it cannot be eliminated. Where interest rates in these markets remain lower than interest rates used to calculate surrender values over a sustained period, this could have an adverse impact on the Enlarged Group’s reported profit.

 

In the US, fluctuations in prevailing interest rates can affect results from Jackson which has a significant spread-based business, with the majority of its assets invested in fixed income securities. In particular, fixed annuities and stable value products written by Jackson expose the Prudential Group to the risk that changes in interest rates, which are not fully reflected in the interest rates credited to customers, will reduce spread. The spread is the difference between the rate of return Jackson is able to earn on the assets backing the policyholders’ liabilities and the amounts that are credited to policyholders in the form of benefit increases, subject to minimum crediting rates. During 2008, the US financial services industry faced an unprecedented array of challenges: the S&P 500 index fell by 38.5%, government interest rates fell to historic lows, and global markets experienced a significant increase in volatility. In addition, credit markets seized up and global credit spreads widened to historic levels. These factors contributed to substantial increases in Jackson’s unrealised losses. Declines in spread from these products or other spread businesses that Jackson conducts could have a material impact on its businesses or results of operations. Jackson also writes a significant amount of variable annuities that offer capital or income protection guarantees. There could be unforeseen market circumstances where the derivatives that it enters into to hedge its market risks may not fully offset its losses, and any cost of the guarantees that remain unhedged will also affect the Prudential Group’s and the Enlarged Group’s results.

 

Interest rate fluctuations may materially and adversely affect the Enlarged Group’s profitability

 

A substantial portion of the Enlarged Group’s investment assets will be in interest-bearing investments. For example, for the AIA Group alone, fixed income securities represented 89% of the carrying value of total policyholder and shareholder investments as of 30 November 2009. During periods of declining interest rates the Enlarged Group’s average investment yield will decline as maturing investments, as well as bonds and loans that are redeemed or repaid in order to take advantage of the lower interest rate environment, are replaced with new investments with lower yields and coupon payments. As a result, the decline in interest rates would reduce the Enlarged Group’s return on investments, which could materially reduce its profitability, regardless of whether such investments are used to support particular insurance policy obligations.

 

Certain of the Enlarged Group’s insurance obligations will have a longer duration than its investment assets. In addition, some of the Enlarged Group’s premiums will be calculated based on an assumed investment yield. As such, lower interest rates may reduce the Enlarged Group’s average investment yield, while premiums from certain outstanding products remain unchanged thereby reducing profitability. Falling interest rates or a prolonged period of low interest rates may make it difficult for the Enlarged Group to match effectively its assets to its liabilities. If the current low interest rate environment continues, these negative effects on profitability will persist or possibly increase as average investment yield decreases. In addition, if a decrease in the profitability of the Enlarged Group’s products reduces the policyholder surplus relating to participating products, some payments to policyholders, such as non-guaranteed dividends, may decrease or not be paid. In such circumstances, the Enlarged Group may experience an increase in customer dissatisfaction, complaints, potential litigation or surrenders relating to these products.

 

The process of pricing the Enlarged Group’s products often entails making assumptions about interest rates. If actual interest rates are lower than the interest rates assumed during the product pricing process, this could have an adverse effect on the profitability of the products. For products with guaranteed interest rate benefits, declines in interest rates reduce the interest rate spread, or the difference between the amounts that are required to be paid under these products and the rate of return the Enlarged Group is able to earn on its investments intended to support its obligations under these products. The AIA Group has previously offered guaranteed interest products where the guaranteed rate of interest is in excess of current market interest rates. These products were sold primarily in China, the Philippines, Taiwan and Thailand at the then prevailing high market interest rates. As of 30 November 2009, the AIA Group’s aggregate policy reserves for such products, calculated in accordance with IFRS, amounted to US$3,504 million, or approximately 5.8% of total net reserves for all of its insurance policies.

 

During periods of rising interest rates, although the increased investment yield increases the returns on the investment portfolio, surrenders and withdrawals of policies may increase as policyholders seek investments with higher perceived returns. This process could lead to a cash outflow from the Enlarged Group’s business. Such outflows could require investment assets to be sold at a time when the prices of those assets are lower because of the increase in market interest rates, which could in turn result in realised investment losses. In addition, unanticipated surrenders and withdrawals could require the Enlarged Group to accelerate the amortisation of deferred policy acquisition costs, which would materially and adversely affect the results of operations. Moreover, a rise in interest

rates would have a material adverse effect on shareholders’ equity due to a decrease in the fair value of its fixed income investments.

 

The Enlarged Group will be subject to the risk of potential sovereign debt credit deterioration owing to the amounts of sovereign debt obligations held in its investment portfolio

 

The Enlarged Group will be subject to the risk of potential sovereign debt credit deterioration and default. Following the Acquisition, the Enlarged Group will hold significant amounts of local currency and foreign currency-denominated sovereign debt obligations in its investment portfolio. The AIA Group held government bonds, primarily issued by governments in Asia, with carrying value of US$17,970 million as of 30 November 2009. In particular, it held Thai government bonds issued in Thai Baht with a carrying value of US$7,374 million. As of 30 November 2009, the AIA Group’s aggregate investment in government bonds represented approximately 28% of the carrying value of the AIA Group’s total policyholder and shareholder investments. Investment in sovereign debt obligations involves risks not present in debt obligations of corporate issuers. Investing in such instruments creates exposure to the direct or indirect consequences of political, social or economic changes (including changes in governments, heads of states or monarchs) in the countries in which the issuers are located and the creditworthiness of the sovereign. In addition, the issuer of the debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or pay interest when due in accordance with the terms of such debt, and the Enlarged Group may have limited recourse to compel payment in the event of a default. A sovereign debtor’s willingness or ability to repay principal and to pay interest in a timely manner may be affected by, among other factors, its cash flow situation, its relations with its central bank, the extent of its foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s policy toward local and international lenders, and the political constraints to which the sovereign debtor may be subject. Periods of economic uncertainty may affect the volatility of market prices of sovereign debt to a greater extent than the volatility inherent in debt obligations of other types of issues. If a sovereign were to default on its obligations, this could have a material adverse effect on the Enlarged Group’s financial condition and results of operations.

 

The Prudential Group is, and the Enlarged Group will be, subject to the risk of exchange rate fluctuations owing to the geographical diversity of its businesses

 

Due to their geographical diversity, the Prudential Group’s and the Enlarged Group’s businesses are subject to the risk of exchange rate fluctuations (including the risk of the de-pegging of the HK dollar to the US dollar). The Prudential Group’s and Enlarged Group’s operations in the US and Asia, which represent a significant proportion of operating profit and shareholders’ funds, generally write policies and invest in assets denominated in local currency. Although this practice limits the effect of exchange rate fluctuations on local operating results, it can lead to significant fluctuations in the Prudential Group’s and Enlarged Group’s consolidated financial statements upon translation of results into pounds sterling. The currency exposure relating to the translation of reported earnings is not currently separately managed. The impact of gains or losses on currency translations is recorded as a component of shareholders’ funds within the statement of changes in equity. Consequently, this could impact on the Enlarged Group’s gearing ratios (defined as debt over debt plus shareholders’ funds).

 

The Prudential Group conducts, and the Enlarged Group will conduct, their businesses subject to regulation and associated regulatory risks, including the effects of changes in the laws, regulations, policies and interpretations and any accounting standards in the markets in which they operate

 

Changes in government policy (including through changes in governments, heads of state or monarchs), legislation (including tax) or regulatory interpretation applying to companies in the financial services and insurance industries in any of the markets in which the Prudential Group operates (or in which the Enlarged Group will operate), which in some circumstances may be applied retrospectively, may adversely affect the Prudential Group’s (and the Enlarged Group’s) product range, distribution channels, capital requirements and, consequently, reported results and financing requirements. For example, the AIA Group’s businesses in China, Malaysia and Thailand were established prior to the implementation of increased restrictions on foreign ownership, and if any of these were to become subject to more stringent ownership restrictions, this could have an adverse effect on the AIA Group’s business. Also, regulators in jurisdictions in which the Prudential Group operates (or in which the Enlarged Group will operate) may change the level of capital required to be held by individual businesses or could introduce possible changes in the regulatory framework for pension arrangements and policies, the regulation of selling practices and solvency requirements. Furthermore, as a result of the recent interventions by governments in response to global economic conditions, it is widely expected that there will be a substantial increase in government regulation and

supervision of the financial services industry, including the possibility of higher capital requirements, restrictions on certain types of transaction structure, and enhanced supervisory powers.

 

Current EU directives, including the EU Insurance Groups Directive (“IGD”) require European financial services groups to demonstrate net aggregate surplus capital in excess of solvency requirements at the group level in respect of shareholder-owned entities. The test is a continuous requirement, so that the Prudential Group needs (and the Enlarged Group will need) to maintain a somewhat higher amount of regulatory capital at the group level than otherwise necessary in respect of some of its individual businesses to accommodate, for example, short-term movements in global foreign exchange rates, interest rates, deterioration in credit quality and equity markets. The EU is also developing a new solvency framework for insurance companies, referred to as “Solvency II”. The new approach will be based on the concept of three pillars — minimum capital requirements, supervisory review of firms’ assessment of risk, and enhanced disclosure requirements — and will cover valuations, the treatment of insurance groups, the definition of capital and the overall level of capital requirements. A key aspect of Solvency II is that the assessment of risks and capital requirements will be aligned more closely with economic capital methodologies, and may allow the Prudential Group (and the Enlarged Group) to make use of its internal economic capital models, if approved by the FSA. The Solvency II Directive was formally approved by a meeting of the EU’s Economic and Financial Affairs Council on 10 November 2009. The European Commission has already initiated the process of developing the detailed rules that will complement the high-level Principles of the Directive, referred to as “implementing measures”, which are subject to a consultation process and are not expected to be finalised until late 2011. There is a significant uncertainty regarding the final outcome of this process. As a result there is a risk that the effect of the measures finally adopted could be adverse for the Enlarged Group, including potentially a significant increase in capital required to support its business.

 

Various jurisdictions in which the Prudential Group operates (and in which the Enlarged Group will operate) have created investor compensation schemes that require mandatory contributions from market participants in some instances in the event of a failure of a market participant. As a major participant in the majority of its chosen markets, circumstances could arise where the Prudential Group (and the Enlarged Group), along with other companies, may be required to make such contributions.

 

The Prudential Group’s accounts are prepared (and the Enlarged Group’s accounts will be prepared) in accordance with current IFRS applicable to the insurance industry. The International Accounting Standards Board (“IASB”) introduced a framework that it described as Phase I, which permitted insurers to continue to use the statutory basis of accounting for insurance assets and liabilities that existed in their jurisdictions prior to January 2005. The IASB has published proposals in its Phase II discussion paper, which would introduce significant changes to the statutory reporting of insurance entities that prepare accounts according to IFRS and has stated its intention to publish an Exposure Draft in 2010. It is uncertain whether and how the proposals in the discussion paper will become definitive IFRS and when such changes might take effect.

 

Any changes or modification of IFRS accounting policies may require a change in the future results or a restatement of reported results.

 

European Embedded Value (“EEV”) basis results are published as supplementary information by Prudential using principles issued by the European CFO (Chief Financial Officers) Forum. The EEV basis is a value-based reporting method for Prudential’s long-term business which is used by market analysts and which underpins a significant part of the key performance indicators used by Prudential’s management for both internal and external reporting purposes. In June 2008, in an effort to improve the consistency and transparency of embedded value reporting, the CFO Forum published the Market Consistent Embedded Value (MCEV) Principles. Following a review of the impact of turbulent market conditions on the MCEV Principles, the CFO Forum announced in May 2009 the postponement of the mandatory reporting on MCEV basis until 2011 and subsequently, in October 2009, changes in the principles to allow for the inclusion of a liquidity premium, which is the additional return investors require for investing in less liquid assets and is a key component in the calculation of the profitability of UK annuity business. It also announced that it was performing further work to develop more detailed application guidance to increase consistency going forward. When the work has been completed, Prudential (and the Enlarged Group) will consider its approach to the new Principles. The adoption of the new Principles would give rise to different embedded value results from those prepared under the application of European Embedded Value Principles.

 

The resolution of several issues affecting the financial services industry could have a negative impact on the Prudential Group’s and the Enlarged Group’s reported results or on their relations with current and potential customers

 

The Prudential Group is, and the Enlarged Group will be, and both in the future may be, subject to legal and regulatory actions in the ordinary course of their business, both in the UK and internationally. This could be a review

of business sold in the past under previously acceptable market practices at the time, such as the requirement in the UK to provide redress to certain past purchasers of pension and mortgage endowment policies, changes to the tax regime affecting products and regulatory reviews on products sold and industry practices, including, in the latter case, businesses it has closed.

 

Regulators particularly, but not exclusively, in the US and the UK are moving towards a regime based on principles-based regulation which brings an element of uncertainty. These regulators are increasingly interested in the approach that product providers use to select third party distributors and to monitor the appropriateness of sales made by them. In some cases, product providers can be held responsible for the deficiencies of third-party distributors.

 

In the US, federal and state regulators have focused on, and continue to devote substantial attention to, the mutual fund, fixed index variable annuity and insurance product industries. This includes new regulations in respect of the suitability of broker-dealers’ sales of certain products. As a result of publicity relating to widespread perceptions of industry abuses, there have been numerous regulatory inquiries and proposals for legislative and regulatory reforms.

 

In Asia, regulatory regimes are developing at different speeds, driven by a combination of global factors and local considerations. There is a risk that new requirements are introduced that are retrospectively applied to sales made prior to their introduction.

 

Litigation, disputes and regulatory investigations may adversely affect the Prudential Group’s and the Enlarged Group’s profitability and financial condition

 

The Prudential Group is, and may be in the future, and the Enlarged Group may be, subject to legal actions, disputes and regulatory investigations in the ordinary course of their insurance, investment management and other business operations. These legal actions, disputes and investigations may relate to aspects of the Prudential Group’s or the Enlarged Group’s businesses and operations that are specific to the Prudential Group or the Enlarged Group, or that are common to companies that operate in the Prudential Group’s or the Enlarged Group’s markets. Legal actions and disputes may arise under contracts, regulations (including tax) or from a course of conduct taken by the Prudential Group or the Enlarged Group, and may be class actions. Although the Prudential Group believes that it has adequately provided in all material aspects for the costs of litigation and regulatory matters, no assurance can be provided that such provisions are sufficient. Given the large or indeterminate amounts of damages sometimes sought, and the inherent unpredictability of litigation and disputes, it is possible that an adverse outcome could, from time to time, have an adverse effect on the Prudential Group’s and the Enlarged Group’s results of operations or cash flows.

 

The Prudential Group’s businesses are conducted, and the Enlarged Group’s businesses will be conducted, in highly competitive environments with developing demographic trends and continued profitability depends on management’s ability to respond to these pressures and trends

 

The markets for financial services in the UK, US and Asia are highly competitive, with several factors affecting the Prudential Group’s and Enlarged Group’s ability to sell their products and continued profitability, including price and yields offered, financial strength and ratings, range of product lines and product quality, brand strength and name recognition, investment management performance, historical bonus levels, developing demographic trends and customer appetite for certain savings products. In some of its markets, the Prudential Group faces, and the Enlarged Group may face, competitors that are larger, have greater financial resources or a greater market share, offer a broader range of products or have higher bonus rates or claims-paying ratios. Further, heightened competition for talented and skilled employees and agents with local experience, particularly in Asia, may limit the Prudential Group’s and the Enlarged Group’s potential to grow their business as quickly as planned.

 

In Asia, the Prudential Group’s and Enlarged Group’s principal regional competitors are international financial companies, including Allianz, AXA, ING, and Manulife. In a number of markets, local companies have a very significant market presence.

 

Within the UK, the Prudential Group’s principal competitors in the life market include many of the major retail financial services companies including, in particular, Aviva, Legal & General, Lloyds Banking Group and Standard Life.

 

Jackson’s competitors in the US include major stock and mutual insurance companies, mutual fund organisations, banks and other financial services companies such as AIG, AXA Financial Inc., Hartford Life Inc., Lincoln National, MetLife and TIAA-CREF.

 

The Prudential Group believes competition will intensify across all regions in response to consumer demand, technological advances, the impact of consolidation, regulatory actions and other factors. The Prudential Group’s and the Enlarged Group’s ability to generate an appropriate return depends significantly upon its capacity to anticipate and respond appropriately to these competitive pressures.

 

Downgrades in the Prudential Group’s, and following the Acquisition, the Enlarged Group’s, financial strength and credit ratings could significantly impact its competitive position and hurt its relationships with creditors or trading counterparties

 

The Prudential Group’s financial strength and credit ratings, which are used by the market to measure its ability to meet policyholder obligations, are an important factor affecting public confidence in most of the Prudential Group’s products, and as a result its competitiveness. Downgrades in the Prudential Group’s, AIA Group’s and/or the Enlarged Group’s ratings, as a result of, for example, decreased profitability, increased costs, increased indebtedness or other concerns, could have an adverse effect on its ability to market products and retain current policyholders. In addition, the interest rates the Prudential Group pays on its borrowings are affected by its debt credit ratings, which are in place to measure the Prudential Group’s ability to meet its contractual obligations.

 

As at 31 March 2010:

 

Prudential’s long-term senior debt is rated as A2 (negative outlook) by Moody’s, A+ (negative watch) by Standard & Poor’s and A+ (negative watch) by Fitch;

 

Prudential’s short-term debt is rated as P-1 by Moody’s, A-1 by Standard & Poor’s and F1+ (negative watch) by Fitch;

 

The Prudential Assurance Company Limited long-term fund is rated Aa2 (negative outlook) by Moody’s, AA (negative watch) by Standard & Poor’s and AA+ (negative watch) by Fitch;

 

Jackson’s financial strength is rated AA (negative watch) by Standard & Poor’s and Fitch, A1 (negative outlook) by Moody’s, and A+ (under review- negative) by AM Best; and

 

American International Assurance Company Limited’s financial strength is rated A+ (developing) by Standard & Poor’s.

 

In addition, changes in methodologies and criteria used by rating agencies could result in downgrades that do not reflect changes in the general economic conditions or the Prudential Group’s financial condition or, following the Acquisition, the Enlarged Group’s financial condition.

 

The Enlarged Group has not yet been rated. There can be no assurance that the Enlarged Group will be rated the same or higher than the current rating of Prudential, its subsidiaries or AIA Co.

 

Adverse experience in the operational risks inherent in the Prudential Group’s and the Enlarged Group’s businesses could have a negative impact on their results of operations

 

Operational risks are present in all of the Prudential Group’s businesses and will be present in all of the Enlarged Group’s businesses, including the risk of direct or indirect loss resulting from inadequate or failed internal and external processes, systems and human error or from external events. The Prudential Group’s business is, and the Enlarged Group’s business will be, dependent on processing a large number of complex transactions across numerous and diverse products, and is subject to a number of different legal and regulatory regimes. In addition, the Prudential Group outsources and the Enlarged Group will outsource, several operations, including a significant part of its UK back office and customer-facing functions as well as a number of IT functions, resulting in reliance upon the operational processing performance of its outsourcing partners.

 

Further, because of the long-term nature of much of the Prudential Group’s business, accurate records have to be maintained for significant periods. The Prudential Group’s systems and processes incorporate controls which are designed to manage and mitigate the operational risks associated with its activities. For example, any weakness in the administration systems or actuarial reserving processes could have an impact on its results of operations during the effective period. The Prudential Group has not experienced or identified any operational risks in its systems or processes during 2009, which have subsequently caused, or are expected to cause, a significant negative impact on its results of operations.

 

In addition, the AIA Group has been gradually implementing certain corporate initiatives to update and improve its financial reporting, actuarial and information systems. Key aspects of these initiatives include the introduction of new automated systems to track and analyse investments and the migration to a uniform actuarial platform. Significant time, investments and management resources will be required for these financial reporting systems to be

fully updated and optimised. While the Prudential Group has, and the Enlarged Group will have, the IT, management and other reporting systems required for Prudential and New Prudential each to comply with its obligations as a company with securities admitted to the Official List and as a supervised firm regulated by the FSA, as a result of the AIA Group’s recent corporate initiatives, the Enlarged Group may experience difficulties that could adversely affect the ability of the Enlarged Group to run its business.

 

Adverse experience against the assumptions used in pricing products and reporting business results could significantly affect the Prudential Group’s and the Enlarged Group’s results of operations

 

The Prudential Group needs, and the Enlarged Group will need, to make assumptions about a number of factors in determining the pricing of its products and setting reserves and for reporting its capital levels and the results of its long-term business operations. For example, the assumption that the Prudential Group makes about future expected levels of mortality is particularly relevant for its UK annuity business. In exchange for a premium equal to the capital value of their accumulated pension fund, pension annuity policyholders receive a guaranteed payment, usually monthly, for as long as they are alive. The Prudential Group conducts rigorous research into longevity risk, using data from its substantial annuitant portfolio. As part of its pension annuity pricing and reserving policy, the Prudential Group’s UK business assumes that current rates of mortality continuously improve over time at levels based on adjusted data from the Continuous Mortality Investigations (CMI) as published by the Institute and Faculty of Actuaries. If mortality improvement rates significantly exceed the improvement assumed, the Prudential Group’s and Enlarged Group’s results of operations could be adversely affected.

 

A further example is the assumption that the Prudential Group makes about future expected levels of the rates of early termination of products by its customers (persistency). This is particularly relevant to its lines of business other than its UK annuity business. The Prudential Group’s persistency assumptions reflect recent past experience for each relevant line of business. Any expected deterioration in future persistency is also reflected in the assumption. If actual levels of future persistency are significantly lower than assumed (that is, policy termination rates are significantly higher than assumed), the Prudential Group’s and the Enlarged Group’s results of operations could be adversely affected.

 

Another example is the impact of epidemics and other effects that cause a large number of deaths. Significant influenza epidemics have occurred three times in the last century, but the likelihood, timing, or the severity of future epidemics can not be predicted. The effectiveness of external parties, including governmental and non-governmental organisations, in combating the spread and severity of any epidemics could have a material impact on the Prudential Group’s and Enlarged Group’s loss experience.

 

In common with other industry participants, the profitability of the Prudential Group’s and the Enlarged Group’s businesses depends on a mix of factors including mortality and morbidity trends, policy surrender rates, investment performance and impairments, unit cost of administration and new business acquisition expense.

 

The business and prospects of the Enlarged Group may be materially and adversely affected if it is not able to manage the growth of the Enlarged Group’s operations successfully

 

The life insurance market in the Asia region has experienced significant growth in recent years. Management of the AIA Group’s growth to date has required significant management and operational resources and is likely to continue to do so. Future growth of the Enlarged Group will require, among other things: the continued development of adequate underwriting and claim handling capabilities and skills, sufficient capital base, increased marketing and sales activities and the hiring and training of new personnel.

 

There is no assurance that the Enlarged Group will be successful in managing future growth. In particular, there may be difficulties in hiring and training sufficient numbers of customer service personnel and agents to keep pace with any future growth in the number of customers in the Asia region. In addition, the Enlarged Group may experience difficulties in upgrading, developing and expanding information technology systems quickly enough to accommodate any future growth. If it is unable to manage future growth successfully, the Enlarged Group’s business and prospects may be materially and adversely affected.

 

As holding companies, Prudential and AIA are each dependent upon their respective subsidiaries to cover operating expenses and dividend payments and, following the Acquisition, New Prudential will in turn depend on dividend payments from Prudential and AIA

 

The Prudential Group’s and AIA Group’s insurance and investment management operations are generally conducted through direct and indirect subsidiaries.

 

As holding companies, Prudential’s and AIA’s principal sources of funds are remittances from subsidiaries, shareholder-backed funds, the shareholder transfer from long-term funds and any amounts that may be raised through the issuance of equity, debt and commercial paper. Certain of the subsidiaries of each of Prudential and AIA are restricted by applicable insurance, foreign exchange and tax laws, rules and regulations that can limit the payment of dividends, which in some circumstances could limit the ability to pay dividends to shareholders or to make available funds held in certain subsidiaries to cover operating expenses of other members of the Enlarged Group. In particular, AIA has historically been limited by regulators in Thailand on the extent to which it can distribute surplus capital from AIA Thailand to any other subsidiary or branch of the AIA Group. In addition, AIA Co and AIA-B will be required to maintain certain solvency ratios pursuant to an undertaking given by Prudential to the OCI in connection with the Transactions.

 

Following the Acquisition, New Prudential will be dependent on dividend payments from Prudential and AIA.

 

The Prudential Group operates, and the Enlarged Group will operate, in a number of markets through joint ventures and other arrangements with third parties (including in China and India), involving certain risks that the Prudential Group does not, and the Enlarged Group will not, face with respect to its consolidated subsidiaries

 

The Prudential Group operates, and the Enlarged Group will operate, and in certain markets is required by local regulation to operate, through joint ventures (including in China and India). The Prudential Group’s and Enlarged Group’s ability to exercise management control over their joint venture operations and their investment in them depends on the terms of the joint venture agreements, in particular, the allocation of control among, and continued co-operation between, the joint venture participants. The Prudential Group and the Enlarged Group may also face financial or other exposure in the event that any of their joint venture partners fails to meet their obligations under the joint venture or encounters financial difficulty. In addition, a significant proportion of the Prudential Group’s and the Enlarged Group’s product distribution is and will be carried out through arrangements with third parties not controlled by the Prudential Group and Enlarged Group respectively and is dependent upon continuation of these relationships. A temporary or permanent disruption to these distribution arrangements could adversely affect the results of operations of the Prudential Group and the Enlarged Group.

 

Prudential’s Articles of Association contain an exclusive jurisdiction provision

 

Under Prudential’s Articles of Association, certain legal proceedings may only be brought in the courts of England and Wales. This applies to legal proceedings by a shareholder (in its capacity as such) against Prudential and/or its directors and/or its professional service providers. It also applies to legal proceedings between Prudential and its directors and/or Prudential and Prudential’s professional service providers that arise in connection with legal proceedings between the shareholder and such professional service provider. This provision could make it difficult for US and other non-UK shareholders to enforce their shareholder rights. It is expected that the articles of association of New Prudential will also include a similar provision.

 

Events relating to the AIG Group could continue to harm the AIA Group’s business and reputation and could also harm the Prudential Group’s business and reputation

 

Following the AIG Events, the AIA Group’s customers, agents and employees, regulators and business counterparties expressed concerns about the business and financial condition of the AIG Group and the AIA Group. As a result, the AIA Group experienced a temporary increase in policy surrenders and withdrawals and a reduction in new business, primarily attributable to a perceived reduction in the AIA Group’s financial strength. Following completion of the Acquisition, the AIA Group will continue to have relationships with the AIG Group, including the provision of services. In addition, although the AIA Group has re-branded a number of its products and businesses to more closely associate them with AIA, in part to overcome any perception of instability surrounding the AIG Group, the re-branding efforts may not be successful or events related or relating to the AIG Group may still adversely impact the AIA Group’s reputation. There is also the risk that the Prudential Group’s business may suffer due to the association with the AIA Group (including as a result of AIA Aurora’s (a subsidiary of AIG) holdings in New Prudential to be issued as part of the consideration for the Acquisition) following the Acquisition, which may lead to, for example, higher withdrawals, lower new business sales, a negative impact on relations with creditors, or a negative impact on the Prudential Group’s credit ratings.

 

Agent, employee and distribution partner misconduct is difficult to detect and deter and could harm the Enlarged Group’s reputation or lead to regulatory sanctions or litigation

 

Agent, employee or distribution partner misconduct could result in violations of law, regulatory sanctions, litigation or serious reputational or financial harm. Such misconduct could include: binding the Enlarged Group to transactions that exceed authorised limits; hiding unauthorised or unsuccessful activities resulting in unknown and unmanaged risks or losses; improperly using or disclosing confidential information, illegal or improper payments; recommending products, services or transactions that are not suitable for customers; misappropriation of funds; engaging in misrepresentation or fraudulent, deceptive or otherwise improper activities when marketing or selling products to customers; engaging in unauthorised or excessive transactions to the detriment of customers; or otherwise not complying with applicable laws or internal policies and procedures.

 

The measures that the Enlarged Group takes to detect and deter misconduct by agents, employees and distribution partners may not be effective in all cases and may therefore not always be successful in detecting or deterring such misconduct. There is no assurance that any such misconduct would not have a material adverse effect on the Enlarged Group’s reputation, business, financial condition, results of operation or prospects.

 

Changes in tax legislation may result in adverse tax consequences

 

Tax rules, including those relating to the insurance industry, and their interpretation, may change, possibly with retrospective effect, in any of the jurisdictions in which the Enlarged Group operates. Significant tax disputes with tax authorities, and any change in the tax status of any member of the Prudential Group or the Enlarged Group or in taxation legislation or its interpretation could affect the Prudential Group’s and the Enlarged Group’s profitability and ability to provide returns to shareholders or alter the post-tax returns to shareholders.

 

2.	Risks relating to the Transactions

 

The Acquisition and the Scheme may each not complete

 

Completion of the Acquisition is subject to the satisfaction (or waiver) of a number of conditions precedent (including the approval of the holders of Prudential Shares, the approval of the Scheme by the Court and relevant competition and regulatory clearances). Any relevant body may refuse its approval or, in the case of competition or regulatory authorities, may seek to make their approval subject to compliance by Prudential with unanticipated or onerous conditions. In certain jurisdictions, although consent may not be required from the relevant regulator, there may be the risk of that regulator imposing onerous requirements on the Enlarged Group because of the Acquisition. These conditions, if accepted, could have the effect, among other things, of imposing significant additional costs on the Enlarged Group, limiting the Enlarged Group’s revenues, requiring divestitures of certain assets, reducing the anticipated benefits of the Acquisition or imposing other operating restrictions upon the business of the Enlarged Group.

 

The Rights Issue is not conditional upon completion of the Acquisition. If completion of the Acquisition does not occur, which Prudential believes is unlikely, Prudential’s current intention is that the net proceeds of the Rights Issue will be invested on a short-term basis while Prudential considers how the net proceeds of the Rights Issue (after deduction of Rights Issue and Transaction related expenses and hedging costs) will be returned to Prudential’s shareholders. In considering how any such proceeds might be returned to Prudential’s shareholders, Prudential will take into account, amongst other things, the tax implications for Prudential’s shareholders.

 

In addition, if completion of the Acquisition does not occur, which Prudential believes is unlikely, a termination fee of £153 million (including any VAT due in respect thereof) is, in certain circumstances, payable by Prudential to AIA Aurora.

 

The integration of the Prudential Group and AIA Group may be more difficult than anticipated

 

The integration process following the completion of the Acquisition may prove more difficult than anticipated. In addition, if the focus on this process impacts on the performance of its business, the results and operations of the Enlarged Group are also at risk. The integration may take longer than expected, or difficulties relating to the integration may arise or may cost more than estimated. The integration could fail to achieve the increased revenues, earnings, cost savings and operational benefits that are expected to result from the Acquisition and could even incur substantial costs as a result of, for example, inconsistencies in standards, controls, procedures and policies and business cultures between the Prudential Group and the AIA Group and the diversion of management’s attention from their responsibilities as a result of the need to deal with integration issues. The success of the integration could also be adversely affected by the occurrence of external factors that are outside the control of the Enlarged Group, such as the adoption of aggressive pricing strategies or other competitive initiatives by the Enlarged Group’s

competitors at a time when the Prudential Group and AIA Group are focused on implementing the integration. Any difficulties in the integration of internal policies, procedures and controls, for example in relation to risk management, could correspondingly increase the risk exposure and losses may be experienced as a direct or indirect result of failures of the Enlarged Group’s policies and controls.

 

In addition, the Enlarged Group will rely to a large extent on its ability to attract and retain key personnel, including agents, who have in-depth knowledge and understanding of the life insurance market in the geographical markets in which it operates. Key personnel may depart because of issues relating to the uncertainty or difficulty of integration or a desire not to remain with the Enlarged Group. The loss of the services of these personnel may cause the Enlarged Group’s business to suffer.

 

The Enlarged Group may fail to realise the anticipated benefits, including estimated synergies, and may fail to achieve its targets, in relation to the Acquisition

 

Prudential anticipates that it can realise material synergies and growth opportunities from, and achieve certain financial targets following, the combination of the Prudential Group and the AIA Group. To realise the anticipated benefits of this combination, the Enlarged Group will need to, amongst other things, develop strategies and implement a business plan to achieve higher growth through improved sales productivity, higher efficiency, cost savings, complementary distribution channels and broader product offering. The ability of the Enlarged Group to achieve the expected synergies and other benefits of the Acquisition, including in particular the expected revenue and cost synergies and the financial targets described in section 4 of Part VI (Information about the Enlarged Group), is subject to the occurrence or non-occurrence of a number of assumptions, including, but not limited to, those set out in that section, and other factors set out in this Part II (Risk Factors). If, the Enlarged Group’s strategies and business plan following the Acquisition fail to achieve these anticipated benefits, if the value of these anticipated benefits is lower than expected, or if these anticipated benefits take longer or cost more to achieve, the targets and estimated synergies may not be achieved or the profitability of the Enlarged Group going forward could be significantly impacted.

 

Change of control provisions in the AIA Group’s and Prudential Group’s agreements may be triggered upon the completion of the Acquisition and may lead to adverse consequences

 

Each of the AIA Group and the Prudential Group may be party to contracts, agreements and instruments that contain change of control provisions that may be triggered upon the completion of the Acquisition. Agreements with change of control provisions typically provide for, or permit the termination of, the agreement upon the occurrence of a change of control of one of the parties. Usually these provisions, if any, may be waived with the consent of the other party, and Prudential will consider whether it will seek these waivers. In the absence of these waivers, the operation of the change of control provisions, if any, could result in the loss of significant contractual rights and benefits, the termination of significant agreements or the payment of a termination fee. In addition, employment agreements or other employee benefit arrangements with members of each of the AIA Group’s and the Prudential Group’s employees may contain change of control provisions providing for additional payments following a change of control.

 

The Acquisition and the Scheme may negatively impact the Prudential Group’s or the AIA Group’s tax position

 

The Acquisition and the Scheme in certain jurisdictions are likely to constitute a change of ownership of the AIA Group and the Prudential Group respectively, which may have a negative impact on their respective tax positions. The tax consequences of a change of ownership of a company can include the loss or restriction of certain tax attributes arising before the change of ownership, including, but not limited to, tax losses, tax credits and/or tax basis in assets. The consequences of a change of ownership on the tax position of the Prudential Group or the AIA Group are not expected to be material in the context of the Enlarged Group. In addition, the change of ownership may result in other tax costs not normally associated with the ordinary course of business.

 

Share prices may fluctuate

 

The market price of Prudential Shares and Rights Issue Shares (including Nil Paid Rights and Fully Paid Rights) could be subject to significant fluctuations due to changes in sentiment in the market. Such risks depend on the market’s perception of the likelihood of completion of the Rights Issue and of the Acquisition, and/or in response to various facts and events, including variations in the Prudential Group’s operating results and business developments of Prudential Group and/or its competitors. Stock markets have from time to time experienced significant price and

volume fluctuations that have affected the market prices for securities and which may be unrelated to the Prudential Group’s operating performance or prospects. Furthermore, the Prudential Group’s operating results and prospects from time to time may be below the expectations of market analysts and investors. Any of these events could result in a decline in the market price of Prudential Shares and Rights Issues Shares (including Nil Paid Rights and Fully Paid Rights).

 

In addition, Prudential has a number of significant shareholders, including, upon completion of the Transactions, AIA Aurora (a subsidiary of AIG), which will hold approximately 10.9% of the issued ordinary share capital of New Prudential (subject to adjustments for, inter alia, further issues of Prudential Shares or New Prudential Shares in the period prior to completion of the Acquisition). A sale or sales of a substantial number of Prudential Shares by any of these significant shareholders, either in the public market or in private transactions, or perception that such a sale or sales may occur, could adversely affect the market price of Prudential Shares.

 

Shareholders who do not take up their rights in full will experience significant dilution in their ownership

 

Those holders of Existing Shares who do not participate in the Rights Issue will suffer a significant reduction in their proportionate ownership and voting interest in the Prudential Shares as represented by their holding of Prudential Shares immediately following Admission. Even if a holder of Existing Shares elects to sell his unexercised Nil Paid Rights, or such Nil Paid Rights are sold on his behalf, the consideration he receives may not be sufficient to compensate such a holder fully for the dilution of his percentage ownership of Prudential that may be caused as a result of the Rights Issue.

 

Following completion of the Transactions, shareholders will also experience dilution in their proportionate ownership and voting interest in New Prudential as compared to their proportionate ownership and voting interest in Prudential because of the issue by New Prudential of ordinary shares to AIA Aurora as part of the consideration for the Acquisition.

 

The trading market for Nil Paid Rights may not develop

 

An active trading market in the Nil Paid Rights may not develop on the London Stock Exchange, the Hong Kong Stock Exchange and/or the SGX-ST during the trading period. In addition, because the trading price of the Nil Paid Rights depends on the trading price of the Prudential Shares, the Nil Paid Rights price may be volatile.

 

The period required for Prudential Shares and New Prudential Shares to be transferred between the UK and Hong Kong markets and between the Hong Kong and Singapore markets may be longer than expected, and shareholders may not be able to settle or effect any sales of their shares during this period

 

There is no direct trading or settlement between the stock exchanges of London and Hong Kong nor between the stock exchanges of Hong Kong and Singapore. To enable the migration of Prudential Shares and New Prudential Shares between the relevant stock exchanges, shareholders are required to comply with specific procedures and bear necessary costs. However, there is no assurance that the transfer of Prudential Shares or New Prudential Shares will complete in accordance with the expected timelines. There may be unforeseen market circumstances or other factors which delay the transfer, thereby preventing shareholders from settling or effecting the sale of their Prudential Shares or New Prudential Shares.

 

An active trading market for Prudential Shares on the Hong Kong Stock Exchange may not develop or be sustained, their trading prices may fluctuate significantly and the effectiveness of the liquidity arrangements by Designated Dealers may be limited

 

Following the completion of the introduction of the Prudential Shares on the Hong Kong Stock Exchange (the “Introduction”), Prudential cannot assure that an active trading market for Prudential Shares on the Hong Kong Stock Exchange will develop or be sustained. In addition, the expected market price for Prudential Shares in Hong Kong following the Introduction may not be indicative of the trading prices of the Prudential Shares on the London Stock Exchange and Prudential ADRs on the New York Stock Exchange. If an active trading market of Prudential Shares in Hong Kong does not develop or is not sustained after the Introduction, the market price and liquidity of the Prudential Shares on the Hong Kong Stock Exchange could be materially and adversely affected.

 

Throughout the Designated Period, the Designated Dealers intend to carry out certain liquidity activities. Whilst such stock borrowing and trading activities are expected to contribute towards liquidity to meet demand for Prudential Shares to avoid a disorderly market in the Prudential Shares arising from excess demand for Prudential Shares not fulfilled in Hong Kong upon and during the initial period following the Introduction, investors should be aware that such liquidity arrangements are subject to the Designated Dealers’ ability to obtain sufficient numbers of

Prudential Shares for settlement on the Hong Kong market to meet demand. There is no guarantee that such liquidity arrangements will attain and/or maintain liquidity in the Prudential Shares at any particular level on the Hong Kong Stock Exchange, nor is there any assurance that the price of Prudential Shares in Hong Kong will not exhibit significant volatility.

 

The liquidity arrangements do not create any obligation on the Designated Dealers to undertake any stock borrowing, trades or other transactions in the Prudential Shares. Accordingly, there is no guarantee that during the Designated Period, the price at which the Shares are traded on the Hong Kong Stock Exchange will be substantially the same as or similar to the price at which Prudential Shares are traded on the London Stock Exchange or that any particular volume of Prudential Shares will trade on the Hong Kong Stock Exchange. The liquidity arrangements being implemented in connection with the Introduction are not equivalent to the price stabilisation activities which may be undertaken in connection with an initial public offering. In addition, the Designated Dealers are not acting as market makers and do not undertake to create or make a market in Prudential Shares on the Hong Kong Stock Exchange. In particular, the Designated Dealers do not intend to seek to use buying of Prudential Shares in Hong Kong to meet excess supply in the market.

 

The liquidity arrangements will also terminate and cease to continue beyond the Designated Period. Accordingly, there may be volatility in the Hong Kong market after the Designated Period and in particular during the period when movements of Prudential Shares between the UK Register and the HK Register are suspended in connection with the Rights Issue when the availability of Prudential Shares in Hong Kong may be limited. Upon expiry of the Designated Period, the Designated Dealers will be obliged to return the Prudential Shares they have borrowed pursuant to the liquidity arrangements. If this is effected by purchasing Prudential Shares in the UK market and transferring such Prudential Shares to the lenders, such activity may create volatility in the UK market which may, in turn, lead to volatility in the Hong Kong market. If this is effected by returning unutilised Prudential Shares borrowed in the UK and moved to Hong Kong back to the UK, such Prudential Shares would no longer be available to contribute to liquidity in the Hong Kong market.

 

FORWARD-LOOKING STATEMENTS

 

This prospectus includes ‘forward-looking statements’, with respect to certain of the Prudential Group’s and the Enlarged Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategy and objectives. Forward-looking statements include, without limitation, statements that typically contain words such as ‘will’, ‘may’, ‘should’, ‘continue’, ‘aims’, ‘believes’, ‘expects’, ‘estimates’, ‘intends’, ‘anticipates’, ‘projects’, ‘plans’ or similar expressions. By their nature, forward-looking statements involve material risks and uncertainties because they relate to events and depend on circumstances that all occur in the future. Many of these risks and uncertainties relate to factors that are beyond the Prudential Group’s and/or the Enlarged Group’s abilities to control or estimate precisely, such as future market conditions, 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 standards, solvency standards or accounting standards, and tax and other legislation and regulations in the jurisdictions in which the Prudential Group and the Enlarged Group operate, together with material risks and uncertainties in relation to the Transactions including the possibility that the Transactions may not be consummated, the ability to achieve expected synergies, including in particular the expected revenue and cost synergies, and the financial targets described in section 4 of Part VI (Information about the Enlarged Group), improved productivity and opportunities for growth from the Transactions; and also all the other factors discussed in Part II (Risk Factors). 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, the Prudential Group’s and/or Enlarged Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the forward-looking statements.

 

The forward-looking statements contained in this prospectus are made as of the date hereof. Prudential and New Prudential may also make or disclose written and/or oral forward-looking statements in reports filed or furnished to the UKLA, the FSA, the London Stock Exchange, the Hong Kong Stock Exchange, the SFC, the SGX-ST, the MAS or the US Securities and Exchange Commission, as well as in their annual report and accounts to shareholders, proxy statements, offering circulars, registration statements and prospectuses, press releases and other written materials and in oral statements made by directors, officers or employees to third parties, including financial analysts. Neither Prudential, New Prudential, any member of the Prudential Group, nor the Enlarged Group assumes any obligation or has any intention to publicly update or revise these forward-looking statements, whether as a result of future events, new information or otherwise except as required pursuant to the Prospectus Rules, the Listing Rules, the Disclosure and Transparency Rules, the Hong Kong Listing Rules or the SGX-ST listing rules. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed in Part II (Risk Factors) of this prospectus. These risk factors are not exhaustive as the Prudential Group operates, and the Enlarged Group will operate, in a continually changing business environment with new risks emerging from time to time that it may be unable to predict or that it currently does not expect to have a material adverse effect on its business. Investors should carefully read this prospectus in its entirety as it contains important information about the business of the Prudential Group and the Enlarged Group and the risks it faces and management plans and objectives.

 

PRESENTATION OF AIA GROUP FINANCIAL INFORMATION

 

IFRS basis financial information

 

The AIA Group was formed following the combination of the branches and subsidiaries of AIA Co, its chief operating subsidiary, with certain of the Asia Pacific life insurance operations of the AIG Group. The AIA Group reorganisation and business combinations arising from transfers of interests in entities that are under the common control of AIG throughout all periods presented in the historical financial information at Part XV of this prospectus have been accounted for as if they had occurred at the beginning of the earliest period presented. Accordingly, the AIA Group historical financial information included in Part XV of this prospectus presents the results of operations of the AIA Group as if it had been in existence throughout the period from 1 December 2006 to 30 November 2009.

 

Part XV of this prospectus contains the historical financial information as of and for the years ended 30 November 2007, 2008 and 2009, which has been prepared in accordance with IFRS, as adopted by the European Union. This

consolidated financial information has been reported on by PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, as stated in their report appearing in Part XV of this prospectus. The financial information relating to the AIA Group comprises the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of financial position, and the consolidated statement of cash flows of the AIA Group, and disclosure notes. The AIA Group’s consolidated financial information is presented in US dollars, the AIA Group’s presentation currency. Accordingly, the results and financial position of the AIA Group’s subsidiaries must be translated into the presentation currency of the AIA Group from their functional currencies, i.e. the currency of the primary economic environment in which the entity operates.

 

Operating profit

 

Note 7 to the historical financial information for the AIA Group contained in Part XV of this prospectus provides segment results for the AIA Group by reference to a performance measure of “operating profit”. This measure is part of the total profit before tax attributable to policyholder returns and shareholders. Note 5 to the AIA Group historical financial information provides a reconciliation of the operating profit to profit before tax. The “operating profit” measure is the basis on which management regularly reviews the performance of the AIA Group segments as defined by IFRS 8.

 

The AIA Group defines operating profit before and after tax respectively as profit excluding the following non-operating items:

 

•	investment experience (which consists of realised gains and losses, foreign exchange gains and losses, impairments and unrealised gains and losses on investments held at fair value through profit or loss);
•	investment income related to investment-linked contracts (consisting of dividends, interest income and rent income);
•	investment management expenses related to investment-linked contracts;
•	corresponding changes in insurance and investment contract liabilities in respect of investment-linked contracts and participating funds and changes in third party interests in consolidated investment funds resulting from the above; and
•	other significant items that management considers to be non-operating income and expenses

 

For this and additional information that is important to understanding the AIA Group’s financial condition and results of operation, see Part XIII (Operating and Financial Review of the AIA Group) of this prospectus.

 

EEV basis supplementary information

 

This prospectus also contains EEV basis supplementary information for the AIA Group as at 30 November 2009 as prepared by Prudential. The information also sets out the contribution to the EEV of new covered business written in the twelve months prior. Prudential has prepared these EEV results with the intention of complying with the EEV Principles and Guidance, with the exception of certain disclosure requirements. This information is set forth in Part XV (Historical Financial Information for AIA) of this prospectus.

 

COMPARABILITY OF IFRS BASIS FINANCIAL INFORMATION AND EEV BASIS SUPPLEMENTARY INFORMATION FOR PRUDENTIAL GROUP AND AIA GROUP

 

IFRS basis financial information

 

The IFRS basis information included in the Prudential Annual Report for 2009 and Part XV of this prospectus for Prudential and AIA respectively has been prepared applying consistent IFRS accounting policies. Whilst consistent IFRS accounting policies have been applied the practical application of certain of these policies varies between the companies. These differences of application are particularly of note in the following two areas:

 

	a)	The application of previous GAAP under the IASB standard IFRS 4 (“Insurance Contracts”) for the measurement of assets and liabilities of insurance contracts and the presentation of deposits and withdrawals for insurance contracts with investment features. Under IFRS 4 insurers are permitted to apply different measurement bases pending development by the IASB of a comprehensive phase II standard. In addition to differences of measurement, under IFRS 4 Prudential accounts for all premium and benefit flows within the income statement. AIA accounts for the investment components directly as movements in the balance sheet.

 

	b)	The application of segment basis reporting of a supplementary reporting measure for operating profits. The operating profit measures for Prudential and AIA are different, in particular in terms of the measurement of profits for with-profits funds and the differing approaches to allocation of investment return between operating and non-operating profit. Prudential’s approach to with-profit accounting is to recognise profits on a distribution basis rather than, as for AIA, as a share of the earnings of the funds. The Prudential basis of operating profit includes longer-term capital returns for assets backing non-participating business whereas AIA’s operating profit does not. The unaudited pro forma financial information set out in Part XVI of this prospectus includes footnote disclosure of the 2009 profit before shareholder tax for the Enlarged Group by the supplementary analysis applied by Prudential. This analysis includes its measure of “operating profit based on longer-term investment returns” and the disclosure is accompanied by an explanation of the adjustments made to the 2009 AIA basis operating profit to derive the Prudential basis “Operating profit based on longer-term investment returns” for AIA.

 

EEV basis supplementary information

 

The EEV methodology adopted by Prudential is in accordance with the EEV principles and guidance issued in May 2004 by the European Insurers’ CFO forum and expanded by the additional guidance on EEV disclosures issued in October 2005. The EEV methodology used for AIA Group, as shown in the unaudited pro forma financial information set out in Part XVI of this prospectus is also in accordance with the same EEV principles and guidance except for certain disclosure points referred to in the Consulting Actuaries’ Report set out in Part XV of this document.

 

As such, the EEV methodologies used for both companies are in accordance with the EEV principles; however the principles do allow for different approaches to be taken by companies. There are two principal differences between the EEV methodology adopted by Prudential and that used for AIA Group. The first is in relation to the way that risk is allowed for in the embedded value calculations and the second is in relation to the way that long term economic assumptions are set. Both approaches are acceptable under the EEV principles. It is important to note that each of these differences should not be considered in isolation, but together with the other differences as part of the entire EEV basis, i.e. the risk discount rates should be considered in conjunction with the long term economic assumptions rather than separately and vice versa.

 

In setting risk discount rates Prudential Group has based these on risk free rates plus a risk margin. The risk margin reflects an allowance for non diversifiable risk associated with the emergence of distributable earnings not allowed for elsewhere in the valuation. Prudential Group has selected a granular approach that reflects differences in market risks inherent in product groups. The risk discount rate so derived does not reflect a market beta but instead reflects the expected volatility associated with cash flows in the embedded value model. Since financial options and guarantees are explicitly valued using stochastic techniques, discount rates under EEV are set excluding the effect of these product features. The approach to setting risk discount rates for AIA Group is a top down approach using weighted industry specific equity capital costs. The cost of equity capital is derived using estimated long term risk free rates, an equity risk premium and industry specific beta for each country where business is sold. No explicit valuation of options and guarantees is set out and as such the discount rates set for AIA Group include an allowance for financial options and guarantees. Both approaches are acceptable under the EEV principles.

 

For Prudential Group at 31 December 2009 — in-force business

 

		China				Hong Kong1				India				Indonesia				Japan				Korea
Risk discount rate			11.75%				5.7%				14.25%				13.8%				5.1%				8.4%

 

		Malaysia				Philippines				Singapore				Taiwan				Thailand				Vietnam
Risk discount rate			9.5%				15.75%				6.8%				7.5%				13.0%				16.75%

 

1		The assumption shown for Hong Kong is for US dollar denominated business which comprises the largest proportion of the in-force Hong Kong business

 

For AIA Group at 30 November 2009 — in-force business

 

Indonesia

Indonesia (USD

(Rupiah

Australia

China

Hong Kong

denominated)

denominated)

Korea

Malaysia

Risk discount rate

9.00%

10.00%

8.00%

12.50%

17.00%

10.00%

9.00%

 

		New Zealand				Philippines				Singapore & Brunei				Taiwan				Thailand				Vietnam
Risk discount rate			9.00%				14.00%				7.50%				8.00%				10.00%				16.00%

 

In setting economic assumptions an active basis is used for Prudential Group’s Asian operations in Japan, Korea and for the US dollar denominated business written in Hong Kong. For Asian operations where the long-term fixed interest markets are less established, economic assumptions are based on an assessment of longer term economic conditions. For AIA Group long term economic assumptions are based on an active basis but where current returns differ markedly from long term returns the returns are assumed to grade to the long term returns linearly over the estimated mean term of the existing fixed income assets. Both approaches are acceptable under the EEV principles.

 

For Prudential Group at 31 December 2009

 

		China				Hong Kong1				India				Indonesia				Japan				Korea
Government bond yield			8.25%				3.9%				9.25%				10.25%				1.9%				5.5%

 

		Malaysia				Philippines				Singapore				Taiwan				Thailand				Vietnam
Government bond yield			6.5%				9.25%				4.25%				5.5%				6.75%				10.25%

 

1		The assumption shown for Hong Kong is for US dollar denominated business which comprises the largest proportion of the in-force Hong Kong business

 

For AIA Group at 30 November 2009

 

Indonesia

Indonesia

(USD

(Rupiah

Australia

China

Hong Kong

denominated)

denominated)

Korea

Malaysia

10 year Government bond yield

5.75%

3.74%

3.83%

6.92%

11.00%

5.16%

4.46%

 

		New Zealand				Philippines				Singapore & Brunei				Taiwan				Thailand				Vietnam
10 year Government bond yield			6.30%				7.47%				2.93%				1.73%				4.16%				9.25%

 

Note that for AIA Group, the assessed long term returns are shown in the table where these differ markedly to current returns.

 

UNAUDITED PRO FORMA FINANCIAL INFORMATION

 

Also included in this prospectus is unaudited pro forma financial information. The unaudited pro forma net asset statement has been prepared to illustrate the effect on the net assets of the Prudential Group as if the proposed Transactions had taken place on 31 December 2009. The unaudited pro forma income statement has been prepared to illustrate the effect on the Prudential Group as if the proposed Transactions had taken place on 1 January 2009. The statement of unaudited pro forma net worth and value-in-force on a European Embedded Value Basis has been prepared to illustrate the effect on the Prudential Group as if the proposed Transactions had taken place on 31 December 2009. The unaudited pro forma financial information has been prepared for illustrative purposes only and because of its nature addresses a hypothetical situation and, therefore, does not represent the Enlarged Group’s actual financial results or financial position following the proposed Transactions.

 

As a result of the above, the unaudited pro forma financial information presented in this prospectus should not be relied on as indicative of future results of operations for the Enlarged Group and investors are cautioned against placing undue reliance on the unaudited pro forma financial information.

 

ACCOUNTING STANDARDS

 

Certain of the financial information included in this prospectus has been prepared in accordance with IFRS and may not be comparable to the financial statements of US companies. US generally accepted accounting principles differ in certain significant respects from IFRS. The financial information in respect of FY 2007, FY 2008 and FY 2009 have not been reported on in accordance with auditing standards generally accepted in the United States or the auditing standards of the Public Company Accounting Oversight Board (United States).

 

ROUNDING AND CURRENCY

 

For convenience, certain financial data in this prospectus has been subject to rounding and, as a result, the totals of the data presented herein and therein may vary slightly from the actual arithmetic totals of such data. In this prospectus, references to “$”, “US$”, “US dollars”, “¢” or “cents” are to United States dollars and cents, the lawful currency of the United States, references to “£”, “pounds sterling”, “pounds”, “sterling”, “p” or “pence” are to pounds sterling and pence, the lawful currency of the United Kingdom, references to “HK$ “HK dollars” and “Hong Kong dollars” are to Hong Kong dollars, the lawful currency of Hong Kong, references to “SGD” or “S$” are to Singapore dollars, the lawful currency of Singapore, and references to “€”, “EUR”, “Euro” and “euro” are to the single currency introduced at the start of the third stage of European Economic and Monetary Union pursuant to the Treaty establishing the European Communities, as amended by the Treaty on European Union.

 

In this prospectus, certain amounts denominated in HK dollars or US dollars have been translated into pounds sterling at the exchange rate stated. Such conversions shall not be construed as representations that amounts in pounds sterling were or could have been or could be converted into HK dollars or US dollars at such rates or any other exchange rates on such date or any other date. Prudential publishes its consolidated financial statements in pounds sterling. The following tables show the period-end, average, high and low noon buying rates in New York City for cable transfers in foreign currencies as certified by the Federal Reserve Bank of New York (the “Noon Buying Rate”) for the US dollar, expressed in US dollars per one pound, and the Hong Kong dollar, expressed in Hong Kong dollars per one pound, for the periods and dates indicated.

 

		US dollar/pound
Month		Period end				Average				High				Low
November 2009			1.64				1.66				1.68				1.64
December 2009			1.62				1.62				1.66				1.59
January 2010			1.60				1.62				1.64				1.59
February 2010			1.52				1.56				1.60				1.52
March 2010			1.52				1.51				1.53				1.49
April 2010			1.53				1.53				1.55				1.52
May 2010 (through to 14 May 2010)			1.46				1.49				1.52				1.46

 

		HK dollar/pound
Month		Period end				Average				High				Low
November 2009			12.72				12.86				13.02				12.70
December 2009			12.53				12.58				12.90				12.32
January 2010			12.43				12.55				12.71				12.34
February 2010			11.83				12.13				12.40				11.80
March 2010			11.79				11.69				11.87				11.55
April 2010			11.88				11.90				12.02				11.78
May 2010 (through to 14 May 2010)			11.33				11.59				11.83				11.33

 

		US dollar/pound
Year		Period end				Average rate				High				Low
2005			1.72				1.82				1.93				1.71
2006			1.96				1.84				1.98				1.73
2007			1.98				2.00				2.11				1.92
2008			1.46				1.85				2.03				1.44
2009			1.62				1.57				1.70				1.37

 

		HK dollar/pound
Year		Period end				Average rate				High				Low
2005			13.33				14.16				15.05				13.29
2006			15.23				14.32				15.39				13.39
2007			15.47				15.62				16.39				15.03
2008			11.33				14.44				15.81				11.16
2009			12.54				12.14				13.16				10.59

 

On 14 May 2010, the noon buying rate was £1.00 = HK$11.33 and £1.00 = US$1.46.

 

Certain amounts and percentage figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures preceding them.

 

1.	Background and reasons for the Transactions

 

Prudential believes that the Transactions are a compelling and rare opportunity with strong strategic, operational and financial rationale that will contribute significantly to the achievement of Prudential’s strategic objective to focus on its Asian growth. The Transactions are expected to create a leading Asian life insurer and to yield significant value for Prudential shareholders, its other stakeholders and AIG.

 

The Transactions will provide the Enlarged Group with a greater presence in Asia and in particular, high growth South East Asian economies. Life insurance premiums in the Asia Pacific region grew at a compound annual growth rate of 17.5% from 2003 to 2008, primarily driven by strong regional economic growth, favourable demographic changes, social welfare reforms, healthcare demand and insurance market reforms.

 

The Transactions provide the Enlarged Group with the opportunity to:

 

•	create a leading life insurer with Asia at its core and strong operations in the US and the UK;
•	establish the leading position in the high growth South East Asian markets of Hong Kong, Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam, and the leading foreign life insurance business in China and India;(3)

 

•	allow Prudential shareholders to benefit from a compelling Acquisition valuation to yield attractive returns for its shareholders;

 

•	deliver sustainable revenue and earnings growth;
•	achieve significant cost and revenue synergies;
•	benefit from improved productivity across distribution channels, enhanced customer insights and broader product offering; and
•	create a platform for further opportunities for growth in Asia.

 

The key growth opportunities include:

 

•	Products: Significant opportunities to narrow the margin gap between AIA and Prudential by managing the AIA product mix in line with Prudential’s;
•	Agency distribution: Improvements in AIA sales force productivity based upon Prudential’s agency management capabilities;
•	Bancassurance: Increase effectiveness of AIA’s current relationships by leveraging Prudential’s capabilities in Asia, with banks such as Standard Chartered Bank (“SCB”), ICICI Bank Limited (“ICICI”) and United Overseas Bank Limited (“UOB”) and
•	Customers: Increasing utilisation of customer management and data mining tools applied to the Enlarged Group’s customers.

 

The combination of the Prudential Group and the AIA Group is expected to generate significant synergy benefits. Prudential is seeking to achieve US$800 million pre-tax (US$650 million post tax) of annualised run-rate revenue synergies (on a value of new business basis) and US$370 million of annualised run-rate pre-tax cost synergies during 2013. These savings are expected to arise from actions planned to be taken by Prudential including: increasing AIA agent productivity, managing AIA’s product mix, growing the bancassurance business by replicating Prudential’s bancassurance skills to AIA’s bancassurance partnerships, increasing utilisation of customer management and data mining tools; and increasing efficiency and reducing costs across regional offices and local business units.

 

2.	Acquisition Agreement

 

Under the Acquisition Agreement, AIA Aurora (a subsidiary of AIG) has agreed to sell, and New Prudential has agreed to purchase, the entire issued share capital of AIA for consideration with a notional value of US$35.5 billion, comprising:

 

(i)	US$25.0 billion in cash payable at completion of the Acquisition, subject to reduction in an amount equal to the aggregate nominal value of any subordinated notes for which AIA Aurora subscribes under the Subordinated Note Commitment Letter;
(ii)	a number of New Prudential Shares having a notional value of £3.613 billion (approximately US$5.5 billion) to be allotted and issued to AIA Aurora at completion of the Acquisition;
(iii)	US$3.0 billion in aggregate principal amount of mandatory convertible notes due 2013 (convertible into New Prudential Shares) to be allotted and issued by New Prudential to AIA Aurora at completion of the Acquisition (the “MCNs”);
(iv)	US$2.0 billion in aggregate principal amount of perpetual tier one notes to be issued by Prudential (the “Tier 1 Notes”); and
(v)	any subordinated notes for which AIA Aurora subscribes under the Subordinated Note Commitment Letter.

 

The number of New Prudential Shares to be issued to AIA Aurora is expected to represent approximately 10.9% of the issued ordinary share capital of New Prudential immediately following completion of the Acquisition (subject to adjustments for, inter alia, further issues of New Prudential Shares in the period prior to completion of the Acquisition).

 

The material conditions to completion of the Acquisition Agreement are:

 

•	the passing of the requisite resolutions by Prudential shareholders at the General Meeting;
•	obtaining the requisite regulatory and antitrust approvals;
•	there having been no material adverse change in AIA between the date of the Acquisition Agreement and commencement of the Rights Issue;
•	there having been no breach of warranty by AIA Aurora giving rise to a material adverse change;
•	there having been no breach by AIG of the covenants relating to the conduct of the business of the AIA Group which is material in the context of the AIA Group taken as a whole;
•	there having been no breach of the warranty by New Prudential giving rise to a material adverse effect on the ability of it or Prudential to complete the Acquisition;
•	the Scheme being approved by Prudential shareholders, sanctioned by the court and becoming effective; and
•	admission of the Rights Issue Shares, the New Prudential Shares, the MCNs and the Tier 1 Notes to listing on the Official List and to trading on the London Stock Exchange.

 

The parties to the Acquisition Agreement have agreed to use their best endeavours to co-operate to satisfy the conditions (which may include Prudential agreeing to divest AIA Group or Prudential Group assets or businesses) and, in particular, Prudential has agreed that the Board will recommend that shareholders vote in favour of the requisite resolutions at the General Meeting (the “Board Recommendation”), subject always to the Directors’ fiduciary duties.

 

In the event that completion of the Acquisition has not occurred and the Acquisition Agreement has not been terminated by 31 August 2010, New Prudential has agreed to pay to AIA Aurora an additional amount of consideration equal to 5/1200ths of the cash consideration outstanding per month from 1 September 2010 to the completion date.

 

The material termination provisions under the Acquisition Agreement allow termination:

 

•	by AIG or AIA Aurora in the event that the Directors adversely withdraw, modify or qualify the Board Recommendation;
•	by any party in the event that Prudential shareholders have not passed the requisite resolutions by 1 August 2010;
•	by any party in the event that completion does not occur by 1 March 2011 (the “Long Stop Date”), subject to options for either party to extend in limited circumstances;
•	by New Prudential in the event of a breach of warranty by AIA Aurora giving rise to a material adverse change, subject to cure;

 

•	by New Prudential in the event of a material adverse change in AIA between the date of the Acquisition Agreement and commencement of the Rights Issue;
•	by New Prudential in the event of a breach of covenant relating to the conduct of the business of the AIA Group prior to completion which is material in the context of the AIA Group taken as a whole, subject to cure; and
•	by AIA Aurora or AIG in the event of a breach of warranty by New Prudential giving rise to a material adverse effect on the ability of it or Prudential to complete the Transactions subject to cure.

 

Prudential has agreed to pay to AIA Aurora a termination fee of £153 million (inclusive of any VAT due in respect thereof) if the Acquisition Agreement is terminated as a result of: (i) the requisite regulatory or antitrust approvals not having been obtained by the Long Stop Date; (ii) the Rights Issue not having been completed by the Long Stop Date; (iii) Prudential shareholders not having passed the requisite resolutions by 1 August 2010; (iv) the Board Recommendation having been adversely withdrawn, modified or qualified; or (v) if the Acquisition Agreement is terminated on or after the Long Stop Date and at the time of termination AIA Aurora would have had the right to terminate as described in (iii) and (iv) above (in each case, other than as a result of breach of warranty or covenant which was sufficiently serious to permit New Prudential to terminate the agreement).

 

The Acquisition Agreement also contains an undertaking by AIG to use best endeavours to ensure that the business of the AIA Group is run in the ordinary course up to completion and that specified actions are not taken without the consent of New Prudential.

 

New Prudential’s liability to AIG and AIA Aurora for breach of warranty terminates at completion of the Acquisition, with the exception of warranties relating to capacity, title and the New Prudential Shares and other securities to be issued on completion. AIG and AIA Aurora’s liability to New Prudential for breach of warranty terminates at completion, with the exception of the warranties relating to capacity and title and certain other matters related to the adequacy of the draft prospectus of AIA prepared in contemplation of the initial public offering of the AIA Group. AIA Aurora’s liability under the prospectus warranty is capped at US$7.5 billion and subject to a limitation period of 12 months.

 

AIA Aurora is subject to a lock-up:

 

•	in respect of New Prudential Shares, 50% is eligible for sale after 12 months under orderly market conditions, which involves the sale taking place in consultation with New Prudential, and the other 50% eligible for sale after 24 months; and
•	in respect of the MCNs, for a period of 24 months from the date of completion of the Acquisition;

 

in each case subject to customary exceptions. These exceptions include the ability for AIA Aurora to pledge New Prudential Shares or MCNs to a financing counterparty providing the financing counterparty accepts a lock-up obligation on the same terms as described above, subject to exceptions for unrelated ordinary course market activities and in circumstances where the financing counterparty is entitled to enforce its security (in which case any sale of the pledged New Prudential Shares or MCNs by the financing counterparty will be undertaken in consultation with New Prudential’s nominated brokers).

 

Prudential and New Prudential are prohibited, from the date of the Acquisition Agreement until the date on which Prudential shareholders pass the requisite resolutions, from:

 

•	entering into discussions regarding any transaction which would require the approval of Prudential shareholders if to do so would result in the Board Recommendation being adversely withdrawn, modified or qualified or assisting any person with, or providing information to any person for the purposes aforementioned; and
•	soliciting, encouraging or assisting any person to acquire securities in Prudential such that an offer would have to be made for Prudential or New Prudential according to the City Code on Takeovers and Mergers, or assisting any person with, or providing information to any person for the purposes of, the aforementioned.

 

The Acquisition Agreement contains a prohibition on AIA Aurora soliciting the senior employees of the AIA Group for a period of 18 months from completion of the Transactions, other than by way of general advertisement.

 

New Prudential’s obligations under the Acquisition Agreement are guaranteed by Prudential.

 

3.	Consideration for the Acquisition

 

The Acquisition is to be financed through US$25.0 billion in cash (subject to reduction in an amount equal to the aggregate nominal value of any subordinated notes for which AIA Aurora subscribes under the Subordinated Note Commitment Letter) and through US$10.5 billion in New Prudential Shares and other securities, which will be increased by an amount equal to the aggregate nominal amount of any subordinated notes for which AIA Aurora

subscribes under the Subordinated Note Commitment Letter. The cash component of the consideration will be financed through:

 

•	Underwritten Rights Issue — a syndicate of banks acting as Joint Global Co-ordinators and Joint Bookrunners have undertaken to Prudential to underwrite the Rights Issue to raise an amount in sterling which is equivalent to US$20.0 billion (net of costs, fees and expenses).
•	Underwritten debt commitment — Prudential intends to raise an amount equivalent to approximately US$5.3 billion (net of costs, fees and expenses which are expected to be up to US$200 million) (US$5.5 billion gross) by way of one or more offerings of subordinated debt securities to institutional investors (the “Bond Offerings”). In connection with the Bond Offerings, Prudential has entered into an agreement pursuant to which the Joint Lead Arrangers will provide a committed US$5.4 billion hybrid capital facility, (the “Hybrid Capital Facility”), and will, at the request of Prudential, subscribe for Lower Tier 2 capital notes and/or Upper Tier 2 capital notes and/or provide Lower Tier 2 capital loans and/or Upper Tier 2 capital loans in aggregate principal value of up to US $5.4 billion to be issued by or advanced to Prudential. The Joint Lead Arrangers will subscribe for the Lower Tier 2 capital notes and Upper Tier 2 capital notes and/or provide Lower Tier 2 capital loans and/or Upper Tier 2 capital loans in the event that Prudential does not issue Lower Tier 2 capital and Upper Tier 2 capital notes in aggregate principal value of up to US $5.4 billion pursuant to the Bond Offerings. Prudential intends to raise the balance of US$100 million through its ordinary course capital markets debt issuance programmes. Prudential, AIG and AIA Aurora have also entered into an agreement (the “Subordinated Note Commitment Letter”) under which, to the extent that the Joint Lead Arrangers are unable to procure subscriptions in full for the Bond Offerings for an aggregate amount equal to US$5.4 billion by the date on which the last of certain conditions in the Acquisition Agreement have been satisfied or waived, AIA Aurora has agreed to subscribe for subordinated debt securities on completion of the Acquisition in an aggregate amount equal to the lesser of: (i) US$1.875 billion; and (ii) the amount required to make the aggregate amount of subordinated debt securities subscribed for under the Bond Offerings and pursuant to the Subordinated Note Commitment Letter equal to US$5.4 billion. The effectiveness of the Subordinated Note Commitment Letter is conditional on the consent of the Joint Lead Arrangers being obtained; at the date of this prospectus such consent has not been obtained. Although Prudential intends to proceed with the Bond Offerings, and the Joint Lead Arrangers have committed to provide the same amount pursuant to the Hybrid Capital Facility, as described above, a syndicate of banks remains committed to Prudential to provide the debt commitment in the form of a senior unsubordinated US$5.4 billion bridge facility. Prudential will not make any drawings under the bridge facility unless circumstances change such that it can do so and remain in compliance with its regulatory capital requirement, which is considered to be unlikely. The net proceeds of any notes issued pursuant to the Bond Offerings or any drawdown under the Hybrid Capital Facility or subscription under the Subordinated Note Commitment Letter will reduce the amount available for drawing under the US$5.4 billion bridge facility commensurately.

 

AIA Aurora will receive up to US$5 billion in cash consideration from the Bond Offerings at completion of the Acquisition. To the extent Prudential raises a net amount in excess of US$5 billion from the Bond Offerings and/or the Hybrid Capital Facility and/or subscription under the Subordinated Note Commitment Letter, such excess will be applied by Prudential to meet, inter alia, costs, fees and expenses and other group liabilities.

 

If the Prudential Shares were listed on the Hong Kong Stock Exchange, the applicable percentage ratios for the Acquisition would have exceeded 100% and the Acquisition would have constituted a very substantial acquisition.

 

The consideration represents a multiple of 1.62x AIA’s Embedded Value as at 30 November 2009 and 22.2x AIA’s 30 November 2009 new business profit. However, Prudential believes the new business profit of the AIA Group in 2009 was significantly impaired due to the AIG Events, and the global economic crisis and not reflective of the potential of the business. Prudential is seeking to achieve US$370 million of annualised cost savings during 2013. In addition, the combination provides an opportunity to achieve revenue synergies through enhanced agency productivity, increasing effectiveness of bancassurance relationships, and increasing utilisation of customer management and data mining tools.

 

Prudential has entered into foreign exchange hedging arrangements in respect of its requirement to convert the pounds sterling proceeds of the Rights Issue into US dollars, which is the currency in which New Prudential must pay the cash element of the consideration. Prudential has budgeted £500 million for hedging costs. The actual impact of these hedging arrangements on the acquisition price and income statement will depend on the evolution of the sterling/dollar exchange rate through to completion of the Acquisition.

 

The US$10.5 billion in New Prudential Shares and other securities will include:

 

•	Equity consideration — AIA Aurora will receive equity consideration having a notional value of £3.613 billion (expected to represent, subject to adjustments for, inter alia, further issues of Prudential Shares or New

Prudential Shares in the period prior to completion of the Acquisition, approximately 10.9% of the issued ordinary share capital of New Prudential immediately following completion of the Acquisition, and being 2,023,836,505 shares if calculated as at 14 May 2010, being the latest practicable date prior to publication of this prospectus). The equity consideration will be subject to a lock-up, with 50% eligible for sale after 12 months under orderly market conditions, which involves the sale taking place in consultation with New Prudential, and the other 50% eligible for sale after 24 months.

 

•	MCNs — AIA Aurora will receive US$3 billion in aggregate principal amount of MCNs to be issued by New Prudential to AIA Aurora on the date of completion of the Acquisition. The MCNs will automatically convert into New Prudential Shares on the third anniversary of the date of completion of the Acquisition (the “Mandatory Conversion Date”). The MCNs may also be converted into New Prudential Shares prior to the Mandatory Conversion Date at the option of the holders or at the option of New Prudential. The number of New Prudential Shares that each MCN converts into on conversion will be determined by the volume weighted average share price of the New Prudential Shares (converted into US dollars at the spot rate published by Bloomberg at 11:00 a.m. on the relevant trading day) on each of the 20 consecutive trading days ending on the third trading day prior to conversion as against a reference share price calculated on the basis of the share price of Prudential’s ordinary shares as at close of trading on 26 February 2010. The MCNs pay a semi-annual fixed coupon of 3.75% per annum and entitle holders to participate in any dividend declared or distribution made to shareholders by New Prudential above pre-determined levels. The MCNs have no fixed maturity date and will be eligible to count towards the New Prudential Group’s tier one capital resources. The MCNs will be subject to a lock-up limiting the sale of them by AIA Aurora for 24 months from the date of completion of the Acquisition.
•	Tier 1 Notes — AIA Aurora will receive US$2 billion in aggregate principal amount of Tier 1 Notes to be issued by Prudential. The Tier 1 Notes will pay a quarterly fixed coupon of 6.25% per annum until the date falling exactly ten years and one day after the date of completion of the Acquisition (the “First Call Date”). From and including the First Call Date, the Tier 1 Notes will pay a floating rate coupon equal to 3-month LIBOR plus 3.566%. The Tier 1 Notes will be perpetual and redeemable prior to the First Call Date only in very limited circumstances. Prudential may elect to defer payments of interest and any deferred interest may only be paid through an alternative coupon satisfaction mechanism. The Tier 1 Notes will be eligible to count towards the Enlarged Group’s tier one capital resources.

 

MCNs

 

The MCNs will be issued by New Prudential in the form of registered securities having a denomination of US$100,000 each. The MCNs automatically convert into New Prudential Shares on the Mandatory Conversion Date, unless previously purchased, cancelled or converted into New Prudential Shares. The MCNs are not redeemable at any time.

 

New Prudential will apply for the MCNs to be admitted to the Official List and to trading on the regulated market of the London Stock Exchange. New Prudential will apply for the New Prudential Shares, on the date of completion of the Acquisition, to be admitted to the Official List and to trading on the regulated market of the London Stock Exchange.

 

Mandatory Conversion

 

The MCNs will automatically convert into the New Prudential Shares on the Mandatory Conversion Date. The number of New Prudential Shares per MCN deliverable on conversion will be equal to the arithmetic average of the 20 conversion ratios determined on the basis of the volume weighted average share price of the New Prudential Shares on the London Stock Exchange (converted into US dollars at the spot rate published by Bloomberg at 11.00 a.m. on the relevant trading day) (each a “Share Price”) on each of the 20 consecutive trading days ending on the third trading day prior to the Mandatory Conversion Date (such arithmetic average, the “Mandatory Conversion Ratio”). For the purposes of calculating the Mandatory Conversion Ratio, the conversion ratio for a given trading day will be determined as follows:

 

•	if the Share Price is less than or equal to the Minimum Conversion Price (as defined below), the conversion ratio will be equal to the Maximum Conversion Ratio as at completion of the Acquisition, of the number of New Prudential Shares per MCN determined by dividing US$100,000 by the Minimum Conversion Price (the “Maximum Conversion Ratio”);
•	if the Share Price is equal to or greater than the Maximum Conversion Price (as defined below), the conversion ratio will be equal to the Minimum Conversion Ratio as at completion of the Acquisition, of the number of New Prudential Shares per MCN determined by dividing US$100,000 by the Maximum Conversion Price (the “Minimum Conversion Ratio”); and

 

•	if the Share Price is greater than the Minimum Conversion Price but less than the Maximum Conversion Price, the conversion ratio will be determined by dividing US$100,000 by the Share Price.

 

The Maximum Conversion Ratio and the Minimum Conversion Ratio are subject to anti dilution adjustments. The Minimum Conversion Price will be equal to 100% of the reference share price and the Maximum Conversion Price will be equal to 125% of the reference share price. The reference share price will be determined on or immediately prior to the completion date of the Acquisition as being £3.613 billion, converted into US dollars at the agreed spot rate of US$1.5224 / £1 and divided by the number of New Prudential Shares to be allotted, issued and credited as fully paid to AIG on the completion date of the Acquisition.

 

Optional Conversion

 

The MCNs permit the holders to elect to convert each MCN into New Prudential Shares on any date falling 41 days after the issue of the MCNs and before the 26th trading day before the Mandatory Conversion Date at the applicable Minimum Conversion Ratio for the MCNs converted and, following a change of control of New Prudential, at the Maximum Conversion Ratio for each MCN converted. In the event that a holder elects to convert the MCNs into New Prudential Shares following a change of control of New Prudential, each holder will receive an additional number of New Prudential Shares in respect of the aggregate amount of all unpaid fixed coupon amounts up to and including the Mandatory Conversion Date.

 

New Prudential may also elect to convert the MCNs into New Prudential Shares at the applicable Maximum Conversion Ratio for each MCN converted and, on such conversion at New Prudential’s election, each holder will receive an additional number of New Prudential Shares in respect of the aggregate amount of all unpaid fixed coupon amounts up to and including the Mandatory Conversion Date.

 

Fixed coupon amounts

 

The MCNs will pay a fixed coupon amount of 3.75% per annum, payable semi-annually in arrear on 23 September and 23 March of each year. New Prudential’s obligation in respect of the payment of fixed coupon amounts will rank pari passu with its other obligations which constitute (or would constitute but for any applicable limit on the amount of such capital) as tier one capital and the most senior class of issued preference shares and senior only to its issued ordinary share capital.

 

Distributions

 

Each MCN entitles its holder to receive an amount in US dollars equal to the amount by which any extraordinary dividend declared or distribution made by New Prudential to its shareholders exceeds certain pre-determined amounts set out in the table below. Any distribution will be payable in cash. The amount of any distribution per MCN will be equal to the product of (1) the number of New Prudential Shares that each MCN would have converted into if it had been converted at the Maximum Conversion Ratio prevailing as at the date of the declaration of such dividend or making of such distribution and (2) the amount per New Prudential Share by which the relevant cash distribution exceeds the applicable amount set out in the table below:

 

During the year ended:		Amount
31 December 2010		£0.0900 per New Prudential Share
31 December 2011		£0.0950 per New Prudential Share
31 December 2012		£0.1000 per New Prudential Share
31 December 2013		£0.0300 per New Prudential Share but only in respect of dividends declared or distributions made prior to the Mandatory Conversion Date

 

Any distribution will be payable within five business days following the date on which the dividend or distribution giving rise to the payment of the distribution is paid.

 

The right of holders of the MCNs in respect of the payment of any distribution under or arising from the MCNs, principal and any amount payable (including, without limitation, any liquidated damages payable by New Prudential) as a result of or arising from New Prudential’s failure or inability to deliver New Prudential Shares on conversion will rank pari passu with the holders of New Prudential Shares.

 

Non-payment of fixed coupon amounts and any distributions

 

All payments under the MCNs are subject to New Prudential satisfying a solvency condition both at the time of, and immediately after, the relevant payment. New Prudential will satisfy the solvency condition if it is able to pay its debts to senior creditors and subordinated creditors (other than subordinated creditors ranking pari passu with or junior to the fixed coupon amounts payable under the MCNs) as they fall due and its total assets exceed its total liabilities by at least 4% or such other figure as specified by the FSA.

 

Any fixed coupon amount not paid by New Prudential because New Prudential fails to satisfy the solvency condition described above both at the time of, and immediately after, the relevant payment date shall constitute deferred fixed coupon amount. New Prudential may also elect to defer any fixed coupon amount if New Prudential determines (acting in good faith and by reference to the then current financial condition of New Prudential and at its sole discretion) that, on or after the 20th business day but not later than the 5th business day prior to such payment date, it fails to comply with certain capital adequacy and regulatory conditions applicable to it or it is required under the terms of any security ranking pari passu or junior to the obligation not to pay the relevant fixed coupon amount and such fixed coupon amount shall also constitute deferred fixed coupon amount. New Prudential may only satisfy its obligation to settle any deferred fixed coupon amount in New Prudential Shares by making an adjustment to the Maximum Conversion Price and Minimum Conversion Price in accordance with the Conversion Adjustment Mechanism (as defined below).

 

In the event that New Prudential does not make payment in cash in full of a fixed coupon amount or any distribution, such fixed coupon amount or distribution will be settled in New Prudential Shares through an adjustment to the Maximum Conversion Price and the Minimum Conversion Price (the “Conversion Adjustment Mechanism”).

 

Conversion Adjustment Mechanism

 

An adjustment made in accordance with the Conversion Adjustment Mechanism will satisfy New Prudential’s obligation to pay any fixed coupon amount or distribution not paid in full in cash. Any adjustment will be effective, in the event of non-payment due to New Prudential’s failure to satisfy the solvency condition, from the date on which the relevant fixed coupon amount or distribution was not paid in full in cash or, in the event of non-payment for any other reason, from the earliest of the first trading day on which the circumstances giving rise to the relevant non-payment cease to exist, the date on which the issuer elects to convert the MCNs or the Mandatory Conversion Date.

 

In the event of the conversion of the MCNs prior to the first trading day on which the circumstances giving rise to the relevant non-payment cease to exist, a holder of the MCNs will be entitled to the number of additional New Prudential Shares which the holder of the relevant MCNs would have been entitled to if the relevant adjustment had become effective before the conversion. New Prudential will issue such additional New Prudential Shares, in the event of a conversion of the MCNs at the election of New Prudential or on the Mandatory Conversion Date, on the earliest of the date on which New Prudential elects to convert the MCNs, the Mandatory Conversion Date or 5 trading days after the circumstances giving rise to the relevant non-payment cease to exist or, in the event of a conversion of the MCNs at the election of the holder, 5 trading days after the circumstances giving rise to the relevant non-payment cease to exist.

 

Other provisions

 

The MCNs contain a dividend and capital restriction which prohibits (1) the declaration or payment of a dividend or distribution or the making of any other payments on any securities ranking pari passu or junior to the fixed coupon amounts payable under the MCNs or (2) the redemption, purchase or acquisition of such securities if New Prudential fails to pay all coupon payments in full due to it failing to satisfy the solvency condition (as described above) or being in compliance with its regulatory capital requirements or it is prohibited from doing so by any other security ranking pari passu with fixed coupon amounts payable under the MCNs.

 

Events of default are limited to non-payment of amounts due and the winding-up of New Prudential. Following the occurrence of an event of default, a holder may elect to exercise its right to convert the MCNs and, on exercise of such right, the number of New Prudential Shares to be delivered will be equal to the Maximum Conversion Ratio per MCN. Upon a liquidation or winding-up of New Prudential, the claims of holders to receive Ordinary Shares will convert into a claim of the holders to participate in the liquidation proceeds of New Prudential with a claim per MCN equal to the number of New Prudential Shares as if the MCNs had been converted immediately before the order is made or effective resolution is passed at the Maximum Conversion Ratio.

 

All payments in respect of the MCNs will be made without withholding or deduction for taxes of any kind, unless such withholding or deduction is required by law. In such event, New Prudential will pay additional amounts in respect thereof.

 

The terms and conditions of the MCNs will be governed by English law.

 

Tier 1 Notes

 

The Tier 1 Notes will be issued by Prudential and will be issued in the form of registered notes having a denomination of US$100,000 each (and integral multiples of US$1,000 in excess thereof). The Tier 1 Notes are perpetual and Prudential is under no obligation to redeem them in cash at any time.

 

Prudential will apply to have the Tier 1 Notes admitted to the Official List and to trading on the regulated market of the London Stock Exchange.

 

Subordination

 

In the event of the winding-up of Prudential, the Tier 1 Notes will be subordinated to the claims of all Senior Creditors, rank pari passu with all other obligations of Prudential which constitute (or would constitute but for any applicable limitation on the amount of such capital) Tier 1 capital and with the most senior class of preference shares issued by Prudential and rank senior to the issued ordinary shares of Prudential.

 

For this purpose, “Senior Creditors” means (i) any unsubordinated creditor of Prudential; (ii) any creditor of Prudential in respect of liabilities that rank (or are expressed to rank) subordinate to claims of other creditors of Prudential (other than those whose claims constitute or would constitute but for any limit on the amount of such capital Tier 1 capital or are expressed to rank pari passu or junior to claims of such creditors); (iii) any creditor of Prudential whose claims are in respect of Prudential’s outstanding debt securities which constitute Tier 2 capital (or such other securities outstanding which rank pari passu with or senior to such Tier 2 capital); and (iv) all other creditors of Prudential other those than those that rank or are expressed to rank equally with or junior to the Tier 1 Notes.

 

Solvency condition

 

All payments under the Tier 1 Notes will be subject to Prudential satisfying a solvency condition both at the time of, and immediately after, the relevant payment.

 

Prudential will satisfy the solvency condition if it is able to pay its debts to Senior Creditors (as defined above) as they fall due and its total assets (determined on a non-consolidated gross assets basis) exceed its total liabilities (determined on a non-consolidated gross liabilities basis and excluding liabilities to creditors that are not Senior Creditors) by at least 4% or such other percentage as specified by the FSA.

 

Interest

 

From the completion date of the Acquisition to the date falling exactly ten years and one day after the completion date (the “First Call Date”), the Tier 1 Notes will pay a fixed rate of interest of 6.25% per annum, payable quarterly in arrear on 23 March, 23 June, 23 September and 23 December. From and including the First Call Date, the interest rate will be reset to such rate that is equal to 3-month LIBOR plus 3.566%.

 

Prudential may elect not to pay interest on any interest payment date if Prudential determines (by reference to the then current financial condition of Prudential and at its sole discretion) that, on or after the 20th business day but not later than the 5th business day prior to such payment date, certain capital adequacy and regulatory conditions applicable to it or it is required under any securities ranking pari passu to the Tier 1 Notes not to pay the relevant interest payment. Interest not paid will constitute deferred interest (“Deferred Interest”).

 

Deferred Interest and, at the option of Prudential, interest that has not been deferred (“Current Interest”) may only be satisfied in accordance with an alternative coupon satisfaction mechanism (the “ACSM”). The ACSM requires Prudential to issue ordinary shares, the proceeds of which will be used to satisfy payments of Deferred Interest or Current Interest.

 

Redemption

 

The Tier 1 Notes are perpetual securities and have no fixed maturity.

 

Prudential will only be able to redeem the Tier 1 Notes prior to the First Call Date in certain limited circumstances relating to their regulatory treatment or tax events. Prudential may, on any interest payment date falling on or after the First Call Date, redeem the Tier 1 Notes at their outstanding aggregate principal amount plus any accrued but unpaid interest and any deferred interest. Any redemption is subject to Prudential being in compliance with its capital requirements, satisfying the solvency conditions (as described above) and giving the FSA prior notice and receiving no objection from the FSA to such redemption and, in the case of any redemption prior to the First Call Date, obtaining the FSA’s consent to such redemption in the form of a waiver or otherwise.

 

In certain limited circumstances relating to the tax treatment of the Tier 1 Notes, Prudential will have the option, following giving the FSA prior notice and receiving no objection from the FSA, to convert the Tier 1 Notes into another series of listed, undated cumulative subordinated notes having the same material terms as the Tier 1 Notes. If, following the giving of prior notice to the FSA, the FSA objects to such conversion, Prudential may redeem the Tier 1 Notes.

 

If the Tier 1 Notes cease to qualify for the Enlarged Group’s regulatory capital purposes, Prudential may redeem them at any time. Should such redemption occur prior to the First Call Amount in these circumstances, the Tier 1 Notes may be redeemed at a make-whole redemption amount. Such make-whole redemption amount will be equal

to the then present value of the principal amount of the Tier 1 Notes outstanding and the present value of each remaining scheduled quarterly interest payment to be due in full to and including the First Call Date discounted on a quarterly basis at a rate equal to the yield on a comparable maturity US treasury gilt plus 5.383%.

 

Other provisions

 

All payments in respect of the Tier 1 Notes will be made without withholding or deduction for taxes of any kind, unless such withholding or deduction is required by law. In such event, New Prudential will pay additional amounts in respect thereof.

 

The terms and conditions of the Tier 1 Notes will be governed by English law.

 

Debt Financing

 

Prudential has appointed a syndicate of banks to act as exclusive joint lead managers and joint bookrunners (“Joint Lead Arrangers”) in connection with the raising of approximately US$5.3 billion (net of costs, fees and expenses) (US$5.5 billion gross) of subordinated debt securities by way of one or more Bond Offerings.

 

The Joint Lead Arrangers will assist Prudential with the Bond Offerings. The debt securities are expected to be sold in transactions not involving a public offering of securities. The proceeds of the Bond Offerings will be applied as part of the consideration for the Acquisition.

 

In connection with the Bond Offerings, Prudential has entered into a committed US$5.4 billion Hybrid Capital Facility pursuant to which the Joint Lead Arrangers have committed to subscribe for up to US$2.4 billion Lower Tier 2 notes and/or up to US$3 billion Upper Tier 2 notes and/or provide up to US$2.4 billion Lower Tier 2 capital loans and/or up to US$3 billion Upper Tier 2 capital loans. The facility will be available for drawing until the earlier of completion of the Acquisition or 1 March 2011. Drawings will be used towards the purchase of AIA. Notes issued under the Hybrid Capital Facility will be listed and it is expected that they will be issued pursuant to Prudential’s MTN Programme. The obligations of the Joint Lead Arrangers to subscribe for notes will be subject to customary conditions precedent (save that market and issuer adverse change conditions are excluded) for the issue of notes under Prudential’s MTN Programme. The commitments under the Hybrid Capital Facility in respect of the Lower Tier 2 notes and loans will be mandatorily cancelled by an amount equal to the net proceeds of any notes and loans issued pursuant to the Bond Offerings which qualify on issue as Lower Tier 2 capital and the commitments under the Hybrid Capital Facility in respect of the Upper Tier 2 notes and loans will be mandatorily cancelled by an amount equal to the net proceeds of any notes and loans issued pursuant to the Bond Offerings which qualify on issue as Upper Tier 2 or Tier 1 capital.

 

Prudential, AIG and AIA Aurora have also entered into the Subordinated Note Commitment Letter, under which, to the extent that the Joint Lead Arrangers are unable to procure subscriptions in full for the Bond Offerings for an aggregate amount equal to US$5.4 billion by the date on which certain conditions in the Acquisition Agreement have been satisfied or waived (the “Determination Date”), AIA Aurora has agreed to subscribe for Lower Tier 2 capital notes and/or Upper Tier 2 capital notes on completion of the Acquisition in an aggregate amount equal to the lesser of: (i) US$1.875 billion; and (ii) the amount required to make the aggregate amount of the Lower Tier 2 capital notes and/or Upper Tier 2 capital notes subscribed for by investors under the Bond Offerings and pursuant to the Subordinated Note Commitment Letter equal to US$5.4 billion. The effectiveness of the Subordinated Note Commitment Letter is conditional on the consent of the Joint Lead Arrangers being obtained.

 

If and to the extent that the aggregate of the amount of the Lower Tier 2 capital notes and/or Upper Tier 2 capital notes to be subscribed by AIA Aurora pursuant to the Subordinated Note Commitment Letter and the amount of Lower Tier 2 capital notes and Upper Tier 2 capital notes subscribed for by investors under the Bond Offerings is less than US$5.4 billion, calculated as at the Determination Date, AIA Aurora will have the option to subscribe for additional subordinated debt securities, such subordinated debt securities to be on the terms set forth in the Subordinated Note Commitment Letter.

 

Lower Tier 2 capital notes and/or Upper Tier 2 capital notes subscribed for by AIA Aurora under the Subordinated Note Commitment Letter will be listed and such Lower Tier 2 capital notes and/or Upper Tier 2 capital notes will be issued pursuant to Prudential’s MTN Programme. The obligations of AIA Aurora to subscribe for subordinated debt securities will be subject to customary conditions precedent (save that market and issuer adverse change conditions are excluded) for the issue of subordinated debt securities under Prudential’s MTN Programme.

 

AIA Aurora is subject to a lock-up in respect of the Lower Tier 2 capital notes and/or Upper Tier 2 capital notes subscribed for under the Subordinated Note Commitment Letter for a period of 12 months from the date of issue of such notes, subject to customary exceptions.

 

If and to the extent that AIA Aurora is required to subscribe for Lower Tier 2 capital notes and/or Upper Tier 2 capital notes under the Subordinated Note Commitment Letter, such notes shall be subscribed for on completion of

the Acquisition, shall form part of the consideration for the Acquisition and the cash consideration which would otherwise be payable on completion of the Acquisition will be reduced by the aggregate nominal value of such notes.

 

Prudential intends to raise an amount equal to approximately US$5.3 billion (net of costs, fees and expenses which are expected to be up to US$200 million) (US$5.5 billion gross) pursuant to the Bond Offerings, of which up to US$5.4 billion may be drawn under the Hybrid Capital Facility or by way of subscription under the Subordinated Note Commitment Letter, in order to ensure that it has sufficient regulatory capital. Prudential intends to raise the balance of US$100 million through its ordinary course capital markets debt issuance programs. In addition, Prudential has entered into a committed bridge facility dated 1 March 2010 between, inter alia, Prudential (in its capacity as borrower), and a syndicate of banks (the “Bridge Facility”). Prudential will not make any drawings under the Bridge Facility unless circumstances change such that it can do so and remain in compliance with its regulatory capital requirement, which is considered to be unlikely.

 

Pursuant to the Bridge Facility, the lenders have agreed to provide a US$5.4 billion senior unsecured facility for the purposes of the Acquisition. The lenders are obliged to provide funds, up to the total committed amount, provided that there are no non-payment events of default, insolvency or insolvency proceedings and provided that Prudential has not breached certain undertakings relating to, inter alia, disposals, and Class 1 or Class 2 acquisitions and the negative pledge. In addition, Prudential may not amend, vary, novate, supplement, supersede, waive or terminate any term of the Acquisition Agreement or enter into any agreement with AIG in a way which materially or adversely affects the interests of the lenders. The certain funds period under the Bridge Facility runs from 1 March 2010 to the earlier of (a) 1 March 2011; (b) the date the Acquisition Agreement is terminated; and (c) the completion date of the Acquisition. During this time, Prudential will be able to draw up to US$5.4 billion of funds under the Bridge Facility to fund a portion of the Acquisition consideration, save that the amount available for drawing will be reduced by the net proceeds of any notes issued pursuant to the Bond Offerings and under the Subordinated Debt Commitment Letter and any drawings under the Hybrid Capital Facility. Once drawn, Prudential has an option to extend the maturity of the Bridge Facility to 1 March 2012. The termination and default provisions of the Bridge Facility are on normal commercial terms.

 

The annual post-tax financing costs of the borrowings described in this section 3 of Part V of this prospectus is estimated to be approximately £300 million (assuming this financing comprises (i) the issue of US$3 billion of MCNs and US$2 billion of Tier 1 Notes to AIA Aurora; and (ii) US$5.5 billion (gross) of external debt financing which is intended to be raised under the Bond Offerings, comprising of US$5.5 billion (gross) of upper and lower Tier 2 notes, the cost of which is estimated at market rates prevailing at the date of this prospectus). Only a portion of the principal amount of the MCNs will be classified in the balance sheet as a liability with the residual being treated as a component of equity (see note 7 to the pro forma net asset statement in section A of Part XVI (Unaudited Pro Forma Financial Information)). Due to this accounting treatment, the £75 million coupon relating to the MCNs would not be included in the IFRS income statement as an expense and it is not included in the £300 million above. The MCN liability referred to above includes the present value of the future coupon payments and the unwind of the discount for the first year is an interest expense estimated at £4 million. The annual pre-tax financing cost of drawing the whole of the £1 billion available under the Subordinated Debt Financing Facility (which is not expected to be drawn) is estimated to be £110 million (based on the prevailing market rates at the date of this prospectus).

 

4.	Principal terms of the Rights Issue

 

The substantial part of the cash financing for the Acquisition will be the net proceeds of the Rights Issue. The Rights Issue will be made on the basis of:

 

11 Rights Issue Shares at 104 pence each for every 2 Existing Share

 

held by Qualifying Shareholders on the Record Date.

 

The Rights Issue is expected to raise proceeds of approximately £13,843 million, net of Rights Issue and Transaction-related expenses. The Issue Price for UK Shareholders of 104 pence per Rights Issue Share represents a discount of approximately 80.8% to the Closing Price of 542.5 pence per Prudential Share on 14 May 2010, being the last business day before the announcement of the terms of the Rights Issue and a 39.3% discount to the theoretical ex-rights price based on that Closing Price. The Issue Price per Rights Issue Share for HK Shareholders and Singapore Shareholders is HK$11.78, which was calculated using the £/HK$ exchange rate of 11.3277, the noon buying rate on 14 May 2010 (being the last business day prior to the announcement of the terms of the Rights Issue).

 

The Rights Issue is fully underwritten and the terms of the Underwriting Agreement are summarised in paragraph 16.2 of Part XIX (Additional Information).

 

The Joint Global Co-ordinators can adjust the Issue Price (but not terminate the Underwriting Agreement) if any of the following occur before UK Admission:

 

(i)	Prudential issues a supplementary prospectus; or
(ii)	there is (a) a suspension in trading in Prudential securities by the London Stock Exchange on any exchange or in trading generally on the New York Stock Exchange, the Hong Kong Stock Exchange or the London Stock Exchange or (b) the fixing of minimum or maximum pricing of securities by any of those exchanges or a material disruption in commercial banking or securities settlement services in the US, Hong Kong or the UK; or
(iii)	a banking moratorium in the US, Hong Kong or the UK is declared.

 

Such an adjustment to the Issue Price will not change the total proceeds of the Rights Issue. The Issue Price cannot be reduced below 5 pence. If the Joint Global Co-ordinators exercise this option, Prudential will issue a supplementary prospectus detailing the effect of the change on the Rights Issue.

 

Holdings of Existing Shares in certificated and uncertificated form will be treated as separate holdings for the purpose of calculating entitlements under the Rights Issue, as will holdings under different designations, in different accounts and on different registers. Entitlements to Rights Issue Shares will be rounded down to the nearest whole number and resulting fractions of Rights Issue Shares will not be allotted to any Qualifying Shareholders, but will instead be aggregated ultimately for the benefit of Prudential and treated in the same way as Rights Issue Shares not taken up.

 

The Rights Issue Shares will, when issued and fully paid, rank pari passu with the Existing Shares, including the rights to receive all dividends or distributions declared with a record date falling after the date of issue of the Rights Issue Shares. Accordingly, the final 2009 dividend will not be paid in respect of any Rights Issue Shares because the record date for that dividend was 9 April 2010.⁽⁴⁾

 

If a Qualifying Shareholder does not take up the offer of Rights Issue Shares (to the extent permitted), his or her proportionate shareholding will be diluted by approximately 84.6% as a result of the Rights Issue, and by approximately 86.3% as a result of both the Rights Issue, and assuming the Transactions complete, the issue of New Prudential Shares to AIA Aurora as part of the consideration for the Acquisition (assuming (i) the issue of Prudential Shares to shareholders who have elected to receive the scrip dividend alternative for the 2009 final dividend, expected to be issued on 27 May 2010; (ii) no options granted under the Prudential Share Schemes are exercised; and (iii) no other Prudential Shares or New Prudential Shares issued between the date of this prospectus and completion of the Transactions, and without taking into account any conversion of the MCNs.

 

Even if a Qualifying Shareholder takes up the offer of Rights Issue Shares in full, his or her proportionate shareholding will be diluted by approximately 10.9% if the Transactions complete because of the issue of New Prudential Shares to AIA Aurora as part of the consideration for the Acquisition (on the basis of the assumptions referred to above).

 

The Rights Issue is conditional, among other things, upon the passing of the Rights Issue Resolution (which itself is conditional upon the passing of the Scheme Resolutions) and the Underwriting Agreement having become unconditional in all respects (other than the condition relating to UK Admission) and not having been terminated in accordance with its terms prior to UK Admission. The Rights Issue is not conditional on completion of the Acquisition or the Scheme. However, if before UK Admission the Acquisition Agreement has been terminated or the conditions to the Acquisition Agreement cease to be capable of satisfaction and, if capable of waiver, have not been waived, the Rights Issue will not proceed.

 

If completion of the Acquisition does not occur, which Prudential believes is unlikely, Prudential’s current intention is that the net proceeds of the Rights Issue will be invested on a short-term basis while Prudential considers how the net proceeds of the Rights Issue (after deduction of Rights Issue and Transaction related expenses and hedging costs) may be returned to Prudential’s shareholders. In considering how any such proceeds might be returned to Prudential’s shareholders the Directors will take into account, amongst other things, the tax implications for Prudential’s shareholders.

 

5.	Scheme

 

The acquisition of Prudential by New Prudential that, with the Acquisition, results in the combination of the AIA Group and the Prudential Group to form the Enlarged Group will be effected by means of the Scheme between Prudential and the shareholders of Prudential. Under the terms of the Scheme the Prudential Shares will be cancelled and, in consideration for this cancellation, the shareholders of Prudential on the register at the Scheme Record Time will receive:

 

for each Prudential Share one New Prudential Share

 

For the Scheme to become effective, a special resolution implementing the Scheme must be passed by Prudential shareholders at the General Meeting and the Scheme must be approved at the Court Meeting by a majority in number of the shareholders of Prudential present and voting representing 75% or more in value of all Prudential Shares held by such shareholders.

 

The Scheme also requires the sanction of the Court, and its timing will depend, amongst other things, on the timing of receipt of regulatory approvals and change of control consents in respect of the Scheme, though the Scheme is not conditional upon the Rights Issue or the Acquisition.

 

If the Scheme becomes effective, it will be binding on all shareholders of Prudential on the register at the Scheme Record Time irrespective of whether or not they attend or vote in favour of the Scheme at the Court Meeting or in favour of the special resolution to be proposed at the General Meeting.

 

It is intended that the New Prudential Shares will be admitted to the premium segment of the Official List of the UKLA and to trading on the main market for listed securities of the London Stock Exchange. It is also intended that the New Prudential Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS and admitted to the Singapore Official List for the listing and quotation of the New Prudential Shares on the Main Board of the SGX-ST.

 

6.	Regulatory approvals

 

Certain approvals from anti-trust authorities, insurance regulators and other supervisory authorities in various jurisdictions are required for the Transactions, as a result of both the acquisition of AIA by New Prudential and as a result of the allotment and issue to AIA Aurora of the consideration shares and Mandatory Convertible Notes in New Prudential.

 

In respect of the acquisition of AIA, anti-trust approval has been granted in Korea and voluntary applications for anti-trust approval have been made in Indonesia and Singapore. In respect of the allotment and issue to AIA Aurora of the consideration shares and Mandatory Convertible Notes in New Prudential, anti-trust approval has been granted in the United States. Discussions are ongoing with regulators and additional approvals may also be required.

 

As a consequence of the structure of the Transactions a number of regulatory approvals are being sought in a number of jurisdictions. Regulatory approvals are being sought in a number of jurisdictions (including Hong Kong) or have already been received (as is the case in Bermuda and the British Virgin Islands) in respect of the change in control of the AIA Group as a result of the Acquisition. Regulatory approvals are also being sought in a number of jurisdictions (including Malaysia, Hong Kong, the United Kingdom and certain states in the United States) or have already been received (as is the case in Bermuda) in respect of the change in control of the Prudential Group pursuant to the Scheme and as a result of the allotment and issue to AIA Aurora of the consideration shares and Mandatory Convertible Notes in New Prudential. Discussions are ongoing with regulators, including the FSA and the OCI, and additional approvals may also be required.

 

 

1.	Structure of the Enlarged Group

 

Following the Scheme and the Acquisition, New Prudential will be the holding company of the Enlarged Group. Both AIA and Prudential will become wholly-owned subsidiaries of New Prudential.

 

2.	Business Overview

 

The Enlarged Group intends to organise its business into the following broad divisions:

 

•	Asia (comprising the Asian life businesses of the Prudential Group and the AIA Group and the Asian asset management business)
•	UK (comprising the UK life businesses of the Prudential Group)
•	US (comprising Jackson, National Planning Holdings and Curian Capital LLC)
•	Asset Management (comprising M&G).

 

The Enlarged Group will use both the Prudential Group brands and the AIA brands.

 

On an aggregated basis and without applying adjustments for the Transactions or the Rights Issue ⁽⁵⁾ , the Enlarged Group would have 68% of its embedded value for FY 2009 attributable to the Asian business. For FY 2009, 58% and 61% of the Enlarged Group’s pre-tax EEV new business profit ⁽⁶⁾ and pre-tax IFRS operating profit, in each case on an aggregated basis, was attributable to the Asian business.

 

In recognition of the importance of Asia to the Enlarged Group, Prudential expects to have from 25 May 2010, a dual-primary listing in Hong Kong alongside the listing of its ordinary shares in London and a secondary listing in Singapore. Prudential is not proposing to offer new ordinary shares in connection with the listings in Hong Kong and Singapore other than those being offered under the Rights Issue, as described in this prospectus.

 

3.	Objectives, strengths and strategies

 

The central objective of the Enlarged Group will be to deliver sustainable value to shareholders.

 

To deliver this objective, the strategy of the Enlarged Group will be to meet, profitably, customers’ changing needs for savings, income and protection products in its chosen markets across Asia, the US and the UK. In particular, the Enlarged Group will focus on the objective of allocating capital to the most attractive opportunities and geographical markets, both in terms of return and payback period.

 

The Transactions bring together two leading insurance companies to create the Enlarged Group with a business that will have a significant focus on the very attractive Asian markets, which are characterised by high GDP growth, high savings rates and very low life premium penetration. The Enlarged Group will have the opportunity to benefit from its significant presence in these growing Asian markets.

 

It is anticipated that the Enlarged Group will be the leading life insurer in Hong Kong, Singapore, Malaysia, Indonesia, Vietnam, Thailand and the Philippines and the leading foreign life insurance business in India and China, as well as having strong and highly cash generative operations in the US and the UK.

 

The following table sets forth the market position of the AIA Group and the Prudential Group and the expected market position of the Enlarged Group following the Acquisition in certain Asian insurance markets. The rankings have been measured for 2008 or 2009 as set out for each country in the Rank by Market Share tables in paragraph 8

of this Part VI below. Save where otherwise stated the market share percentages of the Enlarged Group have been based on weighted new business premiums in each market for 2009.

 

														New business
										AIA Group and				market share of
		AIA Group				Prudential Group				Prudential Group				Prudential Group
		rank by				rank by				combined rank				and AIA Group
Country		market share				market share				by market share(1)				combined(2)
Hong Kong			3				2				1				22	%
Singapore			4				1				1				30	%
Malaysia			4				1				1				28	%
Thailand			1				12				1				25	%
Indonesia			7				1				1				25	%
Philippines			1				3				1				29	%(c)
Vietnam			5				1				1				41	%
China			1	(a)			4	(a)			1	(a)			29	%(a)
India			8	(b)(3)			1	(b)			1	(b)			11	%(b)

 

 

Notes:		(1) Combined rankings are based on (a) Prudential having been ranked as the leading life insurer in Singapore, Malaysia, Indonesia and Vietnam, (b) AIA having been ranked as the leading life insurer in the Philippines and Thailand, (c) ICICI Prudential having been ranked as the leading private life insurer in India and (d) AIA having been ranked as the leading foreign life insurer in China. Combined Hong Kong ranking based on combined market share set out above being greater than the market share of any other company in the Hong Kong life insurance market.
		(2) Hong Kong, OCI; Singapore, Watson Wyatt Asian Life insurance market update, September 2009; Malaysia, LIAM, ISM (data for Prudential includes PAMB takaful sales); Thailand, TLAA; Indonesia, AAJI (AIA’s second subsidiary in Indonesia (AIA Indonesia) was sold in 2009. The data above reflects only the currently owned subsidiary AIA Financial); The Philippines, Individual company filings used to calculate WFYP and ranking (market share is estimated as there are no consolidated data available for the total market); Vietnam, AVI; China, NIICC: India, IRDA.
		(3) As set out in paragraph 6.3 of Part VIII (Information about the AIA Group), it is currently intended that the AIA Group’s equity interest in AIA India will be disposed of either before or around the time of completion of the Acquisition.
		(a) non-domestic insurance company
		(b) private insurance company
		(c) based on 2008 data.

 

In integrating the two businesses, the Enlarged Group’s core aim will be to maintain the commercial strength of both operations, while bringing together the best in class from both companies. Prudential believes that the Prudential Group’s and AIA Group’s businesses have highly complementary products and distribution channels across the region, which should put the Enlarged Group in a good position to capitalise on the rapid growth in these markets.

 

Prudential believes that the Prudential Group and the AIA Group have complementary capabilities, and key growth opportunities for the Enlarged Group will include: improvements in AIA sales force productivity based upon Prudential’s agency management capabilities; value enhancement from AIA’s current bancassurance relationships by leveraging Prudential’s capabilities in Asia with banks such as SCB, ICICI and UOB; managing the AIA product mix in line with Prudential’s; and increasing utilisation of customer management and data mining tools.

 

After completion of the Acquisition, Prudential will continue to seek opportunities to enhance value for shareholders including through disposals, determined by reference to Prudential’s stringent criteria of growth, profitability, capital efficiency and strategic benefit. Such disposals may also provide an effective way to accommodate the requirements of regulators (for example, in China where Prudential expects that it may be required to restructure the Enlarged Group’s operations).

 

4.	Integration approach and expected financial benefits

 

4.1	Integration approach

 

Rob Devey, Chief Executive of Prudential UK and Europe, has been appointed to lead the integration of the Prudential Group and AIA Group. In this capacity, he reports directly to Tidjane Thiam, Group Chief Executive. Barry Stowe will remain Chief Executive Officer of PCA and Mark Wilson Chief Executive Officer of the AIA Group.

 

In integrating the two businesses, the core aim will be to maintain the commercial strength of both operations. For Prudential, the Acquisition is primarily a growth focused transaction, although cost synergies will also be sought.

 

Prudential intends that the Enlarged Group will use both the Prudential and AIA Group brands, maintain separate agency forces and strengthen both agency forces by the sharing of best practices.

 

Prudential plans for the Enlarged Group’s shared services in areas such as product development, risk management, branding, marketing and customer services to be integrated to the extent possible and to increase effectiveness in

these areas by leveraging economies of scale. Overlapping activities between the Prudential Group and AIA Group are intended to be merged and service quality to be enhanced by sharing best practices across both groups. Integration plans will be tailored to the circumstances applicable to each country, dependent upon the relative scale of the Prudential Group’s and AIA Group’s businesses in each market and based on discussions with local regulators and joint venture partners.

 

The following discussion contains forward-looking statements based on current expectations and targets which involve material risks and uncertainties. These expectations and targets have been prepared for use in this prospectus, represent the best estimate of the Prudential Group as of the date of this prospectus, and are based on the methodology and assumptions and qualifications described below. Actual results and the timing of certain events may differ significantly from those projected and targeted in these forward-looking statements due to a number of factors, including, but not limited to, the occurrence or non-occurrence of a number of assumptions, the most significant of which are set forth below, as well as the factors set out in Part II (Risk Factors), including, but not limited to, the sections headed “The Enlarged Group may fail to realise the anticipated benefits, including estimated synergies, and may fail to achieve its targets in relation to the Acquisition” and “The integration of the Prudential Group and AIA Group may be more difficult than anticipated”, and in the section headed “Forward-looking statements” of Part IV (Important Notices).

 

4.2	Revenue synergies(7)

 

Prudential believes that there is significant potential to improve the value of new business (VNB) ⁽⁸⁾ of the AIA Group from the 2009 level of US$837 million pre-tax, through growth in the AIA Group’s APE (from a combination of anticipated market growth and return of the AIA Group to normalised business levels from the depressed levels experienced in 2009, during which the AIA Group’s VNB was severely affected by the AIG Events and the global economic crisis) and revenue synergies.

 

Assuming that AIA Group underlying APE as a whole will grow at a rate of 15% per annum (from a combination of anticipated market growth and the normalisation of the AIA Group’s business levels) and that the revenue synergies described below are achieved, Prudential believes the AIA Group business is capable of targeting a value of new business of US$1.7 billion post-tax in 2013 from a post-tax value of new business in 2009 of US$610 million⁽⁹⁾.

 

From the combination of the Prudential Group and AIA Group, Prudential seeks to achieve US$800 million pre-tax (US$650 million post-tax) of annualised run-rate new business profit revenue synergies during 2013. The assumed AIA Group underlying APE growth rate of 15% per annum applies to these synergies from the period in which they are expected to be achieved. These revenue synergies are expressed net of estimated revenue dis-synergies of US$100 million pre-tax new business profit over that period, which may arise from agent attrition, perceived conflicts from the perspective of bancassurance partners and other similar factors. The implementation steps are expected to be phased in over three years and the estimated pre-tax cost of achieving these synergies is up to US$180 million, including a budget of up to US$100 million for sales costs, which will be expensed through income over the lifetime of the applicable contracts.

 

The following major sources of revenue synergies have been identified: managing product mix for margin improvement and a number of distribution benefits, including agency management to enhance productivity and activity, increasing effectiveness of current bancassurance partnerships and increased utilisation of customer management and data mining tools.

 

Expected sources of revenue synergies⁽¹⁰⁾

 

		Estimated approximate pre-tax value of new business synergies
Source of synergies		(US$m)
Managing AIA product mix for margin improvement			450
Distribution benefits which include:			350
Improve agency management to enhance AIA productivity and activity
Increasing effectiveness of current AIA bancassurance partnerships
Increased utilisation of customer management and data mining tools
Total revenue synergies			800

 

These are the sources of revenue synergies identified in Prudential’s work to date. It is possible that further opportunities to realise revenue synergies may be identified and realised, for example from further improvements in bancassurance productivity in areas not yet quantified, enhanced capital management, portfolio rationalisation and the combination of the two asset management operations.

 

The pre-tax new business margins of AIA and Prudential Corporation Asia in 2009 were 40% and 57% respectively. Prudential believes that there is significant opportunity to narrow this margin gap between AIA and Prudential by managing the AIA product mix in line with Prudential’s, for example by increasing the level of unit-linked product sales and the number of health and protection riders on those products.

 

The Enlarged Group will have an agency force in excess of 550,000⁽¹¹⁾. The Prudential Group’s agents demonstrated significantly higher levels of productivity than those of AIA in 2009, with average productivity in 2009 being higher in all markets other than Thailand. Prudential believes that its expertise will enable it to target the activity levels and the productivity of the AIA Group’s agents in line with the Prudential Group’s through well established proprietary recruitment, training and incentivisation processes.

 

Furthermore, the Enlarged Group, excluding AIA India, will have access to approximately 26,000 bank branches and Prudential believes that there is an opportunity to apply its expertise in the bancassurance channel to increase the volumes and value of sales through the AIA Group’s existing bank relationships.

 

Finally, Prudential believes that increased utilisation of customer management and data mining tools can be effectively applied to the Enlarged Group’s customers and can accelerate initiatives already underway.

 

4.3	Cost synergies(12)

 

From the combination of the Prudential Group and AIA Group, Prudential seeks to achieve US$370 million of annualised run-rate pre-tax cost synergies during 2013. Of these targeted savings, US$200 million is planned to be generated by combining the AIA Group head office with the Asia regional head office of Prudential and US$170 million from combining in-market life business operations.

 

The implementation steps are expected to be phased in over three years and the estimated pre-tax cost of achieving these savings is US$380 million.

 

Expected sources of cost synergies⁽¹³⁾

 

		Estimated approximate pre-tax cost synergies
Source of targeted cost synergies		(US$m)
People costs			140
Property			30
Investment management			15
Third party procurement			60
Special projects			60
IT			30
Other			35
Total			370

 

4.4	Targets

 

Taking into account both the targeted revenue and cost synergies, in each case subject to the assumptions and costs noted above⁽¹⁴⁾, Prudential believes that it is capable of achieving:

 

•	IFRS pre-tax operating profit (15) in 2013 for the combined Asian business of the Enlarged Group of at least £3,260 million;
•	EEV pre-tax new business profit in 2013 for the combined Asian business of the Enlarged Group of at least £2,800 million; and

 

•	the remittance of at least US$1,000 million per annum from the AIA Group in 2011 and onwards.

 

5.	Regulatory capital (IGD)

 

Prudential’s IGD capital surplus was calculated to be £3.4 billion at 31 December 2009 (before allowing for the 2009 final dividend). Prudential forecasts that as at 1 July 2010 its IGD surplus capital following completion of the Transactions will be £5.2 billion (based on an assumed 1 July 2010 closing date and an exchange rate assumption of £1:US$1.46 at the time of closing). This forecast takes into account:

 

•	the increase in capital surplus as a result of:

 

	•	the gross proceeds of the proposed Rights Issue of £14.5 billion;
	•	the issue to AIA Aurora of New Prudential Shares having a value of approximately £3.8 billion;
	•	the issue to AIA Aurora of mandatory convertible notes and perpetual tier one notes with an aggregate principal amount of £3.5 billion; and

 

•	US$5.5 billion (£3.8 billion at the exchange rate stated above) raised pursuant to the Bond Offerings and/or as drawings under the Hybrid Capital Facility and/or issued as notes under the Subordinated Note Commitment Letter(16);

 

•

the reduction in capital surplus as a result of the total estimated cost of the transaction of approximately £25.6 billion, that includes the acquisition price, transaction fees and £500 million of budgeted hedging costs (noting that the actual impact of the hedging arrangements on the acquisition price and the income statement will depend on the evolution of the sterling/dollar exchange rate through to completion of the Acquisition); and

 

•

a net increase in capital surplus of £1.8 billion as a result of including the forecast IGD surplus of the AIA Group entities, changes since 31 December 2009 in net assets of Prudential eligible to be included in capital (including changes resulting from the forecast operating result less dividends paid or expected to be paid to shareholders of Prudential before 30 June 2010) and other adjustments.

 

Following completion of the Acquisition, certain amounts of surplus capital (that is capital in excess of the minimum that is held to meet local legal regulatory requirements) held by companies in the AIA Group will continue to be subject to restrictions on utilisation of that capital in other parts of the Enlarged Group and therefore will not be eligible to be treated as part of the IGD surplus. Prudential forecasts that (based on an assumed 1 July 2010 closing date) the amount of surplus capital restricted in this way (principally in AIA Co, AIA-B, AIA Singapore and AIA Thailand) will be approximately £1.1 billion (which is not included in the forecast IGD surplus capital of £5.2 billion referred to above).

 

Sensitivity analysis

 

Prudential has estimated the impact of the following stresses on the IGD capital for the Enlarged Group as at 1 July 2010 as follows:

 

•	an instantaneous 20% fall in equity markets would reduce IGD surplus by £0.6 billion;
•	a 40% fall in equity markets (comprising an instantaneous 20% fall followed by a further 20% fall over a four week period) would reduce the IGD surplus by £1.3 billion;
•	a 150 basis point reduction (subject to a floor of zero) in interest rates would reduce the IGD surplus by £2.4 billion; and
•	credit defaults of ten times the expected level would have an impact of £1.7 billion in excess of the annual reserve release.

 

In addition the Joint Lead Arrangers have entered into a contingent subordinated debt financing facility to Prudential of up to £1 billion. This facility would only be available to be drawn during the period of twelve months following the completion of the Acquisition, on the occurrence of certain stresses on Prudential’s IGD capital. Prudential is entitled to extend the availability of the facility for a further twelve months at its option. If drawn, the facility will provide Prudential with capital resources to enhance its IGD capital at the relevant time. The facility will provide for Lower Tier 2 loans with a term of six years. The amount drawn will replenish the IGD capital to the amount referred to under ‘FSA Supervision Arrangements for the Enlarged Group’ in Part X of this prospectus. There will be limited conditions to drawing the facility. If drawn, the Joint Lead Arrangers will have the right to exchange the drawings under the facility for Lower Tier 2 notes and/or Upper Tier 2 notes. Drawings under the facility will be used to prepay any amounts outstanding under the Bridge Facility. The commitments under the facility will be mandatorily cancelled, and, subject to FSA approval, any drawings under the facility will be mandatorily prepaid, by an amount equal to the capital benefit arising from (a) any disposals by the Enlarged Group and (b) any capital release from any member of the Enlarged Group, in each case which is counted towards Prudential’s IGD capital ratios. The commitments under the facility will also be mandatorily cancelled by an amount equal to the proceeds of any other issuance of regulatory capital by Prudential (except where such issuance is used to refinance or replace any existing regulatory capital instruments. Whilst the facility is in place, Prudential will be subject to restrictions on making acquisitions and on paying dividends which are not consistent with the group dividend policy as described below.

 

6.	Dividend Policy

 

The Directors intend to focus on delivering a growing dividend for the Enlarged Group, which will be determined after taking into account the Enlarged Group’s financial flexibility and the Directors’ assessment of opportunities to generate attractive returns by investing in specific areas of the business. The Board believe that in the medium term a dividend cover of two times post-tax operating earnings is appropriate.

 

The 2010 interim dividend is expected to reflect the pro forma earnings of the Enlarged Group as if the Acquisition had taken place on 1 January 2010.

 

Dividends are waived on shares held for employees under certain of the Prudential Share Schemes.

 

7.	Capitalisation and indebtedness

 

The following table shows the capitalisation of Prudential as at 31 December 2009 and indebtedness of Prudential and AIA on an aggregated basis (excluding amounts in respect of Prudential and AIA life funds) as at 28 February 2010. With the exception of capitalisation balances which are extracted without material adjustment from the historical financial

information set out in the Prudential Annual Report for 2009 and reported on by KPMG Audit Plc, the balances in Section 7 are extracted without material adjustment from unaudited information contained in underlying financial accounting systems and other management documents.

 

		£m
Capitalisation of Prudential as at 31 December 2009:
Share capital (2,532,227,471 ordinary shares of 5p each fully paid)			127
Share premium			1,843
Total share capital and share premium			1,970
Indebtedness as at 28 February 2010:
1. Prudential’s core structural borrowings of shareholder-financed operations (see (a) below)			3,496
2. Prudential’s operational borrowings attributable to shareholder-financed operations (see (b) below)			3,168
3. AIA’s borrowings attributable to shareholder-financed operations (see (c) below)			413
Total aggregated indebtedness (1) + (2) + (3) (see (d) below)			7,077
There has been no material change in the issued share capital and share premium amounts of Prudential since 31 December 2009.

 

There has been no material change in the aggregated indebtedness of the Prudential Group and the AIA Group attributable to shareholder-financed operations at 14 May 2010 as compared to the £7,077 million recorded at 28 February 2010 as shown in the indebtedness statement above.

 

(a)	Prudential’s core structural borrowings of shareholder-financed operations as at 28 February 2010

 

		£m
Parent company
Subordinated debt:
Innovative Tier 1:
US$1,000m 6.5% Perpetual Subordinated Capital Securities			657
US$250m 6.75% Perpetual Subordinated Capital Securities (note i)			164
US$300m 6.5% Perpetual Subordinated Capital Securities (note i and ii)			206
US$750m 11.75% Perpetual Subordinated Capital Securities			483
			1,510
Lower Tier 2:
€500m 5.75% Subordinated Notes 2021 (note iii)			447
€20m Medium-Term Subordinated Notes 2023 (note iv)			18
£435m 6.125% Subordinated Notes 2031			428
£400m 11.375% Subordinated Notes 2039			380
			1,273
Senior debt:
£300m 6.875% Bonds 2023			300
£250m 5.875% Bonds 2029			249
			549
Total parent company			3,332
Jackson
Lower Tier 2:
US$250m 8.15% Surplus Notes 2027 (note v)			164
Total			3,496

 

 

Notes

 

i		The US$250 million 6.75% borrowings and the US$300 million 6.5% borrowings can be converted, in whole or in part, at Prudential’s option and subject to certain conditions, on any interest payment date falling on or after 23 March 2010 and 23 March 2011 respectively, into one or more series of Prudential preference shares.
ii		Interest on the $300 million 6.5% borrowings was swapped into floating rate payments but, in 2008, was swapped back into fixed rate payments of 6.5% until September 2010.
iii		The €500 million 5.75% borrowings have been swapped into borrowings of £333 million with interest payable at six month £Libor plus 0.962%.
iv		The €20 million borrowings were issued at 20-year Euro Constant Maturity Swap (capped at 6.5%). These have been swapped into borrowings of £14 million with interest payable at three month £Libor plus 1.2%.

 

v		The Jackson borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.

 

(b)	Prudential’s operational borrowings attributable to shareholder-financed operations as at 28 February 2010

 

		£m
Borrowings in respect of short-term fixed income securities programmes:
Commercial paper			2,235
Medium-Term Notes 2010			8
Medium-Term Notes 2013			249
			2,492
Non-recourse borrowings of US operations (note i):
Investment subsidiaries of Jackson			22
Piedmont and CDO funds (note ii)			155
			177
Other borrowings:
Bank loans and overdrafts (note iii)			133
Obligations under finance leases			3
Other borrowings (note iv)			363
			499
Total			3,168

 

 

Notes

 

i		In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and funds.
ii		Piedmont is an investment trust investing in certain asset-backed and mortgage-backed securities in the US. These borrowings pertain to debt instruments issued to external parties.
iii		Bank loans and overdrafts include a short-term loan of £130 million in respect of Asian operations.
iv		Other borrowings represents amounts whose repayment to the lender is contingent on future surpluses emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on the contracts, there is no recourse to other assets of the Prudential Group and the liability is not payable to the degree of shortfall.
v		In addition to the operational borrowings shown in the table above, Prudential has issued £200 million Floating Rate Notes 2010, which were wholly subscribed to by a Prudential Group subsidiary. These borrowings are eliminated on consolidation and so have been excluded from the table above.

 

(c)	AIA’s borrowings attributable to shareholder-financed operations as at 28 February 2010

 

		US$m (note i)				£m
Bank loans and overdrafts			574				377
Loans from other AIG companies			50				33
Other borrowings			4				3
Total			628				413

 

 

Notes

 

i		AIA borrowings shown above in US$ have been translated to pounds sterling at a rate of 1.52.

 

(d) Guaranteed and secured borrowings

 

Prudential

 

At 28 February 2010, a total of £543 million of borrowings are secured which includes borrowings with no recourse to assets beyond the investment fund to which they relate or future surpluses on contracts specified in the arrangement. There were no significant guarantees of third party indebtedness at that date.

 

AIA

 

Properties with a book value of US$758 million (£498 million) and cash and cash equivalent of US$43 million (£28 million) at 28 February 2010 are pledged as security with respect to amounts disclosed as bank loans of US$496 million and other loans of US$4 million.

 

At 28 February 2010, AIA has issued capital guarantees and guarantees of indebtedness of approximately US$1 million. No borrowings are guaranteed by third parties.

 

(e)	Guarantees, contingent liabilities and contingent indebtedness

 

Prudential

 

Prudential’s outstanding guarantees and contingent liabilities are disclosed in the Prudential Annual Report for 2009. There has been no material adverse change in Prudential’s outstanding guarantees and contingent liabilities since 31 December 2009.

 

Prudential has access to committed credit facilities and committed lending liquidity facilities as described in detail in the Prudential Annual Report for 2009. There has been no change in the terms of these facilities as at 28 February 2010.

 

AIA

 

AIA Group’s contingent liabilities at 30 November 2009 are described in note 42 of the historical financial information of the AIA Group as disclosed in Part XV of this prospectus. These contingent liabilities at 28 February 2010 are as stated in that note with the exception that the value of mortgage loans to which AIA is exposed under the Australian residential mortgage credit agreement has fallen to US$3,320 million (£2,184 million) and the associated liabilities and related reinsurance assets had fallen to US$20 million (£13 million); and the accumulation value for minimum guaranteed rates of return has risen to US$1,279 million (£841 million).

 

There has been no material adverse change in AIA’s contingent liabilities since 28 February 2010.

 

(f)	Mortgages and charges

 

Prudential

 

As at 28 February 2010, no member of the Prudential Group has any outstanding mortgages or charges on its property, plant and equipment that would have a material impact on the financial position of the Prudential Group.

 

AIA

 

Save as disclosed elsewhere in the prospectus as at 28 February 2010 AIA did not have any outstanding mortgages, charges or other similar indebtedness.

 

(g)	Obligations under sale and repurchase agreements

 

Prudential

 

Obligations under sale and repurchase agreements attributable to shareholder-financed operations as at 28 February 2010 amounted to £676 million.

 

AIA

 

Obligations under sale and repurchase agreements as at 28 February 2010 amounted to US$554 million (£364 million).

 

8.	Industry overview and competition

 

There are other significant participants in each of the financial services markets in which the Enlarged Group operates. Its competitors include both mutual and stock financial companies. In addition, regulatory and other developments in many of the Enlarged Group’s markets have blurred traditional financial service industry lines and opened the market to new competitors and increased competition. In some of the Enlarged Group’s markets, other companies may have greater financial resources, allowing them to benefit from economies of scale, and may have stronger brands than the Enlarged Group does in that market.

 

The principal competitive factors affecting the sale of the Enlarged Group’s products in its chosen markets are:

 

•	price and yields offered,
•	financial strength and ratings,
•	commission levels, charges and other expenses,
•	range of product lines and product quality,
•	brand strength, including reputation and quality of service,

 

•	distribution channels,
•	investment management performance and
•	historical bonus levels.

 

An important competitive factor is the ratings the Enlarged Group receives in some of its target markets, most notably in the United States, from recognised rating organisations. The intermediaries with whom the Group works, including financial advisers, tied agents, brokers, wholesalers and financial institutions consider ratings as one factor in determining which provider to purchase financial products from.

 

As at 31 March 2010:

 

Prudential’s long-term senior debt is rated as A2 (negative outlook) by Moody’s, A+ (negative watch) by Standard & Poor’s and A+ (negative watch) by Fitch;

 

Prudential’s short-term debt is rated as P-1 by Moody’s, A-1 by Standard & Poor’s and F1+ (negative watch) by Fitch;

 

The Prudential Assurance Company Limited long-term fund is rated Aa2 (negative outlook) by Moody’s, AA (negative watch) by Standard & Poor’s and AA+ (negative watch) by Fitch;

 

Jackson’s financial strength is rated AA (negative watch) by Standard & Poor’s and Fitch, A1 (negative outlook) by Moody’s, and A+ (under review – negative) by AM Best; and

 

AIA Co is rated A+ (developing) by Standard & Poor’s.

 

The Enlarged Group has not yet been rated.

 

The Enlarged Group will offer different products in its different markets in Asia, the UK and the US and, accordingly, will face different competitors and different types of competition in these markets. In all of the markets in which the Enlarged Group will operate its products are not unique and, accordingly, it will face competition from market participants who offer a varying range of similar and identical products.

 

The information and statistics provided for the Asia Pacific life insurance market in this section include Hong Kong, Korea, Thailand, Singapore, China, Malaysia, the Philippines, Indonesia, Vietnam, Taiwan, India, Australia, and New Zealand but excluding Japan.

 

For the purpose of this section, data on “life insurance premiums” indicated as derived from Sigma reports (“World insurance in 2008: life premiums fall in the industrialised countries-strong growth in the emerging economies” published by Swiss Re) is primarily based on the following metrics from Sigma reports: “premium income”, “premium volume”, “premiums”, “life insurance premium” and “life premiums”. Market share data based on “life insurance premiums” or “total premiums” is generally based on data published by the industry source indicated.

 

Described below are some of the key sources and methodologies used in calculating certain information and statistics provided in this section. Please note that the description below is not an exhaustive list of the sources and methodologies used to present the information and statistics set out in this section.

 

Sigma reports present life insurance premium data on a local currency basis converted to US dollars using the average local currency to US dollar exchange rate for the year indicated. The figures are presented on a nominal basis and are not inflation-adjusted. For the purposes of this document, simple and compound average growth rates for life insurance premiums have been calculated using the as-converted US dollar figures published in the Sigma reports. Since the data is converted at the average yearly exchange rate for each year and is presented in nominal terms, exchange rate and inflation fluctuations may impact the growth rates described in this document.

 

Sigma reports present GDP data on a local currency basis converted to US dollars using the average local currency to US dollar exchange rate for the year indicated. GDP data from the Sigma reports is presented on a nominal basis and are not inflation-adjusted. For the purposes of this document, simple and compound average growth rates for GDP have been calculated using the as-converted US dollar figures published in the Sigma reports. Since the data are converted at the average yearly exchange rate for each year and is presented in nominal terms, exchange rate and inflation fluctuations may impact the growth rates described in this document.

 

The Sigma reports referred to above are publicly available and not prepared for the purposes of this document.

 

This section also includes penetration rate, density rate, savings rate and total population data from the Sigma reports. Penetration rate is a market’s life insurance premium as a percentage of its GDP. Density rate is a market’s life insurance premium per capita. Savings rate is savings as a percentage of disposable income.

 

Household savings rate data is based on data published in Euromonitor International.

 

Data on the population above the age of 65 is based on data published in Euromonitor International.

 

Life insurance market

 

The life insurance markets in Asia Pacific, the US and the UK generated US$1,279 billion of life insurance premiums in 2008. Prudential operates in these three key regions: Asia (in the following 12 countries, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand, Vietnam), UK and US.

 

The Asia Pacific life insurance market generated US$358.3 billion of life insurance premiums in 2008, comprising 14.4% of aggregate global life insurance premiums. Although the Asia Pacific region was affected by the global financial turmoil in 2008, it recorded GDP growth of 15.4%. Life insurance premiums in the Asia Pacific region grew at a CAGR of 17.5% from 2003 to 2008, primarily driven by strong regional economic growth, favourable demographic changes, social welfare reforms, healthcare demand and insurance market reforms. This compared to a GDP CAGR of 17.1% over the same period.

 

The UK is the world’s third largest life insurance market and the largest in Europe, with total premium volume in 2008 of £185 billion (US$343 billion). Life insurance premiums in the UK grew at a CAGR from 2003 to 2008 of 17.2%. This compared to a GDP CAGR of 8.3% over the same period.

 

The US life insurance market generated US$578 billion of life insurance premiums in 2008, comprising approximately 23% of aggregate global life insurance premiums, representing the world’s largest life insurance market. Life insurance premiums in the US grew at a CAGR from 2003 to 2008 of 3.8%. This increase compared to a GDP CAGR of 5.4% over the same period.

 

The following table sets forth certain life insurance premium and macroeconomic data for the Asia Pacific region, Japan, the US and the UK for the periods indicated:

 

		Life insurance premiums												GDP
		2008				2008 Share				CAGR				2008				Penetration rate				Density rate				Savings rate
		(US$bn)				of world market in%				2003-2008 (%)				(US$bn)				2008 (%)				2008 (US$)				2008 (%)
Hong Kong			21.3				0.86				16.1				216				9.9				2,930				31.4
Korea(1)			66.4				2.67				9.6				826				8.0				1,348				18.4
Thailand			5.0				0.20				9.0				273				1.8				77				10.9
Singapore			11.4				0.46				15.5				182				6.3				2,549				34.3
China			95.8				3.85				24.2				4,324				2.2				72				36.5
Malaysia(1)			6.1				0.25				12.1				219				2.8				226				23.4
Philippines			1.4				0.06				15.6				169				0.9				16				7.9
Indonesia			4.7				0.19				27.9				514				0.9				20				12.6
Vietnam			0.7				0.03				14.8				90				0.7				8				5.7
Taiwan			52.7				2.12				17.3				396				13.3				2,288				10.0
India			48.9				1.96				29.2				1,218				4.0				41				32.2
Australia			42.7				1.71				13.8				968				4.4				2,038				14.8
New Zealand			1.1				0.04				0.2				127				0.8				253				(8.8	)
Japan			367.1				14.74				(0.8	)			4,845				7.6				2,870				10.0
US			578.2				23.22				3.8				14,265				4.1				1,901				5.8
UK			342.8				13.76				17.2				2,677				12.8				5,582				-1.1

 

 

Source: Swiss Reinsurance Company Sigma Reports No. 3/2004 and No. 3/2009; Euromonitor International for savings rates

 

(1)		Life insurance industry data is for the 12 months ended 31 March of the year subsequent to the year indicated

 

Asia

 

Industry overview and trends

 

Strong economic growth

 

The Asia Pacific region has recently experienced strong economic growth and increases in income per capita. GDP in the Asia Pacific region grew at a CAGR of 17.1% from 2003 to 2008, with GDP growth of 15.4% in 2008. This growth is significantly higher than the growth experienced by UK and US (CAGR of 8.3% and 5.4% from 2003 to 2008, and GDP growth of (3.5%) and 3.0% in 2008, respectively).

 

The following table sets forth key macroeconomic data for the Asia Pacific region for the periods indicated.

 

																										CAGR
		2003				2004				2005				2006				2007				2008				2003-8
GDP (US$bn)			4,325				4,953				6,111				6,861				8,251				9,522				17.1	%
Nominal GDP growth (%)			17.3				14.5				23.4				12.3				20.3				15.4
GDP per capita (US$)			1,483				1,677				2,047				2,259				2,660				3,038

 

Source: Swiss Reinsurance Company Sigma Reports No. 3/2004, No. 2/2005, No. 5/2006, No. 4/2007, No. 3/2008 and No. 3/2009

 

High historical life insurance premium growth rates

 

Asia Pacific life insurance premiums increased significantly in recent years, growing at a CAGR of 17.5% from 2003 to 2008 (life insurance premiums grew from US$159.9 billion in 2003 to US$358.3 billion in 2008). Emerging economies within the Asia Pacific region such as China, India and Indonesia each achieved life insurance premium CAGRs of over 20.0% from 2003 to 2008. Relatively more developed economies within the Asia Pacific region such as Hong Kong, Taiwan and Singapore recorded life insurance premium CAGRs of 16.1%, 17.3% and 15.5%, respectively, during the same period.

 

Continued low penetration and density rates

 

Markets such as China, Thailand, the Philippines, Indonesia, Vietnam and India all have reported density rates under US$100. Prudential believes that if these economies grow and standards of living improve, the low density and penetration rates in these markets indicate significant growth potential for the Asia Pacific insurance industry.

 

Favourable demographic changes

 

The Asia Pacific region had a population of approximately 3.1 billion people, or approximately 47% of the total world population as of 31 December 2008. The Asia Pacific region has experienced high population growth rates historically, and the region’s population is expected to increase by more than 300 million people by 2020. Moreover, from 2003 to 2008, the population in the region above the age of 65 grew at a CAGR of 2.9% (compared to 0.8% and 1.6% for the UK and North America, respectively). In particular, the percentage of the population above the age of 65 in Korea and Singapore has grown significantly from 2003 to 2008, with CAGRs of 4.8% and 5.1%, respectively. The Directors believe that the increasing size of the Asia Pacific region’s population and certain ageing trends and demographic mixes within the region is likely to result in increasing demand for insurance products in the future.

 

The following table sets forth certain demographic data for the Asia Pacific region for the periods indicated:

 

		Population (mm)								Population aged 65 and above
		2008				CAGR 2003-2008				% population 2008				CAGR 2003-2008
Asia Pacific			3,134.3				1.4	%			7.0				2.9	%

 

 

Source: Euromonitor International for population above the age of 65; Swiss Reinsurance Company Sigma Reports No. 3/2004 and No. 3/2009 for total population

 

High household savings rates

 

Households in China (36.5% in 2008), Hong Kong (31.4% in 2008), Singapore (34.3% in 2008), Korea (18.4% in 2008) and Malaysia (23.4% in 2008) have recorded savings rates above 15% from 2003 to 2008, compared to lower household savings rates in the United States (5.8% in 2008) and the United Kingdom ((1.1)% in 2008). Prudential believes that the high household savings rates in many markets within the Asia Pacific region represent an opportunity for the insurance industry as customers benefiting from these high levels of savings may diversify such savings across a spectrum of financial products, including those offered by insurance companies.

 

Growing middle class, significant high net worth populations and increasing financial sophistication

 

The Asia Pacific region has a growing middle class and a significant high net worth population. In particular, markets such as Hong Kong and Singapore already have an established middle class, and many other markets in the Asia Pacific region have an emerging middle class. In 2008, the region (including Kazakhstan, Myanmar and Sri Lanka) had approximately 1 million high net worth individuals, which represents an aggregate of approximately US$4.2 trillion in wealth, or approximately 13.0% of total worldwide wealth. In addition, the high net worth population in China is currently the fourth largest in the world after the United States, Japan and Germany.

 

Gaps in health and protection coverage driving growth for health and protection insurance products

 

There is a wide spectrum of public and private healthcare schemes across the Asia Pacific region. While many markets have government-provided healthcare, such healthcare is often subject to limitations, including with respect to the extent and quality of coverage. Moreover, individual out-of-pocket costs for healthcare are a significant percentage of healthcare expenditures in the Asia Pacific region, based on data published by the Organization for Economic Co-operation and Development. Even in markets such as Hong Kong and Korea, which provide broad healthcare coverage for residents, individual out-of-pocket healthcare expenditures account for over 30% of total healthcare expenditures, based on data published by the World Health Organization (compared with 15% for Japan and 13% for the US). Individual out-of-pocket costs for healthcare are projected to continue to be a significant percentage of healthcare expenditures in many Asia Pacific markets: by 2014, a projected 66% in Singapore, 60% in Hong Kong, 55% in Malaysia, 54% in China, 45% in Korea and 25% in Thailand. This compares to 55% in the United States, 26% in Europe and 14% in Japan. Per capita health expenditures of retirees in East Asia (as classified by the World Health Organization) are projected to triple by 2015. Many markets in the region have been receptive to private sector solutions that address health and protection coverage gaps and reduce individual out-of-pocket healthcare expenditures.

 

There is a growing gap in health and protection coverage in the Asia Pacific region and there is growing customer awareness of health and protection needs and insurance products. Prudential believes that these trends present an opportunity in both the group health insurance segment (serving employers who provide health and protection insurance benefits to their employees) and in the individual segment (in particular, to high net worth individuals who seek more comprehensive healthcare coverage).

 

Developing pension markets

 

In 2008, the Asia Pacific region accounted for approximately 47% of the world’s population but only a small portion of global pension assets. In particular in 2007, China, Korea, India, Hong Kong and Singapore had an aggregate of approximately 38% of the world’s population, but only had private pension assets to the value of US$280 billion, 2.7% of the equivalent value of private pension assets held in the US (US$10 trillion). In addition, government sponsored pension programmes in developed economies like Singapore and Hong Kong have created an opportunity for the private sector and benefited insurance companies in the region. For example, a significant portion of Singapore’s pension assets are held by the Central Provident Fund and insurance products credited for approximately 67% of the Central Provident Fund’s pension assets in the first half of 2008. Prudential believes the relatively low percentage of pension assets represent a growth opportunity for the Asia Pacific insurance industry.

 

Shift to multi-channel distribution

 

While life insurance companies in the Asia Pacific region have historically focused on traditional agency distribution, many life insurance companies have expanded their distribution network to include other channels such as bancassurance, direct marketing and brokers. In certain markets within the Asia Pacific region, bancassurance has become a significant distribution channel and has enabled life insurance companies to reach a broad customer base, in part as a result of certain markets’ extensive banking networks. Prudential believes that there is potential for a shift from traditional agency to multi-channel distribution in many Asia Pacific markets.

 

Country market overview

 

Hong Kong

 

The Hong Kong life insurance market was the sixth largest in the Asia Pacific region, with approximately US$21.3 billion in life insurance premiums in 2008. Prudential considers Hong Kong to be a sophisticated and developed insurance market within the Asia Pacific region. The Hong Kong life insurance industry has experienced double digit life insurance premium growth, with a CAGR of approximately 16.1% between 2003 and 2008. The Directors believe this recent premium growth and Hong Kong’s recent economic growth (GDP grew at a CAGR of approximately 6.3% from 2003 to 2008), coupled with its penetration rate (9.9% in 2008) and density rate (over US$2,900 in 2008), suggest a developed life insurance market within the Asia Pacific region with a demonstrated customer demand for insurance products.

 

The Hong Kong life insurance market had approximately 46 life insurance companies and 19 composite insurance companies as of 30 June 2009. The following table sets forth the top five life insurance companies in Hong Kong by market share of life insurance APE in 2009 based on data published by the OCI:

 

Company		Rank by Market Share(1)
HSBC Insurance			1
Prudential Group			2
AIA Group			3
BOC Life			4
Hang Seng Insurance			5

 

 

(1)		Market share data excludes retirement scheme-related group business classes G and H, as categorised by the OCI

 

Thailand

 

Thailand’s life insurance market was the ninth largest in the Asia Pacific region in 2008, with approximately US$5.0 billion of life insurance premiums. Life insurance premiums grew at a 9.0% CAGR between 2003 and 2008. The Directors believe the relatively small size of the life insurance market and the relatively low penetration rate (1.8% in 2008) and density rate (approximately US$77 in 2008) suggest a developing life insurance market within the region with significant growth opportunities.

 

The following table shows ranking by market share of the top five life insurance companies and the Prudential Group for 2009, ranked by weighted first-year premium, based on data from the Thailand Life Assurance Association:

 

Company		Rank by Market Share
AIA Group			1
Thai Life			2
SC New York Life			3
Muang Thai			4
Bangkok Life			5
Prudential Group			12

 

Singapore

 

Singapore’s life insurance market is the seventh largest in the Asia Pacific region, with approximately US$11.4 billion of life insurance premiums in 2008. Life insurance premiums grew at a 15.5% CAGR between 2003 and 2008. Prudential believes Singapore is an attractive and developed life insurance market within the Asia Pacific region because of its status as a regional financial centre, its compulsory social security savings scheme (the Central Provident Fund), penetration rate (6.3% in 2008) and density rate (over US$2,500 in 2008). The Directors believe that the country’s small population and significant wealth have created a market that presents unique growth opportunities for insurance companies.

 

There were approximately 16 life insurance companies in the Singapore life insurance market as of 30 June 2009. The following table sets forth the top five life insurance companies in Singapore by market share of life insurance premiums in the first half of 2009 on a weighted new business basis:

 

Company		Rank by Market Share
Prudential Group			1
NTUC Income			2
GE Life			3
AIA Group			4
ManuLife			5

 

 

Source: Watson Wyatt Asian Life insurance market update, September 2009.

 

Malaysia

 

With life insurance premiums of approximately US$6.1 billion in the 12 months ended 31 March 2009, Malaysia’s life insurance market is the eighth largest in the Asia Pacific region. Life insurance premiums grew at a CAGR of 12.1% between 31 March 2003 and 31 March 2009. The Directors believe that Malaysia’s recent economic growth (GDP grew at a CAGR of approximately 15.8% from 2003 to 2008) and penetration rate (2.8% in the 12 months

ended 31 March 2009) suggest a developing life insurance market within the Asia Pacific region with strong growth opportunities.

 

There were approximately 16 registered life insurers in Malaysia’s life insurance market as of 31 December 2008. The following table sets forth the top five life insurance companies in Malaysia by market share of life insurance premiums on APE basis in 2009 based on data published by the Life Insurance Association of Malaysia and Insurance Services Malaysia:

 

Company		Rank by Market Share(1)
Prudential Group			1
GE Life			2
ING			3
AIA Group			4
Allianz			5

 

 

(1)		Market share data includes Takaful business

 

India

 

India’s life insurance market was the tenth largest in the world and fourth largest in the Asia Pacific region in 2008, with approximately US$48.9 billion of life insurance premiums. Life insurance premiums grew at a 29.2% CAGR between 2003 and 2008. The US$48.9 billion in premiums written by the Indian life insurance sector in 2008 implied a global market share of 2.0% and 13.6% in an Asian Pacific context. India’s exceptionally strong growth in industry premiums, which is the highest in the region, is primarily due to new entrants ramping up their franchise expansion. Prudential believes that India’s long-term life insurance market growth prospects remain exceptional in view of the ongoing rapid development of the Indian economy.

 

There were approximately 23 life insurance companies in the Indian life insurance market as of 31 March 2009. The following table sets forth the top four private life insurance companies in India by market share of weighted first-year premium in 2009 based on data published by the Insurance Regulatory and Development Authority:

 

Company		Rank by Market Share
ICICI Prudential			1
SBI Life			2
Bajaj Allianz Life			3
Reliance Life			4

 

China

 

With life insurance premiums of approximately US$95.8 billion in 2008, the Chinese life insurance market is the largest in the Asia Pacific region and the sixth largest in the world. China’s life insurance market has recorded significant growth in recent years, with total premiums increasing at a CAGR of 24.2% between 2003 and 2008. Prudential believes that China’s large economy (the third largest in the world in terms of GDP), recent economic growth (GDP grew at a CAGR of approximately 25.1% from 2003 to 2008) and large population (19.8% of the world’s total as of 31 December 2008) combined with the life insurance market’s recent premium growth and penetration rate (2.2% in 2008), suggest a large life insurance market with significant growth opportunities.

 

China’s life insurance market is currently dominated by five domestic Chinese life insurance companies that collectively held an aggregate market share of almost 79% of life insurance premiums in 2009. Foreign life insurance companies held an aggregate market share of approximately 5% of life insurance premiums in 2009 according to data published by the China Insurance Regulatory Commission. The following table sets forth the top five foreign life insurance companies by market share of weighted first-year premiums in 2009 based on data published by the National Insurance Industry Communication Club of China:

 

Company		Rank by Market Share
AIA Group			1
Aviva COFCO			2
Hua Tai			3
CITIC-Prudential			4
Metlife			5

 

Korea

 

With approximately US$66.4 billion in life insurance premiums in the 12 months ended 31 March 2009, the Korean life insurance market is the eighth largest in the world and the second largest in the Asia Pacific region. Life insurance premiums grew at a CAGR of approximately 9.6% between 31 March 2003 and 31 March 2009. Prudential believes that the size of the market, together with its penetration rate (8.0% in the 12 months ended 31 March 2009) and density rate (over US$1,300 in the 12 months ended 31 March 2009), suggest a developed life insurance market within the region with a demonstrated customer demand for insurance products.

 

There were approximately 22 life insurance companies in the Korean life insurance market as of 31 December 2008.

 

The Philippines

 

With life insurance premiums of approximately US$1.4 billion in 2008, the Philippines’ life insurance market is the eleventh largest in the Asia Pacific region. Life insurance premiums grew at a CAGR of 15.6% from 2003 to 2008. Prudential believes that the market’s low penetration rate (0.9% in 2008) and density rate (approximately US$16 in 2008) suggest a life insurance market in the early stages of development with significant growth opportunities.

 

The following table sets forth the top five life insurance companies in 2008 in the Philippines for weighted first year premiums:

 

Company		Rank by Market Share
Philamlife			1
Sunlife			2
Pru Life			3
Insular Life			4
AXA			5

 

 

Source: These ratings have been derived internally by Prudential from publicly available results released by the companies listed above.

 

Indonesia

 

Indonesia’s life insurance market is the tenth largest in the Asia Pacific region, with approximately US$4.7 billion of life insurance premiums in 2008. Indonesia’s life insurance market has recorded significant growth in recent years, with life insurance premiums increasing at a CAGR of 27.9% between 2003 and 2008. Prudential believes that this recent premium growth coupled with the country’s large population (fourth largest in the world) and low penetration rate (0.9% in 2008) and density rate (approximately US$20 in 2008) suggest a developing life insurance market with strong growth opportunities.

 

The following table sets forth the ranking of the top five life insurance companies in Indonesia and AIA based on weighted first year premiums in 2009 based on data published by the Life Insurance Association of Indonesia:

 

Company		Rank by Market Share
Prudential Group			1
Bumputera 1912			2
Mega Life			3
Allianz Life Indonesia			4
AXA Group			5
AIA			7

 

Taiwan

 

With approximately US$52.7 billion of life insurance premiums in 2008, Taiwan’s life insurance market is the third largest in the Asia Pacific region and the ninth largest in the world. Life insurance premiums grew at a CAGR of 17.3% from 2003 to 2008. Prudential believes that the market’s penetration rate (13.3% in 2008) and density rate (over US$2,200 in 2008) suggest that it is a developed market within the Asia Pacific region with a demonstrated customer demand for life insurance products.

 

Vietnam

 

Vietnam’s life insurance market had approximately US$0.7 billion of life insurance premiums in 2008. Life insurance premiums grew at a CAGR of 14.8% from 2003 to 2008. Prudential believes that the country’s growing economy (GDP grew at a CAGR of approximately 18.8% from 2003 to 2008) and a population that is largely

uninsured (0.7% penetration rate in 2008) suggest strong growth opportunities in the life insurance market despite the challenges of distributing insurance products in a market in which only 28% of the population is urbanised.

 

The following table sets forth the top five life insurance companies in Vietnam based on weighted first year premiums for 2009 based on data published by the Association of Vietnam Insurers:

 

Company		Rank by Market share
Prudential Group			1
Bào Viêt Life			2
Manulife			3
ACE Life			4
AIA Group			5

 

Australia

 

Australia’s life insurance market is the fifth largest in the Asia Pacific region, with approximately US$42.7 billion of life insurance premiums in 2008. Life insurance premiums grew at a CAGR of 13.8% from 2003 to 2008. AIA Australia focuses on the life risk insurance segment. This segment, which consists primarily of protection products (as opposed to wealth, investment and superannuation products), had total premiums of approximately US$6.8 billion in 2008. Prudential believes that the Australian life insurance market is a developed market within the Asia Pacific region supported by a robust economic and regulatory framework, compulsory employer contributions to Australia’s superannuation system (a pension system) and favourable tax treatment for individuals purchasing life insurance products through the superannuation system (group insurance).

 

New Zealand

 

New Zealand’s life insurance market had approximately US$1.1 billion of life insurance premiums in 2008. Prudential believes that the market is supported by a relatively developed economic framework and that it has a low penetration rate (0.8% in 2008).

 

External competition

 

The competitive landscape across the Asia Pacific region differs widely by geographical market, reflecting differing levels of market maturity and regulation. Prudential’s competitors include both the subsidiaries of global life insurers and local domestic (including state-owned) entities. Subsidiaries of global life insurance groups that operate in the Asia Pacific region tend to operate in multiple markets in the region, and some currently have top five market shares in a small number of markets. The majority of local domestic life insurers in the Asia Pacific region remain focused on their core home markets. The developed and liberalised markets of Hong Kong and Singapore are dominated by subsidiaries and branches of global life insurance groups. The developing markets in South East Asia such as Indonesia, Vietnam and the Philippines also see a high level of participation by global life insurance groups. The large and relatively mature markets of Korea and Taiwan are dominated by local domestic insurers. In certain countries with continued foreign ownership restrictions (such as China and India), the life insurance markets are dominated by local domestic insurers or by joint venture entities between global insurance groups and local companies.

 

The global life insurers that are Prudential’s competitors in the Asia Pacific region include Allianz, Aviva, AXA Asia Pacific, ING and Manulife. Other competitors relevant in one or two of Prudential’s key markets include HSBC Life in Hong Kong, Korea Life, Kyobo Life and Samsung Life in Korea, Thai Life in Thailand, Great Eastern in Singapore and Malaysia, and China Life, China Pacific and Ping An in China.

 

US

 

The US experienced relatively strong GDP growth throughout the period, with GDP in 2008 totalling US$14,265 billion with a CAGR from 2003 to 2008 of 5.4%.

 

The following table sets forth key macroeconomic data for the US for the periods indicated.

 

																										CAGR
		2003				2004				2005				2006				2007				2008				2003-8
GDP (US$bn)			10,988				11,735				12,487				13,247				13,844				14,265				5.4	%
Nominal GDP growth (%)			4.8				6.8				6.4				6.1				4.5				3.0
GDP per capita (US$)			37,864				40,133				42,343				44,423				46,009				46,893

 

Sources: Swiss Reinsurance Company: Sigma Reports No. 3/2004, No. 2/2005, No. 5/2006, No. 4/2007, No. 3/2008 and No. 3/2009;

 

Following the recent downturn in 2007, 2008 and the first half of 2009, the US economic growth solidified and broadened in the second half of 2009. However, overall prospects remain uncertain. The US economic recovery is expected to remain sluggish by past standards, as the forces driving it are to a certain extent temporary in nature,

notably the exceptional fiscal stimuli put in place and the additional liquidity provided by the Federal Reserve to support credit markets.

 

Strong growth prospects

 

Despite the uncertain economic situation, Prudential believes that the fundamentals of the US life and retirement market remain strong.

 

The US retirement market is the largest in the world and is expected to grow significantly over the next 5 to 10 years, underpinned by favourable demographic and socio-economic trends, as 78 million baby boomers (source: US Census Bureau) are expected to reach retirement over the next 20 years and their retirement assets will shift from asset accumulation to the phase of income distribution. There are already US$2 trillion of assets generating retirement income in the US — and this amount is forecast to rise to some US$7 trillion by 2029 (source: Tiburon Strategic Advisers, LLC).

 

The following table sets forth certain life insurance premium and macroeconomic data for the United States for the periods indicated.

 

												Density
				Life insurance premiums				GDP		Penetration rate		rate		Savings
		2008				CAGR		2008		2008		2008		rate
		(US$bn)		2008 Share of world market in %		2003-2008 (%)		(US$bn)		(%)		(US$)		2008 (%)
US		578.2		23.2		3.8		14,265		4.1		1,901		5.8

 

 

Sources: Swiss Reinsurance Company: Sigma Reports No. 3/2004 and No. 3/2009 and Euromonitor International for savings rates

 

Life insurance premiums in the United States increased in recent years, growing at a CAGR of 3.8% from 2003 to 2008 (from US$481 billion in 2003 to US$578 billion in 2008). Including group pension 401(k) business, life insurance penetration was 4.1% in 2008.

 

Market growth underpinned by demographic and socio-economic factors

 

The following table sets forth certain demographic data for the United States for the periods indicated.

 

						Population aged 65 and
		Population (mm)				above
				CAGR		% population		CAGR
		2008		2003-2008		2008		2003-2008
US		304.2		0.9		12.8		1.6

 

 

Sources: Euromonitor International for population above the age of 65; Swiss Reinsurance Company: Sigma Reports No. 3/2004 and No. 3/2009 for total population

 

Market growth in the US is expected to be driven by the concentration of wealth in the older segments of the population. Life expectancy has been increasing materially over the past decades, while at the same time average retirement ages have fallen significantly. These trends led to a large increase in the average time individuals spend in retirement, and, consequently, have increased the risk that individuals’ finances will be insufficient to cover the costs of living in retirement.

 

Consumer sentiment shifting back to equity-linked products

 

The typical retail product offering in the US life insurance market consists of life and annuity products. Annuity products are long-term individual retirement products, which offer tax-deferred accumulation on the funds invested until proceeds are withdrawn from the policy. Annuities include fixed annuities (FA), fixed-index annuities (FIA) and variable annuities (VA).

 

VA are tax-advantaged, deferred annuities where the rate of return depends upon the performance of the underlying portfolio. They are used for asset accumulation in retirement planning and to provide income in retirement. VA products are typically sold with guaranteed benefit options, which customers can elect and pay for.

 

There was a consumer shift from VA to FA and FIA products in 2008 and the first half of 2009 but this trend began to reverse in the second half of 2009, and is expected to continue to reverse in 2010 and into the near future as equity market sentiment gradually recovers.

 

Quality and independent advice key to consumer choice

 

US life insurance companies typically market their retail products through independent agents, independent broker-dealer firms, regional broker-dealers, wirehouses and banks, registered investment advisers as well as career agencies.

 

In the US insurance market, over the past decades, independent distribution channels have significantly outpaced traditional career agents and are expected to continue to grow in the future. In general, independent channels can provide a broader range of products, although they typically sell products from only a handful of firms. While they are not controlled by one firm and insurers tend to lose control over what they sell, independent channels are viewed as more objective by consumers. This channel is less costly to insurers than a career channel due to the lower level of support provided.

 

Recent economic turmoil caused disruption to annuity market

 

The recent economic turmoil has impacted on the competitive environment in the US life and retirement market. Specifically, in the VA market, product supplier concentration has occurred as a result of the recent economic events. What used to be a variable annuity market with around 15 major providers has contracted to a market with currently only about five major providers. The combined VA market share of the top five VA providers increased from 42.9% in full-year 2008 to 49.9% in full-year 2009 (Source: Morningstar Annuity Research Center).

 

Weaker and financially distressed competitors have been trying to restructure their business models by disposing of assets and books of business as well as downsizing their cost bases.

 

Over the medium term, the perception of financial strength coupled with access to quality, advice-based distribution and cost-effective technology, will continue to be key drivers of competitiveness in the US retirement market, along with continued innovation in product design and speed to market.

 

Increasing regulatory scrutiny

 

The US market is facing increased regulatory scrutiny, and regulatory actions are expected to lead to increased distribution costs due to the need for advisers to obtain securities licences, and decreasing adviser commissions across the various channels.

 

Competition

 

The Prudential Group’s insurance operations in the US operate under the Jackson brand. Prudential is not affiliated with Prudential Financial, Inc. or its subsidiary, The Prudential Insurance Company of America.

 

Jackson’s competitors in the United States include major stock and mutual insurance companies, mutual fund organisations, banks and other financial services companies. National banks, in particular, may become more significant competitors in the future for insurers who sell annuities, as a result of recent legislation, court decisions and regulatory actions. Jackson’s principal life insurance company competitors in the United States include AXA Financial Inc., Hartford Life Inc., Lincoln National, AIG, ING, MetLife, Prudential Financial and TIAA-CREF.

 

Jackson does not have a significant career agency sales force to distribute its annuity products in the United States and, consequently, competes for distributors such as banks, broker-dealers and independent agents.

 

The following table sets forth the top five variable annuities providers in the US by market share in 2009 based on data published by Morningstar (formerly VARDS):

 

Company		Rank by Market Share
Prudential Financial			1
MetLife			2
TIAA-CREF			3
Jackson			4
Lincoln			5

 

The following table sets forth the top five fixed annuities providers in the US by market share in 2009 based on data published by the Life Insurance and Market Research Association (“LIMRA”):

 

Company		Rank by Market Share
NY Life			1
AIG			2
MetLife			3
AEGON			4
Pacific Life			5
Jackson			13

 

The following table sets forth the top five fixed index annuities providers in the US by market share in 2009 based on data published by AnnuitySpecs.com:

 

Company		Rank by Market Share
Allianz			1
Aviva			2
American Equity			3
Jackson			4
Lincoln			5

 

UK

 

The UK life insurance market is characterised by an ageing population with a concentration of wealth in the mass affluent and high net worth sectors. Distribution is currently dominated by intermediaries, though the implementation of the FSA’s Retail Distribution Review may result in some realignment of the distribution landscape. The EU Solvency II Directive, which sets out new principles of insurance regulation, may also have an impact on the insurance industry in Europe.

 

Industry overview and trends

 

Significant life insurance market

 

The UK life insurance market generated US$342.8 billion of life insurance premiums in 2008, comprising 13.8% of aggregate global life insurance premiums and making the UK the world’s third largest life insurance market. Life insurance premiums in the UK grew at a CAGR of 17.2% from 2003 to 2008 while penetration increased from 8.9% in 2003 to 12.8% in 2008.

 

The following table sets forth the key macroeconomic and life insurance market data for the UK for the periods indicated.

 

																		Penetration				Density				Savings
		Life insurance premiums												GDP				rate				rate				rate
						2008 Share
		2008				of world				CAGR				2008				2008				2008
		(US$bn)				market (%)				2003–2008 (%)				(US$bn)				(%)				(US$)				2008 (%)
UK			342.8				13.8				17.2				2,677				12.8				5,582				-1.1