Statutory operating profit (based on longer-term investment returns) before amortisation of goodwill UK Insurance Operations: Long-term business 468 454 General business 33 61
UK Operations 471 452 US Operations 466 451 Prudential Asia 22 15 Prudential Europe (10) 6 Other Income and Expenditure (109) (78) Re-engineering costs – (70)
Operating profit before amortisation of goodwill 840 776 Amortisation of goodwill (84) (54) Short-term fluctuations in investment returns (48) 28 Profit on sale and flotation of holding in Egg 119 – Share of exceptional gain of associate company 21 – Profit on sale of holding in associate company 99 –
Prudential plc, through its businesses in Europe, the US and Asia, provides retail financial products and services and fund management to many millions of customers worldwide.
Our commitment to the shareholders who own Prudential is to maximise the value over time of their investment.We do this by investing for the long term to develop and bring out the best in our people and our businesses to produce superior products and services, and hence superior financial returns. Our aim is to deliver top quartile performance within the FTSE 100 in terms of total shareholder returns.
Scottish Amicable was acquired by Prudential in 1997. It is Prudential’s leading Independent Financial Adviser (IFA) brand. It is committed to supporting advisers through a combination of high levels of service and a strong product range.
Jackson National Life was acquired by Prudential in 1986 and is one of the leading writers of individual life insurance and annuities in the US, providing products and services in all 50 states. It employs 2,100 people and distributes its products through independent agents, broker-dealers and financial institutions.
Prudential Corporation Asia has operations in 11 countries in Asia. Its 20,000 managers, staff and agents develop and sell a range of insurance and investment products tailored to the needs of each local market.
Prudential is a leading international financial services group – a position reinforced by our listing on the New York Stock Exchange in June. We have a clear and focused strategy designed to achieve sustainable growth in our chosen markets. During the course of the year, there were a number of notable achievements that demonstrate the Group’s commitment to broadening our product range and distribution capabilities and to delivering shareholder value.
We have restructured our UK businesses in order to increase productivity and cost effectiveness and enable us to operate competitively in a low margin environment. This reorganisation has led to a clearer customer focus and greater operating efficiency.
The introduction of stakeholder pensions in the UK represents an enormous opportunity for the Group and we are well placed in this market. Both the TUC and British Chambers of Commerce have endorsed our considerable experience in providing pensions, and working with affinity groups, by selecting Prudential as their preferred stakeholder supplier. In October, we also announced that our stakeholder proposition would be accompanied by lower charges for our existing pension customers.
Our operations in Asia have also made significant progress. Following the launch of Prudential’s life operation in Taiwan in 1999, we acquired an 89 per cent interest in a Taiwanese mutual fund company, Core Pacific Securities Investment Trust Enterprise. We launched a joint venture with China International Trust and Investment Corporation (CITIC) in Guangzhou which was one of the first Sino-British life insurance operations in China. Also ICICI Prudential Life Insurance, our joint venture with Industrial Credit and Investment Corporation of India, received a licence from the Insurance Development Authority to commence life insurance operations in India. In January 2001 we announced that we had signed an agreement to acquire Orico Life Insurance Company Limited of Japan.
In mainland Europe, our strategy is to establish distribution alliances and thereby build on our existing partnership agreements with CNP Assurances in France and Signal Iduna in Germany. We have also joined forces with Centre Français du Patrimoine to distribute Prudential Europe Vie, an innovative equity-backed life insurance product that builds on the success of Prudence Bond in the UK. Policy sales began in January 2001. In addition, M&G plans to launch a range of equity and fixed interest funds in Germany in autumn 2001, rolling out to other European markets from 2002 onwards.
2000 was a year of significant international development for the Prudential Group. This achievement stems from the fundamental transformation that has taken place across the Group over the last five years. This transformation has placed us as a major international-based financial services company.
We are totally committed to creating shareholder value and to this end we have not been afraid to take bold decisions. The continued diversification of our product range, broadened distribution reach, increased access to our chosen markets and the quality of our partners and staff have resulted in a record inflow of new funds of more than £13.9 billion in 2000. The changing business mix is reflected in the fact that 25 per cent of this total is from investment product sales.
Value creation involves growing the business in the most appropriate way by deploying capital in the most efficient markets, and can involve taking some difficult decisions. The decision to restructure our UK direct sales channels and customer service operations was taken in the long term interest of our customers and our shareholders.
One of our key initiatives in 2000 was our listing in June on the New York Stock Exchange. This reflects the increasingly international nature of our business and will enable us to widen our international shareholder base. The listing also offers us flexibility in respect of funding any future expansion in the United States.
In June we also completed an Initial Public Offering (IPO) of a minority share of Egg, our internet financial services business, on the London Stock Exchange. The IPO has promoted the continued growth of Egg and has given Egg’s management team the currency to expand and invest further in technology. We have retained 79 per cent of the company to ensure that Prudential shareholders benefit in the future growth of Egg.
In 2000 Standard & Poor’s (S&P) raised its insurer financial strength rating on Jackson National Life and Jackson National Life of New York to AAA.
In Asia we have operations in 11 countries, offering life insurance with health insurance options, investment products and general insurance, tailored to each local market.We distribute these products primarily through our high quality agency sales forces and through strong bank and broker arrangements.
We now have strong and expanding businesses with growing customer recognition of our brand name and values across the region. Life insurance remains our core business, and continues to offer major opportunities for further growth. We also have a growing mutual fund presence and will continue to expand our product range to serve our customers’ lifetime financial services needs as profitable opportunities arise. Building professional agency distribution remains one of our core strengths in the region. However, we are widening our distribution channels with a growing number of bank distribution arrangements. All our expansion and development plans have a clear focus on adding significant value to our customers and shareholders.
Our joint venture with Bank of China had great success in signing up employers for Hong Kong’s Mandatory Provident Fund during the year and the first round of collections commenced in early 2001.
Following another outstanding year of growth, Prudential is now firmly established as a leading life insurer and retail financial services provider in Asia.
modern Japanese life insurance company. Major changes are underway in the Japanese life insurance market and Orico Life provides us with a very strong platform to effectively apply our distribution management and product innovation skills to rapidly build scale in one of the world’s largest life insurance markets.
Our existing operations continue to make good progress. Prudential Taiwan Life now has more than three times the number of agents it had when we acquired the business in November 1999 and new business volumes continue to grow strongly. Prudential Hong Kong has also considerably strengthened its agency force and at the year-end, was fourth in the market in terms of new business, its highest ever ranking. New business sales in Vietnam, our greenfield operation launched in November 1999, continue to exceed all our expectations. These successes illustrate the strength of our approach to building and managing high quality agency forces across the region.
Our bancassurance distribution partnership with Standard Chartered Bank continues to show good growth in new business volumes from Singapore and Hong Kong and was extended to Malaysia in April 2000. Results to date have been encouraging.
In 2000 we launched a number of new products, in line with our focus on meeting customer needs. These included our first range of Syariah compliant funds in Malaysia to cater for the Islamic sector of the population, and PRUeSaver in Singapore, our first insurance product specifically designed for distribution via the internet.
1 Launch of Prudential Taiwan SITE, a mutual fund business with about £1 billion funds under management 2 Prudential Singapore won Asia’s ‘Life Insurance Company of the Year’ award 3 Hong Kong.
Following another outstanding year of growth, Prudential is now firmly established as a leading life insurer and retail financial services provider in Asia and will continue to strengthen this position in 2001.
In the United States, Jackson National Life is the 20th largest life insurance company in terms of total assets. JNL offers a range of products including fixed and equity-indexed annuities, variable annuities, life insurance and stable value products which consist of guaranteed investment contracts and funding agreements.
Despite an increasingly competitive environment, Jackson National Life has continued to perform strongly, with sales in 2000 amounting to £4.9 billion, an increase over the prior year of 19 per cent. Statutory basis operating profit increased by £15 million to £466 million, despite operating in a market experiencing high policy surrenders, adverse investment performance and growing pressures on spreads. Achieved basis operating profit fell from £469 million to £226 million, reflecting changes in persistency and expense assumptions following an increase in the level of fixed annuity surrenders and the development of systems designed to handle higher volumes of our increased product range.
Jackson National Life has continued to expand distribution, both by adding representatives to its broker-dealer network and through strategic acquisitions. These included the acquisitions of Highland Federal Bank and IFC Holdings. The acquisition of Highland Federal doubled its retail branch network and assisted it in obtaining critical mass in its banking operations. IFC Holdings further strengthens JNL’s presence in the broker-dealer market, giving it the largest bank broker-dealer, and increases the scale and profitability of Jackson’s own broker-dealer business, National Planning Holdings, the fifth largest independent financial planner broker-dealer in the USA.
Excellent growth in retail sales has been achieved predominantly through increased sales through bank and broker-dealer channels. JNL continues to expand its distribution capability, which will assist with future acquisitions or joint ventures.
In preparation for the lower charging environment of stakeholder pensions, we are investing in alternative lower-cost distribution models.
will eliminate the processing of paperwork and therefore shorten the time required to issue a policy.
In November Jackson National Life relocated its headquarters into a new award-winning office complex. This move enabled JNL to consolidate its staff, previously housed in five different locations, and allowed it to make significant gains in productivity. JNL has also reorganised its service centre along product lines to improve the quality and efficiency of customer service and to lower marginal cost, allowing it to make more profit from expanded premium sales.
According to S&P the rating upgrade reflected JNL’s improving risk profile and the view that JNL has become a core operation to Prudential, based on its significant contribution to Group earnings.
agreements in place, we have the potential to be the leading player in this new market.
1 London 2 Sales of Prudence Bond in 2000 were £1.5 billion 3 The Nottingham General Insurance call centre takes 46,000 servicing and sales calls every week from our UK customers.
We have seen excellent performance in a number of our flagship retail equity funds as well as in fixed interest, and some of our new funds have shown market-leading returns.
Group Chief Executive’s Review continued 14 Prudential plc Annual Report 2000
We have integrated our annuities business with that of our intermediaries business, predominantly to capitalise on opportunities in the over 50s market where we expect to see substantial and profitable growth. We are well placed to take advantage of the potential of this market through our existing Prudential Annuities business and by leveraging the additional sales potential available through our intermediaries’ distribution capability. In 2001 this business will build through the impetus of its recent profitable growth and maintain the shift in focus from annuities at the point of retirement to income through retirement.
M&G is our UK and European fund manager, responsible for managing £130 billion of funds. Since its acquisition in 1999, M&G has been successfully integrated into the Group and we have restructured our entire European fund management business under this single investment brand, while the PPM brand continues in the US and Asia. During 2000 we completed the sale of part of our institutional business, as announced last year, and focused M&G on its core strengths in unit trusts, specialist fixed interest and pooled life and pension fund management.
The integration of PPM and M&G allowed us to extend this process across our internal funds, including the £80 billion managed on behalf of the Prudential Assurance Company’s longterm fund. In 2000, despite difficult market conditions globally, this fund beat its competitor and strategic benchmarks due in particular to strong relative returns from UK and European equities and fixed interest. This was an exceptional result. Most impressively, the UK equities portfolio outperformed its benchmark in all four quarters of 2000 despite the radically different investment characteristics in these periods.
1 M&G’s outdoor advertising campaign 2 M&G’s trading floor in its London headquarters 3 GreenPark, a Prudential-owned and built business park in Reading, Berkshire. Newly signed occupiers include Cisco Systems and Veritas Software.
During 2000, we also established M&G Europe to target the increasing appetite for equity investment on the Continent.
Prudential Property Investment Managers (PruPIM) continues to manage in excess of £10 billion worth of property and in 2000 consolidated its outstanding long-term performance record. PruPIM is a founding member of a consortium, created in the summer of 2000, comprising five large UK property owners offering broadband telecommunications services to tenants within their buildings. Prudential alone owns over 1,000 properties in the UK and the potential benefits are significant.
‡ Source: Standard & Poor’s Micropal, bid to bid (with net income reinvested) from 15/10/1999 to 29/12/2000.
2000 was an important year for Egg in terms of investing in and developing its business model and customer acquisition. This continuing investment resulted in Egg reporting losses of £155 million for the year, which was in line with expectations.
Product innovation and partnership remains integral to Egg’s philosophy. In April, Egg announced its joint venture with leading retailer Boots, whereby Boots’ highly successful ‘Advantage’ loyalty card has combined with Egg to create a credit and loyalty card. The rate of customer acquisition for the card has started well and we expect this growth to continue over coming months.
Egg remains at the forefront of adopting latest technology to open up new channels
for customers to access its services. Egg has a multi-channel strategy, encompassing internet, telephone, WAP and interactive digital television and, through its partnership with Boots, also has a physical distribution presence on the high street. In addition, Egg has introduced several new products and services during the year including the launch of the first mutual fund supermarket in the UK, a share trading service, and a general and home insurance on-line supermarket.
The year ahead is of equal importance for Egg. The early part of the year will see continued focus on acquiring credit card customers, as well as capitalising on the forthcoming ISA season with the expansion of its range of pre-packaged easy choice ISAs.
Egg is actively exploring opportunities to expand into overseas markets, and is currently exploring commercial partnerships with a number of significant European businesses.
In Germany, we have continued the development of our broker business, with the establishment of a local front office customer service infrastructure to better support the activity. Through our joint venture agreement with Signal Iduna, we have begun distribution of a long-term care bond product through Signal Iduna’s sales force. We aim to be in a position to capture the significant opportunities expected to arise through future legislative and competitive changes.
Prudential plc Annual Report 2000 19 1 Prudential Europe Vie was the first product launched in France. This is an equity-backed, single premium savings product 2 Paris 3 In Germany we have developed our broker business and established a local front office customer service centre.
Prudential plc Annual Report 2000 21 lower in force result, down £124 million. Adverse persistency and expense experience at Jackson National Life (JNL) have resulted in an assumption change impact on the in force profit of £258 million together with current year experience variances of £61 million. Profits from non long-term business improved £45 million in 2000, primarily due to the one-off UK re-engineering charge of £70 million in 1999.
New Business Achieved Profit Group new business achieved profit from insurance business of £613 million, which excludes profits from investment product sales, was £10 million (two per cent) ahead of prior year, with strong growth in the US and Asia offsetting a fall in the UK operations. The growth in new business achieved profits, despite a two per cent fall in insurance sales, reflects slightly stronger new business margins at Group level.
The 12 per cent growth in JNL’s new business achieved profit to £221 million is principally driven by an 18 per cent growth in new insurance sales, reflecting a 44 per cent increase in sales of variable annuities and a 28 per cent increase in sales of fixed annuities.
Prudential Europe’s new business achieved profit of £9 million is £2 million up on 1999. This mostly reflects higher sales through the German broker business.
Achieved profits basis operating profit* Before tax 1,029 1,098 After tax and related minority interests 749 762 Earnings per share 38.2p 39.1p
UK Insurance Operations 230 308 (25%) Jackson National Life 221 198 12%
In Force Achieved Profit UK Insurance Operations’ in force profit was £478 million, £151 million better than 1999, reflecting the growth in the business and a £30 million benefit from a change in assumptions to reflect an improvement in the persistency of Prudence Bond. No adjustment has been required to the provision established in 1999 in respect of the cost of resolving pension mis-selling.
A full description of the achieved profits methodology and the result for the year is included on pages 78 to 86.
Modified Statutory Basis Results Operating Profit Group operating profit before tax on the modified statutory basis (MSB) of £840 million was £64 million ahead of 1999, which included a £70 million UK re-engineering charge. Excluding this charge, MSB operating profit was in line with 1999.
UK Insurance Operations’ operating profit in 2000 was £501 million, £14 million below 1999. Prudential Insurance Services profit of £346 million was £32 million below 1999, as the impact of increased funds under management in the long-term result was offset by the impact of lower reversionary bonus rates. The general insurance result was impacted by £33 million as a result of the severe floods in October and November. Profit from Prudential Intermediary Business was up £26 million to £127 million, primarily reflecting a one-off £30 million profit relating to the reinsurance of the M&G life and pensions business following its transfer to Scottish Amicable. Profit from Prudential Financial Services was down £8 million to £28 million in 2000, reflecting increased investment in our new stakeholder platform.
Prudential Asia’s profit of £22 million was £7 million ahead of 1999 despite increased development expenditure and support for new operations.
Profit Before Tax Profit on ordinary activities before tax amounted to £947 million in 2000, compared to £750 million in 1999. This improvement is despite increased goodwill amortisation of £84 million, mainly due to a full 12 months’ amortisation in respect of the M&G acquisition. The £239 million profit on business disposals represents the sale of the minority stake in Egg and the disposal of our stake in St James’s Place Capital.
Dividend per Share The final dividend per share is 16.3 pence, resulting in a full year dividend growth of 6.5 per cent to 24.5 pence.
These surplus assets have accumulated over many years from a variety of sources and provide the long-term fund with working capital. This working capital permits us to invest a substantial portion of the assets of the long-term fund in equities and real estate, smooth investment returns to with-profits policyholders, to keep our products competitive, to write new business without being constrained as to cash flows in the early years of the policy and to demonstrate solvency.
The calculation of aggregate with-profits policyholder asset shares, unlike the calculation for determining bonuses, depends upon the experience for each type of policy in respect of mortality, surrenders, expenses, investment returns,
taxation and transfers to shareholders over the duration that current policies have been in force. As we have not been using this methodology since the inception of a significant proportion of our in force policies, we do not have the detailed historical data for all policies required to calculate a precise aggregate asset share for each class of policy. Without a precise calculation of aggregate asset shares on which to base our calculation of the surplus assets within the fund for future appropriations, we can only estimate this amount.
The amount of surplus assets changes from year to year to reflect the achieved investment performance of the fund and any change over the year in the anticipated costs of smoothing and guarantees for the in force with-profits business. The anticipated costs of smoothing and guarantees depend upon the projection of claim values and asset shares and hence on assumptions, which themselves vary from year to year, about future experience for mortality, surrenders, expenses, investment return and taxation.
The amount and timing of any attribution to shareholders is sufficiently uncertain that it is not possible to accurately estimate any potential attribution. In addition, it is likely that if any surplus assets are attributed to shareholders they will remain in Prudential Assurance’s long-term fund to support the long-term business, and accordingly, they are unlikely to be distributed to shareholders for some considerable period of time, if at all.
Financial Strength of Insurance Operations The solvency ratio of free assets to liabilities within the Group’s main UK long-term fund at the year end is estimated to be 16 per cent, a reduction of 12 per cent compared with prior year. The reduction in solvency ratio reflects the lower investment return earned on the assets of the fund during 2000 compared with the previous year and the introduction during the year of new, more stringent valuation regulations relating to unitised with-profits policies. The new valuation regulations do not affect the underlying financial strength of the fund, which continues to be rated AAA by Standard & Poor’s and Aaa by Moody’s Investors Service. The solvency position of Jackson National Life remains strong with a riskbased capital ratio of over 230 per cent of the regulatory minimum (1999 – 240 per cent). Also Jackson’s financial strength is rated AAA by Standard & Poor’s and Aa3 by Moody’s Investors Service. Adequate solvency levels have been maintained by our insurance operations in Asia.
Funds Flow The table opposite provides details of the holding company funds flow.
After including £173 million proceeds from the disposal of the Company’s holding in St. James’s Place Capital and from the flotation of Egg, when part of the Company’s holding was placed in the market, and £139 million proceeds from a listing of shares on the New York Stock Exchange, overall there was a net cash inflow in 2000 to the holding company of £179 million.
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.
Risk Management The Group has established a continuous process for identifying, managing and reporting the Group’s risks that is regularly reviewed by the Board. The main features of this process are as follows: Investment The respective responsibilities of the Board and business unit management for investment strategy, compliance and performance are clearly defined. There are also detailed rules governing investment dealing and settlement (including the use of derivatives), incorporating details of procedures and authority levels.
Underwriting The Group has controls over underwriting exposures covering both risks accepted and reinsured. Exposure limits are reviewed annually.
Financial Control Procedures Detailed controls, applicable across the Group, are laid down in financial and actuarial procedures manuals.
Performance Planning and Monitoring There is a comprehensive planning and performance monitoring system based on key performance indicators for each business area.
Vibrant communities and a sound environment are fundamental to profitable trading. As an international Company, we are committed to the delivery of a social investment programme that responds to the changing environment, delivers real value to the communities within which we operate, and recognises the values of our local partners and stakeholders.
• encourage our suppliers to minimise the impact of their operations on the environment through our procurement policies and practices
Diversity We respect and value the talent and diversity of our employees around the world. To remain competitive, we seek to recruit, develop and retain people from the widest range of backgrounds and we seek to be fair, responsible and caring in all aspects of our business. In the UK, we have committed to the Commission for Racial Equality Leadership Challenge and are members of Opportunity Now, Race for Opportunity, Employers for WorkLife Balance and the Employers Forum on Disability. We also subscribe to the Employers Forum on Age and to their voluntary Code of Practice. We have established a UK-wide diversity group to stimulate discussions, develop good practice and monitor progress, chaired by Rodney Baker-Bates, Chief Executive, Prudential Financial Services.
• In China, CITIC Prudential Life donated US$72,000 to the Hope Primary School to expand their equipment and facilities for over 1,000 students.
Sir Roger Hurn* Chairman (Age 62) A director since February 2000 and Chairman since May 2000. Chairman of Marconi plc (formerly The General Electric Company plc). Deputy Chairman of GlaxoSmithKline plc and previously Deputy Chairman of Glaxo Wellcome plc. Non-executive director of Imperial Chemical Industries PLC. Previously Chairman of Smiths Industries plc and previously a director of SG Warburg Group. Chairman of the Court of Governors at the Henley Management College.
Jonathan Bloomer FCA (Age 46) A director since 1995 and Group Chief Executive since March 2000. Previously Deputy Group Chief Executive since May 1999 and Group Finance Director. Non-executive director of Egg plc. Non-executive director of Railtrack Group plc. Member of the Urgent Issues Task Force Committee of the Accounting Standards Board.
Philip Broadley FCA (Age 40) Group Finance Director since May 2000. Previously he was with Arthur Andersen where he became a partner in 1993. He specialised in providing audit, risk management and regulatory advisory services to clients in the financial services industry.
Keith Bedell-Pearce (Age 55) A director since 1992. e-Commerce Director since March 2000 and Chairman of Prudential Europe since September 1999. Previously International Development Director since November 1996. Joined Prudential in 1972.
Sir David Barnes CBE* (Age 65) A director since January 1999. Deputy Chairman of AstraZeneca plc from April 1999 and previously Chief Executive of Zeneca PLC. Nonexecutive Deputy Chairman of Syngenta AG from November 2000. Non-executive Chairman of Imperial Cancer Research Technology Ltd. Member of the Board of Trustees, British Red Cross Society. Previously Deputy Chairman of Business in the Community.
Bridget Macaskill* (Age 52) A director since May 1999. Chairman and Chief Executive Officer of OppenheimerFunds Inc, an investment management company based in New York.
Mark Tucker (Age 43) A director since September 1999. Chief Executive of Prudential Corporation Asia since 1994 and previously General Manager in Prudential, Hong Kong from 1989 to 1992. Joined Prudential in 1986.
Sandy Stewart* (Age 67) A director since 1997. Chairman of Murray Extra Return Investment Trust plc and of the Scottish Amicable (supervisory) Board. Previously a practising solicitor and Chairman of Scottish Amicable Life Assurance Society.
The directors support the Combined Code on Corporate Governance annexed to the Listing Rules issued by the Financial Services Authority. The Company has complied throughout the accounting period ended 31 December 2000 with all the Code provisions set out in Section 1 of the Combined Code, except in relation to recognising a senior independent director following the retirement of Michael Abrahams as Deputy Chairman at the Annual General Meeting in May 2000. We have applied the principles in the manner described below and in the Remuneration Report.
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 page 29, meets regularly, usually eight times a year with a separate strategy day and additional meetings as and when required. The Board determines the objectives and strategy for the Group. It has set out the specific matters which are reserved to it for decision.
Authority is delegated to the Group Chief Executive for implementing the strategy and for managing the Group. In discharging his responsibility, the Group Chief Executive works with a group executive committee, comprising all the executive directors and other business unit heads, and is also assisted by a group head office team of functional specialists.
The Chairman, Group Chief Executive, the Group Finance Director and other members of the senior management team, together with the external auditors usually attend meetings of the Committee except when the Committee wishes to meet alone. The Committee meets privately with both external and internal auditors.
Except in relation to its proposals relating to 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 and certain other senior executives. The Committee has access to professional advice inside and outside the Company.
Independent Professional Advice The Board has approved a procedure whereby directors have the right in furtherance of their duties to seek professional advice at the Company’s expense.
Directors’ Independence, Training and Re-election A majority of Board members are non-executive directors who are all considered to be independent. Given the calibre and experience of its non-executive directors, the Board does not believe that it is appropriate at this time to recognise a senior independent director, other than the Chairman, to whom concerns can be conveyed. The Company is one of the UK’s largest institutional investors and the Board does not believe that this situation compromises the independence of those non-executive directors who are also on the boards of companies in which the Company has a shareholding. The Board also believes that such shareholdings should not preclude the Company from having the most appropriate and highest calibre non-executive directors.
Non-executive directors are appointed initially for a threeyear term. The appointment is then reviewed towards the end of this period. Upon appointment, all non-executive directors embark upon a programme of induction that will usually take the form of visits to different business areas in the Group where the opportunity is taken for the newly appointed director to meet members of staff. Training is available for executive directors where appropriate.
32 Prudential plc Annual Report 2000 and functions are required to carry out a review of risks. This involves an assessment of the impact and likelihood of key risks and of the effectiveness of controls in place to manage them. The assessment is reviewed regularly through the year. In addition, business units review opportunities and risks to business objectives regularly with the Group Chief Executive and Group Finance Director.
Businesses are required to confirm annually that they have undertaken risk management during the year as required by the Group Risk Framework and that they have reviewed the effectiveness of the system of internal control. The results of this review were reported to and reviewed by the Audit Committee and confirmed that the processes described above and required by the Group Risk Framework were in place throughout 2000 and complied with Internal Control: Guidance for Directors on the Combined Code (the Turnbull guidance). Internal Audit undertakes a review for the Audit Committee of the operation of the risk management process throughout the Group.
In addition Internal Audit execute a comprehensive risk-based audit plan throughout the Group, from which all significant issues are reported to the Audit Committee.
The Group’s internal control framework includes detailed procedures laid down in financial and actuarial procedure manuals. The Group prepares an annual business plan with three-year projections. Executive management and the Board receive monthly reports on the Group’s actual performance against plan, together with regularly updated forecasts. The Group’s risk management procedures are further described in the Group Financial Review on page 25.
The members of the Remuneration Committee during 2000 were: Sir David Barnes Chairman Michael Abrahams (who was a member until the date of his retirement from the Board on 5 May 2000) Ann Burdus Sir Roger Hurn (for the period from 17 February 2000 until his election as Chairman of the Board on 5 May 2000) Bridget Macaskill Roberto Mendoza (who became a member on 25 May 2000) Rob Rowley Sandy Stewart
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 through annual incentives and long-term incentive plans directly related to the Company’s longer-term performance.
For 2000, executive directors were eligible for awards of up to 45 per cent of basic salary at the time of making the award, with the exception of Michael McLintock who has an annual bonus award in line with remuneration levels in the investment management industry.
Non-Executive Directors’ Remuneration Fees for individual non-executive directors had been unchanged since July 1996. The fees payable to non-executive directors were increased from £25,000 per annum to £32,500 per annum with effect from 1 June 2000. The non-executive directors used the net amount of the increase to purchase shares in the Company, which they will hold until their retirement from the Board, and it is intended that these arrangements will continue each year. In 2000 the fee received by the Chairman was increased from £175,000 per annum to £300,000 per annum on the election of Sir Roger Hurn as Chairman at the Annual General Meeting in that year. The former Deputy Chairman, Michael Abrahams, received a fee of £45,000 per annum until his retirement at the Annual General Meeting in May 2000. During his appointment he also received a fee of £20,000 per annum as a non-executive director of Scottish Amicable Life. In addition, Sandy Stewart, as Chairman of the supervisory board of the Scottish Amicable Insurance Fund, received a fee of £25,000 per annum and Roberto Mendoza, as Chairman of Egg from 10 May 2000, received a fee at the rate of £75,000 per annum.
Subject to shareholders approving this increase, the Board has also approved additional fees with effect from 1 June 2001. The respective Chairmen of the Audit and Remuneration Committees would be paid an additional fee of £5,000 per annum in respect of the role. The other non-executive directors on each committee would be paid an additional fee of £2,500 per annum. As noted above, it is intended that the net amount of these additional fees would be used by the non-executive directors to purchase shares in the Company.
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 was a member of the Prudential Staff Pension Scheme during his appointment.
For the Group Chief Executive, the conditional award for 2000 was equivalent to 100 per cent of salary at the time of the award and for Michael McLintock the award was equivalent to 40 per cent of salary. For the other executive directors, the award was equivalent to 80 per cent of salary. The shares are valued at their average share price during the preceding calendar year, and the price used for the 2000 award was 921.7 pence (1999 – 837.3 pence).
2. Michael McLintock’s bonus includes a payment of £117,000 that was included in his contractual arrangements following the purchase of M&G in 1999. 3. Mark Tucker’s bonus figure includes a cash payment of £207,000 from his 1998 Asian long-term incentive plan. His benefits include an allowance for housing and additional similar benefits paid to reflect his expatriate circumstances. For 2000, these benefits and allowances amounted to £163,000. 4. Les Cullen also received compensation for loss of office of £276,000.
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 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 made is 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.
Conditional Market value Conditional share awards Conditionally Rights of rights share awards outstanding at awarded in granted granted in 2000* outstanding at Release
Sir Peter Davis (note 2) 101,534 101,534 1,007 * The market value of rights granted in 2000 is based on the market value of the shares over which rights are granted on the day of the grant
Performance under these plans was ranked 37th and 68th respectively, on the basis of TSR performance as at 31 December 2000.
Mark Tucker 85,398 134,713 * Or date of appointment if later
To reflect his role as Chief Executive, Prudential Asia, Mark Tucker also participates in a cash-based long-term incentive plan that measures performance of the Group’s Asian operations. This plan is designed to provide reward contingent upon the rate of change in value of Prudential Asia over a three-year period. The threshold performance criteria under the plan is that the growth in value must be greater than 15 per cent per annum over the period. Any payment for performance above threshold is made in the April following the end of the performance period. The on-target payout is 100 per cent of salary at the beginning of the period, for which an annual growth rate of 35 per cent is required. The maximum of 150 per cent is for exceptional performance, representing 50 per cent per annum growth or higher. The payment for the 1998 award is included in the Directors’ Remuneration table.
To reflect his role as Chief Executive of M&G, Michael McLintock also participates in the M&G Chief Executive Long Term Incentive Plan. The plan is designed to provide a cash reward based on the economic and investment performance of M&G over a three-year period. Awards under the plan are made through the granting of awards of phantom share options and restricted shares, vesting at the end of the performance period. At the time of appointment, he held awards for the year 2000 with face values of £225,000 in phantom restricted shares and £367,800 in phantom share options. In addition, he held an award of £275,000 in phantom restricted shares with a performance period which ended on 31 December 2000 and vesting in December 2001.
Notes 1. The market price of shares at 31 December 2000 was 1,077 pence. The highest and lowest share prices during 2000 were 1,186 pence and 880 pence respectively. 2. During 1999, Keith Bedell-Pearce exercised options with an associated gain on exercise of £40,000. 3. Mark Tucker exercised options over the 4,074 shares on 13 March 2001.
Directors’ Share Options The Restricted Share Plan replaced the Executive Share Option Scheme in 1995 as the Group’s long-term incentive plan. Outstanding options under that Scheme remain in force and are set out below together with options under the
Prudential Savings-Related Share Option Scheme. The Prudential Savings-Related Share Option Scheme is open to all employees in the UK and options up to Inland Revenue limits are granted at a 20 per cent discount and cannot normally be exercised until a minimum of three years has elapsed.
Directors’ Pensions Prudential Staff Pension Scheme Executive directors are eligible to participate in the Prudential Staff Pension Scheme on the same basis as other members. The scheme is non-contributory and provides members with a maximum pension of 38/60 of Final Pensionable Earnings at the normal retirement age of 60. Final Pensionable Earnings are the sum of the pensionable salary for the 12 months immediately preceding retirement or termination of employment and, for entrants since 31 May 1989, are restricted to salary up to the Inland Revenue earnings cap, which at the time of writing is £91,800.
Pension Entitlements Details of directors’ pension entitlements under the Prudential Staff Pension Scheme or other Company pension schemes and pre-tax contributions to FURBS or salary supplements are set out opposite:
2. Total contributions to directors’ pension schemes were £571,000 (1999: £594,000).
Payment Policy 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.
Employee Involvement The Group has effective communication channels through which employees’ views can be sought on issues which concern them. The first two meetings of the Prudential European Employee Forum took place in 2000. The new Forum is a high-level employee consultative body, which ensures that Prudential plc meets its European legal obligations.
Donations Charitable donations made by the Group in 2000 were £2.0 million. It is Group policy not to make political donations and no such donations were made in 2000.
Shareholders The number of accounts on the share register at 31 December 2000 was 88,603 (89,051). Further information about shareholdings in the Company is given on page 88. At 1 March 2001 the Company had received notification in accordance with Sections 198 to 202 of the Companies’ Act 1985 from CGNU plc of a holding of 3.9 per cent of the Company’s share capital.
The following table shows the statutory basis results reported in the profit and loss account on pages 42 to 44. It does not form part of the statutory financial statements.
Operating profit before tax (based on longer-term investment returns) before amortisation of goodwill
General business: UK Prudential Insurance Services 33 61 Re-engineering costs* – (12)
Balance on the general business technical account (analysed on page 42) 33 49 Long-term business: UK Operations Prudential Insurance Services 313 317 Prudential Intermediary Business 127 101 Prudential Financial Services 28 36 UK Insurance Operations 468 454
US Operations 459 457 Asia (net of development expenses of £17m (£12m)) 22 15 Europe (net of development expenses of £18m (£nil)) (10) 6 Long-term business re-engineering costs attributable to shareholders* – (48)
Balance on the long-term business technical account before tax (analysed on pages 43 and 44) 974 901
Group operating profit before amortisation of goodwill 840 776 Items excluded from operating profit before amortisation of goodwill: Amortisation of goodwill (84) (54) Short-term fluctuations in investment returns (48) 28 Profit on sale and flotation of holding in Egg 119 – Share of exceptional gain of associate company 21 – Profit on sale of holding in associate company 99 –
Statutory basis profit on ordinary activities before tax (analysed on page 44) 947 750
Tax on profit on ordinary activities: Tax on operating profit before amortisation of goodwill (235) (209) Tax on items excluded from operating profit before amortisation of goodwill (49) 1
Statutory basis profit for the financial year after minority interests: Operating profit after tax and related minority interests before amortisation of goodwill 617 567 Items excluded from operating profit after tax before amortisation of goodwill 71 (25)
Earnings per share Based on operating profit after tax and related minority interests before amortisation of goodwill 31.5p 29.1p Based on total statutory profit for the financial year after minority interests – basic 35.1p 27.8p
Dividend per share 24.5p 23.0p * Part of re-engineering costs of £70m borne by shareholders’ funds
Gross premiums written 6 333 318 Outwards reinsurance premiums (12) (12)
Allocated investment return transferred from the non-technical account 9(a) 47 40
Gross premiums written 6 14,173 14,826 Outwards reinsurance premiums (109) (75)
Unrealised (losses) gains on investments (8,922) 6,239 Claims paid: Gross amount (13,936) (10,518) Reinsurers’ share 95 89
Change in long-term business provision: Gross amount (6,239) (6,778) Reinsurers’ share 123 33
Change in provisions for linked liabilities, net of reinsurance 554 (4,830)
Consolidated Profit and Loss Account continued Year ended 31 December 2000
Profit on ordinary activities before tax 7 947 750 Tax on profit on ordinary activities 15 (284) (208)
Profit for the financial year before minority interests 663 542 Minority interests 25 –
Dividends: Interim (at 8.2p (7.7p) per share) (162) (150) Final (at 16.3p (15.3p) per share) (322) (299)
(after related minority interests) 4 (1.4)p 2.3p Adjustment in respect of profit on Egg flotation and business disposals
Dividend per share 24.5p 23.0p 44 Prudential plc Annual Report 2000
Consolidated Statement of Total Recognised Gains and Losses Year ended 31 December 2000
Reconciliation of Movements in Consolidated Shareholders’ Capital and Reserves Year ended 31 December 2000
New share capital subscribed 34 34 Transfer for shares issued in lieu of cash dividends (15) 15 Charge in respect of shares issued to qualifying employee share ownership trust 9 (9)
Goodwill on sale of holding in associate company 90 90 New share capital subscribed 1 183 184 Transfer for shares issued in lieu of cash dividends (20) 20 Charge in respect of shares issued to qualifying employee share ownership trust 46 (46)
Investments Land and buildings 21 10,303 8,763 Investments in participating interests 22 83 105 Other financial investments 23 108,125 105,778
Reinsurers’ share of technical provisions Provision for unearned premiums 5 4 Long-term business provision 353 215 Claims outstanding 62 57 Technical provisions for linked liabilities 396 400
Debtors Debtors arising out of direct insurance operations: Debtors arising out of reinsurance operations 14 30 Other debtors: Tax recoverable 50 330
Cash at bank and in hand 1,402 788 Own shares (ordinary shares of parent company) 26 31 29 Present value of acquired in force long-term business 17 133 170 Present value of future margins relating to advances from reinsurers 148 55
Prepayments and accrued income Accrued interest and rent 1,150 988 Deferred acquisition costs: Long-term business 2,935 2,726 General business 17 15
Technical provisions Provision for unearned premiums 175 164 Long-term business provision 91,052 84,476 Claims outstanding 1,022 827 Equalisation provision 38 30
Creditors Creditors arising out of direct insurance operations 213 217 Creditors arising out of reinsurance operations 21 18
The financial statements on pages 42 to 74 and the supplementary information on pages 79 to 85 were approved by the Board of directors on 15 March 2001.
Philip Broadley, Group Finance Director 48 Prudential plc Annual Report 2000
Acquisitions and disposals Net cash (outflow) inflow from: Acquisition of subsidiary undertakings 32 (167) (1,984) Flotation of Egg and business disposals 32 195 –
Financing Issue of debenture loans 30 – 500 (Redemption) issue of loan notes 30 (114) 168 Movement on credit facility utilised by investment subsidiaries managed by
Net sales of portfolio investments 32 (162) (1,675) Increase in cash and short-term deposits 32 185 97
Long-term business products written in the UK and Asia are principally with-profits deposit administration, other conventional and unitised with-profits policies and non-participating pension annuities in the course of payment. Long-term business also includes linked business written in the UK, Asia and Europe. The principal products written by Jackson National Life in the US are interest sensitive deferred annuities and whole-life policies, guaranteed investment contracts, equity linked indexed deferred annuities and term life insurance.
The consolidated financial statements are prepared in accordance with applicable accounting standards under UK Generally Accepted Accounting Practice (‘UK GAAP’), including the Statement of Recommended Practice, ‘Accounting for Insurance Business’, issued in December 1998 by the Association of British Insurers (the ‘ABI SORP’).
The consolidated profit and loss accounts comprise a general business technical account (property and casualty insurance business); a longterm business technical account (life insurance, pension, disability and sickness insurance and annuity business); and a non-technical account. The non-technical account includes the results of the Group’s insurance operations. The insurance operations are presented by category of income and expenditure in each respective technical account. The balances (profits on insurance activities for the year) from the general and long-term business technical accounts are then included in the non-technical account and combined with the
Group’s non-insurance businesses (principally banking and fund management) to determine the consolidated profit for the financial year.
In accordance with Financial Reporting Standard (‘FRS’) No. 1 (Revised), ‘Cash Flow Statements’, long-term business cash flows are included in the statement of cash flows only to the extent of cash transferred to and available to meet the obligations of the Group. The statement of cash flows reflects only the cash flows of general business, the Group’s other non-insurance businesses included in the non-technical account, and amounts transferred to shareholders’ funds from the Group’s long-term businesses.
Premiums and Claims Premium and annuity considerations for conventional with-profits policies and other protection-type life insurance policies are recognised when due. Premium and annuity considerations for linked policies, unitised with-profits policies and other investmenttype policies are recognised when received or, in the case of unitised or unit linked policies, when units are issued. Premiums exclude any taxes or duties assessed based on premiums.
Deferred Acquisition Costs Costs of acquiring new business, principally commissions, marketing and advertising costs and certain other costs associated with policy issuance and underwriting that are not reimbursed by policy charges are specifically identified and capitalised as deferred acquisition costs (‘DAC’). The DAC asset is amortised against margins in future revenues on the related insurance policies, to the extent that the amounts are recoverable out of the margins. Recoverability of the unamortised DAC asset is assessed at the time of policy issue, and reviewed if profit margins have declined.
Long-term Business Provision Prudential’s long-term business written in the UK and Asia comprises predominantly life insurance policies under which the policyholders are entitled to participate in the profits of the long-term business supporting these policies. Such policies are called ‘with-profits’ policies. Prudential maintains with-profits funds within the Group’s long-term business funds which segregate the assets and liabilities and accumulate the profit and loss activity related to that with-profits business. The amounts accumulated in these with-profits funds are available to provide for future policyholder benefit provisions and for bonuses to be distributed
Shareholders’ profits with respect to bonuses declared on with-profits business correspond to the shareholders’ share of the cost of bonuses as declared by the Board of directors. The shareholders’ share currently represents one-ninth of the cost of bonuses declared for with-profits policies.
Annual bonuses are declared and credited each year to all withprofits policies. The annual bonuses increase policy benefits and, once credited, become guaranteed. Annual bonuses are charged to the profit and loss account as a change in the long-term business provision in the year declared. Terminal bonuses are declared each year and accrued for policies scheduled to mature and death benefits expected to be paid during the next financial year. Terminal bonuses are not guaranteed and are only paid on policies that result from claims through the death of the policyholder or maturity of the policy within the period of declaration or by concession on surrender. No policyholder benefit provisions are recorded for future annual or terminal bonus declarations.
In the UK and Asia, the future policyholder benefit provisions on conventional with-profits and other protection-type policies are calculated using the net premium method. The net premium reserves are calculated using assumptions for interest, mortality, morbidity and expense, but without assumptions for withdrawals. These assumptions are determined as prudent best estimates at the date of valuation. Interest rates used in establishing policyholder benefit provisions for conventional with-profits policies in the consolidated financial statements range from 3.0% to 5.35%. The interest rate used in establishing policyholder benefit provisions for pension annuities in the course of payment is adjusted each year and ranged from 5.0% to 6.0% and 4.75% to 6.00%, for 2000 and 1999 respectively. Mortality rates used in establishing policyholder benefit provisions are based on published mortality tables adjusted to reflect actual experience. For unitised with-profits policies, the policyholder benefit provisions are based on the policyholder account balance.
The future policyholder benefit provisions for Jackson National Life’s conventional protection-type policies are determined using the net level premium method, with an allowance for surrenders and claims expenses. Rates of interest used in establishing the policyholder benefit provisions range from 6.0% and 9.5%. Mortality assumptions are based on published mortality tables adjusted to reflect actual experience. For investment-type products sold by Jackson National Life, the policyholder benefit provision included within technical provisions in the consolidated balance sheets is the policyholder account balance.
Fund for Future Appropriations The fund for future appropriations (‘FFA’) represents the excess of assets over policyholder liabilities for the Group’s with-profits funds. The annual excess of income over expenditures of the with-profits fund, after declaration and attribution of the cost of bonuses to policyholders and shareholders, is transferred to the FFA each year through a charge to the profit and loss account. The balance retained in the FFA represents cumulative retained earnings arising on the with-profits business that has not been allocated to policyholders or shareholders.
Overseas Subsidiaries Results of overseas subsidiaries are determined initially using local GAAP bases of accounting with subsequent adjustments where necessary to comply with the Group’s accounting policies.
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 10 on page 61.
Revenue Recognition Premiums are recognised when risks are assumed. The proportion of premiums written relating to periods of risk beyond any year-end is recorded as an unearned premium provision and subsequently recognised in earnings proportional to the period of the risk. Premiums are presented gross of commission and exclude any taxes or duties assessed based on premium.
Deferred Acquisition Costs Direct and indirect costs associated with the writing of new general insurance policies are deferred and amortised in a manner consistent with the method used for premium recognition described above.
Investment returns are allocated from the non-technical account to the general business technical account using the longer-term rate of return on assets supporting the general business technical account, liabilities and solvency capital. Investment returns are also allocated between the long-term business technical account and the nontechnical account for the difference between the actual investment rate of return of the long-term business technical account and the longer-term rate of return on the assets backing shareholder financed long-term business (primarily Jackson National Life). The longerterm rate of return is based on historical real rates of return and current inflation expectations adjusted for consensus economic and investment forecasts.
Certain reinsurance contracts include significant financing elements. For these contracts the financing liability is recorded as a deposit due to the reinsurer. An asset representing the present value of future margins on the ceded business from which the financing will be repaid is also recognised on the consolidated balance sheet to the extent the reinsurer has assumed the risk that such margins will emerge.
Current tax expense is charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. To the extent that losses of an individual company are not offset in any one year they can be carried back for one year or carried forward indefinitely to be offset against profits arising from the same company. Deferred tax assets and liabilities generally are recorded based on the differences between financial statement carrying amounts and tax bases of assets and liabilities for those differences which are considered likely to reverse in the foreseeable future and for net operating losses carried forward, if any. Net deferred tax assets are not recognised, except to the extent that they are expected to be recoverable without replacement by equivalent deferred tax assets arising in the future. Deferred tax assets for tax losses carried forward can be recognised if it is assured beyond reasonable doubt that future taxable profits will be sufficient to offset the loss. Deferred tax assets and liabilities are calculated using currently enacted tax rates and laws expected to be applicable when such differences reverse.
The tax charge for long-term business included in the long-term business technical account includes tax expense on with-profits funds attributable to both the policyholders and the shareholders. Different tax rules apply under UK law depending upon whether the business is life insurance or pension business. Tax on the life insurance business is based on investment returns less expenses attributable to that business. Tax on the pension business is based on the shareholders’
Pension Costs Contributions to the Group’s defined benefit plans are calculated and expensed on a basis that spreads the costs over the service lives of participants. Further details are provided in note 18 on page 66. Contributions in respect of defined contribution plans are accrued by the Group when incurred.
Other Financial Investments Other financial investments include equity securities; debt and other fixed income securities; mortgage and other loans; loans to policyholders and deposits with credit institutions.
Deposits with Credit Institutions Deposits with credit institutions comprise items the withdrawal of which are subject to time constraints. These include commercial paper and certificates of deposit and are carried at fair value. Changes in fair value are included in investment returns for the year.
Derivatives Derivative financial instruments are used to reduce or manage investment, interest rate and currency exposures, to facilitate efficient portfolio management and for investment purposes. The Group’s policy is that amounts at risk through derivative transactions are covered by cash or by corresponding assets.
Derivative financial instruments used to facilitate efficient portfolio management and for investment purposes are carried at fair value with changes in fair value included in investment returns. For other derivative instruments, various methods of hedge accounting are used.
Securities Lending The Group is party to various securities lending agreements under which securities are loaned to third parties on a short-term basis. The loaned securities are not removed from the Group’s consolidated balance sheets, rather, they are retained within the appropriate investment classification. Management’s policy is that collateral in excess of 100% of the fair value of securities loaned is required from all securities borrowers and typically consists of cash, debt securities, equity securities or letters of credit.
In cases where the Group takes possession of the collateral under its securities lending programme, the collateral is included in other financial investments in the consolidated balance sheets with a corresponding liability being recorded to recognise the obligation to return such collateral. To further minimise credit risk, the financial condition of counterparties is monitored on a regular basis.
Further details of UK banking business assets and liabilities are contained in note 9(b) on page 60.
4 Supplemental Earnings Information In accordance with FRS 3 ‘Reporting financial performance’ and the ABI SORP, the Group uses operating profit based on longer-term investment returns before amortisation of goodwill and before tax as a supplemental measure of its results. For the purposes of measuring operating profit, investment returns on general business and other shareholder business are based on the expected longer-term rates of return. The expected longerterm rates of return are based on historical real rates of return and current inflation expectations adjusted for consensus economic and investment forecasts. The only general business and shareholder investments that require calculation of an expected longer-term rate of return are UK equity securities. For these investments the longer-term rate of return is estimated at 8.0% (8.0%). The longer-term dividend yield has been assumed to be 2.75% (2.75%). For the purposes of determining the longer-term investment returns, the realised gains of Jackson National Life, which invests principally in fixed income securities, are averaged over five years and combined with actual interest and dividends.
(note 7) (note 15) interests Net per share (£ millions except per share amounts)
Profit on ordinary activities 750 (208) – 542 27.8p * The adjustment from post-tax longer-term investment returns to post-tax actual investment returns includes investment return that is attributable to external equity investors in two investment funds of the US fund management operation. These two funds are consolidated as quasi-subsidiaries but have no net impact on pre-tax or post-tax operating profit. Total profit, before and after tax, incorporating the adjustment from longer-term investment returns to actual investment returns, includes losses of £13m attributable to these minority interests.
Weighted average shares for basic earnings per share 1,959 1,947 Shares under option at end of year (note 26) 20 26 Assumed number of shares that would have been issued at fair value on assumed option exercise (11) (14)
Weighted average shares for diluted earnings per share 1,968 1,959 5 Segmental Information – New Business Premiums by Product Distributor Annual Premium
Department of Social Security rebate business 175 175 – – 18 18
5 Segmental Information – New Business Premiums by Product Distributor continued Annual Premium
The geographical analysis of premiums is based on the territory of the operating unit assuming the risk. Premiums by territory of risk are not materially different.
Items excluded from operating profit before amortisation of goodwill (note (c)) 107 (26) 107 (26)
Statutory basis profit on ordinary activities before tax 33 49 974 901 (60) (200) 947 750
Asia (net of development expenses of £17m (£12m)) 22 15 22 15 Europe (net of development expenses of £18m (£nil)) (10) 6 (10) 6 Other Income and Expenditure
Investment return (longer-term): Investment income (including realised gains) 140 162 140 162 Unrealised (losses) gains on investments (7) 14 (7) 14 Allocations to technical accounts (104) (54) (104) (54)
Short-term fluctuations in investment returns (note (c)) 48 (28) 48 (28)
Short-term fluctuations in investment returns (note (b)) (48) 28 (48) 28 Profit on sale and flotation of holding in Egg (note 33) 119 – 119 – Share of exceptional gain of associate company* 21 – 21 – Profit on sale of holding in associate company (note 33) 99 – 99 –
* The gain relates to the Company’s share of the profit realised by St James’s Place Capital plc, an associate company at the time of sale, on the disposal of its interest in Global Asset Management, a Bermuda based fund manager
Fund for Future Appropriations: Scottish Amicable Insurance Fund of Prudential Assurance Company (closed to new business and wholly attributable, but not allocated to policyholders)* 3,082 3,699 Other Group companies (principally the with-profits fund of Prudential Assurance Company) 20,185 23,563
Net assets shareholder Net assets shareholder before core financed before core financed shareholder operations Shareholders’ shareholder operations Shareholders’ borrowings (note 30) funds borrowings (note 30) funds
Analysis of shareholders’ capital and reserves 2000 £m 2000 £m 2000 £m 1999 £m 1999 £m 1999 £m
(based on longer-term Gross premiums written Underwriting result Investment return investment returns)
Interest receivable from: Loans and advances to banks 79 159 Loans and advances to customers 211 84 Debt securities 249 142
Total banking liabilities 7,386 8,436 Intragroup liabilities 1 4 Tax balances 23 29
10 Segmental Information – US Operations The results of US operations, mainly Jackson National Life, are consolidated into the Group accounts based on US Generally Accepted Accounting Principles (US GAAP). However, certain adjustments are made to the US GAAP results to comply with UK GAAP and the Group’s accounting policies as set out below: (i) For Group reporting purposes, all fixed income securities are carried at amortised cost subject to provision for permanent diminution 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.
Operating profit per Group accounts 705 731 466 451 Adjustment from longer-term to actual investment gains (79) (24) (52) (15) Amortisation of goodwill (2) – (1) –
Represented by: Broker dealer and fund management 10 (10) 7 (6)
Jackson National Life, the Prudential Assurance Company long-term fund and external investors have interests in two investment funds managed by the US fund management operation which are consolidated in the financial statements of Jackson National Life and the Prudential Group. Accordingly, the financial statements include all of the results of the two funds with appropriate disclosure of minority interests. For Prudential Group reporting purposes the segmental result for Jackson National Life reflects its proportion of the income and realised losses of the two funds.
Exchange rates used for translation were: Average rate for the year for profit before tax 1.52 1.62 Year-end rate for shareholders’ funds 1.49 1.61
Notes on the Financial Statements continued 11 Investment Income Long-term business technical account Non-technical account
Gains on the realisation of investments 7,579 5,086 32 62 12 Long-term Business Provisions, Premiums, and Policyholders’ Bonuses (a) Technical Provisions and Technical Provisions for Linked Liabilities The following table provides an analysis of technical provisions between with-profits and non-participating business: Scottish Amicable Insurance Fund* 11% 11%
(b) Gross Premiums The following table provides an analysis of gross premiums between with-profits and non-participating business: Scottish Amicable Insurance Fund* 4% 4%
* The Scottish Amicable Insurance Fund is closed to new business. The assets and liabilities of the fund are wholly attributable to the policyholders of the Fund ** Annuity business written by a subsidiary of the PAC with-profits fund, Prudential Annuities Limited, and a separate fund of the PAC with-profits fund, which comprises non-participating and linked business purchased from the Scottish Amicable Life Assurance Society prior to the transfer to PAC in 1997
13 Net Operating Expenses Long-term business General business technical account technical account
Interest on bank loans and overdrafts 33 29 3 2 Interest on other loans 116 26 140 129
Long-term business interest payable includes £102m (£18m) in respect of funding arrangements entered into by Jackson National Life.
Interest payable in the non-technical account includes £12m (£9m) in respect of non-recourse borrowings of the US fund management operation.
Long-term business investment management expenses include management fees charged by M&G and fees paid to external property managers.
Notes on the Financial Statements continued 15 Tax (i) Profit and Loss Account Tax Charge The tax expense calculated on the long-term business fund is attributable to shareholders and policyholders. The shareholders’ portion of tax is determined using the long-term effective tax rate of the underlying business applied to the profits transferred to the non-technical account. A summary of the tax expense attributable to the long-term business technical account and shareholders’ profits in the consolidated profit and loss accounts is shown below: Long-term business technical account Non-technical account (attributable to (attributable to long-term funds) shareholders’ profits)
(a) Between UK and Foreign Tax UK tax expense (benefit): Foreign tax expense (benefit): (b) By Category of Tax Expense (Benefit) UK corporation tax 798 503 6 (48)
Shareholder tax attributable to balance on the long-term business technical account 285 261
(c) By Source of Profit Tax on operating profit (based on longer-term investment returns)
Long-term business (excluding tax on 1999 re-engineering costs borne directly by shareholders’ funds): UK Operations* 125 137 Jackson National Life 132 130 Prudential Asia** 4 4
15 Tax continued (ii) Deferred Tax The components of the net deferred tax liability and the net liability not provided are as follows: Liability provided Liability not provided (asset recognised) (asset not recognised)
The Group has elected not to implement FRS 19 on deferred tax for the 2000 financial statements. The amounts shown in the table above have been prepared in accordance with the requirements of SSAP15.
Balance at end of year 1,611 1,582 17 Present Value of Acquired In Force Long-term Business 2000 £m 1999 £m
Balance at beginning of year 170 138 Exchange adjustment 9 0 Addition in respect of M&G – 47 Amortisation: Pre-tax (65) (22)
The projected accrued benefits method was used and the principal actuarial assumptions adopted were investment return 7.1% per annum, pensionable earnings growth 5% per annum, increases to pensions in payment 3% per annum and dividend growth 3.5% per annum.
The employers’ contribution is required to be paid as a minimum in future years irrespective of the excess of assets in the scheme and, under the current scheme rules, access to the surplus through refunds from the scheme is not available. Accordingly the surplus is not recognised as an asset in the Group’s financial statements and the pension cost charge has been determined on an accrued payable basis without regard to the spreading of the surplus in the fund that would normally be appropriate under the requirements of SSAP24.
Audit related services: Regulatory returns and achieved profits basis audits 0.4 0.2 0.1 0.3 Tax and accounting advice 0.3 0.2 0.4 0.6 US GAAP work including work in connection with the listing of shares on the New York Stock Exchange 0.7 – – – Acquisitions 0.3 – – –
Current value: Leasehold with a term of over 50 years 4,033 3,362 Leasehold with a term of less than 50 years 159 110
Interests in associate undertakings 15 146 13 61 Interests in joint ventures 34 20 34 20
The associate undertaking at the end of the year is IFonline plc, a company whose principal activity is mortgage intermediation. Egg plc has a 39.6% share in the total issued share capital of IFonline plc.
During the year the Group disposed of its associated interest in St James’s Place Capital plc. The proportion of ordinary shares held by shareholders’ funds was 25% and all shares were held by a subsidiary company.
Shares and other variable yield securities and units in unit trusts 27,542 25,650 51,232 57,692 Debt securities and other fixed income securities – carried at market value 28,476 21,980 30,105 23,035 Debt securities and other fixed income securities – carried at amortised cost 18,548 16,779 18,489 16,783 Loans secured by mortgages 2,865 2,432 2,895 2,458 Loans to policyholders secured by insurance policies 758 681 758 681
Cost Current value 24 Assets Held to Cover Linked Liabilities 2000 £m 1999 £m 2000 £m 1999 £m
Issued shares of 5p each fully paid shares 2000 £m 2000 £m
At beginning of year 1,953,930,435 97.7 249.6 Shares issued following listing of shares on the New York Stock Exchange: Arising on issue of shares 17,250,000 0.9 158.0 Related expenses – – (19.4)
Shares issued under share option schemes and to qualifying share ownership trust 8,228,066 0.4 69.8 Shares issued in lieu of cash dividends 1,997,681 0.1 19.9 Transfer to retained profit in respect of shares issued in lieu of cash dividends – – (19.9)
At 31 December 2000 there were options subsisting under share option schemes to subscribe for 19,816,460 (26,212,009) shares at prices ranging from 201 pence to 759 pence (193 pence to 759 pence) and exercisable by the year 2007 (2006).
The Company has established trusts to facilitate the delivery of shares under employee incentive plans and savings-related share option schemes. At 31 December 2000, 7.2m Prudential plc shares with a market value of £78m were held in such trusts.
In addition to the 5.2m shares in respect of incentive plans, 2.0m shares were held by a qualifying employee share ownership trust. These shares are expected to be fully distributed after 1 June 2001 on maturity of a savings-related share option scheme. The exercise price under this scheme is 344 pence and the expected proceeds of £7m relating to these shares have also been included in the consolidated balance sheet.
At beginning of year 5,023 1,531 Investments in subsidiary undertakings 22 – Disposal of part of investment in Egg plc (73) – Exchange rate movements – 15 Advances of new loans – 127
29 Subsidiary Undertakings The principal subsidiary undertakings of the Company at 31 December 2000 were: Main activity Country of incorporation
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 M&G Investment Management Limited* Investment Management England and Wales Scottish Amicable Life plc* Insurance Scotland * Owned by a subsidiary undertaking of the Company
Prudential Banking plc is a subsidiary of Egg plc, a listed subsidiary of the Company. The ordinary shares of Egg plc, of which there is only one class, are 79% owned by the Company. 21% of the shares are owned by shareholders external to the Prudential Group.
(a) By Fund Core structural borrowings of shareholder financed operations Holding company and finance subsidiaries: Bank loans and overdrafts repayable on demand 20 20
Jackson National Life: Total core structural borrowings of shareholder financed operations 1,485 1,446 20 230 469 1,735 1,915
Other borrowings of general insurance and shareholders’ funds: Bank loans and overdrafts repayable on demand 20 58 20 58
Borrowings of operations financed by with-profits operations: Scottish Amicable Finance plc (a subsidiary of the Scottish Amicable Insurance Fund of The Prudential Assurance Company Limited) £100m 8.5% undated Guaranteed Bonds (note (iii)) 100 100 100 100
(b) By Maturity Borrowings are repayable as follows: Within one year or on demand 417 359 Between one and two years – 186 Between two and five years 347 299 After five years 1,217 1,376
(iii) 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.
(iv) Jackson National Life has entered into a programme of funding arrangements under contracts which, in substance, are almost identical to Guaranteed Investment Contracts. The liabilities of £1,920m (£619m) under these funding arrangements are included in the consolidated balance sheet in other creditors.
(v) Jackson National Life, through its subsidiary Jackson Federal Savings Bank, has bank borrowings of £157m (£21m). The advances are secured by mortgage loans and mortgage backed securities.
The pension mis-selling liability represents the discounted value of future expected payments, including benefit payments and all internal and external legal and administrative costs of adjudicating, processing and settling those claims and, as a consequence, to the extent that amounts have not been paid, the provision increases each year reflecting the accretion of the discount.
Prudential Assurance Long-term Fund The Prudential Assurance long-term fund retains the annual profit and loss activity of with-profits business in excess of bonus distributions and associated shareholders’ distribution for the year within the fund for future appropriations. The balance of the fund has accumulated over many years and has come from a variety of sources. Management believes that the balance of the fund is greater than the amounts anticipated to be distributed as benefits and future annual and terminal bonuses on policies currently in force. The Company is currently discussing the attribution of unallocated assets in the fund with the Financial Services Authority, the UK insurance regulator. The amount and timing of any attribution to shareholders is sufficiently uncertain that it is not possible to accurately estimate any potential attribution. In addition, it is likely that if any surplus assets are attributed to shareholders, they will remain in Prudential Assurance’s long-term fund to support the long-term business and accordingly they are unlikely to be distributed to shareholders for some considerable period of time, if at all.
General business and shareholders (as above) 983 1,078 Long-term business 117,445 113,463
Total cash at bank and in hand per balance sheet 1,402 788
Acquisitions, Disposals and Flotation of Holding in Egg 2000 £m 2000 £m 2000 £m 1999 £m
Net assets acquired (disposed of): Goodwill on acquisitions (disposals) 130 (22) 108 1,577 Investments – – – 187 Cash and short-term deposits 16 – 16 27 Banking business assets 565 149 714 – Banking business liabilities (535) – (535) – Interest in associate undertaking – (79) (79) – Net assets held in long-term business operations – 184 184 213 Minority interests in Egg – (120) (120) –
The effect of these transactions which have been accounted for as acquisitions was: US Taiwanese operations operations Total
Book and fair value of assets at acquisition 47 6 53
The amounts included in the profit and loss account for 2000 in respect of these operations are not material. The goodwill is being amortised from the date of acquisition over a period of 20 years.
34 Post Balance Sheet Events (a) Acquisition of Orico Life Insurance Company Limited In January 2001 the Company announced that it had signed an agreement to acquire Orico Life Insurance Company Limited of Japan for £133m. The transaction was completed in February.
(b) Restructuring of UK Insurance Operations In February 2001 the Company announced the restructuring of the direct sales force and customer service channels in the UK Insurance Operations. The Company expects to incur a restructuring charge of £110m from these changes of which £13m will impact directly on shareholders.
We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act. We also report to you if, in our opinion, the directors’ report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors’ remuneration and transactions with the Group is not disclosed.
We review whether the statement on pages 30 to 32 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error.
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 2000 and of the profit of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985.
Shareholders’ Funds and Borrowings Statutory basis: Borrowings of holding company and related finance subsidiaries (1,568) (1,760) (1,223) (1,002) (668)
Total statutory basis capital and reserves 4,020 3,424 3,249 2,783 2,757 Additional achieved profits basis retained profit 4,813 4,918 4,261 4,129 3,816
Based on profit for the year after tax and minority interests 35.1p 27.8p 45.3p 43.3p 73.4p
Market price at 31 December 1,077p 1,220p 908p 734p 492p 76 Prudential plc Annual Report 2000
Insurance and Investment Funds under Management (£bn) 129 142 105 93 68
Asia Long-term business including investment products New business: Operating profit before development expenses 39 27 23 20 20
Europe Long-term business New business: Operating profit before development expenses 8 6 4 1 –
Statutory basis capital and reserves 60 53 37 29 – Additional achieved profits basis retained profit 22 15 9 2 –
Insurance and Investment Funds under Management (£bn) 0.6 0.5 0.4 0.3 –
Long-term business 219 475 Broker dealer and fund management 7 (6)
Total operating profit (based on longer-term investment returns) before amortisation of goodwill 1,029 1,098 78 Prudential plc Annual Report 2000
Summarised Consolidated Profit and Loss Account – Achieved Profits Basis Year ended 31 December 2000
Statement of Total Recognised Gains and Losses – Achieved Profits Basis Year ended 31 December 2000
(after related minority interests) (16.2)p 24.2p Adjustment for profit on flotation of Egg and business disposals (1999 tax paid on prior year disposal) 8.5p (0.8)p
Profit for the financial year after minority interests 514 1,162 Currency adjustment translation movements 187 85
Profit on ordinary activities before tax (including actual investment returns) 728 1,681
Profit for the financial year before minority interests 489 1,162 Minority interests 25 –
Assets held to cover linked liabilities 18,323 18,643 Banking business assets 8,603 8,945 Other assets 9,513 8,409
Total assets 154,950 150,643 Less banking business liabilities (8,040) (8,525) Less other liabilities (8,617) (6,892)
Less insurance funds Technical provisions 111,006 104,540 Fund for future appropriations 23,267 27,262 Less shareholders’ accrued interest in the long-term business (4,813) (4,918)
Achieved profits basis capital and reserves 8,833 8,342 80 Prudential plc Annual Report 2000
Reconciliation of Movement in Shareholders’ Capital and Reserves – Achieved Profits Basis Year ended 31 December 2000
Net increase in shareholders’ capital and reserves 11 491 832 Shareholders’ capital and reserves at beginning of year 8,342 7,510
Notes on the Achieved Profits Basis Supplementary Information 1 Basis of Presentation The achieved profits basis results have been prepared in accordance with 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. The information is supplementary to the financial statements on pages 42 to 74.
3 Discount Rates The shareholders’ interests in the future net of tax cash flows of the UK long-term businesses and Jackson National Life at 31 December 2000 and 1999 have been discounted to present values using a discount rate of 8.5%. For Prudential Asia different discount rates are applied in each territory and the weighted average rate applying to new business written in 2000 was 10.4%.
(ii) Operating profit Except for Jackson National Life, investment returns, including investment gains, in respect of long-term insurance business are recognised in operating results at the expected long-term rate of return. For the purposes of calculating investment return to be recognised in operating results, values of assets at the beginning of the reporting 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.
For the purpose of determining operating profit, management charges on unit linked business are projected using smoothed unit prices.
82 Prudential plc Annual Report 2000 5 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 for 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.
7 Operating Profit from New Business Pre-tax Tax Post-tax Pre-tax Tax Post-tax * Jackson National Life net of tax profit Before capital charge 155 141 Capital charge (note 5) (35) (31)
Results of service companies 0 (1) Experience variances against assumptions used for year end valuation: Costs of pension mis-selling – (92) Change of persistency assumption 30 –
Jackson National Life Unwind of discount on opening net assets including target surplus 218 201 Return on surplus assets over target surplus 34 26 Averaged realised gains** 19 37 Experience variances against current assumptions: Mortality and morbidity (10) 11
Asia Unwind of discount on smoothed opening net assets* 58 43 Experience variances against current assumptions: Development expenses (17) (12)
General insurance and shareholders (including tax relief on 1999 re-engineering costs borne directly by shareholders’ funds) (21) (57)
Tax on items not included in operating profit: Tax on short-term fluctuations in investment returns (110) 168 Tax on profit on Egg flotation and business disposals 57 15
Total tax on items not included in operating profit (53) 183
UK Operations: Long-term business operations 4,227 4,127 General business solvency capital* 206 261
US Operations:** Jackson National Life (net of surplus note borrowings of £167m (£155m)): Before charge for cost of capital 2,893 2,643 Capital charge (note 5) (222) (234)
Operating profit (including investment return based on longer-term rates of return) Long-term business: Asia and Europe development expenses (17) (18) (35) Other operating profits (93) (93)
Total operating profit before amortisation of goodwill 708 219 196 (1) (93) 1,029 Amortisation of goodwill (1) (83) (84) Short-term fluctuations in investment returns (218) (171) (46) (3) (2) (440) Profit on sale and flotation of holding in Egg 119 119 Share of exceptional gain of associate company 21 21 Profit on sale of holding in associate company 83 83
Tax: Tax on items not included in operating profit 65 48 7 0 (67) 53
Shareholders’ capital and reserves at 31 December 2000 4,227 2,671 793 82 1,060 8,833
Analysed as: Additional shareholders’ interest on achieved profits basis 3,883 430 478 22 4,813
Provided that the actual outcome is in line with the original assumptions, profits will be earned in each accounting period as the discount rate unwinds. The balance of profit not allocated to future years is recognised in the year of sale and is known as the profit from new business. The unwind of the discount rate and variances between actual and assumed experience during the remainder of the contract period produce the profit on business in force.
Respective Responsibilities of Directors and Auditors The directors are responsible for the preparation of the Annual Report, including as described on page 31, the financial statements and supplementary information. Our responsibilities are outlined on page 75.
Opinion In our opinion, the achieved profits basis Group profit for the year ended 31 December 2000 and shareholders’ interest in the long-term business at that date have been properly prepared on the basis of the assumptions on page 81 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.
Egg plc 1 Waterhouse Square 142 Holborn Bars London EC1N 2NA