SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of March, 2006
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
LAURENCE POUNTNEY HILL,
LONDON, EC4R 0HH, ENGLAND
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82-
Enclosures: Full Year Results 2005
Embargo: 7.00am Thursday 16 March 2006
PRUDENTIAL PLC 2005 FULL YEAR RESULTS
Double-digit growth in all key performance measures
- Total EEV operating profit from continuing operations of GBP1,712 million,
up 33%
- New business APE of GBP2,146 million, up 15%; PVNBP of GBP16.8 billion, up
11%
- New business profit of GBP867 million, up 15%, with Group margin of 41%
- Total statutory profit from continuing operations of GBP957 million, up
36%
- EEV shareholders' funds up 20% to GBP10.3 billion
- Return on embedded value of 15.7% (2004: 13.4%*)
- Total net inflows for funds businesses of GBP5.2 billion, with external
funds under management of GBP46 billion, up 23%
- Full year dividend of 16.32 pence per share (2004: 15.84 pence per
share)
All figures compared to 2004 at constant exchange rates unless stated; * at
reported exchange rates
Commenting, Mark Tucker, Group Chief Executive said:
"Prudential has had a successful year across all its businesses, and we have
delivered double-digit growth in all our key performance measures, with total
statutory profit from continuing operations up 36% and total EEV profit up 33%.
These results demonstrate the progress we are making in developing compelling
positions in the world's leading retail financial services markets. We have
ambitious growth plans in place and I am confident in the outlook for the
Group's future prospects.
"I see tremendous scope to deliver increasing value for shareholders from each
individual business operation; and as a Group, we derive both financial
advantage and resilience from the diversity of our portfolio of businesses, and
the opportunities for collaboration between them.
"In the UK, we have three strong retail franchises in Prudential, Egg and M&G.
"Our UK Insurance business continued to develop its shareholder backed business
successfully and increased APE sales by 10% in the year to GBP900 million,
meeting its 14% target for internal rate of return on new business two years
early. Egg was successful in testing market conditions, improving its net
interest margin against a background of falling base rates and also lowering its
cost income ratio. M&G had an excellent year with record gross and net inflows,
strong profit growth and investment performance.
"In the US, Jackson National Life is a significant cash generative business with
competitive advantage in the key growth sectors in the market. JNL's strength in
variable annuities, its ability to bring products to market rapidly and its
positioning in advice-based distribution channels means it is very well placed
to take advantage of the significant retirement savings flows expected from the
"baby boomer" generation over the coming years.
"We have an unrivalled opportunity in the high growth and high profit markets of
Asia. Whilst continuing to focus on our programme of rapid expansion and profit
growth, we are also expecting the region to become cash positive in 2006, in
line with our previous predictions. We are maintaining momentum in the expansion
of our distribution capability. Our proprietary agent distribution force across
the region reached 170,000 in 2005 with particularly rapid expansion in agent
numbers in India and China.
"Our asset management businesses are providing very good cash flow generation
and have strong growth prospects, with the UK and Asia attracting increasing
volumes of third party funds. These businesses, together with PPMA, our US asset
management business, continued to support their own sales growth and add
significant value to the Group's insurance operations through their excellent
investment performance.
"We will grow by taking full advantage of our excellent positions in the world's
leading retail financial services markets, continuing to build momentum across
the Group and driving profitable growth and value for our shareholders."
Group Chief Executive Review
2005 was a successful year for Prudential.
The Group has continued to expand its insurance business strongly and our asset
management businesses have also had an excellent year.
Total group operating profit before tax, on a European Embedded Value ("EEV")
basis, was GBP1,712 million an increase of 33%. Statutory IFRS operating profit
before tax was up 36% at GBP957 million.
The continuing momentum of the Group can be seen in the growth of insurance
premium income in 2005 to GBP13.8 billion (2004: GBP12.2 billion) and funds
under management of GBP234 billion at the end of 2005 (2004: GBP197 billion).
New business sales in our insurance operations increased by 15% to GBP2,146
million on an APE basis and each of our regional operations achieved
double-digit growth. New business profits increased by 15% across the Group to
GBP867 million, and operating profit before tax on the insurance business on an
EEV basis increased by 30% to GBP1,743 million.
In our asset management businesses external funds under management increased to
GBP46 billion up 23%.
A final dividend of 11.02 pence per share has been recommended by the Board
bringing the full year dividend to 16.32 pence per share, an increase of 3% from
2004. The full year dividend is covered 1.7 times by post-tax IFRS profit after
minority interests. We intend to maintain our current dividend policy, with the
level of dividend growth being determined after considering the opportunities to
invest in those areas of our business offering attractive growth prospects, our
financial flexibility and the development of our statutory profits over the
medium to long-term.
Shareholders' funds, on an EEV basis, grew strongly to GBP10.3 billion at the
end of 2005 (2004: GBP8.6 billion) and the Group's return on embedded value was
15.7% (2004: 13.4%) at reported exchange rates.
In May 2005 I set up a team of senior executives with a brief to identify the
ambitions and business strategies best suited to maximise sustainable growth in
value for the Group's shareholders over the longer-term.
The key conclusions of the review were that:
-Demographic trends and the increasing concentration of wealth in the
hands of those approaching retirement or already retired presents a major
opportunity to establish the Group as a leading provider of 'financial
services for retirement' by playing to our strengths and areas of
competitive advantage.
-The Group is well positioned in markets that offer highly attractive
opportunities for strong organic growth over the next ten years.
-To exploit these opportunities fully we need to broaden our customer
proposition and product range to align them more closely with anticipated
retail financial sector profit pools.
-In addition we must complement our strong and important intermediary
links by expanding the proportion of revenue derived from direct customers;
and ensure that we build deep lifecycle relationships with our customers.
-We should also develop the global reach and profile of our excellent
asset management businesses.
Consistent with this strategy and to support closer workings between our UK
insurance business and Egg we announced the terms of an Offer to acquire the
21.7% of shares in Egg that the Group did not already own.
Each of our businesses has operational autonomy within its market and this is
critical to our success, since it is the key to our ability to tailor products
and services to meet local market needs. However the review also concluded that
there are material synergies that can be achieved through closer working across
the Group, consistent with our decentralised approach; and work is underway to
identify and capture these, for example by establishing a single global IT
infrastructure and support unit with expected cost savings of GBP20 - GBP25
million per annum.
Finally, the review concluded we must continue to enhance the effectiveness of
our capital management processes, to ensure that investment and capital
allocation decisions are focused on those areas of activity that will generate
the best returns to shareholders.
Prudential is developing compelling positions in the world's leading retail
financial services markets. I am confident of the outlook for the Group and we
aim to deliver significant profitable growth.
UK insurance and retail banking operations
The Prudential-branded UK Insurance business continued to develop its
shareholder backed business successfully and increased APE sales by 10% in the
year to GBP900 million. The internal rate of return on new business written in
the year was 14% meeting the target set for 2007 two years early.
We continued in 2005 to increase the scale of our annuity business and at the
same time reduce the average duration of the total book.
We have also continued to develop our product range in 2005. In October we
entered the lifetime mortgage market, a market that is set to grow rapidly to an
estimated GBP7 billion by 2008. Our innovative product has been designed with
the customer, adviser and regulator in mind and initial customer interest has
been encouraging. We have also made good progress in unit-linked and off-shore
bond sales which grew 31% and 15% respectively in the year.
The A-day proposals offer the opportunity to attract new business as customers
increase contributions and consolidate their pension arrangements. We have
already launched a new Flexible Retirement Plan and we will undertake a review
of our overall individual pensions offering during 2006. In addition, we have
established a unit to communicate directly with our existing pension customers.
The UK insurance business has a balanced distribution model with strong
positions across all major segments - IFA and multi-tie intermediaries, direct
marketing and telesales, Employee Benefit Consultants and a well developed
single-tie Partnership channel. We continued to make good progress in
diversifying distribution, reaching agreements with a range of providers
including Barclays, National Australia Bank, St. James' Place and with Royal
London to provide pension annuities for vesting Scottish Life policies.
In addition, we continued to be successful in gaining access to multi-ties in
the year. Prudential is in a strong position to benefit as the IFA market
changes over the next 18-24 months and recently achieved a "5 star" IFA service
rating for its investment products and "4 star" rating overall, demonstrating
strong progress in this important area.
In retail banking, Egg's UK operations delivered an underlying profit of GBP60
million (2004: GBP72 million). Egg was successful in testing market conditions
improving its net interest margin against a background of falling base rates and
also lowering its cost income ratio. There has been a general deterioration in
consumer credit conditions however, Egg's experience here has been substantially
better than the market average.
Following our decision to acquire the minority shareholding in Egg, we have
targeted annualised cost savings of GBP40 million across our UK operations by
2007. During 2006 we will undertake a further review of the cost base in these
operations. We also see opportunities for revenue synergies across our UK
brands' five million marketable customers.
Our central focus in the UK is to use the strong franchises that we have to
improve returns. We are targeting growth but also managing for value and we will
not commit capital if we do not see the individual product returns that we
require emerging over a reasonable timeframe.
US Insurance operations
Jackson National Life (JNL), the Group's US operation, is a significant cash
generative business with the market positioning to continue its strong track
record of profitable growth in the retirement market.
JNL continued to show strong growth in 2005 increasing new business sales by 13%
to GBP515 million APE with growth in variable annuities of 31%. Both the margin
and the internal rate of return on new business moved ahead strongly in the
year.
During the year JNL also successfully integrated the Life of Georgia book of
business acquired in May, transferring 1.5 million policies on to its low cost
flexible platform. We fully expect to beat the 12% return target for the
transaction.
JNL's strength in variable annuities, its ability to bring products to market
rapidly and its positioning in advice-based distribution channels means it is
very well placed to take advantage of the significant retirement savings flows
expected from the "baby boomer" generation over the coming years.
JNL's priorities are to continue to focus on developing their position in the
variable annuity market and to expand the business through bolt-on acquisitions
that meet targeted rates of return.
Asia insurance operations
Prudential has an unrivalled exposure and weighting to the high growth and high
profit markets of Asia. Prudential Corporation Asia saw new business on an APE
basis increase by 23% to GBP731 million with double-digit rates of growth
achieved in Korea, China, India, Singapore and Indonesia.
Profitability on new business and internal rates of return remain high and we
will continue to emphasise unit-linked products, which offer higher returns and
greater capital efficiency. Unit-linked products accounted for 63% of sales
across the region in 2005.
We are maintaining momentum in the expansion of our distribution capability.
Agency distribution is the dominant channel throughout the region and 75% of our
sales are from this source. Our proprietary agent distribution force across the
region reached 170,000 in 2005 with particularly rapid expansion in agent
numbers in India and China. We will continue to increase agent numbers in these
and other markets as the bedrock on which we build our market share and market
leadership positions. We will also maintain a clear focus on improving the
productivity of our agent force across the whole region, and this is
particularly significant for growth in those countries in which we have been
long established.
We see material scope to increase sales volumes through our 40 existing bank
distribution relationships and we intend to enter into new partnership
agreements. We shall also continue to access direct and broker channels as they
develop in individual markets.
As part of our global drive to attain new levels of cost efficiency, in Asia we
are developing a 'regional hub' basis for sharing back office servicing and call
centre facilities to leverage scale advantages beyond the reach of individual
business operations. In March 2005 the first regional hub, servicing the
Singapore and Malaysian life insurance operations, was launched. We have plans
to open an additional hub in China in the second half of 2006, where we already
have a regional IT development centre.
I am pleased to report that, whilst continuing our programme of rapid expansion
and profitable growth in Asia, we are also expecting the region to become cash
positive in 2006, in line with our previous predictions.
Asset Management
Operating profit before tax across our asset management businesses in the UK, US
and Asia increased to GBP195 million up 16%.
M&G in the UK had an excellent year with record gross and net inflows and strong
profit growth. In Asia, underlying growth in retail funds under management was
29%.
These businesses, together with PPMA, our asset management business in the US,
continued to support their own sales growth and add significant value to the
group's insurance operations through their excellent investment performance.
The priorities in asset management are to continue to target growth in external
funds under management by capitalising on a growth in demand for transparent
investment products, access to more global products, the continuing rise of open
architecture platforms and a rapidly expanding role for cross-border sales off a
common platform. We will create value through superior investment performance
and to capitalise on international opportunities through greater collaboration.
Balance Sheet and Capital Management
Improving capital efficiency is at the heart of the Group's commitment to
deliver sustainable increases in shareholder value and we will maintain a
rigorous approach to capital allocation and deployment.
As of the 16 March, we estimate that the Group's capital surplus at the end of
2005 on a regulatory basis, as measured by the Financial Conglomerates
Directive, was around GBP825 million little changed from the previous year. In
July, we took advantage of good market conditions in the US retail market to
raise $300 million of perpetual capital securities, which qualifies as Group
regulatory capital. The primary use of the proceeds will be to re-finance a
non-qualifying GBP150 million bond that matures in 2007.
The Group is confident that it has the capital and cash resources to fund its
planned organic growth.
In summary:
- The Group delivered strong results in 2005 across all its businesses
- We have compelling positions in the world's leading retail financial
services markets and the resources to capitalise on these
- In the UK, we have three excellent and profitable franchises in
Prudential, Egg and M&G on which to build for the future
- In the US, JNL is a significant cash generative business with the market
positioning for profitable growth in the retirement market. It has
competitive advantage in the sectors in which it chooses to operate; and
the ability to participate in market consolidation through bolt-on
acquisitions
- In Asia we have an unrivalled exposure to opportunities for life
insurance sales and profit growth across the region, whilst continuing our
programme of rapid expansion and profit growth. We are also expecting the
region to become cash positive in 2006
- Our asset management businesses have significant growth prospects and
are providing solid cash flow generation
There is tremendous scope to deliver increasing value for shareholders from each
individual business operation, and from the Group as a whole which derives both
financial advantage and resilience from the diversity of its portfolio of
businesses, and the opportunities for collaboration between them.
- ENDS -
Enquiries:
Media Investors / analysts
Jon Bunn 020 7548 3559 James Matthews 020 7548 3561
William Baldwin-Charles 020 7548 3719 Marina Novis 020 7548 3511
Joanne Doyle 020 7548 3708
Notes to Editor follow...
Notes to Editor
1. The results in this announcement are prepared on two bases, namely
International Financial Reporting Standards ('IFRS') and on the European
Embedded Value ('EEV') basis. The IFRS basis results form the basis of the
Group's financial statements. In preparing those statements the Company,
consistent with other financial institutions with banking businesses, has chosen
to adopt the standards IAS32, IAS39 and IFRS4 at 1 January 2005. To assist with
comparison of results additional supplementary information on a pro forma basis
has been provided that shows the 2004 results as if these standards had been
adopted by the Group's insurance operations from 1 January 2004.
The EEV basis results have been prepared in accordance with the principles
issued by the CFO Forum of European Insurance Companies in May 2004 and expanded
by the Additional Guidance on EEV disclosures published in October 2005. Where
appropriate the EEV basis results include the effects of IFRS.
Previously, the Group has reported supplementary information on the Achieved
Profits basis for its interim and full year financial reporting. The adoption of
EEV basis reporting in place of Achieved Profits basis reporting, reflects
developments through the CFO Forum to achieve a better level of consistency, an
improved embedded value methodology, and one which is applied by the major
European Insurance Companies in their financial reporting.
Period on period percentage increases are stated on a constant exchange rate
basis.
2. There will be a conference call today for wire services at 7.45am (GMT)
hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance
Director. Dial in telephone number: 0800 358 2182. Passcode: 155439#.
3. A presentation to analysts will take place at 9.30am (GMT) at Governor's
House, Laurence Pountney Hill, London, EC4R 0HH. An audio cast of the
presentation and the presentation slides will be available on the Group's
website, www.prudential.co.uk.
4. There will be a conference call for investors and analysts at 2.30pm (GMT)
hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance
Director. Please call from the UK +44 (0)208 609 3355 and from the US +1 866 793
4279. Pin number 487687#. A recording of this call will be available for replay
for one week by dialling: +44 (0)208 609 0289 from the UK or +1 866 676 5865
from the US. The conference reference number is 138989.
5. High resolution photographs are available to the media free of charge at
www.newscast.co.uk (+44 (0) 207 608 1000).
6. 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 16
March 2006.
7. Annual premium equivalent (APE) sales comprise regular premium sales plus
one-tenth of single premium insurance sales.
8. Present value of new business premiums (PVNBP) are calculated as equalling
single premiums plus the present value of expected new business premiums of
regular premium business, allowing for lapses and other assumptions made in
determining the EEV new business contribution.
9. 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.
10. Total number of Prudential plc shares in issue as at 31st December 2005 was
2,386,784,266.
11. Financial Calendar 2006:
Ex-dividend date 22 March 2006
Record date 24 March 2006
First Quarter New Business Figures 20 April 2006
Annual General Meeting 18 May 2006
Payment of 2005 final dividend 26 May 2006
2006 Interim Results / Second quarter New Business Figures 28 July 2006
Ex-dividend date 16 August 2006
Record Date 18 August 2006
Payment of interim dividend 27 October 2006
12. 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
*Prudential plc, a company incorporated and with its principal place of business
in the United Kingdom, 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 GBP234 billion in
assets under management, (as at 31 December 2005). 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.
BUSINESS REVIEW
Results Highlights
GBP'm unless
otherwise
stated 2005 2004 Percentage 2005 2004 Percentage
(at CER) Change (at RER) Change
Annual premium
equivalent
(APE) sales 2,146 1,867 15% 2,146 1,846 16%
Net investment
flows 5,189 3,297 57% 5,189 3,284 58%
New business
profit (NBP) 867 752 15% 867 741 17%
NBP margin (%
APE) 41% 40% 1% pt 41% 40% 1% pt
NBP margin (%
PVP) 5.2% 5.0% 0.2% pts 5.2% 5.0% 0.2% pts
Total EEV
basis
operating
profit * 1,712 1,288 33% 1,712 1,274 34%
Total IFRS
operating
profit *+ 957 703 36% 957 699 37%
EEV basis
shareholders'
funds 10,301 8,998 14% 10,301 8,614 20%
IFRS
shareholders'
funds + 5,194 4,837 7% 5,194 4,740 10%
EEV operating
earnings per
share 56.6p 56.6p 43.2p 31%
* Continuing operations - excluding Jackson Federal Bank (JFB) and Egg's France
business.
+ Comparative IFRS results are prepared on a 'proforma' basis which reflects the
estimated effect on the 2004 results as if IAS 32, IAS 39 and IFRS4 had been
applied from 1 January 2004 to the Group's insurance operations together with
the discretionary change for the basis of determining longer-term investment
returns, as disclosed on 2 June 2005. IFRS operating profit is stated excluding
goodwill impairment, short-term fluctuations in investments returns and
shareholders'share of actuarial and other gains and losses on defined benefit
pension schemes.
In the Business Review and Financial Review, year-on-year comparisons of
financial performance are on a Constant Exchange Rate (CER) basis, unless
specifically identified as being on a Reported Exchange Rate (RER) basis.
Group Results
The Group has delivered a good set of results for 2005, as illustrated by the
double-digit growth of all the key performance measures shown above.
As a result of improved sales in the UK, the US and Asia, the Group delivered
strong new business profits (NBP) in 2005. This, together with the significant
increase in contributions from the in-force insurance business and fund
management operations, drove European Embedded Value (EEV) basis operating
profits up 33 per cent on 2004.
On an International Financial Reporting Standards basis (IFRS), operating
profits were up 36 per cent on the same period of last year driven by the growth
in profits from the long-term and fund management businesses.
Earnings per share, based on EEV basis operating profit after tax and related
minority interests, but before amortisation of goodwill, were 56.6 pence,
compared with a restated figure of 43.2 pence in 2004. Following the Rights
Issue in October 2004, a restatement of earnings per share is derived and
reported in accordance with the requirement of Financial Reporting Standard
(FRS) 14.
Earnings per share, based on total IFRS operating profit after tax and minority
interests, but before amortisation of goodwill, were 32.2 pence compared with a
restated figure of 22.7 pence in 2004.
Impact of Currency Movements
Prudential has a diverse international mix of businesses with a significant
proportion of its profit generated outside the UK. In 2005, 72 per cent of new
business profit and 54 per cent of IFRS operating profit was delivered from
overseas operations. In preparing for the Group's consolidated accounts, results
of overseas operations are converted at rates of exchange based on the average
of the year, whilst shareholders' funds are converted at year-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 mask underlying business
performance.
Consequently, the Board has for a number of years reviewed the Group's
international performance on a CER basis. This basis eliminates the impact from
conversion, the effects of which do not alter the long-term value of
shareholders' interests in our non-UK businesses.
In the Business Review and Financial Review, year-on-year comparisons of
financial performance are on a CER basis, unless otherwise stated.
Insurance
UNITED KINGDOM
GBP'm unless otherwise stated 2005 2004 Percentage Change
APE sales 900 817 10%
NBP 243 241 1%
NBP margin (% APE) 27% 30% (3%) pts
NBP margin (% PVP) 3.2% 3.4% (0.2%) pts
Total EEV basis operating profit 426 486 (12%)
Total IFRS operating profit 400 296 35%
Prudential UK delivered double digit growth in new business sales and IFRS
operating profit. EEV new business profit remained in line with 2004 at a time
when certain product markets have shown increased levels of competition
reflected in pricing.
APE sales for Prudential UK increased 10 per cent on 2004 to GBP900 million,
driven by strong sales of bulk annuities (up 28 per cent) and unit-linked bonds
(up 31 per cent). The Phoenix Life & Pensions in-force annuity book transaction
announced in June 2005 contributed GBP145 million to the full-year result.
APE sales of individual annuities were up 2 per cent on 2004 at GBP222 million,
driven by strong sales through the Partnerships and Direct to Consumer channels
which increased by 114 per cent and 14 per cent respectively. Despite APE sales
of with-profit annuities through the Intermediaries channel increasing 100 per
cent year-on-year, total individual annuities sales through this channel
decreased 15 per cent reflecting the very competitive pricing environment
throughout much of the year.
APE sales of unit-linked bonds increased 31 per cent to GBP64 million,
reflecting Prudential's growing presence in the IFA unit-linked bond market.
This offset the year-on-year decrease in with-profit bond sales which fell 31
per cent.
Prudential UK's new business profit increased marginally on 2004 to GBP243
million. This was driven by the increase in sales volumes which was offset by a
fall in the new business profit margin (from 30 per cent in 2004 to 27 per cent
in 2005 on an APE basis). The movement in margin reflected the shift in product
mix in 2005 as Prudential continued to expand its shareholder backed product
range, however, throughout the year there continued to be competitive pressure
on margins across a range of products which Prudential substantially resisted.
Total EEV basis operating profits fell 12 per cent on 2004 to GBP426 million
primarily due to a persistency assumption change made at the half-year. The
charge of GBP148 million reflects a strengthening of persistency assumptions
across all products, primarily in respect of with-profits bonds.
Increased IFRS profits arising from shareholder backed annuities contributed to
the 35 per cent increase in total IFRS operating profits. In addition, the very
strong investment performance of Prudential's life-fund over recent years
resulted in an increase in total IFRS operating profits from the with-profits
business attributable to shareholders.
Prudential UK operates through four diversified distribution channels. The
Intermediaries channel, which accounted for 29 per cent of APE sales in 2005,
distributes a range of medium to long-term savings products primarily through
financial advisers and includes sales generated through multi-ties. The Business
to Business channel, which accounted for 28 per cent of 2005 APE sales,
distributes corporate pensions through work-site marketing in partnership with
consulting actuaries and employee benefit consultants. The Partnerships channel
has responsibility for developing relationships with banks and other
distributors, including other insurers and accounted for 30 per cent of APE
sales in 2005, up from just 6 per cent in 2003. The remaining 13 per cent of APE
sales were generated by the Direct to Customer channel which focuses primarily
on the sale of annuities to individual pension customers.
The Partnerships channel signed a number of significant new agreements during
the year. These included St. James's Place for annuities; National Australia
Bank for annuities and healthcare; Wesleyan's multi-tie panel for protection;
Zurich Financial Services and Openwork for annuities; and the Barclays multi-tie
panel. In addition, Prudential and Royal London reached agreement for all
pension annuities arising from vestings of policies written under the Scottish
Life brand in the period between January 2005 and December 2010 to be reassured
to Prudential as they come into payment.
Following the introduction of the new depolarisation rules, many IFA groups have
used the opportunity to establish multi-tie panels. Prudential has made good
progress with the new panels announced to date and is strongly positioned to
take advantage of the depolarised marketplace as this develops over the next few
years. Prudential achieved APE sales of GBP4 million through this channel in
2005 and expects that multi-ties will start to have a greater impact on sales in
the future.
Prudential's Business to Business distribution channel delivers pension
solutions to many of the FTSE 350 companies and is a market leader in the
provision of pension schemes to the UK Public sector. During 2005 Prudential
continued to expand the services it offers in this area to enable advisers to
address the employee benefit challenges of their clients.
PruHealth, a healthcare product that links health and fitness to the cost of
medical insurance plans, celebrated its first anniversary in the third quarter
of 2005. The business has made good progress with sales growing on average more
than 30 per cent per month in 2005. Total premium income for the year was GBP9
million and PruHealth now has over 30,000 lives insured.
Prudential launched a new lifetime mortgage product, Prudential Property Release
Plan, in October. This innovative product gives customers greater flexibility
and control over the time of when they draw down funds, thereby reducing total
interest charges over the lifetime of the loan. Performance to date has been
encouraging with growing support from both advisers and customers.
Prudential transferred its UK personal lines general insurance business to
Winterthur in 2002 and formed a strategic alliance with Churchill, to offer
Prudential branded general insurance products. Under the terms of the agreement
Prudential receives commission, the levels of which to date have been offset
against payments received at the time of the original transaction, therefore no
profits are recognised on this business at this time. However, under the
agreement, Prudential is entitled to receive full commission payments and
associated profit, from 2008 onwards.
Including these individuals with Prudential branded general insurance policies,
to whom Prudential can sell long-term products, Prudential has 2.5 million
marketable customers.
2006 is expected to be a year of change for the retirement savings market due to
Government pensions reforms which come into force on 6 April (A-Day). Prudential
believes the changes will have a positive impact and create an improved savings
environment over time, although it is unclear how quickly consumers will respond
to these new regulations.
Prudential has made a significant investment in its A-Day preparations including
systems developments and customer communications. It currently expects pension
arrangements will be compliant with the new regulations and that customers will
be aware of the changes. In addition, Prudential is reviewing its product range
to identify where to focus future product developments to enable customers to
take better advantage of the new regime.
As a consequence of this, Prudential launched a new individual personal pension
designed to offer greater transparency and flexibility. The new Pru Flexible
Retirement Plan was launched in December and is available through financial
advisers.
The Pensions Commission published its second report in November in which it
proposed significant reform of the UK's state and private pension systems.
Prudential, with its extensive experience of pensions savings, will continue to
play an active role in this debate and in helping to shape the new structure.
The Prudential Assurance Company's (PAC) long-term fund remains very strong. On
a realistic basis, with liabilities recorded on a market consistent basis, the
free assets were valued at around GBP8.0 billion at 31 December 2005, before a
deduction for the risk capital margin, and the fund is rated AA+ by Standard &
Poor's and Aa1 by Moody's. The with-profits sub-fund delivered a pre-tax return
of 20 per cent in 2005 and over the last five years, the fund has achieved a
total return of 41 per cent against 6 per cent for the FTSE 100 total return
index and 12 per cent for the FTSE All-Share total return index (figures are to
31 December 2005, before tax and charges).
Much of this excellent investment performance was achieved through the active
asset allocation of the fund. As part of its asset allocation process,
Prudential constantly evaluates prospects for different markets. At the end of
the first quarter of 2005, based on Prudential's judgement about the relative
valuations of these assets, Prudential increased its exposure to equities while
decreasing its exposure to corporate bonds and direct property.
As a result of the strong investment performance achieved in 2005, Prudential UK
announced in February 2006 that it will be increasing policy values for the vast
majority of with-profits policies maturing in 2006.
The closer partnership of Egg with Prudential's UK life and pensions business,
as announced in December, is expected to achieve revenue synergies and total
annualised pre-tax cost savings across the combined business of GBP40 million by
the end of 2007. This work to maximise the synergies between the two businesses
has already started with PruHealth policies now being sold through Egg. This is
an attractive opportunity for PruHealth and the first of what we believe will be
a number of effective synergies between Prudential's UK businesses.
Prudential UK will continue to pursue profitable opportunities in its chosen
product areas and distribution channels.
UNITED STATES
GBP'm unless
otherwise
stated 2005 2004 Percentage Change 2005 2004 Percentage Change
(at CER) (at RER)
APE sales 515 456 13% 515 453 14%
NBP 211 146 45% 211 145 46%
NBP margin
(% 41% 32% 9% pts 41% 32% 9% pts
APE)
NBP margin
(%PVP) 4.1% 3.2% 0.9% pts 4.1% 3.2% 0.9% pts
Total EEV
basis
operating
profit * 755 370 104% 755 368 105%
Total IFRS
operating
profit * 362 284 27% 362 282 28%
* Continuing operations - excluding Jackson Federal Bank (JFB) which was sold in
October 2004, including Broker-dealer and fund management profits.
Jackson National Life (JNL) operates in the largest retirement savings market in
the world, with 67 per cent, or $12.9 trillion (Source: Cerulli Associates), of
the world's retirement savings assets concentrated in the US at the end of 2005.
JNL provides retirement income and savings solutions in the mass and
mass-affluent segments of the US market, primarily to pre- and post-retirees. It
offers tools that help people plan for their retirement, and manufactures
products with specialised features and guarantees to meet customer needs. By
seeking to add value to both the representatives who sell JNL products, and to
their customers, JNL has built a strong position in the US retirement market.
JNL delivered APE sales of GBP515 million during 2005, representing a 13 per
cent increase on the 2004 result. This result was achieved in an individual
annuity market that was down 2 per cent on prior year (Source: LIMRA).
JNL's new business profits of GBP211 million were up 45 per cent on 2004,
reflecting a 13 per cent increase in APE sales, and a significant improvement in
new business margin to 41 per cent from 32 per cent in 2004. The improved margin
reflects a favourable business mix; an increase in the spread assumption for
fixed index annuities reflecting the spread being achieved; improved average
policy sizes for variable and fixed annuities; economic assumption changes,
including an increase in the equity risk premium, and benefits derived from
product pricing. Pricing benefits include the price increase, introduced in May
2004, on the Perspective II product. The margin on Institutional business
improved due to the longer average duration contracts written by JNL during
2005.
Total EEV basis operating profit of GBP755 million was up 104 per cent on 2004.
This reflects a 45 per cent increase in new business profits and an in-force
profit of GBP530 million, up 123 per cent on the prior year. This result was
driven by an operating assumption change following price increases introduced on
two older books of term life business (GBP140 million), a favourable spread
variance, and an increase in the unwind of the in-force business.
Total IFRS operating profit of GBP362 million was up 27 per cent on 2004. The
2004 result benefited from two one-off items, a favourable legal settlement and
an accounting adjustment arising from the adoption of new accounting guidance,
totalling GBP29 million. The 17 per cent growth in long-term business operating
profit primarily reflects a GBP119 million increase in spread income and record
variable annuity fee income due to significant growth in separate account assets
and the returns earned on those assets.
From 1999 to 2005, JNL has increased GAAP assets by a compound annual growth
rate of 8.4 per cent from $42 billion to $68 billion, statutory premiums,
excluding GIC deposits, from $4.5 billion to $7.7 billion, and has grown
variable annuity reserves from $5 billion to $18 billion. JNL has also increased
its ranking in the US annuity market from 15th to 12th since 1999, and has
achieved this with a net capital inflow over the period of $11 million from the
parent company.
JNL sells variable, fixed and fixed index annuities, as well as life insurance
and institutional products. All three annuity products are long-term personal
retirement products, which offer tax-deferred accumulation on the funds invested
until proceeds are withdrawn from the policy. Fixed annuities offer customers a
guarantee of principal and a minimum guaranteed rate of return on their
premiums. Fixed index annuities also offer these features, but vary from fixed
annuities in that they offer potential upside from equity index participation.
Variable annuity products differ from the fixed annuity products in that the
returns to the customer will depend upon the performance of the underlying fund
portfolio. JNL's variable annuity products offer a range of protection options,
such as death and withdrawal benefits which are priced separately by JNL, and
which can be elected by customers according to their needs. JNL manages its
exposure to equity market movements through a comprehensive derivative
programme. Value movements in these derivatives are included in operating profit
so as to broadly offset changes in reserves caused by equity volatility.
During 2005, JNL again delivered record sales, with total APE sales for the year
of GBP515 million up 13 per cent on 2004, and retail sales of GBP416 million, up
12 per cent. Variable annuity APE sales of GBP261 million were up 31 per cent on
prior year, compared with market growth of 2.5 per cent during 2005 (Source:
VARDS), primarily reflecting the continued success of its unbundled VA contract
'Perspective II'. Utilising the flexible product design enabled by leading
technology, advisors can customise the product to meet the individual needs of
the consumer, including individually priced benefit options and guarantees, such
that consumers only pay for what they want.
JNL improved fixed index annuity APE sales by 44 per cent to GBP62 million
during the year, improving its market position to seventh for the year, up from
ninth in 2004 (Source: LIMRA). Fixed annuity APE sales of GBP79 million in 2005
were down 31 per cent on 2004, reflecting the continued low interest rate
environment and relatively flat yield curve in the US. JNL has continued to
pursue value and hence has been unwilling to compromise entry spreads in this
market. JNL was ranked the seventh largest provider of traditional individual
deferred fixed annuities during 2005 (Source: LIMRA).
Institutional APE sales of GBP98 million were up 15 per cent on 2004. JNL took
advantage of attractive issuance opportunities during 2005, and continues to
participate in this market on an opportunistic basis.
70 per cent of retail premiums received in 2005 were for products and product
features that did not exist at the beginning of 2004. In January 2005, JNL
launched its 'Perspective Advisors II' variable annuity, and in March launched
'Perspective L Series' variable annuity contract, both of which included the
full menu of Perspective II benefits. These two products generated combined
sales of $678 million in the year. JNL also extended its range of Life products
during the year with the addition of 'Ultimate Investor', a variable universal
life contract. The flexibility of JNL's technology, and demonstrable competency
in execution, have resulted in an ability to quickly and efficiently meet the
changing needs of consumers and advisors.
JNL continued to develop its wholesale distribution capability during 2005.
JNL's long-term commitment to meeting the needs of broker-dealers and their
clients, through the provision of product flexibility, sales support tools,
technology and customer service, continues to pay dividends. During 2005 JNL
increased its share of variable annuity sales through the independent
broker-dealer channel from 6.8 per cent to 9.1 per cent, and its share of the
regional broker-dealer channel from 3.9 per cent to 4.9 per cent (Source:
VARDS).
JNL also distributes in the retail space through its independent broker-dealer,
National Planning Holdings (NPH), which is a network of four independent
broker-dealers that represents approximately 2,600 registered advisors. NPH
employs sophisticated technology that allows representatives to operate
efficiently and productively. In 2005, NPH increased total revenues by 3 per
cent to GBP231 million. At June 2005, NPH was ranked the sixth largest
independent broker-dealer by revenue (Source: Financial Planning Magazine).
As a result of capital conservation measures introduced in previous years and
further strong earnings, JNL continued to generate significant levels of
capital, improving the capital ratio from 8.5 per cent in 2004 to 9.2 per cent
in 2005. JNL's statutory capital, surplus and asset valuation reserve position
improved year on year by $434 million, after deducting the $150 million of
capital remitted to the parent company.
Curian Capital, which offers customised separately managed accounts, continues
to build a strong position with net investment flows of GBP298 million in the
year. Curian, which can be accessed with a minimum account balance of $25,000,
offers customers access to technology that enables individual portfolio
construction, and access to institutional-quality money managers. Advisors
benefit from the efficiencies of on-line processing and compliance. Curian
Capital now has $1.7 billion (GBP973 million) of assets under management
compared with $1.1 billion (GBP615 million) at the start of 2005.
JNL has completed the integration of the 1.5 million Life of Georgia policies
onto its own operating platform. This achievement clearly demonstrates JNL's
operational effectiveness and its increasing capability in consolidating large
blocks of business. This acquisition doubled the number of JNL's in-force life
and annuity policies, adding scale to its operating platform and expanding its
distribution capability, as well as further diversifying its income streams.
This transaction enabled JNL to grow its life business at a higher return and
faster rate than could be achieved organically. JNL expects to achieve the
target internal rate of return after tax on this transaction of 12 per cent, and
will continue to consider further US bolt-on acquisitions as opportunities
arise.
With its relationship driven distribution, innovative product manufacturing
capability and low cost operating model, JNL is well positioned to take
advantage of the evolving opportunities in the US retirement market. As "Baby
Boomers" retire and shift their focus from asset accumulation to income
distribution, one of JNL's main objectives will be to capture a proportion of
these flows. With an emphasis on sales of low capital intensive variable annuity
products, solid operating results and strong investment portfolio performance,
JNL is capable of self-generating the capital necessary to support its future
growth at the required returns and return a growing remittance to the parent
company.
The ageing demographics of the US, with the first of the 77 million ''Baby
Boomers'' reaching 60 this year, will, over the next decade, create a very
significant increase in the level of distributions from retirement savings
plans. Life expectancy in the US continues to increase while at the same time
the average retirement age is decreasing. This has led to a large increase in
the average time individuals will spend in retirement. Consequently there is a
growing risk that individuals' finances will be insufficient to cover the costs
of living through retirement. These consumers will have a growing need for
independent financial advice and will increasingly seek guarantees and longevity
protections from the products they purchase.
ASIA
GBP'm unless
otherwise
stated 2005 2004 Percentage 2005 2004 Percentage Change
(at CER) Change (at RER)
APE sales 731 594 23% 731 576 27%
NBP 413 365 13% 413 355 16%
NBP margin (%
APE) 56% 61% (5%) pts 56% 62% (6%) pts
NBP margin (%
PVP) 10.2% 10.4% (0.2%) pts 10.2% 10.4% (0.2%) pts
Total EEV
basis
operating
profit * 576 473 22% 576 460 25%
Total IFRS
operating
profit * 195 119 64% 195 117 67%
* Excluding fund management operations, development and Asia regional head
office expenses
Asia's life insurance markets are very attractive with large scale and high
growth rates supported by consistently strong economic growth, favourable
demographics and market liberalisations. However, there are some formidable
barriers to successful entry including entrenched incumbents, the pace of change
and nature of regulations, mandatory partners in some markets and a shortage of
experienced staff. Acquisition opportunities, particularly of scale businesses,
are limited and in North Asian markets are likely to involve back books that
currently experience negative spread and hence require material provisions under
European regulatory capital requirements.
Since the mid 1990's Prudential has been progressively building its Asian
platform; strengthening and protecting its market leading positions in its
Established Markets (Singapore, Hong Kong and Malaysia), entering emerging
markets (Thailand, Indonesia, Philippines, Vietnam), securing strong joint
venture partners for the sizable opportunities in India and China (ICICI and
CITIC respectively) and taking positions in the large North Asian markets of
Taiwan, Japan and Korea. Prudential now has over 7 million customers in Asia, up
from 1.5 million in 2000.
In all its markets, Prudential has been focussed on building proprietary
distribution as the most effective way of delivering sustainable new business
volumes and managing the customer proposition; typically through growing tied
agency and integrated bancassurance arrangements (such as with Standard
Chartered Bank in Hong Kong). Prudential also prioritises economic capital
efficiency, profitability and customer centricity in its Asian product portfolio
as seen, for example, with the introduction of unit linked products across the
region, an emphasis on regular premium policies (89 per cent of APE sales in
2005), life stage themed marketing and purposely limiting participation in the
lowest margin and highly tactical sectors.
During 2005, the business continued to make very solid progress in a number of
key areas:
In China, 6 new cities were added including Wuhan, in the provincial capital of
Hubei. CITIC-Prudential now has 10 cities operational in China and a further new
provincial capital, Jinan in Shandong, was added in January 2006. The main
challenge facing foreign players trying to become established in China is the
need to develop local management teams to support geographic expansion.
Prudential has a real advantage in being able to leverage its existing Chinese
speaking operations to help incubate new teams quickly. In 2005 new business APE
for China increased by 47 per cent over 2004.
Strengthening distribution continues to be a major priority. In 2005 agent
numbers grew by 26 per cent to over 170,000 with geographic expansion in India
and China being a key driver (up 36 per cent and 37 per cent respectively). In
Indonesia the business has excellent momentum and has increased agent numbers by
89 per cent during the year. In the Established Markets improving agency
productivity is a key initiative and whilst this improved in 2005 there is still
significant room for growth. Prudential's multi-channel distribution model in
Korea is a real asset as, whilst volumes from direct campaigns such as a home
shopping channel have waned and bank distribution has been limited by regulatory
caps and industrial action, new business APE growth for 2005 of 88 per cent
reflects great success in increasing the number of tied financial advisers (up
132 per cent) and extending the number of general agents (brokers).
Currently 75 per cent of Prudential's new business APE comes from its tied
agency distribution and whilst this will remain the primary channel for some
time, there is the potential to further expand alternate channels, particularly
banks and direct marketing. Bancassurance with Standard Chartered Bank in Hong
Kong continues to be especially successful and there is considerable potential
particularly in Singapore, Malaysia and Taiwan over the short to medium term.
The life business in Japan remains challenging and after piloting a Financial
Adviser channel with little success and high running costs this was closed in
January 2006; the emphasis is now on developing profitable partnership
distribution opportunities.
Taiwan's macro economic environment remains challenging with interest rates
currently at record lows leading to negative spread issues affecting the whole
industry, particularly on tranches of business sold pre 2002. Prudential has a
comparatively small book of this business and remains confident that any
potential deficits are more than adequately supported by the profitable new
business, particularly unit-linked, it has been writing for a number of years.
The Taiwanese life insurance industry is currently dominated by players pursuing
short-term volume whereas Prudential remains firmly focussed on long-term
profitability. In 2005 Prudential's new business APE mix was 73 per cent linked
products compared to the industry total of 29 per cent and new business volumes
were in line with 2004. New Business Profit (NBP) margins in Taiwan were 51 per
cent compared to 61 per cent the previous year. The change is due to a higher
proportion of capital efficient and popular new retirement focused regular
premium unit-linked savings plan that is investment-orientated.
Prudential's increasing scale is enabling it to move ahead with plans for a step
change in its operating platform. A new business processing hub was launched in
Kuala Lumpur, Malaysia in early 2005 under the name Prudential Services Asia.
This is already successfully processing business for the Malaysian and
Singaporean life operations and plans are underway for a second hub to be
launched in China.
Over the last year significant progress was made with embedding a risk
management and compliance framework. Prudential employs 'three lines of
defence'; the operational management in each business, strong risk management
related functions and an independent internal audit function. Prudential's
policies are clear that any breach of regulatory standards attributable to staff
malpractice is unacceptable.
In financial terms, 2005 was another strong year. Prudential's, new business APE
grew by 23 per cent to GBP731 million over 2004. The NBP margin was 56 per cent,
compared to 61 per cent in 2004 representing changes in the average geographic
mix (net 2 percentage points), economic assumption changes (net 2 percentage
points) and product mix (net 1 percentage point). Looking at these changes in
more detail, Korea and India now contribute 26 per cent of total APE compared to
18 per cent in 2004, average NBP margins in these countries are 37 per cent and
29 per cent respectively. The impact attributed to economic assumption changes
is driven principally by increases to the risk discount rates in China and
Korea. This was more than offset by a favourable shift in product mix in Korea
where average margins remained slightly ahead of 2004 at 37 per cent. The other
main product mix related impact was due to the lower margins on the retirement
linked product in Taiwan as discussed above which led to a change in average
margins from 61 per cent to 51 per cent.
With the exception of Taiwan, where although Prudential has increased the
proportion of lower margin unit-linked product sales to 73 per cent from 49
percent these include the new lower margin retirement focussed product, all
markets have increased NBP achieved over 2004.
Long term EEV operating profits of GBP576 million are up 22 per cent over 2004
and are driven by new business profits of GBP413 million and unwind of GBP162
million with small operating assumption changes and experience variances netting
out to GBP1m.
IFRS operating profits increased 64 per cent to GBP195 million from GBP119
million in 2004, however 2005 does include a net GBP30 million from various
non-recurring items including a net GBP44 million profit as previously disclosed
at the half year and subsequently reduced by offset by GBP14 million of
restructuring charges in Japan. Excluding these, growth was 39 per cent
reflecting the steady increase in profits from the Established Markets with
total IFRS operating profits of GBP127, million up 14 per cent, the emergence of
profits on the IFRS basis from the new business being sold across the region and
lower expenses in Japan.
Prudential Asia's high proportion of profitable, regular premium business
combined with sound operational management means cashflows can be predicted with
some certainty. As previously announced the business is on target to fund
continued strong growth internally and begin remitting surplus cash back to the
Group from 2006 onwards.
In summary, Prudential has an excellent track record of building a profitable
business in Asia and the scale of the opportunity for continued growth is clear.
ASSET MANAGEMENT
Prudential's three asset management businesses are aligned with their respective
markets in the UK, Asia and America. They operate under different brands and
with different models, each of which is described further below.
M&G
GBP'm unless otherwise stated 2005 2004 Percentage Change
Gross investment flows 7,916 5,845 35%
Net investment flows 3,862 2,004 93%
Underlying profits before performance
related fees 138 110 25%
Total IFRS operating profit 163 136 20%
M&G is Prudential's UK and European fund management business and has GBP149
billion of funds under management, of which GBP113 billion relates to
Prudential's long-term business funds. M&G operates in 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 also manages Prudential's balance sheet for profit. M&G has scale
in all key asset classes: it is one of the largest active managers in the UK
stockmarket, one of the largest bond investors in the UK and one of the UK's
largest property investors.
M&G's operating profit in 2005 including performance-related fees (PRF) was
GBP163 million, an increase of 20 per cent on last year. Underlying profit
(excluding PRFs) of GBP138m was 25 per cent higher than in 2004, an extremely
strong result given that the previous year included GBP7 million of
non-recurring provision releases. Adjusting for this gives a like-for-like
increase in profits of 34 per cent over 2004. This continues a strong upward
trend which has seen underlying profits grow from GBP49 million in 2002 to
GBP138 million last year, reflecting the strengths of M&G's diversified
business, disciplined cost management and the successful development of new
sources of revenue.
Performance-related fees in 2005 were GBP24 million, including GBP17 million as
a result of several exceptionally profitable realisations by PPM Capital that
are not expected to recur. M&G received GBP7 million of performance fees for
managing Prudential's long-term and annuity funds, which continued to beat their
strategic and competitor benchmarks during the year.
M&G enjoyed a record year for sales during 2005, with gross fund inflows
increasing 35 per cent to GBP7.9 billion. Net fund inflows also grew
significantly, almost doubling to GBP3.9 billion and external funds under
management, which represent a quarter of M&G's total funds, rose by 26 per cent
to GBP36.2 billion.
Gross fund inflows into M&G's retail businesses were their highest ever at
GBP3.8 billion and were nearly double the previous year. Net retail fund inflows
totalled GBP1.3 billion, more than triple those in 2004. In the UK, M&G
generated the highest ever retail sales in its 75 year history across a
combination of its equity, fixed income and property funds. M&G International,
which sells funds in Germany, Austria, Italy, Luxembourg and Switzerland, more
than tripled its funds under management during the year. M&G's South African
business saw a doubling of retail funds under management. Retail fund
performance continued to be very strong, especially M&G's equity funds which saw
92 per cent of funds beating their UK sector average over three years.
M&G's institutional business saw gross fund inflows of GBP4.1 billion.
Significant growth in the areas of private finance and property helped net fund
inflows increase 59 per cent to GBP2.5 billion. M&G continued its successful
strategy of generating new revenue streams with attractive margins using
expertise developed for internal funds, especially in the area of non-correlated
assets such as leveraged loans. M&G broke new ground in this asset class during
the year with the launch of Europe's first pure leveraged loan fund, the M&G
European Loan Fund. The success of M&G's Collateralised Debt Obligation (CDO)
programme also continued during 2005 with the launch of five new CDOs. In
property, the development of external vehicles managed by Prudential Property
Investment Managers (PruPIM) for third party clients delivered strong fund
inflows.
Asia
GBP'm unless
otherwise
stated 2005 2004 Percentage 2005 2004 Percentage
(at CER) Change (at RER) Change
Net investment
flows 1,327 1,293 3% 1,327 1,280 4%
Total IFRS
operating
profit* 12 20 (40%) 12 19 (37%)
*Underlying IFRS operating profit of GBP28m, offset by GBP16m of charges related
to bond funds in Taiwan.
The Asian fund management business had GBP26.2 billion of funds under management
as at 31 December, 2005, of which GBP10.1 billion related to third party funds
in operations in India, Taiwan, Japan, Korea, Malaysia, Singapore and Hong Kong.
Prudential is a top five foreign provider of mutual funds in all countries in
which it operates with the exception of Japan where significant progress has
been made in a very competitive market. In 2005, the fund management business
continued to expand geographically with the securing of fund management licences
in China, through a joint venture with CITIC, and in Vietnam. This takes the
total number of countries in which the business has a presence to nine.
Operating profit from the Asian fund management operations was GBP12 million for
the year, the decrease from 2004 reflecting the exceptional costs of GBP16
million incurred due to bond fund restructuring required as a result of industry
wide issues in Taiwan.
The geographic expansion of the past few years has been matched by growth in
market share, with Korea, Japan, India and Malaysia being notable successes.
Geographic diversification along with this growth in scale has resulted in a
strong upward trend in profits with underlying profits increasing from GBP9
million in 2001 to GBP28 million in 2005.
Net inflows from third parties of GBP1.3 billion were driven by strong net
inflows in Japan of GBP905 million and Korea of GBP926 million though these were
offset by net outflows in Taiwan of GBP745 million due to an unsettled bond fund
market.
Total reported third party funds under management of GBP10.1 billion was up 13
per cent on 2004. In August last year, ICICI increased its stake in Prudential's
India asset management joint venture from 45 per cent to 51 per cent. As a
result, Prudential no longer consolidates this business at 100 per cent and the
year end numbers are reported at 49 per cent, resulting in a GBP1.5 billion
reduction in funds under management for the year. On a comparable basis, full
year 2005 funds under management grew 29 per cent on 2004.
PPM America
GBP'm unless
otherwise
stated 2005 2004 Percentage 2005 2004 Percentage
(at CER) Change (at RER) Change
Funds Under
Management (GBP
bn) 41 40 3% 41 36 14%
Total IFRS
operating
profit 20 12 67% 20 12 67%
PPM America, based in Chicago, is Prudential's North American institutional
investment manager, specialising in public and private fixed income and equity,
and real estate securities, and, through its affiliate PPM Finance, Inc.,
commercial mortgage lending. At the end of 2005, PPM America had funds under
management of GBP41 billion (including PPM Finance), of which 68 per cent
relates primarily to JNL policyholder assets, 29 per cent to funds managed on
behalf of other Prudential UK and Asian affiliates, and 3 per cent to funds
managed for external clients, including CDOs and similar products.
In 2005 PPM America increased IFRS profits by 67 per cent, primarily due to a
one-off GBP5 million revaluation related to investment vehicles managed by PPM
America.
Banking
2005 2004 ** Percentage
GBPm GBPm Change
IFRS Operating Profit from Continuing Operations *
UK banking business 60 72 (17%)
Restructuring costs (10) (5) (100%)
Transaction costs (7) (6) (17%)
Other 1 0 100%
44 61 (28%)
Highlights of UK banking business
Net interest income * 312 287 9%
Non-interest income * 215 209 3%
Cost-to-income ratio 43% 49% -
Bad debts * (241) (182) (32%)
* Continuing operations - excludes Egg France and Funds Direct.
** 2004 comparatives restated to IFRS basis, except for adjustments for IAS 32
and IAS 39 which have been adopted from 1 January 2005.
Egg is an innovative financial services company primarily offering banking
products and services, specifically, unsecured personal loans, credit cards,
mortgages and savings accounts. Egg is now one of the world's largest online
banks with approximately 3.7 million predominantly young and upmarket customers
acquired since launch.
Operating profit from the core UK banking business was GBP60 million, compared
with GBP72 million in 2004. This result represents a strong performance given a
very challenging set of market conditions with sharply reducing growth in
unsecured borrowings, narrowing margins following the increase in average base
rates and a sharp deterioration across the industry in underlying credit
quality. Regulatory changes also impacted this year's business performance. In
particular, the introduction of new measures into the sales processes of payment
protection insurance products in 2005 has led to a significant reduction in
income from these products across the industry.
Despite this market environment, Egg managed to increase margins on credit cards
via increased pricing and through focussing on the active management of its
existing customer base to maximise borrowing balances. The degree of
deterioration in credit quality was at a level substantially below the market.
Egg has completed the re-focus on its successful core UK banking business over
the last 12 months. The exit from France was completed in the first quarter of
2005 with total costs incurred within the provision established in 2004. In
October 2005, Egg completed the sale of Funds Direct, its investment wrap
platform business. Total operating profit from continuing operations in 2005
includes GBP10 million of restructuring costs.
This reorganisation aligned Egg's cost base with its strategic focus on the UK
business and contributed to a GBP17 million reduction in total expenses between
2005 and 2004.
Transaction costs of GBP7 million were incurred during 2005 in relation to
Prudential's acquisition of the minority shareholdings in Egg.
The immediate benefits from the restructuring implemented in early 2005,
together with Egg's effective cost management contributed to the continued
downward trend in Egg's cost to income ratio. It was 43 per cent for 2005,
compared to 49 per cent and 53 per cent for 2004 and 2003 respectively.
The capital position at the end of the year continued to be very strong with
total capital ratio of 14.8 per cent, improving from 12.5 per cent in 2004.
The launch of Egg Money in September has further strengthened the brand
awareness and reinforced the innovative values of Egg. This product concept also
reflects Egg's strategy of deepening its relationship with customers which is a
key differentiator and route to higher levels of cross sales and ultimately a
broader range of product offerings. Egg Money won an award from Which? for 'Best
Money Innovation' in November 2005.
On the 1 December 2005, the Boards of Prudential and Egg announced a recommended
Offer by Prudential for the whole of the issued and to be issued shares of Egg
not already owned by the Prudential Group. This represented approximately 21.7
per cent of the existing issued share capital of Egg.
The Offer valued the existing issued share capital of Egg at approximately
GBP973 million, a 15 per cent. premium to the market capitalisation of Egg of
GBP845 million on 30 November 2005, being the last Business Day prior to
announcement of the Offer. Prudential offered 0.2237 New Prudential Shares for
each Egg Share.
On the 23 January 2006 Prudential announced that it had received acceptances in
respect of 80.3 per cent of the issued ordinary share capital that it did not
already own bringing Prudential's ownership of the Egg Group to 95.7 per cent.
Prudential also announced its intention to extend the offer until further
notice.
On 20 February 2006, Egg shares were delisted from the Official List.
It is anticipated that the acquisition of the minority will enable Prudential
and Egg to capitalise on the product capabilities, customer relationships and
brand strengths of Prudential, M&G and Egg and will also facilitate the
realisation of substantial annualised pre-tax cost savings, with GBP40 million
expected to be realised by the end of 2007, as well as opportunities for revenue
synergies.
FINANCIAL REVIEW
SALES AND FUNDS UNDER MANAGEMENT
Prudential delivered strong sales growth during 2005 with total new insurance
sales up 13 per cent to GBP13.8 billion at constant exchange rates (CER). This
resulted in record insurance sales of GBP2.1 billion on the annual premium
equivalent (APE) basis, an increase of 15 per cent on 2004. At reported exchange
rates (RER), APE was up 16 per cent on 2004. The strong growth is reflected
across all regions with APE up on 2004 by 10 per cent in the UK, 13 per cent in
the US and 23 per cent in Asia at CER.
Total gross investment sales for 2005 were GBP26.4 billion, up 6 per cent on
2004 at RER. Net investment flows of GBP5.2 billion were up 58 per cent on last
year at RER.
Total investment funds under management in 2005 increased by 24 per cent from
GBP37.2 billion to GBP46.3 billion at RER, reflecting net investment flows of
GBP5.2 billion and net market and other movements of GBP3.9 billion.
At 31 December 2005, total insurance and investment funds under management were
GBP234 billion, an increase of 19 per cent up from 2004 at RER.
Present value of new business premiums in 2005 increased by 12 per cent to
GBP16.8 billion. Present value of new business premiums is the preferred basis
of disclosing margin under EEV principles, and from the half year 2006 we will
provide commentary on this basis. We will continue to provide detail on the APE
basis for the foreseeable future until familiarity with the new basis of
reporting is developed.
BASIS OF PREPARTION OF RESULTS
From 1 January 2005, Prudential is required to account for its long-term
insurance business on an International Financial Reporting (IFRS) basis. 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.
As a signatory to the European CFO Forum's EEV Principles, Prudential also
reports supplementary results on the European Embedded Value (EEV) basis for the
Group's long-term business, including asset management operations and service
companies that support the long-term businesses. These results are combined with
the IFRS basis results of the Group's other businesses.
Reference to operating profit relates to profit including the expected long-term
rate of return on investments, but excludes exceptional items, short-term
fluctuations in investment returns and the effect of changes in economic
assumptions.
IFRS BASIS REPORTING
The European Union ("EU") requires that all listed European groups prepare their
2005 financial statements in accordance with EU approved International Financial
Reporting Standards ("IFRS"). The IFRS basis replaces the previous Modified
Statutory basis ("MSB") of reporting. To prepare the market for the changes the
Group reported the impact of restating its 2004 results in its Economic and
Financial Reporting announcement on 2 June 2005.
The announcement explained that the IFRS changes have been implemented in two
stages. First, for the purposes of formal IFRS adoption from 1 January 2004 all
standards other than IAS32 (financial instruments: Disclosure and Presentation),
IAS39 (Financial Instruments: Recognition and Measurement), and IFRS4 (Insurance
contracts) have been applied.
Due to the complications for the retrospective application, particularly for the
banking industry for financial instruments, the IASB allowed adoption of these
three standards from 1 January 2005. The Group has chosen to adopt this
approach. However, mindful of the impact on the Group's insurance operations,
particularly JNL, the Group has prepared supplementary proforma results that
show the effect of adopting these standards if they had been applied in 2004 for
those businesses. The two areas of change that are of particular relevance to
Prudential's results are:
- Altered valuation bases for JNL derivatives and fixed income
securities, and
- Recognition of the shareholders' share of deficits on defined benefit
pension schemes in shareholders' equity.
In preparing its IFRS basis results the Group has chosen to continue to provide
supplementary analysis of the profit before shareholder tax so as to distinguish
operating results based on longer-term investment returns, actuarial gains and
losses on defined benefit pension schemes, and exceptional items. The Group has
also made a discretionary change of accounting policy at the same time as the
adoption of IFRS standards. The change principally affects the determination of
longer-term returns for JNL that are credited to operating results. Total profit
before tax is unaffected by this change.
Total profit before tax now includes value movements on derivatives that JNL
uses for economic hedging together with actuarial gains and losses on the
Group's defined benefit pension schemes, and are expected to be more volatile as
a result. In addition, IFRS basis shareholders' funds will be more volatile from
period to period because of market value movements on fixed income securities of
JNL which are classified as available for sale.
The adoption of IFRS does not have a significant impact on the business or the
underlying financial position.
EUROPEAN EMBEDDED VALUE BASIS REPORTING
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.
As a signatory to the European CFO Forum's EEV Principles, Prudential has
adopted EEV methodology for its 2005 year end results. This replaces the
Achieved Profits basis of reporting. The main impact of the change from the
Achieved Profits basis on the results arises from the effects of changes to the
assumed level of locked in capital allocated to each business, the adoption of
product specific risk discount rates, and an explicit valuation of the time
value of options and guarantees. The EEV results also include the value of
future profits from fund management and service operations that support the
long-term business. In most other respects the approach that Prudential used for
its Achieved Profits reporting already conforms to the requirements of the EEV
Principles.
On the EEV basis, the shareholders' interest in the Group's long-term businesses
comprises:
- the present value of future shareholder cashflows from in-force covered
business (value of in-force business), less a deduction for the cost of
locked-in ("encumbered") capital;
- the locked-in ("encumbered") capital; and
- shareholders' net worth in excess of encumbered capital.
Stochastic valuations have been undertaken to determine the value of in-force
business including the cost of capital. A deterministic valuation of the
in-force business is also derived using consistent assumptions and the time
value of the financial options and guarantees is derived as the difference
between the two.
The Group EEV results also incorporate the effect of the discretionary change to
the basis of determining longer-term investment returns included in operating
profits and IFRS changes for pension scheme accounting and non-insurance
operations as described below.
EEV BASIS OPERATING PROFITS
Total EEV basis operating profits from continuing operations were GBP1,712
million, up 33 per cent from 2004 at CER. At RER, the result was up 34 per cent.
This result reflects a combination of strong growth in all the insurance and
funds management businesses.
2005 2004 Percentage 2005 2004 Percentage
(at CER) Change (at RER) Change
EEV Basis
Operating Profits
GBP'm GBP'm GBP'm GBP'm
Insurance
business
UK 426 486 (12%) 426 486 (12%)
US 741 384 93% 741 382 94%
Asia 576 473 22% 576 460 25%
Development
expenses (20) (15) (33%) (20) (15) (33%)
-------- ------- --------- ------- ------- --------
1,723 1,328 30% 1,723 1,313 31%
-------- ------- --------- ------- ------- --------
Fund
management
business
M&G 163 136 20% 163 136 20%
US broker
dealer and
fund
management 24 15 60% 24 15 60%
Curian (10) (29) 66% (10) (29) 66%
Asia fund
management 12 20 (40%) 12 19 (37%)
-------- ------- --------- ------- ------- --------
189 142 33% 189 141 34%
-------- ------- --------- ------- ------- --------
Banking
Egg (UK) 44 61 (28%) 44 61 (28%)
Other income
and
expenditure (244) (243) 0% (244) (241) 1%
-------- ------- --------- ------- ------- --------
Operating
profits from
continuing
operations 1,712 1,288 33% 1,712 1,274 34%
======== ======= ========= ======= ======= ========
Prudential's insurance business achieved significant growth, both in terms of
new business profits (NBP) and in-force profit, resulting in a 30 per cent
increase in operating profit over 2004 at CER. In 2005, the Group has generated
record new business profits (NBP) from insurance business of GBP867 million
which was 15 per cent above 2004 at CER, driven by strong sales momentum across
all markets. At RER, NBP was up 17 per cent. The average Group NBP margin was 41
per cent up from 40 per cent in 2004 on an APE basis and 5.2 per cent up from
5.0 per cent on a present value of premiums basis. The overall margin has been
broadly maintained over the last two years, reflecting careful management of
product mix within each business. In-force profit increased 48 per cent on 2004
at CER to GBP876 million. At RER, in-force profit was up 49 per cent. The
in-force profit includes a GBP148 million charge in respect of a persistency
assumption change in the UK and a credit in the US of GBP140 million reflecting
an operating assumption change following price increases introduced on two
blocks of in-force term life business announced at the half year. In aggregate,
net assumption changes were negative GBP54 million, with net positive experience
variances and other items of GBP79 million.
Results from fund management and banking business were GBP233 million, an
increase of 15 per cent at CER on 2004. This was mainly driven by the
significant contribution from M&G.
Other income and expenditure was negative GBP244 million compared with negative
GBP243 million at CER in 2004. This reflected an increase in investment return
on centrally held assets and other income offset by higher interest payable and
head office costs.
UK Insurance Operations
EEV basis operating profit of GBP426 million was down 12 per cent on 2004, 62
per cent of the profit attributable to the with-profits fund.
Prudential UK's new business profit remained in line with 2004 at GBP243
million. This was driven by the 10 per cent increase in APE sales volumes which
was offset by a fall in the new business profit margin (from 30 per cent in 2004
to 27 per cent in 2005 on an APE basis). The movement in margin reflected the
shift in product mix in 2005 as Prudential continued to expand its shareholder
backed product range, however, throughout the year there continued to be
competitive pressure on margins across a range of products which Prudential
substantially resisted.
Prudential allocates shareholder capital to support new business growth across a
wide range of products in the UK. The weighted average post-tax Internal Rate of
Return (IRR) on the capital allocated to new business growth in the UK in 2005
was 14 per cent achieving the 2007 target set at the time of the rights issue
two years early. This increase was achieved by broadly maintaining or improving
individual product IRR's during the year coupled with a favourable product mix.
UK in-force profit of GBP183 million was down 25 per cent on 2004. The profits
arising from the unwind of discount from the in-force book were partially offset
by adverse operating assumption changes and other experience variances.
At the half year, persistency assumptions were strengthened across a number of
products, primarily in respect of with-profit bonds. This resulted in a charge
of GBP148 million for 2005 on an EEV basis. In the case of PruBond, which
accounts for a significant proportion of the assumption change, Prudential
expected surrenders to fall after the favourable bonus declaration in February
2005. In the event, following the bonus declaration, customers continued to
surrender their policies leading to a strengthening of the assumption by 40 per
cent. The assumption change reflects Prudential's current experience and, post
tax, represents three per cent of the overall embedded value of the UK business.
The persistency assumptions represent Prudential's current best estimate of
future experience. In the case of PruBond, a product with no set maturity or
term and no surrender penalties after five years, future customer behaviour may
differ from past experience, making it difficult to anticipate future actual
surrenders with certainty.
However, the attractiveness of PruBond as a long term investment is demonstrated
by investment returns that a typical customer has achieved. A Prudence Bond
policy will have seen its value increase from GBP10,000 to GBP18,137 over the
ten years up to 6 April 2006. This payout represents an overall annualised
return of 6.1 per cent over each of the last 10 years net of tax and charges.
Prudential continues to actively manage the conservation of its in-force book
and is currently running within assumptions.
During the year, Prudential carried out a review of its mortality experience
across all of its non-profit annuity business. As a result of this review, it
strengthened the realistic and statutory male assumptions and weakened the
realistic female assumptions to align the realistic assumptions with recent
experience. The total effect of the changes was to reduce operating profits by
GBP47m, of which the main reduction arose from increasing the cost of capital.
New annuity business written in 2005 has been priced on the new basis for both
EEV and IFRS.
Other charges of GBP46 million in the UK include GBP45 million of costs
associated with, complying with new regulatory requirements including Sarbanes
Oxley, product development and distribution development; a negative GBP19
million expense variance; and a net positive GBP18 million of other items.
Prudential believe the announced cost savings from UKIO and Egg's collaboration,
together with other initiatives will lead to a lowering of the absolute cost
base going forwards.
In 2005, Prudential wrote to 440,000 of its customers contracted-out of the
State Second Pension ("S2P") and provided updated information and views to
enable them to make an informed decision about whether to contract back into S2P
or remain contracted-out, stating that Prudential believed that most people
should contract back in for the 2005/6 tax year onwards. As a result of this we
expect premiums from DWP rebate business to fall in 2006 and subsequent years.
US Operations
In the US, EEV operating profit from long-term operations was GBP741 million, up
93 per cent at CER and up 94 per cent from prior year at RER.
JNL new business profits of GBP211 million were up 45 per cent on 2004,
reflecting a 13 per cent increase in APE sales, and a significant improvement in
new business margin to 41 per cent from 32 per cent in 2004. On a present value
of premiums basis, the margin increased from 3.2 per cent to 4.1 per cent. The
improved margin reflects a favourable business mix; an increase in the spread
assumption for fixed index annuities reflecting the spread being achieved;
improved average policy sizes for variable and fixed annuities; economic
assumption changes, including an increase in the equity risk premium; and
benefits derived from product pricing. Pricing benefits include the fee
increase, introduced in May 2004, on the Perspective II product. The margin on
Institutional business improved due to the longer average duration contracts
written by JNL during 2005.
The new business margin achieved on variable annuity business in 2005 was 50 per
cent compared with 36 per cent in 2004. The improved margin was driven by
economic assumption changes, and a full year of benefit associated with the
re-pricing, in May 2004, of JNL's unbundled VA 'Perspective II'. The economic
assumption changes include an increase in the equity risk premium from 3 per
cent to 4 per cent which Prudential believe more accurately reflects the
volatility of equities.
The fixed index annuity margin has improved from the prior year due to an
increase in the long-term spread assumption from 175bps to 190bps, reflecting
the spread being achieved.
For JNL, the average IRR on new business was 15 per cent which reflects JNL's
strong pricing discipline.
In the US, the in-force profit of GBP530 million is 123 per cent up on 2004 at
CER. The increase was primarily due to increased unwind of discount on the
in-force business, an operating assumption change following price increases
introduced on two older books of term life business (GBP140 million), and
improved spread variance. The increase in the unwind of discount reflects the
increase in risk discount rates, following an increase in the equity risk
premium from 3 per cent to 4 per cent. Improved spread variance of GBP89 million
is up from GBP41 million in the prior year, and reflects achieved spreads in
excess of the current weighted portfolio target on the regular portfolio. The
spread variance in 2005 also includes a number of non-recurring items including
mortgage prepayment fees, make-whole payments and total return swap income which
together represent GBP60 million of the spread variance.
As a discretionary change of accounting policy, implemented at the same time as
the adoption of IFRS, the Group has replaced the previous basis of five year
averaging of gains and losses on bonds with a method that more closely reflects
longer-term returns.
On the new basis, longer-term returns on fixed income securities comprise two
elements. The first element is a risk margin reserve (RMR) charge for long-term
default experience of GBP58 million for 2005. The present value of future RMR
charges is reflected in the opening embedded value. The second element is
amortisation of GBP53 million of interest related realised gains and losses.
These gains and losses are amortised to operating profit over the bonds original
maturities.
The excess or deficit of actual realised gains and losses for fixed income
securities for the period over these components of longer-term returns is
included in short-term fluctuations in investment returns as a separate
component of total profit for the period.
Following this change of policy for JNL's EEV basis operating profit the
component for longer-term returns for fixed income securities is expected in the
future to be a more stable feature than on the previous basis, which was
affected by the volatility of realised gains and losses over a five year period.
Total profit, including actual investment returns, is unaffected by the change.
Further details of the change of policy are explained in the notes to the EEV
and IFRS basis results. In 2005, JNL experienced a net realised gain of GBP1
million on its corporate bond portfolio. This is reflected in total EEV basis
profit before tax.
Asia Operations
EEV basis operating profit from long-term operations (excluding development and
regional head office costs) was GBP576 million for the year, up 22 per cent at
CER and 25 per cent at RER on 2004.
In Asia, NBP of GBP413 million was up 13 per cent at CER on 2004 with increased
sales offset partially by NBP margin. During 2005, APE sales were up 23 per cent
on 2004 and the NBP margins were 56 per cent on an APE basis and 10.2 per cent
on a present value of premiums basis, compared with 61 per cent and 10.4 per
cent respectively in 2004 at CER. The key drivers of lower margins in Asia
compared to prior year were country mix (reduction of two percentage points),
product mix - principally in Taiwan (reduction of one percentage point) and
assumption changes (reduction of two percentage points).
Korea and India now contribute 26 per cent of total APE compared to 18 per cent
in 2004, average NBP margins in these countries are 37 per cent and 29 per cent
respectively. The impact attributed to economic assumption changes is driven
principally by increases to the risk discount rates in China and Korea. This was
more than offset by a favourable shift in product mix in Korea where average
margins remained slightly ahead of 2004 at 37 per cent. The other main product
mix related impact was due to the lower margins on the new retirement
unit-linked product in Taiwan which led to a change in average margins from 61
per cent to 51 per cent.
Asia's in-force profit (before development expenses and the Asian fund
management business) increased to GBP163 million in 2005 from GBP108 million in
2004 at CER. This reflects a higher value related to the unwind of the discount
rate as the in-force business builds scale.
In Asia we have target IRRs on new business at a country level of 10 percentage
points over the country risk discount rate. Risk discount rates vary from 5 per
cent to 18 per cent depending upon the risks in each country market. These
target rates of return are average rates and the marginal return on capital on a
particular product could be above or below the target.
We have, however, exceeded the target in each of Asia's markets in 2005 except
for Thailand and Japan, which have yet to reach scale. In aggregate, IRR on new
business exceeded 20 per cent on average new business risk discount rates for
2005 of 9.8 per cent.
Asset Management, Banking and Other
M&G
M&G's operating profit was GBP163m, an increase of 20 per cent on last year.
This included GBP24 million in performance-related fees (PRF), of which GBP17
million was earned by PPM Capital following another year of extremely profitable
realisations on behalf of its clients. These are not expected to recur.
Underlying profit (excluding PRFs) of GBP138 million was 25 per cent higher than
in 2004, an extremely strong result given that the previous year included GBP7m
of non-recurring provision releases. Adjusting for this gives a like-for-like
increase in profits of 34 per cent over 2004.
In the past few years, growth in income from M&G's existing businesses has been
reinforced by the successful development of revenue streams from new activities.
These include Prudential Finance, which manages Prudential's balance sheet for
profit, private finance, including CDOs, and Prudential Property Investment
Managers (PruPIM), which increasingly manages assets for external investors. In
its retail businesses, sales of equity funds have risen significantly in both
the UK, as a result of strong investment performance, and overseas, where M&G
continues to build new distribution channels in selected European and other
markets.
The benefits of this business diversification are clearly demonstrated by the
strong upward trend in profits that M&G has posted - underlying profits have
increased consistently from GBP49 million in 2002 to GBP138 million in 2005.
Profits growth in 2005 was largely due to the impact of higher asset prices in
equity and property markets, combined with the impact of positive net inflows
over a period of several years. In addition, discipline continues to be
exercised over costs, which have risen only slightly this year after four years
in which they were held flat.
US broker dealer and fund management businesses
The broker dealer and fund management operations reported profits of GBP24
million, compared with GBP15 million in 2004, primarily due to a one-off GBP5
million revaluation related to an investment vehicle managed by PPM America.
Curian
Curian, which provides innovative fee-based separately managed accounts,
recorded losses of GBP10 million in 2005, improved from losses of GBP29 million
in 2004, as the business continues to build scale. At year end 2005 Curian had
grown assets under management to $1.7 billion (GBP973 million) from $1.1 billion
(GBP615 million) at year end 2004.
Asian fund management business
The fund management business in Asia has expanded into new markets in the past
few years and is now in nine markets across Asia. Geographic diversification
along with this growth in scale has resulted in a strong upward trend in
profits.
Profit from the Asian fund management operations was GBP12 million for the year,
down 37 per cent from 2004 reflecting the exceptional costs of GBP16 million
incurred due to bond fund restructuring required as a result of industry wide
issues in Taiwan. Underlying profit from the Asian fund management operations,
excluding charges of GBP16 million, grew by 47 per cent to GBP28 million, a
strong result indicative of the economies of scale the business is now
generating. Adjusting for the reporting of India at 49 per cent from 26 August
2005 results in an increase in profits of 55 per cent over 2004.
At the Group level, profit before tax includes GBP4.5 million in profit
attributable to realising value created in India when ICICI increased its stake
in Prudential's Indian asset management joint venture from 45 per cent to 51 per
cent.
Egg
Egg's total continuing operating profit in 2005 was GBP44 million, compared with
GBP61 million in 2004. This reflected the increasingly challenging market
conditions and GBP10 million restructuring costs incurred in the first half of
2005.
Operating profit of the core UK banking business was GBP60 million. The
reduction from GBP72 million for 2004 primarily reflected the fact that although
Egg successfully grew income by GBP31 million in a difficult market and cut
GBP17 million from its cost base this was more than offset by an increase of
GBP59 million in bad debts due to the changing mix in the portfolio, business
growth plus a deterioration in credit quality driven by economic factors across
the UK unsecured lending market.
The UK unsecured lending market only grew marginally in 2005 and indeed there
was a net reduction in credit card balances in the second half of the year.
Against this tough market environment, Egg managed to drive up the return on its
credit card portfolio by focusing on growing interest bearing balances and
successfully re-pricing the card to reflect the higher funding costs, given base
rates had risen on average compared to 2004. This contributed to an increase of
GBP32 million in net interest income.
As a result of the effective cost management, together with the benefits of
re-organisation early this year, Egg's cost to income ratio continued its
downward trend to 43 per cent for 2005, improving from 49 per cent and 53 per
cent for 2004 and 2003 respectively.
In 2005, a sharp deterioration in credit quality has adversely affected the UK
retail banking sector leading to an increase in impairment charges across the
sector, including Egg, compared to expectations. The result Egg achieved, which
we believe is better than average industry performance, is due to the tactical
decision to tighten its lending criteria early in the credit cycle, active
portfolio management and its underlying higher quality card portfolio.
Regulatory attention continues to be devoted to the creditor insurance market
and we believe the introduction of new measures into the sales processes for
payment protection products has led to a reduction of approximately 20 per cent
on the commission revenue earned on this product across the banking sector. Egg
experienced similar reductions, a solid performance for an online bank.
Through the acquisition of the minority interests of Egg and the closer
partnership of Egg with Prudential UK life and pension businesses, Prudential
expects to achieve total annualised pre-tax cost savings across the combined
businesses of GBP40 million by the end of 2007. Costs of approximately GBP50
million pre-tax are estimated to be incurred from this restructuring. This will
be provided for in 2006.
Other
Asia's development expenses (excluding the regional head office expenses)
increased by 33 per cent at CER to GBP20 million, compared with GBP15 million in
2004. These development expenses primarily related to our newer operations and
establishing our services hub in Malaysia.
Other net expenditure remained constant over 2004. This reflected other income
as a result of the interest earned on the net proceeds from the 2004 Rights
Issue offset by higher interest payable. Head office costs (including Asia
regional head office costs of GBP30 million) were GBP100 million, up GBP19
million on 2004. The increase mainly reflects the substantial work being
undertaken for the implementation of International Financial Reporting
Standards, EEV reporting, transaction costs related to buying in the minority
interest in Egg, Sarbanes Oxley and other regulatory costs.
Total EEV Basis - Result Before Tax for Continuing Operations
(Year-on-year comparisons below are based on RER.)
The result before tax and minority interests was a profit of GBP2,244 million up
26 per cent on 2004. This reflects an increase in operating profit from GBP1,274
million to GBP1,712 million, together with a favourable movement of GBP431
million in short term fluctuations in investment returns from GBP570 million to
GBP1,001 million. This is offset by a negative movement of GBP223 million due to
changes in economic assumptions and a goodwill impairment charge of GBP120
million.
The UK component of short-term fluctuations in investment returns of GBP995
million primarily reflects the difference between an actual investment return
for the with-profits life fund of 20 per cent and the long-term assumed return
of 7 per cent.
The US short-term fluctuations in investment returns of GBP65 million include a
positive GBP63 million in respect of the difference between actual investment
returns and long-term returns included in operating profit. The primary factor
was a return in excess of assumptions on limited partnership investments. It
also includes a positive GBP4 million in relation to changed expectations of
future profitability on variable annuity business in-force due to the actual
separate account return exceeding the long-term return reported within operating
profit.
In Asia, short-term investment fluctuations were GBP41 million, compared to
GBP91 million last year. This mainly reflects improving equity markets in a
number of countries.
Negative economic assumption changes of GBP349 million in 2005 compared with
negative economic assumption changes of GBP126 million in 2004. Economic
assumption changes in 2005 comprised negative GBP81 million in the UK, negative
GBP3 million in the US and negative GBP265 million in Asia.
In the UK, economic assumption changes of negative GBP81 million reflect the
impact of the increase in the future investment return assumption offset by the
increase in the risk discount rate. The increases arise because although
interest rates have decreased over 2005, the equity risk premium assumption has
increased from 3 per cent to 4 per cent.
In the US, economic assumption changes of negative GBP3 million primarily
reflect increases in the risk discount rates following the increase in the
equity risk premium from 3 per cent to 4 per cent, partially offset by an
increase in the separate account return assumption.
Asia's negative economic assumption changes of GBP265 million primarily reflect
the effect of lower bond yields in Taiwan which necessitated a reduction in the
Fund Earned Rate assumptions. The economic scenarios used to calculate 2005 EEV
basis results reflect the assumption of a phased progression of the bond yields
from the current rates to the long-term expected rates. The projections assume
that, in the average scenario, the current bond yields of around 2 per cent
trend towards 5.5 per cent at 31 December 2012. Allowance is made for the mix of
assets in the fund, our future investment strategy and the market value
depreciation of the bonds as a result of the assumed yield increases. This gives
rise to an average assumed Fund Earned Rate that trends from 2.3 per cent to 5.4
per cent in 2013 and falls below 2.3 per cent for seven years due to the
depreciation of bond values as yields rise. Thereafter, the Fund Earned Rate
fluctuates around a target of 5.9 per cent. This compares to a grading of 3.4
per cent at 31 December 2004 to 5.9 per cent by 31 December 2012 for the 2004
results. Consistent with our EEV methodology, a constant discount rate has been
applied to the projected cash flows.
The effect of change in the time value of cost of options and guarantees was
positive GBP47 million for the year, consisting of GBP31 million, GBP11 million
and GBP5 million for the UK, US and Asia, respectively.
Total EEV Basis - Result After Tax for Continuing Operations
The result after tax, minority interests and discontinued operations was
GBP1,582 million. The tax charge of GBP653 million compares with a tax charge of
GBP553 million in 2004. Minority interest in the Group results was GBP12
million.
The effective tax rate at an operating profit level was 21 per cent (2004: 27
per cent), reflecting the lower effective tax rates in the UK and certain Asian
territories. The effective tax rate at a total EEV level was 29 per cent (2004:
31 per cent) on a profit of GBP2,244 million. The higher effective rate of tax
compared with that at an operating profit level is primarily due to the effect
of impairment of goodwill (which does not attract tax relief), and the impact of
short term fluctuations in investment returns and changes in economic
assumptions not all of which are tax affected. The reduction in the 2005
effective tax rate arises from a number of factors, including settlement of a
number of outstanding issues with HMRC and benefit taken for prior year losses
incurred in France following a recent European Court of Justice decision.
Return on Embedded Value
Prudential's return on embedded value for 2005 was 15.7 per cent up from 13.4
per cent in 2004 reflecting the Groups' continued focus on profitable growth.
The return is based on post-tax EEV operating profit from continuing operations
as a percentage of opening embedded value.
INTERNATIONAL REPORTING STANDARDS (ifRS) RESULTS
IFRS Operating Profits (based on longer-term investment returns)
Proforma* Proforma*
2005 2004 Percentage 2005 2004 Percentage
(at CER) Change (at RER) Change
IFRS Operating
Profits
GBP'm GBP'm GBP'm GBP'm
Insurance
business
UK 400 296 35% 400 296 35%
US 348 298 17% 348 296 18%
Asia 195 119 64% 195 117 67%
Asia
development
expenses (20) (15) (33%) (20) (15) (33%)
------- ------- -------- ------- ------- -------
923 698 32% 923 694 32%
------- ------- -------- ------- ------- -------
Fund
management
business
M&G 163 136 20% 163 136 20%
US broker
dealer and
fund
management 24 15 60% 24 15 60%
Curian (10) (29) 66% (10) (29) 66%
Asia fund
management 12 20 (40%) 12 19 (37%)
------- ------- -------- ------- ------- -------
189 142 33% 189 141 34%
------- ------- -------- ------- ------- -------
Banking
Egg (UK) 44 61 (28%) 44 61 (28%)
Other income
and
expenditure (199) (198) (1%) (199) (197) (1%)
------- ------- -------- ------- ------- -------
Operating
profits from
continuing
operations 957 703 36% 957 699 37%
======= ======= ======== ======= ======= =======
* The comparative IFRS results shown above are prepared on a 'proforma' basis
which reflects the estimated effect on the 2004 results as if IAS 32, IAS 39 and
IFRS4 had been applied from 1 January 2004 to the Group's insurance operations
together with the discretionary change for the basis of determining longer-term
investment returns, as disclosed on 2 June 2005.
Reference to operating profit relates to profit including investment returns at
the expected long-term rate of return but excludes short-term fluctuations in
investment returns, actuarial gains and losses of defined benefit pension
schemes and exceptional items.
Group operating profit before tax from continuing operations on the IFRS basis
was GBP957 million, an increase of 36 per cent on the pro forma IFRS basis for
2004 at CER. At RER, operating profit was up 37 per cent on prior year. This
reflects strong growth in insurance and funds management businesses.
In the UK, IFRS operating profit increased 35 per cent to GBP400 million in
2005. This reflected a 9 per cent increase in profits attributable to the
with-profits business, a consequence of bonus declarations announced in February
2005 and February 2006, a 44 per cent increase in profits arising from annuities
business, and IFRS profits arising from the Phoenix Life and Pensions
transaction completed in June 2005.
In the US, IFRS operating profit of GBP362 million was up 27 per cent on 2004.
IFRS operating profit for long-term business was GBP348 million, up 17 per cent
from GBP298 million in 2004. The US operations' results are based on US GAAP,
adjusted where necessary to comply with IFRS as the Group's basis of presenting
operating profit is based on longer-term investment returns. In determining the
US results, 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 reflects a
continued ability to deliver improved investment returns, with greater spread
and fee income offset by higher amortisation of deferred acquisition costs
(DAC). In 2005, spread income was GBP119 million higher than in 2004, and
included a number of non-recurring items including mortgage prepayment fees,
make-whole payments and total return swap income which together represented
GBP60 million of spread income. JNL achieved record fee income during 2005,
driven by a 42 per cent increase in separate account assets held at year end,
and improved returns on these assets.
The 2004 result benefited from two one-off items, a favourable legal settlement
of GBP28 million (GBP21 million after related charge to amortisation of deferred
acquisition costs) and a positive GBP8 million adjustment arising from the
adoption of new accounting guidance in SOP 03-01 "Accounting and Reporting by
Insurance Enterprises for Certain Non-traditional Long Duration Contracts and
for Separate Accounts". This adjustment relates to a change in the method of
valuing certain liabilities.
The improvement in non-long term business profits was primarily driven by
reduced losses recorded by Curian, down to GBP10 million from GBP29 million in
2004, as the business continues to build scale. The result also benefited from
an improvement in PPMA profits, primarily due to a one-off GBP5 million
revaluation of an investment vehicle managed by PPMA.
Prudential Corporation Asia's operating profit for long-term business before
development expenses of GBP20 million was GBP195 million, an increase of 64 per
cent on 2004 at CER and included a net GBP44 million profit related to
exceptional items reported at the half year subsequently reduced by GBP14
million in restructuring costs for Japan. At reported rates, operating profits
were 67 per cent up on last year. The majority of this profit currently comes
from the larger and more established operations of Singapore, Hong Kong and
Malaysia, which represent GBP127 million of the total operating profit in 2005,
excluding exceptional items, compared to GBP111 million last year. In addition,
markets such as Indonesia and Vietnam are becoming larger contributors to
operating profits. Five life operations made IFRS losses: China and India which
are relatively new businesses rapidly building scale, Thailand and Taiwan which
are marginally loss making; and Japan where the loss increased over 2004 due to
restructuring costs incurred during the year.
Total IFRS Profits - Result Before Tax for Continuing Operations
(Year-on-year comparisons below are based on RER.)
Total IFRS profits before tax attributable to shareholders and minority
interests were GBP998 million in 2005, compared with GBP985 million on the
pro-forma basis for 2004. The increase reflects: growth in operating profit of
GBP258 million offset by a goodwill impairment charge of GBP120 million in
relation to the Japanese Life business, decrease in short-term fluctuations in
investment return, down GBP82 million from 2004 and a GBP43 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.
The development of the Japanese life business has been slower than expected and,
following its restructuring and the annual impairment review, Prudential
concluded that the purchased goodwill associated with this business of GBP120
million should be written off.
The results for discontinued operations reflects the sale of Jackson Federal
Bank and the discontinuation of Egg's France and Funds Direct operations.
Total IFRS Profits - Result After Tax for Continuing Operations
Profit after tax and minority interests was GBP748 million compared with GBP602
million in 2004. The effective rate of tax on operating profits, based on
longer-term investment returns, was 19 per cent (2004: 30 per cent). The
effective rate of tax at the total IFRS profit level for continuing operations
for 2005 was 24 per cent (2004: 29 per cent).The reduction in the 2005 effective
tax rate arises from a number of factors, including settlement of a number of
outstanding issues with HMRC and benefit taken for prior year losses incurred in
France following a recent European Court of Justice decision.
Earnings per Share
Earnings per share, based on EEV basis operating profit after tax and related
minority interests were 56.6 pence, compared to 43.2 pence in 2004. Earnings per
share, based on IFRS operating profit after tax and related minority interests,
were 32.2 pence, compared with a 2004 figure of 22.7 pence.
Basic earnings per share, based on total EEV basis profit from continuing
operations for the year after minority interests, were 66.8 pence, compared with
a figure of 56.8 pence in 2004. Basic earnings per share, based on IFRS profit
from continuing operations for the year after minority interests, were 31.5
pence, in line with the 2004 figure.
Dividend per Share
We intend to maintain our current dividend policy, with the level of dividend
growth being determined after considering the opportunities to invest in those
areas of our business offering attractive growth prospects, our financial
flexibility and the development of our statutory profits over the medium to
long-term.
The Board recommends a full year dividend per share for 2005 of 16.32 pence, an
increase of three per cent over the full year 2004 dividend of 15.84 pence.
Dividend cover based on reported post-tax IFRS operating profits from continuing
operations is 1.9 times. Dividend cover based on reported IFRS operating profits
from continuing operations and normalised tax rate of 30% is 1.7 times.
Balance sheet
Explanation of Balance Sheet Structure
The Group's capital on an IFRS basis comprises of shareholders' funds GBP5,194
million; subordinated long term and perpetual debt of GBP2,098 million; other
core structured borrowings GBP1,093 million and the unallocated surplus of
with-profits funds of GBP11.4 billion.
Subordinated or hybrid debt is debt capital which has some equity like features
and which would rank below other senior debt in the event of a liquidation.
These features allow hybrid debt to be treated as capital for FSA regulatory
purposes. All of the Group's hybrid which qualifies in this way is held at the
Group level and is therefore taken as capital into the parent solvency test
under the Financial Conglomerates Directive (FCD).
The FSA has established a structure for determining how much hybrid debt can
count as capital which is similar to that used for banks. It categorises capital
as Tier 1 (equity and preference shares), Upper Tier 2 debt and Lower Tier 2
debt. Up to 15 per cent of Tier 1 can be in the form of hybrid debt and called
"Innovative Tier 1". At 31 December 2005, the Group (including Egg) held GBP865
million of Innovative Tier 1 capital, in the form of perpetual securities,
GBP186 million Upper Tier 2 and GBP1,112 million of Lower Tier 2 capital.
Following the implementation of the FCD, it is advantageous to the Group from a
regulatory capital standpoint to raise its long-term debt in hybrid form and it
is the Group's policy to take advantage of favourable market conditions as they
arise to do so.
The unallocated surplus of the with-profits funds represents assets in the Life
Fund which have not yet been allocated either to policyholders or shareholders
and which are not generally available to the Group other than as they emerge
through the statutory transfer of the shareholders' share of the surplus as it
emerges from the fund over time.
Asset and Liability Management
Prudential manages its assets and liabilities locally, in accordance with local
regulatory requirements and reflecting the differing types of liabilities
Prudential has in each business. As a result of the diversity of products
Prudential offers and the different regulatory environments in which it
operates, Prudential employs different methods of asset/liability management on
both an in-force and new business basis. Stochastic modelling of assets and
liabilities is undertaken in the UK, the US and Asia to assess economic capital
requirements for different confidence intervals and time horizons. In addition,
reserve adequacy testing under a range of scenarios and dynamic solvency
analysis is carried out, including certain scenarios mandated by the US, the UK
and Asian regulators.
Weighted Average Cost of Capital (WACC)
Our commitment to our shareholders is to maximise the value of Prudential over
time by delivering superior financial returns. Prudential's weighted average
cost of capital (WACC) is circa 9.2 per cent, which is based on the net core
debt and shares outstanding at the end of 2005, an equity market premium of 4
per cent and a market Beta of 1.4. Prudential's WACC has increased since the end
of 2004 largely due to an increase in the assumed equity risk premium.
Prudential continues to retain a significant portion of the rights issue
proceeds which results in a higher proportion of the Group's capital being
funded by equity which, in turn results in a temporary increase in the Group's
WACC over its long-term WACC.
Shareholders' Funds
On the EEV basis, which recognises the shareholders' interest in long-term
businesses, shareholders' funds at 31 December 2005 were GBP10.3 billion, an
increase of GBP1.7 billion from the 2004 year end level after restating for
relevant IFRS changes. This 20 per cent increase primarily reflects: total EEV
basis operating profit of GBP1,712 million; a GBP1,001 million favourable
movement in short-term fluctuations in investment returns; and the positive
impact of GBP442 million for foreign exchange movements. These were offset by: a
GBP302 million negative movement due to changes in economic assumptions; a tax
charge of GBP653 million; dividend payments of GBP325 million made to
shareholders (net of scrip dividend); and the impairment charge of GBP120
million in respect of purchased goodwill associated with the Japanese life
business.
At year-end 2005, the embedded value for the Asian business as a whole was
GBP2.0 billion. The established markets of Hong Kong, Singapore and Malaysia
contribute GBP1.8 billion to the embedded value generated across the region with
Korea (GBP136 million) and Vietnam (GBP127 million) making further substantial
contributions. Our other markets of China, India, Indonesia, Japan, Thailand and
the Philippines in aggregate contribute GBP211 million in embedded value. Growth
in embedded value for the Asian business as a whole has been partially offset by
a negative embedded value in Taiwan of GBP311 million which includes the
associated cost of economic capital, and reflects the low interest rate
environment in Taiwan.
The current mix of business in Taiwan is weighted heavily towards unit-linked
and protection products, representing 73 per cent and 16 per cent of new
business APE in 2005, respectively. As a result, interest rates have little
effect on new business profitability and a 1 per cent reduction in assumed
interest rates would reduce new business margins in Taiwan by only 2 percentage
points. 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 1 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 GBP174 million
decrease in Taiwan's embedded value. A similar 1 per cent positive shift in
interest rates would increase embedded value by GBP106 million. Sensitivity of
the embedded value to interest rate changes varies considerably across the
region. In aggregate, a 1 per cent decrease in interest rates, along with all
consequential changes noted above, would result in only a 6 per cent decrease to
Asia's embedded value.
Statutory IFRS basis shareholders' funds at 31 December 2005 were GBP5.2
billion. This compares with GBP4.7 billion on the proforma IFRS basis, at 31
December 2004. The increase primarily reflects: profit after tax of GBP760
million and positive foreign exchange movements of GBP268 million, offset by
dividend payments to shareholders (net of scrip dividend) of GBP325 million.
Cash Flow
The table below 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.
FY 2005 FY 2004
GBPm GBPm
Cash remitted by business units :
UK life fund transfer* 194 208
UK other dividends (including special dividend) 103 100
JNL 85 62
Asia 73 67
M&G 62 84
----------- ----------
Total cash remitted to Group 517 521
Net interest paid (115) (119)
Dividends paid (378) (323)
Scrip dividends and share options 55 119
----------- ----------
Cash remittances after interest and dividends 79 198
Tax received 107 34
Corporate activities (66) (56)
----------- ----------
Cash flow before investment in businesses 120 176
Capital invested in business units :
UK (249) (189)
Asia (169) (158)
----------- ----------
Total capital invested in business units (418) (347)
----------- ----------
Decrease in cash before Rights Issue proceeds (298) (171)
Rights Issue proceeds 0 1,021
----------- ----------
(Decrease) increase in cash (298) 850
=========== ==========
* In respect of prior year's bonus declarations.
The Group holding company received GBP517 million in cash remittances from
business units in 2005 (2004: GBP521 million) comprising the shareholders'
statutory life fund transfer of GBP198 million relating to the 2004 bonus
declarations, of which GBP194 million was remitted from the UK and GBP4 million
from Asia, together with other remittances from subsidiaries of GBP319 million.
This includes a special dividend of GBP100 million from the PAC shareholders'
funds in respect of profit arising from earlier business disposals and a
separate payment of $150 million from JNL. The reduced transfer from M&G is due
to a higher level of reinvestment in 2005 in new activities together with a
remittance of surplus cash in 2004.
After net dividends and interest paid, there was a net cash inflow of GBP79
million (2004: GBP198 million).
During 2005, the Group holding company paid GBP66 million in respect of
corporate activities and received GBP107 million in respect of tax. Tax received
in 2004 of GBP34 million included an exceptional payment of around GBP60 million
related to the sale of equity securities backing the general insurance business.
The GBP107 million balance in 2005 represents surrendered tax losses reimbursed
by the Group. The Group invested GBP418 million (2004: GBP347 million) in its
business units, comprising GBP249 million in its UK Operations and GBP169
million in Asia. During 2006, Prudential continues to expect that Asia will be a
net capital provider to the Group.
In aggregate this gave rise to a decrease in cash of GBP298 million (2004:
GBP850 million increase, after Rights Issue proceeds).
As a result of the bonus declarations made in February 2005 and February 2006,
the shareholder transfer is expected to be GBP223 million in 2006, including the
Hong Kong branch.
Cash invested to support the UK business in 2006 will be less than 2005, up to
GBP230 million depending on the mix of business written and the opportunities
available.
Shareholders' Borrowings and Financial Flexibility
Net core structural borrowings at 31 December 2005 were GBP1,611 million
compared with GBP1,236 million at 31 December 2004. This reflects the net cash
outflow of GBP298 million, exchange conversion losses of GBP92 million and IFRS
adjustments of negative GBP15 million.
After adjusting for holding company cash and short-term investments of GBP1,128
million, core structural borrowings of shareholder-financed operations
(excluding Egg) at the end of 2005 totalled GBP2,739 million, compared with
GBP2,797 million at the end of 2004. This decrease reflected the repayment of
US$250 million bonds, the issuance of US$300 million Perpetual Subordinated
Capital Securities, the repayment of GBP171 million of short-term borrowings,
exchange conversion losses of GBP98 million and IFRS adjustments noted above.
Core long-term loans at the end of 2005 included GBP1,830 million at fixed rates
of interest with maturity dates ranging from 2007 to perpetuity. GBP1,010
million of the core borrowings were denominated in US dollars, to hedge
partially the currency exposure arising from the Group's investment in Jackson
National Life (JNL).
Prudential has in place an unlimited global commercial paper programme. At 31
December 2005 commercial paper of GBP408 million, US$1,538 million and EUR228
million has been issued under this programme. Prudential also has in place a
GBP5,000 million medium-term note (MTN) programme. At 31 December 2005
subordinated debt outstanding under this programme were GBP435 million and
EUR520 million, and senior debt outstanding was US$18 million. In addition the
holding company has access to GBP1,500 million committed revolving credit
facilities, provided by 15 major international banks and a GBP500 million
committed securities lending liquidity facility. These facilities have not been
drawn on during the year. The commercial paper programme, the MTN programme, the
committed revolving credit facilities and the committed securities lending
liquidity facility are available for general corporate purposes and to support
the liquidity needs of the parent company.
The Group's insurance and asset management operations are funded centrally. Egg,
as a separate bank, is responsible for its own financing. The Group's core debt
is managed to be within a target level consistent with its current debt ratings.
At 31 December 2005, the gearing ratio (debt, net of cash and short-term
investments, as a proportion of EEV shareholder funds) was 13.5 per cent
compared with 12.6 per cent at 31 December 2004.
Prudential plc enjoys strong debt ratings from both Standard & Poor's and
Moody's. Prudential long-term senior debt is rated AA- (negative outlook) and A2
(stable outlook) from Standard & Poor's and Moody's respectively, while
short-term ratings are A1+ and P-1.
Based on EEV basis operating profit from continuing operations and interest
payable on core structural borrowings, interest cover was 10.8 times in 2005
compared with 9.3 times in 2004.
Treasury Policy
The Group operates a central treasury function, which has overall responsibility
for managing its capital funding programme as well as its central cash and
liquidity positions.
The aim of Prudential's capital funding programme, which includes the GBP5,000
million medium-term note programme together with the unlimited commercial paper
programme, is to maintain a strong and flexible funding capacity.
In the UK and Asia, Prudential uses derivatives to reduce equity risk, interest
rate and currency exposures, and to facilitate efficient investment management.
In the US, Jackson National Life uses derivatives to reduce interest rate risk,
to facilitate efficient portfolio management and to match liabilities under
equity-indexed policies.
It is Prudential's policy that all free-standing derivatives are used to hedge
exposures or facilitate efficient portfolio management. Amounts at risk are
covered by cash or by corresponding assets.
Due to the geographical diversity of Prudential's businesses, it is subject to
the risk of exchange rate fluctuations. Prudential's international operations in
the US, Asia and Europe, which represent a significant proportion of operating
profit and shareholders' funds, generally write policies and invest in assets
denominated in local currency. Although this practice limits the effect of
exchange rate fluctuations on local operating results, it can lead to
significant fluctuations in Prudential's consolidated financial statements upon
conversion of results into pounds sterling. The currency exposure relating to
the conversion of reported earnings is not separately managed, as it is not in
the economic interests of the Group to do so. The impact of gains or losses on
currency conversions is recorded as a component of shareholders' funds within
the statement of recognised income and expense. The impact of exchange rate
fluctuations in 2005 is discussed elsewhere in this Financial Review.
unallocated surplus of with-profits funds
During 2005, the unallocated surplus, which represents the excess of assets over
policyholder liabilities for the Group's with-profits funds on a statutory
basis, grew from GBP8.3 billion at 1 January (after the effect of adoption of
IFRS and the realistic reporting regime in the UK) to GBP11.3 billion at 31
December. This reflects an increase in the cumulative retained earnings arising
on with-profits business that have yet to be allocated to policyholders or
shareholders. The change in 2005 predominantly reflects the positive investment
return earned by the PAC with-profits fund as a result of investment gains in
the UK equity market.
Regulatory capital Requirements
The Financial Conglomerates Directive ("FCD"), which affects groups with
significant cross-sector activities in insurance and banking/investment
services, came into force for Prudential from 1 January 2005. Prior to this,
since 1 January 2001 Prudential was required to meet the solvency requirements
of the Insurance Groups Directive ("IGD"), as implemented by the Financial
Services Authority ("FSA"). The FSA has implemented the FCD by applying the
sectoral rules of the largest sector, hence a group such as Prudential is
classified as an insurance-led conglomerate and is required to focus on the
capital adequacy requirements of the IGD, the Consolidated Life Directive and
the Insurance Company Accounts Directive.
The FCD requires a continuous parent company solvency test which requires the
aggregating of surplus capital held in the regulated subsidiaries, from which
group borrowings are deducted, other than those subordinated debt issues which
qualify as capital. No credit for the benefit of diversification is allowed for
under this approach. The test is passed when this aggregate number is positive,
and a negative result at any point in time is a notifiable breach of UK
regulatory requirements. In practice, whether Prudential is classified as a
financial conglomerate or insurance group, there is very little difference in
application of the rules. This is because the FSA has decided to make the test
mandatory from 31 December 2006 to all insurance groups.
Due to the geographically diverse nature of Prudential's operations, the
application of these requirements to Prudential are complex. In particular, for
many of our Asian operations, the assets, liabilities and capital requirements
have to be recalculated based on FSA regulations as if the companies were
directly subject to FSA regulation.
There have been two additional FSA requirements applicable this year: Firstly,
the elimination of goodwill in the valuation of non-insurance subsidiaries, for
which we had already factored in the full impact in our disclosure of the 2004
IGD position, ahead of the FSA's rules coming into force. Secondly, accounting
for pension fund deficits, which has had an approximate GBP0.1bn impact this
year to the 2005 FCD position.
The FCD position will be submitted to the FSA by 30 April 2006 but is currently
estimated to be around GBP825 million.
The European Union is continuing to develop a new prudential framework for
insurance companies, "the Solvency II project". The main aim of this framework
is to ensure the financial stability of the insurance industry and protect
policyholders through establishing solvency requirements better matched to the
true risks of the business. Like Basel 2, the new approach is expected to be
based on the concept of three pillars - minimum capital requirements,
supervisory review of firms' assessments of risk and enhanced disclosure
requirements. In particular, companies will be encouraged to improve their risk
management processes, including making use of internal economic capital models
to enable a better understanding of the business. The emphasis on transparency
and comparability would help ensure a level playing field.
Solvency II is being led by the European Commission's ("EC") Internal Market
Director-General, with formal "Level 1" agreement by the European Parliament and
Council on framework directive made after a full consultation process. The
detailed regulatory requirements are negotiated at "Level 2" with the EC
receiving guidance from the European Insurance and Occupational Pensions
Committee ("EIOPC") where HM Treasury represents the UK.
The EC have directed the Committee of European Insurance and Occupational
Pensions Supervisors ("CEIOPS"), where the FSA represents the UK, to provide
guidance on many technical aspects of the framework ("Level 3"). CEIOPS will
also develop voluntary guidance for national regulators to ensure consistent
interpretation of Level 2 measures. To this end, the EC and CEIOPS have jointly
issued Calls for Advice in order to incorporate broader feedback from industry,
for which Prudential has actively engaged in mainly through its participation in
the European Chief Risk Officer ("CRO") Forum.
Financial Strength of Insurance Operations
United Kingdom
The fund is very strong with an inherited estate measured on an essentially
deterministic valuation basis of around GBP9.0 billion compared with GBP6.8
billion at the end of 2004. On a realistic basis, with liabilities recorded on a
market consistent basis, the free assets were valued at around GBP8.0 billion
before a deduction for the risk capital margin.
The PAC long-term fund is rated AA+ by Standard & Poor's and Aa1 by Moody's.
The table below shows the change in the investment mix of Prudential's main
with-profits fund:
1999 2004 2005
% % %
---------------------------- ------- ------- -------
UK equities 58 33 40
International equities 14 15 19
Property 11 18 15
Bonds 13 29 21
Cash and other asset classes 4 5 5
---------------------------- ------- ------- -------
Total 100 100 100
---------------------------- ------- ------- -------
For the main UK with-profits fund 83 per cent of fixed income securities are
investment grade with 25 per cent rated AA or above. For Prudential Annuities
Limited 95 per cent of the fixed income securities are investment grade with 48
per cent rated AA or above. For Prudential Retirement Income Limited 98 per cent
of total assets are investment grade with 57 per cent rated AA or above.
With-profits contracts are long-term contracts with relatively low guaranteed
amounts, this combined with the strong financial position of the fund enables
Prudential to invest primarily in equities and property. At the end of 2005 the
equity backing ratio (equity plus property) was nearly 74 per cent which
reflects an approximate 10 per cent increase in the equity exposure over the
year with a corresponding reduction in the bond, and, to a lesser extent the
property, exposure - a strategy driven by the perceived attractive pricing of
equities relative to other assets in the earlier part of 2005, which led us to
move back into equities. To some extent this is a retracing of the substantial
(and successful) equity reduction strategy implemented towards the end of the
late 90's 'bubble' period. The fund remains extremely well diversified
geographically, by asset type and within the underlying stock portfolios, which
we believe is an attractive feature of the Prudential with-profits proposition.
It helps reduce risk or expected volatility by insulating the total fund from
potential weakness in any particular market or stock. The active management of
the asset mix in recent years has had a substantial beneficial impact on
investment returns. The broad asset mix will continue to be reviewed as the
economic environment and market valuations change.
The investment return on the Prudential main with-profits fund was 20 per cent
in the year to 31 December 2005 compared with the rise in the FTSE All Share
(Total Return) Index of 22 per cent over the same period. Over the last ten
years the with-profits fund has consistently generated positive fund returns
with 3, 5 and 10 year compound returns of 16.6 per cent per annum, 7.1 per cent
per annum and 10.1 per cent per annum respectively, compared with corresponding
increases in the FTSE All Share index (Total Return) of 18.5 per cent, 2.2 per
cent and 7.9 per cent. These returns demonstrate the benefits of the fund's
strategic asset allocation and long-term outperformance.
United States
The capital adequacy position of Jackson National Life remains strong, having
improved the capital ratio from 8.5 per cent in 2004 to 9.2 per cent in 2005.
JNL's statutory capital, surplus and asset valuation reserve position improved
year on year by $434 million, after deducting the $150 million of capital
remitted to the parent company. JNL's financial strength is rated AA by Standard
& Poor's (negative outlook) and A1 by Moody's.
JNL's invested asset mix on a US regulatory basis (including Jackson National
Life of New York but excluding policy loans and reverse repo leverage) is as
follows:
2003 2004 2005
% % %
--------------------------------------- ------- ------- -------
Bonds:
Investment Grade Public 58 60 58
Investment Grade Private 19 19 19
Non Investment Grade Public 5 4 5
Non Investment Grade Private 2 2 2
Commercial Mortgages 10 11 11
Private equities and real estate 4 3 3
Equities, cash and other assets 2 1 2
--------------------------------------- ------- ------- -------
Total 100 100 100
--------------------------------------- ------- ------- -------
Asia
Prudential Corporation Asia maintains solvency margins in each of its operations
so that these are at or above the local regulatory requirements. Across the
region less than 20 per cent of non-linked funds are invested in equities.
Both Singapore and Malaysia have discrete life funds, and in 2005 good
investment returns saw their free asset ratios increase. The Hong Kong life
operation is a branch of Prudential Assurance Company Limited and its solvency
is covered by that business. Taiwan has Risk Based Capital regulatory solvency
margins and Prudential ensures sufficient capital is retained in the business to
cover these requirements.
REDRESS OF MORTGAGE ENDOWMENT PRODUCTS
Prudential Assurance's main long-term business with-profits fund paid
compensation of GBP24 million in 2005 in respect of mortgage endowment product
mis-selling claims and held provisions of GBP63 million at 31 December 2005 to
cover further claims. These compensation payments and provisions have had no
impact on policyholders' asset shares. As a result, policyholders' bonuses and
the shareholder's share of these bonuses are unaffected, resulting in no impact
on the Group's profit before tax.
A provision of GBP6 million was held at 31 December 2005 by shareholders' funds
to cover potential compensation in respect of mis-selling claims for Scottish
Amicable mortgage endowment products sold since the acquisition of Scottish
Amicable in 1997. In addition, a provision of GBP50 million was held at 31
December 2005 for the closed Scottish Amicable Insurance Fund (SAIF) in respect
of mortgage endowment products sold prior to acquisition. This provision has no
impact on shareholders. No further Scottish Amicable mortgage endowment products
were sold after April 2001.
Inherited Estate
The long-term fund contains the amount that the Company 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 sub-fund is equal to the policyholders' accumulated asset shares
plus any additional payments that may be required for smoothing or to meet
guarantees. The balance of the assets of the with-profits sub-fund is called the
'inherited estate' and represents the major part of the working capital of
Prudential's long-term fund which enables the Company to support with-profits
business by:
- providing the benefits associated with smoothing and guarantees;
- providing investment flexibility for the fund's assets;
- meeting the regulatory capital requirements, which demonstrate solvency;
- absorbing the costs of significant events, or fundamental changes in its
long-term business without affecting 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.
The Company believes that it would be beneficial if there were greater clarity
as to the status of the inherited estate. In due course, after discussions with
the FSA, the company may therefore take steps to achieve that clarity, whether
through guidance from the court or otherwise. In any event the Company expects
that the entire inherited estate will need to be retained within the long-term
fund for the foreseeable future to provide working capital and so it is not
considering any distribution of the inherited estate to policyholders and
shareholders.
The costs associated with the mis-selling review of Prudential's with-profits
personal pensions have been met from the inherited estate. Accordingly, these
costs have not been charged to the asset shares used in the determination of
policyholder bonus rates. Hence policyholders' pay-out values have been
unaffected by personal pension mis-selling.
In 1998, Prudential stated that deducting personal pensions mis-selling costs
from the inherited estate of the with-profits sub-fund would not impact the
Company's bonus or investment policy. The Company gave an assurance that if this
unlikely event were to occur, it would make available support to the fund from
shareholder resources for as long as the situation continued, to ensure that
policyholders were not disadvantaged.
The assurance was designed to protect both existing policyholders at the date it
was announced, and policyholders who subsequently purchased policies while the
pension mis-selling review was continuing. This review was completed on 30 June
2002 and consequently the assurance has not applied to new business issued since
1 January 2004. Therefore the maximum amount of capital support available under
the terms of the assurance will reduce over time as claims are paid on the
policies covered by it.
Defined Benefit Pension Schemes
The Group operates four defined benefit schemes, three in the UK, of which the
principal scheme is the Prudential Staff Pension Scheme (PSPS), and a small
scheme in Taiwan. The level of surplus or deficit of assets over liabilities for
defined benefit schemes is currently measured in three ways: the actuarial
valuation, FRS17 (for subsidiary accounting in the UK), and IAS19 for the Group
financial statements. FRS17 and IAS19 are very similar. As at 31 December, 2005
the shareholders' share of the deficit of these schemes amounted to GBP153
million net of related tax relief.
Defined benefit schemes in the UK are generally required to be subject to full
actuarial valuation every three years to assess the appropriate level of funding
for schemes having regard to their commitments. These valuations include
assessments of the likely rate of return on the assets held within the separate
trustee administered funds. PSPS was last actuarially valued as at 5 April 2002
and this valuation demonstrated the Scheme to be 110 per cent funded, with an
excess of actuarially determined assets over liabilities of 10 per cent,
representing a fund surplus of GBP376 million. As a result, no change in
employers' contributions from the current 12.5 per cent of salaries has been
required until now.
The PSPS valuation as at 5 April 2005 is currently being finalised and is
expected to show a small deficit on the actuarial basis. The Company expects
that for 2006 and future years the employers contributions for ongoing service
of current employees will approximately double whilst, in addition, deficit
funding amounts designed to eliminate the actuarial deficit over a ten year
period will be made. Total contributions to the scheme for these two components
are expected to be of the order of GBP70-75 million per annum over a ten year
period. This compares with contributions in 2005 of GBP19 million.
Under IAS19 the basis of valuation differs markedly from the full triennial
valuation basis. In particular, it would require assets of the Scheme to be
valued at their market value at the year-end, while pension liabilities would be
required to be discounted at a rate consistent with the current rate of return
on a high quality corporate bond. As a result, the difference between IAS19
basis assets and liabilities can be volatile. For those schemes such as PSPS,
which hold a significant proportion of their assets in equity investments, the
volatility can be particularly significant. Under IAS19, for 2005, a GBP22
million pre-tax shareholder charge to operating results based on longer-term
returns arises, outside the operating result, but included in total profits is a
pre-tax shareholder charge of a further GBP51 million. This is comprised of two
components. First, GBP31 million of net actuarial gains arises on the movement
in the shareholders' share of the scheme deficits. The second component is a
charge of GBP20 million which arises from the need under UK GAAP (when applied
to the Group's insurance contracts under IFRS) to set aside amounts for future
expenses on certain contracts. The GBP20 million charge reflects the increase
relating to the increased future contributions for ongoing service.
Surpluses and deficits on the Group's defined benefit schemes are apportioned to
the Prudential Assurance Company (PAC) life fund and shareholders' funds based
on estimates of employees' service between them. Previously, for the purposes of
memorandum FRS17 disclosure the deficit on the PSPS scheme has been apportioned
in the ratio 80/20 between the life fund and shareholder backed operations.
During the year additional analysis has been undertaken and the ratio reassessed
as 70/30. At 31 December 2005 the total share of the deficits on the PSPS and
much smaller Scottish Amicable scheme amounted to GBP295 million net of related
tax relief.
PRUDENTIAL PLC 2005 RESULTS
RESULTS SUMMARY
European Embedded Value (EEV) Basis Results*
2005 GBPm 2004 GBPm
-------------------------------------- -------- --------
UK Insurance Operations 426 486
M&G 163 136
Egg 44 61
-------------------------------------- -------- --------
UK Operations 633 683
US Operations 755 368
Asian Operations 568 464
Other Income and Expenditure (244) (241)
-------------------------------------- -------- --------
Operating profit from continuing operations based on
longer-term investment returns 1,712 1,274
Goodwill impairment charge (120) -
Short-term fluctuations in investment returns 1,001 570
Shareholders' share of actuarial and other gains and
losses of defined benefit pension schemes (47) (12)
Effect of changes in economic assumptions and time value
of cost of options and guarantees (302) (48)
-------------------------------------- -------- --------
Profit from continuing operations before tax 2,244 1,784
-------------------------------------- -------- --------
Operating earnings per share from continuing operations
after related tax and minority interests* 56.6p 43.2p
Basic earnings per share 66.9p 53.7p
Shareholders' funds, excluding minority interests GBP10.3bn GBP8.6bn
-------------------------------------- -------- --------
International Financial Reporting Standard (IFRS) Basis Results**
Statutory IFRS basis results 2005 2004
------------------------------------- --------- --------
Profit after tax attributable to equity holders of the
Company GBP748m GBP517m
Basic earnings per share 31.6p 24.4p
Shareholders' funds, excluding minority interests GBP5.2bn GBP4.5bn
------------------------------------- --------- --------
Supplementary IFRS basis information Based on Based on
------------------------------------- statutory IFRS pro forma
basis results IFRS results
2005 2004
--------- --------
Operating profit from continuing operations
based on longer-term investment returns GBP957m GBP699m
Profit after tax attributable to equity
holders of the Company GBP748m GBP602m
Operating earnings per share from continuing
operations after related tax and minority interests** 32.2p 22.7p
Basic earnings per share 31.6p 28.4p
Shareholders' funds, excluding minority interests GBP5.2bn GBP4.7bn
------------------------------------- --------- --------
2005 2004
------------------------------------- --------- --------
Dividends per share declared and paid in reporting
period 15.95p 15.48p
Dividends per share relating to reporting period 16.32p 15.84p
Funds under management GBP234bn GBP197bn
------------------------------------- --------- --------
*EEV basis results
The EEV basis results have been prepared in accordance with the European
Embedded Value principles issued by the CFO Forum of European Insurance
Companies in May 2004 and expanded by the Additional Guidance on EEV disclosures
published in October 2005. Previously the Group has reported Embedded Value
based supplementary information on the Achieved Profits basis.
Operating earnings per share is calculated using operating profits from
continuing operations based on longer-term investment returns, after tax and
minority interest. These profits exclude goodwill impairment charges, the
post-tax effects of short-term fluctuations in investment returns, the
shareholder's share of actuarial and other 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. The amounts for these items
are included in the calculation of EEV basis basic earnings per share.
**IFRS basis results
The basis of preparation reflects the formal adoption of IFRS basis reporting
for the 2005 results. This basis of reporting was anticipated in the Company's
interim reporting in July 2005 and which, on all substantive matters the basis
of measurement and presentation of IFRS basis results included in this
announcement, is the same as applied at that time.
References to "Statutory IFRS basis" results throughout this announcement
reflect results contained in the statutory basis financial statements for 2005.
These statements incorporate changes from the basis of preparation for the 2004
financial statements that were included in determining the interim 2005 results.
These changes reflect:
(i) Measurement changes arising from policies the Group has applied on the
adoption of all IFRS standards, other than IAS 32 (Financial Instruments:
Disclosure and Presentation), IAS 39 (Financial Instruments: Recognition and
Measurement), and IFRS 4 (Insurance Contracts), from 1 January 2004. The 2005
results include the effect of adoption of those three standards from 1 January
2005.
(ii) Changes to the format of the results and other presentational changes that
the Group has applied in its 2005 financial statements in so far as they affect
the summary results included in this announcement.
(iii) A discretionary change of policy for the basis of determining longer-term
investment returns included in operating profit based on longer-term investment
returns.
The pro forma IFRS basis results included in this announcement are included as
supplementary information and are not results that form part of the Group's
financial statements. The pro forma IFRS results reflect the application of the
statutory IFRS changes noted above and the estimated effect on the Group's
results for 2004 if IAS 32, IAS 39 and IFRS 4 had been applied from 1 January
2004 to the Group's insurance operations.
Operating earnings per share is calculated using operating profits from
continuing operations based on longer-term investment returns, after tax and
minority interest. These profits exclude goodwill impairment charges, and the
post-tax effects of short-term fluctuations in investment returns, and the
shareholders' share of actuarial and other gains and losses on defined benefit
pension schemes. The amounts for these items are included in the calculation of
IFRS basis basic earnings per share.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
RESULTS SUMMARY
2005 GBPm 2004 GBPm
------------------------------------- -------- --------
UK Insurance Operations 426 486
M&G 163 136
Egg 44 61
------------------------------------- -------- --------
UK Operations 633 683
US Operations 755 368
Asian Operations 568 464
Other Income and Expenditure (244) (241)
------------------------------------- -------- --------
Operating profit from continuing operations based on
longer-term investment returns 1,712 1,274
Goodwill impairment charge (120) -
Short-term fluctuations in investment returns 1,001 570
Shareholders' share of actuarial and other gains and losses
of defined benefit pension schemes (47) (12)
Effect of changes in economic assumptions and time value of
cost of options and guarantees (302) (48)
------------------------------------- -------- --------
Profit from continuing operations before tax (including
actual investment returns) 2,244 1,784
Tax (653) (553)
------------------------------------- -------- --------
Profit from continuing operations after tax before minority
interests 1,591 1,231
Discontinued operations (net of tax) 3 (94)
------------------------------------- -------- --------
Profit for the year 1,594 1,137
------------------------------------- -------- --------
Attributable to:
Equity holders of the Company 1,582 1,138
Minority interests 12 (1)
------------------------------------- -------- --------
Profit for the year 1,594 1,137
------------------------------------- -------- --------
Earnings per share 2005 2004
------------------------------------- -------- --------
Continuing operations
From operating profit, based on longer-term investment
returns, after related tax and minority interests 56.6p 43.2p
Adjustment for goodwill impairment charge (5.1)p -
Adjustment from post-tax longer-term investment returns to
post-tax actual investment returns (after related minority
interests) 27.8p 17.1p
Adjustment for post-tax shareholders' share of actuarial and
other gains and losses on defined benefit pension schemes (1.4)p (0.3)p
Adjustment for post-tax effect of changes in economic
assumptions and time value of cost of options and guarantees (11.1)p (3.2)p
------------------------------------- -------- --------
Based on profit from continuing operations after minority
interests 66.8p 56.8p
------------------------------------- -------- --------
Discontinued operations
Based on profit (loss) from discontinued operations after
minority interests 0.1p (3.1)p
------------------------------------- -------- --------
Based on profit for the year after minority interests 66.9p 53.7p
------------------------------------- -------- --------
Average number of shares (million) 2,365 2,121
------------------------------------- -------- --------
Dividends per share 2005 2004
------------------------------------- -------- --------
Dividends per share relating to reporting period
Interim dividend (2005 and 2004) 5.30p 5.19p
Final dividend (2005 and 2004) 11.02p 10.65p
------------------------------------- -------- --------
Total 16.32p 15.84p
------------------------------------- -------- --------
Dividends per share declared and paid in reporting period
Interim dividend for current period 5.30p 5.19p
Final dividend for prior period 10.65p 10.29p
------------------------------------- -------- --------
Total 15.95p 15.48p
------------------------------------- -------- --------
TOTAL INSURANCE AND INVESTMENT PRODUCTS NEW BUSINESS
INSURANCE PRODUCTS AND INVESTMENT PRODUCTS*
Insurance Products* Investment Products* Total
------------------- ------------------- -----------------
2005 GBPm 2004 GBPm 2005 GBPm 2004 GBPm 2005 GBPm 2004 GBPm
----------------------- ------ ------ ------ ------ ------ ------
UK Operations 7,276 6,538 7,916 5,845 15,192 12,383
US Operations 5,023 4,420 414 418 5,437 4,838
Asian Operations 1,485 1,172 18,457 19,068 19,942 20,240
----------------------- ------ ------ ------ ------ ------ ------
Group Total 13,784 12,130 26,787 25,331 40,571 37,461
----------------------- ------ ------ ------ ------ ------ ------
INSURANCE PRODUCTS - NEW BUSINESS PREMIUMS AND CONTRIBUTIONS*
Annual Premium
and Contribution
Single Regular Equivalents
-------- --------- -------------------
2005 GBPm 2004 GBPm 2005 GBPm 2004 GBPm 2005 GBPm 2004 GBPm
----------------------- ------- ------- ------- ------- ------- ------
UK Insurance Operations
Direct to customer
Individual annuities 720 630 - - 72 63
Individual pensions and
life 29 19 11 10 14 12
Department of Work and
Pensions rebate business 244 265 - - 24 27
----------------------- ------- ------- ------- ------- ------- ------
Total 993 914 11 10 110 102
----------------------- ------- ------- ------- ------- ------- ------
Business to Business
Corporate pensions 242 153 146 137 170 152
Individual annuities 212 229 - - 21 23
Bulk annuities 511 474 - - 51 47
----------------------- ------- ------- ------- ------- ------- ------
Total 965 856 146 137 242 222
----------------------- ------- ------- ------- ------- ------- ------
Intermediated distribution
Life 1,112 1,001 6 5 118 105
Individual annuities 995 1,180 - - 100 118
Individual and corporate
pensions 108 189 25 25 36 44
Department of Work and
Pensions rebate business 83 89 - - 8 9
----------------------- ------- ------- ------- ------- ------- ------
Total 2,298 2,459 31 30 262 276
----------------------- ------- ------- ------- ------- ------- ------
Partnerships
Life 814 790 3 2 84 81
Individual and
bulk annuities 1,814 1,249 - - 182 125
----------------------- ------- ------- ------- ------- ------- ------
Total 2,628 2,039 3 2 266 206
----------------------- ------- ------- ------- ------- ------- ------
Europe
Life 201 89 - 2 20 11
----------------------- ------- ------- ------- ------- ------- ------
Total UK
Insurance
Operations 7,085 6,357 191 181 900 817
----------------------- ------- ------- ------- ------- ------- ------
US Operations
Fixed annuities 788 1,130 - - 79 113
Fixed index annuities 616 429 - - 62 43
Variable annuities 2,605 1,981 - - 261 198
Life 11 16 14 12 15 14
Guaranteed Investment
Contracts 355 180 - - 35 18
GIC - Medium
Term Notes 634 672 - - 63 67
----------------------- ------- ------- ------- ------- ------- ------
Total US Operations 5,009 4,408 14 12 515 453
----------------------- ------- ------- ------- ------- ------- ------
Asian Operations
China 17 9 23 16 25 17
Hong Kong 289 255 83 78 112 103
India (Group's
26% interest) 4 5 57 33 57 33
Indonesia 42 38 42 28 46 32
Japan 30 17 4 7 7 9
Korea 29 36 132 60 135 64
Malaysia 9 7 66 61 67 62
Singapore 284 199 58 47 86 67
Taiwan 124 88 150 143 162 151
Other 9 8 33 37 34 38
----------------------- ------ ------ ------ ------ ------ ------
Total Asian Operations 837 662 648 510 731 576
----------------------- ------ ------ ------ ------ ------ ------
Group Total 12,931 11,427 853 703 2,146 1,846
----------------------- ------ ------ ------ ------ ------ ------
Annual premium and contribution equivalents are calculated as the aggregate of
regular new business amounts and one tenth of single new business amounts.
INVESTMENT PRODUCTS - FUNDS UNDER MANAGEMENT *
1 Jan 2005 Gross inflows Redemptions Market and 31 Dec 2005
other movements
GBPm GBPm GBPm GBPm GBPm
----------------------- ------ ------ -------- -------- ------
UK Operations 28,705 7,916 (4,054) 3,629 36,196
US Operations 550 414 (116) 125 973
Asian
Operations 8,538 18,457 (17,130) 267 10,132
----------------------- ------ ------ -------- -------- ------
Group Total 37,793 26,787 (21,300) 4,021 47,301
----------------------- ------ ------ -------- -------- ------
* The format of the tables shown above is consistent with the distinction
between insurance and investment products as applied for previous financial
reporting periods. With the exception of US institutional business, products
categorised as "insurance" refer to those classified as contracts of long-term
insurance business for regulatory reporting purposes, namely 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.
UK and Asia investment products referred to in the tables above are unit trusts,
mutual funds and similar types of fund management arrangements. US investment
products relate to asset under administration in Curian. These are unrelated to
insurance products that are classified as "investment contracts" under IFRS 4,
as described above, although similar IFRS recognition principles apply to the
acquisition costs and fees attaching to this type of business.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
OPERATING PROFIT FROM CONTINUING OPERATIONS BASED ON LONGER-TERM INVESTMENT
RETURNS*
Results Analysis by Business Area 2005 GBPm 2004 GBPm
------------------------------------- -------- --------
UK Operations
New business 243 241
Business in force 183 245
------------------------------------- -------- --------
Long-term business 426 486
M&G 163 136
Egg 44 61
------------------------------------- -------- --------
Total 633 683
------------------------------------- -------- --------
US Operations
New business 211 145
Business in force 530 237
------------------------------------- -------- --------
Long-term business 741 382
Broker-dealer and fund management 24 15
Curian (10) (29)
------------------------------------- -------- --------
Total 755 368
------------------------------------- -------- --------
Asian Operations
New business 413 355
Business in force 163 105
------------------------------------- -------- --------
Long-term business 576 460
Fund management 12 19
Development expenses (20) (15)
------------------------------------- -------- --------
Total 568 464
------------------------------------- -------- --------
Other Income and Expenditure
Investment return and other income 42 0
Interest payable on core structural borrowings (175) (154)
Corporate expenditure:
Group Head Office (70) (51)
Asia Regional Head Office (30) (29)
Charge for share-based payments for Prudential schemes (11) (7)
------------------------------------- -------- --------
Total (244) (241)
------------------------------------- -------- --------
Operating profit from continuing operations based on
longer-term investment returns 1,712 1,274
------------------------------------- -------- --------
Analysed as profits (losses) from:
New business 867 741
Business in force 876 587
------------------------------------- -------- --------
Long-term business 1,743 1,328
Asia development expenses (20) (15)
Other operating results (11) (39)
------------------------------------- -------- --------
Total 1,712 1,274
------------------------------------- -------- --------
* EEV basis operating profit from continuing operations based on longer-term
investment returns excludes goodwill impairment charges, short-term fluctuations
in investment returns, the shareholders' share of actuarial and other 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
caused by 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 supplementary information.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
MOVEMENT IN SHAREHOLDERS' CAPITAL AND RESERVES (excluding minority interests)
2005 GBPm 2004 GBPm
---------------------------------------- ------ ------
Profit for the year (net of minority interests) 1,582 1,138
Items recognised directly in equity:
Cumulative effect of changes in accounting principles on
adoption of IAS 32, IAS 39 and IFRS 4, net of applicable
taxes, at 1 January 2005 (25) -
Unrealised valuation movements on securities classified as
available-for-sale from 1 January 2005 (1) -
Movement on cash flow hedges (4) -
Exchange movements 377 (239)
Related tax 65 (1)
Proceeds from Rights Issue, net of expenses - 1,021
Other new share capital subscribed 55 119
Dividends (380) (323)
Reserve movements in respect of share-based payments 15 10
Treasury shares:
Movement in own shares in respect of share-based payment
plans 0 (2)
Movement on Prudential plc shares purchased by unit trusts
consolidated under IFRS 3 14
---------------------------------------- ------ ------
Net increase in shareholders' capital and reserves 1,687 1,737
---------------------------------------- ------ ------
Shareholders' capital and reserves at beginning of year (excluding minority interests):
As previously reported on the Achieved Profits basis 8,596 7,005
Adjustments on implementation of statutory IFRS (excluding
IAS 32, IAS 39 and IFRS 4) 165 15
Adjustments on implementation of European Embedded Value
(EEV) methodology (147) (143)
---------------------------------------- ------ ------
As restated on EEV basis 8,614 6,877
---------------------------------------- ------ ------
Shareholders' capital and reserves at end of year
(excluding minority interests) 10,301 8,614
---------------------------------------- ------ ------
Comprising:
---------------------------------------- ------ ------
UK Operations:
Long-term business 5,132 4,228
M&G:
Net assets 245 297
Acquired goodwill 1,153 1,153
Egg 303 273
---------------------------------------- ------ ------
6,833 5,951
US Operations 3,418 2,570
Asian Operations:
Net assets 2,070 1,631
Acquired goodwill 172 292
Other operations:
Holding company net borrowings (1,724) (1,299)
Other net liabilities (468) (531)
---------------------------------------- ------ ------
10,301 8,614
---------------------------------------- ------ ------
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
SUMMARISED CONSOLIDATED BALANCE SHEET
2005 GBPm 2004 GBPm
-------------------------------------- ------- -------
Total assets less liabilities, excluding insurance
funds 174,258 148,682
Less insurance funds*:
Policyholder liabilities (net of reinsurers' share)
and unallocated surplus of with-profits funds (169,064) (144,193)
Less shareholders' accrued interest in the long-term
business 5,107 4,125
-------------------------------------- ------- -------
(163,957) (140,068)
-------------------------------------- ------- -------
Total net assets 10,301 8,614
-------------------------------------- ------- -------
Share capital 119 119
Share premium 1,564 1,558
Statutory basis shareholders' reserves (following
adoption of IFRS) 3,511 2,812
Additional EEV basis retained profit 5,107 4,125
-------------------------------------- ------- -------
Shareholders' capital and reserves (excluding minority
interest) 10,301 8,614
-------------------------------------- ------- -------
*Including liabilities in respect of insurance products classified as investment
products under IFRS 4.
NET ASSET VALUE PER SHARE
2005 2004
-------------------------------------- ------- -------
Based on EEV basis shareholders' funds of GBP10,301m
(GBP8,614m) 432p 363p
Number of shares at year end (million) 2,387 2,375
PART 2
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
BASIS OF PREPARATION OF RESULTS
The European Embedded Value (EEV) basis results have been prepared in accordance
with the European Embedded Value principles issued by the CFO Forum of European
Insurance Companies in May 2004 and expanded by the Additional Guidance on EEV
Disclosures published in October 2005. Where appropriate the EEV basis results
include the effects of adoption of International Financial Reporting Standards.
The EEV results for the Group include the results for the covered business on
the EEV basis. These results are then combined with the IFRS basis results for
the Group's other operations.
With two exceptions, covered business comprises the Group's long-term business
operations. The definition of long-term business operations is consistent with
previous practice under the Modified Statutory Basis and Achieved Profits basis
reporting 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 but do not fall within the technical definition. Under the EEV
principles, the results for covered business now include the projected margins
of attaching internal fund management.
The exceptions are for the closed Scottish Amicable Insurance Fund (SAIF) and in
respect of the Group's defined benefit pension schemes. SAIF is closed to new
business and the assets and liabilities of the fund are wholly attributable to
the policyholders of the fund. As regards the Group's defined benefit pension
schemes, the deficits attaching to the Prudential Staff Pension Scheme and
Scottish Amicable Pension Scheme are excluded. These deficits are partially
attributable to the PAC with-profits fund and shareholder backed long-term
business.
Previously, the Group has reported supplementary information on the Achieved
Profits basis for its interim and full year financial reporting. The adoption of
EEV basis reporting in place of Achieved Profits basis reporting reflects
developments through the CFO Forum to achieve a better level of consistency, an
improved embedded value methodology, and is applied by the major European
insurance companies in their financial reporting.
Except where indicated in this announcement, the Group has applied the same
methodology as previously advised with the announcement of 2004 EEV results on
13 December 2005.
ECONOMIC ASSUMPTIONS
Deterministic
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 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 underdeveloped, 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, based on the long-term view of Prudential's economists in respect
of each territory, to the risk free rate. In the UK the equity risk premium is
4.0% (2004 - 3.0%) above risk free rates. The equity risk premium in the US is
also 4.0% (2004 - 3.0%). In Asia, equity risk premiums range from 3.0% to 5.75%.
Assumptions for other asset classes, such as corporate bond spreads, are set
consistently as best estimate assumptions.
The investment return assumptions as derived above are applied to the actual
assets held at the valuation date to derive the overall fund-earned rate.
The table below summarises the principal financial assumptions.
31 Dec 2005 31 Dec 2004
---------------------------------------- -------- --------
UK Insurance Operations
Risk discount rate
New business 7.55% 7.1%
In-force 7.7% 7.1%
Pre-tax expected long-term nominal rates of investment return:
UK equities 8.1% 7.6%
Overseas equities 8.1% to 8.75% 7.3% to 8.3%
Property 6.4% 6.3%
Gilts 4.1% 4.6%
Corporate bonds 4.9% 5.5%
Expected long-term rate of inflation 2.9% 2.9%
Post-tax expected long-term nominal rate of return:
Pension business (where no tax applies) 7.1% 6.8%
Life business 6.3% 5.9%
US Operations (Jackson National Life)
Risk discount rate:
New business 6.9% 6.1%
In-force 6.1% 5.8%
Expected long-term spread between earned rate and rate credited
to
policyholders for single premium deferred
annuity business 1.75% 1.75%
US 10 year treasury bond rate at end of period 4.4% 4.3%
Pre-tax expected long-term nominal rate of
return for US Equities 8.4% 7.3%
Expected long-term rate of inflation 2.4% 2.6%
Asian Operations
Hong Hong
Kong Kong
China (iii) India Indonesia Japan Korea China (iii) India Indonesia Japan Korea
31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
2005 2005 2005 2005 2005 2005 2004 2004 2004 2004 2004 2004
Risk
discount
rate
New
business 12.0% 5.9% 16.5% 17.5% 5.0% 10.3% 10.0% 4.7% 16.0% 18.75% 5.0% 7.1%
In-force 12.0% 6.15% 16.5% 17.5% 5.0% 10.3% 10.0% 5.0% 16.0% 18.75% 5.0% 7.1%
Expected
long-term
rate
of
inflation 4.0% 2.25% 5.5% 6.5% 0.0% 2.75% 3.0% 2.25% 5.25% 7.75% 0.0% 2.75%
Government
bond yield 9.0% 4.8% 10.5% 11.5% 1.8% 5.8% 7.25% 4.9% 10.25% 13.0% 1.9% 3.9%
Malaysia Philippines Singapore Taiwan Thailand Vietnam Malaysia Philippines Singapore Taiwan Thailand Vietnam
(ii) (ii)
31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
2005 2005 2005 2005 2005 2005 2004 2004 2004 2004 2004 2004
Risk
discount
rate
New
business 9.4% 16.5% 6.7% 9.0% 13.75% 16.5% 9.0% 16.25% 6.3% 7.1% 13.5% 15.5%
In-force 9.0% 16.5% 6.8% 9.4% 13.75% 16.5% 8.7% 16.25% 6.4% 8.2% 13.5% 15.5%
Expected
long-term
rate
of
inflation 3.0% 5.5% 1.75% 2.25% 3.75% 5.5% 3.0% 5.25% 2.25% 2.25% 3.75% 4.5%
Government
bond yield 7.5% 10.5% 4.5% 5.5% 7.75% 10.5% 7.0% 10.5% 5.0% 5.5% 7.75% 9.75%
Asia Total Asia Total
31 Dec 2005 31 Dec 2004
Weighted risk discount rate (i)
New business 9.8% 8.0%
In force 8.4% 7.9%
(i) The weighted discount rates for the Asian Operations shown above have been
determined by weighting each country's 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 2005 EEV basis results reflect the assumption of a phased progression
of the bond yields from the current rates to the long-term expected rates. The
projections assume that, in the average scenario, the current bond yields of
around 2% trend towards 5.5% at 31 December 2012. Allowance is made for the mix
of assets in the fund, our future investment strategy and the market value
depreciation of the bonds as a result of the assumed yield increases. This gives
rise to an average assumed Fund Earned Rate that trends from 2.3% to 5.4% in
2013 and falls below 2.3% for seven years due to the depreciation of bond values
as yields rise. Thereafter, the Fund Earned Rate fluctuates around a target of
5.9%. This compares to a grading of 3.4% at 31 December 2004 to 5.9% by 31
December 2012 for the 2004 results. Consistent with our EEV methodology, a
constant discount rate has been applied to the projected cash flows.
(iii) Assumptions for US dollar denominated business which comprises the larger
proportion of the in-force Hong Kong business.
(iv) Assumed equity yields
The most significant equity holdings in Asian Operations are in Hong Kong,
Singapore and Malaysia. The mean equity return assumptions for these three
territories at 31 December 2005 (2004) were 8.6% (7.3%), 9.3% (9.75%) and 12.8%
(12.25%) respectively. 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.
Stochastic
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.
Property returns are modelled in a similar fashion to corporate bonds, namely as
the return on a risk-less 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.
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 are
as follows:
Standard Deviation
--------------------------------------- ------------
Government bond yield 2.0%
Corporate bond yield 5.5%
Equities
UK 18.0%
Overseas 16.0%
Property 15.0%
--------------------------------------- ------------
Jackson National Life
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.
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
18.6% to 28.1% depending on risk class, and the standard deviation of returns
for bond funds ranges from 1.4% to 1.8%.
Asian Operations
The same asset return model, as used in the UK, appropriately calibrated, has
been used for the Asian operations. The principal asset classes are government
and corporate bonds. Equity holdings are much lower than in the UK whilst
property is not held as an investment asset.
The stochastic cost of guarantees are only of significance for the Hong Kong,
Singapore, Malaysia 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% to 26%, and
the volatility of government bond yields ranges from 1.6% to 8.9%.
NOTES ON THE EEV BASIS RESULTS
a) The EEV basis results for 2005 and 2004 have been derived from the EEV basis
results supplement to the Company's statutory accounts for 2005. The supplement
included an unqualified audit report from the auditors.
b) Under the EEV basis, the operating profit from new business represents the
profitability of new long-term insurance business written in the year, and the
operating profit from business in force represents the profitability of business
in force at the start of the year. These results are combined with the IFRS
basis results of the Group's other operations including banking and fund
management business.
To the extent applicable, presentation of the EEV profit for the year is
consistent with the basis the Group applies for analysis of IFRS basis profits
before shareholder taxes between operating and non-operating results. Operating
results reflect the underlying results of the Group's continuing operations
including longer-term investment returns. Non-operating results include certain
recurrent and exceptional items that primarily do not reflect the underlying
performance in the year of the Group's continuing operations.
The recurrent items that are excluded from operating profit are short-term
fluctuations in investment returns, the effects of changes in economic
assumptions on shareholders' funds at the start of the year, the change in the
time value of the cost of financial options and guarantees attributable to
changes in economic circumstances, and actuarial gains and losses on defined
benefit pension schemes.
c) The proportion of surplus allocated to shareholders from the UK with-profits
business has been based on the present level of 10%. Future bonus rates have
been set at levels which would fully utilise the assets of the with-profits fund
over the life of the business in force.
d) Consistent with prior periods for the Taiwan operation, the projections
include an assumption of phased progression of the bond yields of around 2%
towards 5.5% at 31 December 2012 as described in the section on economic
assumptions of this announcement. This takes into account the effect on bond
values of interest rate movements. The principal cause of the GBP265m charge for
the effect of changed economic assumptions is the reduction in short-term earned
rates in Taiwan. This reduction has the effect of delaying the emergence of the
expected long-term rate.
The EEV basis embedded value of the Taiwan life operation at 31 December 2005
was GBP(311)m with sensitivities to bond rates as follows:
- A 100 basis point fall in starting bond rates would reduce embedded value by
GBP108m.
- A 100 basis point increase in starting bond rates would increase embedded
value by GBP104m.
- A 100 basis point parallel decrease in bond rates with an equivalent
adjustment to the risk discount would reduce embedded value by GBP174m.
- A 100 basis point parallel increase in bond rates with an equivalent
adjustment to the risk discount rate would increase embedded value by GBP106m.
e) Additional analysis of the Group's EEV basis results and sensitivities of
these results to alternative assumptions can be found at the Group's website at
www.prudential.co.uk or on request.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
CONSOLIDATED INCOME STATEMENT
2005 GBPm 2004 GBPm
(note C)
-------------------------------------- -------- -------
Gross premiums earned 15,225 16,408
Outward reinsurance premiums (197) (256)
-------------------------------------- -------- -------
Earned premiums, net of reinsurance 15,028 16,152
Investment income 24,013 15,750
Other income 2,084 2,002
-------------------------------------- -------- -------
Total revenue (note D) 41,125 33,904
-------------------------------------- -------- -------
Benefits and claims and movement in unallocated
surplus of with-profits funds (33,100) (26,593)
Acquisition costs and other operating expenditure (5,552) (5,563)
Finance costs: interest on core structural
borrowings of shareholder financed operations (208) (187)
Goodwill impairment charge (120) -
-------------------------------------- -------- -------
Total charges (note D) (38,980) (32,343)
-------------------------------------- -------- -------
Profit before tax* (note D) 2,145 1,561
Tax attributable to policyholders' returns (1,147) (711)
-------------------------------------- -------- -------
Profit before tax attributable to shareholders 998 850
-------- -------
Tax expense (note M) (1,388) (951)
Less: tax attributable to policyholders' returns 1,147 711
-------- -------
Tax attributable to shareholders' profit (note M) (241) (240)
-------------------------------------- -------- -------
Profit from continuing operations after tax 757 610
Discontinued operations (net of tax) 3 (94)
-------------------------------------- -------- -------
Profit for the year 760 516
-------------------------------------- -------- -------
Attributable to:
Equity holders of the Company 748 517
Minority interests 12 (1)
-------------------------------------- -------- -------
Profit for the year 760 516
-------------------------------------- -------- -------
Earnings per share
-------------------------------------- -------- -------
Basic (based on 2,365m and 2,121m shares respectively)
Based on profit from continuing operations
attributable to the equity holders of the Company 31.5p 27.5p
Based on profit (loss) from discontinued
operations attributable to the equity holders of
the Company 0.1p (3.1)p
-------------------------------------- -------- -------
31.6p 24.4p
-------------------------------------- -------- -------
Diluted (based on 2,369m and 2,124m shares respectively)
Based on profit from continuing operations
attributable to the equity holders of the Company 31.5p 27.5p
Based on profit (loss) from discontinued
operations attributable to the equity holders of
the Company 0.1p (3.1)p
-------------------------------------- -------- -------
31.6p 24.4p
-------------------------------------- -------- -------
Dividends per share
-------------------------------------- -------- -------
Dividends relating to reporting period
Interim dividend (2005 and 2004) 5.30p 5.19p
Final dividend (2005 and 2004) 11.02p 10.65p
-------------------------------------- -------- -------
Total 16.32p 15.84p
-------------------------------------- -------- -------
Dividends declared and paid in reporting period
Interim dividend for current period 5.30p 5.19p
Final dividend for prior period 10.65p 10.29p
-------------------------------------- -------- -------
Total 15.95p 15.48p
-------------------------------------- -------- -------
* 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.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
SUMMARY OF STATEMENT OF CHANGES IN EQUITY
2005 2004
Shareholders' Minority Total Shareholders' Minority Total
equity interest equity equity interest equity
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- -------- ------ ------ -------- ------ ------
Reserves
Profit for the year 748 12 760 517 (1) 516
Items recognised directly in equity:
Exchange movements 268 268 (172) (172)
Movement on cash flow hedges (4) 1 (3)
Unrealised valuation movements on
securities classified as
available-for-sale from 1 January
2005 (see note H)
Unrealised holding losses arising
during the year (773) (773)
Less reclassification adjustment
for losses included in the income
statement 22 22
Related change in amortisation
of deferred income and acquisition
costs 307 307
Related tax 218 218 12 12
----------------------------------- -------- ------ ------ -------- ------ ------
Total items recognised directly in
equity 38 1 39 (160) (160)
----------------------------------- -------- ------ ------ -------- ------ ------
Total income and expense for the year 786 13 799 357 (1) 356
----------------------------------- -------- ------ ------ -------- ------ ------
Cumulative effect of changes in
accounting policies on adoption of
IAS 32, IAS 39 and IFRS 4, net of
applicable taxes at 1 January 2005
(note G) 226 (3) 223
Dividends (380) (380) (323) (323)
Reserve movements in respect of
share-based payments 15 (1) 14 10 10
Change in minority interest arising
principally from purchase and sale of
venture investment companies and
property partnerships of the PAC
with-profits fund 26 26 1 1
Share capital and share premium
---------------------------------
Proceeds from Rights Issue, net of
expenses 1,021 1,021
Other new share capital
subscribed 55 55 119 119
Treasury shares
-----------------
Movement in own shares
purchased in respect of share-based
payment plans 0 0 (2) (2)
Movement on Prudential plc shares
purchased by unit trusts consolidated
under IFRS 3 3 14 14
----------------------------------- -------- ------ ------ -------- ------ ------
Net increase in equity 705 35 740 1,196 0 1,196
----------------------------------- -------- ------ ------ -------- ------ ------
At beginning of year:
As previously reported under
UK GAAP 4,281 71 4,352 3,240 107 3,347
Changes arising from adoption of
IFRS (note F) 208 66 274 53 30 83
----------------------------------- -------- ------ ------ -------- ------ ------
As restated under IFRS 4,489 137 4,626 3,293 137 3,430
----------------------------------- -------- ------ ------ -------- ------ ------
At end of year 5,194 172 5,366 4,489 137 4,626
----------------------------------- -------- ------ ------ -------- ------ ------
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
31 Dec
CONSOLIDATED BALANCE SHEET 31 Dec 2004 GBPm
---------------------------------- 2005 GBPm (note F)
------- -------
Assets
--------
Goodwill:
Attributable to PAC with-profits fund 607 784
Attributable to shareholders 1,341 1,461
---------------------------------- ------- -------
Total 1,948 2,245
---------------------------------- ------- -------
Other intangible assets (primarily deferred acquisition
costs):
PAC with-profits fund (note I) 35 798
Other operations 2,405 2,244
---------------------------------- ------- -------
Total 2,440 3,042
---------------------------------- ------- -------
Other non-investment and non-cash assets:
Property, plant and equipment 910 967
Reinsurers' share of policyholder liabilities 1,278 1,018
Deferred tax assets 755 827
Current tax recoverable 231 159
Accrued investment income 1,791 1,733
Other debtors 1,318 1,188
---------------------------------- ------- -------
Total 6,283 5,892
---------------------------------- ------- -------
Investments of long-term business, banking and other
operations:
Investment properties 13,180 13,303
Investments accounted for using the equity method 5 5
Financial investments:
Loans and receivables 13,245 12,430
Equity securities and portfolio holdings in
unit trusts 71,985 54,466
Debt securities 82,471 76,374
Other investments 3,879 2,537
Deposits 7,627 5,271
---------------------------------- ------- -------
Total 192,392 164,386
---------------------------------- ------- -------
Held for sale assets 728 100
Cash and cash equivalents 3,586 4,341
---------------------------------- ------- -------
Total assets 207,377 180,006
---------------------------------- ------- -------
Equity and liabilities
------------------------
Equity
Shareholders' equity (note K) 5,194 4,489
Minority interests 172 137
---------------------------------- ------- -------
Total equity 5,366 4,626
---------------------------------- ------- -------
Liabilities
Banking customer accounts 5,830 6,607
Policyholder liabilities and unallocated surplus of
with-profits funds*
Insurance contract liabilities 120,436 -
Investment contract liabilities with discretionary
participation features 26,523 -
Investment contract liabilities without discretionary
participation features 12,026 -
Technical provisions in respect of non-linked business - 104,996
Technical provisions for linked liabilities - 24,066
Unallocated surplus of with-profits funds:
Reflecting application of 'realistic' basis provisions for
UK regulated with-profits funds 11,357 -
Reflecting previous UK GAAP basis of provisioning - 16,149
---------------------------------- ------- -------
Total 170,342 145,211
---------------------------------- ------- -------
Core structural borrowings of shareholder-financed
operations:
Subordinated debt (other than Egg) 1,646 1,429
Other 1,093 1,368
---------------------------------- ------- -------
2,739 2,797
Egg subordinated debt 452 451
---------------------------------- ------- -------
Total 3,191 3,248
---------------------------------- ------- -------
Other borrowings:
Operational borrowings attributable to
shareholder-financed operations (note L) 6,432 6,421
Borrowings attributable to with-profits funds (note L) 1,898 2,137
Other non-insurance liabilities:
Obligations under funding, securities lending and sale and
repurchase agreements 4,529 3,819
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds 965 808
Current tax liabilities 962 1,018
Deferred tax liabilities 2,991 2,279
Accruals and deferred income 506 655
Other creditors 1,478 996
Provisions 972 1,006
Other liabilities 1,769 1,175
Held for sale liabilities 146 -
---------------------------------- ------- -------
Total 14,318 11,756
---------------------------------- ------- -------
Total liabilities 202,011 175,380
---------------------------------- ------- -------
Total equity and liabilities 207,377 180,006
---------------------------------- ------- -------
* The presentation of insurance and investment contracts liabilities to
policyholders reflects the adoption of IAS 32, IAS 39 and IFRS 4 at 1 January
2005. The comparative liabilities for 2004 reflect the previous UK GAAP basis.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
CONSOLIDATED CASH FLOW STATEMENT
2005 GBPm 2004 GBPm
---------------------------------------- ------- ------
Cash flows from operating activities (note (i))
Profit before tax (note (ii)) 2,145 1,561
Changes in operating assets and liabilities
Investments (21,462) (14,741)
Banking customer accounts (861) (330)
Other non-investment and non-cash assets (970) (105)
Policyholder liabilities (including unallocated surplus) 21,126 13,639
Other liabilities (including operational borrowings) 180 1,061
Interest income and expense and dividend income included
in (8,410) (7,371)
profit before tax
Other non-cash items 0 73
Operating cash items:
Interest receipts 5,946 5,660
Dividend receipts 2,680 1,853
Tax paid (573) (450)
---------------------------------------- ------- ------
Net cash flows from operating activities (199) 850
---------------------------------------- ------- ------
Cash flows from investing activities
Purchases of property, plant and equipment (160) (227)
Proceeds from disposal of property, plant and equipment 6 4
Acquisition of subsidiaries, net of cash balances (note
(iii)) (68) (92)
Disposal of subsidiaries, net of cash balances (note 252 218
(iii)) ------- ------
----------------------------------------
Net cash flows from investing activities 30 (97)
---------------------------------------- ------- ------
Cash flows from financing activities
Structural borrowings of the Group:
Shareholder-financed operations (note (iv)):
Issue 168 344
Redemption (308) (61)
Interest paid (204) (189)
With-profits operations (note (v)):
Interest paid (9) (9)
Equity capital:
Issues of ordinary share capital 55 1,140
Dividends paid (380) (323)
---------------------------------------- ------- ------
Net cash flows from financing activities (678) 902
---------------------------------------- ------- ------
Net (decrease) increase in cash and cash equivalents (847) 1,655
Cash and cash equivalents at beginning of year 4,341 2,756
Effect of exchange rate changes on cash and cash 92 (70)
equivalents ------- ------
----------------------------------------
Cash and cash equivalents at end of year (note (vi)) 3,586 4,341
---------------------------------------- ------- ------
Notes
(i) The adjusting items to IFRS basis income include changes in operating assets
and liabilities, and other items comprising adjustments in respect of non-cash
items, operational interest receipts and payments, dividend receipts, income tax
paid and cash flows in respect of assets categorised as available-for-sale
investments. The most significant elements of the adjusting items are the
changes in operating assets and liabilities made up as shown above.
(ii) 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.
(iii) Purchases and sales of subsidiaries shown above include purchases and
sales of venture subsidiaries of the PAC with-profits fund.
(iv) Structural borrowings of shareholder-financed operations consists of the
core debt of the parent company and related finance subsidiaries, Jackson
National Life surplus notes and Egg debenture loans. Core debt excludes
borrowings to support short-term fixed income securities reinvestment programmes
and non-recourse borrowings of investment subsidiaries of shareholder-financed
operations. Cash flows in respect of these borrowings are included within
operating cash flows.
(v) Structural borrowings of with-profits operations relate solely to the
GBP100m 8.5% 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 subsidiaries, are
categorised as operating activities in the presentation above.
(vi) Under IFRS the cash flow statement comprises consolidated cash flows for
the Group as a whole, including those of long-term business funds. Of the cash
and cash equivalents amounts of GBP3,586m and GBP4,341m, GBP263m and GBP325m
represent cash and cash equivalents of the parent company and related finance
subsidiaries.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
NOTES ON THE STATUTORY BASIS RESULTS
A. Basis of preparation and audit status
The statutory basis results included in this announcement have been extracted
from the audited financial statements of the Group for the year ended 31
December 2005. These statements have been prepared in accordance with
International Financial Reporting Standards (IFRS), as adopted by the European
Union (EU), as required by EU law (IAS Regulation EC 1606 / 2002).
The Group has applied all IFRSs and interpretations adopted by the EU at 31
December 2005, and has early adopted the amendment to IAS 39 (The fair value
option) and IAS 19 (Employee benefits) (as amended in 2004).
Compared to the UK GAAP basis of presentation, the statutory IFRS basis results
reflect the application of:
(i) Measurement and recognition changes arising from policies the Group has
applied on the adoption of all IFRS standards, other than IAS 32 (Financial
Instruments: Disclosure and Presentation), IAS 39 (Financial Instruments:
Recognition and Measurement), and IFRS 4 (Insurance Contracts), from 1 January
2004. The 2005 results include the effect of these three standards from 1
January 2005.
(ii) Changes to the format of the results and other presentational changes that
the Group has applied in its 2005 financial statements in so far as they affect
the summary results included in this preliminary announcement.
In addition, compared to the basis of preparing supplementary results and
earnings per share basis information previously provided under UK GAAP, a
discretionary change of policy for the basis of determining longer-term
investment returns included in operating profit based on longer-term investment
returns has been applied. This change was first applied in the Group's Interim
2005 results.
The financial information set out above does not constitute the Company's
statutory accounts for the years ended 31 December 2005 or 2004 but is derived
from the 2005 accounts. Statutory accounts for 2004, which were prepared under
UK GAAP, have been delivered to the Registrar of Companies and those for 2005,
prepared under International Financial Reporting Standards as adopted by the EU,
will be delivered following the Company's Annual General Meeting. The auditors
have reported on both those accounts; their reports were (i) unqualified, (ii)
did not include references to any matters to which the auditors drew attention
by way of emphasis without qualifying their reports and (iii) did not contain
statements under Section 237(2) or (3) of the Companies Act 1985.
B. Effects of adoption of IFRS basis reporting
The changes of accounting policy that arise on the conversion to IFRS basis
reporting are numerous and extend to many items of income, expenditure, assets
and liabilities. Comprehensive details of the changes were included with the
announcement of restated 2004 comparative results on 2 June 2005 and the interim
results announcement on 27 July 2005. These details are available at the Group's
web-site at www.prudential.co.uk or on request. Notes C and F show the effect of
IFRS adoption on the income statement for 2004 and shareholders' equity at 1
January 2004 and 31 December 2004. Note G shows the effect of the adoption of
the standards IAS 32, IAS 39 and IFRS 4 at 1 January 2005.
C. Reconciliation of the summary income statement
Year ended 31 December 2004 IFRS adjustments
------------------
Recognition,
Presentation measurement
of UK GAAP in and other Statutory
UK GAAP IFRS format changes IFRS
(note C(i)) (note C(i)) (note C(ii)) basis
GBPm GBPm GBPm GBPm
--------------------------- ------- -------- -------- -------
Earned premiums, net
of reinsurance 16,099 53 16,152
Investment income 13,917 2,082 (249) 15,750
UK fund management result 136 (136)
US broker-dealer and fund
management result (14) 14
Asia fund management result 19 (19)
UK banking result (continuing
operations) 63 (63)
Other income 773 1,229 2,002
--------------------------- ------- -------- -------- -------
Total revenue 30,220 2,704 980 33,904
--------------------------- ------- -------- -------- -------
Benefits and claims and
movement in unallocated
surplus of with-profits
funds (26,598) (83) 88 (26,593)
Acquisition costs and other
operating expenditure (2,069) (2,434) (1,060) (5,563)
Finance costs: interest on
core structural borrowings of
shareholder-financed operations (187) (187)
Amortisation of goodwill
(continuing operations) (94) 94
--------------------------- ------- -------- -------- -------
Total charges (28,761) (2,704) (878) (32,343)
--------------------------- ------- -------- -------- -------
Profit before tax* 1,459 102 1,561
Tax attributable to
policyholders' returns (701) (10) (711)
--------------------------- ------- -------- -------- -------
Profit before tax attributable
to shareholders 758 92 850
--------------------------- ------- -------- -------- -------
Tax expense (947) (4) (951)
Less: Tax attributable to
policyholders' returns 701 10 711
--------------------------- ------- -------- -------- -------
Tax attributable to
shareholders' profits (246) 6 (240)
--------------------------- ------- -------- -------- -------
Profit from continuing
operations after tax 512 98 610
Discontinued operations
(net of tax) (94) (94)
--------------------------- ------- -------- -------- -------
Profit for the year 418 98 516
--------------------------- ------- -------- -------- -------
Attributable to:
Equity holders of the Company 428 89 517
Minority interests (10) 9 (1)
--------------------------- ------- -------- -------- -------
Profit for the year 418 98 516
--------------------------- ------- -------- -------- -------
* 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.
Notes
C(i) UK GAAP results
The UK GAAP basis results shown above reflect those previously recorded in the
technical accounts and non-technical account of the Group's profit and loss
account under Companies Act requirements. These results are then reconfigured to
be consistent with the format applied for reporting in the Group's 2005
financial statements under IFRS.
C(ii) Recognition, measurement and other changes
Changes to profit from continuing operations (including actual investment
returns) before and after tax attributable to shareholders reflect the effects
of IFRS adoption. In summary the effects are for:
GBPm
Egg - primarily relates to charges for share-based payments in respect
of Egg shares (2)
Additional pension costs and share-based payments costs in respect of
Prudential plc shares not allocated by business unit (4)
Amortisation of goodwill not permitted under IFRS 94
Actuarial gains and losses of defined benefit schemes recognised under
IFRS (7)
Value movements of US investment funds newly consolidated under IFRS 2
Share of profits of venture investment companies and property
partnerships of the PAC with-profits fund consolidated under IFRS, that
is attributable to external investors 9
-----
Total changes before tax 92
Related tax attributable to shareholders 6
-----
Total changes after tax 98
=====
Changes to revenue, charges and related tax of the Group's with-profits funds
principally relate to measurement differences on investments, consolidation
criteria for venture funds and other investment subsidiaries, and pension cost
accounting. These changes have been reflected by transfers of an equal and
opposite amount to unallocated surplus and hence have no net effect on
shareholder results.
D. Segmental disclosure
The Group's primary reporting segments are long-term business, banking and
broker-dealer and fund management.
2005 GBPm 2004 GBPm
--------------------------------------- ------- -------
Revenue
Long-term business 39,296 32,073
Banking 1,115 1,110
Broker-dealer and fund management 895 823
Unallocated corporate 98 151
Intragroup revenue eliminated on consolidation (279) (253)
--------------------------------------- ------- -------
Total revenue per income statement 41,125 33,904
--------------------------------------- ------- -------
Charges (before income tax attributable to policyholders and unallocated surplus
of long-term insurance funds)
Long-term business including post-tax transfers to
unallocated surplus of with-profits funds (36,968) (30,531)
Banking (1,071) (1,049)
Broker-dealer and fund management (740) (682)
Unallocated corporate (480) (334)
Intragroup charges eliminated on consolidation 279 253
--------------------------------------- ------- -------
Total charges per income statement (38,980) (32,343)
--------------------------------------- ------- -------
Segment results - Revenue less charges (continuing operations)
Long-term business 2,328 1,542
Banking 44 61
Broker-dealer and fund management 155 141
Unallocated corporate (382) (183)
--------------------------------------- ------- -------
Profit before tax* 2,145 1,561
Tax attributable to policyholders' returns (1,147) (711)
--------------------------------------- ------- -------
Profit before tax attributable to shareholders 998 850
Tax attibutable to shareholders' profits (241) (240)
--------------------------------------- ------- -------
Profit from continuing operations after tax 757 610
--------------------------------------- ------- -------
Segment results - Discontinued operations
Long-term business - 4
Banking 3 (98)
--------------------------------------- ------- -------
3 (94)
--------------------------------------- ------- -------
Profit for the year 760 516
--------------------------------------- ------- -------
* 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.
E. Supplementary analysis of profit from continuing operations before tax
attributable to shareholders and related earnings per share
Profit from continuing operations before tax
2005 GBPm 2004 GBPm
-------------------------------------- ------ --------
Operating profit from continuing operations based
on longer-term investment returns (note E(i)) 957
Goodwill impairment charge (120)
Short-term fluctuations in investment returns on
shareholder-backed business 211
Shareholders' share of actuarial and other gains
and losses on defined benefit pension schemes (50) (see note E(ii))
-------------------------------------- ------ --------
Profit from continuing operations before tax
attributable to shareholders (including actual
investment returns) 998
-------------------------------------- ------ --------
Earnings per share from continuing operations
From operating profit based on longer-term
investment returns after related tax and minority
interests of GBP761m 32.2p
Adjustment for goodwill impairment charge (5.1)p
Adjustment from post-tax longer-term investment returns to post-tax actual investment
returns (after related minority interests) 5.9p (see note E(ii))
Adjustment for post-tax shareholders' share of
actuarial and other gains and losses on defined
benefit pension schemes (1.5)p
-------------------------------------- ------ --------
Based on profit from continuing operations after
tax and minority interests of GBP745m 31.5p
-------------------------------------- ------ --------
Notes
E(i) Under the Group's accounting policies additional analysis is provided of
profit before tax attributable to shareholders that distinguishes operating
profit based on longer-term investment returns from other constituent elements
of total profit before tax attributable to shareholders.
For the purposes of measuring operating profits based on longer-term investment
returns, investment returns are based on the expected longer-term rate of
return. The expected long-term rates of return are intended to reflect
historical real rates of return and, where appropriate, current inflation
expectation, adjusted for consensus economic and investment return forecast. The
significant operations that require adjustment for the difference between actual
and longer-term investment returns are Jackson National Life and certain
businesses of the Group's Asian Operations. The amounts included in operating
results for longer-term capital returns for debt securities comprise two
components. These are a risk margin reserve based charge for expected defaults,
which is determined by reference to the credit quality of the portfolio, and
amortisation of interest related realised gains and losses to operating results
based on longer-term returns to the date when sold bonds would otherwise have
matured.
Items excluded from operating profit based on longer-term investment returns but
included in profit before tax attributable to shareholders of continuing
operations include goodwill impairment charges, short-term fluctuations in
investment returns (i.e actual less longer-term returns), actuarial gains and
losses on defined benefit pension schemes and exceptional items.
With the exception of derivatives used for managing equity exposure, value
movements on derivatives held by Jackson National Life are included within
short-term fluctuations.
For the purposes of distinguishing actuarial gains and losses on defined benefit
pension schemes in this analysis, plan assets include Prudential policies held
by the Prudential Staff Pension Scheme and the M&G pension scheme. At 31
December 2005, these policies had a carrying value of GBP253m.
E(ii)The supplementary analysis of statutory IFRS basis results shown above has
been presented only for 2005. Details have not been provided for 2004 in this
announcement as the results would not be comparable. This is due to IAS 32, IAS
39 and IFRS 4 only being adopted from 1 January 2005. Details of the analysis of
the statutory IFRS basis results for 2004 on this basis will be published in the
Group's financial statements.
Additional analysis of the 2005 result, and pro forma basis comparative results
for 2004 as if the above standards had been applied by the Group's insurance
operations from 1 January 2004, is provided as supplementary information to this
announcement. The analysis on those pages has not been extracted from the
Group's IFRS financial statements.
F. Reconciliations of equity and balance sheet
At 1 January 2004 Shareholders' Minority Total
equity interests equity
GBPm GBPm GBPm
----------------------------------- -------- ------ ------
Changes on adoption of statutory IFRS basis
---------------------------------------------
Treasury shares adjustment for Prudential
plc shares held by unit trusts consolidated
under IFRS (note F(i)) (40) (40)
Minority share of equity of consolidated
venture investment companies and property
partnerships of the PAC with-profits fund
(note F(i)) 32 32
Shareholders' share of deficits (net of
tax) of defined benefit pension schemes
(note F(ii)) (110) (110)
Timing difference on recognition of
dividend declared after balance sheet date 214 214
(note F(iii))
Other items (11) (2) (13)
----------------------------------- -------- ------ ------
Total 53 30 83
Equity at 1 January 2004
--------------------------
As previously published under UK GAAP 3,240 107 3,347
----------------------------------- -------- ------ ------
As restated under statutory IFRS 3,293 137 3,430
----------------------------------- -------- ------ ------
At 31 December 2004
Effect of changes on implementation of IFRS
recognition and measurement changes
UK GAAP Newly Defined Other Grossing-up Total Statutory
consolidated benefit recognition and other IFRS IFRS
entities pension and format changes basis
(note F(i)) schemes measurement changes
accounting changes
(note F (note F
(ii)) (iii))
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ------ ------ ------- -------- ------ ------ ------
Assets
Goodwill:
Attributable
to PAC
with-profits
fund 784 784 784
Attributable
to
shareholders 1,367 94 94 1,461
Investments:
per IFRS
balance sheet 1,963 35 162,388 164,386 164,386
Investments:
per UK GAAP
analysis
(non-linked,
linked and
banking
business
assets) 129,468 (129,468) (129,468) 0
Other items 43,741 1,477 102 50 (31,995) (30,366) 13,375
----------------- ------- ------ ------- -------- ------ ------ -------
Total assets 174,576 4,224 102 179 925 5,430 180,006
----------------- ------- ------ ------- -------- ------ ------ -------
Equity and
liabilities
Equity
Shareholders'
equity 4,281 (30) (117) 355 208 4,489
Minority
interests 71 68 (2) 66 137
----------------- ------- ------ ------- -------- ------ ------ -------
Total equity 4,352 38 (117) 353 274 4,626
----------------- ------- ------ ------- -------- ------ ------ -------
Liabilities
Banking
customer
accounts: per
IFRS balance
sheet 6,607 6,607 6,607
Banking
business
liabilities:
per UK GAAP
balance sheet 11,216 (11,216) (11,216) 0
Policyholder
liabilities and
unallocated
surplus of
with-profits
funds
Technical
provisions 129,101 (125) 8 78 (39) 129,062
Unallocated
surplus of
with-profits
funds 16,686 (31) (472) (34) (537) 16,149
Borrowings per
IFRS balance
sheet
Core
structural
borrowings of
shareholder-fi
nanced
operations 3,248 3,248 3,248
Operational
borrowings
attributable
to
shareholder-fi
nanced
operations 972 9 5,440 6,421 6,421
Borrowings
attributable
to
with-profits
funds 1,888 105 144 2,137 2,137
Borrowings per
UK GAAP
balance sheet
(subordinated
liabilities,
debenture
loans and
other
borrowings) 4,673 (4,673) (4,673) 0
Dividend
payable 253 (253) (253) 0
Other
non-insurance
liabilities 8,295 1,357 816 (9) 1,297 3,461 11,756
----------------- ------- ------ ------- -------- ------ ------ -------
Total
liabilities 170,224 4,186 219 (174) 925 5,156 175,380
----------------- ------- ------ ------- -------- ------ ------ -------
Total equity
and
liabilities 174,576 4,224 102 179 925 5,430 180,006
----------------- ------- ------ ------- -------- ------ ------ -------
Notes
F(i)Newly consolidated entities
Under IAS 27 and SIC 12, the Group is required to consolidate the assets and
liabilities of certain entities which have previously not been consolidated
under UK GAAP. The principal change to shareholders' equity arises from an
adjustment in respect of Prudential plc shares held by unit trusts that are
newly consolidated. These shares are accounted for as treasury shares and the
cost of purchase of GBP44m and GBP29m is deducted from shareholders' equity at 1
January 2004 and 31 December 2004 respectively. The change to the minority share
of equity reflects external parties' interest in consolidated venture investment
companies and property partnerships of the PAC with-profits fund. Measurement
changes to the carrying value of these companies that are attributable to the
PAC with-profits fund share are reflected in unallocated surplus.
F(ii)Defined benefit pension schemes accounting
Provisions for deficits on the Group's defined benefit pension schemes are
absorbed by the unallocated surplus of the PAC with-profits fund and
shareholders' funds on a basis that reflects the weighted cumulative activity
attaching to the contributions paid in the past, and after deduction of deferred
tax. The M&G scheme held Prudential Group insurance policies as scheme assets of
GBP125m at 31 December 2004. The asset and liability are eliminated on
consolidation.
F(iii)Other recognition and measurement changes
Under IFRS, dividends declared after the balance sheet date are not recognised
as a liability. In addition, subject to required impairment testing, goodwill
under IFRS represents the balance sheet carrying value at 1 January 2004.
Adjustments in the table include the write-back of amortisation previously
charged under UK GAAP in 2004.
G. Effect of adoption of IAS 32, IAS 39, and IFRS 4 at 1 January 2005
Effect of adoption of IAS 32, IAS 39 and IFRS 4
Statutory UK Jackson Banking and Grossing-up Total Statutory
IFRS Insurance National non-insurance and other effect IFRS
basis at Operations Life operations format basis at
31 Dec (note G (note G (note G(iii)) changes 1 Jan
2004 (i)) (ii)) 2005
(note F)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ------- --------- ------- --------- -------- ------ --------
Assets
Goodwill
Attributable
to PAC
with-profits
fund 784 784
Attributable
to
shareholders 1,461 1,461
Other intangible
assets (primarily
deferred
acquisition costs)
PAC
with-profits
fund (note I) 798 (765) (765) 33
Other
operations 2,244 23 (456) (433) 1,811
Investments 164,386 (145) 1,262 145 68 1,330 165,716
Other assets 10,333 10 66 (92) (16) 10,317
------------------- ------- --------- ------- --------- -------- ------- --------
Total assets 180,006 (877) 872 53 68 116 180,122
------------------- ------- --------- ------- --------- -------- ------- --------
Equity and
liabilities
Equity
Shareholders'
equity 4,489 (22) 273 (25) 226 4,715
Minority
interest 137 (3) (3) 134
------------------- ------- --------- ------- --------- -------- ------- --------
Total equity 4,626 (22) 273 (28) 223 4,849
------------------- ------- --------- ------- --------- -------- ------- --------
Liabilities
Banking
customer
accounts 6,607 84 84 6,691
Policyholder
liabilities and
unallocated surplus
of with-profits
funds
Contract
liabilities
(non-linked
and linked
business) 129,062 7,020 (51) 6,969 136,031
Unallocated
surplus of
with-profits
funds 16,149 (7,807) (7,807) 8,342
Borrowings
Core
structural
borrowings of
shareholder-fi
nanced
operations 3,248 5 5 3,253
Other
borrowings
attributable
to
shareholder-fi
nanced
operations 6,421 207 62 (13) 256 6,677
Borrowings
attributable
to
with-profits
funds 2,137 2,137
Other non-insurance
liabilities
Deferred tax
liabilities 2,279 (91) 218 (6) 121 2,400
Other 9,477 23 225 (59) 76 265 9,742
------------------- ------- --------- ------- --------- -------- ------- --------
Total
liabilities 175,380 (855) 599 81 68 (107) 175,273
------------------- ------- --------- ------- --------- -------- ------- --------
Total equity
and
liabilities 180,006 (877) 872 53 68 116 180,122
------------------- ------- --------- ------- --------- -------- ------- --------
Notes
The changes shown above reflect the impact of re-measurement for :
G(i)UK Insurance Operations
(a) The reduction of shareholders' equity of GBP22m includes GBP20m relating to
certain unit-linked and similar contracts that do not contain significant
insurance risk and are therefore categorised as investment contracts under IFRS
4. The reduction of shareholders' equity at 1 January 2005 on adoption of IFRS 4
for these items is GBP10m different from the amount reported in the interim
results due to refinements to the IFRS methodology applied.
(b) Changes to insurance assets and liabilities of the PAC with-profits fund
following the improvement of accounting policy applied on adoption of IFRS 4.
The changes correspond to those applicable if the Group had adopted FRS 27 under
UK GAAP. As a result of the policy improvement, liabilities, deferred
acquisition costs, deferred tax and unallocated surplus of UK regulated
with-profits funds are remeasured as described in note I. At 1 January 2005, the
unallocated surplus is subject to a transition adjustment of GBP(7.8)bn.
Shareholders' equity is not affected by this change.
The unallocated surplus of GBP8.3bn at 1 January 2005 post IAS 39 and IFRS 4
adoption, comprises GBP8.0bn for the PAC with-profits fund and GBP0.3bn for
Asian subsidiaries. The GBP8.0bn for the PAC with-profits fund represents:
GBPbn
Regulatory basis realistic surplus of with-profits sub-fund and
SAIF 6.0
Add back: Regulatory basis provision for future shareholder
transfers 2.9
Less: Other adjustments to align with accounting basis (0.9)
------
Accounts basis 8.0
======
G(ii) Jackson National Life
Under IAS 39, JNL's debt securities and derivative financial instruments are
re-measured to fair value from the lower of amortised cost and, if relevant,
impaired value. Fair value movements on debt securities, net of shadow changes
to deferred acquisition costs and related deferred tax are recorded directly to
equity. Fair value movements on derivatives are recorded in the income
statement.
G(iii)Banking and non-insurance operations
Under IAS 39, for Egg, changes to opening equity at 1 January 2005 arise from
altered policies for effective interest rate on credit card receivables,
impairment losses on loans and advances, fair value adjustments on wholesale
financial instruments and embedded derivatives in equity savings products. The
net effect on shareholders equity of these changes, after tax, is a deduction of
GBP15m. A further GBP10m reduction in equity arises on certain centrally held
financial instruments and derivatives.
H. Jackson National Life - Debt securities
Changes in equity
IAS 32 and IAS 39 have been adopted from 1 January 2005. Accordingly, for 2004
under IFRS, financial instruments continue to be accounted for under previous
GAAP. For Jackson National Life debt securities have been accounted for at
amortised cost, unless impaired. From 1 January 2005, these assets have been
classified as available-for-sale under IAS 39 with valuation at fair value.
Unrealised gains and losses and reclassification adjustments for gains and
losses included in net income are recorded from 1 January 2005 within the
statement of changes in equity.
Balance sheet
Due to the change in the valuation basis referred to above, the carrying values
of the debt securities of Jackson National Life that have been included in the
consolidated balance sheet are not comparable. The fair value of the debt
securities at 31 December 2004 was GBP22.5bn. After deduction of related changes
to deferred acquisition costs and deferred tax, there was a consequential impact
on shareholders' equity at 1 January 2005, on adoption of IAS 32 and IAS 39, of
GBP397m for the changed basis of valuation of Jackson's securities.
I. Unallocated surplus of with-profits funds
The unallocated surplus of with-profits funds reflects the excess of assets over
technical provisions and other liabilities and represents amounts that have yet
to be allocated to policyholders and shareholders. For the Group's 2004
financial statements, and as applied for IFRS purposes for 2004 in these
financial statements, the technical provisions in respect of insurance and
investment contracts of UK regulated with-profits funds have been determined in
accordance with the modified statutory basis of accounting that applied under UK
GAAP. With the exception of minor accounting adjustments, the technical
provisions reflect the UK regulatory basis of reporting which effectively
constitutes the Peak 1 basis under the new FSA regime.
On this basis the unallocated surplus of the PAC with-profits fund at 31
December 2004 was GBP16,301m. After inclusion of the unallocated surplus of
with-profits funds of Asian subsidiaries the unallocated surplus in the
consolidated balance sheet at 31 December 2004 was GBP16,686m. Following changes
arising from the application of IFRS requirements applicable for 2004, the IFRS
basis unallocated surplus for the Group is altered as described in note F.
On adoption of IFRS 4 at 1 January 2005, the Group has chosen to improve its
accounting policy in respect of the insurance assets and liabilities of UK
regulated with-profits funds. The improvement is consistent with the
requirements of FRS 27 that apply for life assurers reporting under UK GAAP in
2005 for the application of the Peak 2 realistic basis.
The main accounting changes that are required for UK regulated with-profits
funds are:
De-recognition of deferred acquisition costs and related deferred tax
Inclusion of the FSA Peak 2 basis of the value of in-force non-participating
business written by the PAC with-profits sub-fund, and the Scottish Amicable
Insurance Fund; and
Replacement of modified statutory basis liabilities for with-profits business
with adjusted realistic basis liabilities.
Adjusted realistic liabilities represent the Peak 2 realistic liabilities for
with-profits business included in Form 19 of the FSA regulatory returns, but
after excluding the element for shareholders' share of future bonuses. This
latter item is recognised as a liability for the purposes of regulatory returns
but for accounting purposes shareholder transfers are recognised only on
declaration.
For accounting purposes, to the extent that the value of non-participating
business has been taken into account in determining projected policyholder
benefits, deduction is made from the gross regulatory value of realistic
liabilities. The balance is deducted from the accounting balance of unallocated
surplus.
In determining accounting basis liabilities and unallocated surplus, an
adjustment is also required where the regulatory and accounting carrying values
of assets and liabilities differ for altered measurement or recognition
criteria. For the Group's UK with-profits funds the main additional item for
which adjustment is necessary is the attributable share of deficit of the
Group's UK defined benefit pension schemes, net of related tax.
The impact of the changes at 1 January 2005, on adoption of IFRS 4, are shown in
note G. At 31 December 2005, the unallocated surplus of GBP11.4bn comprises
GBP11.3bn for the PAC with-profits sub-fund and GBP0.1bn for Asian subsidiaries.
The GBP11.3bn for the PAC with-profits fund represents:
GBPbn
Estimated regulatory basis realistic surplus of the PAC
with-profits 8.0
sub-fund
Add back: Provision for future shareholder transfers 3.5
Less: Other adjustments to align with accounting basis (0.2)
-----------
11.3
===========
The GBP11.3bn is attributable solely to the PAC with-profits sub-fund. No amount
is recognised for SAIF. This treatment is to comply with actuarial guidance note
GN 45 which requires that for a closed fund where the fund will be distributed
fully the working capital is shown as zero with the future enhancements to asset
shares being increased by the free capital.
The GBP0.1bn of unallocated surplus for Asia subsidiaries almost wholly relates
to the Malaysian life business. Following local regulatory changes which affect
the presentation of the balance sheet, unallocated surplus of the Singapore
with-profits business is now amalgamated with policyholder liabilities.
J. Dividend
A final dividend of 11.02p per share was proposed by the directors on 15 March
2006. This dividend will absorb an estimated GBP267m of shareholders' funds.
Subject to shareholder approval, the dividend will be paid on 26 May 2006 to
shareholders on the register at the close of business on 24 March 2006. A scrip
dividend alternative will be offered to shareholders.
K. Shareholders' equity
2005 GBPm 2004 GBPm
----------------------------------- --------- --------
Share capital 119 119
Share premium 1,564 1,558
Reserves 3,511 2,812
----------------------------------- --------- --------
Total 5,194 4,489
----------------------------------- --------- --------
L. Other borrowings
2005 GBPm 2004 GBPm
----------------------------------- --------- --------
Operational borrowings attributable to shareholder-financed operations
Borrowings in respect of short-term debt securities
reinvestment programmes 1,472 1,079
Non-recourse borrowings of investment subsidiaries managed
by PPM America 1,085 1,155
Borrowings in respect of banking operations 3,856 4,159
Other borrowings 19 28
----------------------------------- --------- --------
Total 6,432 6,421
----------------------------------- --------- --------
Borrowings attributable to with-profits funds
Non-recourse borrowings of venture fund investment
subsidiaries 988 1,167
Subordinated debt of the Scottish Amicable Insurance Fund 100 100
Other borrowings (predominantly external funding of
consolidated investment vehicles) 810 870
----------------------------------- --------- --------
Total 1,898 2,137
----------------------------------- --------- --------
M. Tax charge
The total tax charge of GBP1,388m for 2005 (GBP951m) comprises GBP1,119m
(GBP805m) UK tax and GBP269m (GBP146m) 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 GBP241m for 2005 (GBP240m) comprises GBP(21)m (GBP63m) UK tax
and GBP262m (GBP177m) overseas tax.
N. Acquisitions
In May 2005, Jackson National Life completed the purchase of Life Insurance
Company of Georgia from ING Groep N.V. for GBP142m subject to post-completion
adjustments. There is currently no goodwill arising on the transaction.
O. Taiwan life operation: Sensitivity of liabilities to projected investment
returns
The in-force business of Taiwan life operation includes traditional whole of
life policies where the premium rates have been set by the regulator at
different points for the industry as a whole. Premium rates were set to give a
guaranteed minimum sum assured on death and a guaranteed surrender value on
early surrender based on prevailing interest rates at the time of policy issue.
Premium rates also included allowance for mortality and expenses. Guarantees
have fallen over time as interest rates have reduced from a high of 8% to
current levels of around 2%. The current low level of bond rates in Taiwan gives
rise to a negative spread in Taiwan of around GBP30m a year.
The profits attaching to these contracts is particularly affected by the rates
of return earned, and estimated to be earned, on the assets held to cover
liabilities and on future investment income and contract cash flows. Under IFRS
the insurance contract liabilities of the Taiwan business are determined on the
US GAAP basis as applied previously under UK GAAP. Under this basis the policy
liabilities are calculated on sets of assumptions, which are locked in at the
point of policy inception, and a deferred acquisition cost is held in the
balance sheet.
The adequacy of the insurance contract liabilities is tested by reference to
best estimates of expected investment returns on policy cash flows and
reinvested income. The assumed earned rates are used to discount the future cash
flows. The assumed earned rates consist of a long-term best estimate determined
by consideration of long-term market conditions, and rates assumed to be earned
in the trending in period. For 2005, it has been projected that rates of return
for Taiwanese bond yields will trend from the current levels of some 2% to 5.5%
by 31 December 2012.
The liability adequacy test results are sensitive to the attainment of the
trended rates during the trending period. Based on the current asset mix,
margins in other contracts that are used in the assessment of the liability
adequacy tests, and currently assumed future rates of return, if interest rates
were to remain at current levels in 2006 the premium reserve, net deferred
acquisition costs, would be broadly sufficient. If interest rates were to remain
at current levels in 2007 then some level of write-off of deferred acquisition
costs may be necessary. However, the amount of the charge, currently estimated
at GBP50m to GBP70m is sensitive for the previously mentioned variables.
The adequacy of the liability is also sensitive to the level of the projected
long-term rate. The current best estimate of 5.5% has been determined on a
prudent best estimate basis by reference to detailed assessments of the
financial dynamics of the Taiwanese economy. In the event that the rate applied
was reduced or increased the carrying value of the liabilities would be
effected.
In broad terms, if the assumed long-term rate applied was to fall by 0.25% from
5.5% to 5.25% the impact on IFRS basis results would be a charge of some GBP120m
to GBP130m. If the rate were to further reduce the incremental increase in
liabilities would be of a similarly commensurate size. The effects of changes in
any one year reflect the combination of short-term and long-term factors
described above.
P. Effect of changes of assumptions and other bases of preparation of
liabilities of insurance contracts
Profit before tax attributable to shareholders for 2005 includes the impact of
the following items:
UK Insurance Operations
For shareholder-backed non-participating business, changes of assumptions were
made which had the effect of increasing liabilities by GBP36m with a consequent
reduction in operating profit based on longer-term investment returns. The
reduction arose from a charge of GBP69m for strengthened mortality assumptions
being partially offset by a net credit of GBP29m in respect of a reduced level
of defaults for fixed income securities, and a credit of GBP4m for other
changes.
In addition to this GBP36m charge to operating profit based on longer-term
investment returns a further GBP20m charge for the effect of changes of
assumption for renewal expenses, which relates to an increase in ongoing pension
scheme contributions for future service of active members, has been recorded as
part of actuarial and other gains and losses excluded from operating profit
based on longer-term investment returns, but included in total profit before
shareholder tax.
US Operations
The operating profit based on longer-term investment returns of GBP362m for US
Operations for 2005 has been determined after taking account of material changes
of assumption during the year. Several changes were modified to conform to more
recent experience. The most significant changes included a write-off of deferred
acquisition costs of GBP21m for Single Premium Deferred Annuities partial
withdrawal changes and a Universal Life SOP 03-01 (Accounting and Reporting by
Insurance Enterprises for Certain Non-Traditional Long Duration Contracts and
Separate Accounts) reserve increase of GBP13m due to increasing the mortality
assumption. Several smaller changes relating to Single Premium Whole Life
surrenders and annuity mortality and annuitisation rates resulted in a GBP19m
benefit on adjusting amortisation of deferred acquisition costs. Combined with
other minor modifications, the resulting net impact of all changes during the
year was a decrease to pre-tax profit of GBP7m.
Asian Operations
The 2005 results for Asian operations are affected in two significant ways for
changes of basis or assumption.
For the Singapore life business, under the basis applied previously, liabilities
of non-participating business for 2004 were determined on a net premium basis
using prescribed interest rates such that a very high degree of prudence
resulted. This basis has been replaced under the Singapore Risk Based Capital
framework with one that, although still including provisions for adverse
deviation, more accurately estimates the liability. This has resulted in a
change of estimate and reduction in the liability of GBP73m.
The second item reflects the application of liability adequacy testing for the
Taiwan life business which has resulted in a write-off of deferred acquisition
costs of GBP21m in 2005. The assumptions for future investment returns are as
described in note O. The loss reflects the reduction in 2005 in the expected
yields over the trending period to the assumed long-term rate of 5.5% for
Taiwanese government bonds.
Q. Asian Fund Management business
Operating profit for the Asian fund management business was GBP12m for 2005. The
decrease from the result for 2004 of GBP19m reflects the exceptional cost of
GBP16m in Taiwan incurred due to bond fund restructuring required as a result of
industry wide regulatory change.
R. Post balance sheet events
In December 2005, the Company announced its intention to acquire the minority
interests in Egg representing approximately 21.7% of the existing issued share
capital of Egg. Under the terms of the offer, Egg shareholders would receive
0.2237 new ordinary shares in the Company for each Egg share. In January 2006,
the Company announced that it had received acceptances in respect of 80.3% of
the shares that it did not already own and that it would extend the offer until
further notice. In February 2006, the Board of Egg announced the de-listing of
Egg shares. Full acceptance of the offer would result in the issue of 41m new
ordinary shares in the Company representing 1.7% of its issued ordinary share
capital as enlarged by this acquisition.
SUPPLEMENTARY IFRS BASIS RESULTS
Additional IFRS basis information to enable consistent comparison of results for
Prudential's insurance operations
This information does not form part of the IFRS basis results to be reported in
the statutory financial statements.
The statutory basis results included in this announcement are for the years 2005
and 2004. These results reflect significant changes of accounting policies from
those previously applied under UK GAAP. For all except three IFRS standards
these changes have been applied consistently in preparing the results for both
years. However, as permitted by the IFRS transition rules, 2005 results include
the effects of adoption of the standards IAS 32, IAS 39 and IFRS 4 for the
Group's insurance and other operations from 1 January 2005. The 2004 comparative
results in those statements are therefore prepared on an inconsistent basis.
The "Pro forma IFRS basis" comparative results shown below for 2004 reflect the
estimated effect on the Group's 2004 results if IAS 32, IAS 39 and IFRS 4 had
been applied from 1 January 2004 to the Group's insurance operations.
The main purpose of providing this pro forma information is to present the
operating results for the UK insurance business and short-term fluctuations in
investment returns for Jackson National Life (JNL) on a consistent basis. Under
IAS 39 and IFRS 4, the assets and liabilities of certain unit-linked and similar
contracts of the UK insurance business are subject to re-measurement. For JNL,
derivatives held for economic hedging purposes are fair valued under IAS 39 with
value movements recorded in the income statement giving rise to significant
levels of volatility. In addition debt securities of JNL are fair valued with
value movements taken directly to shareholders reserves through the statement of
changes in equity.
Based on Pro forma IFRS
statutory IFRS basis results
basis results
Summary results 2005 GBPm 2004 GBPm
----------------------------------- --------- --------
Operating profit from continuing operations
based on longer-term investment returns (note 1) 957 699
Goodwill impairment charge (120) -
Short-term fluctuations in investment returns on
shareholder-backed business (note 2) 211 293
Shareholders' share of actuarial and other gains
and losses on defined benefit pension schemes (50) (7)
----------------------------------- --------- --------
Profit from continuing operations before tax
attributable to shareholders (including
actual investment returns) 998 985
Tax attributable to shareholders' profits (241) (290)
----------------------------------- --------- --------
Profit from continuing operations after tax 757 695
Discontinued operations (net of tax) 3 (94)
----------------------------------- --------- --------
Profit for the year 760 601
----------------------------------- --------- --------
Attributable to:
Equity holders of the Company 748 602
Minority interests 12 (1)
----------------------------------- --------- --------
Profit for the year 760 601
----------------------------------- --------- --------
Earnings per share
Continuing operations
-----------------------
From operating profit, based on longer-term
investment returns after related tax and minority
interests of GBP761m (GBP481m) 32.2p 22.7p
Adjustment for goodwill impairment charge (5.1)p -
Adjustment from post-tax longer-term investment
returns to post-tax actual investment returns (after
related minority interests) 5.9p 9.0p
Adjustment for post-tax shareholders' share of
actuarial and other gains and losses on defined
benefit pension schemes (1.5)p (0.2)p
----------------------------------- --------- --------
Based on profit from continuing operations
after tax and minority interests of GBP745m (GBP669m) 31.5p 31.5p
----------------------------------- --------- --------
Discontinued operations
-------------------------
Based on post-tax profit (loss) from discontinued
operations (after minority interests) 0.1p (3.1)p
----------------------------------- --------- --------
Based on profit for the year after minority
interests of GBP748m (GBP602m) 31.6p 28.4p
----------------------------------- --------- --------
SUPPLEMENTARY IFRS BASIS RESULTS
Additional IFRS basis information to enable consistent comparison of results for
Prudential's insurance operations
This information does not form part of the IFRS basis results to be reported in
the statutory financial statements.
Based on Pro forma IFRS
statutory IFRS basis results
basis results
CHANGES IN EQUITY (NET OF MINORITY
INTERESTS) 2005 GBPm 2004 GBPm
------------------------------------ --------- --------
Other Reserves
Profit for the year 748 602
Items recognised directly in equity:
Exchange movements 268 (191)
Movement on cash flow hedges (4) -
Unrealised valuation movements on securities classified as available-for-sale:
Unrealised investment losses, net (751) (106)
Related change in amortisation of deferred income and acquisition
costs 307 74
Related tax 218 23
------------------------------------ --------- --------
Total items recognised directly in
equity 38 (200)
------------------------------------ --------- --------
Total income and expense for the year 786 402
------------------------------------ --------- --------
Cumulative effect of changes in accounting principles on adoption of IAS 32,
IAS 39 and IFRS 4, net of applicable taxes, at 1 January 2005
Statutory IFRS basis 226 -
less: Pro forma adjustment reflected in adjusted shareholders' equity at 1
January 2005 (as reflected in statement of changes in equity - see
below) for impact of adoption of IAS 32, IAS 39 and IFRS 4 for insurance
operations (251) -
------------------------------------ --------- --------
Pro forma IFRS basis (i.e. transition adjustment in respect of banking and other
non-insurance operations) (25) -
Dividends (380) (323)
Reserve movements in respect of share-based payments 15 10
Share capital and share premium
Proceeds from Rights Issue, net of expenses - 1,021
Other new share capital subscribed 55 119
Treasury shares
Movement in own shares purchased in respect of share-based
payment plans 0 (2)
Movement on Prudential plc shares purchased by unit trusts newly
consolidated under IFRS 3 14
------------------------------------ --------- --------
Net increase in shareholders' equity 454 1,241
------------------------------------ --------- --------
Shareholders' equity at beginning of year
-------------------------------------------
As previously reported under UK GAAP 4,281 3,240
Changes arising from adoption of statutory IFRS 208 53
------------------------------------ --------- --------
Statutory IFRS basis 4,489 3,293
Pro forma basis adjustments for estimated impact if IAS 32, IAS 39,
and IFRS 4 had been adopted from 1 January 2004 for insurance
operations 251 206
------------------------------------ --------- --------
Pro forma IFRS basis 4,740 3,499
------------------------------------ --------- --------
Shareholders' equity at end of year 5,194 4,740
------------------------------------ --------- --------
SUPPLEMENTARY IFRS BASIS RESULTS
Additional IFRS basis information to enable consistent comparison of results for
Prudential's insurance operations
This information does not form part of the IFRS basis results to be reported in
the statutory financial statements
NOTES ON THE SUPPLEMENTARY IFRS BASIS RESULTS
1. Operating profit from continuing operations based on longer-term investment
returns*
Based on Pro forma IFRS
statutory IFRS basis results
basis results
Results
analysis by
business area 2005 GBPm 2004 GBPm
------------------------------------ --------- --------
UK Operations
UK Insurance
Operations 400 296
M&G 163 136
Egg 44 61
------------------------------------ --------- --------
Total 607 493
------------------------------------ --------- --------
US Operations
Jackson National Life 348 296
Broker-dealer and fund management
(including Curian losses of GBP10m and
(GBP29m)) 14 (14)
------------------------------------ --------- --------
Total 362 282
------------------------------------ --------- --------
Asian Operations
Long-term business 195 117
Fund management 12 19
Development expenses (20) (15)
------------------------------------ --------- --------
Total 187 121
------------------------------------ --------- --------
Other income and expenditure
Investment return and other income 87 44
Interest payable on core structural
borrowings (175) (154)
Corporate expenditure:
Group Head Office (70) (51)
Asia Regional Head Office (30) (29)
Charge for share-based payments for
Prudential schemes (11) (7)
------------------------------------ --------- --------
Total (199) (197)
------------------------------------ --------- --------
Operating profit from continuing
operations based on longer-term
investment returns 957 699
------------------------------------ --------- --------
* IFRS basis operating profit from continuing operations based on longer-term
investment returns excludes goodwill impairment charges, short-term fluctuations
in investment returns, and the shareholders' actuarial and other gains and
losses on defined benefit pension schemes. The amounts for these items are
included in total IFRS profit as shown elsewhere in this announcement.
2. Short-term fluctuations in investment returns
Based on Pro forma IFRS
statutory IFRS basis results
basis results
2005 GBPm 2004 GBPm
------------------------------------ --------- --------
US Operations:
Movement in market value of derivatives
used for economic hedging purposes 122 144
Actual less longer-term investment
returns for other items 56 61
Asian Operations 32 37
Other Operations 1 51
------------------------------------ --------- --------
211 293
------------------------------------ --------- --------
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 16 March, 2006
PRUDENTIAL PUBLIC LIMITED COMPANY
By: /s/ Jon Bunn
Jon Bunn
Director of Public Relations