Asia

Introduction

The current economic environment in Asia reflects some uncertainty. Rising commodity prices are putting downward pressure on growth, fuelling inflation and sparking some social unrest and the ramifications of the credit crisis have the potential to slow international investment in Asia. The MSCI Ex Japan Index is down approximately 23 per cent against the same time last year and back at the same level as June 2006. Bonds are at historically high valuations.

However, Prudential firmly believes that while the volatility of the financial markets can have an impact on customers' sentiment, the fundamental economic and social changes under way in Asia will continue to drive strong demand for savings and protection products for the foreseeable future. This is supported by experience during other times of economic stress such as the 1997/98 Asian Crisis and the SARS related downturn.

Therefore Prudential's strategy in Asia remains securely in place with the emphasis on building high quality, multi-channel distribution that delivers customer-centric and profitable products, with an increasing emphasis on retirement solutions. The specific priorities for each market vary reflecting the considerable diversity of each country within the region and also the position of our operations within those countries. Asia remains on-track to deliver the doubling of 2005 new business profits in 2008.

During the first half of 2008, good progress has been made in a number of areas:

Average agent numbers in the first six months of 2008 have increased by 29 per cent compared to the first half of 2007 and are up 21 per cent over the full year 2007. At 30 June 2008 there were 423,000 agents including 286,000 in India. Average agent productivity over the same period measured in terms of APE per agent, excluding Taiwan which had an exceptional second quarter last year, has remained in line with the first half of 2007 as although the activity rate has increased by five per cent, the number of cases per active agent has declined by a similar amount reflecting the more challenging economic environment. Average case size is in line with last year.

New business booked through Prudential's successful bank distribution network increased by 56 per cent over the period compared to last year and generated 20 per cent of total APE up from 14 per cent. Prudential and Standard Chartered Bank recently announced the renewal and extension of their original bank distribution agreement covering Hong Kong, Singapore and Malaysia and the inclusion of Japan and Thailand within this master agreement for the first time too.

Sales of health and protection products, including riders attached to life policies, during the first six months of 2008 were £152 million, 56 per cent up from the same period last year. They accounted for 21 per cent of the sales mix up from 15 per cent last year. This reflects the increased focus on these strategically significant and profitable products. Average new business profit margins were 83 per cent on standalone health and protection sales. New products and marketing campaigns are planned for the second half of the year.

As the financial challenges people will face related to retirement increase in Asia over the coming years, Prudential is developing a new holistic approach to provide retirement solutions that encompasses asset accumulation, protection and income generation. During the first half of this year, Prudential commenced consumer and distributor testing of new propositions with a view to rolling out a new retirement strategy in 2009. In the meantime the business continues to raise awareness of retirement savings with refreshed ‘What’s your number?’ campaigns in Hong Kong and Taiwan.

Although the business's primary focus is the considerable headroom for the acquisition of new customers, as at 30 June 2008 Prudential already has over 11.5 million customers in Asia, up from 8.5 million a year ago, who are a very valuable asset in terms of cross sell and up sell opportunities. In India, health products are being successfully telemarketed, similarly in Indonesia, Malaysia and Singapore upgraded medical products are being successfully up-sold. In Korea good momentum is being seen with a campaign to revisit existing customers.

Prudential already has a uniquely advantaged platform in Asia and the plans in action will continue to strengthen our position and enable us to capture an increasing share of the material value that is set to emerge from the region over the coming years.

Financial performance

Average APE sales grew 14 per cent on first half of 2007 to £727 million. On a comparable basis taking into account the change in consolidation basis for China Life effected for the fourth quarter last year, the growth rate is 17 per cent. Excluding Taiwan, due to the exceptional sales performance in 2007, Asia grew by 29 per cent during the first half of 2008. The proportion of linked business remains high at 70 per cent.

Asia APE sales £m

Asia new business profits £m

These strong performances came from a wide range of drivers that continue to demonstrate the success of Prudential's regional model.

In Indonesia very successful management of the agency model has seen average agent numbers up 62 per cent compared to the same period last year and average agent productivity rates up nine per cent. Takaful products continue to be popular and generated 24 per cent of APE in the first half. Average new business margin was 51 per cent down from 54 per cent in 2007 as a result of increasing credit life business from our bank distribution channel.

Hong Kong had a very strong first half in 2008 with sales growing by 53 per cent supported by marketing activity for retirement planning and the successful launch of the new PRUlink Wealth Builder and PRUlink Wealth, the operation’s first two back-end loaded index linked products. Average new business margins remain high at 66 per cent up from 62 per cent in the first half of 2007 due to an increased proportion of linked products.

In India there was a slower first quarter this year where growth was 41 per cent, but during the second quarter growth rates in India accelerated to 56 per cent bringing the half year to 45 per cent. Average agent numbers are up 25 per cent with average agent productivity improving by 10 per cent, despite the expansion into more rural areas. Average new business margin was 16 per cent down from 20 per cent in the first half of 2007 due to a change in expense assumptions reported at year-end 2007.

In Japan the 56 per cent growth in the first half has been driven largely by Term Life products in the first quarter. The tax advantages of these products were reduced in April this year. New business APE reduced in the second quarter 2008 by 23 per cent compared to the second quarter last year and this slow down in new business volume is expected to continue for the rest of this year. The business is now focusing on Variable Annuity products and a new hospital cash product being launched in the third quarter.

Korea’s new business growth of eight per cent for the first half 2008 is good given the competitive nature of the market and a particularly volatile stock market. Based on market share estimates for May, PCA Life Korea rose one place to 12th. Average new business margin remained level compared to the first half of 2007 at 33 per cent.

On a comparable basis to 2007, APE sales in China were up by 58 per cent driven by a 35 per cent increase in average agent numbers and an 86 per cent increase in average agent productivity. In the second quarter CITIC Prudential Life Insurance was notified that it had been awarded a preparatory licence for Fujian Province, China. Located in the wealthier coastal southeastern region, Fujian province has a population of over 35 million. Average new business margin was 51 per cent up from 44 per cent in 2007 as linked products became a larger proportion of the new business mix.

In Malaysia the Takaful business continues to grow strongly, up 82 per cent on last year and representing 27 per cent of the total APE, up from 17 per cent last year. Total new business was up 11 per cent and the momentum is encouraging with the second quarter up 23 per cent against the same quarter last year.

In Singapore sales have been affected by changes in the Central Provident Fund investment limits effective from 1 April 2008 and first half sales recorded a three per cent decrease. The comparatives in Singapore are likely to be challenging for the rest of the year.

As previously mentioned, Taiwan had an exceptional year last year with the very successful launch of the ‘What’s your number?’ campaign in the second quarter. However, the business remains in a very strong position with average agent numbers up 11 per cent and encouraging results from its new bank distribution agreement with Standard Chartered Bank. Estimates of its market share indicate that in the year to May 2008, PCA Life Taiwan increased to 3.7 per cent, up from 3.2 per cent at the same time last year. Average new business margin was 51 per cent up from 42 per cent in the first half of 2007.

Vietnam, Thailand and Philippines have continued the strong growth seen in 2007 with collective first half APE sales of £30 million, up 25 per cent on last year. Unit linked products were launched in Vietnam in January and they represented six per cent of the country’s sales in the first half.

Asia's overall average NBP margin remains constant over the first half of 2007 at 46 per cent with some net positives in product mix and margins up one per cent at the country level being offset by changes in country mix down one per cent.

Total EEV operating profit was £553 million. In-force EEV operating profits of £217 million are a reduction of one per cent on 2007. There were a number of one-off items in 2007, for example the corporation tax changes in Singapore and China which, after grossing up notional tax, gave rise to a pre-tax benefit of £25 million. Excluding these one-offs in-force profits are increasing steadily with the realisation of value inherent in the business. Operating assumption changes are positive £15 million. Operating variances remain small in the context of the Asian business reflecting the robustness of our operating assumptions. Experience variances are net negative £19 million principally reflecting negative expense experience of £30 million for operations which are at a relatively early stage of development. There is also negative persistency experience of £11 million mainly arising in Korea due to greater than expected premium holidays and negative £14 million for other items. These are partially offset by positive £23 million mortality and morbidity experience variances spread across all operations and positive £13 million in respect of the investment return on capital held centrally in respect of Taiwan.

Asia EEV basis operating profit £m

IFRS operating profits before development expenses for the first half of 2008 were £102 million, up 28 per cent on the same period in 2007 incorporating a complex mix of drivers including higher new business strain in Hong Kong on the new back-end loaded product and higher profits from Indonesia where new business is profitable on the IFRS basis in its first year. India continues to invest in its branch expansion programme giving rise to expense over-runs. Overall new business strain for Asia represented approximately 10 per cent of APE in line with 2007.

IRR for Asia was in excess of 20 per cent for the first half of 2008. In Asia, Prudential targets IRR on new business to be at least 10 percentage points above the country risk discount rate, where these vary from five to 17 per cent.

Asia repatriated £148 million to Group net of tax in the first half and received injections of £137 million principally to fund growth in India and fund solvency in Japan and Korea. Asia has no credit defaults in the first half of 2008. However, the short-term fluctuations include a charge of £37 million for fair value reductions in investments in a Taiwan CDO fund of £29 million and Leverage Super Senior notes in Japan of £8 million.

Prudential continues to deliver strong, broad based and profitable growth in Asia from its well established platform. The demographics and environment in Asia remain as compelling as ever and the business is expected to carry on growing at a fast pace.