Interim Results - Part 1

Prudential PLC 27 July 2005 Part 1 Embargo: 7.05am Wednesday 27th July 2005 PRUDENTIAL PLC 2005 INTERIM RESULTS â€¢ New business APE of Â£1,129 million, up 34% on first half 2004 â€¢ New business achieved profit of Â£413 million, up 37%, with Group margin of 37% (HY2004: 36%) â€¢ Total achieved profit from continuing operations of Â£834 million, up 31% on first half 2004 â€¢ Total statutory profit from continuing operations of Â£469 million, up 25% on first half 2004 â€¢ Achieved profit shareholders' funds of Â£9.3 billion (end 2004: Â£8.8 billion) â€¢ Interim dividend of 5.3 pence per share (HY2004: 5.19 pence per share) Commenting, Mark Tucker, Group Chief Executive said: 'These results demonstrate the Group is performing well. We have delivered double-digit sales growth in all our markets, while maintaining margins at a Group level. We are taking advantage of our strong presence across the diverse markets in which we operate. 'My priority is to maintain our focus on delivery of superior performance, enhancement of earnings and capital efficiency in order to make the most of these opportunities. 'As you would expect, I am actively reviewing longer-term trends and opportunities in order to anticipate the changing needs of our customers. This attention to the longer-term will help ensure that the actions we take today lay the foundations for an even stronger position for Prudential in the future. I will talk more about our evolving thinking with our third quarter new business figures in October. 'We face a number of challenges, but we remain confident of achieving the growth and return targets we have set out across each of our businesses and we are optimistic about prospects in the longer-term.' Operational highlights: Prudential's UK and Europe insurance operations are making good progress with sales of Â£541 million on an APE basis, 50% ahead of last year, including the Phoenix Life & Pensions Limited transaction, which increased APE sales by Â£145 million in the period. Excluding this transaction, sales growth was 10% compared to an estimated market growth of 2-3%; and the primary drivers of growth were strong sales of unit-linked bonds (up 100%), individual annuities (up 12%) and bulk annuities (up 67%). The internal rate of return on new business written in the first half was 13%, moving towards our target of 14% by the end of 2007. New business margin was 30%, although some reduction from the 2004 year-end level is still expected for the full year 2005 due to changing product mix as Prudential UK builds its shareholder-backed business. In the US, sales increased by 18% on an APE basis with margins improving to 37% (HY 2004:34%) as a result of improved profitability from both variable annuities and Guaranteed Investment Contracts (GICs). The acquisition of Life of Georgia was completed in May and the integration of that business remains on track to be completed by the end of 2005. Jackson is a low-cost high quality operator that has shown an ability to innovate in the US market and deliver cash back to the Group. In Asia, sales growth in the first half of the year was 26% on an APE basis, with particularly strong growth in Korea, India, Indonesia, Malaysia and China. The new business margin was lower at 49% (full year 2004: 54%) primarily due to a combination of changes in country and product mix. In July we announced our 9th and 10th licences in China, further strengthening our presence in this exciting market. Trading conditions in Japan remain tough and we have taken the decision to impair goodwill in our life insurance business by Â£95 million in these results. M&G enjoyed a strong start to the year with net investment in-flows of Â£1.7 billion and growth in underlying profit of 15% to Â£68 million. Total profit for the period was Â£83 million. Egg's first half profit from the core UK business was Â£13 million after charging Â£10 million for restructuring costs. We remain focused on optimising the performance of the Egg business and the value of the Group's investment for Prudential's shareholders. We continue to look to improve capital efficiency and earlier in July we took advantage of good market conditions in the US retail market to raise $300 million of perpetual subordinated capital securities, which will qualify as Group regulatory capital. The primary use of the proceeds will be to re-finance our outstanding non-qualifying Â£150 million bond maturing in 2007. - 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 Davidson 020 7548 3708 Notes to Editors 1. The comparative International Financial Reporting Standards results are prepared on a 'proforma' basis which reflects the estimated effect on the 2004 results as if IAS 32, IAS 39 and IFRS 4 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. Achieved profits basis results have been restated for the consequential impact of the adoption of International Financial Reporting Standards at 1 January 2004 together with the discretionary change for the basis of determining longer-term investment returns, as disclosed on 2 June 2005. The 2004 interim dividend per share has been restated to reflect the bonus element of the October 2004 rights issue. 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 (BST) hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance Director. Dial in telephone number: 0800 358 2705. Passcode: 155439#. 3. A presentation to analysts will take place at 9.30am (BST) at Governor's House, Laurence Pountney Hill, London, EC4R 0HH. An audio cast of the presentation and the presentation slides will be available on the Group's website, www.prudential.co.uk. 4. There will be a conference call for investors and analysts at 2.30pm (BST) hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance Director. Please call from the UK +44 (0)20 8609 0205 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)20 8609 0289 from the UK or +1 866 676 5865 from the US. The conference reference number is 129574. 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.comand www.prudential.co.ukfrom 7.05am on 27th July 2005. 7. Annual premium equivalent (APE) sales comprise regular premium sales plus one-tenth of single premium insurance sales. 8. New business achieved profits represent the present value of the future cash flows we expect to receive from new business written in the year, less the costs of acquiring that new business and the cost of holding the capital required to back it. 9. Total number of Prudential plc shares in issue as at 30th June 2005 was 2,383,761,711. 10. Financial Calendar 2005: Ex-dividend date Wednesday 17 August 2005 Record date Friday 19 August 2005 Q3 new business figures Wednesday 26 October 2005 Payment of interim dividend Friday 28 October 2005 11. 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 Â£187 billion in assets under management, (as at 31 December 2004). 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 GROUP Results Highlights Half Year Half Year Half Year CER Change RER Change 2005 2004 2004 Â£m Â£m Â£m -------------------------------------------------------------------------------- Annual premium 1,129 844 34% 849 33% equivalent (APE) sales Net Investment Flows 2,539 792 221% 777 227% New Business Achieved 413 302 37% 305 35% Profit (NBAP) NBAP Margin 37% 36% 36% Total Achieved profits 834 638 31% 638 31% basis operating profit* - Total International 469 374 25% 375 25% Financial Reporting Standards (IFRS) operating profit *+ Achieved profits basis 9.3 7.2 29% 7.2 29% shareholders funds (Â£bn) - IFRS shareholders 5.0 3.4 47% 3.4 47% funds (Â£bn) + -------------------------------------------------------------------------------- * Continuing operations - excluding Jackson Federal Bank (JFB) and Egg's France and Funds Direct businesses. + 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. - Achieved profits basis results have been restated for the consequential impact of the adoption of IFRS at 1 January 2004 together with the discretionary change for the basis of determining longer-term investment returns as disclosed on 2 June 2005. In the Business Review and Financial Review, period-on-period comparisons of financial performance are on a Constant Exchange Rate (CER) basis, unless otherwise stated. The Group has had a good first half as illustrated by growth in all the key performance measures shown above. This is the result of strong contributions across all regions. Growth in APE sales and aggregate new business achieved profit (NBAP) margin of 37 per cent led the Group to achieve NBAP growth of 37 per cent. This, together with growth from the fund management operations and the increase in profits from the in-force insurance business, driven primarily by the US, led to an increase of 31 per cent over the first half of 2004 in achieved profits basis operating profits. The in-force achieved profit for the half year includes a Â£132 million charge in respect of a persistency assumption change in the UK and a credit in the US of Â£141 million reflecting an operating assumption change following price increases introduced on two blocks of in-force term life business. In aggregate, net assumption changes were positive Â£16 million, with net positive experience variances and other items of Â£39 million. On an international financial reporting standards basis (IFRS), operating profits were up 25 per cent on the same period of last year driven primarily by the growth in profits from the UK and Asian insurance operations. Basic earnings per share on the achieved profits basis for the half year after minority interests were 21.7 pence for the half year of 2005, compared with a restated figure of 19.8 pence for the prior year. Basic earnings per share, based on total IFRS profit for the half year after minority interests, were 12.7 pence, down 1.5 pence from the restated 2004 half year figure on a proforma basis of 14.2 pence primarily reflecting the impairment of purchased goodwill associated with the Japanese life business. Impact of Currency Movements Prudential has a diverse international mix of businesses with a significant proportion of its profit generated outside the UK. In preparing the Group's consolidated accounts, results of overseas operations are converted at rates of exchange based on the average of the year to date, whilst shareholders' funds are converted at period-end rates of exchange. Changes in exchange rates from year to year have an impact on the Group's results when these are converted into pounds sterling for reporting purposes. In some cases, these exchange rate fluctuations can mask underlying business performance. For example, growth in the US total achieved profit basis operating profit was 95 per cent at reported exchange rates (RER), compared to 101 per cent at CER. 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 the non-UK businesses. In the Business Review and Financial Review, period-on-period comparisons of financial performance are on a CER basis, unless otherwise stated. INSURANCE UNITED KINGDOM AND EUROPE Half Year Half Year 2005 2004 Change Â£m Â£m ------------------------------------------------------------------------------ APE Sales 541 361 50% NBAP 159 88 81% NBAP Margin* 30% 25% Total Achieved profits basis operating 182 240 (24%) profit Total IFRS operating profit 187 153 22% ------------------------------------------------------------------------------ * excluding APE sales in respect of SAIF DWP rebates Prudential UK and Europe delivered an increase in APE sales of 50 per cent relative to the same period in 2004. This includes APE sales of Â£145 million from the acquisition of the portfolio of in-force pension annuities from Phoenix Life & Pensions ('PLP'), a subsidiary of Resolution Life Ltd, in June 2005. Excluding the PLP transaction, sales increased by 10 per cent. This compares favourably with the total UK medium to long-term savings market growth of 2 per cent in the first quarter (based on data from the Association of British Insurers). NBAP increased by 81 per cent, reflecting the growth in sales volumes and an increase in the NBAP margin to 30 per cent from 25 per cent at the half year 2004 (full-year 2004: 27 per cent). Total achieved profits basis operating profit decreased 24 per cent to Â£182 million primarily due to a Â£132 million charge relating to an assumption change in respect of persistency. Increased annuity sales contributed to the 22 per cent increase in IFRS operating profit to Â£187 million. The Â£132 million charge reflects a strengthening of persistency assumptions across a number of products, primarily in respect of with-profit bonds. This assumption change reflects Prudential's current experience and, post tax, represents 3 per cent of the overall embedded value of the UK business. Prudential continues actively to manage the conservation of the in-force book. The primary drivers of growth for the UK business were strong sales of unit-linked bonds, bulk annuities and individual annuities. APE sales of unit-linked bonds doubled compared with the same period last year to Â£36 million, reflecting Prudential UK's progress in the IFA unit-linked bond market. Bulk annuity sales increased by 67 per cent to Â£35 million, driven by 31 bulk annuity scheme wins (excluding the PLP transaction). Individual annuity sales were strong across all distribution channels with APE sales of Â£111 million up 12 per cent. In particular, with-profit annuities attracted increased levels of interest, with APE sales doubling on half year 2004 levels to Â£7 million. Corporate pension APE sales fell 14 per cent to Â£85 million, reflecting the contraction seen in the corporate pensions market ahead of the change in pensions legislation in April 2006 ('A-Day'). In response to the move away from defined benefit schemes to defined contribution schemes in the market, Prudential UK announced an agreement with AON in May to support the launch of their new defined contribution (DC) pension solution for employers. APE sales through Prudential's European operations increased 200 per cent to Â£12 million, reflecting growing bond sales through new and existing distributors. In June, Prudential UK added a capital guarantee option to the PruFund Investment Plan. This guarantee provides capital security combined with the potential for growth which addresses a primary concern of advisers with low to medium risk investor clients. The demand for lifetime mortgages is projected to grow significantly over the next few years and Prudential UK will launch shortly its own lifetime mortgage product, the Prudential Property Value Release Plan. Unlike many other lifetime mortgage products currently on the market, this innovative product will allow customers much greater flexibility and control over when they draw down funds and thereby reduce total interest charges over the lifetime of the loan. Prudential UK has made good progress with the new multi-tie networks. Most recently, it has been appointed as a provider for Sesame's new regulated multi-tie proposition, Sesame Select. Sesame is one of the UK's leading providers of support services to 8,150 financial advisers. As a result of this and other previously announced appointments, Prudential UK is well positioned to increase its market share in the depolarised marketplace as this develops over the next couple of years. Prudential UK was appointed to the Barclays multi-tie panel during the first half of 2005 and this went live on 1 June. In addition, Prudential began to write business in June through its distribution agreements with St James's Place and National Australia Bank. These will augment growth already being achieved under the existing agreements with Lloyds TSB, Alliance and Leicester, Pearl and Zurich. The With-Profits Fund benefited from a pre-tax investment return of 7.4 per cent in the first half of 2005 compared with 3 per cent in the comparable period of 2004. Over the last five years (to 30 June 2005), the With-Profits Fund has delivered a pre-tax return of 28.9 per cent compared with the return on the FTSE All Share (Total Return) index over the same period of negative 1.5 per cent. The fund remains strong with an inherited estate estimated to be around Â£7.3 billion as at 30 June 2005, on a deterministic valuation basis, compared with approximately Â£6.5 billion at the end of 2004. The PAC long-term fund is currently rated AA+ by Standard & Poor's, Aa1 by Moody's and AA+ by Fitch Ratings. There will be a number of significant changes in the retirement savings market as a result of the Government pensions reforms due to come into force on 'A-Day' in April 2006. These include a single tax regime for pensions, greater investment flexibility for consumers (allowing, for example, residential property to be held within a pension) and increased annual contribution limits. When combined with the increase in charges to stakeholder products announced last year and its success in winning positions on multi-ties, this creates an opportunity for Prudential UK to increase its presence in retirement provision. Prudential UK is developing a number of propositions that take advantage of the increased flexibility and contribution limits created by the pensions reforms. It will launch a series of products, the first of which will be a new personal pension that will be available in advance of A-Day. Market growth in the first half of 2005 is unlikely to be in excess of 5 per cent and Prudential UK does not anticipate a significant improvement in the second half of the year. Recent trading in certain segments of the UK market has been difficult and, most notably, competition within the protection and individual annuity markets intensified in the second quarter. However, we expect to continue to outperform the market in the second half of the year. We remain confident that we can achieve overall growth of 10 per cent in 2005. UNITED STATES Half Year Half Year Half Year CER Change RER Change 2005 2004 2004 Â£m Â£m Â£m -------------------------------------------------------------------------------- APE sales 275 234 18% 240 15% NBAP 102 79 29% 82 24% NBAP Margin 37% 34% 34% Total Achieved profits 429 213 101% 220 95% basis operating profit* Total IFRS operating 169 151 12% 155 9% profit* -------------------------------------------------------------------------------- * Continuing operations - excluding Jackson Federal Bank (JFB) which was sold in October 2004 Period-on-period comparisons of financial performance are on a Constant Exchange Rate (CER) basis, unless otherwise stated Jackson National Life (JNL) continued to focus on the value of new product sales, rather than top line growth. APE sales for the first half of 2005 were 18 per cent higher than prior year, new business achieved profits were up 29 per cent and IFRS operating profits were up 12 per cent over the first half of 2004. At the 2005 half year, JNL had over $65 billion in assets under management. Of this, $15 billion related to variable annuity assets an increase of $1.6 billion compared to 2004 year-end, further diversifying JNL's earnings towards fee-based income. On 18 May 2005 JNL completed the purchase of Life Insurance Company of Georgia from ING at a purchase price of Â£142 million, subject to post-closing adjustments. Following completion, JNL began to move Life Insurance Company of Georgia policies onto its low cost and scaleable platform. Full integration of the business remains on track to be completed by year-end 2005. The 18 per cent growth in APE sales to Â£275 million during the first half of 2005 was driven by stronger variable annuity (VA), fixed index annuity (FIA) and institutional sales, partially offset by decreased sales of fixed annuities. Total APE retail sales for the first half of 2005 of Â£195 million were up 11 per cent on prior year. New business achieved profit of Â£102 million was 29 per cent above the prior year, reflecting both an 18 per cent increase in APE sales and an increase in margin from 34 per cent to 37 per cent half year on half year. The increase in margin primarily reflects increased profitability from the re-pricing in May 2004 of JNL's unbundled VA 'Perspective II' and increased GIC profitability due to longer average maturities available on contracts sold in the first half of 2005. In addition, there has been an increase in the spread assumption for FIA. JNL generated record VA APE sales of Â£118 million during the first half of the year, up 21 per cent on the prior year, in a market that JNL believes was weaker than last year. This reflects the company's innovative product offering and distribution capabilities. In the three months to 31 March 2005, JNL ranked 2nd in VA net flows and 13th in total VA new sales. JNL's 'Perspective II' product ranked 1st overall in VA product net flows and 3rd in total VA new sales. JNL was one of only five of the top 25 VA providers in the US to increase VA assets from year-end 2004 to the end of the first quarter 2005. The rate of take up of the fixed account option remained low, with 25 per cent of variable annuity premium going into fixed accounts during the first half of 2005 compared with 26 per cent for the first half of 2004. Fixed annuity APE sales of Â£41 million were down 27 per cent on prior year, reflecting the flattened yield curve in the US which has made rates on short term certificates of deposit more attractive to customers. As a result of the fall in volumes, JNL ranked 11th in total individual fixed annuity sales at the end of the first quarter of 2005, down from 4th during the same period in the prior year. Lower fixed annuity sales were partially offset by fixed index annuity APE sales of Â£30 million, an increase of 100 per cent over the prior year, reflecting customers' increasing preference when selecting fixed products to have the potential for higher returns linked to equity index performance. JNL has benefited from its approach to educating broker dealers about this complex product, while at the same time offering lower commissions and investing the savings into providing value to the policyholders through enhanced benefits. Institutional APE sales for the first half of 2005 were Â£80 million, up 38 per cent on prior year results. JNL took advantage of several attractive issuance opportunities during the first half of 2005. APE sales of institutional products in the second half of 2005 are anticipated to be in the region of Â£25 million. Total achieved profits basis operating profit at the half year 2005 was Â£429 million compared to Â£213 million in the prior year. This primarily reflects the increase in new business achieved profits, an operating assumption change following price increases introduced on two older, less profitable books of term life business and a favourable spread variance. The growth in IFRS operating profit of 12 per cent from the prior year primarily reflects an increase in spread and fee income over the first half of 2004, together with an increase in profits from Prudential's US fund manager, PPMA. The 2004 half year result benefited from two one-off items, a favourable legal settlement of Â£28 million (Â£20 million after related change to amortisation of deferred acquisition costs) and a positive Â£7 million adjustment arising from the adoption of SOP 03-01 'Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long Duration Contracts and for Separate Accounts'. JNL remains well positioned for the remainder of the year to deliver sales at twice the expected US market growth rate of 4 per cent, since current market conditions continue to favour those financial services companies that have a range of variable and fixed annuity product offerings, a strong relationship-based distribution model, low cost structure and the ability to deliver high quality service. ASIA Half Year Half Year Half Year CER Change RER Change 2005 2004 2004 Â£m Â£m Â£m -------------------------------------------------------------------------------- APE sales 313 249 26% 248 26% NBAP 152 135 13% 135 13% NBAP Margin 49% 54% 54% Total Achieved profits 226 174 30% 169 34% basis operating profit* Total IFRS operating 116 59 97% 58 100% profit* -------------------------------------------------------------------------------- *excluding the fund management business, development and Asia regional head office expenses Period-on-period comparisons of financial performance are on a Constant Exchange Rate (CER) basis, unless otherwise stated Prudential's well diversified portfolio of life insurance businesses in Asia have shown strong growth with first half year sales on an APE basis of Â£313 million, up 26 per cent on the same period in 2004 with 87 per cent of APE sales generated by more profitable regular premium products. Sales in the first half of 2005 primarily reflect the continued strong growth of its Korean and Indian operations combined with solid performances from the more established operations of Malaysia, Singapore and Hong Kong. The businesses in Indonesia and China also showed very good sales growth. Total NBAP increased by 13 per cent over the first half of 2004 to Â£152 million, reflecting the sales increase offset by NBAP margins that decreased from 54 per cent for the full year 2004 to 49 per cent. This represents a change in geographic mix (reduction of 2 percentage points) largely due to a higher proportion of new business from the relatively lower margin markets of Korea and India; a change of product mix (reduction of 1 percentage point) with an increased proportion of lower margin products in Taiwan and Singapore; and a change of assumptions (reduction of 2 percentage points), primarily driven by low interest rates in Taiwan. In-force operating profits in Asia of Â£74 million for the first half of 2005 represent an increase of 90 per cent over the same period for 2004 and IFRS profits increased to Â£116 million from Â£59 million in 2004 including a contribution of Â£44 million from exceptional items. Prudential's Korean Life operation has rapidly become a material contributor to APE sales with first half sales of Â£60 million, an increase of 82 per cent over the same period in 2004. This increase clearly demonstrates the flexibility of its multi-channel distribution model, with in-house financial consultants and general agents currently the dominant distribution channels supported by contributions from direct marketing and bancassurance. Since its launch in 2004, the proportion of the higher margin variable universal life product sold has increased steadily such that it now accounts for 80 per cent of Korea's APE sales. Prudential's Indian life insurance joint venture with ICICI remains firmly in position as the number one private sector life insurance company as reported in the Insurance Regulatory and Development Authority journal in India. Prudential's 26 per cent share of the joint venture's half year APE sales was Â£27 million, up 59 per cent over the first half of 2004. The business continues to extend its geographic reach in India with 74 branches to date and has grown its tied agency force by 16 per cent this year. Prudential intends to increase its equity stake in this operation when regulations permit. However, there is no clear indication when this will be. The life insurance joint venture with CITIC in China is still relatively small in terms of new business volumes but is growing rapidly with a 67 per cent increase in APE sales to Â£10 million compared to the first half of 2004 of Â£6 million. Progress continues to be made in establishing CITIC Prudential as the leading foreign joint venture life insurer in terms of geographic coverage, with 6 new city licences added during 2005 bringing the total to 10. In addition, the operation also has a national licence for the sale of group life insurance. Despite some slowdown in the market for regular premium unit-linked products, Prudential's Singapore life operation delivered APE sales growth of 17 per cent over 2004, driven in part by the new partnership agreement with Maybank. Earlier this year, the business also entered into a distribution agreement with SingPost. In Hong Kong Prudential's long-term partnership with Standard Chartered Bank helped drive good growth against a competitive market generating Â£50 million of sales, up 11 per cent over the same period last year. In Malaysia, Prudential's life business has market leading agent productivity and a popular range of unit-linked products. APE sales of Â£29 million were up 38 per cent compared to the first half 2004. The Indonesian operation posted record quarterly APE sales of Â£11 million, exceeding their previous high achieved in the first quarter of 2004 by 22 per cent, to generate Â£21 million in APE sales in the first half of 2005, 40 per cent above the first half of 2004. The Taiwanese life operation continues to face a challenging environment of falling interest rates, which are now at historic lows. First half 2005 APE sales of Â£62 million are in line with last year. Second quarter APE sales in Taiwan increased 52 per cent over the first quarter following the launch of a pensions orientated linked product with a higher investment content. Total APE sales contribution from the remaining four markets of Japan, the Philippines, Thailand and Vietnam are collectively down 5 per cent, primarily due to a slow market in Vietnam. As reported previously, the development of the Japanese life business has been slower than expected and to reflect this there has been an impairment of Â£95 million of the purchased goodwill associated with this business. In March the first stage of Prudential's Asian regional operations centre was launched. Located in Malaysia, Prudential Services will leverage Prudential's increasing scale and presence in Asia to drive operating synergies and efficiencies. The shared services operation and call centre will initially service the Singapore and Malaysia life businesses. Prudential's Asia strategy remains firmly in place and its focus continues to be on long term, profitable and sustainable growth. Fund Management M&G Half Year Half Year 2005 2004 Change Â£m Â£m -------------------------------------------------------------------------------- Gross investment flows 3,579 2,177 64% Net Investment flows 1,680 (90) Underlying profits before PRF 68 59 15% Total IFRS operating profit 83 79 5% -------------------------------------------------------------------------------- M&G delivered underlying profits (excluding performance related fees (PRFs)) of Â£68 million in the first half of 2005, a 15 per cent increase compared to the same period last year. Excluding the Â£7 million of one-off items in the 2004 result, underlying operating profits were 31 per cent higher than last year. This reflects M&G's strengths in retail fund management, institutional fixed income, pooled life and pension funds, property and private finance, allied with a continued focus on cost control. Total operating profit of Â£83 million was 5 per cent higher than 2004, with growth at the underlying level being offset by lower PRFs. It should be noted that although the Â£15 million of PRFs earned in the first half of 2005 is down compared to Â£20 million in 2004, it still represents an unusually strong result, driven as before primarily by private equity realisations by PPM Capital. Income from PRFs is expected to be significantly lower in future years. M&G delivered record gross retail fund inflows of Â£1.6 billion in the first half of 2005, more than double the previous year. The core UK operation produced gross fund inflows up 48 per cent on last year at Â£686 million as a result of its retail brand presence, good fund performance and diversified product range in equities, fixed income and property. Robust growth was also generated in the international businesses, with gross inflows more than tripling on last year. Total net retail fund inflows of Â£448 million were six times those of half year 2004. M&G's institutional businesses delivered gross fund inflows of Â£2.0 billion, up 43 per cent on last year. This was boosted by a one-off contribution of Â£967 million from Prudential Property Investment Managers (PruPIM), related to the transfer of 50 per cent of Prudential's economic interests in three UK shopping centres into new external vehicles which PruPIM continues to manage. M&G's scale and strong market position in fixed income and private finance was demonstrated by the successful launch to external investors of two Collateralised Debt Obligations (CDOs) of â‚¬445 million collectively. This brings the total number of CDOs launched since 2001 to eight. These strong gross flows were also reflected in net institutional sales of Â£1.2 billion in the first half of 2005, compared to a net outflow of Â£164 million in the first half of 2004. Asia Fund Management Half Year Half Year Half Year CER Change RER Change 2005 2004 2004 Â£m Â£m Â£m -------------------------------------------------------------------------------- Net investment flows 698 697 0% 677 3% Total IFRS operating 2 10 (80%) 10 (80%) profit* -------------------------------------------------------------------------------- * IFRS operating profit in 2005 was Â£12 million, offset by Â£10 million of exceptional charges related to bond funds in Taiwan Period-on-period comparisons of financial performance are on a Constant Exchange Rate (CER) basis, unless otherwise stated Funds under management in Asia at the half year increased by 33 per cent to Â£9.7 billion over the year-end 2004 with net inflows of Â£698 million in line with the first half of 2004. The fund management business continues to expand its geographic presence with the launch of a new operation in Vietnam. Both asset management businesses in Japan and Korea delivered strong results and in May 2005 Morningstar ranked PCA Asset Management Japan as one of the five fastest growing fund management businesses in Japan for the six months to 31 March 2005. The Prudential ICICI Asset Management Company joint venture in India has increased its funds under management to US$4 billion. Earlier this year Prudential's joint venture partner agreed to purchase an additional 6 per cent share of Prudential ICICI Asset Management Company. The transaction is expected to complete later this year and will bring ICICI Group's share to 51 per cent while Prudential will hold 49 per cent. The Taiwanese business has experienced a substantial decline in funds under management over the last year due to high levels of market redemptions in bond funds, particularly foreign managed funds. Prudential Taiwan restructured its bond portfolios to enhance liquidity during the first half of 2005 and this has given rise to a one-off exceptional charge of Â£10 million to operating profits. BANKING Egg Half Year Half Year 2005 2004 ** Change Â£m Â£m -------------------------------------------------------------------------------- IFRS Operating Profit from Continuing Operations * UK banking business 23 36 (36%) Other (10) (3) (233%) -------------------------------------------------------------------------------- 13 33 (61%) -------------------------------------------------------------------------------- Net interest income * 146 145 1% -------------------------------------------------------------------------------- Non-interest income * 105 94 12% -------------------------------------------------------------------------------- * 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's core UK banking operation delivered a profit of Â£23 million for the first half of 2005, compared with Â£36 million for the same period in 2004. Revenues from the UK business grew five per cent over the same period in 2004, primarily reflecting the increased revenues earned from the credit card business. The credit card business has performed well, with balance growth of five per cent for the first half of 2005, compared with two per cent for the industry. The growth in revenue from the card business was partly offset by reduced commission income from sales of associated insurances on loans. This reflects that, as planned, personal loan disbursements have slowed down in the first half of 2005 from the record level achieved in 2004 following Egg's decision to tighten its lending criteria. In comparison with the same period in 2004, the impairment charge on loans and advances to customers also increased in the first half of 2005, driven by the growth in unsecured lending balances and the stage of life cycle of the book. Credit quality remains strong and the impairment charge for the second quarter of 2005 reduced slightly from the previous quarter. Egg's total profit from continuing operations for the first half of 2005 was impacted by a Â£10 million restructuring charge. This process was completed in the second quarter of 2005. The aim of the reorganisation was to align the cost base with Egg's strategy to focus on its core UK business with estimated annual savings of Â£12 million. The exit process from France was completed in the first quarter this year. The total costs incurred were lower than the provision established in July 2004 and Â£5 million of this was released in the first quarter. During 2005, Egg closed Funds Direct, its investment wrap platform business and provided for an exit charge of Â£3 million. FINANCIAL REVIEW SALES AND FUNDS UNDER MANAGEMENT Prudential delivered strong sales growth during the first half of 2005 with total new insurance sales up 45 per cent to Â£8 billion at constant exchange rates (CER). This resulted in insurance sales of Â£1.1 billion on the annual premium equivalent (APE) basis, an increase of 34 per cent on 2004. At reported exchange rates (RER), APE sales were up 33 per cent on the half year of 2004. Total gross investment sales were Â£13.2 billion, up 8 per cent on 2004 at CER. Net investment sales of Â£2.5 billion were over three times net investment sales in 2004 at CER. Strong gross inflows across a number of markets were offset by the high level of redemptions in Taiwan. Total investment funds under management increased by 12 per cent at RER from Â£37.1 billion at 31 December 2004, to Â£41.7 billion at 30 June 2005, reflecting net investment flows of Â£2.5 billion and net market and other movements of Â£2.1 billion. At 30 June 2005, funds under management were Â£214 billion, an increase of 9 per cent from 2004 year end at RER, as a result of strong inflows and favourable market movements. ACHIEVED PROFITS BASIS OPERATING PROFIT Total achieved basis operating profit from continuing operations of Â£834 million was up 31 per cent at both CER and RER reflecting strong growth from Prudential's insurance and fund management businesses. Half Year Half Year Half Year CER Change RER Change 2005 2004* 2004* Â£m Â£m Â£m -------------------------------------------------------------------------------- NBAP 413 302 37% 305 35% Business in-force 412 327 26% 326 26% -------------------------------------------------------------------------------- Long-term business 825 629 31% 631 31% Asia development (8) (9) 11% (10) 20% expenses Other operating 17 18 6% 17 13% results -------------------------------------------------------------------------------- Total 834 638 31% 638 31% -------------------------------------------------------------------------------- *Achieved profits basis results have been restated for the consequential impact of the adoption of International Financial Reporting Standards at 1 January 2004 together with the discretionary change for the basis of determining longer-term investment returns as disclosed on 2 June 2005. Group NBAP from long-term business of Â£413 million was up 37 per cent on the prior year at CER, reflecting strong growth across all regions: up 81 per cent in the UK, up 29 per cent in the US and up 13 per cent in Asia. The Group's average new business margin increased from 36 per cent for the first half of 2004 to 37 per cent for the first half of 2005. During the first half of 2004, 62 per cent of the Group's NBAP was generated from its overseas operations. Total in-force achieved profit of Â£412 million was up 26 per cent on 2004 at both CER and RER. This resulted from strong growth in the US and Asian operations offset by a fall in the UK. UK and Europe Insurance Operations Achieved profits basis operating profit of Â£182 million was down 24 per cent on 2004. New business achieved profit of Â£159 million was up 81 per cent on the first half of 2004, reflecting both a 50 per cent increase in APE sales and an increase in NBAP margin from 25 per cent in 2004 to 30 per cent in 2005. The increase in margin primarily reflects a favourable sales mix and the positive effect of economic assumptions offset by lower annuity yield margins. The favourable sales mix reflects the increased annuity sales, including the Phoenix Life and Pensions bulk annuity transaction and lower sales of less profitable pensions offset by increased unit-linked bond sales. Notwithstanding the current performance achieved in the first half of 2005, some reduction in overall margin from the 2004 year end level is still expected for the full-year 2005 due to changing product mix as Prudential UK builds its shareholder-backed business. The weighted average post-tax Internal Rate of Return (IRR) on the capital allocated to new business growth in the UK for the first half of 2005 was 13 per cent. This remains in line with the target of 14 per cent for the 2007 financial year. In-force profit of Â£23 million was 85 per cent lower than the first half of 2004 reflecting a Â£132 million charge in relation to an assumption change. The Â£132 million charge reflects a strengthening of persistency assumptions across a number of products, primarily in respect of with-profits bonds. In the case of PruBond, which accounts for a significant proportion of the assumption change, Prudential expected surrenders to fall after the bonus declaration in February 2005. In the event, following the bonus declaration, customers have continued to surrender their policies leading to a strengthening of the assumption by 40 per cent. The assumption changes reflect Prudential's current experience and, post tax, represent 3 per cent of the overall embedded value of the UK business. Prudential continues actively to manage the conservation of the in-force book. US Operations In the US, achieved operating profit from long-term operations was Â£417 million, up 94 per cent at CER and up 88 per cent at RER from the prior year. At CER, new business achieved profit increased by 29 per cent to Â£102 million, reflecting an 18 per cent increase in APE sales and an increase in margin from 34 per cent to 37 per cent at the half year. At RER, NBAP was up 24 per cent. The increase in margin reflects increased profitability from the re-pricing in May 2004 of JNL's unbundled VA 'Perspective II', and increased GIC profitability due to longer average maturities available on contracts sold in the first half of 2005. In addition there has been an increase in spread assumption for Fixed Index Annuities, from the long-term assumption of 175bps to 190bps reflecting the spread being achieved. For JNL, the average IRR on new business in the first half of 2005 was 13 per cent. At CER, the in-force profit for the half year increased significantly from Â£136 million in the prior year to Â£315 million. At RER, in-force profit increased from Â£140 million to Â£315 million. This increase is primarily due to a favourable spread variance of Â£44 million and an operating assumption change following price increases introduced on two older books of term life business (Â£141 million). 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 Â£27 million for the half year 2005. The present value of future RMR charges is reflected in the opening embedded value. The second element is amortisation of Â£26 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 achieved profits 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 Achieved Profits and IFRS basis results. In the six months to 30 June 2005, JNL experienced a net realised gain of Â£1 million on its corporate bond portfolio. This is reflected in total achieved basis profit before tax. Asia Operations Achieved profits basis operating profit from long-term operations (excluding development and regional head office costs) was Â£226 million for the half year, up 30 per cent at CER and 34 per cent at RER on half year 2004. Total NBAP increased by 13 per cent over the first half of 2004 to Â£152 million, reflecting the sales increase offset by NBAP margins that decreased from 54 per cent for the full year of 2004 to 49 per cent. This decrease is driven by a change in geographic mix (reduction of 2 percentage points) largely due to a higher proportion of new business from the relatively lower margin markets of Korea and India, a change of product mix (reduction of 1 percentage point) with an increased proportion of lower margin products in Taiwan and Singapore, and a change of assumptions (reduction of 2 percentage points) primarily driven by low interest rates in Taiwan. We expect to be able to maintain the average NBAP margins in Asia at or around current levels given our planned mix of business in 2005. In-force operating profits in Asia of Â£74 million for the first half of 2005 represent an increase of 90 per cent over the same period for 2004 at CER, which included changes of assumptions. In Asia, IRRs on new business at a country level are targeted to be 10 per cent over the country risk discount rate. Risk discount rates vary from 5 to 19 per cent depending upon the maturity of the 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. Non-insurance Operations M&G M&G's underlying profit before performance related fees (PRFs) was Â£68 million, an increase of 15 per cent on the first half of 2004. However, adjusting the 2004 result for the Â£7 million of one-off provision releases that were disclosed last year, profits improved by Â£16 million or 31 per cent, over the same period last year. Underlying profits continue to be driven forward by revenue growth from existing and new business lines, including new business flows, higher market levels in many of the segments in which M&G operates and the ability to extend existing skills and relationships into new markets. This is combined with a continuing emphasis on cost control. Total operating profit, including PRF, of Â£83 million was 5 per cent higher than in 2004, with strong growth at the underlying level being partly offset by lower PRFs. In 2005, M&G earned Â£15 million in PRFs (first half 2004: Â£20 million), of which Â£12 million was contributed by PPM Capital (first half 2004: Â£19 million). It should be noted that both years are unusually high reflecting the realisation of a series of profitable investments by PPM Capital. Income from PRFs is expected to be significantly lower in future years. US broker dealer and fund management businesses The broker dealer and fund management operations reported a total profit of Â£18 million, compared with Â£9 million in the first half of 2004. This reflects an increase in profits from PPM America, arising primarily due to a one-off Â£6 million revaluation of an investment vehicle managed by PPMA. Curian Curian provides innovative fee-based separately managed accounts. Curian incurred a loss of Â£6 million compared to a loss Â£11 million in the prior year, as the business continues to build scale. Asian fund management business Profit from the Asian fund management operations was Â£2 million for the half year, down 80 per cent from 2004 on CER, primarily reflecting a one-off charge of Â£10 million resulting from restructuring of the bond portfolios in Taiwan during the first half of 2005. Excluding this, operating profit grew by 20 per cent. Egg Egg's total continuing operating profit for the first half of 2005 was Â£13 million, compared with Â£33 million in the same period last year. Impairment charges on loans and advances to customers increased in the first half of 2005, driven by the growth in unsecured lending balances and reflecting the stage of life cycle of the book. Despite the strong revenue from the credit card business, the revenue generated from the associated insurances on loans were lower than the same period in 2004, reflecting the planned reduction in personal loan disbursements compared to the record level achieved in 2004 following Egg's decision to tighten its lending criteria. Egg's total profit was further impacted by a Â£10 million restructuring charge. The aim of the restructuring was to align the cost base with Egg's strategy to focus on its core UK business and the estimated annual savings from this reorganisation are Â£12 million. Other Asia's development expenses (excluding the regional head office expenses) for the half year decreased by 11 per cent at CER to Â£8 million, compared with Â£9 million in 2004. These development expenses primarily relate to repositioning the insurance operation in Japan. Other net expenditure of Â£93 million compared to Â£102 million in 2004 at CER. This reflected an increase in investment return and other income as a result of the interest earned on the net proceeds from the 2004 rights issue offset by higher interest payable and head office costs. Head office costs (including Asia regional head office costs of Â£14 million) were Â£50 million, up Â£10 million on 2004 at CER. The increase mainly reflects the substantial work being undertaken for the implementation of IFRS, European Embedded Values, Sarbanes Oxley and other regulatory costs. Total Achieved Profits Basis - Result Before Tax for Continuing Operations (Period-on-period comparisons below are based on RER) Total Achieved Profit before tax and minority interests was Â£816 million up 26 per cent from Â£650 million in the first half of 2004. This reflects an increase in operating profit from Â£638 million to Â£834 million together with a favourable movement of Â£381 million in short-term fluctuations in investment returns from negative Â£76 million to positive Â£305 million. This is offset by a negative movement of Â£241 million due to changes in economic assumptions; an adverse movement of Â£75 million in actuarial gains and losses on defined benefit pension schemes from positive Â£67 million for the half year 2004 to negative Â£8 million for the half year 2005; and a goodwill impairment charge of Â£95 million. The UK component of short-term fluctuations in investment returns of Â£275 million reflects the difference between an actual investment return delivered in the first half of 2005 for the with-profits life fund of 7.4 per cent and the long-term assumed return of 3.3 per cent for the half year. The US short-term fluctuations in investment returns of Â£11 million include a positive Â£42 million in respect of the difference between actual investment returns and long-term returns included in operating profit. For the first half of 2005, the primary factor was a return in excess of assumptions on limited partnership investments. It also includes a negative Â£31 million in relation to changed expectations of future profitability on variable annuity business in-force due to the actual separate account return being lower than the long-term return reported within operating profit. In Asia, short-term investment fluctuations were positive Â£29 million, compared with negative Â£38 million last year. These gains mainly reflect lower bond yields in Taiwan and the resulting unrealised gains. Negative economic assumption changes of Â£220 million in 2005 compared with positive economic assumption changes of Â£21 million in 2004. Economic assumption changes in 2005 comprised negative Â£11 million in the UK and negative Â£230 million in Asia offset by positive Â£21 million in the US. In the UK, economic assumption changes of negative Â£11 million reflect an increase in the future investment return assumption and an increase in the risk discount rate. An increase in the equity premium from 2.5 per cent to 3 per cent was offset partly by a decrease in the 15 year gilt rate. This has resulted in an overall movement in the risk discount rate from 7.2 per cent at 31 December 2004, to 7.3 per cent. US economic assumption changes of Â£21 million primarily reflect the decrease in the risk discount rate following a fall in the 10 year treasury bond rate, offset by reductions in the projected fund earned and crediting rates. Asia's negative economic assumption change of Â£230 million reflects the effect of lower bond yields in Taiwan and other markets, which necessitated a reduction in fund earning rate assumptions. The negative charge of Â£8 million for actuarial gains and losses on the Group's defined benefit pension schemes reflects the consequential impact of accounting for these schemes on a basis consistent with that applied for IFRS reporting. The actuarial gains and losses reported for Achieved Profits reflect the amounts attributable to shareholders, including the 10 per cent interest of the deficits attributable to the PAC with-profits funds. The movements primarily reflect short-term volatility in the values of the scheme assets and changes in market bond rates that are used for discounting projected future benefit cash flows. Total Achieved Profits Basis - Result After Tax for Continuing Operations Profit after tax and minority interests was Â£511 million compared with Â£424 million in 2004. The tax charge of Â£300 million compares with a tax charge of Â£215 million in the first half of 2004. Minority interests in the Group results were negative Â£5 million. The effective tax rate at an operating profit level was 29 per cent. This compares with effective rates on the operating profits for the 2004 half year and full year of 30 per cent and 28 per cent respectively. The effective tax rate at the total achieved profit level of 37 per cent was higher than the 29 per cent effective rate on operating profit 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. EUROPEAN EMBEDDED VALUE BASIS REPORTING Prudential believes that embedded value reporting provides investors with a truer measure of the 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 European Embedded Value (EEV) Principles, Prudential will adopt EEV methodology for its 2005 year-end results. This will replace the Achieved Profits basis, the current supplementary basis of reporting. The effect of implementation of EEV was outlined in the announcement on 2 June 2005. The main impact on the results, compared to the Achieved Profits basis, arises from the effect 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 service companies (including fund management operations) that support the Group's long-term businesses. STATUTORY BASIS RESULTS Impact of IFRS basis reporting Prudential is required to implement International Financial Reporting Standards (IFRS) from a restated opening position as at 1 January 2004. Details of the effects of the changes are included in the notes to the financial statements and were announced on 2 June 2005. The three areas of change that are of particular relevance to Prudential's results are: â€¢ Altered profit recognition for UK and Europe unit-linked business, â€¢ Altered valuation bases for JNL derivatives and fixed income securities, and â€¢ Recognition of the shareholders' share of deficits on defined benefit pension schemes in shareholders' equity. The Group has also applied a discretionary change of accounting treatment which relates to the basis of determining longer-term returns for fixed interest securities included in operating profits. Total profit before tax is unaffected by this change. Operating profits have not been significantly altered by the implementation of IFRS. However, 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 for market value movements on fixed income securities of JNL which are classified as available for sale. Prudential does not expect the adoption of IFRS to have a significant impact on its business or its underlying financial position. Basis of presentation IFRS has been implemented such that IAS 32 and IAS 39 (dealing with financial instruments) apply from 1 January 2005 rather than the beginning of 2004. This is the approach taken by most of the banking industry and reflects the Group's ownership of Egg. IFRS 4, Insurance Contracts, has also been applied from 1 January 2005. The Group's statutory IFRS basis financial statements reflect this basis of application. Prudential's approach to IAS 39 adoption is however, important to the reporting and understanding of the Group's insurance businesses, particularly for JNL. Included within this report as supplementary information are 'Proforma' results that reflect the effects of IFRS 4 and IAS 39 had these standards been applied to Prudential's insurance operations in 2004. INTERNATIONAL FINANCIAL REPORTING STANDARDS IFRS Basis Operating Profits (based on longer term investment returns) Total operating profit before tax, based on longer-term investment returns for continuing operations on the IFRS basis was Â£469 million, Â£95 million up on the proforma IFRS basis result for the first half of 2004 at CER. At RER, operating profit was up Â£94 million. Proforma* Proforma* Half Year Half Year Half Year CER Change RER Change 2005 2004 2004 Â£m Â£m Â£m -------------------------------------------------------------------------------- Insurance business UK and Europe 187 153 22% 153 22% US 157 153 3% 157 0% Asia 116 59 97% 58 100% Asia development (8) (9) 11% (10) 20% expenses -------------------------------------------------------------------------------- 452 356 27% 358 26% -------------------------------------------------------------------------------- Fund management business M&G 83 79 5% 79 5% US broker dealer and 18 9 100% 9 100% fund management Curian (6) (11) 45% (11) 45% Asia fund 2 10 (80%) 10 (80%) management -------------------------------------------------------------------------------- 97 87 11% 87 11% -------------------------------------------------------------------------------- Banking Egg (UK) 13 33 (61%) 33 (61%) -------------------------------------------------------------------------------- Other income and (93) (102) 9% (103) 10% expenditure -------------------------------------------------------------------------------- Operating profits 469 374 25% 375 25% from continuing operations -------------------------------------------------------------------------------- * 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. In UK and Europe, IFRS operating profit was Â£187 million in 2005, an increase of 22 per cent on 2004. This reflected an Â£8 million increase in profit from the with-profits fund, reflecting bonus rates announced in February 2005 and an increase in annuity sales. The US operations' result of Â£169 million, which is based on US GAAP, adjusted where necessary to comply with IFRS and the Group's basis of presenting operating profit based on longer-term investment returns, was up 12 per cent on the proforma 2004 result at CER. At RER, operating profit based on longer-term investment returns for continuing operations was 9 per cent higher than the proforma basis 2004 result. In determining the US results, longer-term returns for fixed income securities reflect the altered basis which is to incorporate an RMR charge for longer-term defaults and amortisation of interest related realised gains and losses. The US result of Â£169 million, up 12 per cent on the proforma 2004 result at CER, reflects increased spread and fee income offset by higher DAC amortisation, together with increased profits from PPMA. The 2004 half year result benefited from two one-off items, a favourable legal settlement of Â£28 million (Â£20 million after related change to amortisation of deferred acquisition costs) and a positive Â£7 million adjustment arising from the adoption of SOP 03-01 'Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional Long Duration Contracts and for Separate Accounts'. In 2005 the increase in PPMA profits arose primarily due to a one-off Â£6 million revaluation of an investment vehicle managed by PPMA. In Asia, IFRS profits increased to Â£118 million from Â£69 million at CER in 2004 (excluding development and regional head office costs). This includes a contribution of Â£34 million from exceptional items, of which the largest is a one-off reserve release due to the introduction of a risk based capital regulatory framework in Singapore. This result also reflects the steady increase in the operating profit from the established life insurance operations (Singapore, Malaysia and Hong Kong) of Â£57 million for the half year as well as the Indonesian and Vietnamese life businesses starting to make meaningful contributions. IFRS basis - total profit before tax for continuing operations (Period-on-period comparisons below are based on RER) Total IFRS basis profit before tax and minority interests for 2005 was Â£460 million. This compares with Â£488 million on the proforma basis for the half year 2004. The decrease reflects: growth in operating profit of Â£94 million; an improvement in short-term fluctuations in investment return, up Â£29 million from the first half of 2004 to positive Â£94 million; offset by a goodwill impairment charge of Â£95 million in relation to the Japanese Life business and a Â£56 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 to reflect this there has been an impairment of the purchased goodwill associated with this business by Â£95 million to Â£25 million. A primary component of the Â£94 million of short-term fluctuations in investment returns is for value movements in JNL's derivative book. Prudential has chosen not to seek to attempt to hedge account under IAS 39 for these derivatives. To do so would have required changes to the way JNL manage its assets and liabilities which the Group believes would not be in the economic interests of the business. For 2005, value movements on JNL's derivatives contributed positive Â£36 million to the Â£94 million of total short-term fluctuations in investment returns. This compares with positive Â£92 million of JNL derivative value movement within proforma IFRS basis 2004 short-term fluctuations in investment returns. IFRS basis - total profit after tax for continuing operations Profit after tax and minority interests was Â£299 million compared with Â£307 million in 2004. The effective rate of tax on operating profits, based on longer-term investment returns, was 29 per cent. This compares with an effective rate of 31 per cent for half year 2004 and 30 per cent for full year 2004 on the proforma basis. The effective rate of tax at the total IFRS profit level for 2005 was 34 per cent. This compares with an effective rate of 35 per cent for half year 2004 and 29 per cent for full year 2004 on the proforma basis. EARNINGS PER SHARE Earnings per share based on achieved profit basis operating profit after tax and related minority interests were 25.2 pence, compared with a restated figure of 21.1 pence for the 2004 half year. Earnings per share on an IFRS operating profit basis after tax and related minority interests were 14.0 pence compared with a restated figure of 12.2 pence for the 2004 half year on the proforma basis. Basic earnings per share, based on total achieved profit basis profit, were 21.7 pence compared with a restated figure of 19.8 pence for the 2004 half year. Basic earning per share, based on total IFRS profit were 12.7 pence compared with a restated figure of 14.2 pence for the 2004 half year on the proforma basis. DIVIDEND PER SHARE The interim dividend per share of 5.3 pence represents a 2 per cent increase on the 2004 interim dividend of 5.19 pence (as restated for the bonus element of the October 2004 rights issue) and will be paid on 28 October 2005. 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 the achieved profits basis, which recognises the shareholders' interest in long-term businesses, shareholders' funds at 30 June 2005 were Â£9.3 billion, an increase of Â£0.5 billion from the 2004 year end level after restating for relevant IFRS changes. This 6 per cent increase primarily reflects: total achieved profits basis operating profit of Â£834 million; a Â£305 million favourable movement in short-term fluctuations in investment returns; and the positive impact of Â£242 million for foreign exchange movements. These were offset by: a Â£220 million negative movement due to changes in economic assumptions; a tax charge of Â£300 million; dividend payments of Â£213 million made to shareholders (net of scrip dividend); and the impairment charge of Â£95 million in respect of purchased goodwill associated with the Japanese life business. Statutory IFRS basis shareholders' funds at 30 June 2005 were Â£5.0 billion. This compares with Â£4.8 billion on the proforma IFRS basis, at 31 December 2004. The increase primarily reflects: profit after tax of Â£300 million and positive foreign exchange movements of Â£183 million, offset by dividend payments to shareholders (net of scrip dividend) of Â£213 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. Half Year Half Year 2005 2004 Â£m Â£m -------------------------------------------------------------------------------- Cash remitted by business units UK life fund transfer* 194 208 Asia 58 62 M&G 27 38 -------------------------------------------------------------------------------- Total cash remitted to group 279 308 Net interest paid (54) (77) Dividends paid (252) (214) Scrip dividends and share options 40 61 -------------------------------------------------------------------------------- Cash remittances after interest and dividends 13 78 Tax received 36 - Corporate activities (36) (30) -------------------------------------------------------------------------------- Cash flow before investment in businesses 13 48 Capital invested in business units UK and Europe (9) (28) Asia (80) (88) -------------------------------------------------------------------------------- Decrease in cash (76) (68) -------------------------------------------------------------------------------- * in respect of prior year's bonus declarations The Group holding company received Â£279 million in cash remittances from business units in the first half of 2005 (2004: Â£308 million) comprising the shareholders statutory life fund transfer of Â£198 million relating to the 2004 bonus declarations, of which Â£194 million was remitted from the UK and Â£4 million from Asia, together with other remittances from subsidiaries of Â£81 million. Prudential expects the life fund transfer to continue broadly at this level. In the second half of 2005 a Â£100 million special dividend is due from the PAC shareholders' funds in respect of profits arising from earlier business disposals, and an estimated payment of $150 million is expected from JNL. After net dividends and interest paid, there was a net cash inflow of Â£13 million (2004: Â£78 million). The Group holding company paid Â£36 million in respect of corporate activities during the first half of 2005 and received Â£36 million in respect of tax. The group invested Â£89 million (2004: Â£116 million) during the first half of the year, including Â£9 million in its UK operations and Â£80 million in Asia. Net investment in Asia was Â£91 million for the 2004 full year and is expected to remain broadly the same in 2005. Prudential continues to expect that its Asian operations will be a net capital provider to the Group in 2006. The capital requirement for the UK business is expected to be up to Â£250 million for 2005. The UK business has managed its capital efficiently in the first half of 2005 but we expect it to draw significantly more capital in line with expectations in the second half of the year. In aggregate, the first six months of 2005 saw a decrease in cash of Â£76 million (2004: Â£68 million). SHAREHOLDERS' BORROWINGS AND FINANCIAL FLEXIBILITY Net core structural borrowings at 30 June 2005 were Â£1,364 million compared with Â£1,236 million at 31 December 2004. This reflects the net cash outflow of Â£76 million and exchange conversion losses of Â£52 million. The Group also has access to Â£1,400 million committed bank facilities provided by 14 major international banks and a Â£500 million committed securities lending liquidity facility. The Group is funded centrally, except for Egg, which 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 30 June 2005, the gearing ratio, on an achieved profits basis including hybrid debt (net of cash and short-term investments) was 13 per cent compared with 12 per cent at 31 December 2004. Prudential plc enjoys strong debt ratings from Moody's, Standard & Poor's and Fitch Ratings. Prudential's long-term senior debt is rated A2 (stable outlook) by Moody's, AA- (negative outlook) by Standard & Poor's and AA- (stable outlook) by Fitch Ratings. Prudential's short-term debt is rated as P-1 by Moody's, A1+ by Standard & Poor's and F1+ by Fitch Ratings. Based on the achieved profits basis operating profit from continuing operations and interest payable on core structural borrowings, interest cover was 11 times for the first half of 2005 compared with 10 times for the first half of 2004. In July 2005, US$300 million of perpetual subordinated capital securities priced at 6.5 per cent were raised via a US retail offer. The proceeds of this issue qualify as Group regulatory capital for Financial Groups Directive purposes and will be used to repay the non-qualifying Â£150 million senior debt maturing in 2007. This issuance of hybrid debt capital remains part of Prudential's financing plan as set out in the 2004 annual report. FUNDS UNDER MANAGEMENT Funds under management across the Group at 30 June 2005 totalled Â£214 billion compared with Â£197 billion at 31 December 2004. The total includes Â£177 billion of Group internal funds under management and Â£37 billion of external funds under management. UNALLOCATED SURPLUS OF WITH-PROFITS FUNDS The accounting basis of recognition of surpluses in the PAC long-term fund has altered for the main PAC with-profit funds. For 2004 reporting the unallocated surplus, previously known as the Fund for Future Appropriations (FFA) reflected the excess of assets over liabilities of the fund with technical provisions being determined on a basis consistent with the Peak 1 regulatory approach and with deferral of acquisition costs. The Peak 1 basis reflects bonuses declared to date with no explicit valuation of guarantees and options. For 2005, as part of the implementation of IFRS 4, the Group has effectively adopted the provisions of the UK reporting standard FRS 27 (Life Assurance). FRS 27 follows closely the requirements of the FSA's new realistic regime with the following key features for the UK regulated with-profits funds: â€¢ De-recognition of deferred acquisition costs â€¢ Establishing realistic liabilities that reflect policyholder benefits based on asset shares (i.e. including projected future bonuses), and â€¢ Explicitly valuing product options and guarantees on a market consistent basis. Under FRS 27 the liabilities are adjusted to exclude the shareholders' share of future cost of bonuses that is recognised for regulatory purposes, with a corresponding increase to the unallocated surplus. After these adjustments and IFRS measurement changes the unallocated surplus of the PAC with-profits fund at the 1 January 2005 was Â£8.0 billion. At 30 June 2005, the PAC unallocated surplus was Â£8.8 billion. The change of Â£0.8 billion in the unallocated surplus of the PAC with-profit fund between 1 January 2005 and 30 June 2005 reflects the return on the assets representing the surplus; and the reduced cost of the product guarantees. FINANCIAL STRENGTH OF THE UK LONG-TERM FUND United Kingdom The fund is very strong with an inherited estate measured on an essentially deterministic valuation basis estimated to be around Â£7.3 billion compared with approximately Â£6.5 billion at the end of 2004. On a realistic basis, with liabilities recorded on a market consistent basis, the free assets of the fund are estimated to be valued at around Â£6.3 billion before a deduction for the risk capital margin. 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 and therefore it has discussed with the Financial Services Authority (FSA) the principles that would apply to any re-attribution of the inherited estate. No conclusions have been reached. Furthermore, 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 has not considered any distribution of the inherited estate to policyholders and shareholders. The PAC long-term fund is rated AA+ by Standard & Poor's, Aa1 by Moody's and AA+ by Fitch Ratings. PRUDENTIAL PLC 2005 UNAUDITED INTERIM RESULTS RESULTS SUMMARY Achieved Profits Basis Results following implementation of Restated Restated International Financial Half Year Half Year Full Year Reporting Standards ('IFRS') 2005 2004 2004 Â£m Â£m Â£m ------------------------------------------------------------------------------- UK and Europe Insurance 182 240 450 Operations M&G 83 79 136 Egg 13 33 61 ------------------------------------------------------------------------------- UK and Europe Operations 278 352 647 US Operations 429 220 413 Asian Operations 228 179 391 Other Income and Expenditure (101) (113) (212) (including Asia development expenses) ------------------------------------------------------------------------------- Operating profit from 834 638 1,239 continuing operations based on longer-term investment returns before exceptional items Goodwill impairment charge (95) - - Short-term fluctuations in 305 (76) 587 investment returns Shareholders' share of (8) 67 (12) actuarial gains and losses on defined benefit pension schemes Effect of changes in economic (220) 21 (100) assumptions ------------------------------------------------------------------------------- Profit on ordinary activities 816 650 1,714 from continuing operations before tax ------------------------------------------------------------------------------- Operating earnings per share 25.2p 21.1p 41.5p from continuing operations after minority interest Basic earnings per share 21.7p 19.8p 53.3p Shareholders' funds, excluding Â£9.3bn Â£7.2bn Â£8.8bn minority interest ------------------------------------------------------------------------------- IFRS Basis Results Half Year Half Year Full Year 2005 2004 2004 Statutory IFRS basis results Â£m Â£m Â£m ------------------------------------------------------------------------------- Total profit after tax for the 300 233 517 period after minority interest Basic earnings per share 12.7p 11.2p 24.4p Shareholders' funds, excluding Â£5.0bn Â£3.4bn Â£4.5bn minority interest ------------------------------------------------------------------------------- Supplementary IFRS basis Based on Based on Based on information statutory IFRS proforma IFRS proforma IFRS results Half results Half results Full Year 2005 Year 2004 Year 2004 Â£m Â£m Â£m ------------------------------------------------------------------------------- Operating profit from continuing 469 375 699 operations based on longer-term investment returns before exceptional items Total profit after tax for the period 300 294 602 after minority interest Operating earnings per share from 14.0p 12.2p 22.7p continuing operations after minority interest Basic earnings per share 12.7p 14.2p 28.4p Shareholders' funds, excluding Â£5.0bn Â£3.4bn Â£4.8bn minority interest ------------------------------------------------------------------------------- Half Year Half Year Full Year 2005 2004 2004 ------------------------------------------------------------------------------- Declared Dividends Per Share 5.30p 5.19p 15.84p relating to reporting period Funds under Management Â£214bn Â£182bn Â£197bn ------------------------------------------------------------------------------- To provide consistency the achieved profits basis results reflect the application of the changes of policy the Group expects to apply in its full year 2005 IFRS basis financial statements, as described below, to the extent applicable. The 2004 results have been restated accordingly. The statutory basis financial statements included within this report are referred to throughout as 'Statutory IFRS basis' results. These statutory IFRS basis results reflect the application of: (i) Measurement changes arising from policies the Group expects to apply on the adoption of all IFRS standards, other than IAS32 ('Financial Instruments: Disclosure and Presentation'), IAS39 ('Financial Instruments: Recognition and Measurement'), and IFRS4 ('Insurance Contracts'), from 1 January 2004. The half year 2005 results include the expected effect of these three standards from 1 January 2005. (ii) Changes to the format of the results and other presentational changes that the Group expects to apply in its full year 2005 financial statements in so far as they affect the summary results included in this interim report. (iii) Compared to 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. The proforma IFRS basis results included in this report are included as supplementary information and are not results that form part of the Group's financial statements. The proforma IFRS results reflect the application of the statutory IFRS changes noted above and the estimated effect on the Group's results for 2004 if IAS32, IAS39 and IFRS4 had been applied from 1 January 2004 to the Group's insurance operations. ACHIEVED PROFITS BASIS RESULTS RESULTS SUMMARY Restated Restated Half Year Half Year Full Year 2005 2004 2004 Â£m Â£m Â£m ----------------------------------------------------------------------------------- UK and Europe Insurance 182 240 450 Operations M&G 83 79 136 Egg 13 33 61 ----------------------------------------------------------------------------------- UK and Europe Operations 278 352 647 US Operations 429 220 413 Asian Operations 228 179 391 Other Income and Expenditure (101) (113) (212) (including Asia development expenses) ----------------------------------------------------------------------------------- Operating profit from continuing 834 638 1,239 operations based on longer-term investment returns before exceptional items Goodwill impairment charge (95) - - Short-term fluctuations in 305 (76) 587 investment returns Shareholders' share of actuarial (8) 67 (12) gains and losses on defined benefit pension schemes Effect of changes in economic (220) 21 (100) assumptions ----------------------------------------------------------------------------------- Profit from continuing operations 816 650 1,714 before tax (including actual investment returns) Tax (300) (215) (491) ----------------------------------------------------------------------------------- Profit from continuing operations 516 435 1,223 after tax before minority interest Discontinued operations (net of 1 (17) (94) tax) ----------------------------------------------------------------------------------- Total profit for the period 517 418 1,129 ----------------------------------------------------------------------------------- Attributable to: Equity holders of the 512 411 1,130 parent company Minority interest 5 7 (1) ----------------------------------------------------------------------------------- Total profit for the period 517 418 1,129 ----------------------------------------------------------------------------------- Earnings Per Share ----------------------------------------------------------------------------------- Continuing operations From operating profit, based on 25.2p 21.1p 41.5p longer-term investment returns, after tax and related minority interest Adjustment for goodwill impairment (4.0)p - - charge Adjustment from post-tax long-term 9.1p (3.5)p 18.6p investment returns to post-tax actual investment returns (after related minority interest) Adjustment for post-tax (0.3)p 2.3p (0.3)p shareholders' share of actuarial gains and losses on defined benefit pension schemes Adjustment for post-tax effect of (8.3)p 0.5p (3.4)p changes in economic assumptions ----------------------------------------------------------------------------------- Based on profit from continuing 21.7p 20.4p 56.4p operations after minority interest ----------------------------------------------------------------------------------- Discontinued operations Based on profit (loss) from 0.0p (0.6)p (3.1)p discontinued operations after minority interest ----------------------------------------------------------------------------------- Total - based on total profit for 21.7p 19.8p 53.3p the period after minority interest ----------------------------------------------------------------------------------- Average number of shares (million) 2,361 2,075 2,121 ----------------------------------------------------------------------------------- Dividends Per Share ----------------------------------------------------------------------------------- Dividends relating to reporting period Interim dividend (2005 5.30p 5.19p 5.19p and 2004) Final dividend (2004) - - 10.65p ----------------------------------------------------------------------------------- Total 5.30p 5.19p 15.84p ----------------------------------------------------------------------------------- Dividends declared and paid in reporting period Current period interim - - 5.19p dividend Final dividend for prior 10.65p 10.29p 10.29p period ----------------------------------------------------------------------------------- Total 10.65p 10.29p 15.48p ----------------------------------------------------------------------------------- TOTAL INSURANCE AND INVESTMENT PRODUCTS NEW BUSINESS INSURANCE PRODUCTS AND INVESTMENT PRODUCTS* Insurance Products * Investment Products * Total Half Half Full Half Half Full Half Half Full Year Year Year Year Year Year Year Year Year 2005 2004 2004 2005 2004 2004 2005 2004 2004 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------------------------------------- UK and Europe 4,600 2,709 6,538 3,579 2,177 5,845 8,179 4,886 12,383 Operations US 2,705 2,348 4,420 217 200 418 2,922 2,548 4,838 Operations Asian 674 521 1,172 9,421 9,584 18,845 10,095 10,105 20,017 Operations ---------------------------------------------------------------------------------------------------------------------- Group Total 7,979 5,578 12,130 13,217 11,961 25,108 21,196 17,539 37,238 ---------------------------------------------------------------------------------------------------------------------- INSURANCE PRODUCTS - NEW BUSINESS PREMIUMS AND CONTRIBUTIONS* Single Regular Annual Premium and Contribution Equivalents Half Half Full Half Half Full Half Half Full Year Year Year Year Year Year Year Year Year 2005 2004 2004 2005 2004 2004 2005 2004 2004 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------------------------------------- UK and Europe Insurance Operations Direct to customer Individual 365 306 630 - - - 37 31 63 annuities Individual 14 12 19 5 6 10 6 7 12 pensions and life Department of 234 252 265 - - - 23 25 27 Work and Pensions rebate business ---------------------------------------------------------------------------------------------------------------------- Total 613 570 914 5 6 10 66 63 102 ---------------------------------------------------------------------------------------------------------------------- Business to Business Corporate 114 77 153 67 75 137 78 83 152 pensions Individual 98 94 229 - - - 10 9 23 annuities Bulk 321 210 474 - - - 32 21 47 annuities ---------------------------------------------------------------------------------------------------------------------- Total 533 381 856 67 75 137 120 113 222 ---------------------------------------------------------------------------------------------------------------------- Intermediated distribution Life 551 446 1,001 3 2 5 58 46 105 Individual 557 545 1,180 - - - 56 55 118 annuities Individual and 62 150 189 14 16 25 20 31 44 corporate pensions Department of 80 92 89 - - - 8 9 9 Work and Pensions rebate business ---------------------------------------------------------------------------------------------------------------------- Total 1,250 1,233 2,459 17 18 30 142 141 276 ---------------------------------------------------------------------------------------------------------------------- Partnerships Life 426 341 790 1 1 2 44 35 81 Individual and 1,569 48 1,249 - - - 157 5 125 bulk annuities ---------------------------------------------------------------------------------------------------------------------- 1,995 389 2,039 1 1 2 201 40 206 ---------------------------------------------------------------------------------------------------------------------- Europe Life 119 36 89 - - 2 12 4 11 ---------------------------------------------------------------------------------------------------------------------- Total UK and 4,510 2,609 6,357 90 100 181 541 361 817 Europe ---------------------------------------------------------------------------------------------------------------------- Insurance Operations US Operations Fixed 410 573 1,130 - - - 41 57 113 annuities Fixed index 296 158 429 - - - 30 16 43 annuities Variable 1,185 1,006 1,981 - - - 118 101 198 annuities Life 6 4 16 5 6 12 6 6 14 Guaranteed 187 32 180 - - - 19 3 18 Investment Contracts GIC - Medium 616 569 672 - - - 61 57 67 Term Notes ---------------------------------------------------------------------------------------------------------------------- Total 2,700 2,342 4,408 5 6 12 275 240 453 ---------------------------------------------------------------------------------------------------------------------- Asian Operations China 5 5 9 9 6 16 10 7 17 Hong Kong 147 108 255 35 35 78 50 46 103 India (Group's 2 3 5 27 17 33 27 17 33 26% interest) Indonesia 27 21 38 18 14 28 21 16 32 Japan 11 7 17 2 3 7 3 4 9 Korea 10 27 36 59 27 60 60 30 64 Malaysia 6 3 7 29 21 61 29 21 62 Singapore 117 96 199 23 20 47 35 30 67 Taiwan 72 30 88 55 57 143 62 60 151 Other 4 4 8 16 17 37 16 17 38 ---------------------------------------------------------------------------------------------------------------------- Total 401 304 662 273 217 510 313 248 576 ---------------------------------------------------------------------------------------------------------------------- Group Total 7,611 5,255 11,427 368 323 703 1,129 849 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 30 June 2005 other Movements Â£m Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------------- UK and Europe 28,705 3,579 (1,899) 786 31,171 Operations US Operations 550 217 (56) 43 754 Asian Operations 7,832 9,421 (8,723) 1,225 9,755 ---------------------------------------------------------------------------------------------- Group Total 37,087 13,217 (10,678) 2,054 41,680 ---------------------------------------------------------------------------------------------- * The format of the tables shown above is consistent with the distinction between insurance and investment products as applied for previous financial reporting periods. Products categorised as 'insurance' refer to those classified as contracts of long-term insurance business for regulatory reporting purposes, i.e. falling within one of the classes of insurance specified in part II of Schedule 1 to the Regulated Activities Order under FSA regulations. The details shown above for insurance products include contributions for contracts that are classified under IFRS 4 'Insurance Contracts' as not containing significant insurance risk. These products are described as investment contracts under IFRS4. Contracts included in this category are primarily certain unit linked and similar contracts written in UK and Europe Insurance Operations and Guaranteed Investment Contracts written in US operations. Investment products referred to in the tables above are unit trust, mutual funds and similar types of fund management arrangements. 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. ACHIEVED PROFITS BASIS RESULTS OPERATING PROFIT FROM CONTINUING OPERATIONS BASED ON LONGER-TERM INVESTMENT RETURNS BEFORE EXCEPTIONAL ITEMS Results Analysis by Business Area Half Year Restated Restated 2005 Half Year Full Year Â£m 2004 2004 Â£m Â£m ------------------------------------------------------------------------------ UK and Europe Operations New business 159 88 220 Business in force 23 152 230 ------------------------------------------------------------------------------ Long-term business 182 240 450 M&G 83 79 136 Egg 13 33 61 ------------------------------------------------------------------------------ Total 278 352 647 ------------------------------------------------------------------------------ US Operations New business 102 82 156 Business in force 315 140 271 ------------------------------------------------------------------------------ Long-term business 417 222 427 Broker dealer and fund management 18 9 15 Curian (6) (11) (29) ------------------------------------------------------------------------------ Total 429 220 413 ------------------------------------------------------------------------------ Asian Operations New business 152 135 312 Business in force 74 34 60 ------------------------------------------------------------------------------ Long-term business 226 169 372 Fund management 2 10 19 Development expenses (8) (10) (15) ------------------------------------------------------------------------------ Total 220 169 376 ------------------------------------------------------------------------------ Other Income and Expenditure Investment return and other income 45 16 44 Interest payable on core structural (84) (74) (154) borrowings Corporate expenditure: Group Head Office (36) (23) (51) Asia Regional Head Office (14) (18) (29) Charge for share based payments for (4) (4) (7) Prudential schemes ------------------------------------------------------------------------------ Total (93) (103) (197) ------------------------------------------------------------------------------ Operating profit from continuing 834 638 1,239 operations based on longer-term investment returns before exceptional items ------------------------------------------------------------------------------ Analysed as profits (losses) from: New business 413 305 688 Business in force 412 326 561 ------------------------------------------------------------------------------ Long-term business 825 631 1,249 Asia development expenses (8) (10) (15) Other operating results 17 17 5 ------------------------------------------------------------------------------ Total 834 638 1,239 ------------------------------------------------------------------------------ ACHIEVED PROFITS BASIS RESULTS SUMMARISED CONSOLIDATED BALANCE SHEET Half Year Restated Restated 2005 Half Year Full Year 2004 Â£m 2004 Â£m Â£m ------------------------------------------------------------------------------ Total assets less liabilities, 160,255 137,376 148,639 excluding insurance funds Less insurance funds*: Technical provisions (net of (155,266) (134,024) (144,149) reinsurers' share) and unallocated surplus of with-profits funds Less shareholders' accrued 4,317 3,884 4,272 interest in the long-term business ------------------------------------------------------------------------------ (150,949) (130,140) (139,877) ------------------------------------------------------------------------------ Total net assets 9,306 7,236 8,762 ------------------------------------------------------------------------------ Share capital 119 101 119 Share premium 1,561 553 1,558 Other statutory basis shareholders' 3,309 2,698 2,813 funds (following adoption of IFRS) Additional achieved profits basis 4,317 3,884 4,272 retained profit ------------------------------------------------------------------------------ Shareholders' capital and reserves 9,306 7,236 8,762 (excluding minority interest) ------------------------------------------------------------------------------ MOVEMENT IN SHAREHOLDERS' CAPITAL AND RESERVES (excluding minority interest) Half Year 2005 Restated Restated Â£m Half Year 2004 Full Year 2004 Â£m Â£m ------------------------------------------------------------------------------------------ Profit for the period (net of minority 512 411 1,130 interest) Items taken directly to equity: Cumulative effect of changes in (25) - - accounting principles on adoption of IAS32, IAS39 and IFRS4, net of applicable taxes, at 1 January 2005 Unrealised valuation movements on 4 - - securities classified as available-for-sale from 1 January 2005 Movement on cashflow hedges (7) - - Exchange movements 242 (53) (240) Related tax 30 5 12 Proceeds from rights issue, net of - - 1,021 expenses Other new share capital subscribed 40 61 119 Dividends (253) (214) (323) Reserve movements in respect of 6 3 10 share based payments Own shares: Own shares purchased in respect 0 0 (4) of share based payment plans Movement on Prudential plc (5) 0 14 shares purchased by unit trusts newly consolidated under IFRS ------------------------------------------------------------------------------------------ Net increase in shareholders' capital and 544 213 1,739 reserves ------------------------------------------------------------------------------------------ Shareholders' capital and reserves at beginning of period (excluding minority interest) As previously reported 8,596 7,005 7,005 Adjustments on implementation of 166 18 18 statutory IFRS (excluding IAS32, IAS39 and IFRS4) ------------------------------------------------------------------------------------------ As restated 8,762 7,023 7,023 ------------------------------------------------------------------------------------------ Shareholders' capital and reserves at end 9,306 7,236 8,762 of period (excluding minority interest) ------------------------------------------------------------------------------------------ Comprising ------------------------------------------------------------------------------------------ UK and Europe Operations: Long-term business 4,433 3,580 4,051 M&G: Net assets 275 333 300 Acquired goodwill 1,153 1,153 1,153 Egg 266 353 273 ------------------------------------------------------------------------------------------ 6,127 5,419 5,777 ------------------------------------------------------------------------------------------ US Operations 3,114 2,570 2,596 Asian Operations: Net assets 1,815 1,482 1,736 Acquired goodwill 197 292 292 Other operations: Holding company net borrowings (1,224) (2,055) (1,106) Other net liabilities (723) (472) (533) ------------------------------------------------------------------------------------------ 9,306 7,236 8,762 ------------------------------------------------------------------------------------------ * Including liabilities in respect of insurance products classified as investment contracts under IFRS4. ACHIEVED PROFITS BASIS RESULTS BASIS OF PREPARATION OF RESULTS The achieved profits basis results have been prepared in accordance with the guidance issued by the Association of British Insurers in December 2001 'Supplementary Reporting for long-term insurance business (the achieved profits method)'. Under this guidance, for most countries long-term expected rates of return on investments and risk discount rates are set by reference to period end rates of return on fixed income securities. This 'active' basis of assumption setting has been applied in preparing the results of the Group's UK, European and US long-term business operations. For the Group's Asian operations, the active basis is appropriate for business written in Japan and Korea and for US dollar denominated business written in Hong Kong. An exception to this general rule is that for countries where long-term fixed income securities markets are underdeveloped, investment return assumptions and risk discount rates should be based on an assessment of long-term economic conditions. Except for the countries listed above, this alternative basis is appropriate for the Group's Asian operations. The key economic assumptions are set out below: Half Year Half Year Full Year 2005 2004 2004 ----------------------------------------------------------------------------------------------- UK and Europe Insurance Operations Pre-tax expected long-term nominal rates of investment return: UK equities 7.2% 7.6% 7.1% Overseas equities 7.0% to 7.9% 7.3% to 8.3% 6.8% to 7.8% Property 6.5% 6.8% 6.3% Gilts 4.2% 5.1% 4.6% Corporate bonds 5.1% 6.1% 5.5% Assets of PAC with-profits 6.6% 7.1% 6.5% fund (applying the rates listed above to the investments held by the fund) Expected long-term rate of 2.8% 3.1% 2.9% inflation Post-tax expected long-term nominal rate of return: Pension business (where no 6.6% 7.1% 6.5% tax applies) Life business 5.8% 6.2% 5.7% Risk margin included within the 3.1% 2.6% 2.6% risk discount rate Risk discount rate 7.3% 7.7% 7.2% US Operations Expected long-term spread 1.75% 1.75% 1.75% between earned rate and rate credited to policyholders US 10 year treasury bond rate 4.0% 4.6% 4.3% at end of period Risk margin included within the 3.1% 3.1% 3.1% risk discount rate Risk discount rate 7.1% 7.7% 7.4% Asian Operations Weighted pre-tax expected 7.0% 6.8% 6.6% long-term nominal rate of investment return Weighted expected long-term 3.2% 3.1% 3.0% rate of inflation Weighted risk discount rate 10.0% 9.9% 9.6% The risk margin for UK and Europe Insurance Operations has been increased to 3.1 per cent following re-assessment in the light of the intention to use the European Embedded Value basis for 2005 year end reporting (see note (g)) The economic assumptions shown above for the Asian Operations have been determined by weighting each country's assumptions by reference to the achieved profits basis operating results for new business written in the relevant period. NOTES ON THE UNAUDITED ACHIEVED PROFITS BASIS RESULTS (a) The achieved profits basis results for the 2005 and 2004 Half Years are unaudited. The results for the 2004 Full Year are also unaudited and have been derived from the achieved profits basis supplement to the Company's statutory accounts for that year and then adjusted for the application of IFRS where appropriate as described in note (d). The supplement included an unqualified audit report from the auditors. (b) Under the achieved profits basis, the operating profit from new business represents the profitability of new long-term insurance business written in the period and the operating profit from business in force represents the profitability of business on the books at the start of the period. These results are combined with the statutory basis results of the Group's other operations including banking and fund management business. The effects of short-term fluctuations in investment returns and of changes in economic assumptions on shareholders' funds at the start of the reporting period are excluded from operating profit but included in total profit. In the directors' opinion, the achieved profits basis results provide a more realistic reflection of the performance of the Group's long-term business operations than results under the statutory basis. (c) The proportion of surplus allocated to shareholders from the UK with-profits business has been based on the present level of 10 per cent. Future bonus rates have been set at levels which would fully utilise the assets of the with-profits fund over the lifetime of the business in force. (d) The achieved profits basis results for the Group reflect the application of the changes the Group expects to apply in its full year 2005 IFRS basis financial statements to the extent applicable. The results of long-term business operations are significantly altered only for the changed basis of determining longer-term returns credited to operating results. The significant changes of policy that affect the 2004 and 2005 results for non-insurance operations principally relate to pension costs, goodwill, the timing basis of recognition of external dividends, and altered measurement of acquisition costs and front end fees of fund management business. The detail of these policy changes is described in note B to the statutory basis financial statements. The change in respect of pension costs is augmented under the Achieved Profits basis to reflect the Group's 10 per cent interest in the share of the deficits of the UK defined benefit pension schemes that are attributable to the PAC with-profits fund. The impact of adoption of IAS39 and IFRS4 from 1 January 2005 is restricted under the Achieved Profits basis to non-insurance operations, as described in the statutory financial statements. Results attributable to shareholders for long-term businesses are not affected. In particular, the investment and derivative value volatility reflected in the statutory basis results for JNL does not feature due to the methodology of the achieved profits basis. The methodology seeks to value the future emergence of surplus, which in the case of JNL's type of business is unaffected by temporary valuation movements. ACHIEVED PROFITS BASIS RESULTS NOTES ON THE UNAUDITED ACHIEVED PROFITS BASIS RESULTS (CONTINUED) (e) The impact of restating the Half Year and Full Year 2004 achieved profits basis results for the changes of policy on adoption of IFRS and discretionary changes to longer-term investment returns is as follows: Half Year 2004 Full Year 2004 As previously Change Restated As previously Change Restated published published Â£m Â£m Â£m Â£m Â£m Â£m Operating 587 51 638 1,144 95 1,239 profit from continuing operations based on longer-term investment returns (note (i)) Amortisation (48) 48 0 (94) 94 0 of goodwill (note (ii)) Short-term (26) (50) (76) 679 (92) 587 fluctuations in investment returns (note (iii)) Shareholders' - 67 67 - (12) (12) share of actuarial gains and losses on defined benefit pension schemes Effect of 21 - 21 (100) - (100) change in economic assumptions ------------------------------------------------------------------------------------- Profit from 534 116 650 1,629 85 1,714 continuing operations before tax attributable to shareholders (including actual investment returns) ------------------------------------------------------------------------------------- Shareholders' 7,222 14 7,236 8,596 166 8,762 funds (excluding minority interest) (note (iv)) ------------------------------------------------------------------------------------- (i) Operating profit from continuing operations, based on longer-term investment returns Half Year 2004 Full Year 2004 Â£m Â£m Discretionary change to longer-term investment returns: US Operations 56 110 Asian Operations (6) (9) IFRS changes 1 (6) ------------------------------- Total changes 51 95 Operating profit - as previously published 587 1,144 ------------------------------- Operating profit - as restated 638 1,239 ------------------------------- (ii) Amortisation of goodwill Under IFRS3 ('Business Combinations') and IFRS1 ('First-time Adoption of International Financial Reporting Standards') goodwill as previously reported at the date of adoption of IFRS, which is 1 January 2004, is left unaltered subject to annual impairment testing. Amortisation charges reported on the previous basis are no longer permitted. (iii) Short-term fluctuations in investment returns including investment return attributable to minority interest in consolidated investment funds Half Year 2004 Full Year 2004 Â£m Â£m Discretionary change to longer-term investment returns (as above): US Operations (56) (110) Asian Operations 6 9 IFRS changes 0 9 ------------- ------------- Total changes (50) (92) Short-term fluctuations in investment (26) 679 returns - as previously published ------------- ------------- Short-term fluctuations in investment (76) 587 returns - as restated ------------- ------------- (iv) Shareholders' funds (excluding minority interest) Half Year 2004 Full Year 2004 Â£m Â£m Changes consequent on adoption of IFRS: Timing difference on recognition of 109 253 dividend declared after balance sheet date Shareholders' share of deficit on UK defined benefit pension schemes (net of deferred tax): Statutory IFRS basis (73) (115) Additional change for shareholders' (30) (47) 10% interest on the achieved profits basis in the deficit attributable to the PAC with-profits fund Goodwill 48 94 Other items (net of related tax) (40) (19) ------------- ------------- ------------- ------------- Total changes 14 166 Shareholders' funds, net of minority 7,222 8,596 interest - as previously published ------------- ------------- Shareholders' funds, net of minority 7,236 8,762 interest - as restated ------------- ------------- (f) Consistent with prior periods for the Taiwan operation, the projections include an assumption of phased progression from current rates to the long-term expected rates over a remaining period of eight years. This takes into account the effect on bond values of interest rate movements. The principal cause of the Â£220m 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 rates. (g) In its Full Year 2005 financial statements, the Group intends to replace the use of the Achieved Profits basis methodology by the European Embedded Value (EEV) principles issued by the CFO forum of the major European Life Insurers in May 2004. Details of the Group's application of the EEV principles are available at the Group's web-site, www.prudential.co.uk. IFRS BASIS RESULTS STATUTORY BASIS RESULTS SUMMARY INCOME STATEMENT Half Year 2005 Half Year 2004 Full Year 2004 Â£m Â£m (note C) Â£m (note C) ---------------------------------------------------------------------------------- Insurance contract revenues 8,159 7,397 16,099 Investment income (including 9,560 3,245 15,742 realised gains and losses, and unrealised appreciation of investments categorised under IAS39 as 'fair value through profit and loss') Other income 982 886 2,026 ---------------------------------------------------------------------------------- Total revenue (note D) 18,701 11,528 33,867 ---------------------------------------------------------------------------------- Benefits and claims for insurance (14,919) (8,582) (26,584) contracts, and movement in unallocated surplus of with-profits funds determined after charging taxes borne by policyholders and unallocated surplus of with-profits funds and unit linked policies Acquisition costs and other (3,036) (2,208) (5,526) operating expenditure Interest on structural borrowings (104) (94) (196) of shareholder financed operations (including Egg) and with-profits operations ---------------------------------------------------------------------------------- Total charges (note D) (18,059) (10,884) (32,306) ---------------------------------------------------------------------------------- IFRS basis income before tax 642 644 1,561 (representing 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) (notes B and D) Income tax expense attributable (182) (249) (711) to policyholders and unallocated surplus of with-profits funds and unit linked policies ---------------------------------------------------------------------------------- Profit from continuing operations 460 395 850 (including actual investment returns) before tax attributable to shareholders (notes B, D and E) Income tax (expense) benefit attributable to shareholders: Total income tax expense* (338) (387) (951) (note M) Less: Income tax 182 249 711 attributable to policyholders and unallocated surplus of with-profits funds and unit linked policies ---------------------------------------------------------------------------------- Income tax expense attributable (156) (138) (240) to shareholders (note M) Profit from continuing operations 304 257 610 after tax Discontinued operations (net of 1 (17) (94) tax) ---------------------------------------------------------------------------------- Profit for the period 305 240 516 ---------------------------------------------------------------------------------- Attributable to: Equity holders of the 300 233 517 parent company Minority interest 5 7 (1) ---------------------------------------------------------------------------------- Profit for the period 305 240 516 ---------------------------------------------------------------------------------- Earnings Per Share ---------------------------------------------------------------------------------- Basic (based on 2,361 million, 2,075 million and 2,121 million shares respectively) Based on profit from 12.7p 11.8p 27.5p continuing operations after minority interest Based on profit (loss) from 0.0p (0.6)p (3.1)p discontinued operations after minority interest ---------------------------------------------------------------------------------- 12.7p 11.2p 24.4p ---------------------------------------------------------------------------------- Diluted (based on 2,364 million, 2,078 million and 2,124 million shares respectively) Based on profit from continuing 12.7p 11.8p 27.5p operations after minority interest Based on profit (loss) from 0.0p (0.6)p (3.1)p discontinued operations after minority interest ---------------------------------------------------------------------------------- 12.7p 11.2p 24.4p ---------------------------------------------------------------------------------- Dividends Per Share ---------------------------------------------------------------------------------- Dividends relating to reporting period Interim dividend (2005 and 2004) 5.30p 5.19p 5.19p Final dividend (2004) - - 10.65p ---------------------------------------------------------------------------------- Total 5.30p 5.19p 15.84p ---------------------------------------------------------------------------------- Dividends declared and paid in reporting period Current period interim dividend - - 5.19p Final dividend for prior period 10.65p 10.29p 10.29p ---------------------------------------------------------------------------------- Total 10.65p 10.29p 15.48p ---------------------------------------------------------------------------------- * Total income tax expense comprises tax attributable to policyholders and unallocated surplus of with profits funds, unit linked policies and shareholders. IFRS BASIS RESULTS STATUTORY BASIS RESULTS Half Year 2005 Half Year 2004 Full Year 2004 CHANGES IN EQUITY Share- Minority Total Share- Minority Total Share- Minority Total holders' interest equity holders' interest equity holders' interest equity equity equity equity Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m ------------------------------------------------------------------------------------------------------------------ Statement of Recognised Income and Expense Net income 300 5 305 233 7 240 517 (1) 516 Items taken directly to equity: Exchange 183 183 (32) (32) (172) (172) movements Movement on cash (7) (1) (8) flow hedges Unrealised valuation movements on securities classified as available-for-sale from 1 January 2005 (see note H) Gross change (63) 1 (62) Related change 14 14 to amortisation of deferred acquisition costs Related tax 48 48 5 5 12 12 ------------------------------------------------------------------------------------------------------------------ Total recognised 475 5 480 206 7 213 357 (1) 356 income for the period ------------------------------------------------------------------------------------------------------------------ Cumulative effect of 236 (3) 233 changes in accounting policies on adoption of IAS32, IAS39, and IFRS4, net of applicable taxes at 1 January 2005 (noteG) ------------------------------------------------------------------------------------------------------------------ Total recognised 711 2 713 206 7 213 357 (1) 356 income and expense ------------------------------------------------------------------------------------------------------------------ Half Year 2005 Half Year 2004 Full Year 2004 Share- Minority Total Share- Minority Total Share- Minority Total holders' interest equity holders' interest equity holders' interest equity equity equity equity Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m ------------------------------------------------------------------------------------------------------------------ Reconciliation of movement on equity Share capital and share premium Proceeds from 1,021 1,021 rights issue, net of expenses Other new share 40 40 61 61 119 119 capital subscribed Treasury shares Consideration 0 0 0 0 (4) (4) paid for own shares purchased in respect of share based payment plans Movement on (5) (5) 0 0 14 14 Prudential plc shares purchased by unit trusts newly consolidated under IFRS Other reserves Total recognised 711 2 713 206 7 213 357 (1) 356 income for the period (as shown above) Dividends (253) (253) (214) (214) (323) (323) Reserve movements 6 6 3 3 10 10 in respect of share based payments Change in minority (9) (9) 27 27 9 9 interest arising principally from purchase and sale of venture investment companies and property partnerships of the PAC with-profits fund ------------------------------------------------------------------------------------------------------------------ Net increase in 499 (7) 492 56 34 90 1,194 8 1,202 equity ------------------------------------------------------------------------------------------------------------------ At beginning of period: As previously 4,281 71 4,352 3,240 107 3,347 3,240 107 3,347 reported under UK GAAP Changes 209 74 283 56 30 86 56 30 86 arising from adoption of IFRS ------------------------------------------------------------------------------------------------------------------ As restated under 4,490 145 4,635 3,296 137 3,433 3,296 137 3,433 IFRS ------------------------------------------------------------------------------------------------------------------ At end of period 4,989 138 5,127 3,352 171 3,523 4,490 145 4,635 ------------------------------------------------------------------------------------------------------------------ IFRS BASIS RESULTS STATUTORY BASIS RESULTS SUMMARY BALANCE SHEET 30 June 30 June 2004 Â£m 31 December 2005 (note F) 2004 Â£m Â£m (note F) ------------------------------------------------------------------------------------------ Assets -------- Goodwill: Attributable to PAC with-profits fund 457 565 754 (in respect of venture investment subsidiaries) Attributable to shareholders 1,366 1,504 1,461 (principally in respect of the acquisitions of M&G and Asian businesses) ------------------------------------------------------------------------------------------ Total 1,823 2,069 2,215 ------------------------------------------------------------------------------------------ Deferred acquisition costs: PAC with-profits fund (note I) - 875 798 Other operations (note H) 1,858 2,088 2,122 ------------------------------------------------------------------------------------------ Total 1,858 2,963 2,920 ------------------------------------------------------------------------------------------ Other non-investment and non-cash assets: Reinsurers' share of contract 648 775 1,018 provisions Income tax recoverable 193 235 159 Deferred tax assets 1,067 830 827 Accrued investment income 1,726 1,760 1,731 Other debtors 3,388 2,163 1,179 Other 768 500 952 ------------------------------------------------------------------------------------------ Total 7,790 6,263 5,866 ------------------------------------------------------------------------------------------ Investments of long term business, banking and other operations: Investment properties 12,721 11,739 13,538 Financial investments: Deposits 6,784 3,134 5,173 Equity securities and portfolio 61,560 49,977 54,466 holdings in unit trusts Fixed income securities 79,442 76,448 76,301 Loans and receivables 13,202 11,901 12,430 Other 3,530 1,950 2,564 ------------------------------------------------------------------------------------------ Total investments 177,239 155,149 164,472 ------------------------------------------------------------------------------------------ Cash and cash equivalents 3,704 2,872 4,429 ------------------------------------------------------------------------------------------ Total assets 192,414 169,316 179,902 ------------------------------------------------------------------------------------------ Equity and liabilities ------------------------ Equity Shareholders' equity (note K) 4,989 3,352 4,490 Minority interest 138 171 145 ------------------------------------------------------------------------------------------ Total equity 5,127 3,523 4,635 ------------------------------------------------------------------------------------------ Liabilities Banking customer accounts 6,451 6,699 6,607 Insurance liabilities: Contract liabilities (including amounts in respect of contracts classified as investment contracts 147,031 122,981 128,981 under IFRS4 from 1 January 2005) - (note I) Unallocated surplus of with-profits funds (note I): Reflecting application of 8,883 - - 'realistic' basis provisions for UK regulated with-profits funds. Reflecting previous UK GAAP basis of - 11,818 16,186 provisioning ------------------------------------------------------------------------------------------ Total insurance liabilities 155,914 134,799 145,167 ------------------------------------------------------------------------------------------ Core structural borrowings of shareholder financed operations other than Egg: Subordinated debt 1,460 1,327 1,429 Other 1,223 1,269 1,368 ------------------------------------------------------------------------------------------ Total 2,683 2,596 2,797 ------------------------------------------------------------------------------------------ Egg subordinated debt capital 468 451 451 Operational borrowings attributable to 6,244 6,800 6,421 shareholder financed operations (note L) Borrowings attributable to with-profits funds 1,665 1,849 2,077 (note L) Other non-insurance liabilities: Obligations under funding, stock lending and 3,774 4,469 3,504 sale and repurchase agreements Net asset value attributable to unit holders 1,073 719 808 of consolidated unit trusts and similar funds Income tax liabilities 958 1,038 1,054 Deferred tax liabilities 2,681 1,995 2,244 Accruals and deferred income 1,514 1,354 1,700 Other creditors 2,690 1,962 1,502 Provisions and other liabilities 1,172 1,062 935 ------------------------------------------------------------------------------------------ Total 13,862 12,599 11,747 ------------------------------------------------------------------------------------------ Total liabilities 187,287 165,793 175,267 ------------------------------------------------------------------------------------------ Total equity and liabilities 192,414 169,316 179,902 ------------------------------------------------------------------------------------------ IFRS BASIS RESULTS STATUTORY BASIS RESULTS SUMMARY CASH FLOW STATEMENT Half Year 2005 Half Year 2004 Â£m Â£m -------------------------------------------------------------------------------- Net cash flows from operating activities (note (i)) IFRS basis income, net of post-tax transfers to 642 644 unallocated surplus of with-profits funds, before tax attributable to policyholders and unallocated surplus of with-profits funds, unit linked policies and shareholders (note D) Changes in operating assets and liabilities (693) (151) Other items (52) (160) -------------------------------------------------------------------------------- (103) 333 -------------------------------------------------------------------------------- Net cash flows from investing activities Net cash flows from purchases and disposals of (52) (35) property and equipment Acquisition of subsidiaries of business operations (141) - (Life Insurance Company of Georgia) (note (ii)) -------------------------------------------------------------------------------- (193) (35) -------------------------------------------------------------------------------- Net cash flows from financing activities Structural borrowings of the Group: Shareholder financed operations (note (iii)) (Redemption) Issue (171) 41 Interest paid (95) (85) With-profits operations (note (iv)) Interest paid (9) (9) Equity capital: Issues of ordinary share capital 40 61 Dividends paid to shareholders (253) (214) -------------------------------------------------------------------------------- (488) (206) -------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash 59 (20) equivalents -------------------------------------------------------------------------------- Net (decrease) increase in cash and cash (725) 72 equivalents Cash and cash equivalents at beginning of period 4,429 2,800 -------------------------------------------------------------------------------- Cash and cash equivalents at end of period (note 3,704 2,872 (v)) -------------------------------------------------------------------------------- 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 follows: Half Year 2005 Half Year 2004 Â£m Â£m Deferred acquisition costs (excluding changes (35) (34) taken directly to equity) Other non-investment and non-cash assets (1,379) (1,048) Investments (7,870) (2,613) Banking customer accounts (240) (838) Insurance liabilities (including unallocated 8,534 1,694 surplus) Other liabilities including operational 297 2,688 borrowings --------------------------------------------------------------------------- Changes in operating assets and liabilities (693) (151) --------------------------------------------------------------------------- (ii) Purchases and sales of subsidiaries shown above are those of business operations. Purchases and sales of venture subsidiaries of the PAC with-profits fund and cash flows of investment funds that are subject to changes in consolidation status are accounted for in the same way as for cash flows in respect of portfolio investments, that is within operating cash flows. (iii) 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. (iv) Structural borrowings of with-profits operations relate solely to the Â£100m 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 investment subsidiaries, are categorised as operating activities in the presentation above. (v) Previously, under UK GAAP, following the requirements of FRS1 ('Cash Flow Statements'), the Group's statutory basis cash flow statement excluded the cash flows of long-term business funds. 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 Â£3,704m and Â£2,872m, Â£42m and Â£93m represent cash and cash equivalents of the parent company and related finance subsidiaries. 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