16th Mar 2006 07:03
Prudential PLC16 March 2006 PART 2 EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS BASIS OF PREPARATION OF RESULTS The European Embedded Value (EEV) basis results have been prepared in accordancewith the European Embedded Value principles issued by the CFO Forum of EuropeanInsurance Companies in May 2004 and expanded by the Additional Guidance on EEVDisclosures published in October 2005. Where appropriate the EEV basis resultsinclude the effects of adoption of International Financial Reporting Standards. The EEV results for the Group include the results for the covered business onthe EEV basis. These results are then combined with the IFRS basis results forthe Group's other operations. With two exceptions, covered business comprises the Group's long-term businessoperations. The definition of long-term business operations is consistent withprevious practice under the Modified Statutory Basis and Achieved Profits basisreporting and comprises those contracts falling under the definition oflong-term insurance business for regulatory purposes together with, for USOperations, contracts that are in substance the same as Guaranteed InvestmentContracts but do not fall within the technical definition. Under the EEVprinciples, the results for covered business now include the projected marginsof attaching internal fund management. The exceptions are for the closed Scottish Amicable Insurance Fund (SAIF) and inrespect of the Group's defined benefit pension schemes. SAIF is closed to newbusiness and the assets and liabilities of the fund are wholly attributable tothe policyholders of the fund. As regards the Group's defined benefit pensionschemes, the deficits attaching to the Prudential Staff Pension Scheme andScottish Amicable Pension Scheme are excluded. These deficits are partiallyattributable to the PAC with-profits fund and shareholder backed long-termbusiness. 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 is applied by the major Europeaninsurance companies in their financial reporting. Except where indicated in this announcement, the Group has applied the samemethodology as previously advised with the announcement of 2004 EEV results on13 December 2005. ECONOMIC ASSUMPTIONS Deterministic In most countries, the long-term expected rates of return on investments andrisk discount rates are set by reference to period end rates of return on fixedinterest securities. This 'active' basis of assumption setting has been appliedin preparing the results of all the Group's UK and US long-term businessoperations. For the Group's Asian operations, the active basis is appropriatefor business written in Japan, Korea and US dollar denominated business writtenin Hong Kong. An exception to this general rule is that for countries where long-term fixedinterest markets are underdeveloped, investment return assumptions and riskdiscount rates are based on an assessment of longer-term economic conditions.Except for the countries listed above, this basis is appropriate for the Group'sAsian operations. Expected returns on equity and property asset classes are derived by adding arisk premium, based on the long-term view of Prudential's economists in respectof each territory, to the risk free rate. In the UK the equity risk premium is4.0% (2004 - 3.0%) above risk free rates. The equity risk premium in the US isalso 4.0% (2004 - 3.0%). In Asia, equity risk premiums range from 3.0% to 5.75%.Assumptions for other asset classes, such as corporate bond spreads, are setconsistently as best estimate assumptions. The investment return assumptions as derived above are applied to the actualassets held at the valuation date to derive the overall fund-earned rate. The table below summarises the principal financial assumptions. 31 Dec 2005 31 Dec 2004---------------------------------------- -------- --------UK Insurance OperationsRisk discount rateNew business 7.55% 7.1%In-force 7.7% 7.1%Pre-tax expected long-term nominal rates of investment return:UK equities 8.1% 7.6%Overseas equities 8.1% to 8.75% 7.3% to 8.3%Property 6.4% 6.3%Gilts 4.1% 4.6%Corporate bonds 4.9% 5.5%Expected long-term rate of inflation 2.9% 2.9%Post-tax expected long-term nominal rate of return:Pension business (where no tax applies) 7.1% 6.8%Life business 6.3% 5.9% US Operations (Jackson National Life)Risk discount rate:New business 6.9% 6.1%In-force 6.1% 5.8%Expected long-term spread between earned rate and rate creditedtopolicyholders for single premium deferredannuity business 1.75% 1.75%US 10 year treasury bond rate at end of period 4.4% 4.3%Pre-tax expected long-term nominal rate ofreturn for US Equities 8.4% 7.3%Expected long-term rate of inflation 2.4% 2.6% Asian Operations Hong Hong Kong Kong China (iii) India Indonesia Japan Korea China (iii) India Indonesia Japan Korea 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 2005 2005 2005 2005 2005 2005 2004 2004 2004 2004 2004 2004RiskdiscountrateNew business 12.0% 5.9% 16.5% 17.5% 5.0% 10.3% 10.0% 4.7% 16.0% 18.75% 5.0% 7.1%In-force 12.0% 6.15% 16.5% 17.5% 5.0% 10.3% 10.0% 5.0% 16.0% 18.75% 5.0% 7.1%Expectedlong-termrate ofinflation 4.0% 2.25% 5.5% 6.5% 0.0% 2.75% 3.0% 2.25% 5.25% 7.75% 0.0% 2.75%Governmentbond yield 9.0% 4.8% 10.5% 11.5% 1.8% 5.8% 7.25% 4.9% 10.25% 13.0% 1.9% 3.9% Malaysia Philippines Singapore Taiwan Thailand Vietnam Malaysia Philippines Singapore Taiwan Thailand Vietnam (ii) (ii) 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 2005 2005 2005 2005 2005 2005 2004 2004 2004 2004 2004 2004RiskdiscountrateNew business 9.4% 16.5% 6.7% 9.0% 13.75% 16.5% 9.0% 16.25% 6.3% 7.1% 13.5% 15.5%In-force 9.0% 16.5% 6.8% 9.4% 13.75% 16.5% 8.7% 16.25% 6.4% 8.2% 13.5% 15.5%Expectedlong-termrate ofinflation 3.0% 5.5% 1.75% 2.25% 3.75% 5.5% 3.0% 5.25% 2.25% 2.25% 3.75% 4.5%Governmentbond yield 7.5% 10.5% 4.5% 5.5% 7.75% 10.5% 7.0% 10.5% 5.0% 5.5% 7.75% 9.75% Asia Total Asia Total 31 Dec 2005 31 Dec 2004Weighted risk discount rate (i)New business 9.8% 8.0%In force 8.4% 7.9% (i) The weighted discount rates for the Asian Operations shown above have beendetermined by weighting each country's discount rates by reference to the EEVbasis operating result for new business and the closing value of in-forcebusiness. (ii) For traditional business in Taiwan, the economic scenarios used tocalculate 2005 EEV basis results reflect the assumption of a phased progressionof the bond yields from the current rates to the long-term expected rates. Theprojections assume that, in the average scenario, the current bond yields ofaround 2% trend towards 5.5% at 31 December 2012. Allowance is made for the mixof assets 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% to 5.4% in2013 and falls below 2.3% for seven years due to the depreciation of bond valuesas yields rise. Thereafter, the Fund Earned Rate fluctuates around a target of5.9%. This compares to a grading of 3.4% at 31 December 2004 to 5.9% by 31December 2012 for the 2004 results. Consistent with our EEV methodology, aconstant discount rate has been applied to the projected cash flows. (iii) Assumptions for US dollar denominated business which comprises the largerproportion of the in-force Hong Kong business. (iv) Assumed equity yields The most significant equity holdings in Asian Operations are in Hong Kong,Singapore and Malaysia. The mean equity return assumptions for these threeterritories at 31 December 2005 (2004) were 8.6% (7.3%), 9.3% (9.75%) and 12.8%(12.25%) respectively. To obtain the mean, an average over all simulations ofthe accumulated return at the end of the projection period is calculated. Theannual average return is then calculated by taking the root of the averageaccumulated return minus 1. Stochastic The economic assumptions used for the stochastic calculations are consistentwith those used for the deterministic calculations described above. Assumptionsspecific to the stochastic calculations such as the volatilities of assetreturns reflect local market conditions and are based on a combination of actualmarket data, historic market data and an assessment of longer-term economicconditions. Common principles have been adopted across the Group for thestochastic asset models, for example, separate modelling of individual assetclasses but with allowance for correlation between the various asset classes. Details are given below of the key characteristics and calibrations of eachmodel. UK Insurance Operations Interest rates are projected using a two-factor model calibrated to actualmarket data. The risk premium on equity assets is assumed to follow a log-normaldistribution. The corporate bond return is calculated as the return on a zero-coupon bond plusa spread. The spread process is a mean reverting stochastic process. Property returns are modelled in a similar fashion to corporate bonds, namely asthe return on a risk-less bond, plus a risk premium, plus a processrepresentative of the change in residual values and the change in value of thecall option on rents. The rates to which the model has been calibrated are set out below: Mean returns have been derived as the annualised arithmetic average returnacross all simulations and durations. Standard deviations have been calculated by taking the annualised variance ofthe returns over all the simulations, taking the square root and averaging overall durations in the projection. For bonds the standard deviations relate to theyields on bonds of the average portfolio duration. For equity and property, theyrelate to the total return on these assets. The standard deviations applied areas follows: Standard Deviation--------------------------------------- ------------Government bond yield 2.0%Corporate bond yield 5.5%EquitiesUK 18.0%Overseas 16.0%Property 15.0%--------------------------------------- ------------ Jackson National Life Interest rates are projected using a log-normal generator calibrated to actualmarket data. Corporate bond returns are based on Treasury securities plus a spread that hasbeen calibrated to current market conditions and varies by credit quality. Variable annuity equity and bond returns have been stochastically generatedusing a regime-switching log-normal model with parameters determined byreference to historical data. The volatility of equity fund returns ranges from18.6% to 28.1% depending on risk class, and the standard deviation of returnsfor bond funds ranges from 1.4% to 1.8%. Asian Operations The same asset return model, as used in the UK, appropriately calibrated, hasbeen used for the Asian operations. The principal asset classes are governmentand corporate bonds. Equity holdings are much lower than in the UK whilstproperty is not held as an investment asset. The stochastic cost of guarantees are only of significance for the Hong Kong,Singapore, Malaysia and Taiwan operations. The mean stochastic returns are consistent with the mean deterministic returnsfor each country. The volatility of equity returns ranges from 18% to 26%, andthe volatility of government bond yields ranges from 1.6% to 8.9%. NOTES ON THE EEV BASIS RESULTS a) The EEV basis results for 2005 and 2004 have been derived from the EEVbasis results supplement to the Company's statutory accounts for 2005. Thesupplement included an unqualified audit report from the auditors. b) Under the EEV basis, the operating profit from new business representsthe profitability of new long-term insurance business written in the year, andthe operating profit from business in force represents the profitability ofbusiness in force at the start of the year. These results are combined with theIFRS basis results of the Group's other operations including banking and fundmanagement business. To the extent applicable, presentation of the EEV profit for the year isconsistent with the basis the Group applies for analysis of IFRS basis profitsbefore shareholder taxes between operating and non-operating results. Operatingresults reflect the underlying results of the Group's continuing operationsincluding longer-term investment returns. Non-operating results include certainrecurrent and exceptional items that primarily do not reflect the underlyingperformance in the year of the Group's continuing operations. The recurrent items that are excluded from operating profit are short-termfluctuations in investment returns, the effects of changes in economicassumptions on shareholders' funds at the start of the year, the change in thetime value of the cost of financial options and guarantees attributable tochanges in economic circumstances, and actuarial gains and losses on definedbenefit pension schemes. c) The proportion of surplus allocated to shareholders from the UKwith-profits business has been based on the present level of 10%. Future bonusrates have been set at levels which would fully utilise the assets of thewith-profits fund over the life of the business in force. d) Consistent with prior periods for the Taiwan operation, the projectionsinclude an assumption of phased progression of the bond yields of around 2%towards 5.5% at 31 December 2012 as described in the section on economicassumptions of this announcement. This takes into account the effect on bondvalues of interest rate movements. The principal cause of the £265m charge forthe effect of changed economic assumptions is the reduction in short-term earnedrates in Taiwan. This reduction has the effect of delaying the emergence of theexpected long-term rate. The EEV basis embedded value of the Taiwan life operation at 31 December 2005was £(311)m with sensitivities to bond rates as follows: • A 100 basis point fall in starting bond rates would reduce embedded value by £108m.• A 100 basis point increase in starting bond rates would increase embedded value by £104m.• A 100 basis point parallel decrease in bond rates with an equivalent adjustment to the risk discount would reduce embedded value by £174m.• A 100 basis point parallel increase in bond rates with an equivalent adjustment to the risk discount rate would increase embedded value by £106m. e) Additional analysis of the Group's EEV basis results andsensitivities of these results to alternative assumptions can be found at theGroup's website at www.prudential.co.uk or on request. IFRS BASIS RESULTS STATUTORY BASIS RESULTS CONSOLIDATED INCOME STATEMENT 2005 £m 2004 £m (note C)-------------------------------------- -------- ------- Gross premiums earned 15,225 16,408Outward reinsurance premiums (197) (256)-------------------------------------- -------- -------Earned premiums, net of reinsurance 15,028 16,152Investment income 24,013 15,750Other income 2,084 2,002-------------------------------------- -------- -------Total revenue (note D) 41,125 33,904-------------------------------------- -------- -------Benefits and claims and movement in unallocatedsurplus of with-profits funds (33,100) (26,593)Acquisition costs and other operating expenditure (5,552) (5,563)Finance costs: interest on core structuralborrowings of shareholder financed operations (208) (187)Goodwill impairment charge (120) --------------------------------------- -------- -------Total charges (note D) (38,980) (32,343)-------------------------------------- -------- -------Profit before tax* (note D) 2,145 1,561Tax attributable to policyholders' returns (1,147) (711)-------------------------------------- -------- -------Profit before tax attributable to shareholders 998 850 -------- -------Tax expense (note M) (1,388) (951)Less: tax attributable to policyholders' returns 1,147 711 -------- -------Tax attributable to shareholders' profit (note M) (241) (240)-------------------------------------- -------- -------Profit from continuing operations after tax 757 610Discontinued operations (net of tax) 3 (94)-------------------------------------- -------- -------Profit for the year 760 516-------------------------------------- -------- -------Attributable to:Equity holders of the Company 748 517Minority interests 12 (1)-------------------------------------- -------- -------Profit for the year 760 516-------------------------------------- -------- ------- Earnings per share-------------------------------------- -------- -------Basic (based on 2,365m and 2,121m shares respectively)Based on profit from continuing operationsattributable to the equity holders of the Company 31.5p 27.5pBased on profit (loss) from discontinuedoperations attributable to the equity holders ofthe Company 0.1p (3.1)p-------------------------------------- -------- ------- 31.6p 24.4p-------------------------------------- -------- -------Diluted (based on 2,369m and 2,124m shares respectively)Based on profit from continuing operationsattributable to the equity holders of the Company 31.5p 27.5pBased on profit (loss) from discontinuedoperations attributable to the equity holders ofthe Company 0.1p (3.1)p-------------------------------------- -------- ------- 31.6p 24.4p-------------------------------------- -------- -------Dividends per share-------------------------------------- -------- -------Dividends 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 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-------------------------------------- -------- ------- * Profit before tax represents income net of post-tax transfers to unallocatedsurplus of with-profits funds, before tax attributable to policyholders andunallocated surplus of with-profits funds, unit-linked policies andshareholders' profits. IFRS BASIS RESULTS STATUTORY BASIS RESULTS SUMMARY OF STATEMENT OF CHANGES IN EQUITY 2005 2004 Shareholders' Minority Total Shareholders' Minority Total equity interest equity equity interest equity £m £m £m £m £m £m----------------------------------- -------- ------ ------ -------- ------ ------ReservesProfit for the year 748 12 760 517 (1) 516Items recognised directly in equity:Exchange movements 268 268 (172) (172)Movement on cash flow hedges (4) 1 (3)Unrealised valuation movements onsecurities classified asavailable-for-sale from 1 January2005 (see note H)Unrealised holding losses arising during the year (773) (773)Less reclassification adjustmentfor losses included in the incomestatement 22 22Related change in amortisationof deferred income and acquisitioncosts 307 307Related tax 218 218 12 12----------------------------------- -------- ------ ------ -------- ------ ------Total items recognised directly inequity 38 1 39 (160) (160)----------------------------------- -------- ------ ------ -------- ------ ------Total income and expense for the year 786 13 799 357 (1) 356----------------------------------- -------- ------ ------ -------- ------ ------Cumulative effect of changes inaccounting policies on adoption ofIAS 32, IAS 39 and IFRS 4, net ofapplicable taxes at 1 January 2005(note G) 226 (3) 223Dividends (380) (380) (323) (323)Reserve movements in respect ofshare-based payments 15 (1) 14 10 10Change in minority interest arisingprincipally from purchase and sale ofventure investment companies andproperty partnerships of the PACwith-profits fund 26 26 1 1 Share capital and share premium---------------------------------Proceeds from Rights Issue, net ofexpenses 1,021 1,021Other new share capitalsubscribed 55 55 119 119 Treasury shares-----------------Movement in own sharespurchased in respect of share-basedpayment plans 0 0 (2) (2)Movement on Prudential plc sharespurchased by unit trusts consolidatedunder IFRS 3 3 14 14----------------------------------- -------- ------ ------ -------- ------ ------Net increase in equity 705 35 740 1,196 0 1,196----------------------------------- -------- ------ ------ -------- ------ ------At beginning of year:As previously reported underUK GAAP 4,281 71 4,352 3,240 107 3,347Changes arising from adoption ofIFRS (note F) 208 66 274 53 30 83----------------------------------- -------- ------ ------ -------- ------ ------As restated under IFRS 4,489 137 4,626 3,293 137 3,430----------------------------------- -------- ------ ------ -------- ------ ------At end of year 5,194 172 5,366 4,489 137 4,626----------------------------------- -------- ------ ------ -------- ------ ------ IFRS BASIS RESULTS STATUTORY BASIS RESULTS 31 DecCONSOLIDATED BALANCE SHEET 31 Dec 2004 £m ---------------------------------- 2005 £m (note F) ------- -------Assets--------Goodwill:Attributable to PAC with-profits fund 607 784Attributable to shareholders 1,341 1,461---------------------------------- ------- -------Total 1,948 2,245---------------------------------- ------- -------Other intangible assets (primarily deferred acquisitioncosts):PAC with-profits fund (note I) 35 798Other operations 2,405 2,244---------------------------------- ------- -------Total 2,440 3,042---------------------------------- ------- -------Other non-investment and non-cash assets:Property, plant and equipment 910 967Reinsurers' share of policyholder liabilities 1,278 1,018Deferred tax assets 755 827Current tax recoverable 231 159Accrued investment income 1,791 1,733Other debtors 1,318 1,188---------------------------------- ------- -------Total 6,283 5,892---------------------------------- ------- -------Investments of long-term business, banking and otheroperations:Investment properties 13,180 13,303Investments accounted for using the equity method 5 5Financial investments:Loans and receivables 13,245 12,430Equity securities and portfolio holdings inunit trusts 71,985 54,466Debt securities 82,471 76,374Other investments 3,879 2,537Deposits 7,627 5,271---------------------------------- ------- -------Total 192,392 164,386---------------------------------- ------- -------Held for sale assets 728 100Cash and cash equivalents 3,586 4,341---------------------------------- ------- -------Total assets 207,377 180,006---------------------------------- ------- ------- Equity and liabilities------------------------EquityShareholders' equity (note K) 5,194 4,489Minority interests 172 137---------------------------------- ------- -------Total equity 5,366 4,626---------------------------------- ------- ------- LiabilitiesBanking customer accounts 5,830 6,607 Policyholder liabilities and unallocated surplus ofwith-profits funds*Insurance contract liabilities 120,436 -Investment contract liabilities with discretionaryparticipation features 26,523 -Investment contract liabilities without discretionaryparticipation features 12,026 -Technical provisions in respect of non-linked business - 104,996Technical provisions for linked liabilities - 24,066Unallocated surplus of with-profits funds:Reflecting application of 'realistic' basis provisions forUK regulated with-profits funds 11,357 -Reflecting previous UK GAAP basis of provisioning - 16,149---------------------------------- ------- -------Total 170,342 145,211---------------------------------- ------- ------- Core structural borrowings of shareholder-financedoperations:Subordinated debt (other than Egg) 1,646 1,429Other 1,093 1,368---------------------------------- ------- ------- 2,739 2,797Egg subordinated debt 452 451---------------------------------- ------- -------Total 3,191 3,248---------------------------------- ------- -------Other borrowings:Operational borrowings attributable toshareholder-financed operations (note L) 6,432 6,421Borrowings attributable to with-profits funds (note L) 1,898 2,137 Other non-insurance liabilities:Obligations under funding, securities lending and sale andrepurchase agreements 4,529 3,819Net asset value attributable to unit holders ofconsolidated unit trusts and similar funds 965 808Current tax liabilities 962 1,018Deferred tax liabilities 2,991 2,279Accruals and deferred income 506 655Other creditors 1,478 996Provisions 972 1,006Other liabilities 1,769 1,175Held for sale liabilities 146 ----------------------------------- ------- -------Total 14,318 11,756---------------------------------- ------- -------Total liabilities 202,011 175,380---------------------------------- ------- -------Total equity and liabilities 207,377 180,006---------------------------------- ------- ------- * The presentation of insurance and investment contracts liabilities topolicyholders reflects the adoption of IAS 32, IAS 39 and IFRS 4 at 1 January2005. The comparative liabilities for 2004 reflect the previous UK GAAP basis. IFRS BASIS RESULTS STATUTORY BASIS RESULTS CONSOLIDATED CASH FLOW STATEMENT 2005 £m 2004 £m---------------------------------------- ------- ------Cash flows from operating activities (note (i)) Profit before tax (note (ii)) 2,145 1,561Changes in operating assets and liabilitiesInvestments (21,462) (14,741)Banking customer accounts (861) (330)Other non-investment and non-cash assets (970) (105)Policyholder liabilities (including unallocated surplus) 21,126 13,639Other liabilities (including operational borrowings) 180 1,061Interest income and expense and dividend income includedin (8,410) (7,371)profit before taxOther non-cash items 0 73Operating cash items:Interest receipts 5,946 5,660Dividend receipts 2,680 1,853Tax paid (573) (450)---------------------------------------- ------- ------Net cash flows from operating activities (199) 850---------------------------------------- ------- ------Cash flows from investing activitiesPurchases of property, plant and equipment (160) (227)Proceeds from disposal of property, plant and equipment 6 4Acquisition of subsidiaries, net of cash balances (note(iii)) (68) (92)Disposal of subsidiaries, net of cash balances (note 252 218(iii)) ------- ----------------------------------------------Net cash flows from investing activities 30 (97)---------------------------------------- ------- ------Cash flows from financing activitiesStructural borrowings of the Group:Shareholder-financed operations (note (iv)):Issue 168 344Redemption (308) (61)Interest paid (204) (189)With-profits operations (note (v)):Interest paid (9) (9)Equity capital:Issues of ordinary share capital 55 1,140Dividends paid (380) (323)---------------------------------------- ------- ------Net cash flows from financing activities (678) 902---------------------------------------- ------- ------ Net (decrease) increase in cash and cash equivalents (847) 1,655Cash and cash equivalents at beginning of year 4,341 2,756Effect of exchange rate changes on cash and cash 92 (70)equivalents ------- ----------------------------------------------Cash and cash equivalents at end of year (note (vi)) 3,586 4,341---------------------------------------- ------- ------ Notes (i) The adjusting items to IFRS basis income include changes in operatingassets and liabilities, and other items comprising adjustments in respect ofnon-cash items, operational interest receipts and payments, dividend receipts,income tax paid and cash flows in respect of assets categorised asavailable-for-sale investments. The most significant elements of the adjustingitems are the changes in operating assets and liabilities made up as shownabove. (ii) Profit before tax represents income, net of post-tax transfers tounallocated surplus of with-profits funds, before tax attributable topolicyholders and unallocated surplus of with-profits funds, unit-linkedpolicies and shareholders' profits. It does not represent profit before taxattributable to shareholders. (iii) Purchases and sales of subsidiaries shown above include purchases andsales of venture subsidiaries of the PAC with-profits fund. (iv) Structural borrowings of shareholder-financed operations consists of thecore debt of the parent company and related finance subsidiaries, JacksonNational Life surplus notes and Egg debenture loans. Core debt excludesborrowings to support short-term fixed income securities reinvestment programmesand non-recourse borrowings of investment subsidiaries of shareholder-financedoperations. Cash flows in respect of these borrowings are included withinoperating cash flows. (v) Structural borrowings of with-profits operations relate solely to the£100m 8.5% undated subordinated guaranteed bonds which contribute to thesolvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fencedsub-fund of the PAC with-profits fund. Cash flows on other borrowings ofwith-profits funds, which principally relate to venture subsidiaries, arecategorised as operating activities in the presentation above. (vi) Under IFRS the cash flow statement comprises consolidated cash flows forthe Group as a whole, including those of long-term business funds. Of the cashand cash equivalents amounts of £3,586m and £4,341m, £263m and £325m representcash and cash equivalents of the parent company and related financesubsidiaries. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE STATUTORY BASIS RESULTS A. Basis of preparation and audit status The statutory basis results included in this announcement have been extractedfrom the audited financial statements of the Group for the year ended 31December 2005. These statements have been prepared in accordance withInternational Financial Reporting Standards (IFRS), as adopted by the EuropeanUnion (EU), as required by EU law (IAS Regulation EC 1606 / 2002). The Group has applied all IFRSs and interpretations adopted by the EU at 31December 2005, and has early adopted the amendment to IAS 39 (The fair valueoption) and IAS 19 (Employee benefits) (as amended in 2004). Compared to the UK GAAP basis of presentation, the statutory IFRS basis resultsreflect the application of: (i) Measurement and recognition changes arising from policies the Group hasapplied on the adoption of all IFRS standards, other than IAS 32 (FinancialInstruments: Disclosure and Presentation), IAS 39 (Financial Instruments:Recognition and Measurement), and IFRS 4 (Insurance Contracts), from 1 January2004. The 2005 results include the effect of these three standards from 1January 2005. (ii) Changes to the format of the results and other presentational changes thatthe Group has applied in its 2005 financial statements in so far as they affectthe summary results included in this preliminary announcement. In addition, compared to the basis of preparing supplementary results andearnings per share basis information previously provided under UK GAAP, adiscretionary change of policy for the basis of determining longer-terminvestment returns included in operating profit based on longer-term investmentreturns has been applied. This change was first applied in the Group's Interim2005 results. The financial information set out above does not constitute the Company'sstatutory accounts for the years ended 31 December 2005 or 2004 but is derivedfrom the 2005 accounts. Statutory accounts for 2004, which were prepared underUK GAAP, have been delivered to the Registrar of Companies and those for 2005,prepared under International Financial Reporting Standards as adopted by the EU,will be delivered following the Company's Annual General Meeting. The auditorshave reported on both those accounts; their reports were (i) unqualified, (ii)did not include references to any matters to which the auditors drew attentionby way of emphasis without qualifying their reports and (iii) did not containstatements under Section 237(2) or (3) of the Companies Act 1985. B. Effects of adoption of IFRS basis reporting The changes of accounting policy that arise on the conversion to IFRS basisreporting are numerous and extend to many items of income, expenditure, assetsand liabilities. Comprehensive details of the changes were included with theannouncement of restated 2004 comparative results on 2 June 2005 and the interimresults announcement on 27 July 2005. These details are available at the Group'sweb-site at www.prudential.co.uk or on request. Notes C and F show the effect ofIFRS adoption on the income statement for 2004 and shareholders' equity at 1January 2004 and 31 December 2004. Note G shows the effect of the adoption ofthe standards IAS 32, IAS 39 and IFRS 4 at 1 January 2005. C. Reconciliation of the summary income statement Year ended 31 December 2004 IFRS adjustments ------------------ Recognition, Presentation measurement of UK GAAP in and other Statutory UK GAAP IFRS format changes IFRS (note C(i)) (note C(i)) (note C(ii)) basis £m £m £m £m--------------------------- ------- -------- -------- -------Earned premiums, netof reinsurance 16,099 53 16,152Investment income 13,917 2,082 (249) 15,750UK fund management result 136 (136)US broker-dealer and fund management result (14) 14Asia fund management result 19 (19)UK banking result (continuingoperations) 63 (63)Other income 773 1,229 2,002--------------------------- ------- -------- -------- -------Total revenue 30,220 2,704 980 33,904--------------------------- ------- -------- -------- -------Benefits and claims andmovement in unallocatedsurplus of with-profitsfunds (26,598) (83) 88 (26,593)Acquisition costs and otheroperating expenditure (2,069) (2,434) (1,060) (5,563)Finance costs: interest on core structural borrowings ofshareholder-financed operations (187) (187)Amortisation of goodwill (continuing operations) (94) 94--------------------------- ------- -------- -------- -------Total charges (28,761) (2,704) (878) (32,343)--------------------------- ------- -------- -------- -------Profit before tax* 1,459 102 1,561Tax attributable topolicyholders' returns (701) (10) (711)--------------------------- ------- -------- -------- -------Profit before tax attributableto shareholders 758 92 850--------------------------- ------- -------- -------- -------Tax expense (947) (4) (951)Less: Tax attributable topolicyholders' returns 701 10 711--------------------------- ------- -------- -------- -------Tax attributable toshareholders' profits (246) 6 (240)--------------------------- ------- -------- -------- -------Profit from continuingoperations after tax 512 98 610Discontinued operations(net of tax) (94) (94)--------------------------- ------- -------- -------- -------Profit for the year 418 98 516--------------------------- ------- -------- -------- -------Attributable to:Equity holders of the Company 428 89 517Minority interests (10) 9 (1)--------------------------- ------- -------- -------- -------Profit for the year 418 98 516--------------------------- ------- -------- -------- ------- * Profit before tax represents income net of post-tax transfers to unallocatedsurplus of with-profits funds, before tax attributable to policyholders andunallocated surplus of with-profits funds, unit-linked policies andshareholders' profits. Notes C(i) UK GAAP results The UK GAAP basis results shown above reflect those previously recorded in thetechnical accounts and non-technical account of the Group's profit and lossaccount under Companies Act requirements. These results are then reconfigured tobe consistent with the format applied for reporting in the Group's 2005financial statements under IFRS. C(ii) Recognition, measurement and other changes Changes to profit from continuing operations (including actual investmentreturns) before and after tax attributable to shareholders reflect the effectsof IFRS adoption. In summary the effects are for: £mEgg - primarily relates to charges for share-based payments in respectof Egg shares (2)Additional pension costs and share-based payments costs in respect ofPrudential plc shares not allocated by business unit (4)Amortisation of goodwill not permitted under IFRS 94Actuarial gains and losses of defined benefit schemes recognised underIFRS (7)Value movements of US investment funds newly consolidated under IFRS 2Share of profits of venture investment companies and propertypartnerships of the PAC with-profits fund consolidated under IFRS, thatis attributable to external investors 9 -----Total changes before tax 92Related tax attributable to shareholders 6 -----Total changes after tax 98 ===== Changes to revenue, charges and related tax of the Group's with-profits fundsprincipally relate to measurement differences on investments, consolidationcriteria for venture funds and other investment subsidiaries, and pension costaccounting. These changes have been reflected by transfers of an equal andopposite amount to unallocated surplus and hence have no net effect onshareholder results. D. Segmental disclosure The Group's primary reporting segments are long-term business, banking andbroker-dealer and fund management. 2005 £m 2004 £m--------------------------------------- ------- -------RevenueLong-term business 39,296 32,073Banking 1,115 1,110Broker-dealer and fund management 895 823Unallocated corporate 98 151Intragroup revenue eliminated on consolidation (279) (253)--------------------------------------- ------- -------Total revenue per income statement 41,125 33,904--------------------------------------- ------- ------- Charges (before income tax attributable to policyholders and unallocated surplusof long-term insurance funds) Long-term business including post-tax transfers tounallocated surplus of with-profits funds (36,968) (30,531)Banking (1,071) (1,049)Broker-dealer and fund management (740) (682)Unallocated corporate (480) (334)Intragroup charges eliminated on consolidation 279 253--------------------------------------- ------- -------Total charges per income statement (38,980) (32,343)--------------------------------------- ------- ------- Segment results - Revenue less charges (continuing operations)Long-term business 2,328 1,542Banking 44 61Broker-dealer and fund management 155 141Unallocated corporate (382) (183)--------------------------------------- ------- ------- Profit before tax* 2,145 1,561 Tax attributable to policyholders' returns (1,147) (711)--------------------------------------- ------- -------Profit before tax attributable to shareholders 998 850Tax attibutable to shareholders' profits (241) (240)--------------------------------------- ------- ------- Profit from continuing operations after tax 757 610--------------------------------------- ------- ------- Segment results - Discontinued operationsLong-term business - 4Banking 3 (98)--------------------------------------- ------- ------- 3 (94)--------------------------------------- ------- -------Profit for the year 760 516--------------------------------------- ------- ------- * Profit before tax represents income net of post-tax transfers to unallocatedsurplus of with-profits funds, before tax attributable to policyholders andunallocated surplus of with-profits funds, unit-linked policies andshareholders' profits. E. Supplementary analysis of profit from continuing operations before taxattributable to shareholders and related earnings per share Profit from continuing operations before tax 2005 £m 2004 £m-------------------------------------- ------ -------- Operating profit from continuing operations basedon longer-term investment returns (note E(i)) 957Goodwill impairment charge (120)Short-term fluctuations in investment returns onshareholder-backed business 211Shareholders' share of actuarial and other gainsand losses on defined benefit pension schemes (50) (see note E(ii))-------------------------------------- ------ --------Profit from continuing operations before taxattributable to shareholders (including actualinvestment returns) 998-------------------------------------- ------ -------- Earnings per share from continuing operations From operating profit based on longer-terminvestment returns after related tax and minorityinterests of £761m 32.2pAdjustment for goodwill impairment charge (5.1)pAdjustment from post-tax longer-term investment returns to post-tax actual investmentreturns (after related minority interests) 5.9p (see note E(ii))Adjustment for post-tax shareholders' share ofactuarial and other gains and losses on definedbenefit pension schemes (1.5)p-------------------------------------- ------ --------Based on profit from continuing operations aftertax and minority interests of £745m 31.5p-------------------------------------- ------ -------- Notes E(i) Under the Group's accounting policies additional analysis is provided ofprofit before tax attributable to shareholders that distinguishes operatingprofit based on longer-term investment returns from other constituent elementsof total profit before tax attributable to shareholders. For the purposes of measuring operating profits based on longer-term investmentreturns, investment returns are based on the expected longer-term rate ofreturn. The expected long-term rates of return are intended to reflecthistorical real rates of return and, where appropriate, current inflationexpectation, adjusted for consensus economic and investment return forecast. Thesignificant operations that require adjustment for the difference between actualand longer-term investment returns are Jackson National Life and certainbusinesses of the Group's Asian Operations. The amounts included in operatingresults for longer-term capital returns for debt securities comprise twocomponents. These are a risk margin reserve based charge for expected defaults,which is determined by reference to the credit quality of the portfolio, andamortisation of interest related realised gains and losses to operating resultsbased on longer-term returns to the date when sold bonds would otherwise havematured. Items excluded from operating profit based on longer-term investment returns butincluded in profit before tax attributable to shareholders of continuingoperations include goodwill impairment charges, short-term fluctuations ininvestment returns (i.e actual less longer-term returns), actuarial gains andlosses on defined benefit pension schemes and exceptional items. With the exception of derivatives used for managing equity exposure, valuemovements on derivatives held by Jackson National Life are included withinshort-term fluctuations. For the purposes of distinguishing actuarial gains and losses on defined benefitpension schemes in this analysis, plan assets include Prudential policies heldby the Prudential Staff Pension Scheme and the M&G pension scheme. At 31December 2005, these policies had a carrying value of £253m. E(ii)The supplementary analysis of statutory IFRS basis results shown above hasbeen presented only for 2005. Details have not been provided for 2004 in thisannouncement as the results would not be comparable. This is due to IAS 32, IAS39 and IFRS 4 only being adopted from 1 January 2005. Details of the analysis ofthe statutory IFRS basis results for 2004 on this basis will be published in theGroup's financial statements. Additional analysis of the 2005 result, and pro forma basis comparative resultsfor 2004 as if the above standards had been applied by the Group's insuranceoperations from 1 January 2004, is provided as supplementary information to thisannouncement. The analysis on those pages has not been extracted from theGroup's IFRS financial statements. F. Reconciliations of equity and balance sheet At 1 January 2004 Shareholders' Minority Total equity interests equity £m £m £m----------------------------------- -------- ------ ------ Changes on adoption of statutory IFRS basis--------------------------------------------- Treasury shares adjustment for Prudentialplc shares held by unit trusts consolidatedunder IFRS (note F(i)) (40) (40)Minority share of equity of consolidatedventure investment companies and propertypartnerships of the PAC with-profits fund(note F(i)) 32 32Shareholders' share of deficits (net oftax) of defined benefit pension schemes(note F(ii)) (110) (110)Timing difference on recognition ofdividend declared after balance sheet date 214 214(note F(iii))Other items (11) (2) (13)----------------------------------- -------- ------ ------Total 53 30 83 Equity at 1 January 2004--------------------------As previously published under UK GAAP 3,240 107 3,347----------------------------------- -------- ------ ------As restated under statutory IFRS 3,293 137 3,430----------------------------------- -------- ------ ------ At 31 December 2004 Effect of changes on implementation of IFRS recognition and measurement changes UK GAAP Newly Defined Other Grossing-up Total Statutory consolidated benefit recognition and other IFRS IFRS entities pension and format changes basis (note F(i)) schemes measurement changes accounting changes (note F (note F (ii)) (iii)) £m £m £m £m £m £m £m----------------- ------ ------ ------- -------- ------ ------ ------AssetsGoodwill:Attributableto PACwith-profitsfund 784 784 784Attributable toshareholders 1,367 94 94 1,461Investments:per IFRSbalance sheet 1,963 35 162,388 164,386 164,386Investments:per UK GAAPanalysis(non-linked,linked andbankingbusinessassets) 129,468 (129,468) (129,468) 0 Other items 43,741 1,477 102 50 (31,995) (30,366) 13,375----------------- ------- ------ ------- -------- ------ ------ -------Total assets 174,576 4,224 102 179 925 5,430 180,006----------------- ------- ------ ------- -------- ------ ------ ------- Equity andliabilitiesEquityShareholders'equity 4,281 (30) (117) 355 208 4,489Minorityinterests 71 68 (2) 66 137----------------- ------- ------ ------- -------- ------ ------ -------Total equity 4,352 38 (117) 353 274 4,626----------------- ------- ------ ------- -------- ------ ------ -------LiabilitiesBankingcustomeraccounts: perIFRS balancesheet 6,607 6,607 6,607Bankingbusinessliabilities:per UK GAAPbalance sheet 11,216 (11,216) (11,216) 0Policyholderliabilities andunallocatedsurplus ofwith-profitsfundsTechnicalprovisions 129,101 (125) 8 78 (39) 129,062Unallocatedsurplus ofwith-profitsfunds 16,686 (31) (472) (34) (537) 16,149Borrowings perIFRS balancesheetCorestructuralborrowings ofshareholder-financedoperations 3,248 3,248 3,248Operationalborrowingsattributabletoshareholder-financedoperations 972 9 5,440 6,421 6,421Borrowingsattributabletowith-profitsfunds 1,888 105 144 2,137 2,137Borrowings perUK GAAPbalance sheet(subordinatedliabilities,debentureloans andotherborrowings) 4,673 (4,673) (4,673) 0Dividendpayable 253 (253) (253) 0Othernon-insuranceliabilities 8,295 1,357 816 (9) 1,297 3,461 11,756----------------- ------- ------ ------- -------- ------ ------ -------Totalliabilities 170,224 4,186 219 (174) 925 5,156 175,380----------------- ------- ------ ------- -------- ------ ------ -------Total equityandliabilities 174,576 4,224 102 179 925 5,430 180,006----------------- ------- ------ ------- -------- ------ ------ ------- Notes F(i)Newly consolidated entities Under IAS 27 and SIC 12, the Group is required to consolidate the assets andliabilities of certain entities which have previously not been consolidatedunder UK GAAP. The principal change to shareholders' equity arises from anadjustment in respect of Prudential plc shares held by unit trusts that arenewly consolidated. These shares are accounted for as treasury shares and thecost of purchase of £44m and £29m is deducted from shareholders' equity at 1January 2004 and 31 December 2004 respectively. The change to the minority shareof equity reflects external parties' interest in consolidated venture investmentcompanies and property partnerships of the PAC with-profits fund. Measurementchanges to the carrying value of these companies that are attributable to thePAC with-profits fund share are reflected in unallocated surplus. F(ii)Defined benefit pension schemes accounting Provisions for deficits on the Group's defined benefit pension schemes areabsorbed by the unallocated surplus of the PAC with-profits fund andshareholders' funds on a basis that reflects the weighted cumulative activityattaching to the contributions paid in the past, and after deduction of deferredtax. The M&G scheme held Prudential Group insurance policies as scheme assets of£125m at 31 December 2004. The asset and liability are eliminated onconsolidation. F(iii)Other recognition and measurement changes Under IFRS, dividends declared after the balance sheet date are not recognisedas a liability. In addition, subject to required impairment testing, goodwillunder IFRS represents the balance sheet carrying value at 1 January 2004.Adjustments in the table include the write-back of amortisation previouslycharged under UK GAAP in 2004. G. Effect of adoption of IAS 32, IAS 39, and IFRS 4 at 1 January 2005 Effect of adoption of IAS 32, IAS 39 and IFRS 4 Statutory UK Jackson Banking and Grossing-up Total Statutory IFRS Insurance National non-insurance and other effect IFRS basis at Operations Life operations format basis at 31 Dec (note G (note G (note G(iii)) changes 1 Jan 2004 (i)) (ii)) 2005 (note F) £m £m £m £m £m £m £m------------------- ------- --------- ------- --------- -------- ------ --------AssetsGoodwillAttributableto PACwith-profitsfund 784 784Attributabletoshareholders 1,461 1,461 Other intangibleassets (primarilydeferredacquisition costs)PACwith-profitsfund (note I) 798 (765) (765) 33Otheroperations 2,244 23 (456) (433) 1,811Investments 164,386 (145) 1,262 145 68 1,330 165,716Other assets 10,333 10 66 (92) (16) 10,317------------------- ------- --------- ------- --------- -------- ------- --------Total assets 180,006 (877) 872 53 68 116 180,122------------------- ------- --------- ------- --------- -------- ------- -------- Equity andliabilitiesEquityShareholders'equity 4,489 (22) 273 (25) 226 4,715Minorityinterest 137 (3) (3) 134------------------- ------- --------- ------- --------- -------- ------- --------Total equity 4,626 (22) 273 (28) 223 4,849------------------- ------- --------- ------- --------- -------- ------- --------LiabilitiesBankingcustomeraccounts 6,607 84 84 6,691Policyholderliabilities andunallocated surplusof with-profitsfundsContractliabilities(non-linkedand linkedbusiness) 129,062 7,020 (51) 6,969 136,031Unallocatedsurplus ofwith-profitsfunds 16,149 (7,807) (7,807) 8,342 BorrowingsCorestructuralborrowings ofshareholder-financedoperations 3,248 5 5 3,253Otherborrowingsattributabletoshareholder-financedoperations 6,421 207 62 (13) 256 6,677Borrowingsattributabletowith-profitsfunds 2,137 2,137Other non-insuranceliabilitiesDeferred taxliabilities 2,279 (91) 218 (6) 121 2,400Other 9,477 23 225 (59) 76 265 9,742------------------- ------- --------- ------- --------- -------- ------- --------Totalliabilities 175,380 (855) 599 81 68 (107) 175,273------------------- ------- --------- ------- --------- -------- ------- -------- Total equityandliabilities 180,006 (877) 872 53 68 116 180,122------------------- ------- --------- ------- --------- -------- ------- -------- Notes The changes shown above reflect the impact of re-measurement for : G(i)UK Insurance Operations (a) The reduction of shareholders' equity of £22m includes £20m relating tocertain unit-linked and similar contracts that do not contain significantinsurance risk and are therefore categorised as investment contracts under IFRS4. The reduction of shareholders' equity at 1 January 2005 on adoption of IFRS 4for these items is £10m different from the amount reported in the interimresults due to refinements to the IFRS methodology applied. (b) Changes to insurance assets and liabilities of the PAC with-profits fundfollowing the improvement of accounting policy applied on adoption of IFRS 4.The changes correspond to those applicable if the Group had adopted FRS 27 underUK GAAP. As a result of the policy improvement, liabilities, deferredacquisition costs, deferred tax and unallocated surplus of UK regulatedwith-profits funds are remeasured as described in note I. At 1 January 2005, theunallocated surplus is subject to a transition adjustment of £(7.8)bn.Shareholders' equity is not affected by this change. The unallocated surplus of £8.3bn at 1 January 2005 post IAS 39 and IFRS 4adoption, comprises £8.0bn for the PAC with-profits fund and £0.3bn for Asiansubsidiaries. The £8.0bn for the PAC with-profits fund represents: £bnRegulatory basis realistic surplus of with-profits sub-fund andSAIF 6.0Add back: Regulatory basis provision for future shareholdertransfers 2.9Less: Other adjustments to align with accounting basis (0.9) ------Accounts basis 8.0 ====== G(ii) Jackson National Life Under IAS 39, JNL's debt securities and derivative financial instruments arere-measured to fair value from the lower of amortised cost and, if relevant,impaired value. Fair value movements on debt securities, net of shadow changesto deferred acquisition costs and related deferred tax are recorded directly toequity. Fair value movements on derivatives are recorded in the incomestatement. G(iii)Banking and non-insurance operations Under IAS 39, for Egg, changes to opening equity at 1 January 2005 arise fromaltered policies for effective interest rate on credit card receivables,impairment losses on loans and advances, fair value adjustments on wholesalefinancial instruments and embedded derivatives in equity savings products. Thenet effect on shareholders equity of these changes, after tax, is a deduction of£15m. A further £10m reduction in equity arises on certain centrally heldfinancial instruments and derivatives. H. Jackson National Life - Debt securities Changes in equity IAS 32 and IAS 39 have been adopted from 1 January 2005. Accordingly, for 2004under IFRS, financial instruments continue to be accounted for under previousGAAP. For Jackson National Life debt securities have been accounted for atamortised cost, unless impaired. From 1 January 2005, these assets have beenclassified as available-for-sale under IAS 39 with valuation at fair value.Unrealised gains and losses and reclassification adjustments for gains andlosses included in net income are recorded from 1 January 2005 within thestatement of changes in equity. Balance sheet Due to the change in the valuation basis referred to above, the carrying valuesof the debt securities of Jackson National Life that have been included in theconsolidated balance sheet are not comparable. The fair value of the debtsecurities at 31 December 2004 was £22.5bn. After deduction of related changesto deferred acquisition costs and deferred tax, there was a consequential impacton shareholders' equity at 1 January 2005, on adoption of IAS 32 and IAS 39, of£397m for the changed basis of valuation of Jackson's securities. I. Unallocated surplus of with-profits funds The unallocated surplus of with-profits funds reflects the excess of assets overtechnical provisions and other liabilities and represents amounts that have yetto be allocated to policyholders and shareholders. For the Group's 2004financial statements, and as applied for IFRS purposes for 2004 in thesefinancial statements, the technical provisions in respect of insurance andinvestment contracts of UK regulated with-profits funds have been determined inaccordance with the modified statutory basis of accounting that applied under UKGAAP. With the exception of minor accounting adjustments, the technicalprovisions reflect the UK regulatory basis of reporting which effectivelyconstitutes the Peak 1 basis under the new FSA regime. On this basis the unallocated surplus of the PAC with-profits fund at 31December 2004 was £16,301m. After inclusion of the unallocated surplus ofwith-profits funds of Asian subsidiaries the unallocated surplus in theconsolidated balance sheet at 31 December 2004 was £16,686m. Following changesarising from the application of IFRS requirements applicable for 2004, the IFRSbasis unallocated surplus for the Group is altered as described in note F. On adoption of IFRS 4 at 1 January 2005, the Group has chosen to improve itsaccounting policy in respect of the insurance assets and liabilities of UKregulated with-profits funds. The improvement is consistent with therequirements of FRS 27 that apply for life assurers reporting under UK GAAP in2005 for the application of the Peak 2 realistic basis. The main accounting changes that are required for UK regulated with-profitsfunds are: De-recognition of deferred acquisition costs and related deferred tax Inclusion of the FSA Peak 2 basis of the value of in-force non-participatingbusiness written by the PAC with-profits sub-fund, and the Scottish AmicableInsurance Fund; and Replacement of modified statutory basis liabilities for with-profits businesswith adjusted realistic basis liabilities. Adjusted realistic liabilities represent the Peak 2 realistic liabilities forwith-profits business included in Form 19 of the FSA regulatory returns, butafter excluding the element for shareholders' share of future bonuses. Thislatter item is recognised as a liability for the purposes of regulatory returnsbut for accounting purposes shareholder transfers are recognised only ondeclaration. For accounting purposes, to the extent that the value of non-participatingbusiness has been taken into account in determining projected policyholderbenefits, deduction is made from the gross regulatory value of realisticliabilities. The balance is deducted from the accounting balance of unallocatedsurplus. In determining accounting basis liabilities and unallocated surplus, anadjustment is also required where the regulatory and accounting carrying valuesof assets and liabilities differ for altered measurement or recognitioncriteria. For the Group's UK with-profits funds the main additional item forwhich adjustment is necessary is the attributable share of deficit of theGroup's UK defined benefit pension schemes, net of related tax. The impact of the changes at 1 January 2005, on adoption of IFRS 4, are shown innote G. At 31 December 2005, the unallocated surplus of £11.4bn comprises£11.3bn for the PAC with-profits sub-fund and £0.1bn for Asian subsidiaries. The£11.3bn for the PAC with-profits fund represents: £bnEstimated regulatory basis realistic surplus of the PACwith-profits 8.0sub-fundAdd back: Provision for future shareholder transfers 3.5Less: Other adjustments to align with accounting basis (0.2) ----------- 11.3 =========== The £11.3bn is attributable solely to the PAC with-profits sub-fund. No amountis recognised for SAIF. This treatment is to comply with actuarial guidance noteGN 45 which requires that for a closed fund where the fund will be distributedfully the working capital is shown as zero with the future enhancements to assetshares being increased by the free capital. The £0.1bn of unallocated surplus for Asia subsidiaries almost wholly relates tothe Malaysian life business. Following local regulatory changes which affect thepresentation of the balance sheet, unallocated surplus of the Singaporewith-profits business is now amalgamated with policyholder liabilities. J. Dividend A final dividend of 11.02p per share was proposed by the directors on 15 March2006. This dividend will absorb an estimated £267m of shareholders' funds.Subject to shareholder approval, the dividend will be paid on 26 May 2006 toshareholders on the register at the close of business on 24 March 2006. A scripdividend alternative will be offered to shareholders. K. Shareholders' equity 2005 £m 2004 £m----------------------------------- --------- -------- Share capital 119 119Share premium 1,564 1,558Reserves 3,511 2,812----------------------------------- --------- --------Total 5,194 4,489----------------------------------- --------- -------- L. Other borrowings 2005 £m 2004 £m----------------------------------- --------- -------- Operational borrowings attributable to shareholder-financed operationsBorrowings in respect of short-term debt securitiesreinvestment programmes 1,472 1,079Non-recourse borrowings of investment subsidiaries managedby PPM America 1,085 1,155Borrowings in respect of banking operations 3,856 4,159Other borrowings 19 28----------------------------------- --------- --------Total 6,432 6,421----------------------------------- --------- -------- Borrowings attributable to with-profits fundsNon-recourse borrowings of venture fund investmentsubsidiaries 988 1,167Subordinated debt of the Scottish Amicable Insurance Fund 100 100Other borrowings (predominantly external funding ofconsolidated investment vehicles) 810 870----------------------------------- --------- --------Total 1,898 2,137----------------------------------- --------- -------- M. Tax charge The total tax charge of £1,388m for 2005 (£951m) comprises £1,119m (£805m) UKtax and £269m (£146m) overseas tax. This tax charge comprises tax attributableto policyholders and unallocated surplus of with-profits funds, unit-linkedpolicies and shareholders. The tax charge attributable to shareholders of £241mfor 2005 (£240m) comprises £(21)m (£63m) UK tax and £262m (£177m) overseas tax. N. Acquisitions In May 2005, Jackson National Life completed the purchase of Life InsuranceCompany of Georgia from ING Groep N.V. for £142m subject to post-completionadjustments. There is currently no goodwill arising on the transaction. O. Taiwan life operation: Sensitivity of liabilities to projected investmentreturns The in-force business of Taiwan life operation includes traditional whole oflife policies where the premium rates have been set by the regulator atdifferent points for the industry as a whole. Premium rates were set to give aguaranteed minimum sum assured on death and a guaranteed surrender value onearly surrender based on prevailing interest rates at the time of policy issue.Premium rates also included allowance for mortality and expenses. Guaranteeshave fallen over time as interest rates have reduced from a high of 8% tocurrent levels of around 2%. The current low level of bond rates in Taiwan givesrise to a negative spread in Taiwan of around £30m a year. The profits attaching to these contracts is particularly affected by the ratesof return earned, and estimated to be earned, on the assets held to coverliabilities and on future investment income and contract cash flows. Under IFRSthe insurance contract liabilities of the Taiwan business are determined on theUS GAAP basis as applied previously under UK GAAP. Under this basis the policyliabilities are calculated on sets of assumptions, which are locked in at thepoint of policy inception, and a deferred acquisition cost is held in thebalance sheet. The adequacy of the insurance contract liabilities is tested by reference tobest estimates of expected investment returns on policy cash flows andreinvested income. The assumed earned rates are used to discount the future cashflows. The assumed earned rates consist of a long-term best estimate determinedby consideration of long-term market conditions, and rates assumed to be earnedin the trending in period. For 2005, it has been projected that rates of returnfor Taiwanese bond yields will trend from the current levels of some 2% to 5.5%by 31 December 2012. The liability adequacy test results are sensitive to the attainment of thetrended rates during the trending period. Based on the current asset mix,margins in other contracts that are used in the assessment of the liabilityadequacy tests, and currently assumed future rates of return, if interest rateswere to remain at current levels in 2006 the premium reserve, net deferredacquisition costs, would be broadly sufficient. If interest rates were to remainat current levels in 2007 then some level of write-off of deferred acquisitioncosts may be necessary. However, the amount of the charge, currently estimatedat £50m to £70m is sensitive for the previously mentioned variables. The adequacy of the liability is also sensitive to the level of the projectedlong-term rate. The current best estimate of 5.5% has been determined on aprudent best estimate basis by reference to detailed assessments of thefinancial dynamics of the Taiwanese economy. In the event that the rate appliedwas reduced or increased the carrying value of the liabilities would beeffected. In broad terms, if the assumed long-term rate applied was to fall by 0.25% from5.5% to 5.25% the impact on IFRS basis results would be a charge of some £120mto £130m. If the rate were to further reduce the incremental increase inliabilities would be of a similarly commensurate size. The effects of changes inany one year reflect the combination of short-term and long-term factorsdescribed above. P. Effect of changes of assumptions and other bases of preparation ofliabilities of insurance contracts Profit before tax attributable to shareholders for 2005 includes the impact ofthe following items: UK Insurance Operations For shareholder-backed non-participating business, changes of assumptions weremade which had the effect of increasing liabilities by £36m with a consequentreduction in operating profit based on longer-term investment returns. Thereduction arose from a charge of £69m for strengthened mortality assumptionsbeing partially offset by a net credit of £29m in respect of a reduced level ofdefaults for fixed income securities, and a credit of £4m for other changes. In addition to this £36m charge to operating profit based on longer-terminvestment returns a further £20m charge for the effect of changes of assumptionfor renewal expenses, which relates to an increase in ongoing pension schemecontributions for future service of active members, has been recorded as part ofactuarial and other gains and losses excluded from operating profit based onlonger-term investment returns, but included in total profit before shareholdertax. US Operations The operating profit based on longer-term investment returns of £362m for USOperations for 2005 has been determined after taking account of material changesof assumption during the year. Several changes were modified to conform to morerecent experience. The most significant changes included a write-off of deferredacquisition costs of £21m for Single Premium Deferred Annuities partialwithdrawal changes and a Universal Life SOP 03-01 (Accounting and Reporting byInsurance Enterprises for Certain Non-Traditional Long Duration Contracts andSeparate Accounts) reserve increase of £13m due to increasing the mortalityassumption. Several smaller changes relating to Single Premium Whole Lifesurrenders and annuity mortality and annuitisation rates resulted in a £19mbenefit on adjusting amortisation of deferred acquisition costs. Combined withother minor modifications, the resulting net impact of all changes during theyear was a decrease to pre-tax profit of £7m. Asian Operations The 2005 results for Asian operations are affected in two significant ways forchanges of basis or assumption. For the Singapore life business, under the basis applied previously, liabilitiesof non-participating business for 2004 were determined on a net premium basisusing prescribed interest rates such that a very high degree of prudenceresulted. This basis has been replaced under the Singapore Risk Based Capitalframework with one that, although still including provisions for adversedeviation, more accurately estimates the liability. This has resulted in achange of estimate and reduction in the liability of £73m. The second item reflects the application of liability adequacy testing for theTaiwan life business which has resulted in a write-off of deferred acquisitioncosts of £21m in 2005. The assumptions for future investment returns are asdescribed in note O. The loss reflects the reduction in 2005 in the expectedyields over the trending period to the assumed long-term rate of 5.5% forTaiwanese government bonds. Q. Asian Fund Management business Operating profit for the Asian fund management business was £12m for 2005. Thedecrease from the result for 2004 of £19m reflects the exceptional cost of £16min Taiwan incurred due to bond fund restructuring required as a result ofindustry wide regulatory change. R. Post balance sheet events In December 2005, the Company announced its intention to acquire the minorityinterests in Egg representing approximately 21.7% of the existing issued sharecapital of Egg. Under the terms of the offer, Egg shareholders would receive0.2237 new ordinary shares in the Company for each Egg share. In January 2006,the Company announced that it had received acceptances in respect of 80.3% ofthe shares that it did not already own and that it would extend the offer untilfurther notice. In February 2006, the Board of Egg announced the de-listing ofEgg shares. Full acceptance of the offer would result in the issue of 41m newordinary shares in the Company representing 1.7% of its issued ordinary sharecapital as enlarged by this acquisition. SUPPLEMENTARY IFRS BASIS RESULTS Additional IFRS basis information to enable consistent comparison of results forPrudential's insurance operations This information does not form part of the IFRS basis results to be reported inthe statutory financial statements. The statutory basis results included in this announcement are for the years 2005and 2004. These results reflect significant changes of accounting policies fromthose previously applied under UK GAAP. For all except three IFRS standardsthese changes have been applied consistently in preparing the results for bothyears. However, as permitted by the IFRS transition rules, 2005 results includethe effects of adoption of the standards IAS 32, IAS 39 and IFRS 4 for theGroup's insurance and other operations from 1 January 2005. The 2004 comparativeresults in those statements are therefore prepared on an inconsistent basis. The "Pro forma IFRS basis" comparative results shown below for 2004 reflect theestimated effect on the Group's 2004 results if IAS 32, IAS 39 and IFRS 4 hadbeen applied from 1 January 2004 to the Group's insurance operations. The main purpose of providing this pro forma information is to present theoperating results for the UK insurance business and short-term fluctuations ininvestment returns for Jackson National Life (JNL) on a consistent basis. UnderIAS 39 and IFRS 4, the assets and liabilities of certain unit-linked and similarcontracts of the UK insurance business are subject to re-measurement. For JNL,derivatives held for economic hedging purposes are fair valued under IAS 39 withvalue movements recorded in the income statement giving rise to significantlevels of volatility. In addition debt securities of JNL are fair valued withvalue movements taken directly to shareholders reserves through the statement ofchanges in equity. Based on Pro forma IFRS statutory IFRS basis results basis resultsSummary results 2005 £m 2004 £m----------------------------------- --------- --------Operating profit from continuing operationsbased on longer-term investment returns (note 1) 957 699Goodwill impairment charge (120) -Short-term fluctuations in investment returns onshareholder-backed business (note 2) 211 293Shareholders' share of actuarial and other gainsand losses on defined benefit pension schemes (50) (7)----------------------------------- --------- --------Profit from continuing operations before taxattributable to shareholders (includingactual investment returns) 998 985Tax attributable to shareholders' profits (241) (290)----------------------------------- --------- --------Profit from continuing operations after tax 757 695Discontinued operations (net of tax) 3 (94)----------------------------------- --------- --------Profit for the year 760 601----------------------------------- --------- -------- Attributable to:Equity holders of the Company 748 602Minority interests 12 (1)----------------------------------- --------- --------Profit for the year 760 601----------------------------------- --------- -------- Earnings per shareContinuing operations-----------------------From operating profit, based on longer-terminvestment returns after related tax and minorityinterests of £761m (£481m) 32.2p 22.7pAdjustment for goodwill impairment charge (5.1)p -Adjustment from post-tax longer-term investmentreturns to post-tax actual investment returns (afterrelated minority interests) 5.9p 9.0pAdjustment for post-tax shareholders' share ofactuarial and other gains and losses on definedbenefit pension schemes (1.5)p (0.2)p----------------------------------- --------- --------Based on profit from continuing operationsafter tax and minority interests of £745m (£669m) 31.5p 31.5p----------------------------------- --------- --------Discontinued operations-------------------------Based on post-tax profit (loss) from discontinuedoperations (after minority interests) 0.1p (3.1)p----------------------------------- --------- --------Based on profit for the year after minority interests of £748m (£602m) 31.6p 28.4p----------------------------------- --------- -------- SUPPLEMENTARY IFRS BASIS RESULTS Additional IFRS basis information to enable consistent comparison of results forPrudential's insurance operations This information does not form part of the IFRS basis results to be reported inthe statutory financial statements. Based on Pro forma IFRS statutory IFRS basis results basis resultsCHANGES IN EQUITY (NET OF MINORITY INTERESTS) 2005 £m 2004 £m------------------------------------ --------- --------Other ReservesProfit for the year 748 602 Items recognised directly in equity:Exchange movements 268 (191)Movement on cash flow hedges (4) -Unrealised valuation movements on securities classified as available-for-sale:Unrealised investment losses, net (751) (106)Related change in amortisation of deferred income and acquisitioncosts 307 74Related tax 218 23------------------------------------ --------- --------Total items recognised directly inequity 38 (200)------------------------------------ --------- --------Total income and expense for the year 786 402------------------------------------ --------- --------Cumulative effect of changes in accounting principles on adoption of IAS 32,IAS 39 and IFRS 4, net of applicable taxes, at 1 January 2005Statutory IFRS basis 226 -less: Pro forma adjustment reflected in adjusted shareholders' equity at 1January 2005 (as reflected in statement of changes in equity - seebelow) for impact of adoption of IAS 32, IAS 39 and IFRS 4 for insuranceoperations (251) ------------------------------------- --------- -------- Pro forma IFRS basis (i.e. transition adjustment in respect of banking and other non-insurance operations) (25) -Dividends (380) (323)Reserve movements in respect of share-based payments 15 10 Share capital and share premium Proceeds from Rights Issue, net of expenses - 1,021Other new share capital subscribed 55 119Treasury sharesMovement in own shares purchased in respect of share-basedpayment plans 0 (2)Movement on Prudential plc shares purchased by unit trusts newlyconsolidated under IFRS 3 14------------------------------------ --------- --------Net increase in shareholders' equity 454 1,241------------------------------------ --------- -------- Shareholders' equity at beginning of year-------------------------------------------As previously reported under UK GAAP 4,281 3,240Changes arising from adoption of statutory IFRS 208 53------------------------------------ --------- --------Statutory IFRS basis 4,489 3,293Pro forma basis adjustments for estimated impact if IAS 32, IAS 39,and IFRS 4 had been adopted from 1 January 2004 for insuranceoperations 251 206------------------------------------ --------- --------Pro forma IFRS basis 4,740 3,499------------------------------------ --------- --------Shareholders' equity at end of year 5,194 4,740------------------------------------ --------- -------- SUPPLEMENTARY IFRS BASIS RESULTS Additional IFRS basis information to enable consistent comparison of results forPrudential's insurance operations This information does not form part of the IFRS basis results to be reported inthe statutory financial statements NOTES ON THE SUPPLEMENTARY IFRS BASIS RESULTS 1. Operating profit from continuing operations based on longer-term investmentreturns* Based on Pro forma IFRS statutory IFRS basis results basis resultsResultsanalysis bybusiness area 2005 £m 2004 £m------------------------------------ --------- --------UK OperationsUK InsuranceOperations 400 296M&G 163 136Egg 44 61------------------------------------ --------- --------Total 607 493------------------------------------ --------- --------US OperationsJackson National Life 348 296Broker-dealer and fund management(including Curian losses of £10m and(£29m)) 14 (14)------------------------------------ --------- --------Total 362 282------------------------------------ --------- --------Asian OperationsLong-term business 195 117Fund management 12 19Development expenses (20) (15)------------------------------------ --------- --------Total 187 121------------------------------------ --------- --------Other income and expenditureInvestment return and other income 87 44Interest payable on core structuralborrowings (175) (154)Corporate expenditure:Group Head Office (70) (51)Asia Regional Head Office (30) (29)Charge for share-based payments forPrudential schemes (11) (7)------------------------------------ --------- --------Total (199) (197)------------------------------------ --------- --------Operating profit from continuingoperations based on longer-terminvestment returns 957 699------------------------------------ --------- -------- * IFRS basis operating profit from continuing operations based on longer-terminvestment returns excludes goodwill impairment charges, short-term fluctuationsin investment returns, and the shareholders' actuarial and other gains andlosses on defined benefit pension schemes. The amounts for these items areincluded in total IFRS profit as shown elsewhere in this announcement. 2. Short-term fluctuations in investment returns Based on Pro forma IFRS statutory IFRS basis results basis results 2005 £m 2004 £m------------------------------------ --------- --------US Operations:Movement in market value of derivativesused for economic hedging purposes 122 144Actual less longer-term investmentreturns for other items 56 61Asian Operations 32 37Other Operations 1 51------------------------------------ --------- -------- 211 293------------------------------------ --------- -------- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Prudential