2007 Interim Results - Part 2
Prudential PLC
01 August 2007
Part 2
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
NOTES ON THE UNAUDITED 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. 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 for the Group's other operations.
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 fund 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
surplus or deficit, the shareholders' 10 per cent share of the PAC with-profits
sub-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 the 2007 and 2006 half years are unaudited. The 2006
full year results have been derived from the EEV basis results supplement to the
Company's statutory accounts for 2006. 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 UK and US 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 are derived by adding a
risk premium, also based on the long-term view of Prudential's economists in
respect of each territory, to the risk-free rate. In the UK and the US, the
equity risk premium is 4.0 per cent above risk-free rates for all periods for
which results are prepared in this report. In Asia, equity risk premiums range
from 3.0 per cent to 5.8 per cent for all periods for which results are prepared
in this report. 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 table below summarises the principal financial assumptions:
30 Jun 30 Jun 31 Dec
2007 2006 2006
% % %
UK Insurance Operations
Risk discount rate:
New business 8.7 8.0 7.8
In force 8.6 8.2 8.0
Pre-tax expected long-term nominal rates of investment return:
UK equities 9.3 8.7 8.6
Overseas equities 9.6 to 8.7 to 8.6 to
10.6 9.4 9.3
Property 7.8 7.2 7.1
Gilts 5.3 4.7 4.6
Corporate bonds 6.0 5.4 5.3
Expected long-term rate of inflation 3.1 3.0 3.1
Post-tax expected long-term nominal rate of return for the with-profits fund:
Pension business (where no tax applies) 8.3 7.7 7.5
Life business 7.4 6.85 6.6
US Operations (Jackson)
Risk discount rate:
New business (note) 7.9 8.0 7.6
In force (note) 7.3 7.1 6.7
Expected long-term spread between earned rate and rate credited to
policyholders for single premium deferred annuity business 1.75 1.75 1.75
US 10 year treasury bond rate at end of period 5.1 5.2 4.8
Pre-tax expected long-term nominal rate of return for US equities 9.1 9.2 8.8
Expected long-term rate of inflation 2.4 2.7 2.5
Note: US Operations - risk discount rates
The risk discount rates at 30 June 2007 for new business and business in force
for US Operations reflect weighted rates based on underlying rates of 8.8% for
variable annuity business and 5.9% for other business. The increase in the
weighted discount rate for business in force from 31 December 2006 of 6.7% to 30
June 2007 of 7.3% reflects the increase in the US 10-year treasury bond rate and
the increasing proportion of variable annuity business.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
Economic assumptions (continued)
Asian Operations
Hong Kong Malaysia Singapore Taiwan
China (notes India Indonesia Japan Korea (notes Philippines (notes (notes Thailand Vietnam
iii,iv,v) iv,v) iv,v) ii,v)
30 Jun 2007 % % % % % % % % % % % %
Risk discount
rate:
New business 12.0 6.5 16.5 17.5 5.3 10.1 9.7 16.5 7.1 8.6 13.75 16.5
In force 12.0 6.7 16.5 17.5 5.3 10.1 9.3 16.5 6.3 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 5.1 10.5 11.5 2.2 5.6 7.0 10.5 4.5 5.5 7.75 10.5
Hong Kong Malaysia Singapore Taiwan
China (notes India Indonesia Japan Korea (notes Philippines (notes (notes Thailand Vietnam
iii,iv,v) iv,v) iv,v) ii,v)
30 Jun 2006 % % % % % % % % % % % %
Risk discount
rate:
New business 12.0 6.6 16.5 17.5 5.3 9.7 9.5 16.5 6.7 8.9 13.75 16.5
In force 12.0 6.9 16.5 17.5 5.3 9.7 9.1 16.5 6.8 9.5 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 5.3 10.5 11.5 2.1 5.2 7.0 10.5 4.5 5.5 7.75 10.5
Hong Kong Malaysia Singapore Taiwan
China (notes India Indonesia Japan Korea (notes Philippines (notes (notes Thailand Vietnam
iii,iv,v) iv,v) iv,v) ii,v)
31 Dec 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 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5
inflation
Government bond 9.0 4.7 10.5 11.5 2.1 5.0 7.0 10.5 4.5 5.5 7.75 10.5
yield
Asia total Asia total Asia total
30 Jun 30 Jun 31 Dec
2007 2006 2006
% % %
Weighted risk discount rate (note i)
New business 10.1 9.9 9.8
In force 8.7 8.9 8.8
Notes:
Asian Operations - economic assumptions
(i) The weighted risk discount rates for the 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 half year 2007 EEV basis results continue to 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 of around 2.5 per
cent trend towards 5.5 per cent at 31 December 2013 (half year 2006: 2 per cent
towards 5.5 per cent at 31 December 2012, full year 2006: 2 per cent towards 5.5
per cent at 31 December 2013).
The projections for the Fund Earned Rate reflect the same approach as applied
for the full year 2006 results with allowance made for the mix of assets in the
fund, future investment strategy and further market depreciation of bonds held
as a result of assumed future yield increases. The projections for the Fund
Earned Rate alter for changes to these factors and the effects of movements in
interest rates from period to period.
After taking into account current bond yields, the assumption of the phased
progression in bond yields and the factors described above, the average assumed
Fund Earned Rate remains below 1.2 per cent until 2010 (due to the depreciation
of bond values as yields rise) and fluctuates around a target of 5.9 per cent
after 2013.
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) Assumed equity returns
The mean equity return assumptions for the most significant equity holdings in
the Asian Operations were:
30 Jun 30 Jun 31 Dec
2007 2006 2006
% % %
Hong Kong 9.1 9.2 8.7
Malaysia 12.8 12.8 12.8
Singapore 9.3 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 Hong Kong, Malaysia, Singapore and Taiwan, bond yields have been used in
setting the risk discount rates for half year 2007 reporting. For half year and
full year 2006, cash rates were used in setting the risk discount rates for
these operations.
(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.
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.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
Economic assumptions (continued)
The rates to which the model has been calibrated are set out below.
Mean returns have been derived as the annualised arithmetic average return
across all simulations and durations.
Standard deviations have been calculated by taking the annualised variance of
the returns over all the simulations, taking the square root and averaging over
all durations in the projection. For bonds the standard deviations relate to the
yields on bonds of the average portfolio duration. For equity and property, they
relate to the total return on these assets. The standard deviations applied to
all periods presented in these statements are as follows:
%
Government bond yield 2.0
Corporate bond yield 5.5
Equities:
UK 18.0
Overseas 16.0
Property 15.0
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 ranges
from 19.2 per cent to 28.6 per cent, (half year 2006 and full year 2006: 18.6
per cent to 28.1 per cent) depending on risk class, and the volatility of bond
funds ranges from 1.4 per cent to 2.0 per cent for all periods presented in this
report.
Asian Operations
The same asset return model, as used in the UK, appropriately calibrated, has
been used for the Asian Operations.
The stochastic cost of guarantees are 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 volatility of equity returns ranges from 18 per cent to 25
per cent, (half year 2006: 18 per cent to 26 per cent, full year 2006: 18 per
cent to 25 per cent) and the volatility of government bond yields ranges from
1.4 per cent to 2.5 per cent (half year 2006: 1.2 per cent to 2.2 per cent, full
year 2006: 1.4 per cent to 2.5 per cent).
(3) Level of encumbered capital
In adopting the EEV Principles, the Company 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 EEV Principles, no credit is taken 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 the UK and Asia, the
capital available in the fund is sufficient to meet the encumbered capital
requirements.
The table below summarises the level of encumbered capital as a percentage of
the relevant statutory requirement.
Capital as a percentage of relevant statutory requirement
UK Insurance Operations 100% of EU Minimum
Jackson 235% of Company Action Level
Asian Operations 100% of Financial Conglomerates Directive requirement
(4) Margins on new business premiums
New Business Premiums Annual Present Pre-Tax New New Business Margin
premium value of Business
equivalent New
Business
Premiums
Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP)
Half year 2007 £m £m £m £m £m % %
UK Insurance Operations 2,441 119 363 2,905 108 30 3.7
US Operations 3,425 9 352 3,490 144 41 4.1
Asian Operations 784 541 619 3,286 282 46 8.6
Total 6,650 669 1,334 9,681 534 40 5.5
New Business Premiums Annual Present Pre-Tax New New Business Margin
premium value of Business
equivalent New
Business
Premiums
Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP)
Half year 2006 £m £m £m £m £m % %
UK Insurance Operations 3,890 95 484 4,224 138 29 3.3
US Operations 3,146 8 323 3,209 134 41 4.2
Asian Operations 519 396 448 2,328 232 52 10.0
Total 7,555 499 1,255 9,761 504 40 5.2
New Business Premiums Annual Present Pre-Tax New New Business Margin
premium value of Business
equivalent New
Business
Premiums
Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP)
Full year 2006 £m £m £m £m £m % %
UK Insurance Operations 6,991 201 900 7,712 266 30 3.4
US Operations 5,964 17 614 6,103 259 42 4.2
Asian Operations 1,072 849 956 5,132 514 54 10.0
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 Equivalents (APE) and the Present Value of New Business Premiums
(PVNBP). APEs are calculated as the aggregate of regular new business premiums
on an annualised basis and one-tenth of single new business premiums. 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 period 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 applying at the end of the reporting period.
(5) UK Insurance Operations expense assumptions
The half year 2006 EEV basis financial statements included note disclosure which
explained that in determining the appropriate expense assumptions account had
been taken of the cost synergies that were expected to arise with some certainty
from the initiative announced in December 2005 from UK Insurance Operations
working more closely with Egg and M&G, and the effect of the end to end review
of the UK business which was underway at the time. The disclosure noted that the
half year 2006 basis results had been prepared on the same basis as the 2005
full year statements which had disclosed that without the anticipation of the
cost synergies there would have been a charge for altered expense assumptions of
approximately £55m.
On 29 January 2007 the Company announced the agreement to sell Egg Banking plc
to Citi. On 15 March 2007 the Company announced the actions necessary to
implement the reassessed plans in light of this transaction and additional
initiatives. In preparing the 2006 full year results, account was also taken of
the effect of expense savings that were expected to arise with some certainty.
Without this factor the effect on the full year 2006 results would have been a
charge of £44m for the net effect of revised assumptions in line with 2006 unit
costs.
The half year 2007 results have been prepared using the same approach. Without
the anticipation of expense savings there would have been an additional charge
of £28m for the net effect of revised assumptions in line with half year 2007
unit costs.
(6) Taiwan - effect of altered economic assumptions and sensitivity of
results to future market conditions
For the half year 2007 results, as explained in note 2 (a), 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 30 June 2007 of the Taiwan operation to
altered economic assumptions and future market conditions to:
(a) a 1 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 £83m and £
(134)m respectively; and
(b) a 1 per cent increase or decrease in the starting bond rate for the
progression to the assumed long-term rate is £92m and £(100)m respectively.
If it had been assumed in preparing the half year 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
£90m.
(7) Effect of changes in corporate tax rates
At 30 June 2007, a change to reduce the UK corporate tax rate from 30 per cent
to 28 per cent in 2008 had been substantively enacted in the legislative
process. Accordingly, the half year 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 rate is
to give rise to a benefit to the value of business in force at 1 January 2007 of
£48m. After grossing up this amount for notional tax, the effect on the pre-tax
operating results based on longer-term investment returns for UK Insurance
Operations for half year 2007 is a credit of £67m.
Similar considerations apply to corporate tax rate changes in Singapore and
China giving rise to a benefit to the value of in-force business at 1 January
2007 of £20m. After grossing up this amount for notional tax, the effect on the
pre-tax operating results based on longer-term investment returns for Asian
Operations for half year 2007 is a credit of £25m.
(8) Short-term fluctuations in investment returns for half year 2006
comparative results
The analysis of the half year 2006 EEV basis results in this announcement
incorporates a reallocation of £41m from the amount shown for the effect of
changes in economic assumptions and time value of cost of options and guarantees
to the credit for short-term fluctuations in investment returns. The change,
which has no effect on operating profit or profit before tax relates to asset
related gains for Jackson and has been made to align with the full year 2006 and
current presentation.
(9) Holding company net borrowings (at market value)
Holding company net borrowings at market value comprise:
30 Jun 30 Jun 31 Dec
2007 2006 2006
£m £m £m
Central funds borrowings:
IFRS basis (2,289) (2,520) (2,485)
Mark to market value adjustment (68) (105) (176)
EEV basis (2,357) (2,625) (2,661)
Holding company* cash and short-term investments 1,546 1,067 1,119
Holding company net borrowings (811) (1,558) (1,542)
* Prudential plc and related finance subsidiaries
TOTAL INSURANCE AND INVESTMENT PRODUCTS NEW BUSINESS
INSURANCE PRODUCTS AND INVESTMENT PRODUCTS*
Insurance Products * Investment Products * Total
Half Year Half Full Half Half Full Half Half Full
2007 £m Year Year Year Year Year Year Year Year
2006 2006 £m 2007 £m 2006 £m 2006 £m 2007 £m 2006 £m 2006 £m
£m
UK Operations 2,560 3,985 7,192 7,519 6,795 13,486 10,079 10,780 20,678
US Operations 3,434 3,154 5,981 19 - - 3,453 3,154 5,981
Asian Operations 1,325 915 1,921 17,471 10,027 20,408 18,796 10,942 22,329
Group Total 7,319 8,054 15,094 25,009 16,822 33,894 32,328 24,876 48,988
INSURANCE PRODUCTS - NEW BUSINESS PREMIUMS AND CONTRIBUTIONS *
Single Regular Annual Premium and Present Value of New
Contribution Business Premiums
Equivalents
Half Half Full Half Half Full Half Half Full Half Half Full
Year Year Year Year Year Year Year Year Year Year Year Year
2007 2006 2006 £m 2007 2006 2006 2007 2006 2006 2007 £m 2006 £m 2006 £m
£m £m £m £m £m £m £m £m
UK Operations
Product Summary
Internal Vesting 687 615 1,341 - - - 69 62 134 687 615 1,341
annuities
Direct and 431 273 780 - - - 43 27 78 431 273 780
Partnership Annuities
Intermediated 282 247 592 - - - 28 25 59 282 247 592
Annuities
Total Individual 1,400 1,135 2,713 - - - 140 114 271 1,400 1,135 2,713
Annuities
Equity Release 67 30 89 - - - 7 3 9 67 30 89
Individual Pensions 18 10 21 - - - 2 1 2 20 10 21
Corporate Pensions 107 35 318 42 32 66 53 36 98 296 124 490
Unit Linked Bonds 138 213 388 - - - 14 21 39 138 213 388
With-Profit Bonds 114 54 139 - - - 11 5 14 114 54 139
Protection - 2 11 2 6 9 2 6 10 14 21 63
Offshore Products 205 361 540 2 - - 22 36 54 215 361 540
Total Retail 2,049 1,840 4,219 46 38 75 251 222 497 2,264 1,948 4,443
Retirement
Corporate Pensions 110 165 261 60 44 100 71 61 126 314 350 643
Other Products 100 134 232 13 13 26 23 26 49 145 175 347
DWP Rebates 129 161 161 - - - 13 16 16 129 161 161
Total Mature Life and 339 460 654 73 57 126 107 103 191 588 686 1,151
Pensions
Total Retail 2,388 2,300 4,873 119 95 201 358 325 688 2,852 2,634 5,594
Wholesale Annuities 38 1,278 1,431 - - - 4 128 143 38 1,278 1,431
Credit Life 15 312 687 - - - 1 31 69 15 312 687
Total UK Operations 2,441 3,890 6,991 119 95 201 363 484 900 2,905 4,224 7,712
Channel Summary
Direct and 1,151 993 2,543 106 81 174 221 180 428 1,567 1,288 3,133
Partnership
Intermediated 1,108 1,146 2,169 13 14 27 124 129 244 1,156 1,185 2,300
Wholesale 53 1,590 2,118 - - - 5 159 212 53 1,590 2,118
Sub-Total 2,312 3,729 6,830 119 95 201 350 468 884 2,776 4,063 7,551
DWP Rebates 129 161 161 - - - 13 16 16 129 161 161
Total UK Operations 2,441 3,890 6,991 119 95 201 363 484 900 2,905 4,224 7,712
US Operations
Fixed annuities 291 313 688 - - - 29 31 69 291 313 688
Fixed index annuities 220 293 554 - - - 22 29 55 220 293 554
Variable annuities 2,243 1,888 3,819 - - - 224 189 382 2,243 1,888 3,819
Life 3 4 8 9 8 17 10 9 18 68 67 147
Guaranteed Investment 133 310 458 - - - 13 31 46 133 310 458
Contracts
GIC - Medium Term 535 338 437 - - - 54 34 44 535 338 437
Notes
Total US Operations 3,425 3,146 5,964 9 8 17 352 323 614 3,490 3,209 6,103
Asian Operations
China 19 17 27 20 13 36 22 15 39 112 88 198
Hong Kong 199 139 355 54 42 103 74 56 139 493 360 933
India (Group's 26% 16 11 20 81 55 105 83 56 107 340 177 411
interest)
Indonesia 35 11 31 43 31 71 46 32 74 178 117 269
Japan 52 23 68 11 1 7 16 3 14 97 30 97
Korea 72 58 103 113 103 208 120 109 218 608 492 1,130
Malaysia 9 2 4 32 31 72 33 31 72 186 185 418
Singapore 306 205 357 30 29 72 61 49 108 484 391 803
Taiwan 63 47 92 136 74 139 142 79 148 711 421 743
Other 13 6 15 21 17 36 22 18 37 77 67 130
Total Asian 784 519 1,072 541 396 849 619 448 956 3,286 2,328 5,132
Operations
Group Total 6,650 7,555 14,027 669 499 1,067 1,334 1,255 2,470 9,681 9,761 18,947
INVESTMENT PRODUCTS - FUNDS UNDER MANAGEMENT *
1 Jan 2007 Gross Inflows Redemptions Market and other 30 June 2007
Movements
£m £m £m £m £m
UK Operations 44,946 7,519 (4,152) 311 48,624
US Operations - 19 (1) - 18
Asian Operations 12,253 17,471 (15,809) 665 14,580
Group Total 57,199 25,009 (19,962) 976 63,222
* 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. 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.
Investment products referred to in the table for funds under management above
are unit trust, mutual funds and similar types of retail fund 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.
The premiums for half year and full year 2006 for wholesale annuities for UK
Operations include £592m and £560m for a bulk annuity transaction with the
Scottish Amicable Insurance Fund (SAIF). 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 full year 2006
amount is £32m different from the half year 2006 estimate due to refinements to
calculations under the reassurance arrangement between the internal funds.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
SUMMARY CONSOLIDATED INCOME STATEMENT
Half Year Half Year Full Year
2007 2006 2006
£m £m £m
Earned premiums, net of reinsurance 7,903 8,164 15,986
Investment income 8,250 4,918 17,128
Other income 1,094 934 1,917
Total revenue, net of reinsurance (note C) 17,247 14,016 35,031
Benefits and claims and movement in unallocated surplus of with-profits funds (14,315) (11,370) (28,421)
Acquisition costs and other operating expenditure (2,118) (1,658) (4,212)
Finance costs: Interest on core structural borrowings of shareholder-financed (88) (89) (177)
operations
Total charges (note C) (16,521) (13,117) (32,810)
Profit before tax* (note C) 726 899 2,221
Tax attributable to policyholders' returns 2 (162) (849)
Profit before tax attributable to shareholders (note D) 728 737 1,372
Tax expense (note E) (251) (415) (1,241)
Less: Tax attributable to policyholders returns (2) 162 849
Tax attributable to shareholders' profits (note E) (253) (253) (392)
Profit from continuing operations after tax 475 484 980
Discontinued operations (net of tax) (note M) 241 (34) (105)
Profit for the period 716 450 875
Attributable to:
Equity holders of the Company 715 449 874
Minority interests 1 1 1
Profit for the period 716 450 875
Earnings per share (in pence)
Basic (based on 2,437m, 2,403m and 2,413m shares respectively):
Based on profit from continuing operations attributable to the equity holders of 19.4p 20.0p 40.5p
the Company (note F)
Based on profit (loss) from discontinued operations attributable to the equity 9.9p (1.3)p (4.3)p
holders of the Company
29.3p 18.7p 36.2p
Diluted (based on 2,440m, 2,406m and 2,416m shares respectively):
Based on profit from continuing operations attributable to the equity holders of 19.4p 20.0p 40.5p
the Company (note F)
Based on profit (loss) from discontinued operations attributable to the equity 9.9p (1.3)p (4.3)p
holders of the Company
29.3p 18.7p 36.2p
Dividends per share (in pence)
Dividends relating to reporting period:
Interim dividend (2007 and 2006) (note G) 5.70p 5.42p 5.42p
Final dividend (2006) - - 11.72p
Total 5.70p 5.42p 17.14p
Dividends declared and paid in reporting period:
Current year interim dividend - - 5.42p
Final dividend for prior year 11.72p 11.02p 11.02p
Total 11.72p 11.02p 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.
The presentation of the half year and full year 2006 comparative results has
been adjusted to show Egg as a discontinued operation.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Period ended 30 June 2007
Share Share Retained Translation Available-for-sale Hedging Shareholders' Minority Total
capital premium earnings reserve securities reserve reserve equity interests equity
£m £m £m £m £m £m £m £m £m
Reserves
Profit for the period 715 715 1 716
Items recognised directly
in equity:
Exchange movements (21) (21) (21)
Movement on cash flow (3) (3) (3)
hedges
Unrealised valuation
movements on securities
classified as
available-for-sale:
Unrealised holding losses (289) (289) (289)
arising during the period
Less gains included in the (3) (3) (3)
income statement
(292) (292) (292)
Related change in 120 120 120
amortisation of deferred
income and acquisition
costs
Related tax (12) 59 1 48 48
Total items of income and (33) (113) (2) (148) (148)
expense recognised
directly in equity
Total income and expense 715 (33) (113) (2) 567 1 568
for the period
Dividends (288) (288) (288)
Reserve movements in 9 9 9
respect of share-based
payments
Change in minority (38) (38)
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
Share capital and share
premium
New share capital 1 116 117 117
subscribed
Transfer to retained (115) 115
earnings in respect of
shares issued in lieu of
cash dividends
Treasury shares
Movement in own shares in 11 11 11
respect of share-based
payment plans
Movement on Prudential plc 1 1 1
shares purchased by unit
trusts consolidated under
IFRS
Net increase (decrease) in 1 1 563 (33) (113) (2) 417 (37) 380
equity
At beginning of period 122 1,822 3,640 (125) 27 2 5,488 132 5,620
At end of period 123 1,823 4,203 (158) (86) 0 5,905 95 6,000
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Period ended 30 June 2006
Share Share Retained Translation Available-for-sale Hedging Shareholders' Minority Total
capital premium earnings reserve securities reserve reserve equity interests equity
£m £m £m £m £m £m £m £m £m
Reserves
Profit for the period 449 449 1 450
Items recognised directly
in equity:
Exchange movements (134) (134) (134)
Movement on cash flow 4 4 4
hedges
Unrealised valuation
movements on securities
classified as
available-for-sale:
Unrealised holding losses (707) (707) (707)
arising during the period
Less gains included in the (3) (3) (3)
income statement
(710) (710) (710)
Related change in 311 311 311
amortisation of deferred
income and acquisition
costs
Related tax (39) 140 (1) 100 100
Total items of income and (173) (259) 3 (429) (429)
expenses recognised
directly in equity
Total income and expense 449 (173) (259) 3 20 1 21
for the period
Dividends (267) (267) (267)
Reserve movements in 6 6 6
respect of share-based
payments
Change in minority 7 7
interests arising
principally from purchase
and sale of venture
investment companies and
property partnerships of
the PAC with-profits fund
Acquisition of Egg (167) (167) (84) (251)
minority interests (note
K)
Share capital and share
premium
New share capital 2 251 253 253
subscribed
Transfer to retained (7) 7
earnings in respect of
shares issued in lieu of
cash dividends
Treasury shares
Movement in own shares in 9 9 9
respect of share-based
payment plans
Movement on Prudential plc 1 1 1
shares purchased by unit
trusts consolidated under
IFRS
Net increase (decrease) in 2 244 38 (173) (259) 3 (145) (76) (221)
equity
At beginning of period 119 1,564 3,236 173 105 (3) 5,194 172 5,366
At end of period 121 1,808 3,274 0 (154) 0 5,049 96 5,145
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Year ended 31 December 2006
Share Share Retained Translation Available-for-sale Hedging Shareholders' Minority Total
capital premium earnings reserve securities reserve reserve equity interests equity
£m £m £m £m £m £m £m £m £m
Reserves
Profit for the year 874 874 1 875
Items recognised directly
in equity:
Exchange movements (224) (224) (224)
Movement on cash flow 7 7 7
hedges
Unrealised valuation
movements on securities
classified as
available-for-sale:
Unrealised holding losses (210) (210) (210)
arising during the year
Less losses included in 7 7 7
the income statement
(203) (203) (203)
Related change in 75 75 75
amortisation of deferred
income and acquisition
costs
Related tax (74) 50 (2) (26) (26)
Total items of income and (298) (78) 5 (371) (371)
expense recognised
directly in equity
Total income and expense 874 (298) (78) 5 503 1 504
for the year
Dividends (399) (399) (399)
Reserve movements in 15 15 15
respect of share-based
payments
Change in minority 43 43
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
Acquisition of Egg (167) (167) (84) (251)
minority interests (note
K)
Share capital and share
premium
New share capital 3 333 336 336
subscribed
Transfer to retained (75) 75
earnings in respect of
shares issued in lieu of
cash dividends
Treasury shares
Movement in own shares in 6 6 6
respect of share-based
payment plans
Movement on Prudential plc 0 0 0
shares purchased by unit
trusts consolidated under
IFRS
Net increase (decrease) in 3 258 404 (298) (78) 5 294 (40) 254
equity
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
SUMMARY CONSOLIDATED BALANCE SHEET
30 Jun 30 Jun 31 Dec
2007 2006 2006
£m £m £m
Assets
Intangible assets attributable to shareholders:
Goodwill 1,341 1,341 1,341
Deferred acquisition costs and acquired in-force value 2,693 2,697 2,497
of long-term business contracts
4,034 4,038 3,838
Intangible assets attributable to PAC with-profits fund
In respect of acquired subsidiaries for venture fund 1,145 978 830
and other investment purposes
Deferred acquisition costs 40 32 31
1,185 1,010 861
Total 5,219 5,048 4,699
Other non-investment and non-cash assets:
Property, plant and equipment 1,107 1,018 1,133
Reinsurers' share of policyholder liabilities 1,092 1,141 945
Deferred tax assets 675 423 1,012
Current tax recoverable 332 315 404
Accrued investment income 1,980 1,891 1,900
Other debtors 2,268 2,297 1,052
Total 7,454 7,085 6,446
Investments of long-term business, banking and other
operations:
Investment properties 14,149 13,682 14,491
Investments accounted for using the equity method 14 5 6
Financial investments:
Loans and receivables 5,441 12,795 11,573
Equity securities and portfolio holdings in 83,819 75,534 78,892
unit trusts
Debt securities 80,211 78,090 81,719
Other investments 6,737 3,930 5,401
Deposits 7,519 7,422 7,759
Total 197,890 191,458 199,841
Held for sale assets 286 94 463
Cash and cash equivalents 4,500 3,665 5,071
Total assets 215,349 207,350 216,520
Equity and liabilities
Equity
Shareholders' equity (note H) 5,905 5,049 5,488
Minority interests 95 96 132
Total equity 6,000 5,145 5,620
Liabilities
Banking customer accounts - 5,545 5,554
Policyholder liabilities and unallocated surplus of
with-profits funds:
Contract liabilities (including amounts in respect of 169,895 158,127 164,988
contracts classified as investment contracts under IFRS 4)
Unallocated surplus of with-profits funds 14,728 13,421 13,599
Total insurance liabilities 184,623 171,548 178,587
Core structural borrowings of shareholder-financed
operations:
Subordinated debt (other than Egg) 1,492 1,573 1,538
Other 921 1,082 1,074
2,413 2,655 2,612
Egg subordinated debt - 451 451
Total (note I) 2,413 3,106 3,063
Other borrowings:
Operational borrowings attributable to 2,605 5,994 5,609
shareholder-financed operations (note J)
Borrowings attributable to with-profits funds (note J) 2,122 2,042 1,776
Other non-insurance liabilities:
Obligations under funding, securities lending and sale 4,381 3,860 4,232
and repurchase agreements
Net asset value attributable to unit holders of 3,406 1,495 2,476
consolidated unit trusts and similar funds
Current tax liabilities 1,033 1,168 1,303
Deferred tax liabilities 3,624 2,714 3,882
Accruals and deferred income 477 476 517
Other creditors 2,029 2,216 1,398
Provisions 376 383 464
Other liabilities 2,260 1,658 1,652
Held for sale liabilities - - 387
Total 17,586 13,970 16,311
Total liabilities 209,349 202,205 210,900
Total equity and liabilities 215,349 207,350 216,520
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
SUMMARY CONSOLIDATED CASH FLOW STATEMENT
Half Year Half Year Full Year
2007 2006 2006
£m £m £m
Cash flows from operating activities
Profit before tax from continuing operations (note i) 726 899 2,221
Profit (loss) before tax from discontinued operations (including profit 222 (45) (150)
on sale) (note M)
Total profit before tax 948 854 2,071
Changes in operating assets and liabilities (note ii) 283 73 420
Other items (note ii) (767) (241) (282)
Net cash flows from operating activities 464 686 2,209
Cash flows from investing activities
Net cash flows from purchases and disposals of property and equipment (137) (280) (140)
Costs incurred on purchase of Egg minority interests (note K) - (6) (6)
Acquisition of subsidiaries, net of cash balances (note iii) (77) 15 (70)
Disposal of Egg, net of cash balances (notes iv and K) (538) - -
Disposal of other subsidiaries, net of cash balances (note iii) 157 80 114
Net cash flows from investing activities (595) (191) (102)
Cash flows from financing activities
Structural borrowings of the Group:
Shareholder-financed operations (note v):
Redemption (150) (1) (1)
Interest paid (104) (104) (204)
With-profits operations (note vi):
Interest paid - (9) (9)
Equity capital (note vii):
Issues of ordinary share capital 1 1 15
Dividends paid (171) (260) (323)
Net cash flows from financing activities (424) (373) (522)
Net (decrease) increase in cash and cash equivalents (555) 122 1,585
Cash and cash equivalents at beginning of period 5,071 3,586 3,586
Effect of exchange rate changes on cash and cash equivalents (16) (43) (100)
Cash and cash equivalents at end of period (note viii) 4,500 3,665 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) The adjusting items to profit before tax include changes in operating
assets and liabilities and other items comprising adjustments in respect of
non-cash items, including operational interest receipts and payments, dividend
receipts and tax paid. The figure of £(767)m for other items at half year 2007
includes £(290)m in respect of the profit on sale of Egg, which is included in
the cash flows from investing activities in this statement, and tax paid of £
(361)m. The most significant elements of the adjusting items within changes in
operating assets and liabilities are as follows:
Half Year Half Year Full Year
2007 2006 2006
£m £m £m
Deferred acquisition costs (excluding changes taken directly (277) (462) (398)
to equity)
Other non-investment and non-cash assets (884) (873) 166
Investments (7,189) (2,618) (13,748)
Policyholder liabilities (including unallocated surplus) 7,181 4,105 13,540
Other liabilities (including operational borrowings) 1,452 (79) 860
Changes in operating assets and liabilities 283 73 420
(iii) Acquisitions and disposals of subsidiaries shown above include venture
fund and other investment subsidiaries of the PAC with-profits fund, as shown in
note K.
(iv) The amount of £(538)m in respect of the disposal of Egg, net of cash
balances shown above, represents the net sale proceeds of £527m less cash and
cash equivalents of £1,065m held by Egg and transferred on disposal.
(v) Structural borrowings of shareholder-financed operations consist of the core
debt of the parent company and related 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 £150m were repaid
on maturity.
(vi) Structural borrowings of with-profits operations relate solely to the £100m
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 on other borrowings of
with-profits funds, which principally relate to venture fund investment
subsidiaries and other consolidated investment vehicles, are categorised as
operating activities in the presentation above.
(vii) Cash movements in 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, £377m (half year
2006: £388m; full year 2006: £437m) represents cash and cash equivalents of the
parent company and related finance subsidiaries.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE UNAUDITED IFRS BASIS RESULTS
A Basis of preparation and audit status
The Group's policy for preparing this interim financial information is to use
the accounting policies adopted by the Group in its last consolidated financial
statements, as updated by any changes in accounting policies it intends to make
in its next consolidated financial statements as a result of new or changed IFRS
that are already endorsed by the European Union (EU) and that are applicable or
available for early adoption for the next annual financial statements.
The IFRS basis results for the 2007 and 2006 half years are unaudited. The 2006
full year IFRS basis results have been derived from the 2006 statutory accounts.
The auditors have reported on the 2006 statutory accounts which have been
delivered to the Registrar of Companies. 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.
B Significant accounting policies
The accounting policies applied by the Group in these condensed consolidated
financial statements are the same as those previously applied in the Group's
consolidated financial statements for the year ended 31 December 2006.
C Segment disclosure
Half Year Half Year Full Year
2007 2006 2006
£m £m £m
Revenue
Long-term business 16,616 13,565 34,197
Broker-dealer and fund management 682 518 1,080
Unallocated corporate 90 71 38
Intra-group revenue eliminated on (141) (138) (284)
consolidation
Total revenue per income statement 17,247 14,016 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 (16,076) (12,881) (32,162)
with-profits funds
Broker-dealer and fund management (479) (358) (797)
Unallocated corporate (107) (16) (135)
Intra-group charges eliminated on 141 138 284
consolidation
Total charges per income statement (16,521) (13,117) (32,810)
Revenue less charges (continuing
operations)
Long-term business 540 684 2,035
Broker-dealer and fund management 203 160 283
Unallocated corporate (17) 55 (97)
Profit before tax* 726 899 2,221
Tax attributable to policyholders' returns 2 (162) (849)
Profit before tax attributable to 728 737 1,372
shareholders
Tax attributable to shareholders' profits (253) (253) (392)
Profit from continuing operations after tax 475 484 980
Discontinued operations (net of tax)
Banking (note M) 241 (34) (105)
Profit for the period 716 450 875
* 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.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE UNAUDITED IFRS BASIS RESULTS (CONTINUED)
D Supplementary analysis of profit from continuing operations before tax
attributable to shareholders
Half Year Half Year Full Year
2007 2006 2006
Results analysis by business area £m £m £m
UK Operations
UK insurance operations 251 205 500
M&G 140 100 204
Total 391 305 704
US Operations
Jackson 218 223 398
Broker-dealer and fund management 9 8 18
Curian (2) (4) (8)
Total 225 227 408
Asian Operations
Long-term business 76 88 189
Fund management 33 22 50
Development expenses (6) (7) (15)
Total 103 103 224
Other income and expenditure
Investment return and other income 42 33 58
Interest payable on core structural borrowings (88) (89) (177)
Corporate expenditure:
Group Head Office (50) (46) (83)
Asia Regional Head Office (17) (19) (36)
Charge for share-based payments for Prudential schemes (note iii) (5) (5) (10)
Total (118) (126) (248)
UK restructuring costs 0 (11) (38)
Operating profit from continuing operations based on longer-term 601 498 1,050
investment returns (note iv)
Short-term fluctuations in investment returns on shareholder-backed 24 39 155
business (note i)
Shareholders' share of actuarial gains and losses on defined benefit 103 200 167
pension schemes (note ii)
Profit from continuing operations before tax attributable to shareholders 728 737 1,372
(note iv)
(i) Short-term fluctuations in investment returns on shareholder-backed
business
£m £m £m
US Operations:
Movement in market value of derivatives (other than 36 93 34
equity-based) used for economic hedging purposes
Actual less longer-term investment returns for other items 25 9 20
Asian Operations (10) (36) 134
Other Operations (27) (27) (33)
24 39 155
(ii) Shareholders' share of actuarial gains and losses on defined benefit
pension schemes
£m £m £m
Actual less expected return on scheme assets* (178) (57) 156
Experience (losses) gains on liabilities (8) 0 18
Gains on changes of assumptions for scheme liabilities** 462 611 311
276 554 485
Less: amounts attributable to the PAC with-profits fund (173) (354) (318)
103 200 167
* The expected rate of return applied for half year 2007 was 5.9 per cent. The
shortfall of actual investment returns against expected returns in half year
2007 was due to the decrease in the value of corporate and government bonds
which more than offset the increase in the value of equity and property holdings
of the schemes.
** The gains on changes of assumptions for scheme liabilities primarily reflect
movements in yields on good quality corporate bonds. These yields are used to
discount the projected pension scheme benefit payments.
The discount rates applied for the Group's UK defined benefit schemes, and
reflected in the gains and losses shown above, are as follows:
#
30 June 2007 5.8%
31 December 2006 5.2%
30 June 2006 5.5%
31 December 2005 4.8%
(iii) Share-based payments
The charge for share-based payments for Prudential schemes is for the SAYE and
Group performance-related schemes.
(iv) Continuing operations - scope
The results for continuing operations shown above exclude those in respect of
discontinued banking operations. On 1 May 2007, the Company sold Egg Banking
plc. Accordingly, the presentation of the comparative results for half year and
full year 2006 has been adjusted from those previously published. Note M shows
the detailed results for the discontinued operations.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE UNAUDITED IFRS BASIS RESULTS (CONTINUED)
E Tax charge
The total tax charge of £251m for the half year 2007 (half year 2006: £415m;
full year 2006: £1,241m) comprises £37m (half year 2006: £231m; full year 2006:
£698m) UK tax and £214m (half year 2006: £184m; full year 2006: £543m) 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 £253m for the half
year 2007 (half year 2006: £253m; full year 2006: £392m) comprises £95m (half
year 2006: £106m; full year 2006: £142m) UK tax and £158m (half year 2006:
£147m; full year 2006: £250m) overseas tax.
The tax credit related to discontinued operations, which is all attributable to
shareholders, amounted to £19m (half year 2006: £11m; full year 2006: £45m).
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 half year 2007 reflect the prospective
change for the main UK corporation tax rate from 30 per cent to 28 per cent
which is anticipated to be effective from 1 April 2008.
Half Half Full
Year 2007 Year Year 2006
2006
F Supplementary analysis of earnings per share from continuing operations (pence) (pence) (pence)
On operating profit based on longer-term investment returns after related tax 16.3p 14.0p 30.9p
and minority interests
Adjustment from post-tax longer-term investment returns to post-tax actual 0.1p 0.2p 4.8p
investment returns (after related minority interests)
Adjustment for post-tax shareholders' share of actuarial and other gains and 3.0p 5.8p 4.8p
losses on defined benefit pension schemes
On profit from continuing operations after tax and minority interests 19.4p 20.0p 40.5p
G Dividend
An interim dividend of 5.70p per share will be paid on 24 September 2007 to
shareholders on the register at the close of business on 17 August 2007. A
scrip dividend alternative will be offered to shareholders.
30 Jun 30 Jun 31 Dec
2007 2006 2006
H Shareholders' equity £m £m £m
Share capital 123 121 122
Share premium 1,823 1,808 1,822
Reserves 3,959 3,120 3,544
Total 5,905 5,049 5,488
30 Jun 30 Jun 31 Dec
2007 2006* 2006*
I Net core structural borrowings of shareholder-financed £m £m £m
operations
Core structural borrowings of shareholder-financed operations (per
consolidated balance sheet):
Central funds 2,289 2,520 2,485
Jackson 124 135 127
Total 2,413 2,655 2,612
Less: Holding company** cash and short-term investments (recorded (1,546) (1,067) (1,119)
within the consolidated balance sheet)
Net core structural borrowings of shareholder-financed operations 867 1,588 1,493
* Excluding Egg's borrowings
** Prudential plc and related finance subsidiaries
30 Jun 30 Jun 31 Dec
2007 2006 2006
J Other borrowings £m £m £m
Operational borrowings attributable to shareholder-financed
operations
Borrowings in respect of short-term fixed income securities 2,045 1,500 2,032
programmes
Non-recourse borrowings of investment subsidiaries managed by PPM 544 943 743
America
Borrowings in respect of banking operations 0 3,535 2,819
Other borrowings 16 16 15
Total 2,605 5,994 5,609
Borrowings attributable to with-profits funds
Non-recourse borrowings of venture fund investment subsidiaries 1,063 1,183 926
Non-recourse borrowings of consolidated investment vehicles 854 690 681
Subordinated debt of the Scottish Amicable Insurance Fund 100 100 100
Other borrowings (predominantly obligations under finance leases) 105 69 69
Total 2,122 2,042 1,776
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE UNAUDITED IFRS BASIS RESULTS (CONTINUED)
K Acquisitions and disposals
(i) Shareholder acquisitions and disposals - Egg
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 of minority interests using the economic entity method. Accordingly,
£167m was charged to retained earnings in 2006 representing the difference
between the consideration paid and the share of net assets acquired.
On 29 January 2007, the Company announced that it had entered into a binding
agreement to sell Egg Banking plc to Citi. Under the terms of the agreement, the
consideration payable to the Company by Citi was £575m 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 £527m. The reduction from the £575m noted above primarily reflects
Egg's post tax operating loss of £49m for the period from 1 January 2007 to the
date of sale, as shown in note M.
Cash and cash equivalents disposed of were £1,065m. Accordingly, the cash
outflow for the Group arising from the disposal of Egg, as shown in the summary
consolidated cashflow statement, was £538m.
(ii) PAC with-profits fund acquisitions
The PAC with-profits fund acquires a number of venture capital holdings through
PPM Capital and M&G in which the Group is deemed to have a controlling interest,
in aggregate with, if applicable, other holdings held by, for example, the
Prudential Staff Pension Scheme. There were two such acquisitions during the
period to 30 June 2007. These were acquisitions for:
• 78 per cent of the voting equity interest of Red Funnel, a ferry company, in
June 2007.
• 71 per cent of the voting equity interest of Orizon AG, an employment hiring
agency, in March 2007.
The results of the acquisitions have been included in the consolidated financial
statements of the Group commencing on the respective dates of acquisition. The
earnings contributed by these acquisitions to the income statement are
insignificant to the half year 2007 results and are reflected in the change in
the unallocated surplus of the with-profits fund. Shareholder results are
unaffected. Total consideration of £97m was paid in respect of the acquisitions
during the period to 30 June 2007. Cash and cash equivalents of £20m were
acquired.
(iii) PAC with-profits fund disposals
As at 31 December 2006, one venture subsidiary was classified as held for sale;
Pharmacia Diagnostics. The sale of this venture subsidiary was completed on 18
January 2007. Total cash consideration received was £179m. Goodwill of £138m and
cash and cash equivalents of £22m were disposed of. No other venture
subsidiaries were sold during the first half of 2007 or classified as held for
sale at 30 June 2007.
L 2006 half year comparative balance sheet
Minor presentational adjustments have been made for refinements to the
acquisition accounting for intangible assets of venture fund investment
subsidiaries of the PAC with-profits fund. These adjustments affect the carrying
value of goodwill and other intangible assets, with minor consequential effects
on some other balance sheet categories. Shareholders' profit and equity are
unaffected by these adjustments.
M Discontinued operations
Half year Half year Full Year
2007 2006 2006
£m £m £m
Pre-tax profit (loss) from discontinued operations
Egg results :
Operating loss based on longer-term investment returns for (68) (45) (157)
the period of ownership
Short-term fluctuations in investment - - 7
returns
Profit on sale of Egg Banking plc 290 - -
Total 222 (45) (150)
Tax
On Egg results :
Operating loss based on longer-term investment returns for 19 11 47
the period of ownership
Short-term fluctuations in investment - - (2)
returns
On profit on sale of Egg Banking plc 0 - -
Total 19 11 45
Profit (loss) from discontinued operations, net of tax 241 (34) (105)
Discontinued operations relate entirely to UK banking operations following the
sale on 1 May 2007 of Egg Banking plc to Citi. Note K(i) provides details of the
sale of Egg.
Independent review report by KPMG Audit Plc to Prudential plc
Introduction
We have been engaged by the Company to review the International Financial
Reporting Standards (IFRS) basis financial information for the six months ended
30 June 2007 set out on pages 10 to 20. We have read the other information
contained in the interim report and considered whether it contains any apparent
misstatements or material inconsistencies with the financial information.
This report is made solely to the Company in accordance with the terms of our
engagement to assist the Company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the Company those matters we are required to state to it
in this report and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than the Company
for our review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The interim report, including the IFRS financial information contained therein,
is the responsibility of, and has been approved, by the directors. The
directors are responsible for preparing the interim report in accordance with
the Listing Rules of the Financial Services Authority which require that the
accounting policies and presentation applied to the interim figures should be
consistent with those applied in preparing the preceding annual financial
statements except where any changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
Review of interim financial information issued by the Auditing Practices Board
for use in the United Kingdom. A review consists principally of making
enquiries of management and applying analytical procedures to the financial
information and underlying financial data and, based thereon, assessing whether
the accounting policies and presentation have been consistently applied unless
otherwise disclosed. A review excludes audit procedures such as tests of
controls and verification of assets, liabilities and transactions. It is
substantially less in scope than an audit performed in accordance with
International Standards on Auditing (UK and Ireland) and therefore provides a
lower level of assurance than an audit. Accordingly, we do not express an audit
opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the IFRS financial information as presented for the six months
ended 30 June 2007.
KPMG Audit Plc
Chartered Accountants
London
31 July 2007
Independent review report by KPMG Audit Plc to Prudential plc
Introduction
We have been engaged by the Company to review the European Embedded Value (EEV)
basis interim supplementary information for the six months ended 30 June 2007
set out on pages 2 to 9 ('the interim supplementary information').
The interim supplementary information has been prepared in accordance with the
EEV Principles issues in May 2004 by the CFO Forum using the methodology and
assumptions set out on pages 6 to 8. The interim supplementary information
should be read in conjunction with the Group's interim IFRS financial
information which is set out on pages 10 to 20.
We have read the other information contained in the interim report and
considered whether it contains any apparent misstatements or material
inconsistencies with the interim supplementary information.
This report is made solely to the Company in accordance with the terms of our
engagement. Our review has been undertaken so that we might state to the
Company those matters we have been engaged to state in this report and for no
other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company for our review work, for
this report, or for the conclusions we have reached.
Directors' responsibilities
The interim report, including the interim supplementary information contained
therein, is the responsibility of, and has been approved by, the directors. The
directors have accepted responsibility for preparing the interim supplementary
information in accordance with the EEV Principles and for determining the
assumptions used in the application of those principles.
Review work performed
We conducted our review having regard to Bulletin 1999/4 Review of interim
financial information issued by the Auditing Practices Board for use in the
United Kingdom. A review consists principally of making enquiries of management
and applying analytical procedures to the interim supplementary information and
underlying financial data and, based thereon, assessing whether the methodology,
assumptions and presentation have been consistently applied unless otherwise
disclosed. A review excludes audit procedures such as tests of controls and
verification of assets, liabilities and transactions. It is substantially less
in scope than an audit performed in accordance with International Standards on
Auditing (UK and Ireland) and therefore provides a lower level of assurance than
an audit. Accordingly, we do not express an audit opinion on the interim
supplementary information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the interim supplementary information as presented for the six
months ended 30 June 2007.
KPMG Audit Plc
Chartered Accountants
London
31 July 2007
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