elsewhere.
Whilst, in the short term, retail savings and investment products are our main focus, in the longer term, the provision of funded pensions both on an individual and a group basis will be a major market opportunity. In addition, we will distribute products through the local equivalents of independent financial advisers and insurance brokers.
Note: For France this asset class consists of insurance investment certificates (Livre A contracts), a form of tax free savings account Source: Donaldson, Lufkin & Jenrette: Pan-European Insurance Industry
US Operations Jackson National Life (JNL) is one of the top 20 life companies in the US. Its product range encompasses traditional fixed annuities, variable annuities, equity-linked indexed annuities, stable value Guaranteed Investment Contract (GIC) business and life assurance products.
JNL continues to go from strength to strength with record profit and sales in 1999. Statutory profit has risen ten per cent to £451 million (after including a £6 million investment in building JNL’s broker-dealer operations and PPM America) with single premium sales 43 per cent ahead of 1998 at £4.1 billion. Annuity sales of £2.4 billion were 65 per cent ahead of the prior year while GIC sales totalled £1.6 billion.
By investing in new technology we have not only improved the service experienced by customers, but have brought about a dramatic financial impact: the cost of a typical call from a customer has been reduced from US$5 to between 25-50 cents for an automated phone call, and five cents for an internet ‘hit’.
During 2000, JNL’s conversion to one system-wide computer platform will give us the processing capability to connect even more effectively with the internet, opening new doors for customer service.
Jackson Federal Bank, the savings and loan institution purchased by JNL in 1998, was able, thanks primarily to our ownership, to upgrade its industry ratings. With the higher ratings, we will be in a very favourable position to expand and build the Thrift in 2000.
PPM America, the fund management company, now reports alongside JNL to Bob Saltzman in order to maximise the synergies between the investment process and product creation and delivery.
Prudential Corporation Asia 1999 was a year of significant progress for our Asian business, Prudential Corporation Asia (PCA). We added operations in three countries, and now operate in eleven.
Our existing Asian operations had a very good year with total insurance and investment product sales of £871 million being four times higher than last year. New business achieved profit, which reflects the value added to the group from new insurance business, increased 61 per cent on 1998 to £90 million. Statutory operating profit before development costs for 1999 was up 17 per cent to £27 million; operating profit after development costs totalled £15 million.
In 1999 we were granted a life licence in China and in December, signed a memorandum of understanding to undertake a life insurance partnership with China International Trust and Investment Corporation (CITIC) in Guangzhou. This will be the first Sino-British life insurance operation. With a population of seven million people in Guangzhou alone, this clearly represents a significant opportunity for us.
Within Hong Kong we have entered into a joint venture agreement with Bank of China to provide pension products to Hong Kong residents through the Mandatory Provident Fund – a compulsory pension scheme to be introduced later this year.
On the technology side, Prudential ICICI has been pioneering internet applications for its customers, including non resident Indians, who are now able to transact over the web. Prudential Singapore’s website has been ranked best in the market as policyholders are able to check unit prices and access their policy details. We have also begun rolling out laptop software which enables customers to complete and sign proposal forms electronically. This is one of the world’s first applications of digital signature technology.
The management of our fund management operations, PPM Singapore and PPM Hong Kong, together with our new operation in Japan, are now more closely aligned to our Asian operations, reporting directly to Mark Tucker, Chief Executive of Prudential Corporation Asia.
This underlying increase reflects good growth from our US operations and our UK Retail Insurance business. These increases were offset by the funding costs of egg:| and of M&G, which was acquired in the first half of the year.
In the UK, underlying profit before re-engineering costs from our Retail Insurance Operations increased by 14 per cent to £479 million. Within this total, underlying profit from our Retail IFA business of £99 million was 13 per cent above prior year as increased funds under management more than offset the impact of lower annual bonuses. The 14 per cent increase in profit from Retail Financial Services and Annuities to £380 million reflects a 56 per cent increase in profit from general insurance to £61 million, and a nine per cent increase in long-term profit to £319 million. The increase in the long-term result reflects higher funds under management and an exceptional level of maturities which offset the impact of the rundown in annual bonuses. Despite recent rises in interest rates, expectations are for continued low inflation and investment returns and we would therefore expect to see a continued downward trend in annual bonus levels. The significant improvement in the general insurance result reflects better claims and expense experience.
Prudential M&G Asset Management’s underlying result of £87 million compares with £28 million in 1998 and includes a strong first time eight month contribution from M&G of £56 million. M&G’s result is ahead of our original acquisition assumptions. The contribution from PPM of £43 million is in line with last year.
The investment in egg:| and Prudential Banking is £150 million compared with £77 million in 1998. This increase reflects both the success of the venture with the resultant demand for additional capacity, and increased investment in the e-card launch, development of future products and the continued investment in systems. Given the continued development expenditure and proposed new initiatives, we expect a similar level of investment for 2000 to that incurred in 1999. We anticipate that with its current plans and activities, egg:| will be breaking even in the latter part of 2001 as the benefits of the customer base and cross-buying materialise.
The movement in other income and expenditure from income of £38 million in 1998 to a charge of £78 million in 1999 predominantly reflects the cost of funding the acquisition of M&G and the investment in egg:|.
This is despite the inclusion of the UK re-engineering charge of £70 million and increased investment in egg:| and is due mainly to strong sales performance across the group. Underlying growth excluding these items was 21 per cent.
Profit from long-term in force business of £627 million compares with £557 million in 1998. The 1999 result was held back by the shareholders’ charge of £92 million for the increase in the cost of pensions mis-selling in the UK.
We have increased the provision for pensions mis-selling from £1.1 billion to £1.7 billion and, including amounts already paid, we now expect the total cost to be £2 billion. The increase in the provision reflects the impact of the revised, shorter, timescale for dealing with Phase 2 cases, revised settlement and interest rate assumptions and additional Phase 2 cases.
A full description of the achieved profits methodology and the result for the year is included on pages 76 to 82.
Total UK Operations 3O4 211 +44 Jackson National Life 198 137 +45 Prudential Corporation Asia 9O 56 +61 Prudential Europe 11 9 +22
Dividend Given the progress made by the company in 1999 and the confidence in the future success of the business, the Board has increased the total dividend for the year by 9.5 per cent to 23.0p per share. Dividend cover is 1.3 times based on statutory operating profit after tax before amortisation of goodwill.
The achieved profits basis shareholders’ funds are analysed in the following table: UK operations 5,029 3,911 US operations 2,533 2,166
Funds available to holding company (160) (13) New investment in businesses (2,320) (265) Capital repatriated from businesses 310 – Disposal of businesses – 481 Timing differences and other items (98) (160)
As a result of the above outflow and exchange translation losses of £22 million, the holding company net borrowings at the end of 1999 totalled £1,837 million, compared with £453 million of net cash at the end of 1998.
The group successfully launched two bonds during the year: a £250 million 5.5 per cent Bond maturing in 2009 and a £250 million 5.875 per cent Bond maturing in 2029.
Treasury Policy The group operates a central treasury function, which has overall responsibility for managing its capital funding programme as well as its central cash and liquidity positions. The treasury function is also responsible for the co-ordination of risk management and investment policy across the group.
The group transacts business primarily in sterling and US dollars. The currency exposure relating to the translation of reported earnings is not separately managed although its impact is reduced by interest payments on the foreign currency borrowings and by the adoption of average exchange rates for the translation of foreign currency revenues.
Derek Higgs holds Board responsibility for environmental policy. He was recently appointed Chairman of Business in the Environment which aims to inspire business to achieve corporate social responsibility by making continuous progress towards environmentally sustainable development an essential part of business excellence.
Ethical Investment With investments exceeding four per cent of the overall UK stock market, we have a significant role in putting ethical investment on to the mainstream business agenda. We expect those companies in which we invest to be able to demonstrate and report on appropriate environmental and social policies.
We also offer ethical investment products, such as the Light Green Fund, which seeks to balance ethical concerns and investment efficiency for pension scheme members.
• Prudential Portfolio Managers Property Division initiated two programmes to benefit retailers and the wider community: – The New Deal Retail Routeway to prepare unemployed people for jobs in retailing – Pru Youth Action, a partnership with Crime Concern, to tackle shop theft in shopping centres.
We also launched two corporate programmes: • ‘£200 for 2000’ to recognise the time our employees give to local communities • over 100 senior managers mentor head teachers through
Arts Prudential sponsors Creative Britons, the UK’s biggest arts prize with £200,000 going to arts organisations to recognise the outstanding work of arts practitioners. The 1999 winner was Mary Ward, Artistic Director of the Chicken Shed. We also sponsored ‘The Art of Bloomsbury’ at the Tate Gallery, Verdi’s ‘Falstaff’, the opening production at the new Royal Opera House, and ‘Gilded Dragons’ at the British Museum.
Chairman (Age 70) A director since 1994 and Chairman since 1995. Chairman of Delta plc. Director of Rio Tinto plc, Marks and Spencer plc, Canary Wharf Group plc and Minorplanet Systems plc. *non-executive director
(Age 45) Group Chief Executive since March 2000. Previously Deputy Group Chief Executive since May 1999 and Group Finance Director since 1995. Director of Railtrack Group plc. Member of the Urgent Issues Task Force Committee of the Accounting Standards Board. Previously a senior partner of Arthur Andersen.
(Age 53) A director since 1992 and International Development Director since 1996. Chairman of Prudential Europe since September 1999. Joined Prudential in 1972.
Organisational Structure The organisational structure of the group is clearly defined by reference to business units for which individual business chief executives are responsible. The Board, the members of which are set out on pages 34 and 35, meets regularly, usually monthly, decides the objectives and strategy and has set out the specific matters which are reserved to it for decision.
The head of each business unit has authority for management of that business unit and has established a management board comprising the most senior executives in that business unit.
All directors have direct access to the advice and services of the Company Secretary who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. Full Board papers are provided to all directors approximately one week before each Board or committee meeting.
The Audit Committee normally meets six times a year and assists the Board in meeting its responsibilities in ensuring an effective system of internal control and accurate external financial reporting. It also provides a direct channel of communication between the external auditors and the Board and assists the Board in ensuring that the external audit is conducted in a thorough, objective and cost-effective manner.
The Remuneration Committee normally meets three times a year to review remuneration policy and determines the remuneration packages of the executive directors. In framing its remuneration policy, the Committee has given full consideration to the provisions of Section 1B of and Schedule A to the Code. The Remuneration Report prepared by the Board is set out on pages 39 to 44. In preparing the Report, the Board has followed the provisions of Schedule B to the Code.
Except in relation to its proposals concerning the remuneration of the Group Chief Executive when only the Chairman is consulted, the Remuneration Committee consults the Chairman and the Group Chief Executive about the Committee’s proposals relating to the remuneration of all executive directors. The Committee has access to professional advice inside and outside the company.
Copies of any instructions and advice given by an independent professional adviser to a director is supplied by the director to the Company Secretary who will, unless otherwise instructed by the director concerned, circulate to other directors any necessary information to ensure that other members of the Board are kept informed on issues arising affecting the company or any of its subsidiaries.
All directors are required to submit themselves for re-election at regular intervals and at least every three years.
Relations with Shareholders As a major institutional investor, the company is acutely aware of the importance of maintaining good relations with its shareholders. The company regularly holds discussions with major shareholders and a programme of meetings took place during 1999.
Annual General Meeting. The Chairman of the Remuneration Committee was not in attendance at the Annual General Meeting in 1999, due to unforeseen circumstances. The notice of the Annual General Meeting and related papers are sent to shareholders at the same time as the Annual Report. As with last year’s Annual General Meeting, a business presentation will be provided and questions sought from shareholders.
Financial Reporting The directors have a duty to report to shareholders on the performance and financial position of the group and are responsible for preparing the financial statements on pages 48 to 72 and the supplementary information on pages 77 to 81. It is the responsibility of the auditors to form an independent opinion, based on their audit, on those financial statements and to report their opinions to the company’s shareholders. These opinions are given on pages 73 and 83.
Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and of the group and of the results for the period and which comply with the Companies Act 1985. In preparing those statements, the directors ensure that suitable accounting policies are selected and applied consistently, that reasonable and prudent judgements and estimates are made and that applicable accounting standards are followed. They also ensure that appropriate accounting records are maintained which disclose with reasonable accuracy at any time the financial position of the company and enable them to prepare the financial statements and that reasonable steps are taken to safeguard the assets of the group and to prevent and detect fraud and other irregularities.
After making appropriate enquiries, the directors consider that the group has adequate resources to continue in operational existence for the foreseeable future. They therefore continue to use the going concern basis in preparing the financial statements.
Underwriting The group has controls over underwriting exposures covering both risks accepted and reinsured. Exposure limits are reviewed annually.
Financial Position The Board receives regular reports from the Group Finance Director on financial matters and receives annual reports from the relevant senior actuaries on the financial condition of the group’s principal long-term insurance businesses.
The members of the Remuneration Committee during 1999 were: Sir David Barnes (who was appointed on 18 February and became Chairman of the Committee upon the retirement of Niall FitzGerald on 6 May)
Executive Directors’ Remuneration Remuneration Policy The policy of the company is to provide competitive remuneration packages in order to recruit and retain high calibre executives. In addition to salary and pensions, this is achieved by means of an annual bonus and long-term incentive plans directly related to the company’s longer-term performance.
For 1999, executive directors were eligible to be awarded a bonus of up to 45 per cent of basic salary at the time of making the award, excluding Derek Higgs who was eligible to be awarded a bonus of up to 100 per cent of basic salary. In 2000, the maximum bonus opportunity for Derek Higgs will be aligned to that available to the other executive directors. Awards under this plan are not pensionable.
Non-executive Directors’ Remuneration The fees for non-executive directors are reviewed annually by the Board after considering recommendations by the executive directors. Since 1 June 1996, non-executive directors’ fees have been £25,000 per annum and £45,000 per annum for the Deputy Chairman. In 1999, the Chairman received a fee of £175,000 per annum. In addition, Sandy Stewart, as Chairman of the supervisory board of the Scottish Amicable Insurance Fund, and Michael Abrahams, as a non-executive director of Scottish Amicable Life plc, received fees of £25,000 and £20,000 per annum respectively. Non-executive directors do not have service contracts and are not eligible for the annual bonus, the long-term incentive scheme or pensions, except Michael Abrahams who has been a member of the Prudential Staff Pension Scheme since his appointment which was before 1988 when such arrangements were ended.
Bridget Macaskill (appointed 7/5/99) 16 16 Rob Rowley (appointed 8/7/99) 12 12
Notes: 1. The highest paid director for both 1999 and 1998 was Sir Peter Davis whose emoluments in 1999, including the value of rights granted to him under the long-term incentive plan, were £1,922,000 (£1,501,000 in 1998 which includes the shares in respect of the 1995 Restricted Share Plan allocated in 1998 which had a market value of £812,000). Additionally, in 1999 the company made pension contributions of £229,000 on his behalf (£204,000 in 1998). The pension contributions made in 1999 comprised contributions of £207,000 to a Funded Unapproved Retirement Benefit Scheme and £22,000 to the Prudential Staff Pension Scheme and a separate life assurance scheme that provides cover over the Inland Revenue earnings cap.
4. Fees in respect of Niall FitzGerald were paid to his employer.
Directors’ Long-term Incentive Plans The group’s primary long-term incentive plan is known as the Restricted Share Plan and is designed to provide reward contingent upon the achievement of pre-determined returns to shareholders, thereby aligning directors’ interests with those of shareholders and encouraging them to perform at the highest level. Under this Plan executive directors are granted annually a conditional award of shares in the company which is held in trust for three years. The conditional award is equivalent to 80 per cent (or 100 per cent in the case of the Group Chief Executive) of salary at the time of the award, valuing the shares at their average share price during the preceding calendar year. The award price used for the 1999 award was 837.3 pence (1998 – 610.7 pence).
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 Total Shareholder Return (TSR) relative to the other companies in the FTSE 100 share index over the performance period. In addition, the Remuneration Committee must be satisfied with the company’s overall financial performance during this period. No rights will be granted if the company’s TSR percentile ranking is 60th or below and the maximum grant will be made only if the TSR percentile ranking is 20th or above. Between these points, the size of the grant will be calculated on a straight line basis. In normal circumstances, directors may take up their right to receive shares at any time during the following seven years.
Details of conditional awards of shares under the Plan are shown below. These shares are held in trust and represent the conditional awards out of which rights may be granted, as stated above, at the end of the relevant performance period.
In respect of the 1997 Restricted Share Plan, the company’s TSR was ranked eighth out of the 89 relevant comparator companies (i.e. ninth percentile) for the three year performance period ended on 31 December 1999. As a result, rights will be granted over 100 per cent of the shares conditionally awarded to executive directors. The 1998 and 1999 Restricted Share Plans run to 31 December 2000 and 31 December 2001 respectively and any grants under these plans will be based on the final TSR ranking at the end of each performance period; performance under these Plans was ranked 15th and 28th on the basis of TSR performance as it stood at 31 December 1999.
Conditional Market value Conditional share awards Conditionally Rights of rights share awards outstanding at awarded in granted granted in 1999 outstanding at Release
Notes: 1. Apart from those shares allocated to Sir Peter Davis in respect of the 1995 Restricted Share Plan, no shares were allocated in 1998 to directors. 2. In accordance with the arrangements for Les Cullen’s departure, the release date applying to his 1999 RSP award will be following his termination of employment in 2000 with shares released subject to pro-rating for service as a director in the performance period and TSR performance at 29 February 2000. 3. In accordance with the arrangements for Sir Peter Davis’ departure, the release dates applying to his RSP awards have been brought forward to February 2000 with shares released subject only to pro-rating for TSR performance at 31 January 2000.
Directors’ Shareholdings As a condition of serving, all executive and non-executive directors are required to hold 2,500 shares in the company within two months of appointment to the Board.
Sir Roger Hurn held 10,000 shares at the date of his appointment as a non-executive director on 17 February 2000. There were no changes in interests between 31 December 1999 and 28 February 2000.
Total 40 * Savings-Related Share Option Scheme. ** Or date of appointment if later.
2. During 1998, Keith Bedell-Pearce and Jonathan Bloomer exercised options with associated gains on exercise of £45,000 and £151,000 respectively. 3. The share options granted to Les Cullen in 1999 will lapse on his departure. 4. In accordance with the arrangements for Sir Peter Davis’ departure, the exercise of his share options, up to the value of his savings at the time of exercise, has been brought forward to 2000.
The Scheme also provides on death, whether in service, in deferment or following retirement, pensions for spouse and children. The spouse’s pension on death in service is the higher of 54 per cent of the member’s prospective pension at age 60 or 25 per cent of salary in the 12 months preceding death subject to the earnings cap. The spouse’s pension on death in deferment is 50 per cent of the member’s deferred pension at the date of death. On death after retirement, the spouse’s pension is 50 per cent of the member’s pension in payment ignoring any pension commuted for a lump sum at retirement. A lump sum death in service benefit of four times Final Pensionable Earnings is also provided. Pension increases after retirement are wholly discretionary but in recent years annual increases have been awarded in line with inflation. Discretionary increases are taken
Remuneration Report continued into account in calculating transfer values payable in lieu of deferred pension benefits. As set out in previous reports, the contract of Keith Bedell-Pearce provides that in the event of his retirement at age 55, his pension will be based on the pension he would have received at normal retirement age 60 subject to a discount rate of three per cent per annum for early retirement.
Other Pension Arrangements For directors subject to the earnings cap, the company will, on request, establish a Funded Unapproved Retirement Benefit Scheme (FURBS) and a separate life assurance scheme to provide additional retirement and life assurance benefits based on salary in excess of the earnings cap. Both Sir Peter Davis and Derek Higgs participate in these arrangements. Jonathan Bloomer and Les Cullen have not participated in a FURBS and instead the company pays a salary supplement to fund arrangements for the provision of income in retirement. The Prudential Staff Pension Scheme provides a lump sum death in service benefit and Jonathan Bloomer also participates in a separate life assurance scheme that provides cover over the earnings cap.
Pension Entitlements Details of directors’ pension entitlements under the Prudential Staff Pension Scheme and pre-tax contributions to FURBS or salary supplements are set out below.
Les Cullen 47 34 * Or date of appointment if later.
Notes: 1. For Michael Abrahams, the normal retirement age in the Scheme is 72 but a pension not discounted for early retirement is available from age 65.
2. Total contributions to directors’ pension schemes were £594,000 (1998 £462,000).
Sir David Barnes Sir Martin Jacomb Chairman of the Remuneration Committee Chairman
Change of Name The company changed its name from Prudential Corporation public limited company to Prudential public limited company on 1 October 1999.
Principal Activity and Business Review Prudential plc is the group holding company and the principal activity of its subsidiary undertakings is the provision of financial services in the United Kingdom and overseas. Particulars of principal subsidiary undertakings are given in note 24 on page 70. The group’s business is reviewed in the Chairman’s Statement on page 4, the Group Chief Executive’s Review on pages 7 to 9 and the Group Financial Review on pages 28 to 31.
Financial Statements and Supplementary Information The consolidated balance sheet on pages 52 and 53 shows the state of affairs of the group at 31 December 1999. The company’s balance sheet appears on page 54 and the consolidated profit and loss account on pages 48 to 50. A summary of the statutory basis results is shown on page 47. There is a five year review of the group on pages 74 and 75. Supplementary information prepared on the achieved profits basis of financial reporting is provided on pages 76 to 82.
Payment Policy The group does not follow any code or standard on payment practice with its suppliers but it is the policy of the group to agree terms of payment when orders for goods and services are placed and to pay in accordance with those terms. Trade creditor days, based on the ratio of trade creditors at the year end to the amounts invoiced by trade creditors during the year, were 24 days.
Employees The following information is given in respect of employees of the group in the United Kingdom. The policy towards employees overseas is the same but the practical application of the policy varies according to local requirements.
Late in 1999, these were extended when employees were invited to elect representatives to the Prudential European Employee Forum, who subsequently agreed its constitution.
The Scheme has now been operating for over 16 years and some 65 per cent of UK staff currently participate.
Auditors During 1999 PricewaterhouseCoopers resigned as auditors of the company and the directors appointed KPMG Audit Plc to fill the casual vacancy thus arising. A resolution for the re-appointment of KPMG Audit Plc will be put to the Annual General Meeting. Special notice of this resolution has been given to the company in accordance with Section 388(3) of the Companies Act 1985.
Balance on the general business technical account (analysed on page 48) 49 39 Long-term business: Retail Financial Services and Annuities 319 294 Retail IFA 99 88 Group Pensions 36 22 Prudential M&G Asset Management 17 – US operations 451 411
Balance on the long-term business technical account before tax (analysed on pages 49 and 50) 895 840
Group operating profit before amortisation of goodwill: Continuing operations 776 860 Discontinued operations – 8
Total operating profit before amortisation of goodwill 776 868 Items excluded from operating profit before amortisation of goodwill: Amortisation of goodwill (54) – Short-term fluctuations in investment returns (note 1 (v) and (vi)) 28 24 Profit on business disposals – 249
Tax on profit on ordinary activities: Tax on operating profit before amortisation of goodwill (209) (214) Tax on items excluded from operating profit before amortisation of goodwill 1 (47)
Statutory basis profit for the financial year: Operating profit after tax before amortisation of goodwill 567 654 Items excluded from operating profit after tax before amortisation of goodwill (25) 226
Earnings per share Based on operating profit after tax before amortisation of goodwill 29.1p 33.7p Based on profit for the financial year – basic 27.8p 45.3p
Premiums written, net of reinsurance 306 295 Change in the gross provision for unearned premiums (5) (3) Change in the provision for unearned premiums, reinsurers’ share 1 1
Allocated investment return transferred from the non-technical account 1(iv) 40 41
Change in the provision for claims: Gross amount 35 19 Reinsurers’ share (10) 4
Net operating expenses (including re-engineering costs of £12m (£nil)) 6 (93) (86)
Gross premiums written and the balance on the general business technical account relate to continuing operations.
Allocated investment return transferred from (to) the non-technical account 14 (5)
Balance on the long-term business technical account 636 608 Tax credit attributable to balance on the long-term business technical account 8 259 232
Balance on the long-term business technical account before tax 1(vii) 895 840
Profit on business disposals – 249 Other charges: Corporate expenditure (40) (46)
Profit for the financial year 1(i) 542 880 Dividends: Interim (at 7.7p (7.0p) per share) (150) (136) Final (at 15.3p (14.0p) per share) (299) (271)
Reconciliation of operating profit before amortisation of goodwill to profit on ordinary activities
Operating profit before amortisation of goodwill based on longer-term investment returns 1(ii) 776 868
Basic earnings per share Based on operating profit after tax before amortisation of goodwill of £567m (£654m)
Reinsurers’ share of technical provisions Provision for unearned premiums 4 3 Long-term business provision 215 172 Claims outstanding 57 60 Technical provisions for linked liabilities 400 259
Prepayments and accrued income Accrued interest and rent 988 779 Deferred acquisition costs: Long-term business 2,726 2,580 General business 15 15
Creditors Creditors arising out of direct insurance operations 217 202 Creditors arising out of reinsurance operations 18 13
Amounts owed to credit institutions 21 1,111 678 Other creditors including taxation and social security: Banking business liabilities 8,438 2,271
Less liabilities: amounts falling due within one year Amounts owed to subsidiary undertakings (527) (434) Final dividend (299) (271) Accruals and deferred income (46) (29)
The financial statements on pages 48 to 72 and the supplementary information on pages 77 to 81 were approved by the Board of directors on 9 March 2000.
The net cash (outflow) inflow was (financed) invested as follows: Portfolio investments Purchases: Ordinary shares 46 40 Fixed income securities 62 1,733
In accordance with FRS 1, this statement shows only the cash flows of general business and shareholders’ funds.
Disclosure Requirements The consolidated financial statements are prepared in accordance with the provisions of Section 255A of, and Schedule 9A to, the Companies Act 1985 which cover the disclosures applicable to insurance companies and groups. The financial statements comply with applicable accounting standards and the Statement of Recommended Practice issued by the Association of British Insurers in December 1998. The balance sheet of the company is prepared in accordance with Section 226 of, and Schedule 4 to, the Companies Act 1985, which apply to companies generally. The company has taken advantage of the exemption under Section 230 of the Companies Act 1985 from presenting its own profit and loss account.
Basis of Consolidation The financial statements of the group incorporate the assets, liabilities and results of the company and its subsidiary undertakings. The results of subsidiaries acquired or disposed of are included in the financial statements from the date of acquisition or up to the effective date of disposal.
Operating Profit and Segmental Reporting Consistent with the Statement of Recommended Practice, investment returns credited to operating results, for investments attributable to shareholders, are determined using the longer term rate of return (see note on investment return, below).
Consistent with this treatment, operating profit, as disclosed within the profit and loss account on pages 48 to 50 and the segmental analysis in note 1 on pages 59 to 61 include investment returns for long-term business and general business (as described above) together with longer term returns for investments of other shareholders’ funds.
Profit before tax includes actual investment returns. The company believes that operating profit before amortisation of goodwill (and related earnings per share) which as described above, is based on longer term investment returns, but excludes profits and losses on business disposals, better reflects the group’s underlying performance.
Investments With the exception of fixed income securities of Jackson National Life and shares in subsidiary undertakings of the company and associate undertakings of the group, investments are shown at market value.
Consistent with the valuation of liabilities, fixed income securities at Jackson National Life are carried at amortised cost, subject to provisions for permanent diminution in value.
Realised gains are determined as the difference between net proceeds on disposal and purchase price or, in the case of securities carried at amortised cost, previous carrying value. Movements in unrealised gains comprise the change in the value of investments held at the balance sheet date and the reversal of unrealised investment gains and losses recognised in earlier accounting periods in respect of investment disposals.
The longer term investment return is an estimate of the long term trend investment return for the relevant category of investments having regard to past performance, current trends and future expectations.
Long-term Business The results are prepared in accordance with the modified statutory basis of accounting as set out in the Statement of Recommended Practice issued by the Association of British Insurers in December 1998. The main features of this method are as follows: (i) Premiums and annuity considerations are accounted for when due. For unit-linked business, premiums are accounted for when the liabilities arising from the premiums are created. Premiums exclude any taxes or duties based on premiums.
In the case of Jackson National Life, US GAAP results are adjusted to comply with UK GAAP in respect of deferred tax. Also, on adjustment to UK GAAP, fixed income securities have been included at amortised cost in the balance sheet. Further details are shown in note 2 on page 62.
(i) Premiums are accounted for when risks are assumed. Premiums are shown gross of commission and exclude any taxes or duties based on premiums. In determining the result, the proportion of premiums written relating to periods of risk beyond the year end is carried forward to subsequent accounting periods as unearned premiums, calculated on a daily basis, so that earned premiums relate to risks carried during the accounting period. A similar treatment is applied to acquisition expenses.
(ii) Claims incurred comprise the settlement and handling costs of paid and outstanding claims arising from events occurring in the year and adjustments to prior years’ claims provisions. Outstanding claims comprise claims incurred up to but not paid at the end of the accounting period whether reported or not.
(iii) An unexpired risks provision is established for any excess of expected claims and deferred acquisition costs over unearned premiums and investment return. The assessment of expected claims has regard to claims experience up to the end of the accounting period. No specific provision is made for major events occurring after this date.
(iv) An equalisation provision has been established in accordance with the requirements of the Insurance Companies (Reserves) Act 1995 in order to reduce the impact of claims volatility.
The transfer from long-term technical account to the nontechnical account is grossed up at the effective rate of tax.
Foreign Currencies Foreign currency revenue transactions are translated at average exchange rates for the year. Foreign currency assets and liabilities are translated at year end exchange rates. Exchange differences on long-term business and on net investments in foreign enterprises less matching borrowings are taken to reserves. Other exchange differences are included in the profit and loss account.
Goodwill Goodwill, representing the excess of the fair value of the consideration given over the fair value of the separable net assets acquired, is capitalised in the balance sheet at cost and amortised through the profit and loss account on a straight line basis over its useful economic life. The gain or loss on subsequent disposal of a subsidiary or associated undertaking will include any attributable unamortised goodwill.
Present Value of Acquired In Force Business The present value of in force business arising from the acquisition of portfolios of long-term insurance business is recognised as an asset and amortised and discount unwound over the anticipated lives of the related contracts in the portfolios on a basis which is commensurate with the expected emergence of surplus.
1 Segmental Analysis Profit Profit Profit Profit before after before after tax Tax tax tax Tax tax
Analysis of new business Analysis of total premiums and operating profit by product distributor by product provider
(ii) Analysis by Business Area 1999 £m 1998 £m 1999 £m 1998 £m 1999 £m 1998 £m 1999 £m 1998 £m
During 1999 the UK operations were reorganised with Group Pensions and Prudential Europe being established as separate business units.
In addition, the stewardship of the US and Asian institutional fund management operations has been transferred from Prudential M&G Asset Management to the US and Asian operations. Comparative figures have been restated accordingly. The Prudential M&G Asset Management result for 1999 includes £17m arising from M&G long-term business.
Single new business includes UK Department of Social Security rebates, increments under existing group pension schemes, and pensions vested into annuity contracts (at the annuity purchase price). Regular new business is determined on an annualised basis.
General business (note (iv)) – – – – 318 310 61 39
Other income and expenditure – – – – – – (78) 38 Re-engineering costs attributable to shareholders – – – – – – (70) –
Operating profit Gross premiums Underwriting Investment (based on longer term written result return investment returns)
Investment return (longer term): Investment income (including realised gains) 162 224 Unrealised gains on investments 14 30 Net allocations to technical accounts (54) (36) Investment management expenses (1) (5) less: short-term fluctuations in investment return (note (vi)) (28) (24)
Investment return and other income 93 189 Interest payable (131) (105) Corporate expenditure (40) (46)
(vi) Items Excluded from Operating Profit before Amortisation of Goodwill 1999 £m 1998 £m
Amortisation of goodwill (note 9) (54) – Short-term fluctuations in investment returns (as per note (v)) 28 24 Profit on business disposals – 249
(vii) Reconciliation of Operating Profit account before tax account Other activities Total to Profit and Loss Account 1999 £m 1998 £m 1999 £m 1998 £m 1999 £m 1998 £m 1999 £m 1998 £m
Continuing operations Retail Financial Services and Annuities 319 294 61 39 – – 380 333 egg:| and Prudential Banking – – – – (150) (77) (150) (77)
Group operating profit before amortisation of goodwill from continuing operations 895 832 49 39 (168) (11) 776 860 Discontinued operations – 8 – – – – – 8
(viii) Net Assets A segmental analysis of the fund for future appropriations and the technical provisions net of reinsurance is set out below which, although liabilities, provide a more useful indication than net assets of the assets supporting the business.
Analysis of Fund for Future Appropriations and Net Technical Provisions 1999 £m 1998 £m
In the analysis of shareholders’ capital and reserves, no interest is recognised in respect of the unattributed assets held within the main UK with-profits fund.
Notes on the Financial Statements continued 2 US Operations The results of US operations, mainly Jackson National Life, are consolidated into the group accounts based on US Generally Accepted Accounting Practices (US GAAP). However, certain adjustments are made to the US GAAP results to comply with UK GAAP and the group’s accounting policies, principally: (i) For group reporting purposes, all fixed income securities are carried at amortised cost subject to provisions for permanent diminutions in value. Under US GAAP, fixed income securities classified as ‘available for sale’ are carried at market value with movements in unrealised gains and losses, including related changes in deferred acquisition costs and applicable tax, recognised as movements in shareholders’ reserves.
(ii) For the purposes of determining group operating profit, realised investment gains and losses are recognised on a longer term basis. Under US GAAP, these items are not included in operating income but are included in profit before tax.
Represented by: Broker dealer and fund management (10) – (6) –
Exchange rates used for translation were: Average rate for the year for profit before tax 1.62 1.66 Year-end rate for shareholders’ funds 1.61 1.66 3 Investment Return
(i) Longer term investment return The longer term rate of return is based on historical real rates of return and current inflation expectations adjusted for consensus economic and investment forecasts. The only significant general business and shareholder investments which require calculation of a longer term rate of return are UK equities. For these investments the longer term rate of return has been taken to be 8% (8%). The net longer term dividend yield has been assumed to be 2.75% (2.6%).
For longer term business the most significant element of gains on investments that are attributable to shareholders arises in Jackson National Life. Gains made on realisation of such investments, which are principally fixed income securities, are averaged over five years for the purposes of determining the longer term rate of return to be included in operating results. From 1998 onwards the gains subject to averaging are determined after deduction of related amortisation charges for deferred acquisition costs.
Reinsurance commissions and profit participation 22 30 (1) (3) Amortisation of present value of acquired in force business 22 17 – –
Notes on the Financial Statements continued 8 Tax Long-term business technical account Non-technical account
Double tax relief (12) (11) – (3) Tax on franked investment income 3 166 2 3
Balance at beginning of year 59 – Additions in respect of the acquisition of: M&G Group P.L.C. (note 27) 1,527 – Chinfon Life Insurance Company of Taiwan (note 27) 50 – Prudential Assurance Malaysia Berhad – 59
10 Information on Staff The average numbers of staff employed by the group during the year were: 1999 1998
The group operates a number of pension schemes around the world. The largest scheme is the Prudential Staff Pension Scheme which is the group’s main UK scheme and covers approximately 60% of members of all group pension schemes. This scheme is of the defined benefit type with scheme assets held in separate trustee administered funds and was last valued as at 5 April 1999 by P N Thornton, a qualified actuary and a partner in the firm of Watson Wyatt Partners.
Statutory audit fees include £0.1m (£0.1m) in respect of the company.
Current value: Leasehold with a term of over 50 years 3,362 2,865 Leasehold with a term of less than 50 years 110 116
The cost of land and buildings was £5,804m (£4,971m). The value of land and buildings occupied by the group was £177m (£111m).
Interest in associate undertaking 146 146 61 58 Interests in joint ventures 20 – 20 –
Movement in the interest in the associate undertaking 1999 £m 1999 £m 1999 £m
Profit for the year after taxation – 4 4 Dividends received – (1) (1)
The market value of debt securities and other fixed income securities valued at amortised cost was £16,127m (£16,316m). All debt securities carried at amortised cost are held by long-term business operations.
For those debt securities and other fixed income securities valued at amortised cost where the maturity value exceeded purchase price, the unamortised difference at the year end was £26m (£100m). There were no investments valued at amortised cost where the purchase price exceeded maturity value.
Cost Current value 16 Assets Held to Cover Linked Liabilities 1999 £m 1998 £m 1999 £m 1998 £m
Depreciation Balance at beginning of year (125) (121) Provided during year (47) (30) Arising on (acquisition) disposal of subsidiaries (30) 11
The company has established trusts to facilitate the delivery of shares under employee incentive plans and savings-related share option schemes. At 31 December 1999, 8.4m Prudential plc shares with a market value of £102m were held in such trusts.
The arrangements for distribution to employees of shares held in trusts relating to employee incentive plans and for entitlement to dividends depend upon the particular terms of each plan. The costs of share awards under the plans are charged to the profit and loss account over the period of service to which awards are made. Shares held in these trusts are conditionally gifted to employees. At 31 December 1999, 7.5m of the 7.7m shares held by trusts under employee incentive plans have been accounted for in the consolidated balance sheet as own shares. The carrying value of the shares is £27m, which represents the cost of purchase less the cumulative amounts charged to the profit and loss account. In addition at 31 December 1999, 0.7m shares were held by a qualifying employee share ownership trust. These shares are expected to be fully distributed shortly after 1 June 2000 on maturity of a savings-related share option scheme. The exercise price under this scheme is 254 pence and the expected proceeds of £2m relating to these shares have also been included in the consolidated balance sheet.
The interest sensitive and guaranteed investment products are valued at policyholder account value. Equity-linked indexed deferred annuities are valued at a liability equal to the policyholder guaranteed account value plus the intrinsic value of the underlying equity option portion of the contract. Options are purchased which match very closely the liabilities arising from any excess of indexed values over guarantee values, and the valuation of these options matches the valuation of the additional liabilities relating to any such excess.
(i) Core structural borrowings of shareholder financed operations Holding company and finance subsidiaries
Debenture loans (unsecured): Other creditors: Floating Rate Guaranteed Unsecured Loan Notes 2004 168 –
Long-term business with-profits funds Debenture loan (unsecured) – £100m 8.5% undated subordinated Guaranteed Bonds issued by Scottish Amicable Finance plc (a subsidiary of the Scottish Amicable Insurance Fund of The Prudential Assurance Company Limited) (note (e)) 100 100
Amounts owed to credit institutions As included in analysis of other borrowings (as analysed in (ii) previous): General insurance and shareholders’ funds 205 101 Long-term business with-profits funds – 5
(b) Reconciliation to borrowings included in cash flow statement disclosures (per note 26) 1999 £m 1998 £m
Borrowings of general insurance and shareholders’ funds Holding company and related finance subsidiaries (as analysed in (i) previous) 1,760 1,223 Other borrowings (as analysed in (ii) previous) 205 101
Borrowings of long-term business operations Jackson National Life (as analysed in (i) previous) 155 150 With-profits funds (as analysed in (ii) previous) 100 105
(c) Under the terms of the group’s arrangements with its main United Kingdom banker, the bank has a right of set off between credit balances (other than those of long-term funds), and all overdrawn balances of those group undertakings with similar arrangements.
(d) The senior debt issued by investment subsidiaries managed by the US fund management operation is secured on the investments held by the relevant subsidiaries. The interests of the holders of the subordinated debt issued by these subsidiaries are subordinate to the entitlements of the holders of the senior debt. The terms of the revolving credit facility include a cross default provision with the subordinated notes. In addition to the debt of these subsidiaries, the US fund management operation manages an investment subsidiary with liabilities of £322m (£nil) pertaining to debt instruments issued to external parties. In all instances the holders of the debt instruments issued by these subsidiaries do not have recourse beyond the assets of these subsidiaries.
(e) The interests of the holders of the bonds issued by Scottish Amicable Finance plc are subordinate to the entitlements of the policyholders of the Scottish Amicable Insurance Fund.
Notes on the Financial Statements continued 22 Investments of the Company Shares in Loans to subsidiary subsidiary undertakings undertakings
At end of year 5,023 1,531 23 Profit of the Company The profit of the company for the year was £530m (£376m). After dividends of £449m (£407m), and a transfer from the share premium account of £15m (£nil) in respect of shares issued in lieu of cash dividends, retained profit at 31 December 1999 amounted to £1,642m (£1,546m).
Jackson National Life Insurance Company* Insurance USA Prudential Annuities Limited* Insurance England and Wales The Prudential Assurance Company Limited Insurance England and Wales Prudential Assurance Company Singapore (Pte) Limited* Insurance Singapore Prudential Banking plc* Banking England and Wales Prudential Portfolio Managers Limited* Investment management England and Wales M&G Limited* Investment management England and Wales Scottish Amicable Life plc* Insurance Scotland * Owned by a subsidiary undertaking of the company.
25 Contingent Liabilities The group has contingent liabilities in respect of insurance and other agreements entered into in the normal course of business and in respect of litigation arising therefrom.
Reconciliation of Operating Profit to Net Cash Inflow from Operations 1999 £m 1998 £m
Increase in cash and short-term deposits 97 238 Net (sales) purchases of portfolio investments (1,675) 76 Increase in loans (668) (314) Credit facility utilised by investment subsidiaries managed by US fund management operation (103) – Share capital issued (34) (15)
General business and shareholders (as above) 150 270 Long-term business 640 414
Total cash at bank and in hand per balance sheet 790 684
General business and shareholders (as above) 1,965 1,324 Long-term business 255 255
Cash consideration (proceeds) including acquisition and disposal costs 1,943 68 2,011 (345)
27 Acquisitions Acquisitions relate to the company’s purchases of the whole of the M&G Group P.L.C. in April and of a majority holding in Chinfon Life Insurance Company of Taiwan in November. The effect of these transactions which have been accounted for as acquisitions was: M&G Chinfon Life Total
The profit and loss account includes the following amounts in respect of these operations: Long-term business technical account 1999 £m
Earned premiums, net of reinsurance 245 Investment income 250 Unrealised gains on investments 151 Claims incurred, net of reinsurance (369) Change in technical provisions, net of reinsurance (154) Net operating expenses (75) Investment expenses and charges (3) Tax attributable to the long-term business (37)
Balance on the long-term business technical account 8 Tax credit attributable to balance on the long-term business technical account 2
Analysed as: Operating profit before re-engineering costs 56 Re-engineering costs (7)
Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the company and the group as at 31 December 1999 and of the profit of the group for the year then ended and have been properly prepared in accordance with the Companies Act 1985.
Total operating profit (based on longer term investment returns) before amortisation of goodwill 776 868 864 854 798
Profit on ordinary activities before tax (including actual investment returns) 750 1,141 1,169 1,614 1,044
Shareholders’ Funds and Borrowings Statutory basis capital and reserves: Employed in business operations 3,326 2,249 1,996 1,398 2,125 Retained centrally 1,858 2,223 1,789 2,027 352 5,184 4,472 3,785 3,425 2,477 Borrowings of holding company and related finance subsidiaries (1,760) (1,223) (1,002) (668) (730)
Total statutory basis capital and reserves 3,424 3,249 2,783 2,757 1,747 Additional achieved profits basis retained profit 4,918 4,261 4,129 3,816 3,856
Achieved profits basis capital and reserves 8,342 7,510 6,912 6,573 5,603
UK operations Long-term business including investment products New business: Operating profit: Statutory basis capital and reserves 1,145 525 398 259 217 Additional achieved profits basis retained profit 3,884 3,386 3,321 3,007 2,718
Achieved profits basis capital and reserves 5,029 3,911 3,719 3,266 2,935
US operations Long-term business New business: Operating profit (including averaged realised gains) 451 411 367 328 241 US GAAP profit (including actual realised gains) 436 413 377 300 252
Statutory basis capital and reserves 1,911 1,564 1,300 1,017 866 Additional achieved profits basis retained profit 622 602 546 519 611
Statutory basis capital and reserves 217 123 46 38 36 Additional achieved profits basis retained profit 376 255 214 209 177
Europe Long-term business New business: Statutory basis capital and reserves 53 37 29 – – Additional achieved profits basis retained profit 15 9 2 – –
Achieved profits basis capital and reserves 68 46 31 – –
Total operating profit (based on long-term investment returns) before amortisation of goodwill for continuing operations 1,098 1,011
Operating profit (including investment returns based on long-term rates of investment return)
Net loss from changes to projected investment return and risk discount rates – (106)
Profit on ordinary activities before tax (including actual investment returns) 1,681 1,408
Adjustment for changes to projected investment return and risk discount rates – (4.1)p
Based on profit for the financial year of £1,162m (£1,037m) 59.7p 53.4p
Statement of Total Recognised Gains and Losses – Achieved Profits Basis
Shareholders’ capital and reserves Share capital and share premium 347 319
In preparing the results of UK long-term business operations, the group has been advised by Tillinghast, consulting actuaries.
The proportion of surplus allocated to shareholders from the UK with-profits business has been based on the present level of ten per cent. Future bonus rates have been set at levels which would fully utilise the assets of the with-profits fund over the lifetime of the business in force. In the UK, Department of Social Security rebate business has been treated as single premium business.
The results for 1999 and 1998 have been prepared using the same principal assumptions.
(ii) Expected rates of future investment return and spread assumptions Expected future rates of investment return reflect prevailing interest rates, the outlook for inflation and the mix of the investment portfolio.
In determining the 1999 and 1998 results for UK operations the key assumptions for these items were: Real pre-tax rates of investment return UK equities Overseas equities } 5.5% Property
For Jackson National Life, the absolute level of rates of future return is less important than the spread achieved between the earned rate and the rates credited to policyholders. In determining the results for both 1999 and 1998, a spread of 1.90 per cent for the main single premium deferred annuity product has been assumed.
The discount rate represents the best estimate of the shareholders’ long-term risk free rate of return on appropriate government securities plus a margin to allow for adverse fluctuations and the risks borne.
The unwind of the discount rate on the present value of future statutory profits is included in profit from business in force (see note 9).
period, to which the expected long-term rates of return are applied, are adjusted to be consistent with long-term expected income yields. This adjustment is most significant for the results of the UK operations.
5 Tax The profit for the year is in most cases calculated initially at the post-tax level. The post-tax profit is then grossed up for presentation purposes at the effective rates of tax applicable to the countries and periods concerned. For Jackson National Life the profit is calculated at the pre-tax level and the effective tax rate is then expected to be applicable on average over the remaining lifetime of the policies.
6 Foreign Currency Translation Foreign currency revenue has been translated at average exchange rates for the year. Foreign currency assets and liabilities have been translated at year-end rates of exchange.
7 Cost of Capital On the achieved profits basis, a charge is deducted from the annual result and the balance sheet value for the cost of capital supporting solvency requirements of the group’s long-term business. This cost is the difference between the nominal value of solvency capital and the present value, at risk discount rates, of the projected release of this capital and investment earnings on the capital.
However, where business is funded directly by shareholders, principally at Jackson National Life, the solvency capital requires adjustments to reflect the cost of that capital.
In determining the cost of capital of Jackson National Life, it has been assumed that an amount equal to 200 per cent of the risk based capital required by the US supervisory authorities must be retained. The impact on Jackson National Life’s shareholders’ funds of the related capital charge is as follows: Before capital charge 2,607 2,280
* Jackson National Life net of tax profit: Before capital charge 104
The achieved profits basis can be illustrated by considering an individual contract. Using prudent best estimate assumptions of the main elements of future income and expenditure – investment return, claims, lapses, surrenders and administration expenses – the total profit expected to be earned from the contract can be estimated at the time of its sale. The total profit expected to be earned is then allocated to individual financial years by application of a discount rate which allows for both the time value of money and the risk associated with the future shareholder cash flows.
The additional profit recognised using the achieved profits basis is represented by the shareholders’ accrued interest in the long-term business and, when combined with shareholders’ funds reported on the statutory basis, provides an improved measure of total shareholders’ funds of the group.
Opinion In our opinion, the achieved profits basis group profit for the year ended 31 December 1999 and shareholders’ interest in the long-term business at that date have been properly prepared on the basis of the assumptions on page 80 and are in accordance with the methodology and disclosure requirements contained in the draft ‘Guidance on accounting in Group Accounts for proprietary companies’ long-term insurance business’ issued by the Association of British Insurers in July 1995.
Size of shareholding Number of shareholders % Number of shares %
M&G 7th Floor, 3 Minster Court Great Tower Street London EC3R 7XH
Jackson National Life 5901 Executive Drive Lansing, Michigan 48911 United States www.jnl.com
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