SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of July, 2006
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
LAURENCE POUNTNEY HILL,
LONDON, EC4R 0HH, ENGLAND
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82-
Enclosures: Interim Results
PRUDENTIAL PLC 2006 INTERIM RESULTS
- Total EEV operating profit GBP980 million before restructuring costs, up 17%
- New business PVNBP GBP9.8 billion, up 3%; APE of GBP1,255 million, up 9%
- New business EEV profit GBP504 million, up 17%
- Total net inflows for the asset management businesses GBP5.3 billion, up 138%
- Total IFRS operating profit GBP470 million before restructuring costs,
down 4%
- Targeted cost savings from UK business increased by GBP110 million per
annum to GBP150 million per annum by 2009
- EEV shareholders' funds up to GBP10.9 billion (end 2005 GBP10.3 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 reported
exchange rates
Commenting, Mark Tucker, Group Chief Executive said:
"In the first half of 2006 the Group has continued to build on the momentum
established during a successful 2005, with Group operating profit on an EEV
basis up 17% to GBP980 million before restructuring costs in the UK.
"Insurance sales were GBP9.8 billion on a PVNBP basis, with strong growth in
Asia and the US and a steady performance in the UK. Net sales in our asset
management businesses more than doubled to GBP5.3 billion. Difficult trading
conditions in the personal loans market resulted in a loss at Egg in the first
half of the year 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 a
net remittance to the Group of GBP5 million in the first half of the year.
Across our UK insurance business and Egg we have increased our cost saving
target to GBP150 million per annum from the GBP40 million announced in December
2005.
"Our clear focus continues to be to drive profitable growth across each of our
businesses as well as leveraging opportunities within each region and across the
Group. There remains tremendous scope to increase value for our shareholders and
I am confident of the outlook for the Group."
Operational highlights:
Insurance and banking
The Group's insurance businesses delivered an increase of 22% in operating
profit before tax on an EEV basis to GBP1,041 million and the operating profit
on an IFRS basis was GBP516 million, up 8%.
Insurance sales in Asia grew by 27% on a PVNBP basis to GBP2.3 billion (up 35%
on an 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 this
level.
In line with our forecast that Asia will be cash positive in 2006 there was a
net remittance to the Group of GBP5 million in the first half of the year. The
Group has an unrivalled exposure to the high growth, high return markets in Asia
and we continue to expect significant growth as we build on our powerful
distribution capability; and to generate increasing levels of cash from the
region.
Jackson, our US business, benefits from a strong presence in all the annuity
product areas. Market conditions continue to favour variable annuities and
Jackson increased its sales by over 50% in the first half of the year well ahead
of overall market growth and market share in the first quarter increased to
4.2%. Overall sales in the US increased by 12% on a PVNBP basis (up 12% on an
APE basis).
Jackson has continued to develop its core Perspective II product with a number
of enhancements that have been well received by customers and advisors. Overall
margins on new business increased to 4.2% on a PVNBP basis (2005: 3.5%). We will
maintain our focus on the variable annuity market and we expect to increase our
market share as the "baby boomer" generation looks to generate income from their
retirement savings.
Further increases in US interest rates in the second half of the year could lead
to a change in the sales mix across the annuity product range. The breadth of
our offering in variable, fixed-indexed and fixed annuities means we are well
positioned to respond.
The US business generated almost $300 million of statutory capital in the period
and is expected to remit $180 million to the Group during 2006.
The UK insurance business continued to focus on value. Sales of GBP4.2 billion
on a PVNBP basis were down 12% (down 9% on an APE basis) on the first half of
2005 with retail sales remaining stable and retail margins improving. Two large
bulk annuity transactions were completed in the first half of 2006 with sales of
GBP1.25 billion on a PVNBP basis. In the first half of 2005 we completed one
large transaction of GBP1.45 billion on a PVNBP basis. There has been some
reduction in margins on the bulk annuity business.
The aggregate margin on new business was 3.3% on a PVNBP basis (2005: 3.3%). We
will continue to target an internal rate of return on new business of 14%. In
the 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 a
successful marketing campaign in the first quarter. Egg has grown its card book
by 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 market
conditions we do not see attractive returns. We have taken action to lower our
exposure to personal lending and we expect this to continue for some time. This
action adversely affects short term reported profits but we are confident that
it will improve the long term value of the loan book. Bad debt charges in the
first half increased significantly across the unsecured lending industry as a
whole and we have taken prudent action by increasing the charge in the first
half by 42%. As a result, Egg reported an operating loss before tax of GBP39
million (2005: profit GBP13 million). We expect Egg to report an operating
profit for the second half.
We are restructuring our UK operations to focus on the opportunities for income
in retirement, the wealth and health sectors and retail banking. We will also
separate out our mature products and manage these as a specific business area.
We are making good progress in integrating our UK insurance operations and Egg
following the completion of the buy-back of the Egg minority announced in
December 2005.
Following a further review of the combined cost base we are targeting total cost
savings of GBP150 million per annum (inclusive of GBP40 million per annum
savings announced in December 2005) by 2009. These savings are equivalent to 18%
of the cost base and one-off costs to be incurred up to 2008 are estimated at
GBP110 million (inclusive of GBP50 million announced in December 2005). In
addition, following the purchase of the minority interest in Egg, we have
reorganised the Group's structure with an expected benefit of GBP120 million to
the Group's Financial Conglomerates Directive capital position.
Asset Management
Supported by continuing excellent investment performance, our asset management
businesses in the UK and Asia are performing very strongly with net investment
flows more than doubling to GBP5.3 billion. Operating profit before tax at M&G
increased by 20% to GBP100 million and in Asia first half profits were GBP22
million (2005: GBP2 million). External funds under management have increased to
GBP51 billion (2005: GBP46 billion).
Outlook
Overall the Group has significant capacity to grow and to build on the strength
of our positions in the major retail financial services markets of Asia, the US
and 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, namely
International Financial Reporting Standards ('IFRS') and the European Embedded
Value ('EEV') basis. The IFRS basis results form the basis of the Group's
financial statements.
The EEV basis results have been prepared in accordance with the principles
issued by the CFO Forum of European Insurance Companies in May 2004. Where
appropriate the EEV basis results include the effects of IFRS.
References to 'operating profit' in this announcement are to operating profit
based on longer-term investment returns. Consistent with previous reporting
practice the Group analyses its EEV basis results, and provides supplementary
analysis of IFRS profit before tax attributable to shareholders, so as to
distinguish operating profit based on longer-term investment returns from other
constituent elements of total profit. On both the EEV and IFRS bases operating
profit based on longer-term investment returns excludes goodwill impairment
charges, short-term fluctuations in investment returns and the shareholders'
share of actuarial and other gains and losses on defined benefit pension
schemes. Under the EEV basis, where additional profit and loss effects arise,
operating profits based on longer-term investment returns also excludes the mark
to market value movement in core borrowings, the effect of changes in economic
assumptions, and changes in the time value of the cost of options and guarantees
arising from changes in economic factors.
'PVNBP' refers to the Present Value of New Business Premiums. PVNBPs are
calculated as equalling new single premiums plus the present value of expected
premiums of new regular premium business. In determining the present value,
allowance is made for lapses and other assumptions applied in determining the
EEV new business profit.
Period on period percentage increases are stated on a constant exchange rate
basis.
2. Annual premium equivalent (APE) sales comprise regular premium sales plus
one-tenth of single premium insurance sales.
3.The internal rate of return (IRR) is equivalent to the discount rate at which
the present value of the post-tax cash flows expected to be earned over the life
time of the business written in shareholder-backed life funds is equal to the
total invested capital to support the writing of the business. The capital
included in the calculation of the IRR is the initial capital in excess of the
premiums received required to pay acquisition costs and set up the statutory
capital requirement. The time value of options and guarantees are included in
the calculation.
4.There will be a conference call today for wire services at 7.30am (BST) hosted
by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance
Director. 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's
House, Laurence Pountney Hill, London, EC4R 0HH. An audio cast of the
presentation and the presentation slides will be available on the Group's
website, 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 Finance
Director. Please call from the UK +44 20 8609 0793 and from the US + 1 866 793
4279. Pin number 487687#. A recording of this call will be available for replay
for one week by dialling: +44 20 8609 0289 from the UK or 1866 676 5865 from the
US. The conference reference number is 147018#.
7. High resolution photographs are available to the media free of charge at
www.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 28
July 2006.
9. Financial Calendar 2006:
Ex-dividend date 16 August 2006
Record Date 18 August 2006
Third Quarter 2006 New Business Figures 19 October 2006
Payment of interim dividend 27 October 2006
Full Year 2006 New Business Figures 30 January 2007
Full 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 at
www.prudential.co.uk
11. Total number of Prudential plc shares in issue as at 30 June 2006 was
2,429,728,675.
*Prudential plc, a company incorporated and with its principal place of business
in the United Kingdom, and its affiliated companies constitute one of the
world's leading financial services groups. It provides insurance and financial
services directly and through its subsidiaries and affiliates throughout the
world. It has been in existence for over 150 years and has GBP238 billion in
assets under management, as at 30 June 2006. Prudential plc is not affiliated in
any manner with Prudential Financial, Inc, a company whose principal place of
business is in the United States of America.
Forward-Looking Statements
This statement may contain certain "forward-looking statements" with respect to
certain of Prudential's plans and its current goals and expectations relating to
its 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. By
their nature, all forward-looking statements involve risk and uncertainty
because they relate to future events and circumstances which are beyond
Prudential's control including among other things, UK domestic and global
economic and business conditions, market related risks such as fluctuations in
interest rates and exchange rates, and the performance of financial markets
generally; the policies and actions of regulatory authorities, the impact of
competition, inflation, and deflation; experience in particular with regard to
mortality and morbidity trends, lapse rates and policy renewal rates; the
timing, impact and other uncertainties of future acquisitions or combinations
within relevant industries; and the impact of changes in capital, solvency or
accounting standards, and tax and other legislation and regulations in the
jurisdictions in which Prudential and its affiliates operate. This may for
example result in changes to assumptions used for determining results of
operations or re-estimations of reserves for future policy benefits. As a
result, Prudential's actual future financial condition, performance and results
may differ materially from the plans, goals, and expectations set forth in
Prudential's forward-looking statements. Prudential undertakes no obligation to
update the forward-looking statements contained in this statement or any other
forward-looking statements it may make.
BUSINESS REVIEW
GROUP
Results Highlights
Half Year Half Year Half Year
CER Change RER (4) Change
2006 2005 2005
GBPm GBPm GBPm
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 (GBPbn) 10.9 9.1 20% 9.1 20%
IFRS shareholders' funds (GBPbn) 5.0 4.9 2% 5.0 -
(1) The details shown include the effect of the GBP592 million bulk annuity
transfer from the Scottish Amicable Insurance Fund (SAIF) to Prudential
Retirement Income Limited, a shareholder owned subsidiary of the Group. SAIF is
a closed ring-fenced sub-fund of the PAC long-term fund established by a court
approved scheme of arrangement in September 1997, whose results are solely for
the benefit of SAIF policyholders.
(2)Based on longer term investment returns from continuing operations. Operating
profit is stated excluding short-term fluctuations in investments returns and
shareholders' share of actuarial and other gains and losses on defined benefit
pension schemes
(3) Including restructuring costs
(4) Reported exchange rate
In the Business Review and Financial Review, period-on-period comparisons of
financial performance are on a Constant Exchange Rate (CER) basis, unless
otherwise stated.
The Group has continued to grow in the first half of 2006 and this has resulted
in a strong set of results.
Growth in sales and the improvement in aggregate new business (NBP) margin to
5.2 per cent on a PVNBP basis and 40 per cent on an APE basis led the Group to
achieve NBP growth of 17 per cent. This, together with significant growth from
the fund management operations and the increase in profits from the in-force
insurance business partially offset by a loss in Egg, led to an increase of 15
per cent over the first half of 2005 in total EEV basis operating profits.
On an international financial reporting standards basis (IFRS), operating
profits were down 7 per cent on the same period last year. Last year's result
included one-off profits in Asia of GBP34 million. The loss in Egg is offset by
significant growth in the US and the asset management businesses.
Basic earnings per share based on total EEV basis for the half year after
minority interests were 43.8 pence for the half year of 2006, compared with a
figure of 20.7 pence for the prior year. Basic earnings per share, based on
total 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 significant
proportion of its profit generated outside the UK. In preparing the Group's
consolidated accounts, results of overseas operations are converted at rates of
exchange based on the average of the year to date, whilst shareholders' funds
are converted at period-end rates of exchange.
Changes in exchange rates from year to year have an impact on the Group's
results when these are converted into pounds sterling for reporting purposes. In
some cases, these exchange rate fluctuations can have a significant effect on
reported results. For example, growth in the Asia new business profit on an EEV
basis was 43 per cent at reported exchange rates (RER), compared to 34 per cent
at CER.
Consequently, the Board has for a number of years reviewed and reported the
Group's international performance on a CER basis. This basis eliminates the
impact from conversion, the effects of which do not alter the long-term value of
shareholders' interests in the non-UK businesses.
In the Business Review and Financial Review, period-on-period comparisons of
financial performance are on a CER basis, unless otherwise stated.
INSURANCE
UNITED KINGDOM
Half Year Half Year Change
2006 2005
GBPm GBPm
PVNBP 4224 4797 (12%)
APE Sales 484 533 (9%)
NBP 138 159 (13%)
NBP Margin (% PVNBP) 3.3% 3.3%
Total EEV basis operating profit(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 first
half of 2006 with the new business margin of 3.3 per cent remaining in line with
2005. PVNBP fell 12 per cent on 2005, while on an APE basis sales fell 9 per
cent to GBP484 million from the corresponding period last year. APE sales in the
first half of 2006 included GBP59 million from the acquisition of inforce
pension annuities from the Scottish Amicable Insurance Fund ("SAIF") in June
2006 and GBP66 million from the acquisition of pension annuities from Royal
London in January 2006. The 2005 result included APE sales from the Phoenix Life
and Pensions ("PLP") transaction of GBP145 million, completed in June 2005.
Excluding bulk 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 per
cent at the half year 2005. This primarily reflects an adverse shift in sales
mix due to a reduced proportion of bulk annuity and DWP rebate business, and the
negative impact of economic assumption changes which were offset by an increase
in annuity yield margins. An overall increase in retail margins (including DWP
rebates) was offset by a decline in the bulk annuity margin reflecting increased
competition in this market. This margin movement and the fall in sales volumes
led to the overall decline in new business profits, down from GBP159 million to
GBP138 million.
Total EEV basis operating profits increased 133 per cent, the 2005 result being
impacted by a persistency assumption change. Prudential UK continues to monitor
closely mortality and persistency experience. Current experience is in line with
our assumptions.
Strong growth in IFRS profits attributable to the with-profits fund (due to
excellent investment returns achieved in 2005 and the subsequent bonus
announcement made in February 2006) and increased annuity profits led to an
overall increase in IFRS profits of 10 per cent.
Bulk annuity sales fell 29 per cent on the first half of 2005 to GBP128 million.
This is due largely to the completion of the large PLP back-book transaction in
2005 (GBP145 million APE) as well as the challenging conditions seen in the bulk
annuity market in the first half of 2006.
Despite the slowdown seen in the first half of 2006, Prudential UK believes that
there is significant potential within this market and it is well positioned to
benefit given its strong brand, financial strength, extensive annuitant
mortality risk assessment capabilities and its well regarded fixed income fund
management teams allowing it to pursue an optimal investment strategy. However,
Prudential UK will not chase headline growth but instead, maintain its focus on
value. In particular, it will only look at transactions that generate an
acceptable 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 the
portfolio of in-payment pension annuities that had been written primarily under
the Royal London brand but which also included some annuities written under the
Refuge Assurance brand. The transaction generated premium income of GBP66
million on an APE basis. In June, Prudential Assurance Company (PAC) agreed to
reinsure the non-profit immediate pension annuity portfolio of the Scottish
Amicable Insurance Fund (SAIF) to Prudential Retirement Income Ltd (PRIL). SAIF
is a closed sub-fund established by a court approved Scheme of Arrangement in
September 1997, in which Prudential shareholders have no economic interest. It
contains a large proportion of the business originally written by the Scottish
Amicable Life Assurance Society that was acquired by PAC in September 1997. The
reinsurance premium for this transaction was GBP59 million on an APE basis.
Retail sales were up 1 per cent on 2005. Increased sales of individual
annuities, with-profit bonds and offshore bonds were offset primarily by a
decline in protection sales and DWP rebate business.
Total individual annuity APE sales for the first half of 2006 were up 3 per cent
on the corresponding period last year at GBP114 million. This reflects the
particularly strong second quarter performance in which APE sales were up 12 per
cent on the same period last year.
The with-profits bonus announcement made in February 2006 was well received by
both customers and advisers and contributed to increased interest in with-profit
bonds and with-profit annuities with sales growth of 50 per cent and over 100
per cent respectively. Sales of with-profit annuities also benefited from the
favourable comparison of their returns with the decline in conventional annuity
rates seen in 2005 and early 2006.
Increased offshore bond sales (up 133 per cent) were offset by a decline in
unit-linked bond sales (down 31 per cent) as Prudential chose to continue its
focus on value, not volume. Within the unit-linked bond market, Prudential is
focusing on intermediaries where it anticipates good persistency and thereby
avoids the recycling of business which has been seen recently. Prudential has
structured its commission rates in accordance with this strategy.
In line with this focus on value for both the customers and advisers, Prudential
launched its new Flexible Protection Plan in July 2006. This innovative new
protection product is designed to pay critical serious illness claimants earlier
and more often than traditional protection products with, on average, four times
as many serious illnesses covered. Payments will be based on severity levels and
multiple claims for the same or new illness will be possible. This will be sold
initially through Prudential's Direct channel and a number of financial advisers
specialising in the protection market.
As a result of the mailing to its 440,000 customers contracted-out of the State
Second Pension ("S2P") for the 2005/2006 tax year, approximately 132,000
customers elected to contract back into the State scheme resulting in a decline
in 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, a
number that has almost doubled in the last six months. Contributing to this
growth is the number of companies adopting PruHealth for their employee
healthcare schemes, including British Airways voluntary scheme, Smith and Nephew
and Norton Rose.
In June, Prudential and Royal London signed a partnership agreement under which
Royal London will offer Prudential's annuity products on an exclusive basis to
customers with maturing pensions originally written under the Royal London,
Refuge and United Assurance Group ("UAG") brands. The agreement, which is
expected to take effect from September 2006 and run for five years, will cover
new vesting annuities resulting from a range of pension policies.
In addition, Prudential and Royal London have reached agreement to reassure (and
subsequently transfer) to Prudential all pension annuities arising from vestings
between July 2005 and October 2006, for policies written under the same brands.
This supplements the agreement reached between Prudential and Royal London in
January 2006 for Prudential to acquire the portfolio of in-payment pension
annuities which were already in payment at 1 July 2005, and which again arose
from vestings of policies written under the Royal London, Refuge and UAG brands.
Prudential has signed an exclusive 5 year agreement with Threadneedle as their
supplier of annuities for Threadneedle's Stakeholder Scheme along with future
defined contribution schemes which Threadneedle acquires. This is a new area for
Prudential which builds on its experience in providing annuities to customers of
life insurance companies. With the future growth in DC schemes within the UK we
expect more agreements of this type in the future.
In December 2005, Prudential announced total annualised pre-tax cost savings
across the combined UK and Egg business of GBP40 million by the end of 2007. To
help achieve this, Prudential UK has been reorganising its structure during the
first half of 2006 to allow it to integrate the Egg banking business. This will
allow the UK business to achieve greater efficiencies and thereby position
itself to better meet its customers' needs, reduce costs and generate greater
shareholder value. The business has been restructured to focus on the
opportunities in the income in retirement, wealth and health and retail banking
markets and mature products have been separated out and will now be managed as a
specific 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 base
is underway. Total UK and Egg pre-tax cost savings are expected to be GBP150
million per annum by 2009. This includes the saving of GBP40 million previously
announced in December 2005. GBP100 million will come from shareholder business
and GBP50 million from policyholder business. The savings are currently expected
to be neutral on an EEV basis but will benefit IFRS profits and the cash
position of the integrated UK business. In total the cost of implementing these
measures are expected to be GBP110 million pre tax of which GBP70 million
relates to the shareholder and GBP40 million to the policyholder. In the first
half of 2006, a charge of GBP12 million 'restructuring' costs on an EEV basis
and GBP11 million on an IFRS basis has been taken in relation to this in the UK.
The cost savings will be achieved by way of functional restructuring, site
rationalisation and control of discretionary spend.
The With-Profits Fund benefited from a pre-tax investment return of 4.2 per cent
in the first half of 2006 compared with 7.4 per cent in the comparable period of
2005. Over the last five years (to 30 June 2006), the With-Profits Fund has
delivered a pre-tax total return of 48.9 per cent compared with the return on
the 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 GBP8.7
billion as at 30 June 2006, on a realistic valuation basis, compared with
approximately GBP8.0 billion at the end of 2005. The PAC long-term fund is
currently rated AA+ by Standard & Poor's, Aa1 by Moody's and AA+ by Fitch
Ratings.
The table below shows the change in the investment mix of Prudential's main
with-profits fund:
Half Year Full Year Full Year
2006 2005 2004
% % %
UK Equities 37 40 33
International equities 17 19 15
Property 16 15 18
Bonds 25 21 29
Cash and other assets classes 5 5 5
Prudential UK will continue to pursue profitable opportunities in its chosen
product areas and distribution channels in 2006 maintaining its focus on
maximising value and return on capital.
UNITED STATES
Half Half Change Half Change
Year Year Year
CER RER
2006 2005 2005
GBPm GBPm GBPm
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 Exchange
Rate (CER) basis, unless otherwise stated
Jackson, our US Insurance business, had a strong first half to the year
delivering PVNBP and APE sales growth of 12 per cent whilst maintaining the
strong new business profit margins achieved during 2005. Jackson again delivered
record variable annuity sales during the first half of 2006, and has now
recorded seven consecutive record quarters of variable annuity growth.
Innovation in product design continues to be a key driver of Jackson
competitiveness, and during the first half of 2006 79 per cent of retail sales
related to products and product features launched since the beginning of 2005.
In January Jackson added a 5 per cent annual benefit increase option to its
popular lifetime guaranteed minimum withdrawal benefits (GMWBs). In February,
the company launched two new fixed index annuity contracts, Elite Choice and
Elite Choice Rewards, which expanded the number of FIA products Jackson offers
to five. In May, Jackson added five new guaranteed minimum withdrawal benefit
(GMWB) options that provide contract holders with a guaranteed return of premium
and lifetime income. Additionally, Jackson expanded its variable annuity fund
offering during the first half of the year.
The organisational flexibility and competency in execution which enables this
product innovation, coupled with a powerful distribution model and strong
service offering increased Jackson's share of the variable annuity market to 4.2
per cent during the first quarter (VARDS), up from 3.3 per cent at the same time
last year. Jackson also improved its share of variable annuity sales through the
independent broker-dealer channel to 10.4 per cent at the end of the first
quarter, up from 5.4 per cent two years ago, and 8.1 per cent at the same point
in 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 billion
compared to 2005 year-end, and up $5.6 billion from 12 months ago, further
diversifying Jackson's earnings towards fee-based income.
The 12 per cent growth in APE sales to GBP323 million during the first half of
2006 reflects a 26 per cent increase in retail sales. This growth was driven by
a 52 per cent increase in variable annuities to GBP189 million against market
growth of 20 per cent (VARDS) in the year to March 2006. The increased variable
annuity sales more than offset a reduction in sales of both fixed annuities and
fixed index annuities, down 28 per cent to GBP31 million and 6 per cent to GBP29
million respectively. Entry spreads for fixed annuities continued to be
challenging during the first half of the year, which limited the attractiveness
of the market to Jackson. To the end of May 2006 the fixed annuity market was
down 9.3 per cent from the same point in the prior year (LIMRA).
Fixed index annuity sales continued to be impacted by the uncertain regulatory
environment in the US, with total market sales to March 2006 down 2 per cent
(LIMRA) from the prior year.
Institutional APE sales of GBP65 million, a market in which Jackson participates
on an opportunistic basis, were down 23 per cent from the prior year.
New business profit of GBP134 million was 35 per cent above the prior year,
reflecting both a 12 per cent increase in APE sales and an increase in margin
from 35 per cent to 41 per cent half year on half year. The increase in margin
reflects a favourable business mix; economic assumption changes, including the
increase in the equity risk premium; and positive effects from the increase in
election of high margin guaranteed benefit options on variable annuity
contracts.
Total EEV basis operating profit at the half year 2006 was GBP350 million
compared to GBP451 million in the prior year. In-force EEV profits of GBP212
million were 37 per cent below prior year profit of GBP339 million, primarily
reflecting the inclusion in 2005 of an operating assumption change relating to
price increases introduced on two older books of term life business representing
GBP142 million, partially offset by an increase in the unwind of the in-force
business during the first half of 2006. The unwind increased as a result of a
higher opening embedded value and a higher risk discount rate as long-term
interest rates increased.
The growth in IFRS operating profit of 28 per cent from the prior year to GBP227
million primarily reflects an increase in spread and fee income over the first
half of 2005. The improved spread income from prior year relates primarily to
spread earned on fixed index annuity assets and earnings in excess of the target
on the regular portfolio, partially offset by lower spread from non-recurring
make-whole and mortgage prepayment fees. Higher fee income of GBP59 million over
prior year was primarily driven by higher separate account assets given the
growth in variable annuity sales, and an improvement in the average fees
generated from those assets given the increase in election of high margin
guaranteed option benefits.
National Planning Holdings (NPH), Jackson's independent-broker network, had a
strong first half to the year with profits up 33 per cent to GBP4 million. NPH,
which is a network of four independent broker-dealers, increased sales through
the network to $6.1 billion in the six months to June 2006, an increase of 27
per cent over the prior year. NPH has also increased the number of registered
advisors in its network to 2,660 at the half year, up from 2,421 in the prior
year, further extending Jackson's footprint in broker-dealer distribution.
Curian Capital, which offers customised separately managed accounts, recorded
improved results with losses of GBP4 million in the first half improved from
losses of GBP6 million in the prior year, as it continues to build scale in
assets under management. At 30 June 2006 Curian Capital had $1.98 billion
(GBP1.07 billion) of assets under management compared with $1.35 billion (GBP731
million) at the same point in the prior year.
In June 2006 Jackson announced a new branding campaign designed to increase
awareness of Jackson's rich tradition, bold vision and innovative approach to
developing and delivering a range of retirement planning solutions.
Jackson continues to deliver growth in the attractive US market and has further
enhanced its competitive advantage in the variable annuity market, offering the
product and service solutions that both customers and advisors want. With a
continued focus on product innovation, a proven relationship-based distribution
model, award winning service and excellence in execution, Jackson is well
positioned to take advantage of the changing demographics and resulting
opportunities in the US market.
ASIA
Half Half Change Half Change
Year Year Year
2006 CER RER
2005 2005
GBPm GBPm GBPm
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 operating profit ** 88 126 (30%) 116 (24%)
* Excluding fund management operations, development and Asia regional head
office expenses.
** Excluding fund management operations, development and Asia regional head
office expenses. Half year 2005 includes exceptional items totalling GBP44m
Prudential continues its profitable growth in Asia through leveraging its
multi-channel distribution capabilities and profitable and capital efficient
products, well known brand and strong local management teams.
Across the region, new business growth remains strong at 27 per cent above the
first half of 2005 on a PVNBP base and 35 per cent on an APE basis. New business
margins on APE are in line the same time last year at 52 per cent . Changes in
geographic mix towards the higher growth, but lower margin markets of India and
Korea were offset by an improved product mix. The proportion of linked business
has increased from 58 per cent last half year to 66 per cent in 2006 on a PVNBP
basis, and Asia have sold a lower proportion of lower margin linked business in
Taiwan which was a feature of the results last year. Operating experience
variances are marginally negative at GBP2 million. Excluding last half year's
one off exceptional items of GBP44 million, which included the release of
reserves in Singapore, IFRS profits have increased by 7 per cent to GBP88
million.
Prudential has developed its Asian business with a focus on building profitable
and sustainable scale. This has led to a strong emphasis on product
profitability and capital efficiency, and the business today has an average new
business capital strain of less than 3 per cent of PVNBP. As a result, and in
line with prior expectations Prudential Corporation Asia became a net capital
contributor in the first half of 2006 with a net repatriation of GBP5 million.
This occurred even while, as noted above, the business grew by 35 per cent on an
APE basis
Our Korean business grew 65 per cent over the first half of 2005 and has now
become our largest country market in Asia in terms of new business APE. New
business margin, at 38 per cent, is in line with the full year 2005. Our
multi-channel approach is highly effective in Korea. Proprietary distribution
continues to grow with the addition of nearly 400 financial consultants for a
total force of over 1,600. These are highly professional agents and are twice as
productive as Prudential Corporation Asia's regional average. We are also
growing the broker network through providing attractive levels of service and
support. Bank distribution continues to develop despite being constrained by
regulatory 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 same
period last year driven by continued geographic expansion. There was a further
boost to sales volumes in the second quarter due to a regulatory driven
cessation of the current form of linked products. New linked products launched
from 1st July 2006 have features designed to ensure customers take a longer term
view of insurance products.
In the first half of 2006 new business APE for our China JV increased by 36 per
cent over the same period in 2005. CITIC-Prudential now has 14 city licenses up
from 10 at the 31 December 2005, and 11 cities operational with Wuxi (Jiangsu
province) being licensed and launched in 2006. CITIC-Prudential has also been
granted life licenses in Jiangmen in Guangdong province and further new
provincial capitals, Jinan in Shandong and Hangzhou in Zhejiang province .
Our business in Indonesia continues to grow apace with a 45 per cent increase in
new business over the same period last year. Prudential has been in Indonesia
for 10 years and the operation is now well established with a high proportion of
unit linked business, good new business margins and reporting profits on an IFRS
basis. At 28,000, agent numbers are almost doubled from last year. The life
insurance market in Indonesia is still very much in its infancy and has
considerable long term potential.
Turning to the established markets, Singapore's first half new business growth
on an APE basis was 32 per cent. Prudential has been a leading player in
Singapore for many years, one of Asia's more competitive markets; however,
during the first half of 2006 we have been able to leverage Prudential's
regional and international fund management expertise to launch an appealing
series of unit linked funds to drive growth in single premiums of 64 per cent
compared to the same period last year.
In Hong Kong, whilst new business volumes have increased more modestly at 10 per
cent compared to last year, margins have increased from 52 per cent to 67 per
cent driven by new products and higher productivity from the agency force.
In Malaysia new business volumes have remained essentially in line with last
year. During the first half of 2006, the Malaysian agency force was adjusting to
a series of regulatory changes that started in the second half of 2005 affecting
policy 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 (Islamic
compliant life insurance) license to develop and market life insurance products
to Muslim Malays who make up more than 60% of the population. BSN (formerly the
Post Office Savings Bank), is wholly owned by the Ministry of Finance and is one
of the major banks in Malaysia with a nationwide network of 391 branches. This
new joint venture will also use Prudential's tied agency distribution and is
expected to launch in the third quarter of this year
In Taiwan the emphasis remains on capital efficient unit linked products and new
business has grown by 25 per cent compared to a weak first half last year. New
business margins have increased from 39 per cent to 52 per cent reflecting a
lower proportion of the retirement orientated linked product sold in the first
half of last year.
Prudential's other markets of the Philippines, Thailand and Vietnam collectively
remained in line with prior year. Prudential continues to retain its clear
market leading position in Vietnam. The business is now generating profits under
the IFRS basis, and we expect to launch unit linked products in the second half
of this year. In Thailand, we have recently opened the market's largest
telemarketing call centre to take advantage of the significant direct marketing
opportunity.
In summary, Prudential continues its excellent track record of building a
profitable business in Asia with the ability to drive strong growth and
increasing capital generation.
ASSET MANAGEMENT
M&G
Half Year Half Year Change
2006 2005
GBPm GBPm
Gross investment flows 6,795 3,579 90%
Net Investment flows 3,595 1,680 114%
Underlying IFRS operating profits
before PRF 91 68 34%
Total IFRS operating profit 100 83 20%
Record net fund in-flows and market leading investment performance led to M&G
delivering a 34 per cent increase in underlying profit in the first half of
2006. Underlying profits (excluding performance related fees) were GBP91 million
in the first six months of the year, compared to GBP68 million for the same
period last year. M&G's operating profit including performance fees was GBP100
million, an increase mof 20 per cent.
M&G delivered an exceptional level of fund inflows in the first six months of
the year, which reflects M&G's leading position in retail fund management,
institutional fixed income, pooled life and pensions funds, property and private
finance. Gross fund inflows were GBP6.8 billion, an increase of 90 per cent on
the same period last year. Net fund inflows more than doubled to GBP3.6 billion,
which is 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
GBP3.6 billion and were more than double those achieved in the first half of
last year. Net fund inflows saw a near four-fold increase to GBP1.7 billion and
have already exceeded the total net flows last year. This was on the back of
excellent fund performance across M&G's equity, fixed income and property funds,
which over the last three years has seen 77 per cent of M&G retail funds beating
their UK sector 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 GBP3.2 billion and net inflows by 51
per cent to GBP1.9 billion. M&G continued its successful strategy of generating
attractive new revenue streams using expertise developed for internal funds with
the roll-out of its Episode global macro strategy to external clients. M&G's
successful Collateralised Debt Obligation (CDO) programme continued with the
launch of two new CDOs in the first half of 2006, bringing the total number
launched to 13.
Asia
Half Half Change Half Change
Year Year Year
CER RER
2006 2005 2005
GBPm GBPm GBPm
Net investment flows 1,709 571 199% 548 212%
Total IFRS operating
profit* 22 3 633% 2 1000%
* IFRS operating profit in 2005 was GBP12 million on RER, offset by GBP10
million of exceptional charges.
The Asian Fund Management Business achieved a record first half year, delivering
the highest first half inflows since the business was launched. Net inflows of
GBP1.7 billion were up 212 per cent on the same period in 2005. Of the GBP1.7
billion in net inflows, GBP1.4 billion was in longer term equity and fixed
income products and GBP0.3 billion was in shorter term money market funds. Third
party funds under management in Asia at the half year were GBP10.9 billion, up
12 per cent compared to the end of the first half of 2005. In August last year,
ICICI increased its stake in Prudential's Indian asset management joint venture
from 45 per cent to 51 per cent. As a result, Prudential no longer consolidates
this business at 100 per cent and the 2006 half year numbers are reported at 49
per cent. On a comparable basis, third party funds under management grew 27 per
cent from 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 in
continued strong net inflows, especially in Korea and India. In India, our joint
venture increased its funds under management to GBP3.7 billion** to become the
number one ranked asset management company in India, overtaking a local
incumbent that had held this rank since 1964. Prudential's first fund launch in
China in April 2006 generated new inflows of GBP205 million (Prudential's share
was GBP68 million).
Total funds under management as at 30 June 2006 were GBP26.2 billion, up 11 per
cent on the first half of 2005. On a comparable basis adjusting as noted above
for India the growth was 16 per cent . On an IFRS operating profit basis,
profits for the first half were GBP22 million compared with GBP3 million for the
same period in 2005. The first half profit numbers for 2005 were reduced by
GBP10 million of exceptional charges related to bond funds in Taiwan. Excluding
these charges profits grew by 69 per cent in the first half of 2006 when
compared to the first half of 2005.
Prudential remains confident that its fund management business is ideally
positioned to capitalise on the opportunities to grow this business strongly and
profitably.
** based on 100 per cent, Prudential only reports its 49 per cent share of funds
under management and profits
PPM America
Half Half Change Half Change
Year Year Year
CER RER
2006 2005 2005
GBPm GBPm GBPm
Funds under management (GBPbn) 38 40 (5%) 41 (7%)
Total IFRS operating profit* 4 16 (75%) 15 (73%)
PPM America is the North American institutional investment manager of
Prudential. PPMA's IFRS operating profits of GBP4 million are down from GBP16
million in the prior year. The decrease is primarily due to an GBP8 million
reduction in investment related income primarily due to a one-off revaluation in
2005 of an investment vehicle managed by PPMA, and an increase in long-term
incentive plan expense in 2006.
PPMA, which specialises in public and private fixed income and equity, and real
estate securities, and, through its affiliate PPM Finance, Inc., commercial
mortgage 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 per
cent relates primarily to JNL policyholder assets, 29 per cent to funds managed
on behalf of other Prudential UK and Asian affiliates, and 2 per cent to funds
managed for external clients, including CDOs and similar products.
BANKING
Egg
Half Year Half Year Change
2006 2005
GBPm GBPm
IFRS Operating Profit from
Continuing 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 related
to integration with Prudential UK
Egg's made a loss of GBP39 million for the first half of 2006, compared with a
profit of GBP13 million for the same period in 2005. This performance is driven
by a significant increase in bad debt charges (GBP49 million higher than the
first half of 2005) in line with the rest of the unsecured lending industry.
Within the Egg book the higher charge also reflects above average bad debt
emerging from a specific cohort of the loan portfolio written in 2004.
Additionally non-interest income has fallen as a result of reduced sales of
Payment Protection Insurance (PPI) products. Egg has made the decision to reduce
new loan volumes by raising the threshold for new applicants consistent with its
stated desire to only write new business that meets its hurdle return on capital
threshold.
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 the
first quarter of 2006 with its balance switcher proposition delivering a record
quarter in card issuance (153,000 visa cards). This was achieved despite a lower
acceptance rate than previous due to the increase in thresholds to maintain the
above industry average credit quality of the card book.
Egg's card book is performing well in a difficult market where consumers are
spending and borrowing less on average. Outstanding balances across the industry
have contracted by 2 per cent in the year to May, whilst Egg's balances have
increased by 3 per cent to May.
Revenues have decreased by GBP17 million over the same period in 2005 primarily
due to the strategic decision to scale back on new loans and the resultant
impact on PPI sales. Whilst this partial withdrawal has driven an approximate
GBP30 million year on year deficit in Egg's first half 2006 results, it will not
impact long-term value as the loans being written in 2006 are of higher credit
quality due to scorecard changes that we have continued to make consistent with
our risk appetite. The benefit of these changes is expected to flow through in
lower bad debt charges in 2007 to 2009.
Income from the credit card book rose by GBP16 million year on year, despite
absorbing an additional GBP10 million IFRS cost associated with card
acquisitions in the first quarter (which will reverse over the second half of
2006). The income was mostly driven by a 100bps increase in the headline APR in
August 2005 and the extension of fees on balance transfers.
The bad debt charge in the first half of 2006 is significantly higher compared
to last year (GBP49 million). This has predominantly been driven by the expected
emergence of bad debt from the maturing card and loan portfolios after
consistent periods of growth. This is exaggerated by a higher than expected
ongoing bad debt charge from 2004 loan business. We believe that these charges
are consistent with, or more favourable than, the higher bad debt charges being
reported across the industry.
For the first half of 2006 Egg has also incurred GBP6 million of re-structuring
costs to deliver standalone cost and synergy savings committed to as part of the
integration with Prudential's UK operations. The benefits of these synergies
will be seen in 2006 and beyond.
FINANCIAL REVIEW
SALES AND FUNDS UNDER MANAGEMENT
Prudential delivered overall sales growth during the first half of 2006 with
total new insurance sales up 3 per cent, on a present value of new business
premium basis ("PVNBP"), to GBP9.8 billion at constant exchange rates (CER).
This resulted in insurance sales of GBP1.3 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 GBP16.8 billion, up 27 per cent on 2005 at
CER. Net investment sales of GBP5.3 billion were more than double net investment
sales in 2005 at CER.
Total investment funds under management increased by 10 per cent at RER from
GBP46.3 billion at 31 December 2005, to GBP51.1 billion at 30 June 2006,
reflecting net investment flows of GBP5.3 billion and net market and other
movements of negative GBP0.6 billion.
At 30 June 2006, funds under management were GBP237.5 billion, an increase of 1
per 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 GBP962 million
was up 15 per cent on a CER basis and up 20 per cent on a RER basis reflecting
strong growth from Prudential's insurance and fund management businesses.
Half Half Half
Year Year Change Year
CER RER Change
2006 2005 2005
GBPm GBPm GBPm
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 development
expenses (7) (8) 13% (8) 13%
Other operating
results (54) (6) (8)
UK restructuring costs (18) - -
Total 962 837 15% 799 20%
Group NBP from long-term business of GBP504 million was up 17 per cent on the
prior year at CER, reflecting strong growth in Asia and the US, up 34 per cent
and up 35 per cent respectively. The Group's new business margin, on a PVNBP
basis, increased from 4.5 per cent for the first half of 2005 to 5.2 per cent
for the first half of 2006.
Total in-force profit of GBP537 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 fall in the US.
In aggregate net operating assumption changes were small at negative GBP8
million while experience variances and other items together were a positive
GBP18 million.
UK Insurance Operations
EEV basis operating profit of GBP336 million was up 133 per cent on 2005.
New business profit of GBP138 million was down 13 per cent on the first half of
2005, reflecting both a decline in sales volumes and a fall in NBP margin on an
APE basis from 30 per cent in the first half of 2005 to 29 per cent in 2006. The
PVNBP 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 lower
proportion of bulk annuity sales and a negative effect from economic assumption
changes partly offset by an increase in annuity yield margins. The bulk annuity
margin fell from 2005 due to increased competitiveness in the market. This was
offset by an increase in the retail margin.
The weighted average post-tax Internal Rate of Return (IRR) on the capital
allocated to new business growth in the UK was unchanged from the first half of
2005, at 13 per cent.
In-force profit of GBP198 million was up on the first half of 2005 reflecting an
increase in unwind (due to increase in equity risk premium from 3 per cent to 4
per cent, an increase in the opening embedded value and an increase in the risk
free rate) offset by a number of other items including service company losses,
continued regulatory costs, losses in PruHealth and GBP24 million for tax
related items. The 2005 result included a charge of GBP148 million in respect of
a persistency assumption change. There were no operating assumption changes in
2006. Prudential continues to closely monitor mortality and persistency
experience and during the first half of 2006 these performed in line with our
assumptions.
US Operations
In the US, EEV basis operating profit from long-term operations was GBP346
million, down 21 per cent at CER and down 17 per cent at RER from the prior
year.
At CER, new business profit (NBP) increased by 35 per cent, and at RER by 41 per
cent, to GBP134 million, reflecting a 12 per cent increase in PVNBP sales and an
increase in margin on a PVNBP basis from 3.5 per cent at half year 2005 to 4.2
per cent at the half year 2006.
APE sales also improved by 12 per cent at CER, and the margin on an APE basis
improved from 35 per cent to 41 per cent. The increase in margin from prior year
reflects a favourable business mix; economic assumption changes, including an
increase in the equity risk premium; and positive effects from the increase in
election of high margin guaranteed benefit options on variable annuity
contracts.
For Jackson, the average IRR on new business in the first half of 2006 was 17
per cent.
At CER, the in-force profit for the half year decreased from GBP339 million in
the prior year to GBP212 million. At RER, in-force profit decreased from GBP324
million to GBP212 million. This decrease is primarily due to an operating
assumption change in 2005 following price increases introduced on two older
books of term life business (GBP142 million), partially offset by an increase in
the unwind of the in-force book, and an improved spread variance. The 50 per
cent increase in the unwind at CER is primarily due to an increase in the risk
discount rate. At CER the spread variance is up 20 per cent to GBP60 million at
half year 2006, primarily reflecting achieved spreads in excess of the current
weighted portfolio target on the regular portfolio. Also included within the
spread variance is GBP16 million of non-recurring items including mortgage
prepayment fees, make-whole payments and total return swap income. Jackson
expects to continue to achieve spread income ahead of target in the second half,
although at lower levels than achieved in the first half.
Asia Operations
EEV basis operating profit from long-term operations (excluding development and
regional head office costs) was GBP359 million for the half year, up 33 per cent
at 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 of
2006 to GBP232 million compared to the same period in 2005, reflecting the
strong sales increase and the maintained NBP margin on an APE basis of 52 per
cent compared to the same period in 2005. The margin remained constant as a
positive effect due to product mix was offset by the negative impact of country
mix with a higher proportion of new business being from the relatively lower
margin markets 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
per cent in 2005.
In-force operating profits (excluding development expenses and regional head
office costs) in Asia of GBP127 million for the first half of 2006 represent an
increase of 32 per cent over the same period for 2005 at CER, which included
changes of assumptions.
In Asia, IRRs on new business at a country level are targeted to be 10 per cent
over the country risk discount rate. Risk discount rates vary from 5 to 18 per
cent depending upon the risk in each country market. These target rates of
return are average rates and individual products could be above or below the
target. In aggregate, IRR on new business exceeded 20 per cent on average new
business 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 GBP100 million, an increase of GBP17 million
(20 per cent) on the first half of 2005. This growth in profits, which has
resulted in M&G achieving interim operating profits of GBP100 million for the
first time, continues to be driven by higher revenue from both existing and new
business lines. Strong net sales have been consistently delivered from retail
and institutional customers which, when combined with higher market levels, has
resulted in assets under management growing from GBP126 billion at the end of
2004 to GBP155 billion at June 2006, an increase of 23 per cent.
Underlying profits of M&G increased to GBP91 million, a 34 per cent increase on
2005. Underlying profits better reflect the improving performance of the
business 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 2006
following two years in which significant but unsustainable income has been
delivered. In the first half of 2006, M&G earned PRFs of GBP6 million (first
half 2005: GBP3 million) and carried interest of GBP3 million (first half 2005:
GBP12 million).
US broker dealer and fund management businesses
The broker dealer and fund management operations reported a total profit of GBP8
million, compared with GBP19 million in the first half of 2005. This reflects a
decrease in profits from PPM America, arising primarily due to an GBP8 million
reduction in investment related income primarily due to a one-off revaluation in
2005 of an investment vehicle managed by PPMA, and an increase in long-term
incentive plan expense in 2006.
NPH recorded profits of GBP4 million for the first half of 2006, an increase of
33 per cent from the prior year.
Curian
Curian provides innovative fee-based separately managed accounts. Curian
incurred losses of GBP4 million compared to a loss GBP6 million in the prior
year, as the business continues to build scale. At the 30 June 2006 Curian had
assets under management of GBP1.07 billion compared to GBP731 million in the
prior year, an increase of 46 per cent at CER.
Asian fund management business
The fund management business in Asia has expanded into new markets in the past
few years and is now in ten markets across Asia. Geographic diversification
along with this growth in scale has resulted in a strong upward trend in
profits.
Profit from Asia fund management operations was GBP22 million for the half year,
up 633 per cent from 2005 on CER, or 69 per cent on CER basis excluding the
one-off charge of GBP10 million in 2005. This was driven from a 12 per cent
increase in retail funds under management with significant contributions to the
growth coming from Japan and Korea; the latter also achieving a higher average
fee rate.
Egg
Egg's total continuing operating result for the first half of 2006 was a loss of
GBP39 million, compared with a GBP13 million profit in the same period of last
year. This loss was driven by a significant increase in bad debt charges (GBP49
million higher than the first half of 2005) in line with the rest of the
unsecured lending industry. Within the Egg book, the higher charge also reflects
the above average bad debt emerging from a specific cohort of the loan portfolio
written in 2004. In the first quarter of the year, Egg acquired a record 153,000
new credit cards. This has resulted in a net cost of GBP10 million in the profit
and loss account, compared to the first half of 2005, for the interest rate
incentive offers associated with the card campaign. This will reverse in the
second half of 2006 in accordance with the accounting policy required under
IFRS.
Revenue generated from the associated insurance on loans was lower than the
first 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 credit
quality of the loan book consistent with its desire to ensure it only writes new
business that meets its hurdle return on capital threshold.
Other
Asia's development expenses (excluding the regional head office expenses) for
the half year decreased by 13 per cent at CER to GBP7 million, compared with
GBP8 million in 2005. These development expenses primarily relate to our newer
operations and establishing our services hub in Malaysia.
Other net expenditure of GBP141 million compared to GBP118 million in 2005 at
CER. This reflected higher interest payable and head office costs. Interest
payable increased GBP5 million to GBP89 million in 2006 primarily due to foreign
exchange movements and a rise in US interest rates. Head office costs (including
Asia regional head office costs of GBP19 million) were GBP65 million, up GBP15
million on 2005 at CER.
In 2006 restructuring costs of GBP18 million were incurred in the UK and Egg.
Total UK and Egg pre-tax cost savings are expected to be GBP150 million per
annum by 2009 and the cost of implementing these measures is expected to be
GBP110 million pre tax, of which GBP70 million relates to the shareholder and
GBP40 million to the policyholder. The shareholder charge for restructuring
costs for the full year 2006 are expected to be GBP55 million.
Total European Embedded Value Basis - Result Before Tax for Continuing
Operations
(Period-on-period comparisons below are based on RER)
Total EEV basis before tax, and minority interests was GBP1,429 million up 72
per cent from GBP831 million in the first half of 2005. This reflects an
increase in operating profit from GBP799 million to GBP962 million together with
a favourable movement in actuarial gains and losses on defined benefit pension
schemes of GBP254 million; economic assumption and time value of cost of options
and guarantees changes of GBP164 million; and the mark to market movement on
core borrowings of GBP197 million; offset by a negative movement in short term
fluctuations in investment returns of GBP275 million. The 2005 result also
included a goodwill impairment charge of GBP95 million.
The UK component of short-term fluctuations in investment returns of GBP34
million in 2006 reflects the difference between an actual investment return
delivered in the first half of 2006 for the with-profits life fund of 4.2 per
cent and the long-term assumed return of 3.8 per cent for the half year.
The US long term business short-term fluctuations in investment returns of GBP12
million in 2006 include a positive GBP15 million in respect of the difference
between actual investment returns and long-term returns included in operating
profit. For the first half of 2006, the primary factor was a return in excess of
assumptions on limited partnership investments.
In Asia, long term business short-term investment fluctuations were negative
GBP34 million, compared with positive GBP24 million for 2005 half year. This
negative result was primarily due to rising interest rates over the period,
though this was mitigated by strong equity gains in Vietnam.
The mark to market movement on core borrowings of GBP168 million in 2006,
compared to negative GBP29 million in 2005 reflects the reduction in fair value
of core borrowings due to increases in interest rates.
Negative economic assumption changes of GBP1 million in 2006 compared with
negative economic assumption changes of GBP145 million in 2005. Positive
economic assumption changes in the UK were offset by adverse changes in the US
and Asia.
In the UK, economic assumption changes of positive GBP163 million in 2006
reflects an increase in the future investment return assumption offset by the
increase in the risk discount rate. The increases in future investment return
assumptions and risk discount rate were due to an increase in the risk free rate
from 4.1 per cent to 4.7 per cent.
In the US economic assumption changes of negative GBP100 million in 2006
primarily reflect the increase in the risk discount rate following a rise in the
10 year treasury bond rate, partially offset by an increase in the assumed
separate account return assumption, also driven by the change in the 10 year
treasury bond rate.
Asia's negative economic assumption change of GBP64 million in 2006 primarily
relates to the established markets, in particular Hong Kong which suffered from
the 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 GBP254 million between half year
2005 and half year 2006 reflects the increase in discount rate applied to
projected pension payments resulting from increased yields on AA corporate
bonds.
The increase in the change in time value of cost of options and guarantees was
positive GBP20 million for the first half of the year consisting of, positive
GBP3 million, positive GBP18 million and negative GBP1 million for the UK, US
and Asia respectively.
Total EEV Basis - Result After Tax for Continuing Operations
Profit after tax and minority interests for continuing operations was GBP1,052
million compared with GBP489 million in 2005. The tax charge of GBP376 million
compares with a tax charge of GBP337 million in the first half of 2005.
The effective tax rate at an operating profit level was 30 per cent. This
compares with effective rates on the operating profits for the 2005 half year
and full year of 28 per cent and 21 per cent respectively. The low rate at full
year 2005 at the operating level reflects a number of factors including
settlement of a number of outstanding issues with HMRC and benefit for losses
incurred in France. The effective tax rate at the total EEV profit level of 26
per cent compared to 41 per cent at the 2005 half year and 29 per cent at the
2005 full year. Variations in the rate on total EEV profit primarily reflect the
movement in the mark to market value of core borrowings and, for 2005, the
goodwill impairment charge and change of economic assumptions in certain Asia
operations. For each of these items there is either no or only a limited tax
effect.
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 for
continuing operations on the IFRS basis was GBP453 million, GBP36 million down
on the IFRS result for the first half of 2005 at CER. At RER, operating profit
was down GBP16 million.
Half Half Half
Year Year Year
CER RER
2006 2005 Change 2005 Change
GBPm GBPm GBPm
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 and
expenditure (126) (93) (35%) (93) (35%)
UK restructuring costs (17) - -
Operating profits from
continuing operations 453 489 (7%) 469 (3%)
In the UK, IFRS operating profit was GBP205 million in 2005, an increase of 10
per cent on 2005. This primarily reflected an increase in profit from the
with-profits fund, reflecting bonus rates announced in February 2005 and an
increase in profits arising from the annuities business.
The US operations' operating profit result of GBP227 million, which is based on
US GAAP, adjusted where necessary to comply with IFRS and the Group's basis of
presenting operating profit based on longer-term investment returns, was up 28
per cent on the 2005 result at CER. At RER, operating profit based on
longer-term investment returns for continuing operations was 34 per cent higher
than the 2005 result.
The US operating result of GBP227 million, reflects increased spread and fee
income partially offset by reduced profits from PPMA. The increased spread
income primarily reflects achieved spreads in excess of the current weighted
portfolio target on the regular portfolio, and contains non-recurring spread
items totalling GBP16 million, including mortgage prepayment, make-whole
payments and total return swap income. Increased fee income was driven by higher
separate account assets as a result of stronger VA sales, and improved average
fees on those assets given the increase in election of high margin guaranteed
benefit options. The reduction in PPMA profits primarily arises from an GBP8
million reduction in investment related income primarily due to a one-off
revaluation in 2005 of an investment vehicle managed by PPMA, and an increase in
long-term incentive plan expense in 2006.
In Asia, IFRS operating profits decreased to GBP110 million from GBP129 million
at CER in 2006 (excluding development and regional head office costs). Half year
2005 results included a contribution of GBP34 million from exceptional items.
Excluding these items, IFRS operating profits rose by 16 per cent driven by
continued profitable growth, and the increasing scale of the inforce books where
the largest of these, Hong Kong, Singapore and Malaysia contributed GBP73
million. There was also a large rise in fund management profits driven from a 12
per cent increase in retail funds under management with significant
contributions to the growth coming from Japan and Korea; the latter also
achieving a higher average fee 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 GBP692
million. This compares with GBP460 million for the half year 2005. The increase
reflects: a reduction in operating profit of GBP16 million; a reduction in
short-term fluctuations in investment returns of GBP55 million from the first
half of 2005 to positive GBP39 million; offset by an increase of GBP208 million
in actuarial gains and losses on the groups defined benefit pensions schemes
reflecting an increase to 5.5 per cent in the discount rate applied to projected
pension payments.
The 2005 result included a goodwill impairment charge of GBP95 million in
respect of the Japanese business.
IFRS basis - total profit after tax and minority interests for continuing
operations
Profit after tax and minority interests for continuing operations was GBP449
million compared with GBP299 million in 2005. The effective rate of tax on
operating 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 19
per cent for full year 2005. The full year 2005 rate was unusually low
reflecting a number of factors including settlement of a number of outstanding
issues 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 per
cent. This compares with an effective rate of 34 per cent for half year 2005 and
24 per cent for full year 2005.
EARNINGS PER SHARE
Earnings per share based on EEV basis operating profit after tax and related
minority interests were 28.0 pence, compared with a 24.4 pence for the 2005 half
year. Earnings per share on an IFRS operating profit basis after tax and related
minority interests were 12.7 pence compared with 14.0 pence for the 2005 half
year.
Basic earnings per share, based on total EEV basis profit, were 43.8 pence
compared with 20.7 pence for the 2005 half year. Basic earning per share, based
on total IFRS profit were 18.7 pence compared with 12.7 pence for the 2005 half
year.
DIVIDEND PER SHARE
The interim dividend per share of 5.42 pence represents a 2.3 per cent increase
on 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 dividend
growth being determined after considering the opportunities to invest in those
areas of our business offering attractive growth prospects, our financial
flexibility and the development of our statutory profits over the medium to
long-term.
SHAREHOLDERS' FUNDS
On the EEV basis, which recognises the shareholders' interest in long-term
businesses, shareholders' funds at 30 June 2006 were GBP10.9 billion, an
increase of GBP0.6 billion from the 2005 year end level. This 6 per cent
increase primarily reflects total EEV profit after tax and minority interest of
GBP1,052 million, offset by negative exchange movements of GBP217 million and
dividend payments to shareholders of GBP267 million.
Statutory IFRS basis shareholders' funds at 30 June 2006 were GBP5.0 billion.
This compares with GBP5.2 billion, at 31 December 2005. The reduction primarily
reflects: profit after tax and minority interests of GBP449 million offset by
negative foreign exchange movements of GBP134 million, dividend payments to
shareholders of GBP267 million and negative movements on unrealised appreciation
of securities classified as available for sale, net of related adjustments to
amortisation of deferred acquisition costs and deferred tax, of GBP259 million.
On both bases the effect of purchasing the minority interest in Egg increased
shareholders' equity by GBP78 million.
CASH FLOW
The table below shows the Group holding company cash flow. Prudential believes
that this format gives a clearer presentation of the use of the Group's
resources than the format of the statement required by IFRS.
Half Year Half Year
2006 2005
GBPm GBPm
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 and
dividends 50 13
Tax received 88 36
Corporate 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 GBP389 million in cash remittances from
business units in the first half of 2006 (2005: GBP279 million) comprising the
shareholders' statutory life fund transfer of GBP223 million relating to the
2005 and 2006 bonus declarations, of which GBP217 million was remitted from the
UK and GBP6 million from Asia, together with other remittances from subsidiaries
of GBP166 million. Prudential expects the life fund transfer to continue broadly
at this level.
Jackson has remitted $118 million in this half year. An estimated total payment
of $180 million is expected from Jackson for the full year.
After net dividends and interest paid, there was a net cash inflow of GBP50
million (2005: GBP13 million).
The Group holding company paid GBP24 million in respect of corporate activities
during the first half of 2006 and received GBP88 million in respect of tax. The
Group invested GBP208 million (2005: GBP89 million) during the first half of the
year, including GBP147 million in its UK operations and GBP61 million in Asia.
The capital requirement for the UK business is planned to be up to GBP230
million for 2006 and up to GBP150 million in 2007. Capital injections into the
UK business are anticipated to decrease thereafter as the shareholder book
continues to grow. This will depend on the mix of business written and the
opportunities available. From 2008 the UK is expected to receive approximately
GBP30 million a year from commission payment in respect of general insurance,
this will depend on the new business volumes and persistency rates. Prudential
transferred its personal lines general insurance to Winterthur in 2002 and
formed a strategic alliance with Churchill, now part of RBS Group. Under the
terms of the agreement Prudential receives commission which is offset against
payments received at the time of the transaction. Total commission levels are
expected to exceed the upfront payments from 2008 onwards.
In the first half of 2006 Asia became a net contributor to the holding company's
cashflow for the first time, with a net remittance of GBP5 million. Asia is
expected to remain a contributor for the full year.
In aggregate, the first six months of 2006 saw a decrease in cash of GBP94
million (2005: GBP76 million).
SHAREHOLDERS' BORROWINGS AND FINANCIAL FLEXIBILITY
Net core structural borrowings at 30 June 2006 were GBP1,588 million compared
with GBP1,611 million at 31 December 2005. This reflects the net cash outflow of
GBP94 million, exchange conversion gains of GBP71 million and gains on forward
currency contracts of GBP46 million.
The Group also has access to GBP1,500 million committed bank facilities provided
by 15 major international banks, and a GBP500 million committed securities
lending liquidity facility.
The Group's insurance and asset management operations are funded centrally. Egg
, as a separate bank, is currently responsible for its own financing. The
Group's core debt is managed to be within a target level consistent with its
current debt ratings. At 30 June 2006, the gearing ratio (debt, net of cash and
short-term investments, as a proportion of EEV shareholders' funds plus net
debt) 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 and
Moody's. Prudential long-term senior debt is rated A+ (stable outlook) and A2
(stable outlook) from Standard & Poor's and Moody's respectively, while
short-term ratings are A1 and P-1.
Based on EEV basis operating profit from continuing operations and interest
payable on core structural borrowings, interest cover was 11.8 times in the
first 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. We
expect the reorganisation to provide a regulatory capital benefit of about
GBP120 million.
Including this benefit Prudential currently estimates its capital surplus under
the Financial Conglomerates Directive ("FCD") at the end of 2006 will be over
GBP800 million.
FUNDS UNDER MANAGEMENT
Funds under management across the Group at 30 June 2006 totalled GBP238 billion
compared with GBP234 billion at 31 December 2005. The total includes GBP192
billion of Group internal funds under management and GBP46 billion of external
funds under management.
FINANCIAL STRENGTH OF THE UK LONG-TERM FUND
United Kingdom
The fund is very strong with an inherited estate measured on an essentially
deterministic valuation basis estimated to be around GBP9.7 billion as at 30
June 2006 compared with approximately GBP9.0 billion at the end of 2005. On a
realistic basis, with liabilities recorded on a market consistent basis, the
free assets of the fund are estimated to be valued at around GBP8.7 billion
before a deduction for the risk capital margin.
The size of the inherited estate fluctuates from year to year depending on the
investment return and the extent to which it has been required to meet smoothing
costs, guarantees and other events.
The Company believes that it would be beneficial if there were greater clarity
as to the status of the
inherited estate. In due course, after discussions with the FSA, the Company may
therefore take steps to achieve that clarity, whether through guidance from the
court or otherwise. In any event the Company expects that the entire inherited
estate will need to be retained within the long-term fund for the foreseeable
future to provide working capital, and so it is not considering any distribution
of 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
GBPm GBPm GBPm
UK Insurance Operations 336 144 426
M&G 100 83 163
Egg (39) 13 44
UK Operations 397 240 633
US Operations 350 431 755
Asian Operations 374 246 568
Other Income and Expenditure (141) (118) (244)
UK restructuring costs (18) - -
Operating profit from continuing
operations based on longer-term
investment returns 962 799 1,712
Goodwill impairment charge - (95) (120)
Short-term fluctuations in
investment returns 32 307 1,068
Mark to market movements on core
borrowings 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 of
cost of options and guarantees 21 (143) (302)
Profit from continuing operations
before tax (including actual
investment returns) 1,429 831 2,244
Operating earnings from continuing
operations per share after related
tax and minority interests* 28.0p 24.4p 56.6p
Basic earnings per share 43.8p 20.7p 66.9p
Shareholders' equity, excluding
minority interests GBP10.9bn GBP9.1bn GBP10.3bn
International Financial Reporting Standards (IFRS) Basis Results*
Statutory IFRS basis results Half Half Full
Year Year Year
2006 2005 2005
Profit after tax
attributable to equity
holders of the Company GBP449m GBP300m GBP748m
Basic earnings per share 18.7p 12.7p 31.6p
Shareholders' equity, excluding
minority interests GBP5.0bn GBP5.0bn GBP5.2bn
Supplementary IFRS basis information
Total operating profit from
continuing operations based
on longer-term investment
returns GBP453m GBP469m GBP957m
Operating earnings per
share from continuing
operations after related
tax and minority interests 12.7p 14.0p 32.2p
Half Half Full
Year Year Year
2006 2005 2005
Dividends per share declared and
paid in reporting period 11.02p 10.65p 15.95p
Dividends per share relating to
reporting period 5.42p 5.30p 16.32p
Funds under management GBP238bn GBP214bn GBP234bn
* Basis of preparation
The EEV basis results have been prepared in accordance with the European
Embedded Value Principles issued by the CFO Forum of European Insurance
Companies in May 2004. The basis of preparation of statutory IFRS basis results
and supplementary IFRS basis information is consistent with that applied for the
2005 full year results and financial statements.
Consistent with previous reporting practice, the Group analyses its EEV basis
results and provides supplementary analysis of IFRS profit before tax
attributable to shareholders, so as to distinguish operating profit based on
longer-term investment returns from other constituent elements of total profit.
On both the EEV and IFRS bases, operating earnings per share are calculated
using operating profits from continuing operations based on longer-term
investment returns, after tax and minority interests. These profits exclude
goodwill impairment charges, short-term fluctuations in investment returns and
the shareholders' share of actuarial and other gains and losses on defined
benefit pension schemes. Under the EEV basis, where additional profit and loss
effects arise, operating profit based on longer-term investment returns also
excludes the mark to market value movement on core borrowings and the effect of
changes in economic assumptions and changes in the time value of cost of options
and guarantees arising from changes in economic factors. After adjusting for
related tax and minority interests, the amounts for these items are included in
the 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
GBPm GBPm GBPm
UK Insurance
Operations 336 144 426
M&G 100 83 163
Egg (39) 13 44
UK Operations 397 240 633
US Operations 350 431 755
Asian Operations 374 246 568
Other Income and Expenditure (141) (118) (244)
UK restructuring costs (note 6) (18) - -
Operating profit from continuing
operations
based on longer-term investment
returns 962 799 1,712
Goodwill impairment charge - (95) (120)
Short-term fluctuations in
investment returns 32 307 1,068
Mark to market value movements on
core borrowings 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 of
cost of options and guarantees 21 (143) (302)
Profit from continuing operations
before tax (including actual
investment returns) 1,429 831 2,244
Shareholder tax (376) (337) (653)
Profit from continuing operations
for the period after tax before
minority interests 1,053 494 1,591
Discontinued operations (net of tax) - 1 3
Profit for the period 1,053 495 1,594
Attributable to:
Equity holders of the Company 1,052 490 1,582
Minority interests 1 5 12
Profit for the period 1,053 495 1,594
Earnings per share (in pence)
Continuing operations
From operating profit, based on
longer-term investment returns,
after related tax and minority
interests 28.0p 24.4p 56.6p
Adjustment for goodwill impairment
charge - (4.0)p (5.1)p
Adjustment from post-tax longer-term
investment returns to post-tax actual
investment returns 0.6p 8.3p 30.6p
Adjustment for mark to market value
movements on core borrowings 7.0p (1.2)p (2.8)p
Adjustment for post-tax effect of
shareholders' share of actuarial and
other gains and losses on defined
benefit pension schemes 7.2p (0.3)p (1.4)p
Adjustment for post-tax effect of
changes in economic assumptions
and time value of cost of
options and guarantees 1.0p (6.5)p (11.1)p
Based on profit from continuing
operations after minority
interests 43.8p 20.7p 66.8p
Discontinued operations
Based on profit from discontinued
operations after minority interests - 0.0p 0.1p
Based on profit for the period after
tax and minority interests 43.8p 20.7p 66.9p
Average 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 5.30p
Final dividend (2005) - - 11.02p
Total 5.42p 5.30p 16.32p
Dividends declared and paid in the
reporting period:
Current year interim dividend - - 5.30p
Final dividend for
prior year 11.02p 10.65p 10.65p
Total 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 2005 2005 2006 2005 2005 2006 2005 2005
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
UK Operations 3,985 4,520 7,193 6,795 3,579 7,916 10,780 8,099 15,109
US Operations 3,154 2,705 5,023 - - - 3,154 2,705 5,023
Asian Operations 915 674 1,485 10,027 9,421 18,457 10,942 10,095 19,942
Group 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 2005 2005 2006 2005 2005 2006 2005 2005
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
UK 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 24
business
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 67 146 104 120 242
Intermediated 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 36
Total 987 1,170 2,215 14 17 31 113 134 254
Partnerships
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 3 193 201 266
Europe
Life 82 119 201 - - - 8 12 20
Total UK Insurance Operations 3,890 4,430 7,002 95 90 191 484 533 892
US 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 35
GIC - Medium Term Notes 338 616 634 - - - 34 61 63
Total US Operations 3,146 2,700 5,009 8 5 14 323 275 515
Asian 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 519 401 837 396 273 648 448 313 731
Group 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 of
regular new business amounts and one tenth of single new business amounts.
INVESTMENT PRODUCTS - FUNDS UNDER MANAGEMENT *
1 Jan 2006 Gross Inflows Redemptions Market and 30 June 2006
other Movements
GBPm GBPm GBPm GBPm GBPm
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 of
transactions undertaken in the reporting period that have the potential to
generate profits for shareholders. The amounts shown are not, and not intended
to be, reflective of premium income recorded in the IFRS income statement.
The tables above include a bulk annuity transaction with the Scottish Amicable
Insurance Fund (SAIF). The transaction reflects the arrangement entered into in
June 2006 for the reinsurance of non-profit immediate pension annuity
liabilities of SAIF to Prudential Retirement Income Limited (PRIL), a
shareholder owned subsidiary of the Group. SAIF is a closed ring-fenced sub-fund
of the PAC long-term fund established by a Court approved Scheme of Arrangement
in October 1997, which is solely for the benefit of SAIF policyholders.
Shareholders have no interest in the profits of this fund, although they are
entitled to investment management fees on this business. The inclusion of the
transaction between SAIF and PRIL as new business reflects the transfer from
SAIF policyholders to Prudential shareholders' funds of longevity risk, the
requirement to set aside supporting capital, and entitlement to surpluses
arising on this block of business arising from the reinsurance arrangement.
The format of the tables shown above is consistent with the distinction between
insurance and investment products as applied for previous financial reporting
periods. Products categorised as "insurance" refer to those classified as
contracts of long-term insurance business for regulatory reporting purposes,
i.e. falling within one of the classes of insurance specified in part II of
Schedule 1 to the Regulated Activities Order under FSA regulations.
The details shown above for insurance products include contributions for
contracts that are classified under IFRS 4 "Insurance Contracts" as not
containing significant insurance risk. These products are described as
investment contracts or other financial instruments under IFRS. Contracts
included in this category are primarily certain unit-linked and similar
contracts written in UK Insurance Operations and Guaranteed Investment Contracts
and similar funding agreements written in US operations.
New business premiums for regular premium products are shown on an annualised
basis. Department of Work and Pensions pension business is classified as single
recurrent business. Internal vesting business is classified as new business
where the contracts include an open market option.
UK and Asian investment products referred to in the table for funds under
management above are unit trust, mutual funds and similar types of retail fund
management arrangements. These are unrelated to insurance products that are
classifed as "investment contracts" under IFRS 4, as described in the preceding
paragraph, although similar IFRS recognition and measurement principles apply to
the acquisition costs and fees attaching to this type of business. US investment
products are no longer included in the table above as they are assets under
administration rather than funds under management.
For previous periods the new business for intermediated distribution of UK
Insurance Operations have included Department of Work and Pensions (DWP) rebate
business for SAIF. These are excluded from the table above with comparatives
restated accordingly. The amounts of new SAIF DWP rebate business written was
GBP60m for half year 2006, GBP80m for half year 2005 and GBP83m for full year
2005.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
OPERATING PROFIT FROM CONTINUING OPERATIONS BASED ON LONGER-TERM INVESTMENT
RETURNS*
Half Year Half Year Full Year
2006 2005 2005
Results Analysis by Business Area GBPm GBPm GBPm
UK Operations
New business 138 159 243
Business in force 198 (15) 183
Long-term business 336 144 426
M&G 100 83 163
Egg (39) 13 44
Total 397 240 633
US Operations
New business 134 95 211
Business in force 212 324 530
Long-term business 346 419 741
Broker-dealer and fund management 8 18 24
Curian (4) (6) (10)
Total 350 431 755
Asian Operations
New business 232 162 413
Business in force 127 90 163
Long-term business 359 252 576
Fund management 22 2 12
Development expenses (7) (8) (20)
Total 374 246 568
Other Income and Expenditure
Investment return and other income 18 20 42
Interest 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 1,712
longer-term investment returns
Analysed as profits (losses) from:
New business 504 416 867
Business in force 537 399 876
Total long-term business 1,041 815 1,743
Asia 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-term
investment returns excludes goodwill impairment charges, short-term fluctuations
in investment returns, the mark to market value movement on core borrowings, the
shareholders' share of actuarial and other gains and losses on defined benefit
pension schemes and the effect of changes in economic assumptions and changes in
the time value of cost of options and guarantees caused by economic factors. The
amounts for these items are included in total EEV profit. The directors believe
that operating profit, as adjusted for these items, better reflects underlying
performance. Profit on ordinary activities and basic earnings per share include
these items together with actual investment returns. This basis of presentation
has 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
GBPm GBPm GBPm
Profit for the period attributable to equity holders of the Company 1,052 490 1,582
Items 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 8,614
minority interests)
Shareholders' capital and reserves at end of period (excluding minority 10,932 9,114 10,301
interests)
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 3,418
Asian Operations:
Net assets 2,159 1,692 2,070
Acquired goodwill 172 197 172
Other 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 10,301
interests)
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
SUMMARISED CONSOLIDATED BALANCE SHEET
Half Year Half Year Full Year
2006 2005 2005
GBPm GBPm GBPm
Total assets less liabilities, excluding insurance funds 175,493 160,379 174,258
Less insurance funds:*
Policyholder liabilities (net of reinsurers' share) and unallocated (170,444) (155,400) (169,064)
surplus of with-profits funds
Less 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 121 119 119
Share premium 1,808 1,560 1,564
Statutory basis shareholders' reserves 3,120 3,300 3,511
Additional 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 GBP10,932m 450p 382p 432p
(GBP9,114m, GBP10,301m)
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 Principles
issued by the CFO Forum of European Insurance Companies in May 2004. Where
appropriate the EEV basis results include the effects of adoption of
International Financial Reporting Standards (IFRS).
The EEV results for the Group are prepared for 'covered business', as defined by
the EEV Principles. Covered business represents the Group's long-term insurance
business for which the value of new and in-force contracts is attributable to
shareholders. The EEV basis results for the Group's covered business are then
combined with the IFRS basis results of the Group's other operations.
The definition of long-term business operations is consistent with previous
practice and comprises those contracts falling under the definition of long-term
insurance 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 EEV
Principles, the results for covered business incorporate the projected margins
of attaching internal fund management.
With two exceptions, covered business comprises the Group's long-term business
operations. The exceptions are for the closed Scottish Amicable Insurance Fund
(SAIF) and for the presentational treatment of the financial position of two of
the Group's defined benefit pension schemes.
SAIF is a ring-fenced sub fund of the PAC long-term fund, established by a Court
approved Scheme of Arrangement in October 1997. SAIF is closed to new business
and the assets and liabilities of the fund are wholly attributable to the
policyholders of the fund. In 2006, a bulk annuity arrangement between SAIF and
Prudential Retirement Income Limited (PRIL), a shareholder-owned subsidiary took
place, as explained in note 5. Reflecting the altered economic interest for SAIF
policyholders and Prudential shareholders, this arrangement represents a
transfer 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 deficit
attaching to the Prudential Staff Pension Scheme (PSPS) and Scottish Amicable
Pension scheme are excluded from the value of UK Operations and included in the
total for Other Operations. The surplus and deficit amounts are partially
attributable to the Prudential Assurance Company (PAC) with-profits fund and
shareholder-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 share
of the PAC with-profits sub-fund's interest in the movement on the financial
position of the schemes is recognised for EEV reporting purposes.
The directors are responsible for the preparation of the supplementary
information in accordance with the EEV Principles.
(2) Economic assumptions
Deterministic
In most countries, the long-term expected rates of return on investments and
risk discount rates are set by reference to period end rates of return on fixed
interest securities. This 'active' basis of assumption setting has been applied
in preparing the results of all the Group's UK and US long-term business
operations. For the Group's Asian operations, the active basis is appropriate
for business written in Japan, Korea and US dollar denominated business written
in Hong Kong.
An exception to this general rule is that for countries where long-term fixed
interest markets are less established, investment return assumptions and risk
discount rates are based on an assessment of longer-term economic conditions.
Except for the countries listed above, this basis is appropriate for the Group's
Asian operations.
Expected returns on equity and property asset classes are derived by adding a
risk premium, based on the long-term view of Prudential's economists in respect
of each territory, to the risk-free rate. In the UK the equity risk premium is
4.0 per cent (half year 2005: 3.0 per cent; full year 2005: 4.0 per cent) above
risk-free rates. The equity risk premium in the US is 4.0 per cent (half year
2005: 3.0 per cent, full year 2005: 4.0 per cent). In Asia, equity risk premiums
range from 3.0 per cent to 5.75 per cent (half year 2005: 2.75 per cent to 5.25
per cent, full year 2005: 3.0 per cent to 5.75 per cent). Assumptions for other
asset classes, such as corporate bond spreads, are set consistently as best
estimate assumptions.
The investment return assumptions as derived above are applied to the actual
assets 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 Operations
Risk discount rate:
New business 8.0 7.4 7.55
In force 8.2 6.9 7.7
Pre-tax expected long-term nominal rates of investment
return:
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 2.9
Post-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 to
policyholders for single premium deferred annuity business 1.75 1.75 1.75
US 10 year treasury bond rate at end of period 5.2 4.0 4.4
Pre-tax expected long-term nominal rate of return for US equities 9.2 7.0 8.4
Expected 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 discount
rate:
New business 12.0 6.6 16.5 17.5 5.3 9.7 9.5 16.5 6.7 8.9 13.75 16.5
In force 12.0 6.9 16.5 17.5 5.3 9.7 9.1 16.5 6.8 9.5 13.75 16.5
Expected long-term
rate of inflation 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5
Government bond 9.0 5.3 10.5 11.5 2.1 5.2 7.0 10.5 4.5 5.5 7.75 10.5
yield
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 discount
rate:
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 15.5
Expected long-term
rate of inflation 3.0 2.25 5.25 7.75 0.0 2.75 3.0 5.25 2.25 2.25 3.75 4.5
Government bond 7.25 4.9 10.25 13.0 1.7 4.4 7.0 10.5 5.0 5.5 7.75 9.75
yield
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 16.5
Expected long-term
rate of inflation 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5
Government bond 9.0 4.8 10.5 11.5 1.8 5.8 7.0 10.5 4.5 5.5 7.75 10.5
yield
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 comprises
the largest proportion of the in force Hong Kong business.
(ii) For traditional business in Taiwan, the economic scenarios used to
calculate the half year 2006 EEV basis results reflect the assumption of a
phased progression of the bond yields from the current rates applying to the
assets held to the long-term expected rates.
In preparing the half year 2006 EEV basis results the same approach has been
applied as was used for the full year 2005 results. The 2005 year end basis was
that, in the average scenario, bond yields trend from the then current levels of
around 2 per cent towards 5.5 per cent at 31 December 2012. In the first six
months of 2006 bond yields increased in a manner consistent with the assumed
phased progression. However, these increases in bond yields consequently reduced
the values of bonds held and, also consistent with the assumed phased
progression, 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 of
assets in the fund, future investment strategy, and further market value
depreciation of bonds held as a result of assumed future yield increases. These
factors, together with the assumption of the phased progression in bond yield
give rise to an average assumed Fund Earned Rate that trends to 5.4 per cent in
2013. Thereafter, the assumed Fund Earned Rate fluctuates around a target of 5.9
per cent. Consistent with the EEV methodology applied, a constant discount rate
has been applied to the projected cashflows.
(iii) The weighted discount rates for the Asian operations shown above have been
determined by weighting each country's discount rates by reference to the EEV
basis operating result for new business and the closing value of in force
business.
(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 territories
at 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: 9.3
per 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 simulations
of the accumulated return at the end of the projection period is calculated. The
annual average return is then calculated by taking the root of the average
accumulated return minus 1.
Stochastic
The economic assumptions used for the stochastic calculations are consistent
with those used for the deterministic calculations described above. Assumptions
specific to the stochastic calculations such as the volatilities of asset
returns reflect local market conditions and are based on a combination of actual
market data, historic market data and an assessment of longer-term economic
conditions. Common principles have been adopted across the Group for the
stochastic asset models, for example, separate modelling of individual asset
classes but with allowance for correlation between the various asset classes.
Details are given below of the key characteristics and calibrations of each
model.
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 return
across all simulations and durations.
Standard deviations have been calculated by taking the annualised variance of
the returns over all the simulations, taking the square root and averaging over
all durations in the projection. For bonds the standard deviations relate to the
yields on bonds of the average portfolio duration. For equity and property, they
relate to the total return on these assets. The standard deviations applied to
all periods presented in these statements are as follows:
%
Government bond yield 2.0
Corporate bond yield 5.5
Equities:
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, has
been used for the Asian operations. The principal asset classes are government
and corporate bonds. Equity holdings are much lower than in the UK whilst
property 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 returns
for each country. The volatility of equity returns ranges from 18 per cent to 26
per cent, and the volatility of government bond returns ranges from 1.6 per cent
to 8.9 per cent.
(3) Level of encumbered capital
In adopting the EEV Principles, Prudential has based encumbered capital on its
internal targets for economic capital subject to it being at least the local
statutory minimum requirements. Economic capital is assessed using internal
models, but when applying EEV Prudential does not take credit for the
significant diversification benefits that exist within the Group. For
with-profits business written in a segregated life fund, as is the case in the
UK and Asia, the capital available in the fund is sufficient to meet the
encumbered capital requirements.
The table below summarises the level of encumbered capital as a percentage of
the relevant statutory requirement.
Capital as a percentage of relevant statutory requirement
UK Business (excluding annuities) 100% of EU Minimum
UK Annuity Business 100% of EU Minimum
Jackson National Life 235% of Company Action Level
Asian 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)
GBPm GBPm GBPm GBPm GBPm % %
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)
GBPm GBPm GBPm GBPm GBPm % %
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)
GBPm GBPm GBPm GBPm GBPm % %
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 to
Annual Premium Equivalents (APE) and the Present Value of New Business Premiums
(PVNBP). APEs are calculated as the aggregate of regular new business premiums
and one tenth of single new business premiums. PVNBPs are calculated as
equalling single premiums plus the present value of expected premiums of new
regular premium business. In determining the present value, allowance is made
for lapses and other assumptions applied in determining the EEV new business new
profit.
The table of new business premiums and margins above excludes SAIF DWP rebate
premiums. Comparatives for premiums for this business, which were previously
included in the totals have been restated.
In determining the EEV basis value of new business written in the year the
policies incept, premiums are included in projected cash flows on the same basis
of distinguishing annual and single premium business as set out for statutory
basis reporting.
New business contributions are determined by applying the economic and
non-economic assumptions applying at the end of the reporting period. The
contributions represent profits at the end of the reporting period.
(5) Bulk annuity reinsurance from the Scottish Amicable Insurance Fund to
Prudential Retirement Income Limited
In June 2006 Prudential Retirement Income Limited (PRIL), a shareholder-backed
subsidiary of the Company, entered into a bulk annuity reinsurance arrangement
with the Scottish Amicable Insurance Fund (SAIF) for the reinsurance of
non-profit immediate pension annuity liabilities with a premium of GBP592m. SAIF
is a closed ring-fenced sub-fund of the PAC long-term fund, which is solely for
the benefit of SAIF policyholders. Shareholders have no interest in the profits
of this sub-fund and, accordingly, it is not part of covered business for EEV
reporting purposes.
Consistent with the transfer from uncovered to covered business and reflecting
the transfer of longevity risk, requirement for capital support, and entitlement
to profits on this block of business from SAIF to Prudential shareholders, the
transaction has been accounted for as new business for EEV basis reporting
purposes.
(6) UK restructuring costs
The charge of GBP18m for restructuring costs comprises GBP17m recognised on the
IFRS basis and an additional GBP1m recognised on the EEV basis for the
shareholders' share of costs incurred by the PAC with-profits sub-fund. The
costs relate to the initiative announced on 1 December 2005 for UK Insurance
operations to work more closely with Egg and M&G.
(7) UK Insurance Operations expense assumptions
The full year 2005 EEV basis financial statements included note disclosure that
explained that in determining the appropriate expense assumptions for 2005
account had been taken of the cost synergies that were expected to arise with
some certainty from the initiative announced on 1 December 2005 from UK
insurance operations working more closely with Egg and M&G. Without this factor
there would have been a charge for altered expense assumptions of approximately
GBP55m. 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 UK
operations in aggregate of GBP40m. In addition, an end to end review of the UK
business, with the aim of reducing the overall cost base is underway. Total UK
annual savings, including the GBP40m mentioned above, are expected to be GBP150m
per annum comprising GBP100m for Egg and shareholder-backed business of UK
Insurance Operations and GBP50m attaching to the with-profits sub-fund. The
savings for the UK Insurance Operations cover both acquisition and renewal
activity. Reflecting the underlying trend in unit costs, the element of the
additional savings of GBP110m that relates to long-term business is currently
expected to be neutral in its effect on EEV basis results.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
SUMMARY CONSOLIDATED INCOME STATEMENT
Half Year Half Year Full Year
2006 2005 2005
GBPm GBPm GBPm
Earned premiums, net of reinsurance 8,164 8,214 15,028
Investment income 5,303 9,563 24,013
Other income 1,006 991 2,084
Total revenue, net of reinsurance (note C) 14,473 18,768 41,125
Benefits and claims and movement in unallocated surplus of (11,370) (14,967) (33,100)
with-profits funds
Acquisition costs and other operating expenditure (2,142) (2,964) (5,552)
Finance costs: Interest on structural borrowings of shareholder (107) (100) (208)
financed operations
Goodwill impairment charge - (95) (120)
Total charges (note C) (13,619) (18,126) (38,980)
Profit before tax* (note C) 854 642 2,145
Tax attributable to policyholders' returns (162) (182) (1,147)
Profit before tax attributable to shareholders (note D) 692 460 998
Tax expense (note E) (404) (338) (1,388)
Less: Income tax attributable to policyholders returns 162 182 1,147
Tax attributable to shareholders profits (note E) (242) (156) (241)
Profit from continuing operations after tax 450 304 757
Discontinued operations (net of tax) 0 1 3
Profit for the period 450 305 760
Attributable to:
Equity holders of the Company 449 300 748
Minority interests 1 5 12
Profit for the period 450 305 760
Earnings per share (in pence)
Basic (based on 2,403m, 2,361m and 2,365m shares respectively)
Based on profit from continuing operations attributable to the 18.7p 12.7p 31.5p
equity holders of the Company (note F)
Based on profit from discontinued operations attributable to the 0.0p 0.0p 0.1p
equity holders of the Company
18.7p 12.7p 31.6p
Diluted (based on 2,406m, 2,364m and 2,369m shares respectively)
Based on profit from continuing operations attributable to the 18.7p 12.7p 31.5p
equity holders of the Company
Based on profit from discontinued operations attributable to the 0.0p 0.0p 0.1p
equity holders of the Company
18.7p 12.7p 31.6p
Dividends per share (in pence)
Dividends relating to reporting period
Interim dividend (2006 and 2005) (note G) 5.42p 5.30p 5.30p
Final dividend (2005) - - 11.02p
Total 5.42p 5.30p 16.32p
Dividends declared and paid in reporting period
Current year interim dividend - - 5.30p
Final dividend for prior year 11.02p 10.65p 10.65p
Total 11.02p 10.65p 15.95p
* Profit before tax represents income net of post-tax transfers to unallocated
surplus of with-profits funds, before tax attributable to policyholders and
unallocated surplus of with-profits funds, unit-linked policies and
shareholders' profits.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Period ended 30 June 2006
Share Share Retained Translation Available- Hedging Shareholders' Minority Total
capital premium earnings reserve for-sale reserve equity interests equity
securities
reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Reserves
Profit for the period 449 449 1 450
Items recognised directly
in equity:
Exchange movements (134) (134) (134)
Movement on cash flow
hedges 4 4 4
Unrealised valuation
movements on securities
classified as
available-for-sale
from 1 January 2005
Unrealised holding losses
arising during the period (707) (707) (707)
Less reclassification
adjustment for gains
included in the income
statement (3) (3) (3)
Unrealised investment
losses, net (710) (710) (710)
Related change in
amortisation of deferred
income and acquisition
costs 311 311 311
Related tax (39) 140 (1) 100 100
Total items recognised
directly in equity (173) (259) 3 (429) (429)
Total income and expense
for the period 449 (173) (259) 3 20 1 21
Dividends (267) (267) (267)
Reserve movements in
respect of share-based
payments 6 6 6
Change in minority
interests arising
principally from purchase
and sale of venture
investment companies and
property partnerships of
the PAC with-profits fund 7 7
Acquisition of Egg minority
interests (note J) (167) (167) (84) (251)
Share capital and share
premium
New share capital
subscribed 2 251 253 253
Transfer to retained
earnings in respect of
shares issued in lieu of
cash dividends (7) 7 0 0
Treasury shares
Movement in own shares
in respect of share-based
payment plans 9 9 9
Movement on Prudential plc
shares purchased by
unit trusts
consolidated under IFRS 1 1 1
Net increase (decrease)
in equity 2 244 38 (173) (259) 3 (145) (76) (221)
At beginning of period 119 1,564 3,236 173 105 (3) 5,194 172 5,366
At end of period 121 1,808 3,274 0 (154) 0 5,049 96 5,145
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Period ended 30 June 2005
Share Share Retained Translation Available- Hedging Shareholders' Minority Total
capital premium earnings reserve for-sale reserve equity interests equity
securities
reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Reserves
Profit for the period 300 300 5 305
Items recognised directly
in equity:
Exchange movements 183 183 183
Movement on cash flow
hedges (7) (7) (1) (8)
Unrealised valuation
movements on securities
classified as
available-for-sale from
1 January 2005
Unrealised holding losses
arising during the period (88) (88) 1 (87)
Less reclassification
adjustment for losses
included in the income
statement 25 25 25
Unrealised investment
losses, net (63) (63) 1 (62)
Related change in
amortisation of deferred
income and acquisition
costs 14 14 14
Related tax 30 16 2 48 48
Total items recognised
directly in equity 213 (33) (5) 175 175
Total income and expense
for the period 300 213 (33) (5) 475 5 480
Cumulative effect of
changes in accounting
policies on adoption of
IAS 32, IAS 39 and IFRS
4, net of applicable
taxes at 1 January 2005
(note M) 2 (173) 397 226 (3) 223
Dividends (253) (253) (253)
Reserve movements in
respect of share-based
payments 6 6 6
Change in minority
interests arising
principally from purchase
and sale of venture
investment companies and
property partnerships of
the PAC with-profits fund (9) (9)
Share capital and share
premium
New share capital
subscribed 0 40 40 40
Transfer to retained
earnings in respect of
shares issued in lieu of
cash dividends (40) 40 0 0
Treasury shares
Movement in own shares in
respect of share-based
payment plans 1 1 1
Movement on Prudential plc
shares purchased by
unit trusts consolidated
under IFRS (5) (5) (5)
Net increase (decrease) in
equity 2 (84) 213 364 (5) 490 (7) 483
At beginning of period 119 1,558 2,972 (160) 4,489 137 4,626
At end of period 119 1,560 2,888 53 364 (5) 4,979 130 5,109
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Year ended 31 December 2005
Share Share Retained Translation Available- Hedging Shareholders' Minority Total
capital premium earnings reserve for-sale reserve equity interests equity
securities
reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Reserves
Profit for the year 748 748 12 760
Items recognised directly
in equity:
Exchange movements 268 268 268
Movement on cash flow
hedges (4) (4) 1 (3)
Unrealised valuation
movements on securities
classified as
available-for-sale
from 1 January 2005
Unrealised holding
losses arising during
the year (773) (773) (773)
Less reclassification
adjustment for losses
included in the income
statement 22 22 22
Unrealised investment
losses, net (751) (751) (751)
Related change in
amortisation of deferred
income and acquisition
costs 307 307 307
Related tax 65 152 1 218 218
Total items recognised
directly in equity 333 (292) (3) 38 1 39
Total income and expense
for the year 748 333 (292) (3) 786 13 799
Cumulative effect of
changes in accounting
policies on adoption of
IAS 32, IAS 39 and
IFRS 4, net of applicable
taxes at 1 January 2005
(note M) 2 (173) 397 226 (3) 223
Dividends (380) (380) (380)
Reserve movements in
respect of share-based
payments 15 15 (1) 14
Change in minority
interests arising
principally from
purchase and sale of
venture investment
companies and property
partnerships of the PAC
with-profits fund 26 26
Share capital and share
premium
New share capital
subscribed 0 55 55 55
Transfer to retained
earnings in respect of
shares issued in lieu of
cash dividends (51) 51 0 0
Treasury shares
Movement in own shares
in respect of share-based
payment plans 0 0 0
Movement on Prudential
plc shares purchased by
unit trusts consolidated
under IFRS 3 3 3
Net increase (decrease)
in equity 6 264 333 105 (3) 705 35 740
At beginning of year 119 1,558 2,972 (160) 4,489 137 4,626
At end of year 119 1,564 3,236 173 105 (3) 5,194 172 5,366
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
SUMMARY CONSOLIDATED BALANCE SHEET 30 June 30 June 31 December
2006 GBPm 2005 GBPm 2005 GBPm
Assets
Goodwill:
Attributable to the PAC with-profits fund (in respect of venture 891 487 607
fund investment subsidiaries)
Attributable to shareholders 1,341 1,366 1,341
Total 2,232 1,853 1,948
Other intangible assets:
Deferred acquisition costs 2,644 1,877 2,339
Present value of acquired in-force contracts 85 110 101
Total 2,729 1,987 2,440
Other non-investment and non-cash assets:
Property, plant and equipment 1,018 816 910
Reinsurers' share of contract provisions 1,141 648 1,278
Deferred tax assets 423 1,071 755
Current tax recoverable 315 193 231
Accrued investment income 1,891 1,728 1,791
Other debtors 2,310 3,388 1,318
Total 7,098 7,844 6,283
Investments of long-term business, banking and other operations:
Investment properties 13,682 12,575 13,180
Investments accounted for using the equity method 5 8 5
Financial investments:
Loans and receivables 12,795 13,202 13,245
Equity securities and portfolio holdings in unit trusts 75,534 61,701 71,985
Debt securities 78,090 79,438 82,471
Other investments 3,930 3,504 3,879
Deposits 7,422 6,784 7,627
Total investments 191,458 177,212 192,392
Held for sale assets 94 1 728
Cash and cash equivalents 3,665 3,708 3,586
Total assets 207,276 192,605 207,377
Equity and liabilities
Equity
Shareholders' equity (note H) 5,049 4,979 5,194
Minority interests 96 130 172
Total equity 5,145 5,109 5,366
Liabilities
Banking customer accounts 5,545 6,451 5,830
Policyholder liabilities and unallocated surplus of with-profits funds:
Contract liabilities (including amounts in respect of contracts 158,127 147,169 158,985
classified as investment contracts under IFRS 4)
Unallocated surplus of with-profits funds 13,458 8,879 11,357
Total insurance liabilities 171,585 156,048 170,342
Core structural borrowings of shareholder-financed operations:
Subordinated debt (other than Egg) 1,573 1,463 1,646
Other 1,082 1,227 1,093
2,655 2,690 2,739
Egg subordinated debt capital 451 451 451
Total 3,106 3,141 3,190
Other borrowings:
Operational borrowings attributable to shareholder-financed 5,994 6,231 6,432
operations (note I)
Borrowings attributable to with-profits funds (note I) 2,042 1,725 1,898
Other non-insurance liabilities:
Obligations under funding, securities lending and sale and 3,860 3,774 4,529
repurchase agreements
Net asset value attributable to unit holders of consolidated unit 1,495 1,073 965
trusts and similar funds
Current tax liabilities 1,168 925 962
Deferred tax liabilities 2,603 2,713 2,991
Accruals and deferred income 476 557 506
Other creditors 2,216 2,460 1,478
Provisions 383 990 972
Other liabilities 1,658 1,408 1,770
Held for sale liabilities - - 146
Total 13,859 13,900 14,319
Total liabilities 202,131 187,496 202,011
Total equity and liabilities 207,276 192,605 207,377
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
SUMMARY CONSOLIDATED CASH FLOW STATEMENT Half Year Half Year Full Year
2006 GBPm 2005 GBPm 2005 GBPm
Net cash flows from operating activities
Profit before tax (note (i)) 854 642 2,145
Changes in operating assets and liabilities (note (ii)) 73 (563) (1,987)
Other items (note (ii)) (241) (138) (357)
686 (59) (199)
Net cash flows from investing activities
Net cash flows from purchases and disposals of property and (280) (52) (154)
equipment
Costs incurred on purchase of Egg minority interests (note J) (6) - -
Acquisition of subsidiaries, net of cash balances (note (iii)) 15 (91) (68)
Disposal of subsidiaries, net of cash balances (note (iii)) 80 - 252
(191) (143) 30
Net cash flows from financing activities
Structural borrowings of the Group:
Shareholder-financed operations (note (iv)):
Redemption of borrowings (1) (171) (308)
Issue of borrowings - - 168
Interest paid (104) (95) (204)
With-profits operations (note (v)):
Interest paid (9) (9) (9)
Equity capital (note (vi)):
Issues of ordinary share capital 1 - 3
Dividends paid to shareholders (260) (213) (328)
(373) (488) (678)
Net increase (decrease) in cash and cash equivalents 122 (690) (847)
Cash and cash equivalents at beginning of period 3,586 4,341 4,341
Effect of exchange rate changes on cash and cash equivalents (43) 57 92
Cash and cash equivalents at end of period (note (vii)) 3,665 3,708 3,586
Notes
(i) Profit before tax represents income net of post-tax transfers to unallocated
surplus of with-profits funds, before tax attributable to policyholders and
unallocated surplus of with-profits funds, unit-linked policies and
shareholders' profits. It does not represent profit before tax attributable to
shareholders.
(ii) The adjusting items to profit before tax include changes in operating
assets and liabilities, and other items comprising adjustments in respect of
non-cash items, operational interest receipts and payments, dividend receipts,
income tax paid and cash flows in respect of assets categorised as
available-for-sale investments. The most significant elements of the adjusting
items within changes in operating assets and liabilities are as follows:
Half Year Half Year Full Year
2006 GBPm 2005 GBPm 2005 GBPm
Deferred acquisition costs (excluding changes taken directly to (462) (21) (401)
equity)
Other non-investment and non-cash assets (883) (1,333) (569)
Investments (2,618) (7,794) (21,462)
Banking customer accounts (285) (240) (861)
Policyholder liabilities (including unallocated surplus) 4,115 8,582 21,126
Other liabilities (including operational borrowings) 206 243 180
Changes in operating assets and liabilities 73 (563) (1,987)
(iii) Acquisitions and disposals of subsidiaries shown above include venture
subsidiaries of the PAC with-profits fund as shown in note J. In 2005, this also
includes the purchase of Life Insurance Company of Georgia.
(iv) Structural borrowings of shareholder-financed operations consist of the
core debt of the parent company and related finance subsidiaries, Jackson
National Life surplus notes and Egg debenture loans. Core debt excludes
borrowings to support short-term fixed income securities reinvestment programmes
and non-recourse borrowings of investment subsidiaries of shareholder-financed
operations. Cash flows in respect of these borrowings are included within
operating cash flows.
(v) Structural borrowings of with-profits operations relates solely to the
GBP100m 8.5 per cent undated subordinated guaranteed bonds which contribute to
the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced
sub-fund of the PAC with-profits fund. Cash flows on other borrowings of
with-profits funds, which principally relate to venture investment subsidiaries,
are categorised as operating activities in the presentation above.
(vi) Cash movements in equity capital exclude scrip dividends and share capital
issued in respect of the acquisition of Egg minority interests.
(vii) Of the cash and cash equivalents amounts reported above GBP388m (half year
2005: GBP42m; full year 2005: GBP263m) represents cash and cash equivalents of
the parent company and related finance subsidiaries.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE UNAUDITED IFRS BASIS RESULTS
A Basis of preparation and audit status
This interim financial information has been prepared using the accounting
policies adopted by the Group in its last consolidated financial statements, as
updated by any changes in accounting policies it intends to make in its next
consolidated financial statements as a result of new or changed IFRSs that are
already endorsed by the EU and that are applicable or available for early
adoption for the next annual financial statements.
The half year 2005 financial statements published in July 2005 were prepared in
accordance with the presentation, recognition and measurement bases that were
expected to be applied for the full year 2005 results on first time adoption of
International Financial Reporting Standards. The comparative half year 2005
results shown within this announcement include minor changes to those previously
published arising from the refinement of these bases in the second half of 2005
prior to their application to the full year financial statements.
The IFRS basis results for the 2006 and 2005 half years are unaudited. The 2005
full year IFRS basis results have been derived from the 2005 statutory accounts.
The auditors have reported on the 2005 statutory accounts which have been
delivered to the Registrar of Companies. The auditors' report was not qualified
and did not contain a statement under section 237(2) or (3) of the Companies Act
1985.
B Significant accounting policies
The accounting policies applied by the Group in these condensed consolidated
financial statements are the same as those previously applied in the Group's
consolidated financial statements for the year ended 31 December 2005.
C Segment disclosure
Half Year Half Year Full Year
2006 GBPm 2005 GBPm 2005 GBPm
Revenue
Long-term business 13,565 17,739 39,296
Banking 457 685 1,115
Broker-dealer and fund management 518 424 895
Unallocated corporate 71 67 98
Intra-group revenue eliminated on consolidation (138) (147) (279)
Total revenue per income statement 14,473 18,768 41,125
Charges (before income tax attributable to policyholders and
unallocated surplus of long-term insurance funds)
Long-term business, including post-tax transfers to (12,881) (17,024) (36,997)
unallocated surplus of with-profits funds
Banking (502) (672) (1,071)
Broker-dealer and fund management (358) (333) (741)
Unallocated corporate (16) (244) (450)
Intra-group charges eliminated on consolidation 138 147 279
Total charges per income statement (13,619) (18,126) (38,980)
Segment results - revenue less charges (continuing
operations)
Long-term business 684 715 2,299
Banking (45) 13 44
Broker-dealer and fund management 160 91 154
Unallocated corporate 55 (177) (352)
Profit before tax* 854 642 2,145
Tax attributable to policyholders' returns (162) (182) (1,147)
Profit before tax attributable to shareholders 692 460 998
Tax attributable to shareholders' profits (242) (156) (241)
Profit from continuing operations after tax 450 304 757
Segment results - discontinued operations (net of
tax)
Banking 0 1 3
Profit for the period 450 305 760
* Profit before tax represents income net of post-tax transfers to unallocated
surplus of with-profits funds, before tax attributable to policyholders and
unallocated surplus of with-profits funds, unit-linked policies and
shareholders' profits.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE UNAUDITED IFRS BASIS RESULTS (CONTINUED)
D Supplementary analysis of profit from continuing operations before tax
attributable to shareholders
Half Year Half Year Full Year
Results analysis by business area 2006 GBPm 2005 GBPm 2005 GBPm
UK Operations
UK Insurance Operations 205 187 400
M&G 100 83 163
Egg (39) 13 44
Total 266 283 607
US Operations
Jackson National Life 223 157 348
Broker-dealer and fund management 8 18 24
Curian (4) (6) (10)
Total 227 169 362
Asian Operations
Long-term business 88 116 195
Fund management 22 2 12
Development expenses (7) (8) (20)
Total 103 110 187
Other income and expenditure
Investment return and other income 33 45 87
Interest 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 (126) (93) (199)
UK restructuring costs (note L) (17) - -
Operating profit from continuing operations based on longer-term 453 469 957
investment returns
Goodwill impairment charge (note (i)) - (95) (120)
Short-term fluctuations in investment returns on 39 94 211
shareholder-backed business (note (ii))
Shareholders' share of actuarial and other gains and losses on 200 (8) (50)
defined benefit pension schemes (note (iii))
Profit from continuing operations before tax attributable to 692 460 998
shareholders
(i) Goodwill impairment charge
The charges for goodwill impairment in 2005 relate to the Japanese life
business.
(ii) Short-term fluctuations in investment returns on shareholder-backed
business
Half Year Half Year Full Year
2006 GBPm 2005 GBPm 2005 GBPm
US Operations:
Movement in market value of derivatives used for economic 93 36 122
hedging purposes
Actual less longer-term investment returns for other 9 24 56
items
Asian Operations (36) 17 32
Other operations (27) 17 1
39 94 211
(iii) Actuarial and other gains and losses on defined benefit
pension schemes
Actuarial gains and losses
Actual less expected return on scheme assets (57) 144 544
Experience (losses) gains on liabilities 0 (3) 1
Gains (losses) on changes of assumptions for scheme liabilities* 611 (156) (489)
554 (15) 56
Less: amounts attributable to the PAC with-profits fund (354) 7 (58)
200 (8) (2)
Non recurrent credit (charge)
Shareholders' share of credit arising from reduction in assumed - - 35
level of future discretionary increases for pensions in payment
of the Prudential Staff Pension Scheme to 2.5%
Loss on re-estimation of shareholders' share of deficit on the - - (63)
Prudential Staff Pension Scheme at 31 December 2005 to 30%
Effect of strengthening in actuarial provisions for increase in - - (20)
ongoing contributions for future service of active scheme members
- - (48)
200 (8) (50)
*The gains and losses on changes of assumption for scheme liabilities primarily
reflect movements in yields on good quality corporate bonds. These yields are
used to discount the projected pension scheme benefit payments.
The discount rates applied for the Group's UK defined benefit schemes, and
reflected in the gains and losses shown above, are as follows:
30 June 2006 5.5%
31 December 2005 4.8%
30 June 2005 5.0%
31 December 2004 5.3%
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE UNAUDITED IFRS BASIS RESULTS (CONTINUED)
E Tax charge
The total tax charge of GBP404m for the 2006 half year (2005 half year GBP338m)
comprises GBP220m (GBP217m) UK tax and GBP184m (GBP121m) overseas tax. This tax
charge comprises tax attributable to policyholders and unallocated surplus of
with-profits funds, unit-linked policies and shareholders. The tax charge
attributable to shareholders of GBP242m for the 2006 half year (2005 half year
GBP156m) comprises GBP95m (GBP52m) UK tax and GBP147m (GBP104m) overseas tax.
Half Year Half Year Full Year
F Supplementary analysis of earnings per share from continuing 2006 GBPm 2005 GBPm 2005 GBPm
operations
Operating profit based on longer-term investment returns after related 12.7p 14.0p 32.2p
tax and minority interests
Adjustment for goodwill impairment charge - (4.0)p (5.1)p
Adjustment from post-tax longer-term investment returns to post-tax 0.2p 3.0p 5.9p
actual investment returns (after related minority interests)
Adjustment for post-tax shareholders' share of actuarial and other 5.8p (0.3)p (1.5)p
gains and losses on defined benefit pension schemes
Based on profit from continuing operations after tax and minority 18.7p 12.7p 31.5p
interests
G Dividend
The interim dividend of 5.42p per share will be paid on 27 October 2006 to
shareholders on the register at the close of business on 18 August 2006. A scrip
dividend alternative will be offered to shareholders.
H Shareholders' equity
30 June 30 June 31 December
2006 GBPm 2005 GBPm 2005 GBPm
Share capital 121 119 119
Share premium 1,808 1,560 1,564
Reserves 3,120 3,300 3,511
Total 5,049 4,979 5,194
I Other borrowings
30 June 30 June 31 December
2006 GBPm 2005 GBPm 2005 GBPm
Operational borrowings attributable to shareholder-financed
operations
Borrowings in respect of short-term fixed income securities 1,500 1,131 1,472
programmes
Non-recourse borrowings of investment subsidiaries managed by PPM 943 1,195 1,085
America
Borrowings in respect of banking operations 3,535 3,888 3,856
Other borrowings 16 17 19
Total 5,994 6,231 6,432
Borrowings attributable to with-profits funds
Non-recourse borrowings of venture fund investment subsidiaries of 1,183 755 988
the PAC with-profits fund
Structural borrowings (subordinated debt of the Scottish Amicable 100 100 100
Insurance Fund)
Other borrowings (predominantly external funding of consolidated 759 870 810
investment vehicles)
Total 2,042 1,725 1,898
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE UNAUDITED IFRS BASIS RESULTS (CONTINUED)
J Acquisitions and disposals
(i) Shareholder acquisitions - Egg minority interests
In December 2005, the Company announced its intention to acquire the minority
interests in Egg representing approximately 21.7 per cent of the existing issued
share capital of Egg. The whole of the minority interests were acquired in the
first half of 2006. Under the terms of the offer, Egg shareholders received
0.2237 new ordinary shares in the Company for each Egg share resulting in the
issue of 41.6m new shares in the Company.
The Company accounts for the purchase of minority interests using the economic
entity method. Accordingly, GBP167m has been charged to retained earnings
representing the difference between the consideration paid (including expenses)
of GBP251m and the share of net assets acquired of GBP84m.
(ii) PAC with-profits fund acquisitions
The PAC with-profits fund acquires a number of venture capital holdings through
PPM Capital in which the Group is deemed to have a controlling interest, in
aggregate with, if applicable, other holdings held by, for example, the
Prudential Staff Pension Scheme. There were two such acquisitions during the
period to 30 June 2006:
- Acquisition of 53 per cent of the voting equity interests of Histoire
D'or, a jewellery retail company, in April 2006; and
- Acquisition of 51 per cent of the voting equity interests of Azzuri
Communications, a business IT services company, in June 2006.
These acquisitions are considered individually immaterial and therefore all 2006
half year information in the following table has been presented in aggregate.
Due to the nature of the investments, it is not practicable to provide certain
information for acquisitions occuring in the 2006 half year, including the pro
forma Group revenue and consolidated net profit information as if the
acquisitions had occurred at the beginning of the year, and the carrying
amounts, in accordance with IFRS, of each class of the acquiree's assets,
liabilities, and contingent liabilities immediately before acquisition.
The results of the acquisitions have been included in the consolidated financial
statements of the Group commencing on the respective dates of acquisition. The
earnings contributed by these acquisitions to the income statement is
insignificant and is also reflected as part of the change in unallocated surplus
of the with-profits fund.
The table below identifies the net assets acquired and reconciles this amount to
the consideration paid for the ventures acquisitions in the six months to 30
June 2006:
Fair value on
acquisition
GBPm
Cash and cash equivalents 16
Other current assets 62
Property, plant and equipment 14
Other non-current assets 51
Less liabilities, including current liabilities and borrowings (455)
(312)
Less minority interests 0
Net assets acquired (312)
Goodwill 313
Cash consideration 1
Aggregate goodwill of GBP313m has been recognised for the excess of the cost
over the Group's interest in the net fair value of entities assets, liabilities
and contingent assets in the 2006 half year.
There are no intangible assets that were not recognised separately from goodwill
for these companies because the fair value of the intangible asset could not be
reliably measured.
(iii) PAC with-profits fund disposals
As at 31 December 2005, two venture subsidiaries were classified as held for
sale; Upperpoint Distribution Limited and Taverner Hotel Group Pty Ltd. The sale
of these venture subsidiaries was completed in the 2006 half year. In addition,
two additional venture subsidiaries of the PAC with-profits fund were disposed
of during the period, namely Orefi and Aperio Group Pty Ltd. Total cash
consideration received was GBP93m. Goodwill of GBP44m and cash and cash
equivalents of GBP13m were disposed of. There are no venture subsidiaries
classified as held for sale at 30 June 2006.
K Bulk annuity reinsurance from the Scottish Amicable Insurance Fund to
Prudential Retirement Income Limited
In June 2006 Prudential Retirement Income Limited (PRIL), a shareholder-backed
subsidiary of the Company, entered into a bulk annuity reinsurance arrangement
with the Scottish Amicable Insurance Fund (SAIF) for the reinsurance of
non-profit immediate pension annuity liabiities with a premium of GBP592m. SAIF
is a closed ring-fenced sub-fund of the PAC long-term fund, established by a
Court approved Scheme of Arrangement in 1997, which is solely for the benefit of
SAIF policyholders. As explained in the notes to the tables for the
supplementary transaction measure of new business, the economic substance of the
arrangement is a transfer of risks and rewards attaching to this business from
SAIF policyholders to Prudential shareholders. Accordingly, for the purpose of
those tables the reinsurance transaction has been recorded as 'new business'.
For Group reporting purposes the amounts recorded by SAIF and PRIL for the
premium are eliminated on consolidation.
L UK restructuring costs
On 1 December 2005 the Company announced an initiative for UK Insurance
Operations to work more closely with Egg and M&G and in the process facilitate
the realisation of substantial annualised pre-tax cost savings and opportunities
for revenue synergies. The one-off restructuring cost of achieving the savings
was estimated to be GBP50m. As at 30 June 2006 GBP17m of cost to
shareholder-backed operations had been incurred.
In the first half of 2006 the level of current and projected restructuring
activity has increased as a result of an end to end review of the UK business,
which is in progress, that is aimed at reducing the overall cost base. The total
cost of implementing this and the previously announced restructuring (as noted
above) is estimated at GBP110m to be incurred in 2006 and 2007, of which GBP70m
is anticipated to be born by the shareholder-backed UK Insurance Operations and
Egg and GBP40m by the PAC with-profits fund.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE UNAUDITED IFRS BASIS RESULTS (CONTINUED)
M Effect of adoption of IAS 32, IAS 39, and IFRS 4
The impact on total equity of adopting IAS 32, IAS 39 and IFRS 4 at 1 January
2005 was as follows:
Shareholders' Minority Total
equity interests equity
GBPm GBPm GBPm
Changes on adoption of IAS 32, IAS 39 and IFRS 4 relating to:
UK Insurance Operations (note (i)) (22) (22)
Jackson National Life (note (ii)) 273 273
Banking and non-insurance operations (note (iii)) (25) (3) (28)
Total 226 (3) 223
Notes
The changes shown above reflect the impact of re-measurement for :
(i) UK Insurance Operations
The reduction in shareholders' equity of GBP22m includes GBP20m relating to
certain unit-linked and similar contracts that do not contain significant
insurance risk and are therefore categorised as investment contracts under IFRS
4.
(ii) Jackson National Life
Under IAS 39, JNL's debt securities and derivative financial instruments are
re-measured to fair value from the lower of amortised cost and, if relevant,
impaired value. Fair value movements on debt securities, net of "shadow" changes
to deferred acquisition costs and related deferred tax are recognised directly
in equity. Fair value movements on derivatives are recorded in the income
statement.
(iii) Banking and non-insurance operations
Under IAS 39, for Egg, changes to opening equity at 1 January 2005 arise from
altered policies for effective interest rate on credit card receivables,
impairment losses on loans and advances, fair value adjustments on wholesale
financial instruments and embedded derivatives in equity savings products. The
net effect on shareholders' equity of these changes, after tax, is a deduction
of GBP15m. A further GBP10m reduction in equity arises on certain centrally held
financial instruments and derivatives.
INDEPENDENT REVIEW REPORTS BY KPMG AUDIT PLC TO PRUDENTIAL PLC, extracted from
the interim report 2006
"Introduction
We have been engaged by the Company to review the IFRS financial information for
the six months ended 30 June 2006 set out on pages 18 and 19 and pages 26 to 38.
We have read the other information contained in the interim report and
considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.
This report is made solely to the Company in accordance with the terms of our
engagement to assist the Company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the Company those matters we are required to state to it
in this report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the Company for
our review work, for this report or for the conclusions we have reached.
Directors' responsibilities
The interim report, including the IFRS financial information contained therein,
is the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
Review of interim financial information issued by the Auditing Practices Board
for use in the UK. A review consists principally of making enquiries of
management and applying analytical procedures to the financial information and
underlying financial data and, based thereon, assessing whether the accounting
policies and presentation have been consistently applied unless otherwise
disclosed. A review excludes audit procedures such as tests of controls and
verification of assets, liabilities and transactions. It is substantially less
in scope than an audit performed in accordance with International Statements on
Auditing (UK and Ireland) and therefore provides a lower level of assurance than
an audit. Accordingly, we do not express an audit opinion on the financial
information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the IFRS financial information as presented for the six months
ended 30 June 2006.
KPMG Audit Plc
Chartered Accountants
London
27 July 2006
Introduction
We have been engaged by the Company to review the European Embedded Value (EEV)
basis supplementary information for the six months ended 30 June 2006 set out on
page 17 and pages 20 to 25.
The supplementary information has been prepared in accordance with the EEV
Principles issued in May 2004 by the CFO Forum using the methodology and
assumptions set out on pages 22 to 24. The supplementary information should be
read in conjunction with the Group's interim IFRS financial information which is
set out on pages 18 and 19 and pages 26 to 38.
We have read the other information contained in the interim report and
considered whether it contains any apparent misstatements or material
inconsistencies with the supplementary information.
This report is made solely to the Company in accordance with the terms of our
engagement. Our review has been undertaken so that we might state to the Company
those matters we have been engaged to state in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company for our review work, for this
report or for the conclusions we have reached.
Directors' responsibilities
The interim report, including the EEV basis supplementary information contained
therein, is the responsibility of, and has been approved by the directors. The
directors have accepted responsibility for preparing the supplementary
information in accordance with the EEV Principles and for determining the
assumptions used in the application of those principles.
Review work performed
We conducted our review having regard to Bulletin 1999/4 Review of interim
financial information issued by the Auditing Practices Board for use in the UK.
A review consists principally of making enquiries of management and applying
analytical procedures to the supplementary information and underlying financial
data and, based thereon, assessing whether the accounting policies and
presentation have been consistently applied unless otherwise disclosed. A review
excludes audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with International Standards on Auditing (UK and
Ireland) and therefore provides a lower level of assurance than an audit.
Accordingly we do not express an audit opinion on the supplementary information.
Review conclusion
On the basis of our review, we are not aware of any material modifications that
should be made to the EEV basis supplementary information as presented for the
six months ended 30 June 2006.
KPMG Audit Plc
Chartered Accountants
London
27 July 2006"
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date 28 July 2006
PRUDENTIAL PUBLIC LIMITED COMPANY
By: /s/ JON BUNN
Jon Bunn
Director of Public Relations