2007 Interim Results

1st Aug 2007 07:01

Prudential PLC01 August 2007 Part 1 Embargo: 07.00 Wednesday 1 August 2007 PRUDENTIAL PLC 2007 INTERIM RESULTS • Total EEV operating profit from continuing operations £1,326 million, up 39% • Total IFRS operating profit from continuing operations £601 million, up 27% • New business APE £1,334 million, up 12%; PVNBP £9.7 billion, up 4% • New business profit £534 million, up 12% • Asset management profit £180 million, up 45% • EEV shareholders' funds £13.4 billion, up 13% (end 2006 £11.9 billion*) • Interim dividend 5.7 pence per share, up 5% (2006: 5.42 pence per share) All figures compared to 2006 constant exchange rates unless stated, *at reportedexchange rates Commenting, Mark Tucker, Group Chief Executive said: "The growth in operating profit of 39 per cent in the first half of the yeardemonstrates the clear and continued momentum that we have within the Group. Itbuilds on the very strong operating performance in both 2005 and 2006 when wegrew operating profit by 36 per cent and 28 per cent respectively. "Our strategy is focused on the growing global market for retirement savings andincome and our advantaged regional platforms and global capabilities place theGroup in an excellent and immensely strong position to capture adisproportionate share of this opportunity. "In Asia, growth across the region continues to be strong, with new business up48 per cent to £619 million APE, and new business profit up 31 per cent to £282million. These strong first half results, and the continuing development of ouroperations in the region, mean that we are very confident that we will achieveour target of at least doubling 2005 EEV new business profits by 2009. "In the US, we have one of the fastest growing variable annuity franchises inthe market - VA sales grew by 31 per cent in the first half to £2.2 billion,continuing to gain profitable market share. "In the UK, retail sales grew by 10 per cent in the first half of the year,while our focus on value has kept margins on new business in the UK at 30 percent which remain high compared to the overall UK market. The Internal Rate ofReturn (IRR) was 15 per cent against our target of 14 per cent. "Our asset management businesses saw very strong growth in operating profit,with M&G and Asia fund management up 40 per cent and 65 per cent respectively.Retail net sales at M&G surpassed last year's record half-year net flows and inAsia net flows remained strong at £1.7 billion, with a number of successful fundlaunches in Taiwan and Korea, as well as ongoing strong net sales in India andJapan. "The Group is extremely well placed to continue to deliver real long-termsustainable profit growth for shareholders." Group Chief Executive's Review Introduction The Group has today announced a strong set of results. Prudential's performance in the first half of the year demonstrates the realshareholder value that we are delivering through consistent implementation ofour retirement-focused strategy. This strategy is generating both continuedexcellent results and creating substantial longer term opportunities from ouradvantaged regional platforms and global capabilities. Capturing the Retirement Opportunity Developments in the global retirement market represent one of the mostsignificant and important global trends in retail financial services. In the UKand US alone, it is estimated that over the next five years, as much as £7trillion of assets will be available for investment into the retirement savingsand retirement income market sectors. In Asia, the retirement opportunity isalso expanding rapidly driven by rising incomes, increasing longevity, and agrowing realisation among individuals of the need to save for retirement and toprotect their income. Prudential's strategy focuses on capturing the ever-increasing revenue and valuefrom these material opportunities. Prudential is well positioned - Capabilities and Geographic Coverage While many financial institutions are moving to capture this opportunity,Prudential has an outstanding combination of assets and capabilities to succeed: • Sophisticated risk management • Integrated solutions to address retirement needs • Privileged access to retirement advisers • Trusted brands which are strongly associated with retirement • Financial strength and reliability • Geographic reach Moreover, Prudential has the additional advantage of being able to draw onexpertise and experience across international frontiers to advance productinnovation, distribution and the quality of customer service. These initiativestransfer learning and value from one business to another, creating competitiveadvantage above and beyond what each could individually achieve. Group Performance The operating performance of the Group was again very strong in the first halfof 2007. Group operating profit before tax from continuing operations, on theEuropean Embedded Value basis (EEV), was up 39 per cent, to £1,326 millionbuilding on the momentum established in 2005 and 2006. On the statutory IFRSbasis, operating profit before tax on continuing operations was up 27 per centto £601 million. The Group had a positive cashflow from operations in the period to 30 June 2007.The benefit of a significant increase in the uptake of the scrip dividend helpedto achieve this. Our expectation remains that operations will provide a positivecash flow in the 2008 full year. The Group's cash balances also benefited by £527 million from the sale of Egg.In addition, the already robust regulatory capital surplus of the Group wasimproved by around £300 million from the sale of this business. Regional Performance As outlined earlier, Prudential's operations in Asia, the US and the UK are allwell-positioned to capitalise on the retirement opportunity, and each hasspecific strategies in place to build on and strengthen our established marketpositions. Performance in all of our regional markets over the first half has been strong,indicating that our approach to the market is delivering material financialbenefits. Asia Prudential's geographic spread in Asia, the strength and scale of ourdistribution, and the recognition of and trust in the Prudential brand in theregion, continue to be key differentiating factors for the Group. Agent numbers have reached 350,000 and at the same time, almost 30 per cent ofnew business is being derived from non-agency sources. In addition to capitalising on and further building these strengths, we areincreasing the focus on the fast emerging retirement opportunity by developingand providing integrated protection and savings solutions to meet consumers'increasingly sophisticated needs. Work is progressing well on our initiatives to deepen our Health business and weare putting in place the infrastructure to facilitate greater cross-selling andup-selling to our established customer base of some 8.5 million in the region. Growth across the region continues to be strong, with new business up 48 percent to £619 million APE in the half year. Compound annual growth in APE overthe last five years is 29 per cent. New business profit was up 31 per cent to£282 million. A significant contributor to this growth was the "What's my number?" retirementcampaign which has already seen great success in Korea and Hong Kong, and wasrolled out to Taiwan at the end of April. As a result, new business in Taiwan inthe second quarter was £106 million APE and half year new business was up 103per cent. We will continue to identify other opportunities in retirement acrossthe region. We are also making good progress in two additional areas; firstly we aredeveloping a regionwide infrastructure to support our approach to developsystematic cross-selling and up-selling to our 8.5 million customers, with plansalready in place in three markets and with the first pilots due to begin laterthis year. Secondly, on health products we saw a 62 per cent increase in thefirst half. We launched a new product in Singapore in the second quarter and wehave recently launched a new product in India. These strong first half results, and the continuing development of ouroperations in the region, mean that we are very confident that we will achieveour target of at least doubling 2005 EEV new business profits by 2009. Theoutlook beyond 2009 also remains very positive. US In the US, our long-term strategy has been to position Jackson to meet theretirement needs of the baby boomer generation pre and post retirement. Werecognised early on the central role of advice as the key source of success inthis market and Jackson has developed a very effective and hard to replicatebusiness model, with particular success in the independent broker channel - thekey channel for advice. The Jackson brand is trusted to provide integrated retirement planning solutionsto financial professionals and their clients, including variable annuityproducts that provide the most flexibility and customisation in the industry. We are continuing to develop our variable annuity offering, adding a number ofnew guaranteed minimum withdrawal benefits and a new guaranteed minimumaccumulation benefit. The total number of benefit combinations available is nowin excess of 2,100. At Curian, our separately managed account platform, we also recently launched anew proposal system which cuts the time required to open a separately managedaccount by a factor of three. This is just one example of how we continue toleverage Jackson's superior technological capabilities to enhance our efficiencyand effectiveness. We have also continued to add to Jackson's distribution strength, increasing thenumber of external wholesalers by 30 per cent. Over the last two years,Jackson's wholesaling force has been one of the fastest growing in the marketwhilst still growing productivity per producer and sales per territory. Thisincrease in numbers of wholesalers will allow us to take an even more granularapproach to our segmentation of the market. Today, Jackson is already one of the fastest growing variable annuity franchisesin the market. Variable annuity sales grew by 31 per cent in the first half to£2.2 billion, continuing to gain profitable market share. Our market share ofvariable annuities reached 5.1 per cent at the end of the first quarter,compared to 4.2 per cent in the first quarter of 2006, and share in the maintarget Independent Broker Dealer channel was 11.7 per cent, up from 10.4 percent in the first quarter of 2006. Overall margins on new business in the US remained strong at 41 per cent (2006:41 per cent) with an IRR of 18 per cent. UK In the UK, our manufacturing capabilities in the retirement space, combined withthe Prudential brand - which is strongest among pre and post retirement agegroups - provides an excellent platform from which to develop the business. In line with our stated plans we are exiting those product areas that arestructurally uneconomic and we are developing a new range of trail-basedcommission products centred on the multi-asset investment capabilities. Our newunit-linked product, for instance, will be launched later this month. To further strengthen our distribution, we have entered into an agreement withBarclays to be the preferred provider of conventional annuity products to retailcustomers of Barclays in the UK. This is a five-year agreement which will takeeffect from later in 2007. UK retail sales grew by 10 per cent in the first half of the year. Momentum isparticularly strong in individual annuities, up 23 per cent, a market segment inwhich we are a clear leader with 23 per cent market share in 2006. This is ahigh growth, high return sector of the market where Prudential benefits fromsignificant and recurring internal flows of maturing pensions as well as flowsfrom both new and existing partnerships. All of this, combined withsophisticated risk management and competitive pricing, is enabling us to delivergood returns to shareholders. In the bulk annuity market we reached an agreement in principle to acquireEquitable Life's portfolio of in-force with-profits annuities, now estimated ataround £1.7 billion. This transaction remains on track to complete in the fourthquarter and on its own represents almost 20 per cent growth on the bulkannuities written by our UK business in the whole of 2006. We will continue toexercise pricing discipline in this market, and to pursue specific opportunitieswhich play to our distinctive capabilities. Margins on new business in the UK of 30 per cent (2006: 29 per cent) remain highcompared to the overall UK market and the Internal Rate of Return (IRR) was 15per cent against our target of 14 per cent. This represents an attractive returnin both absolute and relative terms. We remain confident of achieving our already-announced cost savings target of£195 million by 2010. By the end of 2007 we will have taken all of the actionsto secure £115 million of the announced savings, and we are making good progressin determining the approach we will take to deliver the remaining £80 million,whether that is through offshoring, outsourcing or a combination of the two. Weare on track to confirm our final decision by the middle of the fourth quarterthis year. Prudential's main with-profit fund in the UK was the top performing life fund in2006 in terms of gross investment return ranking first, in the WM Company'ssurvey of with-profit funds, over 1, 3, 5 and 10 years -an outstandingperformance. Investment performance has remained strong in the first half of2007. Our work on the Inherited Estate is progressing well and as previouslydisclosed, if a decision is taken to proceed, a formal appointment of thePolicyholder Advocate could be expected to take place later this year. We willonly proceed if there are clear benefits to both policyholders and shareholders. Asset Management Our asset management businesses continue to both add value to our insuranceoperations as well as growing their external funds under management. Key to this is our ability to develop retirement savings and retirement incomeproducts based on sophisticated asset allocation strategies which matchcustomers' risk profiles and strong investment performance. This is clearly evidenced in the UK, where our strength in the with-profitsbusiness - both bonds and annuities - has been driven by our multi-assetallocation capabilities which can deliver the kind of cautious growth thatcustomers want. In the US, these capabilities enable us to deliver our fullyunbundled variable annuity proposition. These capabilities also position us well in the emerging area of lifecyclefinance where we can create products that adapt to consumers changingcircumstances, risk appetites, and needs over different stages of the retirementcycle. These products need to be underpinned by adaptable and creative assetmanagement. Across the Group's asset management businesses net inflows were £5 billion andat similar levels to those achieved in the first half of 2006. Retail net salesat M&G surpassed last year's record half-year net flows and in Asia net flowsremained strong at £1.7 billion, with a number of successful fund launches inTaiwan and Korea, plus ongoing strong net sales in India and Japan. Externalfunds under management increased to £63 billion. This is contributing to very strong growth in operating profit from thesebusinesses, with M&G and Asia fund management up 40 per cent and 65 per centrespectively. Capital Efficiency Prudential benefits from greater capital efficiency and an increased riskappetite by actively managing its product and geographic diversification.Prudential's economic capital modelling indicates that the capital requirementsof the businesses on a stand-alone basis would be £1.3 billion higher than forthe Group as a whole, as at 31 December 2006. While the dialogue with both regulators and rating agencies continues todevelop, for example over the draft Solvency II Directive, it is already clearthat in future there will be material and enduring opportunities for greaterregulatory capital efficiency within broader-based groups. Outlook In summary: • Our strategy is focused on the growing global market for retirement savings and retirement income • Our advantaged regional platforms and our global capabilities place the Group in a strong position to capture a disproportionate share of the retirement opportunity around the world • Delivery of that strategy is generating continuing excellent short-term operating performance both in the regions and at the Group level, which in turn is creating superior shareholder value • Our diversified geographic footprint across three regions provides a strong and operationally efficient base for future growth • Prudential is extremely well placed to deliver real long-term sustainable profit growth for its shareholders ENDS Enquiries: Media Investors/AnalystsJon Bunn 020 7548 3559 James Matthews 020 7548 3561Carole Butcher 020 7548 3719 Marina Novis 020 7548 3511 Notes to Editor: 1. The results in this announcement are prepared on two bases, namelyInternational Financial Reporting Standards ('IFRS') and the European EmbeddedValue ('EEV') basis. The IFRS basis results form the basis of the Group'sfinancial statements. The EEV basis results have been prepared in accordance with the principlesissued by the CFO Forum of European Insurance Companies in May 2004. Whereappropriate the EEV basis results include the effects of IFRS. References to 'operating profit' in this announcement are to operating profitbased on longer-term investment returns. Consistent with previous reportingpractice the Group analyses its EEV basis results, and provides supplementaryanalysis of IFRS profit before tax attributable to shareholders, so as todistinguish operating profit based on longer-term investment returns from otherconstituent elements of total profit. On both the EEV and IFRS bases operatingprofit based on longer-term investment returns excludes goodwill impairmentcharges, short-term fluctuations in investment returns and the shareholders'share of actuarial and other gains and losses on defined benefit pensionschemes. Under the EEV basis, where additional profit and loss effects arise,operating profits based on longer-term investment returns also excludes the markto market value movement in core borrowings, the effect of changes in economicassumptions, and changes in the time value of the cost of options and guaranteesarising from changes in economic factors. 'PVNBP' refers to the Present Value of New Business Premiums. PVNBPs arecalculated as equalling new single premiums plus the present value of expectedpremiums of new regular premium business. In determining the present value,allowance is made for lapses and other assumptions applied in determining theEEV new business profit. Period on period percentage increases are stated on a constant exchange ratebasis. 2. Annual premium equivalent (APE) sales comprise regular premium sales plusone-tenth of single premium insurance sales. 3.The internal rate of return (IRR) is equivalent to the discount rate at whichthe present value of the post-tax cash flows expected to be earned over the lifetime of the business written in shareholder-backed life funds is equal to thetotal invested capital to support the writing of the business. The capitalincluded in the calculation of the IRR is the initial capital in excess of thepremiums received required to pay acquisition costs and set up the statutorycapital requirement. The time value of options and guarantees are included inthe calculation. 4.There will be a conference call today for wire services at 7.30am (BST) hostedby Mark Tucker, Group Chief Executive and Philip Broadley, Group FinanceDirector. Dial in telephone number: +44 (0)20 8609 0793. Passcode: 155439#. 5. A presentation to analysts will take place at 9.30am (BST) at Governor'sHouse, Laurence Pountney Hill, London, EC4R 0HH. An audio cast of thepresentation and the presentation slides will be available on the Group'swebsite, www.prudential.co.uk 6. There will be a conference call for investors and analysts at 2.30pm (BST)hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group FinanceDirector. Please call from the UK +44 (0)20 8609 0793 and from the US +1 866 7934279. Passcode 487687#. A recording of this call will be available for replayfor one week by dialling: +44 (0)20 8609 0289 from the UK or +1 866 676 5865 fromthe US. The conference passcode is 160473#. 7. High resolution photographs are available to the media free of charge atwww.newscast.co.uk +44 (0) 208 886 5895. 8. An interview with Mark Tucker, Group Chief Executive, (in video/audio/text)will be available on www.cantos.com and www.prudential.co.uk from 7.00am on 1August 2007. 9. Financial Calendar 2007: Ex-dividend date 15 August 2007Record Date 17 August 2007Payment of interim dividend 24 September 2007Third Quarter 2007 New Business Figures 18 October 2007Full Year 2007 New Business Figures 29 January 2008Full Year 2007 results 14 March 2008 10. In addition to the financial statements provided with this press release,additional financial schedules are available on the Group's website atwww.prudential.co.uk 11. Total number of Prudential plc shares in issue as at 30 June 2007 was2,460,159,970. About Prudential Prudential plc is a company incorporated and with its principal place ofbusiness in England, and its affiliated companies constitute one of the world'sleading financial services groups. It provides insurance and financial servicesdirectly and through its subsidiaries and affiliates throughout the world. Ithas been in existence for over 150 years and has £256 billion in assets undermanagement as at 30 June 2007. Prudential plc is not affiliated in any mannerwith Prudential Financial, Inc, a company whose principal place of business isin the United States of America. Forward-Looking Statements This statement may contain certain "forward-looking statements" with respect tocertain of Prudential's plans and its current goals and expectations relating toits 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. Bytheir nature, all forward-looking statements involve risk and uncertaintybecause they relate to future events and circumstances which are beyondPrudential's control including among other things, UK domestic and globaleconomic and business conditions, market related risks such as fluctuations ininterest rates and exchange rates, and the performance of financial marketsgenerally; the policies and actions of regulatory authorities, the impact ofcompetition, inflation, and deflation; experience in particular with regard tomortality and morbidity trends, lapse rates and policy renewal rates; thetiming, impact and other uncertainties of future acquisitions or combinationswithin relevant industries; and the impact of changes in capital, solvency oraccounting standards, and tax and other legislation and regulations in thejurisdictions in which Prudential and its affiliates operate. This may forexample result in changes to assumptions used for determining results ofoperations or re-estimations of reserves for future policy benefits. As aresult, Prudential's actual future financial condition, performance and resultsmay differ materially from the plans, goals, and expectations set forth inPrudential's forward-looking statements. Prudential undertakes no obligation toupdate the forward-looking statements contained in this statement or any otherforward-looking statements it may make. PRUDENTIAL PLC 2007 UNAUDITED INTERIM RESULTS RESULTS SUMMARY European Embedded Value (EEV) Basis Results* Half Year Half Year Full Year 2007 2006 2006 £m £m £mUK Insurance Operations 462 336 686M&G 140 100 204UK Operations 602 436 890US Operations 351 350 718Asian Operations 520 374 864Other Income and Expenditure (147) (141) (298)UK restructuring costs 0 (12) (41)Operating profit from continuing operations based on longer-term investment 1,326 1,007 2,133returns*Short-term fluctuations in investment returns 241 73 738Mark to market value movements on core borrowings 113 168 85Shareholders' share of actuarial gains and losses on defined benefit pension 125 246 207schemesEffect of changes in economic assumptions and time value of cost of options 275 (20) 59and guaranteesProfit from continuing operations before tax 2,080 1,474 3,222 Operating earnings per share from continuing operations after related tax 39.4p 29.3p 62.1pand minority interests*Basic earnings per share 72.8p 43.8p 91.7pShareholders' equity, excluding minority interests £13.4bn £10.9bn £11.9bn International Financial Reporting Standards (IFRS) Basis Results* Half Year Half Year Full Year 2007 2006 2006Statutory IFRS basis resultsProfit after tax attributable to equity holders of the Company £715m £449m £874mBasic earnings per share 29.3p 18.7p 36.2pShareholders' equity, excluding minority interests £5.9bn £5.0bn £5.5bn Half Year Half Year Full Year 2007 2006 2006 Supplementary IFRS basis information Operating profit from continuing operations based on longer-term investment £601m £498m £1,050mreturns*Operating earnings per share from continuing operations after related tax 16.3p 14.0p 30.9pand minority interests* Half Year Half Year Full Year 2007 2006 2006Dividends per share declared and paid in reporting period 11.72p 11.02p 16.44pDividends per share relating to reporting period 5.70p 5.42p 17.14pFunds under management £256bn £238bn £251bn * Basis of preparation Results bases The EEV basis results have been prepared in accordance with the EuropeanEmbedded Value Principles issued by the CFO Forum of European InsuranceCompanies in May 2004. The basis of preparation of the statutory IFRS basisresults and supplementary IFRS basis information is consistent with that appliedfor the 2006 full year results and financial statements. Operating profit based on longer-term investment returns Consistent with previous reporting practice, the Group analyses its EEV basisresults and provides supplementary analysis of IFRS profit before taxattributable to shareholders, so as to distinguish operating profit based onlonger-term investment returns from other constituent elements of total profit.On both the EEV and IFRS bases, operating earnings per share are calculatedusing operating profits from continuing operations based on longer-terminvestment returns, after tax and minority interests. These profits excludeshort-term fluctuations in investment returns and the shareholders' share ofactuarial gains and losses on defined benefit pension schemes. Under the EEVbasis, where additional profit and loss effects arise, operating profit based onlonger-term investment returns also excludes the mark to market value movementson core borrowings and the effect of changes in economic assumptions and changesin the time value of cost of options and guarantees arising from changes ineconomic factors. After adjusting for related tax and minority interests, theamounts for these items are included in the calculation of basic earnings pershare. For half year 2007, the EEV basis operating profit from continuing operationsbased on longer-term investment returns before tax of £1,326m includes a creditof £92m that arises from including the benefits, grossed up for notional tax, ofaltered corporate tax rates for the UK, Singapore and China. Further details areexplained in note 7 to the EEV basis supplementary information. Discontinued operations The results for continuing operations shown above and throughout thisannouncement exclude those in respect of discontinued banking operations. On 1May 2007, the Company sold Egg Banking plc. Accordingly, the presentation ofthe comparative results for half year and full year 2006 has been adjusted fromthose previously published. REVIEW OF OPERATING AND FINANCIAL RESULTS RESULTS HIGHLIGHTS Half Half Half year year year CER RER (4) 2007 2006 Change 2006 Change £m £m % £m % Annual premium equivalent (APE) sales (1) 1,334 1,196 12% 1,255 6%Present value of new business premiums (PVNBP) (1) 9,681 9,300 4% 9,761 (1%)Net investment flows 5,047 5,198 (3%) 5,304 (5%)External funds under management 63,222 50,376 26% 51,070 24%New business profit (NBP) (1) 534 476 12% 504 6%NBP Margin (% APE) (1) 40% 40% 40%NBP Margin (% PVNBP) (1) 5.5% 5.1% 5.2%EEV basis operating profit from long-term business 1,293 979 32% 1,034 25%from continuing operations (2) (3)Total EEV basis operating profit from continuing 1,326 952 39% 1,007 32%operations (3)(5)Total IFRS operating profit from continuing 601 473 27% 498 21%operations(3)(5)EEV basis shareholders' funds 13,412 10,726 25% 10,932 23%IFRS shareholders' funds 5,905 4,915 20% 5,049 17%Holding company cash flow 34 (94) 136% (94) 136% (1) The details shown include the effect of the bulk annuity transfer from theScottish Amicable Insurance Fund (SAIF) to Prudential Retirement Income Limitedin the first half of 2006, a shareholder owned subsidiary of the Group. SAIF isa closed ring-fenced sub-fund of the PAC long-term fund established by a courtapproved scheme of arrangement in September 1997, whose results are solely forthe benefit of SAIF policyholders. (2) Long-term business profits after deducting Asia development expenses andbefore restructuring costs. (3) Based on longer term investment returns from continuing operations, asexplained in the basis of preparation section shown below. (4) Reported exchange rate (RER). (5) The restructuring costs and operating loss for Egg for 2006 and the periodof ownership in 2007, together with the profit on disposal, are included withindiscontinued operations In the Operating and Financial Review (OFR), year-on-year comparisons offinancial performance are on a constant exchange rate (CER) basis, unlessotherwise stated. Impact of currency movements Prudential has a diverse international mix of businesses with a significantproportion of its profit generated outside the UK. In the first half of 2007,64% of the Group's total EEV operating profit came from outside the UK. Inpreparing the Group's consolidated accounts, results of overseas operations areconverted at rates of exchange based on the average of the year to date, whilstshareholders' funds are converted at period-end rates of exchange. Changes in exchange rates from year to year have an impact on the Group'sresults when these are converted into pounds sterling for reporting purposes.In some cases, these exchange rate fluctuations can have a significant effect onreported results. Consequently, the Board has for a number of years reviewed and reported theGroup's international performance on a CER basis. This basis eliminates theimpact from exchange translation. In the Operating and Financial Review, period-on-period comparisons of financialperformance are on a CER basis, unless otherwise stated. Basis of preparation of results The European Union (EU) requires that all listed European groups prepare theirfinancial statements in accordance with EU approved IFRS. Since 1 January 2005,Prudential has been reporting its primary results on an IFRS basis and 2007represents the third year in which the Group's financial statements have beenprepared under IFRS. In addition, as a signatory to the European Chief Financial Officers' (CFO)Forum's EEV Principles, Prudential has also been reporting supplementary resultson an EEV basis for the Group's long-term business since 2005. These results arecombined with the IFRS basis results of the Group's other businesses to providea supplementary operating profit under EEV. Reference to operating profitrelates to profit based on long-term investment returns. On both the EEV andIFRS bases, operating profits from continuing operations based on longer-terminvestment returns exclude short-term fluctuations in investment returns andshareholders' share of actuarial gains and losses on defined benefit pensionschemes. Under the EEV basis, where additional profit and loss effects arise,operating profits based on longer-term investment returns also exclude the markto market value movement on core borrowings and the effect of changes ineconomic assumptions and changes in the time value of the cost of options andguarantees arising from changes in economic factors. In broad terms, IFRS profits for long-term business contracts reflect theaggregate of statutory transfers from with-profits funds and profits on atraditional accounting basis for other long-term business. Although thestatutory transfers from with-profits funds are closely aligned with cash flowgeneration, the pattern of IFRS profits over time from shareholder-backedlong-term businesses will generally differ from the cash flow pattern. Over thelife of a contract, however, aggregate IFRS profits will be the same asaggregate cash flow. Life insurance products are, by their nature, long term and the profit on thisbusiness is generated over a significant number of years. Accounting under IFRSdoes not, in Prudential's opinion, properly reflect the inherent value of thesefuture profit streams. Prudential believes that embedded value reporting provides investors with abetter measure of underlying profitability of the Group's long-term businessesand is a valuable supplement to statutory accounts. Sales and Funds under Management Prudential delivered overall sales growth during the first half of 2007 withtotal new insurance sales up 12 per cent from the first six months of 2006 to£1.3 billion on the annual premium equivalent (APE) basis. At reported exchangerates (RER), APE sales were up 6 per cent on the same period in 2006. This isequivalent to insurance sales of £9.7 billion on a present value of new businesspremium basis ("PVNBP"), an increase of 4 per cent on 2006 at CER. Total gross investment sales were £25 billion, up 55% per cent on the first halfof 2006 at CER. Net investment sales of £5 billion were down 3% from netinvestment sales in 2006 at CER. Total external funds under management increased by 10 per cent at RER from £57.2billion at 31 December 2006, to £63.2 billion at 30 June 2007, reflecting netinvestment flows of £5 billion and net market and other movements of positive £1billion. At 30 June 2007, total funds under management were £256 billion, an increase of2 per cent from 2006 year end at RER. EEV basis operating profit from continuing operations Half Half Half year year year RER CEREEV basis operating profit from continuing 2007 2006 Change 2006 Changeoperations £m £m % £m %Insurance business: UK 462 336 38% 336 38% US 344 316 9% 346 (1%) Asia 493 334 48% 359 37%Long-term business profit 1,299 986 32% 1,041 25%Asia development expenses (6) (7) 14% (7) 14%Fund management business: M&G 140 100 40% 100 40% US broker-dealer and fund management 9 7 29% 8 13% Curian (2) (3) 33% (4) 50% Asia fund management 33 20 65% 22 50% 180 124 45% 126 43% Other income and expenditure (147) (139) (6%) (141) (4%)Total EEV basis operating profit from continuing operations 1,326 964 38% 1,019 30%Restructuring costs 0 (12) 100% (12) 100%Total EEV basis operating profit from continuing 1,326 952 39% 1,007 32%operations after restructuring costs Total EEV basis operating profit from continuing operations based on longer-terminvestment returns was £1,326 million, up 39 per cent from the first half of2006 at CER. At RER, the result was up 32 per cent. This result reflectsprofitable growth in the insurance and funds management businesses, and thebenefit of positive operating assumption changes. Prudential's insurance businesses achieved significant growth, both in terms ofNBP and in-force profit, resulting in a 32 per cent increase in long termbusiness profit over the first half of 2006 at CER. In the first six months of 2007, the Group generated record NBP from insurancebusiness of £534 million, which was 12 per cent above the same period in 2006 atCER, driven by strong sales momentum in the US and Asia, achieved withoutcompromising margins. At RER, NBP was up 6 per cent. The average Group NBPmargin was 40 per cent (2006 H1: 40 per cent) on an APE basis and 5.5 per cent(2006 H1: 5.1 per cent at CER) on a PVNBP basis. In-force profit increased 50per cent on the first half of 2006 at CER to £765 million. In aggregate, netassumption changes were £95 million positive of which £92 million relates tolower tax rates in the UK and Asia. Experience variances and other items were£53 million positive. At RER, in-force profit was up 42 per cent. Asia's development expenses (excluding the regional head office expenses) were£6 million, (2006 H1: £7 million at CER). Results from the fund management business were £180 million (2006 H1: £124million), up 45 per cent on the first half of 2006 at CER. Other income and expenditure totalled a net expense of £147 million comparedwith £141 million in the first half of 2006 at RER. This result includes £17million of costs for the Asia head office (2006 H1: £19 million at RER); £50million for the Group head office costs (2006 H1: £46 million); and net interestexpense on central borrowings and other items of negative £80 million (2006 H1:£76 million). EEV basis profit before tax and minority interests from continuing operations Half year Half year RER 2007 2006 £m £m Total EEV basis operating profit from continuing operationsafter restructuring costs 1,326 1,007Short term fluctuations in investment returns: 241 73UK 98 37US 69 55Asia 54 (34)Other 20 15Actuarial gains and losses on definedbenefit pension schemes 125 246Effect of change in economicassumptions: 253 (42)UK 281 163US (46) (141)Asia 18 (64)Effect of change in time value of costof options and guarantees: 22 22UK 15 4US 8 19Asia (1) (1)Movement in mark to market value of core borrowings: 113 168 US 5 15Other 108 153 Profit from continuing operations before tax 2,080 1,474 The following half year-on-half year comparisons are presented on a RER basis. The EEV basis result before tax and minority interests was a profit of £2,080million up 41 per cent on the first half of 2006. This reflects in part an increase in operating profit from £1,007 million in thefirst six months of 2006 to £1,326 million for the same period in 2007. The profit before tax also includes £241 million in short-term fluctuations ininvestment returns (2006 H1: £73 million), positive changes in economicassumptions of £253 million (2006 H1: negative £42 million) and the effect ofchange in time value of options and guarantees of positive £22 million (2006 H1:positive £22 million). The UK long-term business component of short-term fluctuations in investmentreturns of £97 million (2006 H1: £34 million) primarily reflects the differencebetween the actual investment return for the with-profits life fund of 5.8 percent (2006 H1: 4.2 per cent) and the long-term assumed return of 4.1 per centfor the first half of 2007. The US long-term business short-term fluctuations in investment returns of £68million include a net positive £30 million in relation to changed expectationsof future profitability on variable annuity business in force due to the actualvariable annuity investment account ('separate account') return exceeding thelong-term return reported within operating profit, offset by the impact of theassociated hedging position. It also includes a positive £38 million in respectof the difference between actual investment returns and long-term returnsincluded in operating profit primarily in respect of equity based investmentsand other items. In Asia, long-term business short-term investment fluctuations were £54million,compared to negative £34 million last year. This reflects strong equity marketperformance across the region particularly in Vietnam, Hong Kong and Singaporepartially offset by Taiwan as a result of lower investment returns. The half year 2007 shareholders' share of actuarial gains and losses on definedbenefit schemes of £125 million reflects the increase in discount rate appliedin determining the present value of projected pension payments from 5.2 per centat 31 December 2006 to 5.8 per cent at 30 June 2007, offset by a shortfall ofmarket returns over long-term assumptions due to the decrease in value ofcorporate and government bonds, which more than offset the increase in value ofequity and property asset classes. Positive economic assumption changes of £253 million in the first six months of2007 compared with negative economic assumption changes of £42 million in thesame period in 2006. Economic assumption changes in the first half of 2007comprised positive £281 million in the UK, negative £46 million in the US andpositive £18 million in Asia. In the UK, economic assumption changes of positive £281 million reflect theimpact of the increase in the future investment return assumption offset by theincrease in the risk discount rates, mainly arising from the change in UK giltrates. In the US, economic assumption changes of negative £46 million primarily reflectan increase in the risk discount rates compared to the 2006 year end followingan increase in the US 10-year Treasury rate, partially offset by an increase inthe separate account return assumption. In Asia, economic assumption changes were £18 million, due to a positive changein Hong Kong partially offset by negative effects in Malaysia and Singapore as aresult of adjusting the projected investment returns and risk discount rates inthese countries. Taiwan interest rates have increased ahead of ourassumptions. The change in the time value of cost of options and guarantees was positive £22million for the half year (2006 H1: positive £22 million), consisting of £15million, £8 million and negative £1 million for the UK, the US and Asia,respectively. The mark to market movement on core borrowings was a positive £113 million (2006H1: positive £168 million) reflecting the reduction in fair value of coreborrowings due to increases in interest rates. EEV basis profit after tax and minority interests Half year Half year RER 2007 2006 £m £m Profit from continuing operations before tax 2,080 1,474Tax (545) (387)Profit from continuing operations 1,535 1,087after tax before minority interestsDiscontinued operations (net of tax) 241 (34)Minority interests (1) (1)Profit for the period attributable to 1,775 1,052the equity holders of the Company The following half year-on-half year comparisons are presented on a RER basis. Profit for the period attributable to the equity holders of the Company was£1,775 million (2006 H1: £1,052 million). The tax charge of £545 millioncompares with a tax charge of £387 million in the first half of 2006. Minorityinterests in the Group results were £1 million (2006 H1: £1 million). The effective tax rate at an operating tax level was 28 per cent (2006 H1: 30per cent), generally reflecting expected tax rates. The effective tax rate at atotal EEV level on profits from continuing operations was 26 per cent (2006 H1:26 per cent) on a profit of £2,080 million. On 29 January 2007, Prudential announced that it had entered into a bindingagreement to sell Egg Banking plc to Citi. Under the terms of the agreement,the consideration payable to the Company by Citi was £575 million in cash,subject to adjustments to reflect any change in net asset value between 31December 2006 and completion. On 1 May 2007, Prudential completed the sale. The consideration, net oftransaction expenses, was £527 million. The reduction from the £575 millionnoted above primarily reflects the post-tax loss of Egg Banking plc from 1January 2007 to the date of sale of £49 million. The profit on sale was £290million. IFRS basis operating profit from continuing operations based on longer-terminvestment returns Half Half Half year year year RER (4) CERIFRS basis operating profit based on longer-term 2007 2006 Change 2006 Changeinvestment returns £m £m % £m %Insurance business: UK 251 205 22% 205 22% US 218 203 7% 223 (2%) Asia 76 83 (8%) 88 (14%)Long-term business 545 491 11% 516 6%Asia development expenses (6) (7) (14%) (7) (14%)Fund management business: M&G 140 100 40% 100 40% US broker-dealer and fund management 9 7 29% 8 13% Curian (2) (3) 33% (4) 50% Asia fund management 33 20 65% 22 50% 180 124 45% 126 43% Other income and expenditure (118) (124) 5% (126) 6%Total IFRS basis operating profit based on longer-term 601 484 24% 509 18%investment returnsRestructuring costs 0 (11) (100%) (11) (100%)Total IFRS basis operating profit based on longer- 601 473 27% 498 21%term investment returns after restructuring costs Group operating profit before tax from continuing operations based onlonger-term investment returns on the IFRS basis after restructuring costs was£601 million, an increase of 27 per cent on the first six months of 2006 at CER.At RER, operating profit was up 21 per cent on the same period in the prioryear. Insurance business In the UK, IFRS operating profit for the long-term business increased 22 percent to £251 million in the first half of 2007. This reflected a 15 per centincrease in profits attributable to the with-profits business to £195 million,representing the continued strong investment performance of the Life Fund andits impact on terminal bonuses. In the US, IFRS operating profit for long-term business was £218 million, up 7per cent from £203 million in the first half of 2006 at CER. The US operations'results are based on US GAAP, adjusted where necessary to comply with IFRS andthe Group's basis of presenting operating profit based on longer-term investmentreturns. In determining the operating profit for US operations, longer-termreturns for fixed income securities incorporate a risk margin reserve (RMR)charge for longer-term defaults and amortisation of interest-related realisedgains and losses. The growth in the US operations' long-term IFRS operatingprofit mainly reflects increased fee income. The fee income was driven by anincrease in separate account assets held at the half year, and improved returnson these assets. Profits from the annuities spread business were broadly in linewith prior year and continue to represent the key contributor to the overallIFRS operating profit. One-off items affecting the spread-based income were £14million (2006 H1: £16 million at CER), net of DAC amortisation. Prudential Corporation Asia's IFRS operating profit for long-term business,before development expenses of £6 million, was £76 million, an 8 per centdecrease on the first half of 2006 at CER. The fall in IFRS operating profitsis due primarily to the expansion costs incurred in India to support its rapidgrowth. In the first half of 2007, India incurred losses of £17 million.Investment in India will continue throughout the remainder of 2007. The mostsignificant contribution to operating profit continues to be from theestablished markets of Singapore, Malaysia and Hong Kong which represent £65million of the total operating profit in 2007. There was a significantcontribution from Indonesia as this operation continues to build scale, and alsoTaiwan. Five life operations made IFRS operating losses: China, India and Koreawhich are relatively new businesses rapidly building scale, Thailand, which ismarginally loss making, and Japan, where Prudential continues to look foropportunities to increase the scale and profitability of its life business overthe long term. The profits and recoverability of deferred acquisition costs (DAC) in Taiwan aredependent on the rates of return earned and assumed to be earned on the assetsheld to cover liabilities and on future investment income and contract cashflows for traditional whole of life policies. No write-off of DAC was requiredin half year 2007 or 2006. At the 2006 year end it was estimated that ifinterest rates were to remain at then current levels in 2007 the premiumreserve, net of DAC, would be broadly sufficient and that if interest rates wereto remain at then current levels in 2008 then some level of write-off of DAC maybe necessary. Indicatively the possible 2008 write-off was estimated as beingin the range of £70-90 million. In the first half of 2007 bond yields increasedby 0.5 per cent. With this effect and increases in the value of business inforce in the six month period the outlook on recoverability has significantlyimproved. At 30 June 2007, if interest rates were to remain at current levelsuntil the end of 2008, the premium reserve net of DAC would be at a level suchthat the likelihood of a need for a write-off of DAC in 2008 would besignificantly reduced. The position in future remains sensitive to the abovementioned variables. Fund management business M&G's operating profit for the first half of 2007 was £140 million, an increaseof 40 per cent over the £100 million recorded for the same period in 2006, dueto strong net investment inflows and positive market conditions. The operating profit from the US broker-dealer and fund management businesseswas £9 million, a 29 per cent increase on the first half of 2006 (2006 H1: £7million at CER). Curian recorded losses of £2 million in the first half of 2007,down from £3 million for the same period in 2006, as the business continues tobuild scale. The Asian fund management operations reported an 65 per cent growth in operatingprofits to £33 million (2006 H1: £20 million) driven by strong contributionsfrom the established markets of Hong Kong and Singapore. Hong Kong andSingapore account for 49 per cent of profit compared to 60 per cent a year ago,as newer operations such as India, Japan and Korea begin to make meaningfulcontributions. IFRS basis profit before tax from continuing operations Half year Half year RER 2007 2006 £m £m Operating profit from continuing operationsbased on longer-term investment returns 601 498Short-term fluctuations in investment returns 24 39Shareholders' share of actuarial 103 200gains and losses on defined benefit pension schemesProfit before tax from continuing operations 728 737 The following half year-on-half year comparisons are presented on a RER basis. Total IFRS basis profits before tax and minority interests were £728 million,compared with £737 million for the first half of 2006. The decrease reflects: anincrease in operating profit of £103 million; a decrease in short-termfluctuations in investment returns, down £15 million from the first half of2006; and a £97 million negative movement from the prior year in actuarial gainsand losses attributable to shareholder-backed operations in respect of theGroup's defined benefit pension schemes. IFRS basis profit after tax Half year Half year RER 2007 2006 £m £m Profit before tax from continuing operations 728 737Tax (253) (253)Profit from continuing operationsafter tax before minority interests 475 484Discontinued operations (net of tax) 241 (34)Minority interests (1) (1)Profit for the period attributable toequity holders of the Company 715 449 The following half year-on-half year comparisons are presented on a RER basis. Profit after tax and minority interests was £715 million compared with £449million in the first half of 2006. The effective rate of tax on operatingprofits from continuing operations, based on longer-term investment returns, was34 per cent (2006 H1: 33 per cent). The effective rate of tax at the total IFRSprofit level for continuing operations was 35 per cent (2006 H1: 34 per cent).The effective tax rates in 2007 were broadly in line with those expected exceptfor some Asian operations where there is a restriction on the ability torecognise deferred tax assets on regulatory basis losses. On 29 January 2007, Prudential announced that it had entered into a bindingagreement to sell Egg Banking plc to Citi. Under the terms of the agreement,the consideration payable to the Company by Citi was £575 million in cash,subject to adjustments to reflect any change in net asset value between 31December 2006 and completion. On 1 May 2007, Prudential completed the sale. The consideration, net oftransaction expenses, was £527 million. The reduction from the £575 millionnoted above primarily reflects the post-tax loss of Egg Banking plc from 1January 2007 to the date of sale of £49 million. The profit on sale was £290million. Earnings per share The following half year-on-half year comparisons are presented on an RER basis. Earnings per share for the first half of 2007, based on EEV basis operatingprofit from continuing operations after tax and related minority interests, were39.4 pence, compared with 29.3 pence over the same period in 2006. Earnings per share, based on IFRS operating profit from continuing operationsafter tax and related minority interests, were 16.3 pence, compared with 14.0pence for the 2006 half year. Basic earnings per share, based on total EEV basis profit after minorityinterests, were 72.8 pence, compared with 43.8 pence for the 2006 half year. Basic earnings per share, based on IFRS profit after minority interests, were29.3 pence, compared with 18.7 pence for the 2006 half year.. Dividend per share The Board will focus on delivering a growing dividend, which will continue to bedetermined after taking into account the Group's financial flexibility andopportunities to invest in areas of the business offering attractive returns.The Board believes that in the medium term a dividend cover of around two timesis appropriate. The directors recommend an interim dividend for 2007 of 5.70 pence per sharepayable on 24 September 2007 to shareholders on the register at the close ofbusiness on 17 August 2007, an increase of 5 per cent. The interim dividend for2006 was 5.42 pence per share. Shareholders' funds On the EEV basis, which recognises the shareholders' interest in long-termbusinesses, shareholders' funds at 30 June 2007 were £13.4 billion, an increaseof £1.5 billion from the 2006 year-end level of £11.9 billion at RER. This 13per cent increase primarily reflects: total EEV basis operating profit of £1,326million; a £241 million favourable movement in short-term fluctuations ininvestment returns; a £275 million positive movement due to changes in economicassumptions and in time value of options and guarantees; a positive movement onthe mark to market of core debt of £113 million; a positive movement in theactuarial gains on the defined benefit pension schemes of £125 million; £241million from discontinued operations and £117 million from the issue of newshare capital. These were offset by: a tax charge of £545 million; the negativeimpact of £65 million for foreign exchange movements, and dividend payments of£288 million made to shareholders. The shareholders' funds at 30 June 2007 of £13.4 billion comprise £6.3 billionfor the UK long-term business operations, £3.5 billion for the US long-termbusiness operations, £2.9 billion for the Asian long-term business operationsand £0.7 billion for other operations. Within the embedded value for the Asian long-term business of £2.9 billion, theestablished markets of Hong Kong, Singapore and Malaysia account for £2.2billion of the embedded value, with Korea (£233 million) and Vietnam (£222million) making further substantial contributions. Prudential's other markets,excluding Taiwan, in aggregate account for £397 million of the embedded value.Taiwan has a negative embedded value of £157 million. This is an improvementfrom the reported negative £216 million at the 2006 year end. The current mix of new business in Taiwan is weighted heavily towardsunit-linked and protection products, representing 82 per cent and 8 per cent ofnew business APE in the first half of 2007, respectively. As a result, interestrates have little effect on new business profitability. However, the in-forcebook in Taiwan, predominantly made up of whole of life policies, has an embeddedvalue that is sensitive to interest rate changes. A one per cent decrease ininterest rates, along with consequential changes to assumed investment returnsfor all asset classes, market values of fixed interest assets and risk discountrates, would result in a £134 million decrease in Taiwan's embedded value. Asimilar one per cent positive shift in interest rates would increase embeddedvalue by £83 million. If it had been assumed in preparing the half year 2007results that interest rates remained at the current level of 2.5 per cent until31 December 2008 and the progression period in bond yields was delayed by a yearso as to end on 31 December 2014, there would have been a reduction in theTaiwan embedded value of £90m. Sensitivity of the embedded value to interestrate changes varies considerably across the region. In aggregate, a one per centdecrease in interest rates, along with all consequential changes noted above,would result in a 3 per cent decrease to Asia's embedded value. Statutory IFRS basis shareholders' funds at 30 June 2007 were £5.9 billion. Thiscompares with £5.5 billion at 31 December 2006 at RER. The increase primarilyreflects: profit after tax and minority interests of £715 million and new sharecapital of £117 million, offset by the impact of negative foreign exchangemovements of £21 million, dividend payments to shareholders of £288 million, andthe impact of unrealised holding losses on available for sale investments of£113 million. Holding company cash flow Half year Half year 2007 2006 £m £mCash remitted by business units: UK life fund transfer 261 217 US 0 68 Asia 86 66 M&G 75 38Total cash remitted to Group 422 389Net interest paid (76) (90)Dividends paid (286) (267)Scrip dividends and share options 119 18Cash remittances after interest and dividends 179 50Tax received 24 88Corporate activities (30) (24)Cash flow before investment in businesses 173 114Capital invested in business units: UK (69) (147) Asia (70) (61)Total capital invested in business units (139) (208)Increase/(Decrease) in cash 34 (94)Egg sale net proceeds 527 -Total holding company cash flow 561 (94) The table above shows the Group holding company cash flow. Prudential believesthat this format gives a clearer presentation of the use of the Group'sresources than the format of the statement required by IFRS. The Group holding company received £422 million in cash remittances frombusiness units in the first half of 2007 (2006 H1: £389 million) comprising theshareholders' statutory life fund transfer of £261 million from the UK business,and remittances of £86 million and £75 million from Asia and M&G respectively.A remittance of $230 million is expected from the US operations in the secondhalf of 2007. There was a strong scrip dividend take-up of £117 million, in respect of the2006 final dividend. After net dividends and interest paid, there was a cashinflow of £179 million (2006 H1: £50 million). During the first six months of 2007, the Group holding company paid £30 million(2006 H1: £24 million) in respect of corporate activities and received £24million (2006 H1: £88 million) in respect of relief on taxable losses. The Groupinvested £139 million (2006 H1: £208 million) in its business units, comprising£69 million in its UK operations and £70 million in Asia. In the first half of2007, Asia contributed a net remittance of £16 million to the Group holdingcompany cash flow. In addition, the Group received £527 million from the disposal of Egg (net ofexpenses). In aggregate this gave rise to an increase in cash of £561 million (2006 H1: £94million decrease). Excluding the Egg sale proceeds, cash increased by £34million. Depending on the mix of business written and the opportunities available, cashinvested to support the UK business in 2007 is expected to be less than in 2006,up to £160 million and with the expectation that the UK shareholder backedbusiness will become cash positive in 2010. Taking into account plans for future growth, a normalised level of scripdividend, the reducing UK capital requirement and increased remittances from theother life and asset management operations it is also expected that theoperating cash flow of the Group holding company will be positive in 2008. BUSINESS UNIT REVIEW Insurance Operations United Kingdom 1. Market review and summary of strategy During the first half of 2007 Prudential UK pursued its retirement-led strategy,focusing on profitable opportunities in its chosen product areas anddistribution channels, and declining to write low margin or low persistencybusiness. The success of this strategy is reflected in the financial performancefor the first six months of the year with APE Retail sales increasing by 10 percent at a new business margin of 32 per cent. The business is continuing to target capital efficient returns through selectiveparticipation in the Retail Retirement and Wholesale markets while deliveringembedded value through its Mature Life and Pensions business. The UK continues to be an attractive market for long-term savings, fuelled by anageing demographic profile and increased life expectancy. The proportion of theUK's population aged 65 and over is expected to grow by some 2 million over thenext 10 years, while the average life expectancy of a 65 year old man hasimproved by 3.5 years to 82 compared with a 65 year old man retiring 20 yearsago. In addition, much of the nation's wealth is concentrated in older segmentsof the population, with many having benefited from rising property prices overthe last 30 years. However, the majority still have insufficient savings toprovide for the same standard of living during retirement as they have enjoyedwhile working. Growth in equity markets recently and simpler pension regulation following A-Dayin April 2006, have created positive conditions for growth in the Life andPensions market. Prudential's UK insurance operations are structured into three business areas:Retail Retirement, Wholesale and Mature Life and Pensions. The Retail Retirement business aims to grow a profitable and sustainablefranchise focused on retirement leadership. By building on Prudential UK'sbrand strength and core capabilities in multi-asset management and assetallocation, providing strong investment performance at lower volatility, andlongevity risk management, it is able to offer unique solutions to customers whoare saving for retirement and seeking to turn their wealth into income inretirement. Prudential UK has a significant pipeline of customers with maturing pensionsbusiness over the next 25 years from policies sold through, among otherchannels, its direct sales-force prior to 2001 and under the old ScottishAmicable brand. By providing competitive annuities to these existing customersand to new customers from financial advisers and partnership arrangements,Prudential UK has built a leading presence in the retirement income market. Itis at the forefront of the development of asset-backed retirement incomesolutions, building on the success of its with-profits annuity, which providescustomers with an income linked to potential growth from equity investment butwithout the volatility. In the first half of 2007, Prudential UK added an optionto accept pensions with protected rights and will continue to develop newsolutions in this important market. Prudential UK is also developing its capability in the Lifetime Mortgage market,for customers who want to remain in the family home while drawing additionalincome to support their retirement. In building its proposition in this market,Prudential has established a dedicated sales-force (there are currently 30 fullytrained advisers with a plan to increase this further), as well as selling thisproduct via financial advisors. The UK will continue to extend its capabilitiesin this market through further product innovation in the fourth quarter of thisyear. Prudential now has outstanding loans of over £160 million on its balancesheet and has grown its market share to 12.5 per cent at the end of the firstquarter. Prudential UK is continuing to deliver significant volume and hence operationalscale in the corporate pensions market as it also reduces the costs associatedwith the distribution and administration of this business. Business volume incorporate pensions has increasingly been delivered in recent years throughlarger scheme wins and Prudential is now more selective, choosing not to writelower margin business. Within retirement savings, Prudential is building on its market leadingpropositions. These provide access to strong investment returns with lowervolatility, by adding guarantees that help consumers, particularly thoseapproaching or at retirement, to safeguard their savings while still benefitingfrom investment growth, such as the capital guarantee offered on PruFund. The Wholesale operation, which has been in operation for over 10 years, hasaround 1,100 people years of experience and more than 400 bulk buy-outs alreadywritten, has a strong track record in the risk management of pension schemes forcorporate clients and insurers wishing to reduce or eliminate their investmentand longevity liabilities. In the first quarter of 2007, Prudential reachedagreement in principle with Equitable to acquire Equitable's book of in-forcewith-profit annuities. The transaction is expected to complete in the fourthquarter of 2007. Prudential UK will continue to compete selectively in thismarket, only writing business at prices that deliver an adequate return. The UKbusiness remains confident in the long-term outlook in the bulk and back-bookwholesale market where nearly £900 billion of assets are held in defined benefitschemes and insurers' back-book annuities. Prudential UK is continuing to deliver embedded value through its Mature Lifeand Pensions business. It has set a target to reduce per policy unit processingcosts over and above the cost reduction required to reduce costs in line withthe expected run-off of policies on these closed books of business and isevaluating the best route for achieving this which will include one or all ofinternal cost cutting, further off-shoring or out-sourcing. Prudential welcomes the Retail Distribution Review Discussion Paper, which hasrecently been published by the Financial Services Authority. This is in linewith Prudential's strategy which is focused on building strong longer-termrelationships with advisers and offering market-leading retirement solutions.Prudential has already taken significant steps to improve its distribution modelby moving some of its products to a 'Factory Gate Price' basis, where the costsfor intermediary services are separated from the costs of the product. As theadvice costs are negotiated and paid separately, this method of pricing has alsobeen termed Customer Agreed Remuneration. Factory gate pricing delivers morecapital efficient volume through intermediary partners as the commission costsare no longer funded at outset from shareholder capital. Prudential hasre-aligned its account managers to provide an even more focused service acrossaccounts seeking to build deeper relationships with those distributors who aremoving to "wealth adviser" models. More than half of Prudential UK's top 100advisors have changed compared to last year, reflecting our focus on switchingto value-creating accounts. Through PruHealth, its joint venture with Discovery, the leading South Africanhealth insurer, Prudential UK is building a health insurance business whichrewards those customers who lead healthier lives through the 'Vitality' pointssystem. PruHealth is on track to meet its target of becoming a significantplayer in the private healthcare market with insured lives of more than 117,000up 31 per cent on the 2006 year-end position. The joint venture is being expanded to include Prudential UK's protectionproduct, expanding 'Vitality' across both health and life insurance productslater in 2007. 2. Financial results and performance Half Half Year Half Year Year CER 2006 RER 2006 2007 Change Change £m £m £m SalesAPE retail sales 358 325 10% 325 10%APE total sales 363 484 (25%) 484 (25%)PVNBP 2,905 4,224 (31%) 4,224 (31%)NBP retail 115 95 21% 95 21%NBP total 108 138 (22%) 138 (22%)NBP retail margin (% APE) 32% 29% 29%NBP total margin (% APE) 30% 29% 29%Operating ProfitsTotal EEV basis operating profit * 462 336 38% 336 38%Total IFRS operating profit * 251 205 22% 205 22% * Based on longer-term investment returns Prudential UK delivered a strong performance in the first half of 2007including:# • Retail sales were up 10 per cent on the first half of 2006 • New business Retail profits increased 21 per cent on the first half of 2006 • Retail new business margins were strong at 32 per cent • The Wholesale business announced an agreement in principle to acquire Equitable's portfolio of in-force with-profits annuities • In-force profits increased 79 per cent on first half of 2006 • IFRS profits increase by 22 per cent on first half of 2006 • The initial phase of the cost reduction programme to deliver annual savings of £115 million is on schedule to be achieved by the end of 2007. An update on the second phase (£80 million) will be given in the fourth quarter of 2007 Retail APE sales of £358 million were 10 per cent higher than during the sameperiod in 2006. This growth was driven by strong performance in individualannuities, corporate pensions and with-profits bonds. Total UK APE sales in thefirst half were £363 million, a decrease of 25 per cent year-on-year. However,the first half of 2006 included two large back book annuity deals totalling £128million and also £31 million of credit life sales under a contract with LloydsTSB that was not renewed in 2007. On a PVNBP basis, new business sales were £2.9billion compared with £4.2 billion in the same period last year. Individual annuities continued the strong performance experienced in the firstquarter with total sales for the half-year of £140 million, up 23 per cent onthe same period last year. This performance was driven by the strength ofPrudential's internal vestings (up 11 per cent) with sales from its directchannel and partnership deals with Zurich, Pearl and Royal London gatheringmomentum (up 59 per cent compared with the same period in 2006). Prudential andSave & Prosper signed an agreement in 2006 under which Save & Prosper will offerPrudential's conventional annuity product to customers with maturing Save &Prosper pensions. The 5-year agreement went live on 18 June 2007. The with-profits annuities market continues to grow with increased consumerrecognition for the need to protect retirement income against inflation duringincreasingly longer retirement periods. Prudential UK remains the leading playerin this market with APE sales 51 per cent higher than for the same period lastyear. This was aided by strong relationships with Openwork. The new enhancementsPrudential UK made to the product in the first quarter (adding the facility toaccept Protected Rights monies, which was a first in the with-profit annuitymarket) has been well received and has delivered more than expected. The UK business continues to increase its presence in the lifetime mortgagemarket. Illustrations and applications continued to increase with £67 million ofnew loans advanced to customers in the first 6 months of 2007. This represents a123 per cent increase on the £30 million advanced for the same period in 2006. With-profits bond sales continue to increase on the back of continued stronginvestment performance. At the half-year, APE sales of £17 million were 47 percent higher than during the same period in 2006. The overall with-profits bondmarket has been steadily increasing since the fourth quarter of 2005 (Q4 2005sales through financial advisors of £6.7 million compared with £15.7 million APEin Q1 2007) and Prudential UK continues to write approximately half ofwith-profits bonds sold through financial advisors in the UK. Approximately 45per cent of sales have been made with a capital guarantee, for which anadditional charge is made. APE sales of corporate pensions grew to £124 million, a rise of 28 per cent onthe £97 million written in the first half of 2006. Sales of theshareholder-backed defined contribution proposition grew to £40 million, whilesales of the legacy DC and AVCs grew 16 per cent to £71 million as AVC salescontinued to flourish on the back of A-day. Prudential continues to be a marketleader in AVCs, supporting major customers through its comprehensive salescapability existing in the work-place. Corporate pensions also continue to be animportant source for Prudential's future annuity business. PruHealth has continued to make encouraging progress during the first half of2007. Gross written premiums have increased by 91 per cent to £32 millioncompared with the comparative period last year. PruHealth has extended itsdistribution footprint through a partnership with Boots the Chemist, and quotesand applications under this agreement have been building steadily during thesecond quarter. Importantly, PruHealth's lapse and claim ratios are in line withexpectations. Retail new business profits increased by 21 per cent to £115 million. Retailperformance was driven by increased sales of high margin business, predominatelyof individual annuity business, and the cessation of writing low marginbusiness. This has led to overall margins increasing to 30 per cent, with aRetail margin of 32 per cent being achieved. Total new business profits for thefirst half of £108 million were 22 per cent below the level achieved over thesame period in 2006. However 2006 included significant profits relating to theRoyal London and SAIF back-book transactions, and Lloyds TSB credit lifeprofits. A 15 per cent average IRR was achieved on new business written for the firsthalf of 2007. EEV basis operating profit based on longer-term investment returns of £462million, were 38 per cent up on the same period last year. In-force profits were79 per cent higher than 2006, primarily due to the increase in profits arisingfrom the unwind of the discount from the in-force book and the effect of thechange in the UK corporation tax rate. The unwind of the discount increase of£59 million reflects a higher opening embedded value and increases in riskdiscount rates. Changes to operating assumptions of £68 million included a benefit of £67million being the effect of a reduction in the corporation tax rate from 30 percent to 28 per cent. Prudential UK continues to progress its cost saving programme and by the end of2007 the initiatives will be in place to deliver the initial £115 million ofannual savings (of the total of £195 million target), which is already reflectedin the current assumptions. Prudential UK continues to actively manage theretention of the in-force book. Following the strengthening of persistencyassumptions in 2005, overall experience continues to be in line withassumptions. Other charges of £30 million were below those incurred in the same period of2006. These are mainly costs associated with new product and distributiondevelopment and certain costs associated with complying with regulatory change. IFRS profits of £251 million increased by 22 per cent. This reflected a 15 percent increase in profits attributable to the with-profits business, to £195million, representing the continued strong investment performance of the LifeFund and its impact on terminal bonuses. Financial Strength of the UK Long Term Fund The fund is very strong. On a realistic basis, with liabilities recorded on amarket consistent basis, the inherited estate of the fund is estimated to bevalued at around £9.5 billion before a deduction for the risk capital margin. In the first half of the year, the performance of the Prudential's with-profitslife fund has benefited from its exposure to strongly performing equity marketsaround the world at the expense of global bond markets. The Fund returned 5.8per cent gross in the first half of the year. Recently, the decision was taken by the Fund's investment managers to partiallyhedge its exposure to credit risk. Since 2002, the Fund has taken a strategicexposure devoid of government bonds and encompassing a sizeable low investmentgrade and high yield credit component. This has proved a very successfulstrategy. Given the stretched level of credit spreads around mid-year, the decision wastaken to hedge the entirety of the Funds High Yield and a substantial proportionof its Sterling, Euro and Dollar BBB credit exposure, using highly liquid iTraxxand CDX index credit default swap (CDS) contracts. Around £4 billion nominalcontracts were transacted in the second half of June in respect of thePrudential and Scottish Amicable Funds. Although, given recent market events,these derivative positions are well in the money, it is the intention to holdthem for some time. The PAC long-term fund is rated AA+ (stable outlook) by Standard & Poor's, Aa1(negative outlook) by Moody's and AA+ (stable outlook) by Fitch Ratings. 3. Outlook and forthcoming objectives As announced in the first quarter of 2007, an agreement in principle was reachedfor Prudential to acquire Equitable's portfolio of in-force with-profitannuities, a book of 62,000 policies with assets as at 31 December 2006 ofapproximately £1.7 billion. This transaction demonstrates Prudential's abilityto grow its with-profits fund to create value for both its policyholders andshareholders. This transaction, which is subject to certain conditions includinga vote among Equitable's policyholders as well as regulatory and court approval,is expected to complete in the fourth quarter at which time the sale andassociated profit will be recognised. Prudential UK has entered into an agreement with Barclays under which it will bethe preferred supplier of conventional annuity products to Barclays' retailcustomers in the UK. Prudential will establish an annuities desk within itsPruDirect distribution business through which Barclays customers can enquireabout the range of annuity options and product features that are available tothem. The agreement will take effect later in 2007 and run for five years. In addition Prudential UK has been chosen as the main provider on Thinc group'snew adviser-service, Annuity Desk. The service will allow Thinc advisers, whodo not advise on annuity business, to refer their customers' annuity needs toPruDirect. In line with our strategy of building on the core capability of asset allocationwhich has driven the exceptional investment performance for the Life Fund overrecent years, Prudential UK has launched two multi-asset funds during the firsthalf of 2007 - the Cautious Managed Growth Fund and the Managed Defensive Fund.These two new funds are available within Prudential's collectives, pension,onshore and offshore bond product ranges. As Prudential has avoided business with lower expected persistency, to increaseprofitability, unit-linked bond sales remained subdued, with Prudentialsignalling its intention to progressively withdraw from the traditional providerfunded commission arena to improve the quality of its book. A new factory gatepriced onshore bond will be available during August. Prudential has committed to a £195 million cost saving programme. Much of thiscost will be saved within Mature Life and Pensions, which encompasses productsthat are not actively marketed to customers and in long term decline. Asexplained above, plans to achieve these cost savings are being developed bothinternally and with third parties, with the expectation that significant savingswill be delivered through a decision to either outsource or offshore roles inoperations and overhead areas and simplify the systems and technology requiredto manage these policies. Together these actions will ensure that Prudentialcontinues to deliver in-force profit at least in line with current assumptions.As previously announced, the savings, net of restructuring costs, are expectedto result in a small positive assumption change on an EEV basis, estimated to bearound £60 million. A decision on the option selected to deliver the further £80million cost savings is scheduled to be made during the fourth quarter of 2007. By the end of 2007, the initiatives will be in place to deliver the initial £115million of this annual target which is already reflected in the currentassumptions. Total restructuring costs of £ 57 million have been incurred in 2006 in respectof the annual £115 million savings target (£ 34 million of the costs related toshareholders on an EEV basis). Further costs of approximately £18 million areexpected to be incurred by the end of 2007, bringing the total cost toapproximately £75 million. Prudential UK will continue to focus on growth opportunities to deliver capitalefficient returns and will seek to maintain an aggregate IRR of at least 14 percent on new business. United States 1. Financial results and performance Half Half Year Half Year Year CER 2006 RER 2006 2007 Change Change £m £m £m PVNBP 3,490 2,915 20% 3,209 9%APE sales 352 294 20% 323 9%NBP 144 122 18% 134 7%NBP margin (% APE) 41% 41% 41%Total EEV basis operating profit * 344 316 9% 346 (1)%Total IFRS operating profit * 218 203 7% 223 (2)% * Based on longer-term investment returns and excluding broker-dealer and fundmanagement operations and Curian Jackson, Prudential's US insurance business, provides retirement savings andincome solutions in the mass and mass-affluent segments of the US market,primarily to near and post-retirees. The United States is the largest retirementsavings market in the world, and as 78 million baby boomers born between 1946and 1964 begin to move into retirement, annual retirement distributions areexpected to increase to more than $1 trillion per year by 2012. Jackson's primary focus is manufacturing high-margin, capital-efficientproducts, such as variable annuities (VA), and marketing these products toadvice-based channels through its relationship-based distribution model. Indeveloping new product offerings, Jackson leverages its low-cost, flexibletechnology platform to manufacture innovative, customisable products that can bebrought to the market quickly. Jackson had a strong first half of the year delivering APE sales of £352million, up 20 per cent on last year with strong new business profit margins at41 per cent. PVNBP sales were £3.5 billion. Jackson again delivered record variable annuity sales of £2.2 billion during thefirst half of 2007, up 31 per cent on last year and, in the first quarter of2007, recorded its twelfth consecutive quarter of variable annuity market sharegrowth. This reflects its distinct competitive advantages of an innovativeproduct offering, a relationship-driven distribution model, award-winningservice as well as an efficient and flexible technology platform. Jackson's variable annuity sales result was achieved in a market that grew 6 percent year-on-year through the first quarter of 2007. Jackson increased itsvariable annuity market share to 5.1 per cent as at the end of the first quarterof 2007, up from 4.6 per cent at the end of 2006, and maintained its ranking of12th in total variable annuity sales. In the independent broker-dealerdistribution channel, Jackson's variable annuity sales during the first quarterof 2007 increased 32 per cent over the same period in 2006, while industry salesgrew 16 per cent. Jackson maintained its number 2 ranking in the channel at theend of March 2007 and increased its market share to 11.7 per cent from 10.8 percent at year end 2006. Innovation in product design and speed to market continue to be key drivers ofJackson's competitiveness. In April, Jackson added a number of features to itsvariable annuity key offering: three new guaranteed minimum withdrawal benefits(GMWBs), a new guaranteed minimum accumulation benefit (GMAB), and several newportfolio investment options. In the first quarter of 2007, Jackson continued its track record of productinnovation by launching a set of retail mutual funds for distribution byexisting wholesalers. Jackson's new mutual funds are marketed as an additionaloption for financial advisors selling variable annuity products. At the 2007 half year, Jackson had £39.8 billion in US GAAP assets, an increaseof £2.7 billion at CER compared to 2006 year end and up from £35.2 billion 12months ago. Total assets include £13.6 billion in the separate accounts thatback the variable portion of variable life and annuity contracts, an increase of£2.5 billion compared to the 2006 year-end and up from £8.8 billion 12 monthsago, further diversifying Jackson's earnings towards fee-based income. At 30June 2007, Jackson's investment portfolio of £23.3 billion included asset-backedsecurities with a total of £252 million exposure to sub prime residentialmortgages, including £8 million held within collateralised debt obligation (CDO)structures. All of these securities are triple-A rated. The increased variable annuity APE sales more than offset a reduction in APEsales of fixed index annuities, which were down 19 per cent to £22 million.Fixed annuity APE sales increased 4 per cent to £29 million. Entry spreads for fixed annuities continued to be challenging during the firsthalf of the year, which limited the attractiveness of the market to Jackson. Tothe end of March 2007 the traditional deferred fixed annuity market was down 25per cent from the same point in the prior year while Jackson's market share grewfrom 2.8 per cent to 3.6 per cent over the same period. Fixed index annuity sales continued to be impacted by the uncertain regulatoryenvironment in the US, with total market sales to March 2007 down 9.5 per centfrom the prior year while Jackson's market share grew from 3.4 per cent to 3.5per cent over the same period. Institutional APE sales of £67 million, a market in which Jackson participateson an opportunistic basis, were up 14 per cent from the prior year. New business profit of £144 million was 18 per cent above the prior year,reflecting a 20 per cent increase in APE sales with margins of 41 per cent inline with the prior year figure. Total EEV basis operating profit for the US insurance operations at the halfyear 2007 was £344 million compared to £316 million in the prior year at CER.In-force EEV profits of £200 million were 3 per cent higher than prior yearprofit, primarily reflecting an increase in the unwind of the in-force businessduring the first half of 2007 resulting from a higher opening embedded value anda higher aggregate risk discount rate on the in-force business. Spread varianceof £53 million is broadly in line with that of prior year (£55 million at CER)and includes £23 million of non-recurring items (2006: £28 million at CER). Jackson IFRS operating profit was £218 million, up 7 per cent on the prior year.The driver of this growth was higher fee income from the variable annuitybusiness driven by higher separate account assets given the growth in variableannuity sales and market appreciation. While the fee-based business representsthe key driver of growth in IFRS operating profit, the in-force block ofspread-based business continues to deliver the majority of profits. Profits fromthe annuity spread-based business were broadly in line with prior year. 2. Outlook and forthcoming objectives Jackson continues to deliver profitable growth in the attractive US market andenhance its competitive advantages in the variable annuity market. With acontinued focus on product innovation, a proven relationship-based distributionmodel, award winning service and excellence in execution, Jackson is wellpositioned to take advantage of the changing demographics and resultingopportunities in the US market. Asia 1. Financial results and performance Half Half Year Half Year Year CER 2006 RER 2006 2007 Change Change £m £m £m PVNBP 3,286 2,161 52% 2,328 41%APE sales 619 418 48% 448 38%NBP 282 216 31% 232 22%NBP margin (% APE) 46% 52% 52%Total EEV basis operating profit * 493 334 48% 359 37%Total IFRS operating profit * 76 83 (8%) 88 (14%) * Based on longer-term investment returns and excluding fund managementoperations, development and Asia regional head office expenses. Prudential has increased the pace of growth in Asia delivering strong, broadbased and profitable growth from its Asian life operations through a combinationof freshly invigorated multi-channel distribution, innovative product design andinsightful marketing. Average new business growth accelerated to 48 per cent, up on the first half of2006 on an APE basis at £619 million and this boosted the five year compoundannual growth rate (CAGR) to 29 per cent. The second quarter included the impactof an exceptionally successful retirement campaign in Taiwan. This is notexpected to generate the same level of growth over the full year. Average newbusiness profit margin on APE at 46 per cent compares to 52 per cent for thesame period last year with the change being principally driven by a shift ingeographic mix accounting for 4 per cent of the change and product mix theremaining 2 per cent. Profit margin for the full year is expected to remain ator around this level. The proportion of linked business remains high at 72 percent and, as has been the case in the past, this has been unaffected by theequity market fluctuations seen earlier on this year. In-force EEV profits at £211 million are increasing steadily with therealisation of value inherent in the business; operating variances remain small,but the first half of 2007 saw positive assumption changes of £34 millionprimarily following corporation tax changes in Singapore and China. On the IFRSbasis operating profits for the half year of £76 million are down 8 per cent onthe first half 2006, due to increased losses in India and to a lesser extentChina, as Prudential continues to invest in building the branch networks,offsetting profits from the more established operations including a particularlystrong result from Taiwan. Korea continues to record IFRS losses as a result ofnew business strain. Continuing the trend seen in 2006, Prudential received anet remittance of £16 million capital in the first half of 2007 from Asia afterincluding injections totalling £40 million into China, India and Korea. A key driver of the new business growth in the first half was the launch of anew variable annuity product and the very successful launch of the 'What's yournumber?' retirement planning initiative in Taiwan, replicating the success ofthis initiative in Hong Kong and Korea. New business APE for Taiwan in thesecond quarter was exceptional and 246 per cent higher than the same period lastyear. New business volumes are expected to revert to more normal levels duringthe second half of 2007. The new business profit margin on the VA products islower than regular unit linked business and, together with the launchincentives, this has lowered the average margin from 52 per cent for the firsthalf last year to 42 per cent. Prudential's Indonesian life business continues to maintain its robust growthwith a 57 per cent increase in first half new business. Since 2002 this businesshas been growing at a CAGR of 54 per cent. With APE of £47 million for the halfyear the operation is becoming a material contributor to total new business. Thebusiness now has 40,000 agents and is currently growing this base at around anet 1,000 per month. The life insurance market in Indonesia is still very muchin its infancy and this business has considerable long term potential. Thisbusiness made an IFRS profit during the first half and remitted £11 million ofsurplus capital. In China, growth remains on track at 57 per cent with APE of £22 million,although agency recruitment is currently challenging, particularly in Guangzhouand Beijing. China is also a recipient of capital from the Group to supportgrowth and geographic expansion. China's new business profit margin in the firsthalf of 2007 decreased by two percentage points to 44 per cent compared to 46per cent in 2006 due to a higher proportion of unit-linked business. The life joint venture with ICICI in India continues to grow apace with newbusiness APE for the first half 2007 of £83 million for Prudential's 26 per centstake, up 54 per cent compared to the same period in 2006, with the number ofbranches now 583 compared to 256 this time last year. Agent numbers havesimilarly increased and there are now over 244,000 agents across the country.The CAGR for this business over the last five years has been 107 per cent and itnow has 3.4 million customers. New business profit margins in India remain thelowest in the region and averaged 20 per cent for the first half 2007. This paceof growth is capital intensive and the lower margin products means moreshareholder support is required than in other markets. In the first half of 2007India incurred IFRS operating losses of £17 million. Investment in India willcontinue throughout the remainder of 2007. In Hong Kong, despite this market being deemed mature and competitive, newbusiness growth continues to accelerate, up 45 per cent on the same period lastyear. This is in part driven by successful marketing campaigns with thecontinuation of 'What's your number?' and the 'Double Treasure Income Plan'bancassurance promotion with Standard Chartered Bank (SCB). Average new businessmargins remain satisfactory at 62 per cent, down from 67 per cent in 2006 due toa higher proportion of unit-linked business as a result of the 'What's YourNumber?' retirement campaign. IFRS profits were in line with 2006 reflectinghigher new business strain from a higher proportion of linked business. Singapore's first half new business growth in 2007 on an APE basis was 27 percent. Two new pilot health products were successfully launched in Singapore inMay as part of Prudential's regional initiative in this area and so far 15,000proposals have been received. Korea had a slower first half in 2007 compared to previous years with newbusiness growth at a modest 18 per cent principally due to the first quarterwhere, as previously reported, there were some market related issues aroundunit-linked products, increased competition in the general agent channel andlower agent recruitment. During the second quarter, the business improvedstrongly, being up 31 per cent on the same quarter last year. A new distributionagreement with Korea Bank got underway in the second quarter. New businessprofit margins in Korea are relatively low and were 33 per cent compared to 38per cent at the same time last year as a result of product mix changes. Korea isa recipient of capital injections to fund its growth. Malaysia grew at 10 per cent for the first half of 2007, however seniormanagement remain confident the business will continue to accelerate during thesecond half following a second quarter that was up 25 per cent on the firstquarter. Japan Life reported new business APE of £16 million, up around 5 times the halfyear 2006 level. New business profit margins in Japan are currently negative asthe expense base remains high relative to the current scale of the business. Aspreviously reported, Prudential continues to look for opportunities to increasethe scale and profitability of its Japanese life business over the long term. Prudential's other markets of the Philippines, Thailand and Vietnam collectivelygrew by 29 per cent with some encouraging signs of growth in Vietnam up 6 percent after several years of decline and strong growth in Thailand at 78 per centwith the success of the call centre. In summary, Prudential continues its excellent track record of building aprofitable business in Asia. 2. Outlook and forthcoming objectives Prudential continues to deliver strong, broad based and profitable growth inAsia from its well established platform. The demographics and environment inAsia remain as compelling as ever and the business is expected to carry ongrowing at a fast pace. The objectives going ahead are to continue to focus on building agency scale,particularly in the huge markets of India, China and Indonesia, and to increaseproductivity in other markets. Prudential remains unique amongst the regionalplayers in Asia with a proven approach to partnership distribution and this willcontinue to be expanded. There is also the opportunity to deepen and strengthen relationships with theover 8.5 million customers already on the books using a disciplined andsystematic approach. Work is already underway in this area and pilot schemes arescheduled for later this year in a number of markets. The retirement opportunity is clear and Prudential has already demonstrated itsability to successfully package and promote retirement accumulation productsthrough the 'What's your number?' campaign. The next stage is to build on thiswith a retirement solution that covers not just accumulation, but also drawdownand associated protection needs. Prudential has not leveraged its strengths to building scale direct distributionas yet and this will be a priority in the future. A new regional team is beingassembled to drive this initiative Prudential will also be re-examining its approach to health products as thereare significant opportunities to create value to shareholders and customersabove and beyond what is already being done. A new regional team is developingthe approach and has already piloted initiatives in Singapore and most recentlyIndia. The business remains well on track to deliver its target of at least doubling2005 new business profits of £413m by 2009. Asset Management Global The Prudential Group's asset management businesses are contributing to the Groupin two ways. Not only do they provide value to the insurance businesses withinthe Group, but also are important profit generators in their own right, with lowcapital requirements and generating significant cash flow for the Group. The asset management businesses are well placed to capitalise on their leadingmarket positions and strong track records in investment performance to delivernet flows and profit growth as well as strategically diversifying the Group'sinvestment propositions in retail financial services (RFS) markets that areincreasingly favouring greater product transparency, greater cross-borderopportunities and more open-architecture investment platforms. Wholesale profitstreams are also growing. The Group's asset management businesses operate different models and underdifferent brands tailored to their markets and strengths, but are increasinglyworking together by managing money for each other with clear regionalspecialism, distributing each others' products and sharing knowledge andexpertise, such as credit research. Each business and its performance for the first half of 2007 is summarisedbelow. M&G 1. Financial results and performance Half Year Half Year Half Year CER Change RER Change 2007 2006 2006 £m £m £m Net investment flows 3,367 3,595 (6)% 3,595 (6)%Total IFRS operating profit 140 100 40% 100 40% M&G is Prudential's UK and European fund management business and has £168billion of funds under management, of which £119 billion relates to Prudential'slong-term business funds. M&G aims to maximise profitable growth by operatingin areas of the retail and wholesale markets where it has a leading position andcompetitive advantage, including retail fund management, institutional fixedincome, pooled life and pension funds, property and private finance. M&G is made up of three distinct and autonomous businesses - Retail, Wholesaleand Prudential Capital - each with its own strategy for the markets in which itoperates. M&G's retail strategy is to maximise the leverage of its stronginvestment performance, efficient operating platform and multi-channeldistribution in the UK, Europe and Asia. M&G's wholesale strategy is twofold:to add value to its internal clients through investment performance, liabilitymatching and investment in innovative and attractive areas of capital marketsand to utilise the skills developed primarily for internal funds to build newbusiness streams and diversify revenues. Prudential Capital managesPrudential's balance sheet for profit. M&G delivered significant profit growth during the first six months of 2007.Operating profits, which include performance related fees (PRF), increased 40per cent to £140 million compared to the same period last year. Underlyingprofits, excluding PRF, were £127 million, an increase of 40 per cent. Thiscontinues M&G's strong profit growth that has seen underlying profits increasefourfold over the past five years. Profit growth in the first half wasgenerated on the back of rising market levels, strong net inflows across the UKand international markets and improved deal flow in Prudential Capital. Firsthalf profits were boosted by £5 million of non-recurring items and M&G alsoexpects to incur a number of anticipated project costs in the second half. PRFand carried interest during the first six months was £13 million, an increase of51 per cent on last year. Strong fund performance led to record gross fund inflows of £7.5 billion, up 11per cent on the same period last year. Net fund inflows of £3.4 billion werethe second highest ever achieved in a first half, but were slightly down on lastyear largely due to reduced inflows into lower margin institutional areas suchas traditional segregated bond funds. External funds under management grew by 8per cent to £49 billion from the end of 2006 and represent over a quarter of M&G's total funds under management. In the retail marketplace, continued high demand for M&G's high alpha equity andcompetitive fixed income and property offerings led to record gross fund inflowsof £4.5 billion, up 26 per cent on the first half last year. Net fund inflowsin the first six months were £1.7 billion, equalling last year's record. Excellent retail sales momentum continued in the UK, with gross fund inflowsincreasing by 23 per cent and net inflows up 7 per cent compared with the sameperiod last year. M&G was also named Best Overall Large Group at the 2007Lipper Awards. Growth was also strong in international markets. In Europe, where M&G ismaximising the opportunity created by the continued opening of markets toforeign players, gross fund inflows increased by 15 per cent. While net fundinflows reduced by 25 per cent as a result of asset allocation shifts byEuropean investors in the wake of equity market falls in late February, sales inMay and June have been exceptionally strong. Asian markets, where M&Gdistributes funds in partnership with Prudential Corporation Asia (PCA), alsosaw significant growth with net inflows up 56 per cent in the first halfcompared to 2006. M&G's international markets now account for some 70 per centof net retail fund inflows. In its wholesale markets, M&G saw a continued shift towards higher marginproducts during the first half of 2007 and a fall in lower margin business suchas traditional segregated bond funds. As a result, total gross institutionalfund inflows fell by 6 per cent to £3.0 billion and net inflows fell 13 per centto £1.6 billion. However, gross fund inflows into higher margin products, such as leveragedloans, collateralised debt obligations (CDOs), infrastructure finance and theEpisode global macro hedge fund, more than doubled during the first six monthsof the year and represented over half of all institutional flows. Net fundinflows into these areas more than tripled compared to the same period lastyear, producing a more profitable sales mix. The first half of the year hasalso seen M&G's infrastructure fund, InfraCapital, grow substantially,completing purchases of the Isle of Wight ferry business, Red Funnel, andinvesting in Zephyr, one of the UK's largest wind farm operators. 2. Outlook and forthcoming objectives Looking ahead, M&G's priorities continue to be to deliver investmentoutperformance to its clients, extend distribution through existing channels andexploit new opportunities, and to leverage its scale and capabilities to developinnovative products for the retail and wholesale marketplaces. Asia 1. Financial results and performance Half Year Half Year Half Year CER Change RER Change 2007 2006 2006 £m £m £m Net investment flows 1,662 1,603 4% 1,709 (3%)Total IFRS operating profit 33 20 65% 22 50% The Asian asset management business continues to deliver record net inflows.Net inflows of £1.7 billion were up 4 per cent on the same period in 2006. Ofthe £1.7 billion in net inflows, £1.3 billion was in longer term equity andfixed income products and £0.4 billion was in shorter term money market funds.Third party funds under management in Asia at the half year were £14.6 billion,up 42 per cent compared to the end of the first half of 2006. The maincontributors to the growth were Japan, India, Korea and Taiwan. PCA Asset Management Korea successfully launched the China A-Share fund underthe Qualified Foreign Institutional Investor ("QFII") scheme and raised over £50million in the second quarter of 2007. Introduced in May 2002, the QFII schemeallows qualified foreign institutional investors direct participation in China'sdomestic "A" share equity and fixed income markets. Our innovative product strategy continues to deliver strong growth in netinflows for our operation in Japan. We have reached a significant milestone withour PCA India Infrastructure Equity Fund, which has now become our third POIT(Publicly Offered Investment Trust) crossing the Yen 100 billion mark (GBP 400million). This makes us one of only three foreign asset management companiesthat have attained this achievement in Japan. In Taiwan, PCA Securities Investment Trust (PSIT) had a successful launch of theAsian Infrastructure Fund, raising over £210 million. This is PSIT's thirdconsecutive fund launch that has hit the fund cap and the success of these fundlaunches is evidence that the combination of providing innovative productstogether with a sound distribution strategy is working well in Taiwan. Followingthe successful product launches, PSIT's retail FUM has grown to over £1.9billion up 68 per cent on the first half of 2006. In terms of overall domesticfund market ranking, PSIT's ranking has improved from 9th to 5th in the overallmarket. This increased the number of our funds operations in top five marketpositions from four to five as at the end of May 2007. Our fund management businesses in India (ICICI Prudential Asset Management) andSingapore (Prudential Asset Management Singapore) both won Gold Awards in theReader's Digest Trusted Brand Awards 2007. The top award being Gold for brandswhich score clearly above their competitors based on consumers' surveys. Thisachievement represents consumers' confidence in our brand and services in bothmarkets. Total funds under management as at 30 June 2007 were £32.8 billion, up 34 percent on the first half of 2006. Operating profits grew 65 per cent, compared tothe first half of 2006, to £33 million (2006 H1: £20 million) driven by strongcontributions from the established markets of Hong Kong and Singapore. HongKong and Singapore account for 49 per cent of profit compared to 60 per cent ayear ago, as newer operations such as India, Japan and Korea begin to makemeaningful contributions. 2. Outlook and forthcoming objectives Prudential remains confident that its fund management business is ideallypositioned to capitalise on the opportunities to grow this business strongly andprofitably. United States US broker dealer, fund management and Curian 1. Financial results and performance Half Year Half Year Half Year CER Change RER Change 2007 2006 2006 Funds under management (£bn) Fund Management (PPMA) 39 35 11% 38 3% Curian 1.5 1.0 50% 1.1 36% Total IFRS operating profit (£m) US Broker Dealer 5 3 67% 4 25% Fund Management (PPMA) 4 4 - 4 - Curian (2) (3) 33% (4) 50% Total 7 4 75% 4 75% PPM America (PPMA) manages assets for Prudential's US, UK and Asian affiliates.PPMA also provides investment services to other affiliated and unaffiliatedinstitutional clients including CDOs, private investment funds, institutionalaccounts and mutual funds. PPMA's strategy is focused on effectively managingexisting assets, maximising synergies with international asset managementaffiliates and leveraging investment management capabilities across thePrudential Group. PPMA also opportunistically pursues third party mandates.During the first half of 2007 PPMA raised over £0.5 billion of third party fundsunder management, with the opportunity to increase such mandates during thesecond half of the year. PPMA's IFRS operating profit in the first half of 2007 was £4 million, in linewith the prior year figure. National Planning Holdings (NPH), Jackson's independent broker-dealer network,had a strong first half to the year with profits up 67 per cent to £5 million.NPH, which is a network of four independent broker-dealers, increased productsales to £3.5 billion in the six months ending June 2007, an increase of 14 percent over the prior year. NPH also increased the number of registered advisorsin its network to 2,819 at the half year, up from 2,628 at year-end, furtherexpanding Jackson's access to independent broker-dealer distribution. Curian Capital, which offers innovative fee-based customised separately managedaccounts, recorded improved results with losses of £2 million in the first halfcompared to losses of £3 million in the first half of the prior year at CER, asit continues to build scale in assets under management. At 30 June 2007, CurianCapital had £1.5 billion of assets under management compared with £1.2 billionat 31 December 2006. 2. Outlook and forthcoming objectives PPMA expects a positive outlook for the rest of 2007, driven by currentmomentum, favourable economic and market conditions, and growth prospects. NPH expects to continue its track record of profitable growth driven by itsstrong operating model and opportunities in the US retirement market. Curian expects to continue growing its assets under management, driven byfavourable market conditions and opportunities in the US retirement market. OTHER CORPORATE INFORMATION Shareholders' borrowings and financial flexibility Core structural borrowings of shareholder-financed operations at 30 June 2007totalled £2,413 million, compared with £2,612 million at the end of 2006(excluding Egg). This decrease reflected repayment of the £150 million 9.375%guaranteed bonds, exchange translation gains of £23 million and otheradjustments of £26 million. After adjusting for holding company cash and short-term investments of £1,546million, net core structural borrowings at 30 June 2007 were £867 million. Thiscompared with £1,493 million at 31 December 2006, mainly reflecting the net cashinflow of £561 million (including £527 million net proceeds from the sale ofEgg) and exchange translation gains of £30 million. Core structural borrowings at 30 June 2007 included £1,470 million at fixedrates of interest with maturity dates ranging from 2009 to perpetuity. £841million of the core borrowings were denominated in US dollars, to hedgepartially the currency exposure arising from the Group's investment in Jackson. Prudential has in place an unlimited global commercial paper programme. At 30June 2007, commercial paper of £95 million, US$3,517 million and €212 millionhas been issued under this programme. Prudential also has in place a £5,000million medium-term note (MTN) programme. At 30 June 2007, subordinated debtoutstanding under this programme was £435 million and €520 million, and seniordebt outstanding was €65 million, US$12 million and £5 million. In addition, theholding company has access to £1,600 million committed revolving creditfacilities, provided by sixteen major international banks, and a £500 millioncommitted securities lending liquidity facility. These facilities have not beendrawn on during the first half of the year. The commercial paper programme, theMTN programme, the committed revolving credit facilities and the committedsecurities lending liquidity facility are available for general corporatepurposes and to support the liquidity needs of the parent company. The Group's insurance and asset management operations are funded centrally. TheGroup's core debt is managed to be within a target level consistent with itscurrent debt ratings. At 30 June 2007, the gearing ratio (debt, net of cash andshort-term investments, as a proportion of EEV shareholders' funds plus debt)was 6.1 per cent compared with 11.2 per cent at 31 December 2006. Prudential plc enjoys strong debt ratings from Standard & Poor's, Moody's andFitch. Prudential long-term senior debt is rated A+ (stable outlook), A2 (stableoutlook) and AA- (stable outlook) from Standard & Poor's, Moody's and Fitchrespectively, while short-term ratings are A-1, P-1 and F1+. Based on EEV basis operating profit from continuing operations and interestpayable on core structural borrowings, interest cover was 16.1 times in thefirst half of 2007 compared with 12.3 times in the first half of 2006. Regulatory capital In May 2007, Prudential completed the sale of Egg to Citi. As a result of thistransaction Prudential expects a regulatory capital benefit of around £300million. Including this benefit Prudential currently estimates its FinancialConglomerates Directive ("FCD") capital position at the end of 2007 will be asurplus of over £1 billion. Inherited estate of Prudential Assurance The assets of the main with-profits fund within the long-term insurance fund ofPAC comprise the amounts that it expects to pay out to meet its obligations toexisting policyholders and an additional amount used as working capital. Theamount payable over time to policyholders from the with-profits fund is equal tothe policyholders' accumulated asset shares plus any additional payments thatmay be required by way of smoothing or to meet guarantees. The balance of theassets of the with-profits fund is called the 'inherited estate' and hasaccumulated over many years from various sources. The inherited estate represents the major part of the working capital of PAC'slong-term insurance fund. This enables PAC to support with-profits business byproviding the benefits associated with smoothing and guarantees, by providinginvestment flexibility for the fund's assets, by meeting the regulatory capitalrequirements that demonstrate solvency and by absorbing the costs of significantevents or fundamental changes in its long-term business without affecting thebonus and investment policies. The size of the inherited estate fluctuates fromyear to year depending on the investment return and the extent to which it hasbeen required to meet smoothing costs, guarantees and other events. PAC believes that it would be beneficial if there were greater clarity as to thestatus of the Inherited Estate. As a result PAC has announced that it has beguna process to determine whether it can achieve that clarity through areattribution of the inherited estate. As part of this process a PolicyholderAdvocate has been nominated to represent policyholders' interests. Thisnomination does not mean that a reattribution will occur. Given the size of the Group's with-profits business any proposal is likely to betime consuming and complex to implement and is likely to involve a payment topolicyholders from shareholders funds. If a reattribution is completed theinherited estate will continue to provide working capital for the long-terminsurance fund. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS SUMMARY CONSOLIDATED INCOME STATEMENT Half Year Half Year Full Year 2007 2006 2006 £m £m £mUK Insurance Operations 462 336 686M&G 140 100 204UK Operations 602 436 890US Operations 351 350 718Asian Operations 520 374 864Other Income and Expenditure (147) (141) (298)UK restructuring costs 0 (12) (41)Operating profit from continuing operations based on longer-term investment 1,326 1,007 2,133returnsShort-term fluctuations in investment returns 241 73 738Mark to market value movements on core borrowings 113 168 85Shareholders' share of actuarial gains and losses on defined benefit pension 125 246 207schemesEffect of changes in economic assumptions and time value of cost of options and 275 (20) 59guaranteesProfit from continuing operations before tax 2,080 1,474 3,222Shareholder tax (545) (387) (904)Profit from continuing operations for the period after tax before minority 1,535 1,087 2,318interestsDiscontinued operations (net of tax) 241 (34) (105) Profit for the period 1,776 1,053 2,213Attributable to:Equity holders of the Company 1,775 1,052 2,212Minority interests 1 1 1Profit for the period 1,776 1,053 2,213 Earnings per share (in pence)Continuing operationsFrom operating profit, based on longer-term investment returns, after related tax 39.4p 29.3p 62.1pand minority interestsAdjustment from post-tax longer-term investment returns to post-tax actual 7.0p 1.7p 21.8pinvestment returns (after minority interests)Adjustment for mark to market value movements on core borrowings 4.6p 7.0p 3.5pAdjustment for post-tax effect of shareholders' share of actuarial gains and 3.7p 7.2p 6.0plosses on defined benefit pension schemesAdjustment for post-tax effect of changes in economic assumptions and time value 8.2p (0.1)p 2.6pof cost of options and guaranteesBased on profit from continuing operations after minority interests 62.9p 45.1p 96.0p Discontinued operationsBased on profit (loss) from discontinued operations after minority interests 9.9p (1.3)p (4.3)p Based on profit for the period after tax and minority interests 72.8p 43.8p 91.7pAverage number of shares (millions) 2,437 2,403 2,413 Dividends per share (in pence)Dividends relating to the reporting period:Interim dividend (2007 and 2006) 5.70p 5.42p 5.42pFinal dividend (2006) - - 11.72pTotal 5.70p 5.42p 17.14pDividends declared and paid in the reporting period:Current year interim dividend - - 5.42pFinal dividend for prior year 11.72p 11.02p 11.02pTotal 11.72p 11.02p 16.44p EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS OPERATING PROFIT FROM CONTINUING OPERATIONS BASED ON LONGER-TERM INVESTMENTRETURNS* Half Year Half Full Year 2007 Year 2006 2006Results Analysis by Business Area £m £m £mUK OperationsNew business 108 138 266Business in force 354 198 420Long-term business 462 336 686M&G 140 100 204Total 602 436 890US OperationsNew business 144 134 259Business in force 200 212 449Long-term business 344 346 708Broker-dealer and fund management 9 8 18Curian (2) (4) (8)Total 351 350 718Asian OperationsNew business 282 232 514Business in force 211 127 315Long-term business 493 359 829Fund management 33 22 50Development expenses (6) (7) (15)Total 520 374 864Other Income and ExpenditureInvestment return and other income 13 18 8Interest payable on core structural borrowings (88) (89) (177)Corporate expenditure:Group Head Office (50) (46) (83)Asia Regional Head Office (17) (19) (36)Charge for share-based payments for Prudential schemes (5) (5) (10)Total (147) (141) (298)UK restructuring costs 0 (12) (41)Operating profit from continuing operations based on longer-term investment 1,326 1,007 2,133returnsAnalysed as profits (losses) from:New business 534 504 1,039Business in force 765 537 1,184Long-term business 1,299 1,041 2,223Asia development expenses (6) (7) (15)Other operating results 33 (15) (34)UK restructuring costs 0 (12) (41)Total 1,326 1,007 2,133 * EEV basis operating profit from continuing operations based on longer-terminvestment returns excludes short-term fluctuations in investment returns, themark to market value movements on core borrowings, the shareholders' share ofactuarial gains and losses on defined benefit pension schemes, the effect ofchanges in economic assumptions and changes in the time value of cost of optionsand guarantees arising from changes in economic factors. The amounts for theseitems are included in total EEV profit. The directors believe that operatingprofit, as adjusted for these items, better reflects underlying performance.Profit on ordinary activities and basic earnings per share include these itemstogether with actual investment returns. This basis of presentation has beenadopted consistently throughout this interim report. For half year 2007, the EEV basis operating profit from continuing operationsbased on longer-term investment returns before tax of £1,326m includes a creditof £92m that arises from including the benefits, grossed up for notional tax, ofaltered corporate tax rates for the UK, Singapore and China. Further details areexplained in note 7 to the EEV basis supplementary information. The results for continuing operations shown above exclude those in respect ofdiscontinued banking operations. On 1 May 2007, the Company sold Egg Bankingplc. Accordingly, the presentation of the comparative results for half year andfull year 2006 has been adjusted from those previously published. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS MOVEMENT IN SHAREHOLDERS' EQUITY (excluding minority interests) Half Half Full Year Year Year 2007 2006 2006 £m £m £mProfit for the period attributable to equity holders of the Company 1,775 1,052 2,212Items taken directly to equity:Exchange movements (65) (217) (359)Unrealised valuation movements on Egg securities classified as available-for-sale (2) (4) (2)Movement on cash flow hedges (3) 4 7Related tax (11) (39) (74)Dividends (288) (267) (399)Acquisition of Egg minority interests - (167) (167)New share capital subscribed 117 253 336Reserve movements in respect of share-based payments 9 6 15Treasury shares:Movement in own shares in respect of share-based payment plans 11 9 6Movement on Prudential plc shares purchased by unit trusts consolidated under IFRS 1 1 0Mark to market value movement on Jackson assets backing surplus and required capital* (15) - 7Net increase in shareholders' equity 1,529 631 1,582Shareholders' equity at beginning of period (excluding minority interests) 11,883 10,301 10,301Shareholders' equity at end of period (excluding minority interests) 13,412 10,932 11,883Comprising:UK Operations: Long-term business 6,308 5,370 5,813 M&G: Net assets 287 273 230 Acquired goodwill 1,153 1,153 1,153 Egg - 360 292 7,748 7,156 7,488US Operations 3,544 3,379 3,360Asian Operations:Net assets 3,012 2,159 2,637Acquired goodwill 172 172 172Holding company net borrowings (at market value) (811) (1,558) (1,542)Other net liabilities (253) (376) (232)Shareholders' equity at end of period (excluding minority interests) 13,412 10,932 11,883 Representing shareholders' equity for:Long-term business operations 12,690 10,756 11,664Other operations 722 176 219 13,412 10,932 11,883 * The mark to market value movement on Jackson assets backing surplus andrequired capital for full year 2006 represents the cumulative adjustment as at31 December 2006. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS SUMMARISED CONSOLIDATED BALANCE SHEET 30 Jun 30 Jun 31 Dec 2007 2006 2006 £m £m £mTotal assets less liabilities, excluding insurance funds 189,436 175,456 183,130Less insurance funds:*Policyholder liabilities (net of reinsurers' share) and unallocated (183,531) (170,407) (177,642)surplus of with-profits fundsLess shareholders' accrued interest in the long-term business 7,507 5,883 6,395 (176,024) (164,524) (171,247)Total net assets 13,412 10,932 11,883Share capital 123 121 122Share premium 1,823 1,808 1,822IFRS basis shareholders' reserves 3,959 3,120 3,544Total IFRS basis shareholders' equity 5,905 5,049 5,488Additional EEV basis retained profit 7,507 5,883 6,395Shareholders' equity (excluding minority interests) 13,412 10,932 11,883 *Including liabilities in respect of insurance products classified as investment contracts under IFRS 4. Net asset value per share (in pence)Based on EEV basis shareholders' equity of £13,412m (£10,932m, £11,883m) 545p 450p 486pNumber of issued shares at end of reporting period (millions) 2,460 2,430 2,444 This information is provided by RNS The company news service from the London Stock ExchangeMORE TO FOLLOW

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