SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of March,2008
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
LAURENCE POUNTNEY HILL,
LONDON, EC4R 0HH, ENGLAND
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82-
Enclosures: Full Years Results 2007
Embargo: 7.00am Friday 14 March 2008
PRUDENTIAL PLC DELIVERS OUTSTANDING 2007 FULL YEAR RESULTS
EEV operating profit up 25%, doubled over past three years
- - New business APE of GBP2,874 million, up 21%
- - EEV operating profit of GBP2,542 million, up 25%
- - New business profit of GBP1,215 million, up 22%, with Group margin of
42%(2006: 42%)
- - Asia new business profit up 34% at GBP653m
- - Asia is expected to deliver doubling of 2005 EEV new business profit a
year early
- - Jackson new business profit up 19% at GBP285m
- - UK retail new business profit up 17%, with total new business profit up
4% at GBP277m
- - Asset management operating profit GBP334m up 28% on last year
- - IFRS statutory operating profit of GBP1,213 million, up 20%
- - EEV shareholders' funds up 24% to GBP14.8 billion
- - 2007 dividend increased by 5% to 18 pence per share
All figures compared to 2006 at constant exchange rates
Commenting, Mark Tucker, Group Chief Executive said:
"These outstanding results, with new business profit up 22 per cent to GBP1,215
million, demonstrate excellent and continued momentum in the successful delivery
of the Group's retirement led strategy. Group EEV operating profit has doubled
over the past three years.
"Each of our businesses is performing strongly representing a powerful
geographic spread to our growth platform. Spectacular growth in Asia has been
accompanied by a very strong performance by the US and clear profit growth in
the UK. Combined with our excellent performance in asset management across the
Group, these results demonstrate the benefits of Prudential's diversified,
international strategy.
"That strategy is focused on continued and profitable growth. Our market
presence and product capability, coupled with strong management teams, puts us
in a great position for continued value creation. Overall, the prospects for the
Group in 2008 remain positive. Over the longer-term the demographic, economic
and social factors driving our business will continue and we are well positioned
to capture a greater share of that growth."
Group Chief Executive's Review
In 2007, the Group's operating performance was outstanding building on the very
strong momentum established in 2005 and 2006.
The combination of our retirement-led strategy, a clear focus on generating
profitable growth and excellence in the delivery of our plans are driving
shorter-term performance and also placing the Group in a strong position from
which to outperform in the longer-term.
The retirement market offers significant long-term sustainable growth
opportunities as the biggest demographic wave in history transitions out of the
work-force and into retirement. The Prudential Group has a strong presence in
this sector based on our financial strength, our investment and risk management
skills, our brands and our product and distribution expertise.
The Group has the flexibility to optimise its capture of the retirement
opportunity as it develops in each of our chosen markets and our business model
creates significant financial and operational synergies. Within each market our
focus is to operate in areas where we see sustainable competitive advantage and
in products and distribution channels that have sound and sustainable economics.
Group performance
Group operating profit before tax from continuing operations, on the European
Embedded Value (EEV) basis increased by 25 per cent in the year to GBP2,542
million and has doubled over a three year period. The Group's return on embedded
value was 15.4 per cent (2006: 14.5 per cent).
On the statutory IFRS basis, operating profit before tax from continuing
operations was up 20 per cent to GBP1,213 million, almost doubling over a three
year period.
Across the Group's insurance operations new business increased by 21 per cent to
GBP2,874 million, on an APE basis and profit on new business was GBP1,215
million, up 22 per cent. Average margin across the Group was maintained at 42
per cent (2006: 42 per cent).
Operating profit in the Group's asset management operations increased by 28 per
cent, to GBP334 million in what was an excellent year for these businesses in
increasingly challenging conditions.
The cash flow position continued to improve and we are progressing well towards
our target of being operating cash flow positive at the Group level in 2008. The
Group's operating cash flow in 2007 was negative GBP82 million. During the year
the Group received GBP527 million from the sale of Egg, the UK internet banking
operation, this resulted in an overall Group cash inflow of GBP445 million.
The Group's balance sheet and regulatory capital position remain robust. In
particular, across the Group we have been cautious on credit for some time and
we have been increasingly moving the portfolio to a more defensive position.
Outside the normal market value movements across the Group related to interest
rates and widening credit spreads net credit losses on debt securities in the US
were GBP78 million.
The Board has recommended a final dividend of 12.3 pence per share, bringing the
full year dividend to 18 pence per share, an increase of 5 per cent. The
dividend was covered 1.9 times by post-tax IFRS operating profit from continuing
operations.
The Board will focus on delivering a growing dividend, which will continue to be
determined after taking into account the Group's financial flexibility and
opportunities to invest in areas of the business offering attractive returns.
The Board believes that in the medium-term a dividend cover of around two-times
is appropriate.
Insurance operations
In Asia we continue to power ahead with the region accounting for 54 per cent of
new business profits. New business on an APE basis, increased by 44 per cent to
GBP1,306 million and all businesses across the region grew by 15 per cent or
more.
New business profit was GBP653 million, up 34 per cent. Having achieved compound
growth of 26 per cent since 2005 we expect to deliver, one year earlier than
previously stated, on our target of at least doubling 2005 new business profit
by 2009. EEV operating profit in Asia exceeded GBP1 billion for the first time
this year as the business goes from strength to strength.
Growth in our proprietary agency force, greater agency productivity and the
continuing development of non-agency distribution, in particular bancassurance,
remain central to our success.
The agency force across the region increased by 125,000 to 410,000 during the
year and there was significant expansion in India where average agent numbers
more than doubled to 238,000. Throughout the rest of the region the average
number of agents increased by 10 per cent 112,000. Agency productivity has also
moved ahead strongly in a number of markets including Singapore, Hong Kong and
Vietnam. The continuing success of our multi-distribution approach led to sales
through non-agency channels increasing by 44 per cent and we added a number of
important new distribution relationships.
The retirement opportunity in the region is emerging rapidly and we are
developing innovative integrated savings and protection solutions to meet
consumers' increasingly sophisticated needs. Our retirement campaigns under the
banner "What's your number?" have had considerable success in Korea, Taiwan and
Hong Kong and we are now rolling this concept out into other markets.
There is also significant scope to develop our positioning in the health
insurance market across the region and, with the launch of a number of new
products, notably in Singapore and India, sales of health products in the year
have increased by 45 per cent.
The US is the largest retirement market in the world and our long-term strategy
has been to position Jackson to meet the pre and post-retirement needs of the
baby boomer generation. In 2007, variable annuity new business increased by 29
per cent to GBP455 million, on an APE basis. Jackson has been the fastest
growing variable annuity provider in the US over the past six years, clearly
demonstrating the success of our strategy and our advice based approach.
The variable annuity product in the US is increasingly being used by the
consumer to provide an income in retirement. In 2007, almost two-thirds of
Jackson's customers were over 55 and two-thirds of all variable annuity sales
included a guaranteed minimum withdrawal benefit. Jackson continues to innovate
and develop its market leading Perspective II product, which has been the
top-selling variable annuity contract in the fast growing Independent Broker
channel for each of the last 5 years.
Overall new business in the US increased by 19 per cent to GBP671 million, on an
APE basis, new business profit also increased by 19 per cent with margins
maintained at 42 per cent and an internal rate of return of 19 per cent.
In 2007 we set out our strategy in the UK to focus primarily on the retirement
income market based in particular on our strengths in the annuity market but
also the developing lifetime mortgage and income drawdown markets. In the
retirement savings market we have exited those product areas that are
structurally unprofitable and launched a new range of factory gate priced
savings products.
Retail new business increased by 4 per cent in a market where the competitive
pressures increased still further during the year. In 2007 we also completed the
transfer of Equitable Life's GBP1.7 billion in-force portfolio of with-profits
annuities: however in general pricing across the bulk market was not adequate to
meet our return on capital requirements and we chose not to write business at
uneconomic levels.
The margin at 31 per cent (2006: 30 per cent) remained high in comparison to the
overall UK market as did the internal rate of return which was 18 per cent
including the Equitable Life transaction and 14 per cent excluding it. Our
target internal rate of return in the UK is 14%.
By the end of 2007, GBP115 million of the cost saving target of GBP195 million
had been delivered and plans are in place to deliver the additional GBP80
million. A key milestone this year in the UK was the signing of a major contract
to outsource a large proportion of its back book and new business policy
administration. The outsource agreement will allow us to remove fixed costs from
our operations and to achieve significant operating efficiencies with an
expected positive effect on embedded value estimated at GBP60 million by 2011.
The in-force profit for the UK business includes a charge in respect of a
mortality assumption change on the annuity business of GBP312 million which is
fully offset by a release of excess margins previously held.
In 2007 we announced that the Group would consider a reattribution of the
inherited estate held in the with-profits sub fund of The Prudential Assurance
Company Limited. We are continuing to explore the possibility of a reattribution
and we aim to be in a position in the first half of 2008 to determine whether
this would be in the best interests of policyholders and shareholders.
Asset management
The Group's asset management businesses had another excellent year. Our
international investment management expertise continues to add value to our
insurance operations and also supported the growth in external funds under
management to GBP69 billion at the end of 2007 (2006: GBP57 billion).
M&G's net inflows were the second highest on record at GBP5 billion and profit
increased by 25 per cent to GBP254 million. Our business in Asia continued its
excellent growth record with net inflows of GBP3 billion and operating profit
growing to GBP72 million, up 53 per cent.
Our skills in risk management and our strength across all asset classes in the
UK, the US and in Asia combined with our multi-asset allocation capabilities,
position us well to meet the diverse needs of our customers for savings,
retirement income and protection products.
This is clearly evidenced in the UK where the main with-profits fund, with
assets of over GBP74 billion, was ranked first in 2006 in the WM Company's
survey of with-profits funds, based on gross investment performance over 1, 3, 5
and 10 years. In the US, one of the key drivers of our success is our ability to
provide customised and highly flexible benefit options within our main variable
annuity product that are individually priced for the customer and, in Asia we
continue to see success in our targeted unit-linked and protection products.
Priorities for the Group in 2008
Our overriding objective for 2008 remains that of continuing to create value for
our shareholders by fully exploiting the power of our retirement-led strategy
and continuing to expand the excellent businesses that we have in place today.
Life insurance
In Asia:
- - Expand the agency force and continue to improve productivity
- - Maximise the potential from non-agency distribution and add new
partners
- - Further develop direct marketing channels and up-sell and cross-sell
- - Increased focus on retirement services and health products
In the US:
- - Continue to innovate around our key variable annuity product
- - Enhance further our already world-class operating platform
- - Expand retail distribution
- - Selectively participate in the institutional market
In the UK:
- - Build on our strengths in the retirement market and risk products
- - Migrate to factory-gate cautiously managed asset accumulation
products
- - Deliver on the cost reduction program including the outsource program
- - Selectively participate in the wholesale market
- - Determine whether it is in the best interest of policyholders and
shareholders to pursue a reattribution of the inherited estate
Asset management:
- - Maintain superior investment performance for both internal and
external funds
- - Extend third party retail and institutional businesses
Outlook
There is significant volatility and nervousness in markets and it seems clear
that there will be a period of less attractive economic growth trends in the US
and in the UK than we have seen in recent years. Notwithstanding this, we
believe that our strategy and our business model are very robust and will
continue to deliver sustainable value.
In Asia, the fundamentals underpinning economic growth remain powerful and our
businesses are very well placed to benefit. We expect to deliver, one year
earlier than previously stated, on our target of at least doubling 2005 new
business profit by 2009.
In the US, our record of out performance is set to continue and our value driven
strategy in the UK is on track. In the UK we have already de-emphasised those
products which might have been more sensitive to market conditions.
Our asset management businesses, although more directly influenced by market
movements, are well placed to capitalise on their strong market positions and
investment performance to deliver net flows and profit growth.
Overall the prospects for the Group in 2008 remain positive. Over the
longer-term the demographic, economic and social factors driving our business
will continue and we are ideally positioned to capture a greater share of that
growth.
ENDS
Enquiries:
Media Investors/Analysts
Jon Bunn +44 20 7548 3559 James Matthews +44 20 7548 3561
William Baldwin-Charles +44 20 7548 3719 Jessica Stalley +44 20 7548 3511
Notes to Editors:
1. In addition to the financial statements provided with this press
release, additional financial schedules, including full details of the Group's
investments, are available on the Group's website at www.prudential.co.uk
2. The results in this announcement are prepared on two bases:
International Financial Reporting Standards ('IFRS') and European Embedded Value
('EEV'). The IFRS basis results form the basis of the Group's statutory
financial statements. The supplementary EEV basis results have been prepared in
accordance with the principles issued by the CFO Forum of European Insurance
Companies in May 2004 and expanded by the Additional Guidance on EEV disclosures
published in October 2005. Where appropriate the EEV basis results include the
effects of IFRS.
Period on period percentage increases are stated on a constant exchange rate
basis.
3. Annual premium equivalent (APE) sales comprise regular premium sales
plus one-tenth of single premium insurance sales.
4. 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.
5. An interview with Mark Tucker, Group Chief Executive, (in video/audio/
text) will be available on www.cantos.com and www.prudential.co.uk from 7.00am
today.
6. There will be a conference call today for wire services at 7.30am (GMT)
hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance
Director. Dial in telephone number: 020 8609 0793. Passcode: 155439#.
7. A presentation to analysts will take place at 9.30am (GMT) at Governor's
House, Laurence Pountney Hill, London, EC4R 0HH. An audio cast of the
presentation and the presentation slides will be available on the Group's
website, www.prudential.co.uk
8. A media conference will take place at 11.30am (GMT) at 12 Arthur Street,
London, EC4R 9AQ. To attend please call Claire Glover on 020 7548 2007.
9. High resolution photographs are available to the media free of charge at
www.newscast.co.uk on +44 (0) 207 608 1000 or by calling Claire Glover on 020
7548 2007.
10. Total number of Prudential plc shares in issue as at 31 December 2007 was
2,470,017,240.
11. Financial Calendar 2008:
First Quarter New Business Results 17 April 2008
Annual General Meeting 15 May 2008
Interim Results 31 July 2008
Third Quarter 2008 New Business Results 21 October 2008
2007 Final Dividend
Ex-dividend date 9 April 2008
Record date 11 April 2008
Payment of dividend 20 May 2008
2008 Interim Dividend
Ex-dividend date 13 August 2008
Record date 15 August 2008
Payment of dividend 23 September 2008
About Prudential
Prudential plc is a company incorporated and with its principal place of
business in England, and its affiliated companies constitute one of the world's
leading financial services groups. It provides insurance and financial services
directly and through its subsidiaries and affiliates throughout the world. It
has been in existence since 1848 and has GBP267 billion in assets under
management as at 31 December 2007. Prudential plc is not affiliated in any
manner with Prudential Financial, Inc, a company whose principal place of
business is in the United States of America.
Forward-Looking Statements
This statement may contain certain "forward-looking statements" with respect to
certain of Prudential's plans and its current goals and expectations relating to
its future financial condition, performance, results, strategy and objectives.
Statements containing the words "believes", "intends", "expects", "plans", "
seeks" and "anticipates", and words of similar meaning, are forward-looking. By
their nature, all forward-looking statements involve risk and uncertainty
because they relate to future events and circumstances which are beyond
Prudential's control including among other things, UK domestic and global
economic and business conditions, market related risks such as fluctuations in
interest rates and exchange rates, and the performance of financial markets
generally; the policies and actions of regulatory authorities, the impact of
competition, inflation, and deflation; experience in particular with regard to
mortality and morbidity trends, lapse rates and policy renewal rates; the
timing, impact and other uncertainties of future acquisitions or combinations
within relevant industries; and the impact of changes in capital, solvency or
accounting standards, and tax and other legislation and regulations in the
jurisdictions in which Prudential and its affiliates operate. This may for
example result in changes to assumptions used for determining results of
operations or re-estimations of reserves for future policy benefits. As a
result, Prudential's actual future financial condition, performance and results
may differ materially from the plans, goals, and expectations set forth in
Prudential's forward-looking statements. Prudential undertakes no obligation to
update the forward-looking statements contained in this statement or any other
forward-looking statements it may make.
PRUDENTIAL PLC 2007 PRELIMINARY ANNOUNCEMENT
RESULTS SUMMARY
European Embedded Value (EEV) Basis Results* 2007 2006
GBPm GBPm
Asian operations 1,103 864
US operations 635 718
UK operations:
UK insurance operations 859 686
M&G 254 204
1,113 890
Other income and expenditure (289) (298)
Restructuring costs (20) (41)
Operating profit from continuing operations based on longer-term investment returns* 2,542 2,133
Short-term fluctuations in investment returns 174 738
Mark to market value movements on core borrowings 223 85
Shareholders' share of actuarial gains and losses on defined benefit pension schemes 116 207
Effect of changes in economic assumptions and time value of cost of options and guarantees 748 59
Profit from continuing operations before tax (including actual investment returns) 3,803 3,222
Operating earnings per share from continuing operations after related tax and minority interests* 74.9p 62.1p
Basic earnings per share 125.2p 91.7p
Shareholders' equity, excluding minority interests GBP14.8bn GBP11.9bn
International Financial Reporting Standards (IFRS) Basis Results*
Statutory IFRS basis results 2007 2006
Profit after tax attributable to equity holders of the Company GBP1,022m GBP874m
Basic earnings per share 41.8p 36.2p
Shareholders' equity, excluding minority interests GBP6.2bn GBP5.5bn
Supplementary IFRS basis information 2007 2006
Operating profit from continuing operations based on longer-term investment returns* GBP1,213m GBP1,050m
Operating earnings per share from continuing operations after related tax and minority interests* 33.8p 30.9p
2007 2006
Dividends per share declared and paid in reporting period 17.42p 16.44p
Dividends per share relating to reporting period 18.00p 17.14p
Funds under management GBP267bn GBP251bn
*Basis of preparation
Results bases
The EEV basis results have been prepared in accordance with the European
Embedded Value Principles issued by the CFO Forum of European Insurance
Companies in May 2004 and expanded by the Additional Guidance on EEV disclosures
published in October 2005. The basis of preparation of statutory IFRS basis
results and supplementary IFRS basis information is consistent with that applied
for the 2006 results and financial statements.
Operating profit based on longer-term investment returns
Consistent with previous reporting practice, the Group analyses its EEV basis
results and provides supplementary analysis of IFRS profit before tax
attributable to shareholders, so as to distinguish operating profit based on
longer-term investment returns from other elements of total profit. On both the
EEV and IFRS bases, operating earnings per share are calculated using operating
profits from continuing operations based on longer-term investment returns,
after related tax and minority interests. These profits exclude short-term
fluctuations in investment returns and the shareholders' share of actuarial
gains and losses on defined benefit pension schemes. Under the EEV basis, where
additional profit and loss effects arise, operating profit based on longer-term
investment returns also excludes the mark to market value movements on core
borrowings and the effect of changes in economic assumptions and changes in the
time value of cost of options and guarantees arising from changes in economic
factors. After adjusting for related tax and minority interests, the amounts for
these items are included in the calculation of basic earnings per share.
Discontinued operations
The results for continuing operations shown above and throughout this
preliminary announcement exclude those in respect of discontinued banking
operations. On 1 May 2007, the Company sold Egg. Accordingly, the presentation
of the comparative results for 2006 has been adjusted from those published in
March 2007.
REVIEW OF OPERATING AND FINANCIAL RESULTS
Results highlights
CER RER (4)(5)
2007 2006 Change 2006 Change
GBPm GBPm % GBPm %
Annual premium equivalent (APE) sales 2,874 2,374 21% 2,470 16%
Present value of new business premiums (PVNBP) 21,302 18,192 17% 18,947 12%
Net investment flows 7,975 8,511 (6%) 8,633 (8%)
External funds under management 68,669 57,497 19% 57,199 20%
New business profit (NBP) 1,215 992 22% 1,039 17%
NBP Margin (% APE) 42% 42% 42%
NBP Margin (% PVNBP) 5.7% 5.5% 5.5%
EEV basis operating profit from long-term business 2,517 2,103 20% 2,208 14%
from continuing operations (1) (2)
Total EEV basis operating profit from continuing 2,542 2,030 25% 2,133 19%
operations (2)
Total IFRS operating profit from continuing 1,213 1,008 20% 1,050 16%
operations (3)
EEV basis shareholders' funds (GBPbn) 14,779 11,910 24% 11,883 24%
IFRS shareholders' funds (GBPbn) 6,201 5,483 13% 5,488 13%
Holding company operating cash flow (82) (104) 21% (104) 21%
Holding company operating cash flow 445 (104) 528% (104) 528%
plus proceeds from the sale of Egg
Return on Embedded Value (6) 15.4% 14.5% 6%
(1)Long-term business profits after deducting Asia development expenses and
before restructuring costs.
(2) Based on longer-term investment returns from continuing operations.
Operating profit is stated excluding the effect of short-term fluctuations in
investment returns against the long-term assumptions, the effect of changes in
economic assumptions and changes in the time value of cost of options and
guarantees arising from changes in economic factors, actuarial gains and losses
on defined benefit schemes and the mark to market value movements on borrowings.
(3) Based on longer-term investment returns from continuing operations.
Operating profit is stated excluding the effect of short-term fluctuations in
investment returns against the long-term assumptions, the effect of changes in
economic assumptions, actuarial gains and losses on defined benefit schemes and
the mark to market value movements on borrowings.
(4) Prior year restated excludes Egg, and shows continuing operations only.
(5) Reported exchange rate (RER).
(6) Return on Embedded value is based on EEV operating profit from continuing
operations after tax and minority interests as a percentage of opening embedded
value (shareholder's funds on a EEV basis)
In the Operating and Financial Review (OFR), year-on-year comparisons of
financial performance are on a constant exchange rate (CER) basis, unless
otherwise stated.
These results show the strong performance of the Group in 2007. The KPIs above
show growth in sales and profits and an improvement in cashflow. The surplus
capital position of Prudential plc, measured under the Insurance Group Directive
basis, will be submitted to the FSA by 30 April 2008 but is currently estimated
to be in the region of GBP 1.4 billion. This includes a benefit of around GBP0.3
billion that arose during 2007 from the sale of Egg Banking plc.
At 31 December 2007, total insurance and investment funds under management are
GBP267 billion up from GBP251 billion at the end of 2006, at RER.
Basis of preparation of results
The European Union (EU) requires that all listed European groups prepare their
financial statements in accordance with EU approved IFRS. Since 1 January 2005,
Prudential has been reporting its primary results on an IFRS basis.
As a signatory to the European Chief Financial Officers' (CFO) Forum's EEV
Principles, Prudential also reports supplementary results on an EEV basis for
the Group's long-term business. These results are combined with the IFRS basis
results of the non long-term businesses to provide a supplementary operating
profit under EEV. Reference to operating profit relates to profit based on
long-term investment returns. Under both EEV and IFRS, operating profits from
continuing operations based on longer-term investment returns exclude short-term
fluctuations in investment returns and shareholders' share of actuarial gains
and losses on defined benefit pension schemes. Under EEV, where additional
profit and loss effects arise, operating profits based on longer-term investment
returns also exclude the mark to market value movement on core borrowings and
the effect of changes in economic assumptions and changes in the time value of
the cost of options and guarantees arising from changes in economic factors.
In broad terms, IFRS profits for long-term business contracts reflect the
aggregate of statutory transfers from with-profits funds and profits on a
traditional accounting basis for other long-term business. Although the
statutory transfers from with-profits funds are closely aligned with cash flow
generation, the pattern of IFRS profits over time from shareholder-backed
long-term businesses will generally differ from the cash flow pattern. Over the
life of a contract, however, aggregate IFRS profits will be the same as
aggregate cash flow.
Life insurance products are, by their nature, long term and the profit on this
business is generated over a significant number of years. Accounting under IFRS
does not, in Prudential's opinion, properly reflect the inherent value of these
future profit streams.
Prudential believes that embedded value reporting provides investors with a
better measure of underlying profitability of the Group's long-term businesses
and is a valuable supplement to statutory accounts.
EEV basis operating profit
CER RER(4)(5)
EEV basis operating profit from continuing 2007 2006 Change 2006 Change
operations GBPm GBPm % GBPm %
Insurance business:
Asia 1,046 779 34% 829 26%
US 627 652 (4%) 708 (11%)
UK 859 686 25% 686 25%
Development expenses (15) (14) (7%) (15) 0%
Long-term business profit 2,517 2,103 20% 2,208 14%
Asset management business:
M&G 254 204 25% 204 25%
Asia asset management 72 47 53% 50 44%
Curian (5) (7) 29% (8) 38%
US broker-dealer and asset management 13 16 (19%) 18 (28%)
334 260 28% 264 27%
Other income and expenditure (289) (292) 1% (298) 3%
Total EEV basis operating profit from continuing operations 2,562 2,071 24% 2,174 18%
Restructuring costs (20) (41) 51% (41) 51%
Total EEV basis operating profit from continuing operations 2,542 2,030 25% 2,133 19%
after restructuring costs
Total EEV basis operating profit from continuing operations based on longer-term
investment returns was GBP2,542 million, up 25 per cent from 2006 at CER and up
19 per cent at RER. This result reflects the significant growth of new business
profit of GBP1,215 million and in-force profit of GBP1,317 million by insurance
businesses, up 17 per cent over 2006, and strong asset management profit growth.
Record new business profit from insurance business of GBP1,215 million, was 22
per cent higher than in 2006, driven by strong sales momentum in Asia and the
US. At RER, new business profit was up 17 per cent. The average Group new
business profit margin was 42 per cent (2006: 42 per cent) on an APE basis and
5.7 per cent (2006: 5.5 per cent) on a PVNBP basis. This reflects an increase in
the average UK margin offset by a fall in the average Asia margin. In-force
profit increased 17 per cent on 2006 to GBP1,317 million. At RER, in-force
profit was up 11 per cent. In aggregate, net assumption changes were GBP97
million positive, and experience variances and other items were GBP48 million
positive.
The in-force profit in 2007 for the UK business included a charge in respect of
a mortality operating assumption change on annuity and deferred annuity pension
business of GBP312 million, which is fully offset by a release of excess margins
previously held.
Asia's development expenses (excluding the regional head office expenses) were
GBP15 million, (2006: GBP14 million).
Operating profit from the asset management business was GBP334 million (2006:
GBP260 million), up 28 per cent on 2006, driven by growth in M&G and Asia Asset
Management.
Other income and expenditure totalled a net expense of GBP289 million compared
with GBP298 million in 2006 at RER. This result primarily includes interest
expense on central borrowings of GBP168 million (2006: GBP177 million); GBP117
million of Group head office costs (2006: GBP83 million) and GBP38 million of
costs for the Asia head office (2006: GBP36 million). The increase in Group head
office costs reflects costs in respect of the process to consider a
reattribution of the inherited estate.
New business capital usage
2007 2007 2007 2007 2007
GBPm GBPm GBPm GBPm GBPm
Free surplus Required Total net Value of Total long-term
capital worth in-force business
New business capital usage business
Asia (194) 21 (173) 653 480
US (200) 183 (17) 202 185
UK (150) 104 (46) 246 200
(544) 308 (236) 1,101 865
The Group wrote GBP2,874 million of sales on an APE basis. To support these
sales, the Group invested GBP544 million of capital. This amount covers both new
business acquisition expenses, including commission of GBP236 million and the
required capital of GBP308 million. The total investment of capital for new
business amounts to approximately GBP19 million per GBP100 million of APE sales.
These sales provided a post-tax new business contribution to embedded value of
GBP865 million.
In Asia, capital was invested to support sales at an average rate of GBP15
million per GBP100 million of APE sales.
In the US, capital was invested to support sales at an average rate of GBP30
million per GBP100 million of APE sales.
In the UK, capital was invested to support sales at an average rate of GBP17
million per GBP100 million of APE sales.
EEV basis profit after tax and minority interests
RER(4)(5)
2007 2006 Change
GBPm GBPm %
Total EEV basis operating profit from continuing operations
after restructuring costs 2,542 2,133 19%
Short term fluctuations in investment returns: 174 738
Asia 226 286
US (8) 64
UK (42) 378
Other (2) 10
Actuarial gains and losses on defined
benefit pension schemes: 116 207
Effect of change in economic
assumptions: 748 (1)
Asia 201 (132)
US 81 (51)
UK 466 182
Effect of change in time value of cost
of options and guarantees: 0 60
Asia 9 14
US 8 6
UK (17) 40
Movement in mark to market value
of core borrowings: 223 85
US 9 3
Other 214 82
Profit from continuing operations before tax 3,803 3,222 18%
Tax (961) (904)
Profit from continuing operations 2,842 2,318 23%
after tax before minority interests
Discontinued operations (net of tax) 241 (105)
Minority interests (21) (1)
Profit for the period 3,062 2,212 38%
The following year-on-year comparisons are presented on a RER basis.
In the calculation of EEV operating profit longer-term investment return
assumptions are used rather than actual investment returns achieved. Short-term
fluctuations in investment returns are reported separately in the analysis of
profit.
In Asia, long-term business short-term investment fluctuations were GBP226
million, compared to GBP286 million last year. This reflects favourable equity
performance in most territories, principally Hong Kong, Vietnam and Singapore
offset by an unfavourable valuation movement of GBP30 million on a Taiwan CDO.
The US business short-term fluctuations in investment returns of GBP(8) million
primarily include: a negative GBP44 million in respect of the difference between
actual investment returns and longer-term returns included in operating profit
in respect of fixed income securities and related swap transactions; a negative
GBP16 million in relation to changed expectations of future profitability on
variable annuity business in force due to the actual variable investment account
("separate account") return being lower than the long-term return reported
within operating profit, offset by the impact of the associated hedging
position; and a positive GBP51 million in respect of the difference between
actual investment returns and long-term returns included within operating profit
in respect of equity-based investments and other items.
The UK business component of short-term fluctuations in investment returns of
negative GBP42 million primarily reflects reduced asset values in PRIL, the
shareholder-backed annuity business, from widened credit spreads and the
difference between the actual investment return for the with-profits life fund
of 7.2 per cent and the long-term assumed return of 7.85 per cent.
The actuarial gain of GBP116 million (2006: GBP207 million) included in total
profit reflects the shareholders' share of actuarial gains and losses on the
Group's defined benefit pension schemes. On the EEV basis, this gain includes a
10 per cent share of the actuarial gains and losses on the share attributable to
the PAC with-profits sub-fund for the Prudential Staff and Scottish Amicable
Pension Schemes. The full year 2007 gains mainly reflect changes in economic
assumptions, partly offset by the effect of strengthened mortality assumptions.
The very high level of gains in 2006 reflected the excess market returns over
the long-term assumption and the increase in discount rate applied in
determining the present value of projected pension payments from 4.8 per cent at
31 December 2005 to 5.2 per cent at December 2006.
In Asia positive economic assumption changes were GBP201 million, of which
GBP110 million is due to Taiwan and GBP80 million is due to Hong Kong. The
Taiwan credit primarily reflects a change of projected fund earned rate, offset
by an increase in risk discount rate, whereas Hong Kong primarily reflects a
decrease in the risk discount rate. Taiwan interest rates performed in line with
the assumed EEV trended basis.
In the US, economic assumption changes of positive GBP81 million primarily
reflect a reduction in the risk discount rates following a reduction in the US
10-year Treasury rate, partially offset by a reduction in the separate account
return assumption.
In the UK, economic assumption changes of positive GBP466 million primarily
reflect the impact of the increase in the investment return assumption and a
decrease in the risk free rate.
The mark to market movement on core borrowings was a positive GBP223 million
reflecting the reduction in fair value of core borrowings as the decrease in
interest rates is more than offset by the widening of the credit spread,
thereby increasing overall market yields on comparable debt securities.
The effective tax rate at an operating tax level was 27 per cent (2006: 30 per
cent), generally reflecting expected tax rates. The effective tax rate at a
total EEV level was 25 per cent (2006: 28 per cent) on a profit of GBP3,803
million.
On 1 May 2007, Prudential completed the sale of Egg Banking plc to Citi for a
consideration, net of transaction expenses, of GBP527 million. The profit from
discontinued operations is GBP241 million being the profit on disposal of GBP290
million, net of the post-tax loss of GBP49 million from 1 January 2007 to the
date of sale.
IFRS basis operating profit
CER RER (4)(5)
IFRS basis operating profit from longer term 2007 2006 Change 2006 Change
investment returns GBPm GBPm % GBPm %
Insurance business:
Asia 189 177 7% 189 0%
US 444 367 21% 398 12%
UK 528 500 6% 500 6%
Development expenses (15) (14) 7% (15) 0%
Long-term business profit 1,146 1,030 11% 1,072 7%
Asset management business:
M&G 254 204 25% 204 25%
Asia asset management 72 47 53% 50 44%
Curian (5) (7) 29% (8) 38%
US broker-dealer and asset management 13 16 (19%) 18 (28%)
334 260 28% 264 27%
Other income and expenditure (248) (244) (2%) (248) 0%
Total IFRS basis operating profit based from longer term 1,232 1,046 18% 1,088 13%
investment returns
Restructuring costs (19) (38) (50%) (38) (50%)
Total IFRS basis operating profit based from longer term 1,213 1,008 20% 1,050 16%
investment returns after restructuring costs
The increase in Prudential Corporation Asia's operating profit of seven per cent
for long-term business before development expenses reflects improved
profitability in mature markets with significant contributions to operating
profit from Singapore, Malaysia and Hong Kong, representing GBP153 million of
the total operating profit in 2007, up 15 per cent on 2006. There were increased
contributions from each of Indonesia, Taiwan and Vietnam as these operations
continue to build scale. Five life operations made IFRS losses: GBP43 million in
India which is a relatively new business, incurring costs in rapidly building
scale through its expansion strategy and losses of GBP16 million in Japan.
Korea's loss reflects new business growth. China and Thailand are marginally
loss making.
In the US, IFRS operating profit of GBP444 million was up 21 per cent on 2006 at
CER. The US operations' results are based on US GAAP, adjusted where necessary
to comply with IFRS as the Group's basis of presenting operating profit is based
on longer-term investment returns. Longer-term returns for the US operations'
fixed income securities incorporate a risk margin reserve (RMR) charge for
longer-term defaults and amortisation of interest-related realised gains and
losses. The growth in the US operations' long-term IFRS operating profit mainly
reflects increased fee income driven by a 34 per cent increase in separate
account assets during the year and higher overall election of optional benefits.
Profits from the annuities spread business were broadly in line with prior year
and continue to represent the key contributor to overall IFRS operating profit.
One-off items affecting the spread-based income were GBP26 million, net of DAC
amortisation
In the UK, IFRS operating profit for the long-term business increased six per
cent to GBP528 million in 2007. This reflected a seven per cent increase in
profits attributable to the with-profits business to GBP394 million,
representing the continued strong investment performance of the Life Fund and
its impact on terminal bonuses. 2007 includes the net impact of the mortality
strengthening and a release of excess margins previously held in other
assumptions which was a positive GBP34 million.
M&G's operating profit for 2007 was GBP254 million, an increase of 25 per cent
over 2006, due to strong net investment inflows and positive market conditions
for the first three quarters of 2007.
The Asian asset management operations reported operating profits of GBP72
million, a growth of 53 per cent over 2006, driven by strong contributions from
Vietnam, India and Taiwan.
The operating profit from the US broker-dealer and asset management businesses
was GBP13 million, a 19 per cent decrease on 2006. Curian recorded losses of
GBP5 million in 2007, up from losses of GBP7 million in 2006, as the business
continues to build scale.
IFRS basis profit after tax
RER(4)(5)
2007 2006 Change
GBPm GBPm %
Operating profit from continuing operations
based on longer-term investment returns
after restructuring costs 1,213 1,050 16%
Short-term fluctuations in investment returns (137) 155
Shareholders' share of actuarial and 90 167
other gains and losses on defined benefit pension schemes
Profit before tax from continuing operations
attributable to shareholders 1,166 1,372 (15%)
Tax (382) (392)
Profit from continuing operations
for the financial year after tax 784 980 (20%)
Discontinued operations (net of tax) 241 (105)
Minority interests (3) (1)
Profit for the year attributable to equity holders of the company 1,022 874 17%
The following year-on-year comparisons are presented on a RER basis.
Total IFRS basis profits before tax and minority interests were GBP1,166 million
in 2007, compared with GBP1,372 million for 2006. The decrease reflects a
reduction in short-term fluctuations in investment returns of GBP292 million and
a reduced positive movement from the prior year in actuarial gains and losses
attributable to shareholder-backed operations in respect of the Group's defined
benefit pension schemes.
In the calculation of IFRS operating profit longer-term investment return
assumptions are used rather than actual investment returns achieved. The actual
movements in asset values beyond the longer-term assumptions appear in the
profit and loss account as short-term fluctuations in investment returns, with
the exception of Jackson where unrealised gains or losses on debt securities
feature directly as movements to shareholder reserves.
The GBP137 million charge for short-term fluctuations in investment returns
comprises GBP71 million, GBP18 million and GBP47 million in respect of Asian
operations, US operations and UK operations respectively.
The fluctuations for the Asian operations primarily reflect reduced values for
debt securities in Taiwan and a GBP30 million reduction in the value of an
investment in a CDO fund, partially offset by strong equity movements in
Vietnam.
In the US there was a GBP18 million charge for short-term fluctuations in
investment returns. During 2007 the US life insurance operations recorded net
credit losses of GBP78 million (2006: GBP25 million). This charge is reflected
in two parts of the accounting presentation of the results. Included within the
IFRS operating profit based on longer-term investment returns is a risk margin
reserve (RMR) charge, representing long-term expected credit defaults, of GBP48
million (2006: GBP54 million). The difference between the credit related losses
and the RMR charge in the year was, therefore, a charge of GBP30 million (2006:
GBP29 million credit) which is recorded within short-term fluctuations in
investment returns, within the overall GBP18 million charge for US life
insurance operations.
The fluctuations for the UK operations primarily reflect reduced asset values in
PRIL, the shareholder-backed annuity business, from widened credit spreads on
corporate bond securities.
Profit after tax and minority interests was GBP1,022 million compared with
GBP874 million in 2006. The effective rate of tax on operating profits, based on
longer-term investment returns, was 32 per cent (2006: 29 per cent). The
effective rate of tax at the total IFRS profit level for continuing operations
was 33 per cent (2006: 29 per cent). The effective tax rates in 2007 were
broadly in line with those expected except for some Asian operations where there
is a restriction on the ability to recognise deferred tax assets on regulatory
basis losses.
Earnings per share
Earnings per Share (EPS)
2007 2006
GBPp GBPp
EPS based on operating profit from continuing EEV 74.9 62.1
operations after tax and minority interest IFRS 33.8 30.9
Basic EPS based on total profit after minority interest EEV 125.2 91.7
IFRS 41.8 36.2
Dividend per share
The directors recommend a final dividend for 2007 of 12.30 pence per share
payable on 20 May 2008 to shareholders on the register at the close of business
on 11 April 2008. The interim dividend for 2007 was 5.70 pence per share. The
total dividend for the year, including the interim dividend and the recommended
final dividend, amounts to 18.00 pence per share compared with 17.14 pence per
share for 2006, an increase of five per cent. The total cost of dividends in
respect of 2007 was GBP444 million.
The full year dividend is covered 1.9 times by post-tax IFRS operating profit
from continuing operations.
Dividend cover is calculated as operating profit after tax on an IFRS basis,
divided by the current year interim dividend plus the proposed final dividend.
The Board will focus on delivering a growing dividend, which will continue to be
determined after taking into account the Group's financial flexibility and
opportunities to invest in areas of the business offering attractive returns.
The Board believes that in the medium term a dividend cover of around two times
is appropriate.
Shareholders' funds
On the EEV basis, which recognises the shareholders' interest in long-term
businesses, shareholders' funds at 31 December 2007 were GBP14.8 billion, an
increase of GBP2.9 billion from the 2006 year-end level (2006: GBP11.9 billion
at RER). This 24 per cent increase primarily reflects: total EEV basis operating
profit of GBP2,542 million; a GBP174 million favourable movement in short-term
fluctuations in investment returns; a GBP748 million positive movement due to
changes in economic assumptions and in time value of cost of options and
guarantees; a positive movement on the mark to market of core debt of GBP223
million; the proceeds for the share capital issue of the parent company for
GBP182 million; a positive movement in the actuarial gains on the defined
benefit pension schemes of GBP116 million and the positive impact of GBP64
million for foreign exchange movements. These were offset by: a tax charge of
GBP961 million and dividend payments of GBP426 million made to shareholders.
The shareholders' funds at 2007 of GBP14.8 billion comprise, GBP3.7 billion for
the Asian long-term business operations, GBP3.6 billion for the US long-term
business operations, GBP6.5 billion for the UK long-term business operations and
GBP1 billion for other operations.
At the year end the embedded value for the Asian long-term business was GBP3.7
billion. The established markets of Hong Kong, Singapore and Malaysia contribute
GBP2,704 million to the embedded value generated across the region with Korea
(GBP304 million) and Vietnam (GBP234 million) making further substantial
contributions. Prudential's other markets, excluding Taiwan in aggregate
contribute GBP496 million in embedded value. Taiwan has a negative embedded
value of GBP12 million, this positive movement against prior year (2006:
negative GBP216 million) is a reflection of an increase in new business and a
change in economic assumptions.
The current mix of new business in Taiwan is weighted heavily towards
unit-linked and protection products, representing 75 per cent and 15 per cent of
new business APE in 2007, respectively. As a result, interest rates have little
effect on new business profitability and a one per cent reduction in assumed
interest rates would reduce new business margins in Taiwan by less than one
percentage point. However, the in-force book in Taiwan, predominantly made up of
whole of life policies, has an embedded value that is sensitive to interest rate
changes. A one per cent decrease in interest rates, along with consequential
changes to assumed investment returns for all asset classes, market values of
fixed interest assets and risk discount rates, would result in a GBP91 million
decrease in Taiwan's embedded value. A similar one per cent positive shift in
interest rates would increase embedded value by GBP67 million. On the assumption
that bond yields remained flat during 2008 and then trended towards 5.5 per cent
in December 2014, this would have reduced the 2007 Taiwan embedded value by
GBP70 million. Sensitivity of the embedded value to interest rate changes varies
considerably across the region. In aggregate, a one per cent decrease in
interest rates, along with all consequential changes noted above, would result
in a negligible percentage change to Asia's embedded value.
Statutory IFRS basis shareholders' funds at 31 December 2007 were GBP6.2
billion. This compares with GBP5.5 billion at 31 December 2006 at RER. The
increase primarily reflects: profit after tax and minority interests of GBP1,022
million, the proceeds from the share capital issue of the Company for GBP182
million, offset by the impact of negative unrealised holding losses on available
for sale investments of GBP231 million, and dividend payments to shareholders of
GBP426 million.
Holding company cash flow
2007 2006
GBPm GBPm
Cash remitted by business units:
UK life fund transfer 261 217
UK other 3 0
US 122 110
Asia 186 175
M&G 139 94
Total cash remitted to Group 711 596
Net interest paid (96) (128)
Dividends paid (426) (399)
Scrip dividends and share options 183 91
Cash remittances after interest and 372 160
dividends
Tax received 40 122
Corporate activities (200) (67)
Cash flow before investment in businesses 212 215
Capital invested in business units:
Asia (149) (147)
UK (145) (172)
Total capital invested in business units (294) (319)
Increase/(Decrease) in operating cash (82) (104)
Egg sale net proceeds 527 0
Total holding company cash flow 445 (104)
The Group holding company received GBP711 million in cash remittances from
business units in 2007 including the shareholders' statutory life fund transfer
of GBP261 million from the UK business.
After dividends and net interest paid, there was a net cash inflow of GBP372
million (2006: GBP160 million). There was a high take up of scrip dividends in
2007.
During 2007, the Group holding company paid GBP200 million in respect of
corporate activities, which included costs in respect of the process to consider
a reattribution of the inherited estate together with a repayment to HMRC in
respect of tax recoveries in previous years following a change in tax
legislation. Tax received of GBP40 million (2006: GBP122 million) was lower than
prior year as a result of foreign exchange gains reducing the level of taxable
losses and a payment to HMRC. Asia contributed a net remittance of GBP37 million
to the holding company cash flow.
In aggregate this gave rise to an improvement in operating cash outflow to GBP82
million from GBP104 million in 2006.
The Group received GBP527 million from the disposal of Egg (net of expenses),
and the reduction in net interest paid in 2007 includes the investment income
earned on these proceeds.
In 2008, the UK shareholders' statutory transfer relating to the bonus
declarations is expected to be GBP279 million.
Depending on the mix of business written and the opportunities available,
Prudential expects that the UK shareholder backed business will become cash
positive in 2010.
Taking into account plans for future growth, our ability to surrender group tax
relief, a normalised level of scrip dividend, the reducing UK capital
requirement and increased remittances from the other life and asset management
operations it is expected that the operating cash flow of the Group holding
company will be positive in 2008.
BUSINESS UNIT REVIEW
Insurance Operations
Asia
Asia CER RER(5)
2007 2006 Change 2006 Change
GBPm GBPm % GBPm %
APE sales 1,306 909 44% 956 37%
NBP 653 487 34% 514 27%
NBP margin (% APE) 50% 54% 54%
NBP margin (% PVNBP) 9.3% 10.0% 10.0%
Total EEV basis operating profit* 1,046 779 34% 829 26%
Total IFRS operating profit* 189 177 7% 189 0%
*Based on longer-term investment returns excluding fund management operations, development and regional head
office expenses.
Prudential's strategy in Asia is to build quality, multi-channel distribution
that delivers customer centric and profitable products in segments with the
potential for sustained growth. By necessity, the approach to each market
varies, but all operations are unified under the Prudence icon and common brand
values and Prudential has the proven ability to leverage learning and expertise
from within the region and the wider Group to accelerate the development of
unique opportunities as they arise in each market.
The ability to execute the strategy is highly dependent on the strength and
depth of the management talent pool in the region and consequently Prudential
invests in continually strengthening and developing its teams. The operating
model empowers local management teams with a regional team overseeing control
functions such as risk management and providing strategic guidance and
technical support in areas such as distribution optimization and product design.
Prudential has a market leading platform with top five market share positions,
in terms of new business APE, in seven of its twelve markets. Prudential has the
leading private sector life insurance joint ventures in China and India.
Current year initiatives
The core business priorities were outlined as:
- Building on existing strengths in agency
- Improving and extending partnership distribution
- Continuing product innovation
- Strengthening and deepening customer relationships
- Developing retirement solutions
- Starting work on direct distribution
- Re-examining approach to health products
Agency is the predominant distribution channel in Asia and for Prudential, the
agency force again generated 70 per cent of new business volumes in 2007.
Success in agency distribution requires building and maintaining meaningful
scale in terms of agent numbers whilst also providing the infrastructure to
manage agent training and skills development to drive agency productivity.
Prudential's agency priority depends on the stage of development of each
individual market and Prudential's operation within it. For example in India,
Prudential's joint venture with ICICI has been rapidly expanding, with the
addition of 593 new branches during the year to give a total 1,065 and
correspondingly average agent numbers in 2007 increased by 123 per cent and at
31 December there were 277,000 agents.
Similarly in China, although the rate of geographic expansion is slower as each
new city requires separate regulatory approvals the emphasis is also on
expanding the agency channel; average numbers were up 38 per cent and at 31
December there were 20,500 agents. In markets where we have sufficient agency
scale, the emphasis is on helping those agents become more productive through
intensified training and sales management support. Agent productivity, in terms
of average APE per agent, increased by 67 per cent in Vietnam and 21 per cent in
Singapore during 2007.
Prudential has a large partnership distribution network in Asia. During 2007,
Prudential extended its agreements with Standard Chartered Bank to include
Taiwan where it will exclusively provide bancassurance products in their newly
acquired HsinChu International Bank with its 83 branches and 2.4 million
customers. In Korea regulation states that a bank can only source a maximum of
25 per cent of its total insurance sales from any one insurer, and with
Prudential's sales existing bank partners regularly reaching their maximum
shares, adding new banks is a priority. In 2007 Prudential secured two major new
banks, Industrial Bank of Korea and Kookmin Bank. Prudential's regional
bancassurance relationship with Citibank also grew strongly with new business
APE generated of GBP23 million being 12 per cent of total bank distribution for
2007.
In 2007 Prudential continued to broaden its range of linked products. These
included the new Global Property Fund in Singapore and a new Takaful range in
Indonesia, launched in September 2007. In Taiwan, a new variable annuity product
and an agency incentive programme contributed to the growth in new business of
71 per cent for the year.
Good results were attained from systematic cross-sell campaigns across the
region, contacting more than 2 million of our existing customers. These
included the initiation of a regular up-sell in Hong Kong through the indexation
of policy benefits and initiatives to capture maturity proceeds in Singapore and
a targeted offer of guaranteed increases in protection benefits in Malaysia.
Although still small, new business from direct marketing grew by 65 per cent
over 2006 with Thailand performing well and recording growth of 52 per cent. The
regional Direct Marketing team has been strengthened and work is now underway on
exploring further opportunities.
In Asia, there are very material opportunities arising in the provision of
healthcare solutions. Prudential successfully piloted new supplemental health
products in Singapore, India and Hong Kong during the year selling over 125,000
new policies.
Helping people address their financial needs for retirement is also a major
growth opportunity and whilst Prudential already has a number of products
designed to support the accumulation phase of a retirement fund, work is now
underway on drawdown options and supporting related protection and health
products. Prudential has already begun positioning itself as a provider of
retirement solutions through the roll out of the successful 'What's your number?
' campaigns in six countries that encourage people to think about what resources
they are likely to need to finance their retirement aspirations.
Prudential has a unique position in Vietnam with its market leading life
insurance business and well respected brand. To further leverage this platform,
Prudential launched a consumer finance company in September 2007.
Financial performance
In 2007 Prudential delivered new business APE of GBP1,306 million from Asia
representing very strong growth that averaged 44 per cent over 2006 and with all
operations delivering double digit growth including Taiwan, India and Indonesia,
up 71 per cent, 67 per cent and 75 per cent respectively.
New business profit increased by 34 per cent as the average profit margin
reduced from 54 per cent to 50 per cent mainly due to a change in the country
mix of the sales. China, Hong Kong, Korea and Taiwan all reported increases in
new business profit margins compared to 2006. In India, the branch expansion
programme, has led to an increase in policy acquisition and maintenance costs
and therefore a rebasing of the expense assumptions. The reduction in average
margin for the other countries was due to a change in country mix.
In-force embedded value profits of GBP393 million are driven principally by the
unwind of discount, with net assumption changes of GBP54 million and net
experience variances of GBP(1) million. Assumption changes were principally due
to favourable changes in corporation tax and positive mortality assumption
changes. Negative persistency assumption changes are offset by positive expense
assumption changes. Experience variances mainly reflected positive mortality
across all operations partially offset by expense overruns in the newer
operations of China, India and Vietnam.
IFRS Profits CER
2007 2006 Change
GBPm GBPm %
Established markets (Hong Kong,Singapore, Malaysia) 153 134 15%
North Asia (Taiwan, Korea, Japan) 16 20 (20%)
Joint Venture markets (China, India) (49) (20) (146%)
Other SE Asian markets ( Indonesia, Vietnam, Thailand, Phillipines) 68 43 58%
Total Life IFRS Profits 189 177 7%
The total IFRS Operating profit of GBP189 million was up seven per cent on 2006.
Within this, the Established markets (Singapore, Hong Kong and Malaysia)
generated GBP153 million up 15 per cent from 2006. The North Asia markets
(Taiwan, Japan, and Korea) generated GBP16 million, down 20 percent from last
year reflecting increased losses in Japan. Excluding Japan, profits from North
Asia almost doubled reflecting a strong increase in Taiwan of 47 per cent due to
in-force profits, especially from long term health products and favourable other
experience. Losses from the joint ventures in India increased to GBP43 million,
reflecting the fast pace of new business growth and investment in growing the
branch networks. Losses from the joint venture in China reduced to GBP6 million.
In the other markets (Vietnam, Thailand, Indonesia and Philippines), profits
grew by 58 per cent to GBP68 million reflecting the expected emergence of IFRS
profits and a one off GBP16 million favourable item in Vietnam.
In 2007 the Asian Life operations were again net remitters of cash to the Group
of GBP56 million. Remittances totalling GBP148 million were from Hong Kong,
Indonesia, Malaysia, Singapore and included the first remittance from Vietnam.
The Life operations received injections of GBP92 million, of which GBP49 million
was injected into India to support branch expansion with the balance primarily
injected into China and Korea to support solvency requirements as a result of
new business growth.
IRR for Asia was in excess of 20 per cent for 2007. In Asia, Prudential targets
IRRs on new business to be at least 10 percentage points over the country risk
discount rate, where these vary from five per cent to 17 per cent. During 2007
all markets except India and Japan met this target.
Having achieved compound growth of 26 per cent since 2005, Asia expects to
deliver doubling of 2005 EEV NBP a year early by 2008.
United States
United States CER RER(5)
2007 2006 Change 2006 Change
GBPm GBPm % GBPm %
APE sales 671 565 19% 614 9%
NBP 285 239 19% 259 10%
NBP margin (% APE) 42% 42% 42%
NBP margin (% PVNBP) 4.3% 4.2% 4.2%
Total EEV basis operating profit* 627 652 (4%) 708 (11%)
Total IFRS operating profit* 444 367 21% 398 12%
*Based on longer-term investment returns excludes broker dealer, fund management and Curian
The United States is the largest retirement savings market in the world and
continues to grow rapidly. By mid-2007, total retirement assets in the US
exceeded $17.4 trillion, up from $16.5 trillion at the end of 2006 (Source:
Investment Company Institute). As 78 million baby boomers (Source: US Census
Bureau) move into retirement age, these assets will shift from asset
accumulation to income distribution. Currently, $1.6 trillion of assets are
generating retirement income. This amount is estimated to grow to $7.3 trillion
by 2017 (Source: Financial Research Corporation).
Despite these favourable demographics, US life insurers face challenges from
both within and outside the industry. The industry remains highly fragmented,
with the top 15 annuity companies sharing only 74 per cent of the total market
share in 2007 (source: LIMRA). Competition is intensifying through aggressive
price competition. Life insurers also find themselves competing with other
financial services providers, particularly mutual fund companies and banks, for
a share of US retirement savings assets.
During 2007, the S&P index increased 3.5 per cent (2006: 13.6 per cent), and the
US equity markets experienced significant volatility during the second half of
the year. The S&P index increased 6 per cent through June 2007, yet ended the
year 2.5 per cent lower than in June and 5.7 per cent lower than at the end of
October. This volatility and concerns about the US economy are expected to
increase investors' interest in guarantees on products with equity-based
returns.
In addition, for much of 2007, the yield curve was flat and credit spreads were
relatively low, resulting in a difficult environment for the sale of properly
priced fixed annuities. During the second half of 2007, the yield began to
normalise and credit spreads began to widen, ending closer to normalised
historical levels. The market for fixed annuities was further complicated during
the year by artificially high deposit rates offered by banks to attract assets.
Jackson's primary focus is manufacturing profitable, capital-efficient products,
such as variable annuities, and marketing these products to advice-based
channels through its relationship-based distribution model. In developing new
product offerings, Jackson leverages a low-cost, flexible technology platform to
manufacture innovative, customisable products that can be brought to the market
quickly.
Jackson markets its retail products primarily through advice-based distribution
channels, including independent agents, independent broker-dealer firms,
regional broker-dealers, banks and registered investment advisors. Jackson also
markets life insurance and fixed annuity products through its captive insurance
agency, which is concentrated in the south-eastern United States.
Current year initiatives
During 2007 significant progress was made against the business priorities which
included:
- continued enhancement and expansion of the existing product offering
- continue to take profitable share of variable annuities market
- increased penetration of existing distribution channels
- increase share of the US retail asset management market.
Jackson continues to base its success in the evolving US market on industry
leading distribution and product innovation coupled with sound evaluation of
product economics. Jackson's long-term goals include the continued expansion of
its share of the US annuities and retail asset management markets, which it
plans to achieve by leveraging its relationship-based distribution advantage in
the advice-based channels. Growth in Jackson's share of the US annuities market
will be largely contingent upon continued enhancement and expansion of the
existing product offering, increased penetration of existing distribution
channels and entry into new distribution channels, as well as opportunistic
acquisition activity.
Innovation in product design and speed to market continue to be key drivers of
Jackson's competitiveness in the variable annuity market. High quality,
cost-effective technology has allowed Jackson to offer a comprehensive product
portfolio that can be customised to meet the needs of individual customers.
Products are offered on an unbundled basis, allowing customers to select those
benefits that meet their unique financial needs and pay only for those benefits
that they truly need. This advantage, coupled with distribution through
advice-based channels, allows Jackson to effectively meet individuals' long-term
retirement savings and income needs. Jackson believes that leveraging this
advantage is a more sustainable long-term strategy than price competition and,
as a result, will not sacrifice product economics for a short-term increase in
market share.
Jackson supports its network of independent agents and advisors with
award-winning customer service and marketing support. In 2007, the Service
Quality Measurement Group rewarded Jackson with its third World Class Customer
Satisfaction Award. Jackson's marketing campaigns continue to win awards for
achievement in graphic design, editorial content and overall communications
excellence.
Through organisational flexibility and excellence in execution, coupled with
product innovation, a successful distribution model and a strong service
offering, Jackson increased its share of the US variable annuity market to 5.1
per cent for full-year 2007 (source: Morningstar Annuity Research Center), up
from 4.6 per cent for the full-year 2006.
Jackson continues to expand its product portfolio, adding a variety of new
features during 2007. The company enhanced its variable annuity portfolio by
adding 20 new underlying investment options, four new guaranteed minimum
withdrawal benefits (GMWBs), one new guaranteed minimum income benefit (GMIB)
and its first guaranteed minimum accumulation benefit (GMAB).
In 2007, Jackson also introduced a line of retail mutual funds and launched two
new fixed index annuity products that offer new index options and multiple
crediting methods. These additions provide even more product choices to advisors
and create more opportunities to capture a larger portion of the US retirement
market.
Jackson continues to seek bolt-on acquisitions that will complement its
long-term organic growth strategy. Transactions will need to meet or exceed
Jackson's targeted rate of return and will likely be in the life insurance
channel, which provides stable future cash flows. Depending on the opportunities
that become available, Jackson may consider utilising securitisation financing
for these bolt-on transactions.
Financial performance
Jackson achieved record APE sales of GBP671 million in 2007, representing a 19
per cent increase on 2006. This growth was led by a continued increase in
variable annuity sales. On a PVNBP basis, new business sales were GBP6.7
billion. Retail APE sales in 2007 of GBP577 million were up 19 per cent over
2006.
Jackson delivered record variable annuity APE sales of GBP455 million in 2007,
up 29 per cent over 2006. In 2007, Jackson maintained its ranking of 12th in
gross variable annuity sales (Source: Morningstar Annuity Research Centre).
Fixed annuity APE sales of GBP57 million were 10 per cent down on 2006, while
industry sales of traditional individual deferred fixed annuities were 13 per
cent lower in 2007 compared to 2006 (Source: LIMRA).
Fixed index annuity sales continued to be affected by the uncertain regulatory
environment in the US and the impact of low interest rates on caps and
participation rates that are offered. As a result, industry sales were nearly 1
per cent lower in 2007 compared to 2006 (Source: Advantage Group Associate).
Jackson's APE sales of GBP45 million were 12 per cent down on 2006. In the third
quarter of 2007, Jackson ranked first in fixed index annuity sales through banks
for the ninth consecutive quarter (Source: The Kehrer-LIMRA Report). Jackson
continues to pursue profitable growth and hence has been unwilling to compromise
target margins in this market.
Institutional APE sales of GBP94 million were up 15 per cent on 2006. Jackson
continues to participate in this market on an opportunistic basis when margins
are attractive.
EEV basis new business profits of GBP285 million were 19 per cent above the
prior year, reflecting a 19 per cent increase in APE sales with a shift in the
mix of business toward variable annuities as well as increased sales of
institutional business with longer duration. Total new business margin was 42
per cent, in line with 2006.
The variable annuity new business margin decreased from 49 per cent in 2006 to
42 per cent in 2007, primarily due to a 70 basis point decrease in the risk-free
rate from 2006 to 2007. The lower risk-free rate resulted in a decrease in the
assumed separate account return that was partially offset by a decrease in the
risk discount rate. In addition, Jackson reviewed its experience assumptions
during the year and revised certain partial withdrawal and expense assumptions,
which also decreased the new business margin.
The fixed index annuity new business margin decreased from 31 per cent in 2006
to 26 per cent in 2007, primarily as a result of a change in expected future
surrender charges.
The fixed annuity new business margin increased significantly from 16 per cent
to 28 per cent, primarily as a result of a decrease in the risk discount rate
for the year.
The new business margin on institutional business improved significantly, from
39 per cent in 2006 to 58 per cent in 2007 due to the much longer average
duration contracts written during 2007 and a lower risk discount rate.
Total EEV basis operating profit for the long-term business for 2007 was GBP627
million compared to GBP652 million in the prior year at CER. In-force EEV
profits of GBP342 million were 17 per cent below prior year profit of GBP413
million at CER. Experience variances were GBP58 million lower in 2007 due to
lower spread income and the impact of persistency adjustments. Operating
assumption changes were less favourable than the prior year by GBP17 million
including the impact of updated persistency and lapse rates during 2007. One-off
items favourably affected the spread income variance by GBP40 million during
2007.
IFRS operating profit for the long-term business was GBP444 million, up 21 per
cent on the prior year of GBP367 million at CER, primarily reflecting an
increase in fee income and continued low mortality rates during 2007. Higher fee
income was driven primarily by higher separate account assets given the growth
in variable annuity sales, and an improvement in the average fees generated from
those assets given the increase in election of guaranteed optional benefits. In
2007, IFRS spread income included a number of non-recurring items, totalling
GBP26 million net of DAC amortisation (2006: GBP31 million at CER).
At 31 December 2007, Jackson had more than GBP41 billion in US GAAP assets. Of
this total, GBP15 billion were separate account assets, an increase of GBP4
billion from year-end 2006, further increasing Jackson's earnings from fee-based
products.
During the second half of 2007, equity market volatility increased materially
primarily due to liquidity concerns and valuation issues in the US sub-prime
mortgage market. Much of the market movement was due to concerns regarding the
risk in this market that resulted in a tightening in the level of credit
available. While the financial services industry was hardest hit by these
events, losses were generally limited to those companies with significant levels
of sub-prime or Alt-A mortgage exposure. Jackson's exposure to the sub-prime
mortgage market is limited at only GBP237 million at the end of 2007. Most of
this exposure is in fixed rate, residential mortgage backed securities that are
AAA rated and hold first liens on the underlying collateral. Exposure to Alt-A
was GBP660 million and direct exposure to monoline insurers was GBP23 million.
The average IRR on new business was up slightly to 19 per cent, primarily due to
a larger proportion of variable annuity sales in 2007.
United Kingdom
United Kingdom CER RER(5)
2007 2006 Change 2006 Change
GBPm GBPm % GBPm %
APE sales 897 900 (0%) 900 (0%)
NBP 277 266 4% 266 4%
NBP margin (% APE) 31% 30% 30%
NBP margin (% PVNBP) 3.6% 3.4% 3.4%
Total EEV basis operating profit* 859 686 25% 686 25%
Total IFRS operating profit* 528 500 6% 500 6%
*Based on longer-term investment returns.
In 2007, Prudential UK continued its strategy of selectively competing in areas
of the retirement savings and income markets where it can generate attractive
returns.
The UK business remains focused on maximising value from the opportunity
afforded by the fast growing need for retirement solutions. With an ageing
population and the concentration of UK wealth in the mass affluent and high net
worth sectors, the retirement and near-retirement population will represent the
fastest growing segments of the market over the next 10 years. Low savings rates
and high levels of consumer debt, combined with a shift in responsibility for
providing income during retirement from Government and employers towards
individuals, have resulted in individuals being inadequately provided for during
increasingly long periods of retirement. These consumers will have a need for
high quality financial advice and service and are increasingly seeking
guarantees and longevity protection from their financial products.
Prudential UK has a unique combination of competitive advantages including its
significant longevity experience, multi-asset management capabilities and its
brand and financial strength. These put it in a strong position to pursue its
value driven strategy in its two principal businesses: Retail and Wholesale.
Prudential UK's Retail business is focusing on savings and income for those
customers nearing or in retirement. Its retirement income business aims to
continue to drive profitable growth in its core annuities operation and grow its
presence in the equity release market. The significant 25-year pipeline of
internal vestings annuity business from maturing individual and corporate
pensions policies is enhanced by strategic partnerships with third parties,
where Prudential UK is the recommended annuity provider for customers vesting
their pension at retirement. This scale enables our selective value-based
participation in the external vestings market. Annuities remain core drivers of
the sales and profit derived by Prudential UK, which now has approximately 1.5
million annuities in payment.
Prudential UK remains a market leader in the with-profits market. These products
offer a medium to long-term, medium risk investment with exposure to a diverse
range of assets that is particularly important to many customers against the
backdrop of market uncertainty.
In the Retail accumulation business, Prudential UK continues to be a market
leader in the corporate pensions market where it is a provider of over 20 per
cent of FTSE 350 companies and the largest provider of pension schemes to the UK
public sector. Prudential now administers corporate pensions for over 600,000
members.
In addition, the Retail business has used its brand and strength with Discovery
to build branded distribution in Health and Protection, further using the joint
venture to access Discovery's Vitality concept and lifestyle protection
capabilities.
Prudential UK's strategy in the Wholesale market is to participate selectively
in bulk annuity and back-book buy-outs, where Prudential UK is able to win
business based on its financial strength, superior track record, market leading
investment capability as well as its extensive annuitant mortality risk
assessment capabilities. The Wholesale business, which has been in operation for
over 10 years and has already written more than 400 bulk buy-outs, has a strong
track record in the risk management of pension schemes for corporate clients and
insurers wishing to reduce or eliminate their investment or longevity
liabilities. Prudential UK will maintain a strict focus on value, only
participating in transactions that generate an acceptable rate of return.
Current year initiatives
Prudential UK's key priorities in 2007 were:
- Maintaining leadership position in individual annuities
- Building share of the equity release market
- Growing the volume of products that utilise Prudential's multi-asset
management expertise
- Deepening relationships with chosen distributors including the
introduction of customer-agreed remuneration across some product lines
- Realigning cost base to the selective business strategy
- Delivering wholesale transactions with attractive rates of return
During 2007, Prudential UK maintained its market leadership in individual
annuities, where it has continued to create value by maintaining high retention
rates. This has been augmented by partnership deals with insurers such as
Zurich, Royal London and Save and Prosper. We also announced a new partnership
with Barclays, where Prudential will be the preferred supplier of conventional
annuity products to their retail customers in the UK.
Capitalising on the need for inflation protection in retirement, Prudential
remains the market leader in the growing with-profits annuity market with over
75 per cent market share. Early in 2007 Prudential made a number of product
enhancements including the facility to accept Protected Rights monies, which was
a first in the with-profit annuity market.
In the fourth quarter, Prudential UK launched an income drawdown product. This
product helps customers manage their pension through the various stages of
retirement, and offers flexibility whilst providing potential for growth through
investment. Together with the Flexible Lifetime Annuity this gives Prudential a
full range of retirement income solutions.
Investing in property has been an increasingly important component for many
people saving for their retirement. However this has left many retirees income
poor but asset rich. Prudential UK's lifetime mortgage business grew its share
of the lifetime mortgage market to 14 per cent through its distinctive drawdown
product and strong brand. In the third quarter a number of product enhancements
were introduced, including an inheritance guarantee and a new lump sum product.
Prudential expects both its market share and the overall market size to grow.
In a relatively volatile investment market there has been a marked increase in
demand for cautious managed solutions providing enhanced returns. In February
2007, Prudential UK launched the Cautious Managed Growth Fund and the Managed
Defensive Fund, using Prudential's strengths in investment expertise and in
disciplined approach to asset allocation. These funds have the potential to
offer a better longer-term return than a bank or building society account and
allow the customer to access real returns with lower volatility. These funds are
available across the full tax wrapper suite, including onshore and offshore
bonds, individual pensions and mutual funds.
During 2007, Prudential UK introduced customer-agreed remuneration across some
of its product lines. Under this model, financial advisors agree their
remuneration directly with the customer and not with the product provider and in
doing so make commission structures far more transparent. This is in line with
Prudential UK's focus on building strong long-term relationships with advisors
as well as offering market-leading retirement solutions.
The agreement announced in 2007 with Capita to outsource a large proportion of
its in-force and new business policy administration is another important
milestone for the UK business. This agreement will deliver GBP60 million per
annum of savings to Prudential UK, and is an important element in achieving its
total cost savings target of GBP195 million. The contract will result in
approximately 3,000 employees transferring to Capita and helps the UK deliver
its long-term cost savings strategy by removing fixed costs from the business
and achieving significant operating efficiencies. This provides a significant
reduction in long-term expense risk by providing certainty on per-policy costs
as the number of policies in the mature life and pensions book decreases over
the coming years. Unit costs per policy are expected to reduce by over 30 per
cent by 2011.
By the end of 2007 GBP115 million of the cost saving target had been delivered.
The remaining GBP80 million, including the GBP60 million generated from the
Capita contract, will be delivered by the end of 2010.
In December, Prudential completed the transfer of Equitable Life's portfolio of
in-force with-profits annuities. This book covers approximately 62,000 policies
with assets of approximately GBP1.74 billion. This deal grows Prudential's
with-profits business and creates value for both Equitable policyholders and
Prudential's shareholders and policyholders.
Financial performance
Total APE sales of GBP897 million were in line with 2006 and there was a four
percent increase in new business profit to GBP277 million, reflecting an
improved new business margin of 31 per cent in an increasingly competitive
market. The 2006 comparator included credit life sales of GBP63 million and
associated new business profit of GBP20 million written under a single contract
that was not renewed in 2007.
A strong Retail performance saw a four per cent increase in sales and a 17 per
cent increase in new business profit to GBP223 million demonstrating the
continuing benefits of selectively participating in product lines that can
deliver attractive returns. Retail sales growth was driven by strong
performances in individual annuities, corporate pensions, with-profits bonds and
lifetime mortgages.
In the wholesale bulk annuity and insurer back-book market, Prudential UK
achieved a 26 per cent year-on-year increase with sales in 2007 of GBP180
million. In the fourth quarter Prudential completed the transfer of Equitable
Life's portfolio of in-force with-profit annuities. In the previous year,
Prudential UK completed two back-book insurer deals with a total volume of
GBP143 million. New business profits relating to the Wholesale business were
GBP54 million in 2007.
EEV basis operating profit based on longer-term investment returns of GBP859
million, before restructuring costs of GBP8 million, were up 25 per cent on
2006. The in-force operating profit of GBP582 million was up 39 per cent on
2006, due to the increase in profits arising from the unwind of the in-force
book (reflecting an increased opening embedded value) and a GBP67 million
positive operating assumption change in 2007 reflecting the change in the long
term tax rate assumption from 30 per cent to 28 per cent. A charge in respect of
a mortality operating assumption change on annuity and deferred annuity pension
business of GBP312 million was fully offset by the release of excess margins
previously held.
Other charges of GBP77 million include GBP36 million of costs associated with
product and distribution development; GBP13 million for an annual fee paid by
the shareholder business to the Prudential Assurance Company's (PAC)
with-profits sub-fund for the use of the Prudential and Scottish Amicable
trademarks; GBP14 million in respect of the tariff arrangement with Scottish
Amicable Insurance Finance (SAIF), which terminates at the end of 2007 and GBP14
million in relation to other items.
Prudential continues to manage actively the retention of the in-force book.
During 2007, experience at an aggregate level has been in line with our
long-term assumptions as evidenced by the small positive experience variance.
IFRS operating profit increased six per cent to GBP528 million before
restructuring costs of GBP7 million. This reflects a seven per cent increase in
profits attributable to the with-profits business, which contributed GBP394
million reflecting strong investment performance and its impact on terminal
bonuses. The net impact of the mortality strengthening and release of margins
held in other assumptions under the IFRS basis was a positive net GBP34 million.
In 2007, Prudential received a GBP4 million net commission payment from
Winterthur relating to general insurance sales under the Prudential brand in the
UK. From early 2008, on settlement of an advance payment made by Winterthur in
2002, the business expects to receive approximately GBP30 million a year in
commission payments, although this will depend on the new business volumes and
persistency rates.
Prudential UK writes with-profit annuity, with-profits bond and with-profits
corporate pension business in its life fund with other products backed by
shareholder capital. The weighted average post-tax IRR on the shareholder
capital allocated to new business growth in the UK was 14 per cent, excluding
the Equitable Life deal (18 per cent including this business).
Asset Management
Global
The Prudential Group's asset management businesses provide value to the
insurance businesses within the Group by delivering sustained superior
performance. They are also important profit generators in their own right,
having low capital requirements and generating significant cash flow for the
Group.
The asset management businesses are well placed to capitalise on their leading
market positions and strong track records in investment performance to deliver
net flows and profit growth as well as strategically diversifying the Group's
investment propositions in retail financial services (RFS) markets that are
increasingly favouring greater product transparency, greater cross-border
opportunities and more open-architecture investment platforms. Wholesale profit
streams are also growing.
The Group's asset management businesses operate different models and under
different brands tailored to their markets and strengths, however they continue
to work together by managing money for each other with clear regional
specialism, distribute each others' products and share knowledge and expertise,
such as credit research.
Each business and its performance in 2007 is summarised below.
M&G
M&G is comprised of the M&G asset management business and Prudential Capital.
M&G CER RER(5)
2007 2006 Change 2006 Change
GBPm GBPm % GBPm %
Net investment flows 4,958 6,101 (19%) 6,101 (19%)
Revenue 482 429 12% 429 12%
Other income 30 27 11% 27 11%
Staff Costs (224) (216) (4%) (216) (4%)
Other Costs (113) (106) (7%) (106) (7%)
Underlying profit before Performance-related Fees 175 134 31% 134 31%
Performance-related fees 28 27 4% 27 4%
Operating profit from asset management operations 203 161 26% 161 26%
Operating profit from Prudential Capital 51 43 19% 43 19%
Total IFRS operating profit 254 204 25% 204 25%
M&G Asset Management
M&G is an investment-led business with a demonstrable focus on performance
delivery and aims to offer attractive products in a variety of macro-economic
environments. M&G aims to deliver superior investment performance and maximise
risk-adjusted returns for our retail, wholesale and internal clients. External
funds under management account for nearly a third of M&G's total funds under
management and it is this higher-margin external business that drives
profitability and cash generation for the Group.
M&G's retail strategy is based on obtaining maximum value from a single
manufacturing function through a multi-channel, multi-geography distribution
approach. Over the last five years, M&G's retail business has expanded beyond
the UK into the major European markets, the Middle East, South America and Asia.
By operating through multiple channels, M&G's retail business is well placed to
profit from current trends away from direct selling towards intermediation, and
the growth of on-line fund platforms and third-party product wrappers.
M&G's wholesale strategy centres on leveraging the skills developed primarily
for internal funds to create higher margin products for external clients. In
recent years, this strategy has consolidated M&G's position at the forefront of
the leveraged finance, structured credit and infrastructure investment markets.
The same strategy is now being applied to develop the more traditional pooled
and segregated fixed income areas of M&G's wholesale business.
M&G has significant scale in all major asset classes: it is believed to be one
of the largest active managers in the UK stock market, one of the largest bond
investors in the UK and one of the UK's largest property investors. In addition,
M&G has profitable businesses in a number of specialist areas such as leveraged
loans, structured credit, infrastructure finance and macro investment.
Current year initiatives
Delivering fund performance remains critical and is the key determinant of
success for an asset management business. M&G has continued to deliver
market-leading investment performance in 2007 with impressive results. M&G's
retail funds have performed exceptionally well, with 45 per cent delivering
top-quartile performance(1). In addition, 86 per cent of M&G's segregated
institutional funds have met or exceeded their benchmark performance1.
Returns1 on Prudential's Life Fund assets were 66 basis points ahead of
benchmark and 143 basis points better than peer group.
Overall, the demand for asset management products in M&G's distribution markets
continued to grow strongly in 2007 driven, in part, by the same
retirement-related demographic trends that are creating opportunities for the
Group as a whole.
With a diversified business across different asset classes and across retail and
wholesale markets, both in the UK and internationally, M&G remains well
positioned for a variety of macro-economic and market conditions.
The way that clients purchase asset management products continued to evolve
during 2007. The retail asset management sector benefited from the increasing
shift by retail investors towards more transparent investment products, such as
unit trusts, and M&G's range of market leading funds has positioned it well to
benefit from this trend. M&G extended its range of innovative new funds during
2007 with the launch of the M&G Cautious Multi Asset Fund and M&G Global
Convertibles Fund.
European cross-border distribution of retail funds has accelerated and the trend
in favour of 'Open Architecture' in both the UK and Europe continues to open up
significant bank and life company distribution opportunities. Parallel to this,
distribution of mutual funds has become increasingly intermediated and has been
accompanied by the rise of professional buyers who demand higher levels of
service and investment information, areas in which M&G has considerable
expertise. M&G has continued to expand its geographic coverage in Europe with
the first full year of operations in Spain and the launch of M&G's funds in
France in October 2007 which has given M&G access to Europe's largest mutual
fund market.
Wholesale markets are demanding increasingly sophisticated and tailored products
and there is a continued shift from balanced to specialist mandates. These
trends, plus the increased role of fixed income within portfolios, continue to
play to the strength and scale of M&G's wholesale business. In 2007, M&G
launched three new funds aimed at the institutional and pensions markets - the M
&G Alpha Opportunities Fund, M&G Secured Property Income Fund and the M&G
Secured Debt Fund. All of these funds offer innovative alternatives to
traditional fixed income assets and leverage off M&G's expertise and scale in
both property and private finance.
M&G's infrastructure investment business has grown from inception in 2005 to
manage GBP471 million (2007 year end fair value) in its principal fund,
Infracapital. The business contributed GBP7.1 million to M&G profits in 2007.
M&G's global macro investment business was established in 2005 and has grown to
GBP1.5 billion in external funds under management as at the end of 2007. It
contributed GBP11.2 million in profits to M&G in 2007, including performance
related fees.
In order to support its retail and wholesale strategy, M&G places a high
priority on the recruitment, development and retention of top-quality staff. In
a highly competitive market for the best talent, this entails providing an
inclusive and supportive environment as well as offering appropriate levels of
compensation. At the same time, M&G has a policy of prudent cost control,
ensuring that top-line growth is translated into enhanced operational gearing.
During 2007 turnover of staff remained in line with industry averages at 10 per
cent and the company spent GBP2.1 million on training and development
programmes.
Financial performance
M&G recorded another year of record profits in 2007 with an operating result of
GBP203 million (2006: GBP161 million), representing profit CAGR of 34 per cent
since 2003. Underlying profit growth, which excludes volatile performance
related fees (PRFs) and carried interest earned on private equity investments,
has grown at 36 per cent CAGR over the same period to GBP175 million (2006:
GBP134 million).
M&G continues to target increased diversity in profit generating activities. In
2007, 80 per cent of underlying profits were generated as a result of managing
external funds, compared to 23 per cent in 2003. Profit growth is driven by four
key factors: appreciation of underlying assets, positive net sales, increasing
mix of higher-margin business and decreasing cost/income ratio.
The underlying growth in M&G's principal investment markets over recent years
has been strongly supportive of its performance. While this growth is beyond the
company's control, M&G has been successful at increasing diversity in terms of
both asset class and distribution channel in order to reduce exposure to
cyclical downturns in individual markets.
M&G has performed strongly against the other three measures. Net sales for 2007
of GBP5.0 billion (2006: GBP6.1 billion) were driven by both the retail GBP2.7
billion, (2006: GBP3.1 billion) and wholesale GBP2.3 billion, (2006: GBP3.0
billion) businesses. Gross inflows of GBP14.7 billion were the highest on
record, offset to some extent by higher gross redemptions, particularly in the
more volatile international retail marketplace.
The continued strong growth in external funds under management, coupled with a
small decline in the value of funds managed for Prudential, has resulted in
an increasing mix of higher-yielding business for M&G. This has supported an
increase in gross margin (revenue as a proportion of FUM) from 28.0 basis points
in 2003 to 30.8 in 2007.
During 2007, M&G has exercised continued cost discipline to ensure that top-line
growth feeds through to profitability and cash generation. M&G's cost/income
ratio for 2007 was 66 per cent (2006: 71 per cent) having fallen from 83 per
cent in 2003.
M&G continues to provide capital efficient profits and cash generation for the
Prudential group, as well as strong investment returns on its long-term business
funds. Cash remittances were GBP99 million in 2007.
Prudential Capital
Prudential Capital (re-branded from Prudential Finance in 2007) manages
Prudential's balance sheet for profit through leveraging Prudential's market
position. The business has three strategic objectives: to operate a first class
wholesale and capital markets interface; to realise profitable proprietary
opportunities within a tightly controlled risk framework; and to provide
professional treasury services to Prudential. Prudential Capital generates
revenue by structuring transactions, providing bridging finance, and operating a
securities lending and cash management business for Prudential and its clients.
The business has continued to grow in terms of investment, infrastructure and
personnel in a controlled way while maintaining the dynamism and flexibility
that it requires to identify and realise opportunities for profit. Prudential
Capital is committed to working closer with other Group business units to
deliver opportunities and to improve value creation for the Group. Prudential
Capital is also taking a more holistic view on hedging strategy, liquidity and
capital management for the Group.
Prudential Capital has a diversified earnings base derived from bridging,
structured finance and wholesale markets. Prudential Capital delivered a good
financial result in 2007, driven by increased investment activity and strong
securities lending performance. As a result of increased revenue and maintaining
a low cost/income ratio, operating profits increased by 19 per cent to GBP51
million, resulting in a cash remittance to the holding company of GBP40 million.
Asia
Asia CER RER(5)
2007 2006 Change 2006 Change
GBPm GBPm % GBPm %
Net investment flows 2,961 2,410 23% 2,532 17%
Total IFRS operating profit* 72 47 53% 50 44%
*Based on longer-term investment returns.
Prudential's asset management business in Asia supports the Life Business, and
has established itself as an increasingly material retail business in its own
right. Today it has retail operations in ten markets and, is the only foreign
fund manager with a top five market share position in more than one Asian
country.
The mutual fund industry continues to diversify its investments, expectations
are for a significant increase in net flows over the coming years. Bank
distribution continues to dominate in most markets in Asia, and Prudential has
established strong relationships with both regional and local banks and places
great emphasis on providing good service.
Current Initiatives
Fund innovation is essential in maintaining sales levels and distribution
agreements and during 2007 Prudential's operations launched 71 new funds. The
largest of which include two India funds for Japan; the India Equity Fund and
the India Infrastructure Fund. The China Dragon A Share Equity Fund in Korea
reached its regulatory cap in two weeks and the Asia Pacific REIT in Taiwan also
reached its regulatory cap.
A key achievement in 2007 was the expansion of regional distribution
relationships with Citi and HSBC. The Asian asset management business also
signed a global partnership agreement with HSBC Private Banking and is now part
of the Credit Suisse Fundslab platform.
Greater deregulation and higher allocations by sovereign wealth and other
institutional investors in foreign investments is driving the growth of offshore
funds in the market and Prudential is also developing its institutional asset
management business in Asia winning mandates of GBP0.5 billion during 2007.
Prudential launched a retail mutual fund business in Hong Kong in October 2007.
Since launch six distribution relationships have been signed, including banks,
financial advisers and an on-line portal.
The United Arab Emirates operation also made good progress with 13 distribution
agreements signed since launch a year ago and with funds under management of
GBP397 million.
In August 2007, Prudential increased its stake in CITIC Prudential Fund
Management, its joint venture with CITIC Group in China from 33 per cent to 49
per cent, following approval from regulators. This joint venture launched its
first Qualified Foreign Institutional Investor fund in Korea in May 2007 and hit
its GBP100 million quota.
Financial Performance
Prudential's asset management business achieved record net inflows for 2007 of
GBP3 billion, up 23 per cent on 2006. The growth in net flows was primarily
driven by strong performance in India, Taiwan and Japan. Funds under management
in these three countries increased by 65 per cent, 49 per cent and 46 per cent
respectively. In total during 2007, retail funds under management grew by 39 per
cent to GBP17.4 billion.
IFRS profits from asset management operations were GBP72 million, up 53 per cent
on 2006. Operating profits in terms of basis points on funds under management
increased from 18 basis points in 2006 to 21 in 2007. The asset management
business requires very little capital to support its growth and in 2007 it
remitted a net GBP31 million to the Group.
United States
US Asset Management
PPM America CER RER(5)
2007 2006 Change 2006 Change
GBPm GBPm % GBPm %
Total IFRS operating profit* 4 10 (60%) 12 (67%)
*Based on longer-term investment returns.
PPM America (PPMA) manages assets for Prudential's US, UK and Asian affiliates.
PPMA also provides investment services to other affiliated and unaffiliated
institutional clients including collateralised debt obligations (CDOs), private
equity funds, institutional accounts and mutual funds. PPMA's strategy is
focused on effectively managing existing assets, maximising synergies with
international asset management affiliates and leveraging investment management
capabilities across the Prudential Group. PPMA also opportunistically pursues
third-party mandates.
Current year initiatives
During 2007, PPMA successfully leveraged its investment management capabilities
as evidenced by:
- - Obtaining over GBP329 million of funds under management in the Jackson
variable annuity programme.
- - Assuming management of over GBP194 million of funds under management from
Curian.
- - Assuming additional responsibilities for the UK life fund, growing
assets by GBP2 billion.
- - Launching three new products offered by Prudential Corporation Asia.
- - Raising over GBP638 million of third-party funds under management.
Financial performance
IFRS operating profit in 2007 was GBP4 million, down from GBP10 million in 2006,
primarily due to lower investment income and performance-related fees, partially
offset by asset-driven fee growth.
Year-end 2007 funds under management of GBP39 billion were as follows:
PPMA funds under management
(GBP billions) Asia US UK Total
Insurance 0 23 10 33
Unitised 3 0 1 4
Institutional 0 0 0 0
CDOs 0 2 0 2
Total 3 25 11 39
US Broker dealer
Broker dealer CER RER(5)
2007 2006 Change 2006 Change
GBPm GBPm % GBPm %
Revenue 300 246 22% 267 12%
Costs (291) (240) 21% (261) 11%
Total IFRS operating profit* 9 6 50% 6 50%
*Based on longer-term investment returns.
National Planning Holdings (NPH), Jackson's affiliated independent broker-dealer
network, is comprised of four broker-dealer firms, including INVEST Financial
Corporation, Investment Centers of America, National Planning Corporation and
SII Investments.
NPH continues to grow through significant recruiting efforts. By leveraging its
high-quality, state-of-the-art technology, NPH provides its advisors with the
tools they need to operate their practices more efficiently. Through its
relationship with NPH, Jackson continues to benefit from an important retail
distribution outlet, in addition to receiving valuable insight into the needs of
financial advisors and their clients.
Current year initiatives
NPH increased sales of Jackson's enhanced product offering and the overall
distribution of the network during the year. NPH also introduced several
operational enhancements, which increased the efficiency of its production
processes. In addition, NPH executed a focused recruitment initiative to expand
the total assets under management and the representative base of INVEST
Financial Corporation.
Financial performance
NPH had a very successful year in 2007, generating record revenues of GBP300
million versus GBP246 million in 2006 on gross product sales of GBP7.1 billion.
The network continues to generate profitable growth with 2007 IFRS operating
profit of GBP9 million, a 50 per cent increase at CER from GBP6 million in 2006.
NPH also increased the number of registered advisors in its network to 3,000 at
year-end.
Curian
Curian CER RER(5)
2007 2006 Change 2006 Change
GBPm GBPm % GBPm %
Gross investment flows 663 422 57% 459 44%
Revenue 20 15 33% 16 25%
Costs (25) (22) 14% (24) 4%
Total IFRS operating profit* (5) (7) (29%) (8) (38%)
*Based on longer-term investment returns.
Curian Capital (Curian), Jackson's registered investment advisor, provides
innovative fee-based separately managed accounts and investment products to
advisors through a sophisticated technology platform. Curian expands Jackson's
access to advisors and provides a complement to Jackson's core annuity product
lines.
Current year initiatives
During 2007, Curian implemented its Simplified Proposal Process, which allows
financial professionals to generate proposals in a matter of minutes, while
maintaining the flexibility and customisation that make separately managed
accounts an attractive alternative to traditional investment vehicles. Curian
also expanded its wholesaling force during the year in an effort to accelerate
growth.
Financial performance
As a result of these initiatives, Curian continued to build its position in the
US retail asset management market with total assets under management at the end
of December 2007 of GBP1.7 billion, up from GBP1.2 billion at the end of
December 2006. Curian also generated record deposits in 2007 of GBP663 million,
up 57 per cent over 2006. Curian's IFRS operating loss declined to GBP5 million
in 2007 (2006: GBP7 million at CER).
OTHER CORPORATE INFORMATION
Balance sheet
Explanation of balance sheet structure
The Group's capital on an IFRS basis comprises of shareholders' funds of
GBP6,201 million, subordinated long-term and perpetual debt of GBP1,570 million,
other core structural borrowings of GBP922 million and the unallocated surplus
of with-profits funds of GBP14.4 billion.
Subordinated or hybrid debt is debt capital which has some equity-like features
and which would rank below other senior debt in the event of a liquidation.
These features allow hybrid debt to be treated as capital for FSA regulatory
purposes. All of the Group's hybrid debt which qualifies in this way is held at
the Group level and is therefore taken as capital into the parent solvency test
under the IGD.
The FSA has established a structure for determining how much hybrid debt can
count as capital which is similar to that used for banks. It categorises capital
as Tier 1 (equity and preference shares), Upper Tier 2 and Lower Tier 2. Up to
15 per cent of Tier 1 can be in the form of hybrid debt and called 'Innovative
Tier 1'. At 31 December 2007, the Group held GBP763 million of Innovative Tier 1
capital, in the form of perpetual securities, and GBP932 million of Lower Tier 2
capital. Following the implementation of the IGD, it is advantageous to the
Group from a regulatory capital standpoint to raise its long-term debt in hybrid
form and it is the Group's policy to take advantage of favourable market
conditions as they arise to do so.
The unallocated surplus of the with-profits funds represents assets in the life
fund which have not yet been allocated either to policyholders or shareholders.
They are not generally available to the Group other than as they emerge through
the statutory transfer of the shareholders' share of the surplus as it emerges
from the fund over time.
Shareholders' borrowings and financial flexibility
Core structural borrowings of shareholder-financed operations at 31 December
2007 totalled GBP2,492 million, compared with GBP2,612 million at the end of
2006. This decrease reflected the repayment of GBP150 million long-term
borrowings upon maturity, exchange conversion losses of GBP16 million and other
adjustments of negative GBP14 million.
After adjusting for holding company cash and short-term investments of GBP1,456
million, net core structural borrowings at 31 December 2007 were GBP1,036
million compared with GBP1,493 million at 31 December 2006. This reflects the
net cash inflow of GBP445 million (including GBP527 million net proceeds from
the sale of Egg), exchange conversion gains of GBP49 million and other
adjustments of negative GBP37 million.
Core structural borrowings at 31 December 2007 included GBP1,473 million at
fixed rates of interest with maturity dates ranging from 2009 to perpetuity.
GBP888 million of the core borrowings were denominated in US dollars, to hedge
partially the currency exposure arising from the Group's investment in Jackson.
Prudential has in place an unlimited global commercial paper programme. At 31
December 2007, commercial paper of GBP320 million, US$3,479 million and EUR483
million has been issued under this programme. Prudential also has in place a
GBP5,000 million medium-term note (MTN) programme. At 31 December 2007,
subordinated debt outstanding under this programme was GBP435 million and EUR520
million, and senior debt outstanding was EUR65 million and US$12 million. In
addition, the holding company has access to GBP1,600 million committed revolving
credit facilities, provided in equal tranches of GBP100 million by 16 major
international banks renewable in December 2009 and an annually renewable GBP500
million committed securities lending liquidity facility. These facilities have
not been drawn on during the year. The commercial paper programme, the MTN
programme, the committed revolving credit facilities and the committed
securities lending liquidity facility are available for general corporate
purposes and to support the liquidity needs of the parent company.
The Group's core debt is managed to be within a target level consistent with its
current debt ratings. At 31 December 2007, the gearing ratio (debt, net of cash
and short-term investments, as a proportion of EEV shareholders' funds plus
debt) was 6.6 per cent compared with 11.2 per cent at 31 December 2006.
Prudential plc enjoys strong debt ratings from Standard & Poor's, Moody's and
Fitch. Prudential long-term senior debt is rated A+ (stable outlook), A2 (stable
outlook) and AA- (stable outlook) from Standard & Poor's, Moody's and Fitch
respectively, while short-term ratings are A-1, P-1 and F1+.
Based on EEV basis operating profit from continuing operations and interest
payable on core structural borrowings, interest cover was 16.1 times in 2007
compared with 13.1 times in 2006.
Treasury policy
The Group operates a central treasury function, which has overall responsibility
for managing its capital funding programme as well as its central cash and
liquidity positions.
The aim of Prudential's capital funding programme, which includes the GBP5,000
million MTN programme together with the unlimited commercial paper programme, is
to maintain a strong and flexible funding capacity.
Prudential UK and Prudential Corporation Asia use derivatives to reduce equity
risk, interest rate and currency exposures, and to facilitate efficient
investment management. In the US, Jackson uses derivatives to reduce interest
rate risk, to facilitate efficient portfolio management and to match liabilities
under fixed index policies.
It is Prudential's policy that all free-standing derivatives are used to hedge
exposures or facilitate efficient portfolio management.
Amounts at risk are covered by cash or by corresponding assets.
Due to the geographical diversity of Prudential's businesses, it is subject to
the risk of exchange rate fluctuations. Prudential's international operations in
the US and Asia generally write policies and invest in assets denominated in
local currency. Although this practice limits the effect of exchange rate
fluctuations on local operating results, it can lead to significant fluctuations
in Prudential's consolidated financial statements upon conversion of results
into pounds sterling. The currency exposure relating to the conversion of
reported earnings is not separately managed, as it is not in the economic
interests of the Group to do so. The impact of gains or losses on currency
conversions is recorded as a component of shareholders' funds within the
statement of recognised income and expense. The impact of exchange rate
fluctuations in 2007 is discussed elsewhere in this financial review.
Unallocated surplus of with-profits
During 2007, the unallocated surplus, which represents the excess of assets over
policyholder liabilities for the Group's with-profits funds on a statutory
basis, grew from GBP13.6 billion at 1 January to GBP14.4 billion at 31 December.
This reflects an increase in the cumulative retained earnings arising on
with-profits business that have yet to be allocated to policyholders or
shareholders.
Regulatory capital requirements
Prudential is subject to the capital adequacy requirements of the Insurance
Groups Directive ("IGD") as implemented by the Financial Services Authority ("
FSA"). The IGD pertains to groups whose activities are primarily concentrated in
the insurance sector, and applies for Prudential from December 2007, following
the sale of Egg Banking during 2007. Prior to this, Prudential was required to
meet the requirements of the Financial Conglomerates Directive ("FCD"), which
applies to groups with significant cross-sector activities in insurance and
banking/investment services.
The FSA implemented the FCD by applying the sectoral rules of the largest sector
of the group. Prudential was therefore classified as an insurance conglomerate
under the FCD, and was required to focus on the capital adequacy requirements
relevant to that sector. Prudential's move from FCD to IGD during 2007,
therefore, did not have a significant impact on the Group, as the FSA's
implementation of both directives is closely aligned. In particular, from 31
December 2006 the FSA made the continuous parent solvency testing mandatory for
all insurance groups covered by the IGD. This involves the aggregating of
surplus capital held in the regulated subsidiaries, from which Group borrowings,
except those subordinated debt issues which qualify as capital, are deducted. No
credit for the benefit of diversification is allowed for under this approach.
The test is passed when this aggregate number is positive, and a negative result
at any point in time is a notifiable breach of UK regulatory requirements.
Due to the geographically diverse nature of Prudential's operations, the
application of these requirements to Prudential is complex. In particular, for
many of our Asian operations, the assets, liabilities and capital requirements
have to be recalculated based on FSA regulations as if the companies were
directly subject to FSA regulation.
The IGD surplus as at 31 December 2007 will be submitted to the FSA by 30 April
2008 but is currently estimated to be around GBP1.4 billion. This includes a
gain of around GBP0.3billion that arose during 2007 from the sale of Egg Banking
plc.
The European Union ("EU") is continuing to develop a new prudential framework
for insurance companies, 'the Solvency II project' that will update the existing
life, non-life and insurance groups directives. The main aim of this framework
is to ensure the financial stability of the insurance industry and protect
policyholders through establishing solvency requirements better matched to the
true risks of the business. Like Basel 2, the new approach is expected to be
based on the concept of three pillars - minimum capital requirements,
supervisory review of firms' assessments of risk and enhanced disclosure
requirements. However, the scope is wider than Basel 2 and will cover
valuations, the treatment of insurance groups, the definition of capital and the
overall level of capital requirements.
A key aspect of Solvency II is the focus on risks and, for example, capital
requirements will be calibrated to a one year Value at Risk with a 99.5 per cent
confidence level. Companies will be encouraged to improve their risk management
processes and will be allowed to make use of internal economic capital models to
enable a better understanding of risks. The emphasis on transparency and
comparability would ensure a level playing field but not delivering this remains
one of the key risks for the project.
The European Commission ("EC") published a draft framework directive on 10 July
2007 containing high-level principles. The directive is now being reviewed by
the European Parliament and the Council of Ministers. The EC expects the
institutions to agree the Solvency II framework directive in the second half of
2008. The principles in the directive will be supplemented by implementing
measures that will be adopted by the EC and EU member states. Solvency II is
then intended to be implemented during 2012. It is important that the EU
policy makers keep up the progress to enable implementation by the suggested
date.
During 2007, the Committee of European Insurance and Occupational Pensions
Supervisors (CEIOPS) invited the EU insurance industry to participate in the
third quantitative impact study, which provided useful input for supervisors and
industry alike. The EU insurance industry will be participating in a fourth
quantitative impact study during the first half of 2008 with a view to providing
further quantitative input into the calibration of the capital requirements.
This study will include a particular focus on groups. Participation in these
exercises involves a substantive commitment and is expected to yield benefits by
providing evidence leading to a truly risk-based capital requirement.
Prudential is also actively engaged in policy discussions mainly through its
participation in the Chief Risk Officer (CRO) Forum of major European insurance
firms. We have been emphasising the importance of Solvency II delivering an
economic based approach for groups reflecting diversification benefits across
all the group's insurance activities; an appropriate level playing field, in
particular in connection with the treatment of operations outside the European
Economic Area (EEA); and the provision of instruments of group support that
enhance the efficiency of capital management within the EEA.
Financial strength of insurance operations
Asia
Prudential Corporation Asia maintains solvency margins in each of its operations
so that these are at or above the local regulatory requirements. Across the
region less than 40 per cent of non-linked funds are invested in equities. Both
Singapore and Malaysia have discrete life funds, and have strong free asset
ratios. The Hong Kong life operation is a branch of Prudential Assurance Company
Limited and its solvency is covered by that business. Taiwan has Risk Based
Capital regulatory solvency margins and Prudential ensures sufficient capital is
retained in the business to cover these requirements.
Asia 2007 2006 2005
per cent per cent per cent
Equities 10 3 9
Bonds 67 60 59
Other asset classes 24 37 33
Total 100 100 100
United States
The capital adequacy position of Jackson remains strong, with the capital ratio
improving from 9.8 per cent in 2006 to 10.6 per cent in 2007. Jackson's
statutory capital, surplus and asset valuation reserve position of GBP2,251
million at 31 December 2007 improved year-on-year by GBP327 million, after
deducting the GBP122 million of capital remitted to the parent company.
Jackson's financial strength is rated AA by Standard & Poor's and A1 by Moody's.
Jackson's invested asset mix on a US regulatory basis (excludes policy loans and
reverse repo leverage) is as follows:
Jackson 2007 2006 2005
per cent per cent per cent
Bonds:
Investment Grade Public 59 60 58
Investment Grade Private 18 18 19
Non-Investment Grade Public 3 4 5
Non-Investment Grade Private 2 1 2
Commercial mortgages 12 12 11
Private equities and real estate 3 3 3
Equities, cash and other assets 3 2 2
Total 100 100 100
United Kingdom
The PAC's long-term fund remains very strong. On a realistic valuation basis,
with liabilities recorded on a market consistent basis, the free assets are
valued at approximately GBP8.7 billion at 31 December 2007, before a deduction
for the risk capital margin. The financial strength of PAC is rated AA+ (stable
outlook) by Standard & Poor's, Aa1 (negative outlook) by Moody's and AA+ (stable
outlook) by Fitch Ratings.
The with-profits sub-fund delivered a pre-tax return of 7.2 per cent in 2007,
and over the last five years the fund has achieved a total return of 91 per
cent. Much of this excellent investment performance was achieved through the
active asset allocation of the fund. As part of its asset allocation process,
Prudential UK constantly evaluates prospects for different markets and asset
classes. During the year PAC's Long Term Fund reduced its exposure to property
and increased the quality of its corporate bond portfolio. The fund includes the
assets of the Equitable Life with-profit annuity business, transferred during
the year, which were almost entirely fixed interest corporate bonds.
UK fund 2007 2006 2005
per cent per cent per cent
UK equities 35 36 40
International equities 17 17 19
Property 14 15 15
Bonds 27 26 21
Cash and other assets classes 7 6 5
Total 100 100 100
Inherited estate of Prudential Assurance
The assets of the main with-profits fund within the long-term insurance fund of
PAC comprise the amounts that it expects to pay out to meet its obligations to
existing policyholders and an additional amount used as working capital. The
amount payable over time to policyholders from the with-profits fund is equal to
the policyholders' accumulated asset shares plus any additional payments that
may be required by way of smoothing or to meet guarantees. The balance of the
assets of the with-profits fund is called the 'inherited estate' and has
accumulated over many years from various sources.
The inherited estate represents the major part of the working capital of PAC's
long-term insurance fund. This enables PAC to support with-profits business by
providing the benefits associated with smoothing and guarantees, by providing
investment flexibility for the fund's assets, by meeting the regulatory capital
requirements that demonstrate solvency and by absorbing the costs of significant
events or fundamental changes in its long-term business without affecting the
bonus and investment policies. The size of the inherited estate fluctuates from
year to year depending on the investment return and the extent to which it has
been required to meet smoothing costs, guarantees and other events.
PAC believes that it would be beneficial if there were greater clarity as to the
status of the Inherited Estate. As a result PAC has announced that it has begun
a process to determine whether it can achieve that clarity through a
reattribution of the inherited estate. As part of this process a Policyholder
Advocate has been nominated to represent policyholders' interests. This
nomination does not mean that a reattribution will occur.
Given the size of the Group's with-profits business any proposal is likely to be
time consuming and complex to implement and is likely to involve a payment to
policyholders from shareholders funds. If a reattribution is completed the
inherited estate will continue to provide working capital for the long-term
insurance fund.
Prudential aims to be in a position to determine whether reattribution is in the
best interests of policyholders and shareholders in the first half of 2008.
Defined benefit pension schemes
The Group operates four defined benefit schemes, three in the UK, of which the
principal scheme is the Prudential Staff Pension Scheme (PSPS), and a small
scheme in Taiwan. The level of surplus or deficit of assets over liabilities for
defined benefit schemes is currently measured in three ways: the actuarial
valuation, FRS 17 (for subsidiary accounting in the UK), and IAS 19 for the
Group financial statements. FRS 17 and IAS 19 are very similar. As at 31
December 2007 the shareholders' share of the GBP447 million surplus for PSPS and
the deficits of the other schemes amounted to an GBP76 million surplus net of
related tax relief.
Defined benefit schemes in the UK are generally required to be subject to full
actuarial valuation every three years to assess the appropriate level of funding
for schemes having regard to their commitments. These valuations include
assessments of the likely rate of return on the assets held within the separate
trustee administered funds. PSPS was last actuarially valued as at 5 April 2005
and this valuation demonstrated the Scheme to be 94 per cent funded, with a
shortfall of actuarially determined assets to liabilities of 6 per cent,
representing a deficit of GBP243 million.
The finalisation of the valuation as at 5 April 2005 was accompanied by changes
to the basis of funding for the scheme with effect from that date. Deficit
funding amounts designed to eliminate the actuarial deficit over a 10-year
period have been and are being made based on that valuation. Total contributions
to the Scheme for deficit funding and employer's contributions for ongoing
service for current employees are expected to be of the order of GBP70-75
million per annum over a 10-year period. In 2007, total contributions for the
calendar year including expenses and augmentations were GBP82 million.
Under IAS 19 the basis of valuation differs markedly from the full triennial
valuation basis. In particular, it requires assets of the Scheme to be valued at
their market value at the year-end, while pension liabilities are required to be
discounted at a rate consistent with the current rate of return on a high
quality corporate bond. As a result, the difference between IAS 19 basis assets
and liabilities can be volatile. For those schemes such as PSPS, which hold a
significant proportion of their assets in equity investments, the volatility can
be particularly significant. For 2007, a GBP23 million pre-tax shareholder
charge to operating results based on longer-term returns arises. In addition,
outside the operating result, but included in total profits is a pre-tax
shareholder credit of GBP90 million for net actuarial gains. These gains
primarily represent the effect of changes in economic assumptions which more
than offsets the losses from the effect of strengthened mortality assumptions
for the UK pension schemes.
Surpluses and deficits on the Group's defined benefit schemes are apportioned to
the PAC life fund and shareholders' funds based on estimates of employees'
service between them. At 31 December 2005, the deficit of PSPS was apportioned
in the ratio 70/30 between the life-fund and shareholders' backed operations
following detailed consideration of the sourcing of previous contributions. This
ratio was applied to the base deficit position at 1 January 2006 and for the
purpose of determining the allocation of the movements in that position up to 31
December 2007. The IAS 19 service charge and ongoing employer contributions are
allocated by reference to the cost allocation for current activity. The deficit
of the Scottish Amicable Pension Scheme has been allocated 50 per cent to the
PAC with profits fund and 50 per cent to the PAC shareholder fund.
Reflecting these two elements, at 31 December 2007, the total share of the
surplus on PSPS and the deficit on the smaller Scottish Amicable scheme
attributable to the PAC with-profits fund amounted to a net surplus of GBP304
million net of related tax relief.
RISK MANAGEMENT
Philosophy, principles and objectives
Philosophy
As a provider of financial services, including insurance, the Group's business
is the managed acceptance of risk. Prudential believes that effective risk
management capabilities are a key competitive advantage. A strategic risk,
capital and value management framework and risk management culture has been
developed to enhance the Group's embedded and franchise value.
Principles
Risk is defined as the uncertainty that Prudential faces in successfully
implementing its strategies and objectives. This includes all internal or
external events, acts or omissions that have the potential to threaten the
success and survival of Prudential.
The control procedures and systems established within the Group are designed to
manage, rather than eliminate, the risk of failure to meet business objectives.
They can only provide reasonable and not absolute assurance against material
misstatement or loss, and focus on aligning the levels of risk-taking with the
achievement of business objectives.
The Group's policy is to proactively identify, assess, control, and monitor
risk. This forms an essential element of delivering the Group's performance
ambition. In so doing, material risks will only be retained where this is
consistent with Prudential's risk appetite framework, ie:
- - The retention of the risk contributes to value creation.
- - The Group is able to withstand the impact of an adverse outcome.
- - The Group has the necessary capabilities, expertise, processes and
controls to manage the risk.
Objectives
The Group has five objectives for risk and capital management:
a) Framework: Design, implement and maintain a consistent risk management
framework and policies spanning: economic, regulatory and rating agency capital
management; risk appetite; and risk-adjusted profitability (RAP).
b) Monitoring: Establish a 'no surprises' risk management culture by
identifying the risk landscape, assessing and monitoring risk exposures and
understanding change drivers.
c) Control: Implement risk mitigation strategies and remedial actions where
exposures are deemed inappropriate' and manage the response to extreme events.
d) Communication: Communicate the Group risk, capital and profitability
position to internal and external stakeholders and rating agencies.
e) Culture: Foster a risk management culture, providing quality assurance
and facilitating the sharing of best practice risk measurement and management
across the Group and industry.
Categorisation model
A common risk language is used across the Group, which allows meaningful
comparisons to be made between different business units. Risks are broadly
categorised as shown below.
Category Risk type Definition
Financial risks Market risk The risk that arises from adverse changes in the value of, or
income from, assets and changes in interest rates or exchange
rates.
Credit risk The risk of loss if another party fails to perform its
obligations, or fails to perform them in a timely fashion.
Insurance risk The inherent uncertainty as to the occurrence, amount and
timing of insurance liabilities. This includes adverse
mortality, morbidity and persistency experience.
Liquidity risk The risk that a business, though solvent on a balance sheet
basis, either does not have the financial resources to meet
its obligations as they fall due or can secure them only at
excessive cost.
Non-financial risks Operational risk The risk of direct or indirect loss resulting from inadequate
or failed internal processes, people or systems, or from
external events. This includes legal and regulatory
compliance risk.
Business environment risk Exposure to forces in the external environment that could
significantly change the fundamentals that drive the
business's overall objectives and strategy.
Strategic risk Ineffective, inefficient or inadequate senior management
processes for the development and implementation of business
strategy in relation to the business environment and the
Group's capabilities.
Governance
The Group's internal control processes are detailed in the Group Governance
Manual. This is supported by the Group Risk Framework, which provides an
overview of the Group-wide philosophy and approach to risk management.
For joint ventures where the Group does not control management, the business
unit party to the arrangement must: satisfy itself that suitable governance and
risk management arrangements are in place to protect the Group's interests; and
comply with the Group's requirements in respect of any operations it performs in
support of the joint venture's activities.
Prudential's risk governance framework requires that all of the Group's
businesses and functions establish processes for identifying, evaluating and
managing the key risks faced by the Group. The risk governance framework is
based on the concept of 'three lines of defence': risk management, risk
oversight and independent assurance (see diagram opposite).
Risk management
Primary responsibility for strategy, performance management and risk control
lies with the Prudential plc Board of directors (the Board), the Group Chief
Executive and the chief executives of each business unit. Additionally, the
Board has delegated responsibility to the Approvals Committee to approve actions
which could significantly change the risk profile of any business, capital
commitments and divestments within defined materiality thresholds, and certain
legal matters involving trademarks, contracts, material guarantees and specific
interactions with third parties.
Where appropriate, more detailed policies and procedures have been developed at
Group and/or business unit levels. These include Group-wide mandatory policies
on certain operational risks, including: health, safety, fraud, money
laundering, bribery, business continuity, information security and operational
security. Additional guidelines are provided for some aspects of actuarial and
finance activity.
Board: The Board has overall responsibility for the system of internal control
and risk management. It approves the overall framework for managing the risks
faced by the Group and provides strategic direction on the amount and type of
risk that the Group is prepared to accept.
Group executive management: The Group Chief Executive has overall responsibility
for the risks facing the Group. The Group Chief Executive recommends to the
Board the amount and type of risk that the Group is prepared to accept, and
recommends risk management strategies as well as an overall framework for
managing the risks faced by the Group with support from the Group Executive
Committee, Group Finance Director and Group level risk committees. The Group
Chief Executive provides regular updates to the Board on the risk position and
risk policy.
Business unit management: Business unit chief executives are accountable for the
implementation and operation of appropriate business unit risk frameworks and
for ensuring compliance with the policy and minimum standards set by the Group.
Business units must establish suitable governance structures that are based on
the concept of 'three lines of defence', tailored as appropriate to the scale
and complexity of the business unit. As the first line of defence, business unit
management is responsible for identifying and managing business unit risks and
providing regular risk reporting to the Group.
Risk oversight
Risk oversight: Risk management oversight is provided by Group-level risk
committees, the Group Finance Director and the Group Risk function, working with
counterparts in the business units in addition to other Group Head Office (GHO)
oversight functions.
Group-level risk committees
Group Asset Liability Committee (Group ALCo): The Group ALCo is responsible for
oversight of financial risks (market, credit, liquidity and insurance risks)
across the Group. It is chaired by the Group Finance Director and its membership
includes senior business unit and Group executives (chief actuaries, principal
asset liability management officers and chief investment officers) who are
involved in the management of the aforementioned risks. Group ALCo meetings are
held on a monthly basis.
Balance Sheet and Capital Management Committee (BSCMC): The BSCMC is responsible
for managing the balance sheets of Prudential plc and oversight of the
Prudential Capital business unit. It is chaired by the Group Finance Director
and its membership includes senior representatives from GHO, M&G and Prudential
Capital. BSCMC meetings are held on a monthly basis.
Group Operational Risk Committee (GORC): The GORC is responsible for the
oversight of non-financial risks (operational, business environment and
strategic risks) across the Group. Responsibilities include monitoring
operational risk and related policies and processes as they are applied
throughout the Group. It is chaired by the Group Finance Director and its
membership includes senior representatives of the Group and business unit risk
functions. GORC meetings are held on a quarterly basis.
Group Risk
Group Risk's mandate is to establish and embed a strategic risk, capital and
value management framework and risk management culture, consistent with
Prudential's risk appetite, that protects and enhances the Group's embedded and
franchise value.
Group Risk is responsible for the continued enhancement and evolution of the
Group Risk Framework; provides functional leadership to the business units for
the oversight of risk management across the Group; and acts as secretariat to
the Group ALCo and GORC.
Group Risk also has certain finance and actuarial responsibilities related to
Group regulatory and rating agency capital requirements, development of
actuarial and financial reporting requirements and the RAP value management
framework.
Independent assurance
Group Audit Committee: The Group Audit Committee provides independent assurance
to the Board on the effectiveness of the Group's system of internal controls and
risk management. The Group Audit Committee reviews the Group's risk management
framework, and regular risk reports. The Group Audit Committee is supported by
Group-wide Internal Audit.
Group-wide Internal Audit (GwIA): The GwIA function independently assures the
effective operation of the Group's risk management framework. This involves the
validation of methodology application, policy compliance and control adequacy.
The GwIA Director reports all audit related matters to the Group Audit Committee
(and business unit audit committees where appropriate) and reports for
management purposes (but not audit-related matters) to the Group Chief
Executive.
Risk appetite
The Group risk appetite framework sets out the Group's overall tolerance to risk
exposures, approach to risk and return optimisation and management of risk. The
Board and Group Executive Committee have set up Group-level risk appetite
statements concerning the key risk exposures faced by the Group. The Group risk
appetite statements set out the Group's risk tolerance, or risk appetite, to '
shocks' to the key financial risk exposures (market, credit and insurance risk).
Limits
Aggregate risk limits are defined in terms of earnings volatility and capital
requirements:
(a) Earnings volatility: The objectives of the limits are to ensure that (a)
the volatility of earnings is consistent with stakeholder expectations: (b) the
Group has adequate earnings (and cash flows) to service debt and expected
dividends: and (c) that earnings (and cash flows) are managed properly across
geographies and are consistent with the Group's funding strategies. The two
measures used are European Embedded Value (EEV) operating profit and
International Financial Reporting Standards (IFRS) operating profit.
(b) Capital requirements: The objectives of the limits are to ensure that (a)
the Group is economically solvent: (b) the Group achieves its desired target
rating to meet its business objectives: (c) supervisory intervention is avoided:
(d) any potential capital strains are identified: and (e) accessible capital is
available to meet business objectives. The two measures used are EU Insurance
Groups Directive (IGD) capital requirements and economic capital requirements.
Business units must establish suitable market, credit, underwriting and
liquidity limits that maintain financial risk exposures within the defined risk
appetite.
In addition to business unit operational limits on credit risk, counterparty
risk limits are also set at the Group level. Limits on total Group-wide
exposures to a single counterparty are specified for different credit rating '
buckets'. Actual exposures are monitored against these limits on a quarterly
basis.
Usage by business units
Risk appetite is part of the annual business planning cycle. The risk profile of
the Group is monitored against the agreed limits throughout the year by Group
Risk. Using submissions from business units, Group Risk calculates the Group's
position (allowing for diversification effects between business units) relative
to the limits implied by the risk appetite statements.
In order to determine its risk position, each business unit calculates the
impacts (on earnings and capital measures) of a shock to market, credit,
insurance and operational risk exposures.
A two-tier approach is used to apply the limits at business unit level. Firstly,
indicative business unit risk limits are calculated; these ensure that, if each
business unit keeps within its limits, the Group risk position would be within
the Group limits. Secondly, the impact on the risk position is considered as
part of Group Risk's scrutiny of large transactions or departures from plan
proposed by individual business units.
Any potential breaches of the risk limits implied by a business unit plan will
necessitate a dialogue process between GHO and the business units. Group limits
may not be breached if, for example, limits in other business units are not
fully utilised, or the diversification effect at Group level of a particular
risk with other business units means that the Group limit is not breached.
Ultimately, authorisation to breach Group limits would require Group Executive
Committee approval.
Risk management process
Risk mitigation
The Group expects active management of its actual risk profile against its
tolerance of risk. Primary responsibility for identifying and implementing
controls and mitigation strategies rests with the business units. Group Risk
provides oversight and advice.
Risk registers are maintained that include details of the controls and
mitigating actions being employed for identified risks. The effectiveness of
controls and progress with actions are routinely assessed. Any mitigation
strategies involving large transactions (eg. a material derivative transaction)
would be subject to scrutiny at Group level before implementation.
Prudential employs a range of risk mitigation strategies aimed at reducing the
impact of a variety of risks. Key mitigation strategies include: adjustment of
asset portfolios to reduce investment risks (such as duration mismatches or
overweight counterparty exposures); use of derivatives to hedge market risks;
reinsurance programmes to limit insurance risk; and corporate insurance
programmes to limit impact of operational risks. Revisions to business plans
(such as reassessment of bonus rates on participating business and scaling back
of target new business volumes) may be also be used as a mitigating strategy.
Contingency plans are in place for a range of operational risk scenarios,
including incident management and business continuity plans. As a contingency
plan for liquidity risk, the Group has arranged access to committed revolving
credit facilities and committed securities lending facilities.
Asset liability management
Prudential manages its assets and liabilities locally, in accordance with local
regulatory requirements and reflecting the different types of liabilities of
each business unit. Stochastic asset-liability modelling is carried out locally
by the business units to perform dynamic solvency testing and assess economic
capital requirements. Reserve adequacy testing under a range of scenarios is
also carried out, including scenarios prescribed by local regulatory bodies.
The investment strategy for assets held to back liabilities is set locally by
business units, taking into account the nature, term and currency of the
liabilities, and any local regulatory requirements. The main principles are as
follows:
- - For liabilities that are sensitive to interest rate movements (in
particular, UK non-profit annuities and Jackson fixed annuities), cash flow
analysis is used to construct a portfolio of fixed income securities whose value
changes in line with the value of liabilities when interest rates change;
- - For participating business (in particular, the UK with-profits fund),
stochastic asset-liability modelling is used to derive a strategic asset
allocation and policyholder bonus strategy that (based on the model assumptions)
will optimise policyholder and shareholder returns, while maintaining financial
strength. The bonus strategy on participating business is an integral part of
the asset-liability management approach for participating business; and
- - For unit-linked business, the assets held to cover policyholder unit
accounts are invested as per the stated investment strategy or benchmark index
given in the product marketing literature. Assets in respect of non-unit
reserves (e.g. sterling reserves) are invested in fixed income securities (using
a cash flow matching analysis).
Derivative hedging strategies are also used on a controlled basis across the
Group to manage exposure to market risks. Surplus assets held centrally are
predominantly invested in short-term fixed income securities. The Group's
central treasury function actively manages the surplus assets to maximise
returns, subject to maintaining an acceptable degree of liquidity.
Risk reporting
Group Risk and other GHO oversight functions have individually defined and
publicised frameworks, escalation criteria and processes for the timely
reporting of risks and incidents by business units. As appropriate, these risks
and incidents are escalated to the various Group-level oversight and risk
committees and the Board.
Internal business unit routine reporting requirements vary according to the
nature of the business. Each business unit is responsible for ensuring that its
risk reporting framework meets both the needs of the business unit (for example
reporting to the business unit risk and audit committees) and the minimum
standards set by the Group (for example, to meet Group-level reporting
requirements).
Business units review their risks as part of the annual preparation of their
business plans, and review opportunities and risks to business objectives
regularly with Group executive management. Group Risk reviews, and reports to
Group executive management, on the impact of large transactions or divergences
from business plan.
The Group Executive Committee and Board are provided with regular updates on the
Group's economic capital position, overall position against risk limits and RAP.
They also receive the annual financial condition reports prepared by the Group's
insurance operations.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
SUMMARY CONSOLIDATED INCOME STATEMENT
2007 2006
GBPm GBPm
Asian operations 1,103 864
US operations 635 718
UK operations:
UK insurance operations 859 686
M&G 254 204
1,113 890
Other income and expenditure (289) (298)
Restructuring costs (20) (41)
Operating profit from continuing operations based on longer-term investment returns 2,542 2,133
Short-term fluctuations in investment returns 174 738
Mark to market value movements on core borrowings 223 85
Shareholders' share of actuarial gains and losses on defined benefit pension schemes 116 207
Effect of changes in economic assumptions and time value of cost of options and guarantees 748 59
Profit from continuing operations before tax (including actual investment returns) 3,803 3,222
Tax attributable to shareholders' profit (961) (904)
Profit from continuing operations for the financial year after tax before minority interests 2,842 2,318
Discontinued operations (net of tax) 241 (105)
Profit for the year 3,083 2,213
Attributable to:
Equity holders of the Company 3,062 2,212
Minority interests 21 1
Profit for the year 3,083 2,213
Earnings per share (in pence) 2007 2006
Continuing operations
From operating profit, based on longer-term investment returns, after related tax and minority
interests 74.9p 62.1p
Adjustment from post-tax longer-term investment returns to post-tax actual investment returns
(after minority interests) 6.1p 21.8p
Adjustment for effect of mark to market value movements on core borrowings 9.1p 3.5p
Adjustment for post-tax effect of shareholders' share of actuarial gains and losses on defined
benefit pension schemes 3.4p 6.0p
Adjustment for post-tax effect of changes in economic assumptions and time value of cost of
options and guarantees (after minority interests) 21.8p 2.6p
Based on profit from continuing operations after tax and minority interests 115.3p 96.0p
Discontinued operations
Based on profit (loss) from discontinued operations after tax and minority interests 9.9p (4.3)p
Based on profit for the year after minority interests 125.2p 91.7p
Average number of shares (millions) 2,445 2,413
Dividends per share (in pence) 2007 2006
Dividends relating to reporting period:
Interim dividend (2007 and 2006) 5.70p 5.42p
Final dividend (2007 and 2006) 12.30p 11.72p
Total 18.00p 17.14p
Dividends declared and paid in reporting period:
Current year interim dividend 5.70p 5.42p
Final dividend for prior year 11.72p 11.02p
Total 17.42p 16.44p
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
OPERATING PROFIT FROM CONTINUING OPERATIONS BASED ON LONGER-TERM INVESTMENT
RETURNS*
Results Analysis by Business Area 2007 2006
GBPm GBPm
Asian operations
New business 653 514
Business in force 393 315
Long-term business 1,046 829
Asset management 72 50
Development expenses (15) (15)
Total 1,103 864
US operations
New business 285 259
Business in force 342 449
Long-term business 627 708
Broker-dealer and asset management 13 18
Curian (5) (8)
Total 635 718
UK operations
New business 277 266
Business in force 582 420
Long-term business 859 686
M&G 254 204
Total 1,113 890
Other income and expenditure
Investment return and other income 45 8
Interest payable on core structural borrowings (168) (177)
Corporate expenditure:
Group Head Office (117) (83)
Asia Regional Head Office (38) (36)
Charge for share-based payments for Prudential schemes (11) (10)
Total (289) (298)
Restructuring costs (20) (41)
Operating profit from continuing operations based on longer-term investment returns 2,542 2,133
Analysed as profits (losses) from:
New business 1,215 1,039
Business in force 1,317 1,184
Long-term business 2,532 2,223
Asset management 334 264
Other results (324) (354)
Total 2,542 2,133
* EEV basis operating profit from continuing operations based on longer-term
investment returns excludes short-term fluctuations in investment returns, the
mark to market value movements on core borrowings, the shareholders' share of
actuarial gains and losses on defined benefit pension schemes, the effect of
changes in economic assumptions and changes in the time value of cost of options
and guarantees arising from changes in economic factors. The amounts for these
items are included in total EEV profit. The directors believe that operating
profit, as adjusted for these items, better reflects underlying performance.
Profit before tax and basic earnings per share include these items together with
actual investment returns. This basis of presentation has been adopted
consistently throughout this preliminary announcement.
For 2007, the EEV basis operating profit from continuing operations based on
longer-term investment returns before tax of GBP2,542m includes a credit of
GBP99m that arises from including the benefits, grossed up for notional tax, of
altered corporate tax rates for China, Malaysia, Singapore and the UK. Further
details are explained in note 5.
The results for continuing operations shown above exclude those in respect of
discontinued banking operations. On 1 May 2007, the Company sold Egg.
Accordingly, the presentation of the comparative results for 2006 has been
adjusted from those published in March 2007.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
MOVEMENT IN SHAREHOLDERS' EQUITY (excluding minority interests)
2007 2006
GBPm GBPm
Profit for the year attributable to equity shareholders 3,062 2,212
Items taken directly to equity:
Exchange movements 64 (359)
Unrealised valuation movements on Egg securities classified as available-for-sale (2) (2)
Movement on cash flow hedges (3) 7
Related tax 3 (74)
Dividends (426) (399)
Acquisition of Egg minority interests - (167)
New share capital subscribed 182 336
Reserve movements in respect of share-based payments 18 15
Treasury shares:
Movement in own shares in respect of share-based payment plans 7 6
Movement on Prudential plc shares purchased by unit trusts consolidated under IFRS 4 0
Mark to market value movements on Jackson assets backing surplus and required capital* (13) 7
Net increase in shareholders' equity 2,896 1,582
Shareholders' equity at beginning of year (excluding minority interests) 11,883 10,301
Shareholders' equity at end of year (excluding minority interests) 14,779 11,883
Comprising:
Asian operations:
Net assets 3,837 2,637
Acquired goodwill 172 172
4,009 2,809
US operations 3,686 3,360
UK operations:
Long-term business 6,497 5,813
M&G:
Net assets 271 230
Acquired goodwill 1,153 1,153
Egg - 292
7,921 7,488
Other operations:
Holding company net borrowings at market value (note 7) (873) (1,542)
Other net assets (liabilities) 36 (232)
Shareholders' equity at end of year (excluding minority interests) 14,779 11,883
*The mark to market value movements on Jackson assets backing surplus and
required capital for 2006 represents the cumulative adjustment as at 31 December
2006.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
SUMMARISED CONSOLIDATED BALANCE SHEET
2007 2006
GBPm GBPm
Total assets less liabilities, excluding insurance funds 195,987 183,130
Less insurance funds*:
Policyholder liabilities (net of reinsurers' share) and unallocated surplus of with-profits
funds (189,786) (177,642)
Less shareholders' accrued interest in the long-term business 8,578 6,395
(181,208) (171,247)
Total net assets 14,779 11,883
Share capital 123 122
Share premium 1,828 1,822
IFRS basis shareholders' reserves 4,250 3,544
Total IFRS basis shareholders' equity 6,201 5,488
Additional EEV basis retained profit 8,578 6,395
Shareholders' equity (excluding minority interests) 14,779 11,883
* Including liabilities in respect of insurance products classified as
investment contracts under IFRS 4.
NET ASSET VALUE PER SHARE (in pence)
2007 2006
Based on EEV basis shareholders' equity of GBP14,779m (2006: GBP11,883m) 598p 486p
Number of issued shares at year end (millions) 2,470 2,444
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
NOTES ON THE EEV BASIS RESULTS
(1) Basis of preparation of results
The EEV basis results have been prepared in accordance with the EEV Principles
issued by the CFO Forum of European Insurance Companies in May 2004 and expanded
by the Additional Guidance on EEV Disclosures published in October 2005. Where
appropriate the EEV basis results include the effects of adoption of
International Financial Reporting Standards (IFRS).
The EEV results for the Group are prepared for 'covered business', as defined by
the EEV Principles. Covered business represents the Group's long-term insurance
business for which the value of new and in-force contracts is attributable to
shareholders. The EEV basis results for the Group's covered business are then
combined with the IFRS basis results of the Group's other operations.
These other operations include the results of discontinued banking operations,
following the sale of Egg on 1 May 2007.
The definition of long-term business operations is consistent with previous
practice and comprises those contracts falling under the definition of long-term
insurance business for regulatory purposes together with, for US operations,
contracts that are in substance the same as guaranteed investment contracts
(GICs) but do not fall within the technical definition. Under the EEV
Principles, the results for covered business incorporate the projected margins
of attaching internal asset management.
With two principal exceptions, covered business comprises the Group's long-term
business operations. The principal exceptions are for the closed Scottish
Amicable Insurance Fund (SAIF) and for the presentational treatment of the
financial position of two of the Group's defined benefit pension schemes. A very
small amount of UK group pensions business is also not modelled for EEV
reporting purposes.
SAIF is a ring-fenced sub-fund of the Prudential Assurance Company (PAC)
long-term fund, established by a Court approved Scheme of Arrangement in October
1997. SAIF is closed to new business and the assets and liabilities of the fund
are wholly attributable to the policyholders of the fund. In 2006, a bulk
annuity arrangement between SAIF and Prudential Retirement Income Limited
(PRIL), a shareholder-owned subsidiary, took place as explained in the notes to
the schedule of new business within this announcement. Reflecting the altered
economic interest for SAIF policyholders and Prudential shareholders, this
arrangement represents a transfer from long-term business of the Group that is
not 'covered' to business that is 'covered' with consequential effect on the EEV
basis results.
As regards the Group's defined benefit pension schemes, the surplus or deficit
attaching to the Prudential Staff Pension Scheme (PSPS) and Scottish Amicable
Pension scheme are excluded from the EEV value of UK operations and included in
the total for Other operations. The surplus and deficit amounts are partially
attributable to the PAC with-profits fund and shareholder-backed long-term
business and partially to other parts of the Group. In addition to the IFRS
basis surplus or deficit, the shareholders' 10 per cent share of the PAC
with-profits fund's interest in the movement on the financial position of the
schemes is recognised for EEV reporting purposes.
The directors are responsible for the preparation of the supplementary
information in accordance with the EEV Principles.
The EEV basis results for 2007 and 2006 have been derived from the EEV basis
results supplement to the Company's statutory accounts for 2007. The supplement
included an unqualified audit report from the auditors.
(2) Economic assumptions
(a) Deterministic assumptions
In most countries, the long-term expected rates of return on investments and
risk discount rates are set by reference to period end rates of return on cash
or fixed interest securities. This 'active' basis of assumption setting has been
applied in preparing the results of all the Group's US and UK long-term business
operations. For the Group's Asian operations, the active basis is appropriate
for business written in Japan, Korea and US dollar denominated business written
in Hong Kong.
An exception to this general rule is that for countries where long-term fixed
interest markets are less established, investment return assumptions and risk
discount rates are based on an assessment of longer-term economic conditions.
Except for the countries listed above, this basis is appropriate for the Group's
Asian operations.
Expected returns on equity and property asset classes in respect of each
territory are derived by adding a risk premium, also based on the long-term view
of Prudential's economists, to the risk-free rate. In Asia, equity risk premiums
range from 3.0 per cent to 6.0 per cent (2006: 3.0 per cent to 5.8 per cent).
In the US and the UK, the equity risk premium is 4.0 per cent above risk-free
rates for both 2007 and 2006. Best estimate assumptions for other asset classes,
such as corporate bond spreads, are set consistently.
Assumed investment returns reflect the expected future returns on the assets
held and allocated to the covered business at the valuation date.
The tables below summarise the principal financial assumptions:
Asian operations
China Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam
(notes iii, (notes (notes (notes
iv, v) iv, v) iv,v) ii, v)
31 31 31 31 31 31 31 31 31 31 31 31
Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec
2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007
% % % % % % % % % % % %
Risk discount
rate:
New
business 11.75 5.7 15.75 16.75 5.1 9.7 9.3 15.75 6.4 9.1 13.0 16.75
In force 11.75 6.0 15.75 16.75 5.1 9.7 9.1 15.75 6.8 9.8 13.0 16.75
Expected
long-term
rate of
inflation 4.0 2.25 5.0 6.0 0.0 2.75 2.75 5.0 1.75 2.25 3.0 6.0
Government
bond
yield 8.25 4.1 9.25 10.25 2.0 5.8 6.5 9.25 4.25 5.5 6.75 10.25
China Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam
(notes iii, (notes (notes (notes
iv, v) iv, v) iv, v) ii, v)
31 31 31 31 31 31 31 31 31 31 31 31
Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec
2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006
% % % % % % % % % % % %
Risk discount
rate:
New
business 12.0 6.6 16.5 17.5 5.3 9.5 9.5 16.5 6.9 8.8 13.75 16.5
In force 12.0 6.8 16.5 17.5 5.3 9.5 9.2 16.5 6.9 9.3 13.75 16.5
Expected
long-term
rate of
inflation 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5
Government
bond
yield 9.0 4.7 10.5 11.5 2.1 5.0 7.0 10.5 4.5 5.5 7.75 10.5
Asia total Asia total
31 Dec 2007 31 Dec 2006
% %
Weighted risk discount rate (note (i)):
New business 9.5 9.8
In force 8.7 8.8
Notes
(i) The weighted risk discount rates for Asian operations shown above
have been determined by weighting each country's risk discount rates by
reference to the EEV basis operating result for new business and the closing
value of in-force business.
(ii) For traditional business in Taiwan, the economic scenarios used to
calculate the 2007 and 2006 EEV basis results reflect the assumption of a phased
progression of the bond yields from the current rates applying to the assets
held to the long-term expected rates.
The projections assume that in the average scenario, the current bond yields at
31 December 2007 of around 2.5 per cent (2006: around 2 per cent) trend towards
5.5 per cent at 31 December 2013.
In projecting forward the Fund Earned Rate, allowance is made for the
mix of assets in the fund, future investment strategy, and further market value
depreciation of bonds held as a result of assumed future yield increases. These
factors, together with the assumption of the phased progression in bond yields,
give rise to an average assumed Fund Earned Rate that trends from 0.5 per cent
for 2007 to 6.4 per cent for 2014. The assumed Fund Earned Rate increases to 2.5
per cent in 2008 and then increases to 3.3 per cent by 2013. Thereafter, the
assumed Fund Earned Rate fluctuates around a target of 6.4 per cent. This
projection compares with that applied for the 2006 results of a grading from an
assumed rate of 2.1 per cent for 2006 to 5.7 per cent for 2014.
Consistent with EEV methodology, a constant discount rate has been applied to
the projected cash flows.
(iii) The assumptions shown are for US dollar denominated business which
comprises the largest proportion of the in-force Hong Kong business.
(iv) The mean equity return assumptions for the most significant equity
holdings in the Asian operations were:
31 Dec 2007 31 Dec 2006
% %
Hong Kong 8.1 8.7
Malaysia 12.5 12.8
Singapore 9.3 9.3
To obtain the mean, an average over all simulations of the accumulated return at
the end of the projection period is calculated. The annual average return is
then calculated by taking the root of the average accumulated return minus 1.
(v) For 2007, cash rates rather than government bond yields were used in
setting risk discount rates for Malaysia, Singapore, Taiwan and for Hong Kong
dollar denominated business. For 2006, cash rates were used for these operations
and for all Hong Kong business (i.e. including US dollar denominated business).
31 Dec 2007 31 Dec 2006
US operations (Jackson) % %
Risk discount rate*:
New business 7.0 7.6
In force 6.0 6.7
Expected long-term spread between earned rate and rate credited to policyholders for 1.75 1.75
single premium deferred annuity business
US 10-year treasury bond rate at end of period 4.1 4.8
Pre-tax expected long-term nominal rate of return for US equities 8.1 8.8
Expected long-term rate of inflation 2.4 2.5
*The risk discount rates at 31 December 2007 for new business and business
in-force for US operations reflect weighted rates based on underlying rates of
8.1% for variable annuity business and 4.8% for other business. The decrease in
the weighted discount rates reflects the decrease in the US 10-year treasury
bond rate.
31 Dec 2007 31 Dec 2006
UK insurance operations % %
Risk discount rate (note (i)):
New business 7.3 7.8
In force 7.85 8.0
Pre-tax expected long-term nominal rates of investment return:
UK equities 8.55 8.6
Overseas equities 8.1 to 10.2 8.6 to 9.3
Property 6.8 7.1
Gilts 4.55 4.6
Corporate bonds - with-profits funds (note (ii)) 6.0 5.3
- other business 6.25 5.3
Expected long-term rate of inflation 3.2 3.1
Post-tax expected long-term nominal rate of return for the PAC with-profits fund:
Pension business (where no tax applies) 7.85 7.5
Life business 6.9 6.6
Pre-tax expected long-term nominal rate of return for annuity business (note (iii)):
Fixed annuities 5.4 to 5.6 5.0 to 5.1
Linked annuities 5.0 to 5.2 4.8 to 5.0
Notes
(i) The risk discount rates for new business and business in force for
UK insurance operations reflect weighted rates based on the type of business.
(ii) The assumed long-term rate for corporate bonds for 2007 for
with-profits business reflects the purchase of credit default swaps.
(iii) The pre-tax rates of return for annuity business are based on the
gross redemption yield on the backing assets net of a best estimate allowance
for future defaults.
(b) Stochastic assumptions
The economic assumptions used for the stochastic calculations are consistent
with those used for the deterministic calculations described above. Assumptions
specific to the stochastic calculations, such as the volatilities of asset
returns, reflect local market conditions and are based on a combination of
actual market data, historic market data and an assessment of longer-term
economic conditions. Common principles have been adopted across the Group for
the stochastic asset models, for example, separate modelling of individual asset
classes but with allowance for correlation between the various asset classes.
Details are given below of the key characteristics and calibrations of each
model.
Asian operations
The same asset return models as used in the UK, appropriately calibrated, have
been used for the Asian operations as described for UK insurance operations
below. The principal asset classes are government and corporate bonds. Equity
holdings are much lower than in the UK whilst property holdings do not represent
a significant investment asset.
The stochastic cost of guarantees is primarily only of significance for the Hong
Kong, Malaysia, Singapore and Taiwan operations.
The mean stochastic returns are consistent with the mean deterministic returns
for each country. The expected volatility of equity returns for both 2007 and
2006 ranges from 18 per cent to 25 per cent, and the volatility of government
bond yields ranges from 1.3 per cent to 2.5. per cent (2006: 1.4 per cent to 2.5
per cent).
US operations (Jackson)
- - Interest rates are projected using a log-normal generator calibrated
to actual market data;
- - Corporate bond returns are based on Treasury securities plus a spread
that has been calibrated to current market conditions and varies by credit
quality; and
- - Variable annuity equity and bond returns have been stochastically
generated using a regime-switching log-normal model with parameters determined
by reference to historical data. The volatility of equity fund returns for both
2007 and 2006 ranges from 18.6 per cent to 28.1 per cent, depending on risk
class, and the standard deviation of bond returns ranges from 1.4 per cent to
1.7 per cent (2006: 1.4 per cent to 2.0 per cent).
UK insurance operations
- - Interest rates are projected using a two-factor model calibrated to
actual market data;
- - The risk premium on equity assets is assumed to follow a log-normal
distribution;
- - The corporate bond return is calculated as the return on a
zero-coupon bond plus a spread. The spread process is a mean reverting
stochastic process; and
- - Property returns are modelled in a similar fashion to corporate
bonds, namely as the return on a riskless bond, plus a risk premium, plus a
process representative of the change in residual values and the change in value
of the call option on rents.
Mean returns have been derived as the annualised arithmetic average return
across all simulations and durations.
For each projection year, standard deviations have been calculated by taking the
square root of the annualised variance of the returns over all the simulations.
These have been averaged over all durations in the projection. For equity and
property, the standard deviations relate to the total return on these assets.
The standard deviations applied to both years are as follows:
%
Equities:
UK 18.0
Overseas 16.0
Property 15.0
(3) Level of encumbered capital
In adopting the EEV Principles, Prudential has based encumbered capital on its
internal targets for economic capital subject to it being at least the local
statutory minimum requirements. Economic capital is assessed using internal
models but, when applying the EEV principles, Prudential does not take credit
for the significant diversification benefits that exist within the Group. For
with-profits business written in a segregated life fund, as is the case in Asia
and the UK, the capital available in the fund is sufficient to meet the
encumbered capital requirements.
- - Asian operations: the economic capital requirement is substantially higher
than local statutory requirements in total. Economic capital requirements vary
by territory, but in aggregate, the encumbered capital is equivalent to the
amount required under the Insurance Groups Directive (IGD).
- - US operations: the level of encumbered capital has been set to an amount at
least equal to 235 per cent of the risk-based capital required by the National
Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL),
which is sufficient to meet the economic capital requirement.
- - UK insurance operations: the economic capital requirements for annuity
business are fully met by Pillar I requirements being four per cent of
mathematical reserves, which are also sufficient to meet Pillar II requirements.
(4) Margins on new business premiums
New Business Annual Present
Premiums Premium and Value of
Contribution New
Equivalents Business Pre-Tax New New Business
Premiums Business Margin
Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP)
2007 GBPm GBPm GBPm GBPm GBPm % %
Asian operations 1,820 1,124 1,306 7,007 653 50 9.3
US operations 6,515 19 671 6,666 285 42 4.3
UK insurance operations 6,632 234 897 7,629 277 31 3.6
Total 14,967 1,377 2,874 21,302 1,215 42 5.7
New Business Annual Present
Premiums Premium and Value of
Contribution New
Equivalents Business Pre-Tax New New Business
Premiums Business Margin
Single Regular (APE) (PVNBP) Contribution (APE) PVNBP)
2006 GBPm GBPm GBPm GBPm GBPm % %
Asian operations 1,072 849 956 5,132 514 54 10.0
US operations 5,964 17 614 6,103 259 42 4.2
UK insurance operations 6,991 201 900 7,712 266 30 3.4
Total 14,027 1,067 2,470 18,947 1,039 42 5.5
New business margins are shown on two bases, namely the margins by reference to
Annual Premium and Contribution Equivalents (APE) and the Present Value of New
Business Premiums (PVNBP). APEs are calculated as the aggregate of regular new
business amounts and one-tenth of single new business amounts. PVNBPs are
calculated as equalling single premiums plus the present value of expected
premiums of new regular premium business, allowing for lapses and other
assumptions made in determining the EEV new business contribution.
In determining the EEV basis value of new business written in the year the
policies incept, premiums are included in projected cash flows on the same basis
of distinguishing annual and single premium business as set out for statutory
basis reporting.
New business contributions represent profits determined by applying the economic
and non-economic assumptions as at the end of the year.
(5) Effect of changes in corporate tax rates and other operating assumptions
Effect of changes in corporate tax rates
At 31 December 2007, a change to reduce the UK corporate tax rate from 30 per
cent to 28 per cent in 2008 had been enacted in the legislative process.
Accordingly, the 2007 results incorporate the effects of this change in
projecting the tax cash flows attaching to in-force business. Under the
convention applied for EEV basis reporting, profits are generally determined on
a post-tax basis and then grossed up at the prevailing corporate tax rates to
derive pre-tax results. The effect of the change in the UK corporate tax rate is
to give rise to a benefit to the value of business in force at 1 January 2007 of
GBP48m. After grossing up this amount for notional tax of GBP19m, the effect on
the pre-tax operating results based on longer-term investment returns for UK
insurance operations for 2007 is a credit of GBP67m.
Similar considerations apply to corporate tax rate changes in China, Malaysia
and Singapore giving rise to a benefit to the value of in-force business at 1
January 2007 of GBP25m. After grossing up this amount for notional tax of GBP7m,
the effect on the pre-tax operating result based on longer-term investment
returns for Asian operations for 2007 is a credit of GBP32m.
Effect of changes in other operating assumptions
For UK insurance operations there is a net nil charge or credit for both the
2007 and 2006 results. However, the 2007 results for annuity business have been
determined after a strengthening of explicit mortality assumptions, and the
release of excess margins in the aggregate liabilities that had previously been
set aside as an indirect extra allowance for longevity related risks.
The overall impact of the assumption changes and release of margins for 2007 is
as follows;
GBPm
Strengthening of mortality assumptions (a) (312)
Release of margins:
Projected benefit related (b) 144
Investment related (c) 82
Expense related (d) 29
Other (e) 57
312
0
(a) The mortality assumptions have been strengthened such that the previous
future improvement assumptions of medium cohort for males and 75% of medium
cohort for females are now subject to a minimum level of improvement in future
years.
(b) The release of projected benefit related margins relates to modelling
improvements that have been made during 2007 and the effect of hedging
inflationary increases on certain deferred annuity business.
(c) The release of investment related margins predominantly relates to GBP38m
in respect of default margins and GBP43m for adjustments to the assumed
liquidity premium. The resulting assumptions for expected defaults and liquidity
premium, after allowing for the release of margins, remain appropriate given
economic conditions at 31 December 2007.
(d) A release of expense reserves has been made following recent expense
reductions, on which the related cost of capital on the EEV basis is GBP29m.
(e) This amount reflects the release of other additional margins in the
liabilities that are no longer appropriate in light of the explicit
strengthening of the mortality assumption.
(6) Effect of changes in economic assumptions and time value of cost of
options and guarantees
The profits (losses) on changes in economic assumptions and time value of cost
of options and guarantees resulting from changes in economic factors for
in-force business included within the profit from continuing operations before
tax (including actual investment returns) arise as follows:
2007 2006
Change in Change in
time value time value
Change in of cost of Change in of cost of
economic options and economic options and
assumptions guarantees Total assumptions guarantees Total
GBPm GBPm GBPm GBPm GBPm GBPm
Asian operations (note (i)) 201 9 210 (132) 14 (118)
US operations (note (ii)) 81 8 89 (51) 6 (45)
UK insurance operations (note (iii)) 466 (17) 449 182 40 222
Total 748 0 748 (1) 60 59
Notes
(i) The principal components of the effect of changes in economic assumptions in
2007 of GBP201m for Asian operations are credits of GBP110m in Taiwan and GBP80m
in Hong Kong. The increase for Taiwan reflects the combined effect of changes to
the projected fund earned rate (as explained in note 2), and to economic capital
(versus projected), offset by the effect of an increase in the risk discount
rate. The increase for Hong Kong reflects a reduction in the risk discount rate
for all product lines and an increase in the projected fund earned rate for
participating and linked business. The charge of GBP132m for 2006 mainly relates
to Taiwan where there was a charge of GBP101m arising from the delay in the
assumed long-term yield projection and the associated effect of this delay on
the economic capital requirement.
(ii) The credit of GBP81m for US operations in 2007 arises from the
decrease in risk discount rate, partially offset by the negative effect of a
reduction in the assumed future rate of return for separate account variable
annuity business. Both changes reflect the 0.7 per cent decrease in the 10-year
treasury bond rate (as shown in note 2).
(iii) The effect of changes in economic assumptions in 2007 of GBP466m for
UK insurance operations reflects a 0.35 per cent increase in the fund earned
rate arising from the increase in assumed returns on non-UK equities and
corporate bond rates which more than offsets the slight reduction in gilt rates
(as shown in note 2), a partial offset from the cost of credit default swaps of
GBP41m and the effect of the risk discount rate for business in force reducing
slightly by 0.15 per cent, in a similar way to the fall in gilt rates as also
shown in note 2.
(7) Holding company net borrowings at market value
Holding company net borrowings at market value comprise:
31 Dec 2007 31 Dec 2006
GBPm GBPm
Holding company borrowings:
IFRS basis (2,367) (2,485)
Mark to market value adjustment 38 (176)
EEV basis (2,329) (2,661)
Holding company* cash and short-term investments 1,456 1,119
Holding company net borrowings (873) (1,542)
*Including central finance subsidiaries.
(8) Taiwan - effect of altered economic assumptions and sensitivity of results
to future market conditions
For the 2007 results, as explained in note 2(a)(ii), the expected long-term bond
yield has been maintained at 5.5 per cent to be achieved by 31 December 2013.
The sensitivity of the embedded value at 31 December 2007 of the Taiwan
operation to altered economic assumptions and future market conditions to:
(a) a one per cent increase or decrease in the projected long-term bond
yield, (including all consequential changes to investment returns for all
classes, market values of fixed interest assets and risk discount rates), is an
increase (decrease) of GBP67m and GBP(91)m respectively (2006: GBP107m and
GBP(165)m);and
(b) a one per cent increase or decrease in the starting bond rate for the
progression to the assumed long-term rate is an increase (decrease) of GBP73m
and GBP(57)m respectively (2006: GBP116m and GBP(125m)).
If it had been assumed in preparing the 2007 results that interest rates
remained at the current level of around 2.5% until 31 December 2008 and the
progression period in bond yields was delayed by a year so as to end on 31
December 2014, there would have been a reduction in the Taiwan embedded value of
GBP70m.
TOTAL INSURANCE AND INVESTMENT PRODUCTS NEW BUSINESS
INSURANCE PRODUCTS AND INVESTMENT PRODUCTS
Insurance Investment Total
products products
2007 2006 2007 2006 2007 2006
GBPm GBPm GBPm GBPm GBPm GBPm
Asian operations 2,944 1,921 38,954 20,408 41,898 22,329
US operations 6,534 5,981 60 - 6,594 5,981
UK operations 6,866 7,192 14,745 13,486 21,611 20,678
Group Total 16,344 15,094 53,759 33,894 70,103 48,988
INSURANCE PRODUCTS - NEW BUSINESS PREMIUMS AND CONTRIBUTIONS (note (i))
Single Regular Annual Premium Present Value of
and Contribution New Business
Equivalents (APE) Premiums (PVNBP)
2007 2006 2007 2006 2007 2006 2007 2006
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Asian operations
China (note (v)) 72 27 40 36 47 39 268 198
Hong Kong 501 355 117 103 167 139 1,196 933
India (Group's 26% interest) 26 20 177 105 180 107 728 411
Indonesia 118 31 109 71 121 74 494 269
Japan 122 68 22 7 34 14 214 97
Korea 179 103 241 208 259 218 1,267 1,130
Malaysia 41 4 78 72 82 72 472 418
Singapore 593 357 67 72 126 108 1,047 803
Taiwan 132 92 218 139 231 148 1,121 743
Other 36 15 55 36 59 37 200 130
Total Asian operations 1,820 1,072 1,124 849 1,306 956 7,007 5,132
US operations
Fixed annuities 573 688 - - 57 69 573 688
Fixed index annuities 446 554 - - 45 55 446 554
Variable annuities 4,554 3,819 - - 455 382 4,554 3,819
Life 7 8 19 17 20 18 158 147
Guaranteed Investment Contracts 408 458 - - 41 46 408 458
GIC-Medium Term Notes 527 437 - - 53 44 527 437
Total US operations 6,515 5,964 19 17 671 614 6,666 6,103
UK operations
Product summary
Internal vesting annuities 1,399 1,341 - - 140 134 1,399 1,341
Direct and partnership annuities 842 780 - - 84 78 842 780
Intermediated annuities 589 592 - - 59 59 589 592
Total individual annuities 2,830 2,713 - - 283 271 2,830 2,713
Equity release 156 89 - - 16 9 156 89
Individual pensions 38 21 1 - 5 2 42 21
Corporate pensions 283 318 84 66 112 98 737 490
Unit-linked bonds 243 388 - - 24 39 243 388
With-profit bonds 297 139 - - 30 14 297 139
Protection - 11 5 9 5 10 26 63
Offshore products 434 540 4 - 47 54 455 540
Total retail retirement 4,281 4,219 94 75 522 497 4,786 4,443
Corporate pensions 198 261 115 100 135 126 604 643
Other products 190 232 25 26 44 49 276 347
DWP rebates 143 161 - - 14 16 143 161
Total mature life and pensions 531 654 140 126 193 191 1,023 1,151
Total retail 4,812 4,873 234 201 715 688 5,809 5,594
Wholesale annuities (notes (iii) and (iv)) 1,799 1,431 - - 180 143 1,799 1,431
Credit life 21 687 - - 2 69 21 687
Total UK operations 6,632 6,991 234 201 897 900 7,629 7,712
Channel Summary
Direct and partnership 2,385 2,543 209 174 448 428 3,288 3,133
Intermediated 2,284 2,169 25 27 253 244 2,378 2,300
Wholesale (notes (iii) and (iv)) 1,820 2,118 - - 182 212 1,820 2,118
Sub-total 6,489 6,830 234 201 883 884 7,486 7,551
DWP rebates 143 161 - - 14 16 143 161
Total UK operations 6,632 6,991 234 201 897 900 7,629 7,712
Group Total 14,967 14,027 1,377 1,067 2,874 2,470 21,302 18,947
INVESTMENT PRODUCTS - FUNDS UNDER MANAGEMENT (note (ii))
1 Jan 2007 Market Redemptions Market and 31 Dec 2007
gross other
inflows movements
GBPm GBPm GBPm GBPm GBPm
Asian operations 12,253 38,954 (35,993) 2,179 17,393
US operations - 60 (4) (1) 55
UK operations 44,946 14,745 (9,787) 1,317 51,221
Group Total 57,199 53,759 (45,784) 3,495 68,669
Notes
(i) The tables shown above are provided as an indicative volume measure of
transactions undertaken in the reporting period that have the potential to
generate profits for shareholders. The amounts shown are not, and not intended
to be, reflective of premium income recorded in the IFRS income statement.
Annual premium and contribution equivalents are calculated as the aggregate of
regular new business amounts and one tenth of single new business amounts. New
business premiums for regular premium products are shown on an annualised basis.
Department of Work and Pensions rebate business is classified as single
recurrent business. Internal vesting business is classified as new business
where the contracts include an open market option.
The format of the tables shown above is consistent with the distinction between
insurance and investment products as applied for previous financial reporting
periods. With the exception of some US institutional business, products
categorised as "insurance" refer to those classified as contracts of long-term
insurance business for regulatory reporting purposes, i.e. falling within one of
the classes of insurance specified in part II of Schedule 1 to the Regulated
Activities Order under FSA regulations.
The details shown above for insurance products include contributions for
contracts that are classified under IFRS 4 "Insurance Contracts" as not
containing significant insurance risk. These products are described as
investment contracts or other financial instruments under IFRS. Contracts
included in this category are primarily certain unit-linked and similar
contracts written in UK insurance operations and Guaranteed Investment Contracts
and similar funding agreements written in US operations.
(ii) Investment products referred to in the table for funds under
management above are unit trust, mutual funds and similar types of retail asset
management arrangements. These are unrelated to insurance products that are
classified as "investment contracts" under IFRS 4, as described in the preceding
paragraph, although similar IFRS recognition and measurement principles apply to
the acquisition costs and fees attaching to this type of business. US investment
products are no longer included in the table above as they are assets under
administration rather than assets under management.
(iii) The table above includes the transfer of 62,000 with-profits annuity
policies from Equitable Life on 31 December 2007 with assets of approximately
GBP1.7bn. The transfer represented an APE of GBP174m.
(iv) The tables for 2006 above include a bulk annuity transaction with the
Scottish Amicable Insurance Fund (SAIF) with a premium of GBP560m. The
transaction reflects the arrangement entered into in June 2006 for the
reinsurance of non-profit immediate pension annuity liabilities of SAIF to
Prudential Retirement Income Limited (PRIL), a shareholder owned subsidiary of
the Group. SAIF is a closed ring-fenced sub-fund of the PAC long-term fund
established by a Court approved Scheme of Arrangement in October 1997, which is
solely for the benefit of SAIF policyholders. Shareholders have no interest in
the profits of this fund, although they are entitled to investment management
fees on this business. The inclusion of the transaction between SAIF and PRIL as
new business in the tables reflects the transfer from SAIF to Prudential
shareholders' funds of longevity risk, the requirement to set aside supporting
capital and entitlement to surpluses on the block of business from the
reinsurance arrangements. For Group reporting purposes, the amounts recorded by
SAIF and PRIL for the premium are eliminated on consolidation.
(v) Subsequent to 29 September, following expiry of the previous
management agreement, CITIC-Prudential Life Insurance Company Ltd
(CITIC-Prudential), the Group's life operation in China, has been accounted for
as a joint venture. Prior to this date, CITIC-Prudential was consolidated as a
subsidiary undertaking. The amounts in the table above include 100% of the total
premiums for this operation up to 29 September 2007 and 50% thereafter, being
the Group's share after this date.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
CONSOLIDATED INCOME STATEMENT
2007 2006
GBPm GBPm
Gross premiums earned 18,359 16,157
Outward reinsurance premiums (171) (171)
Earned premiums, net of reinsurance 18,188 15,986
Investment income 12,221 17,128
Other income 2,457 1,917
Total revenue, net of reinsurance (note B) 32,866 35,031
Benefits and claims (26,210) (25,981)
Outward reinsurers' share of benefits and claims (20) (144)
Movement in unallocated surplus of with-profits funds (760) (2,296)
Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance (26,990) (28,421)
Acquisition costs and other operating expenditure (4,523) (4,212)
Finance costs: interest on core structural borrowings of shareholder-financed operations (168) (177)
Total charges, net of reinsurance (note B) (31,681) (32,810)
Profit before tax* (note B) 1,185 2,221
Tax attributable to policyholders' returns (19) (849)
Profit before tax attributable to shareholders (note C) 1,166 1,372
Tax expense (note G) (401) (1,241)
Less: tax attributable to policyholders' returns 19 849
Tax attributable to shareholders' profit (note G) (382) (392)
Profit from continuing operations after tax (note B) 784 980
Discontinued operations (net of tax) (note H) 241 (105)
Profit for the year 1,025 875
Attributable to:
Equity holders of the Company 1,022 874
Minority interests 3 1
Profit for the year 1,025 875
Earnings per share (in pence) 2007 2006
Basic (based on 2,445m and 2,413m shares respectively):
Based on profit from continuing operations attributable to the equity holders of the Company
(note I) 31.9p 40.5p
Based on profit (loss) from discontinued operations attributable to the equity holders of the
Company 9.9p (4.3)p
41.8p 36.2p
Diluted (based on 2,448m and 2,416m shares respectively):
Based on profit from continuing operations attributable to the equity holders of the Company 31.9p 40.5p
Based on profit (loss) from discontinued operations attributable to the equity holders of the
Company 9.8p (4.3)p
41.7p 36.2p
Dividends per share (in pence) 2007 2006
Dividends relating to reporting period:
Interim dividend (2007 and 2006) 5.70p 5.42p
Final dividend (2007 and 2006) (note J) 12.30p 11.72p
Total 18.00p 17.14p
Dividends declared and paid in reporting period:
Current year interim dividend 5.70p 5.42p
Final dividend for prior year 11.72p 11.02p
Total 17.42p 16.44p
* Profit before tax represents income net of post-tax transfers to unallocated
surplus of with-profits funds, before tax attributable to policyholders and
unallocated surplus of with-profits funds, unit-linked policies and
shareholders' profits.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
2007
Share Share Retained Translation Available-for-sale Hedging Shareholders' Minority Total
capital premium earnings reserve securities reserve reserve equity interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Reserves
Profit for the year 1,022 1,022 3 1,025
Items recognised
directly in equity:
Exchange movements 11 11 11
Movement on cash flow
hedges (3) (3) (3)
Unrealised valuation
movements on Egg
securities classified
as available-for-sale (2) (2) (2)
Unrealised valuation
movements on securities
of US insurance
operations classified as
available-for-sale
Unrealised holding losses
arising during the year (231) (231) (231)
Less gains included in
the income statement (13) (13) (13)
Total (note N) (244) (244) (244)
Related change in
amortisation of
deferred income and
acquisition costs 88 88 88
Related tax 2 53 1 56 56
Total items recognised
directly in equity 13 (105) (2) (94) (94)
Total income and expense
for the year 1,022 13 (105) (2) 928 3 931
Dividends (426) (426) (5) (431)
Reserve movements in
respect of
share-based payments 18 18 18
Change in minority
interests arising
principally from
purchase and sale of
venture investment
companies and property
partnerships of the PAC
with-profits fund and
other consolidated
investment funds (28) (28)
Share capital and
share premium
New share capital
subscribed
(note O) 1 181 182 182
Transfer to retained
earnings in respect of
shares issued in lieu
of cash dividends
(note O) (175) 175
Treasury shares
Movement in own shares
in respect of
share-based payment
plans 7 7 7
Movement in Prudential
plc shares purchased
by unit trusts
consolidated under IFRS 4 4 4
Net increase (decrease)
in equity 1 6 800 13 (105) (2) 713 (30) 683
At beginning of year 122 1,822 3,640 (125) 27 2 5,488 132 5,620
At end of year 123 1,828 4,440 (112) (78) 0 6,201 102 6,303
2006
Share Share Retained Translation Available-for-sale Hedging Shareholders' Minority Total
capital premium earnings reserve securities reserve reserve equity interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Reserves
Profit for the year 874 874 1 875
Items recognised
directly in
equity:
Exchange movements (224) (224) (224)
Movement on cash
flow hedges 7 7 7
Unrealised valuation
movements on
Egg securities
classified as
available-for-sale (2) (2) (2)
Unrealised valuation
movements on
securities of US
insurance operations
classified as
available-for-sale:
Unrealised holding
losses arising (208) (208) (208)
during the year
Less losses included
in the income
statement 7 7 7
(201) (201) (201)
Related change in
amortisation of
deferred income and
acquisition costs 75 75 75
Related tax (74) 50 (2) (26) (26)
Total items of income
and expense
recognised directly
in equity (298) (78) 5 (371) (371)
Total income and expense
for the year 874 (298) (78) 5 503 1 504
Dividends (399) (399) (399)
Reserve movements in
respect of
share-based payments 15 15 15
Change in minority
interests
arising principally from
purchase and sale of
venture investment
companies and property
partnerships of the PAC
with-profits fund and
other consolidated
investment funds 43 43
Acquisition of minority
interests of now
discontinued Egg banking
operations (note H) (167) (167) (84) (251)
Share capital and share
premium
New share capital
subscribed 3 333 336 336
Transfer to retained
earnings in respect
of shares issued in lieu
of cash dividends (75) 75
Treasury shares
Movement in own shares
in respect of
share-based payment plans 6 6 6
Movement in Prudential
plc shares purchased
by unit trusts
consolidated under IFRS 0 0 0
Net increase (decrease)
in equity 3 258 404 (298) (78) 5 294 (40) 254
At beginning of year 119 1,564 3,236 173 105 (3) 5,194 172 5,366
At end of year 122 1,822 3,640 (125) 27 2 5,488 132 5,620
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
CONSOLIDATED BALANCE SHEET
2007 2006
GBPm GBPm
Assets
Intangible assets attributable to shareholders:
Goodwill 1,341 1,341
Deferred acquisition costs and other intangible assets 2,836 2,497
4,177 3,838
Intangible assets attributable to the PAC with-profits fund:
In respect of acquired subsidiaries for venture fund and other investment purposes (note K) 192 830
Deferred acquisition costs 19 31
211 861
Total 4,388 4,699
Other non-investment and non-cash assets:
Property, plant and equipment 1,012 1,133
Reinsurers' share of insurance contract liabilities 783 945
Deferred tax assets 925 1,012
Current tax recoverable 285 404
Accrued investment income 2,023 1,900
Other debtors 1,297 1,052
Total 6,325 6,446
Investments:
Investment properties 13,688 14,491
Investments accounted for using the equity method 12 6
Financial investments:
Loans (note L) 7,924 13,754
Equity securities and portfolio holdings in unit trusts 86,157 78,892
Debt securities (note M) 83,984 81,719
Other investments 4,396 3,220
Deposits 7,889 7,759
Total 204,050 199,841
Held for sale assets 30 463
Cash and cash equivalents 4,951 5,071
Total assets 219,744 216,520
Equity and liabilities
Equity
Shareholders' equity (note O) 6,201 5,488
Minority interests 102 132
Total equity 6,303 5,620
Liabilities
Banking customer accounts (note H) - 5,554
Policyholder liabilities and unallocated surplus of with-profits funds:
Insurance contract liabilities 132,636 123,213
Investment contract liabilities with discretionary participation features 29,550 28,733
Investment contract liabilities without discretionary participation features 14,032 13,042
Unallocated surplus of with-profits funds 14,351 13,599
Total insurance liabilities 190,569 178,587
Core structural borrowings of shareholder-financed operations (note P):
Subordinated debt (other than discontinued Egg banking operations) 1,570 1,538
Other 922 1,074
2,492 2,612
Subordinated debt of discontinued Egg banking operations (note H) - 451
Total 2,492 3,063
Other borrowings:
Operational borrowings attributable to shareholder-financed operations (note Q) 3,081 5,609
Borrowings attributable to with-profits funds (note Q) 987 1,776
Other non-insurance liabilities:
Obligations under funding, securities lending and sale and repurchase agreements 4,081 4,232
Net asset value attributable to unit holders of consolidated unit trusts and similar funds 3,556 2,476
Current tax liabilities 1,237 1,303
Deferred tax liabilities 3,475 3,882
Accruals and deferred income 599 517
Other creditors 1,020 1,398
Provisions 473 464
Other liabilities 1,871 1,652
Held for sale liabilities - 387
Total 16,312 16,311
Total liabilities 213,441 210,900
Total equity and liabilities 219,744 216,520
CONSOLIDATED CASH FLOW STATEMENT
2007 2006
GBPm GBPm
Cash flows from operating activities
Profit before tax from continuing operations (note (i) and B) 1,185 2,221
Profit (loss) before tax from discontinued operations (note H) 222 (150)
Profit before tax 1,407 2,071
Changes in operating assets and liabilities:
Investments (11,730) (13,748)
Banking customer accounts (9) (276)
Other non-investment and non-cash assets (817) (232)
Policyholder liabilities (including unallocated surplus) 12,017 13,540
Other liabilities (including operational borrowings) 962 1,136
Interest income and expense and dividend income included in profit before tax (8,201) (10,056)
Other non-cash items (140) 198
Operating cash items:
Interest receipts 5,541 6,466
Dividend receipts 3,633 2,732
Tax paid (624) (523)
Net cash flows from operating activities 1,138 2,209
Cash flows from investing activities
Purchases of property, plant and equipment (231) (174)
Proceeds from disposal of property, plant and equipment 61 34
Costs incurred on purchase of Egg minority interests - (6)
Acquisition of subsidiaries, net of cash balances (note (ii)) (77) (70)
Disposal of Egg, net of cash balances (note (iii) and H) (538) -
Disposal of other subsidiaries, net of cash balances (note (ii)) 157 114
Deconsolidation of investment subsidiaries (note (iv)) (91) -
Net cash flows from investing activities (719) (102)
Cash flows from financing activities
Structural borrowings of the Group:
Shareholder-financed operations (note (v) and P):
Redemption (150) (1)
Interest paid (171) (204)
With-profits operations (note (vi) and Q):
Interest paid (9) (9)
Equity capital (note (vii)):
Issues of ordinary share capital 6 15
Dividends paid to shareholders (255) (323)
Net cash flows from financing activities (579) (522)
Net (decrease) increase in cash and cash equivalents (160) 1,585
Cash and cash equivalents at beginning of year 5,071 3,586
Effect of exchange rate changes on cash and cash equivalents 40 (100)
Cash and cash equivalents at end of year (note (viii)) 4,951 5,071
Notes
(i) Profit before tax represents income, net of post-tax transfers to
unallocated surplus of with-profits funds, before tax attributable to
policyholders and unallocated surplus of with-profits funds, unit-linked
policies and shareholders' profits. It does not represent profit before tax
attributable to shareholders.
(ii) Acquisitions and disposals of subsidiaries shown above include
venture investments and other investment subsidiaries of the PAC with-profits
fund.
(iii)The amount of GBP(538)m in respect of the disposal of Egg, net of cash
balances shown above, represents the net sale proceeds of GBP527m less cash and
cash equivalents of GBP1,065m held by Egg and transferred on disposal.
(iv) In November 2007, the Company sold its venture fund management
subsidiary, PPM Capital, as described in note K. As a result of the arrangements
attaching to the sale, it is no longer appropriate to consolidate the holdings
managed by that company.
(v) Structural borrowings of shareholder-financed operations comprise core
debt of the holding company and central finance subsidiaries, Jackson surplus
notes and, in 2006, Egg debenture loans. Following the sale of Egg in May 2007,
these loans no longer form part of the Group's borrowings. Core debt excludes
borrowings to support short-term fixed income securities programmes and
non-recourse borrowings of investment subsidiaries of shareholder-financed
operations. Cash flows in respect of these borrowings are included within cash
flows from operating activities. In June 2007, borrowings of GBP150m were repaid
on maturity.
(vi) Structural borrowings of with-profits operations relate solely to the
GBP100m 8.5 per cent undated subordinated guaranteed bonds which contribute to
the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced
sub-fund of the PAC with-profits fund. Cash flows in respect of other borrowings
of with-profits funds, which principally relate to consolidated investment funds
and, prior to deconsolidation, venture fund investment subsidiaries are included
within cash flows from operating activities.
(vii) Cash movements in respect of equity capital exclude scrip dividends
and share capital issued in respect of the acquisition of Egg minority interests
in 2006.
(viii) Of the cash and cash equivalents amounts reported above, GBP339m (2006:
GBP437m) represents cash and cash equivalents of central companies.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE STATUTORY IFRS BASIS RESULTS
A Basis of preparation and audit status
The statutory basis results included in this announcement have been extracted
from the audited financial statements of the Group for the year ended 31
December 2007. These statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by the European
Union (EU) as required by EU law (IAS Regulation EC1606/2002).
The auditors have reported on the 2007 statutory accounts. The financial
information set out above does not constitute the Company's statutory accounts
for the years ended 31 December 2007 or 2006 but is derived from those accounts.
The auditors' report was (i) unqualified, (ii) did not include reference to any
matters to which the auditors drew attention by way of emphasis without
qualifying their report and (iii) did not contain a statement under section 237
(2) or (3) of the Companies Act 1985.
In 2007 the Group adopted the following accounting pronouncements
- - IFRS 7, 'Financial instruments: Disclosures'
- - Revised IFRS 4 'Implementation Guidance'
- - Amendment to IAS 1,'Capital Disclosures'
- - IFRIC 9, 'Reassessment of Embedded Derivatives'.
The changes in respect of IFRS 7, IFRS 4 and IAS 1 affect only disclosures in
the Group Financial Statements.
IFRIC 9, which potentially effects measurements, relates to assessment of
whether derivatives are required to be separated from host contracts by the
reporting entity and accounted for as derivatives when the Group first becomes a
party to the contracts. IFRIC 9 became effective for annual periods beginning on
or after 1 June 2006, but had no material effect on the Group's 2007 results.
B Segment disclosure
2007 2006
GBPm GBPm
Revenue
Long-term business 31,555 34,197
Broker-dealer and asset management 1,397 1,080
Unallocated corporate 182 38
Intra-group revenue eliminated on consolidation (268) (284)
Total revenue, net of reinsurance, per income statement 32,866 35,031
Charges (before income tax attributable to policyholders and unallocated surplus of
long-term insurance funds)
Long-term business, including post-tax transfers to unallocated surplus of with-profits
funds (30,533) (32,162)
Broker-dealer and asset management (1,053) (797)
Unallocated corporate (363) (135)
Intra-group charges eliminated on consolidation 268 284
Total charges, net of reinsurance, per income statement (31,681) (32,810)
Segment results - revenue less charges (continuing operations)
Long-term business 1,022 2,035
Broker-dealer and asset management 344 283
Unallocated corporate (181) (97)
Profit before tax* 1,185 2,221
Tax attributable to policyholders' returns (19) (849)
Profit before tax attributable to shareholders 1,166 1,372
Tax attributable to shareholders' profit (382) (392)
Profit from continuing operations after tax 784 980
Segment results - discontinued operations (net of tax)
Banking (note H) 241 (105)
Profit for the year 1,025 875
* Profit before tax represents income net of post-tax transfers to unallocated
surplus of with-profits funds, before tax attributable to policyholders and
unallocated surplus of with-profits funds, unit-linked policies and
shareholders' profits.
C Supplementary analysis of profit from continuing operations before tax
attributable to shareholders
2007 2006
Results analysis by business area GBPm GBPm
Asian operations
Long-term business (note D) 189 189
Asset management 72 50
Development expenses (15) (15)
Total 246 224
US operations
Jackson (note D) 444 398
Broker-dealer and asset management 13 18
Curian (5) (8)
Total 452 408
UK operations
UK insurance operations (note D) 528 500
M&G 254 204
Total 782 704
Other income and expenditure
Investment return and other income 86 58
Interest payable on core structural borrowings (168) (177)
Corporate expenditure:
Group Head Office (117) (83)
Asia Regional Head Office (38) (36)
Charge for share-based payments for Prudential schemes (note (i)) (11) (10)
Total (248) (248)
Restructuring costs (19) (38)
Operating profit from continuing operations based on longer-term investment returns (note (ii)) 1,213 1,050
Short-term fluctuations in investment returns on shareholder-backed business (note E) (137) 155
Shareholders' share of actuarial gains and losses on defined benefit pension schemes (note F) 90 167
Profit from continuing operations before tax attributable to shareholders (note (ii)) 1,166 1,372
Notes
(i) The charge for share-based payments for Prudential schemes is for
the SAYE and Group performance-related schemes.
(ii) The results for continuing operations shown above exclude those in
respect of discontinued banking operations. On 1 May 2007, the Company sold Egg.
Accordingly, the presentation of the comparative results for 2006 has been
adjusted from those previously published. Note H shows the composition of the
contribution from discontinued operations.
D Effect of changes in assumptions, estimates and bases used to measure
insurance assets and liabilities
There were no changes of assumptions that had a material impact on the 2007 and
2006 results for Asian operations.
The 2007 results for US operations have been determined after taking account of
certain changes of assumptions during the year. Generally, assumptions were
modified in 2007 to conform to more recent experience with a net effect of a
credit of GBP8m (2006: charge of GBP7m).
For UK insurance operations, the operating profit based on longer-term
investment returns of GBP528m for 2007 includes a credit of GBP34m for the
effect on shareholders' results for changes in assumptions.
The 2007 results for shareholder-backed annuity business have been determined
after making changes to mortality assumptions and releasing excess margins in
the aggregate liabilities that had previously been set aside as an indirect
extra allowance for longevity related risks.
GBPm
Effect of strengthening of mortality assumptions (a) (276)
Release of margins:
Projected benefit related (b) 104
Investment related (c) 48
Expense related (d) 68
Other (e) 90
310
Net credit to shareholder result 34
(a) The mortality assumptions have been strengthened by increasing the
minimum level of future improvement rate.
(b) The release of projected benefit related margins primarily relates to
modelling improvements that have been made during 2007.
(c) The release of investment related margins of GBP48m relates to default
margins. The resulting assumptions for expected defaults, after allowing for the
release of margins, remain appropriate given economic conditions at 31 December
2007.
(d) A release of expense reserves has been made following recent expense
reductions.
(e) This amount reflects the release of other additional margins in the
liabilities that are no longer appropriate in light of the explicit
strengthening of the mortality assumptions.
The 2006 comparative operating profit based on longer-term investment returns of
GBP500m included a net credit of GBP42m for changes in assumptions, mainly due
to a GBP46m reduction in liabilities due to the implementation of PS 06/14 by
the FSA.
E Short-term fluctuations in investment returns on shareholder-backed
business
2007 2006
GBPm GBPm
Long-term business operations:
Asian insurance operations (note (ii)) (71) 134
US insurance operations (note (iii)) (18) 53
UK insurance operations (note (iv)) (47) (43)
Other (1) 11
Total (note (i)) (137) 155
Notes
(i) General
The short-term fluctuations in investment returns for 2007 reflect primarily
temporary market value movements on the portfolio of investments held by the
Group's shareholder-backed operations. There were no default losses on debt
securities in 2007.
(ii) Asian insurance operations
The fluctuations for Asian operations reflect the impact of interest rate
increases in Taiwan on the value of debt securities and a GBP30m value reduction
in a CDO fund investment, partially offset by the effect of favourable equity
market movements in Vietnam.
(iii) US insurance operations
The short-term fluctuations in investment returns included in the supplementary
analysis of profit for US insurance operations comprise the following items:
2007 2006
GBPm GBPm
Debt securities
Credit related losses
Losses in the year
Bond write downs (35) (32)
Losses on sales of impaired and deteriorating bonds (51) (3)
Recoveries/ reversals 8 10
(78) (25)
Less: Risk margin charge included in operating profit based on longer-term
investment returns 48 54
Short-term fluctuation (30) 29
Interest related realised gains and losses
Gains (losses) in year 31 (15)
Less: Amortisation of gains and losses in current and prior years included in (37) (45)
operating profit based on longer-term investment returns
Short-term fluctuation (6) (60)
Related change to amortisation of deferred acquisition costs 9 6
Total short-term fluctuation related to realised gains and losses on debt securities (27) (25)
Derivatives (other than equity related): market value movement (19) 34
Equity type movements: actual less longer-term return
42 21
Other items (14) 23
Total (18) 53
In addition, for US insurance operations, included within the statement of
changes in equity, is a net reduction in the value of debt securities classified
as available-for-sale of GBP244m. This reduction reflects the effect of widened
credit spreads and global credit concerns partially offset by the effect of
reductions in US interest rates and a steepening yield curve. These temporary
market value movements do not reflect defaults or permanent impairments.
Additional details on the movement in the value of the Jackson portfolio are
included in note N.
(iv) UK insurance operations
The fluctuations for UK insurance operations arise mostly in Prudential
Retirement Income Limited, which writes the most significant element of the
shareholder-backed annuity business in the UK. The fluctuations principally
reflect the impact of widened credit spreads on the corporate bond securities
backing the shareholders' equity of the business.
F Shareholders' share of actuarial gains and losses on defined benefit
pension schemes
2007 2006
GBPm GBPm
Actual less expected return on scheme assets (note (i)) (8) 156
Experience (losses) gains on scheme liabilities (14) 18
Gains on changes of assumptions for scheme liabilities (note (ii)) 317 311
295 485
Less: amount attributable to the PAC with-profits fund (205) (318)
Total attributable to shareholders 90 167
Notes
(i) The expected rate of return for full year 2007 applied to the schemes'
assets was a weighted rate of 5.9%.
(ii) The gains of GBP317m on changes of assumptions comprise gains due to
changes in economic assumptions of GBP509m which are partially offset by
a charge of GBP192m from the effect of strengthened mortality assumptions for
UK schemes.
The discount rates applied for the Group's UK defined benefit schemes, and the
change therein reflected in the gains and losses shown above, are as follows:
31 December 2007 5.9%
31 December 2006 5.2%
G Tax expense
The total tax charge of GBP401m for 2007 (2006: GBP1,241m) comprises a charge of
GBP80m (2006: GBP698m) for UK tax and a charge of GBP321m (2006: GBP543m) for
overseas tax. This tax charge comprises tax attributable to policyholders and
unallocated surplus of with-profits funds, unit-linked policies and
shareholders. The tax charge attributable to shareholders of GBP382m for 2007
(2006: GBP392m) comprises a charge of GBP176m (2006: GBP142m) for UK tax and a
charge of GBP206m (2006: GBP250m) for overseas tax.
The tax credit related to discontinued operations, which is all attributable to
shareholders, amounted to GBP19m for 2007 (2006: GBP45m).
Amounts for deferred tax are determined using the current rate of tax or, where
substantively enacted through the legislative process, the prospective rate.
Accordingly, the deferred tax amounts for full year 2007 reflect the prospective
change for the main UK corporation tax rate from 30 per cent to 28 per cent
which will be effective from 1 April 2008.
H Discontinued operations
In the first half of 2006, the Company acquired the outstanding 21.7 per cent
minority interest in Egg, its UK banking business. The Company accounted for the
purchase using the economic entity method. Accordingly, GBP167m was charged to
retained earnings in 2006 representing the difference between the consideration
paid and net assets acquired.
In January 2007, the Company announced that it had entered into a binding
agreement to sell Egg. Under the terms of the agreement, the consideration
payable to the Company was GBP575m cash, subject to adjustments to reflect any
change in net asset value between 31 December 2006 and completion.
On 1 May 2007, the Company completed the sale. The consideration, net of
expenses, was GBP527m. The reduction from the GBP575m noted above primarily
reflected Egg's post tax operating loss of GBP49m for the period from 1 January
2007 to the date of sale as shown below.
The profit (loss) from discontinued operations comprises:
2007 2006
GBPm GBPm
Pre-tax loss from discontinued operations
Egg results:
Operating loss based on longer-term investment returns for the period of ownership (68) (157)
Short-term fluctuations in investment returns - 7
Profit on sale of Egg 290 -
Total 222 (150)
Tax
On Egg results:
Operating loss based on longer-term investment returns for the period of
ownership 19 47
Short-term fluctuations in investment returns - (2)
On profit on sale of Egg 0 -
Total 19 45
Profit (loss) from discontinued operations, net of tax 241 (105)
Cash and cash equivalents transferred on disposal were GBP1,065m. Accordingly, the
cash outflow arising from the disposal of Egg, as shown in the consolidated cash
flow statement, was GBP538m.
I Supplementary analysis of earnings per share from continuing
operations
Earnings per share (in pence) 2007 2006
From operating profit based on longer-term investment returns after related tax and 33.8p 30.9p
minority interests
Adjustment from post-tax longer-term investment returns to post-tax actual investment (4.5)p 4.8p
returns (after related minority interests)
Adjustment for post-tax shareholders' share of actuarial gains and losses on defined 2.6p 4.8p
benefit pension schemes
Based on profit from continuing operations after tax and minority interests 31.9p 40.5p
J Dividend
A final dividend for 2007 of 12.30p per share was proposed by the directors on
13 March 2008. This dividend will absorb an estimated GBP304m of shareholders'
funds. Subject to shareholder approval, the dividend will be paid on 20 May 2008
to shareholders on the register at the close of business on 11 April 2008. A
scrip dividend alternative will be offered to shareholders.
K Intangible assets attributable to the PAC with-profits fund in respect
of venture fund and other investments
During 2006 and 2007, the PAC with-profits fund held a number of venture capital
holdings which were managed by its venture capital management subsidiary, PPM
Capital. On 9 November 2007, PPM Capital was sold by the Group. Prior to the
sale of PPM Capital, the Group was deemed to have a controlling interest in
these investments and where appropriate these investments were accounted for as
subsidiaries with line-by-line consolidation of assets, including acquired
goodwill and other intangible assets and liabilities. At 31 December 2006,
GBP830m of goodwill and other intangible assets were recognised for the
consolidated venture fund investments. As a result of the control arrangements
put in place at the time of the sale of PPM Capital, the Group no longer
controls these venture fund investments and consequently ceased to consolidate
these investments and instead fair values them in the balance sheet.
The intangible assets of GBP192m at 31 December 2007 attributable to the PAC
with-profits fund relate to the goodwill recognised from the fund's acquisition
of 78 per cent voting equity interests in Red Funnel, a ferry company in June
2007, and which is managed by M&G.
L Loans portfolio
Loans are accounted for at amortised cost unless impaired. The amounts included
in the balance sheet are analysed as follows:
2007 2006
GBPm GBPm
Insurance operations
UK (note(i)) 1,245 1,128
US (note (ii)) 3,258 3,254
Asia (note (iii)) 1,087 904
Asset management operations
M&G (note (iv)) 2,334 2,181
Unallocated to a segment 0 94
Discontinued banking operations - 6,193
Total 7,924 13,754
Notes
(i) UK insurance operations
The loans of the Group's UK insurance operations of GBP1,245m at 31 December
2007 comprise mortgage loans of GBP449m, policy loans of GBP35m and other loans
of GBP761m. The mortgage loans are collateralised by properties. Other loans are
all commercial loans and comprise mainly syndicated loans held by the PAC
with-profits fund.
(ii) US insurance operations
The loans of the Group's US insurance operations of GBP3,258m at 31 December
2007 comprise mortgage loans of GBP2,841m and policy loans of GBP417m. All of
the mortgage loans are commercial mortgage loans which are collateralised by
properties. The property types are mainly industrial, multi-family residential,
suburban office, retail and hotel.
The US insurance operations' mortgage loan portfolio does not include any
single-family residential mortgage loans and is therefore not exposed to the
risk of defaults associated with residential sub-prime mortgage loans.
The policy loans are fully secured by individual life insurance policies or
annuity policies.
(iii) Asian insurance operations
The loans of the Group's Asian insurance operations of GBP1,087m at 31 December
2007 comprise mortgage loans of GBP132m, policy loans of GBP430m and other loans
of GBP525m. The mortgage and policy loans are secured by properties and life
insurance policies respectively.
The majority of the other loans are commercial loans held by the Malaysian
operation and which are all investment graded by two local rating agencies.
(iv) M&G
The M&G loans of GBP2,334m comprise GBP1,383m of bridging loan finance assets
and GBP951m in respect of a structured finance arrangement, both managed by
Prudential Capital. The bridging loan finance assets generally have no external
credit ratings available, with internal ratings prepared by the Group's asset
management operations as part of the risk management process rating GBP738m BBB+
to BBB- and GBP645m BB+ to BB-.
Of the loans receivable under the structured finance arrangement, GBP826m of the
receivable was with counterparties rated AA by Standard and Poor's and GBP125m
AA-. In addition an AAA rated credit default swap was held covering GBP400m of
the AA element of the loans.
M Debt securities portfolio
Debt securities are accounted for at fair value. The amounts included in the
balance sheet are analysed as follows, with further information relating to the
credit quality of the Group's debt securities at 31 December 2007 provided in
the notes below.
2007 2006
GBPm GBPm
Insurance operations
UK (note(ii)) 57,180 53,461
US (note (iii)) 19,002 20,146
Asia (note (iii)) 6,920 5,391
Asset management operations (note (iv)) 882 678
Unallocated to a segment - 67
Discontinued banking operations - 1,976
Total 83,984 81,719
Notes
In the tables below, Standard and Poor's (S&P) ratings have been used where
available. For securities where S&P ratings are not available, those produced by
Moody's and then Fitch have been used as an alternative.
(i) UK insurance operations
PAC-with profits sub-fund Other funds and subsidiaries
Scottish Excluding Prudential Total Prudential Unit-linked Other
Amicable Prudential Annuities Retirement business business
Insurance Annuities Limited Income Total
Fund Limited Limited
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
S&P - AAA 1,453 6,434 4,356 10,790 5,658 3,534 121 21,556
S&P - AA+ to AA- 436 1,978 1,518 3,496 1,541 680 20 6,173
S&P - A+ to A- 1,030 4,356 2,693 7,049 3,354 1,093 31 12,557
S&P - BBB+ to BBB- 652 2,780 920 3,700 781 267 9 5,409
S&P - Other 167 757 11 768 1 6 - 942
3,738 16,305 9,498 25,803 11,335 5,580 181 46,637
Moody's - Aaa 138 550 177 727 125 22 9 1,021
Moody's - Aa1 to Aa3 23 198 273 471 82 9 2 587
Moody's - A1 to A3 74 321 284 605 243 19 3 944
Moody's - Baa1 to Baa3 41 180 150 330 103 14 2 490
Moody's - Other 10 400 - 400 - - - 410
286 1,649 884 2,533 553 64 16 3,452
Fitch 43 196 265 461 160 17 1 682
Other 528 2,233 2,428 4,661 1,125 90 5 6,409
Total debt securities 4,595 20,383 13,075 33,458 13,173 5,751 203 57,180
Where no external ratings are available, internal ratings produced by the
Group's asset management operation, which are prepared on the Company's
assessment of a comparable basis to external ratings, are used where possible.
Of the GBP6,409m total debt securities held at 31 December 2007 which are not
externally rated, GBP2,972m were internally rated AAA to A-, GBP2,844m were
internally rated BBB to B- and GBP593m were unrated. The majority of unrated debt
security investments were held in SAIF and the PAC with-profits fund and relate
to convertible debt and other investments which are not covered by ratings
analysts nor have an internal rating attributed to them.
(ii) US insurance operations
GBPm
S&P - AAA 3,896
S&P - AA+ to AA- 1,187
S&P - A+ to A- 3,657
S&P - BBB+ to BBB- 5,415
S&P - Other 1,113
15,268
Moody's - Aaa 549
Moody's - Aa1 to Aa3 118
Moody's - A1 to A3 47
Moody's - Baa1 to Baa3 79
Moody's - Other 78
871
Fitch 380
Other* 2,483
Total debt securities 19,002
* The amounts within Other which are not rated by S&P, Moody or Fitch have the
following National Association of Insurance Commissioners (NAIC)
classifications:
2007
GBPm
NAIC 1 1,079
NAIC 2 1,311
NAIC 3-6 93
2,483
(iii) Asian insurance operations
With-profits Unit-linked Other business Total
business business
GBPm GBPm GBPm GBPm
S&P - AAA 1,367 660 257 2,284
S&P - AA+ to AA- 242 153 1,599 1,994
S&P - A+ to A- 299 271 105 675
S&P - BBB+ to BBB- 142 34 17 193
S&P - Other 8 47 94 149
2,058 1,165 2,072 5,295
Moody's - Aaa 16 185 - 201
Moody's - Aa1 to Aa3 7 19 19 45
Moody's - A1 to A3 11 16 1 28
Moody's - Baa1 to Baa3 12 7 - 19
Moody's - Other 58 - - 58
104 227 20 351
Other 167 509 598 1,274
Total debt securities 2,329 1,901 2,690 6,920
(iv) Asset management operations
The total for asset management operations was GBP882m, of which GBP841m related to M
&G's Prudential Capital operations and which was all AAA to A- where S&P rated
or Aaa by Moody's.
(v) Group exposure to holdings in sub-prime and Alt-A assets, monoline insurers
and CDO funds
Included in the amounts shown above for debt securities are the following
holdings with S&P ratings.
(a) Sub-prime and Alt-A securities
Shareholder-backed business
GBPm
US insurance operations - Sub-prime (AAA) 237
- Alt-A (77% AAA, 17% AA) 660
Asian insurance operations 15
912
With-profits operations
GBPm
UK insurance operations - Sub-prime (AAA) 129
- Alt-A (96% AAA) 100
Asian insurance operations 7
236
Total 1,148
Further details on the US insurance operations' sub-prime and Alt-A securities
are given in note N.
(b) Monoline insurers
The Group held direct holdings in monoline insurers with a value at 31 December
2007 of GBP33m (shareholder-backed operations GBP27m, with-profits operations GBP6m).
The Group also held debt securities with a value of GBP1,754m (shareholder-backed
operations GBP577m, with-profits operations GBP1,177m) which had a monoline wrap
guarantee.
(c) CDO funds (all without sub-prime exposure)
Shareholder-backed business GBPm
US insurance operations (65% AAA, 8% AA) * 260
Asian insurance operations (72% AAA, 28% AA-) 62
UK insurance operations - PRIL (AAA) 36
Other operations (AAA) 19
377
* including Group's economic interest in Piedmont and other consolidated CDO
funds.
With-profits operations GBPm
UK insurance operations (79% AAA, 8% AA) 240
Asian insurance operations (AAA) 59
299
Total 676
N Debt securities of US insurance operations: Accounting presentation of
movements in unrealised gains and losses and securities in an unrealised loss
position
(i) Accounting presentation of unrealised value movements
With the exception of debt securities of US insurance operations classified as '
available-for-sale' under IAS 39, unrealised value movements on the Group's
investments are booked within the income statement. For with-profits operations,
such value movements are reflected in changes to asset share liabilities to
policyholders or the liability for unallocated surplus. For shareholder-backed
operations, the unrealised value movements form part of the total return for the
year booked in the profit before tax attributable to shareholders. Separately,
as noted elsewhere and in note C in this announcement, and as applied
previously, the Group provides a supplementary analysis of this profit
distinguishing operating profit based on longer-term investment return and
short-term fluctuations in investment returns.
However, for debt securities classified as 'available-for-sale', unless
impaired, fair value movements are recorded as a movement in shareholder
reserves direct to equity. Impairments are recorded in the income statement as
shown in note E of this announcement. This classification is applied for most of
the debt securities of the Group's US insurance operations.
(ii) 2007 movements in unrealised gains and losses
In general, the debt securities of the Group's US insurance operations are
purchased with the intention and the ability to hold them for the longer-term.
In 2007 there was a movement in the balance sheet value for these debt
securities classified as available-for-sale from a net unrealised gain of
GBP110m to a net unrealised loss of GBP136m. During 2007, US interest rates fell
and the yield curve steepened. Offsetting the positive effect on bond values for
these changes were adverse market price effects resulting from increasing credit
spreads and global credit concerns. As a result of these factors, the gross
unrealised gain in the balance sheet decreased from GBP366m at 31 December 2006
to GBP303m at 31 December 2007, while the gross unrealised loss increased from
GBP256m to GBP439m at 31 December 2007.
These features are included in the table shown below of the movements in the
values of available-for-sale securities.
31 Dec 2007 Changes in 31 Dec 2006
unrealised
appreciation
GBPm GBPm GBPm
Assets fair valued at below book value
Book value 10,730 11,258
Unrealised loss (439) (183) (256)
Fair value (as included in balance sheet) 10,291 11,002
Assets fair valued at or above book value
Book value 8,041 8,208
Unrealised gain 303 (63) 366
Fair value (as included in balance sheet) 8,344 8,574
Total
Book value 18,771 19,466
Net unrealised (loss) gains (136) (246) 110
Fair value (as included in balance sheet)* 18,635 19,576
Reflected as part of movement in shareholders' equity
Movement in unrealised appreciation (244)
Exchange movements (2)
(246)
*Debt securities for US operations included in the balance sheet of GBP19,002m,
and as referred to in note M, comprise GBP18,635m for securities classified as
available-for-sale, as shown above, and GBP367m for securities of consolidated
investment funds classified as fair value through profit and loss.
Included within the unrealised valuation losses movement for the debt securities
of Jackson of GBP244m, as shown in the consolidated statement of changes in
equity, was an amount of GBP55m relating to the sub-prime and Alt-A securities
for which the carrying values at 31 December 2007 are shown in note M.
(iii) Securities in unrealised loss position
The following tables show some key attributes of those securities that are in an
unrealised loss position at 31 December 2007.
(a) Fair value of securities as a percentage of book value
Fair value Unrealised loss
GBPm GBPm
Between 90% and 100% 9,370 (274)
Between 80% and 90% 784 (122)
Below 80% 137 (43)
10,291 (439)
Included within the table above, showing the fair value of securities in an
unrealised loss position at 31 December 2007 as a percentage of book value, are
amounts relating to sub-prime and Alt-A securities of:
Fair value of securities as a percentage of book value Unrealised loss
Fair value GBPm
GBPm
Between 90% and 100% 572 (24)
Between 80% and 90% 132 (22)
Below 80% 28 (10)
732 (56)
(b) Aged analysis of unrealised losses for the time periods indicated
Not rated Non investment Investment Total
grade grade
GBPm GBPm GBPm GBPm
Less than 6 months (7) (8) (52) (67)
6 months to 1 year (10) (21) (105) (136)
1 year to 2 years (5) (2) (16) (23)
2 years to 3 years (24) (10) (140) (174)
More than 3 years (7) (3) (29) (39)
(53) (44) (342) (439)
At 31 December 2007, the gross unrealised losses in the balance sheet for the
sub-prime and Alt-A securities in an unrealised loss position were GBP56m, as
shown above in note (a). GBP37m of these losses relate to securities that have
been in an unrealised loss position for less than one year and GBP19m to
securities that have been in an unrealised loss position for more than one year.
(c) By maturity of security
GBPm
Less than 1 year (1)
1 year to 5 years (54)
5 years to 10 years (164)
More than 10 years (60)
Mortgage-backed and other debt securities (160)
Total (439)
O Shareholders' equity
2007 2006
GBPm GBPm
Share capital 123 122
Share premium 1,828 1,822
Reserves 4,250 3,544
Total 6,201 5,488
P Net core structural borrowings of shareholder-financed operations
2007 2006*
GBPm GBPm
Core structural borrowings of shareholder-financed operations:
Central funds 2,367 2,485
Jackson 125 127
Total (per consolidated balance sheet) 2,492 2,612
Less: Holding company** cash and short-term investments (recorded within the consolidated (1,456) (1,119)
balance sheet)
Net core structural borrowings of shareholders-financed operations 1,036 1,493
*Excluding borrowings of discontinued banking operations
**Including central finance subsidiaries
Q Other borrowings
2007 2006
GBPm GBPm
Operational borrowings attributable to shareholder-financed operations
Borrowings in respect of short-term fixed income securities programmes 2,477 2,032
Non-recourse borrowings of US operations 591 743
Other borrowings 13 15
Total continuing operations 3,081 2,790
Discontinued banking operations (note H) - 2,819
Total 3,081 5,609
Borrowings attributable to with-profits funds
Non-recourse borrowings of venture fund investment subsidiaries (note K) - 926
Non-recourse borrowings of consolidated investment funds 789 681
Subordinated debt of the Scottish Amicable Insurance Fund 100 100
Other borrowings (predominantly obligations under finance leases) 98 69
Total 987 1,776
R Inherited estate of the PAC long-term fund
The assets of the main with-profits fund within the long-term fund of PAC
comprise the amounts that it expects to pay out to meet its obligations to
existing policyholders and an additional amount used as working capital. The
amount payable over time to policyholders from the with-profits fund is equal to
the policyholders' accumulated asset shares plus any additional payments that
may be required by way of smoothing or to meet guarantees. The balance of the
assets of the with-profits fund is called the 'inherited estate' and has
accumulated over many years from various sources.
The inherited estate represents the major part of the working capital of PAC's
long-term insurance fund. This enables the Company to support with-profits
business by providing the benefits associated with smoothing and guarantees, by
providing investment flexibility for the fund's assets, by meeting the
regulatory capital requirements that demonstrate solvency and by absorbing the
costs of significant events or fundamental changes in its long-term business
without affecting the bonus and investment policies. The size of the inherited
estate fluctuates from year to year depending on the investment return and the
extent to which it has been required to meet smoothing costs, guarantees and
other events.
PAC believes that it would be beneficial if there were greater clarity as to the
status of the inherited estate. As a result, it has announced that it has begun
a process to determine whether it can achieve that clarity through a
reattribution of the inherited estate. As part of this process a Policyholder
Advocate has been nominated to represent policyholders' interests. This
nomination does not mean that a reattribution will occur.
Given the size of the PAC's with-profits business, any proposal is likely to be
time consuming and complex to implement and is likely to involve a payment to
policyholders from shareholders' funds. If a reattribution is completed, the
inherited estate will continue to provide working capital for the long-term
insurance fund.
S Group Investments - IFRS disclosures from the 2007 Annual Report
The Company has published a document alongside the Company's preliminary
announcement for the year ended 31 December 2007, entitled 'Group Investments -
IFRS disclosures from the 2007 Annual Report'. This document includes detailed
analysis and explanation of the information contained in the Group's financial
statements for the year ended 31 December 2007 on the Group's investments. The
document has been posted to the Company's website address at
www.prudential.co.uk
- --------------------------
1. Over three years
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date 14 March, 2008
PRUDENTIAL PUBLIC LIMITED COMPANY
By: /s/ JON BUNN
Jon Bunn
Director of Public Relations