During the first six months of 1998, Prudential has continued to pursue its strategy in the United Kingdom, the United States and the Asia Pacific region.

In the UK, our priorities have been to integrate Scottish Amicable, to restructure our UK operations, to implement value based management and to resolve pensions mis-selling. We have made good progress with these tasks. In the US, Jackson National Life is established firmly as one of the major players within its market. In Asia, Prudential acquired a controlling interest in our Malaysian operation and established an asset management company in India.

Our sales performance for the half year shows weighted premiums up five per cent at constant exchange rates and two per cent ahead after exchange rate movements.

In the UK the key feature is the strong performance of our IFA businesses. Total weighted IFA sales were £227 million, up 71 per cent on prior year boosted by a first time contribution from Scottish Amicable branded products. IFA business now amounts to over half of our UK sales. Weighted sales of our insurance products through the direct salesforce are in line with last year at £172 million. Sales of investment products are however down following our decision to stop selling regular premium PEPs through this channel. Overseas Jackson’s performance in growing single premiums five per cent to US$2.5 billion at a time of low US interest rates demonstrates the success of its product diversification strategy. Sales within Asia have, as expected, been impacted by adverse market conditions.

Operating profit on the modified statutory basis is up seven per cent at £474 million. On the achieved profits basis operating profit includes an £84 million charge for the increase in the pensions mis-selling provision, and is down eight per cent at £557 million. As Prudential enters its 151st year we will continue to explore opportunities for growing our major businesses around the world for the benefit of our shareholders.

United Kingdom Restructuring
It is Prudential’s intention to remain a major player in the UK retail financial services market. We recognise that, as the market continues to evolve rapidly, the winners will be those who place customer service and value for shareholders at the heart of both their business strategy and corporate culture.

These objectives were fundamental to the review we undertook of our UK operations. This led to the creation of smaller, more focused and accountable business units, charged with enhancing flexibility and responsiveness to the customer and delivering shareholder value. We have been working to develop value based measures and are now introducing these throughout our business units as part of implementing a value based culture. These new business units are led by strong management teams from backgrounds which give Prudential a good blend of internal, external and industry-wide expertise.

John Elbourne, as Chief Executive of Prudential Retail Financial Services, is responsible for four business units, each with its own managing director. These business units are Prudential Retail which is responsible for an integrated direct salesforce distribution channel; Prudential Life and Pensions which manufactures long-term insurance products and services the in force customer base; General Insurance and Prudential Annuities.

It is our intention to move away from a commission led salesforce, to an integrated sales approach using direct channels and the salesforce, with reward driven off business retention and portfolio growth rather than purely business acquisition. We view this aspect as being particularly important as it more closely aligns the interests of the customer with those of the salespeople.

Roy Nicolson is Chief Executive of the Retail IFA business which covers the Scottish Amicable and Prudential brand names including Scottish Amicable International. Mike Harris is Chief Executive of Prudential Banking, responsible for building on the success the bank has achieved to date and charged with developing new initiatives for the direct market. Collective Investments, which is responsible for PEPs and unit trusts, and Prudential Corporate Pensions now sit alongside the Company’s asset management arm, PPM Worldwide, reflecting the investment-led nature and common marketing requirements of these businesses. All three investment-led businesses report to Derek Higgs. Prudential has made significant external appointments to head up three of the new business units: Rodney Baker-Bates has become Managing Director of the Corporate Pensions business having previously been Director of Finance and Information Technology at the BBC; Roger Flynn joins as Managing Director of Prudential Retail having worked at British Airways and Virgin; David Harding becomes Managing Director of Prudential Life and Pensions having previously been Managing Director of Charles Schwab Europe (formerly ShareLink).

Pensions Review
Prudential is committed to resolving the complex issues relating to the pensions review and has devoted considerable resources to ensure that customers’ interests are safeguarded and there is no such re-occurrence in the future. The Company has now dealt with all of its priority cases in advance of the deadline set by the regulators and has been taken off the Treasury’s watch list.

We estimate that our total cost of Phase I and II will be approximately £1.1 billion. This amount has been included within the long-term reserves and has been provided from the capital of the long-term fund, consistent with HM Treasury guidelines.

Sales
Weighted sales through the IFA channel for the first six months of 1998 were up 71 per cent at £227 million. Sales from our Retail IFA business, which comprises Scottish Amicable and Prudential Retail products totalled £156 million. Scottish Amicable branded sales continue to forge strongly ahead with underlying growth up 43 per cent for single premiums excluding DSS rebates and seven per cent for regular premium business. Single premium sales of Prudence Bond were up 24 per cent at £613 million.

Other IFA single premium sales also showed strong growth over 1997; Prudential Annuity products were up 18 per cent at £267 million while sales of Prudential Corporate products were 47 per cent ahead at £231 million. Sales of Prudential Corporate regular premium products through IFAs were down a third at £21 million. Weighted insurance product sales through the direct salesforce of £172 million were in line with last year. This is in spite of the 20 per cent reduction in the size of the salesforce due to the moratorium on recruitment of new salespeople. Investment product sales were down following the decision to stop sales of regular premium PEPs due to their low profitability. Prudential Banking continues to make good progress and provides valuable experience of the direct market. Prudential Banking is opening a second call-centre in Derby towards the end of this year, initially creating around 300 jobs.

Profits
Total operating profit from our UK operations on the modified statutory basis was £221 million for the half year, 12 per cent ahead of prior year. Within this result profits from long-term business were up 22 per cent at £207 million, reflecting increased funds under management and higher terminal bonus values. General insurance profits totalled £23 million, some £14 million down on prior year, due mostly to increased weather related claims.

United States
The first half of 1998 has seen difficult conditions for sales of traditional fixed annuity products, with low US interest rates and high equity markets. Despite these conditions, Jackson National Life’s first half single premiums increased by five per cent to US$2.5 billion, up four per cent in sterling terms. This represents a very creditable performance and once again demonstrates the benefits of Jackson’s successful strategy to expand its distribution and product capability. Jackson’s operating profit increased 12 per cent in 1998 to £197 million.

Variable annuity sales of US$450 million were 17 per cent ahead of prior year and equity linked index annuity sales were 12 per cent up at US$238 million. Sales of variable annuities enjoyed a strong second quarter, with marketing initiatives and improved market conditions providing the boost to sales. Guaranteed interest contracts continue to be written to agreed targets and returns, and totalled US$1.2 billion for the first six months of the year, an increase of over US$500 million over prior year reflecting increased capacity within Jackson and favourable market conditions. Based on current market conditions and plans, Jackson’s total single premiums for 1998 should be in line with last year.

In the first half of 1998 Jackson has made further moves to re-inforce its product and distribution capability. These have included the launch of an operation in New York and of its own broker dealer, National Planning Corporation. Jackson has also acquired the small broker dealer SII Investments Inc. With total assets of US$37 billion and 1997 full year premium income of US$5.4 billion, Jackson is now the 14th largest life company by revenue premiums and the second largest writer of fixed annuity products in the US.

Asia
Prudential’s Asian operations are an integral part of the Group’s strategy and we continue to look for opportunities to strengthen our position in the region. We have acquired a controlling interest in our Malaysian operation, now renamed Prudential Assurance Malaysia Berhad. Prudential is also proud to have re-entered the Indian financial services sector in partnership with the leading local company ICICI and, in response to the Indian government’s ambition to improve the personal savings ratio, we have already launched successfully three open-ended mutual funds.

As expected, the economic uncertainty in Asia has disrupted new business flows in the region. The first six months of 1998 saw regular premiums fall £23 million to £35 million, while single premiums were down £84 million at £38 million. The reduction in single premiums is in the main due to 1997’s exceptional results from the further liberalisation of Singapore’s Central Provident Fund. The fall in regular premiums similarly reflects the decline in CPF sales, while the fall in currency values accounts for a further £10 million.

Australia and New Zealand
Single premium sales for Australia and New Zealand rose by 35 per cent to A$495 million due to improved sales of the retail Master Fund product launched during last year, and competitively priced immediate annuities. Regular premiums were down slightly to A$62 million. After the impact of the stronger pound, single premiums of £194 million were 12 per cent ahead of 1997 and regular premiums of £24 million were down by 23 per cent. Local management continues to work to improve the competitive position of Prudential within the region. A new chief executive, Terry Jay, was appointed to manage Prudential’s businesses in Australia and New Zealand in early 1998 and the fund management and insurance operations have been integrated to better face the local market.

New Zealand continues to see the benefits of the NZI Life acquisition. The operations have been successfully integrated and the original acquisition expectations exceeded. Prudential remains the market leader for regular premiums in New Zealand with a market share of over 17 per cent at 31 March 1998.

Fund Management
As a leading institutional investor, PPM Worldwide manages approximately £130 billion of funds and controls around four per cent of UK shares.

PPM’s strategy is to deliver consistent investment performance around the world through its value based investment methodologies. The performance of the with-profits life fund ranks high in its peer group; our investment performance is also competitive against the industry average for UK pension funds. Within the UK, our approach has enabled PPM to secure seven new segregated fund clients during the first six months of 1998. PPM has also won 20 new pooled fund clients and total new business for the first six months is in excess of £1 billion compared with £410 million for the whole of 1997. PPM was also voted ‘Best Fund Manager’ by the UK’s top 350 finance directors, in the Extel Survey of Investment Analysts. Profit from PPM rose by 50 per cent in the first half of 1998 to £27 million due to increased funds under management and a good performance from our venture capital operation.

Shareholders’ Capital and Reserves
The Group remains in a strong financial position and at 30 June achieved profits basis shareholders’ funds were £7.5 billion, up eight per cent on 31 December 1997. At the same time, cash and short-term investments at the holding company level totalled £1.6 billion.

Discussions with HM Treasury regarding the ‘unattributed assets’ within the UK with-profits fund are continuing. These discussions are both long and complex and we will advise shareholders of the outcome as soon as the discussions are finalised.

Millennium
All business areas within the Group have for some time had programmes to identify and address the risks from the Millennium issue. The Millennium issue is the potential problem arising from computer software developed to recognise only two digits rather than four and, if not corrected, being unable to distinguish the year 2000 from the year 1900. Each business area has prepared detailed plans to ensure that its computer systems are compliant in good time and work is monitored centrally on a regular basis and progress is reported back to the Corporation’s main board. In addition, external consultants have been hired to verify independently that the detailed testing procedures that form the main part of the project have been completed successfully and are on schedule. It is difficult to distinguish between discrete Millennium expenditure, general systems enhancement and development spend. The project began some years ago and it is estimated that the Group’s total incremental cost relating solely to Millennium will be in the range of £130 million to £170 million.

Conclusion
1998 has so far been an important year for Prudential. Despite difficult conditions in some of our markets, profit and sales growth have been maintained. Our management priorities are unaltered and we have continued to pursue our strategy of developing our retail management financial services and fund management activities in our chosen markets around the world. In the UK, our priorities have been the integration of Scottish Amicable, restructuring our UK business, the implementation of value based management and dealing with the pensions review. Overseas we have continued to expand in Asia and the US.

We shall pursue our strategic aims and work to improve the long-term value of Prudential for you, our shareholders.