CONTENTS: 1 Group Financial Highlights 2 Our Purpose 3 Prudential at-aGlance 4 Chairman’s Statement 6 Group Chief Executive’s Review 20 Group Financial Review 26 Community Social Responsibility Review 28 Board of Directors 30 Corporate Governance 33 Remuneration Report 40 Directors’ Report 41 Summary of Statutory Basis Results Statutory Basis Financial Statements 42 Consolidated Profit and Loss Account 45 Consolidated Statement of Total Recognised Gains and Losses 45 Reconciliation of Movements in Consolidated Shareholders’ Capital and Reserves 46 Consolidated Balance Sheet 48 Balance Sheet of the Company 49 Consolidated Cash Flow Statement 50 Notes on the Financial Statements 75 Auditors’ Report 76 Five Year Review Achieved Profits Basis Supplementary Information 78 Results Analysis by Business Area 79 Summarised Consolidated Profit and Loss Account 79 Earnings per Share 79 Statement of Total Recognised Gains and Losses 80 Summarised Consolidated Balance Sheet 80 Reconciliation of Movement in Shareholders’ Capital and Reserves 81 Notes on the Supplementary Information 87 Auditors’ Report • 88 Shareholder Information IBC How to Contact Us
Front cover: In June 2000 Prudential reinforced its position as a leading international financial services group, when it listed on the New York Stock Exchange
Earnings per share Based on operating profit after tax and related minority interests before amortisation of goodwill 31.5p 29.1p Based on profit after tax and minority interests – basic 35.1p 27.8p Based on profit after tax and minority interests – diluted 35.0p 27.7p
Profit before tax includes actual investment returns. The Company believes that operating profit, which is based on longer-term investment returns, before amortisation of goodwill better reflects the Group’s underlying performance.
At Prudential our aim is lasting relationships with our customers and policyholders, through products and services that offer value for money and security.We also seek to enhance our Company’s reputation, built over 150 years, for integrity and for acting responsibly within society.
Established in London in 1848, Prudential plc is a leading international financial services group with a market capitalisation of approximately £20 billion. It has funds under management of £165 billion as at 31 December 2000, and has 22,000 employees worldwide.
Prudential is one of the UK’s leading life insurers. Its UK insurance operations include Prudential Financial Services, Prudential Intermediary Business and Prudential Insurance Services, providing advice on a broad range of financial products including life insurance, pensions and savings plans.
M&G was founded in 1931 and was acquired by Prudential in 1999. As Prudential’s European fund manager, M&G is responsible for managing £130 billion of funds and is one of the largest retail unit trust managers in the UK. M&G’s institutional business focuses on segregated fixed interest and pooled pension funds.
In June, we completed the public offering of a 21 per cent stake in Egg, our internetbased financial services operation.
In the United States, Jackson National Life has leading positions in a number of product areas and we have continued to drive forward our strategy of broadening our distribution reach. We also acquired Highland Bancorp, which we merged with Jackson Federal Bank, a wholly-owned subsidiary of JNL. This acquisition has given our banking operation scale and enabled us to broaden our product range to incorporate banking products. In 2000 we also acquired IFC Holdings, the leading bank third-party marketing organisation in the US, which has significantly enhanced our distribution through banks and has further enhanced our broker-dealer network. This acquisition has created the fifth largest independent broker-dealer network in the US.
We are delighted with the progress that has been made by M&G in 2000. As a result of our acquisition of M&G in 1999, and the strong growth we are experiencing in Asia, 25 per cent of Group sales now come from unit trusts and mutual funds.
None of the progress made by the Group during the year would have been possible without the hard work of our staff. As I have visited our operations around the world, I have been enormously impressed by their commitment, drive and professionalism and I would like to take this opportunity to thank them for all their efforts.
During the year we said farewell to some of our Board and welcomed others. I would like to pay particular tribute to Sir Martin Jacomb, who stepped down in May following five years as Chairman, and to thank him for his enormous contribution to Prudential. I wish him well in his retirement. I am happy to take over from Sir Martin, working with so
“Prudential is a leading international financial services group. We have a clear and focused strategy designed to achieve sustainable growth in our chosen markets.”
The Board has welcomed several new members. Philip Broadley joined Prudential from Arthur Andersen in May as Group Finance Director, and succeeded Les Cullen; Roberto Mendoza, formerly with JP Morgan and recently with Goldman Sachs, also joined the Board in May; and Michael McLintock, the Chief Executive of M&G, joined the Board in September. I am delighted to add that Mark Wood, formerly Chief Executive of AXA UK, will join the Board as Chief Executive of Prudential’s UK and European Insurance businesses, on 21 June 2001. I know that all of them will make valuable contributions to the future prosperity of the Group.
The complementary strengths of the management team, with the breadth of experience of the executive board members and the wealth of knowledge and diversification of skills brought to the Group by the non-executive directors, has ensured that Prudential enters 2001 in excellent health.
The markets in which we operate have witnessed tremendous change, bringing with it both enormous opportunities and challenges. Prudential continues to adapt to meet these changes and we now have a significant brand and distribution presence in each of our chosen markets. I am confident that the Group is well placed for the future and that our focus on value rather than volume will enable us to deliver superior investment returns to our customers and to our shareholders.
This has been a year in which we moved quickly to meet the changing needs of our customers, ensuring rapid and sustained growth and the continued delivery of shareholder value.
During the year we have expanded our operations by reaching new markets and also broadening our services in existing markets. We have achieved a position of strength in the US, UK and Asian markets. We currently manage and invest over £165 billion of client funds worldwide, on behalf of our customers.
Understanding local customer needs in individual marketplaces has been paramount in helping us design the products and channels of delivery to suit consumers and keep us ahead of the competition.
During 2000 we have taken great strides in developing our presence in Asia where we have seen insurance sales grow by 75 per cent over the year to £504 million. We entered two of the largest life markets, China and India, in 2000. In October, we opened an office in Guangzhou, the third largest city in China, in partnership with China International Trust and Investment Corporation (CITIC). This is one of the first Sino-British life insurance operations in China. In November we gained regulatory approval to begin the sale of life insurance in partnership with the Industrial Credit and Investment Corporation of India (ICICI), and sales began in December. Going forward, the business will be further enhanced by our announcement in January 2001 that we have signed an agreement to acquire Orico Life Insurance Company Limited of Japan, one of the world’s largest life insurance markets. Orico Life is a modern and innovative life business and will provide us with a solid platform to build a presence in this significant market.
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.
“We have moved quickly to meet the changing needs of our customers, ensuring rapid and sustained growth and the continued delivery of shareholder value.”
On a personal note, it has been a busy time since taking on the role of Group Chief Executive in February 2000. There have been many exciting milestones, all of which have been made possible by the tremendous efforts of everyone in the Group. I would like to thank each member of staff for their continued drive, enthusiasm and support. The real challenge is to use the Group’s achievements in 2000 as a springboard to further growth and success in 2001.
We re-entered the Indian life market after nearly 50 years’ absence with the launch of ICICI Prudential Life in December 2000.
Our comprehensive customer service, including full e-transactional functionality, has helped Prudential ICICI become the largest private sector mutual fund manager in India.
Prudential Singapore won Asia’s ‘Life Insurance Company of the Year’ award for its commitment to innovation, its responsiveness to customer needs and its high quality customer service.
To support all this strong growth and development we continue to give high priority to attracting, retaining and developing the region’s best people. During 2000 a number of key senior management positions were filled with very experienced industry professionals. Our growth plans for 2001 and beyond make it important to continue this process.
JNL has continued to expand and improve its product portfolio including an equityindex linked banking deposit product, MarketPath, available throughout the United States, and Target Select, an innovative multi-year guarantee fixed annuity. JNL has also expanded its client base by adapting the Medium Term Note programme to reach Australian investors, and has begun developing a client base in Asia.
Building on its established website, JNL has made significant progress in incorporating internet efficiencies into the service areas of the business. It has launched an internet-based variable annuity application, allowing producers to complete and submit applications electronically. JNL has also completed the installation of a fully automated new business system for life insurance. This 1 1 Jackson National Life’s new headquarters facility in Lansing, Michigan 2 National Planning Holdings, the fifth largest independent financial planner broker-dealer in the USA.
Prudential is one of the leading UK life insurers and is well placed to be a significant player in the stakeholder pensions market. Operating under both the Prudential and Scottish Amicable brands, it is a leading provider of annuities and with-profits bonds in the UK.
In 2000, statutory basis operating profit from UK long-term insurance business operations increased three per cent to £468 million in 2000 and achieved basis operating profit grew by 11 per cent to £708 million.
The UK pensions market has undergone significant change ahead of the launch of stakeholder pensions in April 2001. In preparation for the lower charging environment of stakeholder pensions, we are investing in alternative lower-cost distribution models. Our considerable investment in distribution and technology, coupled with the strength of our brand in that market gives us a considerable advantage. We have already announced agreements with the Trades Union Congress and the British Chambers of Commerce to be their preferred provider of stakeholder pensions. With these two
The benefit of lower pensions charging will not be confined solely to new stakeholder pensions customers. Our existing UK individual pensions customers will also benefit from reduced pension charges with effect from April 2001, to reflect the one per cent stakeholder charges.
During 2000, we restructured our UK insurance operations into three key areas: Prudential Financial Services, Prudential Intermediary Business and Prudential Insurance Services. Prudential Financial Services is responsible for all direct distribution of Prudential-branded products; Prudential Intermediary Business, for all distribution of products via the Independent Financial Adviser channel; and Prudential Insurance Services, for all administration of in force products under the Prudential brand, together with our successful and profitable General Insurance business.
This reorganisation reflects the importance of focusing on the needs of our customers, while recognising the importance of the low cost business models necessary for the low margin environment in which we will be operating.
In addition, we recently announced changes to our direct sales channels and customer service operations in the UK. These changes, which are being implemented in order to continue to meet changing customer needs and to ensure we operate cost-effectively as a scale player in the UK marketplace, represent a further evolution of the Group’s business model in the UK to improve our service offering to over six million customers.
In the IFA sector, our UK intermediary business continues to develop, offering products under both the Scottish Amicable and Prudential brands. In March 2001, we will be bringing together our two sales forces (Scottish Amicable and Prudential) into a new integrated structure that will more effectively bring our products and services to a wider group of financial advisers. The development of our adviser extranet which provides online servicing, product information and highlights sales opportunities is part of our overall aim of adding value to the IFA sales process and has been a key differentiator for us in this market place. In 2000 sales of Prudence Bond were £1.5 billion, bringing the total sold in the last 10 years to £10 billion, ensuring we remain a leading player in the market, despite increased competition from new players and very aggressive pricing from other life companies.
Fund performance has been extremely strong across all activities in 2000 on the back of M&G’s revitalised investment team and research process. 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
▲ The price of units and the income from them can go down as well as up. Past performance is not necessarily a guide to future performance. M&G does not offer investment advice or make recommendations about investments. We only market the packaged products and services of the M&G marketing group. M&G unit trusts are managed by M&G Securities Limited which is regulated by IMRO and the Personal Investment Authority. Issued by M&G Financial Services Limited which is regulated by the Personal Investment Authority. Registered office: M&G House, Victoria Road, Chelmsford, CM1 1FB. Registered in England no. 923891. M&G is a wholly owned subsidiary of Prudential plc. Prudential plc Annual Report 2000 15
Egg has continued to develop and enhance its range of products and services, adopting new technologies for the benefit of customers while growing rapidly and retaining its market leading brand position.
M&G continued to develop its business in 2000 with one of the most exciting initiatives being Cofunds, a fund supermarket for intermediaries, founded through a joint venture with Gartmore, Jupiter and Threadneedle. Mutual fund supermarkets have proved to be extremely successful in the US and Cofunds’ exclusive focus on the intermediary market offers it exciting growth opportunities in the UK and potentially in Europe. M&G has also won the contract to provide the third party administration capability for Cofunds, which opened for business in February 2001.
M&G has made considerable progress throughout its refocused wholesale division with the specialist fixed interest business, which we retained due to its competitive advantages and growth potential, winning £2.1 billion of net new mandates in 2000. This was due to increasing demand from defined benefit pension schemes for corporate bonds and sophisticated liability matching services, both team specialities. In pooled funds, our flagship UK equity and balanced funds have improved performance with good second quartile years. In addition, the private finance group continues to expand its innovative capabilities and launched the UK’s first sterling Collateralised Debt Obligation in early 2001.
† Source: Standard & Poor’s Micropal, bid to bid (with net income reinvested) from 23/6/2000 to 29/12/2000.
We successfully completed a public offering of just over a 20 per cent share in Egg in June. This will enable Egg to maximise the potential for growth in the business both in the UK domestic market and, over time, internationally. Egg has continued to develop and enhance its range of products and services, adopting new technologies for the benefit of customers, while growing rapidly and retaining its market leading brand position.
1 Egg savings and investment accounts 2 L O V E campaign from Egg 3 An Egg Call Centre.
Customer acquisition has continued to grow rapidly with 559,000 net new customers joining Egg during the year, giving an impressive customer base of just over 1.35 million at the year-end. Cross-sales numbers are also showing encouraging signs, with nearly 400,000 products cross-sold since launch.
The senior management team remains committed to achieving a break-even position for the existing UK business during the fourth quarter of 2001 and we are confident that they are on track to meet this.
Prudential Europe was formed in 1999 and is responsible for spearheading Prudential’s expansion into continental Europe. We currently have operations in France and Germany where we have established strategic alliances with strong local partners. In addition, we have established a leading position in the unit linked market through our German broker business.
2000 was a significant year for our operations in Europe. We continued to develop our presence in our chosen markets, taking advantage of the growing
Véga Finance. This product is now selling through the Centre Français du Patrimoine (CFP), the largest multiproduct broking network in France and early indications are that it has been extremely well received. Co-operation with our joint venture partner CNP Assurances has continued with an objective to begin operating in both the French and the UK markets in the near future.
We will combine the local expertise of country teams and partners with our global product and service capability. Our approach integrates a range of specialist capabilities to deliver unique and innovative offerings to European markets and provides Prudential with significant scope for large scale, profitable distribution and brand promotion.
Prudential Asia’s new business achieved profit of £153 million is 70 per cent up on 1999 reflecting strong sales growth across all operations (APE insurance sales growth of 106 per cent). New business achieved profits as a percentage of APE reduced in line with anticipated changes in geographic and product mixes.
UK Insurance Operations’ new business achieved profit of £230 million is 25 per cent below 1999, primarily reflecting a 24 per cent reduction in sales volumes. Sales volumes reflect lower sales of Prudence Bond and mortgage endowments through the IFA channel, and the significant reduction in the size of the direct sales force in 2000. Margins from our UK business are in line with 1999.
Shareholders’ funds Statutory basis 4,020 3,424 Achieved profits basis 8,833 8,342 *Based on longer-term investment returns before amortisation of goodwill
New Insurance and Investment Business Total insurance and investment sales for full year 2000 amount to £13.9 billion, 13 per cent ahead of prior year. On an annual premium equivalent (APE) basis, sales amounted to £1,904 million, 13 per cent ahead of prior year. The growth in new business volumes reflects strong growth in overseas APE sales, with Asia up 165 per cent and the US up 18 per cent, offsetting a 16 per cent fall in the UK. APE sales of insurance products fell two per cent to £1,528 million in 2000, while investment products grew 171 per cent to £376 million and now account for 20 per cent of total Group APE sales.
Supplementary Achieved Profits Basis Results Total Achieved Operating Profit The Group total achieved operating profit before amortisation of goodwill was £1,029 million compared to £1,098 million in 1999. This result reflects a £10 million improvement in long-term business new business profits offset by a
Value Added by New Insurance Business up 2% on Prior Year
Total New Business In-flows New funds of £13.9bn in 2000 2000 1999
The ratio of Group new business achieved profit to APE has increased to 40 per cent from 39 per cent in 1999 and 36 per cent in 1998, primarily reflecting the growing proportion of higher margin sales in Asia, with broadly maintained margins in the UK and US.
Relatively high offered crediting rates and an increasingly competitive market encouraged customers to surrender fixed annuities early, giving rise to an adverse experience variance of £24 million. The level of surrenders peaked during the early summer, falling towards the end of the year due to the effects of JNL’s conservation measures and lowering interest rates. The assumption going forward has been changed to reflect an assumed continuation of the level of surrenders experienced towards the end of the year, giving rise to a charge of £192 million.
In addition, there was an adverse expense variance during the year of £37 million.
This reflects changes in the business mix and the development of JNL’s systems to provide the capacity for increased volumes of upscale products at lower cost, continuing the process of creating a balanced product portfolio. This has required a reassessment of the unit cost assumption at current policy volumes, giving rise to a negative assumption change impact of £66 million.
Asia’s in force achieved profit before development expenses of £60 million compares to a profit of £35 million in 1999. The result reflects the growth in the business during 2000.
M&G profit increased from £87 million to £125 million in 2000, primarily reflecting a full 12 months’ contribution from the acquired M&G business compared to eight months in 1999 and increased life fund fees, the result of out-performance by life fund investments against benchmarks in 2000.
Egg’s reported loss of £155 million is in line with the expectation laid out in its prospectus in 2000. Egg’s results are presented in its own annual report.
The achieved profits basis shareholders’ funds are analysed in the following table: UK Operations 5,186 5,167 US Operations 2,756 2,533
Prudential Europe reported a £10 million loss in 2000 compared to a £6 million profit in 1999. This is mostly due to development spend for the future administration platform and set-up costs for the French branch, which began writing business in January 2001.
Earnings per Share Earnings per share, based on MSB operating profit after tax and related minority interests before amortisation of goodwill, have improved by eight per cent in 2000 to 31.5 pence.
Funds under Management Insurance and investment funds under management at 31 December 2000 totalled £165 billion, compared to £170 billion at the end of 1999. This reduction is mainly due to the disposal of M&G’s institutional equity fund management business during 2000, which managed £12 billion of funds at 31 December 1999.
Shareholders’ Funds The consolidated balance sheet on page 47 shows MSB shareholders’ funds of £4,020 million at the end of 2000, an increase of £596 million from 1999. The increase primarily reflects the profit retained after dividend payments.
On the achieved profits basis, which recognises the shareholders’ interest in long-term businesses, shareholders’ funds were £8,833 million, an increase of £491 million compared with 1999. The increase reflects the profit retained in the long-term businesses and profit on disposals. After adjusting for borrowings, approximately 63 per cent of these funds are held in sterling with a further 27 per cent held in US dollars.
Surplus Assets in Prudential Assurance’s Long-term Fund Surplus assets are the assets of the longterm fund less all non-participating liabilities and the policyholder asset shares aggregated across all with-profits policies and any additional amounts expected at the valuation date to be paid to in force policyholders in the future in respect of smoothing costs and guarantees. Thus surplus assets are amounts in excess of what we expect to pay to policyholders.
In addition, we can use surplus assets to absorb the costs of significant events, such as fundamental strategic change in our long-term business and, as approved by the UK regulator, the cost of our pension mis-selling, without affecting the level of distributions to policyholders and shareholders. The costs of fundamental strategic change may include investment in new technology, redundancy and restructuring costs, cost overruns on new business and the funding of other appropriate long-term insurance related activities including acquisitions.
The aggregate with-profits policyholder asset shares upon which the calculation of surplus assets is based are not used in any form of external reporting or for internal financial reporting and do not form part of our accounting books and records. Asset share methodology has evolved only over the past 20 to 30 years for actuarial purposes to assist in the determination of bonus rates. It is only in recent years that the application of this methodology has been extended to calculating aggregate asset shares.
For the reasons set out above, there is significant difficulty in calculating surplus assets. We estimate that at 31 December 2000, our surplus assets, after taking into account pension mis-selling costs and the anticipated costs of fundamental strategic change, amounted to between £7 billion and £9 billion. This estimate is inherently uncertain.
In recent years, a number of UK life insurance companies have reached agreement with the relevant UK supervisory authority to permit them to attribute a proportion of the surplus assets in their long-term funds to their shareholders while retaining it in their long-term funds. To date, the supervisory authority has permitted companies to distribute only a modest proportion of the amounts attributed to them.
We continue to pursue opportunities to resolve the ultimate attribution of the surplus assets in Prudential Assurance’s long-term fund, and have, since 1996, been discussing this attribution with the relevant UK supervisory authorities. The attribution of surplus assets has also been a subject of public debate in the United Kingdom. This may or may not result in a portion of the surplus assets in the long-term fund being attributed solely to shareholders.
We believe that for an insurance group this presentation provides a clearer demonstration of the utilisation of resources than the format prescribed under FRS1 shown on page 49. In 2000 the Group’s operations generated funds after tax of £617 million, compared to £567 million in 1999, and retained funds after dividends were £133 million. In 2000, the Group invested £555 million in its businesses including £292 million reinvested in Jackson National Life. In addition, £123 million was repatriated from businesses in 2000: £72 million of surplus capital from M&G, and £51 million from Prudential Assurance, following a review of capital requirements.
As a result of the above inflow and exchange translation losses of £39 million the holding company net borrowings at the end of 2000 totalled £1,697 million, compared with £1,837 million at the end of 1999.
Shareholders’ Borrowings Core structural borrowings of shareholder financed operations at the end of 2000 totalled £1,735 million including £1,485 million at fixed rates of interest with maturity dates ranging from 2001 to 2029 as set out in note 30 on page 70. Of this long-term borrowings balance, £535 million was denominated in US dollars, in order to hedge partially the currency exposure arising from our investment in Jackson National Life. There were also £196 million short-term commercial paper and bank borrowings and £54 million floating rate loan notes, all sterling denominated.
Financial Position The Board receives regular reports from the Group Finance Director on financial matters and receives annual reports from the relevant senior actuaries on the financial condition of the Group’s principal long-term insurance businesses.
Group operating profit after tax and related minority interests before amortisation of goodwill 617 567
Funds available to holding company (159) (160) New investment in businesses (263) (2,320) Capital repatriated from businesses 123 310 Disposal of businesses 173 – Listing of shares on the New York Stock Exchange (net of expenses) 139 – Timing differences and other items 166 (98)
Environment The Environmental Policy Group sets our Group-wide environmental strategy and makes recommendations to business units on the implementation of environmental action plans. Keith Bedell-Pearce holds board responsibility for our environmental policy. In addition to incorporating environmental considerations into our investment decision making process, we are striving to: • reduce consumption of materials in our operations
• apply best practice in the planning, development and decommissioning of our buildings
We are currently developing targets for measuring and reporting on our environmental performance. We are also a signatory to the United Nations Environment Programme (UNEP) Statement by Financial Institutions on the Environment and Sustainable Development and we take an active role in endorsing the statement principles.
Socially Responsible Investment We believe that the adoption of ethical and environmental codes of practice can help companies improve their long-term growth prospects. As one of the largest investors in the UK stock market, we expect companies in which we invest to report their strategy on these issues.
For investors who feel that social responsibility should play a significant part in their choice of investments, we offer a Light Green Fund, a socially responsible fund for pension fund clients. In addition, Scottish Amicable also offers an Ethical Fund that aims to maximise the long-term total return whilst investing in UK companies that avoid activities which have a significantly harmful impact on the environment.
Community Investment In 2000 our businesses around the world contributed £2 million towards a wide range of community and arts programmes, including the following examples: • Scottish Amicable made a Millennium promise to encourage and support its employees to raise £60,000 for Save the Children, to provide medical facilities for children in Mozambique. As part of this, 180 staff took up the challenge of riding the distance from the UK to Mozambique on static cycles.
• In Ho Chi Minh City, Vietnam, staff are supporting the establishment of a vocational school for under-privileged children, while in Hong Kong, staff are hosting the ‘Best Start Family carnival’ to help families create a healthy environment for raising children.
• Across the UK businesses, staff are volunteering in local schools to support numeracy hour, information technology classes and projects focusing on the development of key skills.
Arts We believe that everyone should be given the opportunity to enjoy access to the arts and take pride in our cultural heritage. As a Founding Corporate Partner of Tate, we are proud to have contributed towards the building of Tate Modern and the redevelopment of Tate Britain. During 2000, we also sponsored ‘The Art of Bloomsbury’ at Tate Britain, a new look at the paintings of the Bloomsbury Group. 2000 was the final year of our sponsorship of the Creative Britons, the UK’s biggest arts prize with £200,000 going to arts organisations to recognise outstanding work of arts practitioners.
In Asia we sponsored the Children’s Theatre Festival in Singapore. This annual event attracts quality theatre companies from around the world including Britain, Japan, Canada and Australia.
participating in the current phase, with plans to bring on a further three centres during 2001. PruPIM shopping centres are also actively involved with the development of the New Deal Retail Routeway, a retail training scheme for the unemployed.
Employee Volunteering We marked the Millennium with ‘£200 for 2000’, rewarding over 800 employee volunteers with a £200 grant for their chosen community organisation. Following the success of this, we are running ‘TimeGivers’ an international employee volunteer reward programme for 2001. Employee volunteering schemes include:
Rob Rowley* (Age 51) A director since July 1999. Director of Reuters Group PLC and Chief Executive of Reuterspace division. Previously Finance Director of Reuters Group PLC.
Michael McLintock (Age 39) A director since September 2000. Chief Executive of M&G since February 1997, a position he held at the time of M&G’s acquisition by Prudential in March 1999. Joined M&G in October 1992.
Ann Burdus* (Age 67) A director since 1996. Non-executive director of Next plc. Council member of the Institute of Directors. Previously a non-executive director of Safeway Group plc and previously a committee member of the Automobile Association.
Roberto Mendoza* (Age 55) A director since May 2000. Non-executive Chairman of Egg plc. Non-executive director of ACE Limited, Reuters Group PLC and Vitro SA. Previously Vice Chairman and director and a member of the Corporate Office of JP Morgan & Co, Inc., and recently a managing director of Goldman Sachs.
The head of each business unit has responsibility and authority for the management of that business unit and has established a management board comprising the most senior executives in that business unit.
All directors have direct access to the advice and services of the Company Secretary who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. Board papers are provided to all directors approximately one week before each Board or committee meeting.
Board Committees The Board has established the following committees of non-executive directors with written terms of reference: Audit Committee Rob Rowley (Chairman) Ann Burdus Sandy Stewart
The Audit Committee normally meets six times a year and assists the Board in meeting its responsibilities under the Combined Code in ensuring an effective system of internal control and risk management. It also provides a direct channel of communication between the external and internal auditors and the Board and assists the Board in ensuring that the external audit is conducted in a thorough, objective and costeffective manner. It reviews the annual audit plan prepared by Internal Audit. The terms of reference of the Audit Committee includes reviewing with the management of the Company and the external auditors the performance of the external auditors and auditors’ fees for both statutory audit work and non-audit work. The minutes of Audit Committee meetings are circulated to the Board after each meeting.
Remuneration Committee Sir David Barnes (Chairman) Ann Burdus Bridget Macaskill Roberto Mendoza Rob Rowley Sandy Stewart
The Remuneration Committee normally meets twice a year to review remuneration policy and determines the remuneration packages of the executive directors and certain other senior executives. Additional meetings of the Remuneration Committee are held as necessary during the year. In framing its remuneration policy, the Committee has given full consideration to the provisions of Section 1B of and Schedule A to the Code. The Remuneration Report prepared by the Board is set out on pages 33 to 39. In preparing the Report, the Board has followed the provisions of Schedule B to the Code.
Copies of any instructions and advice given by an independent professional adviser to a director is supplied
by the director to the Company Secretary who will, unless otherwise instructed by the director concerned, circulate to other directors any necessary information to ensure that other members of the Board are kept informed on issues arising affecting the Company or any of its subsidiaries.
Relations with Shareholders As a major institutional investor, the Company is acutely aware of the importance of maintaining good relations with its shareholders. The Company regularly holds discussions with major shareholders and a programme of meetings took place during 2000. The Company hosted a four-day visit to Hong Kong and Singapore in November 2000 for institutional and broking analysts. Information on the Company is also made available on our website at www.prudential.co.uk/plc
The Annual General Meeting will be held at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE on Thursday 10 May 2001 at 11.00 am. The Company believes the Annual General Meeting is an important forum for both institutional and private shareholders and encourages attendance by all its shareholders. At its Annual General Meeting in 2000 the Company indicated the balance of proxies lodged for and against each resolution after it had been dealt with on a show of hands. This practice provides shareholders present with sufficient information regarding the level of support and opposition to each resolution. The Company discloses details of the proxy votes received to any shareholder upon request after the Annual General Meeting. The notice of the Annual General Meeting and related papers are sent to shareholders at the same time as the Annual Report, no less than 20 working days before the meeting. As with last year’s Annual General Meeting, a business presentation will be provided and questions sought from shareholders.
Financial Reporting The directors have a duty to report to shareholders on the performance and financial position of the Group and are responsible for preparing the financial statements on pages 42 to 74 and the supplementary information on pages 79 to 85.
It is the responsibility of the auditors to form an independent opinion, based on their audit of the financial statements and their review of the supplementary financial statements; and to report their opinions to the Company’s shareholders. Their opinions are given on pages 75 and 87.
Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the Group and of the results for the period and which comply with the Companies Act 1985. In preparing those statements, the directors ensure that suitable accounting policies are selected and applied consistently, that reasonable and prudent judgements and estimates are made and that applicable accounting standards are followed. They also ensure that appropriate accounting records are maintained which disclose with reasonable accuracy at any time the financial position of the Company and enable them to prepare the financial statements and that reasonable steps are taken to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Internal Control The Board has responsibility for the Group’s system of internal control and for reviewing its effectiveness. The control procedures and systems the Group has established are designed to manage, rather than eliminate, the risk of failure to meet business objectives and can only provide reasonable and not absolute assurance against material mis-statement or loss. The system of internal controls includes financial, operational and compliance controls and risk management.
As a provider of financial services, including insurance, the Group’s business is the managed acceptance of risk. The system of internal control is an essential and integral part of the risk management process. As part of the annual preparation of its business plan, all of the Group’s businesses
The Remuneration Committee of the Board is made up wholly of independent non-executive directors and is responsible for setting remuneration policy and individual remuneration packages for executive directors. The Board has adopted the principles of good corporate governance relating to directors’ remuneration as set out in the Combined Code and complies with the provisions of Section 1B of and Schedules A and B to the Code.
Salary The Remuneration Committee normally reviews executive directors’ salaries annually, having regard to business results, individual accountabilities and performance, and market conditions. Independent surveys are obtained on salary levels in major companies of comparable size in both the financial and non-financial sectors in relevant locations. The Group’s policy on salaries is unchanged from 1999.
Annual Bonus The annual incentive plan for directors is designed to leverage value creation over the performance period while supporting sustained long-term value creation. The awards for all executive directors were based on performance against quantitative financial and business targets in the business plans as well as personal performance. Annual bonus awards are non-pensionable and in 2000 were made in cash.
Service Contracts The normal notice of termination which the Company is required to give executive directors is 12 months, although for newly appointed directors there may be an initial contractual period of up to two years before the 12 months’ notice period applies. The contracts of employment for all executive directors, including those appointed to the Board in 2000, contain a 12 months’ notice period. When considering termination of service contracts, the Committee will have regard to the specific circumstances of each case, including mitigation.
Policy on External Appointments Subject to the Board’s approval, executive directors are able to accept a limited number of external appointments as non-executive directors of other organisations.
Shareholders will be asked at the Annual General Meeting in May 2001 to approve an increase to the overall limit of the aggregate annual sum for the fees paid to non-executive directors from £600,000 per annum to £800,000 per annum.
Directors’ Long-term Incentive Plans The Group’s primary long-term incentive plan is the Restricted Share Plan which is designed to provide rewards contingent upon the achievement of pre-determined returns to shareholders.
Non-executive directors Michael Abrahams (retired 5/5/00) 23 – – 23 65 Sir David Barnes 29 – – 29 25
Sir Roger Hurn (appointed 17/2/00, Chairman 5/5/00) 200 – – 200 – Sir Martin Jacomb (retired 5/5/00) 62 – 3 65 188
Niall FitzGerald – – – – 9 Lord Gillmore – – – – 6
Notes 1. The highest paid director for both 2000 and 1999 was Sir Peter Davis whose emoluments in 2000, including the value of rights granted to him under the long-term incentive plan, were £2,476,000 (1999 – £1,922,000). Additionally in 2000 the Company made pension contributions of £47,000 on his behalf (1999 –£299,000) including contributions of £36,000 to a Funded Unapproved Retirement Benefit Scheme.
Notes 1. In accordance with the arrangements for Les Cullen’s departure, the release date applying to his 1999 RSP award was brought forward to April 2000 with shares released subject to pro rating for service in the performance period and TSR performance at 29 February 2000. The balance of the award lapsed. 2. In accordance with the arrangements for Sir Peter Davis’ departure, the release dates applying to his RSP awards were brought forward to February 2000 with shares released subject only to pro rating for TSR performance at 31 January 2000. The balance of the awards lapsed. 3. In accordance with the arrangements for his retirement, the release dates applying to the 1999 and 2000 RSP awards for Derek Higgs have been brought forward to 28 February 2001, with pro rating and TSR performance effective 31 December 2000. The balance of the awards lapsed. 4. The market value of rights granted in 1999 were as follows: Keith Bedell-Pearce £435,000; Jonathan Bloomer £575,000; Sir Peter Davis £1,046,000; and
In respect of the 1998 Restricted Share Plan, the Company’s TSR was ranked 22nd out of the 86 relevant comparator companies (i.e. 26th percentile) for the three year performance period ended on 31 December 2000. As a result, rights will be granted over 85 per cent of the shares conditionally awarded to executive directors. The 1999 and 2000 Restricted Share Plans run to 31 December 2001 and 31 December 2002 respectively and any grants under these plans will be based on the final TSR ranking at the end of each performance period.
Interests of directors in shares of the Company’s listed subsidiary, Egg plc, at 31 December 2000, are shown below: Keith Bedell-Pearce 1,410
Directors’ Shareholdings As a condition of serving, all executive and non-executive directors are required to hold 2,500 shares in the Company. These shares must be acquired within two months of appointment to the Board if the director does not own that number upon appointment. As stated above, non-executive directors also use a proportion of their fees to purchase additional shares in the Company on a quarterly basis.
A cash-based incentive plan replaced the Share Participation Plan in 1999 as the Group’s annual bonus plan. Those shares awarded under the Share Participation Plan in previous years are included in the interests of directors in shares of the Company shown below. In addition, rights granted under the Restricted Share Plan are included in the interests shown below where the executive has yet to exercise his right to receive shares. Awards that remain conditional under the Restricted Share Plan are excluded. All interests are beneficial except in respect of 6,450 shares held in trust by Sandy Stewart.
Options outstanding Exercise Earliest Latest outstanding at Granted Exercised at price exercise exercise 1 Jan 2000** in year in year 31 Dec 2000 (pence) date date * Savings-Related Share Option Scheme ** Or date of appointment if later
The scheme also provides on death, whether in service, in deferment or following retirement, pensions for spouse and eligible children. The spouse’s pension on death in service is the higher of 54 per cent of the member’s prospective pension at age 60 or 25 per cent of salary in the 12 months preceding death subject to the earnings cap. The spouse’s pension on death in deferment is 50 per cent of the member’s deferred pension at the date of death. On death after retirement, the spouse’s pension is 50 per cent of the member’s pension in payment ignoring any pension commuted for a lump-sum at retirement. A lump sum death in service benefit of four times Final Pensionable Earnings is also provided. Pension increases after retirement are wholly discretionary but in recent years annual increases have been awarded broadly in line with inflation. Discretionary increases are taken into account in calculating transfer values payable in lieu of deferred pension benefits. As set out in previous reports, the service contract of Keith Bedell-Pearce provides that in the event of his retirement at age 55, his pension will be based on the pension he would have received at normal retirement age 60 subject to a discount rate of three per cent per annum for early retirement.
The scheme also provides on death, whether in service, in deferment or following retirement, a spouse’s pension. On death in service the spouse would receive a pension equal to 50 per cent of the pension the member would have received had they remained in service until their Normal Retirement Age but based on the pensionable salary at the date of death. The spouse’s pension on death in deferment is 50 per cent of the member’s deferred pension at the date of death. On death after retirement, the spouse’s pension is 50 per cent of the member’s pension in payment ignoring any pension commuted for a lump-sum at retirement. A lump sum death in service benefit of four times salary is also provided. Pensions are increased after retirement each 1 October. In respect of pension in excess of the Guaranteed Minimum Pension, the increases are in line with the increase in the Retail Prices Index over the 12 months to the preceding July subject to a maximum of five per cent per annum.
Other Pension Arrangements For directors subject to the earnings cap, the Company will, on request, establish a Funded Unapproved Retirement Benefit Scheme (FURBS) and a separate life assurance scheme to provide additional retirement and life assurance benefits based on salary in excess of the earnings cap. Sir Peter Davis and Derek Higgs participated in these arrangements and Philip Broadley is now a participant. Jonathan Bloomer does not participate in a FURBS and instead the Company pays a salary supplement to fund arrangements for the provision of income in retirement. The Prudential Staff Pension Scheme provides a lump sum death in service benefit and Jonathan Bloomer also participates in a separate life assurance scheme that provides cover over the earnings cap. The same arrangements applied to Les Cullen.
Years of (excluding Age at pensionable inflation) 31 Dec 31 Dec 31 Dec service at in year 2000 1999* 2000 1999 * Or date of appointment if later
Notes 1. For the one remaining non-executive director during 2000 who was appointed before 1988, Michael Abrahams, the normal retirement age in the Scheme is 72 but a pension not discounted for early retirement is available from age 65. The spouse’s pension on death in service is 50 per cent of the member’s prospective pension at age 72 and, on death after retirement, 50 per cent of the member’s pension in payment. No lump sum benefit is payable on death in service. He ceased to be an active member of the scheme in May 2000.
Principal Activity and Business Review Prudential plc is the Group holding company and the principal activity of its subsidiary undertakings is the provision of financial services in Europe, the US and Asia. Particulars of principal subsidiary undertakings are given in note 29 on page 69. The Group’s business is reviewed in the Chairman’s Statement on pages 4 and 5, the Group Chief Executive’s Review on pages 6 to 19 and the Group Financial Review on pages 21 to 25.
Financial Statements and Supplementary Information The consolidated balance sheet on pages 46 and 47 shows the state of affairs of the Group at 31 December 2000. The Company’s balance sheet appears on page 48 and the consolidated profit and loss account on pages 42 to 44. A summary of the statutory basis results is shown on page 41. There is a five-year review of the Group on pages 76 and 77. Supplementary information prepared on the achieved profits basis of financial reporting is provided on pages 78 to 86.
Dividends The directors have declared a final dividend for 2000 of 16.3p per share payable on 30 May 2001 to shareholders on the register at the close of business on 30 March 2001. The dividend for the year, including the interim dividend of 8.2p per share paid in 2000, amounts to 24.5p per share compared with 23.0p per share for 1999. The total cost of dividends for 2000 was £484 million.
Directors The present directors are shown on pages 28 and 29. Sir Roger Hurn was appointed a director on 17 February 2000 and elected at the Annual General Meeting on 5 May 2000. Les Cullen and Sir Peter Davis resigned as directors on 29 February 2000. Michael Abrahams and Sir Martin Jacomb retired as directors on 5 May 2000. Philip Broadley, Roberto Mendoza and Michael McLintock were appointed directors on 11 May 2000, 25 May 2000 and 1 September 2000 respectively and in accordance with the Articles of Association retire and offer themselves for election at the Annual General Meeting. Derek Higgs retired as a director on 30 November 2000. Sir David Barnes, Jonathan Bloomer and Sandy Stewart retire by rotation at the Annual General Meeting and offer themselves for re-election. Details of directors’ interests in the share capital of the Company are set out in the Remuneration Report on page 36.
Equal Opportunity Our equal opportunities policy is to be fair, responsible and caring in all aspects of our business. We recognise, respect and value difference and diversity. We will treat everyone fairly and with dignity. We are working towards equality as part of our normal way of doing things because we believe it is the right thing to do for our people, our customers and our success. Full consideration is given to continuing the employment of staff who become disabled and to provide training and career development opportunities to disabled employees.
In 2000 employees were again invited to participate in the Prudential Savings-Related Share Option Scheme. The Scheme has now been operating for over 17 years and some 71 per cent of UK staff currently participate. In 2000 a savings-related share option scheme for overseas employees, the Prudential International Savings-Related Share Option Scheme, was introduced. Employees in Hong Kong, Malaysia and Singapore were invited to join and just over 30 per cent of employees in those countries currently participate in the Scheme.
The board of the corporate trustee of the Prudential Staff Pension Scheme includes directors elected by the members of the Scheme in accordance with the Pensions Act 1995.
Total statutory basis profit for the financial year after minority interests 688 542
Premiums written, net of reinsurance 321 306 Change in the gross provision for unearned premiums (10) (5) Change in the provision for unearned premiums, reinsurers’ share 1 1
Change in the provision for claims: Gross amount (31) 35 Reinsurers’ share 0 (10)
Change in the provision for claims: Gross amount (128) (153) Reinsurers’ share 3 6
Net operating expenses (including re-engineering costs of £nil (£48m)) 13 (1,743) (1,603)
Balance on the long-term business technical account 689 640 Tax credit attributable to balance on the long-term business technical account 15 285 261
Balance on the long-term business technical account before tax 7 974 901
Unrealised (losses) gains on investments (7) 14 Allocated investment return transferred to the long-term business technical account (57) (14) Investment expenses and charges 14 (144) (132) Allocated investment return transferred to the general business technical account (47) (40) Other income: UK investment management and products result (including re-engineering costs of £nil (£10m)) 90 60 US broker dealer and fund management 7 (6) 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 –
Reconciliation of operating profit before amortisation of goodwill to profit on ordinary activities Operating profit before amortisation of goodwill based on longer-term investment returns 7 840 776 Amortisation of goodwill 16 (84) (54) Short-term fluctuations in investment returns 7 (48) 28 Profit on Egg flotation and business disposals 7 239 –
Basic earnings per share Based on operating profit after tax and related minority interests before amortisation of goodwill
Adjustment for amortisation of goodwill 4 (4.3)p (2.8)p Adjustment from post-tax longer-term to post-tax actual investment returns
Based on profit for the financial year after minority interests of £688m (£542m) and 1,959m (1,947m) shares 4 35.1p 27.8p
Diluted earnings per share Based on profit for the financial year after minority interests of £688m (£542m) and
Ordinary Retained share Share profit capital premium and loss (note 26) (note 26) reserve Total £m £m £m £m
Fixed assets Investments: Shares in subsidiary undertakings 27 4,972 5,023 Loans to subsidiary undertakings 27 1,673 1,531
Other investments – 81 Cash at bank and in hand 35 29
Less liabilities: amounts falling due within one year Bank loans and overdrafts (20) – Commercial paper (160) – Amounts owed to subsidiary undertakings (260) (527) Tax payable (20) – Final dividend (322) (299) Accruals and deferred income (47) (46)
US fund management operation 32 (31) 103 Issues of ordinary share capital (net of expenses and related transfer to share ownership trust) 32 184 34
The net cash inflow (outflow) was invested (financed) as follows: Portfolio investments Purchases: Ordinary shares 9 46 Fixed income securities 146 62
In accordance with FRS1, this statement shows only the cash flows of general business and shareholders’ funds.
50 Prudential plc Annual Report 2000 1 Nature of Operations Prudential plc (the ‘Company’) together with its subsidiaries (collectively, the ‘Group’ or ‘Prudential’) is an international financial services group with its principal operations in the United Kingdom (‘UK’), the United States (‘US’), Asia and continental Europe. The Group operates in the UK through its subsidiaries, primarily The Prudential Assurance Company Limited (‘PAC’), Prudential Annuities Limited (‘PAL’), Scottish Amicable Life plc (‘SAL’), M&G Group plc (‘M&G’), and Egg plc; in the US through Jackson National Life Insurance Company (‘Jackson National Life’). The Group also has operations in Singapore, Hong Kong, Malaysia, Taiwan and other Asian countries. In Europe, the Group has operations in Ireland, France and Germany. Prudential offers a full range of retail financial products and services and fund management services throughout these territories. The retail financial products and services principally include life insurance, pensions, annuities and personal lines of general (property and casualty) insurance as well as collective investments and deposit and mortgage banking services.
FRS No 16, ‘Current Tax’, was issued in 1999. This standard, which specifies how current tax, in particular withholding tax and tax credits from franked investment income should be reflected in the financial statements, was effective for accounting periods ended on or after 23 March 2000. The adoption of the Standard in these financial statements did not have a material impact.
The consolidated financial statements of the Group include the assets, liabilities and results of the Company and subsidiary undertakings in which Prudential has a controlling interest. The results of subsidiaries are included in the financial statements from the date acquired to the effective date of disposal. All intercompany transactions are eliminated on consolidation except for investment management fees charged by M&G to long-term business funds.
3 Significant Accounting Policies Long-term Business The results are prepared in accordance with the modified statutory basis of reporting as set out in the Statement of Recommended Practice issued by the Association of British Insurers in December 1998.
Policy fees are charged to the linked, unitised with-profits and other investment-type policyholders’ account balances for mortality, asset management and policy administration. These fees are recognised as revenue when charged against the policyholders’ account balances.
to with-profits policyholders. The bonuses, both annual and terminal, reflect the right of the with-profits policyholders to participate in the financial performance of the with-profits funds.
Segregated accounts are established for policyholder business for which policyholder benefits are wholly or partly determined by reference to specific investments or to an investment-related index. The assets and liabilities of this linked business are reported as summary totals in the consolidated balance sheets.
profits or losses attributable to that business. The shareholders’ portion of the long-term business is taxed at the shareholders’ rate with the remaining portion taxed at rates applicable to the policyholders.
The balance of the long-term business technical account is net of the total tax attributable to the long-term business. In order to present the profit on long-term insurance activities transferred to the nontechnical account on a pre-tax basis, a tax add-back attributable to the shareholders’ portion of the tax provision for long-term business, calculated at the effective tax rate of the underlying business, is recorded in the long-term business technical account. This shareholder tax add-back is then included in tax expense on the profit on ordinary activities within the non-technical account.
Stock-based Compensation The Group offers share award and option plans for certain key employees and a Save As You Earn plan (‘SAYE plan’) for all UK employees. Compensation costs for non-SAYE plans are recorded over the periods during which share awards or options are earned. Compensation costs are based on the quoted market prices of the shares at the grant date less any amounts paid or payable by employees in respect of the awards. In addition shares are issued to a qualifying share ownership trust with the excess of the market price subscribed at the date of transfer by the trust over nominal value recorded by the Company in its share premium account. This amount includes the difference between the market price at the date of transfer to the trust and amounts payable by employees. A cost equal to this amount is charged directly to the profit and loss account reserve within shareholders’ funds.
Land and Buildings Investments in tenant and Group occupied leasehold and freehold (directly owned) properties are carried at estimated fair value, with changes in estimated fair value included in investment returns. Properties are valued annually either by the Group’s qualified surveyors or professional external valuers using The Royal Institution of Chartered Surveyors (‘RICS’) guidelines. The RICS guidelines apply separate assumptions to the value of the land, buildings, and tenancy associated with each property. Each property is externally valued at least once every three years. The cost of additions and renovations is capitalised and considered when estimating fair value.
In accordance with Statement of Standard Accounting Practice (‘SSAP’) No. 19, ‘Accounting for Investment Properties’, no depreciation is provided on investment properties as the Group’s directors consider that these properties are held for investment purposes, and to depreciate them would not give a true and fair view of the Group’s financial position or profit for the financial year.
Investments in Associates and Other Participating Interests A participating interest is a beneficial equity investment where the Group exercises influence over the investee’s operating and financial policies. A participating interest where the Group exercises significant influence over the investee, generally through ownership of 20% or more of the entity’s voting rights, is considered to be an investment in associate. The Group’s investments in associates are recorded at the Group’s share of net assets. The carrying value of investments in associates is adjusted each year for the Group’s share of the entities’ profit or loss.
Other participating interests, where significant influence is not exercised, are carried as investments on the consolidated balance sheets at fair value.
Equity Securities and Debt and Other Fixed Income Securities Equity securities are carried at fair value. Debt and other fixed income securities are carried at fair value, except for those held by Jackson National Life, which are carried at amortised cost. Fair value is based on quoted market prices for listed securities, and on quotations provided by external fund managers, brokers, independent pricing services or values as determined by management for unlisted securities. Changes in fair value are recognised in investment returns during the year of the change. Debt and other fixed income securities held by Jackson National Life are carried at amortised cost as permitted by paragraph 24 of Schedule 9A to the Companies Act 1985. The amortised cost basis of valuation is appropriate under the provisions of the ABI SORP for Jackson National Life’s redeemable fixed income securities as they are held as part of a portfolio of such securities intended to be held on an ongoing basis.
Mortgage and Other Loans Loans collateralised by mortgages and other unsecured loans are carried at unpaid principal balances, net of unamortised discounts and premiums and an allowance for loan losses, except for loans held by UK insurance operations which are carried at fair value. The allowance for loan losses is maintained at a level considered adequate to absorb losses inherent in the mortgage loan portfolio.
Loans to Policyholders Loans to policyholders are carried at unpaid principal balances and are fully collateralised by the cash value of policies.
Shares in Subsidiary Undertakings Shares in subsidiary undertakings in the balance sheet of the Company are shown at the lower of cost or estimated realisable value.
Linked Business Funds Certain long-term business policies are linked to specific portfolios of assets or a market related index. Such policies provide benefits to policyholders which are wholly or partly determined by reference to the value of or income from specific investments or by reference to fluctuations in the value of an index of investments. The assets supporting the linked policies are maintained in segregated accounts in conformity with applicable laws and regulations. The segregated assets are reported at fair value within assets held to cover linked liabilities on the consolidated balance sheets. The technical provisions for linked liabilities on the consolidated balance sheets are determined based on the fair value of the underlying assets supporting the policies.
Tangible Assets Tangible assets, principally computer equipment, software development expenditure, and furniture and fixtures, are capitalised and depreciated on a straight-line basis over their estimated useful lives, generally 3 to 10 years. Assets held under finance leases are capitalised at their fair value.
Banking Business Assets and Liabilities Banking business assets consist primarily of certificates of deposit and short-term deposits with credit institutions carried at fair value and mortgage loans carried at outstanding principal balances, net of allowances for loan losses, which approximates fair value. Loan provisions are recorded for the overall loan portfolio to cover bad debts which have not been separately identified but which are known from experience to be present in the portfolio. For loans in default specific loan provisions are recorded. Changes in loan provisions during the year are included in the consolidated profit and loss accounts.
Effective 1 January 1998, goodwill arising from acquisitions is reflected as an asset on the consolidated balance sheets and is amortised through the consolidated profit and loss accounts on a straight-line basis over its estimated useful life, not exceeding 20 years. Prior to 1 January 1998, goodwill relating to acquisitions was charged directly to shareholders’ funds. As permitted under the
54 Prudential plc Annual Report 2000 transitional arrangements of FRS No. 10, ‘Goodwill and Intangible Assets’, amounts previously charged to shareholders’ funds have not been reinstated as assets. Upon disposal of a business acquired prior to 1 January 1998 to which goodwill relates, the original goodwill balance is charged to the consolidated profit and loss accounts in determining the gain or loss on the sale.
Shareholders’ Dividends Shareholders’ dividends are accrued in the period to which they relate regardless of when they are declared. Where scrip dividends are issued, the value of such shares, measured as the amount of the cash dividend alternative, is credited to reserves and is transferred from the share premium account.
Share Premium Share premium represents the difference between the proceeds received on issue of shares, net of issue costs, and the nominal value of the shares issued.
Foreign Currency Translation The profit and loss accounts of foreign subsidiaries are translated at average exchange rates for the year. Assets and liabilities of foreign subsidiaries are translated at year-end exchange rates. Foreign currency borrowings that have been used to finance or provide a hedge against Group equity investments in overseas subsidiaries, are translated at year-end exchange rates. The impact of these currency translations is recorded as a component of shareholders’ funds within the Statement of Recognised Gains and Losses.
Actual gains attributable to shareholders: Jackson National Life 70 160 General business and shareholders 264 359
Longer-term gains credited to operating results: Jackson National Life 152 179 General business and shareholders 158 177
In addition, operating profit excludes gains on business disposals and similar exceptional items.
In accordance with FRS 3, the presentation of additional supplementary earnings per share information is permitted provided the earnings basis used is applied consistently over time and is reconciled to consolidated profit for the financial year. In determining operating profit, the Group has used the expected longer-term investment return excluding exceptional items as management believe that such presentation better reflects the Group’s underlying financial performance.
The Group’s supplemental measure of its results and reconciliation of operating profit based on longer-term investment returns before amortisation of goodwill to profit on ordinary activities, including the related basic earnings per share amounts, are as follows: Before Basic tax Tax Minority earnings
Amortisation of goodwill (84) – – (84) (4.3)p Short-term fluctuations in investment returns* (48) 8 13 (27) (1.4)p Profit on Egg flotation and business disposals 239 (57) – 182 9.3p
Operating profit based on longer-term investment returns before amortisation of goodwill 776 (209) – 567 29.1p Amortisation of goodwill (54) – – (54) (2.8)p Short-term fluctuations in investment returns 28 16 – 44 2.3p Adjustment in respect of tax paid on prior year disposals – (15) – (15) (0.8)p
56 Prudential plc Annual Report 2000 4 Supplemental Earnings Information continued A reconciliation of the weighted average number of ordinary shares used for calculating basic and diluted earnings per share is set out below: (millions) (millions)
Department of Social Security rebate business 59 64 – – 6 7
Single new business premiums include increments under existing group pension schemes and pensions vested into annuity contracts (at the annuity purchase price). Regular new business premiums are determined on an annualised basis.
58 Prudential plc Annual Report 2000 7 Segmental Information – Profit on Ordinary Activities Before Tax Balance on long-term
Balance on general business technical business technical account account before tax Other activities Total
(b) Operating Profit Before Amortisation of Goodwill by Product Provider UK Operations
Group operating profit before amortisation of goodwill 33 49 974 901 (167) (174) 840 776
8 Segmental Information – Net Assets and Shareholders’ Funds (a) Net Assets A segmental analysis of the fund for future appropriations and the technical provisions net of reinsurance is set out below which, although liabilities, provides a more useful indication of the assets supporting the business: Fund for future appropriations and net technical provisions 2000 £m 1999 £m
Comprising: UK Operations 105,939 105,966 Jackson National Life 23,585 21,783 Prudential Asia 3,340 2,848 Prudential Europe 593 529 * The Scottish Amicable Insurance Fund (‘SAIF’) is a separate sub-fund within the PAC long-term business fund. This sub-fund contains all the with-profits business and all other pension business that was transferred from the Scottish Amicable Life Assurance Society to PAC in 1997. No new business will be written in the sub-fund. The SAIF sub-fund will be managed to ensure that all the invested assets of SAIF are distributed to SAIF policyholders over the lifetime of the SAIF policies. With the exception of certain amounts in respect of unitised with-profits life business, all future earnings arising in SAIF are retained for existing SAIF with-profits policyholders. Any excess (deficiency) of revenue over expense within SAIF during a period will be offset by a transfer to (from) the SAIF Fund for Future Appropriations. Shareholders have no interest in the profits of SAIF, although they are entitled to the investment management fees paid on this business. SAIF with-profits policies do not guarantee minimum rates of return to policyholders
(b) Shareholders’ Funds Core structural Core structural borrowings of borrowings of
UK Operations: Long-term business operations (excluding M&G) 344 344 243 243 General business solvency capital* 206 206 261 261
Notes on the Financial Statements continued 9 Segmental Information – UK Operations Operating profit
Administrative expenses (193) (150) Provision for bad and doubtful debts (37) (9)
Assets Loans and advances to banks 238 2,613 Loans and advances to customers 3,736 2,046 Debt securities 3,686 3,971 Other banking assets 235 222
Total banking assets 7,895 8,852 Intragroup balances – 58 Other assets including tax 39 26
(ii) For the purposes of determining Group operating profit, realised investment gains and losses are recognised on a longer-term basis. Under US GAAP, these items are not included in operating income but are included in profit before tax.
(iii) Under US GAAP, deferred tax provisions are generally established in respect of all timing differences whereas, under UK SSAP15, provision is made only for timing differences which are expected to reverse in the foreseeable future.
Reconciliations between the US GAAP and Group reporting bases are shown below: US$m US$m £m £m
Profit Before Tax Jackson National Life US GAAP operating income 672 661 443 408 Longer-term investment gains 23 52 16 32 Cumulative effect of change in accounting for guarantee fund assessments
(and related deferred acquisition costs) – 28 – 17 Broker dealer and fund management operating profit (loss) 10 (10) 7 (6)
Profit before tax included in Group accounts and in accordance with US GAAP 624 707 413 436
Represented by: Jackson National Life (including banking business assets and liabilities) 3,346 2,879 2,241 1,787 Other (relating to funding arrangements, broker dealer and fund management operations) 127 201 85 124
Financed by with-profits funds: With-profits business 43% 42% Non-participating business** 8% 8%
Financed by with-profits funds: With-profits business 32% 37% Non-participating business** 4% 10% Linked business 1% 1%
(c) Policyholders’ Bonuses Bonuses declared for the year in respect of the Group’s with-profits business are included in the the change in long-term business provision or, where the policy is no longer in force, in claims incurred. The total cost of policyholders’ bonuses was £3,454m (£3,395m).
Reinsurance commissions and profit participation 11 22 0 (1) Amortisation of present value of acquired in force business 65 22 – –
Net operating expenses in the consolidated profit and loss accounts also include corporate expenditure of £42m (£40m) in the non-technical account.
14 Investment Expenses and Charges Long-term business technical account Non-technical account
Total long-term business 259 271 General business and shareholders (including tax on 1999 re-engineering costs borne directly by shareholders’ funds) (24) (62)
Total tax on operating profit 235 209 Tax on short-term fluctuations in investment returns (8) (16) Tax on profit on Egg flotation and business disposals 57 15
Tax on profit on ordinary activities (including tax on actual investment returns) 284 208 * Excluding M&G long-term business ** Including tax relief on development expenses
(a) By Category of Timing Difference Unrealised gains on investments 299 515 2,542 3,189 Deferred acquisition costs 391 375 – – Short-term timing differences (335) (296) (17) (30) Long-term business technical provisions and other insurance items 9 8 127 122 Capital allowances (32) (27) (8) (4)
(b) By Fund Scottish Amicable Insurance Fund 247 434 – – PAC with-profits fund* 16 95 2,543 3,090 Jackson National Life – – – (18) Other long-term business operations 39 43 49 57 * Includes deferred tax charges in respect of non-participating annuity business written by a subsidiary, Prudential Annuities Limited, financed by the PAC with-profits fund
Balance at beginning of year 1,582 59 Adjustment in respect of 1999 acquisitions 5 – Additions in respect of the acquisition of: Taiwanese operations (note 33) 67 50 M&G – 1,527 US banking and broker dealer operations (note 33) 63 –
Charges to profit and loss account: In respect of the disposal of M&G institutional fund management business (note 33) (22) – Amortisation expense (84) (54)
Balance at end of year 133 170 18 Information on Staff The average numbers of staff employed by the Group during the year were: 2000 1999
Wages and salaries 656 637 Social security costs 55 51 Other pension costs 46 47
The market value of scheme assets as at that date was £4,504m and the actuarial value of the assets was sufficient to cover 116% of the benefits that had accrued to members, allowing for expected future increases in earnings. As a result of the actuarial valuation, the employers’ contribution rate continued at the minimum prescribed under the scheme rules currently equivalent to 10.6% of pensionable earnings.
19 Directors’ Remuneration Information on directors’ remuneration is given in the Remuneration Report on pages 33 to 39. No director had an interest in shares, transactions or arrangements which requires disclosure, other than those given in the above Report.
Consultancy services: In October 1999 KPMG Audit Plc (KPMG) replaced PricewaterhouseCoopers (PwC) as auditors of the Company and its subsidiaries with the exception of companies managed by Egg which changed auditors in 2000. KPMG were already engaged in performing regulatory reviews prior to their appointment as auditors of the Group.
Statutory audit fees include £0.1m (£0.1m) in respect of the Company. Audit related and consultancy fees payable to KPMG include £18.8m (£5.1m) for work performed in the UK.
The cost of land and buildings was £6,970m (£5,804m). The value of land and buildings occupied by the Group was £230m (£177m).
A summary of the movement in interests in associate undertakings is set out below: Share of Share of Total carrying capital reserves Goodwill value Movement in interests in associate undertakings 2000 £m 2000 £m 2000 £m 2000 £m
Operating profit for the year after tax – 3 – 3 Share of exceptional gain after tax – 14 – 14 Dividends received – (1) – (1)
Interests in joint ventures reflect amounts contributed in respect of ventures with the Bank of China in Hong Kong, ICICI in India, CITIC in China and Signal Iduna in Germany. The differences between the investments on a gross and net equity basis are not material. The other participating interest relates to the Group’s interest in Life Assurance Holding Corporation Limited, a holding company for UK life assurance companies.
The market value of debt securities and other fixed income securities valued at amortised cost was £17,884m (£16,127m). All debt securities carried at amortised cost are held by long-term business operations.
Depreciation: Balance at beginning of year (156) (125) Provided during year (62) (47) Arising on acquisition of subsidiaries (5) (30)
26 Share Capital and Share Premium The authorised share capital of the Company is £120m comprising 2,400,000,000 shares of 5p each.
The arrangements for distribution to employees of shares held in trusts relating to employee incentive plans and for entitlement to dividends depend upon the particular terms of each plan. The cost of share awards under the plans are charged to the profit and loss account over the period of service to which awards are made. Shares held in these trusts are conditionally gifted to employees. At 31 December 2000, the 5.2m shares held by trusts under employee incentive plans have been accounted for in the consolidated balance sheet as own shares. The carrying value of the shares is £24m which represents the cost of purchase less the cumulative amounts charged to the profit and loss account.
At end of year 4,972 1,673 28 Profit of the Company The profit of the Company for the year was £256m (£530m). After dividends of £484m (£449m) and a transfer from the share premium account of £20m (£15m) in respect of shares issued in lieu of cash dividends, retained profit at 31 December 2000 amounted to £1,434m (£1,642m).
Total borrowings of shareholder financed operations 1,485 1,446 40 58 230 469 1,755 1,973
Non-recourse borrowings of investment subsidiaries managed by US fund management operation (note (ii)): Secured senior and subordinated debt 47 44 47 44 Senior secured revolving credit 79 103 79 103
(c) Reconciliation to Cash Flow Statement Disclosures (note 32) General insurance and shareholders’ funds 1,318 1,291 166 205 230 469 1,714 1,965 Long-term business operations 267 255 267 255 * Debenture loans issued by the holding Company
Borrowings (per table above) 166 205 Obligations of Jackson National Life under sale and repurchase agreements 733 893 Obligations under finance leases 10 13
30 Borrowings continued (ii) The senior debt issued by investment subsidiaries managed by the US fund management operation is secured on the investments held by the relevant subsidiaries. The interests of the holders of the subordinated debt issued by these subsidiaries are subordinate to the entitlements of the holders of the senior debt. The terms of the revolving credit facility include a cross default provision with the subordinated notes. In addition to the debt of these subsidiaries, the US fund management operation manages investment companies with liabilities of £1,030m (£322m) pertaining to debt instruments issued to external parties. In all instances the holders of the debt instruments issued by these subsidiaries and other companies do not have recourse beyond the assets of those subsidiaries.
(vi) Under the terms of the Group’s arrangements with its main United Kingdom banker, the bank has a right of set off between credit balances (other than those of long-term funds) and all overdrawn balances of those Group undertakings with similar arrangements.
31 Contingencies Litigation The Group has contingent liabilities in respect of insurance and other agreements entered into in the normal course of business and in respect of litigation arising therefrom. Some of the actions and proceedings have been brought on behalf of various alleged classes of claimants and certain of these claimants seek damages of unspecified amounts. Whilst the outcome of such matters cannot be predicted with certainty, it is the opinion of management that the ultimate outcome of such litigation will not have a material adverse effect on the Group’s financial condition, results of operations or cash flows.
On 14 December 2000, proceedings were issued against Prudential Assurance by a policyholder. These proceedings relate to the surplus assets in Prudential Assurance’s long-term fund and they essentially ask the Court to decide whether and, if so, to what extent the surplus assets should be paid out to or applied for the benefit of policyholders and/or shareholders. We are considering the proceedings and the issues raised by them with our legal advisers. Further details on the issue of surplus assets are given in the paragraph on the Prudential Assurance Long-term Fund on the following page.
Jackson National Life has been named in civil litigation proceedings which appear to be substantially similar to other class action litigation brought against many life insurers alleging misconduct in the sale of insurance products. At this time, it is not possible to make a meaningful estimate of the amount or range of loss, if any, that could result from an unfavourable outcome in such actions. In addition, Jackson National Life is a defendant in several individual actions that involve similar issues, including a 1999 verdict against Jackson National Life for US$32.5m (£21.8m) in punitive damages. Jackson National Life has appealed the verdict on the basis that it is not supported by the facts or the law and a ruling reversing the judgement is expected.
Pension Mis-selling The costs associated with the review of personal pension mis-selling in the UK have been met from the free assets of the long-term fund of The Prudential Assurance Company Limited. Given the strength of the long-term fund, the directors are of the opinion that charging the costs to the free assets of the fund will not have an adverse effect on the level of bonuses paid to policyholders or their reasonable expectations. In the unlikely event of this proving not to be the case, the directors’ intention would be that an appropriate contribution to the long-term fund would be made from shareholders’ funds. In view of the uncertainty, it is not practicable to estimate the level of the potential contribution.
Provisions in respect of the costs associated with the review have been included in the change in the long-term business provision in the Group’s profit and loss account. The transfer from the fund for future appropriations has been determined accordingly.
32 Cash Flow Reconciliation of Operating Profit to Net Cash Inflow from Operations 2000 £m 1999 £m
Operating profit before tax before amortisation of goodwill 840 776 Add back interest charged to operating profit 143 131 Adjustments for non-cash items: Tax on long-term business profits and franked investment income (285) (263) General business and shareholder long-term investment gains (28) (33) Increase (decrease) in general business technical provisions 71 (33) Amounts retained and invested in long-term business operations (449) (332) Decrease (increase) in net banking assets 76 (286) Other items 30 82
Increase in cash and short-term deposits 185 97 Net sales of portfolio investments (162) (1,675) Decrease (increase) in loans 114 (668) Movement on credit facility utilised by investment subsidiaries managed by US fund management operation 31 (103) Share capital issued (184) (34)
Movements arising from cash flow (16) (2,383) Investment appreciation 22 76 Investments and cash acquired with purchase of businesses 16 214 Exchange translation and other 9 37 Transfer to retained profit in respect of shares issued in lieu of cash dividends 20 15 Portfolio investments net of financing at beginning of year (1,025) 1,016
Portfolio investments net of financing at end of year (974) (1,025)
Represented by: Investments (including short-term deposits) 983 1,078 Cash at bank and in hand 209 150 Borrowings (per note 30) (1,714) (1,965) Share capital and share premium (557) (347) Cumulative charge to Group profit and loss account reserve in respect of shares issued to qualifying employee share ownership trust 105 59
32 Cash Flow continued Reconciliation of Investments to Balance Sheet 2000 £m 1999 £m
General business and shareholders (as above) 209 150 Long-term business 1,193 638
General business and shareholders (as above) 1,714 1,965 Long-term business 267 255
Flotation of holding in Egg and disposals of Acquisitions businesses Total Total
Net assets acquired (disposed of) 183 81 264 2,011 Cash consideration (paid) received after expenses (183) 195 12 (2,011)
Comprising: Short-term fluctuations in investment returns after tax – 19 19 – Profit on business disposals after tax – 167 167 – Goodwill credited to reserves – 90 90 –
Notes on the Financial Statements continued 33 Acquisitions, Disposals and Flotation of Holding in Egg (a) Acquisitions Acquisitions in 2000 principally relate to the purchase in September of the whole of Highland Bancorp Inc, a publicly listed California savings company, and the purchase in October of an 89% interest in Core Pacific Securities Investment Trust Enterprise, a Taiwanese mutual fund provider. In September 2000, the Group also increased its holding in its Taiwanese life insurance operation.
(b) Disposals Profit on Sale of Holding in Associate Company In March 2000 the Company announced the disposal of part of its 25% shareholding in its associate company, St James’s Place Capital plc to Halifax Group plc. The profit arising on disposal was first reported as part of the Company’s interim results. At 30 June, an initial 68% of this shareholding had been sold by a combination of the offer arrangements from Halifax and market sales. Proceeds from the disposal of the part of the shareholding that had been sold by 30 June amounted to £213m. After taking into account attributable net assets of £53m and attributable goodwill of £61m charged to reserves on acquisition, the profit on disposal was £99m.
Subsequently the remainder of the shareholding was sold in tranches in the market for £79m. After taking into account attributable net assets of £26m and goodwill of £29m, a net credit of £24m has been accounted for within short-term fluctuations in investment returns.
The goodwill total of £90m has been credited back to reserves.
(c) Profit on Sale and Flotation of Holding in Egg In June 2000 the Company undertook an Initial Public Offering of part of its holding in Egg plc, its wholly owned UK banking subsidiary, and at the same time Egg issued new shares to the market. Total proceeds, net of expenses, amounted to £239m. After taking account of minority interests of £120m arising as a result of this transaction, the profit to the Group was £119m.
(c) Merger with American General Corporation On 12 March 2001 the Company announced the terms of a recommended merger with American General Corporation, a US investment, life insurance and consumer finance group. The merger terms include the issue of 3.6622 Prudential shares for each American General share. The merger is targeted for completion in the third quarter of 2001 subject to shareholder approvals and regulatory consents. On completion of the merger Prudential shareholders would own approximately 50.5% and American General shareholders approximately 49.5% of the enlarged Group on a fully diluted basis. The following financial information produced on a US GAAP basis has been extracted from American General Corporation’s 2000 financial statements: US$m Revenue and deposits 22,368 Operating earnings 1,310 Net income 1,003 Total assets 120,360
We have audited the financial statements on pages 42 to 74.
Respective Responsibilities of Directors and Auditors The directors are responsible for preparing the Annual Report. As described on page 31 this includes responsibility for preparing the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, the Financial Services Authority, and by our profession’s ethical guidance.
Results for the Year Long-term business including investment products New business of continuing operations: Premium income: General business premiums written: Discontinued operations – – – – 304
Operating profit before amortisation of goodwill: US broker dealer and fund management 7 (6) – – –
Shareholders’ investment return and other income 76 93 189 141 30
Amortisation of goodwill (84) (54) – – – Short-term fluctuations in investment returns (48) 28 24 83 (37) Profit on business disposals 239 – 249 18 797 Reclassification of shareholder reserves of discontinued Australian operation – – – 204 –
Achieved profits basis capital and reserves 8,833 8,342 7,510 6,912 6,573
Insurance and Investment Funds under Management (£bn) 165 170 128 119 91
Share Statistics Earnings per share: Based on operating profit after tax and related minority interests
UK Operations Long-term business including investment products New business : Operating profit: Statutory basis capital and reserves 1,303 1,283 525 398 259 Additional achieved profits basis retained profit 3,883 3,884 3,386 3,321 3,007
Achieved profits basis capital and reserves 5,186 5,167 3,911 3,719 3,266
Insurance and Investment Funds under Management (£bn) 30 25 21 19 16
Statutory basis capital and reserves 315 217 123 46 38 Additional achieved profits basis retained profit 478 376 255 214 209
Achieved profits basis capital and reserves 793 593 378 260 247
Insurance and Investment Funds under Management (£bn) 5.6 2.7 1.7 1.5 1.5
Achieved profits basis capital and reserves 82 68 46 31 –
Other Income and Expenditure Investment return and other income 82 111 Interest payable (143) (131) Corporate expenditure (42) (40)
Earnings per Share – Achieved Profits Basis Year ended 31 December 2000
Based on profit for the year after tax and minority interests of £514m (£1,162m) 26.2p 59.7p
US broker dealer and fund management 7 (6) Other income and expenditure (103) (60) Re-engineering costs – (70)
Operating profit before amortisation of goodwill 1,029 1,098 Amortisation of goodwill (84) (54) Short-term fluctuations in investment returns (440) 637 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 83 –
Shareholders’ capital and reserves Share capital and share premium 557 347 Statutory basis retained profit 3,463 3,077 Additional achieved profits basis retained profit 4,813 4,918
Total recognised gains relating to the financial year 701 1,247 New share capital subscribed 184 34 Goodwill on sale of holding in associate company 90 –
2 Assumptions (i) Methodology The achieved profits basis results incorporate best estimate forecasts of future rates of investment return, proprietor’s spread (in the case of Jackson National Life), policy discontinuances, mortality, expenses, expense inflation, taxation, bonus rates, surrender and paid up bases, and statutory valuation bases. In preparing these forecasts, account has been taken of recent experience and general economic conditions, together with inherent uncertainty. It has been assumed that the bases and rates of taxation, both direct and indirect, will not change materially in the countries in which the Group operates.
(ii) Expected rates of future investment return and spread assumptions Expected future rates of investment return reflect prevailing interest rates, the outlook for inflation and the mix of the portfolio.
In determining the 2000 and 1999 results for UK operations the key assumptions were: Real pre-tax rates of investment return Nominal pre-tax rates of investment return UK equities Gilts 6.0% Overseas equities } 5.5% Corporate bonds 7.0% Property PAC with-profits fund
Expense inflation (per policy) (applying the rates listed Ordinary branch 2.5% left and above to the investments Industrial branch 4.5% held by the fund) 8.0%
For Jackson National Life, the absolute level of rates of future return is less important than the spread achieved between the earned rate and the rates credited to policyholders. In determining the results for both 2000 and 1999, a spread of 1.90% for the single premium deferred annuity product has been assumed.
The unwind of discount rate on the present value of future statutory profits is included in profits from business in force.
In the case of Jackson National Life, it is assumed that fixed income investments will normally be held until maturity. Therefore unrealised gains are not reflected in either the achieved profits or statutory basis results and, except on realisation of investments, only income received and the amortisation of the difference between cost and maturity values are recognised to the extent attributable to shareholders.
For Jackson National Life some investments are realised before maturity, mainly through early redemption by issuers or mortgage holders. Gains made on realisation are spread forward over five years for the purposes of calculating operating results.
In determining the cost of capital of Jackson National Life, it has been assumed that an amount equal to 200% of the risk based capital required by the US supervisory authorities must be retained. The impact of the related capital charge is to reduce Jackson National Life’s shareholders’ funds by £222m (£234m).
8 Operating Profit from Business in Force 2000 £m 1999 £m
Europe Unwind of discount 8 6 Experience variances against current assumptions 0 0
Development expenses (18) 0 * Smoothed assets represent the opening assets adjusted to reflect the difference between actual and assumed long-term dividend yields ** Averaged realised gains differ from those reported on the statutory basis (see page 61) for the impact of amortisation of policy acquisition costs attributable to realised gains. These have been included in the statutory basis gains averaging calculation for the years 1998 to 2000. On the achieved profits basis deferred acquisition costs do not feature as part of the methodology. Accordingly the realised gains included in the averaging process are exclusive of the amortisation of policy acquisition costs attributable to realised gains
84 Prudential plc Annual Report 2000 9 Tax The profit for the year is in most cases calculated initially at the post-tax level. The post-tax profit is then grossed up for presentation purposes at the effective rates of tax applicable to the countries and periods concerned. For Jackson National Life the profit is calculated at the pre-tax level and the effective tax rate is the rate expected to be applicable on average over the remaining life times of the policies.
The tax charge comprises: Charge 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 (excluding M&G long-term business) 212 187 Jackson National Life 44 173 Asia (including tax relief on development expenses) 57 29 Europe (including tax relief on development expenses) 0 4
Total tax on profit on ordinary activities 239 519 10 Shareholders’ Funds – Segmental Analysis 2000 £m 1999 £m
After charge for cost of capital 2,671 2,409 Other operations*** 85 124
Other operations: Holding company net borrowings (1,530) (1,682) Other assets 0 81 * The 1999 figure for general business solvency capital has been restated to £261m from the previously published figure of £127m. The restatement has been made to be consistent with a change in allocation of capital and related investments made in January 2000 ** Total goodwill at 31 December 2000 was £1,611m and comprises £65m held within US Operations, relating to broker dealer and banking business, and £1,546m held centrally *** Other US operations relate to broker dealer, fund management, intragroup funding arrangements and certain tax balances
11 Reconciliation of Movement in Shareholders’ Funds UK Jackson long-term National Other Group business Life Asia Europe operations total
Profit for the financial year 343 51 100 (4) 24 514
Achieved profits basis shareholders’ funds 4,227 2,671 793 82 1,060 8,833 * The intragroup dividend of £24m for Jackson National Life is determined after a waiver of intragroup debt payable to Jackson’s holding company in respect of funding arrangements 12 Alternative Assumptions The discount rate appropriate to any investor will depend on the investor’s own requirements, tax and perception of the risks associated with the anticipated cash flows to shareholders. The table below shows the effect on achieved profits basis shareholders’ funds at 31 December 2000 of alternative discount rates: Increase Decrease in rates in rates £m £m 1% change in risk discount rate for all operations (560) 530
The achieved profits basis of financial reporting is based on conventional accounting principles and recognises profit as it accrues over the life of an insurance contract. Although total profit from each contract calculated under this method is the same as under the modified statutory basis of reporting used for the main accounts, the timing of profit recognition is advanced.
The additional profit recognised using the achieved profits basis is represented by the shareholders’ accrued interest in the longterm business and, when combined with shareholders’ funds reported on the statutory basis, provides an improved measure of total shareholders’ funds of the Group.
Auditors’ Report on the Achieved Profits Basis Supplementary Information to the Members of Prudential plc
We have reviewed the supplementary information on pages 79 to 85, which have been prepared on the basis set out in note 1 on page 81.
Shareholder Enquiries Lloyds TSB Registrars The Causeway Worthing West Sussex BN99 6DA
Sir Roger Hurn – Chairman Jonathan Bloomer – Group Chief Executive Philip Broadley – Group Finance Director Geraldine Davies – Director of Corporate Relations Jane Kibbey – Group Human Resources Director Peter Maynard – Group Legal Services Director
Jackson National Life 1 Corporate Way Lansing Michigan 48951 United States www.jnl.com
Prudential public limited company. Incorporated and registered in England and Wales. Registered office: Laurence Pountney Hill London EC4R 0HH. Registered number 1397169.