10 February 2011
Changes to Definition of IFRS Operating Profit for Jackson
In our 2010 Interim Results presentation we indicated that we would review our definition of Jackson's IFRS operating profit based on longer-term investment returns. Having completed our review, we have decided to amend that definition within our 2010 financial statements. This change is purely an issue of accounting presentation. Our hedging approach at Jackson as always, will continue to focus on optimising the economic outcome for our shareholders ahead of the accounting results. This focus means that we sometimes accept a degree of volatility in our accounting results in order to ensure we achieve the right economic result.
The proposed change, which is a reclassification of accounting volatility (described below) from IFRS operating profit into short-term fluctuations in investment returns, will ensure that our results better reflect Jackson's unchanged and continued focus on optimising economic value. It is a presentational change and it has no impact on IFRS profit before tax or shareholders' funds. The proposed change also has no impact on our EEV financial statements.
We are keen to allow enough time for any necessary adjustments to investors' and analysts' financial models to be made ahead of the announcement of our preliminary results for 2010 on 9th March 2011. Therefore we have set out below the details of the proposed accounting change along with tables showing the effect of the change on historic results.
Accounting volatility currently arises within Prudential's IFRS operating profit due to the difference between the movement in the fair value of free standing derivatives within Jackson's variable and fixed index annuity hedging programme and the movement in the accounting value of Jackson's liabilities for variable and fixed index annuity guarantees. Typically, under IFRS, reserves are not fair valued, which for the US variable annuities business produces a distorting accounting effect on the IFRS operating profit that is not representative of the true economics of Jackson's hedging programme. Jackson's hedges are marked to market. When the marked to market value of the hedges changes, there are offsetting changes in the economic value of the hedged liabilities which are not reflected in our accounts. This mismatch creates additional short term volatility in our profit which does not reflect changes in the underlying economic position.
Over the long term the impact of this accounting distortion should cumulatively net out to a broadly neutral effect, but in the short term the IFRS operating profit can be highly volatile. The recent growth in Jackson's variable annuity business has resulted in this short-term effect having a greater impact on our IFRS operating profit than in prior years. In the 2010 half-year financial statements, this accounting mismatch produced a positive contribution to IFRS operating profit of £123m, which we underlined when we presented our interim results and in the 2009 financial statements the same mismatch produced a negative contribution of £159m, as previously disclosed.
Within the 2010 financial statements and for future reporting periods, these amounts will be included in short-term fluctuations in investment returns and will therefore not be included within IFRS operating profit.
The tables below show the historical effect of this change on the presentation of IFRS profits. This new presentation should make it easier for investors and analysts to forecast our results and will improve the comparability of Jackson's results with those of its US peers.
Enquiries:
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Investors
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David Collins
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+44 (0) 20 7548 2871
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Andy Rowe
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+44 (0) 20 7548 3860
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Notes to Editors
About Prudential plc
Prudential plc is a company incorporated and with its principal place of business in England, and its affiliated companies constitute one of the world's leading financial services groups. It provides insurance and financial services through its subsidiaries and affiliates throughout the world. It has been in existence for over 160 years and has £309 billion in assets under management (as at 30 June 2010). Prudential plc is not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America.
Forward-Looking Statements
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