Group Chief Executive’s Review

Three years ago we redefined Prudential’s strategy to concentrate our activities on retail financial services and fund management in our chosen markets. During this time we have therefore disposed of businesses which were either not core activities or which did not attain critical mass in their operations. This year we sold our businesses in Australia and New Zealand taking advantage of a consolidating market and realising a price twice its embedded value. Over the last three years we have disposed of businesses that made up almost one quarter of our new funds and have more than doubled the size of our ongoing operations.

In retail financial services we have concentrated on expanding our distribution capability and broadening our product range to give our customers choice. Our main distribution channel in 1995 – in the UK, US and Asia – was largely salesforce-based delivering £2.5 billion retail funds, two-thirds of our total. Our concern was that we were overdependent on this one particular channel and our exposure to alternative channels was poor. In 1998 our salesforces again delivered £2.5 billion of funds but this represents only 30 per cent of new Group funds. This significant increase in total new business flows came from growth in funds from other channels. We very much believe that salesforces have great strengths with the capability of providing a unique service of face to face advice at a location and time of the customer’s choosing.

At the same time I should say that I am very pleased with the progress we are making in moving Prudential’s salesforce in the UK towards an integrated marketing operation. Crucial to this have been proposals for a revised remuneration package which places much greater emphasis and reward on customer retention and satisfaction.

However, the other main thrust has been to grow funds coming from other channels. Funds from UK IFAs and brokers in the US this year totalled £3.5 billion – more than treble 1995’s total. This growth reflects the full-year contribution of Scottish Amicable and the continued success of Prudence Bond in the UK. During the year we have integrated our existing IFA business with that of Scottish Amicable under one management team. This year its weighted sales are up 28 per cent accounting for 60 per cent of UK sales. Scottish Amicable is performing ahead of our original acquisition assumptions.

In the US we have built up a broker marketing team and launched our own broker dealer National Planning Corporation. Sales through brokers in the US totalled US$0.75 billion in 1998 compared with negligible levels in 1995. Sales through US banks have also increased over the same period by 43 per cent to just under half a billion dollars. Our strategy of positioning Jackson National Life to compete in a range of economic conditions has been tested and found successful.

In Asia we have started a bancassurance operation in Indonesia with our partner Bank Bali. Recently we announced an important co-operation agreement with Standard Chartered whereby we locate our agents in Standard Chartered branches in Hong Kong and Singapore to sell Prudential life products.

Our latest distribution channel is e-commerce and we are doing a lot of work in this area across the Group. While Egg has been exceptionally popular and has certainly hit the headlines in the UK, we are also active in the intermediary markets at Jackson, Scottish Amicable and within Prudential Corporate. We are very pleased with Egg and have, to date, attracted over £3 billion in deposits through 250,000 deposit accounts.

An equally key priority has been to broaden our product range by acquisition and organic initiatives. Nearly half the products we sold in 1998 were not sold by us three years ago.

In the UK we have expanded our IFA product range significantly. Our acquisition of Scottish Amicable has delivered a good complementary range of regular premium and pensions products.

We also created Prudential Banking to deliver banking and mortgage products to our customers. Our direct business, Egg, provides a new delivery channel for a wide range of financial products and services. Egg epitomises Prudential’s strategy of broadening our product ranges, improving customer access and positioning the business to anticipate and respond to changing consumer needs. The success of Egg and the continuing high valuations of branch based networks means that we no longer see any value in acquiring a bank or a building society.

In the US we have expanded our range to include equity based products and group pension schemes. This diversification has allowed Jackson to continue its successful contribution to the Group result despite the impact of the current low interest rates which affect sales of their traditional fixed annuities. Sales volumes came close to matching last year’s record total despite difficult economic conditions while profit once again reached record levels.

In the UK we have this year grouped together our investment-led business – Prudential Corporate, Collectives and our fund management company, PPM – to accelerate growth.

Another important development this year in the UK is that of offering our customers a choice of fund management. This has been a feature of Jackson’s variable annuity products and recently we have launched a similar initiative in Scottish Amicable. Its pension products now feature a choice of six fund managers, including PPM, with a choice of ten new funds. This will be extended to Scottish Amicable’s ISAs and we believe that this extra choice to customers will be well received.

We believe that it is imperative for our business units to be capable of realising the benefits of these product and distribution channel initiatives and to be able to move quickly to anticipate and respond to change.

Our US and Asia operations were already structured to deliver these goals. But the single entity of our UK business was not suited to today’s rapidly changing environment. Hence the decision last year to restructure it. We are already reaping significant benefits from the new UK structure with tremendous energy being released in our new highly focused business units.

Following the restructuring we have now introduced value-based management into all our UK units. This will help us in implementing clear value creation goals and accountabilities in the new business units.

The need to update and expand our product ranges is an ongoing priority. We believe that the global trend towards investment products – such as 401K plans and mutual funds – will continue and will become the dominant basis for future saving and pension plans in the UK and Europe.

On 11 March 1999, we announced the terms of a recommended cash offer for M&G subject to regulatory and other approvals. This acquisition of the leading UK unit trust business and brand will significantly enhance Prudential’s retail fund management capabilities, will give us a further £18.5 billion funds under management, and will strengthen Prudential’s position in the IFA and direct markets. The enlarged Group will be positioned for further growth in fund management, in particular the launch of ISAs and, in due course, stakeholder pensions in the UK.

We hope that regulatory clearance for this acquisition will be received by the end of July 1999.

Looking towards the year ahead we have a range of strong brands, some exciting product opportunities and a diverse spread of channels. We are now customer focused and go forward with confidence.

Sir Peter Davis
Group Chief Executive