Interim Results, Part 1 of 2

28th Jul 2006 07:02

Prudential PLC28 July 2006 Embargo: 07.00 Friday 28 July 2006 PRUDENTIAL PLC 2006 INTERIM RESULTS • Total EEV operating profit £980 million before restructuring costs, up 17% • New business PVNBP £9.8 billion, up 3%; APE of £1,255 million, up 9% • New business EEV profit £504 million, up 17% • Total net inflows for the asset management businesses £5.3 billion, up 138% • Total IFRS operating profit £470 million before restructuring costs, down 4% • Targeted cost savings from UK business increased by £110 million per annum to £150 million per annum by 2009 • EEV shareholders' funds up to £10.9 billion (end 2005 £10.3 billion*) • Interim dividend 5.42 pence per share (2005: 5.3 pence per share) All figures compared to 2005 constant exchange rates unless stated, *at reportedexchange rates Commenting, Mark Tucker, Group Chief Executive said: "In the first half of 2006 the Group has continued to build on the momentumestablished during a successful 2005, with Group operating profit on an EEVbasis up 17% to £980 million before restructuring costs in the UK. "Insurance sales were £9.8 billion on a PVNBP basis, with strong growth in Asiaand the US and a steady performance in the UK. Net sales in our asset managementbusinesses more than doubled to £5.3 billion. Difficult trading conditions inthe personal loans market resulted in a loss at Egg in the first half of theyear but we expect Egg to report an operating profit for the second half. "In line with our forecast that Asia will be cash positive in 2006 there was anet remittance to the Group of £5 million in the first half of the year. Acrossour UK insurance business and Egg we have increased our cost saving target to£150 million per annum from the £40 million announced in December 2005. "Our clear focus continues to be to drive profitable growth across each of ourbusinesses as well as leveraging opportunities within each region and across theGroup. There remains tremendous scope to increase value for our shareholders andI am confident of the outlook for the Group." Operational highlights: Insurance and banking The Group's insurance businesses delivered an increase of 22% in operatingprofit before tax on an EEV basis to £1,041 million and the operating profit onan IFRS basis was £516 million, up 8%. Insurance sales in Asia grew by 27% on a PVNBP basis to £2.3 billion (up 35% onan APE basis) in the half year building on strong growth in 2005 as a whole.There was continuing strong growth in India up 61%, Korea up 56%, China up 40%,Singapore up 32% and Taiwan up 19%. The average margin on new business in the region was 10% on a PVNBP basis (2005:9.4%) and we expect margins for the full year to be maintained at around thislevel. In line with our forecast that Asia will be cash positive in 2006 there was anet remittance to the Group of £5 million in the first half of the year. TheGroup has an unrivalled exposure to the high growth, high return markets in Asiaand we continue to expect significant growth as we build on our powerfuldistribution capability; and to generate increasing levels of cash from theregion. Jackson, our US business, benefits from a strong presence in all the annuityproduct areas. Market conditions continue to favour variable annuities andJackson increased its sales by over 50% in the first half of the year well aheadof overall market growth and market share in the first quarter increased to4.2%. Overall sales in the US increased by 12% on a PVNBP basis (up 12% on anAPE basis). Jackson has continued to develop its core Perspective II product with a numberof enhancements that have been well received by customers and advisors. Overallmargins on new business increased to 4.2% on a PVNBP basis (2005: 3.5%). We willmaintain our focus on the variable annuity market and we expect to increase ourmarket share as the "baby boomer" generation looks to generate income from theirretirement savings. Further increases in US interest rates in the second half of the year could leadto a change in the sales mix across the annuity product range. The breadth ofour offering in variable, fixed-indexed and fixed annuities means we are wellpositioned to respond. The US business generated almost $300 million of statutory capital in the periodand is expected to remit $180 million to the Group during 2006. The UK insurance business continued to focus on value. Sales of £4.2 billion ona PVNBP basis were down 12% (down 9% on an APE basis) on the first half of 2005with retail sales remaining stable and retail margins improving. Two large bulkannuity transactions were completed in the first half of 2006 with sales of£1.25 billion on a PVNBP basis. In the first half of 2005 we completed one largetransaction of £1.45 billion on a PVNBP basis. There has been some reduction inmargins on the bulk annuity business. The aggregate margin on new business was 3.3% on a PVNBP basis (2005: 3.3%). Wewill continue to target an internal rate of return on new business of 14%. Inthe first half we achieved an internal rate of return of 13%. Egg's card book is performing well and 153,000 new cards were sold during asuccessful marketing campaign in the first quarter. Egg has grown its card bookby 3% at a time when the UK card market has contracted by 2%. Conditions in the personal loans market, which had begun to deteriorate in 2005,continued to be difficult in the first half of the year. In current marketconditions we do not see attractive returns. We have taken action to lower ourexposure to personal lending and we expect this to continue for some time. Thisaction adversely affects short term reported profits but we are confident thatit will improve the long term value of the loan book. Bad debt charges in thefirst half increased significantly across the unsecured lending industry as awhole and we have taken prudent action by increasing the charge in the firsthalf by 42%. As a result, Egg reported an operating loss before tax of £39million (2005: profit £13 million). We expect Egg to report an operating profitfor the second half. We are restructuring our UK operations to focus on the opportunities for incomein retirement, the wealth and health sectors and retail banking. We will alsoseparate out our mature products and manage these as a specific business area.We are making good progress in integrating our UK insurance operations and Eggfollowing the completion of the buy-back of the Egg minority announced inDecember 2005. Following a further review of the combined cost base we are targeting total costsavings of £150 million per annum (inclusive of £40 million per annum savingsannounced in December 2005) by 2009. These savings are equivalent to 18% of thecost base and one-off costs to be incurred up to 2008 are estimated at £110million (inclusive of £50 million announced in December 2005). In addition,following the purchase of the minority interest in Egg, we have reorganised theGroup's structure with an expected benefit of £120 million to the Group'sFinancial Conglomerates Directive capital position. Asset Management Supported by continuing excellent investment performance, our asset managementbusinesses in the UK and Asia are performing very strongly with net investmentflows more than doubling to £5.3 billion. Operating profit before tax at M&Gincreased by 20% to £100 million and in Asia first half profits were £22 million(2005: £2 million). External funds under management have increased to £51billion (2005: £46 billion). Outlook Overall the Group has significant capacity to grow and to build on the strengthof our positions in the major retail financial services markets of Asia, the USand the UK. ENDS Enquiries: Media Investors/Analysts Jon Bunn 020 7548 3559 James Matthews 020 7548 3561 William Baldwin-Charles 020 7548 3719 Valerie Pariente 020 7548 3511 Joanne Doyle 020 7548 3708 Notes to Editor: 1. The results in this announcement are prepared on two bases, namelyInternational Financial Reporting Standards ('IFRS') and the European EmbeddedValue ('EEV') basis. The IFRS basis results form the basis of the Group'sfinancial statements. The EEV basis results have been prepared in accordance with the principlesissued by the CFO Forum of European Insurance Companies in May 2004. Whereappropriate the EEV basis results include the effects of IFRS. References to 'operating profit' in this announcement are to operating profitbased on longer-term investment returns. Consistent with previous reportingpractice the Group analyses its EEV basis results, and provides supplementaryanalysis of IFRS profit before tax attributable to shareholders, so as todistinguish operating profit based on longer-term investment returns from otherconstituent elements of total profit. On both the EEV and IFRS bases operatingprofit based on longer-term investment returns excludes goodwill impairmentcharges, short-term fluctuations in investment returns and the shareholders'share of actuarial and other gains and losses on defined benefit pensionschemes. Under the EEV basis, where additional profit and loss effects arise,operating profits based on longer-term investment returns also excludes the markto market value movement in core borrowings, the effect of changes in economicassumptions, and changes in the time value of the cost of options and guaranteesarising from changes in economic factors. 'PVNBP' refers to the Present Value of New Business Premiums. PVNBPs arecalculated as equalling new single premiums plus the present value of expectedpremiums of new regular premium business. In determining the present value,allowance is made for lapses and other assumptions applied in determining theEEV new business profit. Period on period percentage increases are stated on a constant exchange ratebasis. 2. Annual premium equivalent (APE) sales comprise regular premium sales plusone-tenth of single premium insurance sales. 3.The internal rate of return (IRR) is equivalent to the discount rate at whichthe present value of the post-tax cash flows expected to be earned over the lifetime of the business written in shareholder-backed life funds is equal to thetotal invested capital to support the writing of the business. The capitalincluded in the calculation of the IRR is the initial capital in excess of thepremiums received required to pay acquisition costs and set up the statutorycapital requirement. The time value of options and guarantees are included inthe calculation. 4.There will be a conference call today for wire services at 7.30am (BST) hostedby Mark Tucker, Group Chief Executive and Philip Broadley, Group FinanceDirector. Dial in telephone number: +44 (0)20 8609 0793. Passcode: 155439#. 5. A presentation to analysts will take place at 9.30am (BST) at Governor'sHouse, Laurence Pountney Hill, London, EC4R 0HH. An audio cast of thepresentation and the presentation slides will be available on the Group'swebsite, www.prudential.co.uk 6. There will be a conference call for investors and analysts at 2.30pm (BST)hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group FinanceDirector. Please call from the UK +44 20 8609 0793 and from the US + 1 866 7934279. Pin number 487687#. A recording of this call will be available for replayfor one week by dialling: +44 20 8609 0289 from the UK or 1866 676 5865 from theUS. The conference reference number is 147018#. 7. High resolution photographs are available to the media free of charge atwww.newscast.co.uk (+44 (0) 207 608 1000). 8. An interview with Mark Tucker, Group Chief Executive, (in video/audio/text)will be available on www.cantos.com and www.prudential.co.uk from 7.00am on 28July 2006. 9. Financial Calendar 2006: Ex-dividend date 16 August 2006Record Date 18 August 2006Third Quarter 2006 New Business Figures 19 October 2006Payment of interim dividend 27 October 2006Full Year 2006 New Business Figures 30 January 2007Full Year 2006 results 15 March 2007 10. In addition to the financial statements provided with this press release,additional financial schedules are available on the Group's website atwww.prudential.co.uk 11. Total number of Prudential plc shares in issue as at 30 June 2006 was2,429,728,675. *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 £238 billion inassets under management, as at 30 June 2006. Prudential plc is not affiliated inany manner with Prudential Financial, Inc, a company whose principal place ofbusiness 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 GROUP Results Highlights Half Year Half Year Half Year CER Change RER (4) Change 2006 2005 2005 £m £m £m Present value of new business premiums (PVNBP) (1) 9,761 9,507 3% 9,280 5%Annual premium equivalent (APE) sales (1) 1,255 1,152 9% 1,121 12%New business profit (NBP)(1) 504 431 17% 416 21%NBP Margin (% PVNBP) (1) 5.2% 4.5% 4.5%Total EEV basis operating profit (2)(3) 962 837 15% 799 20%Total IFRS operating profit (2) (3) 453 489 (7%) 469 (3%)EEV basis shareholders' funds (£bn) 10.9 9.1 20% 9.1 20%IFRS shareholders' funds (£bn) 5.0 4.9 2% 5.0 - (1) The details shown include the effect of the £592 million bulk annuitytransfer from the Scottish Amicable Insurance Fund (SAIF) to PrudentialRetirement Income Limited, a shareholder owned subsidiary of the Group. SAIF isa closed ring-fenced sub-fund of the PAC long-term fund established by a courtapproved scheme of arrangement in September 1997, whose results are solely forthe benefit of SAIF policyholders. (2)Based on longer term investment returns from continuing operations. Operatingprofit is stated excluding short-term fluctuations in investments returns andshareholders' share of actuarial and other gains and losses on defined benefitpension schemes (3) Including restructuring costs (4) Reported exchange rate In the Business Review and Financial Review, period-on-period comparisons offinancial performance are on a Constant Exchange Rate (CER) basis, unlessotherwise stated. The Group has continued to grow in the first half of 2006 and this has resultedin a strong set of results. Growth in sales and the improvement in aggregate new business (NBP) margin to5.2 per cent on a PVNBP basis and 40 per cent on an APE basis led the Group toachieve NBP growth of 17 per cent. This, together with significant growth fromthe fund management operations and the increase in profits from the in-forceinsurance business partially offset by a loss in Egg, led to an increase of 15per cent over the first half of 2005 in total EEV basis operating profits. On an international financial reporting standards basis (IFRS), operatingprofits were down 7 per cent on the same period last year. Last year's resultincluded one-off profits in Asia of £34 million. The loss in Egg is offset bysignificant growth in the US and the asset management businesses. Basic earnings per share based on total EEV basis for the half year afterminority interests were 43.8 pence for the half year of 2006, compared with afigure of 20.7 pence for the prior year. Basic earnings per share, based ontotal IFRS profit for the half year after minority interests, were 18.7 pence,up 6 pence from 2005 half year figure of 12.7 pence. Impact of Currency Movements Prudential has a diverse international mix of businesses with a significantproportion of its profit generated outside the UK. In preparing the Group'sconsolidated accounts, results of overseas operations are converted at rates ofexchange based on the average of the year to date, whilst shareholders' fundsare converted at period-end rates of exchange. Changes in exchange rates from year to year have an impact on the Group'sresults when these are converted into pounds sterling for reporting purposes. Insome cases, these exchange rate fluctuations can have a significant effect onreported results. For example, growth in the Asia new business profit on an EEVbasis was 43 per cent at reported exchange rates (RER), compared to 34 per centat CER. Consequently, the Board has for a number of years reviewed and reported theGroup's international performance on a CER basis. This basis eliminates theimpact from conversion, the effects of which do not alter the long-term value ofshareholders' interests in the non-UK businesses. In the Business Review and Financial Review, period-on-period comparisons offinancial performance are on a CER basis, unless otherwise stated. INSURANCE UNITED KINGDOM Half Year Half Year Change 2006 2005 £m £m PVNBP 4224 4797 (12%)APE Sales 484 533 (9%)NBP 138 159 (13%)NBP Margin (% PVNBP) 3.3% 3.3%Total EEV basis operatingprofit(1) 336 144 133%Total IFRS operating profit(1) 205 187 10% (1) Excluding restructuring costs Prudential UK continued to focus on value rather than volume during the firsthalf of 2006 with the new business margin of 3.3 per cent remaining in line with2005. PVNBP fell 12 per cent on 2005, while on an APE basis sales fell 9 percent to £484 million from the corresponding period last year. APE sales in thefirst half of 2006 included £59 million from the acquisition of inforce pensionannuities from the Scottish Amicable Insurance Fund ("SAIF") in June 2006 and£66 million from the acquisition of pension annuities from Royal London inJanuary 2006. The 2005 result included APE sales from the Phoenix Life andPensions ("PLP") transaction of £145 million, completed in June 2005. Excludingbulk annuity business, retail APE sales increased 1 per cent on 2005. On an APE basis, the new business margin fell to 29 per cent, down from 30 percent at the half year 2005. This primarily reflects an adverse shift in salesmix due to a reduced proportion of bulk annuity and DWP rebate business, and thenegative impact of economic assumption changes which were offset by an increasein annuity yield margins. An overall increase in retail margins (including DWPrebates) was offset by a decline in the bulk annuity margin reflecting increasedcompetition in this market. This margin movement and the fall in sales volumesled to the overall decline in new business profits, down from £159 million to£138 million. Total EEV basis operating profits increased 133 per cent, the 2005 result beingimpacted by a persistency assumption change. Prudential UK continues to monitorclosely mortality and persistency experience. Current experience is in line withour assumptions. Strong growth in IFRS profits attributable to the with-profits fund (due toexcellent investment returns achieved in 2005 and the subsequent bonusannouncement made in February 2006) and increased annuity profits led to anoverall increase in IFRS profits of 10 per cent. Bulk annuity sales fell 29 per cent on the first half of 2005 to £128 million.This is due largely to the completion of the large PLP back-book transaction in2005 (£145 million APE) as well as the challenging conditions seen in the bulkannuity market in the first half of 2006. Despite the slowdown seen in the first half of 2006, Prudential UK believes thatthere is significant potential within this market and it is well positioned tobenefit given its strong brand, financial strength, extensive annuitantmortality risk assessment capabilities and its well regarded fixed income fundmanagement teams allowing it to pursue an optimal investment strategy. However,Prudential UK will not chase headline growth but instead, maintain its focus onvalue. In particular, it will only look at transactions that generate anacceptable rate of return. The first half of 2006 saw the completion of two further back-book transactions.In January, Prudential reached agreement with Royal London to acquire theportfolio of in-payment pension annuities that had been written primarily underthe Royal London brand but which also included some annuities written under theRefuge Assurance brand. The transaction generated premium income of £66 millionon an APE basis. In June, Prudential Assurance Company (PAC) agreed to reinsurethe non-profit immediate pension annuity portfolio of the Scottish AmicableInsurance Fund (SAIF) to Prudential Retirement Income Ltd (PRIL). SAIF is aclosed sub-fund established by a court approved Scheme of Arrangement inSeptember 1997, in which Prudential shareholders have no economic interest. Itcontains a large proportion of the business originally written by the ScottishAmicable Life Assurance Society that was acquired by PAC in September 1997. Thereinsurance premium for this transaction was £59 million on an APE basis. Retail sales were up 1 per cent on 2005. Increased sales of individualannuities, with-profit bonds and offshore bonds were offset primarily by adecline in protection sales and DWP rebate business. Total individual annuity APE sales for the first half of 2006 were up 3 per centon the corresponding period last year at £114 million. This reflects theparticularly strong second quarter performance in which APE sales were up 12 percent on the same period last year. The with-profits bonus announcement made in February 2006 was well received byboth customers and advisers and contributed to increased interest in with-profitbonds and with-profit annuities with sales growth of 50 per cent and over 100per cent respectively. Sales of with-profit annuities also benefited from thefavourable comparison of their returns with the decline in conventional annuityrates seen in 2005 and early 2006. Increased offshore bond sales (up 133 per cent) were offset by a decline inunit-linked bond sales (down 31 per cent) as Prudential chose to continue itsfocus on value, not volume. Within the unit-linked bond market, Prudential isfocusing on intermediaries where it anticipates good persistency and therebyavoids the recycling of business which has been seen recently. Prudential hasstructured its commission rates in accordance with this strategy. In line with this focus on value for both the customers and advisers, Prudentiallaunched its new Flexible Protection Plan in July 2006. This innovative newprotection product is designed to pay critical serious illness claimants earlierand more often than traditional protection products with, on average, four timesas many serious illnesses covered. Payments will be based on severity levels andmultiple claims for the same or new illness will be possible. This will be soldinitially through Prudential's Direct channel and a number of financial advisersspecialising in the protection market. As a result of the mailing to its 440,000 customers contracted-out of the StateSecond Pension ("S2P") for the 2005/2006 tax year, approximately 132,000customers elected to contract back into the State scheme resulting in a declinein DWP rebate business of 30 per cent in the first half of 2006. PruHealth continues to grow strongly with over 50,000 individuals now covered, anumber that has almost doubled in the last six months. Contributing to thisgrowth is the number of companies adopting PruHealth for their employeehealthcare schemes, including British Airways voluntary scheme, Smith and Nephewand Norton Rose. In June, Prudential and Royal London signed a partnership agreement under whichRoyal London will offer Prudential's annuity products on an exclusive basis tocustomers with maturing pensions originally written under the Royal London,Refuge and United Assurance Group ("UAG") brands. The agreement, which isexpected to take effect from September 2006 and run for five years, will covernew vesting annuities resulting from a range of pension policies. In addition, Prudential and Royal London have reached agreement to reassure (andsubsequently transfer) to Prudential all pension annuities arising from vestingsbetween July 2005 and October 2006, for policies written under the same brands.This supplements the agreement reached between Prudential and Royal London inJanuary 2006 for Prudential to acquire the portfolio of in-payment pensionannuities which were already in payment at 1 July 2005, and which again arosefrom vestings of policies written under the Royal London, Refuge and UAG brands. Prudential has signed an exclusive 5 year agreement with Threadneedle as theirsupplier of annuities for Threadneedle's Stakeholder Scheme along with futuredefined contribution schemes which Threadneedle acquires. This is a new area forPrudential which builds on its experience in providing annuities to customers oflife insurance companies. With the future growth in DC schemes within the UK weexpect more agreements of this type in the future. In December 2005, Prudential announced total annualised pre-tax cost savingsacross the combined UK and Egg business of £40 million by the end of 2007. Tohelp achieve this, Prudential UK has been reorganising its structure during thefirst half of 2006 to allow it to integrate the Egg banking business. This willallow the UK business to achieve greater efficiencies and thereby positionitself to better meet its customers' needs, reduce costs and generate greatershareholder value. The business has been restructured to focus on theopportunities in the income in retirement, wealth and health and retail bankingmarkets and mature products have been separated out and will now be managed as aspecific business area. All of these areas now share single support functions,thereby reducing duplication across the two businesses. An end to end review of the UK business aimed at reducing the overall cost baseis underway. Total UK and Egg pre-tax cost savings are expected to be £150million per annum by 2009. This includes the saving of £40 million previouslyannounced in December 2005. £100 million will come from shareholder business and£50 million from policyholder business. The savings are currently expected to beneutral on an EEV basis but will benefit IFRS profits and the cash position ofthe integrated UK business. In total the cost of implementing these measures areexpected to be £110 million pre tax of which £70 million relates to theshareholder and £40 million to the policyholder. In the first half of 2006, acharge of £12 million 'restructuring' costs on an EEV basis and £11 million onan IFRS basis has been taken in relation to this in the UK. The cost savings will be achieved by way of functional restructuring, siterationalisation and control of discretionary spend. The With-Profits Fund benefited from a pre-tax investment return of 4.2 per centin the first half of 2006 compared with 7.4 per cent in the comparable period of2005. Over the last five years (to 30 June 2006), the With-Profits Fund hasdelivered a pre-tax total return of 48.9 per cent compared with the return onthe FTSE All Share (Total Return) index over the same period of 27.8 per cent.The fund remains strong with an inherited estate estimated to be around £8.7billion as at 30 June 2006, on a realistic valuation basis, compared withapproximately £8.0 billion at the end of 2005. The PAC long-term fund iscurrently rated AA+ by Standard & Poor's, Aa1 by Moody's and AA+ by FitchRatings. The table below shows the change in the investment mix of Prudential's mainwith-profits fund: Half Year Full Year Full Year 2006 2005 2004 % % % UK Equities 37 40 33International equities 17 19 15Property 16 15 18Bonds 25 21 29Cash and other assets classes 5 5 5 Prudential UK will continue to pursue profitable opportunities in its chosenproduct areas and distribution channels in 2006 maintaining its focus onmaximising value and return on capital. UNITED STATES Half Half Change Half Change Year Year Year CER RER 2006 2005 2005 £m £m £m PVNBP 3,209 2,875 12% 2,749 17%APE sales 323 288 12% 275 17%NBP 134 99 35% 95 41%NBP Margin (% PVNBP) 4.2% 3.5% 3.5%Total EEV basis operating profit* 350 451 (22%) 431 (19%)Total IFRS operating profit* 227 178 28% 169 34% * Continuing operations. Period-on-period comparisons of financial performance are on a Constant ExchangeRate (CER) basis, unless otherwise stated Jackson, our US Insurance business, had a strong first half to the yeardelivering PVNBP and APE sales growth of 12 per cent whilst maintaining thestrong new business profit margins achieved during 2005. Jackson again deliveredrecord variable annuity sales during the first half of 2006, and has nowrecorded seven consecutive record quarters of variable annuity growth. Innovation in product design continues to be a key driver of Jacksoncompetitiveness, and during the first half of 2006 79 per cent of retail salesrelated to products and product features launched since the beginning of 2005.In January Jackson added a 5 per cent annual benefit increase option to itspopular lifetime guaranteed minimum withdrawal benefits (GMWBs). In February,the company launched two new fixed index annuity contracts, Elite Choice andElite Choice Rewards, which expanded the number of FIA products Jackson offersto five. In May, Jackson added five new guaranteed minimum withdrawal benefit(GMWB) options that provide contract holders with a guaranteed return of premiumand lifetime income. Additionally, Jackson expanded its variable annuity fundoffering during the first half of the year. The organisational flexibility and competency in execution which enables thisproduct innovation, coupled with a powerful distribution model and strongservice offering increased Jackson's share of the variable annuity market to 4.2per cent during the first quarter (VARDS), up from 3.3 per cent at the same timelast year. Jackson also improved its share of variable annuity sales through theindependent broker-dealer channel to 10.4 per cent at the end of the firstquarter, up from 5.4 per cent two years ago, and 8.1 per cent at the same pointin 2005. At the 2006 half year, Jackson had $70.7 billion in GAAP assets. Of this total,$21.0 billion related to variable annuity assets, an increase of $2.9 billioncompared to 2005 year-end, and up $5.6 billion from 12 months ago, furtherdiversifying Jackson's earnings towards fee-based income. The 12 per cent growth in APE sales to £323 million during the first half of2006 reflects a 26 per cent increase in retail sales. This growth was driven bya 52 per cent increase in variable annuities to £189 million against marketgrowth of 20 per cent (VARDS) in the year to March 2006. The increased variableannuity sales more than offset a reduction in sales of both fixed annuities andfixed index annuities, down 28 per cent to £31 million and 6 per cent to £29million respectively. Entry spreads for fixed annuities continued to bechallenging during the first half of the year, which limited the attractivenessof the market to Jackson. To the end of May 2006 the fixed annuity market wasdown 9.3 per cent from the same point in the prior year (LIMRA). Fixed index annuity sales continued to be impacted by the uncertain regulatoryenvironment in the US, with total market sales to March 2006 down 2 per cent(LIMRA) from the prior year. Institutional APE sales of £65 million, a market in which Jackson participateson an opportunistic basis, were down 23 per cent from the prior year. New business profit of £134 million was 35 per cent above the prior year,reflecting both a 12 per cent increase in APE sales and an increase in marginfrom 35 per cent to 41 per cent half year on half year. The increase in marginreflects a favourable business mix; economic assumption changes, including theincrease in the equity risk premium; and positive effects from the increase inelection of high margin guaranteed benefit options on variable annuitycontracts. Total EEV basis operating profit at the half year 2006 was £350 million comparedto £451 million in the prior year. In-force EEV profits of £212 million were 37per cent below prior year profit of £339 million, primarily reflecting theinclusion in 2005 of an operating assumption change relating to price increasesintroduced on two older books of term life business representing £142 million,partially offset by an increase in the unwind of the in-force business duringthe first half of 2006. The unwind increased as a result of a higher openingembedded value and a higher risk discount rate as long-term interest ratesincreased. The growth in IFRS operating profit of 28 per cent from the prior year to £227million primarily reflects an increase in spread and fee income over the firsthalf of 2005. The improved spread income from prior year relates primarily tospread earned on fixed index annuity assets and earnings in excess of the targeton the regular portfolio, partially offset by lower spread from non-recurringmake-whole and mortgage prepayment fees. Higher fee income of £59 million overprior year was primarily driven by higher separate account assets given thegrowth in variable annuity sales, and an improvement in the average feesgenerated from those assets given the increase in election of high marginguaranteed option benefits. National Planning Holdings (NPH), Jackson's independent-broker network, had astrong first half to the year with profits up 33 per cent to £4 million. NPH,which is a network of four independent broker-dealers, increased sales throughthe network to $6.1 billion in the six months to June 2006, an increase of 27per cent over the prior year. NPH has also increased the number of registeredadvisors in its network to 2,660 at the half year, up from 2,421 in the prioryear, further extending Jackson's footprint in broker-dealer distribution. Curian Capital, which offers customised separately managed accounts, recordedimproved results with losses of £4 million in the first half improved fromlosses of £6 million in the prior year, as it continues to build scale in assetsunder management. At 30 June 2006 Curian Capital had $1.98 billion (£1.07billion) of assets under management compared with $1.35 billion (£731 million)at the same point in the prior year. In June 2006 Jackson announced a new branding campaign designed to increaseawareness of Jackson's rich tradition, bold vision and innovative approach todeveloping and delivering a range of retirement planning solutions. Jackson continues to deliver growth in the attractive US market and has furtherenhanced its competitive advantage in the variable annuity market, offering theproduct and service solutions that both customers and advisors want. With acontinued focus on product innovation, a proven relationship-based distributionmodel, award winning service and excellence in execution, Jackson is wellpositioned to take advantage of the changing demographics and resultingopportunities in the US market. ASIA Half Half Change Half Change Year Year Year 2006 CER RER 2005 2005 £m £m £m PVNBP 2,328 1,835 27% 1,734 34%APE sales 448 331 35% 313 43%NBP 232 173 34% 162 43%NBP margin (% PVNBP) 10.0% 9.4% 9.3%Total EEV basis operating profit * 359 269 33% 252 42%Total IFRS operatingprofit ** 88 126 (30%) 116 (24%) * Excluding fund management operations, development and Asia regional headoffice expenses. ** Excluding fund management operations, development and Asia regional headoffice expenses. Half year 2005 includes exceptional items totalling £44m Prudential continues its profitable growth in Asia through leveraging itsmulti-channel distribution capabilities and profitable and capital efficientproducts, well known brand and strong local management teams. Across the region, new business growth remains strong at 27 per cent above thefirst half of 2005 on a PVNBP base and 35 per cent on an APE basis. New businessmargins on APE are in line the same time last year at 52 per cent . Changes ingeographic mix towards the higher growth, but lower margin markets of India andKorea were offset by an improved product mix. The proportion of linked businesshas increased from 58 per cent last half year to 66 per cent in 2006 on a PVNBPbasis, and Asia have sold a lower proportion of lower margin linked business inTaiwan which was a feature of the results last year. Operating experiencevariances are marginally negative at £2 million. Excluding last half year's oneoff exceptional items of £44 million, which included the release of reserves inSingapore, IFRS profits have increased by 7 per cent to £88 million. Prudential has developed its Asian business with a focus on building profitableand sustainable scale. This has led to a strong emphasis on productprofitability and capital efficiency, and the business today has an average newbusiness capital strain of less than 3 per cent of PVNBP. As a result, and inline with prior expectations Prudential Corporation Asia became a net capitalcontributor in the first half of 2006 with a net repatriation of £5 million.This occurred even while, as noted above, the business grew by 35 per cent on anAPE basis Our Korean business grew 65 per cent over the first half of 2005 and has nowbecome our largest country market in Asia in terms of new business APE. Newbusiness margin, at 38 per cent, is in line with the full year 2005. Ourmulti-channel approach is highly effective in Korea. Proprietary distributioncontinues to grow with the addition of nearly 400 financial consultants for atotal force of over 1,600. These are highly professional agents and are twice asproductive as Prudential Corporation Asia's regional average. We are alsogrowing the broker network through providing attractive levels of service andsupport. Bank distribution continues to develop despite being constrained byregulatory volume caps imposed on our partner banks. Our JVs in the large growth markets of India and China grew rapidly as well.ICICI-Prudential in India grew new business APE by 100 per cent over the sameperiod last year driven by continued geographic expansion. There was a furtherboost to sales volumes in the second quarter due to a regulatory drivencessation of the current form of linked products. New linked products launchedfrom 1st July 2006 have features designed to ensure customers take a longer termview of insurance products. In the first half of 2006 new business APE for our China JV increased by 36 percent over the same period in 2005. CITIC-Prudential now has 14 city licenses upfrom 10 at the 31 December 2005, and 11 cities operational with Wuxi (Jiangsuprovince) being licensed and launched in 2006. CITIC-Prudential has also beengranted life licenses in Jiangmen in Guangdong province and further newprovincial capitals, Jinan in Shandong and Hangzhou in Zhejiang province . Our business in Indonesia continues to grow apace with a 45 per cent increase innew business over the same period last year. Prudential has been in Indonesiafor 10 years and the operation is now well established with a high proportion ofunit linked business, good new business margins and reporting profits on an IFRSbasis. At 28,000, agent numbers are almost doubled from last year. The lifeinsurance market in Indonesia is still very much in its infancy and hasconsiderable long term potential. Turning to the established markets, Singapore's first half new business growthon an APE basis was 32 per cent. Prudential has been a leading player inSingapore for many years, one of Asia's more competitive markets; however,during the first half of 2006 we have been able to leverage Prudential'sregional and international fund management expertise to launch an appealingseries of unit linked funds to drive growth in single premiums of 64 per centcompared to the same period last year. In Hong Kong, whilst new business volumes have increased more modestly at 10 percent compared to last year, margins have increased from 52 per cent to 67 percent driven by new products and higher productivity from the agency force. In Malaysia new business volumes have remained essentially in line with lastyear. During the first half of 2006, the Malaysian agency force was adjusting toa series of regulatory changes that started in the second half of 2005 affectingpolicy illustrations, minimum sum assureds and delays to new product approval.New business volumes remained in line with last year. In January 2006,Prudential and Bank Simpanan Nasional (BSN) were awarded a takaful (Islamiccompliant life insurance) license to develop and market life insurance productsto Muslim Malays who make up more than 60% of the population. BSN (formerly thePost Office Savings Bank), is wholly owned by the Ministry of Finance and is oneof the major banks in Malaysia with a nationwide network of 391 branches. Thisnew joint venture will also use Prudential's tied agency distribution and isexpected to launch in the third quarter of this year In Taiwan the emphasis remains on capital efficient unit linked products and newbusiness has grown by 25 per cent compared to a weak first half last year. Newbusiness margins have increased from 39 per cent to 52 per cent reflecting alower proportion of the retirement orientated linked product sold in the firsthalf of last year. Prudential's other markets of the Philippines, Thailand and Vietnam collectivelyremained in line with prior year. Prudential continues to retain its clearmarket leading position in Vietnam. The business is now generating profits underthe IFRS basis, and we expect to launch unit linked products in the second halfof this year. In Thailand, we have recently opened the market's largesttelemarketing call centre to take advantage of the significant direct marketingopportunity. In summary, Prudential continues its excellent track record of building aprofitable business in Asia with the ability to drive strong growth andincreasing capital generation. ASSET MANAGEMENT M&G Half Year Half Year Change 2006 2005 £m £m Gross investment flows 6,795 3,579 90%Net Investment flows 3,595 1,680 114%Underlying IFRS operating profitsbefore PRF 91 68 34%Total IFRS operating profit 100 83 20% Record net fund in-flows and market leading investment performance led to M&Gdelivering a 34 per cent increase in underlying profit in the first half of2006. Underlying profits (excluding performance related fees) were £91 millionin the first six months of the year, compared to £68 million for the same periodlast year. M&G's operating profit including performance fees was £100 million,an increase of 20 per cent. M&G delivered an exceptional level of fund inflows in the first six months ofthe year, which reflects M&G's leading position in retail fund management,institutional fixed income, pooled life and pensions funds, property and privatefinance. Gross fund inflows were £6.8 billion, an increase of 90 per cent on thesame period last year. Net fund inflows more than doubled to £3.6 billion, whichis already 93 per cent of total net inflows achieved in the whole of 2005. Gross fund inflows into M&G's retail businesses were their highest ever at £3.6billion and were more than double those achieved in the first half of last year.Net fund inflows saw a near four-fold increase to £1.7 billion and have alreadyexceeded the total net flows last year. This was on the back of excellent fundperformance across M&G's equity, fixed income and property funds, which over thelast three years has seen 77 per cent of M&G retail funds beating their UKsector average and 45 per cent delivering top quartile performance. M&G's institutional businesses also enjoyed an excellent first half to the year.Gross fund inflows grew by 64 per cent to £3.2 billion and net inflows by 51 percent to £1.9 billion. M&G continued its successful strategy of generatingattractive new revenue streams using expertise developed for internal funds withthe roll-out of its Episode global macro strategy to external clients. M&G'ssuccessful Collateralised Debt Obligation (CDO) programme continued with thelaunch of two new CDOs in the first half of 2006, bringing the total numberlaunched to 13. Asia Half Half Change Half Change Year Year Year CER RER 2006 2005 2005 £m £m £m Net investment flows 1,709 571 199% 548 212%Total IFRS operatingprofit* 22 3 633% 2 1000% * IFRS operating profit in 2005 was £12 million on RER, offset by £10 million ofexceptional charges. The Asian Fund Management Business achieved a record first half year, deliveringthe highest first half inflows since the business was launched. Net inflows of£1.7 billion were up 212 per cent on the same period in 2005. Of the £1.7billion in net inflows, £1.4 billion was in longer term equity and fixed incomeproducts and £0.3 billion was in shorter term money market funds. Third partyfunds under management in Asia at the half year were £10.9 billion, up 12 percent compared to the end of the first half of 2005. In August last year, ICICIincreased its stake in Prudential's Indian asset management joint venture from45 per cent to 51 per cent. As a result, Prudential no longer consolidates thisbusiness at 100 per cent and the 2006 half year numbers are reported at 49 percent. On a comparable basis, third party funds under management grew 27 per centfrom the first half of 2005. The strength of the Asian Fund Management Business's geographic diversification,product innovation and delivery and strong fund performance has resulted incontinued strong net inflows, especially in Korea and India. In India, our jointventure increased its funds under management to £3.7 billion** to become thenumber one ranked asset management company in India, overtaking a localincumbent that had held this rank since 1964. Prudential's first fund launch inChina in April 2006 generated new inflows of £205 million (Prudential's sharewas £68 million). Total funds under management as at 30 June 2006 were £26.2 billion, up 11 percent on the first half of 2005. On a comparable basis adjusting as noted abovefor India the growth was 16 per cent . On an IFRS operating profit basis,profits for the first half were £22 million compared with £3 million for thesame period in 2005. The first half profit numbers for 2005 were reduced by £10million of exceptional charges related to bond funds in Taiwan. Excluding thesecharges profits grew by 69 per cent in the first half of 2006 when compared tothe first half of 2005. Prudential remains confident that its fund management business is ideallypositioned to capitalise on the opportunities to grow this business strongly andprofitably. ** based on 100 per cent, Prudential only reports its 49 per cent share of fundsunder management and profits PPM America Half Half Change Half Change Year Year Year CER RER 2006 2005 2005 £m £m £m Funds under management (£bn) 38 40 (5%) 41 (7%)Total IFRS operatingprofit* 4 16 (75%) 15 (73%) PPM America is the North American institutional investment manager ofPrudential. PPMA's IFRS operating profits of £4 million are down from £16million in the prior year. The decrease is primarily due to an £8 millionreduction in investment related income primarily due to a one-off revaluation in2005 of an investment vehicle managed by PPMA, and an increase in long-termincentive plan expense in 2006. PPMA, which specialises in public and private fixed income and equity, and realestate securities, and, through its affiliate PPM Finance, Inc., commercialmortgage lending, had funds under management of $70 billion at half year 2006(including PPM Finance) down from $73 billion in the prior year, of which 69 percent relates primarily to JNL policyholder assets, 29 per cent to funds managedon behalf of other Prudential UK and Asian affiliates, and 2 per cent to fundsmanaged for external clients, including CDOs and similar products. BANKING Egg Half Year Half Year Change 2006 2005 £m £m IFRS Operating Profit fromContinuing Operations * (39) 13 (400%) Highlights of banking business *Net interest income 163 146 12%Non-interest income 71 105 (32)%Cost-to-income ratio 45.9% 44.2% -Bad debts (166) (117) (42)% * Excluding Funds Direct as being discontinued and re-engineering costs relatedto integration with Prudential UK Egg's made a loss of £39 million for the first half of 2006, compared with aprofit of £13 million for the same period in 2005. This performance is driven bya significant increase in bad debt charges (£49 million higher than the firsthalf of 2005) in line with the rest of the unsecured lending industry. Withinthe Egg book the higher charge also reflects above average bad debt emergingfrom a specific cohort of the loan portfolio written in 2004. Additionallynon-interest income has fallen as a result of reduced sales of PaymentProtection Insurance (PPI) products. Egg has made the decision to reduce newloan volumes by raising the threshold for new applicants consistent with itsstated desire to only write new business that meets its hurdle return on capitalthreshold. Egg is expecting to report an operating profit for the second half of 2006. Egg had a strong performance in new credit card customer acquisition in thefirst quarter of 2006 with its balance switcher proposition delivering a recordquarter in card issuance (153,000 visa cards). This was achieved despite a loweracceptance rate than previous due to the increase in thresholds to maintain theabove industry average credit quality of the card book. Egg's card book is performing well in a difficult market where consumers arespending and borrowing less on average. Outstanding balances across the industryhave contracted by 2 per cent in the year to May, whilst Egg's balances haveincreased by 3 per cent to May. Revenues have decreased by £17 million over the same period in 2005 primarilydue to the strategic decision to scale back on new loans and the resultantimpact on PPI sales. Whilst this partial withdrawal has driven an approximate£30 million year on year deficit in Egg's first half 2006 results, it will notimpact long-term value as the loans being written in 2006 are of higher creditquality due to scorecard changes that we have continued to make consistent withour risk appetite. The benefit of these changes is expected to flow through inlower bad debt charges in 2007 to 2009. Income from the credit card book rose by £16 million year on year, despiteabsorbing an additional £10 million IFRS cost associated with card acquisitionsin the first quarter (which will reverse over the second half of 2006). Theincome was mostly driven by a 100bps increase in the headline APR in August 2005and the extension of fees on balance transfers. The bad debt charge in the first half of 2006 is significantly higher comparedto last year (£49 million). This has predominantly been driven by the expectedemergence of bad debt from the maturing card and loan portfolios afterconsistent periods of growth. This is exaggerated by a higher than expectedongoing bad debt charge from 2004 loan business. We believe that these chargesare consistent with, or more favourable than, the higher bad debt charges beingreported across the industry. For the first half of 2006 Egg has also incurred £6 million of re-structuringcosts to deliver standalone cost and synergy savings committed to as part of theintegration with Prudential's UK operations. The benefits of these synergieswill be seen in 2006 and beyond. FINANCIAL REVIEW SALES AND FUNDS UNDER MANAGEMENT Prudential delivered overall sales growth during the first half of 2006 withtotal new insurance sales up 3 per cent, on a present value of new businesspremium basis ("PVNBP"), to £9.8 billion at constant exchange rates (CER). Thisresulted in insurance sales of £1.3 billion on the annual premium equivalent(APE) basis, an increase of 9 per cent on 2005. At reported exchange rates(RER), APE sales were up 12 per cent on the half year of 2005. Total gross investment sales were £16.8 billion, up 27 per cent on 2005 at CER.Net investment sales of £5.3 billion were more than double net investment salesin 2005 at CER. Total investment funds under management increased by 10 per cent at RER from£46.3 billion at 31 December 2005, to £51.1 billion at 30 June 2006, reflectingnet investment flows of £5.3 billion and net market and other movements ofnegative £0.6 billion. At 30 June 2006, funds under management were £237.5 billion, an increase of 1per cent from 2005 year end at RER. EUROPEAN EMBEDDED VALUE (EEV) RESULTS EEV Basis Operating Profits Total EEV basis operating profit from continuing operations of £962 million wasup 15 per cent on a CER basis and up 20 per cent on a RER basis reflectingstrong growth from Prudential's insurance and fund management businesses. Half Half Half Year Year Change Year CER RER Change 2006 2005 2005 £m £m £m New business profit (NBP) 504 431 17% 416 21%Business in-force 537 420 28% 399 35%Long-term business 1041 851 22% 815 28%Asia developmentexpenses (7) (8) 13% (8) 13%Other operatingresults (54) (6) (8)UK restructuring costs (18) - - Total 962 837 15% 799 20% Group NBP from long-term business of £504 million was up 17 per cent on theprior year at CER, reflecting strong growth in Asia and the US, up 34 per centand up 35 per cent respectively. The Group's new business margin, on a PVNBPbasis, increased from 4.5 per cent for the first half of 2005 to 5.2 per centfor the first half of 2006. Total in-force profit of £537 million was up 28 per cent on 2005 on a CER basis.This resulted from strong growth in the UK and Asian operations offset by a fallin the US. In aggregate net operating assumption changes were small at negative £8 millionwhile experience variances and other items together were a positive £18 million. UK Insurance Operations EEV basis operating profit of £336 million was up 133 per cent on 2005. New business profit of £138 million was down 13 per cent on the first half of2005, reflecting both a decline in sales volumes and a fall in NBP margin on anAPE basis from 30 per cent in the first half of 2005 to 29 per cent in 2006. ThePVNBP margin remained in line with 2005 at 3.3 per cent. The decrease in APE margin primarily reflects a shift in sales mix with a lowerproportion of bulk annuity sales and a negative effect from economic assumptionchanges partly offset by an increase in annuity yield margins. The bulk annuitymargin fell from 2005 due to increased competitiveness in the market. This wasoffset by an increase in the retail margin. The weighted average post-tax Internal Rate of Return (IRR) on the capitalallocated to new business growth in the UK was unchanged from the first half of2005, at 13 per cent. In-force profit of £198 million was up on the first half of 2005 reflecting anincrease in unwind (due to increase in equity risk premium from 3 per cent to 4per cent, an increase in the opening embedded value and an increase in the riskfree rate) offset by a number of other items including service company losses,continued regulatory costs, losses in PruHealth and £24 million for tax relateditems. The 2005 result included a charge of £148 million in respect of apersistency assumption change. There were no operating assumption changes in2006. Prudential continues to closely monitor mortality and persistencyexperience and during the first half of 2006 these performed in line with ourassumptions. US Operations In the US, EEV basis operating profit from long-term operations was £346million, down 21 per cent at CER and down 17 per cent at RER from the prioryear. At CER, new business profit (NBP) increased by 35 per cent, and at RER by 41 percent, to £134 million, reflecting a 12 per cent increase in PVNBP sales and anincrease in margin on a PVNBP basis from 3.5 per cent at half year 2005 to 4.2per cent at the half year 2006. APE sales also improved by 12 per cent at CER, and the margin on an APE basisimproved from 35 per cent to 41 per cent. The increase in margin from prior yearreflects a favourable business mix; economic assumption changes, including anincrease in the equity risk premium; and positive effects from the increase inelection of high margin guaranteed benefit options on variable annuitycontracts. For Jackson, the average IRR on new business in the first half of 2006 was 17per cent. At CER, the in-force profit for the half year decreased from £339 million in theprior year to £212 million. At RER, in-force profit decreased from £324 millionto £212 million. This decrease is primarily due to an operating assumptionchange in 2005 following price increases introduced on two older books of termlife business (£142 million), partially offset by an increase in the unwind ofthe in-force book, and an improved spread variance. The 50 per cent increase inthe unwind at CER is primarily due to an increase in the risk discount rate. AtCER the spread variance is up 20 per cent to £60 million at half year 2006,primarily reflecting achieved spreads in excess of the current weightedportfolio target on the regular portfolio. Also included within the spreadvariance is £16 million of non-recurring items including mortgage prepaymentfees, make-whole payments and total return swap income. Jackson expects tocontinue to achieve spread income ahead of target in the second half, althoughat lower levels than achieved in the first half. Asia Operations EEV basis operating profit from long-term operations (excluding development andregional head office costs) was £359 million for the half year, up 33 per centat CER and 42 per cent at RER on half year 2005. New business profit increased by 34 per cent, at CER, over the first half of2006 to £232 million compared to the same period in 2005, reflecting the strongsales increase and the maintained NBP margin on an APE basis of 52 per centcompared to the same period in 2005. The margin remained constant as a positiveeffect due to product mix was offset by the negative impact of country mix witha higher proportion of new business being from the relatively lower marginmarkets of Korea and India, which now contribute 37 per cent of APE sales.Margin on a PVNBP basis at half year 2006 is 10 per cent compared to 9.4 percent in 2005. In-force operating profits (excluding development expenses and regional headoffice costs) in Asia of £127 million for the first half of 2006 represent anincrease of 32 per cent over the same period for 2005 at CER, which includedchanges of assumptions. In Asia, IRRs on new business at a country level are targeted to be 10 per centover the country risk discount rate. Risk discount rates vary from 5 to 18 percent depending upon the risk in each country market. These target rates ofreturn are average rates and individual products could be above or below thetarget. In aggregate, IRR on new business exceeded 20 per cent on average newbusiness discount rates for the first half of 2006 of 9.9 per cent. However,Thailand and Japan which have yet to reach scale, did not exceed their target. Asset management, banking and other M&G M&G's total operating profit was £100 million, an increase of £17 million (20per cent) on the first half of 2005. This growth in profits, which has resultedin M&G achieving interim operating profits of £100 million for the first time,continues to be driven by higher revenue from both existing and new businesslines. Strong net sales have been consistently delivered from retail andinstitutional customers which, when combined with higher market levels, hasresulted in assets under management growing from £126 billion at the end of 2004to £155 billion at June 2006, an increase of 23 per cent. Underlying profits of M&G increased to £91 million, a 34 per cent increase on2005. Underlying profits better reflect the improving performance of thebusiness as they are stated before more volatile performance related fees (PRFs)and carried interest, the latter of which fell sharply in the first half of 2006following two years in which significant but unsustainable income has beendelivered. In the first half of 2006, M&G earned PRFs of £6 million (first half2005: £3 million) and carried interest of £3 million (first half 2005: £12million). US broker dealer and fund management businesses The broker dealer and fund management operations reported a total profit of £8million, compared with £19 million in the first half of 2005. This reflects adecrease in profits from PPM America, arising primarily due to an £8 millionreduction in investment related income primarily due to a one-off revaluation in2005 of an investment vehicle managed by PPMA, and an increase in long-termincentive plan expense in 2006. NPH recorded profits of £4 million for the first half of 2006, an increase of 33per cent from the prior year. Curian Curian provides innovative fee-based separately managed accounts. Curianincurred losses of £4 million compared to a loss £6 million in the prior year,as the business continues to build scale. At the 30 June 2006 Curian had assetsunder management of £1.07 billion compared to £731 million in the prior year, anincrease of 46 per cent at CER. Asian fund management business The fund management business in Asia has expanded into new markets in the pastfew years and is now in ten markets across Asia. Geographic diversificationalong with this growth in scale has resulted in a strong upward trend inprofits. Profit from Asia fund management operations was £22 million for the half year,up 633 per cent from 2005 on CER, or 69 per cent on CER basis excluding theone-off charge of £10 million in 2005. This was driven from a 12 per centincrease in retail funds under management with significant contributions to thegrowth coming from Japan and Korea; the latter also achieving a higher averagefee rate. Egg Egg's total continuing operating result for the first half of 2006 was a loss of£39 million, compared with a £13 million profit in the same period of last year.This loss was driven by a significant increase in bad debt charges (£49 millionhigher than the first half of 2005) in line with the rest of the unsecuredlending industry. Within the Egg book, the higher charge also reflects the aboveaverage bad debt emerging from a specific cohort of the loan portfolio writtenin 2004. In the first quarter of the year, Egg acquired a record 153,000 newcredit cards. This has resulted in a net cost of £10 million in the profit andloss account, compared to the first half of 2005, for the interest rateincentive offers associated with the card campaign. This will reverse in thesecond half of 2006 in accordance with the accounting policy required underIFRS. Revenue generated from the associated insurance on loans was lower than thefirst half of 2005, reflecting Egg's strategic move to reduce new loan volumes.This followed a raising of the threshold for new applicants to raise the creditquality of the loan book consistent with its desire to ensure it only writes newbusiness that meets its hurdle return on capital threshold. Other Asia's development expenses (excluding the regional head office expenses) forthe half year decreased by 13 per cent at CER to £7 million, compared with £8million in 2005. These development expenses primarily relate to our neweroperations and establishing our services hub in Malaysia. Other net expenditure of £141 million compared to £118 million in 2005 at CER.This reflected higher interest payable and head office costs. Interest payableincreased £5 million to £89 million in 2006 primarily due to foreign exchangemovements and a rise in US interest rates. Head office costs (including Asiaregional head office costs of £19 million) were £65 million, up £15 million on2005 at CER. In 2006 restructuring costs of £18 million were incurred in the UK and Egg.Total UK and Egg pre-tax cost savings are expected to be £150 million per annumby 2009 and the cost of implementing these measures is expected to be £110million pre tax, of which £70 million relates to the shareholder and £40 millionto the policyholder. The shareholder charge for restructuring costs for the fullyear 2006 are expected to be £55 million. Total European Embedded Value Basis - Result Before Tax for ContinuingOperations (Period-on-period comparisons below are based on RER) Total EEV basis before tax, and minority interests was £1,429 million up 72 percent from £831 million in the first half of 2005. This reflects an increase inoperating profit from £799 million to £962 million together with a favourablemovement in actuarial gains and losses on defined benefit pension schemes of£254 million; economic assumption and time value of cost of options andguarantees changes of £164 million; and the mark to market movement on coreborrowings of £197 million; offset by a negative movement in short termfluctuations in investment returns of £275 million. The 2005 result alsoincluded a goodwill impairment charge of £95 million. The UK component of short-term fluctuations in investment returns of £34 millionin 2006 reflects the difference between an actual investment return delivered inthe first half of 2006 for the with-profits life fund of 4.2 per cent and thelong-term assumed return of 3.8 per cent for the half year. The US long term business short-term fluctuations in investment returns of £12million in 2006 include a positive £15 million in respect of the differencebetween actual investment returns and long-term returns included in operatingprofit. For the first half of 2006, the primary factor was a return in excess ofassumptions on limited partnership investments. In Asia, long term business short-term investment fluctuations were negative £34million, compared with positive £24 million for 2005 half year. This negativeresult was primarily due to rising interest rates over the period, though thiswas mitigated by strong equity gains in Vietnam. The mark to market movement on core borrowings of £168 million in 2006, comparedto negative £29 million in 2005 reflects the reduction in fair value of coreborrowings due to increases in interest rates. Negative economic assumption changes of £1 million in 2006 compared withnegative economic assumption changes of £145 million in 2005. Positive economicassumption changes in the UK were offset by adverse changes in the US and Asia. In the UK, economic assumption changes of positive £163 million in 2006 reflectsan increase in the future investment return assumption offset by the increase inthe risk discount rate. The increases in future investment return assumptionsand risk discount rate were due to an increase in the risk free rate from 4.1per cent to 4.7 per cent. In the US economic assumption changes of negative £100 million in 2006 primarilyreflect the increase in the risk discount rate following a rise in the 10 yeartreasury bond rate, partially offset by an increase in the assumed separateaccount return assumption, also driven by the change in the 10 year treasurybond rate. Asia's negative economic assumption change of £64 million in 2006 primarilyrelates to the established markets, in particular Hong Kong which suffered fromthe effect of a higher risk discount rate, due to a rise in interest rates.Taiwan interest rate changes were in line with our assumptions. The increase in actuarial gains and losses of £254 million between half year2005 and half year 2006 reflects the increase in discount rate applied toprojected pension payments resulting from increased yields on AA corporatebonds. The increase in the change in time value of cost of options and guarantees waspositive £20 million for the first half of the year consisting of, positive £3million, positive £18 million and negative £1 million for the UK, US and Asiarespectively. Total EEV Basis - Result After Tax for Continuing Operations Profit after tax and minority interests for continuing operations was £1,052million compared with £489 million in 2005. The tax charge of £376 millioncompares with a tax charge of £337 million in the first half of 2005. The effective tax rate at an operating profit level was 30 per cent. Thiscompares with effective rates on the operating profits for the 2005 half yearand full year of 28 per cent and 21 per cent respectively. The low rate at fullyear 2005 at the operating level reflects a number of factors includingsettlement of a number of outstanding issues with HMRC and benefit for lossesincurred in France. The effective tax rate at the total EEV profit level of 26per cent compared to 41 per cent at the 2005 half year and 29 per cent at the2005 full year. Variations in the rate on total EEV profit primarily reflect themovement in the mark to market value of core borrowings and, for 2005, thegoodwill impairment charge and change of economic assumptions in certain Asiaoperations. For each of these items there is either no or only a limited taxeffect. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) RESULTS IFRS Basis Operating Profit (based on longer term investment returns) Total operating profit before tax, based on longer-term investment returns forcontinuing operations on the IFRS basis was £453 million, £36 million down onthe IFRS result for the first half of 2005 at CER. At RER, operating profit wasdown £16 million. Half Half Half Year Year Year CER RER 2006 2005 Change 2005 Change £m £m £m Insurance business UK 205 187 10% 187 10% US 223 165 35% 157 42% Asia 88 126 (30%) 116 (24%) Asia development expenses (7) (8) 13% (8) 13% 509 470 8% 452 13% Fund management business M&G 100 83 20% 83 20% US broker dealer and fund management 8 19 (58%) 18 (56%) Curian (4) (6) 33% (6) 33% Asia fund management 22 3 633% 2 1000% 126 99 27% 97 30% Banking Egg (UK) (39) 13 (400%) 13 (400%) Other income andexpenditure (126) (93) (35%) (93) (35%)UK restructuringcosts (17) - - Operating profits fromcontinuing operations 453 489 (7%) 469 (3%) In the UK, IFRS operating profit was £205 million in 2005, an increase of 10 percent on 2005. This primarily reflected an increase in profit from thewith-profits fund, reflecting bonus rates announced in February 2005 and anincrease in profits arising from the annuities business. The US operations' operating profit result of £227 million, which is based on USGAAP, adjusted where necessary to comply with IFRS and the Group's basis ofpresenting operating profit based on longer-term investment returns, was up 28per cent on the 2005 result at CER. At RER, operating profit based onlonger-term investment returns for continuing operations was 34 per cent higherthan the 2005 result. The US operating result of £227 million, reflects increased spread and feeincome partially offset by reduced profits from PPMA. The increased spreadincome primarily reflects achieved spreads in excess of the current weightedportfolio target on the regular portfolio, and contains non-recurring spreaditems totalling £16 million, including mortgage prepayment, make-whole paymentsand total return swap income. Increased fee income was driven by higher separateaccount assets as a result of stronger VA sales, and improved average fees onthose assets given the increase in election of high margin guaranteed benefitoptions. The reduction in PPMA profits primarily arises from an £8 millionreduction in investment related income primarily due to a one-off revaluation in2005 of an investment vehicle managed by PPMA, and an increase in long-termincentive plan expense in 2006. In Asia, IFRS operating profits decreased to £110 million from £129 million atCER in 2006 (excluding development and regional head office costs). Half year2005 results included a contribution of £34 million from exceptional items.Excluding these items, IFRS operating profits rose by 16 per cent driven bycontinued profitable growth, and the increasing scale of the inforce books wherethe largest of these, Hong Kong, Singapore and Malaysia contributed £73 million.There was also a large rise in fund management profits driven from a 12 per centincrease in retail funds under management with significant contributions to thegrowth coming from Japan and Korea; the latter also achieving a higher averagefee rate. IFRS basis - total profit before tax for continuing operations (Period-on-period comparisons below are based on RER) Total IFRS basis profit before tax and minority interests for 2006 was £692million. This compares with £460 million for the half year 2005. The increasereflects: a reduction in operating profit of £16 million; a reduction inshort-term fluctuations in investment returns of £55 million from the first halfof 2005 to positive £39 million; offset by an increase of £208 million inactuarial gains and losses on the groups defined benefit pensions schemesreflecting an increase to 5.5 per cent in the discount rate applied to projectedpension payments. The 2005 result included a goodwill impairment charge of £95 million in respectof the Japanese business. IFRS basis - total profit after tax and minority interests for continuingoperations Profit after tax and minority interests for continuing operations was £449million compared with £299 million in 2005. The effective rate of tax onoperating profits, based on longer-term investment returns, was 33 per cent.This compares with an effective rate of 29 per cent for half year 2005 and 19per cent for full year 2005. The full year 2005 rate was unusually lowreflecting a number of factors including settlement of a number of outstandingissues with HMRC and benefit taken for losses incurred in France. The effective rate of tax at the total IFRS profit level for 2006 was 35 percent. This compares with an effective rate of 34 per cent for half year 2005 and24 per cent for full year 2005. EARNINGS PER SHARE Earnings per share based on EEV basis operating profit after tax and relatedminority interests were 28.0 pence, compared with a 24.4 pence for the 2005 halfyear. Earnings per share on an IFRS operating profit basis after tax and relatedminority interests were 12.7 pence compared with 14.0 pence for the 2005 halfyear. Basic earnings per share, based on total EEV basis profit, were 43.8 pencecompared with 20.7 pence for the 2005 half year. Basic earning per share, basedon total IFRS profit were 18.7 pence compared with 12.7 pence for the 2005 halfyear. DIVIDEND PER SHARE The interim dividend per share of 5.42 pence represents a 2.3 per cent increaseon the 2005 interim dividend of 5.30 pence and will be paid on 27 October 2006.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. SHAREHOLDERS' FUNDS On the EEV basis, which recognises the shareholders' interest in long-termbusinesses, shareholders' funds at 30 June 2006 were £10.9 billion, an increaseof £0.6 billion from the 2005 year end level. This 6 per cent increase primarilyreflects total EEV profit after tax and minority interest of £1,052 million,offset by negative exchange movements of £217 million and dividend payments toshareholders of £267 million. Statutory IFRS basis shareholders' funds at 30 June 2006 were £5.0 billion. Thiscompares with £5.2 billion, at 31 December 2005. The reduction primarilyreflects: profit after tax and minority interests of £449 million offset bynegative foreign exchange movements of £134 million, dividend payments toshareholders of £267 million and negative movements on unrealised appreciationof securities classified as available for sale, net of related adjustments toamortisation of deferred acquisition costs and deferred tax, of £259 million. On both bases the effect of purchasing the minority interest in Egg increasedshareholders' equity by £78 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. Half Year Half Year 2006 2005 £m £m Cash remitted by business units UK life fund transfer* 217 194 Jackson 68 - Asia 66 58 M&G 38 27 Total cash remitted to group 389 279 Net interest paid (90) (54)Dividends paid (267) (252)Scrip dividends and share options 18 40 Cash remittances after interest anddividends 50 13 Tax received 88 36Corporate activities (24) (36) Cash flow before investment in businesses 114 13 Capital invested in business units UK and Europe (147) (9) Asia (61) (80)Decrease in cash (94) (76) * in respect of prior year's bonus declarations The Group holding company received £389 million in cash remittances frombusiness units in the first half of 2006 (2005: £279 million) comprising theshareholders' statutory life fund transfer of £223 million relating to the 2005and 2006 bonus declarations, of which £217 million was remitted from the UK and£6 million from Asia, together with other remittances from subsidiaries of £166million. Prudential expects the life fund transfer to continue broadly at thislevel. Jackson has remitted $118 million in this half year. An estimated total paymentof $180 million is expected from Jackson for the full year. After net dividends and interest paid, there was a net cash inflow of £50million (2005: £13 million). The Group holding company paid £24 million in respect of corporate activitiesduring the first half of 2006 and received £88 million in respect of tax. TheGroup invested £208 million (2005: £89 million) during the first half of theyear, including £147 million in its UK operations and £61 million in Asia. The capital requirement for the UK business is planned to be up to £230 millionfor 2006 and up to £150 million in 2007. Capital injections into the UK businessare anticipated to decrease thereafter as the shareholder book continues togrow. This will depend on the mix of business written and the opportunitiesavailable. From 2008 the UK is expected to receive approximately £30 million ayear from commission payment in respect of general insurance, this will dependon the new business volumes and persistency rates. Prudential transferred itspersonal lines general insurance to Winterthur in 2002 and formed a strategicalliance with Churchill, now part of RBS Group. Under the terms of the agreementPrudential receives commission which is offset against payments received at thetime of the transaction. Total commission levels are expected to exceed theupfront payments from 2008 onwards. In the first half of 2006 Asia became a net contributor to the holding company'scashflow for the first time, with a net remittance of £5 million. Asia isexpected to remain a contributor for the full year. In aggregate, the first six months of 2006 saw a decrease in cash of £94 million(2005: £76 million). SHAREHOLDERS' BORROWINGS AND FINANCIAL FLEXIBILITY Net core structural borrowings at 30 June 2006 were £1,588 million compared with£1,611 million at 31 December 2005. This reflects the net cash outflow of £94million, exchange conversion gains of £71 million and gains on forward currencycontracts of £46 million. The Group also has access to £1,500 million committed bank facilities providedby 15 major international banks, and a £500 million committed securities lendingliquidity facility. The Group's insurance and asset management operations are funded centrally. Egg, as a separate bank, is currently responsible for its own financing. TheGroup's core debt is managed to be within a target level consistent with itscurrent debt ratings. At 30 June 2006, the gearing ratio (debt, net of cash andshort-term investments, as a proportion of EEV shareholders' funds plus netdebt) was 12.7 per cent compared with 13.5 per cent at 31 December 2005. Prudential plc enjoys strong debt ratings from both Standard & Poor's andMoody's. Prudential long-term senior debt is rated A+ (stable 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 11.8 times in thefirst half of 2006 compared with 10.5 times in the first half of 2005. REGULATORY CAPITAL Following the acquisition by Prudential of the entire share capital of Egg plc,completed in May 2006 Prudential has reorganised its corporate structure. Weexpect the reorganisation to provide a regulatory capital benefit of about £120million. Including this benefit Prudential currently estimates its capital surplus underthe Financial Conglomerates Directive ("FCD") at the end of 2006 will be over£800 million. FUNDS UNDER MANAGEMENT Funds under management across the Group at 30 June 2006 totalled £238 billioncompared with £234 billion at 31 December 2005. The total includes £192 billionof Group internal funds under management and £46 billion of external funds undermanagement. FINANCIAL STRENGTH OF THE UK LONG-TERM FUND United Kingdom The fund is very strong with an inherited estate measured on an essentiallydeterministic valuation basis estimated to be around £9.7 billion as at 30 June2006 compared with approximately £9.0 billion at the end of 2005. On a realisticbasis, with liabilities recorded on a market consistent basis, the free assetsof the fund are estimated to be valued at around £8.7 billion before a deductionfor the risk capital margin. 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 with the FSA, the Company maytherefore take steps to achieve that clarity, whether through guidance from thecourt or otherwise. In any event the Company expects that the entire inheritedestate will need to be retained within the long-term fund for the foreseeablefuture to provide working capital, and so it is not considering any distributionof the inherited estate to policyholders and shareholders. The PAC long-term fund is rated AA+ by Standard & Poor's, Aa1 by Moody's and AA+by Fitch Ratings. PRUDENTIAL PLC 2006 UNAUDITED INTERIM RESULTS RESULTS SUMMARY European Embedded Value (EEV) Basis Results* Half Half Full Year Year Year 2006 2005 2005 £m £m £m UK Insurance Operations 336 144 426M&G 100 83 163Egg (39) 13 44 UK Operations 397 240 633US Operations 350 431 755Asian Operations 374 246 568Other Income and Expenditure (141) (118) (244)UK restructuring costs (18) - -Operating profit from continuing operations based on longer-terminvestment returns 962 799 1,712Goodwill impairment charge - (95) (120)Short-term fluctuations ininvestment returns 32 307 1,068Mark to market movements on coreborrowings 168 (29) (67)Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes 246 (8) (47)Effect of changes in economic assumptions and time value ofcost of options and guarantees 21 (143) (302) Profit from continuing operationsbefore tax (including actual investment returns) 1,429 831 2,244 Operating earnings from continuingoperations per share after related tax and minority interests* 28.0p 24.4p 56.6pBasic earnings per share 43.8p 20.7p 66.9p Shareholders' equity, excluding minority interests £10.9bn £9.1bn £10.3bn International Financial Reporting Standards (IFRS) Basis Results* Statutory IFRS basis results Half Half Full Year Year Year 2006 2005 2005 Profit after taxattributable to equityholders of the Company £449m £300m £748mBasic earnings per share 18.7p 12.7p 31.6p Shareholders' equity, excluding minority interests £5.0bn £5.0bn £5.2bn Supplementary IFRS basis information Total operating profit fromcontinuing operations basedon longer-term investmentreturns £453m £469m £957mOperating earnings pershare from continuingoperations after relatedtax and minority interests 12.7p 14.0p 32.2p Half Half Full Year Year Year 2006 2005 2005 Dividends per sharedeclared and paid inreporting period 11.02p 10.65p 15.95p Dividends per sharerelating to reportingperiod 5.42p 5.30p 16.32p Funds under management £238bn £214bn £234bn * Basis of preparation The EEV basis results have been prepared in accordance with the EuropeanEmbedded Value Principles issued by the CFO Forum of European InsuranceCompanies in May 2004. The basis of preparation of statutory IFRS basis resultsand supplementary IFRS basis information is consistent with that applied for the2005 full year results and financial statements. Consistent with previous reporting practice, the Group analyses its EEV basisresults and provides supplementary analysis of IFRS profit before taxattributable to shareholders, so as to distinguish operating profit based onlonger-term investment returns from other constituent elements of total profit.On both the EEV and IFRS bases, operating earnings per share are calculatedusing operating profits from continuing operations based on longer-terminvestment returns, after tax and minority interests. These profits excludegoodwill impairment charges, short-term fluctuations in investment returns andthe shareholders' share of actuarial and other gains and losses on definedbenefit pension schemes. Under the EEV basis, where additional profit and losseffects arise, operating profit based on longer-term investment returns alsoexcludes the mark to market value movement on core borrowings and the effect ofchanges in economic assumptions and changes in the time value of cost of optionsand guarantees arising from changes in economic factors. After adjusting forrelated tax and minority interests, the amounts for these items are included inthe calculation of basic earnings per share. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS SUMMARY CONSOLIDATED INCOME STATEMENT Half Half Full Year Year Year 2006 2005 2005 £m £m £mUK InsuranceOperations 336 144 426M&G 100 83 163Egg (39) 13 44 UK Operations 397 240 633US Operations 350 431 755Asian Operations 374 246 568Other Income and Expenditure (141) (118) (244)UK restructuring costs (note 6) (18) - - Operating profit from continuing operationsbased on longer-term investmentreturns 962 799 1,712Goodwill impairment charge - (95) (120)Short-term fluctuations ininvestment returns 32 307 1,068Mark to market value movements on core borrowings 168 (29) (67)Shareholders' share of actuarial andother gains and losses on definedbenefit pension schemes 246 (8) (47)Effect of changes in economic assumptions and time value ofcost of options and guarantees 21 (143) (302)Profit from continuing operationsbefore tax (including actual investment returns) 1,429 831 2,244Shareholder tax (376) (337) (653)Profit from continuing operationsfor the period after tax before minority interests 1,053 494 1,591Discontinued operations (net of tax) - 1 3Profit for the period 1,053 495 1,594Attributable to:Equity holders of the Company 1,052 490 1,582Minority interests 1 5 12Profit for the period 1,053 495 1,594 Earnings per share (in pence)Continuing operationsFrom operating profit, based onlonger-term investment returns,after related tax and minority interests 28.0p 24.4p 56.6pAdjustment for goodwill impairmentcharge - (4.0)p (5.1)pAdjustment from post-tax longer-terminvestment returns to post-tax actualinvestment returns 0.6p 8.3p 30.6pAdjustment for mark to market valuemovements on core borrowings 7.0p (1.2)p (2.8)pAdjustment for post-tax effect ofshareholders' share of actuarial andother gains and losses on definedbenefit pension schemes 7.2p (0.3)p (1.4)pAdjustment for post-tax effect ofchanges in economic assumptions and time value of cost ofoptions and guarantees 1.0p (6.5)p (11.1)p Based on profit from continuing operations after minorityinterests 43.8p 20.7p 66.8p Discontinued operationsBased on profit from discontinuedoperations after minority interests - 0.0p 0.1p Based on profit for the period after tax and minority interests 43.8p 20.7p 66.9pAverage number of shares (millions) 2,403 2,361 2,365 Dividends per share (in pence)Dividends relating to the reporting period:Interim dividend (2006 and 2005) 5.42p 5.30p 5.30pFinal dividend (2005) - - 11.02pTotal 5.42p 5.30p 16.32p Dividends declared and paid in the reporting period:Current year interim dividend - - 5.30pFinal dividend forprior year 11.02p 10.65p 10.65pTotal 11.02p 10.65p 15.95p TOTAL INSURANCE AND INVESTMENT PRODUCTS NEW BUSINESS INSURANCE PRODUCTS AND INVESTMENT PRODUCTS* Insurance Products * Investment Products * Total Half Half Full Half Half Full Half Half Full Year Year Year Year Year Year Year Year Year 2006 £m 2005 £m 2005 £m 2006 £m 2005 £m 2005 £m 2006 £m 2005 £m 2005 £m UK Operations 3,985 4,520 7,193 6,795 3,579 7,916 10,780 8,099 15,109US Operations 3,154 2,705 5,023 - - - 3,154 2,705 5,023Asian Operations 915 674 1,485 10,027 9,421 18,457 10,942 10,095 19,942Group Total 8,054 7,899 13,701 16,822 13,000 26,373 24,876 20,899 40,074 INSURANCE PRODUCTS - NEW BUSINESS PREMIUMS AND CONTRIBUTIONS * Single Regular Annual Premium and Contribution Equivalents Half Half Full Half Half Full Half Half Full Year Year Year Year Year Year Year Year Year 2006 £m 2005 £m 2005 £m 2006 £m 2005 £m 2005 2006 2005 £m 2005 £m £m £mUK Insurance Operations Direct to customer Individual annuities 412 365 720 - - - 41 37 72 Individual pensions and life 29 14 29 6 5 11 9 6 14 Department of Work and Pensions rebate 161 234 244 - - - 16 23 24business Total 602 613 993 6 5 11 66 66 110 Business to Business Corporate pensions 178 114 242 74 67 146 92 78 170 Individual annuities 101 98 212 - - - 10 10 21 Bulk annuities 24 321 511 - - - 2 32 51 Total 303 533 965 74 67 146 104 120 242Intermediated distribution * Life 550 551 1,112 3 3 6 58 58 118 Individual annuities 359 557 995 - - - 36 56 100 Individual and corporate pensions 78 62 108 11 14 25 19 20 36Total 987 1,170 2,215 14 17 31 113 134 254Partnerships Life 397 426 814 1 1 3 41 44 84 Individual and bulk annuities Bulk annuity reinsurance from the 592 - - - - - 59 - - Scottish Amicable Insurance Fund* Individual and other bulk annuities 927 1,569 1,814 - - - 93 157 182 1,916 1,995 2,628 1 1 3 193 201 266Europe Life 82 119 201 - - - 8 12 20 Total UK Insurance Operations 3,890 4,430 7,002 95 90 191 484 533 892US Operations Fixed annuities 313 410 788 - - - 31 41 79 Fixed index annuities 293 296 616 - - - 29 30 62 Variable annuities 1,888 1,185 2,605 - - - 189 118 261 Life 4 6 11 8 5 14 9 6 15 Guaranteed Investment Contracts 310 187 355 - - - 31 19 35GIC - Medium Term Notes 338 616 634 - - - 34 61 63 Total US Operations 3,146 2,700 5,009 8 5 14 323 275 515Asian Operations China 17 5 17 13 9 23 15 10 25 Hong Kong 139 147 289 42 35 83 56 50 112 India (Group's 26% interest) 11 2 4 55 27 57 56 27 57 Indonesia 11 27 42 31 18 42 32 21 46 Japan 23 11 30 1 2 4 3 3 7 Korea 58 10 29 103 59 132 109 60 135 Malaysia 2 6 9 31 29 66 31 29 67 Singapore 205 117 284 29 23 58 49 35 86 Taiwan 47 72 124 74 55 150 79 62 162 Other 6 4 9 17 16 33 18 16 34 Total Asian Operations 519 401 837 396 273 648 448 313 731Group Total 7,555 7,531 12,848 499 368 853 1,255 1,121 2,138 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 2006 Gross Inflows Redemptions Market and other 30 June 2006 Movements £m £m £m £m £m UK Operations 36,195 6,795 (3,200) 345 40,135 Asian Operations 10,132 10,027 (8,318) (906) 10,935 Group Total 46,327 16,822 (11,518) (561) 51,070 \* The tables shown above are provided as an indicative volume measure oftransactions undertaken in the reporting period that have the potential togenerate profits for shareholders. The amounts shown are not, and not intendedto be, reflective of premium income recorded in the IFRS income statement. The tables above include a bulk annuity transaction with the Scottish AmicableInsurance Fund (SAIF). The transaction reflects the arrangement entered into inJune 2006 for the reinsurance of non-profit immediate pension annuityliabilities of SAIF to Prudential Retirement Income Limited (PRIL), ashareholder owned subsidiary of the Group. SAIF is a closed ring-fenced sub-fundof the PAC long-term fund established by a Court approved Scheme of Arrangementin October 1997, which is solely for the benefit of SAIF policyholders.Shareholders have no interest in the profits of this fund, although they areentitled to investment management fees on this business. The inclusion of thetransaction between SAIF and PRIL as new business reflects the transfer fromSAIF policyholders to Prudential shareholders' funds of longevity risk, therequirement to set aside supporting capital, and entitlement to surplusesarising on this block of business arising from the reinsurance arrangement. The format of the tables shown above is consistent with the distinction betweeninsurance and investment products as applied for previous financial reportingperiods. Products categorised as "insurance" refer to those classified ascontracts of long-term insurance business for regulatory reporting purposes,i.e. falling within one of the classes of insurance specified in part II ofSchedule 1 to the Regulated Activities Order under FSA regulations. The details shown above for insurance products include contributions forcontracts that are classified under IFRS 4 "Insurance Contracts" as notcontaining significant insurance risk. These products are described asinvestment contracts or other financial instruments under IFRS. Contractsincluded in this category are primarily certain unit-linked and similarcontracts written in UK Insurance Operations and Guaranteed Investment Contractsand similar funding agreements written in US operations. New business premiums for regular premium products are shown on an annualisedbasis. Department of Work and Pensions pension business is classified as singlerecurrent business. Internal vesting business is classified as new businesswhere the contracts include an open market option. UK and Asian investment products referred to in the table for funds undermanagement above are unit trust, mutual funds and similar types of retail fundmanagement arrangements. These are unrelated to insurance products that areclassifed as "investment contracts" under IFRS 4, as described in the precedingparagraph, although similar IFRS recognition and measurement principles apply tothe acquisition costs and fees attaching to this type of business. US investmentproducts are no longer included in the table above as they are assets underadministration rather than funds under management. For previous periods the new business for intermediated distribution of UKInsurance Operations have included Department of Work and Pensions (DWP) rebatebusiness for SAIF. These are excluded from the table above with comparativesrestated accordingly. The amounts of new SAIF DWP rebate business written was£60m for half year 2006, £80m for half year 2005 and £83m for full year 2005. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS OPERATING PROFIT FROM CONTINUING OPERATIONS BASED ON LONGER-TERM INVESTMENTRETURNS* Half Year Half Year Full Year 2006 2005 2005Results Analysis by Business Area £m £m £m UK OperationsNew business 138 159 243Business in force 198 (15) 183 Long-term business 336 144 426M&G 100 83 163Egg (39) 13 44 Total 397 240 633 US OperationsNew business 134 95 211Business in force 212 324 530 Long-term business 346 419 741Broker-dealer and fund management 8 18 24Curian (4) (6) (10) Total 350 431 755 Asian OperationsNew business 232 162 413Business in force 127 90 163 Long-term business 359 252 576Fund management 22 2 12Development expenses (7) (8) (20) Total 374 246 568 Other Income and ExpenditureInvestment return and other income 18 20 42Interest payable on core structural borrowings (89) (84) (175)Corporate expenditure: Group Head Office (46) (36) (70) Asia Regional Head Office (19) (14) (30)Charge for share-based payments for Prudential schemes (5) (4) (11) Total (141) (118) (244) UK restructuring costs (18) - - Operating profit from continuing operations based on 962 799 1,712longer-term investment returnsAnalysed as profits (losses) from: New business 504 416 867Business in force 537 399 876Total long-term business 1,041 815 1,743Asia development expenses (7) (8) (20)Other operating results (54) (8) (11)UK restructuring costs (18) - - Total 962 799 1,712 * EEV basis operating profit from continuing operations based on longer-terminvestment returns excludes goodwill impairment charges, short-term fluctuationsin investment returns, the mark to market value movement on core borrowings, theshareholders' share of actuarial and other gains and losses on defined benefitpension schemes and the effect of changes in economic assumptions and changes inthe time value of cost of options and guarantees caused by economic factors. Theamounts for these items are included in total EEV profit. The directors believethat operating profit, as adjusted for these items, better reflects underlyingperformance. Profit on ordinary activities and basic earnings per share includethese items together with actual investment returns. This basis of presentationhas been adopted consistently throughout this interim report. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS MOVEMENT IN SHAREHOLDERS' CAPITAL AND RESERVES (excluding minority interests) Half Year Half Full 2006 Year Year 2005 2005 £m £m £m Profit for the period attributable to equity holders of the Company 1,052 490 1,582Items taken directly to equity: Cumulative effect of IAS 32, IAS 39 and IFRS 4, net of applicable taxes, - (25) (25) at 1 January 2005 Unrealised valuation movements on securities classified as (4) 4 (1) available-for-sale Movement on cash flow hedges 4 (7) (4) Exchange movements (217) 219 377 Related tax (39) 30 65 Dividends (267) (253) (380) Acquisition of Egg minority interests (167) - - New share capital subscribed 253 40 55 Reserve movements in respect of share-based payments 6 6 15 Treasury shares: Movement in own shares in respect of share-based payment plans 9 1 0 Movement on Prudential plc shares purchased by unit trusts consolidated 1 (5) 3 under IFRS Net increase in shareholders' capital and reserves 631 500 1,687 Shareholders' capital and reserves, at beginning of period (excluding 10,301 8,614 8,614minority interests) Shareholders' capital and reserves at end of period (excluding minority 10,932 9,114 10,301interests) Comprising: UK Operations: Long-term business 5,370 4,598 5,132 M&G: Net assets 273 272 245 Acquired goodwill 1,153 1,153 1,153 Egg 360 266 303 7,156 6,289 6,833 US Operations 3,379 3,092 3,418Asian Operations: Net assets 2,159 1,692 2,070 Acquired goodwill 172 197 172Other operations: Holding company net borrowings (at market value) (1,558) (1,443) (1,724) Other net liabilities (376) (713) (468) Shareholders' capital and reserves at end of period (excluding minority 10,932 9,114 10,301interests) EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS SUMMARISED CONSOLIDATED BALANCE SHEET Half Year Half Year Full Year 2006 2005 2005 £m £m £m Total assets less liabilities, excluding insurance funds 175,493 160,379 174,258Less insurance funds:* Policyholder liabilities (net of reinsurers' share) and unallocated (170,444) (155,400) (169,064) surplus of with-profits fundsLess shareholders' accrued interest in the long-term business 5,883 4,135 5,107 (164,561) (151,265) (163,957) Total net assets 10,932 9,114 10,301 Share capital 121 119 119Share premium 1,808 1,560 1,564Statutory basis shareholders' reserves 3,120 3,300 3,511Additional EEV basis retained profit 5,883 4,135 5,107 Shareholders' capital and reserves (excluding minority interests) 10,932 9,114 10,301 *Including liabilities in respect of insurance products classified as investment contracts under IFRS 4. Net asset value per share (in pence) Based on EEV basis shareholders' capital and reserves of £10,932m 450p 382p 432p(£9,114m, £10,301m)Number of issued shares at end of reporting period (millions) 2,430 2,384 2,387 EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS NOTES ON THE UNAUDITED EEV BASIS RESULTS (1) Basis of preparation of results The EEV basis results have been prepared in accordance with the EEV Principlesissued by the CFO Forum of European Insurance Companies in May 2004. Whereappropriate the EEV basis results include the effects of adoption ofInternational Financial Reporting Standards (IFRS). The EEV results for the Group are prepared for 'covered business', as defined bythe EEV Principles. Covered business represents the Group's long-term insurancebusiness for which the value of new and in-force contracts is attributable toshareholders. The EEV basis results for the Group's covered business are thencombined with the IFRS basis results of the Group's other operations. The definition of long-term business operations is consistent with previouspractice and comprises those contracts falling under the definition of long-terminsurance business for regulatory purposes together with, for US Operations,contracts that are in substance the same as guaranteed investment contracts(GICs) but do not fall within the technical definition. Under the EEVPrinciples, the results for covered business incorporate the projected marginsof attaching internal fund management. With two exceptions, covered business comprises the Group's long-term businessoperations. The exceptions are for the closed Scottish Amicable Insurance Fund(SAIF) and for the presentational treatment of the financial position of two ofthe Group's defined benefit pension schemes. SAIF is a ring-fenced sub fund of the PAC long-term fund, established by a Courtapproved Scheme of Arrangement in October 1997. SAIF is closed to new businessand the assets and liabilities of the fund are wholly attributable to thepolicyholders of the fund. In 2006, a bulk annuity arrangement between SAIF andPrudential Retirement Income Limited (PRIL), a shareholder-owned subsidiary tookplace, as explained in note 5. Reflecting the altered economic interest for SAIFpolicyholders and Prudential shareholders, this arrangement represents atransfer from business of the Group that is not 'covered' to business that is'covered' with consequential effect on the EEV basis results. As regards the Group's defined benefit pension schemes, the surplus and deficitattaching to the Prudential Staff Pension Scheme (PSPS) and Scottish AmicablePension scheme are excluded from the value of UK Operations and included in thetotal for Other Operations. The surplus and deficit amounts are partiallyattributable to the Prudential Assurance Company (PAC) with-profits fund andshareholder-backed long-term business and partially to other parts of the Group.In addition to the IFRS surplus or deficit, the shareholders' 10 per cent shareof the PAC with-profits sub-fund's interest in the movement on the financialposition of the schemes is recognised for EEV reporting purposes. The directors are responsible for the preparation of the supplementaryinformation in accordance with the EEV Principles. (2) 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 less established, investment return assumptions and riskdiscount rates are based on an assessment of longer-term economic conditions.Except for the countries listed above, this basis is appropriate for the Group'sAsian operations. Expected returns on equity and property asset classes are derived by adding arisk premium, 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 per cent (half year 2005: 3.0 per cent; full year 2005: 4.0 per cent) aboverisk-free rates. The equity risk premium in the US is 4.0 per cent (half year2005: 3.0 per cent, full year 2005: 4.0 per cent). In Asia, equity risk premiumsrange from 3.0 per cent to 5.75 per cent (half year 2005: 2.75 per cent to 5.25per cent, full year 2005: 3.0 per cent to 5.75 per cent). Assumptions for otherasset classes, such as corporate bond spreads, are set consistently as bestestimate 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: Half Year Half Year Full Year 2006 2005 2005 % % %UK Insurance OperationsRisk discount rate: New business 8.0 7.4 7.55 In force 8.2 6.9 7.7Pre-tax expected long-term nominal rates of investmentreturn: UK equities 8.7 7.2 8.1 Overseas equities 8.7 to 9.4 7.0 to 7.9 8.1 to 8.75 Property 7.2 6.5 6.4 Gilts 4.7 4.2 4.1 Corporate bonds 5.4 5.1 4.9 Expected long-term rate of inflation 3.0 2.8 2.9Post-tax expected long-term nominal rate of return: Pension business (where no tax applies) 7.7 6.6 7.1 Life business 6.85 5.8 6.3 US Operations (Jackson National Life) Risk discount rate: New business 8.0 5.8 6.9 In force 7.1 5.3 6.1 Expected long-term spread between earned rate and rate credited topolicyholders for single premium deferred annuity business 1.75 1.75 1.75US 10 year treasury bond rate at end of period 5.2 4.0 4.4Pre-tax expected long-term nominal rate of return for US equities 9.2 7.0 8.4Expected long-term rate of inflation 2.7 2.2 2.4 EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS Economic assumptions (continued) Asian Operations Hong Taiwan Kong China (note India Indonesia Japan Korea Malaysia Philippines Singapore (note Thailand Vietnam i) ii) 30 30 30 30 Jun 30 30 30 Jun 30 Jun 30 Jun 30 Jun 30 Jun 30 Jun Jun Jun Jun Jun Jun 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 % % % % % % % % % % % %Risk discountrate: New business 12.0 6.6 16.5 17.5 5.3 9.7 9.5 16.5 6.7 8.9 13.75 16.5 In force 12.0 6.9 16.5 17.5 5.3 9.7 9.1 16.5 6.8 9.5 13.75 16.5Expected long-termrate of inflation 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5Government bond 9.0 5.3 10.5 11.5 2.1 5.2 7.0 10.5 4.5 5.5 7.75 10.5yield China Hong India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam Kong (note (note ii) i) 30 30 30 30 Jun 30 30 30 Jun 30 Jun 30 Jun 30 Jun 30 Jun 30 Jun Jun Jun Jun Jun Jun 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 % % % % % % % % % % % %Risk discountrate: New business 10.0 4.7 16.0 18.75 4.9 7.5 9.15 16.25 6.4 9.7 13.5 15.5 In force 10.0 5.1 16.0 18.75 4.9 7.5 8.7 16.25 6.65 9.5 13.5 15.5Expected long-termrate of inflation 3.0 2.25 5.25 7.75 0.0 2.75 3.0 5.25 2.25 2.25 3.75 4.5Government bond 7.25 4.9 10.25 13.0 1.7 4.4 7.0 10.5 5.0 5.5 7.75 9.75yield Hong Taiwan Kong China (note India Indonesia Japan Korea Malaysia Philippines Singapore (note Thailand Vietnam i) ii) 31 31 31 31 Dec 31 31 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec Dec Dec Dec Dec Dec 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 % % % % % % % % % % % %Risk discount rate: New business 12.0 5.9 16.5 17.5 5.0 10.3 9.4 16.5 6.7 9.0 13.75 16.5 In force 12.0 6.15 16.5 17.5 5.0 10.3 9.0 16.5 6.8 9.4 13.75 16.5Expected long-termrate of inflation 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5Government bond 9.0 4.8 10.5 11.5 1.8 5.8 7.0 10.5 4.5 5.5 7.75 10.5yield Asia total Asia total Asia total 30 June 30 June 31 Dec 2006 2005 2005 % % %Weighted risk discount rate (note iii) New business 9.9 9.4 9.8 In force 8.9 7.2 8.4 Notes (i) The assumptions shown are for US dollar denominated business which comprisesthe largest proportion of the in force Hong Kong business. (ii) For traditional business in Taiwan, the economic scenarios used tocalculate the half year 2006 EEV basis results reflect the assumption of aphased progression of the bond yields from the current rates applying to theassets held to the long-term expected rates. In preparing the half year 2006 EEV basis results the same approach has beenapplied as was used for the full year 2005 results. The 2005 year end basis wasthat, in the average scenario, bond yields trend from the then current levels ofaround 2 per cent towards 5.5 per cent at 31 December 2012. In the first sixmonths of 2006 bond yields increased in a manner consistent with the assumedphased progression. However, these increases in bond yields consequently reducedthe values of bonds held and, also consistent with the assumed phasedprogression, the Fund Earned Rate for half year 2006 was 0.2 per cent. In projecting forward the Fund Earned Rate allowance is made for the mix ofassets in the fund, future investment strategy, and further market valuedepreciation of bonds held as a result of assumed future yield increases. Thesefactors, together with the assumption of the phased progression in bond yieldgive rise to an average assumed Fund Earned Rate that trends to 5.4 per cent in2013. Thereafter, the assumed Fund Earned Rate fluctuates around a target of 5.9per cent. Consistent with the EEV methodology applied, a constant discount ratehas been applied to the projected cashflows. (iii) 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. (iv) Assumed equity returns The most significant equity holdings in the Asian operations are in Hong Kong,Singapore and Malaysia. The mean equity return assumptions for those territoriesat 30 June 2006 were 9.2 per cent (30 June 2005: 7.3 per cent, 31 December 2005:8.6 per cent), 9.3 per cent (30 June 2005: 9.75 per cent, 31 December 2005: 9.3per cent) and 12.8 per cent (30 June 2005: 12.25 per cent, 31 December 2005:12.8 per cent) respectively. To obtain the mean, an average over all simulationsof the 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 actual market data; • The risk premium on equity assets is assumed to follow a log-normal distribution; • The corporate bond return is calculated as the return on a zero-coupon bond plus a spread. The spread process is a mean reverting stochastic process; and • Property returns are modelled in a similar fashion to corporate bonds, namely as the return on a riskless bond, plus a risk premium, plus a process representative of the change in residual values and the change in value of the call option on rents. Economic assumptions (continued) The rates to which the model has been calibrated are set out below. Mean returns have been derived as the annualised arithmetic average returnacross all simulations and durations. Standard deviations have been calculated by taking the annualised variance ofthe returns over all the simulations, taking the square root and averaging overall durations in the projection. For bonds the standard deviations relate to theyields on bonds of the average portfolio duration. For equity and property, theyrelate to the total return on these assets. The standard deviations applied toall periods presented in these statements are as follows: %Government bond yield 2.0Corporate bond yield 5.5Equities: UK 18.0 Overseas 16.0 Property 15.0 Jackson National Life • Interest rates are projected using a log-normal generator calibrated to actual market data; • Corporate bond returns are based on Treasury securities plus a spread that has been calibrated to current market conditions and varies by credit quality; and • Variable annuity equity and bond returns have been stochastically generated using a regime-switching log-normal model with parameters determined by reference to historical data. The volatility of equity fund returns ranges from 18.6 per cent to 28.1 per cent, depending on risk class, and the volatility of bond funds ranges from 1.4 per cent to 2.0 per cent. 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 per cent to 26per cent, and the volatility of government bond returns ranges from 1.6 per centto 8.9 per cent. (3) Level of encumbered capital In adopting the EEV Principles, Prudential has based encumbered capital on itsinternal targets for economic capital subject to it being at least the localstatutory minimum requirements. Economic capital is assessed using internalmodels, but when applying EEV Prudential does not take credit for thesignificant diversification benefits that exist within the Group. Forwith-profits business written in a segregated life fund, as is the case in theUK and Asia, the capital available in the fund is sufficient to meet theencumbered capital requirements. The table below summarises the level of encumbered capital as a percentage ofthe relevant statutory requirement. Capital as a percentage of relevant statutory requirement UK Business (excluding annuities) 100% of EU MinimumUK Annuity Business 100% of EU MinimumJackson National Life 235% of Company Action LevelAsian Operations 100% of Financial Conglomerates Directive requirement (4) Margins on new business premiums Half year 2006 New Business Premiums Annual Present Pre-Tax New New Business Margin premium value of Business equivalent New Business Premiums Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP) £m £m £m £m £m % % UK Insurance 3,890 95 484 4,224 138 29 3.3 Operations Jackson National Life 3,146 8 323 3,209 134 41 4.2 Asian Operations 519 396 448 2,328 232 52 10.0 Total 7,555 499 1,255 9,761 504 40 5.2 Half year 2005 New Business Premiums Annual Present Pre-Tax New New Business Margin premium value of Business equivalent New Business Premiums Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP) £m £m £m £m £m % % UK Insurance 4,430 90 533 4,797 159 30 3.3 Operations Jackson National Life 2,700 5 275 2,749 95 35 3.5 Asian Operations 401 273 313 1,734 162 52 9.3 Total 7,531 368 1,121 9,280 416 37 4.5 Full year 2005 New Business Premiums Annual Present Pre-Tax New New Business Margin premium value of Business equivalent New Business Premiums Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP) £m £m £m £m £m % % UK Insurance 7,002 191 892 7,593 243 27 3.2 Operations Jackson National Life 5,009 14 515 5,135 211 41 4.1 Asian Operations 837 648 731 4,039 413 56 10.2 Total 12,848 853 2,138 16,767 867 41 5.2 EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS Margins on new business premiums (continued) New business margins are shown on two bases, namely the margins by reference toAnnual Premium Equivalents (APE) and the Present Value of New Business Premiums(PVNBP). APEs are calculated as the aggregate of regular new business premiumsand one tenth of single new business premiums. PVNBPs are calculated asequalling single premiums plus the present value of expected premiums of newregular premium business. In determining the present value, allowance is madefor lapses and other assumptions applied in determining the EEV new business newprofit. The table of new business premiums and margins above excludes SAIF DWP rebatepremiums. Comparatives for premiums for this business, which were previouslyincluded in the totals have been restated. In determining the EEV basis value of new business written in the year thepolicies incept, premiums are included in projected cash flows on the same basisof distinguishing annual and single premium business as set out for statutorybasis reporting. New business contributions are determined by applying the economic andnon-economic assumptions applying at the end of the reporting period. Thecontributions represent profits at the end of the reporting period. (5) Bulk annuity reinsurance from the Scottish Amicable Insurance Fund toPrudential Retirement Income Limited In June 2006 Prudential Retirement Income Limited (PRIL), a shareholder-backedsubsidiary of the Company, entered into a bulk annuity reinsurance arrangementwith the Scottish Amicable Insurance Fund (SAIF) for the reinsurance ofnon-profit immediate pension annuity liabilities with a premium of £592m. SAIFis a closed ring-fenced sub-fund of the PAC long-term fund, which is solely forthe benefit of SAIF policyholders. Shareholders have no interest in the profitsof this sub-fund and, accordingly, it is not part of covered business for EEVreporting purposes. Consistent with the transfer from uncovered to covered business and reflectingthe transfer of longevity risk, requirement for capital support, and entitlementto profits on this block of business from SAIF to Prudential shareholders, thetransaction has been accounted for as new business for EEV basis reportingpurposes. (6) UK restructuring costs The charge of £18m for restructuring costs comprises £17m recognised on the IFRSbasis and an additional £1m recognised on the EEV basis for the shareholders'share of costs incurred by the PAC with-profits sub-fund. The costs relate tothe initiative announced on 1 December 2005 for UK Insurance operations to workmore closely with Egg and M&G. (7) UK Insurance Operations expense assumptions The full year 2005 EEV basis financial statements included note disclosure thatexplained that in determining the appropriate expense assumptions for 2005account had been taken of the cost synergies that were expected to arise withsome certainty from the initiative announced on 1 December 2005 from UKinsurance operations working more closely with Egg and M&G. Without this factorthere would have been a charge for altered expense assumptions of approximately£55m. The half year 2006 EEV basis results have been prepared on the same basis. The initiative is expected to provide annual savings to the cost base of UKoperations in aggregate of £40m. In addition, an end to end review of the UKbusiness, with the aim of reducing the overall cost base is underway. Total UKannual savings, including the £40m mentioned above, are expected to be £150m perannum comprising £100m for Egg and shareholder-backed business of UK InsuranceOperations and £50m attaching to the with-profits sub-fund. The savings for theUK Insurance Operations cover both acquisition and renewal activity. Reflectingthe underlying trend in unit costs, the element of the additional savings of£110m that relates to long-term business is currently expected to be neutral inits effect on EEV basis results. This information is provided by RNS The company news service from the London Stock Exchange PART 1, MORE TO FOLLOW

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