During 2003, I visited a number of our operations around the world and continue to be struck by the enthusiasm and energy of our staff. I would like to thank them for their professionalism and commitment.
Mark was previously with General Electric where he was President and Chief Executive Officer for GE Japan. He brings a wealth of experience to the role, as well as considerable knowledge of the region having worked in Asia for over 10 years, and I know that he will make a valuable contribution to the future prosperity of the Group.
PCA is a leader in the introduction of unit-linked life insurance products and this remains a significant source of competitive advantage: 45 per cent of PCA’s 2003 NBAP was from unit-linked life products, up from 43 per cent in 2002.
In September, PCA Life Japan put into place the next stage of its plans in Japan by focusing distribution on its proprietary financial adviser and bank distribution channels. It also launched its new Universal Life product in January 2004.
US$m *Excludes FAS 115, FAS 133, reverse repurchase obligations, and securities lending deposits
In 2003, JNL improved its market position in variable annuity sales, ranking 15th for the full-year 2003, up from 17th for the full-year 2002 (source: The VARDS Report). In terms of variable annuity assets, JNL saw an increase of 55 per cent in 2003 to end the year ranked 21st, up from 24th at the end of 2002. In addition, JNL improved its market position in total individual fixed annuity sales for the full-year 2003 to fifth from sixth in 2002 (source: LIMRA International).
Gross fund inflows into M&G’s retail products were £1.2 billion in 2003, a six per cent fall on 2002. Net fund inflows for 2003 were £184 million. M&G continued to benefit from its leading position as a fixed income provider and its revised equity investment process delivered good performance. M&G received a number of awards during the year and was one of only three investment groups to receive a Gold Standard Award from Incisive Media plc, a new benchmark designed to give consumers greater confidence when buying financial services. M&G maintained its focused expansion into Germany, Austria and Italy in 2003 with ¤101 million of assets at the end of 2003.
Insurance and investment funds under management at 31 December 2003 totalled £168 billion, compared with £155 billion at the end of 2002 at reported exchange rates (£150 billion at CER). This increase was due to the combination of rises in the market value of investments and the impact of net insurance and investment sales achieved during the year offset by foreign exchange losses on translation of non-sterling assets under management. Excluding Prudential Assurance Company’s (PAC) with-profits fund, other assets under management backed by shareholderprovided capital grew by eight per cent during 2003 and have grown at an 11 per cent compound rate since 1998.
In 2003, Egg incurred a £10 million charge for restructuring, which principally relates to the reorganisation of the IT development and support function and a headcount reduction in the fourth quarter.
ACHIEVED PROFITS – RESULT BEFORE TAX The result before tax and minority interests was a profit of £838 million compared with a loss of £483 million in 2002. The significant increase in profit principally reflects the movement in short-term fluctuations in investment returns.
FUND FOR FUTURE APPROPRIATIONS During 2003 the fund for future appropriations, which represents the excess of assets over policyholder liabilities for the Group’s with-profits funds on a statutory basis, grew from £7.7 billion in 2002 to £12.6 billion in 2003. This reflects an increase in the cumulative retained earnings arising on with-profits business that have yet to be allocated to policyholders or shareholders. The change in 2003 predominantly reflects the positive investment return earned by the PAC with-profits fund as a result of investment gains in the UK equity market.
The investment return on the Prudential main with-profits fund was 16.5 per cent in the year to 31 December 2003 compared with the rise in the FTSE 100 (Total Return) Index of 17.9 per cent over the same period. Over the last 10 years the with-profits fund has consistently generated positive fund returns with three, five and 10-year compound returns of 1.1 per cent per annum, 4.9 per cent per annum and 8.6 per cent per annum respectively. These returns demonstrate the benefits of the fund’s strategic asset allocation and long-term outperformance. During 2003 there has been no change to the strategic asset allocation of the fund. There has been no significant reduction in the level of the fund’s equity holdings during the year or subsequently.
DEFINED BENEFIT PENSION SCHEMES The Group operates three defined benefit schemes, all of them in the UK, of which the principal scheme is the Prudential Staff Pension Scheme (PSPS). The level of surplus or deficit of assets over liabilities for defined benefit schemes is measured in three ways, namely the actuarial valuation, SSAP 24, and FRS 17 bases.
The achieved profits basis profits emerging in each subsequent accounting period will comprise the unwinding of the discount (which arises from discounting future cash flows for one fewer period) and the profit or loss arising from any difference between the actual cash flow and the cash flow which had been assumed in the accounting period under review, together with the effect of any changes of
ILLUSTRATION MODIFIED STATUTORY BASIS AND ACHIEVED PROFITS BASIS PROFIT PROFILES FOR A TYPICAL WITH-PROFITS PRODUCT
In Poland we have established the Przezornosc Charitable Foundation, in recognition of former Prudential policyholders and their heirs, who lost contact with the Company as a consequence of World War II and have been unable to claim on their life policies. The charities selected to receive funding via the Foundation cover welfare, cultural, historical and educational issues. The Foundation, established in 2003, will run for five years.
PRESERVING NATURAL HABITATS The grounds surrounding Jackson National Life’s headquarters in Lansing, Michigan, have been designed to simulate the natural environment. When the building was constructed in 2000, all wetlands around the building were protected and still remain intact. These areas provide habitat for geese, cranes, deer, and other types of wildlife. Although the original site lacked trees and foliage, Jackson National Life has planted approximately 400 new trees around the site to enhance the environment.
For the purposes of compliance with the revised Combined Code in the UK and the Sarbanes-Oxley Act in the US, the Board has designated Rob Rowley as the Audit Committee financial expert. All the members of the Audit Committee are independent of management.
The Company is one of the UK’s largest institutional investors and the Board does not believe that this situation compromises the independence of those non-executive directors who are also on the boards of companies in which the Company has a shareholding. The Board also believes that such shareholdings should not preclude the Company from having the most appropriate and highest calibre non-executive directors.
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 2003, the Company indicated the balance of proxies lodged for and against each resolution after it had been dealt with on a show of hands, and the total percentage of share capital voted on all resolutions. This practice provides shareholders present with sufficient information regarding the level of support and opposition to each resolution. The Company discloses the number of the proxy votes cast on each resolution on its website 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, and the
The details of the 2003 awards described above and details of all outstanding RSP awards are set out in the section on the Restricted Share Plan on pages 44 to 46.
Regional and sector focus In order to grow the value of Prudential for shareholders, the Board needs to focus on growing each area of business. Each executive director that runs a business area participates in two long-term incentive plans. To reflect Group responsibilities awards are made under the RSP described above, and awards are also made under the business specific long-term incentive plans described below, reflecting those responsibilities. In all cases the performance period for 2003 awards runs from the beginning of 2003 to the end of 2005.
Clark Manning To reflect his role as Chief Executive of Jackson National Life, Clark Manning participates in a cash-based long-term plan that rewards the growth in appraisal value of Jackson National Life over the three-year performance period after which any award payout is made. The payout equals the initial award value multiplied by a factor equalling the Prudential plc share price at the end of the performance period divided by the price at the beginning. In order for any award to be paid under the 2003 plan the appraisal value growth of Jackson National Life must be greater than eight per cent per annum compound over the performance period. At this level of performance the initial award value is US$864,240. If the on-target performance level is achieved, for which a growth rate of 11.5 per cent per annum compound is required, the initial award value is US$1,728,480. The initial award value increases to a maximum payout of 150 per cent of the on-target level if a growth rate of 17.5 per cent per annum compound or more is achieved. For payouts for performance between these points a sliding scale applies.
3. The commencement and expiry dates of Bridget Macaskill’s and Kathleen O’Donovan’s initial terms are subject to resolutions for their election being passed at the Annual General Meeting in May 2004.
ended on 31 December 2003. As Prudential’s position was lower than 60th percentile, the 2001 awards lapsed and rights will not be granted over any of the shares conditionally awarded to executive directors.
Notes 1. The 2000 conditional RSP award lapsed and no rights were granted after the performance period ending on 31 December 2002.
2. The 2001 conditional RSP award lapsed and no rights were granted after the performance period ending on 31 December 2003.
Conditional Conditional Date of original price at share awards Conditionally Scrip Shares share awards end of Shares date of date of outstanding awarded dividends released outstanding at restricted released Date of award vesting at 1 Jan 2003 in 2003 accumulated in 2003 31 Dec 2003 period in 2003 release (pence) (pence)
Notes 1. Bart Becht’s shareholding at 1 January 2003 includes 201 shares received as a result of a scrip dividend that were not reported in the 2002 Annual Report.
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 31 on page 90. The Group’s business and likely future developments are reviewed in the Chairman’s Statement on pages 2 and 3, the Group Chief Executive’s Review on pages 4 and 5, the Business Review on pages 6 to 10 and the Financial Review on pages 11 to 26, which contain details of the development of the business of the Group during the financial year and of the Group’s position at the end of it. No important events affecting the Group have occurred since the end of the financial year.
Balance on the general business technical account (analysed on page 56) 0 0
Compliance with the revised SORP is required for 2004 reporting but early adoption is encouraged. The Company has chosen to adopt early the revised SORP. Previously the consolidated financial statements were prepared in accordance with the 1998 version of the SORP. The only items of significance to the Group’s results for the changed provisions of the revised SORP relate to the accounting for certain types of reinsurance contracts. The results for 2002 have been restated for the altered accounting policy in this respect. Further details are shown in note 4.
3. SIGNIFICANT ACCOUNTING POLICIES CONTINUED Premiums and claims continued 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.
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 and is charged directly to the profit and loss account reserve within shareholders’ funds.
UK and Europe Operations: Long-term business operations* 612 612 554 554 M&G 336 336 382 382 Egg (note 11)† 348 348 369 369
(ii) The valuation basis of hedging derivative instruments – reversal of FAS 133 effects Under FAS 133, all derivative instruments are recognised in the balance sheet at their fair values and changes in such fair values are recognised immediately in earnings unless specific hedging criteria are met. Jackson National Life uses derivatives (primarily interest rate swaps) to hedge certain risks in conjunction with its asset/liability management programme. However, Jackson National Life has elected not to incur the costs of restructuring its derivative contracts, segregating investment portfolios and adding the systems and personnel required to qualify for much stricter hedge accounting treatment.
Financed by with-profits funds: With-profits business 41 42 Non-participating business† 9 10
Shareholder financed business: Non-participating business 54 56 Linked business 18 11
Total 100 100 ^The Scottish Amicable Insurance Fund is closed to new business. The assets and liabilities of the fund are wholly attributable to the policyholders of the fund. †Annuity business written by Prudential Annuities Limited, a subsidiary of the with-profits fund of the Prudential Assurance Company Limited (PAC), and by a separate fund of the PAC with-profits fund, which comprises non-participating and linked business purchased from the Scottish Amicable Life Assurance Society.
Interest on other borrowings in the non-technical account includes £2m (£9m) in respect of non-recourse borrowings of investment funds managed by PPM America, £26m (£11m) in respect of Egg debenture loans and £18m (£40m) in respect of commercial paper and other borrowings that support a short-term fixed income securities reinvestment programme. Further details on borrowings are included in note 32.
Number of 2003 2003 Issued shares of 5 pence each fully paid shares £m £m
The review required companies to identify relevant investors and to contact them with an offer to review their individual case. The Group met the deadline set by the FSA to issue offers to all cases by 31 December 2002. As a result of the review, the Group held a provision of £2m at 31 December 2003.
Guaranteed Annuities Prudential Assurance used to sell guaranteed annuity products in the UK and held a provision of £35m at 31 December 2003 within the main with-profits fund to honour guarantees on these products. The Group’s main exposure to guaranteed annuities in the UK is through the Scottish Amicable Insurance Fund (SAIF) and a provision of £649m was held in SAIF at 31 December 2003 to honour the guarantees. As SAIF is a separate sub-fund of the Prudential Assurance long-term business fund, this provision has no impact on shareholders.
Total borrowings (per note 32) 4,445 4,373 35. DISPOSALS In 2003 the Company sold its German life business and its Dublin based management services company for a total consideration of £98m. After allowing for the write off of deferred acquisition costs of £63m and taking account of net assets at the date of sale of £14m and the costs of sale and other related items, the profit on sale was not material. As part of the sale arrangements in respect of the German life business, the insurance liabilities of the business were reinsured. After settlement of this reinsurance payment and other costs, there was a net cash inflow of £27m to shareholders' funds.
OPINION In our opinion: • the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2003 and of the profit of the Group for the year then ended; and
Profit after tax and minority interests: Operating profit (including post-tax long-term investment returns) 257 333 466 511 507 Profit for the year (including post-tax actual investment returns) 208 468 395 577 472
Prior year figures have been restated where relevant to be consistent with 2003 accounting policies and presentation.
Changes in mortality experienced by Prudential’s UK pension annuity policyholders could significantly affect Prudential’s results of operations.
Prudential Asia New business 8 291 307 Business in-force 9 87 209
Operating profit (based on long-term investment returns) before amortisation of goodwill and exceptional items 794 1,133
Total recognised gains (losses) relating to the financial year 137 (475) New share capital subscribed 30 40 Dividends (320) (519)
Actual less averaged realised gains and losses (including impairments) for fixed income securities(iv) 98 (156) Actual less long-term return on equity based investments 0 (128) Investment depreciation on preference shares (2) (11)
112 PRUDENTIAL PLC ANNUAL REPORT 2003 13. SHAREHOLDERS’ FUNDS – SEGMENTAL ANALYSIS
Holding company net borrowings (1,995) (2,071) Core structural borrowings – Jackson National Life (140) (155)
Operations Life Asia operations operations total £m £m £m £m £m £m
Development costs included above (net of tax) borne centrally 4 4 (4) Intragroup dividends (including statutory transfer) (189) (52) (40) (281) 281 External dividends (320) (320)