SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of August, 2007
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
LAURENCE POUNTNEY HILL,
LONDON, EC4R 0HH, ENGLAND
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82-
Enclosures: 2007 Interim Results
Embargo: 07.00 Wednesday 1 August 2007
PRUDENTIAL PLC 2007 INTERIM RESULTS
- Total EEV operating profit from continuing operations GBP1,326 million, up 39%
- Total IFRS operating profit from continuing operations GBP601 million, up
27%
- New business APE GBP1,334 million, up 12%; PVNBP GBP9.7 billion, up 4%
- New business profit GBP534 million, up 12%
- Asset management profit GBP180 million, up 45%
- EEV shareholders' funds GBP13.4 billion, up 13% (end 2006 GBP11.9 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 GBP619 million APE, and new business profit up 31 per cent to
GBP282 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 GBP2.2 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 GBP1.7 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 GBP7
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 GBP1,326 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 GBP601 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 GBP527 million from the sale of Egg.
In addition, the already robust regulatory capital surplus of the Group was
improved by around GBP300 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 GBP619 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
GBP282 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 GBP106 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
GBP2.2 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 GBP1.7 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
GBP195 million by 2010. By the end of 2007 we will have taken all of the actions
to secure GBP115 million of the announced savings, and we are making good
progress in determining the approach we will take to deliver the remaining GBP80
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 GBP5 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 GBP1.7 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 GBP63 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 GBP1.3 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 GBP256 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
GBPm GBPm GBPm
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 GBP13.4bn GBP10.9bn GBP11.9bn
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 GBP715m GBP449m GBP874m
Basic earnings per share 29.3p 18.7p 36.2p
Shareholders' equity, excluding minority interests GBP5.9bn GBP5.0bn GBP5.5bn
Half Year Half Year Full Year
2007 2006 2006
Supplementary IFRS basis information
Operating profit from continuing operations based on longer-term investment GBP601m GBP498m GBP1,050m
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 GBP256bn GBP238bn GBP251bn
* Basis of preparation
Results bases
The EEV basis results have been prepared in accordance with the European
Embedded Value Principles issued by the CFO Forum of European Insurance
Companies in May 2004. 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 GBP1,326m includes a
credit of GBP92m 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
GBPm GBPm % GBPm %
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
GBP1.3 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 GBP9.7 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 GBP25 billion, up 55% per cent on the first
half of 2006 at CER. Net investment sales of GBP5 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
GBP57.2 billion at 31 December 2006, to GBP63.2 billion at 30 June 2007,
reflecting net investment flows of GBP5 billion and net market and other
movements of positive GBP1 billion.
At 30 June 2007, total funds under management were GBP256 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 GBPm GBPm % GBPm %
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 GBP1,326 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 GBP534 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 GBP765 million. In aggregate, net
assumption changes were GBP95 million positive of which GBP92 million relates to
lower tax rates in the UK and Asia. Experience variances and other items were
GBP53 million positive. At RER, in-force profit was up 42 per cent.
Asia's development expenses (excluding the regional head office expenses) were
GBP6 million, (2006 H1: GBP7 million at CER).
Results from the fund management business were GBP180 million (2006 H1: GBP124
million), up 45 per cent on the first half of 2006 at CER.
Other income and expenditure totalled a net expense of GBP147 million compared
with GBP141 million in the first half of 2006 at RER. This result includes GBP17
million of costs for the Asia head office (2006 H1: GBP19 million at RER); GBP50
million for the Group head office costs (2006 H1: GBP46 million); and net
interest expense on central borrowings and other items of negative GBP80 million
(2006 H1: GBP76 million).
EEV basis profit before tax and minority interests from continuing operations
Half year Half year
RER
2007 2006
GBPm GBPm
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 GBP2,080
million up 41 per cent on the first half of 2006.
This reflects in part an increase in operating profit from GBP1,007 million in
the first six months of 2006 to GBP1,326 million for the same period in 2007.
The profit before tax also includes GBP241 million in short-term fluctuations in
investment returns (2006 H1: GBP73 million), positive changes in economic
assumptions of GBP253 million (2006 H1: negative GBP42 million) and the effect
of change in time value of options and guarantees of positive GBP22 million
(2006 H1: positive GBP22 million).
The UK long-term business component of short-term fluctuations in investment
returns of GBP97 million (2006 H1: GBP34 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 GBP68
million include a net positive GBP30 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 GBP38 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
GBP54million, compared to negative GBP34 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 GBP125 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 GBP253 million in the first six months
of 2007 compared with negative economic assumption changes of GBP42 million in
the same period in 2006. Economic assumption changes in the first half of 2007
comprised positive GBP281 million in the UK, negative GBP46 million in the US
and positive GBP18 million in Asia.
In the UK, economic assumption changes of positive GBP281 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 GBP46 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 GBP18 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
GBP22 million for the half year (2006 H1: positive GBP22 million), consisting of
GBP15 million, GBP8 million and negative GBP1 million for the UK, the US and
Asia, respectively.
The mark to market movement on core borrowings was a positive GBP113 million
(2006 H1: positive GBP168 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
GBPm GBPm
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
GBP1,775 million (2006 H1: GBP1,052 million). The tax charge of GBP545 million
compares with a tax charge of GBP387 million in the first half of 2006. Minority
interests in the Group results were GBP1 million (2006 H1: GBP1 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 GBP2,080 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 GBP575 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 GBP527 million. The reduction from the GBP575 million
noted above primarily reflects the post-tax loss of Egg Banking plc from 1
January 2007 to the date of sale of GBP49 million. The profit on sale was GBP290
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 GBPm GBPm % GBPm %
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
GBP601 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 GBP251 million in the first half of 2007. This reflected a 15 per cent
increase in profits attributable to the with-profits business to GBP195 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 GBP218 million, up 7
per cent from GBP203 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 GBP14 million (2006 H1: GBP16 million at CER), net of
DAC amortisation.
Prudential Corporation Asia's IFRS operating profit for long-term business,
before development expenses of GBP6 million, was GBP76 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 GBP17 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 GBP65
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 GBP70-90 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 GBP140 million, an
increase of 40 per cent over the GBP100 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 GBP9 million, a 29 per cent increase on the first half of 2006 (2006 H1:
GBP7 million at CER). Curian recorded losses of GBP2 million in the first half
of 2007, down from GBP3 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 GBP33 million (2006 H1: GBP20 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
GBPm GBPm
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 GBP728 million,
compared with GBP737 million for the first half of 2006. The decrease reflects: an
increase in operating profit of GBP103 million; a decrease in short-term
fluctuations in investment returns, down GBP15 million from the first half of
2006; and a GBP97 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
GBPm GBPm
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 GBP715 million compared with GBP449
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 GBP575 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 GBP527 million. The reduction from the GBP575 million
noted above primarily reflects the post-tax loss of Egg Banking plc from 1
January 2007 to the date of sale of GBP49 million. The profit on sale was GBP290
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 GBP13.4 billion, an
increase of GBP1.5 billion from the 2006 year-end level of GBP11.9 billion at
RER. This 13 per cent increase primarily reflects: total EEV basis operating
profit of GBP1,326 million; a GBP241 million favourable movement in short-term
fluctuations in investment returns; a GBP275 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 GBP113 million; a
positive movement in the actuarial gains on the defined benefit pension schemes
of GBP125 million; GBP241 million from discontinued operations and GBP117
million from the issue of new share capital. These were offset by: a tax charge
of GBP545 million; the negative impact of GBP65 million for foreign exchange
movements, and dividend payments of GBP288 million made to shareholders.
The shareholders' funds at 30 June 2007 of GBP13.4 billion comprise GBP6.3
billion for the UK long-term business operations, GBP3.5 billion for the US
long-term business operations, GBP2.9 billion for the Asian long-term business
operations and GBP0.7 billion for other operations.
Within the embedded value for the Asian long-term business of GBP2.9 billion,
the established markets of Hong Kong, Singapore and Malaysia account for GBP2.2
billion of the embedded value, with Korea (GBP233 million) and Vietnam (GBP222
million) making further substantial contributions. Prudential's other markets,
excluding Taiwan, in aggregate account for GBP397 million of the embedded value.
Taiwan has a negative embedded value of GBP157 million. This is an improvement
from the reported negative GBP216 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 GBP134 million decrease in Taiwan's embedded value. A
similar one per cent positive shift in interest rates would increase embedded
value by GBP83 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 GBP90m. 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 GBP5.9 billion.
This compares with GBP5.5 billion at 31 December 2006 at RER. The increase
primarily reflects: profit after tax and minority interests of GBP715 million
and new share capital of GBP117 million, offset by the impact of negative
foreign exchange movements of GBP21 million, dividend payments to shareholders
of GBP288 million, and the impact of unrealised holding losses on available for
sale investments of GBP113 million.
Holding company cash flow
Half year Half year
2007 2006
GBPm GBPm
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 GBP422 million in cash remittances from
business units in the first half of 2007 (2006 H1: GBP389 million) comprising
the shareholders' statutory life fund transfer of GBP261 million from the UK
business, and remittances of GBP86 million and GBP75 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 GBP117 million, in respect of the
2006 final dividend. After net dividends and interest paid, there was a cash
inflow of GBP179 million (2006 H1: GBP50 million).
During the first six months of 2007, the Group holding company paid GBP30
million (2006 H1: GBP24 million) in respect of corporate activities and received
GBP24 million (2006 H1: GBP88 million) in respect of relief on taxable losses.
The Group invested GBP139 million (2006 H1: GBP208 million) in its business
units, comprising GBP69 million in its UK operations and GBP70 million in Asia.
In the first half of 2007, Asia contributed a net remittance of GBP16 million to
the Group holding company cash flow.
In addition, the Group received GBP527 million from the disposal of Egg (net of
expenses).
In aggregate this gave rise to an increase in cash of GBP561 million (2006 H1:
GBP94 million decrease). Excluding the Egg sale proceeds, cash increased by
GBP34 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 GBP160 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 GBP160 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 GBP900 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
GBPm GBPm GBPm
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 GBP115 million is on schedule to be achieved by the end of 2007.
An update on the second phase (GBP80 million) will be given in the fourth
quarter of 2007
Retail APE sales of GBP358 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 GBP363 million, a decrease of 25 per cent year-on-year. However,
the first half of 2006 included two large back book annuity deals totalling
GBP128 million and also GBP31 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 GBP2.9 billion compared with GBP4.2 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 GBP140 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 GBP67 million
of new loans advanced to customers in the first 6 months of 2007. This
represents a 123 per cent increase on the GBP30 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 GBP17 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 GBP6.7 million compared with GBP15.7 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 GBP124 million, a rise of 28 per cent on
the GBP97 million written in the first half of 2006. Sales of the
shareholder-backed defined contribution proposition grew to GBP40 million, while
sales of the legacy DC and AVCs grew 16 per cent to GBP71 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 GBP32 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 GBP115 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 GBP108 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 GBP462
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
GBP59 million reflects a higher opening embedded value and increases in risk
discount rates.
Changes to operating assumptions of GBP68 million included a benefit of GBP67
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 GBP115 million of
annual savings (of the total of GBP195 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 GBP30 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 GBP251 million increased by 22 per cent. This reflected a 15 per
cent increase in profits attributable to the with-profits business, to GBP195
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 GBP9.5 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 GBP4 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 GBP1.7 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 GBP195 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 GBP60 million. A decision on the option selected to deliver the further
GBP80 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
GBP115 million of this annual target which is already reflected in the current
assumptions.
Total restructuring costs of GBP 57 million have been incurred in 2006 in
respect of the annual GBP115 million savings target (GBP 34 million of the costs
related to shareholders on an EEV basis). Further costs of approximately GBP18
million are expected to be incurred by the end of 2007, bringing the total cost
to approximately GBP75 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
GBPm GBPm GBPm
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 GBP352
million, up 20 per cent on last year with strong new business profit margins at
41 per cent. PVNBP sales were GBP3.5 billion.
Jackson again delivered record variable annuity sales of GBP2.2 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 GBP39.8 billion in US GAAP assets, an
increase of GBP2.7 billion at CER compared to 2006 year end and up from GBP35.2
billion 12 months ago. Total assets include GBP13.6 billion in the separate
accounts that back the variable portion of variable life and annuity contracts,
an increase of GBP2.5 billion compared to the 2006 year-end and up from GBP8.8
billion 12 months ago, further diversifying Jackson's earnings towards fee-based
income. At 30 June 2007, Jackson's investment portfolio of GBP23.3 billion
included asset-backed securities with a total of GBP252 million exposure to sub
prime residential mortgages, including GBP8 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 GBP22 million.
Fixed annuity APE sales increased 4 per cent to GBP29 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 GBP67 million, a market in which Jackson participates
on an opportunistic basis, were up 14 per cent from the prior year.
New business profit of GBP144 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 GBP344 million compared to GBP316 million in the prior year at
CER. In-force EEV profits of GBP200 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 GBP53 million is broadly in line with that of prior year (GBP55
million at CER) and includes GBP23 million of non-recurring items (2006: GBP28
million at CER).
Jackson IFRS operating profit was GBP218 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
GBPm GBPm GBPm
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 GBP619 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 GBP211 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 GBP34 million
primarily following corporation tax changes in Singapore and China. On the IFRS
basis operating profits for the half year of GBP76 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 GBP16 million capital in the first half of 2007 from Asia
after including injections totalling GBP40 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 GBP47 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 GBP11
million of surplus capital.
In China, growth remains on track at 57 per cent with APE of GBP22 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 GBP83 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 GBP17 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 GBP16 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 GBP413m 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
GBPm GBPm GBPm
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 GBP168
billion of funds under management, of which GBP119 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 GBP140 million compared to the same period last year. Underlying
profits, excluding PRF, were GBP127 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 GBP5 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 GBP13 million, an increase of
51 per cent on last year.
Strong fund performance led to record gross fund inflows of GBP7.5 billion, up
11 per cent on the same period last year. Net fund inflows of GBP3.4 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 GBP49 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 GBP4.5 billion, up 26 per cent on the first half last year. Net fund inflows
in the first six months were GBP1.7 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 GBP3.0 billion and net inflows fell 13 per
cent to GBP1.6 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
GBPm GBPm GBPm
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 GBP1.7 billion were up 4 per cent on the same period in 2006. Of the
GBP1.7 billion in net inflows, GBP1.3 billion was in longer term equity and
fixed income products and GBP0.4 billion was in shorter term money market funds.
Third party funds under management in Asia at the half year were GBP14.6
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
GBP50 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 GBP210 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 GBP1.9
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 GBP32.8 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 GBP33 million (2006 H1: GBP20 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 (GBPbn)
Fund Management (PPMA) 39 35 11% 38 3%
Curian 1.5 1.0 50% 1.1 36%
Total IFRS operating profit (GBPm)
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 GBP0.5 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 GBP4 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 GBP5 million.
NPH, which is a network of four independent broker-dealers, increased product
sales to GBP3.5 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 GBP2 million in the first
half compared to losses of GBP3 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 GBP1.5 billion of assets under management compared with
GBP1.2 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 GBP2,413 million, compared with GBP2,612 million at the end of 2006
(excluding Egg). This decrease reflected repayment of the GBP150 million 9.375%
guaranteed bonds, exchange translation gains of GBP23 million and other
adjustments of GBP26 million.
After adjusting for holding company cash and short-term investments of GBP1,546
million, net core structural borrowings at 30 June 2007 were GBP867 million.
This compared with GBP1,493 million at 31 December 2006, mainly reflecting the
net cash inflow of GBP561 million (including GBP527 million net proceeds from
the sale of Egg) and exchange translation gains of GBP30 million.
Core structural borrowings at 30 June 2007 included GBP1,470 million at fixed
rates of interest with maturity dates ranging from 2009 to perpetuity. GBP841
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 GBP95 million, US$3,517 million and EUR212
million has been issued under this programme. Prudential also has in place a
GBP5,000 million medium-term note (MTN) programme. At 30 June 2007, subordinated
debt outstanding under this programme was GBP435 million and EUR520 million, and
senior debt outstanding was EUR65 million, US$12 million and GBP5 million. In
addition, the holding company has access to GBP1,600 million committed revolving
credit facilities, provided by sixteen major international banks, and a GBP500
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 GBP300
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 GBP1 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
GBPm GBPm GBPm
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 GBPm GBPm GBPm
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 GBP1,326m includes a
credit of GBP92m 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
GBPm GBPm GBPm
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
GBPm GBPm GBPm
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 GBP13,412m (GBP10,932m, GBP11,883m) 545p 450p 486p
Number of issued shares at end of reporting period (millions) 2,460 2,430 2,444
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
NOTES ON THE UNAUDITED EEV BASIS RESULTS
(1) Basis of preparation of results
The EEV basis results have been prepared in accordance with the EEV Principles
issued by the CFO Forum of European Insurance Companies in May 2004. Where
appropriate the EEV basis results include the effects of adoption of
International Financial Reporting Standards (IFRS).
The EEV results for the Group are prepared for 'covered business', as defined by
the EEV Principles. Covered business represents the Group's long-term insurance
business for which the value of new and in-force contracts is attributable to
shareholders. The EEV basis results for the Group's covered business are then
combined with the IFRS basis results for the Group's other operations.
The definition of long-term business operations is consistent with previous
practice and comprises those contracts falling under the definition of long-term
insurance business for regulatory purposes together with, for US Operations,
contracts that are in substance the same as guaranteed investment contracts
(GICs) but do not fall within the technical definition. Under the EEV
Principles, the results for covered business incorporate the projected margins
of attaching internal fund management.
With two principal exceptions, covered business comprises the Group's long-term
business operations. The principal exceptions are for the closed Scottish
Amicable Insurance Fund (SAIF) and for the presentational treatment of the
financial position of two of the Group's defined benefit pension schemes. A very
small amount of UK group pensions business is also not modelled for EEV
reporting purposes.
SAIF is a ring-fenced sub-fund of the Prudential Assurance Company (PAC)
long-term fund, established by a Court approved Scheme of Arrangement in October
1997. SAIF is closed to new business and the assets and liabilities of the fund
are wholly attributable to the policyholders of the fund. In 2006, a bulk
annuity arrangement between SAIF and Prudential Retirement Income Limited
(PRIL), a shareholder-owned subsidiary, took place as explained in the notes to
the schedule of new business within this announcement. Reflecting the altered
economic interest for SAIF policyholders and Prudential shareholders, this
arrangement represents a transfer from long-term business of the Group that is
not 'covered' to business that is 'covered' with consequential effect on the EEV
basis results.
As regards the Group's defined benefit pension schemes, the surplus or deficit
attaching to the Prudential Staff Pension Scheme (PSPS) and Scottish Amicable
Pension scheme are excluded from the EEV value of UK Operations and included in
the total for Other Operations. The surplus and deficit amounts are partially
attributable to the PAC with-profits fund and shareholder-backed long-term
business and partially to other parts of the Group. In addition to the IFRS
surplus or deficit, the shareholders' 10 per cent share of the PAC with-profits
sub-fund's interest in the movement on the financial position of the schemes is
recognised for EEV reporting purposes.
The directors are responsible for the preparation of the supplementary
information in accordance with the EEV Principles.
The EEV basis results for the 2007 and 2006 half years are unaudited. The 2006
full year results have been derived from the EEV basis results supplement to the
Company's statutory accounts for 2006. The supplement included an unqualified
audit report from the auditors.
(2) Economic assumptions
(a) Deterministic assumptions
In most countries, the long-term expected rates of return on investments and
risk discount rates are set by reference to period end rates of return on cash
or fixed interest securities. This 'active' basis of assumption setting has been
applied in preparing the results of all the Group's UK and US long-term business
operations. For the Group's Asian operations, the active basis is appropriate
for business written in Japan, Korea and US dollar denominated business written
in Hong Kong.
An exception to this general rule is that for countries where long-term fixed
interest markets are less established, investment return assumptions and risk
discount rates are based on an assessment of longer-term economic conditions.
Except for the countries listed above, this basis is appropriate for the Group's
Asian Operations.
Expected returns on equity and property asset classes are derived by adding a
risk premium, also based on the long-term view of Prudential's economists in
respect of each territory, to the risk-free rate. In the UK and the US, the
equity risk premium is 4.0 per cent above risk-free rates for all periods for
which results are prepared in this report. In Asia, equity risk premiums range
from 3.0 per cent to 5.8 per cent for all periods for which results are prepared
in this report. Best estimate assumptions for other asset classes, such as
corporate bond spreads, are set consistently .
Assumed investment returns reflect the expected future returns on the assets
held and allocated to the covered business at the valuation date.
The table below summarises the principal financial assumptions:
30 Jun 30 Jun 31 Dec
2007 2006 2006
% % %
UK Insurance Operations
Risk discount rate:
New business 8.7 8.0 7.8
In force 8.6 8.2 8.0
Pre-tax expected long-term nominal rates of investment return:
UK equities 9.3 8.7 8.6
Overseas equities 9.6 to 8.7 to 8.6 to
10.6 9.4 9.3
Property 7.8 7.2 7.1
Gilts 5.3 4.7 4.6
Corporate bonds 6.0 5.4 5.3
Expected long-term rate of inflation 3.1 3.0 3.1
Post-tax expected long-term nominal rate of return for the with-profits fund:
Pension business (where no tax applies) 8.3 7.7 7.5
Life business 7.4 6.85 6.6
US Operations (Jackson)
Risk discount rate:
New business (note) 7.9 8.0 7.6
In force (note) 7.3 7.1 6.7
Expected long-term spread between earned rate and rate credited to
policyholders for single premium deferred annuity business 1.75 1.75 1.75
US 10 year treasury bond rate at end of period 5.1 5.2 4.8
Pre-tax expected long-term nominal rate of return for US equities 9.1 9.2 8.8
Expected long-term rate of inflation 2.4 2.7 2.5
Note: US Operations - risk discount rates
The risk discount rates at 30 June 2007 for new business and business in force
for US Operations reflect weighted rates based on underlying rates of 8.8% for
variable annuity business and 5.9% for other business. The increase in the
weighted discount rate for business in force from 31 December 2006 of 6.7% to 30
June 2007 of 7.3% reflects the increase in the US 10-year treasury bond rate and
the increasing proportion of variable annuity business.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
Economic assumptions (continued)
Asian Operations
Hong Kong Malaysia Singapore Taiwan
China (notes India Indonesia Japan Korea (notes Philippines (notes (notes Thailand Vietnam
iii,iv,v) iv,v) iv,v) ii,v)
30 Jun 2007 % % % % % % % % % % % %
Risk discount
rate:
New business 12.0 6.5 16.5 17.5 5.3 10.1 9.7 16.5 7.1 8.6 13.75 16.5
In force 12.0 6.7 16.5 17.5 5.3 10.1 9.3 16.5 6.3 9.3 13.75 16.5
Expected
long-term
rate of
inflation 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5
Government bond
yield 9.0 5.1 10.5 11.5 2.2 5.6 7.0 10.5 4.5 5.5 7.75 10.5
Hong Kong Malaysia Singapore Taiwan
China (notes India Indonesia Japan Korea (notes Philippines (notes (notes Thailand Vietnam
iii,iv,v) iv,v) iv,v) ii,v)
30 Jun 2006 % % % % % % % % % % % %
Risk discount
rate:
New business 12.0 6.6 16.5 17.5 5.3 9.7 9.5 16.5 6.7 8.9 13.75 16.5
In force 12.0 6.9 16.5 17.5 5.3 9.7 9.1 16.5 6.8 9.5 13.75 16.5
Expected
long-term
rate of
inflation 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5
Government bond
yield 9.0 5.3 10.5 11.5 2.1 5.2 7.0 10.5 4.5 5.5 7.75 10.5
Hong Kong Malaysia Singapore Taiwan
China (notes India Indonesia Japan Korea (notes Philippines (notes (notes Thailand Vietnam
iii,iv,v) iv,v) iv,v) ii,v)
31 Dec 2006 % % % % % % % % % % % %
Risk discount
rate:
New business 12.0 6.6 16.5 17.5 5.3 9.5 9.5 16.5 6.9 8.8 13.75 16.5
In force 12.0 6.8 16.5 17.5 5.3 9.5 9.2 16.5 6.9 9.3 13.75 16.5
Expected
long-term
rate of 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5
inflation
Government bond 9.0 4.7 10.5 11.5 2.1 5.0 7.0 10.5 4.5 5.5 7.75 10.5
yield
Asia total Asia total Asia total
30 Jun 30 Jun 31 Dec
2007 2006 2006
% % %
Weighted risk discount rate (note i)
New business 10.1 9.9 9.8
In force 8.7 8.9 8.8
Notes:
Asian Operations - economic assumptions
(i) The weighted risk discount rates for the Asian operations shown above have
been determined by weighting each country's risk discount rates by reference to
the EEV basis operating result for new business and the closing value of
in-force business.
(ii) For traditional business in Taiwan, the economic scenarios used to
calculate the half year 2007 EEV basis results continue to reflect the
assumption of a phased progression of the bond yields from the current rates
applying to the assets held to the long-term expected rates. The projections
assume that in the average scenario, the current bond yields of around 2.5 per
cent trend towards 5.5 per cent at 31 December 2013 (half year 2006: 2 per cent
towards 5.5 per cent at 31 December 2012, full year 2006: 2 per cent towards 5.5
per cent at 31 December 2013).
The projections for the Fund Earned Rate reflect the same approach as applied
for the full year 2006 results with allowance made for the mix of assets in the
fund, future investment strategy and further market depreciation of bonds held
as a result of assumed future yield increases. The projections for the Fund
Earned Rate alter for changes to these factors and the effects of movements in
interest rates from period to period.
After taking into account current bond yields, the assumption of the phased
progression in bond yields and the factors described above, the average assumed
Fund Earned Rate remains below 1.2 per cent until 2010 (due to the depreciation
of bond values as yields rise) and fluctuates around a target of 5.9 per cent
after 2013.
Consistent with EEV methodology, a constant discount rate has been applied to
the projected cash flows.
(iii) The assumptions shown are for US dollar denominated business which
comprises the largest proportion of the in-force Hong Kong business.
(iv) Assumed equity returns
The mean equity return assumptions for the most significant equity holdings in
the Asian Operations were:
30 Jun 30 Jun 31 Dec
2007 2006 2006
% % %
Hong Kong 9.1 9.2 8.7
Malaysia 12.8 12.8 12.8
Singapore 9.3 9.3 9.3
To obtain the mean, an average over all simulations of the accumulated return at
the end of the projection period is calculated. The annual average return is
then calculated by taking the root of the average accumulated return minus 1.
(v) For Hong Kong, Malaysia, Singapore and Taiwan, bond yields have been used in
setting the risk discount rates for half year 2007 reporting. For half year and
full year 2006, cash rates were used in setting the risk discount rates for
these operations.
(b) Stochastic assumptions
The economic assumptions used for the stochastic calculations are consistent
with those used for the deterministic calculations described above. Assumptions
specific to the stochastic calculations such as the volatilities of asset
returns reflect local market conditions and are based on a combination of actual
market data, historic market data and an assessment of longer-term economic
conditions. Common principles have been adopted across the Group for the
stochastic asset models, for example, separate modelling of individual asset
classes but with allowance for correlation between the various asset classes.
Details are given below of the key characteristics and calibrations of each
model.
UK Insurance Operations
- Interest rates are projected using a two-factor model calibrated to
actual market data;
- The risk premium on equity assets is assumed to follow a log-normal
distribution;
- The corporate bond return is calculated as the return on a zero-coupon
bond plus a spread. The spread process is a mean reverting stochastic process;
and
- Property returns are modelled in a similar fashion to corporate bonds,
namely as the return on a riskless bond, plus a risk premium, plus a process
representative of the change in residual values and the change in value of the
call option on rents.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
Economic assumptions (continued)
The rates to which the model has been calibrated are set out below.
Mean returns have been derived as the annualised arithmetic average return
across all simulations and durations.
Standard deviations have been calculated by taking the annualised variance of
the returns over all the simulations, taking the square root and averaging over
all durations in the projection. For bonds the standard deviations relate to the
yields on bonds of the average portfolio duration. For equity and property, they
relate to the total return on these assets. The standard deviations applied to
all periods presented in these statements are as follows:
%
Government bond yield 2.0
Corporate bond yield 5.5
Equities:
UK 18.0
Overseas 16.0
Property 15.0
US Operations (Jackson)
- Interest rates are projected using a log-normal generator calibrated
to actual market data;
- Corporate bond returns are based on Treasury securities plus a spread
that has been calibrated to current market conditions and varies by credit
quality; and
- Variable annuity equity and bond returns have been stochastically
generated using a regime-switching log-normal model with parameters determined
by reference to historical data. The volatility of equity fund returns ranges
from 19.2 per cent to 28.6 per cent, (half year 2006 and full year 2006: 18.6
per cent to 28.1 per cent) depending on risk class, and the volatility of bond
funds ranges from 1.4 per cent to 2.0 per cent for all periods presented in this
report.
Asian Operations
The same asset return model, as used in the UK, appropriately calibrated, has
been used for the Asian Operations.
The stochastic cost of guarantees are only of significance for the Hong Kong,
Malaysia, Singapore and Taiwan operations.
The mean stochastic returns are consistent with the mean deterministic returns
for each country. The volatility of equity returns ranges from 18 per cent to 25
per cent, (half year 2006: 18 per cent to 26 per cent, full year 2006: 18 per
cent to 25 per cent) and the volatility of government bond yields ranges from
1.4 per cent to 2.5 per cent (half year 2006: 1.2 per cent to 2.2 per cent, full
year 2006: 1.4 per cent to 2.5 per cent).
(3) Level of encumbered capital
In adopting the EEV Principles, the Company has based encumbered capital on its
internal targets for economic capital subject to it being at least the local
statutory minimum requirements. Economic capital is assessed using internal
models, but when applying EEV Principles, no credit is taken for the significant
diversification benefits that exist within the Group. For with-profits business
written in a segregated life fund, as is the case in the UK and Asia, the
capital available in the fund is sufficient to meet the encumbered capital
requirements.
The table below summarises the level of encumbered capital as a percentage of
the relevant statutory requirement.
Capital as a percentage of relevant statutory requirement
UK Insurance Operations 100% of EU Minimum
Jackson 235% of Company Action Level
Asian Operations 100% of Financial Conglomerates Directive requirement
(4) Margins on new business premiums
New Business Premiums Annual Present Pre-Tax New New Business Margin
premium value of Business
equivalent New
Business
Premiums
Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP)
Half year 2007 GBPm GBPm GBPm GBPm GBPm % %
UK Insurance Operations 2,441 119 363 2,905 108 30 3.7
US Operations 3,425 9 352 3,490 144 41 4.1
Asian Operations 784 541 619 3,286 282 46 8.6
Total 6,650 669 1,334 9,681 534 40 5.5
New Business Premiums Annual Present Pre-Tax New New Business Margin
premium value of Business
equivalent New
Business
Premiums
Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP)
Half year 2006 GBPm GBPm GBPm GBPm GBPm % %
UK Insurance Operations 3,890 95 484 4,224 138 29 3.3
US Operations 3,146 8 323 3,209 134 41 4.2
Asian Operations 519 396 448 2,328 232 52 10.0
Total 7,555 499 1,255 9,761 504 40 5.2
New Business Premiums Annual Present Pre-Tax New New Business Margin
premium value of Business
equivalent New
Business
Premiums
Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP)
Full year 2006 GBPm GBPm GBPm GBPm GBPm % %
UK Insurance Operations 6,991 201 900 7,712 266 30 3.4
US Operations 5,964 17 614 6,103 259 42 4.2
Asian Operations 1,072 849 956 5,132 514 54 10.0
Total 14,027 1,067 2,470 18,947 1,039 42 5.5
New business margins are shown on two bases, namely the margins by reference to
Annual Premium Equivalents (APE) and the Present Value of New Business Premiums
(PVNBP). APEs are calculated as the aggregate of regular new business premiums
on an annualised basis and one-tenth of single new business premiums. PVNBPs are
calculated as equalling single premiums plus the present value of expected
premiums of new regular premium business allowing for lapses and other
assumptions made in determining the EEV new business contribution.
In determining the EEV basis value of new business written in the period the
policies incept, premiums are included in projected cash flows on the same basis
of distinguishing annual and single premium business as set out for statutory
basis reporting.
New business contributions represent profits determined by applying the economic
and non-economic assumptions applying at the end of the reporting period.
(5) UK Insurance Operations expense assumptions
The half year 2006 EEV basis financial statements included note disclosure which
explained that in determining the appropriate expense assumptions account had
been taken of the cost synergies that were expected to arise with some certainty
from the initiative announced in December 2005 from UK Insurance Operations
working more closely with Egg and M&G, and the effect of the end to end review
of the UK business which was underway at the time. The disclosure noted that the
half year 2006 basis results had been prepared on the same basis as the 2005
full year statements which had disclosed that without the anticipation of the
cost synergies there would have been a charge for altered expense assumptions of
approximately GBP55m.
On 29 January 2007 the Company announced the agreement to sell Egg Banking plc
to Citi. On 15 March 2007 the Company announced the actions necessary to
implement the reassessed plans in light of this transaction and additional
initiatives. In preparing the 2006 full year results, account was also taken of
the effect of expense savings that were expected to arise with some certainty.
Without this factor the effect on the full year 2006 results would have been a
charge of GBP44m for the net effect of revised assumptions in line with 2006
unit costs.
The half year 2007 results have been prepared using the same approach. Without
the anticipation of expense savings there would have been an additional charge
of GBP28m for the net effect of revised assumptions in line with half year 2007
unit costs.
(6) Taiwan - effect of altered economic assumptions and sensitivity of
results to future market conditions
For the half year 2007 results, as explained in note 2 (a), the expected
long-term bond yield has been maintained at 5.5 per cent to be achieved by 31
December 2013.
The sensitivity of the embedded value at 30 June 2007 of the Taiwan operation to
altered economic assumptions and future market conditions to:
(a) a 1 per cent increase or decrease in the projected long-term bond yield,
(including all consequential changes to investment returns for all classes,
market values of fixed interest assets and risk discount rates), is GBP83m and
GBP (134)m respectively; and
(b) a 1 per cent increase or decrease in the starting bond rate for the
progression to the assumed long-term rate is GBP92m and GBP(100)m respectively.
If it had been assumed in preparing the half year 2007 results that interest
rates remained at the current level of around 2.5% until 31 December 2008 and
the progression period in bond yields was delayed by a year so as to end on 31
December 2014, there would have been a reduction in the Taiwan embedded value of
GBP90m.
(7) Effect of changes in corporate tax rates
At 30 June 2007, a change to reduce the UK corporate tax rate from 30 per cent
to 28 per cent in 2008 had been substantively enacted in the legislative
process. Accordingly, the half year 2007 results incorporate the effects of this
change in projecting the tax cash flows attaching to in-force business. Under
the convention applied for EEV basis reporting, profits are generally determined
on a post-tax basis and then grossed up at the prevailing corporate tax rates to
derive pre-tax results. The effect of the change in the UK rate is to give rise
to a benefit to the value of business in force at 1 January 2007 of GBP48m.
After grossing up this amount for notional tax, the effect on the pre-tax
operating results based on longer-term investment returns for UK Insurance
Operations for half year 2007 is a credit of GBP67m.
Similar considerations apply to corporate tax rate changes in Singapore and
China giving rise to a benefit to the value of in-force business at 1 January
2007 of GBP20m. After grossing up this amount for notional tax, the effect on
the pre-tax operating results based on longer-term investment returns for Asian
Operations for half year 2007 is a credit of GBP25m.
(8) Short-term fluctuations in investment returns for half year 2006
comparative results
The analysis of the half year 2006 EEV basis results in this announcement
incorporates a reallocation of GBP41m from the amount shown for the effect of
changes in economic assumptions and time value of cost of options and guarantees
to the credit for short-term fluctuations in investment returns. The change,
which has no effect on operating profit or profit before tax relates to asset
related gains for Jackson and has been made to align with the full year 2006 and
current presentation.
(9) Holding company net borrowings (at market value)
Holding company net borrowings at market value comprise:
30 Jun 30 Jun 31 Dec
2007 2006 2006
GBPm GBPm GBPm
Central funds borrowings:
IFRS basis (2,289) (2,520) (2,485)
Mark to market value adjustment (68) (105) (176)
EEV basis (2,357) (2,625) (2,661)
Holding company* cash and short-term investments 1,546 1,067 1,119
Holding company net borrowings (811) (1,558) (1,542)
* Prudential plc and related finance subsidiaries
TOTAL INSURANCE AND INVESTMENT PRODUCTS NEW BUSINESS
INSURANCE PRODUCTS AND INVESTMENT PRODUCTS*
Insurance Products * Investment Products * Total
Half Year Half Full Half Half Full Half Half Full
2007 GBPm Year Year Year Year Year Year Year Year
2006 2006 2007 2006 2006 2007 2006 200
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
UK Operations 2,560 3,985 7,192 7,519 6,795 13,486 10,079 10,780 20,678
US Operations 3,434 3,154 5,981 19 - - 3,453 3,154 5,981
Asian Operations 1,325 915 1,921 17,471 10,027 20,408 18,796 10,942 22,329
Group Total 7,319 8,054 15,094 25,009 16,822 33,894 32,328 24,876 48,988
INSURANCE PRODUCTS - NEW BUSINESS PREMIUMS AND CONTRIBUTIONS *
Single Regular Annual Premium and Present Value of New
Contribution Business Premiums
Equivalents
Half Half Full Half Half Full Half Half Full Half Half Full
Year Year Year Year Year Year Year Year Year Year Year Year
2007 2006 2006 2007 2006 2006 2007 2006 2006 2007 2006 2006
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
UK Operations
Product Summary
Internal Vesting 687 615 1,341 - - - 69 62 134 687 615 1,341
annuities
Direct and 431 273 780 - - - 43 27 78 431 273 780
Partnership Annuities
Intermediated 282 247 592 - - - 28 25 59 282 247 592
Annuities
Total Individual 1,400 1,135 2,713 - - - 140 114 271 1,400 1,135 2,713
Annuities
Equity Release 67 30 89 - - - 7 3 9 67 30 89
Individual Pensions 18 10 21 - - - 2 1 2 20 10 21
Corporate Pensions 107 35 318 42 32 66 53 36 98 296 124 490
Unit Linked Bonds 138 213 388 - - - 14 21 39 138 213 388
With-Profit Bonds 114 54 139 - - - 11 5 14 114 54 139
Protection - 2 11 2 6 9 2 6 10 14 21 63
Offshore Products 205 361 540 2 - - 22 36 54 215 361 540
Total Retail 2,049 1,840 4,219 46 38 75 251 222 497 2,264 1,948 4,443
Retirement
Corporate Pensions 110 165 261 60 44 100 71 61 126 314 350 643
Other Products 100 134 232 13 13 26 23 26 49 145 175 347
DWP Rebates 129 161 161 - - - 13 16 16 129 161 161
Total Mature Life and 339 460 654 73 57 126 107 103 191 588 686 1,151
Pensions
Total Retail 2,388 2,300 4,873 119 95 201 358 325 688 2,852 2,634 5,594
Wholesale Annuities 38 1,278 1,431 - - - 4 128 143 38 1,278 1,431
Credit Life 15 312 687 - - - 1 31 69 15 312 687
Total UK Operations 2,441 3,890 6,991 119 95 201 363 484 900 2,905 4,224 7,712
Channel Summary
Direct and 1,151 993 2,543 106 81 174 221 180 428 1,567 1,288 3,133
Partnership
Intermediated 1,108 1,146 2,169 13 14 27 124 129 244 1,156 1,185 2,300
Wholesale 53 1,590 2,118 - - - 5 159 212 53 1,590 2,118
Sub-Total 2,312 3,729 6,830 119 95 201 350 468 884 2,776 4,063 7,551
DWP Rebates 129 161 161 - - - 13 16 16 129 161 161
Total UK Operations 2,441 3,890 6,991 119 95 201 363 484 900 2,905 4,224 7,712
US Operations
Fixed annuities 291 313 688 - - - 29 31 69 291 313 688
Fixed index annuities 220 293 554 - - - 22 29 55 220 293 554
Variable annuities 2,243 1,888 3,819 - - - 224 189 382 2,243 1,888 3,819
Life 3 4 8 9 8 17 10 9 18 68 67 147
Guaranteed Investment 133 310 458 - - - 13 31 46 133 310 458
Contracts
GIC - Medium Term 535 338 437 - - - 54 34 44 535 338 437
Notes
Total US Operations 3,425 3,146 5,964 9 8 17 352 323 614 3,490 3,209 6,103
Asian Operations
China 19 17 27 20 13 36 22 15 39 112 88 198
Hong Kong 199 139 355 54 42 103 74 56 139 493 360 933
India (Group's 26% 16 11 20 81 55 105 83 56 107 340 177 411
interest)
Indonesia 35 11 31 43 31 71 46 32 74 178 117 269
Japan 52 23 68 11 1 7 16 3 14 97 30 97
Korea 72 58 103 113 103 208 120 109 218 608 492 1,130
Malaysia 9 2 4 32 31 72 33 31 72 186 185 418
Singapore 306 205 357 30 29 72 61 49 108 484 391 803
Taiwan 63 47 92 136 74 139 142 79 148 711 421 743
Other 13 6 15 21 17 36 22 18 37 77 67 130
Total Asian 784 519 1,072 541 396 849 619 448 956 3,286 2,328 5,132
Operations
Group Total 6,650 7,555 14,027 669 499 1,067 1,334 1,255 2,470 9,681 9,761 18,947
INVESTMENT PRODUCTS - FUNDS UNDER MANAGEMENT *
1 Jan 2007 Gross Inflows Redemptions Market and other 30 June 2007
Movements
GBPm GBPm GBPm GBPm GBPm
UK Operations 44,946 7,519 (4,152) 311 48,624
US Operations - 19 (1) - 18
Asian Operations 12,253 17,471 (15,809) 665 14,580
Group Total 57,199 25,009 (19,962) 976 63,222
* The tables shown above are provided as an indicative volume measure of
transactions undertaken in the reporting period that have the potential to
generate profits for shareholders. The amounts shown are not, and not intended
to be, reflective of premium income recorded in the IFRS income statement.
Annual premium and contribution equivalents are calculated as the aggregate of
regular new business amounts and one tenth of single new business amounts. New
business premiums for regular premium products are shown on an annualised basis.
Department of Work and Pensions rebate business is classified as single
recurrent business. Internal vesting business is classified as new business
where the contracts include an open market option.
The format of the tables shown above is consistent with the distinction between
insurance and investment products as applied for previous financial reporting
periods. Products categorised as "insurance" refer to those classified as
contracts of long-term insurance business for regulatory reporting purposes,
i.e. falling within one of the classes of insurance specified in part II of
Schedule 1 to the Regulated Activities Order under FSA regulations.
The details shown above for insurance products include contributions for
contracts that are classified under IFRS 4 "Insurance Contracts" as not
containing significant insurance risk. These products are described as
investment contracts or other financial instruments under IFRS. Contracts
included in this category are primarily certain unit-linked and similar
contracts written in UK Insurance Operations and Guaranteed Investment Contracts
and similar funding agreements written in US Operations.
Investment products referred to in the table for funds under management above
are unit trust, mutual funds and similar types of retail fund management
arrangements. These are unrelated to insurance products that are classified as
"investment contracts" under IFRS 4, as described in the preceding paragraph,
although similar IFRS recognition and measurement principles apply to the
acquisition costs and fees attaching to this type of business.
The premiums for half year and full year 2006 for wholesale annuities for UK
Operations include GBP592m and GBP560m for a bulk annuity transaction with the
Scottish Amicable Insurance Fund (SAIF). SAIF is a closed ring-fenced sub-fund
of the PAC long-term fund established by a Court approved Scheme of Arrangement
in October 1997, which is solely for the benefit of SAIF policyholders.
Shareholders have no interest in the profits of this fund, although they are
entitled to investment management fees on this business. The full year 2006
amount is GBP32m different from the half year 2006 estimate due to refinements
to calculations under the reassurance arrangement between the internal funds.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
SUMMARY CONSOLIDATED INCOME STATEMENT
Half Year Half Year Full Year
2007 2006 2006
GBPm GBPm GBPm
Earned premiums, net of reinsurance 7,903 8,164 15,986
Investment income 8,250 4,918 17,128
Other income 1,094 934 1,917
Total revenue, net of reinsurance (note C) 17,247 14,016 35,031
Benefits and claims and movement in unallocated surplus of with-profits funds (14,315) (11,370) (28,421)
Acquisition costs and other operating expenditure (2,118) (1,658) (4,212)
Finance costs: Interest on core structural borrowings of shareholder-financed (88) (89) (177)
operations
Total charges (note C) (16,521) (13,117) (32,810)
Profit before tax* (note C) 726 899 2,221
Tax attributable to policyholders' returns 2 (162) (849)
Profit before tax attributable to shareholders (note D) 728 737 1,372
Tax expense (note E) (251) (415) (1,241)
Less: Tax attributable to policyholders returns (2) 162 849
Tax attributable to shareholders' profits (note E) (253) (253) (392)
Profit from continuing operations after tax 475 484 980
Discontinued operations (net of tax) (note M) 241 (34) (105)
Profit for the period 716 450 875
Attributable to:
Equity holders of the Company 715 449 874
Minority interests 1 1 1
Profit for the period 716 450 875
Earnings per share (in pence)
Basic (based on 2,437m, 2,403m and 2,413m shares respectively):
Based on profit from continuing operations attributable to the equity holders of 19.4p 20.0p 40.5p
the Company (note F)
Based on profit (loss) from discontinued operations attributable to the equity 9.9p (1.3)p (4.3)p
holders of the Company
29.3p 18.7p 36.2p
Diluted (based on 2,440m, 2,406m and 2,416m shares respectively):
Based on profit from continuing operations attributable to the equity holders of 19.4p 20.0p 40.5p
the Company (note F)
Based on profit (loss) from discontinued operations attributable to the equity 9.9p (1.3)p (4.3)p
holders of the Company
29.3p 18.7p 36.2p
Dividends per share (in pence)
Dividends relating to reporting period:
Interim dividend (2007 and 2006) (note G) 5.70p 5.42p 5.42p
Final dividend (2006) - - 11.72p
Total 5.70p 5.42p 17.14p
Dividends declared and paid in reporting period:
Current year interim dividend - - 5.42p
Final dividend for prior year 11.72p 11.02p 11.02p
Total 11.72p 11.02p 16.44p
* Profit before tax represents income net of post-tax transfers to unallocated
surplus of with-profits funds, before tax attributable to policyholders and
unallocated surplus of with-profits funds, unit-linked policies and
shareholders' profits.
The presentation of the half year and full year 2006 comparative results has
been adjusted to show Egg as a discontinued operation.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Period ended 30 June 2007
Share Share Retained Translation Available-for-sale Hedging Shareholders' Minority Total
capital premium earnings reserve securities reserve reserve equity interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Reserves
Profit for the period 715 715 1 716
Items recognised directly
in equity:
Exchange movements (21) (21) (21)
Movement on cash flow (3) (3) (3)
hedges
Unrealised valuation
movements on securities
classified as
available-for-sale:
Unrealised holding losses (289) (289) (289)
arising during the period
Less gains included in the (3) (3) (3)
income statement
(292) (292) (292)
Related change in 120 120 120
amortisation of deferred
income and acquisition
costs
Related tax (12) 59 1 48 48
Total items of income and (33) (113) (2) (148) (148)
expense recognised
directly in equity
Total income and expense 715 (33) (113) (2) 567 1 568
for the period
Dividends (288) (288) (288)
Reserve movements in 9 9 9
respect of share-based
payments
Change in minority (38) (38)
interests arising
principally from purchase
and sale of venture
investment companies and
property partnerships of
the PAC with-profits fund
and other consolidated
investment funds
Share capital and share
premium
New share capital 1 116 117 117
subscribed
Transfer to retained (115) 115
earnings in respect of
shares issued in lieu of
cash dividends
Treasury shares
Movement in own shares in 11 11 11
respect of share-based
payment plans
Movement on Prudential plc 1 1 1
shares purchased by unit
trusts consolidated under
IFRS
Net increase (decrease) in 1 1 563 (33) (113) (2) 417 (37) 380
equity
At beginning of period 122 1,822 3,640 (125) 27 2 5,488 132 5,620
At end of period 123 1,823 4,203 (158) (86) 0 5,905 95 6,000
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Period ended 30 June 2006
Share Share Retained Translation Available-for-sale Hedging Shareholders' Minority Total
capital premium earnings reserve securities reserve reserve equity interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Reserves
Profit for the period 449 449 1 450
Items recognised directly
in equity:
Exchange movements (134) (134) (134)
Movement on cash flow 4 4 4
hedges
Unrealised valuation
movements on securities
classified as
available-for-sale:
Unrealised holding losses (707) (707) (707)
arising during the period
Less gains included in the (3) (3) (3)
income statement
(710) (710) (710)
Related change in 311 311 311
amortisation of deferred
income and acquisition
costs
Related tax (39) 140 (1) 100 100
Total items of income and (173) (259) 3 (429) (429)
expenses recognised
directly in equity
Total income and expense 449 (173) (259) 3 20 1 21
for the period
Dividends (267) (267) (267)
Reserve movements in 6 6 6
respect of share-based
payments
Change in minority 7 7
interests arising
principally from purchase
and sale of venture
investment companies and
property partnerships of
the PAC with-profits fund
Acquisition of Egg (167) (167) (84) (251)
minority interests (note
K)
Share capital and share
premium
New share capital 2 251 253 253
subscribed
Transfer to retained (7) 7
earnings in respect of
shares issued in lieu of
cash dividends
Treasury shares
Movement in own shares in 9 9 9
respect of share-based
payment plans
Movement on Prudential plc 1 1 1
shares purchased by unit
trusts consolidated under
IFRS
Net increase (decrease) in 2 244 38 (173) (259) 3 (145) (76) (221)
equity
At beginning of period 119 1,564 3,236 173 105 (3) 5,194 172 5,366
At end of period 121 1,808 3,274 0 (154) 0 5,049 96 5,145
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Year ended 31 December 2006
Share Share Retained Translation Available-for-sale Hedging Shareholders' Minority Total
capital premium earnings reserve securities reserve reserve equity interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Reserves
Profit for the year 874 874 1 875
Items recognised directly
in equity:
Exchange movements (224) (224) (224)
Movement on cash flow 7 7 7
hedges
Unrealised valuation
movements on securities
classified as
available-for-sale:
Unrealised holding losses (210) (210) (210)
arising during the year
Less losses included in 7 7 7
the income statement
(203) (203) (203)
Related change in 75 75 75
amortisation of deferred
income and acquisition
costs
Related tax (74) 50 (2) (26) (26)
Total items of income and (298) (78) 5 (371) (371)
expense recognised
directly in equity
Total income and expense 874 (298) (78) 5 503 1 504
for the year
Dividends (399) (399) (399)
Reserve movements in 15 15 15
respect of share-based
payments
Change in minority 43 43
interests arising
principally from purchase
and sale of venture
investment companies and
property partnerships of
the PAC with-profits fund
and other consolidated
investment funds
Acquisition of Egg (167) (167) (84) (251)
minority interests (note
K)
Share capital and share
premium
New share capital 3 333 336 336
subscribed
Transfer to retained (75) 75
earnings in respect of
shares issued in lieu of
cash dividends
Treasury shares
Movement in own shares in 6 6 6
respect of share-based
payment plans
Movement on Prudential plc 0 0 0
shares purchased by unit
trusts consolidated under
IFRS
Net increase (decrease) in 3 258 404 (298) (78) 5 294 (40) 254
equity
At beginning of year 119 1,564 3,236 173 105 (3) 5,194 172 5,366
At end of year 122 1,822 3,640 (125) 27 2 5,488 132 5,620
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
SUMMARY CONSOLIDATED BALANCE SHEET
30 Jun 30 Jun 31 Dec
2007 2006 2006
GBPm GBPm GBPm
Assets
Intangible assets attributable to shareholders:
Goodwill 1,341 1,341 1,341
Deferred acquisition costs and acquired in-force value 2,693 2,697 2,497
of long-term business contracts
4,034 4,038 3,838
Intangible assets attributable to PAC with-profits fund
In respect of acquired subsidiaries for venture fund 1,145 978 830
and other investment purposes
Deferred acquisition costs 40 32 31
1,185 1,010 861
Total 5,219 5,048 4,699
Other non-investment and non-cash assets:
Property, plant and equipment 1,107 1,018 1,133
Reinsurers' share of policyholder liabilities 1,092 1,141 945
Deferred tax assets 675 423 1,012
Current tax recoverable 332 315 404
Accrued investment income 1,980 1,891 1,900
Other debtors 2,268 2,297 1,052
Total 7,454 7,085 6,446
Investments of long-term business, banking and other
operations:
Investment properties 14,149 13,682 14,491
Investments accounted for using the equity method 14 5 6
Financial investments:
Loans and receivables 5,441 12,795 11,573
Equity securities and portfolio holdings in 83,819 75,534 78,892
unit trusts
Debt securities 80,211 78,090 81,719
Other investments 6,737 3,930 5,401
Deposits 7,519 7,422 7,759
Total 197,890 191,458 199,841
Held for sale assets 286 94 463
Cash and cash equivalents 4,500 3,665 5,071
Total assets 215,349 207,350 216,520
Equity and liabilities
Equity
Shareholders' equity (note H) 5,905 5,049 5,488
Minority interests 95 96 132
Total equity 6,000 5,145 5,620
Liabilities
Banking customer accounts - 5,545 5,554
Policyholder liabilities and unallocated surplus of
with-profits funds:
Contract liabilities (including amounts in respect of 169,895 158,127 164,988
contracts classified as investment contracts under IFRS 4)
Unallocated surplus of with-profits funds 14,728 13,421 13,599
Total insurance liabilities 184,623 171,548 178,587
Core structural borrowings of shareholder-financed
operations:
Subordinated debt (other than Egg) 1,492 1,573 1,538
Other 921 1,082 1,074
2,413 2,655 2,612
Egg subordinated debt - 451 451
Total (note I) 2,413 3,106 3,063
Other borrowings:
Operational borrowings attributable to 2,605 5,994 5,609
shareholder-financed operations (note J)
Borrowings attributable to with-profits funds (note J) 2,122 2,042 1,776
Other non-insurance liabilities:
Obligations under funding, securities lending and sale 4,381 3,860 4,232
and repurchase agreements
Net asset value attributable to unit holders of 3,406 1,495 2,476
consolidated unit trusts and similar funds
Current tax liabilities 1,033 1,168 1,303
Deferred tax liabilities 3,624 2,714 3,882
Accruals and deferred income 477 476 517
Other creditors 2,029 2,216 1,398
Provisions 376 383 464
Other liabilities 2,260 1,658 1,652
Held for sale liabilities - - 387
Total 17,586 13,970 16,311
Total liabilities 209,349 202,205 210,900
Total equity and liabilities 215,349 207,350 216,520
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
SUMMARY CONSOLIDATED CASH FLOW STATEMENT
Half Year Half Year Full Year
2007 2006 2006
GBPm GBPm GBPm
Cash flows from operating activities
Profit before tax from continuing operations (note i) 726 899 2,221
Profit (loss) before tax from discontinued operations (including profit 222 (45) (150)
on sale) (note M)
Total profit before tax 948 854 2,071
Changes in operating assets and liabilities (note ii) 283 73 420
Other items (note ii) (767) (241) (282)
Net cash flows from operating activities 464 686 2,209
Cash flows from investing activities
Net cash flows from purchases and disposals of property and equipment (137) (280) (140)
Costs incurred on purchase of Egg minority interests (note K) - (6) (6)
Acquisition of subsidiaries, net of cash balances (note iii) (77) 15 (70)
Disposal of Egg, net of cash balances (notes iv and K) (538) - -
Disposal of other subsidiaries, net of cash balances (note iii) 157 80 114
Net cash flows from investing activities (595) (191) (102)
Cash flows from financing activities
Structural borrowings of the Group:
Shareholder-financed operations (note v):
Redemption (150) (1) (1)
Interest paid (104) (104) (204)
With-profits operations (note vi):
Interest paid - (9) (9)
Equity capital (note vii):
Issues of ordinary share capital 1 1 15
Dividends paid (171) (260) (323)
Net cash flows from financing activities (424) (373) (522)
Net (decrease) increase in cash and cash equivalents (555) 122 1,585
Cash and cash equivalents at beginning of period 5,071 3,586 3,586
Effect of exchange rate changes on cash and cash equivalents (16) (43) (100)
Cash and cash equivalents at end of period (note viii) 4,500 3,665 5,071
Notes
(i) Profit before tax represents income net of post-tax transfers to unallocated
surplus of with-profits funds before tax attributable to policyholders and
unallocated surplus of with-profits funds, unit-linked policies and
shareholders' profits. It does not represent profit before tax attributable to
shareholders.
(ii) The adjusting items to profit before tax include changes in operating
assets and liabilities and other items comprising adjustments in respect of
non-cash items, including operational interest receipts and payments, dividend
receipts and tax paid. The figure of GBP(767)m for other items at half year 2007
includes GBP(290)m in respect of the profit on sale of Egg, which is included in
the cash flows from investing activities in this statement, and tax paid of GBP
(361)m. The most significant elements of the adjusting items within changes in
operating assets and liabilities are as follows:
Half Year Half Year Full Year
2007 2006 2006
GBPm GBPm GBPm
Deferred acquisition costs (excluding changes taken directly (277) (462) (398)
to equity)
Other non-investment and non-cash assets (884) (873) 166
Investments (7,189) (2,618) (13,748)
Policyholder liabilities (including unallocated surplus) 7,181 4,105 13,540
Other liabilities (including operational borrowings) 1,452 (79) 860
Changes in operating assets and liabilities 283 73 420
(iii) Acquisitions and disposals of subsidiaries shown above include venture
fund and other investment subsidiaries of the PAC with-profits fund, as shown in
note K.
(iv) The amount of GBP(538)m in respect of the disposal of Egg, net of cash
balances shown above, represents the net sale proceeds of GBP527m less cash and
cash equivalents of GBP1,065m held by Egg and transferred on disposal.
(v) Structural borrowings of shareholder-financed operations consist of the core
debt of the parent company and related finance subsidiaries, Jackson surplus
notes and, in 2006, Egg debenture loans. Following the sale of Egg in May 2007,
these loans no longer form part of the Group's borrowings. Core debt excludes
borrowings to support short-term fixed income securities programmes and
non-recourse borrowings of investment subsidiaries of shareholder-financed
operations. Cash flows in respect of these borrowings are included within cash
flows from operating activities. In June 2007, borrowings of GBP150m were repaid
on maturity.
(vi) Structural borrowings of with-profits operations relate solely to the
GBP100m 8.5 per cent undated subordinated guaranteed bonds which contribute to
the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced
sub-fund of the PAC with-profits fund. Cash flows on other borrowings of
with-profits funds, which principally relate to venture fund investment
subsidiaries and other consolidated investment vehicles, are categorised as
operating activities in the presentation above.
(vii) Cash movements in equity capital exclude scrip dividends and share capital
issued in respect of the acquisition of Egg minority interests in 2006.
(viii) Of the cash and cash equivalents amounts reported above, GBP377m (half
year 2006: GBP388m; full year 2006: GBP437m) represents cash and cash
equivalents of the parent company and related finance subsidiaries.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE UNAUDITED IFRS BASIS RESULTS
A Basis of preparation and audit status
The Group's policy for preparing this interim financial information is to use
the accounting policies adopted by the Group in its last consolidated financial
statements, as updated by any changes in accounting policies it intends to make
in its next consolidated financial statements as a result of new or changed IFRS
that are already endorsed by the European Union (EU) and that are applicable or
available for early adoption for the next annual financial statements.
The IFRS basis results for the 2007 and 2006 half years are unaudited. The 2006
full year IFRS basis results have been derived from the 2006 statutory accounts.
The auditors have reported on the 2006 statutory accounts which have been
delivered to the Registrar of Companies. The auditors' report was (i)
unqualified, (ii) did not include reference to any matters to which the auditors
drew attention by way of emphasis without qualifying their report and (iii) did
not contain a statement under section 237(2) or (3) of the Companies Act 1985.
B Significant accounting policies
The accounting policies applied by the Group in these condensed consolidated
financial statements are the same as those previously applied in the Group's
consolidated financial statements for the year ended 31 December 2006.
C Segment disclosure
Half Year Half Year Full Year
2007 2006 2006
GBPm GBPm GBPm
Revenue
Long-term business 16,616 13,565 34,197
Broker-dealer and fund management 682 518 1,080
Unallocated corporate 90 71 38
Intra-group revenue eliminated on (141) (138) (284)
consolidation
Total revenue per income statement 17,247 14,016 35,031
Charges (before income tax attributable to policyholders and
unallocated surplus of long-term insurance funds)
Long-term business, including post-tax transfers to unallocated surplus of (16,076) (12,881) (32,162)
with-profits funds
Broker-dealer and fund management (479) (358) (797)
Unallocated corporate (107) (16) (135)
Intra-group charges eliminated on 141 138 284
consolidation
Total charges per income statement (16,521) (13,117) (32,810)
Revenue less charges (continuing
operations)
Long-term business 540 684 2,035
Broker-dealer and fund management 203 160 283
Unallocated corporate (17) 55 (97)
Profit before tax* 726 899 2,221
Tax attributable to policyholders' returns 2 (162) (849)
Profit before tax attributable to 728 737 1,372
shareholders
Tax attributable to shareholders' profits (253) (253) (392)
Profit from continuing operations after tax 475 484 980
Discontinued operations (net of tax)
Banking (note M) 241 (34) (105)
Profit for the period 716 450 875
* Profit before tax represents income net of post-tax transfers to unallocated
surplus of with-profits funds, before tax attributable to policyholders and
unallocated surplus of with-profits funds, unit-linked policies and
shareholders' profits.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE UNAUDITED IFRS BASIS RESULTS (CONTINUED)
D Supplementary analysis of profit from continuing operations before tax
attributable to shareholders
Half Year Half Year Full Year
2007 2006 2006
Results analysis by business area GBPm GBPm GBPm
UK Operations
UK insurance operations 251 205 500
M&G 140 100 204
Total 391 305 704
US Operations
Jackson 218 223 398
Broker-dealer and fund management 9 8 18
Curian (2) (4) (8)
Total 225 227 408
Asian Operations
Long-term business 76 88 189
Fund management 33 22 50
Development expenses (6) (7) (15)
Total 103 103 224
Other income and expenditure
Investment return and other income 42 33 58
Interest payable on core structural borrowings (88) (89) (177)
Corporate expenditure:
Group Head Office (50) (46) (83)
Asia Regional Head Office (17) (19) (36)
Charge for share-based payments for Prudential schemes (note iii) (5) (5) (10)
Total (118) (126) (248)
UK restructuring costs 0 (11) (38)
Operating profit from continuing operations based on longer-term 601 498 1,050
investment returns (note iv)
Short-term fluctuations in investment returns on shareholder-backed 24 39 155
business (note i)
Shareholders' share of actuarial gains and losses on defined benefit 103 200 167
pension schemes (note ii)
Profit from continuing operations before tax attributable to shareholders 728 737 1,372
(note iv)
(i) Short-term fluctuations in investment returns on shareholder-backed
business
GBPm GBPm GBPm
US Operations:
Movement in market value of derivatives (other than 36 93 34
equity-based) used for economic hedging purposes
Actual less longer-term investment returns for other items 25 9 20
Asian Operations (10) (36) 134
Other Operations (27) (27) (33)
24 39 155
(ii) Shareholders' share of actuarial gains and losses on defined benefit
pension schemes
GBPm GBPm GBPm
Actual less expected return on scheme assets* (178) (57) 156
Experience (losses) gains on liabilities (8) 0 18
Gains on changes of assumptions for scheme liabilities** 462 611 311
276 554 485
Less: amounts attributable to the PAC with-profits fund (173) (354) (318)
103 200 167
* The expected rate of return applied for half year 2007 was 5.9 per cent. The
shortfall of actual investment returns against expected returns in half year
2007 was due to the decrease in the value of corporate and government bonds
which more than offset the increase in the value of equity and property holdings
of the schemes.
** The gains on changes of assumptions for scheme liabilities primarily reflect
movements in yields on good quality corporate bonds. These yields are used to
discount the projected pension scheme benefit payments.
The discount rates applied for the Group's UK defined benefit schemes, and
reflected in the gains and losses shown above, are as follows:
#
30 June 2007 5.8%
31 December 2006 5.2%
30 June 2006 5.5%
31 December 2005 4.8%
(iii) Share-based payments
The charge for share-based payments for Prudential schemes is for the SAYE and
Group performance-related schemes.
(iv) Continuing operations - scope
The results for continuing operations shown above exclude those in respect of
discontinued banking operations. On 1 May 2007, the Company sold Egg Banking
plc. Accordingly, the presentation of the comparative results for half year and
full year 2006 has been adjusted from those previously published. Note M shows
the detailed results for the discontinued operations.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE UNAUDITED IFRS BASIS RESULTS (CONTINUED)
E Tax charge
The total tax charge of GBP251m for the half year 2007 (half year 2006: GBP415m;
full year 2006: GBP1,241m) comprises GBP37m (half year 2006: GBP231m; full year
2006: GBP698m) UK tax and GBP214m (half year 2006: GBP184m; full year 2006:
GBP543m) overseas tax. This tax charge comprises tax attributable to
policyholders and unallocated surplus of with-profits funds, unit-linked
policies and shareholders. The tax charge attributable to shareholders of
GBP253m for the half year 2007 (half year 2006: GBP253m; full year 2006:
GBP392m) comprises GBP95m (half year 2006: GBP106m; full year 2006: GBP142m) UK
tax and GBP158m (half year 2006: GBP147m; full year 2006: GBP250m) overseas tax.
The tax credit related to discontinued operations, which is all attributable to
shareholders, amounted to GBP19m (half year 2006: GBP11m; full year 2006:
GBP45m).
Amounts for deferred tax are determined using the current rate of tax or, where
substantively enacted through the legislative process, the prospective rate.
Accordingly, the deferred tax amounts for half year 2007 reflect the prospective
change for the main UK corporation tax rate from 30 per cent to 28 per cent
which is anticipated to be effective from 1 April 2008.
Half Half Full
Year 2007 Year Year 2006
2006
F Supplementary analysis of earnings per share from continuing operations (pence) (pence) (pence)
On operating profit based on longer-term investment returns after related tax 16.3p 14.0p 30.9p
and minority interests
Adjustment from post-tax longer-term investment returns to post-tax actual 0.1p 0.2p 4.8p
investment returns (after related minority interests)
Adjustment for post-tax shareholders' share of actuarial and other gains and 3.0p 5.8p 4.8p
losses on defined benefit pension schemes
On profit from continuing operations after tax and minority interests 19.4p 20.0p 40.5p
G Dividend
An interim dividend of 5.70p per share will be paid on 24 September 2007 to
shareholders on the register at the close of business on 17 August 2007. A
scrip dividend alternative will be offered to shareholders.
30 Jun 30 Jun 31 Dec
2007 2006 2006
H Shareholders' equity GBPm GBPm GBPm
Share capital 123 121 122
Share premium 1,823 1,808 1,822
Reserves 3,959 3,120 3,544
Total 5,905 5,049 5,488
30 Jun 30 Jun 31 Dec
2007 2006* 2006*
I Net core structural borrowings of shareholder-financed GBPm GBPm GBPm
operations
Core structural borrowings of shareholder-financed operations (per
consolidated balance sheet):
Central funds 2,289 2,520 2,485
Jackson 124 135 127
Total 2,413 2,655 2,612
Less: Holding company** cash and short-term investments (recorded (1,546) (1,067) (1,119)
within the consolidated balance sheet)
Net core structural borrowings of shareholder-financed operations 867 1,588 1,493
* Excluding Egg's borrowings
** Prudential plc and related finance subsidiaries
30 Jun 30 Jun 31 Dec
2007 2006 2006
J Other borrowings GBPm GBPm GBPm
Operational borrowings attributable to shareholder-financed
operations
Borrowings in respect of short-term fixed income securities 2,045 1,500 2,032
programmes
Non-recourse borrowings of investment subsidiaries managed by PPM 544 943 743
America
Borrowings in respect of banking operations 0 3,535 2,819
Other borrowings 16 16 15
Total 2,605 5,994 5,609
Borrowings attributable to with-profits funds
Non-recourse borrowings of venture fund investment subsidiaries 1,063 1,183 926
Non-recourse borrowings of consolidated investment vehicles 854 690 681
Subordinated debt of the Scottish Amicable Insurance Fund 100 100 100
Other borrowings (predominantly obligations under finance leases) 105 69 69
Total 2,122 2,042 1,776
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE UNAUDITED IFRS BASIS RESULTS (CONTINUED)
K Acquisitions and disposals
(i) Shareholder acquisitions and disposals - Egg
In the first half of 2006, the Company acquired the outstanding 21.7 per cent
minority interest in Egg, its UK banking business. The Company accounted for the
purchase of minority interests using the economic entity method. Accordingly,
GBP167m was charged to retained earnings in 2006 representing the difference
between the consideration paid and the share of net assets acquired.
On 29 January 2007, the Company announced that it had entered into a binding
agreement to sell Egg Banking plc to Citi. Under the terms of the agreement, the
consideration payable to the Company by Citi was GBP575m cash, subject to
adjustments to reflect any change in net asset value between 31 December 2006
and completion.
On 1 May 2007, the Company completed the sale. The consideration, net of
expenses, was GBP527m. The reduction from the GBP575m noted above primarily
reflects Egg's post tax operating loss of GBP49m for the period from 1 January
2007 to the date of sale, as shown in note M.
Cash and cash equivalents disposed of were GBP1,065m. Accordingly, the cash
outflow for the Group arising from the disposal of Egg, as shown in the summary
consolidated cashflow statement, was GBP538m.
(ii) PAC with-profits fund acquisitions
The PAC with-profits fund acquires a number of venture capital holdings through
PPM Capital and M&G in which the Group is deemed to have a controlling interest,
in aggregate with, if applicable, other holdings held by, for example, the
Prudential Staff Pension Scheme. There were two such acquisitions during the
period to 30 June 2007. These were acquisitions for:
- 78 per cent of the voting equity interest of Red Funnel, a ferry company, in
June 2007.
- 71 per cent of the voting equity interest of Orizon AG, an employment hiring
agency, in March 2007.
The results of the acquisitions have been included in the consolidated financial
statements of the Group commencing on the respective dates of acquisition. The
earnings contributed by these acquisitions to the income statement are
insignificant to the half year 2007 results and are reflected in the change in
the unallocated surplus of the with-profits fund. Shareholder results are
unaffected. Total consideration of GBP97m was paid in respect of the
acquisitions during the period to 30 June 2007. Cash and cash equivalents of
GBP20m were acquired.
(iii) PAC with-profits fund disposals
As at 31 December 2006, one venture subsidiary was classified as held for sale;
Pharmacia Diagnostics. The sale of this venture subsidiary was completed on 18
January 2007. Total cash consideration received was GBP179m. Goodwill of GBP138m
and cash and cash equivalents of GBP22m were disposed of. No other venture
subsidiaries were sold during the first half of 2007 or classified as held for
sale at 30 June 2007.
L 2006 half year comparative balance sheet
Minor presentational adjustments have been made for refinements to the
acquisition accounting for intangible assets of venture fund investment
subsidiaries of the PAC with-profits fund. These adjustments affect the carrying
value of goodwill and other intangible assets, with minor consequential effects
on some other balance sheet categories. Shareholders' profit and equity are
unaffected by these adjustments.
M Discontinued operations
Half year Half year Full Year
2007 2006 2006
GBPm GBPm GBPm
Pre-tax profit (loss) from discontinued operations
Egg results :
Operating loss based on longer-term investment returns for (68) (45) (157)
the period of ownership
Short-term fluctuations in investment - - 7
returns
Profit on sale of Egg Banking plc 290 - -
Total 222 (45) (150)
Tax
On Egg results :
Operating loss based on longer-term investment returns for 19 11 47
the period of ownership
Short-term fluctuations in investment - - (2)
returns
On profit on sale of Egg Banking plc 0 - -
Total 19 11 45
Profit (loss) from discontinued operations, net of tax 241 (34) (105)
Discontinued operations relate entirely to UK banking operations following the
sale on 1 May 2007 of Egg Banking plc to Citi. Note K(i) provides details of the
sale of Egg.
Independent review report by KPMG Audit Plc to Prudential plc
Introduction
We have been engaged by the Company to review the International Financial
Reporting Standards (IFRS) basis financial information for the six months ended
30 June 2007 set out on pages 10 to 20. We have read the other information
contained in the interim report and considered whether it contains any apparent
misstatements or material inconsistencies with the financial information.
This report is made solely to the Company in accordance with the terms of our
engagement to assist the Company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the Company those matters we are required to state to it
in this report and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than the Company
for our review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The interim report, including the IFRS financial information contained therein,
is the responsibility of, and has been approved, by the directors. The
directors are responsible for preparing the interim report in accordance with
the Listing Rules of the Financial Services Authority which require that the
accounting policies and presentation applied to the interim figures should be
consistent with those applied in preparing the preceding annual financial
statements except where any changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
Review of interim financial information issued by the Auditing Practices Board
for use in the United Kingdom. A review consists principally of making
enquiries of management and applying analytical procedures to the financial
information and underlying financial data and, based thereon, assessing whether
the accounting policies and presentation have been consistently applied unless
otherwise disclosed. A review excludes audit procedures such as tests of
controls and verification of assets, liabilities and transactions. It is
substantially less in scope than an audit performed in accordance with
International Standards on Auditing (UK and Ireland) and therefore provides a
lower level of assurance than an audit. Accordingly, we do not express an audit
opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the IFRS financial information as presented for the six months
ended 30 June 2007.
KPMG Audit Plc
Chartered Accountants
London
31 July 2007
Independent review report by KPMG Audit Plc to Prudential plc
Introduction
We have been engaged by the Company to review the European Embedded Value (EEV)
basis interim supplementary information for the six months ended 30 June 2007
set out on pages 2 to 9 ("the interim supplementary information").
The interim supplementary information has been prepared in accordance with the
EEV Principles issues in May 2004 by the CFO Forum using the methodology and
assumptions set out on pages 6 to 8. The interim supplementary information
should be read in conjunction with the Group's interim IFRS financial
information which is set out on pages 10 to 20.
We have read the other information contained in the interim report and
considered whether it contains any apparent misstatements or material
inconsistencies with the interim supplementary information.
This report is made solely to the Company in accordance with the terms of our
engagement. Our review has been undertaken so that we might state to the
Company those matters we have been engaged to state in this report and for no
other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company for our review work, for
this report, or for the conclusions we have reached.
Directors' responsibilities
The interim report, including the interim supplementary information contained
therein, is the responsibility of, and has been approved by, the directors. The
directors have accepted responsibility for preparing the interim supplementary
information in accordance with the EEV Principles and for determining the
assumptions used in the application of those principles.
Review work performed
We conducted our review having regard to Bulletin 1999/4 Review of interim
financial information issued by the Auditing Practices Board for use in the
United Kingdom. A review consists principally of making enquiries of management
and applying analytical procedures to the interim supplementary information and
underlying financial data and, based thereon, assessing whether the methodology,
assumptions and presentation have been consistently applied unless otherwise
disclosed. A review excludes audit procedures such as tests of controls and
verification of assets, liabilities and transactions. It is substantially less
in scope than an audit performed in accordance with International Standards on
Auditing (UK and Ireland) and therefore provides a lower level of assurance than
an audit. Accordingly, we do not express an audit opinion on the interim
supplementary information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the interim supplementary information as presented for the six
months ended 30 June 2007.
KPMG Audit Plc
Chartered Accountants
London
31 July 2007
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date 01 August 2007
PRUDENTIAL PUBLIC LIMITED COMPANY
By: /s/ Jon Bunn
Jon Bunn
Director of Public Relations