Full Year Results 2007-Part 2

Prudential PLC 14 March 2008 PART TWO EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS MOVEMENT IN SHAREHOLDERS' EQUITY (excluding minority interests) 2007 2006 Â£m Â£m Profit for the year attributable to equity shareholders 3,062 2,212 Items taken directly to equity: Exchange movements 64 (359) Unrealised valuation movements on Egg securities classified as available-for-sale (2) (2) Movement on cash flow hedges (3) 7 Related tax 3 (74) Dividends (426) (399) Acquisition of Egg minority interests - (167) New share capital subscribed 182 336 Reserve movements in respect of share-based payments 18 15 Treasury shares: Movement in own shares in respect of share-based payment plans 7 6 Movement on Prudential plc shares purchased by unit trusts consolidated under IFRS 4 0 Mark to market value movements on Jackson assets backing surplus and required capital* (13) 7 Net increase in shareholders' equity 2,896 1,582 Shareholders' equity at beginning of year (excluding minority interests) 11,883 10,301 Shareholders' equity at end of year (excluding minority interests) 14,779 11,883 Comprising: Asian operations: Net assets 3,837 2,637 Acquired goodwill 172 172 4,009 2,809 US operations 3,686 3,360 UK operations: Long-term business 6,497 5,813 M&G: Net assets 271 230 Acquired goodwill 1,153 1,153 Egg - 292 7,921 7,488 Other operations: Holding company net borrowings at market value (note 7) (873) (1,542) Other net assets (liabilities) 36 (232) Shareholders' equity at end of year (excluding minority interests) 14,779 11,883 *The mark to market value movements on Jackson assets backing surplus and required capital for 2006 represents the cumulative adjustment as at 31 December 2006. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS SUMMARISED CONSOLIDATED BALANCE SHEET 2007 2006 Â£m Â£m Total assets less liabilities, excluding insurance funds 195,987 183,130 Less insurance funds*: Policyholder liabilities (net of reinsurers' share) and unallocated surplus of with-profits funds (189,786) (177,642) Less shareholders' accrued interest in the long-term business 8,578 6,395 (181,208) (171,247) Total net assets 14,779 11,883 Share capital 123 122 Share premium 1,828 1,822 IFRS basis shareholders' reserves 4,250 3,544 Total IFRS basis shareholders' equity 6,201 5,488 Additional EEV basis retained profit 8,578 6,395 Shareholders' equity (excluding minority interests) 14,779 11,883 * Including liabilities in respect of insurance products classified as investment contracts under IFRS 4. NET ASSET VALUE PER SHARE (in pence) 2007 2006 Based on EEV basis shareholders' equity of Â£14,779m (2006: Â£11,883m) 598p 486p Number of issued shares at year end (millions) 2,470 2,444 EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS NOTES ON THE EEV BASIS RESULTS (1) Basis of preparation of results The EEV basis results have been prepared in accordance with the EEV Principles issued by the CFO Forum of European Insurance Companies in May 2004 and expanded by the Additional Guidance on EEV Disclosures published in October 2005. Where appropriate the EEV basis results include the effects of adoption of International Financial Reporting Standards (IFRS). The EEV results for the Group are prepared for 'covered business', as defined by the EEV Principles. Covered business represents the Group's long-term insurance business for which the value of new and in-force contracts is attributable to shareholders. The EEV basis results for the Group's covered business are then combined with the IFRS basis results of the Group's other operations. These other operations include the results of discontinued banking operations, following the sale of Egg on 1 May 2007. The definition of long-term business operations is consistent with previous practice and comprises those contracts falling under the definition of long-term insurance business for regulatory purposes together with, for US operations, contracts that are in substance the same as guaranteed investment contracts (GICs) but do not fall within the technical definition. Under the EEV Principles, the results for covered business incorporate the projected margins of attaching internal asset management. With two principal exceptions, covered business comprises the Group's long-term business operations. The principal exceptions are for the closed Scottish Amicable Insurance Fund (SAIF) and for the presentational treatment of the financial position of two of the Group's defined benefit pension schemes. A very small amount of UK group pensions business is also not modelled for EEV reporting purposes. SAIF is a ring-fenced sub-fund of the Prudential Assurance Company (PAC) long-term fund, established by a Court approved Scheme of Arrangement in October 1997. SAIF is closed to new business and the assets and liabilities of the fund are wholly attributable to the policyholders of the fund. In 2006, a bulk annuity arrangement between SAIF and Prudential Retirement Income Limited (PRIL), a shareholder-owned subsidiary, took place as explained in the notes to the schedule of new business within this announcement. Reflecting the altered economic interest for SAIF policyholders and Prudential shareholders, this arrangement represents a transfer from long-term business of the Group that is not 'covered' to business that is 'covered' with consequential effect on the EEV basis results. As regards the Group's defined benefit pension schemes, the surplus or deficit attaching to the Prudential Staff Pension Scheme (PSPS) and Scottish Amicable Pension scheme are excluded from the EEV value of UK operations and included in the total for Other operations. The surplus and deficit amounts are partially attributable to the PAC with-profits fund and shareholder-backed long-term business and partially to other parts of the Group. In addition to the IFRS basis surplus or deficit, the shareholders' 10 per cent share of the PAC with-profits fund's interest in the movement on the financial position of the schemes is recognised for EEV reporting purposes. The directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles. The EEV basis results for 2007 and 2006 have been derived from the EEV basis results supplement to the Company's statutory accounts for 2007. The supplement included an unqualified audit report from the auditors. (2) Economic assumptions (a) Deterministic assumptions In most countries, the long-term expected rates of return on investments and risk discount rates are set by reference to period end rates of return on cash or fixed interest securities. This 'active' basis of assumption setting has been applied in preparing the results of all the Group's US and UK long-term business operations. For the Group's Asian operations, the active basis is appropriate for business written in Japan, Korea and US dollar denominated business written in Hong Kong. An exception to this general rule is that for countries where long-term fixed interest markets are less established, investment return assumptions and risk discount rates are based on an assessment of longer-term economic conditions. Except for the countries listed above, this basis is appropriate for the Group's Asian operations. Expected returns on equity and property asset classes in respect of each territory are derived by adding a risk premium, also based on the long-term view of Prudential's economists, to the risk-free rate. In Asia, equity risk premiums range from 3.0 per cent to 6.0 per cent (2006: 3.0 per cent to 5.8 per cent). In the US and the UK, the equity risk premium is 4.0 per cent above risk-free rates for both 2007 and 2006. Best estimate assumptions for other asset classes, such as corporate bond spreads, are set consistently. Assumed investment returns reflect the expected future returns on the assets held and allocated to the covered business at the valuation date. The tables below summarise the principal financial assumptions: Asian operations China Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam (notes iii, (notes (notes (notes iv, v) iv, v) iv,v) ii, v) 31 31 31 31 31 31 31 31 31 31 31 31 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 % % % % % % % % % % % % Risk discount rate: New business 11.75 5.7 15.75 16.75 5.1 9.7 9.3 15.75 6.4 9.1 13.0 16.75 In force 11.75 6.0 15.75 16.75 5.1 9.7 9.1 15.75 6.8 9.8 13.0 16.75 Expected long-term rate of inflation 4.0 2.25 5.0 6.0 0.0 2.75 2.75 5.0 1.75 2.25 3.0 6.0 Government bond yield 8.25 4.1 9.25 10.25 2.0 5.8 6.5 9.25 4.25 5.5 6.75 10.25 China Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam (notes iii, (notes (notes (notes iv, v) iv, v) iv, v) ii, v) 31 31 31 31 31 31 31 31 31 31 31 31 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 % % % % % % % % % % % % Risk discount rate: New business 12.0 6.6 16.5 17.5 5.3 9.5 9.5 16.5 6.9 8.8 13.75 16.5 In force 12.0 6.8 16.5 17.5 5.3 9.5 9.2 16.5 6.9 9.3 13.75 16.5 Expected long-term rate of inflation 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5 Government bond yield 9.0 4.7 10.5 11.5 2.1 5.0 7.0 10.5 4.5 5.5 7.75 10.5 Asia total Asia total 31 Dec 2007 31 Dec 2006 % % Weighted risk discount rate (note (i)): New business 9.5 9.8 In force 8.7 8.8 Notes (i) The weighted risk discount rates for Asian operations shown above have been determined by weighting each country's risk discount rates by reference to the EEV basis operating result for new business and the closing value of in-force business. (ii) For traditional business in Taiwan, the economic scenarios used to calculate the 2007 and 2006 EEV basis results reflect the assumption of a phased progression of the bond yields from the current rates applying to the assets held to the long-term expected rates. The projections assume that in the average scenario, the current bond yields at 31 December 2007 of around 2.5 per cent (2006: around 2 per cent) trend towards 5.5 per cent at 31 December 2013. In projecting forward the Fund Earned Rate, allowance is made for the mix of assets in the fund, future investment strategy, and further market value depreciation of bonds held as a result of assumed future yield increases. These factors, together with the assumption of the phased progression in bond yields, give rise to an average assumed Fund Earned Rate that trends from 0.5 per cent for 2007 to 6.4 per cent for 2014. The assumed Fund Earned Rate increases to 2.5 per cent in 2008 and then increases to 3.3 per cent by 2013. Thereafter, the assumed Fund Earned Rate fluctuates around a target of 6.4 per cent. This projection compares with that applied for the 2006 results of a grading from an assumed rate of 2.1 per cent for 2006 to 5.7 per cent for 2014. Consistent with EEV methodology, a constant discount rate has been applied to the projected cash flows. (iii) The assumptions shown are for US dollar denominated business which comprises the largest proportion of the in-force Hong Kong business. (iv) The mean equity return assumptions for the most significant equity holdings in the Asian operations were: 31 Dec 2007 31 Dec 2006 % % Hong Kong 8.1 8.7 Malaysia 12.5 12.8 Singapore 9.3 9.3 To obtain the mean, an average over all simulations of the accumulated return at the end of the projection period is calculated. The annual average return is then calculated by taking the root of the average accumulated return minus 1. (v) For 2007, cash rates rather than government bond yields were used in setting risk discount rates for Malaysia, Singapore, Taiwan and for Hong Kong dollar denominated business. For 2006, cash rates were used for these operations and for all Hong Kong business (i.e. including US dollar denominated business). 31 Dec 2007 31 Dec 2006 US operations (Jackson) % % Risk discount rate*: New business 7.0 7.6 In force 6.0 6.7 Expected long-term spread between earned rate and rate credited to policyholders for 1.75 1.75 single premium deferred annuity business US 10-year treasury bond rate at end of period 4.1 4.8 Pre-tax expected long-term nominal rate of return for US equities 8.1 8.8 Expected long-term rate of inflation 2.4 2.5 *The risk discount rates at 31 December 2007 for new business and business in-force for US operations reflect weighted rates based on underlying rates of 8.1% for variable annuity business and 4.8% for other business. The decrease in the weighted discount rates reflects the decrease in the US 10-year treasury bond rate. 31 Dec 2007 31 Dec 2006 UK insurance operations % % Risk discount rate (note (i)): New business 7.3 7.8 In force 7.85 8.0 Pre-tax expected long-term nominal rates of investment return: UK equities 8.55 8.6 Overseas equities 8.1 to 10.2 8.6 to 9.3 Property 6.8 7.1 Gilts 4.55 4.6 Corporate bonds - with-profits funds (note (ii)) 6.0 5.3 - other business 6.25 5.3 Expected long-term rate of inflation 3.2 3.1 Post-tax expected long-term nominal rate of return for the PAC with-profits fund: Pension business (where no tax applies) 7.85 7.5 Life business 6.9 6.6 Pre-tax expected long-term nominal rate of return for annuity business (note (iii)): Fixed annuities 5.4 to 5.6 5.0 to 5.1 Linked annuities 5.0 to 5.2 4.8 to 5.0 Notes (i) The risk discount rates for new business and business in force for UK insurance operations reflect weighted rates based on the type of business. (ii) The assumed long-term rate for corporate bonds for 2007 for with-profits business reflects the purchase of credit default swaps. (iii) The pre-tax rates of return for annuity business are based on the gross redemption yield on the backing assets net of a best estimate allowance for future defaults. (b) Stochastic assumptions The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations described above. Assumptions specific to the stochastic calculations, such as the volatilities of asset returns, reflect local market conditions and are based on a combination of actual market data, historic market data and an assessment of longer-term economic conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling of individual asset classes but with allowance for correlation between the various asset classes. Details are given below of the key characteristics and calibrations of each model. Asian operations The same asset return models as used in the UK, appropriately calibrated, have been used for the Asian operations as described for UK insurance operations below. The principal asset classes are government and corporate bonds. Equity holdings are much lower than in the UK whilst property holdings do not represent a significant investment asset. The stochastic cost of guarantees is primarily only of significance for the Hong Kong, Malaysia, Singapore and Taiwan operations. The mean stochastic returns are consistent with the mean deterministic returns for each country. The expected volatility of equity returns for both 2007 and 2006 ranges from 18 per cent to 25 per cent, and the volatility of government bond yields ranges from 1.3 per cent to 2.5. per cent (2006: 1.4 per cent to 2.5 per cent). US operations (Jackson) â€¢ Interest rates are projected using a log-normal generator calibrated to actual market data; â€¢ Corporate bond returns are based on Treasury securities plus a spread that has been calibrated to current market conditions and varies by credit quality; and â€¢ Variable annuity equity and bond returns have been stochastically generated using a regime-switching log-normal model with parameters determined by reference to historical data. The volatility of equity fund returns for both 2007 and 2006 ranges from 18.6 per cent to 28.1 per cent, depending on risk class, and the standard deviation of bond returns ranges from 1.4 per cent to 1.7 per cent (2006: 1.4 per cent to 2.0 per cent). UK insurance operations â€¢ Interest rates are projected using a two-factor model calibrated to actual market data; â€¢ The risk premium on equity assets is assumed to follow a log-normal distribution; â€¢ The corporate bond return is calculated as the return on a zero-coupon bond plus a spread. The spread process is a mean reverting stochastic process; and â€¢ Property returns are modelled in a similar fashion to corporate bonds, namely as the return on a riskless bond, plus a risk premium, plus a process representative of the change in residual values and the change in value of the call option on rents. Mean returns have been derived as the annualised arithmetic average return across all simulations and durations. For each projection year, standard deviations have been calculated by taking the square root of the annualised variance of the returns over all the simulations. These have been averaged over all durations in the projection. For equity and property, the standard deviations relate to the total return on these assets. The standard deviations applied to both years are as follows: % Equities: UK 18.0 Overseas 16.0 Property 15.0 (3) Level of encumbered capital In adopting the EEV Principles, Prudential has based encumbered capital on its internal targets for economic capital subject to it being at least the local statutory minimum requirements. Economic capital is assessed using internal models but, when applying the EEV principles, Prudential does not take credit for the significant diversification benefits that exist within the Group. For with-profits business written in a segregated life fund, as is the case in Asia and the UK, the capital available in the fund is sufficient to meet the encumbered capital requirements. â€¢ Asian operations: the economic capital requirement is substantially higher than local statutory requirements in total. Economic capital requirements vary by territory, but in aggregate, the encumbered capital is equivalent to the amount required under the Insurance Groups Directive (IGD). â€¢ US operations: the level of encumbered capital has been set to an amount at least equal to 235 per cent of the risk-based capital required by the National Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL), which is sufficient to meet the economic capital requirement. â€¢ UK insurance operations: the economic capital requirements for annuity business are fully met by Pillar I requirements being four per cent of mathematical reserves, which are also sufficient to meet Pillar II requirements. (4) Margins on new business premiums New Business Annual Present Premiums Premium and Value of Contribution New Equivalents Business Pre-Tax New New Business Premiums Business Margin Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP) 2007 Â£m Â£m Â£m Â£m Â£m % % Asian operations 1,820 1,124 1,306 7,007 653 50 9.3 US operations 6,515 19 671 6,666 285 42 4.3 UK insurance operations 6,632 234 897 7,629 277 31 3.6 Total 14,967 1,377 2,874 21,302 1,215 42 5.7 New Business Annual Present Premiums Premium and Value of Contribution New Equivalents Business Pre-Tax New New Business Premiums Business Margin Single Regular (APE) (PVNBP) Contribution (APE) PVNBP) 2006 Â£m Â£m Â£m Â£m Â£m % % Asian operations 1,072 849 956 5,132 514 54 10.0 US operations 5,964 17 614 6,103 259 42 4.2 UK insurance operations 6,991 201 900 7,712 266 30 3.4 Total 14,027 1,067 2,470 18,947 1,039 42 5.5 New business margins are shown on two bases, namely the margins by reference to Annual Premium and Contribution Equivalents (APE) and the Present Value of New Business Premiums (PVNBP). APEs are calculated as the aggregate of regular new business amounts and one-tenth of single new business amounts. PVNBPs are calculated as equalling single premiums plus the present value of expected premiums of new regular premium business, allowing for lapses and other assumptions made in determining the EEV new business contribution. In determining the EEV basis value of new business written in the year the policies incept, premiums are included in projected cash flows on the same basis of distinguishing annual and single premium business as set out for statutory basis reporting. New business contributions represent profits determined by applying the economic and non-economic assumptions as at the end of the year. (5) Effect of changes in corporate tax rates and other operating assumptions Effect of changes in corporate tax rates At 31 December 2007, a change to reduce the UK corporate tax rate from 30 per cent to 28 per cent in 2008 had been enacted in the legislative process. Accordingly, the 2007 results incorporate the effects of this change in projecting the tax cash flows attaching to in-force business. Under the convention applied for EEV basis reporting, profits are generally determined on a post-tax basis and then grossed up at the prevailing corporate tax rates to derive pre-tax results. The effect of the change in the UK corporate tax rate is to give rise to a benefit to the value of business in force at 1 January 2007 of Â£48m. After grossing up this amount for notional tax of Â£19m, the effect on the pre-tax operating results based on longer-term investment returns for UK insurance operations for 2007 is a credit of Â£67m. Similar considerations apply to corporate tax rate changes in China, Malaysia and Singapore giving rise to a benefit to the value of in-force business at 1 January 2007 of Â£25m. After grossing up this amount for notional tax of Â£7m, the effect on the pre-tax operating result based on longer-term investment returns for Asian operations for 2007 is a credit of Â£32m. Effect of changes in other operating assumptions For UK insurance operations there is a net nil charge or credit for both the 2007 and 2006 results. However, the 2007 results for annuity business have been determined after a strengthening of explicit mortality assumptions, and the release of excess margins in the aggregate liabilities that had previously been set aside as an indirect extra allowance for longevity related risks. The overall impact of the assumption changes and release of margins for 2007 is as follows; Â£m Strengthening of mortality assumptions (a) (312) Release of margins: Projected benefit related (b) 144 Investment related (c) 82 Expense related (d) 29 Other (e) 57 312 0 (a) The mortality assumptions have been strengthened such that the previous future improvement assumptions of medium cohort for males and 75% of medium cohort for females are now subject to a minimum level of improvement in future years. (b) The release of projected benefit related margins relates to modelling improvements that have been made during 2007 and the effect of hedging inflationary increases on certain deferred annuity business. (c) The release of investment related margins predominantly relates to Â£38m in respect of default margins and Â£43m for adjustments to the assumed liquidity premium. The resulting assumptions for expected defaults and liquidity premium, after allowing for the release of margins, remain appropriate given economic conditions at 31 December 2007. (d) A release of expense reserves has been made following recent expense reductions, on which the related cost of capital on the EEV basis is Â£29m. (e) This amount reflects the release of other additional margins in the liabilities that are no longer appropriate in light of the explicit strengthening of the mortality assumption. (6) Effect of changes in economic assumptions and time value of cost of options and guarantees The profits (losses) on changes in economic assumptions and time value of cost of options and guarantees resulting from changes in economic factors for in-force business included within the profit from continuing operations before tax (including actual investment returns) arise as follows: 2007 2006 Change in Change in time value time value Change in of cost of Change in of cost of economic options and economic options and assumptions guarantees Total assumptions guarantees Total Â£m Â£m Â£m Â£m Â£m Â£m Asian operations (note (i)) 201 9 210 (132) 14 (118) US operations (note (ii)) 81 8 89 (51) 6 (45) UK insurance operations (note (iii)) 466 (17) 449 182 40 222 Total 748 0 748 (1) 60 59 Notes (i) The principal components of the effect of changes in economic assumptions in 2007 of Â£201m for Asian operations are credits of Â£110m in Taiwan and Â£80m in Hong Kong. The increase for Taiwan reflects the combined effect of changes to the projected fund earned rate (as explained in note 2), and to economic capital (versus projected), offset by the effect of an increase in the risk discount rate. The increase for Hong Kong reflects a reduction in the risk discount rate for all product lines and an increase in the projected fund earned rate for participating and linked business. The charge of Â£132m for 2006 mainly relates to Taiwan where there was a charge of Â£101m arising from the delay in the assumed long-term yield projection and the associated effect of this delay on the economic capital requirement. (ii) The credit of Â£81m for US operations in 2007 arises from the decrease in risk discount rate, partially offset by the negative effect of a reduction in the assumed future rate of return for separate account variable annuity business. Both changes reflect the 0.7 per cent decrease in the 10-year treasury bond rate (as shown in note 2). (iii) The effect of changes in economic assumptions in 2007 of Â£466m for UK insurance operations reflects a 0.35 per cent increase in the fund earned rate arising from the increase in assumed returns on non-UK equities and corporate bond rates which more than offsets the slight reduction in gilt rates (as shown in note 2), a partial offset from the cost of credit default swaps of Â£41m and the effect of the risk discount rate for business in force reducing slightly by 0.15 per cent, in a similar way to the fall in gilt rates as also shown in note 2. (7) Holding company net borrowings at market value Holding company net borrowings at market value comprise: 31 Dec 2007 31 Dec 2006 Â£m Â£m Holding company borrowings: IFRS basis (2,367) (2,485) Mark to market value adjustment 38 (176) EEV basis (2,329) (2,661) Holding company* cash and short-term investments 1,456 1,119 Holding company net borrowings (873) (1,542) *Including central finance subsidiaries. (8) Taiwan - effect of altered economic assumptions and sensitivity of results to future market conditions For the 2007 results, as explained in note 2(a)(ii), the expected long-term bond yield has been maintained at 5.5 per cent to be achieved by 31 December 2013. The sensitivity of the embedded value at 31 December 2007 of the Taiwan operation to altered economic assumptions and future market conditions to: (a) a one per cent increase or decrease in the projected long-term bond yield, (including all consequential changes to investment returns for all classes, market values of fixed interest assets and risk discount rates), is an increase (decrease) of Â£67m and Â£(91)m respectively (2006: Â£107m and Â£(165)m); and (b) a one per cent increase or decrease in the starting bond rate for the progression to the assumed long-term rate is an increase (decrease) of Â£73m and Â£(57)m respectively (2006: Â£116m and Â£(125m)). If it had been assumed in preparing the 2007 results that interest rates remained at the current level of around 2.5% until 31 December 2008 and the progression period in bond yields was delayed by a year so as to end on 31 December 2014, there would have been a reduction in the Taiwan embedded value of Â£70m. TOTAL INSURANCE AND INVESTMENT PRODUCTS NEW BUSINESS INSURANCE PRODUCTS AND INVESTMENT PRODUCTS Insurance Investment Total products products 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m Asian operations 2,944 1,921 38,954 20,408 41,898 22,329 US operations 6,534 5,981 60 - 6,594 5,981 UK operations 6,866 7,192 14,745 13,486 21,611 20,678 Group Total 16,344 15,094 53,759 33,894 70,103 48,988 INSURANCE PRODUCTS - NEW BUSINESS PREMIUMS AND CONTRIBUTIONS (note (i)) Single Regular Annual Premium Present Value of and Contribution New Business Equivalents (APE) Premiums (PVNBP) 2007 2006 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Asian operations China (note (v)) 72 27 40 36 47 39 268 198 Hong Kong 501 355 117 103 167 139 1,196 933 India (Group's 26% interest) 26 20 177 105 180 107 728 411 Indonesia 118 31 109 71 121 74 494 269 Japan 122 68 22 7 34 14 214 97 Korea 179 103 241 208 259 218 1,267 1,130 Malaysia 41 4 78 72 82 72 472 418 Singapore 593 357 67 72 126 108 1,047 803 Taiwan 132 92 218 139 231 148 1,121 743 Other 36 15 55 36 59 37 200 130 Total Asian operations 1,820 1,072 1,124 849 1,306 956 7,007 5,132 US operations Fixed annuities 573 688 - - 57 69 573 688 Fixed index annuities 446 554 - - 45 55 446 554 Variable annuities 4,554 3,819 - - 455 382 4,554 3,819 Life 7 8 19 17 20 18 158 147 Guaranteed Investment Contracts 408 458 - - 41 46 408 458 GIC-Medium Term Notes 527 437 - - 53 44 527 437 Total US operations 6,515 5,964 19 17 671 614 6,666 6,103 UK operations Product summary Internal vesting annuities 1,399 1,341 - - 140 134 1,399 1,341 Direct and partnership annuities 842 780 - - 84 78 842 780 Intermediated annuities 589 592 - - 59 59 589 592 Total individual annuities 2,830 2,713 - - 283 271 2,830 2,713 Equity release 156 89 - - 16 9 156 89 Individual pensions 38 21 1 - 5 2 42 21 Corporate pensions 283 318 84 66 112 98 737 490 Unit-linked bonds 243 388 - - 24 39 243 388 With-profit bonds 297 139 - - 30 14 297 139 Protection - 11 5 9 5 10 26 63 Offshore products 434 540 4 - 47 54 455 540 Total retail retirement 4,281 4,219 94 75 522 497 4,786 4,443 Corporate pensions 198 261 115 100 135 126 604 643 Other products 190 232 25 26 44 49 276 347 DWP rebates 143 161 - - 14 16 143 161 Total mature life and pensions 531 654 140 126 193 191 1,023 1,151 Total retail 4,812 4,873 234 201 715 688 5,809 5,594 Wholesale annuities (notes (iii) and (iv)) 1,799 1,431 - - 180 143 1,799 1,431 Credit life 21 687 - - 2 69 21 687 Total UK operations 6,632 6,991 234 201 897 900 7,629 7,712 Channel Summary Direct and partnership 2,385 2,543 209 174 448 428 3,288 3,133 Intermediated 2,284 2,169 25 27 253 244 2,378 2,300 Wholesale (notes (iii) and (iv)) 1,820 2,118 - - 182 212 1,820 2,118 Sub-total 6,489 6,830 234 201 883 884 7,486 7,551 DWP rebates 143 161 - - 14 16 143 161 Total UK operations 6,632 6,991 234 201 897 900 7,629 7,712 Group Total 14,967 14,027 1,377 1,067 2,874 2,470 21,302 18,947 INVESTMENT PRODUCTS - FUNDS UNDER MANAGEMENT (note (ii)) 1 Jan 2007 Market Redemptions Market and 31 Dec 2007 gross other inflows movements Â£m Â£m Â£m Â£m Â£m Asian operations 12,253 38,954 (35,993) 2,179 17,393 US operations - 60 (4) (1) 55 UK operations 44,946 14,745 (9,787) 1,317 51,221 Group Total 57,199 53,759 (45,784) 3,495 68,669 Notes (i) The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profits for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS income statement. Annual premium and contribution equivalents are calculated as the aggregate of regular new business amounts and one tenth of single new business amounts. New business premiums for regular premium products are shown on an annualised basis. Department of Work and Pensions rebate business is classified as single recurrent business. Internal vesting business is classified as new business where the contracts include an open market option. The format of the tables shown above is consistent with the distinction between insurance and investment products as applied for previous financial reporting periods. With the exception of some US institutional business, products categorised as 'insurance' refer to those classified as contracts of long-term insurance business for regulatory reporting purposes, i.e. falling within one of the classes of insurance specified in part II of Schedule 1 to the Regulated Activities Order under FSA regulations. The details shown above for insurance products include contributions for contracts that are classified under IFRS 4 'Insurance Contracts' as not containing significant insurance risk. These products are described as investment contracts or other financial instruments under IFRS. Contracts included in this category are primarily certain unit-linked and similar contracts written in UK insurance operations and Guaranteed Investment Contracts and similar funding agreements written in US operations. (ii) Investment products referred to in the table for funds under management above are unit trust, mutual funds and similar types of retail asset management arrangements. These are unrelated to insurance products that are classified as 'investment contracts' under IFRS 4, as described in the preceding paragraph, although similar IFRS recognition and measurement principles apply to the acquisition costs and fees attaching to this type of business. US investment products are no longer included in the table above as they are assets under administration rather than assets under management. (iii) The table above includes the transfer of 62,000 with-profits annuity policies from Equitable Life on 31 December 2007 with assets of approximately Â£1.7bn. The transfer represented an APE of Â£174m. (iv) The tables for 2006 above include a bulk annuity transaction with the Scottish Amicable Insurance Fund (SAIF) with a premium of Â£560m. The transaction reflects the arrangement entered into in June 2006 for the reinsurance of non-profit immediate pension annuity liabilities of SAIF to Prudential Retirement Income Limited (PRIL), a shareholder owned subsidiary of the Group. SAIF is a closed ring-fenced sub-fund of the PAC long-term fund established by a Court approved Scheme of Arrangement in October 1997, which is solely for the benefit of SAIF policyholders. Shareholders have no interest in the profits of this fund, although they are entitled to investment management fees on this business. The inclusion of the transaction between SAIF and PRIL as new business in the tables reflects the transfer from SAIF to Prudential shareholders' funds of longevity risk, the requirement to set aside supporting capital and entitlement to surpluses on the block of business from the reinsurance arrangements. For Group reporting purposes, the amounts recorded by SAIF and PRIL for the premium are eliminated on consolidation. (v) Subsequent to 29 September, following expiry of the previous management agreement, CITIC-Prudential Life Insurance Company Ltd (CITIC-Prudential), the Group's life operation in China, has been accounted for as a joint venture. Prior to this date, CITIC-Prudential was consolidated as a subsidiary undertaking. The amounts in the table above include 100% of the total premiums for this operation up to 29 September 2007 and 50% thereafter, being the Group's share after this date. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS CONSOLIDATED INCOME STATEMENT 2007 2006 Â£m Â£m Gross premiums earned 18,359 16,157 Outward reinsurance premiums (171) (171) Earned premiums, net of reinsurance 18,188 15,986 Investment income 12,221 17,128 Other income 2,457 1,917 Total revenue, net of reinsurance (note B) 32,866 35,031 Benefits and claims (26,210) (25,981) Outward reinsurers' share of benefits and claims (20) (144) Movement in unallocated surplus of with-profits funds (760) (2,296) Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance (26,990) (28,421) Acquisition costs and other operating expenditure (4,523) (4,212) Finance costs: interest on core structural borrowings of shareholder-financed operations (168) (177) Total charges, net of reinsurance (note B) (31,681) (32,810) Profit before tax* (note B) 1,185 2,221 Tax attributable to policyholders' returns (19) (849) Profit before tax attributable to shareholders (note C) 1,166 1,372 Tax expense (note G) (401) (1,241) Less: tax attributable to policyholders' returns 19 849 Tax attributable to shareholders' profit (note G) (382) (392) Profit from continuing operations after tax (note B) 784 980 Discontinued operations (net of tax) (note H) 241 (105) Profit for the year 1,025 875 Attributable to: Equity holders of the Company 1,022 874 Minority interests 3 1 Profit for the year 1,025 875 Earnings per share (in pence) 2007 2006 Basic (based on 2,445m and 2,413m shares respectively): Based on profit from continuing operations attributable to the equity holders of the Company (note I) 31.9p 40.5p Based on profit (loss) from discontinued operations attributable to the equity holders of the Company 9.9p (4.3)p 41.8p 36.2p Diluted (based on 2,448m and 2,416m shares respectively): Based on profit from continuing operations attributable to the equity holders of the Company 31.9p 40.5p Based on profit (loss) from discontinued operations attributable to the equity holders of the Company 9.8p (4.3)p 41.7p 36.2p Dividends per share (in pence) 2007 2006 Dividends relating to reporting period: Interim dividend (2007 and 2006) 5.70p 5.42p Final dividend (2007 and 2006) (note J) 12.30p 11.72p Total 18.00p 17.14p Dividends declared and paid in reporting period: Current year interim dividend 5.70p 5.42p Final dividend for prior year 11.72p 11.02p Total 17.42p 16.44p * Profit before tax represents income net of post-tax transfers to unallocated surplus of with-profits funds, before tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders' profits. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 2007 Share Share Retained Translation Available-for-sale Hedging Shareholders' Minority Total capital premium earnings reserve securities reserve reserve equity interests equity Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Reserves Profit for the year 1,022 1,022 3 1,025 Items recognised directly in equity: Exchange movements 11 11 11 Movement on cash flow hedges (3) (3) (3) Unrealised valuation movements on Egg securities classified as available-for-sale (2) (2) (2) Unrealised valuation movements on securities of US insurance operations classified as available-for-sale Unrealised holding losses arising during the year (231) (231) (231) Less gains included in the income statement (13) (13) (13) Total (note N) (244) (244) (244) Related change in amortisation of deferred income and acquisition costs 88 88 88 Related tax 2 53 1 56 56 Total items recognised directly in equity 13 (105) (2) (94) (94) Total income and expense for the year 1,022 13 (105) (2) 928 3 931 Dividends (426) (426) (5) (431) Reserve movements in respect of share-based payments 18 18 18 Change in minority interests arising principally from purchase and sale of venture investment companies and property partnerships of the PAC with-profits fund and other consolidated investment funds (28) (28) Share capital and share premium New share capital subscribed (note O) 1 181 182 182 Transfer to retained earnings in respect of shares issued in lieu of cash dividends (note O) (175) 175 Treasury shares Movement in own shares in respect of share-based payment plans 7 7 7 Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS 4 4 4 Net increase (decrease) in equity 1 6 800 13 (105) (2) 713 (30) 683 At beginning of year 122 1,822 3,640 (125) 27 2 5,488 132 5,620 At end of year 123 1,828 4,440 (112) (78) 0 6,201 102 6,303 2006 Share Share Retained Translation Available-for-sale Hedging Shareholders' Minority Total capital premium earnings reserve securities reserve reserve equity interests equity Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Reserves Profit for the year 874 874 1 875 Items recognised directly in equity: Exchange movements (224) (224) (224) Movement on cash flow hedges 7 7 7 Unrealised valuation movements on Egg securities classified as available-for-sale (2) (2) (2) Unrealised valuation movements on securities of US insurance operations classified as available-for-sale: Unrealised holding losses arising (208) (208) (208) during the year Less losses included in the income statement 7 7 7 (201) (201) (201) Related change in amortisation of deferred income and acquisition costs 75 75 75 Related tax (74) 50 (2) (26) (26) Total items of income and expense recognised directly in equity (298) (78) 5 (371) (371) Total income and expense for the year 874 (298) (78) 5 503 1 504 Dividends (399) (399) (399) Reserve movements in respect of share-based payments 15 15 15 Change in minority interests arising principally from purchase and sale of venture investment companies and property partnerships of the PAC with-profits fund and other consolidated investment funds 43 43 Acquisition of minority interests of now discontinued Egg banking operations (note H) (167) (167) (84) (251) Share capital and share premium New share capital subscribed 3 333 336 336 Transfer to retained earnings in respect of shares issued in lieu of cash dividends (75) 75 Treasury shares Movement in own shares in respect of share-based payment plans 6 6 6 Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS 0 0 0 Net increase (decrease) in equity 3 258 404 (298) (78) 5 294 (40) 254 At beginning of year 119 1,564 3,236 173 105 (3) 5,194 172 5,366 At end of year 122 1,822 3,640 (125) 27 2 5,488 132 5,620 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS CONSOLIDATED BALANCE SHEET 2007 2006 Â£m Â£m Assets Intangible assets attributable to shareholders: Goodwill 1,341 1,341 Deferred acquisition costs and other intangible assets 2,836 2,497 4,177 3,838 Intangible assets attributable to the PAC with-profits fund: In respect of acquired subsidiaries for venture fund and other investment purposes (note K) 192 830 Deferred acquisition costs 19 31 211 861 Total 4,388 4,699 Other non-investment and non-cash assets: Property, plant and equipment 1,012 1,133 Reinsurers' share of insurance contract liabilities 783 945 Deferred tax assets 925 1,012 Current tax recoverable 285 404 Accrued investment income 2,023 1,900 Other debtors 1,297 1,052 Total 6,325 6,446 Investments: Investment properties 13,688 14,491 Investments accounted for using the equity method 12 6 Financial investments: Loans (note L) 7,924 13,754 Equity securities and portfolio holdings in unit trusts 86,157 78,892 Debt securities (note M) 83,984 81,719 Other investments 4,396 3,220 Deposits 7,889 7,759 Total 204,050 199,841 Held for sale assets 30 463 Cash and cash equivalents 4,951 5,071 Total assets 219,744 216,520 Equity and liabilities Equity Shareholders' equity (note O) 6,201 5,488 Minority interests 102 132 Total equity 6,303 5,620 Liabilities Banking customer accounts (note H) - 5,554 Policyholder liabilities and unallocated surplus of with-profits funds: Insurance contract liabilities 132,636 123,213 Investment contract liabilities with discretionary participation features 29,550 28,733 Investment contract liabilities without discretionary participation features 14,032 13,042 Unallocated surplus of with-profits funds 14,351 13,599 Total insurance liabilities 190,569 178,587 Core structural borrowings of shareholder-financed operations (note P): Subordinated debt (other than discontinued Egg banking operations) 1,570 1,538 Other 922 1,074 2,492 2,612 Subordinated debt of discontinued Egg banking operations (note H) - 451 Total 2,492 3,063 Other borrowings: Operational borrowings attributable to shareholder-financed operations (note Q) 3,081 5,609 Borrowings attributable to with-profits funds (note Q) 987 1,776 Other non-insurance liabilities: Obligations under funding, securities lending and sale and repurchase agreements 4,081 4,232 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 3,556 2,476 Current tax liabilities 1,237 1,303 Deferred tax liabilities 3,475 3,882 Accruals and deferred income 599 517 Other creditors 1,020 1,398 Provisions 473 464 Other liabilities 1,871 1,652 Held for sale liabilities - 387 Total 16,312 16,311 Total liabilities 213,441 210,900 Total equity and liabilities 219,744 216,520 CONSOLIDATED CASH FLOW STATEMENT 2007 2006 Â£m Â£m Cash flows from operating activities Profit before tax from continuing operations (note (i) and B) 1,185 2,221 Profit (loss) before tax from discontinued operations (note H) 222 (150) Profit before tax 1,407 2,071 Changes in operating assets and liabilities: Investments (11,730) (13,748) Banking customer accounts (9) (276) Other non-investment and non-cash assets (817) (232) Policyholder liabilities (including unallocated surplus) 12,017 13,540 Other liabilities (including operational borrowings) 962 1,136 Interest income and expense and dividend income included in profit before tax (8,201) (10,056) Other non-cash items (140) 198 Operating cash items: Interest receipts 5,541 6,466 Dividend receipts 3,633 2,732 Tax paid (624) (523) Net cash flows from operating activities 1,138 2,209 Cash flows from investing activities Purchases of property, plant and equipment (231) (174) Proceeds from disposal of property, plant and equipment 61 34 Costs incurred on purchase of Egg minority interests - (6) Acquisition of subsidiaries, net of cash balances (note (ii)) (77) (70) Disposal of Egg, net of cash balances (note (iii) and H) (538) - Disposal of other subsidiaries, net of cash balances (note (ii)) 157 114 Deconsolidation of investment subsidiaries (note (iv)) (91) - Net cash flows from investing activities (719) (102) Cash flows from financing activities Structural borrowings of the Group: Shareholder-financed operations (note (v) and P): Redemption (150) (1) Interest paid (171) (204) With-profits operations (note (vi) and Q): Interest paid (9) (9) Equity capital (note (vii)): Issues of ordinary share capital 6 15 Dividends paid to shareholders (255) (323) Net cash flows from financing activities (579) (522) Net (decrease) increase in cash and cash equivalents (160) 1,585 Cash and cash equivalents at beginning of year 5,071 3,586 Effect of exchange rate changes on cash and cash equivalents 40 (100) Cash and cash equivalents at end of year (note (viii)) 4,951 5,071 Notes (i) Profit before tax represents income, net of post-tax transfers to unallocated surplus of with-profits funds, before tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders' profits. It does not represent profit before tax attributable to shareholders. (ii) Acquisitions and disposals of subsidiaries shown above include venture investments and other investment subsidiaries of the PAC with-profits fund. (iii) The amount of Â£(538)m in respect of the disposal of Egg, net of cash balances shown above, represents the net sale proceeds of Â£527m less cash and cash equivalents of Â£1,065m held by Egg and transferred on disposal. (iv) In November 2007, the Company sold its venture fund management subsidiary, PPM Capital, as described in note K. As a result of the arrangements attaching to the sale, it is no longer appropriate to consolidate the holdings managed by that company. (v) Structural borrowings of shareholder-financed operations comprise core debt of the holding company and central finance subsidiaries, Jackson surplus notes and, in 2006, Egg debenture loans. Following the sale of Egg in May 2007, these loans no longer form part of the Group's borrowings. Core debt excludes borrowings to support short-term fixed income securities programmes and non-recourse borrowings of investment subsidiaries of shareholder-financed operations. Cash flows in respect of these borrowings are included within cash flows from operating activities. In June 2007, borrowings of Â£150m were repaid on maturity. (vi) Structural borrowings of with-profits operations relate solely to the Â£100m 8.5 per cent undated subordinated guaranteed bonds which contribute to the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced sub-fund of the PAC with-profits fund. Cash flows in respect of other borrowings of with-profits funds, which principally relate to consolidated investment funds and, prior to deconsolidation, venture fund investment subsidiaries are included within cash flows from operating activities. (vii) Cash movements in respect of equity capital exclude scrip dividends and share capital issued in respect of the acquisition of Egg minority interests in 2006. (viii) Of the cash and cash equivalents amounts reported above, Â£339m (2006: Â£437m) represents cash and cash equivalents of central companies. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS NOTES ON THE STATUTORY IFRS BASIS RESULTS A Basis of preparation and audit status The statutory basis results included in this announcement have been extracted from the audited financial statements of the Group for the year ended 31 December 2007. These statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) as required by EU law (IAS Regulation EC1606/2002). The auditors have reported on the 2007 statutory accounts. The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2007 or 2006 but is derived from those accounts. The auditors' report was (i) unqualified, (ii) did not include reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 237 (2) or (3) of the Companies Act 1985. In 2007 the Group adopted the following accounting pronouncements â€¢ IFRS 7, 'Financial instruments: Disclosures' â€¢ Revised IFRS 4 'Implementation Guidance' â€¢ Amendment to IAS 1,'Capital Disclosures' â€¢ IFRIC 9, 'Reassessment of Embedded Derivatives'. The changes in respect of IFRS 7, IFRS 4 and IAS 1 affect only disclosures in the Group Financial Statements. IFRIC 9, which potentially effects measurements, relates to assessment of whether derivatives are required to be separated from host contracts by the reporting entity and accounted for as derivatives when the Group first becomes a party to the contracts. IFRIC 9 became effective for annual periods beginning on or after 1 June 2006, but had no material effect on the Group's 2007 results. B Segment disclosure 2007 2006 Â£m Â£m Revenue Long-term business 31,555 34,197 Broker-dealer and asset management 1,397 1,080 Unallocated corporate 182 38 Intra-group revenue eliminated on consolidation (268) (284) Total revenue, net of reinsurance, per income statement 32,866 35,031 Charges (before income tax attributable to policyholders and unallocated surplus of long-term insurance funds) Long-term business, including post-tax transfers to unallocated surplus of with-profits funds (30,533) (32,162) Broker-dealer and asset management (1,053) (797) Unallocated corporate (363) (135) Intra-group charges eliminated on consolidation 268 284 Total charges, net of reinsurance, per income statement (31,681) (32,810) Segment results - revenue less charges (continuing operations) Long-term business 1,022 2,035 Broker-dealer and asset management 344 283 Unallocated corporate (181) (97) Profit before tax* 1,185 2,221 Tax attributable to policyholders' returns (19) (849) Profit before tax attributable to shareholders 1,166 1,372 Tax attributable to shareholders' profit (382) (392) Profit from continuing operations after tax 784 980 Segment results - discontinued operations (net of tax) Banking (note H) 241 (105) Profit for the year 1,025 875 * Profit before tax represents income net of post-tax transfers to unallocated surplus of with-profits funds, before tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders' profits. C Supplementary analysis of profit from continuing operations before tax attributable to shareholders 2007 2006 Results analysis by business area Â£m Â£m Asian operations Long-term business (note D) 189 189 Asset management 72 50 Development expenses (15) (15) Total 246 224 US operations Jackson (note D) 444 398 Broker-dealer and asset management 13 18 Curian (5) (8) Total 452 408 UK operations UK insurance operations (note D) 528 500 M&G 254 204 Total 782 704 Other income and expenditure Investment return and other income 86 58 Interest payable on core structural borrowings (168) (177) Corporate expenditure: Group Head Office (117) (83) Asia Regional Head Office (38) (36) Charge for share-based payments for Prudential schemes (note (i)) (11) (10) Total (248) (248) Restructuring costs (19) (38) Operating profit from continuing operations based on longer-term investment returns (note (ii)) 1,213 1,050 Short-term fluctuations in investment returns on shareholder-backed business (note E) (137) 155 Shareholders' share of actuarial gains and losses on defined benefit pension schemes (note F) 90 167 Profit from continuing operations before tax attributable to shareholders (note (ii)) 1,166 1,372 Notes (i) The charge for share-based payments for Prudential schemes is for the SAYE and Group performance-related schemes. (ii) The results for continuing operations shown above exclude those in respect of discontinued banking operations. On 1 May 2007, the Company sold Egg. Accordingly, the presentation of the comparative results for 2006 has been adjusted from those previously published. Note H shows the composition of the contribution from discontinued operations. D Effect of changes in assumptions, estimates and bases used to measure insurance assets and liabilities There were no changes of assumptions that had a material impact on the 2007 and 2006 results for Asian operations. The 2007 results for US operations have been determined after taking account of certain changes of assumptions during the year. Generally, assumptions were modified in 2007 to conform to more recent experience with a net effect of a credit of Â£8m (2006: charge of Â£7m). For UK insurance operations, the operating profit based on longer-term investment returns of Â£528m for 2007 includes a credit of Â£34m for the effect on shareholders' results for changes in assumptions. The 2007 results for shareholder-backed annuity business have been determined after making changes to mortality assumptions and releasing excess margins in the aggregate liabilities that had previously been set aside as an indirect extra allowance for longevity related risks. Â£m Effect of strengthening of mortality assumptions (a) (276) Release of margins: Projected benefit related (b) 104 Investment related (c) 48 Expense related (d) 68 Other (e) 90 310 Net credit to shareholder result 34 (a) The mortality assumptions have been strengthened by increasing the minimum level of future improvement rate. (b) The release of projected benefit related margins primarily relates to modelling improvements that have been made during 2007. (c) The release of investment related margins of Â£48m relates to default margins. The resulting assumptions for expected defaults, after allowing for the release of margins, remain appropriate given economic conditions at 31 December 2007. (d) A release of expense reserves has been made following recent expense reductions. (e) This amount reflects the release of other additional margins in the liabilities that are no longer appropriate in light of the explicit strengthening of the mortality assumptions. The 2006 comparative operating profit based on longer-term investment returns of Â£500m included a net credit of Â£42m for changes in assumptions, mainly due to a Â£46m reduction in liabilities due to the implementation of PS 06/14 by the FSA. E Short-term fluctuations in investment returns on shareholder-backed business 2007 2006 Â£m Â£m Long-term business operations: Asian insurance operations (note (ii)) (71) 134 US insurance operations (note (iii)) (18) 53 UK insurance operations (note (iv)) (47) (43) Other (1) 11 Total (note (i)) (137) 155 Notes (i) General The short-term fluctuations in investment returns for 2007 reflect primarily temporary market value movements on the portfolio of investments held by the Group's shareholder-backed operations. There were no default losses on debt securities in 2007. (ii) Asian insurance operations The fluctuations for Asian operations reflect the impact of interest rate increases in Taiwan on the value of debt securities and a Â£30m value reduction in a CDO fund investment, partially offset by the effect of favourable equity market movements in Vietnam. (iii) US insurance operations The short-term fluctuations in investment returns included in the supplementary analysis of profit for US insurance operations comprise the following items: 2007 2006 Â£m Â£m Debt securities Credit related losses Losses in the year Bond write downs (35) (32) Losses on sales of impaired and deteriorating bonds (51) (3) Recoveries/ reversals 8 10 (78) (25) Less: Risk margin charge included in operating profit based on longer-term investment returns 48 54 Short-term fluctuation (30) 29 Interest related realised gains and losses Gains (losses) in year 31 (15) Less: Amortisation of gains and losses in current and prior years included in (37) (45) operating profit based on longer-term investment returns Short-term fluctuation (6) (60) Related change to amortisation of deferred acquisition costs 9 6 Total short-term fluctuation related to realised gains and losses on debt securities (27) (25) Derivatives (other than equity related): market value movement (19) 34 Equity type movements: actual less longer-term return 42 21 Other items (14) 23 Total (18) 53 In addition, for US insurance operations, included within the statement of changes in equity, is a net reduction in the value of debt securities classified as available-for-sale of Â£244m. This reduction reflects the effect of widened credit spreads and global credit concerns partially offset by the effect of reductions in US interest rates and a steepening yield curve. These temporary market value movements do not reflect defaults or permanent impairments. Additional details on the movement in the value of the Jackson portfolio are included in note N. (iv) UK insurance operations The fluctuations for UK insurance operations arise mostly in Prudential Retirement Income Limited, which writes the most significant element of the shareholder-backed annuity business in the UK. The fluctuations principally reflect the impact of widened credit spreads on the corporate bond securities backing the shareholders' equity of the business. F Shareholders' share of actuarial gains and losses on defined benefit pension schemes 2007 2006 Â£m Â£m Actual less expected return on scheme assets (note (i)) (8) 156 Experience (losses) gains on scheme liabilities (14) 18 Gains on changes of assumptions for scheme liabilities (note (ii)) 317 311 295 485 Less: amount attributable to the PAC with-profits fund (205) (318) Total attributable to shareholders 90 167 Notes (i) The expected rate of return for full year 2007 applied to the schemes' assets was a weighted rate of 5.9%. (ii) The gains of Â£317m on changes of assumptions comprise gains due to changes in economic assumptions of Â£509m which are partially offset by a charge of Â£192m from the effect of strengthened mortality assumptions for UK schemes. The discount rates applied for the Group's UK defined benefit schemes, and the change therein reflected in the gains and losses shown above, are as follows: 31 December 2007 5.9% 31 December 2006 5.2% G Tax expense The total tax charge of Â£401m for 2007 (2006: Â£1,241m) comprises a charge of Â£80m (2006: Â£698m) for UK tax and a charge of Â£321m (2006: Â£543m) for overseas tax. This tax charge comprises tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders. The tax charge attributable to shareholders of Â£382m for 2007 (2006: Â£392m) comprises a charge of Â£176m (2006: Â£142m) for UK tax and a charge of Â£206m (2006: Â£250m) for overseas tax. The tax credit related to discontinued operations, which is all attributable to shareholders, amounted to Â£19m for 2007 (2006: Â£45m). Amounts for deferred tax are determined using the current rate of tax or, where substantively enacted through the legislative process, the prospective rate. Accordingly, the deferred tax amounts for full year 2007 reflect the prospective change for the main UK corporation tax rate from 30 per cent to 28 per cent which will be effective from 1 April 2008. H Discontinued operations In the first half of 2006, the Company acquired the outstanding 21.7 per cent minority interest in Egg, its UK banking business. The Company accounted for the purchase using the economic entity method. Accordingly, Â£167m was charged to retained earnings in 2006 representing the difference between the consideration paid and net assets acquired. In January 2007, the Company announced that it had entered into a binding agreement to sell Egg. Under the terms of the agreement, the consideration payable to the Company was Â£575m cash, subject to adjustments to reflect any change in net asset value between 31 December 2006 and completion. On 1 May 2007, the Company completed the sale. The consideration, net of expenses, was Â£527m. The reduction from the Â£575m noted above primarily reflected Egg's post tax operating loss of Â£49m for the period from 1 January 2007 to the date of sale as shown below. The profit (loss) from discontinued operations comprises: 2007 2006 Â£m Â£m Pre-tax loss from discontinued operations Egg results: Operating loss based on longer-term investment returns for the period of ownership (68) (157) Short-term fluctuations in investment returns - 7 Profit on sale of Egg 290 - Total 222 (150) Tax On Egg results: Operating loss based on longer-term investment returns for the period of ownership 19 47 Short-term fluctuations in investment returns - (2) On profit on sale of Egg 0 - Total 19 45 Profit (loss) from discontinued operations, net of tax 241 (105) Cash and cash equivalents transferred on disposal were Â£1,065m. Accordingly, the cash outflow arising from the disposal of Egg, as shown in the consolidated cash flow statement, was Â£538m. I Supplementary analysis of earnings per share from continuing operations Earnings per share (in pence) 2007 2006 From operating profit based on longer-term investment returns after related tax and 33.8p 30.9p minority interests Adjustment from post-tax longer-term investment returns to post-tax actual investment (4.5)p 4.8p returns (after related minority interests) Adjustment for post-tax shareholders' share of actuarial gains and losses on defined 2.6p 4.8p benefit pension schemes Based on profit from continuing operations after tax and minority interests 31.9p 40.5p J Dividend A final dividend for 2007 of 12.30p per share was proposed by the directors on 13 March 2008. This dividend will absorb an estimated Â£304m of shareholders' funds. Subject to shareholder approval, the dividend will be paid on 20 May 2008 to shareholders on the register at the close of business on 11 April 2008. A scrip dividend alternative will be offered to shareholders. K Intangible assets attributable to the PAC with-profits fund in respect of venture fund and other investments During 2006 and 2007, the PAC with-profits fund held a number of venture capital holdings which were managed by its venture capital management subsidiary, PPM Capital. On 9 November 2007, PPM Capital was sold by the Group. Prior to the sale of PPM Capital, the Group was deemed to have a controlling interest in these investments and where appropriate these investments were accounted for as subsidiaries with line-by-line consolidation of assets, including acquired goodwill and other intangible assets and liabilities. At 31 December 2006, Â£830m of goodwill and other intangible assets were recognised for the consolidated venture fund investments. As a result of the control arrangements put in place at the time of the sale of PPM Capital, the Group no longer controls these venture fund investments and consequently ceased to consolidate these investments and instead fair values them in the balance sheet. The intangible assets of Â£192m at 31 December 2007 attributable to the PAC with-profits fund relate to the goodwill recognised from the fund's acquisition of 78 per cent voting equity interests in Red Funnel, a ferry company in June 2007, and which is managed by M&G. L Loans portfolio Loans are accounted for at amortised cost unless impaired. The amounts included in the balance sheet are analysed as follows: 2007 2006 Â£m Â£m Insurance operations UK (note(i)) 1,245 1,128 US (note (ii)) 3,258 3,254 Asia (note (iii)) 1,087 904 Asset management operations M&G (note (iv)) 2,334 2,181 Unallocated to a segment 0 94 Discontinued banking operations - 6,193 Total 7,924 13,754 Notes (i) UK insurance operations The loans of the Group's UK insurance operations of Â£1,245m at 31 December 2007 comprise mortgage loans of Â£449m, policy loans of Â£35m and other loans of Â£761m. The mortgage loans are collateralised by properties. Other loans are all commercial loans and comprise mainly syndicated loans held by the PAC with-profits fund. (ii) US insurance operations The loans of the Group's US insurance operations of Â£3,258m at 31 December 2007 comprise mortgage loans of Â£2,841m and policy loans of Â£417m. All of the mortgage loans are commercial mortgage loans which are collateralised by properties. The property types are mainly industrial, multi-family residential, suburban office, retail and hotel. The US insurance operations' mortgage loan portfolio does not include any single-family residential mortgage loans and is therefore not exposed to the risk of defaults associated with residential sub-prime mortgage loans. The policy loans are fully secured by individual life insurance policies or annuity policies. (iii) Asian insurance operations The loans of the Group's Asian insurance operations of Â£1,087m at 31 December 2007 comprise mortgage loans of Â£132m, policy loans of Â£430m and other loans of Â£525m. The mortgage and policy loans are secured by properties and life insurance policies respectively. The majority of the other loans are commercial loans held by the Malaysian operation and which are all investment graded by two local rating agencies. (iv) M&G The M&G loans of Â£2,334m comprise Â£1,383m of bridging loan finance assets and Â£951m in respect of a structured finance arrangement, both managed by Prudential Capital. The bridging loan finance assets generally have no external credit ratings available, with internal ratings prepared by the Group's asset management operations as part of the risk management process rating Â£738m BBB+ to BBB- and Â£645m BB+ to BB-. Of the loans receivable under the structured finance arrangement, Â£826m of the receivable was with counterparties rated AA by Standard and Poor's and Â£125m AA-. In addition an AAA rated credit default swap was held covering Â£400m of the AA element of the loans. M Debt securities portfolio Debt securities are accounted for at fair value. The amounts included in the balance sheet are analysed as follows, with further information relating to the credit quality of the Group's debt securities at 31 December 2007 provided in the notes below. 2007 2006 Â£m Â£m Insurance operations UK (note(ii)) 57,180 53,461 US (note (iii)) 19,002 20,146 Asia (note (iii)) 6,920 5,391 Asset management operations (note (iv)) 882 678 Unallocated to a segment - 67 Discontinued banking operations - 1,976 Total 83,984 81,719 Notes In the tables below, Standard and Poor's (S&P) ratings have been used where available. For securities where S&P ratings are not available, those produced by Moody's and then Fitch have been used as an alternative. (i) UK insurance operations PAC-with profits sub-fund Other funds and subsidiaries Scottish Excluding Prudential Total Prudential Unit-linked Other Amicable Prudential Annuities Retirement business business Insurance Annuities Limited Income Total Fund Limited Limited Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m S&P - AAA 1,453 6,434 4,356 10,790 5,658 3,534 121 21,556 S&P - AA+ to AA- 436 1,978 1,518 3,496 1,541 680 20 6,173 S&P - A+ to A- 1,030 4,356 2,693 7,049 3,354 1,093 31 12,557 S&P - BBB+ to BBB- 652 2,780 920 3,700 781 267 9 5,409 S&P - Other 167 757 11 768 1 6 - 942 3,738 16,305 9,498 25,803 11,335 5,580 181 46,637 Moody's - Aaa 138 550 177 727 125 22 9 1,021 Moody's - Aa1 to Aa3 23 198 273 471 82 9 2 587 Moody's - A1 to A3 74 321 284 605 243 19 3 944 Moody's - Baa1 to Baa3 41 180 150 330 103 14 2 490 Moody's - Other 10 400 - 400 - - - 410 286 1,649 884 2,533 553 64 16 3,452 Fitch 43 196 265 461 160 17 1 682 Other 528 2,233 2,428 4,661 1,125 90 5 6,409 Total debt securities 4,595 20,383 13,075 33,458 13,173 5,751 203 57,180 Where no external ratings are available, internal ratings produced by the Group's asset management operation, which are prepared on the Company's assessment of a comparable basis to external ratings, are used where possible. Of the Â£6,409m total debt securities held at 31 December 2007 which are not externally rated, Â£2,972m were internally rated AAA to A-, Â£2,844m were internally rated BBB to B- and Â£593m were unrated. The majority of unrated debt security investments were held in SAIF and the PAC with-profits fund and relate to convertible debt and other investments which are not covered by ratings analysts nor have an internal rating attributed to them. (ii) US insurance operations Â£m S&P - AAA 3,896 S&P - AA+ to AA- 1,187 S&P - A+ to A- 3,657 S&P - BBB+ to BBB- 5,415 S&P - Other 1,113 15,268 Moody's - Aaa 549 Moody's - Aa1 to Aa3 118 Moody's - A1 to A3 47 Moody's - Baa1 to Baa3 79 Moody's - Other 78 871 Fitch 380 Other* 2,483 Total debt securities 19,002 * The amounts within Other which are not rated by S&P, Moody or Fitch have the following National Association of Insurance Commissioners (NAIC) classifications: 2007 Â£m NAIC 1 1,079 NAIC 2 1,311 NAIC 3-6 93 2,483 (iii) Asian insurance operations With-profits Unit-linked Other business Total business business Â£m Â£m Â£m Â£m S&P - AAA 1,367 660 257 2,284 S&P - AA+ to AA- 242 153 1,599 1,994 S&P - A+ to A- 299 271 105 675 S&P - BBB+ to BBB- 142 34 17 193 S&P - Other 8 47 94 149 2,058 1,165 2,072 5,295 Moody's - Aaa 16 185 - 201 Moody's - Aa1 to Aa3 7 19 19 45 Moody's - A1 to A3 11 16 1 28 Moody's - Baa1 to Baa3 12 7 - 19 Moody's - Other 58 - - 58 104 227 20 351 Other 167 509 598 1,274 Total debt securities 2,329 1,901 2,690 6,920 (iv) Asset management operations The total for asset management operations was Â£882m, of which Â£841m related to M &G's Prudential Capital operations and which was all AAA to A- where S&P rated or Aaa by Moody's. (v) Group exposure to holdings in sub-prime and Alt-A assets, monoline insurers and CDO funds Included in the amounts shown above for debt securities are the following holdings with S&P ratings. (a) Sub-prime and Alt-A securities Shareholder-backed business Â£m US insurance operations - Sub-prime (AAA) 237 - Alt-A (77% AAA, 17% AA) 660 Asian insurance operations 15 912 With-profits operations Â£m UK insurance operations - Sub-prime (AAA) 129 - Alt-A (96% AAA) 100 Asian insurance operations 7 236 Total 1,148 Further details on the US insurance operations' sub-prime and Alt-A securities are given in note N. (b) Monoline insurers The Group held direct holdings in monoline insurers with a value at 31 December 2007 of Â£33m (shareholder-backed operations Â£27m, with-profits operations Â£6m). The Group also held debt securities with a value of Â£1,754m (shareholder-backed operations Â£577m, with-profits operations Â£1,177m) which had a monoline wrap guarantee. (c) CDO funds (all without sub-prime exposure) Shareholder-backed business Â£m US insurance operations (65% AAA, 8% AA) * 260 Asian insurance operations (72% AAA, 28% AA-) 62 UK insurance operations - PRIL (AAA) 36 Other operations (AAA) 19 377 * including Group's economic interest in Piedmont and other consolidated CDO funds. With-profits operations Â£m UK insurance operations (79% AAA, 8% AA) 240 Asian insurance operations (AAA) 59 299 Total 676 N Debt securities of US insurance operations: Accounting presentation of movements in unrealised gains and losses and securities in an unrealised loss position (i) Accounting presentation of unrealised value movements With the exception of debt securities of US insurance operations classified as ' available-for-sale' under IAS 39, unrealised value movements on the Group's investments are booked within the income statement. For with-profits operations, such value movements are reflected in changes to asset share liabilities to policyholders or the liability for unallocated surplus. For shareholder-backed operations, the unrealised value movements form part of the total return for the year booked in the profit before tax attributable to shareholders. Separately, as noted elsewhere and in note C in this announcement, and as applied previously, the Group provides a supplementary analysis of this profit distinguishing operating profit based on longer-term investment return and short-term fluctuations in investment returns. However, for debt securities classified as 'available-for-sale', unless impaired, fair value movements are recorded as a movement in shareholder reserves direct to equity. Impairments are recorded in the income statement as shown in note E of this announcement. This classification is applied for most of the debt securities of the Group's US insurance operations. (ii) 2007 movements in unrealised gains and losses In general, the debt securities of the Group's US insurance operations are purchased with the intention and the ability to hold them for the longer-term. In 2007 there was a movement in the balance sheet value for these debt securities classified as available-for-sale from a net unrealised gain of Â£110m to a net unrealised loss of Â£136m. During 2007, US interest rates fell and the yield curve steepened. Offsetting the positive effect on bond values for these changes were adverse market price effects resulting from increasing credit spreads and global credit concerns. As a result of these factors, the gross unrealised gain in the balance sheet decreased from Â£366m at 31 December 2006 to Â£303m at 31 December 2007, while the gross unrealised loss increased from Â£256m to Â£439m at 31 December 2007. These features are included in the table shown below of the movements in the values of available-for-sale securities. 31 Dec 2007 Changes in 31 Dec 2006 unrealised appreciation Â£m Â£m Â£m Assets fair valued at below book value Book value 10,730 11,258 Unrealised loss (439) (183) (256) Fair value (as included in balance sheet) 10,291 11,002 Assets fair valued at or above book value Book value 8,041 8,208 Unrealised gain 303 (63) 366 Fair value (as included in balance sheet) 8,344 8,574 Total Book value 18,771 19,466 Net unrealised (loss) gains (136) (246) 110 Fair value (as included in balance sheet)* 18,635 19,576 Reflected as part of movement in shareholders' equity Movement in unrealised appreciation (244) Exchange movements (2) (246) *Debt securities for US operations included in the balance sheet of Â£19,002m, and as referred to in note M, comprise Â£18,635m for securities classified as available-for-sale, as shown above, and Â£367m for securities of consolidated investment funds classified as fair value through profit and loss. Included within the unrealised valuation losses movement for the debt securities of Jackson of Â£244m, as shown in the consolidated statement of changes in equity, was an amount of Â£55m relating to the sub-prime and Alt-A securities for which the carrying values at 31 December 2007 are shown in note M. (iii) Securities in unrealised loss position The following tables show some key attributes of those securities that are in an unrealised loss position at 31 December 2007. (a) Fair value of securities as a percentage of book value Fair value Unrealised loss Â£m Â£m Between 90% and 100% 9,370 (274) Between 80% and 90% 784 (122) Below 80% 137 (43) 10,291 (439) Included within the table above, showing the fair value of securities in an unrealised loss position at 31 December 2007 as a percentage of book value, are amounts relating to sub-prime and Alt-A securities of: Fair value of securities as a percentage of book value Unrealised loss Fair value Â£m Â£m Between 90% and 100% 572 (24) Between 80% and 90% 132 (22) Below 80% 28 (10) 732 (56) (b) Aged analysis of unrealised losses for the time periods indicated Not rated Non investment Investment Total grade grade Â£m Â£m Â£m Â£m Less than 6 months (7) (8) (52) (67) 6 months to 1 year (10) (21) (105) (136) 1 year to 2 years (5) (2) (16) (23) 2 years to 3 years (24) (10) (140) (174) More than 3 years (7) (3) (29) (39) (53) (44) (342) (439) At 31 December 2007, the gross unrealised losses in the balance sheet for the sub-prime and Alt-A securities in an unrealised loss position were Â£56m, as shown above in note (a). Â£37m of these losses relate to securities that have been in an unrealised loss position for less than one year and Â£19m to securities that have been in an unrealised loss position for more than one year. (c) By maturity of security Â£m Less than 1 year (1) 1 year to 5 years (54) 5 years to 10 years (164) More than 10 years (60) Mortgage-backed and other debt securities (160) Total (439) O Shareholders' equity 2007 2006 Â£m Â£m Share capital 123 122 Share premium 1,828 1,822 Reserves 4,250 3,544 Total 6,201 5,488 P Net core structural borrowings of shareholder-financed operations 2007 2006* Â£m Â£m Core structural borrowings of shareholder-financed operations: Central funds 2,367 2,485 Jackson 125 127 Total (per consolidated balance sheet) 2,492 2,612 Less: Holding company** cash and short-term investments (recorded within the consolidated (1,456) (1,119) balance sheet) Net core structural borrowings of shareholders-financed operations 1,036 1,493 *Excluding borrowings of discontinued banking operations **Including central finance subsidiaries Q Other borrowings 2007 2006 Â£m Â£m Operational borrowings attributable to shareholder-financed operations Borrowings in respect of short-term fixed income securities programmes 2,477 2,032 Non-recourse borrowings of US operations 591 743 Other borrowings 13 15 Total continuing operations 3,081 2,790 Discontinued banking operations (note H) - 2,819 Total 3,081 5,609 Borrowings attributable to with-profits funds Non-recourse borrowings of venture fund investment subsidiaries (note K) - 926 Non-recourse borrowings of consolidated investment funds 789 681 Subordinated debt of the Scottish Amicable Insurance Fund 100 100 Other borrowings (predominantly obligations under finance leases) 98 69 Total 987 1,776 R Inherited estate of the PAC long-term fund The assets of the main with-profits fund within the long-term fund of PAC comprise the amounts that it expects to pay out to meet its obligations to existing policyholders and an additional amount used as working capital. The amount payable over time to policyholders from the with-profits fund is equal to the policyholders' accumulated asset shares plus any additional payments that may be required by way of smoothing or to meet guarantees. The balance of the assets of the with-profits fund is called the 'inherited estate' and has accumulated over many years from various sources. The inherited estate represents the major part of the working capital of PAC's long-term insurance fund. This enables the Company to support with-profits business by providing the benefits associated with smoothing and guarantees, by providing investment flexibility for the fund's assets, by meeting the regulatory capital requirements that demonstrate solvency and by absorbing the costs of significant events or fundamental changes in its long-term business without affecting the bonus and investment policies. The size of the inherited estate fluctuates from year to year depending on the investment return and the extent to which it has been required to meet smoothing costs, guarantees and other events. PAC believes that it would be beneficial if there were greater clarity as to the status of the inherited estate. As a result, it has announced that it has begun a process to determine whether it can achieve that clarity through a reattribution of the inherited estate. As part of this process a Policyholder Advocate has been nominated to represent policyholders' interests. This nomination does not mean that a reattribution will occur. Given the size of the PAC's with-profits business, any proposal is likely to be time consuming and complex to implement and is likely to involve a payment to policyholders from shareholders' funds. If a reattribution is completed, the inherited estate will continue to provide working capital for the long-term insurance fund. S Group Investments - IFRS disclosures from the 2007 Annual Report The Company has published a document alongside the Company's preliminary announcement for the year ended 31 December 2007, entitled 'Group Investments - IFRS disclosures from the 2007 Annual Report'. This document includes detailed analysis and explanation of the information contained in the Group's financial statements for the year ended 31 December 2007 on the Group's investments. The document has been posted to the Company's website address at www.prudential.co.uk -------------------------- 1. Over three years This information is provided by RNS The company news service from the London Stock Exchange

Companies

Prudential (PRU)

Monday, 6th January 2025

COMPANIES COVERED:

FXPO AXL S247

Smarttech 247 jumps on full year results update and Ukrainian based Ferrexpo tops the FTSE-250, whilst Arrow Exploration puts in a shaky start despite upbeat drilling results from Colombia.

Full Archive

UK 100

Latest directors dealings

17 minutes ago Entain
2 days ago Legal & General Group
2 days ago Baillie Gifford Japan Trust
2 days ago British Land Company
2 days ago Premier Miton Global Renewables Trust

All directors dealings today