Prudential’s businesses in Asia delivered a strong set of results in the first half of 2013. This performance is evidence of the disciplined execution of our strategy to drive both profitable growth and cash, building on our distribution and product suite in the region, which allow us to cater successfully and profitably to the needs of a growing and increasingly wealthy Asian middle class.
As a result, Asia’s life new business profit increased 20 per cent to £659 million (2012: £547 million), outpacing APE sales growth of 12 per cent in part due to the positive impact of higher interest rates, primarily in Hong Kong, and a more favourable geographic mix. The second quarter saw record sales for seven local business units, with sales at the half year for Hong Kong up 21 per cent, China up 42 per cent, Indonesia up 17 per cent, Singapore up 21 per cent, Thailand up 32 per cent, the Philippines up 38 per cent, Korea up 38 per cent and Vietnam up 28 per cent. Total sales of health and protection products comprised 30 per cent of the mix of business. This contributed to a regional internal rate of return in excess of 20 per cent and a payback period of four years.
Life IFRS operating profit1 was £474 million, up 18 per cent, driven by the increasing scale of the in-force book.
EEV operating profit1 grew by 24 per cent to £1,077 million, supported by three factors: (i) our strong new business growth; (ii) the increasing scale and intrinsic profitability of the in-force book; and (iii) the positive impact of higher interest rates.
Highlights of our performance in Asia during the first half of 2013 include the continued success of our agency distribution channel, where APE sales growth of 15 per cent was driven by strong increases in agency activity. We remain focused on both building the scale of our agency force and improving the productivity of our agents through initiatives aimed at enhancing quality and performance. During the first half, we have seen particularly good growth in active agent numbers in Indonesia, Hong Kong and Singapore. We have also been very successful in growing our active agency force in the Philippines, which combined with ongoing progress in partnership distribution, was a major factor in driving strong APE sales growth of 38 per cent in that market.
We have continued to drive agent productivity gains in Hong Kong and Singapore. In Hong Kong, this partly results from the success of sales of participating products and the launch of a new medical product, PRUmyhealth lifelong crisis protector. Singapore benefited from the success of new product campaigns including a revised health and protection product. Vietnam and China have also benefited from a large improvement in productivity, reflecting enhancements in agency training and management. In Malaysia, we remain focused on deepening our presence in the Bumi sector and building the share of health and protection product sales through our agency force. Excluding Taiwan, where we chose not to provide low-margin guaranteed products, bancassurance APE sales growth was 21 per cent, with broad-based growth across our major partners, especially in Singapore and China, which has continued its excellent start to the year. Sales performance in Korea was boosted by increased volumes in the first quarter ahead of a one-off regulatory change in February that restricted some of the policyholder tax benefits associated with life insurance policies.
We continue to ‘invest to grow’ in markets where we have not been as strong in the past. In Thailand, the integration of Thanachart Life is going well. Effective preparation between the signing of the agreement in quarter four 2012 and its completion on 3 May 2013 enabled us to commence sales through Thanachart Bank immediately and performance is currently running ahead of our plans.
In Cambodia, where we started operating in January 2013, our new life business is progressing well, thanks to our partnership with the largest bank in the country, Acleda. We also opened a representative office in Myanmar during the first half of 2013, starting to plant the seeds of what we believe will be a significant presence in that promising market.
In parallel to these growth initiatives, we continue to manage the business with discipline, focusing on exceeding our target returns and payback periods. This strategy led us to closing our traditional life business in Japan to new business on 15 February 2010 and to put the in-force book in run-off. We have now taken a further step on 16 July 2013 when we announced our intention to sell our closed-book life insurance business in Japan for US$85 million, subject to regulatory approvals. We remain committed to our well-performing asset management business in this country, Eastspring Investments Japan.
Eastspring Investments saw net third-party inflows2 of £2.0 billion, 371 per cent higher than last year, mainly due to the appeal of Taiwan’s US high-yield bond funds, Japan’s Asia Oceania equity fund, bond funds in India and new bond funds in China. Given these high net flows and positive market movements, funds under management at 30 June 2013 were £62 billion, 15 per cent higher than at the same time last year. IFRS operating profit3 grew 19 per cent to £38 million (2012: £32 million).
Eastspring Investments was awarded the ‘Best Asset Management Company of the Year – South-east Asia’ at The Asset Triple A Investor and Fund Management Awards 2013. We are also making good progress with our strategy to broaden our distribution reach into the US and Europe.
We have a long-standing presence in Asia and, in line with our values, we wish to make a positive contribution to the countries and communities where we operate. Therefore, in April 2013, the Prudence Foundation, our Asian CSR platform, announced a series of multi-country programmes in partnership with Save the Children and Plan International with two main objectives: to enable communities to better cope with disasters and to help children receive a better start to their education through the First Read initiative. More than 170,000 people in Cambodia, Indonesia, the Philippines, Thailand and Vietnam are expected to benefit from these programmes over a three-year period.
I am pleased to report that the long-running project to domesticate our Hong Kong insurance business is approaching the closing stages. This will better align the legal entity structure with our management structure. We continue to work very closely with our regulators in both the UK and Hong Kong in order to achieve a satisfactory conclusion for all affected stakeholders, with whom we will be engaging in due course. We will also be reorganising our Asia businesses under a single new entity, the Board of which I will chair. Ultimately this will bring all our Asian geographies under one umbrella company and give us a simpler, more effective corporate structure.
In the first half of 2013, there was a considerable amount of activity in the variable annuity (VA) market as insurers continued to make changes to their product offerings to ensure that they are fit for the current economic environment, characterised by historically low long-term interest rates. Several insurers with challenging legacy books have launched buyout offers to their existing policyholders. Following a prolonged period of successive increases in VA pricing and the adoption of less and less attractive product features for customers across the market, there are early signs of movement in the opposite direction by some VA providers who are starting to make their products more attractive to customers. This should lead, after a long period of increasing concentration among the three largest providers, to a period where players lower in the league table are likely to gain market share.
Towards the end of the first half, comments from the Federal Reserve Chairman in relation to a potential tapering of quantitative easing resulted in significant movements in US bond markets. This led to a strengthening of the US dollar and an increase in the 10-year treasury rate to end the period at 2.5 per cent. While interest rates remain well below historic averages, this recent move upwards in long-term yields, if sustained, would be beneficial to the financial performance of the VA industry.
In the first half of 2013, beyond these market considerations, Jackson achieved APE retail sales of £758 million, an 8 per cent increase compared to the first half of 2012. These sales levels were achieved while maintaining pricing discipline and we continued to write new business at aggregate internal rates of return in excess of 20 per cent and payback period of two years. Including institutional sales, total APE sales were £797 million, an 11 per cent increase over the same period in 2012.
In that context, total variable annuity APE sales increased to £665 million (2012: £611 million). This growth was exclusively driven by the rapid progress of Elite Access, our variable annuity without guarantees, which contributed £127 million of APE sales in the period (2012: £14 million). Excluding Elite Access, VA sales actually declined 10 per cent to £538 million, reflecting the actions we took in the final quarter of 2012 to control sales of VAs with living benefit guarantees to match the Group’s risk appetite. Of our total VA sales in the first half of 2013, 29 per cent do not feature living benefit guarantees (2012: 14 per cent) and this change in product mix is in line with the strategy we outlined for the US business at our investor conference held in New York in November 2012. Net inflows for variable annuities’ separate accounts continue to be strongly positive at £4,054 million (2012: £3,842 million), reflecting the growth in new business sales and low, stable levels of policy surrenders.
Fixed annuity APE sales of £30 million remained relatively flat compared to 2012, while fixed index annuity APE sales of £62 million increased 24 per cent. We have seen a moderate increase in demand for fixed index annuities as consumers seek to increase their exposure to equity markets following the recent strong performance of the S&P 500.
Jackson’s new business profit increased 8 per cent to £479 million, driven by higher sales as well as the positive effects of pricing and product actions and rising interest rates.
Life IFRS operating profit was £582 million during the first half of 2013, up 32 per cent from £442 million in 2012. This result reflects strong underlying growth in fee income, which was partially offset by higher expenses. In addition, the performance benefited from the inclusion of operating profit totalling £56 million from REALIC. REALIC was acquired in the third quarter of 2012 and continues to both perform in line with expectations and deliver the objective of improving the diversity of Jackson’s earnings.
EEV operating profit increased by 26 per cent to £1,016 million (2012: £805 million) as we continue to grow the underlying book, including REALIC. We have maintained our discipline of managing our in-force business for value and Jackson has generated large positive contributions from operating experience variances and assumption changes.
Our US asset management businesses, PPM America and Curian, increased IFRS operating profit to £8 million (2012: £2 million) and £14 million (2012: £7 million) respectively, largely reflecting higher average assets under management due to market accretion. IFRS operating profit from our broker-dealer network, National Planning Holdings, was up 50 per cent to £12 million (2012: £8 million).
Jackson’s strong earnings progress has enabled it to remit £294 million to Group while supporting its balance sheet growth and maintaining adequate capital. We continue to price new business on a conservative basis, targeting value over volume, and our financial market hedging remains focused on the economics of our exposures rather than the accounting. This approach has enabled Jackson to deliver significant profitable growth since the financial crisis while maintaining a strong balance sheet. Over the last three years Jackson has remitted £945 million of cash to Group, demonstrating that Jackson’s recent growth is quickly translating into profits and cash, the ultimate metric for us over time of a successful strategy.
The UK life and pensions industry has continued to undergo considerable regulatory and market change in the first half of 2013 with the appointment of two new industry regulatory bodies, the phasing in of auto-enrolment for company pensions and the introduction of the ABI Code on Retirement Choices. The distribution landscape continues to be in transition, post the implementation of the recommendations of the Retail Distribution Review (RDR). These combined developments, as anticipated, have presented a series of challenges in a number of our key activities. The competitive landscape across the UK life and pensions sector remains in a state of flux as providers, distributors, advisers and their clients adjust to the new environment.
In the second quarter, the effects of the transition to adviser charging triggered by the RDR have started to reduce and monthly sales levels have settled to a more steady pattern compared to the first quarter of the year. However, advisers are still working through the impact of the RDR on their business models and the bancassurance market has continued to contract. The experience for many customers is that in the short term their access points to advice are reduced. As a result, we anticipate that a degree of market dislocation will persist and that this will dampen particularly our sales of investment bonds in 2013, compared to the unusually high level of sales achieved in 2012. Looking at with-profit bonds, it appears that the impact of the anticipated fall in adviser numbers post-RDR has been less severe in the first half than expected, with volumes 25 per cent down on the first half of 2012 but in line with the first half of 2011. This was partly due to the fact that there was a significant pipeline of business advised ahead of the date of implementation of the RDR.
Our small direct advice channel, Prudential Financial Planning (PFP) continues to establish its presence, with a deliberately limited ambition of focusing primarily on our existing direct customer base. By the end of 2013, two years from launch, PFP adviser numbers should reach around 200.
In the first half of 2013, we have commenced sales operations in Poland, one of Europe’s fastest-growing economies, which has an expanding middle class and high savings rates.
We continue to manage our UK business by focusing on our strengths in individual annuities and with-profits products. The strength of our with-profits proposition continues to drive strong demand for our Income Choice Annuity, which offers customers attractive returns with a potential for income growth even in the current sustained low interest rate environment. Customers also continue to be attracted to our Additional Voluntary Contribution plans where, despite a challenging market environment, Prudential UK remains the largest provider within the public sector, with arrangements in place with 68 of the 99 public sector authorities in the UK.
Total APE sales of £355 million were 14 per cent lower than the first half of 2012. In the wholesale market, we did not complete any significant bulk annuity transactions in the first half of 2013 (2012: single deal APE £27 million). Retail APE sales of £355 million were 8 per cent lower than the first half of 2012, as a result of the decrease in with-profits bonds sales that was caused by the implementation of the RDR, lower corporate pensions sales and the cessation of Department of Work and Pensions rebate business, which contributed APE sales of £9 million in the first half of 2012.
Individual annuities APE sales increased 6 per cent to £111 million. External annuities APE sales increased 13 per cent to £44 million, while internal vestings were 2 per cent higher at £67 million. In terms of product mix, the half year saw higher sales of with-profits annuities, offset by lower conventional annuity sales. Corporate pensions APE sales of £93 million were 11 per cent lower, mainly due to reduced levels of new scheme sales.
Total new business profit of £130 million was lower than the £152 million earned in the first half of 2012 which included a £22 million contribution from the bulk annuity transaction that has not been repeated. Retail new business profit was in line with the first half of 2012, as lower sales volumes were offset by positive effects of mix and pricing activity.
Life IFRS operating profit was up 1 per cent at £341 million (2012: £336 million), with £133 million (2012: £146 million) from with-profits and the balance from shareholder-backed business. During the first half of 2013, Prudential UK remitted cash of £226 million to the Group, including £206 million from the annual with-profits transfer to shareholders.
In April 2013, we announced the appointment of Jackie Hunt as Chief Executive, Prudential UK and Europe and to the Board of Prudential plc. Jackie will succeed Rob Devey, who will leave the Group at the end of October 2013. Jackie will join Prudential from Standard Life plc where she has been Chief Financial Officer. I would like to thank Rob for the contribution he has made towards the progress of Prudential UK and Europe over the past four years and I look forward to working with Jackie.
Our European-based asset management business, M&G, has continued to focus on delivering superior investment performance for our customers while expanding the reach of its distribution capabilities. It has pursued business diversification across asset classes and geographies and its retail funds are now registered for sale in 21 jurisdictions, with offices in 16 countries.
Net retail fund flows remained strong during the first half of 2013 at £4.8 billion, principally through increased sales in Continental Europe, where net inflows totalled £5.6 billion (2012: £2.2 billion). Funds under management (FUM) from outside of the UK have doubled to £21.2 billion over the past 12 months and now represent 34 per cent of retail FUM, up from 22 per cent a year ago. During the period, eight funds attracted net sales of at least £150 million each, with the majority of new money going into the M&G Optimal Income Fund, a flexible bond portfolio, and into the M&G Global Dividend Fund. In the UK, after four consecutive calendar years and 15 consecutive quarters as the number one house for both net and gross sales, an unprecedented achievement, new business has slowed. We have proactively decided to slow contributions to two of our market-leading corporate bond funds in the UK to protect their investment performance. M&G’s sales in the UK stabilised during the second quarter with overall net outflows of £1.2 billion in the first six months (2012: inflows of £2.8 billion). The implementation of the RDR at the start of the year has also contributed to dampening activity across the industry. Total retail FUM now stand at £62.7 billion, up 30 per cent compared to 30 June 2012.
M&G’s institutional business incurred total net outflows of £0.9 billion during the year to June. This largely reflects the start of scheduled withdrawals from a single large but low-margin mandate of £7.6 billion received during 2012. Despite the net outflows in the period, institutional FUM increased to £55.5 billion, up 20 per cent compared to 30 June 2012.
M&G currently has a strong pipeline of higher-margin institutional business. In particular, M&G has used its investment expertise to develop a number of products that allow institutional investors to take advantage of the gap created by the decline in long-term commercial bank loans. These opportunities include lending to medium-sized companies, housing association-registered providers, commercial real estate borrowers and infrastructure projects. Our property business, formerly known as PRUPIM, was rebranded as M&G Real Estate during the period. Recent activity includes a return to the residential property market in the UK with a £104 million investment in London housing.
Fund sales, combined with a 14 per cent increase in equity market levels and 8 per cent rise in bond markets, pushed total FUM to £234.3 billion, 15 per cent higher than a year ago. External client assets of £118.1 billion now account for over half of the total, compared to a third five years ago.
Underlying profits4 rose by 16 per cent to a new half-year record of £195 million. Over the past five years, underlying profits have grown at an annualised rate of 15 per cent, principally reflecting very strong net sales over the period.
The strong growth in FUM over the first half of the year has helped the business achieve a cost/income ratio of 54 per cent (2012: 53 per cent) despite a larger cost base as a result of increased headcount and continued investment in the operational infrastructure of the business. Following the addition of performance-related fees and profit from our associate investment in South Africa, total operating profit at the half year stands at a record level of £204 million. This is an increase of 17 per cent on the 2012 position of £175 million.
Given the strength of its financial performance, M&G continues to provide capital-efficient profits and cash generation for the Group and remitted cash totalling £109 million in the first half of 2013 (2012: £98 million).
M&G has been recognised for its investment performance with numerous awards, including the European Pensions Awards of 2013 Investment Manager of the Year, Fixed Income Manager of the Year and Property Manager of the Year.
Looking ahead, M&G will continue to seek diversification by both asset class and geography, while remaining focused on delivering excellent investment performance and service to its clients.
- For IFRS reporting purposes, the Group adopted new and amended
accounting standards. Accordingly, the IFRS elements and EEV basis
shareholders’ interest for the comparative results have been adjusted for
the retrospective application of this adoption of IFRS accounting policies,
as discussed in note B of the IFRS financial statements and note 1 of the
EEV basis results. In addition, following its reclassification as held for sale
at 30 June 2013, operating results exclude the results of the Japan Life
insurance business. 2012 comparatives have been retrospectively adjusted
on a comparable basis.
- Excluding Money Market Funds.
- The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards as discussed in note B of the IFRS financial statements. In addition, following its reclassification as held for sale
at 30 June 2013, operating results exclude the result of the Japan Life
insurance business. 2012 comparatives have been retrospectively
adjusted on a comparable basis.
- Excluding performance fee and share of profits from PPM South Africa.