1st Aug 2007 07:01
Prudential PLC01 August 2007 Part 2 EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS NOTES ON THE UNAUDITED EEV BASIS RESULTS (1) Basis of preparation of results The EEV basis results have been prepared in accordance with the EEV Principlesissued by the CFO Forum of European Insurance Companies in May 2004. Whereappropriate the EEV basis results include the effects of adoption ofInternational Financial Reporting Standards (IFRS). The EEV results for the Group are prepared for 'covered business', as defined bythe EEV Principles. Covered business represents the Group's long-term insurancebusiness for which the value of new and in-force contracts is attributable toshareholders. The EEV basis results for the Group's covered business are thencombined with the IFRS basis results for the Group's other operations. The definition of long-term business operations is consistent with previouspractice and comprises those contracts falling under the definition of long-terminsurance business for regulatory purposes together with, for US Operations,contracts that are in substance the same as guaranteed investment contracts(GICs) but do not fall within the technical definition. Under the EEVPrinciples, the results for covered business incorporate the projected marginsof attaching internal fund management. With two principal exceptions, covered business comprises the Group's long-termbusiness operations. The principal exceptions are for the closed ScottishAmicable Insurance Fund (SAIF) and for the presentational treatment of thefinancial position of two of the Group's defined benefit pension schemes. A verysmall amount of UK group pensions business is also not modelled for EEVreporting purposes. SAIF is a ring-fenced sub-fund of the Prudential Assurance Company (PAC)long-term fund, established by a Court approved Scheme of Arrangement in October1997. SAIF is closed to new business and the assets and liabilities of the fundare wholly attributable to the policyholders of the fund. In 2006, a bulkannuity arrangement between SAIF and Prudential Retirement Income Limited(PRIL), a shareholder-owned subsidiary, took place as explained in the notes tothe schedule of new business within this announcement. Reflecting the alteredeconomic interest for SAIF policyholders and Prudential shareholders, thisarrangement represents a transfer from long-term business of the Group that isnot 'covered' to business that is 'covered' with consequential effect on the EEVbasis results. As regards the Group's defined benefit pension schemes, the surplus or deficitattaching to the Prudential Staff Pension Scheme (PSPS) and Scottish AmicablePension scheme are excluded from the EEV value of UK Operations and included inthe total for Other Operations. The surplus and deficit amounts are partiallyattributable to the PAC with-profits fund and shareholder-backed long-termbusiness and partially to other parts of the Group. In addition to the IFRSsurplus or deficit, the shareholders' 10 per cent share of the PAC with-profitssub-fund's interest in the movement on the financial position of the schemes isrecognised for EEV reporting purposes. The directors are responsible for the preparation of the supplementaryinformation in accordance with the EEV Principles. The EEV basis results for the 2007 and 2006 half years are unaudited. The 2006full year results have been derived from the EEV basis results supplement to theCompany's statutory accounts for 2006. The supplement included an unqualifiedaudit report from the auditors. (2) Economic assumptions (a) Deterministic assumptions In most countries, the long-term expected rates of return on investments andrisk discount rates are set by reference to period end rates of return on cashor fixed interest securities. This 'active' basis of assumption setting has beenapplied in preparing the results of all the Group's UK and US long-term businessoperations. For the Group's Asian operations, the active basis is appropriatefor business written in Japan, Korea and US dollar denominated business writtenin Hong Kong. An exception to this general rule is that for countries where long-term fixedinterest markets are less established, investment return assumptions and riskdiscount rates are based on an assessment of longer-term economic conditions.Except for the countries listed above, this basis is appropriate for the Group'sAsian Operations. Expected returns on equity and property asset classes are derived by adding arisk premium, also based on the long-term view of Prudential's economists inrespect of each territory, to the risk-free rate. In the UK and the US, theequity risk premium is 4.0 per cent above risk-free rates for all periods forwhich results are prepared in this report. In Asia, equity risk premiums rangefrom 3.0 per cent to 5.8 per cent for all periods for which results are preparedin this report. Best estimate assumptions for other asset classes, such ascorporate bond spreads, are set consistently . Assumed investment returns reflect the expected future returns on the assetsheld and allocated to the covered business at the valuation date. The table below summarises the principal financial assumptions: 30 Jun 30 Jun 31 Dec 2007 2006 2006 % % %UK Insurance OperationsRisk discount rate: New business 8.7 8.0 7.8 In force 8.6 8.2 8.0Pre-tax expected long-term nominal rates of investment return: UK equities 9.3 8.7 8.6 Overseas equities 9.6 to 8.7 to 8.6 to 10.6 9.4 9.3 Property 7.8 7.2 7.1 Gilts 5.3 4.7 4.6 Corporate bonds 6.0 5.4 5.3Expected long-term rate of inflation 3.1 3.0 3.1Post-tax expected long-term nominal rate of return for the with-profits fund: Pension business (where no tax applies) 8.3 7.7 7.5 Life business 7.4 6.85 6.6 US Operations (Jackson)Risk discount rate: New business (note) 7.9 8.0 7.6 In force (note) 7.3 7.1 6.7Expected long-term spread between earned rate and rate credited to policyholders for single premium deferred annuity business 1.75 1.75 1.75US 10 year treasury bond rate at end of period 5.1 5.2 4.8Pre-tax expected long-term nominal rate of return for US equities 9.1 9.2 8.8Expected long-term rate of inflation 2.4 2.7 2.5 Note: US Operations - risk discount rates The risk discount rates at 30 June 2007 for new business and business in forcefor US Operations reflect weighted rates based on underlying rates of 8.8% forvariable annuity business and 5.9% for other business. The increase in theweighted discount rate for business in force from 31 December 2006 of 6.7% to 30June 2007 of 7.3% reflects the increase in the US 10-year treasury bond rate andthe increasing proportion of variable annuity business. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS Economic assumptions (continued) Asian Operations Hong Kong Malaysia Singapore Taiwan China (notes India Indonesia Japan Korea (notes Philippines (notes (notes Thailand Vietnam iii,iv,v) iv,v) iv,v) ii,v)30 Jun 2007 % % % % % % % % % % % %Risk discountrate: New business 12.0 6.5 16.5 17.5 5.3 10.1 9.7 16.5 7.1 8.6 13.75 16.5 In force 12.0 6.7 16.5 17.5 5.3 10.1 9.3 16.5 6.3 9.3 13.75 16.5Expectedlong-termrate of inflation 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5 Government bondyield 9.0 5.1 10.5 11.5 2.2 5.6 7.0 10.5 4.5 5.5 7.75 10.5 Hong Kong Malaysia Singapore Taiwan China (notes India Indonesia Japan Korea (notes Philippines (notes (notes Thailand Vietnam iii,iv,v) iv,v) iv,v) ii,v)30 Jun 2006 % % % % % % % % % % % %Risk discountrate: New business 12.0 6.6 16.5 17.5 5.3 9.7 9.5 16.5 6.7 8.9 13.75 16.5 In force 12.0 6.9 16.5 17.5 5.3 9.7 9.1 16.5 6.8 9.5 13.75 16.5 Expectedlong-termrate of inflation 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5 Government bondyield 9.0 5.3 10.5 11.5 2.1 5.2 7.0 10.5 4.5 5.5 7.75 10.5 Hong Kong Malaysia Singapore Taiwan China (notes India Indonesia Japan Korea (notes Philippines (notes (notes Thailand Vietnam iii,iv,v) iv,v) iv,v) ii,v)31 Dec 2006 % % % % % % % % % % % %Risk discountrate: New business 12.0 6.6 16.5 17.5 5.3 9.5 9.5 16.5 6.9 8.8 13.75 16.5 In force 12.0 6.8 16.5 17.5 5.3 9.5 9.2 16.5 6.9 9.3 13.75 16.5Expectedlong-termrate of 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5inflationGovernment bond 9.0 4.7 10.5 11.5 2.1 5.0 7.0 10.5 4.5 5.5 7.75 10.5yield Asia total Asia total Asia total 30 Jun 30 Jun 31 Dec 2007 2006 2006 % % %Weighted risk discount rate (note i) New business 10.1 9.9 9.8 In force 8.7 8.9 8.8 Notes: Asian Operations - economic assumptions (i) The weighted risk discount rates for the Asian operations shown above havebeen determined by weighting each country's risk discount rates by reference tothe EEV basis operating result for new business and the closing value ofin-force business. (ii) For traditional business in Taiwan, the economic scenarios used tocalculate the half year 2007 EEV basis results continue to reflect theassumption of a phased progression of the bond yields from the current ratesapplying to the assets held to the long-term expected rates. The projectionsassume that in the average scenario, the current bond yields of around 2.5 percent trend towards 5.5 per cent at 31 December 2013 (half year 2006: 2 per centtowards 5.5 per cent at 31 December 2012, full year 2006: 2 per cent towards 5.5per cent at 31 December 2013). The projections for the Fund Earned Rate reflect the same approach as appliedfor the full year 2006 results with allowance made for the mix of assets in thefund, future investment strategy and further market depreciation of bonds heldas a result of assumed future yield increases. The projections for the FundEarned Rate alter for changes to these factors and the effects of movements ininterest rates from period to period. After taking into account current bond yields, the assumption of the phasedprogression in bond yields and the factors described above, the average assumedFund Earned Rate remains below 1.2 per cent until 2010 (due to the depreciationof bond values as yields rise) and fluctuates around a target of 5.9 per centafter 2013. Consistent with EEV methodology, a constant discount rate has been applied tothe projected cash flows. (iii) The assumptions shown are for US dollar denominated business whichcomprises the largest proportion of the in-force Hong Kong business. (iv) Assumed equity returns The mean equity return assumptions for the most significant equity holdings inthe Asian Operations were: 30 Jun 30 Jun 31 Dec 2007 2006 2006 % % %Hong Kong 9.1 9.2 8.7Malaysia 12.8 12.8 12.8Singapore 9.3 9.3 9.3 To obtain the mean, an average over all simulations of the accumulated return atthe end of the projection period is calculated. The annual average return isthen calculated by taking the root of the average accumulated return minus 1. (v) For Hong Kong, Malaysia, Singapore and Taiwan, bond yields have been used insetting the risk discount rates for half year 2007 reporting. For half year andfull year 2006, cash rates were used in setting the risk discount rates forthese operations. (b) Stochastic assumptions The economic assumptions used for the stochastic calculations are consistentwith those used for the deterministic calculations described above. Assumptionsspecific to the stochastic calculations such as the volatilities of assetreturns reflect local market conditions and are based on a combination of actualmarket data, historic market data and an assessment of longer-term economicconditions. Common principles have been adopted across the Group for thestochastic asset models, for example, separate modelling of individual assetclasses but with allowance for correlation between the various asset classes. Details are given below of the key characteristics and calibrations of eachmodel. UK Insurance Operations • Interest rates are projected using a two-factor model calibrated toactual market data; • The risk premium on equity assets is assumed to follow a log-normaldistribution; • The corporate bond return is calculated as the return on a zero-couponbond plus a spread. The spread process is a mean reverting stochastic process;and • Property returns are modelled in a similar fashion to corporate bonds,namely as the return on a riskless bond, plus a risk premium, plus a processrepresentative of the change in residual values and the change in value of thecall option on rents. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS Economic assumptions (continued) The rates to which the model has been calibrated are set out below. Mean returns have been derived as the annualised arithmetic average returnacross all simulations and durations. Standard deviations have been calculated by taking the annualised variance ofthe returns over all the simulations, taking the square root and averaging overall durations in the projection. For bonds the standard deviations relate to theyields on bonds of the average portfolio duration. For equity and property, theyrelate to the total return on these assets. The standard deviations applied toall periods presented in these statements are as follows: %Government bond yield 2.0Corporate bond yield 5.5Equities: UK 18.0 Overseas 16.0Property 15.0 US Operations (Jackson) • Interest rates are projected using a log-normal generator calibratedto actual market data; • Corporate bond returns are based on Treasury securities plus a spreadthat has been calibrated to current market conditions and varies by creditquality; and • Variable annuity equity and bond returns have been stochasticallygenerated using a regime-switching log-normal model with parameters determinedby reference to historical data. The volatility of equity fund returns rangesfrom 19.2 per cent to 28.6 per cent, (half year 2006 and full year 2006: 18.6per cent to 28.1 per cent) depending on risk class, and the volatility of bondfunds ranges from 1.4 per cent to 2.0 per cent for all periods presented in thisreport. Asian Operations The same asset return model, as used in the UK, appropriately calibrated, hasbeen used for the Asian Operations. The stochastic cost of guarantees are only of significance for the Hong Kong,Malaysia, Singapore and Taiwan operations. The mean stochastic returns are consistent with the mean deterministic returnsfor each country. The volatility of equity returns ranges from 18 per cent to 25per cent, (half year 2006: 18 per cent to 26 per cent, full year 2006: 18 percent to 25 per cent) and the volatility of government bond yields ranges from1.4 per cent to 2.5 per cent (half year 2006: 1.2 per cent to 2.2 per cent, fullyear 2006: 1.4 per cent to 2.5 per cent). (3) Level of encumbered capital In adopting the EEV Principles, the Company has based encumbered capital on itsinternal targets for economic capital subject to it being at least the localstatutory minimum requirements. Economic capital is assessed using internalmodels, but when applying EEV Principles, no credit is taken for the significantdiversification benefits that exist within the Group. For with-profits businesswritten in a segregated life fund, as is the case in the UK and Asia, thecapital available in the fund is sufficient to meet the encumbered capitalrequirements. The table below summarises the level of encumbered capital as a percentage ofthe relevant statutory requirement. Capital as a percentage of relevant statutory requirement UK Insurance Operations 100% of EU MinimumJackson 235% of Company Action LevelAsian Operations 100% of Financial Conglomerates Directive requirement (4) Margins on new business premiums New Business Premiums Annual Present Pre-Tax New New Business Margin premium value of Business equivalent New Business Premiums Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP)Half year 2007 £m £m £m £m £m % %UK Insurance Operations 2,441 119 363 2,905 108 30 3.7US Operations 3,425 9 352 3,490 144 41 4.1Asian Operations 784 541 619 3,286 282 46 8.6Total 6,650 669 1,334 9,681 534 40 5.5 New Business Premiums Annual Present Pre-Tax New New Business Margin premium value of Business equivalent New Business Premiums Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP)Half year 2006 £m £m £m £m £m % %UK Insurance Operations 3,890 95 484 4,224 138 29 3.3US Operations 3,146 8 323 3,209 134 41 4.2Asian Operations 519 396 448 2,328 232 52 10.0Total 7,555 499 1,255 9,761 504 40 5.2 New Business Premiums Annual Present Pre-Tax New New Business Margin premium value of Business equivalent New Business Premiums Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP)Full year 2006 £m £m £m £m £m % %UK Insurance Operations 6,991 201 900 7,712 266 30 3.4US Operations 5,964 17 614 6,103 259 42 4.2Asian Operations 1,072 849 956 5,132 514 54 10.0Total 14,027 1,067 2,470 18,947 1,039 42 5.5 New business margins are shown on two bases, namely the margins by reference toAnnual Premium Equivalents (APE) and the Present Value of New Business Premiums(PVNBP). APEs are calculated as the aggregate of regular new business premiumson an annualised basis and one-tenth of single new business premiums. PVNBPs arecalculated as equalling single premiums plus the present value of expectedpremiums of new regular premium business allowing for lapses and otherassumptions made in determining the EEV new business contribution. In determining the EEV basis value of new business written in the period thepolicies incept, premiums are included in projected cash flows on the same basisof distinguishing annual and single premium business as set out for statutorybasis reporting. New business contributions represent profits determined by applying the economicand non-economic assumptions applying at the end of the reporting period. (5) UK Insurance Operations expense assumptions The half year 2006 EEV basis financial statements included note disclosure whichexplained that in determining the appropriate expense assumptions account hadbeen taken of the cost synergies that were expected to arise with some certaintyfrom the initiative announced in December 2005 from UK Insurance Operationsworking more closely with Egg and M&G, and the effect of the end to end reviewof the UK business which was underway at the time. The disclosure noted that thehalf year 2006 basis results had been prepared on the same basis as the 2005full year statements which had disclosed that without the anticipation of thecost synergies there would have been a charge for altered expense assumptions ofapproximately £55m. On 29 January 2007 the Company announced the agreement to sell Egg Banking plcto Citi. On 15 March 2007 the Company announced the actions necessary toimplement the reassessed plans in light of this transaction and additionalinitiatives. In preparing the 2006 full year results, account was also taken ofthe effect of expense savings that were expected to arise with some certainty.Without this factor the effect on the full year 2006 results would have been acharge of £44m for the net effect of revised assumptions in line with 2006 unitcosts. The half year 2007 results have been prepared using the same approach. Withoutthe anticipation of expense savings there would have been an additional chargeof £28m for the net effect of revised assumptions in line with half year 2007unit costs. (6) Taiwan - effect of altered economic assumptions and sensitivity ofresults to future market conditions For the half year 2007 results, as explained in note 2 (a), the expectedlong-term bond yield has been maintained at 5.5 per cent to be achieved by 31December 2013. The sensitivity of the embedded value at 30 June 2007 of the Taiwan operation toaltered economic assumptions and future market conditions to: (a) a 1 per cent increase or decrease in the projected long-term bond yield,(including all consequential changes to investment returns for all classes,market values of fixed interest assets and risk discount rates), is £83m and £(134)m respectively; and (b) a 1 per cent increase or decrease in the starting bond rate for theprogression to the assumed long-term rate is £92m and £(100)m respectively. If it had been assumed in preparing the half year 2007 results that interestrates remained at the current level of around 2.5% until 31 December 2008 andthe progression period in bond yields was delayed by a year so as to end on 31December 2014, there would have been a reduction in the Taiwan embedded value of£90m. (7) Effect of changes in corporate tax rates At 30 June 2007, a change to reduce the UK corporate tax rate from 30 per centto 28 per cent in 2008 had been substantively enacted in the legislativeprocess. Accordingly, the half year 2007 results incorporate the effects ofthis change in projecting the tax cash flows attaching to in-force business.Under the convention applied for EEV basis reporting, profits are generallydetermined on a post-tax basis and then grossed up at the prevailing corporatetax rates to derive pre-tax results. The effect of the change in the UK rate isto give rise to a benefit to the value of business in force at 1 January 2007 of£48m. After grossing up this amount for notional tax, the effect on the pre-taxoperating results based on longer-term investment returns for UK InsuranceOperations for half year 2007 is a credit of £67m. Similar considerations apply to corporate tax rate changes in Singapore andChina giving rise to a benefit to the value of in-force business at 1 January2007 of £20m. After grossing up this amount for notional tax, the effect on thepre-tax operating results based on longer-term investment returns for AsianOperations for half year 2007 is a credit of £25m. (8) Short-term fluctuations in investment returns for half year 2006comparative results The analysis of the half year 2006 EEV basis results in this announcementincorporates a reallocation of £41m from the amount shown for the effect ofchanges in economic assumptions and time value of cost of options and guaranteesto the credit for short-term fluctuations in investment returns. The change,which has no effect on operating profit or profit before tax relates to assetrelated gains for Jackson and has been made to align with the full year 2006 andcurrent presentation. (9) Holding company net borrowings (at market value) Holding company net borrowings at market value comprise: 30 Jun 30 Jun 31 Dec 2007 2006 2006 £m £m £m Central funds borrowings: IFRS basis (2,289) (2,520) (2,485) Mark to market value adjustment (68) (105) (176) EEV basis (2,357) (2,625) (2,661)Holding company* cash and short-term investments 1,546 1,067 1,119Holding company net borrowings (811) (1,558) (1,542) * Prudential plc and related finance subsidiaries TOTAL INSURANCE AND INVESTMENT PRODUCTS NEW BUSINESS INSURANCE PRODUCTS AND INVESTMENT PRODUCTS* Insurance Products * Investment Products * Total Half Year Half Full Half Half Full Half Half Full 2007 £m Year Year Year Year Year Year Year Year 2006 2006 £m 2007 £m 2006 £m 2006 £m 2007 £m 2006 £m 2006 £m £mUK Operations 2,560 3,985 7,192 7,519 6,795 13,486 10,079 10,780 20,678US Operations 3,434 3,154 5,981 19 - - 3,453 3,154 5,981 Asian Operations 1,325 915 1,921 17,471 10,027 20,408 18,796 10,942 22,329Group Total 7,319 8,054 15,094 25,009 16,822 33,894 32,328 24,876 48,988 INSURANCE PRODUCTS - NEW BUSINESS PREMIUMS AND CONTRIBUTIONS * Single Regular Annual Premium and Present Value of New Contribution Business Premiums Equivalents Half Half Full Half Half Full Half Half Full Half Half Full Year Year Year Year Year Year Year Year Year Year Year Year 2007 2006 2006 £m 2007 2006 2006 2007 2006 2006 2007 £m 2006 £m 2006 £m £m £m £m £m £m £m £m £mUK OperationsProduct SummaryInternal Vesting 687 615 1,341 - - - 69 62 134 687 615 1,341annuities Direct and 431 273 780 - - - 43 27 78 431 273 780Partnership Annuities Intermediated 282 247 592 - - - 28 25 59 282 247 592Annuities Total Individual 1,400 1,135 2,713 - - - 140 114 271 1,400 1,135 2,713Annuities Equity Release 67 30 89 - - - 7 3 9 67 30 89 Individual Pensions 18 10 21 - - - 2 1 2 20 10 21 Corporate Pensions 107 35 318 42 32 66 53 36 98 296 124 490 Unit Linked Bonds 138 213 388 - - - 14 21 39 138 213 388 With-Profit Bonds 114 54 139 - - - 11 5 14 114 54 139 Protection - 2 11 2 6 9 2 6 10 14 21 63 Offshore Products 205 361 540 2 - - 22 36 54 215 361 540Total Retail 2,049 1,840 4,219 46 38 75 251 222 497 2,264 1,948 4,443Retirement Corporate Pensions 110 165 261 60 44 100 71 61 126 314 350 643Other Products 100 134 232 13 13 26 23 26 49 145 175 347DWP Rebates 129 161 161 - - - 13 16 16 129 161 161Total Mature Life and 339 460 654 73 57 126 107 103 191 588 686 1,151Pensions Total Retail 2,388 2,300 4,873 119 95 201 358 325 688 2,852 2,634 5,594Wholesale Annuities 38 1,278 1,431 - - - 4 128 143 38 1,278 1,431Credit Life 15 312 687 - - - 1 31 69 15 312 687Total UK Operations 2,441 3,890 6,991 119 95 201 363 484 900 2,905 4,224 7,712 Channel SummaryDirect and 1,151 993 2,543 106 81 174 221 180 428 1,567 1,288 3,133Partnership Intermediated 1,108 1,146 2,169 13 14 27 124 129 244 1,156 1,185 2,300Wholesale 53 1,590 2,118 - - - 5 159 212 53 1,590 2,118Sub-Total 2,312 3,729 6,830 119 95 201 350 468 884 2,776 4,063 7,551 DWP Rebates 129 161 161 - - - 13 16 16 129 161 161Total UK Operations 2,441 3,890 6,991 119 95 201 363 484 900 2,905 4,224 7,712 US OperationsFixed annuities 291 313 688 - - - 29 31 69 291 313 688Fixed index annuities 220 293 554 - - - 22 29 55 220 293 554Variable annuities 2,243 1,888 3,819 - - - 224 189 382 2,243 1,888 3,819Life 3 4 8 9 8 17 10 9 18 68 67 147 Guaranteed Investment 133 310 458 - - - 13 31 46 133 310 458Contracts GIC - Medium Term 535 338 437 - - - 54 34 44 535 338 437Notes Total US Operations 3,425 3,146 5,964 9 8 17 352 323 614 3,490 3,209 6,103Asian OperationsChina 19 17 27 20 13 36 22 15 39 112 88 198 Hong Kong 199 139 355 54 42 103 74 56 139 493 360 933India (Group's 26% 16 11 20 81 55 105 83 56 107 340 177 411interest)Indonesia 35 11 31 43 31 71 46 32 74 178 117 269Japan 52 23 68 11 1 7 16 3 14 97 30 97Korea 72 58 103 113 103 208 120 109 218 608 492 1,130Malaysia 9 2 4 32 31 72 33 31 72 186 185 418Singapore 306 205 357 30 29 72 61 49 108 484 391 803Taiwan 63 47 92 136 74 139 142 79 148 711 421 743 Other 13 6 15 21 17 36 22 18 37 77 67 130 Total Asian 784 519 1,072 541 396 849 619 448 956 3,286 2,328 5,132Operations Group Total 6,650 7,555 14,027 669 499 1,067 1,334 1,255 2,470 9,681 9,761 18,947 INVESTMENT PRODUCTS - FUNDS UNDER MANAGEMENT * 1 Jan 2007 Gross Inflows Redemptions Market and other 30 June 2007 Movements £m £m £m £m £mUK Operations 44,946 7,519 (4,152) 311 48,624US Operations - 19 (1) - 18Asian Operations 12,253 17,471 (15,809) 665 14,580Group Total 57,199 25,009 (19,962) 976 63,222 * The tables shown above are provided as an indicative volume measure oftransactions undertaken in the reporting period that have the potential togenerate profits for shareholders. The amounts shown are not, and not intendedto be, reflective of premium income recorded in the IFRS income statement. Annual premium and contribution equivalents are calculated as the aggregate ofregular new business amounts and one tenth of single new business amounts. Newbusiness premiums for regular premium products are shown on an annualised basis.Department of Work and Pensions rebate business is classified as singlerecurrent business. Internal vesting business is classified as new businesswhere the contracts include an open market option. The format of the tables shown above is consistent with the distinction betweeninsurance and investment products as applied for previous financial reportingperiods. Products categorised as "insurance" refer to those classified ascontracts of long-term insurance business for regulatory reporting purposes,i.e. falling within one of the classes of insurance specified in part II ofSchedule 1 to the Regulated Activities Order under FSA regulations. The details shown above for insurance products include contributions forcontracts that are classified under IFRS 4 "Insurance Contracts" as notcontaining significant insurance risk. These products are described asinvestment contracts or other financial instruments under IFRS. Contractsincluded in this category are primarily certain unit-linked and similarcontracts written in UK Insurance Operations and Guaranteed Investment Contractsand similar funding agreements written in US Operations. Investment products referred to in the table for funds under management aboveare unit trust, mutual funds and similar types of retail fund managementarrangements. These are unrelated to insurance products that are classified as"investment contracts" under IFRS 4, as described in the preceding paragraph,although similar IFRS recognition and measurement principles apply to theacquisition costs and fees attaching to this type of business. The premiums for half year and full year 2006 for wholesale annuities for UKOperations include £592m and £560m for a bulk annuity transaction with theScottish Amicable Insurance Fund (SAIF). SAIF is a closed ring-fenced sub-fundof the PAC long-term fund established by a Court approved Scheme of Arrangementin October 1997, which is solely for the benefit of SAIF policyholders.Shareholders have no interest in the profits of this fund, although they areentitled to investment management fees on this business. The full year 2006amount is £32m different from the half year 2006 estimate due to refinements tocalculations under the reassurance arrangement between the internal funds. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS SUMMARY CONSOLIDATED INCOME STATEMENT Half Year Half Year Full Year 2007 2006 2006 £m £m £m Earned premiums, net of reinsurance 7,903 8,164 15,986Investment income 8,250 4,918 17,128Other income 1,094 934 1,917Total revenue, net of reinsurance (note C) 17,247 14,016 35,031 Benefits and claims and movement in unallocated surplus of with-profits funds (14,315) (11,370) (28,421) Acquisition costs and other operating expenditure (2,118) (1,658) (4,212)Finance costs: Interest on core structural borrowings of shareholder-financed (88) (89) (177)operationsTotal charges (note C) (16,521) (13,117) (32,810) Profit before tax* (note C) 726 899 2,221Tax attributable to policyholders' returns 2 (162) (849) Profit before tax attributable to shareholders (note D) 728 737 1,372 Tax expense (note E) (251) (415) (1,241)Less: Tax attributable to policyholders returns (2) 162 849Tax attributable to shareholders' profits (note E) (253) (253) (392) Profit from continuing operations after tax 475 484 980Discontinued operations (net of tax) (note M) 241 (34) (105)Profit for the period 716 450 875 Attributable to:Equity holders of the Company 715 449 874Minority interests 1 1 1Profit for the period 716 450 875 Earnings per share (in pence) Basic (based on 2,437m, 2,403m and 2,413m shares respectively):Based on profit from continuing operations attributable to the equity holders of 19.4p 20.0p 40.5pthe Company (note F)Based on profit (loss) from discontinued operations attributable to the equity 9.9p (1.3)p (4.3)pholders of the Company 29.3p 18.7p 36.2p Diluted (based on 2,440m, 2,406m and 2,416m shares respectively):Based on profit from continuing operations attributable to the equity holders of 19.4p 20.0p 40.5pthe Company (note F)Based on profit (loss) from discontinued operations attributable to the equity 9.9p (1.3)p (4.3)pholders of the Company 29.3p 18.7p 36.2p Dividends per share (in pence)Dividends relating to reporting period:Interim dividend (2007 and 2006) (note G) 5.70p 5.42p 5.42pFinal dividend (2006) - - 11.72pTotal 5.70p 5.42p 17.14pDividends declared and paid in reporting period:Current year interim dividend - - 5.42pFinal dividend for prior year 11.72p 11.02p 11.02pTotal 11.72p 11.02p 16.44p * Profit before tax represents income net of post-tax transfers to unallocatedsurplus of with-profits funds, before tax attributable to policyholders andunallocated surplus of with-profits funds, unit-linked policies andshareholders' profits. The presentation of the half year and full year 2006 comparative results hasbeen adjusted to show Egg as a discontinued operation. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Period ended 30 June 2007 Share Share Retained Translation Available-for-sale Hedging Shareholders' Minority Total capital premium earnings reserve securities reserve reserve equity interests equity £m £m £m £m £m £m £m £m £mReservesProfit for the period 715 715 1 716 Items recognised directlyin equity:Exchange movements (21) (21) (21)Movement on cash flow (3) (3) (3)hedgesUnrealised valuationmovements on securitiesclassified asavailable-for-sale:Unrealised holding losses (289) (289) (289)arising during the periodLess gains included in the (3) (3) (3)income statement (292) (292) (292)Related change in 120 120 120amortisation of deferredincome and acquisitioncosts Related tax (12) 59 1 48 48Total items of income and (33) (113) (2) (148) (148)expense recogniseddirectly in equity Total income and expense 715 (33) (113) (2) 567 1 568for the period Dividends (288) (288) (288)Reserve movements in 9 9 9respect of share-basedpaymentsChange in minority (38) (38)interests arisingprincipally from purchaseand sale of ventureinvestment companies andproperty partnerships ofthe PAC with-profits fundand other consolidatedinvestment funds Share capital and sharepremiumNew share capital 1 116 117 117subscribedTransfer to retained (115) 115earnings in respect ofshares issued in lieu ofcash dividends Treasury sharesMovement in own shares in 11 11 11respect of share-basedpayment plansMovement on Prudential plc 1 1 1shares purchased by unittrusts consolidated underIFRS Net increase (decrease) in 1 1 563 (33) (113) (2) 417 (37) 380equity At beginning of period 122 1,822 3,640 (125) 27 2 5,488 132 5,620At end of period 123 1,823 4,203 (158) (86) 0 5,905 95 6,000 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued) Period ended 30 June 2006 Share Share Retained Translation Available-for-sale Hedging Shareholders' Minority Total capital premium earnings reserve securities reserve reserve equity interests equity £m £m £m £m £m £m £m £m £mReservesProfit for the period 449 449 1 450 Items recognised directlyin equity:Exchange movements (134) (134) (134)Movement on cash flow 4 4 4hedgesUnrealised valuationmovements on securitiesclassified asavailable-for-sale:Unrealised holding losses (707) (707) (707)arising during the periodLess gains included in the (3) (3) (3)income statement (710) (710) (710)Related change in 311 311 311amortisation of deferredincome and acquisitioncostsRelated tax (39) 140 (1) 100 100Total items of income and (173) (259) 3 (429) (429)expenses recogniseddirectly in equity Total income and expense 449 (173) (259) 3 20 1 21for the period Dividends (267) (267) (267)Reserve movements in 6 6 6respect of share-basedpaymentsChange in minority 7 7interests arisingprincipally from purchaseand sale of ventureinvestment companies andproperty partnerships ofthe PAC with-profits fundAcquisition of Egg (167) (167) (84) (251)minority interests (noteK) Share capital and sharepremiumNew share capital 2 251 253 253subscribedTransfer to retained (7) 7earnings in respect ofshares issued in lieu ofcash dividends Treasury sharesMovement in own shares in 9 9 9respect of share-basedpayment plansMovement on Prudential plc 1 1 1shares purchased by unittrusts consolidated underIFRS Net increase (decrease) in 2 244 38 (173) (259) 3 (145) (76) (221)equity At beginning of period 119 1,564 3,236 173 105 (3) 5,194 172 5,366At end of period 121 1,808 3,274 0 (154) 0 5,049 96 5,145 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued) Year ended 31 December 2006 Share Share Retained Translation Available-for-sale Hedging Shareholders' Minority Total capital premium earnings reserve securities reserve reserve equity interests equity £m £m £m £m £m £m £m £m £mReservesProfit for the year 874 874 1 875 Items recognised directlyin equity:Exchange movements (224) (224) (224)Movement on cash flow 7 7 7hedgesUnrealised valuationmovements on securitiesclassified asavailable-for-sale:Unrealised holding losses (210) (210) (210)arising during the yearLess losses included in 7 7 7the income statement (203) (203) (203)Related change in 75 75 75amortisation of deferredincome and acquisitioncostsRelated tax (74) 50 (2) (26) (26)Total items of income and (298) (78) 5 (371) (371)expense recogniseddirectly in equity Total income and expense 874 (298) (78) 5 503 1 504for the year Dividends (399) (399) (399)Reserve movements in 15 15 15respect of share-basedpaymentsChange in minority 43 43interests arisingprincipally from purchaseand sale of ventureinvestment companies andproperty partnerships ofthe PAC with-profits fundand other consolidatedinvestment fundsAcquisition of Egg (167) (167) (84) (251)minority interests (noteK) Share capital and sharepremiumNew share capital 3 333 336 336subscribedTransfer to retained (75) 75earnings in respect ofshares issued in lieu ofcash dividends Treasury sharesMovement in own shares in 6 6 6respect of share-basedpayment plansMovement on Prudential plc 0 0 0shares purchased by unittrusts consolidated underIFRS Net increase (decrease) in 3 258 404 (298) (78) 5 294 (40) 254equity At beginning of year 119 1,564 3,236 173 105 (3) 5,194 172 5,366At end of year 122 1,822 3,640 (125) 27 2 5,488 132 5,620 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS SUMMARY CONSOLIDATED BALANCE SHEET 30 Jun 30 Jun 31 Dec 2007 2006 2006 £m £m £mAssets Intangible assets attributable to shareholders: Goodwill 1,341 1,341 1,341 Deferred acquisition costs and acquired in-force value 2,693 2,697 2,497 of long-term business contracts 4,034 4,038 3,838 Intangible assets attributable to PAC with-profits fund In respect of acquired subsidiaries for venture fund 1,145 978 830 and other investment purposes Deferred acquisition costs 40 32 31 1,185 1,010 861 Total 5,219 5,048 4,699Other non-investment and non-cash assets: Property, plant and equipment 1,107 1,018 1,133 Reinsurers' share of policyholder liabilities 1,092 1,141 945 Deferred tax assets 675 423 1,012 Current tax recoverable 332 315 404 Accrued investment income 1,980 1,891 1,900 Other debtors 2,268 2,297 1,052 Total 7,454 7,085 6,446 Investments of long-term business, banking and otheroperations: Investment properties 14,149 13,682 14,491 Investments accounted for using the equity method 14 5 6 Financial investments: Loans and receivables 5,441 12,795 11,573 Equity securities and portfolio holdings in 83,819 75,534 78,892 unit trusts Debt securities 80,211 78,090 81,719 Other investments 6,737 3,930 5,401 Deposits 7,519 7,422 7,759 Total 197,890 191,458 199,841 Held for sale assets 286 94 463Cash and cash equivalents 4,500 3,665 5,071 Total assets 215,349 207,350 216,520 Equity and liabilities EquityShareholders' equity (note H) 5,905 5,049 5,488Minority interests 95 96 132Total equity 6,000 5,145 5,620 LiabilitiesBanking customer accounts - 5,545 5,554 Policyholder liabilities and unallocated surplus ofwith-profits funds: Contract liabilities (including amounts in respect of 169,895 158,127 164,988 contracts classified as investment contracts under IFRS 4) Unallocated surplus of with-profits funds 14,728 13,421 13,599 Total insurance liabilities 184,623 171,548 178,587 Core structural borrowings of shareholder-financedoperations: Subordinated debt (other than Egg) 1,492 1,573 1,538 Other 921 1,082 1,074 2,413 2,655 2,612 Egg subordinated debt - 451 451 Total (note I) 2,413 3,106 3,063 Other borrowings: Operational borrowings attributable to 2,605 5,994 5,609 shareholder-financed operations (note J) Borrowings attributable to with-profits funds (note J) 2,122 2,042 1,776Other non-insurance liabilities: Obligations under funding, securities lending and sale 4,381 3,860 4,232 and repurchase agreements Net asset value attributable to unit holders of 3,406 1,495 2,476 consolidated unit trusts and similar funds Current tax liabilities 1,033 1,168 1,303 Deferred tax liabilities 3,624 2,714 3,882 Accruals and deferred income 477 476 517 Other creditors 2,029 2,216 1,398 Provisions 376 383 464 Other liabilities 2,260 1,658 1,652 Held for sale liabilities - - 387 Total 17,586 13,970 16,311Total liabilities 209,349 202,205 210,900 Total equity and liabilities 215,349 207,350 216,520 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS SUMMARY CONSOLIDATED CASH FLOW STATEMENT Half Year Half Year Full Year 2007 2006 2006 £m £m £mCash flows from operating activities Profit before tax from continuing operations (note i) 726 899 2,221Profit (loss) before tax from discontinued operations (including profit 222 (45) (150)on sale) (note M)Total profit before tax 948 854 2,071Changes in operating assets and liabilities (note ii) 283 73 420Other items (note ii) (767) (241) (282)Net cash flows from operating activities 464 686 2,209Cash flows from investing activitiesNet cash flows from purchases and disposals of property and equipment (137) (280) (140)Costs incurred on purchase of Egg minority interests (note K) - (6) (6) Acquisition of subsidiaries, net of cash balances (note iii) (77) 15 (70)Disposal of Egg, net of cash balances (notes iv and K) (538) - - Disposal of other subsidiaries, net of cash balances (note iii) 157 80 114Net cash flows from investing activities (595) (191) (102)Cash flows from financing activitiesStructural borrowings of the Group: Shareholder-financed operations (note v): Redemption (150) (1) (1) Interest paid (104) (104) (204) With-profits operations (note vi): Interest paid - (9) (9) Equity capital (note vii): Issues of ordinary share capital 1 1 15 Dividends paid (171) (260) (323)Net cash flows from financing activities (424) (373) (522) Net (decrease) increase in cash and cash equivalents (555) 122 1,585Cash and cash equivalents at beginning of period 5,071 3,586 3,586Effect of exchange rate changes on cash and cash equivalents (16) (43) (100)Cash and cash equivalents at end of period (note viii) 4,500 3,665 5,071 Notes (i) Profit before tax represents income net of post-tax transfers to unallocatedsurplus of with-profits funds before tax attributable to policyholders andunallocated surplus of with-profits funds, unit-linked policies andshareholders' profits. It does not represent profit before tax attributable toshareholders. (ii) The adjusting items to profit before tax include changes in operatingassets and liabilities and other items comprising adjustments in respect ofnon-cash items, including operational interest receipts and payments, dividendreceipts and tax paid. The figure of £(767)m for other items at half year 2007includes £(290)m in respect of the profit on sale of Egg, which is included inthe cash flows from investing activities in this statement, and tax paid of £(361)m. The most significant elements of the adjusting items within changes inoperating assets and liabilities are as follows: Half Year Half Year Full Year 2007 2006 2006 £m £m £m Deferred acquisition costs (excluding changes taken directly (277) (462) (398) to equity) Other non-investment and non-cash assets (884) (873) 166 Investments (7,189) (2,618) (13,748) Policyholder liabilities (including unallocated surplus) 7,181 4,105 13,540 Other liabilities (including operational borrowings) 1,452 (79) 860 Changes in operating assets and liabilities 283 73 420 (iii) Acquisitions and disposals of subsidiaries shown above include venturefund and other investment subsidiaries of the PAC with-profits fund, as shown innote K. (iv) The amount of £(538)m in respect of the disposal of Egg, net of cashbalances shown above, represents the net sale proceeds of £527m less cash andcash equivalents of £1,065m held by Egg and transferred on disposal. (v) Structural borrowings of shareholder-financed operations consist of the coredebt of the parent company and related finance subsidiaries, Jackson surplusnotes and, in 2006, Egg debenture loans. Following the sale of Egg in May 2007,these loans no longer form part of the Group's borrowings. Core debt excludesborrowings to support short-term fixed income securities programmes andnon-recourse borrowings of investment subsidiaries of shareholder-financedoperations. Cash flows in respect of these borrowings are included within cashflows from operating activities. In June 2007, borrowings of £150m were repaidon maturity. (vi) Structural borrowings of with-profits operations relate solely to the £100m8.5 per cent undated subordinated guaranteed bonds which contribute to thesolvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fencedsub-fund of the PAC with-profits fund. Cash flows on other borrowings ofwith-profits funds, which principally relate to venture fund investmentsubsidiaries and other consolidated investment vehicles, are categorised asoperating activities in the presentation above. (vii) Cash movements in equity capital exclude scrip dividends and share capitalissued in respect of the acquisition of Egg minority interests in 2006. (viii) Of the cash and cash equivalents amounts reported above, £377m (half year2006: £388m; full year 2006: £437m) represents cash and cash equivalents of theparent company and related finance subsidiaries. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS NOTES ON THE UNAUDITED IFRS BASIS RESULTS A Basis of preparation and audit status The Group's policy for preparing this interim financial information is to usethe accounting policies adopted by the Group in its last consolidated financialstatements, as updated by any changes in accounting policies it intends to makein its next consolidated financial statements as a result of new or changed IFRSthat are already endorsed by the European Union (EU) and that are applicable oravailable for early adoption for the next annual financial statements. The IFRS basis results for the 2007 and 2006 half years are unaudited. The 2006full year IFRS basis results have been derived from the 2006 statutory accounts.The auditors have reported on the 2006 statutory accounts which have beendelivered to the Registrar of Companies. The auditors' report was (i)unqualified, (ii) did not include reference to any matters to which the auditorsdrew attention by way of emphasis without qualifying their report and (iii) didnot contain a statement under section 237(2) or (3) of the Companies Act 1985. B Significant accounting policies The accounting policies applied by the Group in these condensed consolidatedfinancial statements are the same as those previously applied in the Group'sconsolidated financial statements for the year ended 31 December 2006. C Segment disclosure Half Year Half Year Full Year 2007 2006 2006 £m £m £mRevenueLong-term business 16,616 13,565 34,197Broker-dealer and fund management 682 518 1,080Unallocated corporate 90 71 38Intra-group revenue eliminated on (141) (138) (284)consolidationTotal revenue per income statement 17,247 14,016 35,031 Charges (before income tax attributable to policyholders andunallocated surplus of long-term insurance funds)Long-term business, including post-tax transfers to unallocated surplus of (16,076) (12,881) (32,162)with-profits fundsBroker-dealer and fund management (479) (358) (797)Unallocated corporate (107) (16) (135)Intra-group charges eliminated on 141 138 284consolidationTotal charges per income statement (16,521) (13,117) (32,810) Revenue less charges (continuingoperations)Long-term business 540 684 2,035Broker-dealer and fund management 203 160 283Unallocated corporate (17) 55 (97)Profit before tax* 726 899 2,221Tax attributable to policyholders' returns 2 (162) (849)Profit before tax attributable to 728 737 1,372shareholdersTax attributable to shareholders' profits (253) (253) (392)Profit from continuing operations after tax 475 484 980Discontinued operations (net of tax)Banking (note M) 241 (34) (105) Profit for the period 716 450 875 * Profit before tax represents income net of post-tax transfers to unallocatedsurplus of with-profits funds, before tax attributable to policyholders andunallocated surplus of with-profits funds, unit-linked policies andshareholders' profits. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS NOTES ON THE UNAUDITED IFRS BASIS RESULTS (CONTINUED) D Supplementary analysis of profit from continuing operations before taxattributable to shareholders Half Year Half Year Full Year 2007 2006 2006Results analysis by business area £m £m £m UK OperationsUK insurance operations 251 205 500M&G 140 100 204Total 391 305 704US OperationsJackson 218 223 398Broker-dealer and fund management 9 8 18Curian (2) (4) (8)Total 225 227 408Asian OperationsLong-term business 76 88 189Fund management 33 22 50Development expenses (6) (7) (15)Total 103 103 224Other income and expenditureInvestment return and other income 42 33 58Interest payable on core structural borrowings (88) (89) (177)Corporate expenditure: Group Head Office (50) (46) (83) Asia Regional Head Office (17) (19) (36)Charge for share-based payments for Prudential schemes (note iii) (5) (5) (10)Total (118) (126) (248) UK restructuring costs 0 (11) (38)Operating profit from continuing operations based on longer-term 601 498 1,050investment returns (note iv)Short-term fluctuations in investment returns on shareholder-backed 24 39 155business (note i)Shareholders' share of actuarial gains and losses on defined benefit 103 200 167pension schemes (note ii) Profit from continuing operations before tax attributable to shareholders 728 737 1,372(note iv) (i) Short-term fluctuations in investment returns on shareholder-backedbusiness £m £m £mUS Operations: Movement in market value of derivatives (other than 36 93 34 equity-based) used for economic hedging purposes Actual less longer-term investment returns for other items 25 9 20Asian Operations (10) (36) 134Other Operations (27) (27) (33) 24 39 155 (ii) Shareholders' share of actuarial gains and losses on defined benefitpension schemes £m £m £m Actual less expected return on scheme assets* (178) (57) 156Experience (losses) gains on liabilities (8) 0 18Gains on changes of assumptions for scheme liabilities** 462 611 311 276 554 485Less: amounts attributable to the PAC with-profits fund (173) (354) (318) 103 200 167 * The expected rate of return applied for half year 2007 was 5.9 per cent. Theshortfall of actual investment returns against expected returns in half year2007 was due to the decrease in the value of corporate and government bondswhich more than offset the increase in the value of equity and property holdingsof the schemes. ** The gains on changes of assumptions for scheme liabilities primarily reflectmovements in yields on good quality corporate bonds. These yields are used todiscount the projected pension scheme benefit payments. The discount rates applied for the Group's UK defined benefit schemes, andreflected in the gains and losses shown above, are as follows: # 30 June 2007 5.8% 31 December 2006 5.2% 30 June 2006 5.5% 31 December 2005 4.8% (iii) Share-based payments The charge for share-based payments for Prudential schemes is for the SAYE andGroup performance-related schemes. (iv) Continuing operations - scope 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. Note M showsthe detailed results for the discontinued operations. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS NOTES ON THE UNAUDITED IFRS BASIS RESULTS (CONTINUED) E Tax charge The total tax charge of £251m for the half year 2007 (half year 2006: £415m;full year 2006: £1,241m) comprises £37m (half year 2006: £231m; full year 2006:£698m) UK tax and £214m (half year 2006: £184m; full year 2006: £543m) overseastax. This tax charge comprises tax attributable to policyholders andunallocated surplus of with-profits funds, unit-linked policies andshareholders. The tax charge attributable to shareholders of £253m for the halfyear 2007 (half year 2006: £253m; full year 2006: £392m) comprises £95m (halfyear 2006: £106m; full year 2006: £142m) UK tax and £158m (half year 2006:£147m; full year 2006: £250m) overseas tax. The tax credit related to discontinued operations, which is all attributable toshareholders, amounted to £19m (half year 2006: £11m; full year 2006: £45m). Amounts for deferred tax are determined using the current rate of tax or, wheresubstantively enacted through the legislative process, the prospective rate.Accordingly, the deferred tax amounts for half year 2007 reflect the prospectivechange for the main UK corporation tax rate from 30 per cent to 28 per centwhich is anticipated to be effective from 1 April 2008. Half Half Full Year 2007 Year Year 2006 2006F Supplementary analysis of earnings per share from continuing operations (pence) (pence) (pence) On operating profit based on longer-term investment returns after related tax 16.3p 14.0p 30.9pand minority interestsAdjustment from post-tax longer-term investment returns to post-tax actual 0.1p 0.2p 4.8pinvestment returns (after related minority interests)Adjustment for post-tax shareholders' share of actuarial and other gains and 3.0p 5.8p 4.8plosses on defined benefit pension schemesOn profit from continuing operations after tax and minority interests 19.4p 20.0p 40.5p G Dividend An interim dividend of 5.70p per share will be paid on 24 September 2007 toshareholders on the register at the close of business on 17 August 2007. Ascrip dividend alternative will be offered to shareholders. 30 Jun 30 Jun 31 Dec 2007 2006 2006H Shareholders' equity £m £m £m Share capital 123 121 122Share premium 1,823 1,808 1,822Reserves 3,959 3,120 3,544Total 5,905 5,049 5,488 30 Jun 30 Jun 31 Dec 2007 2006* 2006*I Net core structural borrowings of shareholder-financed £m £m £m operations Core structural borrowings of shareholder-financed operations (perconsolidated balance sheet): Central funds 2,289 2,520 2,485 Jackson 124 135 127Total 2,413 2,655 2,612Less: Holding company** cash and short-term investments (recorded (1,546) (1,067) (1,119)within the consolidated balance sheet)Net core structural borrowings of shareholder-financed operations 867 1,588 1,493* Excluding Egg's borrowings** Prudential plc and related finance subsidiaries 30 Jun 30 Jun 31 Dec 2007 2006 2006J Other borrowings £m £m £m Operational borrowings attributable to shareholder-financedoperationsBorrowings in respect of short-term fixed income securities 2,045 1,500 2,032programmesNon-recourse borrowings of investment subsidiaries managed by PPM 544 943 743AmericaBorrowings in respect of banking operations 0 3,535 2,819Other borrowings 16 16 15Total 2,605 5,994 5,609 Borrowings attributable to with-profits fundsNon-recourse borrowings of venture fund investment subsidiaries 1,063 1,183 926Non-recourse borrowings of consolidated investment vehicles 854 690 681Subordinated debt of the Scottish Amicable Insurance Fund 100 100 100Other borrowings (predominantly obligations under finance leases) 105 69 69Total 2,122 2,042 1,776 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS NOTES ON THE UNAUDITED IFRS BASIS RESULTS (CONTINUED) K Acquisitions and disposals (i) Shareholder acquisitions and disposals - Egg In the first half of 2006, the Company acquired the outstanding 21.7 per centminority interest in Egg, its UK banking business. The Company accounted for thepurchase of minority interests using the economic entity method. Accordingly,£167m was charged to retained earnings in 2006 representing the differencebetween the consideration paid and the share of net assets acquired. On 29 January 2007, the Company announced that it had entered into a bindingagreement to sell Egg Banking plc to Citi. Under the terms of the agreement, theconsideration payable to the Company by Citi was £575m cash, subject toadjustments to reflect any change in net asset value between 31 December 2006and completion. On 1 May 2007, the Company completed the sale. The consideration, net ofexpenses, was £527m. The reduction from the £575m noted above primarily reflectsEgg's post tax operating loss of £49m for the period from 1 January 2007 to thedate of sale, as shown in note M. Cash and cash equivalents disposed of were £1,065m. Accordingly, the cashoutflow for the Group arising from the disposal of Egg, as shown in the summaryconsolidated cashflow statement, was £538m. (ii) PAC with-profits fund acquisitions The PAC with-profits fund acquires a number of venture capital holdings throughPPM Capital and M&G in which the Group is deemed to have a controlling interest,in aggregate with, if applicable, other holdings held by, for example, thePrudential Staff Pension Scheme. There were two such acquisitions during theperiod to 30 June 2007. These were acquisitions for: • 78 per cent of the voting equity interest of Red Funnel, a ferry company, inJune 2007. • 71 per cent of the voting equity interest of Orizon AG, an employment hiringagency, in March 2007. The results of the acquisitions have been included in the consolidated financialstatements of the Group commencing on the respective dates of acquisition. Theearnings contributed by these acquisitions to the income statement areinsignificant to the half year 2007 results and are reflected in the change inthe unallocated surplus of the with-profits fund. Shareholder results areunaffected. Total consideration of £97m was paid in respect of the acquisitionsduring the period to 30 June 2007. Cash and cash equivalents of £20m wereacquired. (iii) PAC with-profits fund disposals As at 31 December 2006, one venture subsidiary was classified as held for sale;Pharmacia Diagnostics. The sale of this venture subsidiary was completed on 18January 2007. Total cash consideration received was £179m. Goodwill of £138m andcash and cash equivalents of £22m were disposed of. No other venturesubsidiaries were sold during the first half of 2007 or classified as held forsale at 30 June 2007. L 2006 half year comparative balance sheet Minor presentational adjustments have been made for refinements to theacquisition accounting for intangible assets of venture fund investmentsubsidiaries of the PAC with-profits fund. These adjustments affect the carryingvalue of goodwill and other intangible assets, with minor consequential effectson some other balance sheet categories. Shareholders' profit and equity areunaffected by these adjustments. M Discontinued operations Half year Half year Full Year 2007 2006 2006 £m £m £mPre-tax profit (loss) from discontinued operations Egg results : Operating loss based on longer-term investment returns for (68) (45) (157) the period of ownership Short-term fluctuations in investment - - 7 returns Profit on sale of Egg Banking plc 290 - - Total 222 (45) (150)Tax On Egg results : Operating loss based on longer-term investment returns for 19 11 47 the period of ownership Short-term fluctuations in investment - - (2) returns On profit on sale of Egg Banking plc 0 - - Total 19 11 45Profit (loss) from discontinued operations, net of tax 241 (34) (105) Discontinued operations relate entirely to UK banking operations following thesale on 1 May 2007 of Egg Banking plc to Citi. Note K(i) provides details of thesale of Egg. Independent review report by KPMG Audit Plc to Prudential plc Introduction We have been engaged by the Company to review the International FinancialReporting Standards (IFRS) basis financial information for the six months ended30 June 2007 set out on pages 10 to 20. We have read the other informationcontained in the interim report and considered whether it contains any apparentmisstatements or material inconsistencies with the financial information. This report is made solely to the Company in accordance with the terms of ourengagement to assist the Company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the Company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted bylaw, we do not accept or assume responsibility to anyone other than the Companyfor our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the IFRS financial information contained therein,is the responsibility of, and has been approved, by the directors. Thedirectors are responsible for preparing the interim report in accordance withthe Listing Rules of the Financial Services Authority which require that theaccounting policies and presentation applied to the interim figures should beconsistent with those applied in preparing the preceding annual financialstatements except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4Review of interim financial information issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of makingenquiries of management and applying analytical procedures to the financialinformation and underlying financial data and, based thereon, assessing whetherthe accounting policies and presentation have been consistently applied unlessotherwise disclosed. A review excludes audit procedures such as tests ofcontrols and verification of assets, liabilities and transactions. It issubstantially less in scope than an audit performed in accordance withInternational Standards on Auditing (UK and Ireland) and therefore provides alower level of assurance than an audit. Accordingly, we do not express an auditopinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the IFRS financial information as presented for the six monthsended 30 June 2007. KPMG Audit PlcChartered AccountantsLondon31 July 2007 Independent review report by KPMG Audit Plc to Prudential plc Introduction We have been engaged by the Company to review the European Embedded Value (EEV)basis interim supplementary information for the six months ended 30 June 2007set out on pages 2 to 9 ("the interim supplementary information"). The interim supplementary information has been prepared in accordance with theEEV Principles issues in May 2004 by the CFO Forum using the methodology andassumptions set out on pages 6 to 8. The interim supplementary informationshould be read in conjunction with the Group's interim IFRS financialinformation which is set out on pages 10 to 20. We have read the other information contained in the interim report andconsidered whether it contains any apparent misstatements or materialinconsistencies with the interim supplementary information. This report is made solely to the Company in accordance with the terms of ourengagement. Our review has been undertaken so that we might state to theCompany those matters we have been engaged to state in this report and for noother purpose. To the fullest extent permitted by law, we do not accept orassume responsibility to anyone other than the Company for our review work, forthis report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the interim supplementary information containedtherein, is the responsibility of, and has been approved by, the directors. Thedirectors have accepted responsibility for preparing the interim supplementaryinformation in accordance with the EEV Principles and for determining theassumptions used in the application of those principles. Review work performed We conducted our review having regard to Bulletin 1999/4 Review of interimfinancial information issued by the Auditing Practices Board for use in theUnited Kingdom. A review consists principally of making enquiries of managementand applying analytical procedures to the interim supplementary information andunderlying financial data and, based thereon, assessing whether the methodology,assumptions and presentation have been consistently applied unless otherwisedisclosed. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit performed in accordance with International Standards onAuditing (UK and Ireland) and therefore provides a lower level of assurance thanan audit. Accordingly, we do not express an audit opinion on the interimsupplementary information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the interim supplementary information as presented for the sixmonths ended 30 June 2007. KPMG Audit PlcChartered AccountantsLondon31 July 2007 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Prudential