Embargo: 07:00am Wednesday 28 October 2009 PRUDENTIAL PLC THIRD QUARTER 2009 INTERIM MANAGEMENT STATEMENT ROBUST NINE MONTHS GROUP-WIDE SALES OF GBP2,020 MILLION IN THE THIRD QUARTER: . GROUP-WIDE RETAIL SALES OF GBP699 MILLION UP TEN PER CENT . POWERFUL MOMENTUM IN US, RETAIL SALES UP 66 PER CENT . ASIAN SALES UP FOUR PER CENT . OUTSTANDING ASSET MANAGEMENT NET INFLOWS OF GBP2.9 BILLION UP 187 PER CENT STRONG CAPITAL POSITION - IGD SURPLUS ESTIMATED AT GBP2.8 BILLION 9m 09 APE % change Q3 09 APE % change on Q3 08 Retail Insurance Asia+ GBP846m (9)% GBP293m 4% US GBP640m 51% GBP249m 66% UK GBP531m (13)% GBP157m (22)% Total - Retail GBP2,017m 3% GBP699m 10% Total - Wholesale GBP3m (99)% GBP1m (99)% Total Group Insurance GBP2,020m (9)% GBP700m (9)% Net inflows Net inflows M&G GBP11,137m 169% GBP2,512m 47% Asia Asset Management GBP1,891m 99% GBP435m ++ US GBP(61)m ++ GBP(49)m ++ Total GBP12,967m 154% GBP2,898m 187% + Asia 2009 and 2008 comparative APE sales exclude the Taiwan agency business disposed of during Q2 2009. ++ Asia asset management net outflows in Q3 2008 were GBP690m. US asset management net inflows in 9m 2008 were GBP8m (net outflows GBP4m in Q3 2008). Tidjane Thiam, Group Chief Executive said: "I am pleased to report strong Group-wide new business in the third quarter with total retail sales of GBP699 million up 10 per cent over the same period last year. This performance demonstrates the effectiveness of our strategy in what remains a challenging and fragile economic environment. In total, for the first nine months of the year, Group-wide retail sales were GBP2,017 million, three per cent higher than the same period last year. Wholesale sales were held to minimum levels as we continued to focus on products with higher IRRs and shorter payback periods. In Asia, we achieved sales of GBP293 million in the third quarter, up four per cent on the third quarter last year on actual exchange rates. The third quarter of 2009 was the first quarter with positive year-on-year growth since the second quarter of2008. Our new business sales of GBP846 million for the first nine months of the year were down nine per cent on the same period in 2008, compared to a 15 per cent fall at the half year, an improving performance in difficult market conditions. As a Group we remain well-positioned in the region, which we believe offers the best long-term profitable growth prospects. In the US, we continue to be one of the major beneficiaries of the significant changes in the competitive landscape. Jackson has delivered the highest level of retail sales for the first nine months of the year in the company's history, with sales of GBP640 million, a 51 per cent increase from the same period in 2008 on actual exchange rates. The momentum seen in the first half of the year has continued, with GBP249 million of new business written in the third quarter, a 66 per cent increase over the same quarter last year, demonstrating the strength and quality of our business model. In the UK, our disciplined approach to capital consumption led to retail sales of GBP531 million in the first nine months of the year, down 13 per cent on the same period last year. Our total new business sales were down 28 per cent at GBP534 million, reflecting the large bulk annuity transaction executed in the third quarter of 2008. We remain focused on our two key areas of strength; the with-profits and annuity markets. M&G continues to deliver strong investment performance and as a result has continued to outperform, with total net fund inflows of GBP11.1 billion to the end of September, including GBP2.5 billion in the third quarter alone. External funds under management have increased to GBP66.2 billion, up 41 per cent on the start of the year. Our Asian asset management business has been able to generate net inflows of GBP1.9 billion to the end of September, double the 2008 performance, and has seen external funds under management increase by 23 per cent during the year to GBP18.8 billion. Our capital position continues to be strong with an estimated IGD surplus of GBP2.8 billion, covering our minimum capital requirement 2.4 times. We believe that the economic environment will remain uncertain for a while. The Group has clearly demonstrated its strong defensive capabilities and is now well positioned to benefit from the next stage of the economic cycle." 1. Business Unit Review 1.1 Asia insurance operations We are becoming progressively more optimistic about the economic situation in Asia, following the turbulence of the previous 12 months. There are some encouraging signs of recovery. The experience of our life businesses is in line with this more positive assessment of the region. Third quarter new business APE of GBP293 million is up four per cent on the third quarter of 2008 after corresponding decreases of 11 per cent and 14 per cent in the first and second quarters. Year to date APE of GBP846 million is nine per cent lower than the same period last year, compared to a 15 per cent fall at the half year, confirming the inflexion observed in the third quarter. In nine markets out of 12, sales were higher in Q3 than for the same period last year. Year to date, the proportion of higher-margin and strategically important health and protection business remains at 29 per cent. We have continued to focus on the profitability of the business we write, with a high proportion of regular premium business. Furthermore, we have not seen any material adverse changes in persistency experience in the in-force book during the third quarter. Looking at developments of our sales in each major market: CITIC-Prudential Life in China had a very encouraging third quarter with our share of new business at GBP13 million up 44 per cent on the same period in 2008, making this the highest ever quarter in this market both in local currency and at actual exchange rates. Bancassurance remains a key driver of growth with year to date APE up 73 per cent over 2008, contributing 44 per cent of total new business compared to 32 per cent last year. There has also been an up-tick in agency activity during the third quarter following new initiatives to boost recruitment and productivity together with renewed interest in unit-linked products. Year to date new business is GBP34 million, up 21 per cent over the same period last year. Hong Kong continued the upwards trend seen in the second quarter with third quarter APE of GBP55 million 20 per cent above the third quarter of 2008. Sales growth is being led by the agency channel, and there are some signs of recovery in the bank channel, with September seeing the highest volume of new business so far this year. Year to date APE of GBP150 million is six per cent below the same period last year compared to the 16 per cent decrease reported at half year. Regular premium business is up 27 per cent year to date and 49 per cent in the third quarter compared to prior year. After some challenges related to the economic climate earlier this year, the life market in India rebounded strongly in the third quarter. Prudential's share of ICICI-Prudential Life's new business in the third quarter was GBP40 million, principally driven by the resurgence in interest in insurance products and an increase in average case sizes. Compared to 2008 new business is down 15 per cent in the third quarter, a very significant and positive change in trend, compared to the second quarter year on year decline of 46 per cent. Year to date APE of GBP116 million is 33 per cent lower than the same period in 2008 reflecting the severity of the impacts of the economic crisis especially during the beginning of the year. Our business in Indonesia has expanded rapidly during the last two years, principally through the very successful growth of the agency force. We now have over 70,000 agents there and are firmly established as the market leader. New business for the third quarter was GBP43 million, two per cent higher than the third quarter of 2008. Year to date APE of GBP126 million is three per cent lower than the same period in 2008, an improvement on the six per cent fall at the half year. The market conditions in Korea remain challenging, especially for foreign players and our management remain firmly committed to our value over volume strategy. We have therefore refused to match products in the market which we consider to offer unattractive returns to shareholders. This clearly impacted sales with year to date APE of GBP96 million being 47 per cent lower than the same period last year. Encouragingly, persistency rates in this business have now stabilized. Prudential's life businesses in Malaysia continue to perform very well with third quarter new business of GBP32 million up 19 per cent compared to the third quarter of 2008. The key driver of this growth remains the agency force of 12,000 that generates over 90 per cent of the new business. However, there are now positive signs from the bank channel, as although still relatively small, volumes of new business year to date are over three times the same period last year. Year to date APE of GBP84 million is a very positive 27 per cent higher than the previous year. The latest available data from Singapore shows that we have outperformed the market in terms of regular premium new business, with sales of GBP64 million year to date, 14 per cent higher than the same period last year. Third quarter APE was up 32 per cent compared to the same period in 2008. Year to date APE of GBP80 million is eight per cent lower than the same period last year, compared to the 20 per cent reduction reported at the half year. The proportion of linked business in Singapore saw a boost during the third quarter averaging 29 per cent of APE, compared to an average 20 per cent for the first half this year. Post the successful disposal of the agency distribution channel earlier this year in Taiwan, our business has seen the rapid transformation of the partnership channel into a material generator of new business. Year to date APE of GBP77 million is 166 per cent higher than the same period last year on a like for like basis and the third quarter was 30 per cent higher than the second quarter. We are also beginning to see a very positive shift in product mix with increased sales of longer-term par products in bancassurance, supported by continued momentum in direct and tele-marketing sales focusing on higher margin medical products. Looking at the other smaller operations on actual exchange rates Vietnam had a record quarter and is 28 per cent up on prior year to date, both Thailand and the Philippines performed satisfactorily given the market conditions and Japan continues to generate small, but consistent volumes of protection business through the broker channel. 1.2 US operations Jackson has continued to benefit significantly from the flight to quality in the US annuity market, as customers are increasingly seeking product providers that offer consistency, stability and financial strength. Our strategy has been to target increasing volumes in variable annuities whilst managing down fixed annuity sales in line with the goal of capital preservation. There were no institutional sales during the first three quarters of 2009, as Jackson focused on optimising the balance between new business profits and capital consumption. Jackson delivered APE retail sales in the first three quarters of 2009 of GBP640 million, representing a 51 per cent increase over the same period in 2008 at actual exchange rates, a 20 per cent increase at constant exchange rates and the highest level of retail sales during the first three quarters in the company's history. The strong momentum seen in the first half of the year has continued - third quarter retail APE sales of GBP249 million was the highest quarter in the company's history, 20 per cent higher than the second quarter of 2009 and 66 per cent higher than the third quarter of 2008. We have maintained our pricing discipline and continued to write business at very attractive IRRs and payback periods. Variable annuity APE sales of GBP432 million during the first three quarters of 2009 were 66 per cent higher than the same period in 2008, reflecting the equity market rally that began in the second quarter of 2009, the relative consistency of Jackson's product offering and continued disruptions among some of our major competitors. Sales in the third quarter of GBP180 million were the highest in the company's history, 22 per cent higher than the second quarter of 2009 and 125 per cent higher than the third quarter of 2008. Jackson ranked fourth nationally in new variable annuity sales in the second quarter of 2009, with a market share of 7.2 per cent, up from 12th with a market share of 4.3 per cent in the second quarter of 2008. In the first half of 2009, the latest period for which statistics are available, Jackson ranked second in variable annuity net flows and experienced the lowest level of outflows, as a percentage of variable annuity inflows, in the industry. Fixed index annuity (FIA) APE sales of GBP106 million in the first three quarters of 2009 were up 231 per cent over the same period of 2008. Sales in the third quarter of GBP48 million were 45 per cent higher than the second quarter of 2009 and 300 per cent higher than the third quarter of 2008. Industry FIA sales have benefited from an increase in customer demand for products which offer guaranteed rates of return with additional upside potential linked to stock market index performance. Additionally, Jackson's FIA sales have benefited from the company's financial strength ratings and further disruptions among some of the top FIA sellers. Jackson ranked sixth in sales of FIA during the second quarter of 2009, with a market share of 6.0 per cent, up from 11th with a market share of 2.8 per cent in the second quarter of 2008. Jackson's strategy of containing fixed annuity volumes resulted in APE sales of GBP84 million, 26 per cent lower than the same period in 2008. Sales in the third quarter of GBP14 million were 36 per cent lower than the second quarter of 2009 and 73 per cent lower than the third quarter of 2008. Total retail annuity net flows of GBP3.3 billion for the first nine months represent a 96 per cent increase on the same period in 2008 at AER, reflecting the impacts of record sales and continued low levels of surrender activity. Curian Capital, a specialised asset management company that provides innovative fee-based separately managed accounts, had total assets under management of GBP2.0 billion at the end of September 2009 compared with GBP1.8 billion at the end of 2008. Curian generated deposits of GBP 507 million in the first three quarters of 2009, up five per cent on the same period of 2008. 1.3 UK insurance operations Prudential UK has continued to focus on optimising the balance between writing profitable new business and capital conservation. We have maintained our strict pricing discipline and as a result have been able to minimise new business strain. Consequently, total APE sales of GBP534 million for the first nine months were 28 per cent down on the same period last year, as the 2008 figure included a large bulk annuity transaction in the third quarter for GBP106 million. Retail sales for the first nine months of 2009 of APE GBP531 million were down 13 per cent. This disciplined approach led to lower sales of individual annuities. The stock market falls seen in 2008 and early 2009 have also impacted sales of some other product lines, such as offshore bonds. These reductions in sales were partially offset by the continued strength of with-profits sales, in particular PruFund, as consumers remain attracted by a more cautious investment approach and keen to protect themselves from market downturns. As we said at the half year results, in the first six months of the year margins on individual annuities were exceptionally high due to the abnormal spreads available on high quality credit assets, which have now reduced materially. Sales of individual annuities were down 21 per cent on the same period last year to APE GBP164 million, impacted by a reduction of 13 per cent in average case sizes. The reduction was a direct consequence of depressed asset values and the decision by some customers to defer retirement. In addition, we actively managed the flow of external annuity business consistent with our value over volume strategy. The pipeline from maturing individual and corporate pension policies remains strong. Sales of with-profits bonds of APE GBP101 million were up 36 per cent on the same period in 2008. The strong year-to date sales growth reflects the attractiveness of Prudential's with-profits offering, including in particular PruFund, in which over GBP1 billion has been invested across our retail savings product range in the last 12 months. In the third quarter, we extended the PruFund range of investments with the launch of the PruFund Cautious series to sit alongside the PruFund Growth series within our Flexible Investment Plan, an on-shore bond wrapper. Individual pensions sales of APE GBP34 million were 36 per cent higher than in the first nine months of 2008. Sales of the Flexible Retirement Plan, our factory-gate priced individual pension product, have continued to grow with sales in 2009 of APE GBP15 million up 117 per cent, helped by the addition of PruFund as an investment option in November 2008. Corporate pension sales of GBP156 million were 18 per cent lower than for the first nine months of 2008. Growth into existing schemes has remained healthy. Underlying sales, excluding one-off items in 2008 of GBP37 million, were two per cent higher. Prudential has secured more than 20 new corporate schemes in 2009 and is provider to over 20 per cent of FTSE 350 companies. The PruHealth joint venture with Discovery now has 219,000 lives insured, an increase of 16 per cent over the same period in 2008, and gross written premiums were GBP76 million, up 12 per cent. PruProtect has experienced encouraging sales growth for the first nine months following the re-launch of its product range in November 2008. Equity Release volumes have fallen 58 per cent as we maintained our strict pricing discipline. 1.4 M&G M&G is an investment-led business with a core strategy of delivering superior performance. This relentless focus on investment performance, combined with a well-diversified business mix and well-established distribution capabilities, has helped M&G to have an extremely strong nine months, despite the challenge posed to the asset management industry by the market turmoil at the start of the year. Over the past three quarters, M&G has attracted gross fund inflows of GBP18.4 billion, an increase of 52 per cent over the same period in 2008. Net inflows reached a record GBP11.1 billion, a year-on-year increase of 169 per cent. In the third quarter, net inflows were GBP2.5 billion, 47 per cent higher than the same period last year. This reflects a particularly strong contribution from the Retail Business where sales remained robust. M&G's external funds under management at the end of the third quarter were GBP66.2 billion, up 41 per cent on the 2008 year-end and up 32 per cent on the third quarter of 2008. The increase is the combined result of strong inflows and the recent recovery in equity markets. It continues to be an outstandingly successful year for M&G's Retail Business, which for the 2009 year to the end of August had a 27 per cent market share of net UK retail flows as defined by the Investment Management Association. Gross sales year-to-date were GBP9.8 billion and GBP3.3 billion for the quarter. Net inflows rose to a record level of GBP5.7 billion against GBP1.4 billion for the same period in 2008, including GBP1.7 billion of net sales for the three months to the end of September. Our market-leading bond funds continued to attract the lion's share of inflows, accounting for 77 per cent of net sales year to date. Many of our equity funds have also seen strong net inflows year-to-date, including M&G Recovery and M&G Global Basics. The M&G Recovery Fund is now the largest and best-selling fund in the UK All Companies sector. Performance of M&G's funds has remained excellent. Over the three years to the end of September, 28 per cent of our retail funds have delivered top quartile performance, while 72 per cent have beaten their sector averages. In the institutional market, M&G recorded gross sales of GBP8.7 billion for the three quarters, up 53 per cent on 2008. Net flows were GBP5.4 billion for the period, an increase of 98 per cent on the same period last year, and GBP0.9 billion in the third quarter of 2009. Year-to- date figures include the award of a single GBP4 billion fixed income mandate and net inflows of GBP0.7 billion into our Leveraged Loans Funds, but exclude the GBP1.3 billion raised in the first two rounds of financing for the UK Companies Financing Fund. These assets will start to be recorded as the Fund starts advancing money to clients. This has been a unique year for net sales and for growth in external funds under management - all achieved against the backdrop of continued uncertainty in markets. 1.5 Asia Asset Management During the first half of 2009 market conditions were particularly challenging however during the third quarter there has been a strong recovery in market valuations, as reflected by the 17 per cent increase in the MSCI AC Asia index (in actual exchange rate terms). This supported a strong recovery in year to date net flows from third parties of GBP1.9 billion, double the same period last year. Net flows in the third quarter of 2009 of GBP435 million (compared to a net outflow of GBP690 million in the same period in 2008) were predominantly due to inflows in higher-margin equity and bond funds. Third quarter flows were aided by several successful fund launches including China where the You Sheng Selected Equity Fund raised GBP212 million and Dubai where the United Arab Emirates and Qatar fixed maturity plan series attracted net new funds of GBP330 million. Investment performance has improved with 66 per cent of funds either outperforming their benchmarks or ranking in the top-two quartiles relative to peers in the year to August. Of particular note, in China, CITIC-Pru's Blue-chip Equity Fund was awarded the top-class fund recognition for 1-year performance by Lipper. Asia's funds under management (FUM) at the end of the third quarter was GBP42.2 billion, up 22 per cent year to date (excluding the FUM related to the sold Taiwan agency business) and 18 per cent higher than at the start of the third quarter. The overall FUM level was comprised of GBP18.8 billion from external clients, GBP18.0 billion from Prudential's Asia life funds and GBP5.4 billion from other parts of the Group. 2. Financial Management The Group remains focussed on the proactive management of its balance sheet and risk profile. We continue to impose stringent stress testing on our key capital measures, ensuring we could withstand, both in the short and medium term, significant market shocks. 2.1 Capital Management Our capital position remains strong. We have continued to place emphasis on maintaining the Group's financial strength through optimising the balance between writing profitable new business, conserving capital and generating cash. We estimate that our Insurance Groups Directive (IGD) capital surplus was GBP2.8 billion at 30 September 2009, covering our capital requirements 2.4 times. This compares to GBP1.5 billion at the end of 2008, GBP1.6 billion at the end of Q1 2009, GBP2.5 billion at 30 June 2009 and GBP3.0 billion in July after allowing for the July hybrid debt issuance. The movement in our IGD position since we disclosed it in our interim results primarily reflects underlying earnings offset by payment of the interim dividend, investment in new business, credit related impacts in the US and various other items. This robust capital position, together with the Group's strong existing earnings capacity, our established hedging programmes and our additional areas of financial flexibility, mean that we remain well positioned to withstand significant deteriorations in market conditions should they occur. As at 30 September the sensitivity of our IGD capital position to various events was as follows: . An instantaneous 20 per cent fall in equity markets from 30 September 2009 levels would not have a significant impact on IGD surplus . A 40 per cent fall in equity markets (comprising an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four week period) would reduce the IGD surplus by GBP300 million . A 150bps reduction (subject to a floor of zero) in interest rates would reduce the IGD surplus by GBP250 million . Credit defaults of ten times the expected level would have an impact of GBP750 million. As disclosed in our interim results, during the extreme equity market conditions experienced in the first quarter of 2009 the Group entered into additional one-off hedging contracts to protect the Group's IGD capital position against a tail-event of an instantaneous 40 per cent drop in equity markets with no recovery. The hedge has not been renewed and the total costs related to that hedge are in line with the reported estimate of GBP252 million. In addition to our strong capital position, the total credit reserve for the UK shareholder annuity funds also protects our capital position in excess of the IGD surplus. This credit reserve has increased to GBP1.5 billion following the decrease in valuation yields over the quarter and now represents 40 per cent of the portfolio spread over swaps, compared to 31 per cent at 30 June 2009, and 25 per cent as at 31 December 2008. 2.2 Credit The Group's total debt portfolio on an IFRS basis is estimated at GBP92 billion at 30 September 2009 excluding holdings attributable to external unit holders of consolidated unit trusts. Of this total, GBP63 billion is in the UK, including GBP40 billion within the UK with- profits fund. Shareholders have limited risk exposure to the with- profits fund as the solvency is protected by the inherited estate. Outside the with-profits fund there is GBP4 billion in unit-linked funds where the shareholder risk is limited, with the remaining GBP19 billion backing the shareholder annuity business and other non-linked business (of which 78 per cent is rated AAA to A, 18 per cent BBB and four per cent non-investment grade). Asia's debt portfolio totals GBP4.9 billion of which GBP3.0 billion is invested in unit-linked and with-profits funds with minimal shareholder risk and GBP1.9 billion held by shareholder backed non-linked business. No defaults were reported in the third quarter of 2009. Therefore, the most significant area of exposure to credit risk for the shareholder remains Jackson in the US. Jackson's fixed income portfolio at 30 September is estimated at GBP22.9 billion. We continue to see the benefits of the normalisation of the US credit markets. Jackson's net unrealised loss has reduced from GBP1.8 billion at half year 2009 to GBP 0.2 billion at the end of the third quarter. Gross unrealised losses on securities priced below 80 per cent of book value were GBP0.8 billion at the end of the third quarter compared to GBP1.5 billion at half year 2009. As stated in our half year results announcement, it is our intention to hold these securities for the longer term, an approach which in economic terms limits the impact of short term market volatility. Jackson did not experience any losses on defaults during the third quarter of 2009. Write downs of impaired securities in the third quarter of the year were GBP156 million, of which GBP136 million were on Residential Mortgage Backed Securities (RMBS). No write downs were reported on corporate bonds. This compares to total write downs of GBP32 4 million reported for the first six months of 2009. The Group remains comfortable with its liquidity position at both holding and subsidiary company level. The holding company has significant internal sources of liquidity which are sufficient to meet all of our requirements for the foreseeable future without having to utilise external funding. ENDS Enquiries: Media Investors/Analysts Edward Brewster +44 (0)20 7548 Matt Lilley +44 (0)20 7548 3719 2007 Robin Tozer +44 (0)20 7548 Jessica Stalley +44 (0)20 7548 2776 3511 Sunita Patel +44 (0)20 7548 2466 Notes to Editor: 1. Annual premium equivalent (APE) sales comprise regular premium sales plus one-tenth of single premium insurance sales and are subject to rounding. 2. Present Value of New Business Premiums (PVNBP) are calculated as equalling single premiums plus the present value of expected new business premiums of regular premium business, allowing for lapses and other assumptions made in determining the EEV new business contribution. 3. UK Retail sales include all products except bulk annuities and credit life sales. 4. There will be a conference call today for wire services at 7.30am (GMT) hosted by Tidjane Thiam, Group Chief Executive. Dial in telephone number: +44 (0)20 8609 0793. Passcode:797476# 5. There will be a conference call today for investors and analysts at 9:30am (GMT) hosted by Tidjane Thiam, Group Chief Executive. From the UK please call +44 (0)20 8609 0793. Passcode 851650#. A recording of this call will be available for replay for one week by dialling: +44 (0)20 8609 0289 from the UK or +1 866 676 5865 from the US. The conference reference number is 273855#. 6. High resolution photographs are available to the media free of charge at www.newscast.co.uk (+44 (0) 207 608 1000). 7. Financial Calendar 2010: Fourth Quarter 2009 New Business Release 24 February 2010 2009 Full Year Results 25 March 2010 AGM 19 May 2010 2010 Half Year Results 10 August 2010 8. Sales for overseas operations have been reported using average exchange rates for the period as shown in the attached schedules. Reference to prior year figures in the commentary is on an actual exchange rate basis unless stated. An alternative method of presentation is on a constant exchange rate basis - the two bases are compared in the table below. Click on, or paste the following links into your web browser, to view the full text of this press release. http://www.rns-pdf.londonstockexchange.com/rns/4762B_1-2009-10-27.pdf http://www.rns-pdf.londonstockexchange.com/rns/4762B_2-2009-10-27.pdf This information is provided by RNS The company news service from the London Stock Exchange END
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