Achieved Profits Basis Supplementary Information 76 Operating Profit from Continuing Operations 77 Summarised Consolidated Profit and Loss Account 78 Summarised Consolidated Balance Sheet 79 Reconciliation of Movement in Shareholders’ Capital and Reserves 80 Notes on the Supplementary Information 82 The Achieved Profits Basis of Financial Reporting 83 Auditors’ Report on the Supplementary Information 84 Shareholder Information IBCHow to Contact Us
The information in this report related to the proposed egg:| flotation is not an offer of securities for sale into the United States, Canada or Japan.
The egg:| securities may not be offered or sold in the United States unless they are registered under applicable law or exempt from registration. egg:| does not intend to register any portion of the proposed flotation in the United States or to conduct a public offering of securities in the United States.
Prudential’s operations in the UK comprise Prudential Retail, Life and Pensions, General Insurance and Prudential Annuities. Prudential Retail provides high quality advice to six million customers requiring a broad range of financial products including life insurance, pensions and savings plans.
Scottish Amicable was acquired by Prudential in 1997. With two million customers, it is Prudential’s leading Independent Financial Adviser (IFA) brand. It is committed to supporting advisers through a combination of high levels of service and a strong product range.
egg:| was launched in October 1998 and has become established as a household name. It is the UK’s leading financial services e-commerce brand. egg|: provides competitive, customer friendly savings, loan and other products.
Prudential Group Pensions provides employer sponsored pension schemes to over 500,000 people in the UK. Working with many of the country’s leading companies, its new e-commerce platforms put it at the forefront of developments in the industry.
Our commitment to the shareholders who own Prudential is to maximise the value over time of their investment. We do this by investing for the long term to develop and bring out the best in our people and our businesses to produce superior products and services, and hence superior financial returns. Our aim is to deliver top quartile performance within the FTSE 100 in terms of total shareholder returns.
Prudential Europe has formed strategic alliances with CNP Assurances, France’s largest life company, and Signal Iduna, one of Germany’s leading life and health insurers. The agreements cover the provision of co-branded products and the potential to access distribution networks for each company, in France, Germany and the UK.
Jackson National Life (JNL) was acquired by Prudential in 1986 and is one of the leading writers of individual life insurance and annuities in the US, providing products and services in all 50 states. It employs 1,700 people and distributes its products through independent agents, broker dealers and financial institutions.
Prudential Corporation Asia (PCA) has operations in 11 countries in Asia. Its 20,000 managers, staff and agents develop and sell a range of insurance and investment products tailored to the needs of each local market.
We have risen to the challenges which the increasingly competitive environment presents: we have increased our product range, expanded our distribution capabilities hugely, grown our business in the UK and the US and taken it further into Asia.
In just over a year, egg:|, our internet bank, has become established as the UK’s leading e-commerce provider of financial services and the brand has become a household name. This is a fine achievement.
The arrival of Stakeholder Pensions in the UK next year is a further change which will benefit people who traditionally have had difficulty accessing a suitable pension. The internet will also grow in its reach and effect. It is already bringing transparency to all markets. Our task is to respond to customer needs more readily than ever before.
The scale and pace of change and the success of the company would not have been possible without the professionalism, dedication and sheer energy of our staff around the world. My sincere thanks are due to all of them and my best wishes for the future go with them.
Finally, I want to pay tribute to Sir Peter Davis who has been Group Chief Executive of Prudential for the past five years and who has led a remarkable transformation within the company. I welcome Jonathan Bloomer as his successor. Jonathan, as Finance Director and more recently as Deputy Group Chief Executive, has worked closely with Peter since 1995 on the development of our strategy. I will retire at this year’s Annual General Meeting in May and am delighted that Sir Roger Hurn has agreed to succeed me as Chairman. I have every confidence that the company is in safe hands and that it is well equipped to meet the challenges of the future.
‘All parts of the group are making rapid progress in making e-commerce integral to the way we do business.’
In the UK we have made important progress in developing new business models for our retail insurance business and in growing our Independent Financial Adviser operations. We bought M&G Group P.L.C. (M&G) and are integrating it successfully with Prudential Portfolio Managers (PPM) in the UK. We believe that the global trend towards increased sales of investment products will continue and this move allows us to focus on those areas of fund management where we have unique strengths and competitive advantage: unit trusts, fixed income and pooled life and pension funds. This acquisition has increased the group’s retail fund management presence greatly and since acquisition M&G has produced a 20 per cent increase in sales over the equivalent prior year period.
We have been delighted with the progress of egg:|. Since its launch in 1998, egg:| has become established as a household name and one of the UK’s most recognised e-commerce brands.
In the past few years we have consistently delivered superior investment returns to our shareholders. We will continue to maximise the value from our existing businesses and invest for the future. With a strong management team we are ideally placed to continue to deliver long-term out-performance.
Through egg:| we have been able to reach a new type of customer, one who is computer literate and financially discerning and who wants to benefit from the combination of the best financial products the market has to offer, and who uses internet services which fit in with their lifestyle. The growth in the number of customers using our website is spectacular. In July 1999 we had 184,000 visitors to the egg:| website and in January 2000 that figure rose to 1.1 million. In January, 62 per cent of all egg:|’s deposit transactions took place over the internet and 86 per cent of mortgage applications were via the internet.
We are capitalising on the strengths of on-line services to ensure that egg:| remains at the forefront of technological development and will continue to do so as our range of innovative products and services continues to expand.
During 1999 our investment in egg:| totalled £150 million and we expect a similar level of investment during 2000. We anticipate that with its current plans and activities, egg:| will be breaking even in the latter part of 2001 as the benefits of the customer base and cross-buying materialise.
Underlying statutory profit (before re-engineering costs) from our Retail IFA business increased by 13 per cent to £99 million in 1999 while new business achieved profit increased by 53 per cent to £174 million. This strong growth in new business achieved profit has been driven by increased sales of investment bonds, predominantly Prudence Bond, with sales of £1.9 billion in 1999.
Central to this growth has been the further improvements that we have initiated in customer service. During the year we have given customers a choice of fund manager and re-engineered the distribution process to give a stronger match between the specialisations of each IFA and Scottish Amicable’s sales force. The choice of fund managers was launched under the ‘Power to Choose’ banner and has been widely welcomed by IFAs. It is a concept which competitors are now following. In addition we have also developed a new sales contact centre which will lead to even higher levels of customer service.
During 1999, we refocused our marketing efforts and developed a campaign which targeted both consumers and financial advisers, raising brand awareness and stressing the importance of professional financial advice. Our activity included television sponsorship, national press advertising, radio commercials and London Underground advertising.
Our investment in technology will enable continued improvements to customer care, under both the Scottish Amicable and Prudential brands, and will increase the cost-effectiveness of the business adding to shareholder value. These developments include an extranet giving IFAs the latest information on products and services. In addition, new business processing developments will allow IFAs to administer pensions on-line.
We continue to expand the range of products designed to meet the changing needs of IFAs and introduced a ‘Stakeholderfriendly ’ group personal pension product on 1 March 2000.
Prudential Retail Financial Services Prudential Retail Financial Services (PRFS) comprises three business units: Prudential Retail (with its 1,900 strong direct sales force), Life and Pensions and General Insurance.
PRFS has six million UK customers to which it sells a comprehensive range of personal investment and insurance products. Currently PRFS has 7.1 million life policies in force and is one of Britain’s biggest pension providers with 1.6 million personal pension contracts. It also sells banking products for Prudential Banking: mortgage sales exceeded £600 million in 1999.
Prudential’s response to the Government proposals has been positive: we aim to combine first class customer service with operating efficiencies to make Prudential a low-cost and profitable participant in the emerging Stakeholder environment.
Two specific initiatives have been taken to exploit these market changes: – a marketing and distribution platform has been developed, that employs current e-commerce and future broadband technology to its fullest advantage. Designed to maximise participation by giving employees access to pension information through their company’s intranet and at home, it has the added benefit of providing a strong education capability to enable users to understand and manage their pensions better; – secondly, we have improved the distribution efficiency of our Additional Voluntary Contribution (AVC) product by moving away from one to one sales to a new approach based on communication teams visiting the workplace and informing members of the pension choices available to them.
Going forward, these and other initiatives build on Prudential’s already highly respected brand and will enable us to capitalise on market changes, to deliver both customer value and strong shareholder returns.
Prudential M&G Asset Management Prudential’s fund management business in the UK is conducted under the umbrella of Prudential M&G Asset Management. The acquisition of M&G Group P.L.C. (M&G) in April 1999 has given us enhanced access to the retail investment market and we are currently carrying out a fundamental reorganisation of our fund management operations.
In the UK we will specialise in those areas of fund management where we have unique strengths and competitive advantage – unit trusts, fixed income and pooled life and pension funds. We have therefore entered into discussions, which are now at an advanced stage, to sell our UK institutional segregated balanced and specialist equity business which constitutes around £10 billion of mandates (out of a total group funds under management of £170 billion).
PPM Property, the UK’s largest property investor with a portfolio valued at over £9 billion, has had a particularly successful year. We made significant investments at Bluewater and Milton Keynes shopping centres and agreed the sale of our entire rural estate to the Duchy of Cornwall. We opened the first building on GreenPark in Reading, our major business park under development, and plan to upgrade and extend the Arndale Centre in Manchester, where our development represents a large part of the city centre redevelopment.
PPM Ventures (PPMV) also had an excellent year, delivering strong returns to clients and a record operating profit of £11 million. At the year end, PPMV had invested capital of £600 million, with investments made on behalf of the Life Fund and external pension fund clients.
M&G embraced Individual Savings Accounts (ISAs) from the outset. Taking full advantage of the changes in regulations which allow customers to invest by telephone or internet, we are one of only a handful of companies that give investors the chance to buy an ISA on-line.
Sales of ISAs, through both the intermediary and direct channels, have been good since launch, securing a five per cent share of the unit trust ISA market.
In 1997 we redesigned our investment process in order to create a more diversified fund range and greater investment flexibility within the fund management team. These efforts have resulted in a broader range of offerings, including growth, fixed interest and themed funds, and are now delivering better performance from the traditional M&G equity income funds.
During 1999, we introduced innovative products, including the M&G Global Managed Bond Fund and the M&G Global Technology Fund, to strengthen M&G’s reputation in the retail market. In November we reduced the annual management charge on our UK Index Tracker from 0.75 per cent to 0.3 per cent resulting in a six-fold increase in the daily rate of sales.
Our strategy for continental European retail markets involves harnessing existing product resources and tailoring them to individual market needs. Whilst meeting local presentational, fiscal and regulatory requirements, the basic core products will be the same in each market and be produced in a single location.
We will launch the first new products for distribution in France and Germany later this year. In the meantime, we continue to develop our German broker business based in Frankfurt where we have already established a leading position in the new but rapidly-growing unit linked market.
The next major markets for implementing our strategic partnership approach are Italy and Spain. We will develop plans for these markets during the course of this year.
Source: Datamonitor: Taking Advantage of Opportunities in the Retirements Savings Market in Europe, 1999
Sales of variable annuity products were nearly £1.2 billion, more than double 1998’s figures. This compares with industry growth over the same period of 21 per cent.
Equity-linked indexed annuity sales surpassed expectations and reached £431 million, 52 per cent above 1998 levels. By the end of 1999, JNL ranked as the largest provider of equity-linked indexed annuities in the US. Our fixed annuity sales also rose by 23 per cent, keeping us at second in that market.
Our Lansing and Denver Service Centres have processed 60 per cent more applications and service requests than in 1998. Additionally, our Institutional Marketing Group service centre won several awards and was judged best in the industry for fixed annuity service and marketing support, including two prestigious Crystal Pyramid awards. Construction of our new US$50 million headquarters building continues and we expect to occupy it this autumn.
During November we acquired a majority stake in a top ten life insurance company in Taiwan, giving us access to one of the region’s major retail financial services markets. The company has been launched already as Prudential Taiwan and significant expansion plans are being put into place.
Prudential Vietnam was launched in November 1999. We are the first EU company to be operating in the new Vietnamese life market. Agency teams are already in place in Hanoi and Ho Chi Minh and the early signs are very encouraging.
We have also been at the forefront of new developments in distribution through our bancassurance partnership with Standard Chartered Bank in Hong Kong and Singapore.
Shareholders’ funds Statutory basis 3,424 3,249 Achieved profits basis 8,342 7,510 * Before amortisation of goodwill † Continuing operations including acquired businesses
Modified Statutory Basis Results Operating profit before amortisation of goodwill totalled £776 million in 1999, a decrease of ten per cent over prior year. The 1999 result includes an investment of £150 million in egg:| and a £70 million charge for UK re-engineering costs. Underlying operating profit before these items is up six per cent to £996 million.
Our US operations generated a profit in 1999 of £451 million, ten per cent ahead of prior year reflecting increased spread income due to a growth in the liability book, and a slight strengthening of the dollar against sterling (local currency results were up eight per cent on prior year). The after tax return on capital for the year of 17 per cent is again ahead of our long-term target of 15 per cent. However, we would expect 2000’s returns to be closer to our target return.
Operating earnings per share were down 14 per cent on prior year at 29.1 pence. This fall is higher than the ten per cent fall in operating profit due to the unusually low effective tax rate in 1998 of 25 per cent, compared with 27 per cent in 1999.
Supplementary Achieved Profits Basis Results On the achieved profits basis of reporting, operating profit was £1,098 million in 1999, nine per cent ahead of 1998.
The achieved profits result for our long-term operations was an increase of 27 per cent on 1998 at £1,230 million reflecting a 46 per cent rise in new business profits to £603 million and a 13 per cent increase in in-force profits to £627 million.
Within new business profits, the contribution from our UK businesses was up 44 per cent to £304 million. This increase reflected a 53 per cent increase in Retail IFA new business profit to £174 million due to increased sales and a revised assessment of persistency of our Prudence Bond product. Within Retail Financial Services and Annuities, strong sales growth and a shift to more profitable product lines drove the result up 35 per cent to £104 million, while Group Pensions’ contribution was £26 million, up 30 per cent on 1998.
Overseas, Jackson National Life generated new business profit of £198 million, up 45 per cent on prior year, reflecting record sales volumes and a shift in product mix to relatively more profitable variable annuity and equity-linked indexed annuity (ELI) products. Prudential Corporation Asia’s contribution of £90 million represents another very strong result, up 61 per cent on prior year, and is primarily attributable to the increase in sales in our established markets, a more profitable sales mix and our increased stake in Malaysia. Prudential Europe’s contribution was £11 million, up 22 per cent on 1998.
The returns on average shareholders’ funds for our long-term businesses based on local currency achieved basis operating profit after tax, are shown in the following table: UK operations 11 10 Jackson National Life 14 16 Prudential Corporation Asia* 18 18 * Established operations net of development costs
Total operating profit after tax on the achieved profits basis was £762 million and earnings per share were 39.1p.
Retail IFA 174 114 +53 PRFS and Annuities 1O4 77 +35 Group Pensions 26 20 +30
Accounting Policies There have been no changes in accounting policies during the year that impact materially on the results.
On the achieved profits basis, which recognises the shareholders’ interest in our long-term businesses, shareholders’ funds were £8,342 million, an increase of £832 million compared with 1998. The increase reflects the profit retained in the long-term businesses and strong investment returns. After adjusting for borrowings, approximately 65 per cent of these funds are held in sterling with a further 25 per cent held in US dollars.
The achieved profits basis provides a better indication of the group’s financial strength. It does not, however, anticipate the results of our discussions with the FSA on the unattributed assets held in the main with-profits fund. For the purposes of the achieved profits basis results, it is assumed that only ten per cent of these assets are allocated to shareholders. Our discussions with the FSA on the unattributed assets continue.
Financial Strength of Insurance Operations The solvency ratio of free assets to liabilities within the group’s main UK long-term fund at the year end after charging for the pension mis-selling provision is estimated to be 29 per cent, an increase of eight per cent over prior year. The fund’s financial strength has been rated Aaa by Moody’s Investors Service. The solvency position of Jackson National Life remains strong with a risk-based capital ratio of over 240 per cent of the regulatory minimum. Adequate solvency levels have been maintained by our insurance operations in Asia.
Funds Flow The table below provides details of the holding company’s funds flow: Group operating profit before amortisation of goodwill after tax 567 654
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 55. In 1999 the group’s operations generated funds after tax of £567 million, compared to £654 million in 1998, and retained funds after dividends were £118 million. In 1999, the group invested £2,598 million in its businesses including £278 million reinvested in Jackson National Life and £1,943 million relating to the acquisition of M&G. We have also invested £262 million regulatory capital in Prudential Banking and egg:| and £97 million in Asia, principally in Taiwan. In addition, £310 million was repatriated from businesses in 1999: £190 million of surplus capital from M&G, and £120 million from Prudential Assurance Company, following a review of capital requirements. Overall there was a net cash outflow in 1999 from the holding company of £2,268 million.
Shareholders’ Borrowings Core structural borrowings of shareholder financed operations at the end of 1999 totalled £1,915 million including £1,446 million at fixed rates of interest with maturity dates ranging from 2001 to 2029, as set out in note 21 on page 68. Of this long-term borrowings balance, £496 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 £301 million short-term commercial paper borrowings and £168 million floating rate loan notes, all sterling denominated.
The group also successfully placed £168 million of loan notes due to mature in 2004. The proceeds of these debt issues along with the net cash held by the holding company at the end of 1998 were used to finance the acquisition of M&G.
Prudential plc enjoys strong debt ratings from both Moody’s Investors Service and Standard and Poor’s. Its rated long-term debt is Aa3 and AA+, whilst the short-term ratings of its guaranteed finance subsidiaries are P-1 and A-1+. The group also retains access to both committed and uncommitted bank facilities.
To reduce investment, interest rate and currency exposures, and to facilitate efficient investment management, derivative instruments are used. Group policy is that amounts at risk through derivative transactions are covered by cash or by corresponding assets. The accounting treatment of derivative contracts is consistent with that of the underlying assets or liabilities.
We recognise that our business activities, and the investments we make on behalf of our customers, have an effect on the environment and the wider community. We believe that corporate social responsibility is an integral part of good business practice, encompassing our relationships with employees, customers, shareholders, suppliers, business partners and the communities in which we operate. In January 2000 we created a new unit to manage our approach to social responsibility.
Environment The Environmental Policy Group sets the group-wide environmental strategy and makes recommendations to business units on the implementation of environmental action plans.We are striving to: • reduce consumption of materials in our operations • help employees to achieve environmental improvement • encourage our suppliers to minimise the impact of their operations on the environment • make environmental considerations part of our investment decision making • apply best practice in the planning, development and decommissioning of our buildings.
• Prudential Corporation Asia contributed to a rehabilitation centre for children recovering from the Taiwan earthquake
• Jackson National Life supports educational and youth projects in Michigan and Chicago through United Way
Diversity We respect and value diversity. To remain competitive we seek to recruit, develop and retain people from the widest range of backgrounds. In the UK we have committed to the Commission for Racial Equality Leadership Challenge and we are members of Opportunity Now and Race for Opportunity.
Deputy Chairman (Age 62) A director since 1984 and Deputy Chairman since 1991. Chairman of Prudential Staff Pensions, Kingston Communications (Hull) plc, Minorplanet Systems plc and the London Clinic. *non-executive director
(Age 64) A director since January 1999. Deputy Chairman of AstraZeneca plc from April 1999 and previously Chief Executive of Zeneca PLC. Deputy Chairman of Business in the Community and non-executive Chairman of Imperial Cancer Research Technology Limited. Member of the Board of Trustees, British Red Cross Society. *non-executive director
(Age 55) A director since 1996. Chairman of Prudential Portfolio Managers. Previously Chairman of S.G. Warburg & Co Ltd. Chairman Designate of Partnerships UK and Chairman of Business in the Environment.
(Age 51) A director since May 1999. President and Chief Executive Officer of OppenheimerFunds Inc, a New York based investment management company.
(Age 50) A director since July 1999. Finance director of Reuters Group PLC. *non-executive director
(Age 66) A director since 1997. Chairman of Murray Extra Return Investment Trust plc and of the Scottish Amicable (supervisory) Board. Previously a practising solicitor and Chairman of Scottish Amicable Life Assurance Society.
Corporate Governance The directors support the Combined Code. The company has complied throughout the accounting period ended 31 December 1999 with all the Code provisions. We have applied the principles in the manner described below and in the Remuneration Report.
Authority is delegated to the Group Chief Executive for implementing the strategy and for managing the group. In discharging his responsibility, the Group Chief Executive works with a group executive committee, comprising all the executive directors and other business unit heads, and is also assisted by a group head office team of functional specialists.
Board Committees The Board has established the following committees of non-executive directors: Audit Committee Michael Abrahams (Chairman) Ann Burdus Rob Rowley Sandy Stewart
The Group Chief Executive, the Group Finance Director, the Group Legal Services Director, the Head of Group Compliance, the Head of Group Internal Audit and the external auditors attend meetings of the Committee except when the Committee wishes to meet alone.
Remuneration Committee Sir David Barnes (Chairman) Michael Abrahams Ann Burdus Sir Roger Hurn Bridget Macaskill Rob Rowley Sandy Stewart
Upon appointment to the Board, all non-executive directors (except the Chairman) automatically become members of the Remuneration Committee.
Nomination Committee Sir Martin Jacomb (Chairman) Michael Abrahams Ann Burdus Sandy Stewart
Directors’ Independence, Training and Re-election All non-executive directors are considered to be independent. After the Chairman, the Deputy Chairman, Michael Abrahams, is recognised as the senior independent director. As the UK’s largest institutional investor, conflicts of interest are always possible, but the Board does not consider that this affects the independence of those non-executive directors in whose companies the company has a shareholding.
Non-executive directors are appointed initially for a three year term. The appointment is then reviewed towards the end of this period. Upon appointment, all non-executive directors embark upon a programme of induction that will usually take the form of visits to different business areas in the group where the opportunity is taken for the newly appointed director to meet members of staff. Training is available for executive directors where appropriate.
The company believes the Annual General Meeting is an important forum for both institutional and private shareholders and encourages attendance by shareholders. At its Annual General Meeting in 1999 the company indicated the balance of proxies lodged in respect of 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 opposition to each resolution. The company discloses full details of the proxy votes received to any shareholder upon request after the
Internal Control Guidance for directors ‘Internal Control: Guidance for Directors on the Combined Code’ (the Turnbull guidance) was published in September 1999. The directors have taken advantage of the London Stock Exchange’s transitional rules and have continued to review and report upon internal financial controls in accordance with the Institute of Chartered Accountants in England and Wales’ 1994 guidance ‘Internal control and financial reporting’.
Nevertheless, in the light of the Turnbull Committee’s guidance on internal control, the Board has taken the opportunity to review and improve its process for identifying and managing the group’s risks and the control procedures in place to manage those risks. The Board confirms that it has established procedures necessary to implement the Turnbull guidance such that it will fully comply with it for the accounting period ending
The management of exposure to risk is fundamental to the group’s operations. The group’s system of internal control, for which the Board has overall responsibility, is an essential and integral part of the risk management process. The system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can provide only reasonable and not absolute assurance against material misstatement or loss.
Financial Control Procedures Detailed controls, applicable across the group, are laid down in financial and actuarial procedures manuals.
Performance Planning and Monitoring There is a comprehensive planning and performance monitoring system based on key performance indicators for each business area. The group is continuing the implementation of value-based management in its operations.
Compliance The Head of Group Compliance monitors adherence to regulatory requirements and reports directly to the Audit Committee on the group’s compliance matters.
Audit The Head of Group Internal Audit has direct access to the Chairman of the Audit Committee and any significant matters arising from internal audit work are reported to the Committee. The Audit Committee receives twice-yearly reports from the external auditors on internal financial control and reviews action taken in response to any weaknesses which are identified.
Effectiveness of Internal Control The Board has reviewed the effectiveness of the system of internal financial control in operation during the year through the monitoring processes set out above.
Salary Executive directors’ salaries are reviewed by the Remuneration Committee, normally 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.
Annual Bonus This element of the directors’ remuneration package is designed to encourage directors to achieve the highest levels of annual corporate performance.
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 month notice period applies. The contracts of employment for both Les Cullen and Mark Tucker, both appointed to the Board in 1999, contained a 12 month notice period. During 1999, the notice periods for Keith Bedell-Pearce and Jonathan Bloomer were reduced to 12 months from 18 months. When considering termination of service contracts, the Committee will have regard to the specific circumstances of each case, including mitigation.
Policy on External Appointments Executive directors are able, subject to the Board’s approval, to accept a limited number of external appointments as non-executive directors of other organisations.
Mark Tucker (appointed 1/9/99) (notes 2 and 3) 120 85 51 256
Niall FitzGerald (retired 6/5/99, note 4) 9 9 25 Lord Gillmore (pro-rated to 20/3/99) 6 6 25
2. Included in the benefits figure for Mark Tucker is an allowance for housing and additional similar benefits of £45,000, reflecting his expatriate circumstances.
3. Included in the annual bonus figure for Mark Tucker is a special bonus payment of £33,000 reflecting significant strategic advances and outstanding business performance in 1999 in the group’s Asian operations.
Balance on the long-term business technical account before tax 1 825 770*
Unrealised gains on investments 30 33 Allocated investment return transferred from the long-term business technical account 5 21* Investment expenses and charges 7 (110) (78) Allocated investment return transferred to the general business technical account (41) (49)* Other income: Investment management result 43 44 Profit on business disposals 9 249 18 Reclassification of shareholder reserves of Australian operation – 204
Profit on ordinary activities before tax 1,141 1,169 Tax on profit on ordinary activities 8 (261) (332)
Profit for the financial year 1 880 837 Dividends: Interim [at 7.0p (6.4p) per share] (136) (124) Final [at 14.0p (12.7p) per share] (271) (246)
Reconciliation of operating profit to profit on ordinary activities Operating profit before tax based on longer term investment returns 1 868 864* Short-term fluctuations in investment returns 24 83* Profit on business disposals 9 249 18 Reclassification of shareholder reserves of Australian operation – 204
Basic earnings per share Based on operating profit after tax of £654m (£618m) and 1,942m (1,932m) shares 1 33.7p 32.0p* Adjustment from post-tax longer term to post-tax actual investment gains 0.8p 2.6p* Adjustment in respect of profit on business disposals 10.8p 0.9p Adjustment from reclassification of shareholder reserves of Australian operation – 7.8p
Based on profit for the financial year of £880m (£837m) and 1,942m (1,932m) shares 1 45.3p 43.3p
Diluted earnings per share Based on profit for the financial year of £880m (£837m) and 1,955m (1,947m) shares 17 45.0p 43.0p
Sir Peter Davis 115,474 115,474 1,046 * Or date of appointment if later. ** The market value of rights granted in 1999 is based on the market value of the shares over which rights are granted on the day of the grant (906 pence).
To reflect his role as Chief Executive, Prudential Corporation Asia, Mark Tucker also participates in a long-term incentive plan that measures performance of the group’s Asian operations. This plan is designed to provide reward based on the growth of the appraisal value of Prudential Corporation Asia during each three-year period.
The resulting payment (if any) is made each year in April following the end of the preceding three-year period. The theoretical maximum payout from 2000 is 150 per cent of the basic salary being paid at the beginning of the three-year period (previously 172.5 per cent). However the growth required for such a period is such that 100 per cent is unlikely to be exceeded. No payment has become due since Mark Tucker became a director, nor will one become due in 2000.
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, as well as those allocated under the 1995 Restricted Share Plan, are included in the interests of directors in shares of the company shown below. In addition, all rights granted under the 1996 Restricted Share Plan are included in the interests shown below where these remain outstanding. Awards that remain conditional under the Restricted Share Plan are excluded. All interests are beneficial except in respect of 7,200 shares held in trust by Sandy Stewart.
Directors’ Share Options The Restricted Share Plan replaced the Executive Share Option Scheme in 1995 as the group’s long-term incentive plan. Outstanding options under that Scheme remain in force and are set out below together with options under the Savings-Related Share Option Scheme. The Savings-Related Share Option Scheme is open to all employees and options up to Inland Revenue limits are granted at a 20 per cent discount and cannot normally be exercised until a minimum of three years has elapsed.
Options Market price Options outstanding Exercise at date Gain on Earliest Latest outstanding at Granted Exercised at price of exercise exercise exercise exercise 1 Jan 1999** in year in year 31Dec1999 (pence) (pence) £000 date date
Notes: 1. The market price of shares at 31 December 1999 was 1220 pence which was also the highest share price during 1999. The lowest share price during 1999 was 765.5 pence.
Directors’ Pensions Prudential Staff Pension Scheme Executive directors are eligible to participate in the Prudential Staff Pension Scheme on the same basis as other members. The Scheme is non-contributory and provides members with a maximum pension of 38/60 of Final Pensionable Earnings at the normal retirement age of 60. Final Pensionable Earnings are the sum of the pensionable salary for the 12 months immediately preceding retirement or termination of employment and, for entrants since 31 May 1989, are restricted to salary up to the Inland Revenue earnings cap, which at the time of writing is £90,600.
Years of (excluding Age at pensionable inflation) 31 Dec 31 Dec 31 Dec service at in year 1999 1998* 1999 1998
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.
Service Contracts of Directors Proposed for Re-election Mark Tucker, who is proposed for election, and Keith Bedell-Pearce, who is proposed for re-election, have service contracts of 12 months. Sir Roger Hurn, Bridget Macaskill and Rob Rowley, who are proposed for election, and Ann Burdus, who is proposed for re-election, do not have service contracts.
Dividends The directors have declared a final dividend for 1999 of 15.3p per share payable on 31 May 2000 to shareholders on the register at the close of business on 31 March 2000. The dividend for the year, including the interim dividend of 7.7p per share paid in 1999, amounts to 23.0p per share compared with 21.0p per share for 1998. The total cost of dividends for 1999 was £449 million.
Millennium Since the beginning of the year no material problems attributable to the Year 2000 date change have arisen in any of the group’s business units. However, we are continuing to monitor both our own internal systems and processes as well as those which impact our customers and suppliers in order to identify any Year 2000 related problems should they occur.
Directors The present directors are shown on pages 34 and 35.
Sir David Barnes was appointed a director on 4 January 1999 and elected at the Annual General Meeting on 6 May 1999. Niall FitzGerald retired as a director on 6 May 1999. Lord Gillmore died on 20 March 1999. Bridget Macaskill, Rob Rowley, Mark Tucker and Sir Roger Hurn were appointed directors on 7 May 1999, 8 July 1999, 1 September 1999 and 17 February 2000 respectively and in accordance with the Articles of Association retire and offer themselves for election at the Annual General Meeting. Les Cullen was appointed a director on 6 September 1999 and resigned on 29 February 2000. Sir Peter Davis resigned on 29 February 2000. Ann Burdus and Keith Bedell-Pearce retire by rotation at the Annual General Meeting and offer themselves for re-election. Michael Abrahams and Sir Martin Jacomb also retire by rotation but do not 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 42.
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 a 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.
Employee Involvement The group has effective communication channels through which employees’ views can be sought on issues which concern them.
The new Forum is a high-level employee consultative body, which ensures that Prudential plc meets its European legal obligations. The first meeting will be held on 22 March 2000.
In 1999 employees were again invited to participate in the Prudential Savings-Related Share Option Scheme.
Shareholders The number of accounts on the share register at 31 December 1999 was 89,051 (80,205). Further information about shareholdings in the company is given on page 84. At 28 February 2000 the company had received notification from Janus Capital Corporation of a holding of 3.9 per cent of the company’s share capital.
The following table summarises the statutory basis results reported in the profit and loss account on pages 48 to 50. This summary does not form part of the statutory financial statements.
General business: Retail Financial Services 61 39 Re-engineering costs* (12) –
Discontinued Australia and New Zealand operations – 8 Long-term business re-engineering costs attributable to shareholders* (48) –
egg:| and Prudential Banking (150) (77) Other income and expenditure (analysed in note 1(v)) (78) 38
Dividend per share 23.0p 21.0p * Part of re-engineering costs of £70m borne by shareholders’ funds.
Gross premiums written 1(iv) 318 310 Outward reinsurance premiums (12) (15)
Change in the provision for claims: Gross amount (153) (12) Reinsurers’ share 6 (2)
Change in long-term business provision: Gross amount (6,778) (8,405) Reinsurers’ share 33 27
Change in provisions for linked liabilities, net of reinsurance (4,830) (1,439)
Net operating expenses (including re-engineering costs attributable to shareholders of £48m (£nil)) 6 (1,609) (1,290)
Unrealised gains on investments 14 30 Allocated investment return transferred (to) from the long-term business technical account (14) 5 Investment expenses and charges 7 (132) (110) Allocated investment return transferred to the general business technical account (40) (41) Other income: Investment management and products result (including re-engineering costs of £10m (£nil)) 60 28
Adjustment for amortisation of goodwill (2.8)p – Adjustment from post-tax longer-term to post-tax actual investment gains 2.3p 0.8p Adjustment in respect of profit on business disposals (1999 tax paid on prior year disposals) (0.8)p 10.8p
Based on profit for the financial year of £542m (£880m) and 1,947m (1,942m) shares 1(i) 27.8p 45.3p
Goodwill on disposal of subsidiaries – 28 New share capital subscribed 34 15
Net movement in shareholders’ capital and reserves 175 466 Shareholders’ capital and reserves at beginning of year 3,249 2,783
Investments Land and buildings 13 8,763 7,298 Investments in participating interests 14 105 82 Other financial investments 15 105,867 93,014
Present value of acquired in force long-term business 170 138 Present value of future margins relating to advances from reinsurers 55 36
Fixed assets Investments: Shares in subsidiary undertakings 22 5,023 2,794 Loans to subsidiary undertakings 22 1,531 1,464
Current assets Debtors: Amounts owed by subsidiary undertakings 295 291 Tax recoverable 95 95 Other debtors 14 103
Other investments 81 9 Cash at bank and in hand 29 155
Acquisitions and disposals Net cash (outflow) inflow from acquisitions and disposals of subsidiary undertakings 26 (1,984) 345
Financing Issue of debenture loans 21 500 300 Issue of loan notes 21 168 – Credit facility utilised by investment subsidiaries managed by US fund management operation 21 103 – Bank loans raised – 98 Repayment of debenture loan – (84) Issues of ordinary share capital (net of related transfer to share ownership trust) 34 15
Net (sales) purchases of portfolio investments 26 (1,675) 76 Increase in cash and short-term deposits 26 97 238
Shares in subsidiary undertakings in the balance sheet of the company are shown at the lower of cost or estimated realisable value. The group’s interests in associate undertakings are carried at the group’s share of net assets. For unlisted securities market value is estimated by the directors.
Investment Return Investment return comprises investment income, including the amortisation of differences between cost and maturity value of those fixed income securities carried at amortised cost, together with realised and unrealised investment gains.
Investment return in respect of long-term business, including that on assets matching solvency capital, is included in the long-term business technical account. Other investment return is included in the non-technical account.
For long-term business, an allocation is made from the long-term business technical account for the difference between the longer term investment return and the actual return on investments of the long-term business other than for assets backing the long-term business provision, the technical provisions for linked liabilities and the fund for future appropriations.
For general business, an allocation is made between the nontechnical account and the general business technical account of the longer term investment return on investments matching general business provisions and solvency capital.
(ii) Maturity claims are accounted for on the policy maturity date. Annuities are accounted for when the annuity becomes due for payment. Surrenders are accounted for when paid and death claims when notified.
(iii) Those costs of acquiring new insurance contracts, principally commission and certain costs associated with policy issue and underwriting which are not matched by policy charges, are amortised against margins in future revenues on the related insurance contracts, to the extent that the amounts are recoverable out of the margins.
(iv) Profits in respect of UK companies comprise actuarial surpluses allocated to shareholders adjusted, other than for with-profits business, for the deferral of acquisition costs and movements in the shareholders’ interest in reserves held within long-term funds.
For with-profits business, unappropriated surplus is carried forward in the fund for future appropriations and no allocation is made to shareholders.
The fund for future appropriations comprises amounts arising in relation to participating policies and other non-linked policies, the allocation of which to policyholders or to shareholders has not been determined at the balance sheet date.
(v) Results of overseas subsidiaries are determined initially using local GAAP bases of accounting with subsequent adjustments where necessary to comply with the group’s accounting policies.
Tax Tax is charged on all taxable profits arising in the accounting period. Provision under the liability method is made for deferred tax arising from timing differences other than those considered likely to continue into the foreseeable future. Under this policy, deferred tax is not provided on earnings retained overseas.
Tangible Assets Tangible assets, principally computer equipment, software development expenditure, and fixtures and furniture, are capitalised and depreciated by equal annual instalments over their estimated useful lives.
Leased Assets Assets held under finance leases are capitalised at their fair market value.
Pension Costs Charges in respect of employers’ contributions to defined benefit schemes are calculated on a basis which spreads the costs over the service lives of scheme members. Contributions in respect of defined contribution schemes are recognised when incurred.
Operating profit before amortisation of goodwill (note (ii)) 776 (209) 567 868 (214) 654 Items excluded from operating profit (note (vi)) (26) 1 (25) 273 (47) 226
Operating profit (based on longer term investment returns) before Single Regular Gross premiums written amortisation of goodwill
UK operations Retail Financial Services and Annuities egg:| and Prudential Banking – – – – – – (150) (77)
Broker dealer and fund management – – – – – – (6) –
Prudential Corporation Asia Long-term business and investment products 765 114 106 79 1,237 532 27 23 Development expenses – – – – – – (12) (10)
Other income and expenditure (note (v)) – – – – – – (78) 38 Re-engineering costs – – – – – – (70) –
Total continuing operations (note (iii)) 11,834 7,189 509 468 16,451 11,319 776 860 Discontinued long-term business operations – 276 – 46 – 456 – 8
Notes on the Financial Statements continued 1 Segmental Analysis continued Analysis of new business Analysis of total premiums and operating profit by product distributor by product provider
Premiums for investment management and products relate to unit trusts, PEPs, ISAs, and mutual funds.
Operating profit (based on longer term investment returns) (v) Other Income and Expenditure 1999 £m 1998 £m
Other income and expenditure – – – – (78) 38 (78) 38
Re-engineering costs attributable to shareholders (48) – (12) – (10) – (70) –
Items excluded from operating profit (note (vi)) – – – – (26) 273 (26) 273
Fund for future appropriations: Scottish Amicable Insurance Fund of Prudential Assurance Company (closed to new business and wholly attributable, but not allocated, to policyholders) 3,699 2,478 Other group companies (principally the with-profits fund of Prudential Assurance Company) 23,563 18,401
Net assets shareholder Net assets shareholder before core financed before core financed shareholder operations Shareholders’ shareholder operations Shareholders’ borrowings (note 21) funds borrowings (note 21) funds
Analysis of Shareholders’ Capital and Reserves 1999 £m 1999 £m 1999 £m 1998 £m 1998 £m 1998 £m
(iii) Under US GAAP, deferred tax provisions are generally established in respect of all timing differences whereas, under UK SSAP 15, 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.
Jackson National Life US GAAP operating income 661 637 408 386 Cumulative effect of change in accounting for guarantee fund assessments
(and related deferred acquisition costs) 28 – 17 – Longer term investment gains 52 42 32 25 Broker dealer and fund management operating loss (10) – (6) –
Operating profit per group accounts 731 679 451 411 Adjustment from longer term to actual investment gains (24) 4 (15) 2
Profit before tax included in group accounts and in accordance with US GAAP 707 683 436 413
Jackson National Life US GAAP shareholders’ funds 2,461 2,896 1,527 1,740 Investment value and related adjustments 500 (292) 311 (175) Deferred tax asset eliminated (29) (127) (18) (76)
Represented by: Other (related to funding arrangements, broker dealer and fund management operations) 201 197 124 119
(ii) Comparison of longer term investment gains with actual investment gains For the group’s continuing operations with investment portfolios that are both attributable to shareholders and subject to short-term volatility, a comparison of actual and longer term gains is set out over.
Actual gains attributable to shareholders: Jackson National Life 160 131 General business and shareholders 359 242
Gains on the realisation of investments 5,086 3,048 62 15 5 Policyholder Bonuses Bonuses added during the year are included in the change in long-term business provision or, where the policy is no longer in force, in claims incurred. The total cost of bonuses was £3,395m (£3,056m).
* Administrative expenses for 1999 include £48m (long-term business) and £12m (general business) of re-engineering costs charged to shareholders’ funds.
Analysed between: Tax on operating profit – – 209 214 Tax on short-term fluctuations in investment returns – – (16) 9 Tax on profit on business disposals – – 15 38
Unrealised gains on investments 515 413 3,179 2,685 Deferred acquisition costs 375 319 11 – Short-term timing differences (292) (255) (31) (91) Long-term business reserves – – 122 97
The principal reconciling item between the movement during 1999 on the balance sheet provision for deferred tax, and the charge for deferred tax included in the profit and loss account, is the provisions held by M&G on acquisition in 1999.
The cumulative goodwill charged against the group’s reserves arising on acquisitions of subsidiary undertakings that remain part of the group amounted to £679m (£679m).
The market value of scheme assets 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 employer’s contribution rate continued at the minimum prescribed under the scheme rules, currently equivalent to 10.6% of pensionable earnings. £4m (£4m) of the pension costs related to overseas schemes.
11 Directors’ Remuneration Information on directors’ remuneration is given in the Remuneration Report on pages 39 to 44. No director had an interest in shares, transactions or arrangements which requires disclosure, other than those given in the above Report.
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:| and Prudential Banking which will change auditors in 2000.
Audit related and consultancy fees payable to KPMG include £0.2m and £4.3m respectively incurred prior to the date of their appointment as auditors. Audit related and consultancy fees include £5.1m and £6.3m for KPMG and for PwC respectively for work performed in the UK (1998 PwC £8.2m).
Notes on the Financial Statements continued 14 Investments in Participating Interests continued
The interest in the associate undertaking is included in the consolidated balance sheet at the group’s share of the undertaking’s net assets.
Movement in the interest in the associate undertaking – 3 3 Balance at beginning of year 16 42 58
The associate undertaking is St James’s Place Capital plc, which is incorporated in England and Wales and is listed on a recognised investment exchange. The proportion of ordinary shares held by shareholders’ funds is 25% and all shares are held by a subsidiary company. The principal activity of the St James’s Place Capital Group of companies is the transacting of insurance business.
Interests in joint ventures reflect amounts contributed in the fourth quarter of 1999 in respect of ventures with the Bank of China in Hong Kong and with Signal Iduna in Germany and represent the investments on both a gross and net equity basis. The other participating interest is in respect of the group’s interest in Life Assurance Holding Corporation Limited, a holding company for UK life assurance companies.
Shares and other variable yield securities and units in unit trusts 25,651 23,113 57,693 49,088 Debt securities and other fixed income securities – carried at market value 21,980 18,685 23,035 21,283 Debt securities and other fixed income securities – carried at amortised cost 16,794 15,847 16,798 15,902 Loans secured by mortgages 2,503 1,849 2,529 1,938 Loans to policyholders secured by insurance policies 681 583 681 583
Amounts included in the above relating to listed investments were: Shares and other variable yield securities and units in unit trusts 56,406 48,108 Debt securities and other fixed income securities – carried at market value 20,530 19,406 Debt securities and other fixed income securities – carried at amortised cost 14,093 13,411
Net book value at beginning of year 141 114 18 Share Capital and Share Premium The authorised share capital of the company is £120m comprising 2,400,000,000 shares of 5p each.
At beginning of year 1,948,666,170 97.5 221.1 Shares issued under share option schemes and to qualifying employee share ownership trust 3,648,991 0.1 28.5 Shares issued in lieu of cash dividends 1,615,274 0.1 14.8 Transfer to retained profit in respect of shares issued in lieu of cash dividends – – (14.8)
Weighted average number of shares in diluted earnings per share calculation 1,959 1,955 19 Group Profit and Loss Account Reserve 1999 £m 1998 £m
At beginning of year 2,930 2,529 Retained profit for the financial year 93 473 Exchange movements 48 (50) Transfer from share premium in respect of shares issued in lieu of cash dividends 15 – Charge in respect of shares issued to qualifying employee share ownership trust (9) (50) Goodwill on disposal of subsidiaries – 28
Notes on the Financial Statements continued 20 Long-term Business Provision The principal valuation methods and assumptions are as follows: (i) UK Operations and Prudential Corporation Asia The main relevant products are with-profits deposit administration, other unitised and non-unitised with-profits contracts and non-profit pension annuities in course of payment. The calculation of the provision is based on fund value in the case of deposit administration and unitised contracts and the net premium method for non-unitised contracts. No explicit provision is made for future bonuses but the provision includes the cost of bonuses added following the valuation at the end of 1999. The assumed interest rates for UK with-profits contracts valued by the net premium method range from 3.0% to 5.35% whilst the rate of interest for pension annuities in course of payment range from 4.75% to 6.0%. Mortality rates are based on published tables suitably adjusted to reflect actual experience.
Additional provisions are held to meet the expenses, compensation costs and guarantees arising in respect of the FSA pensions review and to meet costs associated with guaranteed annuity options offered by Scottish Amicable Life Assurance Society.
(ii) Jackson National Life The main relevant products are interest sensitive deferred annuities and whole life contracts, guaranteed investment contracts, equity-linked indexed deferred annuities and term assurance.
Debenture loan (unsecured) – US$250m 8.15% Surplus Notes 2027 155 150
Total core structural borrowings of shareholder financed operations 1,915 1,373 * Debenture loans issued by the holding company.
Core structural borrowings of shareholder financed operations (as analysed in (i) previous) 1,915 1,373 Other borrowings (as analysed in (ii) previous) 305 206
Long-term business with-profits funds (as analysed in (ii) previous) 100 100
Other amounts: Obligations under finance leases 13 18 Obligations of Jackson National Life under sale and repurchase agreements 893 554
(f) Jackson National Life has entered into a programme of funding arrangements under contracts which, in substance, are almost identical to Guaranteed Investment Contracts. The liabilities of £619m (£nil) under these arrangements have been included in the consolidated balance sheet in other creditors.
At beginning of year 2,794 1,464 Investment in subsidiary undertakings 2,238 – Transfer of subsidiary undertakings (9) – Exchange rate movements – 6 Advances of new loans – 61
24 Subsidiary Undertakings The principal subsidiary undertakings of the company at 31 December 1999 were: Main activity Country of incorporation
Each undertaking has only one class of ordinary shares, all of which are held by the group, and operates mainly in its country of incorporation.
The total costs of £2 billion associated with the review of personal pensions mis-selling in the UK has 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 provision to the free assets of the fund will not have an adverse effect on the levels of bonus 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 be made from shareholders’ funds. In view of the uncertainty, it is not practicable to estimate the level of this potential contribution.
Movements arising from cash flow (2,383) (15) Investment appreciation 76 42 Investments and cash acquired with purchase of M&G 214 – Exchange translation and other 37 (15) Transfer to retained profit in respect of shares issued in lieu of cash dividends 15 – Portfolio investments net of financing at beginning of year 1,016 1,004
Portfolio investments net of financing at end of year (1,025) 1,016
Represented by: Investments (including short-term deposits) 1,078 2,339 Cash at bank and in hand 150 270 Borrowings (per note 21) (1,965) (1,324) Share capital and share premium (347) (319) Cumulative charge to group profit and loss account reserve in respect of shares issued to qualifying employee share ownership trust 59 50
M&G Taiwan Total Total Acquisitions and Disposals of Subsidiary Undertakings 1999 £m 1999 £m 1999 £m 1998 £m
Net assets acquired (disposed of): Net assets held in long-term business operations 195 18 213 (127)
Goodwill credited to reserves – – – (28) Profit after tax on disposal – – – (211)
Net assets: Assets held to cover linked liabilities 3,981 – 3,981 Long-term business provision, net of reinsurance (77) (322) (399) Technical provisions for linked liabilities, net of reinsurance (3,981) – (3,981) Other net assets 36 18 54
The fair value adjustment of £47m shown above is for the present value of in force long-term business. The goodwill is being amortised from the date of acquisition over a period of 20 years.
We have audited the financial statements on pages 48 to 72.
Respective Responsibilities of Directors and Auditors The directors are responsible for preparing the Annual Report. As described on page 37 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 Listing Rules of the London Stock Exchange, and by our profession’s ethical guidance.
We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act. We also report to you if, in our opinion, the directors’ report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors’ remuneration and transactions with the group is not disclosed.
We review whether the statement on pages 36 to 38 reflects the company’s compliance with the seven provisions of the Combined Code specified for our review by the Stock Exchange, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures.
We read the other information contained in the Annual Report, including the corporate governance statement, and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements.
Results for the year Long-term business including investment products New business of continuing operations including acquisitions: Premium income: General business premiums written: Operating profit before amortisation of goodwill: Long-term business 943 832 764 670 560 General business 61 39 38 69 47 Investment management and products 70 28 20 28 30 Banking (150) (77) (22) (54) (20) Shareholders’ investment return and other income 93 189 141 30 56 Interest payable (131) (105) (75) (61) (68)
Continuing operations including acquisitions 776 860 834 658 583 Discontinued operations – 8 30 196 215
Profit after tax: Operating profit (including post-tax longer term investment returns) 567 654 618 636 543 Profit for the year (including post-tax actual investment returns) 542 880 837 1,407 758
Asia Long-term business including investment products New business: Operating profit before development expenses 27 23 20 20 16 Development expenses (12) (10) (9) (8) (5)
Achieved profits basis capital and reserves 593 378 260 247 213
Based on operating profit after tax before amortisation of goodwill of £762m (£752m) 39.1p 38.7p
Adjustment from post-tax long-term investment returns to post-tax actual investment returns 24.2p 10.3p
Adjustment for profit on business disposals (1999 tax paid on prior year disposals) (0.8)p 8.5p
Reconciliation of Movement in Shareholders’ Capital and Reserves – Achieved Profits Basis
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.
Nominal pre-tax rates of investment return Gilts 6.0% Corporate bonds 7.0% PAC with-profits fund (applying the rates listed above to the investments held by the fund) 8.0%
Management charges on unit linked business have been projected from smoothed unit prices.
3 Discount Rates The shareholders’ interests in the future net of tax cash flows of the UK long-term businesses and Jackson National Life at 31 December 1999 and 1998 have been discounted to present values using a discount rate of 8.5 per cent.
4 Investment Return (i) Profit before tax With the exception of fixed interest investments held by Jackson National Life, investment gains during the period (to the extent that changes in capital values do not directly match changes in liabilities) are included in the profit for the year and shareholders’ funds as they arise.
(ii) Operating profit Except for Jackson National Life, investment returns, including investment gains, in respect of long-term insurance business are recognised in operating results at the expected long-term rate of return. For the purposes of calculating investment return to be recognised in operating results, values of assets at the beginning of the reporting
After capital charge 2,373 2,047 8 Profit from New Business Pre-tax Tax Post-tax
* Jackson National Life net of tax profit: Before capital charge 141
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 recognition of profit is advanced.
The additional profit recognised at an earlier stage under the achieved profits method is retained within the long-term funds and is known as the shareholders’ accrued interest in the long-term business.
The use of the achieved profits basis does not affect either the cash surpluses which are released to shareholders’ funds from the long-term funds, which continue to be determined by the directors following statutory actuarial valuations of the funds, or amounts available for dividend payments to shareholders.
We have reviewed the supplementary information on pages 77 to 81, which has been prepared on the basis set out in note 1 on page 80 and is limited to a restatement of the group profit and the shareholders’ interest in the group’s long-term business on an achieved profits basis.
Respective Responsibilities of Directors and Auditors The company’s directors are responsible for the preparation of the Annual Report including as described on page 37 the financial statements and supplementary information. Our responsibilities are outlined on page 73.
Basis of Opinion Our review included examination, on a test basis, of evidence relevant to the amounts and disclosures in the supplementary information. It also included tests of calculation and of the extraction of data from the underlying records.
Stockbrokers Cazenove & Co offer a postal sharedealing service to Prudential shareholders at competitive commission rates. For details telephone 020 7588 2828 or write to 12 Tokenhouse Yard London EC2R 7AN.
Sir Martin Jacomb – Chairman Jonathan Bloomer – Group Chief Executive Jane Kibbey – Group Human Resources Director Peter Maynard – Group Legal Services Director Jan Shawe – Director of Corporate Relations and Group Marketing egg:| and Prudential Banking 1 Waterhouse Square 142 Holborn Bars London EC1N 2ST
Prudential Corporation Asia Suites 2910-14, Two Pacific Place 88 Queensway www.prudentialasia.com
Media enquiries: Prudential public limited company. Incorporated and registered in England and Wales. Registered number 1397169.