2007 Interim Results
Prudential PLC
01 August 2007
Part 1
Embargo: 07.00 Wednesday 1 August 2007
PRUDENTIAL PLC 2007 INTERIM RESULTS
• Total EEV operating profit from continuing operations £1,326 million, up 39%
• Total IFRS operating profit from continuing operations £601 million, up
27%
• New business APE £1,334 million, up 12%; PVNBP £9.7 billion, up 4%
• New business profit £534 million, up 12%
• Asset management profit £180 million, up 45%
• EEV shareholders' funds £13.4 billion, up 13% (end 2006 £11.9 billion*)
• Interim dividend 5.7 pence per share, up 5% (2006: 5.42 pence per share)
All figures compared to 2006 constant exchange rates unless stated, *at reported
exchange rates
Commenting, Mark Tucker, Group Chief Executive said:
'The growth in operating profit of 39 per cent in the first half of the year
demonstrates the clear and continued momentum that we have within the Group. It
builds on the very strong operating performance in both 2005 and 2006 when we
grew operating profit by 36 per cent and 28 per cent respectively.
'Our strategy is focused on the growing global market for retirement savings and
income and our advantaged regional platforms and global capabilities place the
Group in an excellent and immensely strong position to capture a
disproportionate share of this opportunity.
'In Asia, growth across the region continues to be strong, with new business up
48 per cent to £619 million APE, and new business profit up 31 per cent to £282
million. These strong first half results, and the continuing development of our
operations in the region, mean that we are very confident that we will achieve
our target of at least doubling 2005 EEV new business profits by 2009.
'In the US, we have one of the fastest growing variable annuity franchises in
the market - VA sales grew by 31 per cent in the first half to £2.2 billion,
continuing to gain profitable market share.
'In the UK, retail sales grew by 10 per cent in the first half of the year,
while our focus on value has kept margins on new business in the UK at 30 per
cent which remain high compared to the overall UK market. The Internal Rate of
Return (IRR) was 15 per cent against our target of 14 per cent.
'Our asset management businesses saw very strong growth in operating profit,
with M&G and Asia fund management up 40 per cent and 65 per cent respectively.
Retail net sales at M&G surpassed last year's record half-year net flows and in
Asia net flows remained strong at £1.7 billion, with a number of successful fund
launches in Taiwan and Korea, as well as ongoing strong net sales in India and
Japan.
'The Group is extremely well placed to continue to deliver real long-term
sustainable profit growth for shareholders.'
Group Chief Executive's Review
Introduction
The Group has today announced a strong set of results.
Prudential's performance in the first half of the year demonstrates the real
shareholder value that we are delivering through consistent implementation of
our retirement-focused strategy. This strategy is generating both continued
excellent results and creating substantial longer term opportunities from our
advantaged regional platforms and global capabilities.
Capturing the Retirement Opportunity
Developments in the global retirement market represent one of the most
significant and important global trends in retail financial services. In the UK
and US alone, it is estimated that over the next five years, as much as £7
trillion of assets will be available for investment into the retirement savings
and retirement income market sectors. In Asia, the retirement opportunity is
also expanding rapidly driven by rising incomes, increasing longevity, and a
growing realisation among individuals of the need to save for retirement and to
protect their income.
Prudential's strategy focuses on capturing the ever-increasing revenue and value
from these material opportunities.
Prudential is well positioned - Capabilities and Geographic Coverage
While many financial institutions are moving to capture this opportunity,
Prudential has an outstanding combination of assets and capabilities to succeed:
• Sophisticated risk management
• Integrated solutions to address retirement needs
• Privileged access to retirement advisers
• Trusted brands which are strongly associated with retirement
• Financial strength and reliability
• Geographic reach
Moreover, Prudential has the additional advantage of being able to draw on
expertise and experience across international frontiers to advance product
innovation, distribution and the quality of customer service. These initiatives
transfer learning and value from one business to another, creating competitive
advantage above and beyond what each could individually achieve.
Group Performance
The operating performance of the Group was again very strong in the first half
of 2007. Group operating profit before tax from continuing operations, on the
European Embedded Value basis (EEV), was up 39 per cent, to £1,326 million
building on the momentum established in 2005 and 2006. On the statutory IFRS
basis, operating profit before tax on continuing operations was up 27 per cent
to £601 million.
The Group had a positive cashflow from operations in the period to 30 June 2007.
The benefit of a significant increase in the uptake of the scrip dividend helped
to achieve this. Our expectation remains that operations will provide a positive
cash flow in the 2008 full year.
The Group's cash balances also benefited by £527 million from the sale of Egg.
In addition, the already robust regulatory capital surplus of the Group was
improved by around £300 million from the sale of this business.
Regional Performance
As outlined earlier, Prudential's operations in Asia, the US and the UK are all
well-positioned to capitalise on the retirement opportunity, and each has
specific strategies in place to build on and strengthen our established market
positions.
Performance in all of our regional markets over the first half has been strong,
indicating that our approach to the market is delivering material financial
benefits.
Asia
Prudential's geographic spread in Asia, the strength and scale of our
distribution, and the recognition of and trust in the Prudential brand in the
region, continue to be key differentiating factors for the Group.
Agent numbers have reached 350,000 and at the same time, almost 30 per cent of
new business is being derived from non-agency sources.
In addition to capitalising on and further building these strengths, we are
increasing the focus on the fast emerging retirement opportunity by developing
and providing integrated protection and savings solutions to meet consumers'
increasingly sophisticated needs.
Work is progressing well on our initiatives to deepen our Health business and we
are putting in place the infrastructure to facilitate greater cross-selling and
up-selling to our established customer base of some 8.5 million in the region.
Growth across the region continues to be strong, with new business up 48 per
cent to £619 million APE in the half year. Compound annual growth in APE over
the last five years is 29 per cent. New business profit was up 31 per cent to
£282 million.
A significant contributor to this growth was the 'What's my number?' retirement
campaign which has already seen great success in Korea and Hong Kong, and was
rolled out to Taiwan at the end of April. As a result, new business in Taiwan in
the second quarter was £106 million APE and half year new business was up 103
per cent. We will continue to identify other opportunities in retirement across
the region.
We are also making good progress in two additional areas; firstly we are
developing a regionwide infrastructure to support our approach to develop
systematic cross-selling and up-selling to our 8.5 million customers, with plans
already in place in three markets and with the first pilots due to begin later
this year. Secondly, on health products we saw a 62 per cent increase in the
first half. We launched a new product in Singapore in the second quarter and we
have recently launched a new product in India.
These strong first half results, and the continuing development of our
operations in the region, mean that we are very confident that we will achieve
our target of at least doubling 2005 EEV new business profits by 2009. The
outlook beyond 2009 also remains very positive.
US
In the US, our long-term strategy has been to position Jackson to meet the
retirement needs of the baby boomer generation pre and post retirement. We
recognised early on the central role of advice as the key source of success in
this market and Jackson has developed a very effective and hard to replicate
business model, with particular success in the independent broker channel - the
key channel for advice.
The Jackson brand is trusted to provide integrated retirement planning solutions
to financial professionals and their clients, including variable annuity
products that provide the most flexibility and customisation in the industry.
We are continuing to develop our variable annuity offering, adding a number of
new guaranteed minimum withdrawal benefits and a new guaranteed minimum
accumulation benefit. The total number of benefit combinations available is now
in excess of 2,100.
At Curian, our separately managed account platform, we also recently launched a
new proposal system which cuts the time required to open a separately managed
account by a factor of three. This is just one example of how we continue to
leverage Jackson's superior technological capabilities to enhance our efficiency
and effectiveness.
We have also continued to add to Jackson's distribution strength, increasing the
number of external wholesalers by 30 per cent. Over the last two years,
Jackson's wholesaling force has been one of the fastest growing in the market
whilst still growing productivity per producer and sales per territory. This
increase in numbers of wholesalers will allow us to take an even more granular
approach to our segmentation of the market.
Today, Jackson is already one of the fastest growing variable annuity franchises
in the market. Variable annuity sales grew by 31 per cent in the first half to
£2.2 billion, continuing to gain profitable market share. Our market share of
variable annuities reached 5.1 per cent at the end of the first quarter,
compared to 4.2 per cent in the first quarter of 2006, and share in the main
target Independent Broker Dealer channel was 11.7 per cent, up from 10.4 per
cent in the first quarter of 2006.
Overall margins on new business in the US remained strong at 41 per cent (2006:
41 per cent) with an IRR of 18 per cent.
UK
In the UK, our manufacturing capabilities in the retirement space, combined with
the Prudential brand - which is strongest among pre and post retirement age
groups - provides an excellent platform from which to develop the business.
In line with our stated plans we are exiting those product areas that are
structurally uneconomic and we are developing a new range of trail-based
commission products centred on the multi-asset investment capabilities. Our new
unit-linked product, for instance, will be launched later this month.
To further strengthen our distribution, we have entered into an agreement with
Barclays to be the preferred provider of conventional annuity products to retail
customers of Barclays in the UK. This is a five-year agreement which will take
effect from later in 2007.
UK retail sales grew by 10 per cent in the first half of the year. Momentum is
particularly strong in individual annuities, up 23 per cent, a market segment in
which we are a clear leader with 23 per cent market share in 2006. This is a
high growth, high return sector of the market where Prudential benefits from
significant and recurring internal flows of maturing pensions as well as flows
from both new and existing partnerships. All of this, combined with
sophisticated risk management and competitive pricing, is enabling us to deliver
good returns to shareholders.
In the bulk annuity market we reached an agreement in principle to acquire
Equitable Life's portfolio of in-force with-profits annuities, now estimated at
around £1.7 billion. This transaction remains on track to complete in the fourth
quarter and on its own represents almost 20 per cent growth on the bulk
annuities written by our UK business in the whole of 2006. We will continue to
exercise pricing discipline in this market, and to pursue specific opportunities
which play to our distinctive capabilities.
Margins on new business in the UK of 30 per cent (2006: 29 per cent) remain high
compared to the overall UK market and the Internal Rate of Return (IRR) was 15
per cent against our target of 14 per cent. This represents an attractive return
in both absolute and relative terms.
We remain confident of achieving our already-announced cost savings target of
£195 million by 2010. By the end of 2007 we will have taken all of the actions
to secure £115 million of the announced savings, and we are making good progress
in determining the approach we will take to deliver the remaining £80 million,
whether that is through offshoring, outsourcing or a combination of the two. We
are on track to confirm our final decision by the middle of the fourth quarter
this year.
Prudential's main with-profit fund in the UK was the top performing life fund in
2006 in terms of gross investment return ranking first, in the WM Company's
survey of with-profit funds, over 1, 3, 5 and 10 years -an outstanding
performance. Investment performance has remained strong in the first half of
2007.
Our work on the Inherited Estate is progressing well and as previously
disclosed, if a decision is taken to proceed, a formal appointment of the
Policyholder Advocate could be expected to take place later this year. We will
only proceed if there are clear benefits to both policyholders and shareholders.
Asset Management
Our asset management businesses continue to both add value to our insurance
operations as well as growing their external funds under management.
Key to this is our ability to develop retirement savings and retirement income
products based on sophisticated asset allocation strategies which match
customers' risk profiles and strong investment performance.
This is clearly evidenced in the UK, where our strength in the with-profits
business - both bonds and annuities - has been driven by our multi-asset
allocation capabilities which can deliver the kind of cautious growth that
customers want. In the US, these capabilities enable us to deliver our fully
unbundled variable annuity proposition.
These capabilities also position us well in the emerging area of lifecycle
finance where we can create products that adapt to consumers changing
circumstances, risk appetites, and needs over different stages of the retirement
cycle. These products need to be underpinned by adaptable and creative asset
management.
Across the Group's asset management businesses net inflows were £5 billion and
at similar levels to those achieved in the first half of 2006. Retail net sales
at M&G surpassed last year's record half-year net flows and in Asia net flows
remained strong at £1.7 billion, with a number of successful fund launches in
Taiwan and Korea, plus ongoing strong net sales in India and Japan. External
funds under management increased to £63 billion.
This is contributing to very strong growth in operating profit from these
businesses, with M&G and Asia fund management up 40 per cent and 65 per cent
respectively.
Capital Efficiency
Prudential benefits from greater capital efficiency and an increased risk
appetite by actively managing its product and geographic diversification.
Prudential's economic capital modelling indicates that the capital requirements
of the businesses on a stand-alone basis would be £1.3 billion higher than for
the Group as a whole, as at 31 December 2006.
While the dialogue with both regulators and rating agencies continues to
develop, for example over the draft Solvency II Directive, it is already clear
that in future there will be material and enduring opportunities for greater
regulatory capital efficiency within broader-based groups.
Outlook
In summary:
• Our strategy is focused on the growing global market for retirement
savings and retirement income
• Our advantaged regional platforms and our global capabilities place the
Group in a strong position to capture a disproportionate share of the
retirement opportunity around the world
• Delivery of that strategy is generating continuing excellent short-term
operating performance both in the regions and at the Group level, which in
turn is creating superior shareholder value
• Our diversified geographic footprint across three regions provides a
strong and operationally efficient base for future growth
• Prudential is extremely well placed to deliver real long-term sustainable
profit growth for its shareholders
ENDS
Enquiries:
Media Investors/Analysts
Jon Bunn 020 7548 3559 James Matthews 020 7548 3561
Carole Butcher 020 7548 3719 Marina Novis 020 7548 3511
Notes to Editor:
1. The results in this announcement are prepared on two bases, namely
International Financial Reporting Standards ('IFRS') and the European Embedded
Value ('EEV') basis. The IFRS basis results form the basis of the Group's
financial statements.
The EEV basis results have been prepared in accordance with the principles
issued by the CFO Forum of European Insurance Companies in May 2004. Where
appropriate the EEV basis results include the effects of IFRS.
References to 'operating profit' in this announcement are to 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
constituent elements of total profit. On both the EEV and IFRS bases operating
profit based on longer-term investment returns excludes goodwill impairment
charges, short-term fluctuations in investment returns and the shareholders'
share of actuarial and other gains and losses on defined benefit pension
schemes. Under the EEV basis, where additional profit and loss effects arise,
operating profits based on longer-term investment returns also excludes the mark
to market value movement in core borrowings, 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.
'PVNBP' refers to the Present Value of New Business Premiums. PVNBPs are
calculated as equalling new single premiums plus the present value of expected
premiums of new regular premium business. In determining the present value,
allowance is made for lapses and other assumptions applied in determining the
EEV new business profit.
Period on period percentage increases are stated on a constant exchange rate
basis.
2. Annual premium equivalent (APE) sales comprise regular premium sales plus
one-tenth of single premium insurance sales.
3.The internal rate of return (IRR) is equivalent to the discount rate at which
the present value of the post-tax cash flows expected to be earned over the life
time of the business written in shareholder-backed life funds is equal to the
total invested capital to support the writing of the business. The capital
included in the calculation of the IRR is the initial capital in excess of the
premiums received required to pay acquisition costs and set up the statutory
capital requirement. The time value of options and guarantees are included in
the calculation.
4.There will be a conference call today for wire services at 7.30am (BST) hosted
by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance
Director. Dial in telephone number: +44 (0)20 8609 0793. Passcode: 155439#.
5. A presentation to analysts will take place at 9.30am (BST) 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
6. There will be a conference call for investors and analysts at 2.30pm (BST)
hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance
Director. Please call from the UK +44 (0)20 8609 0793 and from the US +1 866 793
4279. Passcode 487687#. A recording of this call will be available for replay
for
one week by dialling: +44 (0)20 8609 0289 from the UK or +1 866 676 5865 from
the US. The conference passcode is 160473#.
7. High resolution photographs are available to the media free of charge at
www.newscast.co.uk +44 (0) 208 886 5895.
8. 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 on 1
August 2007.
9. Financial Calendar 2007:
Ex-dividend date 15 August 2007
Record Date 17 August 2007
Payment of interim dividend 24 September 2007
Third Quarter 2007 New Business Figures 18 October 2007
Full Year 2007 New Business Figures 29 January 2008
Full Year 2007 results 14 March 2008
10. In addition to the financial statements provided with this press release,
additional financial schedules are available on the Group's website at
www.prudential.co.uk
11. Total number of Prudential plc shares in issue as at 30 June 2007 was
2,460,159,970.
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 for over 150 years and has £256 billion in assets under
management as at 30 June 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 UNAUDITED INTERIM RESULTS
RESULTS SUMMARY
European Embedded Value (EEV) Basis Results*
Half Year Half Year Full Year
2007 2006 2006
£m £m £m
UK Insurance Operations 462 336 686
M&G 140 100 204
UK Operations 602 436 890
US Operations 351 350 718
Asian Operations 520 374 864
Other Income and Expenditure (147) (141) (298)
UK restructuring costs 0 (12) (41)
Operating profit from continuing operations based on longer-term investment 1,326 1,007 2,133
returns*
Short-term fluctuations in investment returns 241 73 738
Mark to market value movements on core borrowings 113 168 85
Shareholders' share of actuarial gains and losses on defined benefit pension 125 246 207
schemes
Effect of changes in economic assumptions and time value of cost of options 275 (20) 59
and guarantees
Profit from continuing operations before tax 2,080 1,474 3,222
Operating earnings per share from continuing operations after related tax 39.4p 29.3p 62.1p
and minority interests*
Basic earnings per share 72.8p 43.8p 91.7p
Shareholders' equity, excluding minority interests £13.4bn £10.9bn £11.9bn
International Financial Reporting Standards (IFRS) Basis Results*
Half Year Half Year Full Year
2007 2006 2006
Statutory IFRS basis results
Profit after tax attributable to equity holders of the Company £715m £449m £874m
Basic earnings per share 29.3p 18.7p 36.2p
Shareholders' equity, excluding minority interests £5.9bn £5.0bn £5.5bn
Half Year Half Year Full Year
2007 2006 2006
Supplementary IFRS basis information
Operating profit from continuing operations based on longer-term investment £601m £498m £1,050m
returns*
Operating earnings per share from continuing operations after related tax 16.3p 14.0p 30.9p
and minority interests*
Half Year Half Year Full Year
2007 2006 2006
Dividends per share declared and paid in reporting period 11.72p 11.02p 16.44p
Dividends per share relating to reporting period 5.70p 5.42p 17.14p
Funds under management £256bn £238bn £251bn
* 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. The basis of preparation of the statutory IFRS basis
results and supplementary IFRS basis information is consistent with that applied
for the 2006 full year 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 constituent 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 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.
For half year 2007, the EEV basis operating profit from continuing operations
based on longer-term investment returns before tax of £1,326m includes a credit
of £92m that arises from including the benefits, grossed up for notional tax, of
altered corporate tax rates for the UK, Singapore and China. Further details are
explained in note 7 to the EEV basis supplementary information.
Discontinued operations
The results for continuing operations shown above and throughout this
announcement 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.
REVIEW OF OPERATING AND FINANCIAL RESULTS
RESULTS HIGHLIGHTS
Half Half Half
year year year
CER RER (4)
2007 2006 Change 2006 Change
£m £m % £m %
Annual premium equivalent (APE) sales (1) 1,334 1,196 12% 1,255 6%
Present value of new business premiums (PVNBP) (1) 9,681 9,300 4% 9,761 (1%)
Net investment flows 5,047 5,198 (3%) 5,304 (5%)
External funds under management 63,222 50,376 26% 51,070 24%
New business profit (NBP) (1) 534 476 12% 504 6%
NBP Margin (% APE) (1) 40% 40% 40%
NBP Margin (% PVNBP) (1) 5.5% 5.1% 5.2%
EEV basis operating profit from long-term business 1,293 979 32% 1,034 25%
from continuing operations (2) (3)
Total EEV basis operating profit from continuing 1,326 952 39% 1,007 32%
operations (3)(5)
Total IFRS operating profit from continuing 601 473 27% 498 21%
operations(3)(5)
EEV basis shareholders' funds 13,412 10,726 25% 10,932 23%
IFRS shareholders' funds 5,905 4,915 20% 5,049 17%
Holding company cash flow 34 (94) 136% (94) 136%
(1) The details shown include the effect of the bulk annuity transfer from the
Scottish Amicable Insurance Fund (SAIF) to Prudential Retirement Income Limited
in the first half of 2006, 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 September 1997, whose results are solely for
the benefit of SAIF policyholders.
(2) Long-term business profits after deducting Asia development expenses and
before restructuring costs.
(3) Based on longer term investment returns from continuing operations, as
explained in the basis of preparation section shown below.
(4) Reported exchange rate (RER).
(5) The restructuring costs and operating loss for Egg for 2006 and the period
of ownership in 2007, together with the profit on disposal, are included within
discontinued operations
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.
Impact of currency movements
Prudential has a diverse international mix of businesses with a significant
proportion of its profit generated outside the UK. In the first half of 2007,
64% of the Group's total EEV operating profit came from outside the UK. In
preparing the Group's consolidated accounts, results of overseas operations are
converted at rates of exchange based on the average of the year to date, whilst
shareholders' funds are converted at period-end rates of exchange.
Changes in exchange rates from year to year have an impact on the Group's
results when these are converted into pounds sterling for reporting purposes.
In some cases, these exchange rate fluctuations can have a significant effect on
reported results.
Consequently, the Board has for a number of years reviewed and reported the
Group's international performance on a CER basis. This basis eliminates the
impact from exchange translation.
In the Operating and Financial Review, period-on-period comparisons of financial
performance are on a CER basis, unless otherwise stated.
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 and 2007
represents the third year in which the Group's financial statements have been
prepared under IFRS.
In addition, as a signatory to the European Chief Financial Officers' (CFO)
Forum's EEV Principles, Prudential has also been reporting supplementary results
on an EEV basis for the Group's long-term business since 2005. These results are
combined with the IFRS basis results of the Group's other businesses to provide
a supplementary operating profit under EEV. Reference to operating profit
relates to profit based on long-term investment returns. On both the EEV and
IFRS bases, 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 the EEV basis, 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.
Sales and Funds under Management
Prudential delivered overall sales growth during the first half of 2007 with
total new insurance sales up 12 per cent from the first six months of 2006 to
£1.3 billion on the annual premium equivalent (APE) basis. At reported exchange
rates (RER), APE sales were up 6 per cent on the same period in 2006. This is
equivalent to insurance sales of £9.7 billion on a present value of new business
premium basis ('PVNBP'), an increase of 4 per cent on 2006 at CER.
Total gross investment sales were £25 billion, up 55% per cent on the first half
of 2006 at CER. Net investment sales of £5 billion were down 3% from net
investment sales in 2006 at CER.
Total external funds under management increased by 10 per cent at RER from £57.2
billion at 31 December 2006, to £63.2 billion at 30 June 2007, reflecting net
investment flows of £5 billion and net market and other movements of positive £1
billion.
At 30 June 2007, total funds under management were £256 billion, an increase of
2 per cent from 2006 year end at RER.
EEV basis operating profit from continuing operations
Half Half Half year
year year RER
CER
EEV basis operating profit from continuing 2007 2006 Change 2006 Change
operations £m £m % £m %
Insurance business:
UK 462 336 38% 336 38%
US 344 316 9% 346 (1%)
Asia 493 334 48% 359 37%
Long-term business profit 1,299 986 32% 1,041 25%
Asia development expenses (6) (7) 14% (7) 14%
Fund management business:
M&G 140 100 40% 100 40%
US broker-dealer and fund management 9 7 29% 8 13%
Curian (2) (3) 33% (4) 50%
Asia fund management 33 20 65% 22 50%
180 124 45% 126 43%
Other income and expenditure (147) (139) (6%) (141) (4%)
Total EEV basis operating profit from continuing operations 1,326 964 38% 1,019 30%
Restructuring costs 0 (12) 100% (12) 100%
Total EEV basis operating profit from continuing 1,326 952 39% 1,007 32%
operations after restructuring costs
Total EEV basis operating profit from continuing operations based on longer-term
investment returns was £1,326 million, up 39 per cent from the first half of
2006 at CER. At RER, the result was up 32 per cent. This result reflects
profitable growth in the insurance and funds management businesses, and the
benefit of positive operating assumption changes.
Prudential's insurance businesses achieved significant growth, both in terms of
NBP and in-force profit, resulting in a 32 per cent increase in long term
business profit over the first half of 2006 at CER.
In the first six months of 2007, the Group generated record NBP from insurance
business of £534 million, which was 12 per cent above the same period in 2006 at
CER, driven by strong sales momentum in the US and Asia, achieved without
compromising margins. At RER, NBP was up 6 per cent. The average Group NBP
margin was 40 per cent (2006 H1: 40 per cent) on an APE basis and 5.5 per cent
(2006 H1: 5.1 per cent at CER) on a PVNBP basis. In-force profit increased 50
per cent on the first half of 2006 at CER to £765 million. In aggregate, net
assumption changes were £95 million positive of which £92 million relates to
lower tax rates in the UK and Asia. Experience variances and other items were
£53 million positive. At RER, in-force profit was up 42 per cent.
Asia's development expenses (excluding the regional head office expenses) were
£6 million, (2006 H1: £7 million at CER).
Results from the fund management business were £180 million (2006 H1: £124
million), up 45 per cent on the first half of 2006 at CER.
Other income and expenditure totalled a net expense of £147 million compared
with £141 million in the first half of 2006 at RER. This result includes £17
million of costs for the Asia head office (2006 H1: £19 million at RER); £50
million for the Group head office costs (2006 H1: £46 million); and net interest
expense on central borrowings and other items of negative £80 million (2006 H1:
£76 million).
EEV basis profit before tax and minority interests from continuing operations
Half year Half year
RER
2007 2006
£m £m
Total EEV basis operating profit from continuing operations
after restructuring costs 1,326 1,007
Short term fluctuations in investment returns: 241 73
UK 98 37
US 69 55
Asia 54 (34)
Other 20 15
Actuarial gains and losses on defined
benefit pension schemes 125 246
Effect of change in economic
assumptions: 253 (42)
UK 281 163
US (46) (141)
Asia 18 (64)
Effect of change in time value of cost
of options and guarantees: 22 22
UK 15 4
US 8 19
Asia (1) (1)
Movement in mark to market value
of core borrowings: 113 168
US 5 15
Other 108 153
Profit from continuing operations before tax 2,080 1,474
The following half year-on-half year comparisons are presented on a RER basis.
The EEV basis result before tax and minority interests was a profit of £2,080
million up 41 per cent on the first half of 2006.
This reflects in part an increase in operating profit from £1,007 million in the
first six months of 2006 to £1,326 million for the same period in 2007.
The profit before tax also includes £241 million in short-term fluctuations in
investment returns (2006 H1: £73 million), positive changes in economic
assumptions of £253 million (2006 H1: negative £42 million) and the effect of
change in time value of options and guarantees of positive £22 million (2006 H1:
positive £22 million).
The UK long-term business component of short-term fluctuations in investment
returns of £97 million (2006 H1: £34 million) primarily reflects the difference
between the actual investment return for the with-profits life fund of 5.8 per
cent (2006 H1: 4.2 per cent) and the long-term assumed return of 4.1 per cent
for the first half of 2007.
The US long-term business short-term fluctuations in investment returns of £68
million include a net positive £30 million in relation to changed expectations
of future profitability on variable annuity business in force due to the actual
variable annuity investment account ('separate account') return exceeding the
long-term return reported within operating profit, offset by the impact of the
associated hedging position. It also includes a positive £38 million in respect
of the difference between actual investment returns and long-term returns
included in operating profit primarily in respect of equity based investments
and other items.
In Asia, long-term business short-term investment fluctuations were £54million,
compared to negative £34 million last year. This reflects strong equity market
performance across the region particularly in Vietnam, Hong Kong and Singapore
partially offset by Taiwan as a result of lower investment returns.
The half year 2007 shareholders' share of actuarial gains and losses on defined
benefit schemes of £125 million reflects the increase in discount rate applied
in determining the present value of projected pension payments from 5.2 per cent
at 31 December 2006 to 5.8 per cent at 30 June 2007, offset by a shortfall of
market returns over long-term assumptions due to the decrease in value of
corporate and government bonds, which more than offset the increase in value of
equity and property asset classes.
Positive economic assumption changes of £253 million in the first six months of
2007 compared with negative economic assumption changes of £42 million in the
same period in 2006. Economic assumption changes in the first half of 2007
comprised positive £281 million in the UK, negative £46 million in the US and
positive £18 million in Asia.
In the UK, economic assumption changes of positive £281 million reflect the
impact of the increase in the future investment return assumption offset by the
increase in the risk discount rates, mainly arising from the change in UK gilt
rates.
In the US, economic assumption changes of negative £46 million primarily reflect
an increase in the risk discount rates compared to the 2006 year end following
an increase in the US 10-year Treasury rate, partially offset by an increase in
the separate account return assumption.
In Asia, economic assumption changes were £18 million, due to a positive change
in Hong Kong partially offset by negative effects in Malaysia and Singapore as a
result of adjusting the projected investment returns and risk discount rates in
these countries. Taiwan interest rates have increased ahead of our
assumptions.
The change in the time value of cost of options and guarantees was positive £22
million for the half year (2006 H1: positive £22 million), consisting of £15
million, £8 million and negative £1 million for the UK, the US and Asia,
respectively.
The mark to market movement on core borrowings was a positive £113 million (2006
H1: positive £168 million) reflecting the reduction in fair value of core
borrowings due to increases in interest rates.
EEV basis profit after tax and minority interests
Half year Half year
RER
2007 2006
£m £m
Profit from continuing operations before tax 2,080 1,474
Tax (545) (387)
Profit from continuing operations 1,535 1,087
after tax before minority interests
Discontinued operations (net of tax) 241 (34)
Minority interests (1) (1)
Profit for the period attributable to 1,775 1,052
the equity holders of the Company
The following half year-on-half year comparisons are presented on a RER basis.
Profit for the period attributable to the equity holders of the Company was
£1,775 million (2006 H1: £1,052 million). The tax charge of £545 million
compares with a tax charge of £387 million in the first half of 2006. Minority
interests in the Group results were £1 million (2006 H1: £1 million).
The effective tax rate at an operating tax level was 28 per cent (2006 H1: 30
per cent), generally reflecting expected tax rates. The effective tax rate at a
total EEV level on profits from continuing operations was 26 per cent (2006 H1:
26 per cent) on a profit of £2,080 million.
On 29 January 2007, Prudential 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 £575 million in cash,
subject to adjustments to reflect any change in net asset value between 31
December 2006 and completion.
On 1 May 2007, Prudential completed the sale. The consideration, net of
transaction expenses, was £527 million. The reduction from the £575 million
noted above primarily reflects the post-tax loss of Egg Banking plc from 1
January 2007 to the date of sale of £49 million. The profit on sale was £290
million.
IFRS basis operating profit from continuing operations based on longer-term
investment returns
Half Half Half year
year year RER (4)
CER
IFRS basis operating profit based on longer-term 2007 2006 Change 2006 Change
investment returns £m £m % £m %
Insurance business:
UK 251 205 22% 205 22%
US 218 203 7% 223 (2%)
Asia 76 83 (8%) 88 (14%)
Long-term business 545 491 11% 516 6%
Asia development expenses (6) (7) (14%) (7) (14%)
Fund management business:
M&G 140 100 40% 100 40%
US broker-dealer and fund management 9 7 29% 8 13%
Curian (2) (3) 33% (4) 50%
Asia fund management 33 20 65% 22 50%
180 124 45% 126 43%
Other income and expenditure (118) (124) 5% (126) 6%
Total IFRS basis operating profit based on longer-term 601 484 24% 509 18%
investment returns
Restructuring costs 0 (11) (100%) (11) (100%)
Total IFRS basis operating profit based on longer- 601 473 27% 498 21%
term investment returns after restructuring costs
Group operating profit before tax from continuing operations based on
longer-term investment returns on the IFRS basis after restructuring costs was
£601 million, an increase of 27 per cent on the first six months of 2006 at CER.
At RER, operating profit was up 21 per cent on the same period in the prior
year.
Insurance business
In the UK, IFRS operating profit for the long-term business increased 22 per
cent to £251 million in the first half of 2007. This reflected a 15 per cent
increase in profits attributable to the with-profits business to £195 million,
representing the continued strong investment performance of the Life Fund and
its impact on terminal bonuses.
In the US, IFRS operating profit for long-term business was £218 million, up 7
per cent from £203 million in the first half of 2006 at CER. The US operations'
results are based on US GAAP, adjusted where necessary to comply with IFRS and
the Group's basis of presenting operating profit based on longer-term investment
returns. In determining the operating profit for US operations, longer-term
returns for 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. The fee income was driven by an
increase in separate account assets held at the half year, and improved returns
on these assets. Profits from the annuities spread business were broadly in line
with prior year and continue to represent the key contributor to the overall
IFRS operating profit. One-off items affecting the spread-based income were £14
million (2006 H1: £16 million at CER), net of DAC amortisation.
Prudential Corporation Asia's IFRS operating profit for long-term business,
before development expenses of £6 million, was £76 million, an 8 per cent
decrease on the first half of 2006 at CER. The fall in IFRS operating profits
is due primarily to the expansion costs incurred in India to support its rapid
growth. In the first half of 2007, India incurred losses of £17 million.
Investment in India will continue throughout the remainder of 2007. The most
significant contribution to operating profit continues to be from the
established markets of Singapore, Malaysia and Hong Kong which represent £65
million of the total operating profit in 2007. There was a significant
contribution from Indonesia as this operation continues to build scale, and also
Taiwan. Five life operations made IFRS operating losses: China, India and Korea
which are relatively new businesses rapidly building scale, Thailand, which is
marginally loss making, and Japan, where Prudential continues to look for
opportunities to increase the scale and profitability of its life business over
the long term.
The profits and recoverability of deferred acquisition costs (DAC) in Taiwan are
dependent on the rates of return earned and assumed to be earned on the assets
held to cover liabilities and on future investment income and contract cash
flows for traditional whole of life policies. No write-off of DAC was required
in half year 2007 or 2006. At the 2006 year end it was estimated that if
interest rates were to remain at then current levels in 2007 the premium
reserve, net of DAC, would be broadly sufficient and that if interest rates were
to remain at then current levels in 2008 then some level of write-off of DAC may
be necessary. Indicatively the possible 2008 write-off was estimated as being
in the range of £70-90 million. In the first half of 2007 bond yields increased
by 0.5 per cent. With this effect and increases in the value of business in
force in the six month period the outlook on recoverability has significantly
improved. At 30 June 2007, if interest rates were to remain at current levels
until the end of 2008, the premium reserve net of DAC would be at a level such
that the likelihood of a need for a write-off of DAC in 2008 would be
significantly reduced. The position in future remains sensitive to the above
mentioned variables.
Fund management business
M&G's operating profit for the first half of 2007 was £140 million, an increase
of 40 per cent over the £100 million recorded for the same period in 2006, due
to strong net investment inflows and positive market conditions.
The operating profit from the US broker-dealer and fund management businesses
was £9 million, a 29 per cent increase on the first half of 2006 (2006 H1: £7
million at CER). Curian recorded losses of £2 million in the first half of 2007,
down from £3 million for the same period in 2006, as the business continues to
build scale.
The Asian fund management operations reported an 65 per cent growth in operating
profits to £33 million (2006 H1: £20 million) driven by strong contributions
from the established markets of Hong Kong and Singapore. Hong Kong and
Singapore account for 49 per cent of profit compared to 60 per cent a year ago,
as newer operations such as India, Japan and Korea begin to make meaningful
contributions.
IFRS basis profit before tax from continuing operations
Half year Half year
RER
2007 2006
£m £m
Operating profit from continuing operations
based on longer-term investment returns 601 498
Short-term fluctuations in investment returns 24 39
Shareholders' share of actuarial 103 200
gains and losses on defined benefit pension schemes
Profit before tax from continuing operations 728 737
The following half year-on-half year comparisons are presented on a RER basis.
Total IFRS basis profits before tax and minority interests were £728 million,
compared with £737 million for the first half of 2006. The decrease reflects: an
increase in operating profit of £103 million; a decrease in short-term
fluctuations in investment returns, down £15 million from the first half of
2006; and a £97 million negative 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.
IFRS basis profit after tax
Half year Half year
RER
2007 2006
£m £m
Profit before tax from continuing operations 728 737
Tax (253) (253)
Profit from continuing operations
after tax before minority interests 475 484
Discontinued operations (net of tax) 241 (34)
Minority interests (1) (1)
Profit for the period attributable to
equity holders of the Company 715 449
The following half year-on-half year comparisons are presented on a RER basis.
Profit after tax and minority interests was £715 million compared with £449
million in the first half of 2006. The effective rate of tax on operating
profits from continuing operations, based on longer-term investment returns, was
34 per cent (2006 H1: 33 per cent). The effective rate of tax at the total IFRS
profit level for continuing operations was 35 per cent (2006 H1: 34 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.
On 29 January 2007, Prudential 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 £575 million in cash,
subject to adjustments to reflect any change in net asset value between 31
December 2006 and completion.
On 1 May 2007, Prudential completed the sale. The consideration, net of
transaction expenses, was £527 million. The reduction from the £575 million
noted above primarily reflects the post-tax loss of Egg Banking plc from 1
January 2007 to the date of sale of £49 million. The profit on sale was £290
million.
Earnings per share
The following half year-on-half year comparisons are presented on an RER basis.
Earnings per share for the first half of 2007, based on EEV basis operating
profit from continuing operations after tax and related minority interests, were
39.4 pence, compared with 29.3 pence over the same period in 2006.
Earnings per share, based on IFRS operating profit from continuing operations
after tax and related minority interests, were 16.3 pence, compared with 14.0
pence for the 2006 half year.
Basic earnings per share, based on total EEV basis profit after minority
interests, were 72.8 pence, compared with 43.8 pence for the 2006 half year.
Basic earnings per share, based on IFRS profit after minority interests, were
29.3 pence, compared with 18.7 pence for the 2006 half year..
Dividend per share
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.
The directors recommend an interim dividend for 2007 of 5.70 pence per share
payable on 24 September 2007 to shareholders on the register at the close of
business on 17 August 2007, an increase of 5 per cent. The interim dividend for
2006 was 5.42 pence per share.
Shareholders' funds
On the EEV basis, which recognises the shareholders' interest in long-term
businesses, shareholders' funds at 30 June 2007 were £13.4 billion, an increase
of £1.5 billion from the 2006 year-end level of £11.9 billion at RER. This 13
per cent increase primarily reflects: total EEV basis operating profit of £1,326
million; a £241 million favourable movement in short-term fluctuations in
investment returns; a £275 million positive movement due to changes in economic
assumptions and in time value of options and guarantees; a positive movement on
the mark to market of core debt of £113 million; a positive movement in the
actuarial gains on the defined benefit pension schemes of £125 million; £241
million from discontinued operations and £117 million from the issue of new
share capital. These were offset by: a tax charge of £545 million; the negative
impact of £65 million for foreign exchange movements, and dividend payments of
£288 million made to shareholders.
The shareholders' funds at 30 June 2007 of £13.4 billion comprise £6.3 billion
for the UK long-term business operations, £3.5 billion for the US long-term
business operations, £2.9 billion for the Asian long-term business operations
and £0.7 billion for other operations.
Within the embedded value for the Asian long-term business of £2.9 billion, the
established markets of Hong Kong, Singapore and Malaysia account for £2.2
billion of the embedded value, with Korea (£233 million) and Vietnam (£222
million) making further substantial contributions. Prudential's other markets,
excluding Taiwan, in aggregate account for £397 million of the embedded value.
Taiwan has a negative embedded value of £157 million. This is an improvement
from the reported negative £216 million at the 2006 year end.
The current mix of new business in Taiwan is weighted heavily towards
unit-linked and protection products, representing 82 per cent and 8 per cent of
new business APE in the first half of 2007, respectively. As a result, interest
rates have little effect on new business profitability. 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 £134 million decrease in Taiwan's embedded value. A
similar one per cent positive shift in interest rates would increase embedded
value by £83 million. If it had been assumed in preparing the half year 2007
results that interest rates remained at the current level of 2.5 per cent 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. 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 3 per cent decrease to Asia's embedded value.
Statutory IFRS basis shareholders' funds at 30 June 2007 were £5.9 billion. This
compares with £5.5 billion at 31 December 2006 at RER. The increase primarily
reflects: profit after tax and minority interests of £715 million and new share
capital of £117 million, offset by the impact of negative foreign exchange
movements of £21 million, dividend payments to shareholders of £288 million, and
the impact of unrealised holding losses on available for sale investments of
£113 million.
Holding company cash flow
Half year Half year
2007 2006
£m £m
Cash remitted by business units:
UK life fund transfer 261 217
US 0 68
Asia 86 66
M&G 75 38
Total cash remitted to Group 422 389
Net interest paid (76) (90)
Dividends paid (286) (267)
Scrip dividends and share options 119 18
Cash remittances after interest and dividends 179 50
Tax received 24 88
Corporate activities (30) (24)
Cash flow before investment in businesses 173 114
Capital invested in business units:
UK (69) (147)
Asia (70) (61)
Total capital invested in business units (139) (208)
Increase/(Decrease) in cash 34 (94)
Egg sale net proceeds 527 -
Total holding company cash flow 561 (94)
The table above shows the Group holding company cash flow. Prudential believes
that this format gives a clearer presentation of the use of the Group's
resources than the format of the statement required by IFRS.
The Group holding company received £422 million in cash remittances from
business units in the first half of 2007 (2006 H1: £389 million) comprising the
shareholders' statutory life fund transfer of £261 million from the UK business,
and remittances of £86 million and £75 million from Asia and M&G respectively.
A remittance of $230 million is expected from the US operations in the second
half of 2007.
There was a strong scrip dividend take-up of £117 million, in respect of the
2006 final dividend. After net dividends and interest paid, there was a cash
inflow of £179 million (2006 H1: £50 million).
During the first six months of 2007, the Group holding company paid £30 million
(2006 H1: £24 million) in respect of corporate activities and received £24
million (2006 H1: £88 million) in respect of relief on taxable losses. The Group
invested £139 million (2006 H1: £208 million) in its business units, comprising
£69 million in its UK operations and £70 million in Asia. In the first half of
2007, Asia contributed a net remittance of £16 million to the Group holding
company cash flow.
In addition, the Group received £527 million from the disposal of Egg (net of
expenses).
In aggregate this gave rise to an increase in cash of £561 million (2006 H1: £94
million decrease). Excluding the Egg sale proceeds, cash increased by £34
million.
Depending on the mix of business written and the opportunities available, cash
invested to support the UK business in 2007 is expected to be less than in 2006,
up to £160 million and with the expectation that the UK shareholder backed
business will become cash positive in 2010.
Taking into account plans for future growth, a normalised level of scrip
dividend, the reducing UK capital requirement and increased remittances from the
other life and asset management operations it is also expected that the
operating cash flow of the Group holding company will be positive in 2008.
BUSINESS UNIT REVIEW
Insurance Operations
United Kingdom
1. Market review and summary of strategy
During the first half of 2007 Prudential UK pursued its retirement-led strategy,
focusing on profitable opportunities in its chosen product areas and
distribution channels, and declining to write low margin or low persistency
business. The success of this strategy is reflected in the financial performance
for the first six months of the year with APE Retail sales increasing by 10 per
cent at a new business margin of 32 per cent.
The business is continuing to target capital efficient returns through selective
participation in the Retail Retirement and Wholesale markets while delivering
embedded value through its Mature Life and Pensions business.
The UK continues to be an attractive market for long-term savings, fuelled by an
ageing demographic profile and increased life expectancy. The proportion of the
UK's population aged 65 and over is expected to grow by some 2 million over the
next 10 years, while the average life expectancy of a 65 year old man has
improved by 3.5 years to 82 compared with a 65 year old man retiring 20 years
ago. In addition, much of the nation's wealth is concentrated in older segments
of the population, with many having benefited from rising property prices over
the last 30 years. However, the majority still have insufficient savings to
provide for the same standard of living during retirement as they have enjoyed
while working.
Growth in equity markets recently and simpler pension regulation following A-Day
in April 2006, have created positive conditions for growth in the Life and
Pensions market.
Prudential's UK insurance operations are structured into three business areas:
Retail Retirement, Wholesale and Mature Life and Pensions.
The Retail Retirement business aims to grow a profitable and sustainable
franchise focused on retirement leadership. By building on Prudential UK's
brand strength and core capabilities in multi-asset management and asset
allocation, providing strong investment performance at lower volatility, and
longevity risk management, it is able to offer unique solutions to customers who
are saving for retirement and seeking to turn their wealth into income in
retirement.
Prudential UK has a significant pipeline of customers with maturing pensions
business over the next 25 years from policies sold through, among other
channels, its direct sales-force prior to 2001 and under the old Scottish
Amicable brand. By providing competitive annuities to these existing customers
and to new customers from financial advisers and partnership arrangements,
Prudential UK has built a leading presence in the retirement income market. It
is at the forefront of the development of asset-backed retirement income
solutions, building on the success of its with-profits annuity, which provides
customers with an income linked to potential growth from equity investment but
without the volatility. In the first half of 2007, Prudential UK added an option
to accept pensions with protected rights and will continue to develop new
solutions in this important market.
Prudential UK is also developing its capability in the Lifetime Mortgage market,
for customers who want to remain in the family home while drawing additional
income to support their retirement. In building its proposition in this market,
Prudential has established a dedicated sales-force (there are currently 30 fully
trained advisers with a plan to increase this further), as well as selling this
product via financial advisors. The UK will continue to extend its capabilities
in this market through further product innovation in the fourth quarter of this
year. Prudential now has outstanding loans of over £160 million on its balance
sheet and has grown its market share to 12.5 per cent at the end of the first
quarter.
Prudential UK is continuing to deliver significant volume and hence operational
scale in the corporate pensions market as it also reduces the costs associated
with the distribution and administration of this business. Business volume in
corporate pensions has increasingly been delivered in recent years through
larger scheme wins and Prudential is now more selective, choosing not to write
lower margin business.
Within retirement savings, Prudential is building on its market leading
propositions. These provide access to strong investment returns with lower
volatility, by adding guarantees that help consumers, particularly those
approaching or at retirement, to safeguard their savings while still benefiting
from investment growth, such as the capital guarantee offered on PruFund.
The Wholesale operation, which has been in operation for over 10 years, has
around 1,100 people years of experience and more than 400 bulk buy-outs already
written, has a strong track record in the risk management of pension schemes for
corporate clients and insurers wishing to reduce or eliminate their investment
and longevity liabilities. In the first quarter of 2007, Prudential reached
agreement in principle with Equitable to acquire Equitable's book of in-force
with-profit annuities. The transaction is expected to complete in the fourth
quarter of 2007. Prudential UK will continue to compete selectively in this
market, only writing business at prices that deliver an adequate return. The UK
business remains confident in the long-term outlook in the bulk and back-book
wholesale market where nearly £900 billion of assets are held in defined benefit
schemes and insurers' back-book annuities.
Prudential UK is continuing to deliver embedded value through its Mature Life
and Pensions business. It has set a target to reduce per policy unit processing
costs over and above the cost reduction required to reduce costs in line with
the expected run-off of policies on these closed books of business and is
evaluating the best route for achieving this which will include one or all of
internal cost cutting, further off-shoring or out-sourcing.
Prudential welcomes the Retail Distribution Review Discussion Paper, which has
recently been published by the Financial Services Authority. This is in line
with Prudential's strategy which is focused on building strong longer-term
relationships with advisers and offering market-leading retirement solutions.
Prudential has already taken significant steps to improve its distribution model
by moving some of its products to a 'Factory Gate Price' basis, where the costs
for intermediary services are separated from the costs of the product. As the
advice costs are negotiated and paid separately, this method of pricing has also
been termed Customer Agreed Remuneration. Factory gate pricing delivers more
capital efficient volume through intermediary partners as the commission costs
are no longer funded at outset from shareholder capital. Prudential has
re-aligned its account managers to provide an even more focused service across
accounts seeking to build deeper relationships with those distributors who are
moving to 'wealth adviser' models. More than half of Prudential UK's top 100
advisors have changed compared to last year, reflecting our focus on switching
to value-creating accounts.
Through PruHealth, its joint venture with Discovery, the leading South African
health insurer, Prudential UK is building a health insurance business which
rewards those customers who lead healthier lives through the 'Vitality' points
system. PruHealth is on track to meet its target of becoming a significant
player in the private healthcare market with insured lives of more than 117,000
up 31 per cent on the 2006 year-end position.
The joint venture is being expanded to include Prudential UK's protection
product, expanding 'Vitality' across both health and life insurance products
later in 2007.
2. Financial results and performance
Half Half Year Half Year
Year CER 2006 RER 2006
2007 Change Change
£m £m £m
Sales
APE retail sales 358 325 10% 325 10%
APE total sales 363 484 (25%) 484 (25%)
PVNBP 2,905 4,224 (31%) 4,224 (31%)
NBP retail 115 95 21% 95 21%
NBP total 108 138 (22%) 138 (22%)
NBP retail margin (% APE) 32% 29% 29%
NBP total margin (% APE) 30% 29% 29%
Operating Profits
Total EEV basis operating profit * 462 336 38% 336 38%
Total IFRS operating profit * 251 205 22% 205 22%
* Based on longer-term investment returns
Prudential UK delivered a strong performance in the first half of 2007
including:#
• Retail sales were up 10 per cent on the first half of 2006
• New business Retail profits increased 21 per cent on the first half of
2006
• Retail new business margins were strong at 32 per cent
• The Wholesale business announced an agreement in principle to acquire
Equitable's portfolio of in-force with-profits annuities
• In-force profits increased 79 per cent on first half of 2006
• IFRS profits increase by 22 per cent on first half of 2006
• The initial phase of the cost reduction programme to deliver annual
savings of £115 million is on schedule to be achieved by the end of 2007. An
update on the second phase (£80 million) will be given in the fourth quarter
of 2007
Retail APE sales of £358 million were 10 per cent higher than during the same
period in 2006. This growth was driven by strong performance in individual
annuities, corporate pensions and with-profits bonds. Total UK APE sales in the
first half were £363 million, a decrease of 25 per cent year-on-year. However,
the first half of 2006 included two large back book annuity deals totalling £128
million and also £31 million of credit life sales under a contract with Lloyds
TSB that was not renewed in 2007. On a PVNBP basis, new business sales were £2.9
billion compared with £4.2 billion in the same period last year.
Individual annuities continued the strong performance experienced in the first
quarter with total sales for the half-year of £140 million, up 23 per cent on
the same period last year. This performance was driven by the strength of
Prudential's internal vestings (up 11 per cent) with sales from its direct
channel and partnership deals with Zurich, Pearl and Royal London gathering
momentum (up 59 per cent compared with the same period in 2006). Prudential and
Save & Prosper signed an agreement in 2006 under which Save & Prosper will offer
Prudential's conventional annuity product to customers with maturing Save &
Prosper pensions. The 5-year agreement went live on 18 June 2007.
The with-profits annuities market continues to grow with increased consumer
recognition for the need to protect retirement income against inflation during
increasingly longer retirement periods. Prudential UK remains the leading player
in this market with APE sales 51 per cent higher than for the same period last
year. This was aided by strong relationships with Openwork. The new enhancements
Prudential UK made to the product in the first quarter (adding the facility to
accept Protected Rights monies, which was a first in the with-profit annuity
market) has been well received and has delivered more than expected.
The UK business continues to increase its presence in the lifetime mortgage
market. Illustrations and applications continued to increase with £67 million of
new loans advanced to customers in the first 6 months of 2007. This represents a
123 per cent increase on the £30 million advanced for the same period in 2006.
With-profits bond sales continue to increase on the back of continued strong
investment performance. At the half-year, APE sales of £17 million were 47 per
cent higher than during the same period in 2006. The overall with-profits bond
market has been steadily increasing since the fourth quarter of 2005 (Q4 2005
sales through financial advisors of £6.7 million compared with £15.7 million APE
in Q1 2007) and Prudential UK continues to write approximately half of
with-profits bonds sold through financial advisors in the UK. Approximately 45
per cent of sales have been made with a capital guarantee, for which an
additional charge is made.
APE sales of corporate pensions grew to £124 million, a rise of 28 per cent on
the £97 million written in the first half of 2006. Sales of the
shareholder-backed defined contribution proposition grew to £40 million, while
sales of the legacy DC and AVCs grew 16 per cent to £71 million as AVC sales
continued to flourish on the back of A-day. Prudential continues to be a market
leader in AVCs, supporting major customers through its comprehensive sales
capability existing in the work-place. Corporate pensions also continue to be an
important source for Prudential's future annuity business.
PruHealth has continued to make encouraging progress during the first half of
2007. Gross written premiums have increased by 91 per cent to £32 million
compared with the comparative period last year. PruHealth has extended its
distribution footprint through a partnership with Boots the Chemist, and quotes
and applications under this agreement have been building steadily during the
second quarter. Importantly, PruHealth's lapse and claim ratios are in line with
expectations.
Retail new business profits increased by 21 per cent to £115 million. Retail
performance was driven by increased sales of high margin business, predominately
of individual annuity business, and the cessation of writing low margin
business. This has led to overall margins increasing to 30 per cent, with a
Retail margin of 32 per cent being achieved. Total new business profits for the
first half of £108 million were 22 per cent below the level achieved over the
same period in 2006. However 2006 included significant profits relating to the
Royal London and SAIF back-book transactions, and Lloyds TSB credit life
profits.
A 15 per cent average IRR was achieved on new business written for the first
half of 2007.
EEV basis operating profit based on longer-term investment returns of £462
million, were 38 per cent up on the same period last year. In-force profits were
79 per cent higher than 2006, primarily due to the increase in profits arising
from the unwind of the discount from the in-force book and the effect of the
change in the UK corporation tax rate. The unwind of the discount increase of
£59 million reflects a higher opening embedded value and increases in risk
discount rates.
Changes to operating assumptions of £68 million included a benefit of £67
million being the effect of a reduction in the corporation tax rate from 30 per
cent to 28 per cent.
Prudential UK continues to progress its cost saving programme and by the end of
2007 the initiatives will be in place to deliver the initial £115 million of
annual savings (of the total of £195 million target), which is already reflected
in the current assumptions. Prudential UK continues to actively manage the
retention of the in-force book. Following the strengthening of persistency
assumptions in 2005, overall experience continues to be in line with
assumptions.
Other charges of £30 million were below those incurred in the same period of
2006. These are mainly costs associated with new product and distribution
development and certain costs associated with complying with regulatory change.
IFRS profits of £251 million increased by 22 per cent. This reflected a 15 per
cent increase in profits attributable to the with-profits business, to £195
million, representing the continued strong investment performance of the Life
Fund and its impact on terminal bonuses.
Financial Strength of the UK Long Term Fund
The fund is very strong. On a realistic basis, with liabilities recorded on a
market consistent basis, the inherited estate of the fund is estimated to be
valued at around £9.5 billion before a deduction for the risk capital margin.
In the first half of the year, the performance of the Prudential's with-profits
life fund has benefited from its exposure to strongly performing equity markets
around the world at the expense of global bond markets. The Fund returned 5.8
per cent gross in the first half of the year.
Recently, the decision was taken by the Fund's investment managers to partially
hedge its exposure to credit risk. Since 2002, the Fund has taken a strategic
exposure devoid of government bonds and encompassing a sizeable low investment
grade and high yield credit component. This has proved a very successful
strategy.
Given the stretched level of credit spreads around mid-year, the decision was
taken to hedge the entirety of the Funds High Yield and a substantial proportion
of its Sterling, Euro and Dollar BBB credit exposure, using highly liquid iTraxx
and CDX index credit default swap (CDS) contracts. Around £4 billion nominal
contracts were transacted in the second half of June in respect of the
Prudential and Scottish Amicable Funds. Although, given recent market events,
these derivative positions are well in the money, it is the intention to hold
them for some time.
The PAC long-term fund is rated AA+ (stable outlook) by Standard & Poor's, Aa1
(negative outlook) by Moody's and AA+ (stable outlook) by Fitch Ratings.
3. Outlook and forthcoming objectives
As announced in the first quarter of 2007, an agreement in principle was reached
for Prudential to acquire Equitable's portfolio of in-force with-profit
annuities, a book of 62,000 policies with assets as at 31 December 2006 of
approximately £1.7 billion. This transaction demonstrates Prudential's ability
to grow its with-profits fund to create value for both its policyholders and
shareholders. This transaction, which is subject to certain conditions including
a vote among Equitable's policyholders as well as regulatory and court approval,
is expected to complete in the fourth quarter at which time the sale and
associated profit will be recognised.
Prudential UK has entered into an agreement with Barclays under which it will be
the preferred supplier of conventional annuity products to Barclays' retail
customers in the UK. Prudential will establish an annuities desk within its
PruDirect distribution business through which Barclays customers can enquire
about the range of annuity options and product features that are available to
them. The agreement will take effect later in 2007 and run for five years.
In addition Prudential UK has been chosen as the main provider on Thinc group's
new adviser-service, Annuity Desk. The service will allow Thinc advisers, who
do not advise on annuity business, to refer their customers' annuity needs to
PruDirect.
In line with our strategy of building on the core capability of asset allocation
which has driven the exceptional investment performance for the Life Fund over
recent years, Prudential UK has launched two multi-asset funds during the first
half of 2007 - the Cautious Managed Growth Fund and the Managed Defensive Fund.
These two new funds are available within Prudential's collectives, pension,
onshore and offshore bond product ranges.
As Prudential has avoided business with lower expected persistency, to increase
profitability, unit-linked bond sales remained subdued, with Prudential
signalling its intention to progressively withdraw from the traditional provider
funded commission arena to improve the quality of its book. A new factory gate
priced onshore bond will be available during August.
Prudential has committed to a £195 million cost saving programme. Much of this
cost will be saved within Mature Life and Pensions, which encompasses products
that are not actively marketed to customers and in long term decline. As
explained above, plans to achieve these cost savings are being developed both
internally and with third parties, with the expectation that significant savings
will be delivered through a decision to either outsource or offshore roles in
operations and overhead areas and simplify the systems and technology required
to manage these policies. Together these actions will ensure that Prudential
continues to deliver in-force profit at least in line with current assumptions.
As previously announced, the savings, net of restructuring costs, are expected
to result in a small positive assumption change on an EEV basis, estimated to be
around £60 million. A decision on the option selected to deliver the further £80
million cost savings is scheduled to be made during the fourth quarter of 2007.
By the end of 2007, the initiatives will be in place to deliver the initial £115
million of this annual target which is already reflected in the current
assumptions.
Total restructuring costs of £ 57 million have been incurred in 2006 in respect
of the annual £115 million savings target (£ 34 million of the costs related to
shareholders on an EEV basis). Further costs of approximately £18 million are
expected to be incurred by the end of 2007, bringing the total cost to
approximately £75 million.
Prudential UK will continue to focus on growth opportunities to deliver capital
efficient returns and will seek to maintain an aggregate IRR of at least 14 per
cent on new business.
United States
1. Financial results and performance
Half Half Year Half Year
Year CER 2006 RER 2006
2007 Change Change
£m £m £m
PVNBP 3,490 2,915 20% 3,209 9%
APE sales 352 294 20% 323 9%
NBP 144 122 18% 134 7%
NBP margin (% APE) 41% 41% 41%
Total EEV basis operating profit * 344 316 9% 346 (1)%
Total IFRS operating profit * 218 203 7% 223 (2)%
* Based on longer-term investment returns and excluding broker-dealer and fund
management operations and Curian
Jackson, Prudential's US insurance business, provides retirement savings and
income solutions in the mass and mass-affluent segments of the US market,
primarily to near and post-retirees. The United States is the largest retirement
savings market in the world, and as 78 million baby boomers born between 1946
and 1964 begin to move into retirement, annual retirement distributions are
expected to increase to more than $1 trillion per year by 2012.
Jackson's primary focus is manufacturing high-margin, capital-efficient
products, such as variable annuities (VA), and marketing these products to
advice-based channels through its relationship-based distribution model. In
developing new product offerings, Jackson leverages its low-cost, flexible
technology platform to manufacture innovative, customisable products that can be
brought to the market quickly.
Jackson had a strong first half of the year delivering APE sales of £352
million, up 20 per cent on last year with strong new business profit margins at
41 per cent. PVNBP sales were £3.5 billion.
Jackson again delivered record variable annuity sales of £2.2 billion during the
first half of 2007, up 31 per cent on last year and, in the first quarter of
2007, recorded its twelfth consecutive quarter of variable annuity market share
growth. This reflects its distinct competitive advantages of an innovative
product offering, a relationship-driven distribution model, award-winning
service as well as an efficient and flexible technology platform.
Jackson's variable annuity sales result was achieved in a market that grew 6 per
cent year-on-year through the first quarter of 2007. Jackson increased its
variable annuity market share to 5.1 per cent as at the end of the first quarter
of 2007, up from 4.6 per cent at the end of 2006, and maintained its ranking of
12th in total variable annuity sales. In the independent broker-dealer
distribution channel, Jackson's variable annuity sales during the first quarter
of 2007 increased 32 per cent over the same period in 2006, while industry sales
grew 16 per cent. Jackson maintained its number 2 ranking in the channel at the
end of March 2007 and increased its market share to 11.7 per cent from 10.8 per
cent at year end 2006.
Innovation in product design and speed to market continue to be key drivers of
Jackson's competitiveness. In April, Jackson added a number of features to its
variable annuity key offering: three new guaranteed minimum withdrawal benefits
(GMWBs), a new guaranteed minimum accumulation benefit (GMAB), and several new
portfolio investment options.
In the first quarter of 2007, Jackson continued its track record of product
innovation by launching a set of retail mutual funds for distribution by
existing wholesalers. Jackson's new mutual funds are marketed as an additional
option for financial advisors selling variable annuity products.
At the 2007 half year, Jackson had £39.8 billion in US GAAP assets, an increase
of £2.7 billion at CER compared to 2006 year end and up from £35.2 billion 12
months ago. Total assets include £13.6 billion in the separate accounts that
back the variable portion of variable life and annuity contracts, an increase of
£2.5 billion compared to the 2006 year-end and up from £8.8 billion 12 months
ago, further diversifying Jackson's earnings towards fee-based income. At 30
June 2007, Jackson's investment portfolio of £23.3 billion included asset-backed
securities with a total of £252 million exposure to sub prime residential
mortgages, including £8 million held within collateralised debt obligation (CDO)
structures. All of these securities are triple-A rated.
The increased variable annuity APE sales more than offset a reduction in APE
sales of fixed index annuities, which were down 19 per cent to £22 million.
Fixed annuity APE sales increased 4 per cent to £29 million.
Entry spreads for fixed annuities continued to be challenging during the first
half of the year, which limited the attractiveness of the market to Jackson. To
the end of March 2007 the traditional deferred fixed annuity market was down 25
per cent from the same point in the prior year while Jackson's market share grew
from 2.8 per cent to 3.6 per cent over the same period.
Fixed index annuity sales continued to be impacted by the uncertain regulatory
environment in the US, with total market sales to March 2007 down 9.5 per cent
from the prior year while Jackson's market share grew from 3.4 per cent to 3.5
per cent over the same period.
Institutional APE sales of £67 million, a market in which Jackson participates
on an opportunistic basis, were up 14 per cent from the prior year.
New business profit of £144 million was 18 per cent above the prior year,
reflecting a 20 per cent increase in APE sales with margins of 41 per cent in
line with the prior year figure.
Total EEV basis operating profit for the US insurance operations at the half
year 2007 was £344 million compared to £316 million in the prior year at CER.
In-force EEV profits of £200 million were 3 per cent higher than prior year
profit, primarily reflecting an increase in the unwind of the in-force business
during the first half of 2007 resulting from a higher opening embedded value and
a higher aggregate risk discount rate on the in-force business. Spread variance
of £53 million is broadly in line with that of prior year (£55 million at CER)
and includes £23 million of non-recurring items (2006: £28 million at CER).
Jackson IFRS operating profit was £218 million, up 7 per cent on the prior year.
The driver of this growth was higher fee income from the variable annuity
business driven by higher separate account assets given the growth in variable
annuity sales and market appreciation. While the fee-based business represents
the key driver of growth in IFRS operating profit, the in-force block of
spread-based business continues to deliver the majority of profits. Profits from
the annuity spread-based business were broadly in line with prior year.
2. Outlook and forthcoming objectives
Jackson continues to deliver profitable growth in the attractive US market and
enhance its competitive advantages in the variable annuity market. With a
continued focus on product innovation, a proven relationship-based distribution
model, award winning service and excellence in execution, Jackson is well
positioned to take advantage of the changing demographics and resulting
opportunities in the US market.
Asia
1. Financial results and performance
Half Half Year Half Year
Year CER 2006 RER 2006
2007 Change Change
£m £m £m
PVNBP 3,286 2,161 52% 2,328 41%
APE sales 619 418 48% 448 38%
NBP 282 216 31% 232 22%
NBP margin (% APE) 46% 52% 52%
Total EEV basis operating profit * 493 334 48% 359 37%
Total IFRS operating profit * 76 83 (8%) 88 (14%)
* Based on longer-term investment returns and excluding fund management
operations, development and Asia regional head office expenses.
Prudential has increased the pace of growth in Asia delivering strong, broad
based and profitable growth from its Asian life operations through a combination
of freshly invigorated multi-channel distribution, innovative product design and
insightful marketing.
Average new business growth accelerated to 48 per cent, up on the first half of
2006 on an APE basis at £619 million and this boosted the five year compound
annual growth rate (CAGR) to 29 per cent. The second quarter included the impact
of an exceptionally successful retirement campaign in Taiwan. This is not
expected to generate the same level of growth over the full year. Average new
business profit margin on APE at 46 per cent compares to 52 per cent for the
same period last year with the change being principally driven by a shift in
geographic mix accounting for 4 per cent of the change and product mix the
remaining 2 per cent. Profit margin for the full year is expected to remain at
or around this level. The proportion of linked business remains high at 72 per
cent and, as has been the case in the past, this has been unaffected by the
equity market fluctuations seen earlier on this year.
In-force EEV profits at £211 million are increasing steadily with the
realisation of value inherent in the business; operating variances remain small,
but the first half of 2007 saw positive assumption changes of £34 million
primarily following corporation tax changes in Singapore and China. On the IFRS
basis operating profits for the half year of £76 million are down 8 per cent on
the first half 2006, due to increased losses in India and to a lesser extent
China, as Prudential continues to invest in building the branch networks,
offsetting profits from the more established operations including a particularly
strong result from Taiwan. Korea continues to record IFRS losses as a result of
new business strain. Continuing the trend seen in 2006, Prudential received a
net remittance of £16 million capital in the first half of 2007 from Asia after
including injections totalling £40 million into China, India and Korea.
A key driver of the new business growth in the first half was the launch of a
new variable annuity product and the very successful launch of the 'What's your
number?' retirement planning initiative in Taiwan, replicating the success of
this initiative in Hong Kong and Korea. New business APE for Taiwan in the
second quarter was exceptional and 246 per cent higher than the same period last
year. New business volumes are expected to revert to more normal levels during
the second half of 2007. The new business profit margin on the VA products is
lower than regular unit linked business and, together with the launch
incentives, this has lowered the average margin from 52 per cent for the first
half last year to 42 per cent.
Prudential's Indonesian life business continues to maintain its robust growth
with a 57 per cent increase in first half new business. Since 2002 this business
has been growing at a CAGR of 54 per cent. With APE of £47 million for the half
year the operation is becoming a material contributor to total new business. The
business now has 40,000 agents and is currently growing this base at around a
net 1,000 per month. The life insurance market in Indonesia is still very much
in its infancy and this business has considerable long term potential. This
business made an IFRS profit during the first half and remitted £11 million of
surplus capital.
In China, growth remains on track at 57 per cent with APE of £22 million,
although agency recruitment is currently challenging, particularly in Guangzhou
and Beijing. China is also a recipient of capital from the Group to support
growth and geographic expansion. China's new business profit margin in the first
half of 2007 decreased by two percentage points to 44 per cent compared to 46
per cent in 2006 due to a higher proportion of unit-linked business.
The life joint venture with ICICI in India continues to grow apace with new
business APE for the first half 2007 of £83 million for Prudential's 26 per cent
stake, up 54 per cent compared to the same period in 2006, with the number of
branches now 583 compared to 256 this time last year. Agent numbers have
similarly increased and there are now over 244,000 agents across the country.
The CAGR for this business over the last five years has been 107 per cent and it
now has 3.4 million customers. New business profit margins in India remain the
lowest in the region and averaged 20 per cent for the first half 2007. This pace
of growth is capital intensive and the lower margin products means more
shareholder support is required than in other markets. In the first half of 2007
India incurred IFRS operating losses of £17 million. Investment in India will
continue throughout the remainder of 2007.
In Hong Kong, despite this market being deemed mature and competitive, new
business growth continues to accelerate, up 45 per cent on the same period last
year. This is in part driven by successful marketing campaigns with the
continuation of 'What's your number?' and the 'Double Treasure Income Plan'
bancassurance promotion with Standard Chartered Bank (SCB). Average new business
margins remain satisfactory at 62 per cent, down from 67 per cent in 2006 due to
a higher proportion of unit-linked business as a result of the 'What's Your
Number?' retirement campaign. IFRS profits were in line with 2006 reflecting
higher new business strain from a higher proportion of linked business.
Singapore's first half new business growth in 2007 on an APE basis was 27 per
cent. Two new pilot health products were successfully launched in Singapore in
May as part of Prudential's regional initiative in this area and so far 15,000
proposals have been received.
Korea had a slower first half in 2007 compared to previous years with new
business growth at a modest 18 per cent principally due to the first quarter
where, as previously reported, there were some market related issues around
unit-linked products, increased competition in the general agent channel and
lower agent recruitment. During the second quarter, the business improved
strongly, being up 31 per cent on the same quarter last year. A new distribution
agreement with Korea Bank got underway in the second quarter. New business
profit margins in Korea are relatively low and were 33 per cent compared to 38
per cent at the same time last year as a result of product mix changes. Korea is
a recipient of capital injections to fund its growth.
Malaysia grew at 10 per cent for the first half of 2007, however senior
management remain confident the business will continue to accelerate during the
second half following a second quarter that was up 25 per cent on the first
quarter.
Japan Life reported new business APE of £16 million, up around 5 times the half
year 2006 level. New business profit margins in Japan are currently negative as
the expense base remains high relative to the current scale of the business. As
previously reported, Prudential continues to look for opportunities to increase
the scale and profitability of its Japanese life business over the long term.
Prudential's other markets of the Philippines, Thailand and Vietnam collectively
grew by 29 per cent with some encouraging signs of growth in Vietnam up 6 per
cent after several years of decline and strong growth in Thailand at 78 per cent
with the success of the call centre.
In summary, Prudential continues its excellent track record of building a
profitable business in Asia.
2. Outlook and forthcoming objectives
Prudential continues to deliver strong, broad based and profitable growth in
Asia from its well established platform. The demographics and environment in
Asia remain as compelling as ever and the business is expected to carry on
growing at a fast pace.
The objectives going ahead are to continue to focus on building agency scale,
particularly in the huge markets of India, China and Indonesia, and to increase
productivity in other markets. Prudential remains unique amongst the regional
players in Asia with a proven approach to partnership distribution and this will
continue to be expanded.
There is also the opportunity to deepen and strengthen relationships with the
over 8.5 million customers already on the books using a disciplined and
systematic approach. Work is already underway in this area and pilot schemes are
scheduled for later this year in a number of markets.
The retirement opportunity is clear and Prudential has already demonstrated its
ability to successfully package and promote retirement accumulation products
through the 'What's your number?' campaign. The next stage is to build on this
with a retirement solution that covers not just accumulation, but also drawdown
and associated protection needs.
Prudential has not leveraged its strengths to building scale direct distribution
as yet and this will be a priority in the future. A new regional team is being
assembled to drive this initiative
Prudential will also be re-examining its approach to health products as there
are significant opportunities to create value to shareholders and customers
above and beyond what is already being done. A new regional team is developing
the approach and has already piloted initiatives in Singapore and most recently
India.
The business remains well on track to deliver its target of at least doubling
2005 new business profits of £413m by 2009.
Asset Management
Global
The Prudential Group's asset management businesses are contributing to the Group
in two ways. Not only do they provide value to the insurance businesses within
the Group, but also are important profit generators in their own right, with 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, but are increasingly
working together by managing money for each other with clear regional
specialism, distributing each others' products and sharing knowledge and
expertise, such as credit research.
Each business and its performance for the first half of 2007 is summarised
below.
M&G
1. Financial results and performance
Half Year Half Year Half Year
CER Change RER Change
2007 2006 2006
£m £m £m
Net investment flows 3,367 3,595 (6)% 3,595 (6)%
Total IFRS operating profit 140 100 40% 100 40%
M&G is Prudential's UK and European fund management business and has £168
billion of funds under management, of which £119 billion relates to Prudential's
long-term business funds. M&G aims to maximise profitable growth by operating
in areas of the retail and wholesale markets where it has a leading position and
competitive advantage, including retail fund management, institutional fixed
income, pooled life and pension funds, property and private finance.
M&G is made up of three distinct and autonomous businesses - Retail, Wholesale
and Prudential Capital - each with its own strategy for the markets in which it
operates. M&G's retail strategy is to maximise the leverage of its strong
investment performance, efficient operating platform and multi-channel
distribution in the UK, Europe and Asia. M&G's wholesale strategy is twofold:
to add value to its internal clients through investment performance, liability
matching and investment in innovative and attractive areas of capital markets
and to utilise the skills developed primarily for internal funds to build new
business streams and diversify revenues. Prudential Capital manages
Prudential's balance sheet for profit.
M&G delivered significant profit growth during the first six months of 2007.
Operating profits, which include performance related fees (PRF), increased 40
per cent to £140 million compared to the same period last year. Underlying
profits, excluding PRF, were £127 million, an increase of 40 per cent. This
continues M&G's strong profit growth that has seen underlying profits increase
fourfold over the past five years. Profit growth in the first half was
generated on the back of rising market levels, strong net inflows across the UK
and international markets and improved deal flow in Prudential Capital. First
half profits were boosted by £5 million of non-recurring items and M&G also
expects to incur a number of anticipated project costs in the second half. PRF
and carried interest during the first six months was £13 million, an increase of
51 per cent on last year.
Strong fund performance led to record gross fund inflows of £7.5 billion, up 11
per cent on the same period last year. Net fund inflows of £3.4 billion were
the second highest ever achieved in a first half, but were slightly down on last
year largely due to reduced inflows into lower margin institutional areas such
as traditional segregated bond funds. External funds under management grew by 8
per cent to £49 billion from the end of 2006 and represent over a quarter of M&
G's total funds under management.
In the retail marketplace, continued high demand for M&G's high alpha equity and
competitive fixed income and property offerings led to record gross fund inflows
of £4.5 billion, up 26 per cent on the first half last year. Net fund inflows
in the first six months were £1.7 billion, equalling last year's record.
Excellent retail sales momentum continued in the UK, with gross fund inflows
increasing by 23 per cent and net inflows up 7 per cent compared with the same
period last year. M&G was also named Best Overall Large Group at the 2007
Lipper Awards.
Growth was also strong in international markets. In Europe, where M&G is
maximising the opportunity created by the continued opening of markets to
foreign players, gross fund inflows increased by 15 per cent. While net fund
inflows reduced by 25 per cent as a result of asset allocation shifts by
European investors in the wake of equity market falls in late February, sales in
May and June have been exceptionally strong. Asian markets, where M&G
distributes funds in partnership with Prudential Corporation Asia (PCA), also
saw significant growth with net inflows up 56 per cent in the first half
compared to 2006. M&G's international markets now account for some 70 per cent
of net retail fund inflows.
In its wholesale markets, M&G saw a continued shift towards higher margin
products during the first half of 2007 and a fall in lower margin business such
as traditional segregated bond funds. As a result, total gross institutional
fund inflows fell by 6 per cent to £3.0 billion and net inflows fell 13 per cent
to £1.6 billion.
However, gross fund inflows into higher margin products, such as leveraged
loans, collateralised debt obligations (CDOs), infrastructure finance and the
Episode global macro hedge fund, more than doubled during the first six months
of the year and represented over half of all institutional flows. Net fund
inflows into these areas more than tripled compared to the same period last
year, producing a more profitable sales mix. The first half of the year has
also seen M&G's infrastructure fund, InfraCapital, grow substantially,
completing purchases of the Isle of Wight ferry business, Red Funnel, and
investing in Zephyr, one of the UK's largest wind farm operators.
2. Outlook and forthcoming objectives
Looking ahead, M&G's priorities continue to be to deliver investment
outperformance to its clients, extend distribution through existing channels and
exploit new opportunities, and to leverage its scale and capabilities to develop
innovative products for the retail and wholesale marketplaces.
Asia
1. Financial results and performance
Half Year Half Year Half Year
CER Change RER Change
2007 2006 2006
£m £m £m
Net investment flows 1,662 1,603 4% 1,709 (3%)
Total IFRS operating profit 33 20 65% 22 50%
The Asian asset management business continues to deliver record net inflows.
Net inflows of £1.7 billion were up 4 per cent on the same period in 2006. Of
the £1.7 billion in net inflows, £1.3 billion was in longer term equity and
fixed income products and £0.4 billion was in shorter term money market funds.
Third party funds under management in Asia at the half year were £14.6 billion,
up 42 per cent compared to the end of the first half of 2006. The main
contributors to the growth were Japan, India, Korea and Taiwan.
PCA Asset Management Korea successfully launched the China A-Share fund under
the Qualified Foreign Institutional Investor ('QFII') scheme and raised over £50
million in the second quarter of 2007. Introduced in May 2002, the QFII scheme
allows qualified foreign institutional investors direct participation in China's
domestic 'A' share equity and fixed income markets.
Our innovative product strategy continues to deliver strong growth in net
inflows for our operation in Japan. We have reached a significant milestone with
our PCA India Infrastructure Equity Fund, which has now become our third POIT
(Publicly Offered Investment Trust) crossing the Yen 100 billion mark (GBP 400
million). This makes us one of only three foreign asset management companies
that have attained this achievement in Japan.
In Taiwan, PCA Securities Investment Trust (PSIT) had a successful launch of the
Asian Infrastructure Fund, raising over £210 million. This is PSIT's third
consecutive fund launch that has hit the fund cap and the success of these fund
launches is evidence that the combination of providing innovative products
together with a sound distribution strategy is working well in Taiwan. Following
the successful product launches, PSIT's retail FUM has grown to over £1.9
billion up 68 per cent on the first half of 2006. In terms of overall domestic
fund market ranking, PSIT's ranking has improved from 9th to 5th in the overall
market. This increased the number of our funds operations in top five market
positions from four to five as at the end of May 2007.
Our fund management businesses in India (ICICI Prudential Asset Management) and
Singapore (Prudential Asset Management Singapore) both won Gold Awards in the
Reader's Digest Trusted Brand Awards 2007. The top award being Gold for brands
which score clearly above their competitors based on consumers' surveys. This
achievement represents consumers' confidence in our brand and services in both
markets.
Total funds under management as at 30 June 2007 were £32.8 billion, up 34 per
cent on the first half of 2006. Operating profits grew 65 per cent, compared to
the first half of 2006, to £33 million (2006 H1: £20 million) driven by strong
contributions from the established markets of Hong Kong and Singapore. Hong
Kong and Singapore account for 49 per cent of profit compared to 60 per cent a
year ago, as newer operations such as India, Japan and Korea begin to make
meaningful contributions.
2. Outlook and forthcoming objectives
Prudential remains confident that its fund management business is ideally
positioned to capitalise on the opportunities to grow this business strongly and
profitably.
United States
US broker dealer, fund management and Curian
1. Financial results and performance
Half Year Half Year Half Year
CER Change RER Change
2007 2006 2006
Funds under management (£bn)
Fund Management (PPMA) 39 35 11% 38 3%
Curian 1.5 1.0 50% 1.1 36%
Total IFRS operating profit (£m)
US Broker Dealer 5 3 67% 4 25%
Fund Management (PPMA) 4 4 - 4 -
Curian (2) (3) 33% (4) 50%
Total 7 4 75% 4 75%
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 CDOs, private investment 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.
During the first half of 2007 PPMA raised over £0.5 billion of third party funds
under management, with the opportunity to increase such mandates during the
second half of the year.
PPMA's IFRS operating profit in the first half of 2007 was £4 million, in line
with the prior year figure.
National Planning Holdings (NPH), Jackson's independent broker-dealer network,
had a strong first half to the year with profits up 67 per cent to £5 million.
NPH, which is a network of four independent broker-dealers, increased product
sales to £3.5 billion in the six months ending June 2007, an increase of 14 per
cent over the prior year. NPH also increased the number of registered advisors
in its network to 2,819 at the half year, up from 2,628 at year-end, further
expanding Jackson's access to independent broker-dealer distribution.
Curian Capital, which offers innovative fee-based customised separately managed
accounts, recorded improved results with losses of £2 million in the first half
compared to losses of £3 million in the first half of the prior year at CER, as
it continues to build scale in assets under management. At 30 June 2007, Curian
Capital had £1.5 billion of assets under management compared with £1.2 billion
at 31 December 2006.
2. Outlook and forthcoming objectives
PPMA expects a positive outlook for the rest of 2007, driven by current
momentum, favourable economic and market conditions, and growth prospects.
NPH expects to continue its track record of profitable growth driven by its
strong operating model and opportunities in the US retirement market.
Curian expects to continue growing its assets under management, driven by
favourable market conditions and opportunities in the US retirement market.
OTHER CORPORATE INFORMATION
Shareholders' borrowings and financial flexibility
Core structural borrowings of shareholder-financed operations at 30 June 2007
totalled £2,413 million, compared with £2,612 million at the end of 2006
(excluding Egg). This decrease reflected repayment of the £150 million 9.375%
guaranteed bonds, exchange translation gains of £23 million and other
adjustments of £26 million.
After adjusting for holding company cash and short-term investments of £1,546
million, net core structural borrowings at 30 June 2007 were £867 million. This
compared with £1,493 million at 31 December 2006, mainly reflecting the net cash
inflow of £561 million (including £527 million net proceeds from the sale of
Egg) and exchange translation gains of £30 million.
Core structural borrowings at 30 June 2007 included £1,470 million at fixed
rates of interest with maturity dates ranging from 2009 to perpetuity. £841
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 30
June 2007, commercial paper of £95 million, US$3,517 million and €212 million
has been issued under this programme. Prudential also has in place a £5,000
million medium-term note (MTN) programme. At 30 June 2007, subordinated debt
outstanding under this programme was £435 million and €520 million, and senior
debt outstanding was €65 million, US$12 million and £5 million. In addition, the
holding company has access to £1,600 million committed revolving credit
facilities, provided by sixteen major international banks, and a £500 million
committed securities lending liquidity facility. These facilities have not been
drawn on during the first half of 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 insurance and asset management operations are funded centrally. The
Group's core debt is managed to be within a target level consistent with its
current debt ratings. At 30 June 2007, the gearing ratio (debt, net of cash and
short-term investments, as a proportion of EEV shareholders' funds plus debt)
was 6.1 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 the
first half of 2007 compared with 12.3 times in the first half of 2006.
Regulatory capital
In May 2007, Prudential completed the sale of Egg to Citi. As a result of this
transaction Prudential expects a regulatory capital benefit of around £300
million.
Including this benefit Prudential currently estimates its Financial
Conglomerates Directive ('FCD') capital position at the end of 2007 will be a
surplus of over £1 billion.
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.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
SUMMARY CONSOLIDATED INCOME STATEMENT
Half Year Half Year Full Year
2007 2006 2006
£m £m £m
UK Insurance Operations 462 336 686
M&G 140 100 204
UK Operations 602 436 890
US Operations 351 350 718
Asian Operations 520 374 864
Other Income and Expenditure (147) (141) (298)
UK restructuring costs 0 (12) (41)
Operating profit from continuing operations based on longer-term investment 1,326 1,007 2,133
returns
Short-term fluctuations in investment returns 241 73 738
Mark to market value movements on core borrowings 113 168 85
Shareholders' share of actuarial gains and losses on defined benefit pension 125 246 207
schemes
Effect of changes in economic assumptions and time value of cost of options and 275 (20) 59
guarantees
Profit from continuing operations before tax 2,080 1,474 3,222
Shareholder tax (545) (387) (904)
Profit from continuing operations for the period after tax before minority 1,535 1,087 2,318
interests
Discontinued operations (net of tax) 241 (34) (105)
Profit for the period 1,776 1,053 2,213
Attributable to:
Equity holders of the Company 1,775 1,052 2,212
Minority interests 1 1 1
Profit for the period 1,776 1,053 2,213
Earnings per share (in pence)
Continuing operations
From operating profit, based on longer-term investment returns, after related tax 39.4p 29.3p 62.1p
and minority interests
Adjustment from post-tax longer-term investment returns to post-tax actual 7.0p 1.7p 21.8p
investment returns (after minority interests)
Adjustment for mark to market value movements on core borrowings 4.6p 7.0p 3.5p
Adjustment for post-tax effect of shareholders' share of actuarial gains and 3.7p 7.2p 6.0p
losses on defined benefit pension schemes
Adjustment for post-tax effect of changes in economic assumptions and time value 8.2p (0.1)p 2.6p
of cost of options and guarantees
Based on profit from continuing operations after minority interests 62.9p 45.1p 96.0p
Discontinued operations
Based on profit (loss) from discontinued operations after minority interests 9.9p (1.3)p (4.3)p
Based on profit for the period after tax and minority interests 72.8p 43.8p 91.7p
Average number of shares (millions) 2,437 2,403 2,413
Dividends per share (in pence)
Dividends relating to the reporting period:
Interim dividend (2007 and 2006) 5.70p 5.42p 5.42p
Final dividend (2006) - - 11.72p
Total 5.70p 5.42p 17.14p
Dividends declared and paid in the 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
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
OPERATING PROFIT FROM CONTINUING OPERATIONS BASED ON LONGER-TERM INVESTMENT
RETURNS*
Half Year Half Full Year
2007 Year 2006
2006
Results Analysis by Business Area £m £m £m
UK Operations
New business 108 138 266
Business in force 354 198 420
Long-term business 462 336 686
M&G 140 100 204
Total 602 436 890
US Operations
New business 144 134 259
Business in force 200 212 449
Long-term business 344 346 708
Broker-dealer and fund management 9 8 18
Curian (2) (4) (8)
Total 351 350 718
Asian Operations
New business 282 232 514
Business in force 211 127 315
Long-term business 493 359 829
Fund management 33 22 50
Development expenses (6) (7) (15)
Total 520 374 864
Other Income and Expenditure
Investment return and other income 13 18 8
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 (5) (5) (10)
Total (147) (141) (298)
UK restructuring costs 0 (12) (41)
Operating profit from continuing operations based on longer-term investment 1,326 1,007 2,133
returns
Analysed as profits (losses) from:
New business 534 504 1,039
Business in force 765 537 1,184
Long-term business 1,299 1,041 2,223
Asia development expenses (6) (7) (15)
Other operating results 33 (15) (34)
UK restructuring costs 0 (12) (41)
Total 1,326 1,007 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 on ordinary activities and basic earnings per share include these items
together with actual investment returns. This basis of presentation has been
adopted consistently throughout this interim report.
For half year 2007, the EEV basis operating profit from continuing operations
based on longer-term investment returns before tax of £1,326m includes a credit
of £92m that arises from including the benefits, grossed up for notional tax, of
altered corporate tax rates for the UK, Singapore and China. Further details are
explained in note 7 to the EEV basis supplementary information.
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.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
MOVEMENT IN SHAREHOLDERS' EQUITY (excluding minority interests)
Half Half Full
Year Year Year
2007 2006 2006
£m £m £m
Profit for the period attributable to equity holders of the Company 1,775 1,052 2,212
Items taken directly to equity:
Exchange movements (65) (217) (359)
Unrealised valuation movements on Egg securities classified as available-for-sale (2) (4) (2)
Movement on cash flow hedges (3) 4 7
Related tax (11) (39) (74)
Dividends (288) (267) (399)
Acquisition of Egg minority interests - (167) (167)
New share capital subscribed 117 253 336
Reserve movements in respect of share-based payments 9 6 15
Treasury shares:
Movement in own shares in respect of share-based payment plans 11 9 6
Movement on Prudential plc shares purchased by unit trusts consolidated under IFRS 1 1 0
Mark to market value movement on Jackson assets backing surplus and required capital* (15) - 7
Net increase in shareholders' equity 1,529 631 1,582
Shareholders' equity at beginning of period (excluding minority interests) 11,883 10,301 10,301
Shareholders' equity at end of period (excluding minority interests) 13,412 10,932 11,883
Comprising:
UK Operations:
Long-term business 6,308 5,370 5,813
M&G:
Net assets 287 273 230
Acquired goodwill 1,153 1,153 1,153
Egg - 360 292
7,748 7,156 7,488
US Operations 3,544 3,379 3,360
Asian Operations:
Net assets 3,012 2,159 2,637
Acquired goodwill 172 172 172
Holding company net borrowings (at market value) (811) (1,558) (1,542)
Other net liabilities (253) (376) (232)
Shareholders' equity at end of period (excluding minority interests) 13,412 10,932 11,883
Representing shareholders' equity for:
Long-term business operations 12,690 10,756 11,664
Other operations 722 176 219
13,412 10,932 11,883
* The mark to market value movement on Jackson assets backing surplus and
required capital for full year 2006 represents the cumulative adjustment as at
31 December 2006.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
SUMMARISED CONSOLIDATED BALANCE SHEET
30 Jun 30 Jun 31 Dec
2007 2006 2006
£m £m £m
Total assets less liabilities, excluding insurance funds 189,436 175,456 183,130
Less insurance funds:*
Policyholder liabilities (net of reinsurers' share) and unallocated (183,531) (170,407) (177,642)
surplus of with-profits funds
Less shareholders' accrued interest in the long-term business 7,507 5,883 6,395
(176,024) (164,524) (171,247)
Total net assets 13,412 10,932 11,883
Share capital 123 121 122
Share premium 1,823 1,808 1,822
IFRS basis shareholders' reserves 3,959 3,120 3,544
Total IFRS basis shareholders' equity 5,905 5,049 5,488
Additional EEV basis retained profit 7,507 5,883 6,395
Shareholders' equity (excluding minority interests) 13,412 10,932 11,883
*Including liabilities in respect of insurance products classified as investment
contracts under IFRS 4.
Net asset value per share (in pence)
Based on EEV basis shareholders' equity of £13,412m (£10,932m, £11,883m) 545p 450p 486p
Number of issued shares at end of reporting period (millions) 2,460 2,430 2,444
This information is provided by RNS
The company news service from the London Stock Exchange
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