Full Year Results 2005 -Pt1

16th Mar 2006 07:02

Prudential PLC16 March 2006 Embargo: 7.00am Thursday 16 March 2006 PRUDENTIAL PLC 2005 FULL YEAR RESULTS Double-digit growth in all key performance measures • Total EEV operating profit from continuing operations of £1,712 million, up 33% • New business APE of £2,146 million, up 15%; PVNBP of £16.8 billion, up 11% • New business profit of £867 million, up 15%, with Group margin of 41% • Total statutory profit from continuing operations of £957 million, up 36% • EEV shareholders' funds up 20% to £10.3 billion • Return on embedded value of 15.7% (2004: 13.4%*) • Total net inflows for funds businesses of £5.2 billion, with external funds under management of £46 billion, up 23% • Full year dividend of 16.32 pence per share (2004: 15.84 pence per share) All figures compared to 2004 at constant exchange rates unless stated; * atreported exchange rates Commenting, Mark Tucker, Group Chief Executive said: "Prudential has had a successful year across all its businesses, and we havedelivered double-digit growth in all our key performance measures, with totalstatutory profit from continuing operations up 36% and total EEV profit up 33%.These results demonstrate the progress we are making in developing compellingpositions in the world's leading retail financial services markets. We haveambitious growth plans in place and I am confident in the outlook for theGroup's future prospects. "I see tremendous scope to deliver increasing value for shareholders from eachindividual business operation; and as a Group, we derive both financialadvantage and resilience from the diversity of our portfolio of businesses, andthe opportunities for collaboration between them. "In the UK, we have three strong retail franchises in Prudential, Egg and M&G. "Our UK Insurance business continued to develop its shareholder backed businesssuccessfully and increased APE sales by 10% in the year to £900 million, meetingits 14% target for internal rate of return on new business two years early. Eggwas successful in testing market conditions, improving its net interest marginagainst a background of falling base rates and also lowering its cost incomeratio. M&G had an excellent year with record gross and net inflows, strongprofit growth and investment performance. "In the US, Jackson National Life is a significant cash generative business withcompetitive advantage in the key growth sectors in the market. JNL's strength invariable annuities, its ability to bring products to market rapidly and itspositioning in advice-based distribution channels means it is very well placedto take advantage of the significant retirement savings flows expected from the"baby boomer" generation over the coming years. "We have an unrivalled opportunity in the high growth and high profit markets ofAsia. Whilst continuing to focus on our programme of rapid expansion and profitgrowth, we are also expecting the region to become cash positive in 2006, inline with our previous predictions. We are maintaining momentum in the expansionof our distribution capability. Our proprietary agent distribution force acrossthe region reached 170,000 in 2005 with particularly rapid expansion in agentnumbers in India and China. "Our asset management businesses are providing very good cash flow generationand have strong growth prospects, with the UK and Asia attracting increasingvolumes of third party funds. These businesses, together with PPMA, our US assetmanagement business, continued to support their own sales growth and addsignificant value to the Group's insurance operations through their excellentinvestment performance. "We will grow by taking full advantage of our excellent positions in the world'sleading retail financial services markets, continuing to build momentum acrossthe Group and driving profitable growth and value for our shareholders." Group Chief Executive Review 2005 was a successful year for Prudential. The Group has continued to expand its insurance business strongly and our assetmanagement businesses have also had an excellent year. Total group operating profit before tax, on a European Embedded Value ("EEV")basis, was £1,712 million an increase of 33%. Statutory IFRS operating profitbefore tax was up 36% at £957 million. The continuing momentum of the Group can be seen in the growth of insurancepremium income in 2005 to £13.8 billion (2004: £12.2 billion) and funds undermanagement of £234 billion at the end of 2005 (2004: £197 billion). New business sales in our insurance operations increased by 15% to £2,146million on an APE basis and each of our regional operations achieveddouble-digit growth. New business profits increased by 15% across the Group to£867 million, and operating profit before tax on the insurance business on anEEV basis increased by 30% to £1,743 million. In our asset management businesses external funds under management increased to£46 billion up 23%. A final dividend of 11.02 pence per share has been recommended by the Boardbringing the full year dividend to 16.32 pence per share, an increase of 3% from2004. The full year dividend is covered 1.7 times by post-tax IFRS profit afterminority interests. We intend to maintain our current dividend policy, with thelevel of dividend growth being determined after considering the opportunities toinvest in those areas of our business offering attractive growth prospects, ourfinancial flexibility and the development of our statutory profits over themedium to long-term. Shareholders' funds, on an EEV basis, grew strongly to £10.3 billion at the endof 2005 (2004: £8.6 billion) and the Group's return on embedded value was 15.7% (2004: 13.4%) at reported exchange rates. In May 2005 I set up a team of senior executives with a brief to identify theambitions and business strategies best suited to maximise sustainable growth invalue for the Group's shareholders over the longer-term. The key conclusions of the review were that: •Demographic trends and the increasing concentration of wealth in the hands of those approaching retirement or already retired presents a major opportunity to establish the Group as a leading provider of 'financial services for retirement' by playing to our strengths and areas of competitive advantage. •The Group is well positioned in markets that offer highly attractive opportunities for strong organic growth over the next ten years. •To exploit these opportunities fully we need to broaden our customer proposition and product range to align them more closely with anticipated retail financial sector profit pools. •In addition we must complement our strong and important intermediary links by expanding the proportion of revenue derived from direct customers; and ensure that we build deep lifecycle relationships with our customers. •We should also develop the global reach and profile of our excellent asset management businesses. Consistent with this strategy and to support closer workings between our UKinsurance business and Egg we announced the terms of an Offer to acquire the21.7% of shares in Egg that the Group did not already own. Each of our businesses has operational autonomy within its market and this iscritical to our success, since it is the key to our ability to tailor productsand services to meet local market needs. However the review also concluded thatthere are material synergies that can be achieved through closer working acrossthe Group, consistent with our decentralised approach; and work is underway toidentify and capture these, for example by establishing a single global ITinfrastructure and support unit with expected cost savings of £20 - £25 millionper annum. Finally, the review concluded we must continue to enhance the effectiveness ofour capital management processes, to ensure that investment and capitalallocation decisions are focused on those areas of activity that will generatethe best returns to shareholders. Prudential is developing compelling positions in the world's leading retailfinancial services markets. I am confident of the outlook for the Group and weaim to deliver significant profitable growth. UK insurance and retail banking operations The Prudential-branded UK Insurance business continued to develop itsshareholder backed business successfully and increased APE sales by 10% in theyear to £900 million. The internal rate of return on new business written in theyear was 14% meeting the target set for 2007 two years early. We continued in 2005 to increase the scale of our annuity business and at thesame time reduce the average duration of the total book. We have also continued to develop our product range in 2005. In October weentered the lifetime mortgage market, a market that is set to grow rapidly to anestimated £7 billion by 2008. Our innovative product has been designed with thecustomer, adviser and regulator in mind and initial customer interest has beenencouraging. We have also made good progress in unit-linked and off-shore bondsales which grew 31% and 15% respectively in the year. The A-day proposals offer the opportunity to attract new business as customersincrease contributions and consolidate their pension arrangements. We havealready launched a new Flexible Retirement Plan and we will undertake a reviewof our overall individual pensions offering during 2006. In addition, we haveestablished a unit to communicate directly with our existing pension customers. The UK insurance business has a balanced distribution model with strongpositions across all major segments - IFA and multi-tie intermediaries, directmarketing and telesales, Employee Benefit Consultants and a well developedsingle-tie Partnership channel. We continued to make good progress indiversifying distribution, reaching agreements with a range of providersincluding Barclays, National Australia Bank, St. James' Place and with RoyalLondon to provide pension annuities for vesting Scottish Life policies. In addition, we continued to be successful in gaining access to multi-ties inthe year. Prudential is in a strong position to benefit as the IFA marketchanges over the next 18-24 months and recently achieved a "5 star" IFA servicerating for its investment products and "4 star" rating overall, demonstratingstrong progress in this important area. In retail banking, Egg's UK operations delivered an underlying profit of £60million (2004: £72 million). Egg was successful in testing market conditionsimproving its net interest margin against a background of falling base rates andalso lowering its cost income ratio. There has been a general deterioration inconsumer credit conditions however, Egg's experience here has been substantiallybetter than the market average. Following our decision to acquire the minority shareholding in Egg, we havetargeted annualised cost savings of £40 million across our UK operations by2007. During 2006 we will undertake a further review of the cost base in theseoperations. We also see opportunities for revenue synergies across our UKbrands' five million marketable customers. Our central focus in the UK is to use the strong franchises that we have toimprove returns. We are targeting growth but also managing for value and we willnot commit capital if we do not see the individual product returns that werequire emerging over a reasonable timeframe. US Insurance operations Jackson National Life (JNL), the Group's US operation, is a significant cashgenerative business with the market positioning to continue its strong trackrecord of profitable growth in the retirement market. JNL continued to show strong growth in 2005 increasing new business sales by 13%to £515 million APE with growth in variable annuities of 31%. Both the marginand the internal rate of return on new business moved ahead strongly in theyear. During the year JNL also successfully integrated the Life of Georgia book ofbusiness acquired in May, transferring 1.5 million policies on to its low costflexible platform. We fully expect to beat the 12% return target for thetransaction. JNL's strength in variable annuities, its ability to bring products to marketrapidly and its positioning in advice-based distribution channels means it isvery well placed to take advantage of the significant retirement savings flowsexpected from the "baby boomer" generation over the coming years. JNL's priorities are to continue to focus on developing their position in thevariable annuity market and to expand the business through bolt-on acquisitionsthat meet targeted rates of return. Asia insurance operations Prudential has an unrivalled exposure and weighting to the high growth and highprofit markets of Asia. Prudential Corporation Asia saw new business on an APEbasis increase by 23% to £731 million with double-digit rates of growth achievedin Korea, China, India, Singapore and Indonesia. Profitability on new business and internal rates of return remain high and wewill continue to emphasise unit-linked products, which offer higher returns andgreater capital efficiency. Unit-linked products accounted for 63% of salesacross the region in 2005. We are maintaining momentum in the expansion of our distribution capability.Agency distribution is the dominant channel throughout the region and 75% of oursales are from this source. Our proprietary agent distribution force across theregion reached 170,000 in 2005 with particularly rapid expansion in agentnumbers in India and China. We will continue to increase agent numbers in theseand other markets as the bedrock on which we build our market share and marketleadership positions. We will also maintain a clear focus on improving theproductivity of our agent force across the whole region, and this isparticularly significant for growth in those countries in which we have beenlong established. We see material scope to increase sales volumes through our 40 existing bankdistribution relationships and we intend to enter into new partnershipagreements. We shall also continue to access direct and broker channels as theydevelop in individual markets. As part of our global drive to attain new levels of cost efficiency, in Asia weare developing a 'regional hub' basis for sharing back office servicing and callcentre facilities to leverage scale advantages beyond the reach of individualbusiness operations. In March 2005 the first regional hub, servicing theSingapore and Malaysian life insurance operations, was launched. We have plansto open an additional hub in China in the second half of 2006, where we alreadyhave a regional IT development centre. I am pleased to report that, whilst continuing our programme of rapid expansionand profitable growth in Asia, we are also expecting the region to become cashpositive in 2006, in line with our previous predictions. Asset Management Operating profit before tax across our asset management businesses in the UK, USand Asia increased to £195 million up 16%. M&G in the UK had an excellent year with record gross and net inflows and strongprofit growth. In Asia, underlying growth in retail funds under management was29%. These businesses, together with PPMA, our asset management business in the US,continued to support their own sales growth and add significant value to thegroup's insurance operations through their excellent investment performance. The priorities in asset management are to continue to target growth in externalfunds under management by capitalising on a growth in demand for transparentinvestment products, access to more global products, the continuing rise of openarchitecture platforms and a rapidly expanding role for cross-border sales off acommon platform. We will create value through superior investment performanceand to capitalise on international opportunities through greater collaboration. Balance Sheet and Capital Management Improving capital efficiency is at the heart of the Group's commitment todeliver sustainable increases in shareholder value and we will maintain arigorous approach to capital allocation and deployment. As of the 16 March, we estimate that the Group's capital surplus at the end of2005 on a regulatory basis, as measured by the Financial ConglomeratesDirective, was around £825 million little changed from the previous year. InJuly, we took advantage of good market conditions in the US retail market toraise $300 million of perpetual capital securities, which qualifies as Groupregulatory capital. The primary use of the proceeds will be to re-finance anon-qualifying £150 million bond that matures in 2007. The Group is confident that it has the capital and cash resources to fund itsplanned organic growth. In summary: • The Group delivered strong results in 2005 across all its businesses • We have compelling positions in the world's leading retail financial services markets and the resources to capitalise on these • In the UK, we have three excellent and profitable franchises in Prudential, Egg and M&G on which to build for the future • In the US, JNL is a significant cash generative business with the market positioning for profitable growth in the retirement market. It has competitive advantage in the sectors in which it chooses to operate; and the ability to participate in market consolidation through bolt-on acquisitions • In Asia we have an unrivalled exposure to opportunities for life insurance sales and profit growth across the region, whilst continuing our programme of rapid expansion and profit growth. We are also expecting the region to become cash positive in 2006 • Our asset management businesses have significant growth prospects and are providing solid cash flow generation There is tremendous scope to deliver increasing value for shareholders from eachindividual business operation, and from the Group as a whole which derives bothfinancial advantage and resilience from the diversity of its portfolio ofbusinesses, and the opportunities for collaboration between them. - ENDS - Enquiries: Media Investors / analystsJon Bunn 020 7548 3559 James Matthews 020 7548 3561William Baldwin-Charles 020 7548 3719 Marina Novis 020 7548 3511Joanne Doyle 020 7548 3708 Notes to Editor follow... Notes to Editor 1. The results in this announcement are prepared on two bases, namelyInternational Financial Reporting Standards ('IFRS') and on the EuropeanEmbedded Value ('EEV') basis. The IFRS basis results form the basis of theGroup's financial statements. In preparing those statements the Company,consistent with other financial institutions with banking businesses, has chosento adopt the standards IAS32, IAS39 and IFRS4 at 1 January 2005. To assist withcomparison of results additional supplementary information on a pro forma basishas been provided that shows the 2004 results as if these standards had beenadopted by the Group's insurance operations from 1 January 2004. The EEV basis results have been prepared in accordance with the principlesissued by the CFO Forum of European Insurance Companies in May 2004 and expandedby the Additional Guidance on EEV disclosures published in October 2005. Whereappropriate the EEV basis results include the effects of IFRS. Previously, the Group has reported supplementary information on the AchievedProfits basis for its interim and full year financial reporting. The adoption ofEEV basis reporting in place of Achieved Profits basis reporting, reflectsdevelopments through the CFO Forum to achieve a better level of consistency, animproved embedded value methodology, and one which is applied by the majorEuropean Insurance Companies in their financial reporting. Period on period percentage increases are stated on a constant exchange ratebasis. 2. There will be a conference call today for wire services at 7.45am (GMT)hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group FinanceDirector. Dial in telephone number: 0800 358 2182. Passcode: 155439#. 3. A presentation to analysts will take place at 9.30am (GMT) atGovernor's House, 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. 4. There will be a conference call for investors and analysts at 2.30pm(GMT) hosted by Mark Tucker, Group Chief Executive and Philip Broadley, GroupFinance Director. Please call from the UK +44 (0)208 609 3355 and from the US +1866 793 4279. Pin number 487687#. A recording of this call will be available forreplay for one week by dialling: +44 (0)208 609 0289 from the UK or +1 866 6765865 from the US. The conference reference number is 138989. 5. High resolution photographs are available to the media free of chargeat www.newscast.co.uk (+44 (0) 207 608 1000). 6. An interview with Mark Tucker, Group Chief Executive, (in video/audio/text) will be available on www.cantos.com and www.prudential.co.uk from 7.00amon 16 March 2006. 7. Annual premium equivalent (APE) sales comprise regular premium salesplus one-tenth of single premium insurance sales. 8. Present value of new business premiums (PVNBP) are calculated asequalling single premiums plus the present value of expected new businesspremiums of regular premium business, allowing for lapses and other assumptionsmade in determining the EEV new business contribution. 9. The internal rate of return (IRR) is equivalent to the discount rate atwhich the present value of the post-tax cash flows expected to be earned overthe life time of the business written in shareholder-backed life funds is equalto the total invested capital to support the writing of the business. Thecapital included in the calculation of the IRR is the initial capital in excessof the premiums received required to pay acquisition costs and set up thestatutory capital requirement. The time value of options and guarantees areincluded in the calculation. 10. Total number of Prudential plc shares in issue as at 31st December 2005was 2,386,784,266. 11. Financial Calendar 2006: Ex-dividend date 22 March 2006Record date 24 March 2006First Quarter New Business Figures 20 April 2006Annual General Meeting 18 May 2006Payment of 2005 final dividend 26 May 20062006 Interim Results / Second quarter New Business Figures 28 July 2006Ex-dividend date 16 August 2006Record Date 18 August 2006Payment of interim dividend 27 October 2006 12. In addition to the financial statements provided with this press release,additional financial schedules are available on the Group's website atwww.prudential.co.uk *Prudential plc, a company incorporated and with its principal place of businessin the United Kingdom, and its affiliated companies constitute one of theworld's leading financial services groups. It provides insurance and financialservices directly and through its subsidiaries and affiliates throughout theworld. It has been in existence for over 150 years and has £234 billion inassets under management, (as at 31 December 2005). Prudential plc is notaffiliated in any manner with Prudential Financial, Inc, a company whoseprincipal place of business is in 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. BUSINESS REVIEW Results Highlights £'m unlessotherwisestated 2005 2004 Percentage 2005 2004 Percentage (at CER) Change (at RER) Change Annual premiumequivalent(APE) sales 2,146 1,867 15% 2,146 1,846 16%Net investmentflows 5,189 3,297 57% 5,189 3,284 58%New businessprofit (NBP) 867 752 15% 867 741 17%NBP margin (%APE) 41% 40% 1% pt 41% 40% 1% ptNBP margin (%PVP) 5.2% 5.0% 0.2% pts 5.2% 5.0% 0.2% ptsTotal EEVbasisoperatingprofit * 1,712 1,288 33% 1,712 1,274 34%Total IFRSoperatingprofit *+ 957 703 36% 957 699 37%EEV basisshareholders'funds 10,301 8,998 14% 10,301 8,614 20%IFRSshareholders'funds + 5,194 4,837 7% 5,194 4,740 10%EEV operatingearnings pershare 56.6p 56.6p 43.2p 31% * Continuing operations - excluding Jackson Federal Bank (JFB) and Egg's Francebusiness. + Comparative IFRS results are prepared on a 'proforma' basis which reflects theestimated effect on the 2004 results as if IAS 32, IAS 39 and IFRS4 had beenapplied from 1 January 2004 to the Group's insurance operations together withthe discretionary change for the basis of determining longer-term investmentreturns, as disclosed on 2 June 2005. IFRS operating profit is stated excludinggoodwill impairment, short-term fluctuations in investments returns andshareholders'share of actuarial and other gains and losses on defined benefitpension schemes. In the Business Review and Financial Review, year-on-year comparisons offinancial performance are on a Constant Exchange Rate (CER) basis, unlessspecifically identified as being on a Reported Exchange Rate (RER) basis. Group Results The Group has delivered a good set of results for 2005, as illustrated by thedouble-digit growth of all the key performance measures shown above. As a result of improved sales in the UK, the US and Asia, the Group deliveredstrong new business profits (NBP) in 2005. This, together with the significantincrease in contributions from the in-force insurance business and fundmanagement operations, drove European Embedded Value (EEV) basis operatingprofits up 33 per cent on 2004. On an International Financial Reporting Standards basis (IFRS), operatingprofits were up 36 per cent on the same period of last year driven by the growthin profits from the long-term and fund management businesses. Earnings per share, based on EEV basis operating profit after tax and relatedminority interests, but before amortisation of goodwill, were 56.6 pence,compared with a restated figure of 43.2 pence in 2004. Following the RightsIssue in October 2004, a restatement of earnings per share is derived andreported in accordance with the requirement of Financial Reporting Standard(FRS) 14. Earnings per share, based on total IFRS operating profit after tax and minorityinterests, but before amortisation of goodwill, were 32.2 pence compared with arestated figure of 22.7 pence in 2004. Impact of Currency Movements Prudential has a diverse international mix of businesses with a significantproportion of its profit generated outside the UK. In 2005, 72 per cent of newbusiness profit and 54 per cent of IFRS operating profit was delivered fromoverseas operations. In preparing for the Group's consolidated accounts, resultsof overseas operations are converted at rates of exchange based on the averageof the year, whilst shareholders' funds are converted at year-end rates ofexchange. 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. Insome cases, these exchange rate fluctuations can mask underlying businessperformance. Consequently, the Board has for a number of years reviewed the Group'sinternational performance on a CER basis. This basis eliminates the impact fromconversion, the effects of which do not alter the long-term value ofshareholders' interests in our non-UK businesses. In the Business Review and Financial Review, year-on-year comparisons offinancial performance are on a CER basis, unless otherwise stated. Insurance UNITED KINGDOM £'m unless otherwise stated 2005 2004 Percentage ChangeAPE sales 900 817 10%NBP 243 241 1%NBP margin (% APE) 27% 30% (3%) ptsNBP margin (% PVP) 3.2% 3.4% (0.2%) ptsTotal EEV basis operating profit 426 486 (12%)Total IFRS operating profit 400 296 35% Prudential UK delivered double digit growth in new business sales and IFRSoperating profit. EEV new business profit remained in line with 2004 at a timewhen certain product markets have shown increased levels of competitionreflected in pricing. APE sales for Prudential UK increased 10 per cent on 2004 to £900 million,driven by strong sales of bulk annuities (up 28 per cent) and unit-linked bonds(up 31 per cent). The Phoenix Life & Pensions in-force annuity book transactionannounced in June 2005 contributed £145 million to the full-year result. APE sales of individual annuities were up 2 per cent on 2004 at £222 million,driven by strong sales through the Partnerships and Direct to Consumer channelswhich increased by 114 per cent and 14 per cent respectively. Despite APE salesof with-profit annuities through the Intermediaries channel increasing 100 percent year-on-year, total individual annuities sales through this channeldecreased 15 per cent reflecting the very competitive pricing environmentthroughout much of the year. APE sales of unit-linked bonds increased 31 per cent to £64 million, reflectingPrudential's growing presence in the IFA unit-linked bond market. This offsetthe year-on-year decrease in with-profit bond sales which fell 31 per cent. Prudential UK's new business profit increased marginally on 2004 to £243million. This was driven by the increase in sales volumes which was offset by afall in the new business profit margin (from 30 per cent in 2004 to 27 per centin 2005 on an APE basis). The movement in margin reflected the shift in productmix in 2005 as Prudential continued to expand its shareholder backed productrange, however, throughout the year there continued to be competitive pressureon margins across a range of products which Prudential substantially resisted. Total EEV basis operating profits fell 12 per cent on 2004 to £426 millionprimarily due to a persistency assumption change made at the half-year. Thecharge of £148 million reflects a strengthening of persistency assumptionsacross all products, primarily in respect of with-profits bonds. Increased IFRS profits arising from shareholder backed annuities contributed tothe 35 per cent increase in total IFRS operating profits. In addition, the verystrong investment performance of Prudential's life-fund over recent yearsresulted in an increase in total IFRS operating profits from the with-profitsbusiness attributable to shareholders. Prudential UK operates through four diversified distribution channels. TheIntermediaries channel, which accounted for 29 per cent of APE sales in 2005,distributes a range of medium to long-term savings products primarily throughfinancial advisers and includes sales generated through multi-ties. The Businessto Business channel, which accounted for 28 per cent of 2005 APE sales,distributes corporate pensions through work-site marketing in partnership withconsulting actuaries and employee benefit consultants. The Partnerships channelhas responsibility for developing relationships with banks and otherdistributors, including other insurers and accounted for 30 per cent of APEsales in 2005, up from just 6 per cent in 2003. The remaining 13 per cent of APEsales were generated by the Direct to Customer channel which focuses primarilyon the sale of annuities to individual pension customers. The Partnerships channel signed a number of significant new agreements duringthe year. These included St. James's Place for annuities; National AustraliaBank for annuities and healthcare; Wesleyan's multi-tie panel for protection;Zurich Financial Services and Openwork for annuities; and the Barclays multi-tiepanel. In addition, Prudential and Royal London reached agreement for allpension annuities arising from vestings of policies written under the ScottishLife brand in the period between January 2005 and December 2010 to be reassuredto Prudential as they come into payment. Following the introduction of the new depolarisation rules, many IFA groups haveused the opportunity to establish multi-tie panels. Prudential has made goodprogress with the new panels announced to date and is strongly positioned totake advantage of the depolarised marketplace as this develops over the next fewyears. Prudential achieved APE sales of £4 million through this channel in 2005and expects that multi-ties will start to have a greater impact on sales in thefuture. Prudential's Business to Business distribution channel delivers pensionsolutions to many of the FTSE 350 companies and is a market leader in theprovision of pension schemes to the UK Public sector. During 2005 Prudentialcontinued to expand the services it offers in this area to enable advisers toaddress the employee benefit challenges of their clients. PruHealth, a healthcare product that links health and fitness to the cost ofmedical insurance plans, celebrated its first anniversary in the third quarterof 2005. The business has made good progress with sales growing on average morethan 30 per cent per month in 2005. Total premium income for the year was £9million and PruHealth now has over 30,000 lives insured. Prudential launched a new lifetime mortgage product, Prudential Property ReleasePlan, in October. This innovative product gives customers greater flexibilityand control over the time of when they draw down funds, thereby reducing totalinterest charges over the lifetime of the loan. Performance to date has beenencouraging with growing support from both advisers and customers. Prudential transferred its UK personal lines general insurance business toWinterthur in 2002 and formed a strategic alliance with Churchill, to offerPrudential branded general insurance products. Under the terms of the agreementPrudential receives commission, the levels of which to date have been offsetagainst payments received at the time of the original transaction, therefore noprofits are recognised on this business at this time. However, under theagreement, Prudential is entitled to receive full commission payments andassociated profit, from 2008 onwards. Including these individuals with Prudential branded general insurance policies,to whom Prudential can sell long-term products, Prudential has 2.5 millionmarketable customers. 2006 is expected to be a year of change for the retirement savings market due toGovernment pensions reforms which come into force on 6 April (A-Day). Prudentialbelieves the changes will have a positive impact and create an improved savingsenvironment over time, although it is unclear how quickly consumers will respondto these new regulations. Prudential has made a significant investment in its A-Day preparations includingsystems developments and customer communications. It currently expects pensionarrangements will be compliant with the new regulations and that customers willbe aware of the changes. In addition, Prudential is reviewing its product rangeto identify where to focus future product developments to enable customers totake better advantage of the new regime. As a consequence of this, Prudential launched a new individual personal pensiondesigned to offer greater transparency and flexibility. The new Pru FlexibleRetirement Plan was launched in December and is available through financialadvisers. The Pensions Commission published its second report in November in which itproposed significant reform of the UK's state and private pension systems.Prudential, with its extensive experience of pensions savings, will continue toplay an active role in this debate and in helping to shape the new structure. The Prudential Assurance Company's (PAC) long-term fund remains very strong. Ona realistic basis, with liabilities recorded on a market consistent basis, thefree assets were valued at around £8.0 billion at 31 December 2005, before adeduction for the risk capital margin, and the fund is rated AA+ by Standard &Poor's and Aa1 by Moody's. The with-profits sub-fund delivered a pre-tax returnof 20 per cent in 2005 and over the last five years, the fund has achieved atotal return of 41 per cent against 6 per cent for the FTSE 100 total returnindex and 12 per cent for the FTSE All-Share total return index (figures are to31 December 2005, before tax and charges). Much of this excellent investment performance was achieved through the activeasset allocation of the fund. As part of its asset allocation process,Prudential constantly evaluates prospects for different markets. At the end ofthe first quarter of 2005, based on Prudential's judgement about the relativevaluations of these assets, Prudential increased its exposure to equities whiledecreasing its exposure to corporate bonds and direct property. As a result of the strong investment performance achieved in 2005, Prudential UKannounced in February 2006 that it will be increasing policy values for the vastmajority of with-profits policies maturing in 2006. The closer partnership of Egg with Prudential's UK life and pensions business,as announced in December, is expected to achieve revenue synergies and totalannualised pre-tax cost savings across the combined business of £40 million bythe end of 2007. This work to maximise the synergies between the two businesseshas already started with PruHealth policies now being sold through Egg. This isan attractive opportunity for PruHealth and the first of what we believe will bea number of effective synergies between Prudential's UK businesses. Prudential UK will continue to pursue profitable opportunities in its chosenproduct areas and distribution channels. UNITED STATES £'m unlessotherwisestated 2005 2004 Percentage Change 2005 2004 Percentage Change (at CER) (at RER) APE sales 515 456 13% 515 453 14%NBP 211 146 45% 211 145 46%NBP margin(% 41% 32% 9% pts 41% 32% 9% ptsAPE)NBP margin(%PVP) 4.1% 3.2% 0.9% pts 4.1% 3.2% 0.9% ptsTotal EEVbasisoperatingprofit * 755 370 104% 755 368 105%Total IFRSoperatingprofit * 362 284 27% 362 282 28% * Continuing operations - excluding Jackson Federal Bank (JFB) which was sold inOctober 2004, including Broker-dealer and fund management profits. Jackson National Life (JNL) operates in the largest retirement savings market inthe world, with 67 per cent, or $12.9 trillion (Source: Cerulli Associates), ofthe world's retirement savings assets concentrated in the US at the end of 2005.JNL provides retirement income and savings solutions in the mass andmass-affluent segments of the US market, primarily to pre- and post-retirees. Itoffers tools that help people plan for their retirement, and manufacturesproducts with specialised features and guarantees to meet customer needs. Byseeking to add value to both the representatives who sell JNL products, and totheir customers, JNL has built a strong position in the US retirement market. JNL delivered APE sales of £515 million during 2005, representing a 13 per centincrease on the 2004 result. This result was achieved in an individual annuitymarket that was down 2 per cent on prior year (Source: LIMRA). JNL's new business profits of £211 million were up 45 per cent on 2004,reflecting a 13 per cent increase in APE sales, and a significant improvement innew business margin to 41 per cent from 32 per cent in 2004. The improved marginreflects a favourable business mix; an increase in the spread assumption forfixed index annuities reflecting the spread being achieved; improved averagepolicy sizes for variable and fixed annuities; economic assumption changes,including an increase in the equity risk premium, and benefits derived fromproduct pricing. Pricing benefits include the price increase, introduced in May2004, on the Perspective II product. The margin on Institutional businessimproved due to the longer average duration contracts written by JNL during2005. Total EEV basis operating profit of £755 million was up 104 per cent on 2004.This reflects a 45 per cent increase in new business profits and an in-forceprofit of £530 million, up 123 per cent on the prior year. This result wasdriven by an operating assumption change following price increases introduced ontwo older books of term life business (£140 million), a favourable spreadvariance, and an increase in the unwind of the in-force business. Total IFRS operating profit of £362 million was up 27 per cent on 2004. The 2004result benefited from two one-off items, a favourable legal settlement and anaccounting adjustment arising from the adoption of new accounting guidance,totalling £29 million. The 17 per cent growth in long-term business operatingprofit primarily reflects a £119 million increase in spread income and recordvariable annuity fee income due to significant growth in separate account assetsand the returns earned on those assets. From 1999 to 2005, JNL has increased GAAP assets by a compound annual growthrate of 8.4 per cent from $42 billion to $68 billion, statutory premiums,excluding GIC deposits, from $4.5 billion to $7.7 billion, and has grownvariable annuity reserves from $5 billion to $18 billion. JNL has also increasedits ranking in the US annuity market from 15th to 12th since 1999, and hasachieved this with a net capital inflow over the period of $11 million from theparent company. JNL sells variable, fixed and fixed index annuities, as well as life insuranceand institutional products. All three annuity products are long-term personalretirement products, which offer tax-deferred accumulation on the funds investeduntil proceeds are withdrawn from the policy. Fixed annuities offer customers aguarantee of principal and a minimum guaranteed rate of return on theirpremiums. Fixed index annuities also offer these features, but vary from fixedannuities in that they offer potential upside from equity index participation.Variable annuity products differ from the fixed annuity products in that thereturns to the customer will depend upon the performance of the underlying fundportfolio. JNL's variable annuity products offer a range of protection options,such as death and withdrawal benefits which are priced separately by JNL, andwhich can be elected by customers according to their needs. JNL manages itsexposure to equity market movements through a comprehensive derivativeprogramme. Value movements in these derivatives are included in operating profitso as to broadly offset changes in reserves caused by equity volatility. During 2005, JNL again delivered record sales, with total APE sales for the yearof £515 million up 13 per cent on 2004, and retail sales of £416 million, up 12per cent. Variable annuity APE sales of £261 million were up 31 per cent onprior year, compared with market growth of 2.5 per cent during 2005 (Source:VARDS), primarily reflecting the continued success of its unbundled VA contract'Perspective II'. Utilising the flexible product design enabled by leadingtechnology, advisors can customise the product to meet the individual needs ofthe consumer, including individually priced benefit options and guarantees, suchthat consumers only pay for what they want. JNL improved fixed index annuity APE sales by 44 per cent to £62 million duringthe year, improving its market position to seventh for the year, up from ninthin 2004 (Source: LIMRA). Fixed annuity APE sales of £79 million in 2005 weredown 31 per cent on 2004, reflecting the continued low interest rate environmentand relatively flat yield curve in the US. JNL has continued to pursue value andhence has been unwilling to compromise entry spreads in this market. JNL wasranked the seventh largest provider of traditional individual deferred fixedannuities during 2005 (Source: LIMRA). Institutional APE sales of £98 million were up 15 per cent on 2004. JNL tookadvantage of attractive issuance opportunities during 2005, and continues toparticipate in this market on an opportunistic basis. 70 per cent of retail premiums received in 2005 were for products and productfeatures that did not exist at the beginning of 2004. In January 2005, JNLlaunched its 'Perspective Advisors II' variable annuity, and in March launched'Perspective L Series' variable annuity contract, both of which included thefull menu of Perspective II benefits. These two products generated combinedsales of $678 million in the year. JNL also extended its range of Life productsduring the year with the addition of 'Ultimate Investor', a variable universallife contract. The flexibility of JNL's technology, and demonstrable competencyin execution, have resulted in an ability to quickly and efficiently meet thechanging needs of consumers and advisors. JNL continued to develop its wholesale distribution capability during 2005.JNL's long-term commitment to meeting the needs of broker-dealers and theirclients, through the provision of product flexibility, sales support tools,technology and customer service, continues to pay dividends. During 2005 JNLincreased its share of variable annuity sales through the independentbroker-dealer channel from 6.8 per cent to 9.1 per cent, and its share of theregional broker-dealer channel from 3.9 per cent to 4.9 per cent (Source:VARDS). JNL also distributes in the retail space through its independent broker-dealer,National Planning Holdings (NPH), which is a network of four independentbroker-dealers that represents approximately 2,600 registered advisors. NPHemploys sophisticated technology that allows representatives to operateefficiently and productively. In 2005, NPH increased total revenues by 3 percent to £231 million. At June 2005, NPH was ranked the sixth largest independentbroker-dealer by revenue (Source: Financial Planning Magazine). As a result of capital conservation measures introduced in previous years andfurther strong earnings, JNL continued to generate significant levels ofcapital, improving the capital ratio from 8.5 per cent in 2004 to 9.2 per centin 2005. JNL's statutory capital, surplus and asset valuation reserve positionimproved year on year by $434 million, after deducting the $150 million ofcapital remitted to the parent company. Curian Capital, which offers customised separately managed accounts, continuesto build a strong position with net investment flows of £298 million in theyear. Curian, which can be accessed with a minimum account balance of $25,000,offers customers access to technology that enables individual portfolioconstruction, and access to institutional-quality money managers. Advisorsbenefit from the efficiencies of on-line processing and compliance. CurianCapital now has $1.7 billion (£973 million) of assets under management comparedwith $1.1 billion (£615 million) at the start of 2005. JNL has completed the integration of the 1.5 million Life of Georgia policiesonto its own operating platform. This achievement clearly demonstrates JNL'soperational effectiveness and its increasing capability in consolidating largeblocks of business. This acquisition doubled the number of JNL's in-force lifeand annuity policies, adding scale to its operating platform and expanding itsdistribution capability, as well as further diversifying its income streams.This transaction enabled JNL to grow its life business at a higher return andfaster rate than could be achieved organically. JNL expects to achieve thetarget internal rate of return after tax on this transaction of 12 per cent, andwill continue to consider further US bolt-on acquisitions as opportunitiesarise. With its relationship driven distribution, innovative product manufacturingcapability and low cost operating model, JNL is well positioned to takeadvantage of the evolving opportunities in the US retirement market. As "BabyBoomers" retire and shift their focus from asset accumulation to incomedistribution, one of JNL's main objectives will be to capture a proportion ofthese flows. With an emphasis on sales of low capital intensive variable annuityproducts, solid operating results and strong investment portfolio performance,JNL is capable of self-generating the capital necessary to support its futuregrowth at the required returns and return a growing remittance to the parentcompany. The ageing demographics of the US, with the first of the 77 million ''BabyBoomers'' reaching 60 this year, will, over the next decade, create a verysignificant increase in the level of distributions from retirement savingsplans. Life expectancy in the US continues to increase while at the same timethe average retirement age is decreasing. This has led to a large increase inthe average time individuals will spend in retirement. Consequently there is agrowing risk that individuals' finances will be insufficient to cover the costsof living through retirement. These consumers will have a growing need forindependent financial advice and will increasingly seek guarantees and longevityprotections from the products they purchase. ASIA £'m unlessotherwisestated 2005 2004 Percentage 2005 2004 Percentage Change (at CER) Change (at RER) APE sales 731 594 23% 731 576 27%NBP 413 365 13% 413 355 16%NBP margin (%APE) 56% 61% (5%) pts 56% 62% (6%) ptsNBP margin (%PVP) 10.2% 10.4% (0.2%) pts 10.2% 10.4% (0.2%) ptsTotal EEVbasisoperatingprofit * 576 473 22% 576 460 25%Total IFRSoperatingprofit * 195 119 64% 195 117 67% * Excluding fund management operations, development and Asia regional headoffice expenses Asia's life insurance markets are very attractive with large scale and highgrowth rates supported by consistently strong economic growth, favourabledemographics and market liberalisations. However, there are some formidablebarriers to successful entry including entrenched incumbents, the pace of changeand nature of regulations, mandatory partners in some markets and a shortage ofexperienced staff. Acquisition opportunities, particularly of scale businesses,are limited and in North Asian markets are likely to involve back books thatcurrently experience negative spread and hence require material provisions underEuropean regulatory capital requirements. Since the mid 1990's Prudential has been progressively building its Asianplatform; strengthening and protecting its market leading positions in itsEstablished Markets (Singapore, Hong Kong and Malaysia), entering emergingmarkets (Thailand, Indonesia, Philippines, Vietnam), securing strong jointventure partners for the sizable opportunities in India and China (ICICI andCITIC respectively) and taking positions in the large North Asian markets ofTaiwan, Japan and Korea. Prudential now has over 7 million customers in Asia, upfrom 1.5 million in 2000. In all its markets, Prudential has been focussed on building proprietarydistribution as the most effective way of delivering sustainable new businessvolumes and managing the customer proposition; typically through growing tiedagency and integrated bancassurance arrangements (such as with StandardChartered Bank in Hong Kong). Prudential also prioritises economic capitalefficiency, profitability and customer centricity in its Asian product portfolioas seen, for example, with the introduction of unit linked products across theregion, an emphasis on regular premium policies (89 per cent of APE sales in2005), life stage themed marketing and purposely limiting participation in thelowest margin and highly tactical sectors. During 2005, the business continued to make very solid progress in a number ofkey areas: In China, 6 new cities were added including Wuhan, in the provincial capital ofHubei. CITIC-Prudential now has 10 cities operational in China and a further newprovincial capital, Jinan in Shandong, was added in January 2006. The mainchallenge facing foreign players trying to become established in China is theneed to develop local management teams to support geographic expansion.Prudential has a real advantage in being able to leverage its existing Chinesespeaking operations to help incubate new teams quickly. In 2005 new business APEfor China increased by 47 per cent over 2004. Strengthening distribution continues to be a major priority. In 2005 agentnumbers grew by 26 per cent to over 170,000 with geographic expansion in Indiaand China being a key driver (up 36 per cent and 37 per cent respectively). InIndonesia the business has excellent momentum and has increased agent numbers by89 per cent during the year. In the Established Markets improving agencyproductivity is a key initiative and whilst this improved in 2005 there is stillsignificant room for growth. Prudential's multi-channel distribution model inKorea is a real asset as, whilst volumes from direct campaigns such as a homeshopping channel have waned and bank distribution has been limited by regulatorycaps and industrial action, new business APE growth for 2005 of 88 per centreflects great success in increasing the number of tied financial advisers (up132 per cent) and extending the number of general agents (brokers). Currently 75 per cent of Prudential's new business APE comes from its tiedagency distribution and whilst this will remain the primary channel for sometime, there is the potential to further expand alternate channels, particularlybanks and direct marketing. Bancassurance with Standard Chartered Bank in HongKong continues to be especially successful and there is considerable potentialparticularly in Singapore, Malaysia and Taiwan over the short to medium term.The life business in Japan remains challenging and after piloting a FinancialAdviser channel with little success and high running costs this was closed inJanuary 2006; the emphasis is now on developing profitable partnershipdistribution opportunities. Taiwan's macro economic environment remains challenging with interest ratescurrently at record lows leading to negative spread issues affecting the wholeindustry, particularly on tranches of business sold pre 2002. Prudential has acomparatively small book of this business and remains confident that anypotential deficits are more than adequately supported by the profitable newbusiness, particularly unit-linked, it has been writing for a number of years.The Taiwanese life insurance industry is currently dominated by players pursuingshort-term volume whereas Prudential remains firmly focussed on long-termprofitability. In 2005 Prudential's new business APE mix was 73 per cent linkedproducts compared to the industry total of 29 per cent and new business volumeswere in line with 2004. New Business Profit (NBP) margins in Taiwan were 51 percent compared to 61 per cent the previous year. The change is due to a higherproportion of capital efficient and popular new retirement focused regularpremium unit-linked savings plan that is investment-orientated. Prudential's increasing scale is enabling it to move ahead with plans for a stepchange in its operating platform. A new business processing hub was launched inKuala Lumpur, Malaysia in early 2005 under the name Prudential Services Asia.This is already successfully processing business for the Malaysian andSingaporean life operations and plans are underway for a second hub to belaunched in China. Over the last year significant progress was made with embedding a riskmanagement and compliance framework. Prudential employs 'three lines ofdefence'; the operational management in each business, strong risk managementrelated functions and an independent internal audit function. Prudential'spolicies are clear that any breach of regulatory standards attributable to staffmalpractice is unacceptable. In financial terms, 2005 was another strong year. Prudential's, new business APEgrew by 23 per cent to £731 million over 2004. The NBP margin was 56 per cent,compared to 61 per cent in 2004 representing changes in the average geographicmix (net 2 percentage points), economic assumption changes (net 2 percentagepoints) and product mix (net 1 percentage point). Looking at these changes inmore detail, Korea and India now contribute 26 per cent of total APE compared to18 per cent in 2004, average NBP margins in these countries are 37 per cent and29 per cent respectively. The impact attributed to economic assumption changesis driven principally by increases to the risk discount rates in China andKorea. This was more than offset by a favourable shift in product mix in Koreawhere average margins remained slightly ahead of 2004 at 37 per cent. The othermain product mix related impact was due to the lower margins on the retirementlinked product in Taiwan as discussed above which led to a change in averagemargins from 61 per cent to 51 per cent. With the exception of Taiwan, where although Prudential has increased theproportion of lower margin unit-linked product sales to 73 per cent from 49percent these include the new lower margin retirement focussed product, allmarkets have increased NBP achieved over 2004. Long term EEV operating profits of £576 million are up 22 per cent over 2004 andare driven by new business profits of £413 million and unwind of £162 millionwith small operating assumption changes and experience variances netting out to£1m. IFRS operating profits increased 64 per cent to £195 million from £119 millionin 2004, however 2005 does include a net £30 million from various non-recurringitems including a net £44 million profit as previously disclosed at the halfyear and subsequently reduced by offset by £14 million of restructuring chargesin Japan. Excluding these, growth was 39 per cent reflecting the steady increasein profits from the Established Markets with total IFRS operating profits of£127, million up 14 per cent, the emergence of profits on the IFRS basis fromthe new business being sold across the region and lower expenses in Japan. Prudential Asia's high proportion of profitable, regular premium businesscombined with sound operational management means cashflows can be predicted withsome certainty. As previously announced the business is on target to fundcontinued strong growth internally and begin remitting surplus cash back to theGroup from 2006 onwards. In summary, Prudential has an excellent track record of building a profitablebusiness in Asia and the scale of the opportunity for continued growth is clear. ASSET MANAGEMENT Prudential's three asset management businesses are aligned with their respectivemarkets in the UK, Asia and America. They operate under different brands andwith different models, each of which is described further below. M&G £'m unless otherwise stated 2005 2004 Percentage Change Gross investment flows 7,916 5,845 35%Net investment flows 3,862 2,004 93%Underlying profits before performancerelated fees 138 110 25%Total IFRS operating profit 163 136 20% M&G is Prudential's UK and European fund management business and has £149billion of funds under management, of which £113 billion relates to Prudential'slong-term business funds. M&G operates in markets where it has a leadingposition and competitive advantage, including retail fund management,institutional fixed income, pooled life and pension funds, property and privatefinance. M&G also manages Prudential's balance sheet for profit. M&G has scalein all key asset classes: it is one of the largest active managers in the UKstockmarket, one of the largest bond investors in the UK and one of the UK'slargest property investors. M&G's operating profit in 2005 including performance-related fees (PRF) was £163million, an increase of 20 per cent on last year. Underlying profit (excludingPRFs) of £138m was 25 per cent higher than in 2004, an extremely strong resultgiven that the previous year included £7 million of non-recurring provisionreleases. Adjusting for this gives a like-for-like increase in profits of 34 percent over 2004. This continues a strong upward trend which has seen underlyingprofits grow from £49 million in 2002 to £138 million last year, reflecting thestrengths of M&G's diversified business, disciplined cost management and thesuccessful development of new sources of revenue. Performance-related fees in 2005 were £24 million, including £17 million as aresult of several exceptionally profitable realisations by PPM Capital that arenot expected to recur. M&G received £7 million of performance fees for managingPrudential's long-term and annuity funds, which continued to beat theirstrategic and competitor benchmarks during the year. M&G enjoyed a record year for sales during 2005, with gross fund inflowsincreasing 35 per cent to £7.9 billion. Net fund inflows also grewsignificantly, almost doubling to £3.9 billion and external funds undermanagement, which represent a quarter of M&G's total funds, rose by 26 per centto £36.2 billion. Gross fund inflows into M&G's retail businesses were their highest ever at £3.8billion and were nearly double the previous year. Net retail fund inflowstotalled £1.3 billion, more than triple those in 2004. In the UK, M&G generatedthe highest ever retail sales in its 75 year history across a combination of itsequity, fixed income and property funds. M&G International, which sells funds inGermany, Austria, Italy, Luxembourg and Switzerland, more than tripled its fundsunder management during the year. M&G's South African business saw a doubling ofretail funds under management. Retail fund performance continued to be verystrong, especially M&G's equity funds which saw 92 per cent of funds beatingtheir UK sector average over three years. M&G's institutional business saw gross fund inflows of £4.1 billion. Significantgrowth in the areas of private finance and property helped net fund inflowsincrease 59 per cent to £2.5 billion. M&G continued its successful strategy ofgenerating new revenue streams with attractive margins using expertise developedfor internal funds, especially in the area of non-correlated assets such asleveraged loans. M&G broke new ground in this asset class during the year withthe launch of Europe's first pure leveraged loan fund, the M&G European LoanFund. The success of M&G's Collateralised Debt Obligation (CDO) programme alsocontinued during 2005 with the launch of five new CDOs. In property, thedevelopment of external vehicles managed by Prudential Property InvestmentManagers (PruPIM) for third party clients delivered strong fund inflows. Asia £'m unlessotherwisestated 2005 2004 Percentage 2005 2004 Percentage (at CER) Change (at RER) Change Net investmentflows 1,327 1,293 3% 1,327 1,280 4%Total IFRSoperatingprofit* 12 20 (40%) 12 19 (37%) *Underlying IFRS operating profit of £28m, offset by £16m of charges related tobond funds in Taiwan. The Asian fund management business had £26.2 billion of funds under managementas at 31 December, 2005, of which £10.1 billion related to third party funds inoperations in India, Taiwan, Japan, Korea, Malaysia, Singapore and Hong Kong.Prudential is a top five foreign provider of mutual funds in all countries inwhich it operates with the exception of Japan where significant progress hasbeen made in a very competitive market. In 2005, the fund management businesscontinued to expand geographically with the securing of fund management licencesin China, through a joint venture with CITIC, and in Vietnam. This takes thetotal number of countries in which the business has a presence to nine. Operating profit from the Asian fund management operations was £12 million forthe year, the decrease from 2004 reflecting the exceptional costs of £16 millionincurred due to bond fund restructuring required as a result of industry wideissues in Taiwan. The geographic expansion of the past few years has been matched by growth inmarket share, with Korea, Japan, India and Malaysia being notable successes.Geographic diversification along with this growth in scale has resulted in astrong upward trend in profits with underlying profits increasing from £9million in 2001 to £28 million in 2005. Net inflows from third parties of £1.3 billion were driven by strong net inflowsin Japan of £905 million and Korea of £926 million though these were offset bynet outflows in Taiwan of £745 million due to an unsettled bond fund market. Total reported third party funds under management of £10.1 billion was up 13 percent on 2004. In August last year, ICICI increased its stake in Prudential'sIndia asset management joint venture from 45 per cent to 51 per cent. As aresult, Prudential no longer consolidates this business at 100 per cent and theyear end numbers are reported at 49 per cent, resulting in a £1.5 billionreduction in funds under management for the year. On a comparable basis, fullyear 2005 funds under management grew 29 per cent on 2004. PPM America £'m unlessotherwisestated 2005 2004 Percentage 2005 2004 Percentage (at CER) Change (at RER) Change Funds UnderManagement (£bn) 41 40 3% 41 36 14%Total IFRSoperatingprofit 20 12 67% 20 12 67% PPM America, based in Chicago, is Prudential's North American institutionalinvestment manager, specialising in public and private fixed income and equity,and real estate securities, and, through its affiliate PPM Finance, Inc.,commercial mortgage lending. At the end of 2005, PPM America had funds undermanagement of £41 billion (including PPM Finance), of which 68 per cent relatesprimarily to JNL policyholder assets, 29 per cent to funds managed on behalf ofother Prudential UK and Asian affiliates, and 3 per cent to funds managed forexternal clients, including CDOs and similar products. In 2005 PPM America increased IFRS profits by 67 per cent, primarily due to aone-off £5 million revaluation related to investment vehicles managed by PPMAmerica. Banking 2005 2004 ** Percentage £m £m Change IFRS Operating Profit from Continuing Operations *UK banking business 60 72 (17%)Restructuring costs (10) (5) (100%)Transaction costs (7) (6) (17%)Other 1 0 100% 44 61 (28%)Highlights of UK banking businessNet interest income * 312 287 9%Non-interest income * 215 209 3%Cost-to-income ratio 43% 49% -Bad debts * (241) (182) (32%) * Continuing operations - excludes Egg France and Funds Direct. ** 2004 comparatives restated to IFRS basis, except for adjustments for IAS 32and IAS 39 which have been adopted from 1 January 2005. Egg is an innovative financial services company primarily offering bankingproducts and services, specifically, unsecured personal loans, credit cards,mortgages and savings accounts. Egg is now one of the world's largest onlinebanks with approximately 3.7 million predominantly young and upmarket customersacquired since launch. Operating profit from the core UK banking business was £60 million, comparedwith £72 million in 2004. This result represents a strong performance given avery challenging set of market conditions with sharply reducing growth inunsecured borrowings, narrowing margins following the increase in average baserates and a sharp deterioration across the industry in underlying creditquality. Regulatory changes also impacted this year's business performance. Inparticular, the introduction of new measures into the sales processes of paymentprotection insurance products in 2005 has led to a significant reduction inincome from these products across the industry. Despite this market environment, Egg managed to increase margins on credit cardsvia increased pricing and through focussing on the active management of itsexisting customer base to maximise borrowing balances. The degree ofdeterioration in credit quality was at a level substantially below the market. Egg has completed the re-focus on its successful core UK banking business overthe last 12 months. The exit from France was completed in the first quarter of2005 with total costs incurred within the provision established in 2004. InOctober 2005, Egg completed the sale of Funds Direct, its investment wrapplatform business. Total operating profit from continuing operations in 2005includes £10 million of restructuring costs. This reorganisation aligned Egg's cost base with its strategic focus on the UKbusiness and contributed to a £17 million reduction in total expenses between2005 and 2004. Transaction costs of £7 million were incurred during 2005 in relation toPrudential's acquisition of the minority shareholdings in Egg. The immediate benefits from the restructuring implemented in early 2005,together with Egg's effective cost management contributed to the continueddownward trend in Egg's cost to income ratio. It was 43 per cent for 2005,compared to 49 per cent and 53 per cent for 2004 and 2003 respectively. The capital position at the end of the year continued to be very strong withtotal capital ratio of 14.8 per cent, improving from 12.5 per cent in 2004. The launch of Egg Money in September has further strengthened the brandawareness and reinforced the innovative values of Egg. This product concept alsoreflects Egg's strategy of deepening its relationship with customers which is akey differentiator and route to higher levels of cross sales and ultimately abroader range of product offerings. Egg Money won an award from Which? for 'BestMoney Innovation' in November 2005. On the 1 December 2005, the Boards of Prudential and Egg announced a recommendedOffer by Prudential for the whole of the issued and to be issued shares of Eggnot already owned by the Prudential Group. This represented approximately 21.7per cent of the existing issued share capital of Egg. The Offer valued the existing issued share capital of Egg at approximately £973million, a 15 per cent. premium to the market capitalisation of Egg of £845million on 30 November 2005, being the last Business Day prior to announcementof the Offer. Prudential offered 0.2237 New Prudential Shares for each EggShare. On the 23 January 2006 Prudential announced that it had received acceptances inrespect of 80.3 per cent of the issued ordinary share capital that it did notalready own bringing Prudential's ownership of the Egg Group to 95.7 per cent.Prudential also announced its intention to extend the offer until furthernotice. On 20 February 2006, Egg shares were delisted from the Official List. It is anticipated that the acquisition of the minority will enable Prudentialand Egg to capitalise on the product capabilities, customer relationships andbrand strengths of Prudential, M&G and Egg and will also facilitate therealisation of substantial annualised pre-tax cost savings, with £40 millionexpected to be realised by the end of 2007, as well as opportunities for revenuesynergies. FINANCIAL REVIEW SALES AND FUNDS UNDER MANAGEMENT Prudential delivered strong sales growth during 2005 with total new insurancesales up 13 per cent to £13.8 billion at constant exchange rates (CER). Thisresulted in record insurance sales of £2.1 billion on the annual premiumequivalent (APE) basis, an increase of 15 per cent on 2004. At reported exchangerates (RER), APE was up 16 per cent on 2004. The strong growth is reflectedacross all regions with APE up on 2004 by 10 per cent in the UK, 13 per cent inthe US and 23 per cent in Asia at CER. Total gross investment sales for 2005 were £26.4 billion, up 6 per cent on 2004at RER. Net investment flows of £5.2 billion were up 58 per cent on last year atRER. Total investment funds under management in 2005 increased by 24 per cent from£37.2 billion to £46.3 billion at RER, reflecting net investment flows of £5.2billion and net market and other movements of £3.9 billion. At 31 December 2005, total insurance and investment funds under management were£234 billion, an increase of 19 per cent up from 2004 at RER. Present value of new business premiums in 2005 increased by 12 per cent to £16.8billion. Present value of new business premiums is the preferred basis ofdisclosing margin under EEV principles, and from the half year 2006 we willprovide commentary on this basis. We will continue to provide detail on the APEbasis for the foreseeable future until familiarity with the new basis ofreporting is developed. BASIS OF PREPARTION OF RESULTS From 1 January 2005, Prudential is required to account for its long-terminsurance business on an International Financial Reporting (IFRS) basis. Inbroad terms, IFRS profits for long-term business contracts reflect the aggregateof statutory transfers from with-profits funds and profits on a traditionalaccounting basis for other long-term business. Although the statutory transfersfrom with-profits funds are closely aligned with cash flow generation, thepattern of IFRS profits over time from shareholder-backed long-term businesseswill generally differ from the cash flow pattern. Over the life of a contract,however, aggregate IFRS profits will be the same as aggregate cash flow. As a signatory to the European CFO Forum's EEV Principles, Prudential alsoreports supplementary results on the European Embedded Value (EEV) basis for theGroup's long-term business, including asset management operations and servicecompanies that support the long-term businesses. These results are combined withthe IFRS basis results of the Group's other businesses. Reference to operating profit relates to profit including the expected long-termrate of return on investments, but excludes exceptional items, short-termfluctuations in investment returns and the effect of changes in economicassumptions. IFRS BASIS REPORTING The European Union ("EU") requires that all listed European groups prepare their2005 financial statements in accordance with EU approved International FinancialReporting Standards ("IFRS"). The IFRS basis replaces the previous ModifiedStatutory basis ("MSB") of reporting. To prepare the market for the changes theGroup reported the impact of restating its 2004 results in its Economic andFinancial Reporting announcement on 2 June 2005. The announcement explained that the IFRS changes have been implemented in twostages. First, for the purposes of formal IFRS adoption from 1 January 2004 allstandards other than IAS32 (financial instruments: Disclosure and Presentation),IAS39 (Financial Instruments: Recognition and Measurement), and IFRS4 (Insurancecontracts) have been applied. Due to the complications for the retrospective application, particularly for thebanking industry for financial instruments, the IASB allowed adoption of thesethree standards from 1 January 2005. The Group has chosen to adopt thisapproach. However, mindful of the impact on the Group's insurance operations,particularly JNL, the Group has prepared supplementary proforma results thatshow the effect of adopting these standards if they had been applied in 2004 forthose businesses. The two areas of change that are of particular relevance toPrudential's results are: • Altered valuation bases for JNL derivatives and fixed incomesecurities, and • Recognition of the shareholders' share of deficits on defined benefitpension schemes in shareholders' equity. In preparing its IFRS basis results the Group has chosen to continue to providesupplementary analysis of the profit before shareholder tax so as to distinguishoperating results based on longer-term investment returns, actuarial gains andlosses on defined benefit pension schemes, and exceptional items. The Group hasalso made a discretionary change of accounting policy at the same time as theadoption of IFRS standards. The change principally affects the determination oflonger-term returns for JNL that are credited to operating results. Total profitbefore tax is unaffected by this change. Total profit before tax now includes value movements on derivatives that JNLuses for economic hedging together with actuarial gains and losses on theGroup's defined benefit pension schemes, and are expected to be more volatile asa result. In addition, IFRS basis shareholders' funds will be more volatile fromperiod to period because of market value movements on fixed income securities ofJNL which are classified as available for sale. The adoption of IFRS does not have a significant impact on the business or theunderlying financial position. EUROPEAN EMBEDDED VALUE BASIS REPORTING 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. As a signatory to the European CFO Forum's EEV Principles, Prudential hasadopted EEV methodology for its 2005 year end results. This replaces theAchieved Profits basis of reporting. The main impact of the change from theAchieved Profits basis on the results arises from the effects of changes to theassumed level of locked in capital allocated to each business, the adoption ofproduct specific risk discount rates, and an explicit valuation of the timevalue of options and guarantees. The EEV results also include the value offuture profits from fund management and service operations that support thelong-term business. In most other respects the approach that Prudential used forits Achieved Profits reporting already conforms to the requirements of the EEVPrinciples. On the EEV basis, the shareholders' interest in the Group's long-term businessescomprises: • the present value of future shareholder cashflows from in-force covered business (value of in-force business), less a deduction for the cost of locked-in ("encumbered") capital;• the locked-in ("encumbered") capital; and• shareholders' net worth in excess of encumbered capital. Stochastic valuations have been undertaken to determine the value of in-forcebusiness including the cost of capital. A deterministic valuation of thein-force business is also derived using consistent assumptions and the timevalue of the financial options and guarantees is derived as the differencebetween the two. The Group EEV results also incorporate the effect of the discretionary change tothe basis of determining longer-term investment returns included in operatingprofits and IFRS changes for pension scheme accounting and non-insuranceoperations as described below. EEV BASIS OPERATING PROFITS Total EEV basis operating profits from continuing operations were £1,712million, up 33 per cent from 2004 at CER. At RER, the result was up 34 per cent.This result reflects a combination of strong growth in all the insurance andfunds management businesses. 2005 2004 Percentage 2005 2004 Percentage (at CER) Change (at RER) Change EEV Basis Operating Profits £'m £'m £'m £'m Insurance business UK 426 486 (12%) 426 486 (12%) US 741 384 93% 741 382 94% Asia 576 473 22% 576 460 25% Development expenses (20) (15) (33%) (20) (15) (33%) -------- ------- --------- ------- ------- -------- 1,723 1,328 30% 1,723 1,313 31% -------- ------- --------- ------- ------- -------- Fund management business M&G 163 136 20% 163 136 20% US broker dealer and fund management 24 15 60% 24 15 60% Curian (10) (29) 66% (10) (29) 66% Asia fund management 12 20 (40%) 12 19 (37%) -------- ------- --------- ------- ------- -------- 189 142 33% 189 141 34% -------- ------- --------- ------- ------- -------- Banking Egg (UK) 44 61 (28%) 44 61 (28%) Other income and expenditure (244) (243) 0% (244) (241) 1% -------- ------- --------- ------- ------- -------- Operating profits from continuing operations 1,712 1,288 33% 1,712 1,274 34% ======== ======= ========= ======= ======= ======== Prudential's insurance business achieved significant growth, both in terms ofnew business profits (NBP) and in-force profit, resulting in a 30 per centincrease in operating profit over 2004 at CER. In 2005, the Group has generatedrecord new business profits (NBP) from insurance business of £867 million whichwas 15 per cent above 2004 at CER, driven by strong sales momentum across allmarkets. At RER, NBP was up 17 per cent. The average Group NBP margin was 41 percent up from 40 per cent in 2004 on an APE basis and 5.2 per cent up from 5.0per cent on a present value of premiums basis. The overall margin has beenbroadly maintained over the last two years, reflecting careful management ofproduct mix within each business. In-force profit increased 48 per cent on 2004at CER to £876 million. At RER, in-force profit was up 49 per cent. The in-forceprofit includes a £148 million charge in respect of a persistency assumptionchange in the UK and a credit in the US of £140 million reflecting an operatingassumption change following price increases introduced on two blocks of in-forceterm life business announced at the half year. In aggregate, net assumptionchanges were negative £54 million, with net positive experience variances andother items of £79 million. Results from fund management and banking business were £233 million, an increaseof 15 per cent at CER on 2004. This was mainly driven by the significantcontribution from M&G. Other income and expenditure was negative £244 million compared with negative£243 million at CER in 2004. This reflected an increase in investment return oncentrally held assets and other income offset by higher interest payable andhead office costs. UK Insurance Operations EEV basis operating profit of £426 million was down 12 per cent on 2004, 62 percent of the profit attributable to the with-profits fund. Prudential UK's new business profit remained in line with 2004 at £243 million.This was driven by the 10 per cent increase in APE sales volumes which wasoffset by a fall in the new business profit margin (from 30 per cent in 2004 to27 per cent in 2005 on an APE basis). The movement in margin reflected the shiftin product mix in 2005 as Prudential continued to expand its shareholder backedproduct range, however, throughout the year there continued to be competitivepressure on margins across a range of products which Prudential substantiallyresisted. Prudential allocates shareholder capital to support new business growth across awide range of products in the UK. The weighted average post-tax Internal Rate ofReturn (IRR) on the capital allocated to new business growth in the UK in 2005was 14 per cent achieving the 2007 target set at the time of the rights issuetwo years early. This increase was achieved by broadly maintaining or improvingindividual product IRR's during the year coupled with a favourable product mix. UK in-force profit of £183 million was down 25 per cent on 2004. The profitsarising from the unwind of discount from the in-force book were partially offsetby adverse operating assumption changes and other experience variances. At the half year, persistency assumptions were strengthened across a number ofproducts, primarily in respect of with-profit bonds. This resulted in a chargeof £148 million for 2005 on an EEV basis. In the case of PruBond, which accountsfor a significant proportion of the assumption change, Prudential expectedsurrenders to fall after the favourable bonus declaration in February 2005. Inthe event, following the bonus declaration, customers continued to surrendertheir policies leading to a strengthening of the assumption by 40 per cent. Theassumption change reflects Prudential's current experience and, post tax,represents three per cent of the overall embedded value of the UK business. The persistency assumptions represent Prudential's current best estimate offuture experience. In the case of PruBond, a product with no set maturity orterm and no surrender penalties after five years, future customer behaviour maydiffer from past experience, making it difficult to anticipate future actualsurrenders with certainty. However, the attractiveness of PruBond as a long term investment is demonstratedby investment returns that a typical customer has achieved. A Prudence Bondpolicy will have seen its value increase from £10,000 to £18,137 over the tenyears up to 6 April 2006. This payout represents an overall annualised return of6.1 per cent over each of the last 10 years net of tax and charges. Prudential continues to actively manage the conservation of its in-force bookand is currently running within assumptions. During the year, Prudential carried out a review of its mortality experienceacross all of its non-profit annuity business. As a result of this review, itstrengthened the realistic and statutory male assumptions and weakened therealistic female assumptions to align the realistic assumptions with recentexperience. The total effect of the changes was to reduce operating profits by£47m, of which the main reduction arose from increasing the cost of capital. New annuity business written in 2005 has been priced on the new basis for bothEEV and IFRS. Other charges of £46 million in the UK include £45 million of costs associatedwith, complying with new regulatory requirements including Sarbanes Oxley,product development and distribution development; a negative £19 million expensevariance; and a net positive £18 million of other items. Prudential believe theannounced cost savings from UKIO and Egg's collaboration, together with otherinitiatives will lead to a lowering of the absolute cost base going forwards. In 2005, Prudential wrote to 440,000 of its customers contracted-out of theState Second Pension ("S2P") and provided updated information and views toenable them to make an informed decision about whether to contract back into S2Por remain contracted-out, stating that Prudential believed that most peopleshould contract back in for the 2005/6 tax year onwards. As a result of this weexpect premiums from DWP rebate business to fall in 2006 and subsequent years. US Operations In the US, EEV operating profit from long-term operations was £741 million, up93 per cent at CER and up 94 per cent from prior year at RER. JNL new business profits of £211 million were up 45 per cent on 2004, reflectinga 13 per cent increase in APE sales, and a significant improvement in newbusiness margin to 41 per cent from 32 per cent in 2004. On a present value ofpremiums basis, the margin increased from 3.2 per cent to 4.1 per cent. Theimproved margin reflects a favourable business mix; an increase in the spreadassumption for fixed index annuities reflecting the spread being achieved;improved average policy sizes for variable and fixed annuities; economicassumption changes, including an increase in the equity risk premium; andbenefits derived from product pricing. Pricing benefits include the feeincrease, introduced in May 2004, on the Perspective II product. The margin onInstitutional business improved due to the longer average duration contractswritten by JNL during 2005. The new business margin achieved on variable annuity business in 2005 was 50 percent compared with 36 per cent in 2004. The improved margin was driven byeconomic assumption changes, and a full year of benefit associated with there-pricing, in May 2004, of JNL's unbundled VA 'Perspective II'. The economicassumption changes include an increase in the equity risk premium from 3 percent to 4 per cent which Prudential believe more accurately reflects thevolatility of equities. The fixed index annuity margin has improved from the prior year due to anincrease in the long-term spread assumption from 175bps to 190bps, reflectingthe spread being achieved. For JNL, the average IRR on new business was 15 per cent which reflects JNL'sstrong pricing discipline. In the US, the in-force profit of £530 million is 123 per cent up on 2004 atCER. The increase was primarily due to increased unwind of discount on thein-force business, an operating assumption change following price increasesintroduced on two older books of term life business (£140 million), and improvedspread variance. The increase in the unwind of discount reflects the increase inrisk discount rates, following an increase in the equity risk premium from 3 percent to 4 per cent. Improved spread variance of £89 million is up from £41million in the prior year, and reflects achieved spreads in excess of thecurrent weighted portfolio target on the regular portfolio. The spread variancein 2005 also includes a number of non-recurring items including mortgageprepayment fees, make-whole payments and total return swap income which togetherrepresent £60 million of the spread variance. As a discretionary change of accounting policy, implemented at the same time asthe adoption of IFRS, the Group has replaced the previous basis of five yearaveraging of gains and losses on bonds with a method that more closely reflectslonger-term returns. On the new basis, longer-term returns on fixed income securities comprise twoelements. The first element is a risk margin reserve (RMR) charge for long-termdefault experience of £58 million for 2005. The present value of future RMRcharges is reflected in the opening embedded value. The second element isamortisation of £53 million of interest related realised gains and losses. Thesegains and losses are amortised to operating profit over the bonds originalmaturities. The excess or deficit of actual realised gains and losses for fixed incomesecurities for the period over these components of longer-term returns isincluded in short-term fluctuations in investment returns as a separatecomponent of total profit for the period. Following this change of policy for JNL's EEV basis operating profit thecomponent for longer-term returns for fixed income securities is expected in thefuture to be a more stable feature than on the previous basis, which wasaffected by the volatility of realised gains and losses over a five year period.Total profit, including actual investment returns, is unaffected by the change.Further details of the change of policy are explained in the notes to the EEVand IFRS basis results. In 2005, JNL experienced a net realised gain of £1million on its corporate bond portfolio. This is reflected in total EEV basisprofit before tax. Asia Operations EEV basis operating profit from long-term operations (excluding development andregional head office costs) was £576 million for the year, up 22 per cent at CERand 25 per cent at RER on 2004. In Asia, NBP of £413 million was up 13 per cent at CER on 2004 with increasedsales offset partially by NBP margin. During 2005, APE sales were up 23 per centon 2004 and the NBP margins were 56 per cent on an APE basis and 10.2 per centon a present value of premiums basis, compared with 61 per cent and 10.4 percent respectively in 2004 at CER. The key drivers of lower margins in Asiacompared to prior year were country mix (reduction of two percentage points),product mix - principally in Taiwan (reduction of one percentage point) andassumption changes (reduction of two percentage points). Korea and India now contribute 26 per cent of total APE compared to 18 per centin 2004, average NBP margins in these countries are 37 per cent and 29 per centrespectively. The impact attributed to economic assumption changes is drivenprincipally by increases to the risk discount rates in China and Korea. This wasmore than offset by a favourable shift in product mix in Korea where averagemargins remained slightly ahead of 2004 at 37 per cent. The other main productmix related impact was due to the lower margins on the new retirementunit-linked product in Taiwan which led to a change in average margins from 61per cent to 51 per cent. Asia's in-force profit (before development expenses and the Asian fundmanagement business) increased to £163 million in 2005 from £108 million in 2004at CER. This reflects a higher value related to the unwind of the discount rateas the in-force business builds scale. In Asia we have target IRRs on new business at a country level of 10 percentagepoints over the country risk discount rate. Risk discount rates vary from 5 percent to 18 per cent depending upon the risks in each country market. Thesetarget rates of return are average rates and the marginal return on capital on aparticular product could be above or below the target. We have, however, exceeded the target in each of Asia's markets in 2005 exceptfor Thailand and Japan, which have yet to reach scale. In aggregate, IRR on newbusiness exceeded 20 per cent on average new business risk discount rates for2005 of 9.8 per cent. Asset Management, Banking and Other M&G M&G's operating profit was £163m, an increase of 20 per cent on last year. Thisincluded £24 million in performance-related fees (PRF), of which £17 million wasearned by PPM Capital following another year of extremely profitablerealisations on behalf of its clients. These are not expected to recur. Underlying profit (excluding PRFs) of £138 million was 25 per cent higher thanin 2004, an extremely strong result given that the previous year included £7m ofnon-recurring provision releases. Adjusting for this gives a like-for-likeincrease in profits of 34 per cent over 2004. In the past few years, growth in income from M&G's existing businesses has beenreinforced by the successful development of revenue streams from new activities.These include Prudential Finance, which manages Prudential's balance sheet forprofit, private finance, including CDOs, and Prudential Property InvestmentManagers (PruPIM), which increasingly manages assets for external investors.In its retail businesses, sales of equity funds have risen significantly in boththe UK, as a result of strong investment performance, and overseas, where M&Gcontinues to build new distribution channels in selected European and othermarkets. The benefits of this business diversification are clearly demonstrated by thestrong upward trend in profits that M&G has posted - underlying profits haveincreased consistently from £49 million in 2002 to £138 million in 2005. Profitsgrowth in 2005 was largely due to the impact of higher asset prices in equityand property markets, combined with the impact of positive net inflows over aperiod of several years. In addition, discipline continues to be exercised overcosts, which have risen only slightly this year after four years in which theywere held flat. US broker dealer and fund management businesses The broker dealer and fund management operations reported profits of £24million, compared with £15 million in 2004, primarily due to a one-off £5million revaluation related to an investment vehicle managed by PPM America. Curian Curian, which provides innovative fee-based separately managed accounts,recorded losses of £10 million in 2005, improved from losses of £29 million in2004, as the business continues to build scale. At year end 2005 Curian hadgrown assets under management to $1.7 billion (£973 million) from $1.1 billion(£615 million) at year end 2004. Asian fund management business The fund management business in Asia has expanded into new markets in the pastfew years and is now in nine markets across Asia. Geographic diversificationalong with this growth in scale has resulted in a strong upward trend inprofits. Profit from the Asian fund management operations was £12 million for the year,down 37 per cent from 2004 reflecting the exceptional costs of £16 millionincurred due to bond fund restructuring required as a result of industry wideissues in Taiwan. Underlying profit from the Asian fund management operations,excluding charges of £16 million, grew by 47 per cent to £28 million, a strongresult indicative of the economies of scale the business is now generating.Adjusting for the reporting of India at 49 per cent from 26 August 2005 resultsin an increase in profits of 55 per cent over 2004. At the Group level, profit before tax includes £4.5 million in profitattributable to realising value created in India when ICICI increased its stakein Prudential's Indian asset management joint venture from 45 per cent to 51 percent. Egg Egg's total continuing operating profit in 2005 was £44 million, compared with£61 million in 2004. This reflected the increasingly challenging marketconditions and £10 million restructuring costs incurred in the first half of2005. Operating profit of the core UK banking business was £60 million. The reductionfrom £72 million for 2004 primarily reflected the fact that although Eggsuccessfully grew income by £31 million in a difficult market and cut £17million from its cost base this was more than offset by an increase of £59million in bad debts due to the changing mix in the portfolio, business growthplus a deterioration in credit quality driven by economic factors across the UKunsecured lending market. The UK unsecured lending market only grew marginally in 2005 and indeed therewas a net reduction in credit card balances in the second half of the year.Against this tough market environment, Egg managed to drive up the return on itscredit card portfolio by focusing on growing interest bearing balances andsuccessfully re-pricing the card to reflect the higher funding costs, given baserates had risen on average compared to 2004. This contributed to an increase of£32 million in net interest income. As a result of the effective cost management, together with the benefits ofre-organisation early this year, Egg's cost to income ratio continued itsdownward trend to 43 per cent for 2005, improving from 49 per cent and 53 percent for 2004 and 2003 respectively. In 2005, a sharp deterioration in credit quality has adversely affected the UKretail banking sector leading to an increase in impairment charges across thesector, including Egg, compared to expectations. The result Egg achieved, whichwe believe is better than average industry performance, is due to the tacticaldecision to tighten its lending criteria early in the credit cycle, activeportfolio management and its underlying higher quality card portfolio. Regulatory attention continues to be devoted to the creditor insurance marketand we believe the introduction of new measures into the sales processes forpayment protection products has led to a reduction of approximately 20 per centon the commission revenue earned on this product across the banking sector. Eggexperienced similar reductions, a solid performance for an online bank. Through the acquisition of the minority interests of Egg and the closerpartnership of Egg with Prudential UK life and pension businesses, Prudentialexpects to achieve total annualised pre-tax cost savings across the combinedbusinesses of £40 million by the end of 2007. Costs of approximately £50 millionpre-tax are estimated to be incurred from this restructuring. This will beprovided for in 2006. Other Asia's development expenses (excluding the regional head office expenses)increased by 33 per cent at CER to £20 million, compared with £15 million in2004. These development expenses primarily related to our newer operations andestablishing our services hub in Malaysia. Other net expenditure remained constant over 2004. This reflected other incomeas a result of the interest earned on the net proceeds from the 2004 RightsIssue offset by higher interest payable. Head office costs (including Asiaregional head office costs of £30 million) were £100 million, up £19 million on2004. The increase mainly reflects the substantial work being undertaken for theimplementation of International Financial Reporting Standards, EEV reporting,transaction costs related to buying in the minority interest in Egg, SarbanesOxley and other regulatory costs. Total EEV Basis - Result Before Tax for Continuing Operations(Year-on-year comparisons below are based on RER.) The result before tax and minority interests was a profit of £2,244 million up26 per cent on 2004. This reflects an increase in operating profit from £1,274million to £1,712 million, together with a favourable movement of £431 millionin short term fluctuations in investment returns from £570 million to £1,001million. This is offset by a negative movement of £223 million due to changes ineconomic assumptions and a goodwill impairment charge of £120 million. The UK component of short-term fluctuations in investment returns of £995million primarily reflects the difference between an actual investment returnfor the with-profits life fund of 20 per cent and the long-term assumed returnof 7 per cent. The US short-term fluctuations in investment returns of £65 million include apositive £63 million in respect of the difference between actual investmentreturns and long-term returns included in operating profit. The primary factorwas a return in excess of assumptions on limited partnership investments. Italso includes a positive £4 million in relation to changed expectations offuture profitability on variable annuity business in-force due to the actualseparate account return exceeding the long-term return reported within operatingprofit. In Asia, short-term investment fluctuations were £41 million, compared to £91million last year. This mainly reflects improving equity markets in a number ofcountries. Negative economic assumption changes of £349 million in 2005 compared withnegative economic assumption changes of £126 million in 2004. Economicassumption changes in 2005 comprised negative £81 million in the UK, negative £3million in the US and negative £265 million in Asia. In the UK, economic assumption changes of negative £81 million reflect theimpact of the increase in the future investment return assumption offset by theincrease in the risk discount rate. The increases arise because althoughinterest rates have decreased over 2005, the equity risk premium assumption hasincreased from 3 per cent to 4 per cent. In the US, economic assumption changes of negative £3 million primarily reflectincreases in the risk discount rates following the increase in the equity riskpremium from 3 per cent to 4 per cent, partially offset by an increase in theseparate account return assumption. Asia's negative economic assumption changes of £265 million primarily reflectthe effect of lower bond yields in Taiwan which necessitated a reduction in theFund Earned Rate assumptions. The economic scenarios used to calculate 2005 EEVbasis results reflect the assumption of a phased progression of the bond yieldsfrom the current rates to the long-term expected rates. The projections assumethat, in the average scenario, the current bond yields of around 2 per centtrend towards 5.5 per cent at 31 December 2012. Allowance is made for the mix ofassets in the fund, our future investment strategy and the market valuedepreciation of the bonds as a result of the assumed yield increases. This givesrise to an average assumed Fund Earned Rate that trends from 2.3 per cent to 5.4per cent in 2013 and falls below 2.3 per cent for seven years due to thedepreciation of bond values as yields rise. Thereafter, the Fund Earned Ratefluctuates around a target of 5.9 per cent. This compares to a grading of 3.4per cent at 31 December 2004 to 5.9 per cent by 31 December 2012 for the 2004results. Consistent with our EEV methodology, a constant discount rate has beenapplied to the projected cash flows. The effect of change in the time value of cost of options and guarantees waspositive £47 million for the year, consisting of £31 million, £11 million and £5million for the UK, US and Asia, respectively. Total EEV Basis - Result After Tax for Continuing Operations The result after tax, minority interests and discontinued operations was £1,582million. The tax charge of £653 million compares with a tax charge of £553million in 2004. Minority interest in the Group results was £12 million. The effective tax rate at an operating profit level was 21 per cent (2004: 27per cent), reflecting the lower effective tax rates in the UK and certain Asianterritories. The effective tax rate at a total EEV level was 29 per cent (2004:31 per cent) on a profit of £2,244 million. The higher effective rate of taxcompared with that at an operating profit level is primarily due to the effectof impairment of goodwill (which does not attract tax relief), and the impact ofshort term fluctuations in investment returns and changes in economicassumptions not all of which are tax affected. The reduction in the 2005effective tax rate arises from a number of factors, including settlement of anumber of outstanding issues with HMRC and benefit taken for prior year lossesincurred in France following a recent European Court of Justice decision. Return on Embedded Value Prudential's return on embedded value for 2005 was 15.7 per cent up from 13.4per cent in 2004 reflecting the Groups' continued focus on profitable growth.The return is based on post-tax EEV operating profit from continuing operationsas a percentage of opening embedded value. INTERNATIONAL REPORTING STANDARDS (ifRS) RESULTS IFRS Operating Profits (based on longer-term investment returns) Proforma* Proforma* 2005 2004 Percentage 2005 2004 Percentage (at CER) Change (at RER) Change IFRS Operating Profits £'m £'m £'m £'m Insurance business UK 400 296 35% 400 296 35% US 348 298 17% 348 296 18% Asia 195 119 64% 195 117 67% Asia development expenses (20) (15) (33%) (20) (15) (33%) ------- ------- -------- ------- ------- ------- 923 698 32% 923 694 32% ------- ------- -------- ------- ------- ------- Fund management business M&G 163 136 20% 163 136 20% US broker dealer and fund management 24 15 60% 24 15 60% Curian (10) (29) 66% (10) (29) 66% Asia fund management 12 20 (40%) 12 19 (37%) ------- ------- -------- ------- ------- ------- 189 142 33% 189 141 34% ------- ------- -------- ------- ------- ------- Banking Egg (UK) 44 61 (28%) 44 61 (28%) Other income and expenditure (199) (198) (1%) (199) (197) (1%) ------- ------- -------- ------- ------- ------- Operating profits from continuing operations 957 703 36% 957 699 37% ======= ======= ======== ======= ======= ======= * The comparative IFRS results shown above are prepared on a 'proforma' basiswhich reflects the estimated effect on the 2004 results as if IAS 32, IAS 39 andIFRS4 had been applied from 1 January 2004 to the Group's insurance operationstogether with the discretionary change for the basis of determining longer-terminvestment returns, as disclosed on 2 June 2005. Reference to operating profit relates to profit including investment returns atthe expected long-term rate of return but excludes short-term fluctuations ininvestment returns, actuarial gains and losses of defined benefit pensionschemes and exceptional items. Group operating profit before tax from continuing operations on the IFRS basiswas £957 million, an increase of 36 per cent on the pro forma IFRS basis for2004 at CER. At RER, operating profit was up 37 per cent on prior year. Thisreflects strong growth in insurance and funds management businesses. In the UK, IFRS operating profit increased 35 per cent to £400 million in 2005.This reflected a 9 per cent increase in profits attributable to the with-profitsbusiness, a consequence of bonus declarations announced in February 2005 andFebruary 2006, a 44 per cent increase in profits arising from annuitiesbusiness, and IFRS profits arising from the Phoenix Life and Pensionstransaction completed in June 2005. In the US, IFRS operating profit of £362 million was up 27 per cent on 2004.IFRS operating profit for long-term business was £348 million, up 17 per centfrom £298 million in 2004. The US operations' results are based on US GAAP,adjusted where necessary to comply with IFRS as the Group's basis of presentingoperating profit is based on longer-term investment returns. In determining theUS results, longer-term returns for fixed income securities incorporate a riskmargin reserve (RMR) charge for longer-term defaults and amortisation ofinterest related realised gains and losses. The growth in the US operations' long-term IFRS operating profit reflects acontinued ability to deliver improved investment returns, with greater spreadand fee income offset by higher amortisation of deferred acquisition costs(DAC). In 2005, spread income was £119 million higher than in 2004, and includeda number of non-recurring items including mortgage prepayment fees, make-wholepayments and total return swap income which together represented £60 million ofspread income. JNL achieved record fee income during 2005, driven by a 42 percent increase in separate account assets held at year end, and improved returnson these assets. The 2004 result benefited from two one-off items, a favourable legal settlementof £28 million (£21 million after related charge to amortisation of deferredacquisition costs) and a positive £8 million adjustment arising from theadoption of new accounting guidance in SOP 03-01 "Accounting and Reporting byInsurance Enterprises for Certain Non-traditional Long Duration Contracts andfor Separate Accounts". This adjustment relates to a change in the method ofvaluing certain liabilities. The improvement in non-long term business profits was primarily driven byreduced losses recorded by Curian, down to £10 million from £29 million in 2004,as the business continues to build scale. The result also benefited from animprovement in PPMA profits, primarily due to a one-off £5 million revaluationof an investment vehicle managed by PPMA. Prudential Corporation Asia's operating profit for long-term business beforedevelopment expenses of £20 million was £195 million, an increase of 64 per centon 2004 at CER and included a net £44 million profit related to exceptionalitems reported at the half year subsequently reduced by £14 million inrestructuring costs for Japan. At reported rates, operating profits were 67 percent up on last year. The majority of this profit currently comes from thelarger and more established operations of Singapore, Hong Kong and Malaysia,which represent £127 million of the total operating profit in 2005, excludingexceptional items, compared to £111 million last year. In addition, markets suchas Indonesia and Vietnam are becoming larger contributors to operating profits.Five life operations made IFRS losses: China and India which are relatively newbusinesses rapidly building scale, Thailand and Taiwan which are marginally lossmaking; and Japan where the loss increased over 2004 due to restructuring costsincurred during the year. Total IFRS Profits - Result Before Tax for Continuing Operations(Year-on-year comparisons below are based on RER.) Total IFRS profits before tax attributable to shareholders and minorityinterests were £998 million in 2005, compared with £985 million on the pro-formabasis for 2004. The increase reflects: growth in operating profit of £258million offset by a goodwill impairment charge of £120 million in relation tothe Japanese Life business, decrease in short-term fluctuations in investmentreturn, down £82 million from 2004 and a £43 million negative movement from theprior year in actuarial gains and losses attributable to shareholder-backedoperations in respect of the Group's defined benefit pension schemes. The development of the Japanese life business has been slower than expected and,following its restructuring and the annual impairment review, Prudentialconcluded that the purchased goodwill associated with this business of £120million should be written off. The results for discontinued operations reflects the sale of Jackson FederalBank and the discontinuation of Egg's France and Funds Direct operations. Total IFRS Profits - Result After Tax for Continuing Operations Profit after tax and minority interests was £748 million compared with £602million in 2004. The effective rate of tax on operating profits, based onlonger-term investment returns, was 19 per cent (2004: 30 per cent). Theeffective rate of tax at the total IFRS profit level for continuing operationsfor 2005 was 24 per cent (2004: 29 per cent).The reduction in the 2005 effectivetax rate arises from a number of factors, including settlement of a number ofoutstanding issues with HMRC and benefit taken for prior year losses incurred inFrance following a recent European Court of Justice decision. Earnings per Share Earnings per share, based on EEV basis operating profit after tax and relatedminority interests were 56.6 pence, compared to 43.2 pence in 2004. Earnings pershare, based on IFRS operating profit after tax and related minority interests,were 32.2 pence, compared with a 2004 figure of 22.7 pence. Basic earnings per share, based on total EEV basis profit from continuingoperations for the year after minority interests, were 66.8 pence, compared witha figure of 56.8 pence in 2004. Basic earnings per share, based on IFRS profitfrom continuing operations for the year after minority interests, were 31.5pence, in line with the 2004 figure. Dividend per Share We intend to maintain our current dividend policy, with the level of dividendgrowth being determined after considering the opportunities to invest in thoseareas of our business offering attractive growth prospects, our financialflexibility and the development of our statutory profits over the medium tolong-term. The Board recommends a full year dividend per share for 2005 of 16.32 pence, anincrease of three per cent over the full year 2004 dividend of 15.84 pence. Dividend cover based on reported post-tax IFRS operating profits from continuingoperations is 1.9 times. Dividend cover based on reported IFRS operating profitsfrom continuing operations and normalised tax rate of 30% is 1.7 times. Balance sheet Explanation of Balance Sheet Structure The Group's capital on an IFRS basis comprises of shareholders' funds £5,194million; subordinated long term and perpetual debt of £2,098 million; other corestructured borrowings £1,093 million and the unallocated surplus of with-profitsfunds of £11.4 billion. Subordinated or hybrid debt is debt capital which has some equity like featuresand which would rank below other senior debt in the event of a liquidation.These features allow hybrid debt to be treated as capital for FSA regulatorypurposes. All of the Group's hybrid which qualifies in this way is held at theGroup level and is therefore taken as capital into the parent solvency testunder the Financial Conglomerates Directive (FCD). The FSA has established a structure for determining how much hybrid debt cancount as capital which is similar to that used for banks. It categorises capitalas Tier 1 (equity and preference shares), Upper Tier 2 debt and Lower Tier 2debt. Up to 15 per cent of Tier 1 can be in the form of hybrid debt and called"Innovative Tier 1". At 31 December 2005, the Group (including Egg) held £865million of Innovative Tier 1 capital, in the form of perpetual securities, £186million Upper Tier 2 and £1,112 million of Lower Tier 2 capital. Following theimplementation of the FCD, it is advantageous to the Group from a regulatorycapital standpoint to raise its long-term debt in hybrid form and it is theGroup's policy to take advantage of favourable market conditions as they ariseto do so. The unallocated surplus of the with-profits funds represents assets in the LifeFund which have not yet been allocated either to policyholders or shareholdersand which are not generally available to the Group other than as they emergethrough the statutory transfer of the shareholders' share of the surplus as itemerges from the fund over time. Asset and Liability Management Prudential manages its assets and liabilities locally, in accordance with localregulatory requirements and reflecting the differing types of liabilitiesPrudential has in each business. As a result of the diversity of productsPrudential offers and the different regulatory environments in which itoperates, Prudential employs different methods of asset/liability management onboth an in-force and new business basis. Stochastic modelling of assets andliabilities is undertaken in the UK, the US and Asia to assess economic capitalrequirements for different confidence intervals and time horizons. In addition,reserve adequacy testing under a range of scenarios and dynamic solvencyanalysis is carried out, including certain scenarios mandated by the US, the UKand Asian regulators. Weighted Average Cost of Capital (WACC) Our commitment to our shareholders is to maximise the value of Prudential overtime by delivering superior financial returns. Prudential's weighted averagecost of capital (WACC) is circa 9.2 per cent, which is based on the net coredebt and shares outstanding at the end of 2005, an equity market premium of 4per cent and a market Beta of 1.4. Prudential's WACC has increased since the endof 2004 largely due to an increase in the assumed equity risk premium.Prudential continues to retain a significant portion of the rights issueproceeds which results in a higher proportion of the Group's capital beingfunded by equity which, in turn results in a temporary increase in the Group'sWACC over its long-term WACC. Shareholders' Funds On the EEV basis, which recognises the shareholders' interest in long-termbusinesses, shareholders' funds at 31 December 2005 were £10.3 billion, anincrease of £1.7 billion from the 2004 year end level after restating forrelevant IFRS changes. This 20 per cent increase primarily reflects: total EEVbasis operating profit of £1,712 million; a £1,001 million favourable movementin short-term fluctuations in investment returns; and the positive impact of£442 million for foreign exchange movements. These were offset by: a £302million negative movement due to changes in economic assumptions; a tax chargeof £653 million; dividend payments of £325 million made to shareholders (net ofscrip dividend); and the impairment charge of £120 million in respect ofpurchased goodwill associated with the Japanese life business. At year-end 2005, the embedded value for the Asian business as a whole was £2.0billion. The established markets of Hong Kong, Singapore and Malaysia contribute£1.8 billion to the embedded value generated across the region with Korea (£136million) and Vietnam (£127 million) making further substantial contributions.Our other markets of China, India, Indonesia, Japan, Thailand and thePhilippines in aggregate contribute £211 million in embedded value. Growth inembedded value for the Asian business as a whole has been partially offset by anegative embedded value in Taiwan of £311 million which includes the associatedcost of economic capital, and reflects the low interest rate environment inTaiwan. The current mix of business in Taiwan is weighted heavily towards unit-linkedand protection products, representing 73 per cent and 16 per cent of newbusiness APE in 2005, respectively. As a result, interest rates have littleeffect on new business profitability and a 1 per cent reduction in assumedinterest rates would reduce new business margins in Taiwan by only 2 percentagepoints. However, the in-force book in Taiwan, predominantly made up of whole oflife policies, has an embedded value that is sensitive to interest rate changes.A 1 per cent decrease in interest rates, along with consequential changes toassumed investment returns for all asset classes, market values of fixedinterest assets and risk discount rates, would result in a £174 million decreasein Taiwan's embedded value. A similar 1 per cent positive shift in interestrates would increase embedded value by £106 million. Sensitivity of the embeddedvalue to interest rate changes varies considerably across the region. Inaggregate, a 1 per cent decrease in interest rates, along with all consequentialchanges noted above, would result in only a 6 per cent decrease to Asia'sembedded value. Statutory IFRS basis shareholders' funds at 31 December 2005 were £5.2 billion.This compares with £4.7 billion on the proforma IFRS basis, at 31 December 2004.The increase primarily reflects: profit after tax of £760 million and positiveforeign exchange movements of £268 million, offset by dividend payments toshareholders (net of scrip dividend) of £325 million. Cash Flow The table below 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. FY 2005 FY 2004 £m £m Cash remitted by business units : UK life fund transfer* 194 208 UK other dividends (including special dividend) 103 100 JNL 85 62 Asia 73 67 M&G 62 84 ----------- ----------Total cash remitted to Group 517 521 Net interest paid (115) (119)Dividends paid (378) (323)Scrip dividends and share options 55 119 ----------- ----------Cash remittances after interest and dividends 79 198 Tax received 107 34 Corporate activities (66) (56) ----------- ----------Cash flow before investment in businesses 120 176 Capital invested in business units : UK (249) (189) Asia (169) (158) ----------- ----------Total capital invested in business units (418) (347) ----------- ---------- Decrease in cash before Rights Issue proceeds (298) (171) Rights Issue proceeds 0 1,021 ----------- ----------(Decrease) increase in cash (298) 850 =========== ========== * In respect of prior year's bonus declarations. The Group holding company received £517 million in cash remittances frombusiness units in 2005 (2004: £521 million) comprising the shareholders'statutory life fund transfer of £198 million relating to the 2004 bonusdeclarations, of which £194 million was remitted from the UK and £4 million fromAsia, together with other remittances from subsidiaries of £319 million. Thisincludes a special dividend of £100 million from the PAC shareholders' funds inrespect of profit arising from earlier business disposals and a separate paymentof $150 million from JNL. The reduced transfer from M&G is due to a higher levelof reinvestment in 2005 in new activities together with a remittance of surpluscash in 2004. After net dividends and interest paid, there was a net cash inflow of £79million (2004: £198 million). During 2005, the Group holding company paid £66 million in respect of corporateactivities and received £107 million in respect of tax. Tax received in 2004 of£34 million included an exceptional payment of around £60 million related to thesale of equity securities backing the general insurance business. The £107million balance in 2005 represents surrendered tax losses reimbursed by theGroup. The Group invested £418 million (2004: £347 million) in its businessunits, comprising £249 million in its UK Operations and £169 million in Asia.During 2006, Prudential continues to expect that Asia will be a net capitalprovider to the Group. In aggregate this gave rise to a decrease in cash of £298 million (2004: £850million increase, after Rights Issue proceeds). As a result of the bonus declarations made in February 2005 and February 2006,the shareholder transfer is expected to be £223 million in 2006, including theHong Kong branch. Cash invested to support the UK business in 2006 will be less than 2005, up to£230 million depending on the mix of business written and the opportunitiesavailable. Shareholders' Borrowings and Financial Flexibility Net core structural borrowings at 31 December 2005 were £1,611 million comparedwith £1,236 million at 31 December 2004. This reflects the net cash outflow of£298 million, exchange conversion losses of £92 million and IFRS adjustments ofnegative £15 million. After adjusting for holding company cash and short-term investments of £1,128million, core structural borrowings of shareholder-financed operations(excluding Egg) at the end of 2005 totalled £2,739 million, compared with £2,797million at the end of 2004. This decrease reflected the repayment of US$250million bonds, the issuance of US$300 million Perpetual Subordinated CapitalSecurities, the repayment of £171 million of short-term borrowings, exchangeconversion losses of £98 million and IFRS adjustments noted above. Core long-term loans at the end of 2005 included £1,830 million at fixed ratesof interest with maturity dates ranging from 2007 to perpetuity. £1,010 millionof the core borrowings were denominated in US dollars, to hedge partially thecurrency exposure arising from the Group's investment in Jackson National Life(JNL). Prudential has in place an unlimited global commercial paper programme. At 31December 2005 commercial paper of £408 million, US$1,538 million and €228million has been issued under this programme. Prudential also has in place a£5,000 million medium-term note (MTN) programme. At 31 December 2005subordinated debt outstanding under this programme were £435 million and €520million, and senior debt outstanding was US$18 million. In addition the holdingcompany has access to £1,500 million committed revolving credit facilities,provided by 15 major international banks and a £500 million committed securitieslending liquidity facility. These facilities have not been drawn on during theyear. The commercial paper programme, the MTN programme, the committed revolvingcredit facilities and the committed securities lending liquidity facility areavailable for general corporate purposes and to support the liquidity needs ofthe parent company. The Group's insurance and asset management operations are funded centrally. Egg,as a separate bank, is responsible for its own financing. The Group's core debtis managed to be within a target level consistent with its current debt ratings.At 31 December 2005, the gearing ratio (debt, net of cash and short-terminvestments, as a proportion of EEV shareholder funds) was 13.5 per centcompared with 12.6 per cent at 31 December 2004. Prudential plc enjoys strong debt ratings from both Standard & Poor's andMoody's. Prudential long-term senior debt is rated AA- (negative outlook) and A2(stable outlook) from Standard & Poor's and Moody's respectively, whileshort-term ratings are A1+ and P-1. Based on EEV basis operating profit from continuing operations and interestpayable on core structural borrowings, interest cover was 10.8 times in 2005compared with 9.3 times in 2004. Treasury Policy The Group operates a central treasury function, which has overall responsibilityfor managing its capital funding programme as well as its central cash andliquidity positions. The aim of Prudential's capital funding programme, which includes the £5,000million medium-term note programme together with the unlimited commercial paperprogramme, is to maintain a strong and flexible funding capacity. In the UK and Asia, Prudential uses derivatives to reduce equity risk, interestrate and currency exposures, and to facilitate efficient investment management.In the US, Jackson National Life uses derivatives to reduce interest rate risk,to facilitate efficient portfolio management and to match liabilities underequity-indexed policies. It is Prudential's policy that all free-standing derivatives are used to hedgeexposures or facilitate efficient portfolio management. Amounts at risk arecovered by cash or by corresponding assets. Due to the geographical diversity of Prudential's businesses, it is subject tothe risk of exchange rate fluctuations. Prudential's international operations inthe US, Asia and Europe, which represent a significant proportion of operatingprofit and shareholders' funds, generally write policies and invest in assetsdenominated in local currency. Although this practice limits the effect ofexchange rate fluctuations on local operating results, it can lead tosignificant fluctuations in Prudential's consolidated financial statements uponconversion of results into pounds sterling. The currency exposure relating tothe conversion of reported earnings is not separately managed, as it is not inthe economic interests of the Group to do so. The impact of gains or losses oncurrency conversions is recorded as a component of shareholders' funds withinthe statement of recognised income and expense. The impact of exchange ratefluctuations in 2005 is discussed elsewhere in this Financial Review. unallocated surplus of with-profits funds During 2005, the unallocated surplus, which represents the excess of assets overpolicyholder liabilities for the Group's with-profits funds on a statutorybasis, grew from £8.3 billion at 1 January (after the effect of adoption of IFRSand the realistic reporting regime in the UK) to £11.3 billion at 31 December.This reflects an increase in the cumulative retained earnings arising onwith-profits business that have yet to be allocated to policyholders orshareholders. The change in 2005 predominantly reflects the positive investmentreturn earned by the PAC with-profits fund as a result of investment gains inthe UK equity market. Regulatory capital Requirements The Financial Conglomerates Directive ("FCD"), which affects groups withsignificant cross-sector activities in insurance and banking/investmentservices, came into force for Prudential from 1 January 2005. Prior to this,since 1 January 2001 Prudential was required to meet the solvency requirementsof the Insurance Groups Directive ("IGD"), as implemented by the FinancialServices Authority ("FSA"). The FSA has implemented the FCD by applying thesectoral rules of the largest sector, hence a group such as Prudential isclassified as an insurance-led conglomerate and is required to focus on thecapital adequacy requirements of the IGD, the Consolidated Life Directive andthe Insurance Company Accounts Directive. The FCD requires a continuous parent company solvency test which requires theaggregating of surplus capital held in the regulated subsidiaries, from whichgroup borrowings are deducted, other than those subordinated debt issues whichqualify as capital. No credit for the benefit of diversification is allowed forunder this approach. The test is passed when this aggregate number is positive,and a negative result at any point in time is a notifiable breach of UKregulatory requirements. In practice, whether Prudential is classified as afinancial conglomerate or insurance group, there is very little difference inapplication of the rules. This is because the FSA has decided to make the testmandatory from 31 December 2006 to all insurance groups. Due to the geographically diverse nature of Prudential's operations, theapplication of these requirements to Prudential are complex. In particular, formany of our Asian operations, the assets, liabilities and capital requirementshave to be recalculated based on FSA regulations as if the companies weredirectly subject to FSA regulation. There have been two additional FSA requirements applicable this year: Firstly,the elimination of goodwill in the valuation of non-insurance subsidiaries, forwhich we had already factored in the full impact in our disclosure of the 2004IGD position, ahead of the FSA's rules coming into force. Secondly, accountingfor pension fund deficits, which has had an approximate £0.1bn impact this yearto the 2005 FCD position. The FCD position will be submitted to the FSA by 30 April 2006 but is currentlyestimated to be around £825 million. The European Union is continuing to develop a new prudential framework forinsurance companies, "the Solvency II project". The main aim of this frameworkis to ensure the financial stability of the insurance industry and protectpolicyholders through establishing solvency requirements better matched to thetrue risks of the business. Like Basel 2, the new approach is expected to bebased on the concept of three pillars - minimum capital requirements,supervisory review of firms' assessments of risk and enhanced disclosurerequirements. In particular, companies will be encouraged to improve their riskmanagement processes, including making use of internal economic capital modelsto enable a better understanding of the business. The emphasis on transparencyand comparability would help ensure a level playing field. Solvency II is being led by the European Commission's ("EC") Internal MarketDirector-General, with formal "Level 1" agreement by the European Parliament andCouncil on framework directive made after a full consultation process. Thedetailed regulatory requirements are negotiated at "Level 2" with the ECreceiving guidance from the European Insurance and Occupational PensionsCommittee ("EIOPC") where HM Treasury represents the UK. The EC have directed the Committee of European Insurance and OccupationalPensions Supervisors ("CEIOPS"), where the FSA represents the UK, to provideguidance on many technical aspects of the framework ("Level 3"). CEIOPS willalso develop voluntary guidance for national regulators to ensure consistentinterpretation of Level 2 measures. To this end, the EC and CEIOPS have jointlyissued Calls for Advice in order to incorporate broader feedback from industry,for which Prudential has actively engaged in mainly through its participation inthe European Chief Risk Officer ("CRO") Forum. Financial Strength of Insurance Operations United Kingdom The fund is very strong with an inherited estate measured on an essentiallydeterministic valuation basis of around £9.0 billion compared with £6.8 billionat the end of 2004. On a realistic basis, with liabilities recorded on a marketconsistent basis, the free assets were valued at around £8.0 billion before adeduction for the risk capital margin. The PAC long-term fund is rated AA+ by Standard & Poor's and Aa1 by Moody's. The table below shows the change in the investment mix of Prudential's mainwith-profits fund: 1999 2004 2005 % % %---------------------------- ------- ------- -------UK equities 58 33 40International equities 14 15 19Property 11 18 15Bonds 13 29 21 Cash and other asset classes 4 5 5---------------------------- ------- ------- -------Total 100 100 100---------------------------- ------- ------- ------- For the main UK with-profits fund 83 per cent of fixed income securities areinvestment grade with 25 per cent rated AA or above. For Prudential AnnuitiesLimited 95 per cent of the fixed income securities are investment grade with 48per cent rated AA or above. For Prudential Retirement Income Limited 98 per centof total assets are investment grade with 57 per cent rated AA or above. With-profits contracts are long-term contracts with relatively low guaranteedamounts, this combined with the strong financial position of the fund enablesPrudential to invest primarily in equities and property. At the end of 2005 theequity backing ratio (equity plus property) was nearly 74 per cent whichreflects an approximate 10 per cent increase in the equity exposure over theyear with a corresponding reduction in the bond, and, to a lesser extent theproperty, exposure - a strategy driven by the perceived attractive pricing ofequities relative to other assets in the earlier part of 2005, which led us tomove back into equities. To some extent this is a retracing of the substantial(and successful) equity reduction strategy implemented towards the end of thelate 90's 'bubble' period. The fund remains extremely well diversifiedgeographically, by asset type and within the underlying stock portfolios, whichwe believe is an attractive feature of the Prudential with-profits proposition.It helps reduce risk or expected volatility by insulating the total fund frompotential weakness in any particular market or stock. The active management ofthe asset mix in recent years has had a substantial beneficial impact oninvestment returns. The broad asset mix will continue to be reviewed as theeconomic environment and market valuations change. The investment return on the Prudential main with-profits fund was 20 per centin the year to 31 December 2005 compared with the rise in the FTSE All Share(Total Return) Index of 22 per cent over the same period. Over the last tenyears the with-profits fund has consistently generated positive fund returnswith 3, 5 and 10 year compound returns of 16.6 per cent per annum, 7.1 per centper annum and 10.1 per cent per annum respectively, compared with correspondingincreases in the FTSE All Share index (Total Return) of 18.5 per cent, 2.2 percent and 7.9 per cent. These returns demonstrate the benefits of the fund'sstrategic asset allocation and long-term outperformance. United States The capital adequacy position of Jackson National Life remains strong, havingimproved the capital ratio from 8.5 per cent in 2004 to 9.2 per cent in 2005.JNL's statutory capital, surplus and asset valuation reserve position improvedyear on year by $434 million, after deducting the $150 million of capitalremitted to the parent company. JNL's financial strength is rated AA by Standard& Poor's (negative outlook) and A1 by Moody's. JNL's invested asset mix on a US regulatory basis (including Jackson NationalLife of New York but excluding policy loans and reverse repo leverage) is asfollows: 2003 2004 2005 % % %--------------------------------------- ------- ------- -------Bonds:Investment Grade Public 58 60 58Investment Grade Private 19 19 19Non Investment Grade Public 5 4 5Non Investment Grade Private 2 2 2Commercial Mortgages 10 11 11Private equities and real estate 4 3 3Equities, cash and other assets 2 1 2--------------------------------------- ------- ------- -------Total 100 100 100--------------------------------------- ------- ------- ------- Asia Prudential Corporation Asia maintains solvency margins in each of its operationsso that these are at or above the local regulatory requirements. Across theregion less than 20 per cent of non-linked funds are invested in equities. Both Singapore and Malaysia have discrete life funds, and in 2005 goodinvestment returns saw their free asset ratios increase. The Hong Kong lifeoperation is a branch of Prudential Assurance Company Limited and its solvencyis covered by that business. Taiwan has Risk Based Capital regulatory solvencymargins and Prudential ensures sufficient capital is retained in the business tocover these requirements. REDRESS OF MORTGAGE ENDOWMENT PRODUCTS Prudential Assurance's main long-term business with-profits fund paidcompensation of £24 million in 2005 in respect of mortgage endowment productmis-selling claims and held provisions of £63 million at 31 December 2005 tocover further claims. These compensation payments and provisions have had noimpact on policyholders' asset shares. As a result, policyholders' bonuses andthe shareholder's share of these bonuses are unaffected, resulting in no impacton the Group's profit before tax. A provision of £6 million was held at 31 December 2005 by shareholders' funds tocover potential compensation in respect of mis-selling claims for ScottishAmicable mortgage endowment products sold since the acquisition of ScottishAmicable in 1997. In addition, a provision of £50 million was held at 31December 2005 for the closed Scottish Amicable Insurance Fund (SAIF) in respectof mortgage endowment products sold prior to acquisition. This provision has noimpact on shareholders. No further Scottish Amicable mortgage endowment productswere sold after April 2001. Inherited Estate The long-term fund contains the amount that the Company expects to pay out tomeet its obligations to existing policyholders and an additional amount used asworking capital. The amount payable over time to policyholders from thewith-profits sub-fund is equal to the policyholders' accumulated asset sharesplus any additional payments that may be required for smoothing or to meetguarantees. The balance of the assets of the with-profits sub-fund is called the'inherited estate' and represents the major part of the working capital ofPrudential's long-term fund which enables the Company to support with-profitsbusiness by: • providing the benefits associated with smoothing and guarantees; • providing investment flexibility for the fund's assets; • meeting the regulatory capital requirements, which demonstrate solvency; • absorbing the costs of significant events, or fundamental changes in its long-term business without affecting bonus and investment policies. The size of the inherited estate fluctuates from year to year depending on theinvestment return and the extent to which it has been required to meet smoothingcosts, guarantees and other events. The Company believes that it would be beneficial if there were greater clarityas to the status of the inherited estate. In due course, after discussions withthe FSA, the company may therefore take steps to achieve that clarity, whetherthrough guidance from the court or otherwise. In any event the Company expectsthat the entire inherited estate will need to be retained within the long-termfund for the foreseeable future to provide working capital and so it is notconsidering any distribution of the inherited estate to policyholders andshareholders. The costs associated with the mis-selling review of Prudential's with-profitspersonal pensions have been met from the inherited estate. Accordingly, thesecosts have not been charged to the asset shares used in the determination ofpolicyholder bonus rates. Hence policyholders' pay-out values have beenunaffected by personal pension mis-selling. In 1998, Prudential stated that deducting personal pensions mis-selling costsfrom the inherited estate of the with-profits sub-fund would not impact theCompany's bonus or investment policy. The Company gave an assurance that if thisunlikely event were to occur, it would make available support to the fund fromshareholder resources for as long as the situation continued, to ensure thatpolicyholders were not disadvantaged. The assurance was designed to protect both existing policyholders at the date itwas announced, and policyholders who subsequently purchased policies while thepension mis-selling review was continuing. This review was completed on 30 June2002 and consequently the assurance has not applied to new business issued since1 January 2004. Therefore the maximum amount of capital support available underthe terms of the assurance will reduce over time as claims are paid on thepolicies covered by it. Defined Benefit Pension Schemes The Group operates four defined benefit schemes, three in the UK, of which theprincipal scheme is the Prudential Staff Pension Scheme (PSPS), and a smallscheme in Taiwan. The level of surplus or deficit of assets over liabilities fordefined benefit schemes is currently measured in three ways: the actuarialvaluation, FRS17 (for subsidiary accounting in the UK), and IAS19 for the Groupfinancial statements. FRS17 and IAS19 are very similar. As at 31 December, 2005the shareholders' share of the deficit of these schemes amounted to £153 millionnet of related tax relief. Defined benefit schemes in the UK are generally required to be subject to fullactuarial valuation every three years to assess the appropriate level of fundingfor schemes having regard to their commitments. These valuations includeassessments of the likely rate of return on the assets held within the separatetrustee administered funds. PSPS was last actuarially valued as at 5 April 2002and this valuation demonstrated the Scheme to be 110 per cent funded, with anexcess of actuarially determined assets over liabilities of 10 per cent,representing a fund surplus of £376 million. As a result, no change inemployers' contributions from the current 12.5 per cent of salaries has beenrequired until now. The PSPS valuation as at 5 April 2005 is currently being finalised and isexpected to show a small deficit on the actuarial basis. The Company expectsthat for 2006 and future years the employers contributions for ongoing serviceof current employees will approximately double whilst, in addition, deficitfunding amounts designed to eliminate the actuarial deficit over a ten yearperiod will be made. Total contributions to the scheme for these two componentsare expected to be of the order of £70-75 million per annum over a ten yearperiod. This compares with contributions in 2005 of £19 million. Under IAS19 the basis of valuation differs markedly from the full triennialvaluation basis. In particular, it would require assets of the Scheme to bevalued at their market value at the year-end, while pension liabilities would berequired to be discounted at a rate consistent with the current rate of returnon a high quality corporate bond. As a result, the difference between IAS19basis assets and liabilities can be volatile. For those schemes such as PSPS,which hold a significant proportion of their assets in equity investments, thevolatility can be particularly significant. Under IAS19, for 2005, a £22 millionpre-tax shareholder charge to operating results based on longer-term returnsarises, outside the operating result, but included in total profits is a pre-taxshareholder charge of a further £51 million. This is comprised of twocomponents. First, £31 million of net actuarial gains arises on the movement inthe shareholders' share of the scheme deficits. The second component is a chargeof £20 million which arises from the need under UK GAAP (when applied to theGroup's insurance contracts under IFRS) to set aside amounts for future expenseson certain contracts. The £20 million charge reflects the increase relating tothe increased future contributions for ongoing service. Surpluses and deficits on the Group's defined benefit schemes are apportioned tothe Prudential Assurance Company (PAC) life fund and shareholders' funds basedon estimates of employees' service between them. Previously, for the purposes ofmemorandum FRS17 disclosure the deficit on the PSPS scheme has been apportionedin the ratio 80/20 between the life fund and shareholder backed operations.During the year additional analysis has been undertaken and the ratio reassessedas 70/30. At 31 December 2005 the total share of the deficits on the PSPS andmuch smaller Scottish Amicable scheme amounted to £295 million net of relatedtax relief. PRUDENTIAL PLC 2005 RESULTS RESULTS SUMMARY European Embedded Value (EEV) Basis Results* 2005 £m 2004 £m-------------------------------------- -------- --------UK Insurance Operations 426 486M&G 163 136Egg 44 61-------------------------------------- -------- --------UK Operations 633 683US Operations 755 368Asian Operations 568 464Other Income and Expenditure (244) (241)-------------------------------------- -------- --------Operating profit from continuing operations based onlonger-term investment returns 1,712 1,274Goodwill impairment charge (120) -Short-term fluctuations in investment returns 1,001 570Shareholders' share of actuarial and other gains andlosses of defined benefit pension schemes (47) (12)Effect of changes in economic assumptions and time valueof cost of options and guarantees (302) (48)-------------------------------------- -------- --------Profit from continuing operations before tax 2,244 1,784-------------------------------------- -------- -------- Operating earnings per share from continuing operationsafter related tax and minority interests* 56.6p 43.2pBasic earnings per share 66.9p 53.7pShareholders' funds, excluding minority interests £10.3bn £8.6bn-------------------------------------- -------- -------- International Financial Reporting Standard (IFRS) Basis Results** Statutory IFRS basis results 2005 2004------------------------------------- --------- --------Profit after tax attributable to equity holders of theCompany £748m £517mBasic earnings per share 31.6p 24.4pShareholders' funds, excluding minority interests £5.2bn £4.5bn------------------------------------- --------- -------- Supplementary IFRS basis information Based on Based on------------------------------------- statutory IFRS pro forma basis results IFRS results 2005 2004 --------- --------Operating profit from continuing operationsbased on longer-term investment returns £957m £699mProfit after tax attributable to equityholders of the Company £748m £602mOperating earnings per share from continuingoperations after related tax and minority interests** 32.2p 22.7pBasic earnings per share 31.6p 28.4pShareholders' funds, excluding minority interests £5.2bn £4.7bn------------------------------------- --------- -------- 2005 2004 ------------------------------------- --------- --------Dividends per share declared and paid in reporting period 15.95p 15.48pDividends per share relating to reporting period 16.32p 15.84pFunds under management £234bn £197bn------------------------------------- --------- -------- *EEV basis results 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 and expanded by the Additional Guidance on EEV disclosurespublished in October 2005. Previously the Group has reported Embedded Valuebased supplementary information on the Achieved Profits basis. Operating earnings per share is calculated using operating profits fromcontinuing operations based on longer-term investment returns, after tax andminority interest. These profits exclude goodwill impairment charges, thepost-tax effects of short-term fluctuations in investment returns, theshareholder's share of actuarial and other gains and losses on defined benefitpension schemes, the effect of changes in economic assumptions, and changes inthe time value of cost of options and guarantees. The amounts for these itemsare included in the calculation of EEV basis basic earnings per share. **IFRS basis results The basis of preparation reflects the formal adoption of IFRS basis reportingfor the 2005 results. This basis of reporting was anticipated in the Company'sinterim reporting in July 2005 and which, on all substantive matters the basisof measurement and presentation of IFRS basis results included in thisannouncement, is the same as applied at that time. References to "Statutory IFRS basis" results throughout this announcementreflect results contained in the statutory basis financial statements for 2005.These statements incorporate changes from the basis of preparation for the 2004financial statements that were included in determining the interim 2005 results.These changes reflect: (i) Measurement changes arising from policies the Group has applied on theadoption of all IFRS standards, other than IAS 32 (Financial Instruments:Disclosure and Presentation), IAS 39 (Financial Instruments: Recognition andMeasurement), and IFRS 4 (Insurance Contracts), from 1 January 2004. The 2005results include the effect of adoption of those three standards from 1 January2005. (ii) Changes to the format of the results and other presentational changesthat the Group has applied in its 2005 financial statements in so far as theyaffect the summary results included in this announcement. (iii) A discretionary change of policy for the basis of determining longer-terminvestment returns included in operating profit based on longer-term investmentreturns. The pro forma IFRS basis results included in this announcement are included assupplementary information and are not results that form part of the Group'sfinancial statements. The pro forma IFRS results reflect the application of thestatutory IFRS changes noted above and the estimated effect on the Group'sresults for 2004 if IAS 32, IAS 39 and IFRS 4 had been applied from 1 January2004 to the Group's insurance operations. Operating earnings per share is calculated using operating profits fromcontinuing operations based on longer-term investment returns, after tax andminority interest. These profits exclude goodwill impairment charges, and thepost-tax effects of short-term fluctuations in investment returns, and theshareholders' share of actuarial and other gains and losses on defined benefitpension schemes. The amounts for these items are included in the calculation ofIFRS basis basic earnings per share. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS RESULTS SUMMARY 2005 £m 2004 £m------------------------------------- -------- --------UK Insurance Operations 426 486M&G 163 136Egg 44 61------------------------------------- -------- --------UK Operations 633 683US Operations 755 368Asian Operations 568 464Other Income and Expenditure (244) (241)------------------------------------- -------- --------Operating profit from continuing operations based onlonger-term investment returns 1,712 1,274Goodwill impairment charge (120) -Short-term fluctuations in investment returns 1,001 570Shareholders' share of actuarial and other gains and lossesof defined benefit pension schemes (47) (12)Effect of changes in economic assumptions and time value ofcost of options and guarantees (302) (48)------------------------------------- -------- --------Profit from continuing operations before tax (includingactual investment returns) 2,244 1,784Tax (653) (553)------------------------------------- -------- --------Profit from continuing operations after tax before minorityinterests 1,591 1,231Discontinued operations (net of tax) 3 (94)------------------------------------- -------- --------Profit for the year 1,594 1,137------------------------------------- -------- --------Attributable to:Equity holders of the Company 1,582 1,138Minority interests 12 (1)------------------------------------- -------- --------Profit for the year 1,594 1,137------------------------------------- -------- -------- Earnings per share 2005 2004------------------------------------- -------- --------Continuing operationsFrom operating profit, based on longer-term investmentreturns, after related tax and minority interests 56.6p 43.2pAdjustment for goodwill impairment charge (5.1)p -Adjustment from post-tax longer-term investment returns topost-tax actual investment returns (after related minorityinterests) 27.8p 17.1pAdjustment for post-tax shareholders' share of actuarial andother gains and losses on defined benefit pension schemes (1.4)p (0.3)pAdjustment for post-tax effect of changes in economicassumptions and time value of cost of options and guarantees (11.1)p (3.2)p------------------------------------- -------- --------Based on profit from continuing operations after minorityinterests 66.8p 56.8p------------------------------------- -------- -------- Discontinued operationsBased on profit (loss) from discontinued operations afterminority interests 0.1p (3.1)p------------------------------------- -------- --------Based on profit for the year after minority interests 66.9p 53.7p------------------------------------- -------- --------Average number of shares (million) 2,365 2,121------------------------------------- -------- -------- Dividends per share 2005 2004------------------------------------- -------- --------Dividends per share relating to reporting periodInterim dividend (2005 and 2004) 5.30p 5.19pFinal dividend (2005 and 2004) 11.02p 10.65p------------------------------------- -------- --------Total 16.32p 15.84p------------------------------------- -------- -------- Dividends per share declared and paid in reporting periodInterim dividend for current period 5.30p 5.19pFinal dividend for prior period 10.65p 10.29p------------------------------------- -------- --------Total 15.95p 15.48p------------------------------------- -------- -------- TOTAL INSURANCE AND INVESTMENT PRODUCTS NEW BUSINESS INSURANCE PRODUCTS AND INVESTMENT PRODUCTS* Insurance Products* Investment Products* Total ------------------- ------------------- ----------------- 2005 £m 2004 £m 2005 £m 2004 £m 2005 £m 2004 £m ----------------------- ------ ------ ------ ------ ------ ------UK Operations 7,276 6,538 7,916 5,845 15,192 12,383US Operations 5,023 4,420 414 418 5,437 4,838Asian Operations 1,485 1,172 18,457 19,068 19,942 20,240----------------------- ------ ------ ------ ------ ------ ------Group Total 13,784 12,130 26,787 25,331 40,571 37,461----------------------- ------ ------ ------ ------ ------ ------ INSURANCE PRODUCTS - NEW BUSINESS PREMIUMS AND CONTRIBUTIONS* Annual Premium and Contribution Single Regular Equivalents -------- --------- ------------------- 2005 £m 2004 £m 2005 £m 2004 £m 2005 £m 2004 £m----------------------- ------- ------- ------- ------- ------- ------UK Insurance Operations Direct to customerIndividual annuities 720 630 - - 72 63Individual pensions andlife 29 19 11 10 14 12Department of Work andPensions rebate business 244 265 - - 24 27----------------------- ------- ------- ------- ------- ------- ------Total 993 914 11 10 110 102----------------------- ------- ------- ------- ------- ------- ------Business to BusinessCorporate pensions 242 153 146 137 170 152Individual annuities 212 229 - - 21 23Bulk annuities 511 474 - - 51 47----------------------- ------- ------- ------- ------- ------- ------Total 965 856 146 137 242 222----------------------- ------- ------- ------- ------- ------- ------Intermediated distributionLife 1,112 1,001 6 5 118 105Individual annuities 995 1,180 - - 100 118Individual and corporatepensions 108 189 25 25 36 44Department of Work andPensions rebate business 83 89 - - 8 9----------------------- ------- ------- ------- ------- ------- ------Total 2,298 2,459 31 30 262 276----------------------- ------- ------- ------- ------- ------- ------PartnershipsLife 814 790 3 2 84 81Individual andbulk annuities 1,814 1,249 - - 182 125----------------------- ------- ------- ------- ------- ------- ------Total 2,628 2,039 3 2 266 206----------------------- ------- ------- ------- ------- ------- ------EuropeLife 201 89 - 2 20 11----------------------- ------- ------- ------- ------- ------- ------Total UKInsuranceOperations 7,085 6,357 191 181 900 817----------------------- ------- ------- ------- ------- ------- ------US OperationsFixed annuities 788 1,130 - - 79 113Fixed index annuities 616 429 - - 62 43Variable annuities 2,605 1,981 - - 261 198Life 11 16 14 12 15 14 Guaranteed InvestmentContracts 355 180 - - 35 18GIC - MediumTerm Notes 634 672 - - 63 67----------------------- ------- ------- ------- ------- ------- ------Total US Operations 5,009 4,408 14 12 515 453----------------------- ------- ------- ------- ------- ------- ------Asian OperationsChina 17 9 23 16 25 17Hong Kong 289 255 83 78 112 103India (Group's26% interest) 4 5 57 33 57 33Indonesia 42 38 42 28 46 32Japan 30 17 4 7 7 9Korea 29 36 132 60 135 64Malaysia 9 7 66 61 67 62Singapore 284 199 58 47 86 67Taiwan 124 88 150 143 162 151Other 9 8 33 37 34 38----------------------- ------ ------ ------ ------ ------ ------Total Asian Operations 837 662 648 510 731 576----------------------- ------ ------ ------ ------ ------ ------Group Total 12,931 11,427 853 703 2,146 1,846----------------------- ------ ------ ------ ------ ------ ------ Annual premium and contribution equivalents are calculated as the aggregate ofregular new business amounts and one tenth of single new business amounts. INVESTMENT PRODUCTS - FUNDS UNDER MANAGEMENT * 1 Jan 2005 Gross inflows Redemptions Market and 31 Dec 2005 other movements £m £m £m £m £m ----------------------- ------ ------ -------- -------- ------UK Operations 28,705 7,916 (4,054) 3,629 36,196US Operations 550 414 (116) 125 973AsianOperations 8,538 18,457 (17,130) 267 10,132----------------------- ------ ------ -------- -------- ------Group Total 37,793 26,787 (21,300) 4,021 47,301----------------------- ------ ------ -------- -------- ------ * The format of the tables shown above is consistent with the distinctionbetween insurance and investment products as applied for previous financialreporting periods. With the exception of US institutional business, productscategorised as "insurance" refer to those classified as contracts of long-terminsurance business for regulatory reporting purposes, namely falling within oneof the classes of insurance specified in part II of Schedule 1 to the RegulatedActivities 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 InvestmentContracts and similar funding agreements written in US Operations. UK and Asia investment products referred to in the tables above are unit trusts,mutual funds and similar types of fund management arrangements. US investmentproducts relate to asset under administration in Curian. These are unrelated toinsurance products that are classified as "investment contracts" under IFRS 4,as described above, although similar IFRS recognition principles apply to theacquisition costs and fees attaching to this type of business. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS OPERATING PROFIT FROM CONTINUING OPERATIONS BASED ON LONGER-TERM INVESTMENTRETURNS* Results Analysis by Business Area 2005 £m 2004 £m------------------------------------- -------- --------UK OperationsNew business 243 241Business in force 183 245------------------------------------- -------- --------Long-term business 426 486M&G 163 136Egg 44 61------------------------------------- -------- --------Total 633 683------------------------------------- -------- --------US OperationsNew business 211 145Business in force 530 237------------------------------------- -------- --------Long-term business 741 382Broker-dealer and fund management 24 15Curian (10) (29)------------------------------------- -------- --------Total 755 368------------------------------------- -------- --------Asian OperationsNew business 413 355Business in force 163 105------------------------------------- -------- --------Long-term business 576 460Fund management 12 19Development expenses (20) (15)------------------------------------- -------- --------Total 568 464------------------------------------- -------- --------Other Income and ExpenditureInvestment return and other income 42 0Interest payable on core structural borrowings (175) (154)Corporate expenditure:Group Head Office (70) (51)Asia Regional Head Office (30) (29)Charge for share-based payments for Prudential schemes (11) (7)------------------------------------- -------- --------Total (244) (241)------------------------------------- -------- --------Operating profit from continuing operations based onlonger-term investment returns 1,712 1,274------------------------------------- -------- -------- Analysed as profits (losses) from:New business 867 741Business in force 876 587------------------------------------- -------- --------Long-term business 1,743 1,328Asia development expenses (20) (15)Other operating results (11) (39)------------------------------------- -------- --------Total 1,712 1,274------------------------------------- -------- -------- * EEV basis operating profit from continuing operations based on longer-terminvestment returns excludes goodwill impairment charges, short-term fluctuationsin investment returns, the shareholders' share of actuarial and other gains andlosses on defined benefit pension schemes, the effect of changes in economicassumptions and changes in the time value of cost of options and guaranteescaused by economic factors. The amounts for these items are included in totalEEV profit. The directors believe that operating profit, as adjusted for theseitems, better reflects underlying performance. Profit on ordinary activities andbasic earnings per share include these items together with actual investmentreturns. This basis of presentation has been adopted consistently throughoutthis supplementary information. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS MOVEMENT IN SHAREHOLDERS' CAPITAL AND RESERVES (excluding minority interests) 2005 £m 2004 £m---------------------------------------- ------ ------Profit for the year (net of minority interests) 1,582 1,138Items recognised directly in equity: Cumulative effect of changes in accounting principles onadoption of IAS 32, IAS 39 and IFRS 4, net of applicabletaxes, at 1 January 2005 (25) -Unrealised valuation movements on securities classified asavailable-for-sale from 1 January 2005 (1) -Movement on cash flow hedges (4) -Exchange movements 377 (239)Related tax 65 (1)Proceeds from Rights Issue, net of expenses - 1,021Other new share capital subscribed 55 119Dividends (380) (323)Reserve movements in respect of share-based payments 15 10Treasury shares:Movement in own shares in respect of share-based paymentplans 0 (2)Movement on Prudential plc shares purchased by unit trustsconsolidated under IFRS 3 14---------------------------------------- ------ ------Net increase in shareholders' capital and reserves 1,687 1,737---------------------------------------- ------ ------Shareholders' capital and reserves at beginning of year (excluding minority interests):As previously reported on the Achieved Profits basis 8,596 7,005Adjustments on implementation of statutory IFRS (excludingIAS 32, IAS 39 and IFRS 4) 165 15Adjustments on implementation of European Embedded Value(EEV) methodology (147) (143)---------------------------------------- ------ ------As restated on EEV basis 8,614 6,877---------------------------------------- ------ ------Shareholders' capital and reserves at end of year(excluding minority interests) 10,301 8,614---------------------------------------- ------ ------ Comprising:---------------------------------------- ------ ------UK Operations:Long-term business 5,132 4,228M&G:Net assets 245 297Acquired goodwill 1,153 1,153Egg 303 273---------------------------------------- ------ ------ 6,833 5,951US Operations 3,418 2,570Asian Operations:Net assets 2,070 1,631Acquired goodwill 172 292Other operations:Holding company net borrowings (1,724) (1,299)Other net liabilities (468) (531)---------------------------------------- ------ ------ 10,301 8,614---------------------------------------- ------ ------ EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTSSUMMARISED CONSOLIDATED BALANCE SHEET 2005 £m 2004 £m-------------------------------------- ------- -------Total assets less liabilities, excluding insurancefunds 174,258 148,682Less insurance funds*:Policyholder liabilities (net of reinsurers' share)and unallocated surplus of with-profits funds (169,064) (144,193)Less shareholders' accrued interest in the long-termbusiness 5,107 4,125-------------------------------------- ------- ------- (163,957) (140,068)-------------------------------------- ------- -------Total net assets 10,301 8,614-------------------------------------- ------- -------Share capital 119 119Share premium 1,564 1,558Statutory basis shareholders' reserves (followingadoption of IFRS) 3,511 2,812Additional EEV basis retained profit 5,107 4,125-------------------------------------- ------- -------Shareholders' capital and reserves (excluding minorityinterest) 10,301 8,614-------------------------------------- ------- ------- *Including liabilities in respect of insurance products classified as investmentproducts under IFRS 4. NET ASSET VALUE PER SHARE 2005 2004-------------------------------------- ------- -------Based on EEV basis shareholders' funds of £10,301m (£8,614m) 432p 363pNumber of shares at year end (million) 2,387 2,375 MORE TO FOLLOW

---

Related Shares:

Prudential