SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of March, 2007
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
LAURENCE POUNTNEY HILL,
LONDON, EC4R 0HH, ENGLAND
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82-
Enclosures: 2006 Full Year Results
Embargo: 7.00am Thursday 15 March 2007
PRUDENTIAL PLC 2006 FULL YEAR RESULTS
New business profit up 20%, exceeding GBP1 billion for the first time; margin
increased
- New business APE of GBP2,470 million, up 16%; PVNBP of GBP18.9 billion, up
12%
- Total EEV operating profit of GBP1,976 million, up 15%
- New business profit of GBP1,039 million, up 20%, with Group margin of 42%
(2005: 41%)
- Total IFRS statutory operating profit of GBP893 million, down 7%, includes
GBP145m non-continuing Egg losses
- EEV shareholders' funds up 15% to GBP11.9 billion*
UK business focused on growing highly profitable core and enhancing future value
- Strong UK new business performance: margin 30%, IRR 15% and strong growth
in IFRS and EEV profit
- Creation of focused Retail Retirement business comprising Individual
Annuities, Equity Release and a new approach to Retirement Savings
- Cost reduction target increased from GBP115 million** to GBP195 million
- Nomination of Policyholder Advocate for potential reattribution of
inherited estate
Cash and dividend
- Overall Group operating cash flow to be positive in 2008
- New dividend policy reflects the commitment to deliver a growing
dividend
- 2006 dividend increased by 5% to 17.14 pence per share
All figures compared to 2005 at constant exchange rates unless stated; *at
reported exchange rates
** Previously announced UK cost savings target of GBP150 million by 2009
included GBP35 million in relation to Egg, which was acquired by Citi in January
2007.
Commenting, Mark Tucker, Group Chief Executive said:
"These results demonstrate excellent continued progress in the delivery of the
Group's growth and value agenda.
"Our new dividend policy reflects our confidence in the future and our
commitment to providing shareholders with a cash return on the investments we
make on their behalf.
"In Asia, the US and UK we have an enviable portfolio of businesses that will
continue to deliver growth in profits and create value for our shareholders in
the coming years.
"Our UK strategy, following the sale of Egg, builds on a strong performance in
2006 and our industry-leading position in the retail retirement annuity sector,
eliminates uneconomic products and sets the scene for an enhanced contribution
to future earnings."
Group Chief Executive's review
The Group's strategy is centred on optimising our competitive advantages in life
assurance, becoming a leading provider of financial services for the retirement
market, and on the further development of our asset management businesses. In
implementing this strategy our clear aim is to secure superior growth in value
for our shareholders.
In 2006 we continued to focus on developing our position in our chosen markets
of Asia, the US and the UK; markets that we believe offer the greatest
opportunity for sustained profitable growth.
Total Group operating profit before tax was GBP1,976 million on a European
Embedded Value (EEV) basis, an increase of 15 per cent, and the Group's return
on embedded value was 13.5 per cent (2005: 15.5 per cent). Statutory IFRS
operating profit before tax was GBP893 million (2005: GBP957 million).
Across the Group's insurance operations new business increased by 16 per cent to
GBP2,470 million, on an APE basis. Profits on new business exceeded GBP1 billion
for the first time, 20 per cent up on 2005. Average margins across the Group
remained strong and were 42 per cent (41 per cent in 2005) and returns on new
business have also improved. Operating profit from the insurance businesses was
GBP2,209 million, on an EEV basis, increasing by 28 per cent on 2005, and IFRS
operating profit increased by 15% to GBP1,087 million.
In asset management we delivered record net flows at M&G and in our rapidly
growing retail businesses in Asia. Net inflows of GBP8.6 billion were 66% ahead
of 2005 and external funds under management increased to GBP57 billion (2005:
GBP46 billion). Operating profit from these businesses was GBP254 million, up 46
per cent on 2005.
Difficult trading conditions in the UK personal loans market led to losses at
Egg, the Group's UK banking business, of GBP145 million (2005: profit GBP44
million). In January 2007 we received an offer for Egg from Citi and the
business was sold for GBP575 million in cash, subject to completion adjustments.
We expect this transaction to complete by the end of April 2007.
The Group's cash flow developed strongly in 2006 and its capital position
remains robust. Taking into account our plans for sustained high levels of
growth and a normalised level of scrip dividend uptake we expect our operating
cash flow to be positive in 2008. In light of this the Board has reviewed its
longer term dividend policy.
The Board recommends a final dividend of 11.72 pence per share, bringing the
full-year dividend to 17.14 pence per share, an increase of 5 per cent over the
full year 2005 dividend of 16.32 pence.
The full year dividend is covered 1.52 times by post-tax IFRS operating profit
from continuing operations.
The Board will focus on delivering a growing dividend, which will continue to be
determined after taking into account the Group's financial flexibility and
opportunities to invest in areas of the business offering attractive returns.
The Board believes that in the medium-term a dividend cover of around two-times
is appropriate.
Insurance operations
The Group's position in Asia continues to develop rapidly with the region
accounting for almost 50 per cent of the Group's 2006 new business profits. One
of the key priorities in the region in 2006 was to continue to build our
distribution capability. Agency remains the major channel in the region and
during the year we added 115,000 agents, to total 285,000 agents by the end of
the year. Building the agency force in a disciplined way in developing markets
such as India, China and Indonesia is critical to success, whereas in some of
the more developed markets in the region such as Hong Kong and Singapore where
agency numbers are more stable, the main focus is on increasing productivity.
Non-agency distribution is also developing strongly and accounted for 30 per
cent of new business in 2006 (26 per cent in 2005) as we established a number of
new and important relationships during the year. As well as experiencing rapid
growth Asia became cash positive in 2006, in line with our previous forecast,
with a net remittance of GBP28 million to the Group.
In 2007 and beyond, Asia offers significant potential for profitable growth and
we are on track to deliver on our target to at least double 2005 new business
profits by 2009. We are in all the region's major markets and see further
opportunity to build distribution, improve productivity and efficiency and
increase sales of our market leading unit-linked products. We also see scope to
increase sales to our 7 million existing customers; to use our regional and
Group expertise to play a key role as the retirement market develops in a number
of Asian countries; to extend our direct distribution capabilities and to
increase selectively our presence in the Accident and Health product sector
across a number of markets in the region.
Our strategy in the US is to focus on the opportunities that exist in the
growing retirement market as the US baby boomers retire, with a particular
emphasis on variable annuities. We have market leading product flexibility and
high levels of product innovation, a focus on advice-based distribution and on
maintaining high service levels at low cost. As a result our retail sales in
2006 grew at more than double the rate of the market overall. Variable annuity
sales increased by 48 per cent over 2005, and we have achieved compound growth
of 45 per cent over a five year period.
In 2007 our aim is to capitalise on the market position that the Jackson team
have built, growing distribution and further developing the product range to
address both existing and new market areas. For example, in January 2007 we
launched a new simplified retirement annuity aimed at mutual fund
representatives extending our distribution reach. We remain confident that we
can continue to outperform the market and gain profitable market share.
In the UK, retail insurance new business increased by 14 per cent in 2006 and
overall new business sales were up 1 per cent. We continued to focus on writing
for value across the UK business with average margins increasing to 30 per cent
(27 per cent in 2005). Returns on new business improved to 15 per cent and
remain high compared with the rest of the UK market.
Notwithstanding this strong performance, we have continued to assess the
positioning of our UK insurance operations, examining a broad range of potential
options with a clear goal of maximising value for our shareholders. We are
confident that there are profitable opportunities for the Group in the
retirement income and savings market.
We have significant competitive advantages in the retirement income market, in
particular our flow of internal vestings from our back book of personal
pensions, and this market remains very attractive. We therefore see retail
annuities and equity release and the nurturing of our existing policyholders as
key parts of our strategy. In the wholesale annuity market we also have distinct
competitive advantages but we will only write business that meets our required
returns.
Much of our Wealth and Health business is low margin and our strategy will be to
improve returns through a much narrower business, exiting segments that are
unprofitable and concentrating our effort only where we have a material and
sustainable competitive advantage and where we can achieve returns significantly
in excess of the cost of capital. We have withdrawn from provision of front-end
commission individual pensions and will also exit front-end commission
unit-linked bonds, segments of the market where we do not see that adequate
returns can be made.
We believe there is an opportunity in the retirement savings market for us to
capitalise on our proven low risk multi-asset investment capabilities. We will
bring a new range of products to the market based on these capabilities and with
improved returns through a focus on trail, rather than front-end commission. We
will concentrate our advice-based distribution activity on the significant
number of investors approaching retirement who have substantial assets outside
personal or corporate pension plans, or have investments in poorly performing
funds, and require inflation protection.
We also see opportunity to develop further our already strong position in the
corporate pensions market and we will improve returns by focusing on schemes
with higher case sizes and holding costs as volumes grow.
We will participate in the health market through our existing joint venture with
Discovery, which will be expanded to include our new Flexible Protection
product. A combination of the strength of the Prudential brand in the UK,
clearly differentiated products and the operational capabilities of Discovery
provide an excellent base to deliver profitable growth in these markets. The
joint venture will be led by Discovery.
Actions are in place to realise 65% of the previously announced cost savings
target of GBP115 million* for the UK insurance business. We have increased our
annualised target cost savings to GBP195 million by 2010 and our current
estimate is that these savings will lead to a GBP60 million positive impact on
embedded value. Total restructuring costs are estimated to be up to GBP165
million*.
We have initiated discussions with the regulator on the possible reattribution
of the inherited estate of the Group's main with-profits fund in the UK,
Prudential Assurance Company. An Independent Policyholder Advocate has been
nominated to represent policyholders should a decision be taken to proceed. We
will only proceed if there are clear benefits to both policyholders and
shareholders. If a decision is taken to proceed a formal appointment of the
Policyholder Advocate could be expected to take place later this year.
With a focused strategy in the UK based on our competitive advantages we see
opportunities for growth in the retail market at high margins and returns
relative to the overall market. In the wholesale annuity market we will write
business that meets our required returns and by definition the flows will be
lumpy year on year. We are maintaining our 14% IRR target for new business and
we expect the UK's shareholder-backed business to become a net capital generator
for the Group by 2010.
Asset Management
Maintaining superior investment performance is the key factor in the continuing
growth and success of the Group's asset management businesses. In 2006, the
performance of M&G in the UK and Europe and our asset management businesses in
Asia has again been very strong adding value to our insurance businesses
worldwide, supporting record net inflows and continuing the growth of the
Group's external funds under management.
In 2007, we will continue to build on the strong growth over recent years in
both M&G and in Asia. In addition, Jackson will enter the US retail mutual fund
market for the first time, a significant market that continues to gain momentum,
especially among the baby boomers.
Group
As a Group we are continuing to increase the level of co-operation and the
exchange of ideas across our businesses.
The Group's asset management businesses are using their global presence,
exchanging information to support their investment decisions and to enable the
efficient management of over GBP6 billion of cross border money.
In our insurance businesses, which remain predominantly market specific,
collaboration is taking place where there is a commercial benefit. Product
development teams are working across the Group to access existing skills and
expertise. In distribution, the UK business has utilised the very successful
techniques developed by Jackson in the US, to segment the independent financial
adviser market, saving time and cost and improving returns.
Work is ongoing to consolidate our technology infrastructure in particular
across the UK and the US. A single Customer Service Desktop is now under
development and will be launched in 2007.
Central to the management of the Group is capital efficiency and capital
allocation. During 2006, we have made significant progress in the assessment of,
and management of, risk on a group-wide basis. This understanding provides a
solid foundation as we continue to embed decision making on a risk-adjusted
basis.
Summary
The Group goes into 2007 with strong momentum. I continue to see tremendous
scope for the Group to build sustainable profitable growth and secure superior
growth in value for our shareholders.
(* Previously announced UK cost savings target of GBP150 million by 2009
included GBP35 million in relation to Egg, which was acquired by Citi in January
2007. Previously announced restructuring costs of GBP110 million included GBP25
million related to Egg.)
ENDS
Enquiries:
Media Investors/Analysts
Jon Bunn +44 20 7548 3559 James Matthews +44 20 7548 3561
William Baldwin-Charles +44 20 7548 3719 Valerie Pariente +44 20 7548 3511
Notes to Editors:
1. The results in this announcement are prepared on two bases: International
Financial Reporting Standards ('IFRS') and on the European Embedded Value
('EEV') basis. The IFRS basis results form the basis of the Group's financial
statements. The supplementary EEV basis results have been prepared in accordance
with the principles issued by the CFO Forum of European Insurance Companies in
May 2004 and expanded by the Additional Guidance on EEV disclosures published in
October 2005. Where appropriate the EEV basis results include the effects of
IFRS.
Period on period percentage increases are stated on a constant exchange rate
basis.
2. Annual premium equivalent (APE) sales comprise regular premium sales plus
one-tenth of single premium insurance sales.
3. Present value of new business premiums (PVNBP) are calculated as equalling
single premiums plus the present value of expected new business premiums of
regular premium business, allowing for lapses and other assumptions made in
determining the EEV new business contribution.
4. There will be a conference call today for wire services at 7.30am (GMT)
hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance
Director. Dial in telephone number: 0800 358 2705. Passcode: 155439#.
5. A presentation to analysts will take place at 9.30am (GMT) at Governor's
House, Laurence Pountney Hill, London, EC4R 0HH. An audio cast of the
presentation and the presentation slides will be available on the Group's
website, www.prudential.co.uk
6. There will be a conference call for investors and analysts at 2.30pm (GMT)
hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance
Director. Please call from the UK 0208 609 0793 and from the US +1 866 793 4279.
Passcode: 487687#. A recording of this call will be available for replay for one
week by dialling: 0208 609 0289 from the UK or +1 866 676 5865 from the US. The
conference reference number is 160470.
7. An interview with Mark Tucker, Group Chief Executive, (in video/audio/ text)
will be available on www.cantos.com and www.prudential.co.uk from 7.00am today.
8. High resolution photographs are available to the media free of charge at
www.newscast.co.uk on +44 (0) 207 608 1000 or by calling Claire Glover on 020
7548 2007.
9. Total number of Prudential plc shares in issue as at 31 December 2006 was
2,444,312,425.
10. Financial Calendar 2007:
Ex-dividend date 11 April 2007
Record date 13 April 2007
First Quarter New Business Figures 19 April 2007
Annual General Meeting 17 May 2007
Payment of 2006 final dividend 22 May 2007
2007 Interim Results / Second quarter New Business Figures 1 August 2007
Ex-dividend date 15 August 2007
Record Date 17 August 2007
Payment of interim dividend 24 September 2007
11. In addition to the financial statements provided with this press release,
additional financial schedules are available on the Group's website at
www.prudential.co.uk
12. About Prudential
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
directly and through its subsidiaries and affiliates throughout the world. It
has been in existence for over 150 years and has GBP250.7 billion in assets
under management as at 31 December 2006. Prudential plc is not affiliated in any
manner with Prudential Financial, Inc, a company whose principal place of
business is in the United States of America.
Forward-Looking Statements
This statement may contain certain "forward-looking statements" with respect to
certain of Prudential's plans and its current goals and expectations relating to
its future financial condition, performance, results, strategy and objectives.
Statements containing the words "believes", "intends", "expects", "plans", "
seeks" and "anticipates", and words of similar meaning, are forward-looking. By
their nature, all forward-looking statements involve risk and uncertainty
because they relate to future events and circumstances which are beyond
Prudential's control including among other things, UK domestic and global
economic and business conditions, market related risks such as fluctuations in
interest rates and exchange rates, and the performance of financial markets
generally; the policies and actions of regulatory authorities, the impact of
competition, inflation, and deflation; experience in particular with regard to
mortality and morbidity trends, lapse rates and policy renewal rates; the
timing, impact and other uncertainties of future acquisitions or combinations
within relevant industries; and the impact of changes in capital, solvency or
accounting standards, and tax and other legislation and regulations in the
jurisdictions in which Prudential and its affiliates operate. This may for
example result in changes to assumptions used for determining results of
operations or re-estimations of reserves for future policy benefits. As a
result, Prudential's actual future financial condition, performance and results
may differ materially from the plans, goals, and expectations set forth in
Prudential's forward-looking statements. Prudential undertakes no obligation to
update the forward-looking statements contained in this statement or any other
forward-looking statements it may make.
REVIEW OF OPERATING AND FINANCIAL RESULTS
GROUP OVERVIEW
Results highlights
CER RER (4)
2006 2005 Change 2005 Change
GBPm GBPm % GBPm %
Annual premium equivalent (APE) sales (1) 2,470 2,134 16% 2,138 16%
Present value of new business premiums (PVNBP) (1) 18,947 16,860 12% 16,892 12%
Net investment flows 8,633 5,183 67% 5,189 66%
External funds under management 57,199 45,378 26% 46,329 23%
New business profit (NBP) (1) 1,039 869 20% 867 20%
NBP Margin (% APE) (1) 42% 41% 41%
NBP Margin (% PVNBP) (1) 5.5% 5.2% 5.1%
EEV basis operating profit from long-term business 2,209 1,722 28% 1,723 28%
from continuing operations (2) (3)
Total EEV basis operating profit from continuing 1,976 1,711 15% 1,712 15%
operations (3)
Total IFRS operating profit from continuing operations 893 958 (7%) 957 (7%)
(3)
EEV basis shareholders' funds (GBPbn) 11,883 9,991 19% 10,301 15%
IFRS shareholders' funds (GBPbn) 5,488 4,986 10% 5,194 6%
Holding company cash flow (104) (298) 65% (298) 65%
(1) The details shown include the effect of the bulk annuity transfer from the
Scottish Amicable Insurance Fund (SAIF) to Prudential Retirement Income Limited,
a shareholder owned subsidiary of the Group.
SAIF is a closed ring-fenced sub-fund of the PAC long-term fund established by a
court approved scheme of arrangement in September 1997, whose results are solely
for the benefit of SAIF policyholders.
(2) Long-term business profits after deducting Asia development expenses and
before restructuring costs.
(3) Based on longer term investment returns from continuing operations.
Operating profit is stated excluding the effect of short-term fluctuations in
investment returns against the long-term assumptions, the effect of changes in
economic assumptions, actuarial gains and losses on defined benefit pension
schemes, the mark to market value movements on borrowings and goodwill
impairment charges.
(4) Reported exchange rate (RER).
In the Operating and Financial Review (OFR), year-on-year comparisons of
financial performance are on a constant exchange rate (CER) basis, unless
otherwise stated.
The Group has delivered a strong set of results for 2006 as illustrated in the
table above.
The Group delivered record total APE sales of GBP 2,470 million (2005: GBP2,134
million) and for the first time generated NBP in excess of GBP1 billion.
This, together with the significant increase in contributions from the in-force
business, drove a record EEV basis operating profit from the long-term business
to GBP2.2 billion.
The following year-on-year comparisons are presented on a RER basis.
The EEV basis result before tax and minority interests was a profit of GBP3,072
million up 37 per cent on 2005.
Within this, short-term fluctuations in investment return were GBP745 million
(2005: GBP 1,068 million), mainly driven by positive variances in the UK (GBP378
million) and Asia (GBP286 million).
Changes in economic assumptions were negative GBP1 million (2005: negative
GBP349 million). They include a positive change in the UK (GBP182 million), a
negative change in the US (GBP51 million), and a negative change in Asia (GBP132
million).
EEV basis shareholders' funds were GBP11.9 billion (2005: GBP10.3 million), an
increase of GBP1.6 billion over last year, driven by a strong operating
performance from all insurance and asset management business units.
Earnings per share, based on EEV operating profit after tax and related minority
interests, were 57.6 pence, compared with 56.6 pence in 2005.
On an IFRS basis, operating profits (before tax) were GBP893 million (2005:
GBP957 million), down 7 per cent on last year principally due to the GBP145
million loss incurred by Egg.
The Group delivered strong growth of 66 per cent in total net investment flows
from its asset management businesses of GBP8.6 billion (2005: GBP5.2 billion).
This performance contributed to the growth in total external investment funds
under management that grew from GBP46.3 billion in 2005 to GBP57.2 billion in
2006.
Earnings per share, based on total IFRS operating profit after tax and minority
interests, were 26.4 pence compared with 32.2 pence in 2005.
Holding company cash flow improved significantly from a cash outflow of GBP298
million in 2005 to a cash outflow of GBP104 million in 2006, reflecting higher
capital remittances, and lower capital invested in the UK reflecting the benefit
from a change in the Financial Services Authority (FSA) reserving regulations.
The capital position of Prudential plc, measured under the Financial
Conglomerate Directive (FCD) basis, will be submitted to the FSA by 30 April
2007 but is currently estimated to be in the region of GBP1.0 billion.
The total capital invested by the Group to support new business sales, in terms
of both initial strain and required capital, was GBP554 million in 2006. This
represents GBP22.4 million per GBP100 million sales in terms of APE and GBP2.9
million per GBP100 million in terms of PVNBP sales.
On 29 January 2007 Prudential announced that it had entered into a binding
agreement to sell Egg to Citi for a consideration of GBP575 million, subject to
adjustment to reflect any change in net asset value between 31 December 2006 and
completion.
Impact of currency movements
Prudential has a diverse international mix of businesses with a significant
proportion of its profit generated outside the UK. In 2006, 74 per cent of NBP
and 67 per cent of IFRS operating profit was delivered from overseas operations.
In preparing the Group's consolidated accounts, results of overseas operations
are converted at rates of exchange based on the average of the year, whilst
shareholders' funds are converted at year-end rates of exchange.
Changes in exchange rates from year to year have an impact on the Group's
results when these are converted into pounds sterling for reporting purposes. In
some cases these exchange rate fluctuations can mask underlying business
performance. Consequently, the Board has for a number of years reviewed the
Group's international performance on a CER basis. This basis eliminates the
impact from conversion, the effects of which do not alter the long-term value of
shareholders' interests in Prudential's non-UK businesses.
Basis of preparation of results
The European Union (EU) requires that all listed European groups prepare their
financial statements in accordance with EU approved IFRS. Since 1 January 2005,
Prudential has been reporting its primary results on an IFRS basis and 2006
represents the second year-end of financial statements prepared under IFRS for
the Group.
In addition, as a signatory to the European Chief Financial Officers' (CFO)
Forum's EEV Principles, Prudential has also been reporting supplementary results
on an EEV basis for the Group's long-term business since 2005. These results are
combined with the IFRS basis results of the Group's other businesses to provide
a supplementary operating profit under EEV. Reference to operating profit
relates to profit based on longer-term investment returns that excludes goodwill
impairment charges, short-term fluctuations in investment returns, the mark to
market movement on core borrowings, the shareholders' share of actuarial and
other gains and losses on defined benefit pension schemes, the effect of changes
in economic assumptions and changes in the time value of options and guarantees
caused by economic factors.
In broad terms, IFRS profits for long-term business contracts reflect the
aggregate of statutory transfers from with-profits funds and profits on a
traditional accounting basis for other long-term business. Although the
statutory transfers from with-profits funds are closely aligned with cash flow
generation, the pattern of IFRS profits over time from shareholder-backed
long-term businesses will generally differ from the cash flow pattern. Over the
life of a contract, however, aggregate IFRS profits will be the same as
aggregate cash flow.
In preparing its IFRS basis results the Group continues to provide supplementary
analysis of the profit before shareholder tax so as to distinguish operating
results based on longer-term investment returns, actuarial gains and losses on
defined benefit pension schemes, and exceptional items.
Life insurance products are, by their nature, long term and the profit on this
business is generated over a significant number of years. Accounting under IFRS
does not, in Prudential's opinion, properly reflect the inherent value of these
future profit streams.
Prudential believes that embedded value reporting provides investors with a
better measure of underlying profitability of the Group's long-term businesses
and is a valuable supplement to statutory accounts.
Sales and funds under management
Prudential delivered strong sales growth during 2006 with total new insurance
sales up 11 per cent to GBP15.1 billion at CER. This resulted in record
insurance sales of GBP2.5 billion on the APE basis, an increase of 16 per cent
on 2005. At RER, APE was up 16 per cent on 2005. Strong growth came from the US,
with APE up on 2005 by 21 per cent, and in Asia with APE up 30 per cent at CER.
Sales under the PVNBP basis in 2006 increased by 12 per cent to GBP19 billion at
CER.
Total gross investment sales for 2006 were GBP33.9 billion, up 31 per cent on
2005 at CER. Net investment flows of GBP8.6 billion were up 67 per cent on last
year at CER.
Total external funds under management in 2006 increased by 23 per cent from
GBP46.3 billion in 2005 to GBP57.2 billion at RER, reflecting net investment
flows of GBP8.6 billion, and net market and other movements of GBP2.2 billion.
At 31 December 2006, total insurance and investment funds under management were
GBP251 billion, an increase of 7 per cent from 2005 at RER.
EEV basis operating profit from continuing operations
CER RER
2006 2005 Change 2005 Change
GBPm GBPm % GBPm %
Insurance business:
UK 686 426 61% 426 61%
US 708 731 (3%) 741 (4%)
Asia 829 585 42% 576 44%
Long-term business 2,223 1,742 28% 1,743 28%
Development expenses (15) (20) (175%) (20) (75%)
Fund management business:
M&G 204 163 25% 163 25%
US broker-dealer and fund management 18 24 (25%) 24 (25%)
Curian (8) (10) 20% (10) 20%
Asia fund management 50 11 355% 12 317%
264 188 40% 189 40%
Banking:
Egg (UK) (145) 44 (430%) 44 (430%)
Other income and expenditure (298) (243) (23%) (244) (22%)
Total EEV basis operating profit on continuing
operations 2,029 1,711 19% 1,712 19%
Restructuring costs (53) 0 0
Total EEV basis operating profit on continuing
operations after restructuring costs 1,976 1,711 15% 1,712 15%
Total EEV basis operating profit from continuing operations based on longer-term
investment returns was GBP1,976 million, up 15 per cent from 2005 at CER. At
RER, the result was up 15 per cent. This result reflects profitable growth in
the insurance and funds management businesses.
Prudential's insurance businesses achieved significant growth, both in terms of
NBP and in-force profit, resulting in a 28 per cent increase in operating profit
over 2005 at CER.
In 2006, the Group generated record NBP from insurance business of GBP1,039
million, which was 20 per cent above 2005 at CER, driven by strong sales
momentum in US and Asia, achieved without compromising margins. At RER, NBP was
up 20 per cent. The average Group NBP margin was 42 per cent (2005: 41 per cent)
on an APE basis and 5.5 per cent (2005: 5.2 per cent at CER) on a PVNBP basis.
The overall margin has increased mainly driven by profitable sales of individual
annuities in the UK and of variable annuities in the US. In-force profit
increased 36 per cent on 2005 at CER to GBP1,184 million. At RER, in-force
profit was up 35 per cent. In aggregate, net assumption changes were GBP38
million positive, and experience variances and other items were GBP111 million
positive.
The in-force profit in 2005 included a GBP148 million charge in respect of a
persistency assumption change in the UK, and a credit in the US of GBP140
million reflecting an operating assumption change following price increases
introduced on two blocks of in-force term life business.
Asia's development expenses (excluding the regional head office expenses) were
GBP15 million, (2005: GBP20 million at CER).
Results from the fund management business were GBP264 million (2005: GBP188
million), up 40 per cent on 2005 at CER.
Egg losses were GBP145 million (2005: profit GBP44 million).
Other income and expenditure totalled a net expense of GBP298 million compared
with GBP244 million in 2005 at RER. This result includes GBP36 million of costs
for the Asia head office costs (2005: GBP30 million); GBP83 million for the
Group head office costs (2005: GBP70 million); net interest expense on central
borrowings of negative GBP169 million (2005: GBP133 million); and a charge for
share-based payments for Prudential schemes of GBP10 million (2005: GBP11
million).
Total EEV basis operating profit includes GBP53 million in restructuring costs
(nil in 2005), primarily related to the costs associated with the UK and Egg
cost saving initiatives announced in July 2006.
EV basis profit before tax and minority interests from continuing operations
RER
2006 2005
GBPm GBPm
Total EEV basis operating profit on continuing operations
after restructuring costs 1,976 1,712
Short term fluctuations in investment return: 745 1,068
UK 378 994
US 64 67
Asia 286 41
Other 17 (34)
Actuarial gains and losses on defined
benefit pension schemes 207 (47)
Effect of change in economic
assumptions: (1) (349)
UK 182 (81)
US (51) (3)
Asia (132) (265)
Effect of change in time value of cost
of options and guarantees: 60 47
UK 40 31
US 6 11
Asia 14 5
Movement in mark to market value
of core borrowings: 85 (67)
US 3 (2)
Other 82 (65)
Goodwill impairment charge 0 (120)
Profit from continuing operations before tax 3,072 2,244
The following year-on-year comparisons are presented on a RER basis.
The EEV basis result before tax and minority interests was a profit of GBP3,072
million up 37 per cent on 2005.
This reflects in part an increase in operating profit from GBP1,712 million in
2005 to GBP1,976 million in 2006.
The profit before tax also includes GBP745 million in short-term fluctuations in
investment returns (2005: GBP1,068 million), negative changes in economic
assumptions of GBP1 million (2005: negative GBP349 million) and the effect of
change in time value of options and guarantees of positive GBP60 million (2005:
positive GBP47 million).
The UK long-term business component of short-term fluctuations in investment
returns of GBP378 million (2005: GBP994 million) primarily reflects the
difference between the actual investment return for the with-profits life fund
of 12.4 per cent (2005: 20 per cent) and the long-term assumed return of 7.5 per
cent.
The US long-term business short-term fluctuations in investment returns of GBP64
million primarily include a positive GBP46 million in respect of the difference
between actual investment returns and long-term returns included in operating
profit in respect of fixed income securities, related swap transactions and
equity based investments. It also includes a positive GBP17 million in relation
to changed expectations of future profitability on variable annuity business in
force due to the actual variable annuity investment account ('separate account')
return exceeding the long-term return reported within operating profit, offset
by the impact of the associated hedging position.
In Asia, long-term business short-term investment fluctuations were GBP286
million, compared to GBP41 million last year. This reflects strong market
performance across the region particularly in Vietnam, Hong Kong, Singapore and
Taiwan.
An actuarial gain on the defined benefit pension schemes was recorded in 2006
for GBP207 million (2005: loss GBP47 million). This gain primarily represents
the difference between actual and expected investment returns for the schemes
and the reduction in liabilities due to an increase in the risk discount rate
resulting from increases in corporate bond returns.
Negative economic assumption changes of GBP1 million in 2006 compared with
negative economic assumption changes of GBP349 million in 2005. Economic
assumption changes in 2006 comprised positive GBP182 million in the UK, negative
GBP51 million in the US and negative GBP132 million in Asia.
In the UK, economic assumption changes of positive GBP182 million reflect the
impact of the increase in the future investment return assumption offset by the
increase in the risk discount rate.
In the US, economic assumption changes of negative GBP51 million primarily
reflect increases in the risk discount rates following an increase in the US
10-year Treasury rate, partially offset by an increase in the separate account
return assumption.
In Asia negative economic assumption changes were GBP132 million, of which
GBP101 million is due to Taiwan. This primarily reflects the effect of delaying
for a further year Prudential's assumption of a gradual rise in interest rates.
The economic scenarios used to calculate 2006 EEV basis results reflect the
assumption of a phased progression of the bond yields from the current rates to
the long-term expected rates. The projections assume that, in the average
scenario, the current bond yields of around 2 per cent trend towards 5.5 per
cent at 31 December 2013. Allowance is made for the mix of assets in the fund,
the future investment strategy and the market value depreciation of the bonds as
a result of the assumed yield increases. This gives rise to an average assumed
fund earned rate that trends from 2.1 per cent to 5.7 per cent in 2014. The
assumed fund earned rate falls to 1.4 per cent in 2007 and remains below 2.1 per
cent for a further five years due to the depreciation of bond values as yields
rise. Thereafter, the fund earned rate fluctuates around a target of 5.9 per
cent. For the 2005 results the grading of bond yields, in the average scenario,
was around 2 per cent towards 5.5 per cent at 31 December 2012. Consistent with
the Group's EEV methodology, a constant discount rate has been applied to the
projected cash flows.
The change in the time value of cost of options and guarantees was positive
GBP60 million for the year (2005: positive GBP47 million), consisting of GBP40
million, GBP6 million and GBP14 million for the UK, the US and Asia,
respectively.
The mark to market movement on core borrowings (excluding Egg) was a positive
GBP85 million (2005: negative GBP67 million) reflecting the reduction in fair
value of core borrowings due to increases in interest rates.
EEV basis profit after tax and minority interests
RER
2006 2005
GBPm GBPm
Profit from continuing operations before tax 3,072 2,244
Tax (859) (653)
Profit from continuing operations for the financial year 2,213 1,591
after tax before minority interests
Discontinued operations (net of tax) 0 3
Minority interests (1) (12)
Profit for the year attributable to equity
holders of the Company 2,212 1,582
The following year-on-year comparisons are presented on a RER basis.
Profit after tax and minority interests was GBP2,212 million (2005: GBP1,582
million). The tax charge of GBP859 million compares with a tax charge of GBP653
million in 2005. Minority interests in the Group results were GBP1 million
(2005: GBP12 million).
The effective tax rate at an operating tax level was 30 per cent (2005: 21 per
cent), generally reflecting expected tax rates. The effective tax rate in 2005
was unusually low due to a number of factors, including favourable settlements
reached with the tax authorities, and being able to take credit for Egg's French
losses. The effective tax rate at a total EEV level was 28 per cent (2005: 29
per cent) on a profit of GBP3,072 million. The higher rate of effective tax at a
total level for 2005 was primarily due to the effect of impairment of goodwill
(which does not attract tax relief) and the impact of short-term fluctuations
and changes in economic assumptions not all of which are tax affected.
Return on Embedded Value
Prudential's return on embedded value for 2006 was 13.5 per cent (2005: 15.5 per
cent). This reduction is due to an increase in the opening shareholders' funds
at 1 January 2006, mainly affected by the UK short-term investment fluctuations
in 2005, which was higher than the corresponding growth in after-tax operating
profit.
The return is based on EEV operating profit from continuing operations after tax
and minority interests as a percentage of opening embedded value (shareholders'
funds on a EEV basis).
IFRS basis operating profit (based on longer term investment returns)
CER RER
2006 2005 Change 2005 Change
IFRS basis operating profit based on longer term GBPm GBPm % GBPm %
investment returns
Insurance business:
UK 500 400 25% 400 25%
US 398 344 16% 348 14%
Asia 189 201 (6%) 195 (3%)
Long-term business 1,087 945 15% 943 15%
Development expenses (15) (20) (25%) (20) (25%)
Fund management business:
M&G 204 163 25% 163 25%
US broker-dealer and fund management 18 24 (25%) 24 (25%)
Curian (8) (10) 20% (10) 20%
Asia fund management 50 11 355% 12 317%
264 188 40% 189 40%
Banking:
Egg (UK) (145) 44 (430%) 44 (430%)
Other income and expenditure (248) (198) (25%) (199) (25%)
Total IFRS basis operating profit based on longer
term investment returns 943 959 (2%) 957 (1%)
Restructuring costs (50) 0 0
Total IFRS basis operating profit based on longer
term investment returns after restructuring costs 893 959 (7%) 957 (7%)
Group operating profit before tax from continuing operations on the IFRS basis
after restructuring costs was GBP893 million, a reduction of 7 per cent on 2005
at CER. This figure includes GBP50 million of restructuring costs. Group
operating profit before tax from continuing operations before restructuring
costs was GBP943 million, a reduction of 2 per cent on 2005 at CER. This
reduction is mainly caused by the loss of GBP145 million in Egg (2005: GBP44
million profit).
At RER, operating profit before restructuring costs was down 1 per cent on the
prior year.
In the UK, IFRS operating profit for the long-term business increased 25 per
cent to GBP500 million in 2006. This primarily reflected a 22 per cent increase
in profits attributable to the with-profits business, a consequence of bonus
declarations announced in February 2006 and 2007 and a benefit of GBP46 million
from a change in reserving requirements. This was due to the FSA's relaxation of
reserving requirements under the policy statement that effected the proposal in
CP 06/16. The result of GBP500 million excludes restructuring costs of GBP31
million in respect of implementation costs associated with Prudential UK and Egg
cost saving initiatives announced in July 2006.
In the US, IFRS operating profit of GBP408 million was up 14 per cent on 2005 at
CER. IFRS operating profit for long-term business was GBP398 million, up 16 per
cent from GBP344 million in 2005 at CER. The US operations' results are based on
US GAAP, adjusted where necessary to comply with IFRS as the Group's basis of
presenting operating profit is based on longer-term investment returns. In
determining the operating profit for US operations, longer-term returns for
fixed income securities incorporate a risk margin reserve (RMR) charge for
longer-term defaults and amortisation of interest-related realised gains and
losses. The growth in the US operations' long-term IFRS operating profit mainly
reflects increased fee and spread income. The fee income was driven by a 51 per
cent increase in separate account assets held at year-end, and improved returns
on these assets. One-off items affecting the spread-based income were GBP33
million (2005: GBP44 million), net of DAC amortisation. The operating profit
from non-long-term business was GBP10 million, a reduction on 2005 (2005: GBP14
million). The 2005 result however, benefited from a one-off GBP5 million
revaluation of an investment vehicle managed by PPM America (PPMA). Curian
recorded losses of GBP8 million in 2006, down from GBP10 million in 2005, as the
business continues to build scale.
Prudential Corporation Asia's operating profit for long-term business before
development expenses of GBP15 million was GBP189 million, a 6 per cent decrease
on 2005 at CER. However, this result was 11 per cent above prior year excluding
a net positive GBP30 million contribution from exceptional items in 2005.
Operating profit continues to be driven mainly by the established markets of
Singapore, Malaysia and Hong Kong which represent GBP139 million of the total
operating profit in 2006. There was an increased contribution from Indonesia and
Vietnam as these operations continue to build scale. Four life operations made
IFRS losses: China, India and Korea which are relatively new businesses rapidly
building scale and Thailand which is marginally loss making. Within the net
positive GBP30 million of exceptional items in 2005 there was a write-off of
deferred acquisition costs (DAC) in Taiwan of GBP21 million. No write-off was
required in 2006. The profits and recoverability of DAC in Taiwan are dependent
on the rates of return earned and assumed to be earned on the assets held to
cover liabilities and on future investment income and contract cash flows for
traditional whole of life policies. If interest rates were to remain at current
levels in 2007 the premium reserve, net of DAC, would be broadly sufficient. If
interest rates were to remain at current levels in 2008 then some level of
write-off of DAC may be necessary. However, the amount of the charge currently
estimated to be GBP70-90 million is sensitive to the above mentioned variables.
The Asian fund management operations reported an 85 per cent growth in operating
profits to GBP50 million (2005: GBP11 million), excluding negative GBP16 million
of exceptional items recorded in 2005, driven by strong contributions from the
established markets of Singapore and Hong Kong.
IFRS basis profit before tax for continuing operations
RER
2006 2005
GBPm GBPm
Operating profit from continuing operations
based on longer-term investment returns
after restructuring costs 893 957
Goodwill impairment charge 0 (120)
Short-term fluctuations in investment returns 162 211
Shareholders' share of actuarial and
other gains and losses on defined benefit pension schemes 167 (50)
Profit before tax from continuing operations 1,222 998
The following year-on-year comparisons are presented on a RER basis.
Total IFRS basis profits before tax and minority interests were GBP1,222 million
in 2006, compared with GBP998 million for 2005. The increase reflects: a
reduction in operating profit of GBP64 million; a decrease in short-term
fluctuations in investment return, down GBP49 million from 2005; and a GBP217
million positive movement from the prior year in actuarial gains and losses
attributable to shareholder-backed operations in respect of the Group's defined
benefit pension schemes. In addition, in 2006 there is no goodwill impairment
charge (2005: GBP120 million).
IFRS basis profit after tax
RER
2006 2005
GBPm GBPm
Profit before tax from continuing operations 1,222 998
Tax (347) (241)
Profit from continuing operations
for the financial year after tax 875 757
Discontinued operations (net of tax) 3
Minority interests (1) (12)
Profit for the year attributable to equity 874 748
holders of the Company
The following year-on-year comparisons are presented on a RER basis.
Profit after tax and minority interests was GBP874 million compared with GBP748
million in 2005. The effective rate of tax on operating profits, based on
longer-term investment returns, was 29 per cent (2005: 19 per cent). The
effective rate of tax at the total IFRS profit level for continuing operations
for 2006 was 28 per cent (2005: 24 per cent). The effective tax rate in 2006 was
close to the expected tax rate of 31 per cent (which reflects the geographic
split of profits). The effective tax rate in 2005 was unusually low due to a
number of factors, including favourable settlements reached with the revenue
authorities, and being able to take credit for Egg's French losses.
Earnings per share
Earnings per share, based on EEV basis operating profit from continuing
operations after tax and related minority interests, were 57.6 pence, compared
with 56.6 pence in 2005.
Earnings per share, based on IFRS operating profit from continuing operations
after tax and related minority interests, were 26.4 pence, compared with 32.2
pence in 2005.
Basic earnings per share, based on total EEV basis profit after minority
interests, were 91.7 pence, compared with 66.9 pence in 2005.
Basic earnings per share, based on IFRS profit after minority interests, were
36.2 pence, compared with 31.6 pence in 2005.
Dividend per share
The Board has reviewed its longer term dividend policy in light of its
expectation that the overall operating cash flow of the Group will be positive
from 2008.
The directors recommend a final dividend for 2006 of 11.72 pence per share
payable on 22 May 2007 to shareholders on the register at the close of business
on 13 April 2007. The interim dividend for 2006 was 5.42 pence per share. The
total dividend for the year, including the interim dividend and the recommended
final dividend, amounts to 17.14 pence per share compared with 16.32 pence per
share for 2005. The total cost of dividends in respect of 2006 was GBP418
million.
The full year dividend is covered 1.5 times by post-tax IFRS operating profit
from continuing operations.
Dividend cover is calculated as operating profit after tax on an IFRS basis,
divided by the current year interim dividend plus the proposed final dividend.
The Board will focus on delivering a growing dividend, which will continue to be
determined after taking into account the Group's financial flexibility and
opportunities to invest in areas of the business offering attractive returns.
The Board believes that in the medium term a dividend cover of around two times
is appropriate.
Shareholders' funds
On the EEV basis, which recognises the shareholders' interest in long-term
businesses, shareholders' funds at 31 December 2006 were GBP11.9 billion, an
increase of GBP1.6 billion from the 2005 year-end level (2005: GBP10.3 billion).
This 15 per cent increase primarily reflects: total EEV basis operating profit
of GBP1,976 million; a GBP745 million favourable movement in short-term
fluctuations in investment returns; a GBP59 million positive movement due to
changes in economic assumptions and in time value of options and guarantees; a
positive movement on the mark to market of core debt of GBP85 million; the
proceeds for the share capital issue of the parent company for GBP336 million,
and a positive movement in the actuarial gains on the defined benefit pension
schemes of GBP207 million. These were offset by: a tax charge of GBP859 million;
the negative impact of GBP359 million for foreign exchange movements; the impact
of the acquisition of the minority interest in Egg for GBP167 million, and
dividend payments of GBP399 million made to shareholders.
At year-end 2006, the embedded value for the Asian long-term business as a whole
was GBP2.5 billion. The established markets of Hong Kong, Singapore and Malaysia
contribute GBP2.0 billion to the embedded value generated across the region with
Korea (GBP191 million) and Vietnam (GBP198 million) making further substantial
contributions. Prudential's other markets of China, India, Indonesia, Japan,
Thailand and the Philippines in aggregate contribute GBP336 million in embedded
value. Growth in embedded value for the Asian business as a whole has been
partially offset by a negative embedded value in Taiwan of GBP216 million. This
is an improvement from the reported negative GBP311 million in 2005, which
includes the associated cost of economic capital(1), and reflects the impact of
the low interest rate environment in Taiwan on the in-force business.
The current mix of new business in Taiwan is weighted heavily towards
unit-linked and protection products, representing 58 per cent and 17 per cent of
new business APE in 2006, respectively. As a result, interest rates have little
effect on new business profitability and a one per cent reduction in assumed
interest rates would reduce new business margins in Taiwan by only two
percentage points. However, the in-force book in Taiwan, predominantly made up
of whole of life policies, has an embedded value that is sensitive to interest
rate changes. A one per cent decrease in interest rates, along with
consequential changes to assumed investment returns for all asset classes,
market values of fixed interest assets and risk discount rates, would result in
a GBP165 million decrease in Taiwan's embedded value. A similar one per cent
positive shift in interest rates would increase embedded value by GBP107
million. On the assumption that bond yields remained flat during 2007 and then
trended towards 5.5 per cent in 2014 this would have reduced the 2006 Taiwan
embedded value by GBP88 million. Sensitivity of the embedded value to interest
rate changes varies considerably across the region. In aggregate, a one per cent
decrease in interest rates, along with all consequential changes noted above,
would result in a 5 per cent decrease to Asia's embedded value.
Statutory IFRS basis shareholders' funds at 31 December 2006 were GBP5.5
billion. This compares with GBP5.2 billion at 31 December 2005. The increase
primarily reflects: profit after tax and minority interests of GBP874 million,
the proceeds from the share capital issue of the Company for GBP336 million,
offset by the impact of the acquisition of Egg's minority interests for GBP167
million, negative foreign exchange movements of GBP224 million, dividend
payments to shareholders of GBP399 million, and the impact of unrealised holding
losses on available for sale investments of GBP210 million.
--------------------------
(1) Economic capital is broadly considered to be the amount of capital a
financial services firm's own internal risk assessment determines it should hold
to remain solvent following events that might be considered as unexpected, yet
not so unlikely that they might never occur in practice.
Holding company cash flow
2006 2005
GBPm GBPm
Cash remitted by business units:
UK life fund transfer* 217 194
UK other dividends (including special 0 103
dividend)
Jackson 110 85
Asia 175 73
M&G 94 62
Total cash remitted to Group 596 517
Net interest paid (128) (115)
Dividends paid (399) (378)
Scrip dividends and share options 91 55
Cash remittances after interest and 160 79
dividends
Tax received 122 107
Corporate activities (67) (66)
Cash flow before investment in businesses 215 120
Capital invested in business units:
UK (172) (249)
Asia (147) (169)
Total capital invested in business units (319) (418)
Decrease in cash (104) (298)
*In respect of current and prior year's bonus declarations.
The table above shows the Group holding company cash flow. Prudential believes
that this format gives a clearer presentation of the use of the Group's
resources than the format of the statement required by IFRS.
The Group holding company received GBP596 million in cash remittances from
business units in 2006 (2005: GBP517 million) comprising the shareholders'
statutory life fund transfer of GBP217 million relating to the 2005 and 2006
bonus declarations from the UK business, and remittances of GBP110 million,
GBP175 million, and GBP94 million from Jackson, Asia and M&G respectively.
The last of three special dividends of GBP100 million was paid from the
Prudential Assurance Company (PAC) shareholders' funds in 2005 to the Group
holding company in respect of profit arising from earlier business disposals.
After net dividends and interest paid, there was a net cash inflow of GBP160
million (2005: GBP79 million).
During 2006, the Group holding company paid GBP67 million in respect of
corporate activities and received GBP122 million (2005: GBP107 million) in
respect of Group relief on taxable losses. The Group invested GBP319 million
(2005: GBP418 million) in its business units, comprising GBP172 million in its
UK operations and GBP147 million in Asia. In 2006, Asia became a net contributor
to the Group holding company cash flow for the first time, with a net remittance
of GBP28 million.
The capital investment in the UK was lower than planned reflecting a capital
benefit from the FSA's change of reserving requirements. Without this reserving
change the UK business would have required capital of approximately GBP230
million.
In aggregate this gave rise to a decrease in cash of GBP104 million (2005:
GBP298 million decrease).
In 2007 the Group cash flow is expected to be positive including the cash
proceeds from the sale of Egg. At an operational level the cash outflow is
expected to be greater than in 2006, given the benefit this year of the
regulatory change to the FSA reserving requirements in the UK.
In 2007, the UK shareholders' statutory transfer relating to the bonus
declarations made in February 2006 and 2007 will be GBP261 million.
Depending on the mix of business written and the opportunities available, cash
invested to support the UK business in 2007 is expected to be less than in 2006,
up to GBP160 million and with the expectation that the UK shareholder backed
business will become cash positive in 2010.
Taking into account plans for future growth, a normalised level of scrip
dividend, the reducing UK capital requirement and increased remittances from the
other life and asset management operations it is expected that the operating
cash flow of the Group holding company will be positive in 2008.
New business capital usage
2006 2006 2006 2006 2006
GBPm GBPm GBPm GBPm GBPm
Free Required Net Value Total
surplus capital worth in force long-term
business
UK (221) 176 (45) 231 186
US (228) 196 (32) 200 168
Asia (105) 11 (94) 467 373
(554) 383 (171) 898 727
The Group wrote GBP2,470 million of sales on an APE basis and GBP18,947 million
on a PVNBP basis in 2006. In support of this amount of new business sales, the
Group invested GBP554 million of capital. This amount covers both new business
acquisition expenses, including commission, statutory reserves and the required
capital and amounts to approximately GBP22.4 million per GBP100 million of APE
sales and GBP2.9 million per GBP100 million of sales on a PVNBP basis.
In the UK business, GBP221 million of capital was invested in 2006 to support
APE sales of GBP900 million and PVNBP sales of GBP7,712 million. This amounts to
approximately GBP24.6 million per GBP100 million of APE sales and GBP2.9 million
per GBP100 million of sales on a PVNBP basis.
In the US business, GBP228 million of capital was invested in 2006 to support
APE sales of GBP614 million and PVNBP sales of GBP6,103 million. This amounts to
approximately GBP37.1 million per GBP100 million of APE sales and GBP3.7 million
per GBP100 million of sales on a PVNBP basis.
In the Asia business, GBP105 million of capital was invested in 2006 to support
APE sales of GBP956 million and PVNBP sales of GBP5,132 million. This amounts to
approximately GBP11 million per GBP100 million of APE sales and GBP2.0 million
per GBP100 million of sales on a PVNBP basis.
BUSINESS UNIT REVIEW
Insurance Operations
United Kingdom
CER RER
2006 2005 Change 2005 Change
GBPm GBPm % GBPm %
APE sales 900 892 1% 892 1%
NBP 266 243 9% 243 9%
NBP margin (% APE) 30% 27% 27%
NBP margin (% PVNBP) 3.4% 3.1% 3.1%
Total EEV basis operating profit* 686 426 61% 426 61%
Total IFRS operating profit* 500 400 25% 400 25%
*Based on longer-term investment returns.
1. Market review and summary of strategy
The UK retirement market continues to remain attractive with an ageing
population driving demand for pre and post-retirement products.
While many UK consumers remain overly indebted and are not saving enough for
retirement, with a backdrop of reduced state and employer provision, they
increasingly need to take control of their financial affairs. This positive
demographic trend, together with an increasing concentration of wealth in the
hands of those approaching retirement or already retired, will continue to fuel
the opportunity for financial provision in, and preparing for, retirement.
The impact of A-Day, the implementation of pensions simplification legislation
in April 2006, initially dampened new business in certain areas, particularly in
the retail annuities market, but subsequently led to considerable market growth
in individual pensions, Self Invested Personal Pensions (SIPPs) and annuities.
Much of the market growth in pensions savings reflected recycling of money as
consumers consolidated existing pensions arrangements to one provider.
The wholesale annuity and risk management market experienced increased
competition over 2006, as short-term demand slowed and several new entrants
started to participate. However, the long-term potential in this market remains
considerable, with approximately GBP900 billion of funds held across a number of
market segments.
During 2006, Prudential UK Insurance Operations (Prudential UK) has continued to
target capital efficient returns through selective participation within its
chosen markets, Retirement Income, Wealth and Health and Wholesale. Going
forward, Prudential UK will specifically focus on maximising value for
shareholders through taking a leadership position in the retirement income and
savings market. This will be achieved by building on its longevity and asset
allocation strengths, as well as utilising its brand strength with older
customers, targeting their specific retirement needs. This focus on maximising
value will be achieved alongside a programme of cost cutting initiatives for
both new business and Prudential UK's back book to ensure that greater operating
efficiencies are achieved.
Prudential will not participate directly in healthcare and protection but will
instead expand its joint venture with Discovery Holding Limited ('Discovery'),
the leading South African insurance company. It is expected that the Flexible
Protection Plan ('FPP') will be incorporated into the 50:50 Discovery joint
venture during 2007. Both PruHealth and the FPP will utilise the successful '
Vitality' philosophy of a healthier lifestyle leading to lower protection
premiums and have a dedicated sales force creating a more focused business
model. In addition, FPP will continue to benefit from distribution to financial
intermediaries through Prudential UK's intermediary sales-force.
As of February 2007, PruHealth had 450 employees and over 100,000 customers, and
its customer base, in contrast to the rest of the industry, has been growing at
a rate of 15 per cent per month during 2006. Product leadership through strong
innovation and multi-channel distribution strategy is expected to continue to
deliver a significant market presence with 200,000 customers by the end of the
year. PruHealth's aim is to achieve breakeven in 2008 and to be profitable
thereafter.
Following the transfer of the protection business to the joint venture, the UK
operations will be structured into three business units: Wholesale, Retail
Retirement and Mature Life and Pensions.
The strategy in wholesale retirement income is to participate selectively in
bulk and back book buyouts, where Prudential UK is able to win business based on
its financial strength, operational capability and superior track record as well
as its extensive annuitant mortality risk assessment capabilities. Prudential UK
will maintain a strict focus on value, only participating in transactions that
generate an acceptable rate of return. In addition, Prudential UK provides
pension management services (including full or partial buyouts) to corporate
clients looking to manage or close pension deficits in cost-efficient ways.
While there is currently limited activity in this market, Prudential UK believes
opportunities will arise to help corporate clients manage significant amounts of
pension assets, which are non-core to their operations.
Retail Retirement will focus on savings and income for those customers nearing
or in retirement. Retirement income will drive profitable growth in the core
annuities business, building on the significant pipeline of vestings business
over the next 30 years from maturing policies in its individual and corporate
pensions books. This is enhanced by a number of strategic partnerships with
third parties, where Prudential UK is the default annuity provider for customers
vesting their pension at the point of retirement. The portfolio of retirement
products also includes equity release products to provide more flexibility to
customers with assets invested in property.
Prudential UK has exited the unprofitable front end commission markets for
individual pensions and will transition from front end commission unit-linked
bonds, particularly moving away from those areas of low persistency. Instead,
Prudential UK will focus on new low risk multi-asset products which utilise
Prudential UK's strengths in asset allocation and use 'factory gate pricing'
(negotiated between customer and adviser with separate advice costs). These
products will target the significant number of retail investors approaching
retirement who have substantial assets outside personal or corporate pension
plans, or have investments in poorly performing funds, and require inflation
protection.
Prudential UK remains committed to the corporate pensions market but will move
to a tighter focus on larger schemes with better than average persistency and
undertake a cost reduction programme. Together these are expected to deliver an
IRR of 14 per cent by 2009. The corporate pensions book is an important source
of vestings for the retail annuity business.
Prudential UK will continue to deliver embedded value through the Mature Life
and Pensions Business. It has an aggressive target to reduce per policy unit
processing costs and is evaluating the best route for achieving this which will
include one or all of internal cost cutting, further off-shoring or outsourcing.
Prudential UK distributes products through both direct and intermediated
channels. The direct channel will focus on capturing internal pension vesting
business and Prudential UK's equity release product via a specialist
face-to-face direct sales-force. The indirect channel will distribute products
through retail intermediaries, strategic partners and through Employee Benefit
Consultants ('EBCs') and consulting actuaries. Participation within the
intermediary market will be selective, targeting those advisers who focus on
value and building client relationships.
Prudential UK continues to investigate the opportunity for wrap platform
development and views this as an integral component to ensure future access to
distribution. Any involvement is likely to be in partnership with a third party.
2. Current year initiatives
Over the course of 2006, Prudential UK has continued to deliver innovative new
solutions to the market building on the award-winning launches of PruHealth and
the Property Value Release Plan, Prudential's equity release product, in
previous years.
The new Flexible Protection Plan was launched in July 2006 to the Direct channel
and to a limited group of intermediaries specialising in the protection market.
This innovative protection product is designed to pay critical serious illness
claimants earlier and more often than traditional protection products with, on
average, four times as many serious illnesses covered. Payments are based on
severity levels and multiple claims for the same illness or new illnesses are
possible. Early results have been encouraging and as a result the product was
rolled out nationally in February 2007 and is expected to be incorporated into
the Discovery joint venture during 2007.
Towards the end of 2006, Prudential UK received 4 stars in both the Life &
Pension Providers category and the Investment Providers & Packages category at
the FT Financial Adviser Practiv Services Awards. In addition, Prudential UK was
ranked number 1 for service in the Life & Pension Annuities sector. These awards
are widely recognised throughout the industry as independent recognition of a
provider's proposition, as they are voted on by intermediary financial advisers,
who base the ratings on the level of service they receive from providers for new
business processing, central processing, product support and commission payment.
Prudential UK's strength in retirement provision continued to be well recognised
as it won the Moneywise Best Annuity Provider Award for the third year running
and was awarded the best lifetime mortgage provider at the 2006 Equity Release
Awards for the Property Value Release Plan, together with awards from Moneyfacts
and Mortgage Strategy.
In relation to its externally sourced annuity business, Prudential UK has signed
further partnership agreements in 2006, including with Royal London which came
into effect in September. This agreement allows Prudential UK to provide annuity
quotes to all Royal London customers with maturing pensions which were
originally written under various brands within the Royal London Group. In
addition, Prudential UK signed an exclusive 5-year agreement with Threadneedle
as their supplier of annuities for their Stakeholder scheme, along with any
future defined contribution schemes that Threadneedle acquires. This is a new
area for Prudential UK that builds on its experience in providing annuities to
the customers of life insurance companies. With the future growth in defined
contribution schemes within the UK, Prudential UK expects more agreements of
this type.
Prudential UK and Save & Prosper have also signed a direct marketing agreement
under which Save & Prosper will offer Prudential's conventional annuity product
on an exclusive basis to customers with maturing Save & Prosper pensions. The
agreement is expected to take effect from mid-2007 and will run for five years.
Prudential UK's financial strength and continuing outstanding life fund
investment returns have been well received by both customers and advisers having
a positive impact on with-profits product sales. Prudential UK has also signed
new distribution agreements with National Australia Bank Group and Openwork for
PruFund, Prudential UK's unitised and smoothed investment plan.
3. Financial results and performance
Prudential UK delivered a strong retail performance in 2006. Total APE sales of
GBP900 million increased 1 per cent on 2005 and there was a 9 per cent increase
in NBP to GBP266 million, reflecting the significant increase in new business
margin from 27 per cent to 30 per cent. This demonstrated the benefits of the
selective participation strategy focusing on value pursued throughout 2006.
This performance was driven by underlying growth in the UK retail business
(excludes credit life, bulks and back books):
- Retail APE sales of GBP688 million were 14 per cent higher than 2005
(GBP605 million);
- Retail NBP of GBP190 million was 67 per cent higher than 2005
(GBP114 million); and
- Retail New business margin has increased to 28 per cent (2005: 19 per cent).
The Retail life and pensions sales performance was primarily driven by strong
individual annuity volumes, where Prudential UK has a 24 per cent market share
(source: Association of British Insurers), together with increased sales of
with-profits bonds and offshore bonds. These increases were offset by a decline
in unit-linked bonds, protection and DWP rebate business.
Individual annuity sales grew by 22 per cent to GBP271 million as the annuity
market experienced increased activity in the second half of 2006 following the
removal of uncertainty around A-Day pension changes. Sales volume has been
driven primarily by the continued strength of internal vestings (which
contributed around 50 per cent of individual annuity sales) together with the
cumulative benefit of partnership deals signed in previous years.
Individual annuity sales were also boosted by sales of with-profits annuities
where sales have more than doubled to GBP37 million compared with 2005, and are
expected to increase. From February 2007, customers are able to start using
their Protected Rights Funds to buy with-profits annuities. This new feature is
the first of its type and allows customers to combine 100 per cent of their
pension into an asset-backed annuity without having to buy two separate
annuities. Protected Rights is a term used to describe the funds held in a money
purchase scheme derived from National Insurance rebates for those who contracted
out of the State Earnings Related Pension Scheme (which was replaced by State
Second Pension).
With-profits sales were supported by the excellent with-profits bonus
announcements in 2006, in respect of 2005, which were well received by both
customers and advisers. This was reflected in APE sales of with-profits bonds up
44 per cent to GBP26 million.
Corporate pension APE sales increased 23 per cent due in part to the continuing
shift from defined benefit to defined contribution pension schemes but also due
to the impact of A-Day. The sales upturn is also a reflection of Prudential UK's
re-engineered and improved account management capability, where the company
works in partnership with the major Employee Benefit Consultants. Individual
pension APE sales increased 3 per cent to GBP35 million due to increased
activity following A-Day.
PruHealth continues to grow strongly with full-year gross written premiums (GWP)
up 300 per cent at GBP36 million (2005: GBP9 million). GWP from new lives (which
is equivalent to new business APE) was GBP28 million. Contributing to this
growth is the number of companies adopting PruHealth for their employee
healthcare schemes, including the British Airways voluntary scheme, Smith and
Nephew and Norton Rose.
In the wholesale market, bulks and back book business APE volumes of GBP143
million were 70 per cent of those achieved in 2005. This reflected the selective
participation strategy undertaken by Prudential UK to ensure margins and
profitability were maintained in a period when the market experienced increased
competition.
Prudential UK completed two significant back book transactions in 2006. In
January, it reached agreement with Royal London to acquire the portfolio of in-
payment pension annuities that had been written primarily under the Royal London
brand, but which also included some annuities written under the Refuge Assurance
brand. The transaction generated premium income of GBP66 million on an APE
basis. In June, Prudential Assurance Company (PAC) agreed to reinsure the
non-profit immediate pension annuity portfolio of the Scottish Amicable
Insurance Fund (SAIF) to Prudential Retirement Income Ltd (PRIL). SAIF is a
closed sub-fund established by a court-approved Scheme of Arrangement in
September 1997, in which Prudential shareholders have no economic interest. It
contains a large proportion of the business originally written by the Scottish
Amicable Life Assurance Society that was acquired by PAC in September 1997. The
reinsurance premium for this transaction was GBP56 million on an APE basis.
In December, Prudential UK reached agreement with Save & Prosper to acquire its
portfolio of in-payment pension annuities. The book covers approximately 16,900
policies (weighted average age 72) with assets of around GBP135 million (GBP13.5
million APE). During 2007, the intention is for these annuity policies to
transfer to Prudential, subject to legal and regulatory approvals, at which
point Prudential will take over direct responsibility for the payment of all
annuitants.
Total credit life APE sales of GBP69 million generated NBP of GBP26 million in
2006 (GBP83 million and GBP35 million respectively in 2005). Credit life sales
reduced in 2006 and will continue to do so in 2007 as Prudential UK's credit
life contract with Lloyds TSB, which in 2006 contributed APE sales of GBP63
million and NBP of GBP20 million, has not been renewed. Prudential UK will
continue to participate in the credit life market, pricing on a case-by-case
basis.
In 2002, Prudential UK transferred its UK personal lines general insurance
business to Winterthur, forming a strategic alliance with Churchill to offer
Prudential-branded general insurance products for which Prudential receives a
commission payment that has been offset against an advance payment made by
Winterthur at completion resulting in a net payment to Prudential of GBP4
million in 2006. From 2008, under the terms of the contractual arrangement, the
advance payment will have been fully offset therefore the UK is expected to
receive approximately GBP30 million a year from the commission payments,
although this will depend on the new business volumes and persistency rates.
Prudential UK allocates shareholder capital to support new business growth
across a wide range of products in the UK. The weighted average post-tax IRR on
the capital allocated to new business growth in the UK in 2006 was 15 per cent,
up by 1 percentage point from that achieved in 2005.
The NBP increased 9 per cent to GBP266 million, primarily reflecting an increase
in margin from 27 per cent in 2005 to 30 per cent in 2006. This reflects an
increase in profitability within the retail business, where the margin increased
significantly, driven principally by individual annuities offset by a change in
business mix following the lower sales of more profitable bulk annuities, credit
life business and DWP rebates.
EEV basis operating profit based on longer-term investment returns of GBP686
million, before restructuring costs of GBP34 million, were up 61 per cent on
2005. The in-force operating profit of GBP420 million was up 129 per cent on
2005, due to the increase in profits arising from the unwind of discount from
the in-force book (reflecting an increase in the risk discount rates together
with an increased opening embedded value); and because there were no operating
assumption changes required in 2006, in comparison to 2005 when a charge of
GBP148 million was made in respect of persistency.
Other charges of GBP110 million include GBP32 million of costs associated with
product and distribution development and complying with regulatory requirements
including Sarbanes-Oxley; GBP9 million negative persistency experience variance;
GBP14 million for an annual fee paid by the shareholder business to the PAC
with-profits sub-fund for the use of the Prudential and Scottish Amicable
trademarks; GBP16 million in respect of the tariff arrangement with SAIF, which
is to be renegotiated in 2007; GBP26 million for tax related items and GBP13
million in relation other items.
Prudential continues to manage actively the retention of the in-force book.
During 2006 Prudential saw surrenders within its personal pension and DWP rebate
business run ahead of assumptions following A-Day resulting in a small negative
experience variance. All other lines of business performed in line with
assumptions.
IFRS operating profit before restructuring costs of GBP31 million increased 25
per cent to GBP500 million in 2006. This reflects a 22 per cent increase in
profits attributable to the with-profits business, which contributed GBP368
million reflecting the strong investment performance of the Life-Fund and its
impact on terminal bonuses. In addition, the result benefited from a GBP46
million positive impact of changes in FSA reserving requirements for protection
and unit-linked products.
4. Outlook and forthcoming objectives
While Prudential's retail APE sales volume growth may fall in the short term, as
it refocuses its retirement savings products, Prudential expects the UK
financial services environment to remain favourable, and expects to achieve
growth in line with the market (5 to 10 per cent) over the next five years.
Prudential UK will continue to focus on profitable opportunities which deliver
capital-efficient returns and will seek to maintain an aggregate 14 per cent IRR
on new business. It will continue to pursue profitable opportunities in its
chosen product areas and distribution channels in 2007.
As previously announced, Prudential UK has targeted GBP150 million of cost
savings by 2008 through the integration of Egg and other shareholder cost saving
initiatives at a cost of GBP110 million. Of these target savings and costs,
GBP35 million and GBP25 million respectively were due to be realised by Egg.
Following the sale, the revised target savings for Prudential is GBP115 million.
Prudential UK has, however, identified further cost saving initiatives which
result in target cost savings for the UK business being increased to GBP195
million, to be achieved by 2010. The savings when achieved, net of restructuring
costs, will result in a small positive assumption change on an EEV basis,
estimated to be around GBP60 million. The cost savings will be achieved through
a combination of internal cost saving, further off-shoring or outsourcing. The
work of approximately 3,000 people in the customer service, customer operations
and information technology areas will be in the core scope of this review.
Prudential will comply with its legal obligations to consult with unions and
employee representatives in relation to these proposals. The total cost of
achieving the GBP195 million of savings is expected to be up to GBP165 million
and will depend upon the final detail of the cost reduction programme.
In connection with the sale of Egg, outline terms of a distribution agreement
have been agreed in principle with Citi through which Prudential UK will provide
life and pension products to Egg's customers for a five-year period. Prudential
UK sees Egg's direct distribution capacity and access to its three million
customers as powerful strategic assets, and this agreement enables it to
preserve these benefits while reducing the risk to its balance sheet.
United States
CER RER
2006 2005 Change 2005 Change
GBPm GBPm % GBPm %
APE sales 614 508 21% 515 19%
NBP 259 208 25% 211 23%
NBP margin (% APE) 42% 41% 41%
NBP margin (% PVNBP) 4.2% 4.1% 4.1%
Total EEV basis operating profit* 718 745 (4%) 755 (5%)
Total IFRS operating profit* 408 358 14% 362 13%
*Based on longer-term investment returns.
1. Market review and summary of strategy
The United States is the largest retirement savings market in the world, with 67
per cent, or US$12.9 trillion, of the world's retirement assets concentrated in
the US at the end of 2005 (Source: Cerulli Associates). As 78 million baby
boomers (source: US Census Bureau), born between 1946 and 1964, approach
retirement age, the aging demographics of the US are expected to increase annual
retirement distributions to more than US$1 trillion per year by 2012. The
combination of increasing average life expectancy and decreasing average
retirement age in the US is leading to an increase in the average time
individuals will spend in retirement. At the same time, the responsibility for
providing income during retirement continues to shift away from institutions,
such as government and employers, toward individuals. These changes, coupled
with historically low savings rates in the US, have resulted in an increasing
risk that individuals' finances will be insufficient to cover the cost of living
through retirement. These consumers will have a growing need for independent
financial advice and increasingly seek guarantees and longevity protections from
the financial products they purchase.
Despite favourable demographics, US life insurers face challenges from both
within and outside the industry. The US life insurance industry remains highly
fragmented - the combination of all annuity companies ranked below the top 20
annuity sellers have more than twice the market share of the top annuity
provider (Source: LIMRA) and competition for market share is expected to
intensify. In addition to competing against each other, life insurers are
increasingly competing with other financial services providers, in particular
mutual fund companies and banks, for a share of retirement savings assets in the
US. Sales of annuities in the career agency distribution channel continue to
decline to the benefit of independent agents/broker-dealers due to increasing
costs and regulatory burdens, as well as a growing pool of sophisticated
investors increasingly seeking more independent investment advice.
The US insurance industry faces continued regulatory scrutiny, particularly with
respect to index and variable annuity products. The National Association of
Securities Dealers Inc. (NASD) has issued guidelines requesting that its member
firms provide stricter supervision of the marketing and sales of index
annuities. In the variable annuity market, regulators continue to focus on
product suitability in an effort to ensure that the products are sold
appropriately to customers. There has also been regulatory pressure to reduce
fees and costs associated with variable annuities, which has increased advisor
demand for providers to manufacture low-cost variable annuity options.
Companies with quality distribution relationships, strong product manufacturing
and below-industry-average cost structures are well positioned to compete
effectively and continue to grow profitably. Significant convergence in the US
financial services industry has yet to occur. As noted, the market remains
fragmented with more business being consolidated organically among market
participants with significant scale and sophisticated risk management functions.
During 2006 and 2005, the S&P index increased 13.6 per cent and 3.0 per cent,
respectively, increasing the attractiveness of products providing access to
equity based returns. During the same periods, interest rates trended upward.
However, the short end of the yield curve rose more dramatically than the long
end of the curve, resulting in a flat to inverted yield curve. This, combined
with low spreads over Treasury bonds, created a difficult environment for the
sale of properly priced fixed annuities.
Jackson provides retirement income and savings solutions in the mass and
mass-affluent segments of the US market, primarily to near- and post-retirees.
It offers tools that help people plan for their retirement, and manufactures
products with specialised features and guarantees to meet customers' needs. By
seeking to add value to both the representatives who sell Jackson products, and
to their customers, Jackson has built a strong position in the US retirement
savings and income market with the fastest-growing variable annuity franchise
measured by new sales growth during the past four years (Source: VARDS) and
top-10 sales rankings in fixed index annuities and individual traditional
deferred fixed annuities (Source: LIMRA).
Jackson's primary focus is manufacturing high-margin, capital-efficient
products, such as variable annuities, and marketing these products to
advice-based channels through its relationship-based distribution model. In
developing new product offerings, Jackson leverages a low-cost, flexible
technology platform to manufacture innovative, customisable products that can be
brought to the market quickly. In 2006, 81 per cent of Jackson's retail sales
were from products and features developed and launched in 2006 and 2005.
Jackson's product offerings include variable, fixed and fixed index annuities,
as well as life insurance and institutional products. Jackson's annuity products
are long-term personal retirement products, which offer tax-deferred
accumulation on the funds invested until proceeds are withdrawn from the policy.
Fixed annuities offer customers a guarantee of principal and a minimum
guaranteed rate of return on their deposits. Fixed index annuities also offer
these features, but vary from fixed annuities in that they offer the potential
for additional interest to be credited based upon the performance of an equity
index over a specified period. Variable annuity products differ from the fixed
annuity products in that the returns to the customer will depend upon the
performance of the underlying fund portfolio. Jackson's variable annuity
products offer a range of protection options, such as death, income and
withdrawal benefits, which are priced separately by the company and can be
elected by customers according to their individual needs. Jackson manages its
exposure to equity market movements through a comprehensive hedging program.
Due to the increasing complexity of the retirement savings and income market and
broad array of financial products being brought to market, professional advice
is vital for customers to understand the choices available and to determine
which products are best for their particular financial situation. Therefore,
Jackson primarily markets its retail products through advice-based distribution
channels, including independent agents, independent broker-dealer firms,
regional broker-dealers, banks and registered investment advisors. Beginning in
2005, Jackson also began marketing products through its captive insurance
agency, acquired through the purchase of Life of Georgia (LOG).
Jackson supports its network of independent agents and advisors with
award-winning marketing support and award-winning customer service. In 2006, the
Service Quality Measurement Group recognised Jackson with a World Class Customer
Satisfaction Award, and Jackson's marketing campaigns won awards for achievement
in graphic design, editorial content and overall communications excellence.
Jackson complements its award-winning marketing and customer service with
value-added services such as the Seminar Systems Unit, which helps advisors host
educational seminars for clients on a variety of financial planning topics. In
addition, Jackson recently launched the Retirement and Wealth Strategies Group,
a unit dedicated to helping advisors better address their clients' evolving
retirement planning needs.
By manufacturing and distributing a broad suite of platform-based products that
can be tailored to an individual customer's needs, Jackson has positioned itself
to compete effectively in all phases of the business cycle based upon the
quality and value of the products and services it provides, rather than price
alone.
Jackson's institutional products division markets institutional products such as
traditional Guaranteed Investment Contracts (GICs), Funding Agreements and
Medium Term Note (MTN) funding agreements. Jackson distributes its institutional
products directly to investors, through investment banks or through funding
agreement brokers. This is a market in which Jackson continues to participate on
an opportunistic basis.
In early 2003, Jackson entered the registered investment advisor channel with
the launch of Curian Capital. Curian provides innovative fee-based separately
managed accounts and investment products to advisors through a sophisticated
technology platform.
In 1998, Jackson launched the National Planning Holdings (NPH) independent
broker-dealer network with the formation of National Planning Corporation. Since
its formation, NPH has grown through acquisitions to comprise four broker-dealer
firms: INVEST Financial, Investment Centers of America, National Planning
Corporation, and SII Investments. By leveraging technology, NPH provides its
advisors with the tools they need to operate their practices more efficiently.
Through its relationship with NPH, Jackson has gained an important distribution
outlet, plus invaluable insight into the needs of financial advisors and their
clients.
Jackson's focus on current retirees and those approaching retirement age is not
unique among US financial institutions. As a result, competition in this segment
is expected to continue as the Baby Boomer generation retires and their
retirement savings assets are moved from pre-retirement accumulation accounts
into post-retirement income accounts. Jackson believes that its specialised
product offerings, advice-based distribution model, sophisticated risk
management function and low cost structure will offer a significant competitive
advantage.
As competition and regulatory challenges intensify, Jackson expects
consolidation within the industry to continue at a measured pace. Further
consolidation will provide an excellent opportunity for Jackson to leverage its
efficient information technology platform and cost effective business model as
an aggregator of annuity and life portfolios, as demonstrated with Jackson's
acquisition and integration of LOG in 2005.
2. Current year initiatives
Jackson's focus on maximising its opportunities in the evolving US market is
embedded in the development of current and future strategic initiatives. These
goals include a continued expansion of Jackson's share of the US annuities and
retail asset management markets.
Expansion of Jackson's share of the US annuities market will be largely
contingent on continued expansion of existing product offerings, additional
growth in new and existing distribution channels and opportunistic acquisition
activity.
Innovation in product design and speed to market continue to be key drivers of
Jackson's competitiveness. In January, Jackson added a 5 per cent annual benefit
increase option to its popular lifetime guaranteed minimum withdrawal benefits
(GMWBs). In February 2006, the company launched two new fixed index annuity
contracts, Elite Choice and Elite Choice Rewards, which expanded the number of
FIA products Jackson offers to five. In May, Jackson added five new GMWB options
that provide contract holders with a guaranteed return of premium and lifetime
income. Additionally, Jackson expanded its variable annuity fund offering during
the year.
In the near-term, Jackson's product development strategy includes further
enhancement of its variable annuity offerings and the introduction of new
guarantees, including a Guaranteed Minimum Accumulation Benefit (GMAB). In early
2007, Jackson launched a simplified retirement annuity that will serve as a
low-cost option for financial advisors who are currently not participating in
the variable annuity market. Additionally, Jackson launched its first set of
retail mutual funds for distribution by existing wholesalers. Jackson's new
mutual funds are marketed as an additional option for financial advisors
currently selling variable annuity products.
Jackson will continue to build its relationship-based distribution advantage in
the advice-based channels and explore additional distribution opportunities,
including expansion into the wirehouse channel, as evidenced by the company's
recently announced distribution agreement with UBS.
Jackson's organizational flexibility and excellence in execution, coupled with
its product innovation, successful distribution model and strong service
offering, increased Jackson's share of the US variable annuity market to 4.6 per
cent in 2006 (VARDS), up from 3.6 per cent in 2005. Jackson also increased its
share of variable annuity sales through the independent broker-dealer channel to
10.8 per cent at the end of 2006, up from 9.2 per cent at the end of 2005.
Jackson continues to seek opportunities to deploy capital through opportunistic,
value-creating acquisitions. Jackson demonstrated its ability to efficiently
consolidate annuity and life portfolios by meeting or exceeding performance
targets during the completion of its acquisition of LOG. Jackson integrated more
than 1.5 million policies onto its platform within eight months of the
acquisition date. The IRR on the acquisition of LOG exceeded 13 per cent and the
purchase resulted in a gain of US$8.9 million (GBP4.8 million) as the net assets
acquired exceeded the purchase price paid.
Jackson's continued expansion in the US retail asset management market will be
led by the efforts of its independent broker-dealer network, NPH, and Curian.
NPH was ranked the seventh largest independent broker-dealer network in the US
(source: Investment News magazine) and generated nearly US$12 billion in gross
product sales and nearly US$500 million in revenues in 2006. Curian continues to
be one of the fastest growing third-party separately managed account platforms
in the US, with assets under management of US$2.4 billion at the end of 2006.
Curian is expected to continue expansion of its product offerings and further
improve efficiencies through planned improvements to its core technology system.
Curian also continues to expand its distribution relationships with key
financial institutions, as evidenced in recently announced agreements with AIG
and Commonwealth Financial Group.
3. Financial results and performance
Jackson has a diversified earnings base derived from spread, fee and
underwriting income. Through strong growth in its variable annuity business
during 2006, Jackson increased the share of revenue received from fee income and
further diversified its revenue streams. Underwriting revenue from life
insurance provides Jackson with stable cash flows to balance the volatility of
cash flows from fixed annuities, thereby providing the company with a more
stable earnings base and greater flexibility in how assets are invested.
Jackson achieved record APE sales of GBP614 million in 2006, representing a 21
per cent increase on 2005, driven by strong growth in sales of variable
annuities. On a PVNBP basis, new business sales were GBP6.1 billion. Retail APE
sales in 2006 of GBP524 million were up 27 per cent. APE sales in the fourth
quarter of 2006 were GBP147 million, up 43 per cent compared to the fourth
quarter of 2005.
Jackson delivered record variable annuity sales in 2006 of GBP3.8 billion, up 48
per cent on last year. This reflects its distinct competitive advantages of an
innovative product offering, an efficient and flexible technology platform, a
relationship-driven distribution model and award-winning service. Jackson's
sales result was achieved in a market that grew 18 per cent year-on-year in
2006.
Entry spreads for fixed annuities continued to be challenging during 2006, which
limited the attractiveness of the market to Jackson. APE sales of GBP69 million
were down 12 per cent on the same period in 2005.
Fixed index annuity sales continued to be affected by the uncertain regulatory
environment in the US. APE sales of GBP55 million were 10 per cent down on 2005.
Jackson's market share in 2006 was 3.7 per cent, compared to 3.8 per cent in the
prior year.
Institutional APE sales of GBP90 million were down 8 per cent from 2005. Jackson
participates in this market on an opportunistic basis.
EEV basis NBP of GBP259 million was 24 per cent above the prior year, reflecting
both a 21 per cent increase in APE sales and an increase in margin from 41 per
cent to 42 per cent year on year. The increase in margin reflects a favourable
business mix, economic assumption changes, and positive effects from the
increase in election of high margin guaranteed benefit options on variable
annuity contracts, offset by more prudent operating assumptions.
The variable annuity new business margin decreased slightly from 50 per cent in
2005 to 49 per cent in 2006. The fall in margin primarily reflects changes in
assumptions for expenses and utilisation of lifetime guaranteed minimum
withdrawal benefits, offset by economic assumption changes and a more favourable
mix due to the increased election of guaranteed minimum withdrawal benefits.
The fixed annuity new business margin fell from 23 percent to 16 per cent
reflecting changes to expense and cash withdrawal assumptions partly offset by
economic assumption changes.
The new business margin on institutional business improved due to the larger
average duration contracts written during 2006.
The average IRR on new business was 18 per cent compared to 15 per cent in 2005.
While product IRRs are generally in line with returns reported for 2005 new
business, the aggregate returns are higher due to a larger proportion of
variable annuity sales in 2006 (64 per cent) as compared to 2005 (52 per cent).
For variable annuities, the IRR has increased to 25 per cent in 2006 from 24 per
cent last year due to higher interest rates and therefore a higher separate
account return assumption.
Total EEV basis operating profit for Jackson for 2006 was GBP708 million
compared to GBP731 million in the prior year. In-force EEV profits of GBP449
million were 14 per cent below prior year profit of GBP523 million, primarily
reflecting the inclusion in 2005 of an operating assumption change relating to
price increases introduced on two older books of term life business representing
GBP140 million. This was partially offset by an increase in the unwind of the
in-force business during 2006 as a result of a higher opening embedded value and
a higher risk discount rate as long-term interest rates increased. On a
normalised basis, the EEV basis operating profit was up by 19 per cent. One-off
items affecting the spread income variance totalled GBP46 million.
The growth in IFRS operating profit for total US operations of 14 per cent from
the prior year to GBP408 million primarily reflects an increase in fee and
spread income over 2005. The improved spread income primarily reflects higher
net average invested assets. Higher fee income was primarily driven by higher
separate account assets given the growth in variable annuity sales, and an
improvement in the average fees generated from those assets given the increase
in election of high margin guaranteed optional benefits. In 2006, spread income
included a number of non-recurring items including mortgage prepayment fees,
make-whole payments and total return swap income which together represent GBP33
million of spread, compared to GBP44 million in 2005, both net of DAC
amortisation.
At 31 December 2006, Jackson had more than US$74 billion (GBP38 billion) in GAAP
assets. Of this total, US$22 billion related to separate account assets, an
increase of more than US$7 billion compared to 2005 year-end, further
diversifying Jackson's earnings toward fee-based income.
NPH had a strong year with pretax profits up 51 per cent to GBP6 million. NPH,
which is a network of four independent broker-dealers, increased gross product
sales through the network to US$11.9 billion (GBP6.5 million) in 2006, an
increase of 26 per cent over the prior year. NPH has also increased the number
of registered advisors in its network to more than 2,600 at year-end, further
extending Jackson's footprint in broker-dealer distribution.
Curian recorded improved results with pretax losses of GBP8 million in 2006,
improving from losses of GBP10 million in the prior year, as it continues to
build scale in assets under management. At 31 December 2006, Curian Capital had
US$2.4 billion (GBP1.2 billion) of assets under management compared with US$1.7
billion (GBP853 million at CER) at the same point in the prior year.
Jackson continues to maintain a strong capital position through capital
conservation and strong earnings. At 31 December 2006, Jackson's capital was
well in excess of regulatory requirements with sufficient available capital to
fund future bolt-on acquisitions. During 2006, Jackson increased the capital
remittance to the Group to US$200 million, with future increases expected with
continued growth.
4. Outlook and forthcoming objectives
Jackson continues to deliver growth in the attractive US market and has further
enhanced its competitive advantage in the variable annuity market, offering the
product and service solutions that both customers and advisors desire. With its
continued focus on product innovation, a proven relationship-based distribution
model, award-winning service and excellence in execution, Jackson is well
positioned to take advantage of the changing demographics and resulting
opportunities in the US market.
Asia
CER RER
2006 2005 Change 2005 Change
GBPm GBPm % GBPm %
APE sales 956 734 30% 731 31%
NBP 514 418 23% 413 24%
NBP margin (% APE) 54% 57% 56%
NBP margin (% PVNBP) 10.0% 10.3% 10.2%
Total EEV basis operating profit* 829 585 42% 576 44%
Total IFRS operating profit* ** 189 201 (6%) 195 (3%)
*Based on longer-term investment returns.
** Excluding fund management operations, development and Asia regional head office expenses
1.The Asian opportunity
Asia remains a very attractive region for growth opportunities due to its high
levels of economic activity translating into higher levels of personal wealth,
greater disposable incomes and a growing appetite for good quality protection
and savings products. Within this environment, ageing demographics are also
beginning to drive increased household savings rates and an emerging need for
retirement solutions.
Within Asia, each country typically has incumbent life insurers and asset
managers and the majority of market share is concentrated in the top five
players. For many years, these incumbents have used predominantly lower quality
tied agency distribution and life products have tended to be simple, often with
some form of guarantee that may be based on higher interest rates than the
current prevailing ones.
The country markets within Asia are extremely diverse and a 'one size fits all'
business model does not work. Regional players must accommodate different stages
of economic development, varying cultures, multiple languages, differing legal
and regulatory regimes and competitors with different objectives and standards.
Joint venture with local companies is also mandated in some markets and there is
a limited pool of attractive partners. Regional players such as Prudential have
had considerable success across multiple Asian markets but, to date, this has
been the exception rather than the rule with local players tending to stay
within their markets and other international players, whilst successful in one
or two markets, have not developed their businesses across the region.
Opportunities for foreign players to access the Asia protection and savings
markets have been increasing steadily and regulators in the region are becoming
more accommodating regarding product and distribution innovation. These include
unit-linked products, more professional non agency channels and mandatory
licensing of agents. Most notably, the significant markets of China and India
have greatly opened up within the last few years.
Despite the increasing opportunities in Asia, there are also challenges to
expansion. Experienced staff and agents are very much in demand, particularly in
markets such as China and India where the rapid growth of the industry has
resulted in limited pools of resources. There is also the potential for
miss-selling where there can often be a difference between the customer's
perception of product features and the reality which may take several years to
become apparent. These challenges can be exacerbated by a media that is becoming
more consumer focused as de-regulation continues.
During 2006, economic activity in the region remained strong and equity market
performance was robust. We anticipate the Asian economic outlook will remain
strong with domestic demand and foreign investment and capital inflow expected
to increase, resulting in average GDP growth across Asia being around 7 per cent
for the next few years.
2. Prudential's Asian strategy
Since 1994 Prudential has implemented a strategy designed to build an Asian
platform with the breadth and depth to deliver material shareholder value that
is sustainable over the long term. This strategy has been executed by securing
early access to countries with high potential customer bases, building and
professionalising core tied agency distribution that is complemented by
alternative channels such as bank partnerships, launching capital efficient
consumer orientated products and supporting the entire structure with a sharp
focus on excellent customer service.
Underpinning the strategy is an investment in recruiting and training with the
objective of retaining the best people in the industry. Prudential also
continues to leverage the significant advantages from its well respected UK
heritage including a powerful brand, embodied by the Prudence icon, over 150
years experience as a market leader and the governance and compliance
infrastructure associated with a leading international business.
Today, Prudential has life operations in 12 countries, including joint ventures
with CITIC in China and ICICI in India. Prudential is a regional force in the
life insurance and fund management business, and, at 31 December 2006 had 7.2
million customers in Asia and 14,000 staff. Brand recognition is high and
Prudential's customer centric delivery has been acknowledged through a number of
awards, including 2nd most trusted life insurance and asset management brand in
India. Life insurance new business APE has grown at a compound annual growth
rate (CAGR) of 22 per cent since 2001 and funds under management, including
Prudential's market leading retail mutual fund business has grown at a CAGR of
25 per cent over the same period. For the first time this year, Asia also became
a net contributor of cash to the Group, demonstrating the growing scale of the
business.
3. Business priorities
An ongoing priority for Prudential is to continue building distribution to drive
growth. The agency strategy is tailored to each market, with the more developed
markets typically focussed on enhancing agency productivity and the newer
markets emphasising increased distribution reach through growth in agent
numbers. In China and India particularly this means increasing geographic
coverage through entering new cities and opening more branches.
2006 was a very successful year for the agency distribution channel with
year-end 2006 agent numbers increasing by 114,000 in India, 11,000 in Indonesia
and 5,000 in China compared to 2005. Agency productivity measured by APE per
average agent also improved strongly during the year with Prudential's more
developed markets of Singapore, Hong Kong and Malaysia all showing double digit
improvement over 2005 of 23 per cent, 30 per cent and 32 per cent, respectively.
Distribution from non-agency channels also grew strongly in 2006. Strong growth
from bank distribution included record new business volumes from Standard
Chartered Bank (SCB) in Hong Kong, an increasing proportion of new business from
ICICI Bank in India and encouraging growth from Maybank and Singpost in
Singapore. In addition, a new direct distribution initiative, PRUcall, was
launched in Thailand during 2006, posting strong results to date.
Prudential's product strategy has been a key driver of its success. From the
outset, the focus has been on predominantly regular premium products designed
and targeted to meet customer needs. In the more emerging markets this is
illustrated by the success of products that focus on providing for children and
their education such as PRUkid in Vietnam. However, in an older and more
developed market such as Korea, retirement orientated unit linked products such
as PRUretire are proving popular.
Prudential has led product innovation in a number of markets often working
closely with the regulators. As a result, Prudential has been first to market
with unit linked products in Singapore, Malaysia, Taiwan, Indonesia, India, the
Philippines and Korea. Unit-linked products are now a well established part of
the overall portfolio generating 61 per cent of total new business APE in 2006
and, within the regulatory driven investment guidelines in each market,
Prudential continues to expand the choice of investment funds available to
customers, including third-party funds in markets where it makes sense.
During 2006, Prudential launched a new universal life product in Malaysia to
give customers more choice and in India, ICICI Prudential launched a
ground-breaking new diabetes care product. Prudential has also made its first
move into the takaful market by forming a joint venture with Bank Simpanan
Nasional (BSN) in Malaysia and successfully launching its first linked product
in November.
As a result of this strategic focus on regular premium policies, capital
efficient linked products and the high proportion of A&H riders, new business
profit margins as a percentage of weighted sales tend to be higher in Asia than
are seen elsewhere.
The focus on effective distribution and profitable life products has proven more
difficult to deliver in Japan. Neither tied agency nor general agency
distribution were found to be economically viable and, whilst a profitable
variable annuity product has been approved by the regulators, it has not been
commercially attractive when compared to some competitor products. The business
remains subscale and we continue to look for profitable growth opportunities in
the market.
Further demonstrating the benefits of scale that Prudential is beginning to
realise in Asia, costs as a proportion of gross written premiums have been
decreasing steadily from 16 per cent in 2002 to 11 per cent in 2006. However,
continuing to increase efficiencies through greater use of common systems,
platforms and processes across the region and the Group remains a priority.
Prudential is committed to delivering material shareholder value from its Asian
business and, during 2006, a number of steps were taken to strengthen the Asia
regional management team with Barry Stowe becoming the new CEO in November 2006.
Major market overviews
China
Prudential, with its joint venture partner CITIC, continues to be very well
placed amongst the foreign players establishing themselves in this very
attractive market. In 2006, CITIC-Prudential retained its position as the number
two foreign player with new business APE growth of 56 per cent to GBP39 million
and continued to successfully implement its strategy of geographic expansion
receiving 6 new city licence awards from the regulators.
New business profit margins of 43 per cent remain attractive but as would be
expected, the business is currently making IFRS losses and consuming capital as
it invests in new cities. The reduction in margin from 51 per cent in 2005 is
primarily due to product mix and persistency assumption changes in 2006.
Hong Kong
The Hong Kong market grew strongly between 2000 and 2005 with a CAGR of 18 per
cent and Prudential has consistently outperformed the market with a CAGR of 22
per cent over the same period. One reason for this is Prudential's successful
multi channel model while most of the top five players in the market choose to
focus on only one distribution channel. In 2006 55 per cent of distribution came
from agency and 45 per cent from bank distribution with SCB.
During 2006, Hong Kong successfully focused on recruiting and training agents
with average agent numbers and productivity up 7 per cent and 15 per cent,
respectively. Another priority for the business is to continue leveraging its
strong partnership with SCB and new business APE from this channel increased by
32 per cent in 2006.
NBP margins on APE increased from 60 per cent to 69 per cent during 2006
reflecting improving experience. Hong Kong also generates material IFRS profits
and is a net remitter of capital to the Group.
As in Singapore and Korea, there are significant opportunities in the retirement
sector in Hong Kong and Prudential is well placed with a marketing campaign
already underway.
India
Prudential's strategy of working with top quality joint venture partners has
been very successful in India, where ICICI-Prudential Life is the clear leader
amongst the private sector insurers and, with its 9 per cent market share, is
really making headway. This is a remarkable achievement given it has only been
operating for six years.
As reflected by the over 280 new branches opened during the year and the 165 per
cent increase in agent numbers, the strategy in India has been to build scale
rapidly. Bancassurance is also well established in India and generated 27 per
cent of ICICI -Prudential's new business in 2006. At 31 December 2006
ICICI-Prudential had 2.6 million policies in force.
Whilst 96 per cent of India's 2006 new business is made up of unit linked
products, margins are lower than in other Asian markets. This is driven
primarily by relatively higher discount rates and more aggressive pricing. The
margin of 23 per cent in 2006 is lower than the 29 per cent reported for 2005
primarily due to product mix and expense assumption changes.
Prudential's ownership of this venture is capped at 26 per cent by law and,
although there is much speculation that this limit may be increased to 49 per
cent in the future, there is no firm timetable in place. Prudential will
consider an increase in its stake as and when this becomes a feasible option.
Resulting from the fast pace of expansion, the business currently makes a loss
under the IFRS basis and requires net capital injections.
Indonesia
Indonesia is a very attractive market with a population of 240 million and an
increasingly stable and productive economy. Prudential is already a well
established market leader and during 2006 has continued to aggressively expand
its agency distribution with numbers up 49 per cent in the year. In addition to
continuing to expand the agency force, Indonesia is expected to begin working
with Citi in 2007 as announced at the time of the Egg sale.
In 1997, Prudential successfully introduced unit linked products in Indonesia,
which now account for virtually all new business sold. The business is
profitable under the IFRS basis and remitted surplus capital to the Group in
2006.
Japan
Prudential's Japanese life insurance operation remains subscale, although 2006
saw new business double. A review of opportunities in Japan is underway.
Korea
Prudential's Korean life operation has an impressive growth track record with a
CAGR of 82 per cent since its acquisition in 2001 and is the fastest growing
company in the industry. This has resulted primarily from successful
implementation of a multi channel distribution and product innovation strategy
that has differentiated Prudential from the market.
New business APE in 2006 of GBP218 million was driven principally by the tied
financial consultant channel (49 per cent) and the GA (broker) channel (38 per
cent). Bancassurance volumes are limited by regulatory constraints which
prescribe a maximum 25 per cent of banks' sales volume from any one life
insurer. This has negatively impacted bank distribution in Korea as Prudential
reached this limit early on in the year with all its major bank partners. Direct
distribution accounted for 5 per cent in 2006 and this reflects the more
competitive environment at present. In 2007 Prudential will continue building on
its advantaged distribution model, including new bank partnerships with Korea
Bank and Shinhan Bank.
Prudential Korea has benefited significantly from its innovative stance in the
retirement space; and has been hugely successful with its 'What's your Number'
campaign.
Whilst lower than some other markets, new business profit margins in Korea
remain attractive at 35 per cent and are driven by the high proportion of unit
linked products at 84 per cent of APE.
As a result of its rapid growth, investment in building scale and the
comparatively small size of the acquired in-force book, the business currently
makes a loss under the IFRS basis and receives capital injections from the
Group.
Malaysia
Prudential Malaysia had a challenging year in 2006 in part due to regulatory
driven changes on illustrations which unsettled the industry. Against this
backdrop Prudential Malaysia was able to grow by 6 per cent. Distribution in
Malaysia is predominately tied agency as the current bank distribution
regulations limit insurers to one bank partner. In 2007 the focus in Malaysia
will be to continue expanding the agency force and further broaden the product
range with a universal life product.
For sometime Prudential has seen the potential for takaful products in Malaysia
and in 2006 formed a takaful joint venture with BSN, Prudential BSN Takaful.
This launched in November and has started selling Shariah compliant linked life
products through Prudential Malaysia's tied agency force.
Malaysia generates significant IFRS profits and makes material contributions of
surplus capital to the Group.
Philippines
Although it is a top 5 player in the Philippines, Prudential's operation is
small; during 2007 a major revamp of the agency channel and product portfolio
will begin.
Singapore
Prudential is a leading player in Singapore and, over the five year period 2001
to 2005, consistently outgrew the market.
During 2006 Prudential Singapore delivered strong APE growth of 23 per cent
driven by its strategy of growing and rejuvenating the agency force against the
industry trend and implementing a number of agency productivity initiatives,
including the operationalisation of a sophisticated sales force automation tool
to simplify the application process. Third-party distribution through Maybank
and Singpost is also beginning to make meaningful contributions to new business.
Prudential Singapore continues to sell a higher proportion of unit linked
business than the market supported by the strategy of enhancing the fund range.
Given the size, longevity and quality of its in-force book, Singapore is a major
contributor to Prudential Corporation Asia's IRFS profits and generates material
surplus operating cash which is remitted back to the Group.
Looking ahead, growth opportunities in Singapore remain promising, particularly
in the retirement space (both accumulation and drawn down).
Taiwan
Taiwan now has the highest life insurance penetration rate in the world measured
by premiums as a percentage of GDP. To a large extent, however, this has been
driven by competitors launching low margin tactical products which capitalise on
the current low interest rate environment. Prudential has deliberately avoided
this tactic and its strategic priority continues to be to position the business
for the long-term with quality, multi-channel distribution and profitable
products.
2006 new business volumes decreased slightly compared to 2005 with agent numbers
reducing by 7 per cent reflecting the focus on quality as non-performers were
terminated There are also good opportunities for bancassurance in Taiwan and
Prudential has 5 agreements in place with the intention to expand these further.
Prudential continues to sell a higher proportion of unit-linked business than
the market and for 2006 this was 58 per cent compared to 39 per cent. NBP
margins at 55 per cent, are up from 51 per cent in 2005, at RER, primarily due
to product mix changes.
The Taiwan business continues to receive capital support from the Group to
maintain solvency resulting from current negative spread on the back book
acquired in 1999.
During 2006 interest rates did not increase from their current low levels as
expected, although the long term assumption remains that these will rise.
Looking ahead priorities for the Taiwan life business include driving greater
rider attachments and direct marketing with A&H products.
Thailand
For many years, Prudential has struggled to make headway with agency
distribution in Thailand; however, during 2006 it launched a call centre in
support of its direct marketing operation. Although still small, the results to
date have been very encouraging contributing to new business APE growing 81 per
cent in 2006.
Vietnam
In Vietnam, Prudential has retained its market leading position but the market
continues to be depressed following the initial post liberalisation boom. The
longer term potential remains excellent and Prudential continues to develop and
build its agency distribution.
4. Financial results and performance
In financial terms, 2006 was another strong year. Prudential Corporation Asia's
new business APE grew by 30 per cent to GBP956 million. New business profit
margins remain robust at 54 per cent with the net 2 per cent change from 56 per
cent in 2005 at RER, principally attributed to higher proportion of new business
in the mix from lower margin geographies. The percentage of unit linked
products, which are more capital efficient, remained high at 64 per cent
compared to 63 per cent in 2005.
Long-term EEV operating profits of GBP829 million are up 42 per cent over 2005
and are principally driven by new business profits of GBP514 million and an 89
per cent increase in in-force profits, from GBP167 million in 2005 to GBP315
million in 2006. This includes the increase in unwind across all countries,
positive operating assumption changes of GBP45 million together with positive
experience and other variances of GBP16 million.
Operating assumption changes include positive mortality and persistency
assumption changes which are the net result of a number of small movements in
countries across the region. In addition there are positive expense assumption
changes, primarily the result of uplifting the Prudential Asset Management (PAM)
profit assumptions across Asia.
Within experience variances, there is a positive persistency experience variance
which is the net result of a number of small variances in countries across the
region. There is negative expense experience in China and India, as expected, as
these operations expand rapidly.
Total EEV shareholders' funds at 31 December 2006 were GBP2.5 billion, up 28 per
cent on 31 December 2005.
IFRS operating profits increased 11 per cent to GBP189 million, compared to
2005, excluding 2005 net exceptional items of positive GBP30 million. This
reflects the steady increase in profits from the established markets of
Singapore, Malaysia and Hong Kong with total IFRS operating profits of GBP139
million, and the emergence of profits on the IFRS basis from some of the newer
operations as they build scale. Total shareholders' funds on the IFRS basis, of
GBP1.29 billion, increased by 12 per cent compared to 2005.
IRRs for Asia were in excess of 20 per cent for 2006. In Asia Prudential has
target IRRs on new business at a country level of 10 percentage points over the
country risk discount rate. Risk discount rates vary from 5 per cent to 18 per
cent depending upon the risks in each country market. These target rates of
return are average rates and the marginal return on capital on a particular
product could be above or below the target.
As expected, overall Prudential Asia became a net contributor of cash to the
Group with a net remittance of surplus capital of GBP28 million during 2006.
5. Outlook for 2007
The opportunities for profitable growth in Asia remain compelling and Prudential
is very well placed with an excellent platform.
The focus going forward will be continuing to focus on developing its existing
strengths in terms of growing agency scale and productivity, improving and
expanding partnership distribution and continuing product innovation.
There is also the opportunity to deepen and strengthen relationships with the
over 9 million customers already on the books with a disciplined and systematic
approach. The retirement opportunity is clear and Prudential is developing a
comprehensive approach to this in terms of accumulation, drawn down and
associated protection needs. Prudential Asia will be leveraging its very
successful Korean media campaign 'What's your number' to other markets during
2007.
Prudential has not leveraged its strengths to building scale direct distribution
as yet and this will be a priority in the future.
Prudential will also be re-examining its approach to health products as there
are significant opportunities to create value for shareholders and customer
above and beyond what is already being done.
Prudential remains committed to the target of at least doubling its 2005 new
business profit by 2009, and expect to generate increasing levels of cash from
the region.
In summary, the outlook for the life insurance business in 2007 remains very
positive.
Asset Management
Global
The Prudential Group's asset management businesses are very successful. Not only
do they provide value to the insurance businesses within the Group, but also are
important profit generators in their own right, with low capital requirements
and generating significant cash flow for the Group.
The asset management businesses are well placed to capitalise on their leading
market positions and strong track records in investment performance to deliver
net flows and profit growth as well as strategically diversifying the Group's
investment propositions in retail financial services (RFS) markets that are
increasingly favouring greater product transparency, greater cross-border
opportunities and more open-architecture investment platforms. Wholesale profit
streams are also growing.
The Group's asset management businesses operate different models and under
different brands tailored to their markets and strengths, but are increasingly
working together by managing money for each other with clear regional
specialism, distributing each others' products and sharing knowledge and
expertise, such as credit research.
Each business and its performance in 2006 is summarised below.
M&G
CER RER
2006 2005 Change 2005 Change
GBPm GBPm % GBPm %
Gross investment flows 13,486 7,916 70% 7,916 70%
Net investment flows 6,101 3,862 58% 3,862 58%
Underlying profit before PRF
performance related fees 177 138 28% 138 28%
Total IFRS operating profit* 204 163 25% 163 25%
*Based on longer-term investment returns.
1. Market review and summary of strategy
M&G is Prudential's UK and European fund management business and has GBP164
billion of funds under management, of which GBP119 billion relates to
Prudential's long-term business funds. M&G aims to maximise profitable growth by
operating in markets where it has a leading position and competitive advantage,
including retail fund management, institutional fixed income, pooled life and
pension funds, property and private finance. M&G also manages Prudential's
balance sheet for profit.
M&G is an investment-led business with a demonstrable focus on performance
delivery and aims to offer attractive products in a variety of macro-economic
environments. M&G has scale in all key asset classes: it is one of the largest
active managers in the UK stock market, one of the largest bond investors in the
UK and one of the UK's largest property investors.
M&G is made up of three distinct and autonomous businesses - Retail, Wholesale
and Prudential Finance - each with its own strategy for the markets in which it
operates.
The UK and European retail asset management industry has grown strongly during
2006 as rising stock markets have increased the value of existing funds under
management and attracted investors back into the market. M&G's retail strategy
is to maximise the leverage of its strong investment performance, multi-channel
distribution and efficient operating platform.
The asset management sector has continued to benefit from the increasing shift
by retail investors from opaque to transparent investment products, such as unit
trusts, and M&G's range of market leading funds has positioned it well to
benefit from this trend. European cross-border distribution has accelerated and
the trend in favour of 'Open Architecture' in both the UK and Europe has
continued to open up significant bank and life company distribution
opportunities. Parallel to this, distribution of mutual funds has become
increasingly intermediated and has been accompanied by the rise of professional
buyers who demand higher levels of service and investment information, areas in
which M&G has considerable expertise.
Institutional markets are demanding increasingly sophisticated and tailored
products and 2006 saw a rising awareness of asset/liability matching and a
continued shift from balanced to specialist mandates. These trends, plus the
increased role of fixed income within portfolios, continue to play to the
strength and scale of M&G's wholesale business.
M&G's wholesale strategy is twofold: to add value to its internal clients
through investment performance, liability matching and investment in innovative
and attractive areas of capital markets and to utilise the skills developed
primarily for internal funds to build new business streams and diversify
revenues. Examples of new business streams include leveraged loans,
collateralised debt obligations (CDOs), infrastructure finance and the Episode
global macro hedge fund. Demand has increased for alternative investments and
structured credit expertise, meaning that managers who offer value-adding
skills, such as M&G, are able to command attractive margins. With its strong
track record and market leading reputation, M&G remains well placed to continue
to benefit from this trend.
Prudential Finance was set up to manage Prudential's balance sheet for profit.
In addition to acting as the internal banker to the Prudential Group and its
subsidiaries, Prudential Finance's strategy is to leverage Prudential's and M&
G's positioning and skills for profit. Its activities include bridging
transactions, property financing and securities lending with a focus on deals
which have high profitability and capital velocity but low capital usage.
2. Current year initiatives
M&G maintained its reputation for strong fund performance and product innovation
during 2006 and continued to expand its multi-channel distribution model.
In the retail market, the excellent fund performance of M&G's fund range was
recognised by M&G being named Best Equity Group (Large) and Best Non UK Equity
Group (Large) at the Lipper Fund Awards 2006. M&G continued to innovate during
the year by extending its fixed income and property fund ranges with the launch
of two new funds, the M&G Optimal Income Fund and the M&G European Property
Fund. M&G expanded its retail distribution in 2006 by adding Spain to the
European countries in which it operates and in the UK significantly expanded its
links with life company platforms.
In the wholesale marketplace, M&G benefited from increasing demand from clients
for specialist mandates and liability matching, both of which are core areas of
expertise for M&G. Strong fund performance was maintained with 86 per cent of
segregated funds beating their benchmark over one year and 90 per cent over
three years. M&G continued to develop its market leading positions in structured
credit and leveraged loans and also its position in infrastructure finance.
Utilising skills developed for the internal funds, M&G has built significant new
business streams with external third parties over the past five years. In
structured credit, seven new CDOs were launched in 2006 and M&G was named CDO
manager of the year by the International Securitisation Report. M&G's
infrastructure fund, InfraCapital, made its first purchase as part of a
consortium which made a successful bid for Associated British Ports plc.
Following a soft launch in August 2005, M&G rolled out its Episode global macro
hedge fund in February last year, a fund which again uses investment expertise
originally developed for internal funds. Episode has been a notable success with
external clients and by year-end had reached assets under management of US$1.5
billion.
3. Financial results and performance
M&G delivered significant profit growth during 2006 on the back of rising market
levels, strong net inflows and continued business diversification. Operating
profits, which include performance related fees (PRF), increased 25 per cent to
GBP204 million. Underlying profits, excluding PRF, were GBP177 million, an
increase of 28 per cent compared to the previous year. PRF increased by 11 per
cent over 2005, totalling GBP27 million for 2006. As a result, M&G's cost income
ratio improved from 66 per cent to 64 per cent in 2006.
In addition to adding significant value via the management of Prudential's
internal funds, M&G remains an important generator of earnings and cash for the
Prudential Group. Since 2002, M&G has delivered strong profit growth which has
seen underlying profits more than triple.
Outstanding fund performance led to record fund inflows into M&G's retail and
wholesale businesses during 2006. Gross fund inflows were GBP13.5 billion, an
increase of 70 per cent on the previous year. Net fund inflows were their
highest ever, increasing by 58 per cent to GBP6.1 billion. External funds under
management grew significantly, up 24 per cent to GBP45 billion, and at this
level represent over a quarter of M&G's total funds under management.
In the retail marketplace, demand remained strong for M&G's high alpha equity
and competitive fixed income and property offerings, with gross fund inflows
increasing by 75 per cent to GBP6.7 billion and net fund inflows more than
doubling to GBP3.1 billion. Product innovation has remained key for opening up
new markets for M&G and 66 per cent of gross mutual fund inflows in 2006 through
UK and European distribution channels were into funds launched or re-engineered
within the past six years.
Sales were strong across all retail markets. Excellent progress was made in the
UK and across the European markets of Germany, Austria, Switzerland, Luxembourg,
Italy and Spain. In Germany, the first European market entered (in 2002), M&G is
now the number three foreign provider and in just four years has risen to number
nine in net sales against all providers in the German marketplace. In an
official FERI ranking of the best selling funds by UK fund managers across the
UK and Europe in 2006, M&G had three funds represented in the top 20. In South
Africa, M&G's business was last year ranked number one by net inflows in the
market only five years on from launch.
M&G's wholesale business also saw substantial growth, with gross fund inflows
increasing by 66 per cent to GBP6.8 billion and net inflows rising 19 per cent
to GBP3 billion. M&G's scale and market reputation in fixed income continued to
position it very favourably in both traditional areas of the market, such as
segregated funds, and alternative areas such as structured credit.
4. Outlook and forthcoming objectives
M&G's priorities for the year ahead are to:
- deliver investment outperformance to its clients;
- distribute through existing channels and exploit new opportunities;
- leverage its scale and capabilities to develop innovative products for the
retail and wholesale marketplaces;
- deliver attractive returns to Prudential.
Asia
CER RER
2006 2005 Change 2005 Change
GBPm GBPm % GBPm %
Net investment flows 2,532 1,321 92% 1,327 91%
Total IFRS operating profit* 50 11 355% 12 317%
*Based on longer-term investment returns.
1. Market review
The mutual fund market in Asia(2) has grown at a CAGR of 22 per cent from end
2003 to end 2006 with GBP720 billion of assets under management at 31 December
2006 with Japan and Korea accounting for over three quarters of the total FUM.
China and India have been the fastest growing markets over this period with
annual growth rates of 57 per cent and 31 per cent respectively.
Over the past few years, appetite for risk based products has gradually been
increasing and during 2006, Asian investors have shown increased interest in
equity-focused funds. Regulatory change has also continued to drive demand for
Luxembourg based offshore products.
2. Prudential's strategy
Prudential's fund management business serves both the life companies in Asia by
managing the life funds and by designing and managing the funds underlying the
investment linked products and third-party customers through a growing mutual
fund business.
Given that the majority of individuals' personal financial assets currently
reside in bank deposits in Asia (Source: Citi Asia Pacific Household Balance
Sheets 2005), Prudential continues to grow its third-party mutual fund business
by developing strong customer propositions to cater to an estimated potential
450 million customers for mutual fund products in Asia. Prudential's strategy is
underpinned by building local operating entities with local market knowledge and
expertise and supporting these with strong regional capabilities.
Given the significance of bank distribution, broadening distribution reach
involves developing strong relationships with regional and local bank
distributors and providing better servicing.
Continued delivery of strong and consistent fund performance is essential in
maintaining the credibility of the Prudential brand in this market.
Today, Prudential's fund management business in Asia is the 2nd largest retail
fund management company in terms of Asia (ex Japan) sourced retail FUM as of
June 2006 (Source: Asia Asset Management Sept 2006 for survey participants)(3).
Including institutional and insurance assets, Prudential's fund management
business was ranked in June 2006 as the third largest asset manager in terms of
overall assets sourced in Asia ex Japan, compared with its 5th ranking in 2005.
--------------------------
(2) Asia here refers to the eight countries of China, India, Korea, Japan,
Taiwan, Singapore, Malaysia(Private Funds) and Hong Kong(Local retail funds)
Sources: Cerulli Associates, Monetary Authority of Singapore, Association of
Mututal Fund in India, Securities Inv Trust Association, KITCA
(3) Source: Asia Asset Management Sep 2006.
3. Progress in 2006
In 2006, Prudential entered three new markets: China, Vietnam and the UAE. In
China, Prudential's joint venture with CITIC launched two retail mutual funds
during the year and raised GBP414 million (Prudential share at GBP137 million).
In Vietnam, Prudential launched its first mutual fund and an offshore fund
investing in Vietnam, together raising GBP 163 million. A licence was obtained
for doing business in the UAE, with an office in Dubai.
Prudential continued to build on its existing platform in Asia with specific
focus on the markets of India, Korea and Japan. In India, Prudential's joint
venture with ICICI Bank grew assets under management by 53 per cent; in Korea,
Prudential's business grew assets by 33 per cent and in Japan - the region's
largest market - assets grew by 20 per cent.
PRUPIM Singapore - a joint venture with PruPIM in the UK - was established with
its first core fund with a gross asset value of US$616 million. This gives the
business an entry into the real estate space which is a fast growing and
attractive segment of the business.
4. Financial results and performance
Prudential's fund management business achieved record net inflows for 2006, with
GBP2.5 billion being almost twice that of 2005. This reflects the strengths of
the Asian Fund Management's geographic and product diversification.
Prudential's total FUM as at 31 December were GBP29.2 billion and included
GBP6.2 billion of assets from the Group, GBP10.6 billion from Prudential
Corporation Asia's life funds and GBP12.3 billion from the retail operations.
This is an increase of 22 per cent from 31 December 2005, though mutual funds
through the retail operations grew by 33%.
IFRS profits from fund management operations were GBP50 million, up 85 per cent
on 2005, excluding 2005 exceptional items.
5. Outlook for 2007
The main focus for 2007 will be to continue to pursue profitable opportunities
in all markets but more specifically in the key growth markets of China and
India and the large Japanese and Korean markets. The fund range will continue to
be expanded through expanding both onshore and offshore funds and developing
real estate and Islamic funds. Distribution will be broadened and deepened
through relationships with channel partners in the individual countries and
regionally.
PPM America
1. Market review and summary of strategy
PPMA manages assets for Prudential's US, UK and Asian affiliates. PPMA also
provides investment services to other affiliated and unaffiliated institutional
clients including CDOs, private investment funds, institutional accounts, and
mutual funds.
PPMA's strategy is focused on effectively managing existing assets, maximizing
synergies with international asset management affiliates and leveraging
investment management capabilities across the Prudential Group.
A summary of PPMA's year-end 2006 assets under management follows:
PPMA funds under management
(US$ billions) US UK Asia Total
Insurance 45.5 16.3 0.5 62.3
Retail 0.0 2.5 5.0 7.5
Institutional 0.2 0.0 0.0 0.2
CDOs 3.6 0.0 0.0 3.6
Total 49.3 18.8 5.5 73.6
2. Current year initiatives
During 2006, PPMA executed several initiatives to improve operational
effectiveness and scalability, including the enhancement of fixed income
analytical capabilities. Initiatives designed to maximise synergies within the
Group included leveraging PPMA's capabilities to manufacture financial products
distributed by affiliates.
3. Financial results and performance
Investment performance was favourable in 2006, particularly across US affiliate
portfolios, the US public equity and fixed income components of the portfolios
managed for UK affiliates and CDOs.
IFRS operating profit in 2006 was GBP12 million versus GBP20 million in 2005.
The 2005 results benefited from a GBP5 million positive non-recurring item
related to revaluation of a CDO.
4. Outlook and forthcoming objectives
The 2007 outlook is positive driven by current momentum, favourable economic and
market conditions, and the growth prospects of internal clients.
Banking
Egg
1. Market review and summary of strategy
The high level of consumer indebtedness has led to a sharp increase in the
number of individuals seeking to restructure their credit obligations. This has
been observed through higher levels of personal bankruptcies and individual
voluntary arrangements: the number of personal insolvencies has risen at an
annual rate of over 50 per cent. These factors have given rise to increased bad
debt provisions across the UK banking industry.
In January 2007, Prudential concluded that its current banking business does not
represent the best opportunity for it to drive profitable growth in the future
and it announced the sale of Egg to Citi for GBP575 million, with the
transaction expected to complete later in 2007, subject to regulatory approvals.
Citi is the largest credit card issuer in the world and a group that is well
placed to develop and grow Egg's franchise. As part of the transaction,
Prudential has agreed in principle outline terms of a five-year agreement to
distribute life and pension products through Egg. Prudential has also been
selected as a strategic provider to Citi for the distribution of life insurance
products to Citi's consumer banking customers in Thailand, Indonesia and the
Philippines. The transaction will improve Prudential's capital position and is
expected to increase Prudential's solvency surplus under FCD by an estimated
GBP300 million.
2. Financial results and performance
Egg's total operating loss in 2006 was GBP145 million, compared with a profit of
GBP44 million in 2005. This result reflects a marked deterioration in
industry-wide consumer behaviour. This has resulted in a reduction of net
borrowing on credit cards as consumers reduce their spending and borrowing. In
addition, bad debt experience is considerably worse than expected, particularly
in relation to personal loans.
During 2006, Egg made a number of changes to its lending approach. On unsecured
loans, Egg's strategy was to tactically reduce its exposure and it tightened the
acceptance criteria throughout the year. This resulted in a significantly
reduced level of sales, and associated insurance income. Egg also changed its
approach to the management of the credit card book, and it adopted the standard
industry policy of charging variable interest rates in relation to a customer's
expected risk profile.
Throughout the industry, 2006 saw an increase in the application of balance
transfer fees therefore reducing the levels of balance transfer activity.
Egg's net interest income of GBP330 million increased 6 per cent in 2006.
Slightly lower customer balances were offset by the effects of a higher interest
rate environment.
Non-interest income reduced by 36 per cent to GBP138 million following a
significant reduction in personal loan insurance income as Egg reduced its
exposure to the unsecured loans business. Total new loan sales reduced to
83,000, which is approximately 50 per cent of the new volumes achieved in 2005.
In addition, payment protection insurance (PPI) penetration rates were far lower
than that experienced in 2005. Other non-interest card income is lower than
2005, reflecting consumer spend patterns and continuing regulatory focus on the
creditor insurance market, resulting in reductions in commission revenue earned.
Egg's loan book performance reflects the industry wide increase in consumers
using individual voluntary arrangements, debt management companies and in some
cases bankruptcy to alleviate their debt burden. Within the Egg personal loan
portfolio, the number of customers employing debt management companies in the
last quarter increased 18 per cent on the prior quarter. These arrangements
typically result in lower recoveries from customers than have historically been
achieved via Egg's collection strategies. The overall deterioration in credit
led to the total charge for bad debts increasing by GBP143 million to GBP382
million.
Restructuring costs of GBP12 million were incurred during 2006.
OTHER CORPORATE INFORMATION
Balance sheet
Explanation of balance sheet structure
The Group's capital on an IFRS basis comprises of shareholders' funds of
GBP5,488 million, subordinated long-term and perpetual debt of GBP1,989 million,
other core structural borrowings of GBP1,074 million and the unallocated surplus
of with-profits funds of GBP13.6 billion.
Subordinated or hybrid debt is debt capital which has some equity-like features
and which would rank below other senior debt in the event of a liquidation.
These features allow hybrid debt to be treated as capital for FSA regulatory
purposes. All of the Group's hybrid debt which qualifies in this way is held at
the Group level and is therefore taken as capital into the parent solvency test
under the FCD.
The FSA has established a structure for determining how much hybrid debt can
count as capital which is similar to that used for banks. It categorises capital
as Tier 1 (equity and preference shares), Upper Tier 2 debt and Lower Tier 2
debt. Up to 15 per cent of Tier 1 can be in the form of hybrid debt and called '
Innovative Tier 1'. At 31 December 2006, the Group held GBP763 million of
Innovative Tier 1 capital, in the form of perpetual securities, GBP201 million
of Upper Tier 2 and GBP1,152 million of Lower Tier 2 capital. Following the
implementation of the FCD, it is advantageous to the Group from a regulatory
capital standpoint to raise its long-term debt in hybrid form and it is the
Group's policy to take advantage of favourable market conditions as they arise
to do so.
The unallocated surplus of the with-profits funds represents assets in the life
fund which have not yet been allocated either to policyholders or shareholders.
They are not generally available to the Group other than as they emerge through
the statutory transfer of the shareholders' share of the surplus as it emerges
from the Fund over time.
Weighted Average Cost of Capital (WACC)
Prudential's commitment to its shareholders is to maximise the value of
Prudential over time by delivering superior financial returns.
Prudential's weighted average cost of capital (WACC) is circa 9.6 per cent,
which is based on the net core debt and shares outstanding at the end of 2006,
an equity market premium of four per cent and a market beta of 1.4. Prudential's
WACC has increased since the end of 2005 largely due to an increase in interest
rates and to equity forming a greater proportion of capital.
Shareholders' borrowings and financial flexibility
Net core structural borrowings at 31 December 2006 were GBP1,493 million
compared with GBP1,611 million at 31 December 2005. This reflects the net cash
outflow of GBP104 million, exchange conversion gains of GBP240 million and other
adjustments of GBP18 million.
After adjusting for holding company cash and short-term investments of GBP1,119
million, core structural borrowings of shareholder-financed operations
(excluding Egg) at the end of 2006 totalled GBP2,612 million, compared with
GBP2,739 million at the end of 2005. This decrease reflected exchange conversion
gains of GBP135 million and other adjustments of GBP8 million.
Core long-term loans at the end of 2006 included GBP1,626 million at fixed rates
of interest with maturity dates ranging from 2007 to perpetuity. GBP890 million
of the core borrowings were denominated in US dollars, to hedge partially the
currency exposure arising from the Group's investment in Jackson.
Prudential has in place an unlimited global commercial paper programme. At 31
December 2006, commercial paper of GBP198 million, US$3,449 million and EUR85
million has been issued under this programme. Prudential also has in place a
GBP5,000 million medium-term note (MTN) programme. At 31 December 2006,
subordinated debt outstanding under this programme was GBP435 million and EUR520
million, and senior debt outstanding was US$18 million and GBP5 million. In
addition, the holding company has access to GBP1,600 million committed revolving
credit facilities, provided by 16 major international banks and a GBP500 million
committed securities lending liquidity facility. These facilities have not been
drawn on during the year. The commercial paper programme, the MTN programme, the
committed revolving credit facilities and the committed securities lending
liquidity facility are available for general corporate purposes and to support
the liquidity needs of the parent company.
The Group's insurance and asset management operations are funded centrally. Egg,
as a separate bank, is responsible for its own financing. The Group's core debt
is managed to be within a target level consistent with its current debt ratings.
At 31 December 2006, the gearing ratio (debt, net of cash and short-term
investments, as a proportion of EEV shareholders' funds plus debt) was 11.2 per
cent compared with 13.5 per cent at 31 December 2005.
Prudential plc enjoys strong debt ratings from both Standard & Poor's and
Moody's. Prudential long-term senior debt is rated A+ (stable outlook), A2
(stable outlook) and AA- from Standard & Poor's, Moody's and Fitch respectively,
while short-term ratings are A1, P-1 and F1+.
Based on EEV basis operating profit from continuing operations and interest
payable on core structural borrowings (excluding Egg), interest cover was 12.2
times in 2006 compared with 10.8 times in 2005.
Treasury policy
The Group operates a central treasury function, which has overall responsibility
for managing its capital funding programme as well as its central cash and
liquidity positions.
The aim of Prudential's capital funding programme, which includes the GBP5,000
million MTN programme together with the unlimited commercial paper programme, is
to maintain a strong and flexible funding capacity.
In the UK and Asia, Prudential uses derivatives to reduce equity risk, interest
rate and currency exposures, and to facilitate efficient investment management.
In the US, Jackson uses derivatives to reduce interest rate risk, to facilitate
efficient portfolio management and to match liabilities under fixed index
policies.
It is Prudential's policy that all free-standing derivatives are used to hedge
exposures or facilitate efficient portfolio management.
Amounts at risk are covered by cash or by corresponding assets.
Due to the geographical diversity of Prudential's businesses, it is subject to
the risk of exchange rate fluctuations. Prudential's international 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 Prudential's consolidated financial statements upon
conversion of results into pounds sterling. The currency exposure relating to
the conversion of reported earnings is not separately managed, as it is not in
the economic interests of the Group to do so. The impact of gains or losses on
currency conversions is recorded as a component of shareholders' funds within
the statement of recognised income and expense. The impact of exchange rate
fluctuations in 2006 is discussed elsewhere in this OFR.
Unallocated surplus of with-profits
During 2006, the unallocated surplus, which represents the excess of assets over
policyholder liabilities for the Group's with-profits funds on a statutory
basis, grew from GBP11.3 billion at 1 January to GBP13.6 billion at 31 December.
This reflects an increase in the cumulative retained earnings arising on
with-profits business that have yet to be allocated to policyholders or
shareholders. The change in 2006 predominantly reflects the positive investment
return earned by the PAC with-profits fund as a result of investment gains in
the UK equity market.
Regulatory capital requirements
The Financial Conglomerates Directive, which affects groups with significant
cross-sector activities in insurance and banking/investment services, came into
force for Prudential from 1 January 2005. Prior to this, since 1 January 2001
Prudential was required to meet the solvency requirements of the Insurance
Groups Directive ('IGD'), as implemented by the FSA. The FSA has implemented the
FCD by applying the sectoral rules of the largest sector, hence a group such as
Prudential is classified as an insurance conglomerate and is required to focus
on the capital adequacy requirements of the IGD, the Consolidated Life Directive
and the Insurance Company Accounts Directive.
The FCD requires a continuous parent company solvency test which requires the
aggregating of surplus capital held in the regulated subsidiaries, from which
Group borrowings are deducted, other than those subordinated debt issues which
qualify as capital. No credit for the benefit of diversification is allowed for
under this approach. The test is passed when this aggregate number is positive,
and a negative result at any point in time is a notifiable breach of UK
regulatory requirements.
Due to the geographically diverse nature of Prudential's operations, the
application of these requirements to Prudential is complex. In particular, for
many of our Asian operations, the assets, liabilities and capital requirements
have to be recalculated based on FSA regulations as if the companies were
directly subject to FSA regulation.
The FCD position will be submitted to the FSA by 30 April 2007 but is currently
estimated to be around GBP1.0 billion. A further gain of GBP0.3 billion is
expected to arise in 2007 from the sale of Egg Banking. The sale of Egg Banking
implies that Prudential may again be designated an 'insurance group' rather than
its current treatment as a financial conglomerate, and thus will be required to
meet the requirements of the IGD. This should not have a significant impact on
the Group, as the FSA's prudential requirements pertaining to insurance groups
are very similar to those applying to insurance conglomerates, in particular
because the FSA has decided to make the continuous parent solvency test
mandatory from 31 December 2006 for all insurance groups.
The European Commission is continuing to develop a new prudential framework for
insurance companies, 'the Solvency II project' that will update the existing
life, non-life and insurance groups directives. The main aim of this framework
is to ensure the financial stability of the insurance industry and protect
policyholders through establishing solvency requirements better matched to the
true risks of the business. Like Basel 2, the new approach is expected to be
based on the concept of three pillars - minimum capital requirements,
supervisory review of firms' assessments of risk and enhanced disclosure
requirements. However, the scope is wider than Basel 2 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 the focus on risks and, for example, capital
requirements will be calibrated to a one year Value at Risk with a 99.5%
confidence level. Companies will be encouraged to improve their risk management
processes and will be allowed to make use of internal economic capital models to
enable a better understanding of risks. The emphasis on transparency and
comparability would ensure a level playing field but not delivering this remains
one of the key risks for the project.
Prudential is actively engaged in policy discussions mainly through its
participation in the Chief Risk Officer (CRO) Forum of major European insurance
firms. Prudential has been emphasising the importance of level playing fields,
in particular in connection with the treatment of operations outside the EU.
The Commission intends to adopt proposals for a framework directive in mid 2007
which will contain high-level principles. These principles will be supplemented
by implementing measures that will be adopted by the Commission and EU member
states. Solvency II is then intended to be implemented around 2010. It is
important that the EU policy makers keep up the progress to enable
implementation by the suggested date.
During 2006, the Committee of European Insurance and Occupational Pensions
Supervisors (CEIOPS) invited EU insurance industry to participate in the second
quantitative impact study, which provided useful input for supervisors and
industry alike. The EU insurance industry will be participating in another
quantitative impact study during the first half of 2007 with a view to provide
quantitative input into the calibration of the capital requirements.
Participation in these exercises involves a substantive commitment and is
expected to yield benefits by providing evidence leading to a truly risk-based
capital requirement.
Financial strength of insurance operations
United Kingdom
The PAC's long-term fund remains very strong. On a realistic valuation basis,
with liabilities recorded on a market consistent basis, the free assets are
valued at approximately GBP8.7 billion at 31 December 2006, before a deduction
for the risk capital margin. The fund is rated AA+ by Standard & Poor's, Aa1 by
Moody's and AA+ by Fitch Ratings.
The with-profits sub-fund delivered a pre-tax return of 12.4 per cent in 2006,
and over the last five years the fund has achieved a total return of 63.8 per
cent against 41.1 per cent for the FTSE 100 total return and 50.2 per cent for
the FTSE All-Share (Total Return) index (figures are to 31 December 2006, before
tax and charges). Much of this excellent investment performance was achieved
through the active asset allocation of the fund. As part of its asset allocation
process, Prudential UK constantly evaluates prospects for different markets and
asset classes. During the year Prudential UK decreased its exposure to equities
while increasing its exposure to corporate bonds and alternative assets,
reflecting Prudential UK's view that increased diversification in the assets of
the with-profits sub-fund was appropriate.
The table below shows the change in the investment mix of Prudential UK's main
with-profits fund:
2006 2005 2004
% % %
UK equities 36 40 33
International equities 17 19 15
Property 15 15 18
Bonds 25 21 29
Cash and other assets classes 7 5 5
Total 100 100 100
United States
The capital adequacy position of Jackson remains strong, having improved the
capital ratio from 9.2 per cent in 2005 to 9.8 per cent in 2006. Jackson's
statutory capital, surplus and asset valuation reserve position improved
year-on-year by US$193 million, after deducting the US$200 million of capital
remitted to the parent company. Jackson's financial strength is rated AA by
Standard & Poor's and A1 by Moody's.
Jackson's invested asset mix on a US regulatory basis (excludes policy loans and
reverse repo leverage) is as follows:
2006 2005 2004
% % %
Bonds:
Investment Grade Public 60 58 60
Investment Grade Private 18 19 19
Non-Investment Grade Public 4 5 4
Non-Investment Grade Private 1 2 2
Commercial mortgages 12 11 11
Private equities and real estate 3 3 3
Equities, cash and other assets 2 2 1
Total 100 100 100
Asia
Prudential Corporation Asia maintains solvency margins in each of its operations
so that these are at or above the local regulatory requirements. Across the
region less than 40 per cent of non-linked funds are invested in equities. Both
Singapore and Malaysia have discrete life funds, and have strong free asset
ratios. The Hong Kong life operation is a branch of Prudential Assurance Company
Limited and its solvency is covered by that business. Taiwan has Risk Based
Capital regulatory solvency margins and Prudential ensures sufficient capital is
retained in the business to cover these requirements.
Redress of mortgage endowment products
PAC's main long-term business with-profits fund paid compensation of GBP'11
million in 2006 in respect of mortgage endowment product mis-selling claims and
held a provision of GBP60 million at 31 December 2006 to cover further claims.
These compensation payments and provisions have had no impact on policyholders'
asset shares. As a result, policyholders' bonuses and the shareholders' share of
these bonuses are unaffected, resulting in no impact on the Group's profit
before tax.
A provision of GBP5 million was held at 31 December 2006 by shareholders' funds
to cover potential compensation in respect of mis-selling claims for Scottish
Amicable mortgage endowment products sold since the acquisition of Scottish
Amicable in 1997. In addition, a provision of GBP45 million was held at 31
December 2006 for the closed Scottish Amicable Insurance Fund (SAIF) in respect
of mortgage endowment products sold prior to acquisition. This provision has no
impact on shareholders. No further Scottish Amicable mortgage endowment products
were sold after April 2001.
In May 2006, the Group introduced a deadline for both Prudential and Scottish
Amicable mortgage endowment complaints. Impacted customers have three years to
lodge a mis-selling complaint in line with the time limit prescribed by the FSA
and the ABI.
Inherited estate of Prudential Assurance
The assets of the main with-profits fund within the long-term insurance fund of
PAC comprise the amounts that it expects to pay out to meet its obligations to
existing policyholders and an additional amount used as working capital. The
amount payable over time to policyholders from the with-profits fund is equal to
the policyholders' accumulated asset shares plus any additional payments that
may be required by way of smoothing or to meet guarantees. The balance of the
assets of the with-profits fund is called the 'inherited estate' and has
accumulated over many years from various sources.
The inherited estate represents the major part of the working capital of PAC's
long-term insurance fund. This enables PAC to support with-profits business by
providing the benefits associated with smoothing and guarantees, by providing
investment flexibility for the fund's assets, by meeting the regulatory capital
requirements that demonstrate solvency and by absorbing the costs of significant
events or fundamental changes in its long-term business without affecting the
bonus and investment policies. The size of the inherited estate fluctuates from
year to year depending on the investment return and the extent to which it has
been required to meet smoothing costs, guarantees and other events.
PAC believes that it would be beneficial if there were greater clarity as to the
status of the Inherited Estate. As a result PAC has announced that it has begun
a process to determine whether it can achieve that clarity through a
reattribution of the inherited estate. As part of this process a Policyholder
Advocate has been nominated to represent policyholders' interests. This
nomination does not mean that a reattribution will occur.
Given the size of the Group's with-profits business any proposal is likely to be
time consuming and complex to implement and is likely to involve a payment to
policyholders from shareholders funds. If a reattribution is completed the
inherited estate will continue to provide working capital for the long-term
insurance fund.
Defined benefit pension schemes
The Group operates four defined benefit schemes, three in the UK, of which the
principal scheme is the Prudential Staff Pension Scheme (PSPS), and a small
scheme in Taiwan. The level of surplus or deficit of assets over liabilities for
defined benefit schemes is currently measured in three ways: the actuarial
valuation, FRS 17 (for subsidiary accounting in the UK), and IAS 19 for the
Group financial statements. FRS 17 and IAS 19 are very similar. As at 31
December 2006 the shareholders' share of the GBP65 million surplus for PSPS and
the deficits of the other schemes amounted to an GBP8 million deficit net of
related tax relief.
Defined benefit schemes in the UK are generally required to be subject to full
actuarial valuation every three years to assess the appropriate level of funding
for schemes having regard to their commitments. These valuations include
assessments of the likely rate of return on the assets held within the separate
trustee administered funds. PSPS was last actuarially valued as at 5 April 2005
and this valuation demonstrated the Scheme to be 94 per cent funded, with a
shortfall of actuarially determined assets to liabilities of 6 per cent,
representing a deficit of GBP243 million.
The finalisation of the valuation as at 5 April 2005 was accompanied by changes
to the basis of funding for the scheme. For 2006 and future years deficit
funding amounts designed to eliminate the actuarial deficit over a 10-year
period have been and are being made. Total contributions to the Scheme for
deficit funding and employer's contributions for ongoing service for current
employees are expected to be of the order of GBP70-75 million per annum over a
10-year period. However in 2006 total contributions, including amounts in
arrears for the scheme year to 5 April 2006, were GBP137 million.
Under IAS 19 the basis of valuation differs markedly from the full triennial
valuation basis. In particular, it requires assets of the Scheme to be valued at
their market value at the year-end, while pension liabilities are required to be
discounted at a rate consistent with the current rate of return on a high
quality corporate bond. As a result, the difference between IAS 19 basis assets
and liabilities can be volatile. For those schemes such as PSPS, which hold a
substantial proportion of their assets in equity investments, the volatility can
be particularly significant. For 2006, a GBP28 million pre-tax shareholder
charge to operating results based on longer-term returns arises. In addition,
outside the operating result, but included in total profits is a pre-tax
shareholder credit of GBP167 for net actuarial gains. These gains primarily
represent the difference between actual and expected investment returns for the
schemes and the reduction in liabilities caused by an increase in the discount
rate caused by increases in corporate bond returns.
In 2006 the PSPS asset allocation was altered away from equity investments such
that at 31 December 2006 the market value of equities for the Group's defined
benefit schemes represented 31 per cent (2005: 52 per cent) of the total asset
value, whilst the bond portfolio accounted for 43 per cent (2005: 34 per cent).
Surpluses and deficits on the Group's defined benefit schemes are apportioned to
the PAC life fund and shareholders' funds based on estimates of employees'
service between them. At 31 December 2005, the deficit on the PSPS Scheme was
apportioned in the ratio 70/30 between the life fund and shareholder-backed
operations. This ratio was determined following extensive analysis of the source
of the cumulative funding for the scheme to that date. This basis has been
applied for 2006 to the assets and liability movements relating to the start
position and also to the deficit funding paid in the year. However, the IAS 19
service cost for the year and employer contributions for ongoing service of
current employees have been apportioned in the ratio relevant to current
activity. At 31 December 2006, the total share of the surplus on PSPS and the
deficit on the much smaller Scottish Amicable scheme attributable to the PAC
life fund amounted to a net surplus of GBP66 million net of related tax relief.
PRUDENTIAL PLC 2006 PRELIMINARY ANNOUNCEMENT
RESULTS SUMMARY
European Embedded Value (EEV) Basis Results* 2006 2005
GBPm GBPm
UK Insurance Operations 686 426
M&G 204 163
Egg (145) 44
UK Operations 745 633
US Operations 718 755
Asian Operations 864 568
Other Income and Expenditure (298) (244)
UK restructuring costs (53)
-
Operating profit from continuing operations based on longer-term investment returns 1,976 1,712
Goodwill impairment charge (120)
-
Short-term fluctuations in investment returns 745 1,068
Mark to market value movements on core borrowings 85 (67)
Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes 207 (47)
Effect of changes in economic assumptions and time value of cost of options and guarantees 59 (302)
Profit from continuing operations before tax 3,072 2,244
Operating earnings per share from continuing operations after related tax and minority interests* 57.6p 56.6p
Basic earnings per share 91.7p 66.9p
Shareholders' funds, excluding minority interests GBP11.9bn GBP10.3bn
International Financial Reporting Standard (IFRS) Basis Results*
Statutory IFRS basis results 2006 2005
Profit after tax attributable to equity holders of the Company GBP874m GBP748m
Basic earnings per share 36.2p 31.6p
Shareholders' funds, excluding minority interests GBP5.5bn GBP5.2bn
Supplementary IFRS basis information
Operating profit from continuing operations based on longer-term investment returns GBP893m GBP957m
Operating earnings per share from continuing operations after related tax and minority interests* 26.4p 32.2p
2006 2005
Dividends per share declared and paid in reporting period 16.44p 15.95p
Dividends per share relating to reporting period 17.14p 16.32p
Funds under management GBP251bn GBP234bn
*Basis of preparation
The EEV basis results have been prepared in accordance with the European
Embedded Value Principles issued by the CFO Forum of European Insurance
Companies in May 2004 and expanded by the Additional Guidance on EEV disclosures
published in October 2005. The basis of preparation of statutory IFRS basis
results and supplementary IFRS basis information is consistent with that applied
for the 2005 full year results and financial statements.
Consistent with previous reporting practice, the Group analyses its EEV basis
results and provides supplementary analysis of IFRS profit before tax
attributable to shareholders, so as to distinguish operating profit based on
longer-term investment returns from other constituent elements of total profit.
On both the EEV and IFRS bases, operating earnings per share are calculated
using operating profits from continuing operations based on longer-term
investment returns, after tax and minority interests. These profits exclude
goodwill impairment charges, short-term fluctuations in investment returns and
the shareholders' share of actuarial and other gains and losses on defined
benefit pension schemes. Under the EEV basis, where additional profit and loss
effects arise, operating profit based on longer-term investment returns also
excludes the mark to market value movements on core borrowings and the effect of
changes in economic assumptions and changes in the time value of cost of options
and guarantees arising from changes in economic factors. After adjusting for
related tax and minority interests, the amounts for these items are included in
the calculation of basic earnings per share.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
SUMMARY CONSOLIDATED INCOME STATEMENT
2006 2005
GBPm GBPm
UK Insurance Operations 686 426
M&G 204 163
Egg (145) 44
UK Operations 745 633
US Operations 718 755
Asian Operations 864 568
Other Income and Expenditure (298) (244)
UK restructuring costs (53) -
Operating profit from continuing operations based on longer-term investment returns 1,976 1,712
Goodwill impairment charge (120)
-
Short-term fluctuations in investment returns 745 1,068
Mark to market value movements on core borrowings 85 (67)
Shareholders' share of actuarial and other gains and losses on defined benefit pension 207 (47)
schemes
Effect of changes in economic assumptions and time value of cost of options and guarantees 59 (302)
Profit from continuing operations before tax (including actual investment returns) 3,072 2,244
Tax (859) (653)
Profit from continuing operations for the financial year after tax before minority interests 2,213 1,591
Discontinued operations (net of tax) - 3
Profit for the year 2,213 1,594
Attributable to:
Equity holders of the Company 2,212 1,582
Minority interests 1 12
Profit for the year 2,213 1,594
Earnings per share (in pence) 2006 2005
From operating profit, based on longer-term investment returns, after related tax and
minority interests 57.6p 56.6p
Adjustment for goodwill impairment charge - (5.1)p
Adjustment from post-tax longer-term investment returns to post-tax actual investment returns
(after related minority interests) 22.0p 30.6p
Adjustment for mark to market value movements on core borrowings 3.5p (2.8)p
Adjustment for post-tax shareholders' share of actuarial and other gains and losses on
defined benefit pension schemes 6.0p (1.4)p
Adjustment for post-tax effect of changes in economic assumptions and time value of cost of
options and guarantees 2.6p (11.1)p
Based on profit from continuing operations after minority interests 91.7p 66.8p
Based on profit from discontinued operations after minority interests - 0.1p
Based on profit for the year after minority interests 91.7p 66.9p
Average number of shares (millions) 2,413 2,365
Dividends per share ( in pence) 2006 2005
Dividends relating to reporting period:
Interim dividend (2006 and 2005) 5.42p 5.30p
Final dividend (2006 and 2005) 11.72p 11.02p
Total 17.14p 16.32p
Dividends declared and paid in reporting period:
Current year interim dividend 5.42p 5.30p
Final dividend for prior year 11.02p 10.65p
Total 16.44p 15.95p
TOTAL INSURANCE AND INVESTMENT PRODUCTS NEW BUSINESS
INSURANCE PRODUCTS AND INVESTMENT PRODUCTS*
Insurance Products* Investment Products* Total
2006 2005 2006 2005 2006 2005
GBPm GBPm GBPm GBPm GBPm GBPm
UK Operations 7,192 7,193 13,486 7,916 20,678 15,109
US Operations 5,981 5,023 - - 5,981 5,023
Asian Operations 1,921 1,485 20,408 18,457 22,329 19,942
Group Total 15,094 13,701 33,894 26,373 48,988 40,074
INSURANCE PRODUCTS - NEW BUSINESS PREMIUMS AND CONTRIBUTIONS*
Single Regular Annual Premium Present Value of
and Contribution New Business
Equivalents Premiums
2006 2005 2006 2005 2006 2005 2006 2005
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
UK Insurance Operations
Direct to customer
Individual annuities 816 720 - - 82 72 816 720
Individual pensions and life 60 29 9 11 15 14 99 70
Department of Work and Pensions rebate 161 244 - - 16 24 161 244
business
Total 1,037 993 9 11 113 110 1,076 1,034
Business to Business
Corporate pensions 536 242 162 146 216 170 1,071 772
Individual annuities 264 212 - - 26 21 264 212
Bulk annuities 85 511 - - 8 51 85 511
Total 885 965 162 146 250 242 1,420 1,495
Intermediated distribution*
Life 961 1,112 5 6 101 118 995 1,149
Individual annuities 919 995 - - 92 100 919 995
Individual and corporate pensions 130 108 22 25 35 36 228 195
Total 2,010 2,215 27 31 228 254 2,142 2,339
Partnerships
Life 840 814 3 3 87 84 855 835
Individual and bulk annuities
Bulk annuity reinsurance from the Scottish 560 - - - 56 - 560 -
Amicable Insurance Fund*
Individual and other bulk annuities 1,500 1,814 - 150 182 1,500 1,814
-
Total 2,900 2,628 3 3 293 266 2,915 2,649
Europe
Life 159 201 - - 16 20 159 201
Total UK Insurance Operations 6,991 7,002 201 191 900 892 7,712 7,718
US Operations
Fixed annuities 688 788 - - 69 79 688 788
Fixed index annuities 554 616 - - 55 62 554 616
Variable annuities 3,819 2,605 - - 382 261 3,819 2,605
Life 8 11 17 14 18 15 147 137
Guaranteed Investment Contracts 458 355 - - 46 35 458 355
GIC - Medium Term Notes 437 634 - 44 63 437 634
-
Total US Operations 5,964 5,009 17 14 614 515 6,103 5,135
Asian Operations
China 27 17 36 23 39 25 198 144
Hong Kong 355 289 103 83 139 112 933 741
India (Group's 26% interest) 20 4 105 57 107 57 411 215
Indonesia 31 42 71 42 74 46 269 186
Japan 68 30 7 4 14 7 97 50
Korea 103 29 208 132 218 135 1,130 578
Malaysia 4 9 72 66 72 67 418 383
Singapore 357 284 72 58 108 86 803 704
Taiwan 92 124 139 150 148 162 743 912
Other 15 9 36 33 37 34 130 126
Total Asian Operations 1,072 837 849 648 956 731 5,132 4,039
Group Total 14,027 12,848 1,067 853 2,470 2,138 18,947 16,892
INVESTMENT PRODUCTS - FUNDS UNDER MANAGEMENT *
2006 1 Jan 2006 Gross Redemptions Market and 31 Dec 2006
inflows other movements
GBPm GBPm GBPm GBPm GBPm
UK Operations 36,196 13,486 (7,385) 2,649 44,946
Asian Operations 10,132 20,408 (17,876) (411) 12,253
Group Total 46,328 33,894 (25,261) 2,238 57,199
1 Jan 2005 Gross Redemptions Market and 31 Dec 2005
inflows other movements
2005 GBPm GBPm GBPm GBPm GBPm
UK Operations 28,705 7,916 (4,054) 3,629 36,196
Asian Operations 8,538 18,457 (17,130) 267 10,132
Group Total 37,243 26,373 (21,184) 3,896 46,328
* The format of the tables shown above is consistent with the distinction
between insurance and investment products as applied for previous financial
reporting periods. Products categorised as "insurance" refer to those classified
as contracts of long-term insurance business for regulatory reporting purposes,
i.e. falling within one of the classes of insurance specified in part II of
Schedule 1 to the Regulated Activities Order under FSA regulations.
Annual premium and contribution equivalents are calculated as the aggregate of
regular new business amounts and one tenth of single new business amounts.
The tables shown above are provided as an indicative volume measure of
transactions undertaken in the reporting period that have the potential to
generate profits for shareholders. The amounts shown are not, and not intended
to be, reflective of premium income recorded in the IFRS income statement.
The tables above include a bulk annuity transaction with the Scottish Amicable
Insurance Fund (SAIF) with a premium of GBP560m. The transaction reflects the
arrangement entered into in June 2006 for the reinsurance of non-profit
immediate pension annuity liabilities of SAIF to Prudential Retirement Income
Limited (PRIL), a shareholder owned subsidiary of the Group. SAIF is a closed
ring-fenced sub-fund of the PAC long-term fund established by a Court approved
Scheme of Arrangement in October 1997, which is solely for the benefit of SAIF
policyholders. Shareholders have no interest in the profits of this fund,
although they are entitled to investment management fees on this business.
Accordingly, it is not part of covered business for EEV reporting purposes. The
inclusion of the transaction between SAIF and PRIL as new business in the tables
above reflects the transfer from SAIF to Prudential shareholders' funds of
longevity risk, the requirement to set aside supporting capital and the
entitlement to surpluses arising on this block of business from the reinsurance
arrangement.
Consistent with the transfer from uncovered to covered business and reflecting
the transfers above, the transaction has been accounted for as new business for
EEV basis reporting purposes.
The details shown above for insurance products include contributions for
contracts that are classified under IFRS 4 "Insurance Contracts" as not
containing significant insurance risk. These products are described as
investment contracts or other financial instruments under IFRS. Contracts
included in this category are primarily certain unit-linked and similar
contracts written in UK Insurance Operations and Guaranteed Investment Contracts
and similar funding agreements written in US Operations.
New business premiums for regular premium products are shown on an annualised
basis. Department of Work and Pensions rebate business is classified as single
recurrent business. Internal vesting business is classified as new business
where the contracts include an open market option.
UK and Asian investment products referred to in the table for funds under
management above are unit trusts, mutual funds and similar types of retail fund
management arrangements. These are unrelated to insurance products that are
classified as "investment contracts" under IFRS 4, as described in the preceding
paragraph, although similar IFRS recognition and measurement principles apply to
the acquisition costs and fees attaching to this type of business. US investment
products are no longer included in the table above as they are assets under
administration rather than funds under management.
In previous periods new business premiums for intermediated distribution of UK
Insurance Operations have included Department of Work and Pensions (DWP) rebate
business for SAIF. As shareholders have no interest in SAIF, these are now
excluded from the table above with comparatives restated accordingly. The
amounts of new SAIF DWP rebate business written were GBP60m for 2006 and GBP83m
for 2005.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
OPERATING PROFIT FROM CONTINUING OPERATIONS BASED ON LONGER-TERM INVESTMENT
RETURNS*
Results Analysis by Business Area 2006 2005
GBPm GBPm
UK Operations
New business 266 243
Business in force 420 183
Long-term business 686 426
M&G 204 163
Egg (145) 44
Total 745 633
US Operations
New business 259 211
Business in force 449 530
Long-term business 708 741
Broker-dealer and fund management 18 24
Curian (8) (10)
Total 718 755
Asian Operations
New business 514 413
Business in force 315 163
Long-term business 829 576
Fund management 50 12
Development expenses (15) (20)
Total 864 568
Other Income and Expenditure
Investment return and other income 8 42
Interest payable on core structural borrowings (177) (175)
Corporate expenditure:
Group Head Office (83) (70)
Asia Regional Head Office (36) (30)
Charge for share-based payments for Prudential schemes (10) (11)
Total (298) (244)
UK restructuring costs (53) -
Operating profit from continuing operations based on longer-term investment returns 1,976 1,712
Analysed as profits (losses) from:
New business 1,039 867
Business in force 1,184 876
Long-term business 2,223 1,743
Asia development expenses (15) (20)
Other operating results (179) (11)
UK restructuring costs (53) -
Total 1,976 1,712
* EEV basis operating profit from continuing operations based on longer-term
investment returns excludes goodwill impairment charges, short-term fluctuations
in investment returns, the mark to market value movements on core borrowings,
the shareholders' share of actuarial and other gains and losses on defined
benefit pension schemes, the effect of changes in economic assumptions and
changes in the time value of cost of options and guarantees caused by economic
factors. The amounts for these items are included in total EEV profit. The
directors believe that operating profit, as adjusted for these items, better
reflects underlying performance. Profit on ordinary activities and basic
earnings per share include these items together with actual investment returns.
This basis of presentation has been adopted consistently throughout this
preliminary announcement.
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
MOVEMENT IN SHAREHOLDERS' CAPITAL AND RESERVES (excluding minority interests)
2006 2005
GBPm GBPm
Profit for the year attributable to equity holders of the Company 2,212 1,582
Items recognised directly in equity:
Cumulative effect of changes in accounting policies on adoption of IAS - (25)
32, IAS 39 and IFRS 4, net of related tax, at 1 January 2005
Unrealised valuation movements on Egg securities classified as (2) (1)
available-for-sale
Movement on cash flow hedges 7 (4)
Exchange movements (359) 377
Related tax (74) 65
Dividends (399) (380)
Acquisition of Egg minority interests (167) -
New share capital subscribed 336 55
Reserve movements in respect of share-based payments 15 15
Treasury shares:
Movement in own shares in respect of share-based payment plans 6 0
Movement in Prudential plc shares purchased by unit trusts consolidated 0 3
under IFRS
Cumulative adjustment at 31 December 2006 net of related tax, for Jackson 7 -
National Life assets backing surplus and required capital (note 8)
Net increase in shareholders' capital and reserves 1,582 1,687
Shareholders' capital and reserves at beginning of year (excluding 10,301 8,614
minority interests)
Shareholders' capital and reserves at end of year (excluding minority 11,883 10,301
interests)
Comprising:
UK Operations:
Long-term business 5,813 5,132
M&G:
Net assets 230 245
Acquired goodwill 1,153 1,153
Egg 292 303
7,488 6,833
US Operations 3,360 3,418
Asian Operations:
Net assets 2,637 2,070
Acquired goodwill 172 172
Other Operations:
Holding company net borrowings (at market value) (1,542) (1,724)
Other net liabilities (232) (468)
Shareholders' capital and reserves at end of year (excluding minority 11,883 10,301
interests)
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
SUMMARISED CONSOLIDATED BALANCE SHEET
2006 2005
GBPm GBPm
Total assets less liabilities, excluding insurance funds 183,130 174,231
Less insurance funds*:
Policyholder liabilities (net of reinsurers' share) and unallocated (177,642) (169,037)
surplus of with-profits funds
Less shareholders' accrued interest in the long-term business 6,395 5,107
(171,247) (163,930)
Total net assets 11,883 10,301
Share capital 122 119
Share premium 1,822 1,564
Statutory basis shareholders' reserves 3,544 3,511
Additional EEV basis retained profit 6,395 5,107
Shareholders' capital and reserves (excluding minority interests) 11,883 10,301
* Including liabilities in respect of insurance products classified as
investment products under IFRS 4.
NET ASSET VALUE PER SHARE (in pence)
2006 2005
Based on EEV basis shareholders' funds of GBP11,883m (GBP10,301m) 486p 432p
Number of shares issued at year end (millions) 2,444 2,387
EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS
NOTES ON THE EEV BASIS RESULTS
(1) Basis of preparation of results
The EEV basis results have been prepared in accordance with the EEV Principles
issued by the CFO Forum of European Insurance Companies in May 2004 and expanded
by the Additional Guidance on EEV Disclosures published in October 2005. Where
appropriate the EEV basis results include the effects of adoption of
International Financial Reporting Standards (IFRS).
The EEV results for the Group are prepared for 'covered business', as defined by
the EEV Principles. Covered business represents the Group's long-term insurance
business for which the value of new and in-force contracts is attributable to
shareholders. The EEV basis results for the Group's covered business are then
combined with the IFRS basis results of the Group's other operations.
The definition of long-term business operations is consistent with previous
practice and comprises those contracts falling under the definition of long-term
insurance business for regulatory purposes together with, for US Operations,
contracts that are in substance the same as guaranteed investment contracts
(GICs) but do not fall within the technical definition. Under the EEV
Principles, the results for covered business incorporate the projected margins
of attaching internal fund management.
With two principal exceptions, covered business comprises the Group's long-term
business operations. The principal exceptions are for the closed Scottish
Amicable Insurance Fund (SAIF) and for the presentational treatment of the
financial position of two of the Group's defined benefit pension schemes. A very
small amount of UK group pensions business is also not modelled for EEV
reporting purposes.
SAIF is a ring-fenced sub-fund of the PAC long-term fund, established by a Court
approved Scheme of Arrangement in October 1997. SAIF is closed to new business
and the assets and liabilities of the fund are wholly attributable to the
policyholders of the fund. In 2006, a bulk annuity arrangement between SAIF and
Prudential Retirement Income Limited (PRIL), a shareholder-owned subsidiary took
place, as explained in note 5. Reflecting the altered economic interest from
SAIF policyholders to Prudential shareholders, this arrangement represents a
transfer from business of the Group that is not 'covered' to business that is
'covered' with consequential effect on the EEV basis results.
As regards the Group's defined benefit pension schemes, the surplus or deficit
attaching to the Prudential Staff Pension Scheme (PSPS) and Scottish Amicable
Pension scheme are excluded from the value of UK Operations and included in the
total for Other Operations. The surplus and deficit amounts are partially
attributable to the Prudential Assurance Company (PAC) with-profits fund and
shareholder-backed long-term business and partially to other parts of the Group.
In addition to the IFRS surplus or deficit, the shareholders' 10 per cent share
of the PAC with-profits sub-fund's interest in the movement on the financial
position of the schemes is recognised for EEV reporting purposes.
The directors are responsible for the preparation of the supplementary
information in accordance with the EEV Principles.
The EEV basis results for 2006 and 2005 have been derived from the EEV basis
results supplement to the Company's statutory accounts for 2006. The supplement
included an unqualified audit report from the auditors.
(2) Economic assumptions
Deterministic
In most countries, the long-term expected rates of return on investments and
risk discount rates are set by reference to period end rates of return on cash
or fixed interest securities. This 'active' basis of assumption setting has been
applied in preparing the results of all the Group's UK and US long-term business
operations. For the Group's Asian Operations, the active basis is appropriate
for business written in Japan, Korea and US dollar denominated business written
in Hong Kong.
An exception to this general rule is that for countries where long-term fixed
interest markets are less established, investment return assumptions and risk
discount rates are based on an assessment of longer-term economic conditions.
Except for the countries listed above, this basis is appropriate for the Group's
Asian operations.
Expected returns on equity and property asset classes are derived by adding a
risk premium, also based on the long-term view of Prudential's economists in
respect of each territory, to the risk-free rate. In the UK the equity risk
premium is 4.0 per cent (2005: 4.0 per cent) above risk-free rates. The equity
risk premium in the US is 4.0 per cent (2005: 4.0 per cent). In Asia, equity
risk premiums range from 3.0 per cent to 5.8 per cent (2005: 3.0 per cent to
5.75 per cent). Best estimate assumptions for other asset classes, such as
corporate bond spreads, are set consistently.
Assumed investment returns reflect the expected future returns on the assets
held and allocated to the covered business at the valuation date.
The table below summarises the principal financial assumptions:
2006 2005
% %
UK Insurance Operations
Risk discount rate:
New business 7.8 7.55
In force 8.0 7.7
Pre-tax expected long-term nominal rates of investment return:
UK equities 8.6 8.1
Overseas equities 8.6 to 9.3 8.1 to 8.75
Property 7.1 6.4
Gilts 4.6 4.1
Corporate bonds 5.3 4.9
Expected long-term rate of inflation 3.1 2.9
Post-tax expected long-term nominal rate of return for the
with-profits fund:
Pension business (where no tax applies) 7.5 7.1
Life business 6.6 6.3
US Operations (Jackson National Life)
Risk discount rate:
New business 7.6 6.9
In force 6.7 6.1
Expected long-term spread between earned rate and rate credited to 1.75 1.75
policyholders for single premium deferred annuity business
US 10 year treasury bond rate at end of period 4.8 4.4
Pre-tax expected long-term nominal rate of return for US equities 8.8 8.4
Expected long-term rate of inflation 2.5 2.4
Asian Operations
China Hong India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam
Kong (notes (notes
(notes iv, v) (notes ii, v)
iii, iv, iv, v)
v)
31 31 Dec 31 31 Dec 31 31 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
Dec Dec Dec Dec
2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006
% % % % % % % % % % % %
Risk discount
rate:
New business 12.0 6.6 16.5 17.5 5.3 9.5 9.5 16.5 6.9 8.8 13.75 16.5
In force 12.0 6.8 16.5 17.5 5.3 9.5 9.2 16.5 6.9 9.3 13.75 16.5
Expected 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5
long-term rate
of inflation
Government 9.0 4.7 10.5 11.5 2.1 5.0 7.0 10.5 4.5 5.5 7.75 10.5
bond yield
China Hong India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam
Kong (notes (notes (notes
(notes iv, v) iv, v) ii, v)
iii, iv,
v)
31 31 Dec 31 31 Dec 31 31 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
Dec Dec Dec Dec
2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005
% % % % % % % % % % % %
Risk
discount
rate:
New business 12.0 5.9 16.5 17.5 5.0 10.3 9.4 16.5 6.7 9.0 13.75 16.5
In force 12.0 6.15 16.5 17.5 5.0 10.3 9.0 16.5 6.8 9.4 13.75 16.5
Expected 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5
long-term rate
of inflation
Government 9.0 4.8 10.5 11.5 1.8 5.8 7.0 10.5 4.5 5.5 7.75 10.5
bond yield
Asia total Asia total
31 Dec 2006 31 Dec 2005
% %
Weighted risk discount rate (note i)
New business 9.8 9.8
In force 8.8 8.4
Notes
(i) The weighted discount rates for the Asian operations shown above have been
determined by weighting each country's discount rates by reference to the EEV
basis operating result for new business and the closing value of in-force
business.
(ii) For traditional business in Taiwan, the economic scenarios used to
calculate the 2006 and 2005 EEV basis results reflect the assumption of a phased
progression of the bond yields from the current rates applying to the assets
held to the long-term expected rates.
The projections assume that in the average scenario, the current bond yields of
around 2 per cent trend towards 5.5 per cent at 31 December 2013 (2005: 2 per
cent trend towards 5.5 per cent at 31 December 2012).
In projecting forward the Fund Earned Rate allowance is made for the mix of
assets in the fund, future investment strategy, and further market value
depreciation of bonds held as a result of assumed future yield increases. These
factors, together with the assumption of the phased progression in bond yields
give rise to an average assumed Fund Earned Rate that trends from 2.1 per cent
for 2006 to 5.7 per cent in 2014. The assumed Fund Earned Rate falls to 1.4 per
cent in 2007 and remains below 2.1 per cent for a further five years. This
feature is due to the depreciation of bond values as yields rise. Thereafter,
the assumed Fund Earned Rate fluctuates around a target of 5.9 per cent. This
projection compares with that applied for the 2005 results of a grading from an
assumed rate of 2.3 per cent for 2005 to 5.4 per cent for 2013. Consistent with
the EEV methodology applied, a constant discount rate has been applied to the
projected cashflows.
(iii) The assumptions shown are for US dollar denominated business which
comprises the larger proportion of the in-force Hong Kong business.
(iv) Assumed equity returns
The most significant equity holdings in the Asian operations are in Hong Kong,
Singapore and Malaysia. The mean equity return assumptions for those territories
at 31 December 2006 were 8.7 per cent (31 December 2005: 8.6 per cent), 9.3 per
cent (31 December 2005: 9.3 per cent) and 12.8 per cent (31 December 2005: 12.8
per cent) respectively. To obtain the mean, an average over all simulations of
the accumulated return at the end of the projection period is calculated. The
annual average return is then calculated by taking the root of the average
accumulated return minus 1.
(v) For Singapore, Malaysia, Taiwan and Hong Kong, cash rates are used in
setting the risk discount rates.
Stochastic
The economic assumptions used for the stochastic calculations are consistent
with those used for the deterministic calculations described above. Assumptions
specific to the stochastic calculations such as the volatilities of asset
returns reflect local market conditions and are based on a combination of actual
market data, historic market data and an assessment of longer-term economic
conditions. Common principles have been adopted across the Group for the
stochastic asset models, for example, separate modelling of individual asset
classes but with allowance for correlation between the various asset classes.
Details are given below of the key characteristics and calibrations of each
model.
UK Insurance Operations
- Interest rates are projected using a two-factor model calibrated to
actual market data;
- The risk premium on equity assets is assumed to follow a log-normal
distribution;
- The corporate bond return is calculated as the return on a
zero-coupon bond plus a spread. The spread process is a mean reverting
stochastic process; and
- Property returns are modelled in a similar fashion to corporate
bonds, namely as the return on a riskless bond, plus a risk premium, plus a
process representative of the change in residual values and the change in value
of the call option on rents.
The rates to which the model has been calibrated are set out below.
Mean returns have been derived as the annualised arithmetic average return
across all simulations and durations.
Standard deviations have been calculated by taking the annualised variance of
the returns over all the simulations, taking the square root and averaging over
all durations in the projection. For bonds the standard deviations relate to the
yields on bonds of the average portfolio duration. For equity and property, they
relate to the total return on these assets. The standard deviations applied to
both years presented in these statements are as follows:
%
Government bond yield 2.0
Corporate bond yield 5.5
Equities:
UK 18.0
Overseas 16.0
Property 15.0
Jackson National Life
- Interest rates are projected using a log-normal generator calibrated
to actual market data;
- Corporate bond returns are based on Treasury securities plus a
spread that has been calibrated to current market conditions and varies by
credit quality; and
- Variable annuity equity and bond returns have been stochastically
generated using a regime-switching log-normal model with parameters determined
by reference to historical data. The volatility of equity fund returns ranges
from 18.6 per cent to 28.1 per cent (2005: 18.6 per cent to 28.1 per cent),
depending on risk class, and the volatility of bond funds ranges from 1.4 per
cent to 2.0 per cent (2005: 1.4 per cent to 1.8 per cent).
Asian Operations
The same asset return model, as used in the UK, appropriately calibrated, has
been used for the Asian operations. The principal asset classes are government
and corporate bonds. Equity holdings are much lower than in the UK whilst
property is not held as an investment asset.
The stochastic cost of guarantees is only of significance for the Hong Kong,
Singapore, Malaysia and Taiwan operations.
The mean stochastic returns are consistent with the mean deterministic returns
for each country. The volatility of equity returns ranges from 18 per cent to 25
per cent (2005: 18 per cent to 26 per cent), and the volatility of government
bond yields ranges from 1.4 per cent to 2.5 per cent (2005: 1.3 per cent to 2.2
per cent).
(3) Level of encumbered capital
In adopting the EEV Principles, Prudential has based encumbered capital on its
internal targets for economic capital subject to it being at least the local
statutory minimum requirements. Economic capital is assessed using internal
models, but when applying the EEV principals Prudential does not take credit for
the significant diversification benefits that exist within the Group. For
with-profits business written in a segregated life fund, as is the case in the
UK and Asia, the capital available in the fund is sufficient to meet the
encumbered capital requirements.
The table below summarises the levels of encumbered capital as a percentage of
the relevant statutory requirement.
Capital as a percentage of relevant statutory
requirement
UK Insurance Operations 100% of EU Minimum
Jackson National Life 235% of Company Action Level
Asian Operations 100% of Financial Conglomerates Directive
requirement
(4) Margins on new business premiums and contributions
2006 New Business Annual Present Pre-Tax New New Business
Premiums Premium and value of Business Margin
Contribution New
Equivalents Business
Premiums
Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP)
GBPm GBPm GBPm GBPm GBPm % %
UK Insurance Operations 6,991 201 900 7,712 266 30 3.4
Jackson National Life 5,964 17 614 6,103 259 42 4.2
Asian Operations 1,072 849 956 5,132 514 54 10.0
Total 14,027 1,067 2,470 18,947 1,039 42 5.5
2005 New Business Annual Present Pre-Tax New New Business
Premiums Premium and value of Business Margin
Contribution New
Equivalents Business
Premiums
Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP)
GBPm GBPm GBPm GBPm GBPm % %
UK Insurance Operations 7,002 191 892 7,718 243 27 3.1
Jackson National Life 5,009 14 515 5,135 211 41 4.1
Asian Operations 837 648 731 4,039 413 56 10.2
Total 12,848 853 2,138 16,892 867 41 5.1
New business margins are shown on two bases, namely the margins by reference to
Annual Premium and Contribution Equivalents (APE) and the Present Value of New
Business Premiums (PVNBP). APEs are calculated as the aggregate of regular new
business amounts and one-tenth of single new business amounts. PVNBPs are
calculated as equalling single premiums plus the present value of expected new
business premiums of regular premium business, allowing for lapses and other
assumptions made in determining the EEV new business contribution.
The table of new business premiums and margins above excludes SAIF DWP rebate
premiums. Comparatives for premiums for this business, which were previously
included in the totals have been restated.
In determining the EEV basis value of new business written in the year the
policies incept, premiums are included in projected cash flows on the same basis
of distinguishing annual and single premium business as set out for statutory
basis reporting.
New business contributions represent profits determined by applying the economic
and non-economic assumptions applying at the end of the reporting period.
(5) Bulk annuity reinsurance from the Scottish Amicable Insurance Fund to
Prudential Retirement Income Limited
In June 2006 Prudential Retirement Income Limited (PRIL), a shareholder-backed
subsidiary of the Company, entered into a bulk annuity reinsurance arrangement
with the Scottish Amicable Insurance Fund (SAIF) for the reinsurance of
non-profit immediate pension annuity liabilities with a premium of GBP560m. SAIF
is a closed ring-fenced sub-fund of the PAC long-term fund, which is solely for
the benefit of SAIF policyholders. Shareholders have no interest in the profits
of this sub-fund and, accordingly, it is not part of covered business for EEV
reporting purposes.
Consistent with the transfer from uncovered to covered business and reflecting
the transfer of longevity risk, requirement for capital support, and entitlement
to surpluses on this block of business from SAIF to Prudential shareholders, the
transaction has been accounted for as new business for EEV basis reporting
purposes.
(6) UK restructuring costs
The charge of GBP53m for restructuring costs comprises GBP50m recognised on the
IFRS basis and an additional GBP3m recognised on the EEV basis for the
shareholders' share of costs incurred by the PAC with-profits sub-fund. The
costs relate to the initiative announced in December 2005 for UK Insurance
Operations to work more closely with Egg and M&G.
(7) UK Insurance Operations expense assumptions
The 2005 EEV basis financial statements included note disclosure explaining that
in determining the appropriate expense assumptions for 2005 account had been
taken of the cost synergies that were expected to arise with some certainty from
the initiative announced in December 2005 from UK Insurance Operations working
more closely with Egg and M&G. Without this factor there would have been a
charge for altered expense assumptions of approximately GBP55m. The half year
2006 EEV basis results were prepared on the same basis.
The initiative was expected to provide annual savings to the cost base of UK
Operations in aggregate of GBP40m. In addition, at the interim results stage, it
was announced that an end to end review of the UK business, with the aim of
reducing the overall cost base was underway. Total UK annual savings, including
the GBP40m mentioned above, were noted as being expected to be GBP150m per annum
comprising GBP100m for Egg and shareholder-backed business of UK Insurance
Operations and GBP50m attaching to the with-profits sub-fund. The savings for
the UK Insurance Operations cover both acquisition and renewal activity.
Reflecting the underlying trend in unit costs, the interim results announcement
noted that the element of the additional savings of GBP110m that relate to
long-term business was expected to be neutral in its effect on EEV basis
results.
With the agreement to sell Egg Banking Plc, the actions necessary to implement
these plans have been reassessed and additional initiatives put in place, as
announced on 15 March 2007.
In preparing the 2006 EEV basis results for UK Insurance Operations, account has
been taken of the expense savings that are expected to arise from these
initiatives. Without this factor the effect on the 2006 results would have been
an additional charge of GBP44m for the net effect of revised assumptions in line
with 2006 unit costs. The size of this change reflects the lagged effect of the
implementation of the previously announced initiatives which have affected
run-rate savings as at 31 December 2006 but not translated to the same extent in
unit costs over 2006 as a whole.
(8) Cumulative adjustment at 31 December 2006 for Jackson National life (JNL)
assets backing surplus and required capital
Previously the valuation placed on the JNL assets backing surplus and required
capital reflected the fact that generally they are held for the longer-term and
excluded the short-term differences between market value and amortised cost. For
the balance sheet at 31 December 2006 and prospectively these short-term value
adjustments are incorporated. At 31 December 2006 the balance sheet adjustment,
net of related tax is an increase of GBP7m. For 31 December 2005 the adjustment,
if it had been booked at that date, was an increase of GBP19m. Future movements
for this item, consistent with the basis applied under IFRS for
available-for-sale securities, will be booked in the statement of movement in
shareholders' capital and reserves.
(9) Taiwan - effect of altered economic assumptions and sensitivity of results
to future market conditions
In 2006, as explained in note 2, the expected long-term bond yield has been
maintained at 5.5 per cent. However, the date at which the expected long-term
yield is projected to be attained has been altered from 31 December 2012, as
applied for the 2005 results, to 31 December 2013. This change of assumption
together with the associated effect of the resulting change on the economic
capital requirement has given rise to a pre-tax charge of GBP101m.
The sensitivity of the embedded value at 31 December 2006 of the Taiwan
operation to altered economic assumptions and future market conditions to:
(a) A 1 per cent increase or decrease in the projected long-term bond yield,
(including all consequential changes to investment returns for all classes,
market values of fixed interest assets and risk discount rates), is GBP107m and
GBP(165)m respectively (31 December 2005: GBP106m and GBP(174)m respectively);
and
(b) A 1 per cent increase or decrease in the starting bond rate for the
progression to the assumed long-term rate is GBP116m and GBP(125)m respectively
(31 December 2005: GBP104m and GBP(108)m respectively).
If a delay of a further year to 31 December 2014 for the start and end of the
progression period had been assumed in preparing the 2006 results, there would
have been an additional charge of GBP(88)m.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
CONSOLIDATED INCOME STATEMENT
2006 2005
GBPm GBPm
Gross premiums earned 16,157 15,225
Outward reinsurance premiums (171) (197)
Earned premiums, net of reinsurance 15,986 15,028
Investment income 17,904 24,013
Other income 2,055 2,084
Total revenue, net of reinsurance (note B) 35,945 41,125
Benefits and claims and movement in unallocated surplus of (28,421) (33,100)
with-profits funds
Acquisition costs and other operating expenditure (5,243) (5,552)
Finance costs: interest on core structural borrowings of (210) (208)
shareholder-financed operations
Goodwill impairment charge - (120)
Total charges (note B) (33,874) (38,980)
Profit before tax* (note B) 2,071 2,145
Tax attributable to policyholders' returns (849) (1,147)
Profit before tax attributable to shareholders (note C) 1,222 998
Tax expense (note E) (1,196) (1,388)
Less: tax attributable to policyholders' returns 849 1,147
Tax attributable to shareholders' profit (note E) (347) (241)
Profit from continuing operations after tax 875 757
Discontinued operations (net of tax) - 3
Profit for the year 875 760
Attributable to:
Equity holders of the Company 874 748
Minority interests 1 12
Profit for the year 875 760
Earnings per share (in pence) 2006 2005
Basic (based on 2,413m and 2,365m shares respectively):
Based on profit from continuing operations attributable to the 36.2p 31.5p
equity holders of the Company (note F)
Based on profit from discontinued operations attributable to the - 0.1p
equity holders of the Company
36.2p 31.6p
Diluted (based on 2,416m and 2,369m shares respectively):
Based on profit from continuing operations attributable to the 36.2p 31.5p
equity holders of the Company
Based on profit from discontinued operations attributable to the - 0.1p
equity holders of the Company
36.2p 31.6p
Dividends per share (in pence) 2006 2005
Dividends relating to reporting period:
Interim dividend (2006 and 2005) 5.42p 5.30p
Final dividend (2006 and 2005) (note G) 11.72p 11.02p
Total 17.14p 16.32p
Dividends declared and paid in reporting period:
Current year interim dividend 5.42p 5.30p
Final dividend for prior year 11.02p 10.65p
Total 16.44p 15.95p
* Profit before tax represents income net of post-tax transfers to unallocated
surplus of with-profits funds, before tax attributable to policyholders and
unallocated surplus of with-profits funds, unit-linked policies and
shareholders' profits.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
2006
Share Share Retained Trans- Avail- Hedging Share- Minority Total
capital premium earnings lation able- reserve holders' interests equity
reserve for- equity
sale
secur-
ities
reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Reserves
Profit for the year 874 874 1 875
Items recognised directly
in equity:
Exchange movements (224) (224) (224)
Movement on cash flow 7 7 7
hedges
Unrealised valuation
movements on securities
classified as
available-for-sale:
Unrealised holding losses (210) (210) (210)
arising during the year
Less losses included in the 7 7 7
income statement
Unrealised investment (203) (203) (203)
losses, net
Related change in 75 75 75
amortisation of deferred
income and acquisition
costs
Related tax (74) 50 (2) (26) (26)
Total items recognised (298) (78) 5 (371) (371)
directly in equity
Total income and expense 874 (298) (78) 5 503 1 504
for the year
Dividends (399) (399) (399)
Reserve movements in 15 15 15
respect of share-based
payments
Change in minority 43 43
interests arising
principally from purchase
and sale of venture
investment companies and
property partnerships of
the PAC with-profits fund
and of other investment
funds
Acquisition of Egg minority (167) (167) (84) (251)
interests (note J)
Share capital and share
premium
New share capital 3 333 336 336
subscribed (note H)
Transfer to retained (75) 75
earnings in respect of
shares issued in lieu of
cash dividends (note H)
Treasury shares
Movement in own shares in 6 6 6
respect of share-based
payment plans
Movement in Prudential plc 0 0 0
shares purchased by unit
trusts consolidated under
IFRS
Net increase (decrease) in 3 258 404 (298) (78) 5 294 (40) 254
equity
At beginning of year 119 1,564 3,236 173 105 (3) 5,194 172 5,366
At end of year 122 1,822 3,640 (125) 27 2 5,488 132 5,620
2005
Share Share Retained Trans- Avail- Hedging Share- Minority Total
capital premium earnings lation able- reserve holders' interests equity
reserve for- equity
sale
secur-
ities
reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Reserves
Profit for the year 748 748 12 760
Items recognised directly
in equity:
Exchange movements 268 268 268
Movement on cash flow (4) (4) 1 (3)
hedges
Unrealised valuation
movements on securities
classified as
available-for-sale:
Unrealised holding losses (773) (773) (773)
arising during the year
Less losses included in the 22 22 22
income statement
Unrealised investment (751) (751) (751)
losses, net
Related change in 307 307 307
amortisation of deferred
income and acquisition
costs
Related tax 65 152 1 218 218
Total items recognised 333 (292) (3) 38 1 39
directly in equity
Total income and expense 748 333 (292) (3) 786 13 799
for the year
Cumulative effect of 2 (173) 397 226 (3) 223
changes in accounting
policies on adoption of IAS
32, IAS 39 and IFRS 4, net
of applicable taxes at 1
January 2005 (note M)
Dividends (380) (380) (380)
Reserve movements in 15 15 (1) 14
respect of share-based
payments
Change in minority 26 26
interests arising
principally from purchase
and sale of venture
investment companies and
property partnerships of
the PAC with-profits fund
Share capital and share
premium
New share capital 0 55 55 55
subscribed
Transfer to retained (51) 51
earnings in respect of
shares issued in lieu of
cash dividends
Treasury shares
Movement in own shares in 0 0 0
respect of share-based
payment plans
Movement in Prudential plc 3 3 3
shares purchased by unit
trusts consolidated under
IFRS
Net increase (decrease) in 6 264 333 105 (3) 705 35 740
equity
At beginning of year 119 1,558 2,972 (160) 4,489 137 4,626
At end of year 119 1,564 3,236 173 105 (3) 5,194 172 5,366
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
CONSOLIDATED BALANCE SHEET
2006 2005
(note
GBPm N) GBPm
Assets
Intangible assets attributable to shareholders:
Goodwill 1,341 1,341
Deferred acquisition costs and acquired in force value of 2,497 2,405
long-term business contracts
3,838 3,746
Intangible assets attributable to PAC with-profits fund (note N):
In respect of venture fund investment subsidiaries 830 679
Deferred acquisition costs 31 35
861 714
Total 4,699 4,460
Other non-investment and non-cash assets:
Property, plant and equipment 1,133 910
Reinsurers' share of policyholder liabilities 945 1,278
Deferred tax assets 1,012 755
Current tax recoverable 404 231
Accrued investment income 1,900 1,791
Other debtors 1,052 1,305
Total 6,446 6,270
Investments of long-term business, banking and other operations:
Investment properties 14,491 13,180
Investments accounted for using the equity method 6 5
Financial investments:
Loans and receivables 11,573 13,245
Equity securities and portfolio holdings in unit trusts 78,892 71,985
Debt securities 81,719 82,471
Other investments 5,401 3,879
Deposits 7,759 7,627
Total 199,841 192,392
Held for sale assets 463 728
Cash and cash equivalents 5,071 3,586
Total assets 216,520 207,436
Equity and liabilities
Equity
Shareholders' equity (note H) 5,488 5,194
Minority interests 132 172
Total equity 5,620 5,366
Liabilities
Banking customer accounts 5,554 5,830
Policyholder liabilities and unallocated surplus of with-profits
funds:
Insurance contract liabilities 123,213 120,436
Investment contract liabilities with discretionary participation 28,733 26,523
features
Investment contract liabilities without discretionary 13,042 12,026
participation features
Unallocated surplus of with-profits funds 13,599 11,330
Total 178,587 170,315
Core structural borrowings of shareholder-financed operations:
Subordinated debt (other than Egg) 1,538 1,646
Other 1,074 1,093
2,612 2,739
Egg subordinated debt 451 451
Total 3,063 3,190
Other borrowings:
Operational borrowings attributable to shareholder-financed 5,609 6,432
operations (note I)
Borrowings attributable to with-profits funds (note I) 1,776 1,898
Other non-insurance liabilities:
Obligations under funding, securities lending and sale and 4,232 4,529
repurchase agreements
Net asset value attributable to unit holders of consolidated unit 2,476 965
trusts and similar funds
Current tax liabilities 1,303 962
Deferred tax liabilities 3,882 3,077
Accruals and deferred income 517 506
Other creditors 1,398 1,478
Provisions 464 972
Other liabilities 1,652 1,770
Held for sale liabilities 387 146
Total 16,311 14,405
Total liabilities 210,900 202,070
Total equity and liabilities 216,520 207,436
CONSOLIDATED CASH FLOW STATEMENT
2006 2005
GBPm GBPm
Cash flows from operating activities
Profit before tax (note i) 2,071 2,145
Changes in operating assets and liabilities:
Investments (13,748) (21,462)
Banking customer accounts (276) (861)
Other non-investment and non-cash assets (232) (957)
Policyholder liabilities (including unallocated surplus) 13,540 21,113
Other liabilities (including operational borrowings) 1,136 180
Interest income and expense and dividend income included in profit (10,056) (8,410)
before tax
Other non-cash items 198 0
Operating cash items:
Interest receipts 6,466 5,946
Dividend receipts 3,633 2,680
Tax paid (523) (573)
Net cash flows from operating activities 2,209 (199)
Cash flows from investing activities
Purchases of property, plant and equipment (174) (160)
Proceeds from disposal of property, plant and equipment 34 6
Costs incurred on purchase of Egg minority interests (6) -
Acquisition of subsidiaries, net of cash balances (note ii) (70) (68)
Disposal of subsidiaries, net of cash balances (note ii) 114 252
Net cash flows from investing activities (102) 30
Cash flows from financing activities
Structural borrowings of the Group:
Shareholder-financed operations (note iii):
Issue - 168
Redemption (1) (308)
Interest paid (204) (204)
With-profits operations (note iv):
Interest paid (9) (9)
Equity capital (note v):
Issues of ordinary share capital 15 3
Dividends paid to shareholders (323) (328)
Net cash flows from financing activities (522) (678)
Net increase (decrease) in cash and cash equivalents 1,585 (847)
Cash and cash equivalents at beginning of year 3,586 4,341
Effect of exchange rate changes on cash and cash equivalents (100) 92
Cash and cash equivalents at end of year (note vi) 5,071 3,586
Notes
(i) Profit before tax represents income, net of post-tax transfers to
unallocated surplus of with-profits funds, before tax attributable to
policyholders and unallocated surplus of with-profits funds, unit-linked
policies and shareholders' profits. It does not represent profit before tax
attributable to shareholders.
(ii) Acquisitions and disposals of subsidiaries shown above include venture
investment subsidiaries of the PAC with-profits fund as shown in note J. In
2005, this also includes the purchase of Life Insurance Company of Georgia.
(iii) Structural borrowings of shareholder-financed operations consist of the
core debt of the parent company and related finance subsidiaries, Jackson
National Life surplus notes and Egg subordinated debt. Core debt excludes
borrowings to support short-term fixed income securities programmes and
non-recourse borrowings of investment subsidiaries of shareholder-financed
operations. Cash flows in respect of these borrowings are included within cash
flows from operating activities.
(iv) Structural borrowings of with-profits operations relate solely to the
GBP100m 8.5 per cent undated subordinated guaranteed bonds which contribute to
the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced
sub-fund of the PAC with-profits fund. Cash flows on other borrowings of
with-profits funds, which principally relate to venture investment subsidiaries,
are included within cash flows from operating activities.
(v) Cash movements in respect of equity capital exclude scrip dividends and
share capital issued in respect of the acquisition of Egg minority interests.
(vi) Of the cash and cash equivalents amounts reported above, GBP437m (2005:
GBP263m) represents cash and cash equivalents of the parent company and related
finance subsidiaries.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS
NOTES ON THE STATUTORY IFRS BASIS RESULTS
A Basis of preparation and audit status
The statutory basis results included in this announcement have been extracted
from the audited financial statements of the Group for the year ended 31
December 2006. These statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by the European
Union (EU) as required by EU law (IAS Regulation EC1606/2002).
The auditors have reported on the 2006 statutory accounts. The financial
information set out above does not constitute the Company's statutory accounts
for the years ended 31 December 2006 or 2005 but is derived from those accounts.
The auditors' report was (i) unqualified, (ii) did not include reference to any
matters to which the auditors drew attention by way of emphasis without
qualifying their report and (iii) did not contain a statement under section 237
(2) or (3) of the Companies Act 1985.
In 2005, the Group adopted the amendments to IAS 39, 'The Fair Value Option' and
IAS 19, 'Employee Benefits' (as amended in 2004). These amendments were
mandatory for accounting periods beginning on or after 1 January 2006.
There are no other new or revised accounting standards and interpretations
issued by the International Accounting Standards Board (IASB) or the
International Financial Reporting Interpretations Committee (IFRIC) of the IASB,
effective in 2006, that have an impact on the results of the Group.
The following amendments and interpretations to published standards were
mandatory for accounting periods beginning on or after 1 January 2006 and are
relevant to the Group's operations but their adoption did not have an impact on
the Group's results:
(i) Amendment to IAS 39, 'Cash Flow Hedge Accounting of Forecast Intra-group
Transactions'.
(ii) Amendment to IAS 39 and IFRS 4, 'Financial Guarantee Contracts'.
(iii) Amendments to IAS 21, 'Net Investment in a foreign operation'.
B Segment disclosure
2006 2005
GBPm GBPm
Revenue
Long-term business 34,197 39,296
Banking 914 1,115
Broker-dealer and fund management 1,080 895
Unallocated corporate 38 98
Intra-group revenue eliminated on consolidation (284) (279)
Total revenue, net of reinsurance, per income statement 35,945 41,125
Charges (before income tax attributable to policyholders and
unallocated surplus of long-term insurance funds)
Long-term business, including post-tax transfers to unallocated (32,162) (36,997)
surplus of with-profits funds
Banking (1,064) (1,071)
Broker-dealer and fund management (797) (741)
Unallocated corporate (135) (450)
Intra-group charges eliminated on consolidation 284 279
Total charges per income statement (33,874) (38,980)
Segment results - revenue less charges (continuing operations)
Long-term business 2,035 2,299
Banking* (150) 44
Broker-dealer and fund management 283 154
Unallocated corporate (97) (352)
Profit before tax** 2,071 2,145
Tax attributable to policyholders' returns (849) (1,147)
Profit before tax attributable to shareholders 1,222 998
Tax attributable to shareholders' profits (347) (241)
Profit from continuing operations after tax 875 757
Segment results - discontinued operations (net of tax)
Banking - 3
Profit for the year 875 760
* The segment result for banking represents the operating profit based on
longer-term investment returns net of restructuring costs, and short-term
fluctuations in investment returns.
** Profit before tax represents income net of post-tax transfers to unallocated
surplus of with-profits funds, before tax attributable to policyholders and
unallocated surplus of with-profits funds, unit-linked policies and
shareholders' profits.
C Supplementary analysis of profit from continuing operations before tax
attributable to shareholders
2006 2005
Results analysis by business area GBPm GBPm
UK Operations
UK Insurance Operations (note D) 500 400
M&G 204 163
Egg (145) 44
Total 559 607
US Operations
Jackson National Life (note D) 398 348
Broker-dealer and fund management 18 24
Curian (8) (10)
Total 408 362
Asian Operations
Long-term business (note D) 189 195
Fund management 50 12
Development expenses (15) (20)
Total 224 187
Other Income and Expenditure
Investment return and other income 58 87
Interest payable on core structural borrowings (177) (175)
Corporate expenditure:
Group Head Office (83) (70)
Asia Regional Head Office (36) (30)
Charge for share-based payments for Prudential schemes (10) (11)
Total (248) (199)
UK restructuring costs (note L) (50) -
Operating profit from continuing operations based on longer-term 893 957
investment returns
Goodwill impairment charge (note i) - (120)
Short-term fluctuations in investment returns on 162 211
shareholder-backed business (note ii)
Shareholders' share of actuarial and other gains and losses on 167 (50)
defined benefit pension schemes (note iii)
Profit from continuing operations before tax attributable to 1,222 998
shareholders
Notes
(i) Goodwill impairment charge
The charge for goodwill impairment in 2005 relates to the Japanese life
business.
(ii) Short-term fluctuations in investment returns on shareholder-backed
business
2006 2005
GBPm GBPm
US Operations:
Movement in market value of derivatives used for economic 34 122
hedging purposes
Actual less longer-term investment returns for other items 20 56
Asian Operations 134 32
Other Operations (26) 1
162 211
(iii) Actuarial and other gains and losses on defined benefit pension schemes
2006 2005
GBPm GBPm
Actuarial gains and losses
Actual less expected return on scheme assets 156 544
Experience gains on liabilities 18 1
Gains (losses) on changes of assumptions for scheme 311 (489)
liabilities*
485 56
Less: amount attributable to the PAC with-profits fund (318) (58)
167 (2)
Non-recurrent credit (charge)
Shareholders' share of credit arising from reduction in - 35
assumed level of future discretionary increases for pensions
in payment of the Prudential Staff Pension Scheme to 2.5%
Loss on re-estimation of shareholders' share of deficit on the - (63)
Prudential Staff Pension Scheme at 31 December 2005 to 30%
Effect of strengthening in actuarial provisions for increase - (20)
in ongoing contributions for future service of active scheme
members
- (48)
167 (50)
* The gains and losses on changes of assumptions for scheme liabilities
primarily reflect movements in yields on good quality corporate bonds. These
yields are used to discount the projected pension scheme benefit payments.
The discount rates applied for the Group's UK defined benefit schemes, and
reflected in the gains and losses shown above, are as follows:
31 December 2006 5.2%
31 December 2005 4.8%
D Effect of changes in assumptions, estimates and bases used to measure
insurance assets and liabilities
(a) UK Insurance Operations
2006
In 2006, the FSA made regulatory changes for UK regulated non-participating
business. These changes were proposed in the consultative paper CP 06/16 and
confirmed in December 2006 policy statement PS 06/14.
The changes to the FSA rules allow insurance technical provisions to incorporate
more economic realism. In particular this is achieved by;
- Setting technical provisions for expenses not directly attributable to one
particular contract at a homogenous risk level and not, as previously, at an
individual contract level for all non-profit business.
- Recognising the economic effect of making a prudent lapse rate assumption.
Previously, no lapses were assumed.
The effect of this change is accounted for as a change in estimate and there is
a consequent increase in operating profit based on longer-term investment
returns of GBP46m.
In addition, a charge of GBP4m was recognised in 2006 for the effect of change
of assumption for renewal and termination expenses mainly in respect of PAC.
2005
For shareholder-backed non-participating business a number of changes of
assumptions were made in 2005. Taken together these changes had the effect of
reducing operating profit based on longer-term investment returns before
shareholder tax by GBP36m with a consequent increase in liabilities.
(b) US Operations
2006
Several assumptions were modified in 2006 to conform to more recent experience
resulting in a net decrease of GBP7m. These changes included revisions to the
assumption regarding utilisation of free partial withdrawal options, resulting
in a decrease in deferred acquisition costs of GBP12m. Other smaller changes
included changes relating to lapse rates, mortality rates and other assumptions,
which resulted in an increase of GBP6m in deferred acquisition costs.
2005
Several assumptions were modified in 2005 to conform to more recent experience
resulting in a net decrease to pre-tax profits of GBP7m. The most significant
changes included a write-down of deferred acquisition costs of GBP21m for Single
Premium Deferred Annuities, partial withdrawal changes and a Universal Life SOP
03-1, 'Accounting and Reporting by Insurance Enterprises for Certain
Non-traditional Long Duration Contracts and for Separate Accounts' reserve
increase of GBP13m due to increasing the mortality assumption. Other smaller
changes included changes relating to Single Premium Whole Life surrenders and
annuity mortality and annuitisation rates, which resulted in a GBP19m benefit on
adjusting amortisation of deferred acquisition costs.
(c) Asian Operations
2006
There are no changes of assumptions that had a material impact on the 2006
results of Asian operations.
2005
The 2005 results for Asian operations were affected in two significant ways for
changes of basis or assumption.
For the Singapore life business, the adoption of the Singapore risk-based
capital framework in 2005 resulted in a change of estimate and reduction in the
liability of GBP73m.
The second item reflects the application of liability adequacy testing for the
Taiwan life business which resulted in a write-off of deferred acquisition costs
of GBP21m in 2005.
E Tax charge
The total tax charge of GBP1,196m for 2006 (2005: GBP1,388m) comprises GBP653m
(2005: GBP1,119m) UK tax and GBP543m (2005: GBP269m) overseas tax. This tax
charge comprises tax attributable to policyholders and unallocated surplus of
with-profits funds, unit-linked policies and shareholders. The tax charge
attributable to shareholders of GBP347m for 2006 (2005: GBP241m) comprises
GBP97m (2005: GBP(21)m) UK tax and GBP250m (2005: GBP262m) overseas tax.
F Supplementary analysis of earnings per share from continuing operations
2006 2005
GBPm GBPm
Operating profit based on longer-term investment returns 26.4p 32.2p
after related tax and minority interests
Adjustment for goodwill impairment charge - (5.1)p
Adjustment from post-tax longer-term investment returns to 5.0p 5.9p
post-tax actual investment returns (after related minority
interests)
Adjustment for post-tax shareholders' share of actuarial and 4.8p (1.5)p
other gains and losses on defined benefit pension schemes
Based on profit from continuing operations after tax and 36.2p 31.5p
minority interests
G Dividend
A final dividend of 11.72p per share was proposed by the directors on 14 March
2007. This dividend will absorb an estimated GBP287m of shareholders' funds.
Subject to shareholder approval, the dividend will be paid on 22 May 2007 to
shareholders on the register at the close of business on 13 April 2007. A scrip
dividend alternative will be offered to shareholders.
H Shareholders' equity
2006 2005
GBPm GBPm
Share capital 122 119
Share premium 1,822 1,564
Reserves 3,544 3,511
Total 5,488 5,194
I Other borrowings
2006 2005
GBPm GBPm
Operational borrowings attributable to shareholder-financed
operations
Borrowings in respect of short-term fixed income securities 2,032 1,472
programmes
Non-recourse borrowings of investment subsidiaries managed 743 1,085
by PPM America
Borrowings in respect of banking operations 2,819 3,856
Other borrowings 15 19
Total 5,609 6,432
Borrowings attributable to with-profits funds
Non-recourse borrowings of venture fund investment 926 988
subsidiaries of the PAC with-profits fund
Structural borrowings (subordinated debt of a subsidiary of 100 100
the Scottish Amicable Insurance Fund)
Other borrowings (predominantly external funding of 750 810
consolidated investment vehicles)
Total 1,776 1,898
J Acquisitions and disposals
(i) Shareholder acquisitions and disposals
In December 2005, the Company announced its intention to acquire the minority
interests in Egg representing approximately 21.7 per cent of the existing issued
share capital of Egg. The whole of the minority interests were acquired in the
first half of 2006. Under the terms of the offer, Egg shareholders received
0.2237 new ordinary shares in the Company for each Egg share resulting in the
issue of 41.6m new shares in the Company.
The Company accounted for the purchase of minority interests using the economic
entity method. Accordingly, GBP167m has been charged to retained earnings
representing the difference between the consideration paid (including expenses)
of GBP251m and the share of net assets acquired of GBP84m.
On 29 January 2007, Prudential announced that it had reached agreement with Citi
to sell Egg for GBP575m in cash, subject to adjustments to reflect any change in
net asset value between 31 December 2006 and completion. The transaction is
subject to regulatory approval and is expected to complete by the end of April
2007.
(ii) PAC with-profits fund acquisitions and disposals of venture fund
investments subsidiaries
In 2006 the PAC with-profits fund acquired three new venture capital holdings
through PPM Capital in which the Group is deemed to have a controlling interest,
in aggregate with, if applicable, other holdings held by, for example, the
Prudential Staff Pension Scheme. These acquisitions were for:
- 53 per cent of the voting equity interests of Histoire D'or, a jewellery
retail company, in April 2006;
- 51 per cent of the voting equity interests of Azzuri Communications, a
business IT services company, in June 2006: and
- 60 per cent of the voting equity interests of Paramount plc, a restaurant
company, in September 2006.
The results of the aggregated venture acquisitions in 2006 have been included in
the consolidated financial statements of the Group commencing on the respective
dates of acquisition and contributed a loss of GBP7.7m within the income
statement, which is also reflected as part of the movement in unallocated
surplus of the with-profits fund.
The table below identifies the net assets of these acquisitions and minor
business purchases by existing venture holdings. This reconciles the net assets
to the consideration paid
Fair value on
acquisition
GBPm
Cash and cash equivalents 18
Other current assets 31
Property, plant and equipment 45
Intangible assets other than goodwill 139
Other non-current assets 100
Less liabilities, including current liabilities and (581)
borrowings
Net assets acquired (248)
Goodwill 336
Cash consideration 88
Aggregate goodwill of GBP336m has been recognised for the excess of the cost
over the Group's interest in the net fair value of entities' assets.
In 2006, Upperpoint Distribution Limited, Taverner Hotel Group Pty Ltd, Orefi,
Aperio Group Pty Ltd and BST Safety Textiles Luxemborg S.a.r.l., all venture
subsidiaries of the PAC with-profits fund, were disposed of for cash
consideration of GBP133m. Goodwill of GBP46m and cash and cash equivalents of
GBP19m were disposed of. In addition, one venture subsidiary was classified as
held for sale at 31 December 2006.
K Bulk annuity reinsurance from the Scottish Amicable Insurance Fund (SAIF) to
Prudential Retirement Income Limited (PRIL)
In June 2006, PRIL, a shareholder-backed subsidiary of the Group, entered into a
bulk annuity reinsurance arrangement with SAIF for the reinsurance of non-profit
immediate pension annuity liabilities with a premium of GBP560m. SAIF is a
closed ring-fenced sub-fund of the PAC long-term fund, established by a Court
approved Scheme of Arrangement in 1997, which is solely for the benefit of SAIF
policyholders. As explained in the notes to the tables for the supplementary
transaction measure of new business, the economic substance of the arrangement
is a transfer of risks and rewards attaching to this business from SAIF
policyholders to Prudential shareholders. Accordingly, for the purpose of those
tables the reinsurance transaction has been recorded as 'new business'. For
Group reporting purposes the amounts recorded by SAIF and PRIL for the premium
are eliminated on consolidation.
L UK restructuring costs
In December 2005, the Group announced an initiative for UK Insurance Operations
to work more closely with Egg and M&G and in the process facilitate the
realisation of substantial annualised pre-tax cost savings and opportunities for
revenue synergies. The one-off restructuring cost of achieving the savings was
estimated to be GBP50m.
In the first half of 2006 the level of current and projected restructuring
activity increased as a result of an end to end review of the UK business, that
was aimed at reducing the overall cost base. The total cost of implementing this
and the previously announced restructuring (as noted above) was estimated at
GBP110m to be incurred in 2006 and 2007, of which GBP70m was anticipated to be
borne by the shareholder-backed UK Insurance Operations and Egg and GBP40m by
the PAC with-profits fund.
As at 31 December 2006, GBP50m of cost attributable to shareholder-backed
operations had been incurred.
UK restructuring costs have been incurred as follows:
GBPm
UK Insurance Operations 31
M&G 2
Egg 12
Unallocated corporate 5
50
M Effect of adoption of IAS 32, IAS 39, and IFRS 4
The impact on total equity of adopting IAS 32, IAS 39 and IFRS 4 at 1 January
2005 was as follows:
Shareholders' Minority Total
equity interests equity
GBPm GBPm GBPm
Changes on adoption of IAS 32, IAS 39 and IFRS 4
relating to:
UK Insurance Operations (note i) (22) (22)
Jackson National Life (note ii) 273 273
Banking and non-insurance operations (note iii) (25) (3) (28)
Total 226 (3) 223
Notes
The changes shown above reflect the impact of re-measurement for :
(i) UK Insurance Operations
The reduction in shareholders' equity of GBP22m includes GBP20m relating to
certain unit-linked and similar contracts that do not contain significant
insurance risk and are therefore categorised as investment contracts under IFRS
4.
(ii) Jackson National Life
Under IAS 39, JNL's debt securities and derivative financial instruments are
re-measured to fair value from the lower of amortised cost and, if relevant,
impaired value. Fair value movements on debt securities, net of shadow changes
to deferred acquisition costs and related deferred tax, are recognised directly
in equity. Fair value movements on derivatives are recorded in the income
statement.
(iii) Banking and non-insurance operations
Under IAS 39, for Egg, changes to opening equity at 1 January 2005 arise from
altered policies for effective interest rate on credit card receivables,
impairment losses on loans and advances, fair value adjustments on wholesale
financial instruments and embedded derivatives in equity savings products. The
net effect on shareholders' equity of these changes, after tax, is a deduction
of GBP15m. A further GBP10m reduction in equity arises on fair valuation of
certain centrally held financial instruments and derivatives.
N 2005 comparative balance sheet
Minor presentational adjustments have been made for refinements to the
acquisition accounting for intangible assets of venture investment subsidiaries
of the PAC with-profits fund. These adjustments affect the carrying value of
goodwill and other intangible assets, with minor consequential effects on some
other balance sheet categories. Shareholders' profit and equity are unaffected
by these adjustments.
O Sensitivity of IFRS basis results for Taiwan life business to economic
assumptions and market conditions
The in-force business of the Taiwan life operation includes traditional whole of
life policies where the premium rates have been set by the regulator at
different points for the industry as a whole. Premium rates were set to give a
guaranteed minimum sum assured on death and a guaranteed surrender value on
early surrender based on prevailing interest rates at the time of policy issue.
Premium rates also included allowance for mortality and expenses. The required
rates of guarantee have fallen over time as interest rates have reduced from a
high of 8 per cent to current levels of around 2 per cent. The current low level
of bond rates in Taiwan gives rise to a negative spread against the majority of
these policies. The current cash costs of funding in force negative spread in
Taiwan is around GBP40m a year.
The profits attaching to these contracts are particularly affected by the rates
of return earned, and estimated to be earned, on the assets held to cover
liabilities and on future investment income and contract cash flows. Under IFRS,
the insurance contract liabilities of the Taiwan business are determined on the
US GAAP basis as applied previously under UK GAAP. Under this basis the policy
liabilities are calculated on sets of assumptions, which are locked in at the
point of policy inception, and a deferred acquisition cost is held in the
balance sheet.
The adequacy of the insurance contract liabilities is tested by reference to
best estimates of expected investment returns on policy cash flows and
reinvested income. The assumed earned rates are used to discount the future cash
flows. The assumed earned rates consist of a long-term best estimate determined
by consideration of long-term market conditions, and rates assumed to be earned
in the trending period. For 2005, it was projected that rates of return for
Taiwanese bond yields would trend from the then current levels of some 2 per
cent to 5.5 per cent by 31 December 2012. For 2006, it has been assumed that the
long-term bond rate will be attained one year later, i.e. by 31 December 2013.
The liability adequacy test results are sensitive to the attainment of the
trended rates during the trending period. Based on the current asset mix,
margins in other contracts that are used in the assessment of the liability
adequacy tests, and currently assumed future rates of return, if interest rates
were to remain at current levels in 2007, and the target date for attainment of
the long-term bond yield deferred to 31 December 2014, the premium reserve, net
of deferred acquisition costs, would be broadly sufficient. If interest rates
were to remain at current levels in 2008 with a further one year delay in the
progression period then some level of write-off of deferred acquisition costs
may be necessary. However, the amount of the charge based on current in-force
business which is estimated at between GBP70m and GBP90m, is sensitive for the
previously mentioned variables.
Furthermore, the actual amount of any write-off would be affected by the impact
of new business written between 31 December 2006 and the future reporting dates
to the extent that the business is taken into account as part of the liability
adequacy testing calculations for the portfolio of contracts.
The adequacy of the liability is also sensitive to the level of the projected
long-term rate. The current long-term assumption of 5.5 per cent has been
determined on a prudent best estimate basis by reference to detailed assessments
of the financial dynamics of the Taiwanese economy. In the event that the rate
applied was altered the carrying value of the deferred acquisition costs and
policyholder liabilities would be potentially affected.
At 31 December 2006, if the assumed long-term bond yield applied had been
reduced by 0.5 per cent from 5.5 per cent to 5.0 per cent and continued to apply
the same progression period to 31 December 2013, by assuming bond yields
increase from current levels in equal annual instalments to the long-term rate,
the premium reserve, net of deferred acquisition costs, would have been
insufficient and there would have been a charge of some GBP60m to the income
statement. The impact of reducing the long-term rate by a further 0.5 per cent
to 4.5 per cent would have increased this charge by some GBP160m. The primary
reason for the lower level of charge for the initial 0.5 per cent reduction is
the current level of margins in the liability adequacy calculation. The effects
of additional 0.5 per cent reductions in the assumed long-term rate below 4.5
per cent would be of a similar or slightly higher level to the GBP160m noted
previously.
The effects of changes in any one year reflect the combination of the short-term
and long-term factors described above.
P Inherited Estate of the PAC long-term fund
The assets of the main with-profits fund within the long-term fund of PAC
comprise the amounts that it expects to pay out to meet its obligations to
existing policyholders and an additional amount used as working capital. The
amount payable over time to policyholders from the with-profits fund is equal to
the policyholders' accumulated asset shares plus any additional payments that
may be required by way of smoothing or to meet guarantees. The balance of the
assets of the with-profits fund is called the 'inherited estate' and has
accumulated over many years from various sources.
The inherited estate represents the major part of the working capital of PAC's
long-term insurance fund. This enables PAC to support with-profits business by
providing the benefits associated with smoothing and guarantees, by providing
investment flexibility for the fund's assets, by meeting the regulatory capital
requirements that demonstrate solvency and by absorbing the costs of significant
events or fundamental changes in its long-term business without affecting the
bonus and investment policies. The size of the inherited estate fluctuates from
year to year depending on the investment return and the extent to which it has
been required to meet smoothing costs, guarantees and other events.
PAC believes that it would be beneficial if there were greater clarity as to the
status of the Inherited Estate. As a result, PAC has announced that it has begun
a process to determine whether it can achieve that clarity through a
reattribution of the Inherited Estate. As part of this process a Policyholder
Advocate has been nominated to represent policyholders' interests. This
nomination does not mean that a reattribution will occur.
Given the size of the Group's with-profits business any proposal is likely to be
time consuming and complex to implement and is likely to involve a payment to
policyholders from shareholders funds. If a reattribution is completed the
inherited estate will continue to provide working capital for the long-term
insurance fund.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date 15 March 2007
PRUDENTIAL PUBLIC LIMITED COMPANY
By: /s/ Jon Bunn
Jon Bunn,
Director of Public Relations,