Our EEV operating profit has doubled over the past three years with more than 75 per cent of new business profit coming from Asia and the United States.
The directors' report of Prudential plc for the year ended 31 December 2007 is set out on pages 1 to 100 and on pages 336 to 339, and includes the sections of the Annual Report referred to in these pages.
Directors’ remuneration report 124 Summary of statutory and supplementary International Financial Reporting Standards (IFRS) basis and EEV basis results 126 Index to Group financial statements 127 Consolidated income statement 128 Consolidated statement of changes in equity 130 Consolidated balance sheet 132 Consolidated cash flow statement 133 Notes on the Group financial statements 290 Balance sheet of the parent company 291 Notes on the parent company financial statements 300 Statement of directors' responsibilities in respect of the Annual Report and the financial statements 301 Independent auditor's report to the members of Prudential plc 302 EEV basis supplementary information 306 Notes on the EEV basis supplementary information 333 Statement of directors' responsibilities in respect of the EEV basis supplementary information 334 Independent auditor's report to Prudential plc on the EEV basis supplementary information
Business overview Prudential plc is an international retail financial services group with significant operations in Asia, the US and the UK. Our purpose is to promote the financial well-being of our customers and their families, with a particular focus on saving for retirement and security in retirement.
Prudential Corporation Asia is the leading European-based life insurer in Asia in terms of market coverage and number of top five market positions. The Company has life and asset management operations in 13 markets, covering China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand, Vietnam and the United Arab Emirates.
£1,046m £829m *2006 comparatives at reported exchange rates (RER). †IFRS operating profits based on longer-term investment returns before restructuring costs and other income and expenditure.
£(82)m £(104)m *Including Asia development costs. † 2006 comparatives at constant exchange rates (CER).
Operating profit from continuing operations based on longer-term investment returns* £2,542m £2,133m Short-term fluctuations in investment returns £174m £738m Mark to market value movements on core borrowings £223m £85m Shareholders' share of actuarial gains and losses on defined benefit pension schemes £116m £207m Effect of changes in economic assumptions and time value of cost of options and guarantees £748m £59m
International Financial Reporting Standards (IFRS) basis results* Statutory IFRS basis results 2007 2006
Supplementary IFRS basis information Operating profit from continuing operations based on longer-term investment returns* £1,213m £1,050m Operating earnings per share from continuing operations after related tax and minority interests* 33.8p 30.9p
Operating profit based on longer-term investment returns Consistent with previous reporting practice, the Group analyses its EEV basis results and provides supplementary analysis of IFRS profit before tax attributable to shareholders, so as to distinguish operating profit based on longer-term investment returns from other 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 related tax and minority interests. These profits exclude short-term fluctuations in investment returns and the shareholders' share of actuarial 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.
Discontinued operations The results for continuing operations shown above and throughout this preliminary announcement exclude those in respect of discontinued banking operations. On 1 May 2007, the Company sold Egg. Accordingly, the presentation of the comparative results for 2006 has been adjusted from those published in March 2007.
‘We feel that the prospects for the Group continue to be exciting, and that we have the positioning, the skills and the capabilities to continue to deliver profitable growth for our shareholders.’
Perhaps the most significant trend affecting retail financial services today is the transition into retirement of an unprecedented proportion of the working population. This demographic trend is well documented in the UK and the US, but is also happening in many other markets in which we operate. Individuals worldwide are accepting the need to take charge of their own retirement planning and finances to an extent that has not happened before.
This retirement opportunity plays well to Prudential’s strengths. We have trusted brands and the distribution, investment management, risk management and product innovation skills to meet customers’ changing needs as they save for, and draw an income in, retirement.
We are also successfully leveraging the knowledge and experience of our more mature businesses to create solutions for our newer markets more quickly and effectively than would be possible on a standalone basis.
This year Prudential will be 160 years old, and the values that have guided the organisation throughout its history remain evident today. Our founding principles of integrity, security and prudence continue to underpin our ambition to promote the financial well-being of our customers and their families, and we remain committed to supporting the communities in which we operate.
In 2007 over 2,000 of our people gave their time to projects to improve their local environment, through the Chairman’s Award scheme. At the end of the year, employees across the Group were invited to vote for the project which they felt had had the greatest impact. This year’s winning project involved some 370 employees in Thailand in a reforestation and forest conservation project supporting 16 communities in the Chiang Rai region of the country.
‘Our founding principles of integrity, security and prudence continue to underpin our ambition to promote the financial well-being of our customers and their families.’
Financial capability remains at the heart of our Corporate Responsibility programme and, during the year, we added a new scheme in the US to our existing programmes in the UK and Asia. More details about our Corporate Responsibility programme can be found later in this Report.
We believe that this global retirement opportunity will be a significant driver of growth and profitability over the coming years, and that we have a set of assets and capabilities which position us extremely well to capture a disproportionately large share of that opportunity in our chosen markets. These include our brands, our investment and risk management skills, our product innovation and our powerful distribution networks.
As 78 million baby boomers move into retirement age, their assets will shift from asset accumulation to income distribution.
Traditionally, older people have relied on their children to provide for them, but within just one generation this will be far less common. Within this environment, ageing demographics are also beginning to drive increased household savings rates and an emerging need for healthcare and retirement solutions.
Asian governments have little appetite to increase the provision of state-funded retirement benefits and healthcare, and are actively encouraging the development of a strong, dynamic private sector to meet people’s growing need for financial solutions.
The combination of increasing life expectancy and decreasing 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, towards individuals. As a result, consumers have a growing need for independent financial advice and increasingly seek guarantees and longevity protections from the financial products they purchase.
Additionally, the responsibility for providing income during retirement is continuing to shift away from the government and employers towards the individual. This coupled with low savings and high indebtedness in the UK, increases the risk that individuals will be inadequately provided for during increasingly long periods of retirement. Consequently, there is a growing demand for financial advice and financial products including guarantees and longevity protection.
The Group has the flexibility to optimise its capture of the retirement opportunity as it develops in each of our chosen markets and our business model creates significant financial and operational synergies. Within each market our focus is to operate in areas where we see sustainable competitive advantage and in products and distribution channels that have sound and sustainable economics.
Group performance Group operating profit before tax from continuing operations, on the European Embedded Value (EEV) basis increased by 25 per cent in the year to £2,542 million and has doubled over a three-year period. The Group’s return on embedded value was 15.4 per cent (2006: 14.5 per cent).
‘The combination of our retirement-led strategy, a clear focus on generating profitable growth, and excellence in the delivery of our plans is driving shorter-term performance and also placing the Group in a strong position from which to outperform in the longer term.’
Our assets and capabilities Within these markets, we will continue to leverage our brands, our product innovation skills and our investment management and risk management expertise to develop and deliver solutions that meet the changing needs of customers throughout their pre- and post-retirement years, and we will further strengthen our powerful distribution networks to enable us to bring those products to market successfully.
Operating profit in the Group’s asset management operations increased by 28 per cent, to £334 million in what was an excellent year for these businesses in increasingly challenging conditions.
The cash flow position continued to improve and we are progressing well towards our target of being operating cash flow positive at the Group level in 2008. The holding company’s operating cash flow in 2007 was negative £82 million. During the year the Group received £527 million from the sale of Egg, the UK internet banking operation. This resulted in an overall holding company cash inflow of £445 million.
Insurance operations In Asia we continue to power ahead with the region accounting for 54 per cent of new business profits. New business on an APE basis increased by 44 per cent to £1,306 million and all businesses across the region grew by 15 per cent or more.
Business unit strategies Asia Prudential’s strategy in Asia is to continue to build quality, multi-channel distribution that delivers customer-centric and profitable products in segments that have the potential for sustained growth, with an increasing emphasis on retirement solutions.
M&G M&G’s strategy is to focus on delivering superior investment performance and maximising risk-adjusted returns for its retail, wholesale and internal clients.
United States — Continue to enhance and expand the existing product offering — Continue to take profitable share of variable annuities
— We introduced six guaranteed living benefits and a further 20 investment options to our variable annuity product.
— We launched a range of retail mutual fund products. Curian increased assets under management by 42 per cent in 2007.
— We have withdrawn from unprofitable product areas and developed a factory gate proposition aimed at distribution partners with good persistency. We completed the £1.7 billion Equitable Life transaction.
— 45 per cent of M&G’s retail mutual funds delivered top quartile performance. 86 per cent of segregated institutional mandates met or exceeded their benchmarks.
The US is the largest retirement market in the world and our long-term strategy has been to position Jackson to meet the pre- and post-retirement needs of the baby boomer generation. In 2007, variable annuity new business increased by 29 per cent to £455 million on an APE basis. Jackson has been the fastest-growing variable annuity provider in the US over the past six years, clearly demonstrating the success of our strategy and our advice-based approach.
‘We will focus on expanding our existing franchises in Asia, the US and the UK where we already hold strong and often market-leading positions.’
Retail new business increased by four per cent in a market where the competitive pressures increased still further during the year. In 2007 we also completed the transfer of Equitable Life’s £1.7 billion in-force portfolio of with-profits annuities: however in general, pricing across the bulk market was not adequate to meet our return on capital requirements and we chose not to write business at uneconomic levels.
The in-force profit for the UK business includes a charge in respect of a mortality assumption change on the annuity business of £312 million which is fully offset by a release of excess margins previously held.
In 2007 we announced that the Group would consider a reattribution of the inherited estate held in the with-profits sub-fund of The Prudential Assurance Company Limited. We are continuing to explore the possibility of a reattribution and we aim to be in a position in the first half of 2008 to determine whether this would be in the best interests of policyholders and shareholders.
Asia — Expand the agency force and continue to improve productivity — Maximise the potential from non-agency distribution and add new partners — Further develop direct marketing channels and up-sell and cross-sell — Increase focus on retirement services and health products
US — Continue to innovate around our key variable annuity product — Enhance further our already world-class operating platform — Expand retail distribution — Selectively participate in the institutional market
Outlook There is significant volatility and nervousness in markets and it seems clear that there will be a period of less attractive economic growth trends in the US and in the UK than we have seen in recent years. Notwithstanding this, we believe that our strategy and our business model are very robust and will continue to deliver sustainable value.
In Asia, the fundamentals underpinning economic growth remain powerful and our businesses are very well placed to benefit. We expect to deliver, one year earlier than previously stated, on our target of at least doubling 2005 new business profit by 2009.
We believe our assets and capabilities position us extremely well to capture a disproportionately large share of the growing retirement opportunity in our chosen markets.These include: Trusted brands We believe that our brands are a significant advantage in capturing an increasing share of the global retirement market. See page 21
In the UK, where we have had a presence for 160 years, we continued to build our brand during 2007, supported by an aspirational campaign to redefine retirement as a time of opportunity.
In the US, where we operate under the Jackson brand, our strategy centres on the advice-based channels to which customers are increasingly turning for help in choosing from the maze of retirement solutions in this complex and crowded marketplace. Jackson is already recognised as a leading provider of one of the country’s most popular retirement vehicles, the variable annuity, and in 2007 it continued to raise its profile through targeted media campaigns focused on independent intermediaries. Jackson also rebranded its website in 2007, highlighting its vision to help Americans achieve their retirement dreams.
Key skills Our risk and investment management capabilities underpin our business, enabling us to meet customers’ changing needs throughout their lifetimes.
In the UK our wealth of longevity knowledge and experience is a significant advantage in designing and pricing products for the retirement income market, while our multi-asset investment capability and emphasis on cautiously-managed products such as With-Profits, enable us to meet customers’ needs, especially in volatile markets.
In Asia, we successfully leverage our regional and international expertise and multi-asset investment capabilities to create tailored insurance and mutual fund products for different markets. For example, we launched pan-Asian funds in several Asian markets during the year; we also offer a range of global, US and European funds in Hong Kong, managed by M&G, and a number of US funds in Japan, managed by our US investment management company PPMA.
Innovative products We have established a strong track record of delivering innovative solutions that meet customers’ needs, with a particular focus on helping them to save for, and secure an income in, retirement.
In the UK, we have developed a full range of retirement income solutions.
This includes a new Flexible Lifetime Annuity, and an Income Drawdown product which helps customers manage their pension through the various stages of retirement, as well as offering flexibility and the potential for growth through investment. We have also made a number of enhancements to our lifetime mortgage range, including a new lump sum product as well as an inheritance guarantee. Our PruHealth joint venture also continues to grow well, attracting over 140,000 customers to date with its mould-breaking proposition, which rewards healthy living.
We also launched several new funds aimed at capturing the potential in fast-growing economies such as China and India. In Japan, our India Infrastructure Equity Fund became our third fund in Japan to pass the 100 billion Japanese Yen milestone, while in Singapore, our Dragon Peacock Fund, which invests in China and India, is one of the largest retail equity funds in the market.
M&G also extended its product range in 2007. In the retail market, the business cemented its position as a leading innovator with the launches of the M&G Cautious Multi Asset Fund and the M&G Global Convertibles Fund. In the wholesale arena, M&G launched three new funds – the M&G Alpha Opportunities Fund, M&G Secured Property Income Fund and M&G Secured Debt Fund. These three funds leverage the company’s expertise and scale in both property and private finance, and provide institutional and pension fund clients with innovative alternatives to traditional fixed income assets.
In Asia, we have a highly successful multi-channel distribution platform, tailored to each market, which includes traditional tied agency, banks, general agents or brokers and an emerging direct channel. For example, in India, the emphasis is on rapidly building agency scale, and in 2007 agent numbers increased by over 120 per cent, whereas in markets where we already have agency scale, the emphasis is on improving agent productivity. During 2007 we also entered several significant new partnerships, including Standard Chartered Bank in Taiwan, and Kookmin Bank and Industrial Bank of Korea in Korea.
This Operating and Financial Review (OFR) has been prepared in accordance with the Accounting Standards Board’s Reporting Statement 1- OFR, a reporting statement of voluntary best practice.
65 Other corporate information 72 Risk management 81 Corporate responsibility review
The Group’s strategy is to focus primarily on the enormous opportunity offered by the retirement market as this is where the major growth trends in our sector lie. Global asset flows around retirement can be measured in trillions of pounds and the Prudential Group is ideally positioned through capability, geographic presence and powerful brands to capture growing value from this opportunity.
New business premiums and new business profit Prudential’s focus remains on growing sales in areas that deliver the most profitable returns. In 2007, the Group increased weighted insurance sales, calculated on an APE basis, by 21 per cent and new business profits grew by 22 per cent compared with 2006 on a constant exchange rate (CER) basis. Sales on a PVNBP basis increased by 17 per cent to £21.3 billion compared to 2006.
New business premiums, on an APE basis, are calculated as the aggregate of regular new business contributions (shown on an annualised basis) plus 10 per cent of single new business contributions.
New business premiums, on a PVNBP basis, 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 profit.
The present pre-tax value of future shareholder cash flows from new business, less a deduction for the cost of locked-in (encumbered) capital and the impact of the time value of options and guarantees.
+22% EEV new business profit £m £1,215m £992m 2005 £831m 2004 £680m
Prudential continually works to enhance the effectiveness of its capital management processes, to ensure that investment and capital allocation decisions are focused on those areas of activity that will generate the best returns to shareholders.
The increase or decrease in holding company cash and short-term investments during the reporting period.
EEV operating profit from long-term business based on longer-term investment returns and IFRS operating profit from continuing operations based on longer-term investment returns Prudential’s objective is to achieve superior growth in value for its shareholders. This is shown by sustainable growth in operating profit, both on an EEV and IFRS basis.
In 2007 the Group delivered a 20 per cent increase on the same period in 2006 (CER basis) in EEV operating profit on its long-term business.
Total IFRS operating profit based on longer-term investment returns on continuing operations was 20 per cent higher in 2007 than in 2006 (CER basis) reflecting the strong performance of the Group’s UK and US insurance businesses.
Prior year comparatives have been restated to exclude the performance of Egg, the sale of which was completed in May 2007.
The change in pre-tax value of EEV as a result of new business, expected investment returns and the unwind of the discount rate, the effect of changes in operating assumptions and any operating experience variances. It excludes the effect of shortterm fluctuations in investment returns against the long-term assumptions, the effect of changes in economic assumptions, the effect of the change in time value of the cost of options and guarantees, shareholders’ share of actuarial gains and losses on defined benefit pension schemes and the mark to market value movements on borrowings.
These profits exclude short-term fluctuations in investment returns and the shareholders’ share of actuarial gains and losses on defined benefit pension schemes.
These results show the strong performance of the Group in 2007. The KPIs above show growth in sales and profits and an improvement in cash flow. The surplus capital position of Prudential plc, measured under the Insurance Groups Directive (IGD) basis, will be submitted to the FSA by 30 April 2008 but is currently estimated to be in the region of £1.4 billion. This includes a benefit of around £0.3 billion that arose during 2007 from the sale of Egg Banking plc.
As a signatory to the European Chief Financial Officers’ (CFO) Forum’s EEV Principles, Prudential also reports supplementary results on an EEV basis for the Group’s long-term business. These results are combined with the IFRS basis results of the non long-term businesses to provide a supplementary operating profit under EEV. Reference to operating profit relates to profit based on long-term investment returns. Under both EEV and IFRS, operating profits from continuing operations based on longer-term investment returns exclude short-term fluctuations in investment returns and shareholders’ share of actuarial gains and losses on defined benefit pension schemes. Under EEV, where additional profit and loss effects arise, operating profits based on longer-term investment returns also exclude the mark to market value movement on core borrowings and the effect of changes in economic assumptions and changes in the time value of the cost of options and guarantees arising from changes in economic factors.
Annual premium equivalent (APE) sales 2,874 2,374 21 2,470 16 Present value of new business premiums (PVNBP) 21,302 18,192 17 18,947 12
EEV basis operating profit from long-term business from continuing operationsnotes 1,2 2,517 2,103 20 2,208 14 Total EEV basis operating profit
Total IFRS operating profit from continuing operationsnotes 3,4 1,213 1,008 20 1,050 16 EEV basis shareholders’ funds (£bn) 14,779 11,910 24 11,883 24
Holding company operating cash flow (82) (104) 21 (104) 21 Holding company operating cash flow plus proceeds from the sale of Egg 445 (104) 528 (104) 528 Return on embedded valuenote 6 15.4% 14.5% 6
4 Prior year restated excludes Egg, and shows continuing operations only. 5 Reported exchange rate (RER). 6 Return on embedded value is based on EEV operating profit from continuing operations after tax and minority interests as a percentage of opening embedded value (shareholder’s funds on a EEV basis).
EEV basis operating profit from continuing operations £m £m % £m %
Total EEV basis operating profit from continuing operations based on longer-term investment returns was £2,542 million, up 25 per cent from 2006 at CER and up 19 per cent at RER. This result reflects the significant growth of new business profit of £1,215 million and in-force profit of £1,317 million by insurance businesses, up 17 per cent over 2006, and strong asset management profit growth.
The in-force profit in 2007 for the UK business included a charge in respect of a mortality operating assumption change on annuity and deferred annuity pension business of £312 million, which is fully offset by a release of excess margins previously held.
Asia’s development expenses (excluding the regional head office expenses) were £15 million (2006: £14 million).
Other income and expenditure totalled a net expense of £289 million compared with £298 million in 2006 at RER. This result primarily includes interest expense on central borrowings of £168 million (2006: £177 million); £117 million of Group Head Office (GHO) costs (2006: £83 million) and £38 million of costs for the Asia head office (2006: £36 million). The increase in Group Head Office (GHO) costs reflects costs in respect of the process to consider a reattribution of the inherited estate.
Value of Total Free Required Total net in-force long-term surplus capital worth business business
In the US, capital was invested to support sales at an average rate of £30 million per £100 million of APE sales.
In the UK, capital was invested to support sales at an average rate of £17 million per £100 million of APE sales.
Total EEV basis operating profit from continuing operations after restructuring costs 2,542 2,133 19
Discontinued operations (net of tax) 241 (105) Minority interests (21) (1)
The UK business component of short-term fluctuations in investment returns of negative £42 million primarily reflects reduced asset values in PRIL, the shareholder-backed annuity business, from widened credit spreads and the difference between the actual investment return for the with-profits life fund of 7.2 per cent and the long-term assumed return of 7.85 per cent.
In the UK, economic assumption changes of positive £466 million primarily reflect the impact of the increase in the investment return assumption and a decrease in the risk free rate.
The effective tax rate at an operating tax level was 27 per cent (2006: 30 per cent), generally reflecting expected tax rates. The effective tax rate at a total EEV level was 25 per cent (2006: 28 per cent) on a profit of £3,803 million.
Insurance business: Asset management business: US broker-dealer and asset management 13 16 (19) 18 (28)
Total IFRS basis operating profit based on longer-term investment returns before restructuring costs 1,232 1,046 18 1,088 13
In the US, IFRS operating profit of £444 million was up 21 per cent on 2006 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. Longer-term returns for the US operations’ 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’ IFRS operating profit for longterm business mainly reflects increased fee income driven by a 34 per cent increase in separate account assets during the year and higher overall election of optional benefits. Profits from the annuities spread business were broadly in line with prior year and continue to represent the key contributor to overall IFRS operating profit. One-off items affecting the spread-based income were £26 million, net of related amortisation of deferred acquisition costs (DAC).
In the UK, IFRS operating profit for the long-term business increased six per cent to £528 million in 2007. This reflected a seven per cent increase in profits attributable to the withprofits business to £394 million, representing the continued strong investment performance of the Life Fund and its impact on terminal bonuses. 2007 includes the net impact of the mortality strengthening and a release of excess margins previously held in other assumptions which was a positive £34 million.
M&G’s operating profit for 2007 was £254 million, an increase of 25 per cent over 2006, due to strong net investment inflows and positive market conditions for the first three quarters of 2007.
The operating profit from the US broker-dealer and asset management businesses was £13 million, a 19 per cent decrease on 2006. Curian recorded losses of £5 million in 2007, down from losses of £7 million in 2006, as the business continues to build scale.
Total IFRS basis profits before tax attributable to shareholders and minority interests were £1,166 million in 2007, compared with £1,372 million for 2006. The decrease reflects a reduction in short-term fluctuations in investment returns of £292 million and a reduced 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 the calculation of IFRS operating profit longer-term investment return assumptions are used rather than actual investment returns achieved. The actual movements in asset values beyond the longer-term assumptions appear in the profit and loss account as short-term fluctuations in investment returns, with the exception of Jackson where unrealised gains or losses on debt securities feature directly as movements to shareholder reserves.
In the US there was a £18 million charge for short-term fluctuations in investment returns. During 2007 the US life insurance operations recorded net credit losses of £78 million (2006: £25 million). This charge is reflected in two parts of the accounting presentation of the results. Included within the IFRS operating profit based on longer-term investment returns is a risk margin reserve (RMR) charge, representing long-term expected credit defaults, of £48 million (2006: £54 million). The difference between the credit related losses and the RMR charge in the year was, therefore, a charge of £30 million (2006: £29 million credit) which is recorded within short-term fluctuations in investment returns, within the overall £18 million charge for US life insurance operations.
The fluctuations for the UK operations primarily reflect reduced asset values in PRIL, the shareholder-backed annuity business, from widened credit spreads on corporate bond securities.
The full year dividend is covered 1.9 times by post-tax IFRS operating profit from continuing operations.
The current mix of new business in Taiwan is weighted heavily towards unit-linked and protection products, representing 75 per cent and 15 per cent of new business APE in 2007, 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 less than one percentage point. 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
Statutory IFRS basis shareholders’ funds at 31 December 2007 were £6.2 billion. This compares with £5.5 billion at 31 December 2006 at RER. The increase primarily reflects: profit after tax and minority interests of £1,022 million, the proceeds from the share capital issue of the Company for £182 million, offset by the impact of negative unrealised holding losses on available for sale investments of £231 million, and dividend payments to shareholders of £426 million.
A 2007 opening shareholders’ funds B Life new business profits C Life in-force profit D Asset management and other operating profit E Other income and expenditure (including Asia development expenses and restructuring costs) F Short-term fluctuations in investment returns G Effect changes in economic assumptions and time value of cost of options and guarantees H Mark to market movement on core borrowings, actuarial gains and losses on defined benefit pension schemes I Tax J Dividends K Other including result for discontinued operations and increase in share capital L 2007 closing shareholders’ funds
Cash remitted by business units: UK life fund transfer 261 217 UK other 3 0
Total cash remitted to Group 711 596 Net interest paid (96) (128) Dividends paid (426) (399) Scrip dividends and share options 183 91
Capital invested in business units: Total capital invested in business units (294) (319)
During 2007, the Group holding company paid £200 million in respect of corporate activities, which included costs in respect of the process to consider a reattribution of the inherited estate together with a repayment to HMRC in respect of tax recoveries in previous years following a change in tax legislation. Tax received of £40 million (2006: £122 million) was lower than prior year as a result of foreign exchange gains reducing the level of taxable losses and a payment to HMRC. Asia contributed a net remittance of £37 million to the holding company cash flow.
In 2008, the UK shareholders’ statutory transfer relating to the bonus declarations is expected to be £279 million.
Depending on the mix of business written and the opportunities available, Prudential expects that the UK shareholder-backed business will become cash positive in 2010.
Taking into account plans for future growth, our ability to surrender group tax relief, 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.
The scale and reach of our Asian franchise is unparalleled, with top five market share positions in seven of our 12 insurance markets. At the heart of our success lies our multi-distribution platform, which includes a tied agency force of over 410,000 people as well as a significant network of bank and other partnerships, and an emerging direct channel.
Prudential’s strategy in Asia is to build quality, multi-channel distribution that delivers customer-centric and profitable products in segments with the potential for sustained growth. By necessity, the approach to each market varies, but all operations are unified under the Prudence icon and common brand values and Prudential has the proven ability to leverage learning and expertise from within the region and the wider Group to accelerate the development of unique opportunities as they arise in each market.
Current year initiatives The core business priorities were outlined as: — Building on existing strengths in agency channel. — Improving and extending partnership distribution. — Continuing product innovation. — Strengthening and deepening customer relationships. — Developing retirement solutions. — Starting work on direct distribution.
In Asia, there are very material opportunities arising in the provision of healthcare solutions. Prudential successfully piloted new supplemental health products in Singapore, India and Hong Kong during the year, selling over 125,000 new policies.
Helping people address their financial needs for retirement is also a major growth opportunity and whilst Prudential already has a number of products designed to support the accumulation phase of a retirement fund, work is now under way on drawdown options and supporting related protection and health products. Prudential has already begun positioning itself as a provider of retirement solutions through the roll-out of the successful ‘What’s your number?’ campaigns in six countries that encourage people to think about what resources they are likely to need to finance their retirement aspirations.
Prudential has a unique position in Vietnam with its marketleading life insurance business and well-respected brand. To further leverage this platform, Prudential launched a consumer finance company in September 2007.
Financial performance In 2007 Prudential delivered new business APE of £1,306 million from Asia, representing very strong growth that averaged 44 per cent over 2006 and with all operations delivering double-digit growth including Taiwan, India and Indonesia, up 71 per cent, 67 per cent and 75 per cent respectively.
The total IFRS Operating profit of £189 million was up seven per cent on 2006. Within this, the Established markets (Singapore, Hong Kong and Malaysia) generated £153 million, up 15 per cent from 2006. The North Asia markets (Taiwan, Japan and Korea) generated £16 million, down 20 per cent from last year reflecting increased losses in Japan of £16 million. Excluding Japan, profits from North Asia almost doubled reflecting a strong increase in Taiwan of 47 per cent due to in-force profits, especially from long-term health products and favourable other experience. Losses from the joint ventures in India increased to £43 million, reflecting the fast pace of new business growth and investment in growing the branch networks. Losses from the joint venture in China reduced to £6 million. In the other markets (Vietnam, Thailand, Indonesia and the Philippines), profits grew by 58 per cent to £68 million reflecting the expected emergence of IFRS profits and a one-off £16 million favourable item in Vietnam.
Having achieved compound growth of 26 per cent since 2005, Asia expects to deliver doubling of 2005 EEV NBP a year early by 2008.
The United States is the largest retirement market in the world, with some 78 million baby boomers, the first of whom are now reaching retirement age. As the fastest growing variable annuity provider in the US for the past six years, Jackson is well positioned to meet the needs of this generation as it retires over the next decade and beyond.
The US is the largest retirement savings market in the world and continues to grow rapidly. By mid-2007, total retirement assets in the US exceeded US$17.4 trillion, up from US$16.5 trillion at the end of 2006 (Source: Investment Company Institute). As 78 million baby boomers (Source: US Census Bureau) move into retirement age, these assets will shift from asset accumulation to income distribution. Currently, US$1.6 trillion of assets are generating retirement income. This amount is estimated to grow to US$7.3 trillion by 2017 (Source: Financial Research Corporation).
During 2007, the Standard & Poor’s (S&P) index increased 3.5 per cent (2006: 13.6 per cent), and the US equity markets
In addition, for much of 2007, the yield curve was flat and credit spreads were relatively low, resulting in a difficult environment for the sale of properly priced fixed annuities. During the second half of 2007, the yield began to normalise and credit spreads began to widen, ending closer to normalised historical levels. The market for fixed annuities was further complicated during the year by artificially high deposit rates offered by banks to attract assets.
— Increase penetration of existing distribution channels. — Increase share of the US retail asset management market.
‘Jackson continues to base its success in the evolving US market on industry-leading distribution and product innovation coupled with sound evaluation of product economics.’
In 2007, Jackson also introduced a line of retail mutual funds and launched two new fixed index annuity products that offer new index options and multiple crediting methods. These additions provide even more product choices to advisers and create more opportunities to capture a larger portion of the US retirement market.
‘Jackson delivered record variable annuity APE sales of £455 million in 2007, up 29 per cent over 2006.’
Fixed annuity APE sales of £57 million were 10 per cent down on 2006, while industry sales of traditional individual deferred fixed annuities were 13 per cent lower in 2007 compared to 2006 (Source: LIMRA).
Associates). Jackson’s APE sales of £45 million were 12 per cent down on 2006. In the third quarter of 2007, Jackson ranked first in fixed index annuity sales through banks for the ninth consecutive quarter (Source: The Kehrer-LIMRA Report). Jackson continues to pursue profitable growth and hence has been unwilling to compromise target margins in this market.
Institutional APE sales of £94 million were up 15 per cent on 2006. Jackson continues to participate in this market on an opportunistic basis when margins are attractive.
EEV basis new business profits of £285 million were 19 per cent above the prior year, reflecting a 19 per cent increase in APE sales with a shift in the mix of business toward variable annuities as well as increased sales of institutional business with longer duration. Total new business margin was 42 per cent, in line with 2006.
The new business margin on institutional business improved significantly, from 39 per cent in 2006 to 58 per cent in 2007 due to the much longer average duration contracts written during 2007 and a lower risk discount rate.
Total EEV basis operating profit for the long-term business for 2007 was £627 million compared to £652 million in the prior year at CER. In-force EEV profits of £342 million were 17 per cent below prior year profit of £413 million at CER. Experience variances were £58 million lower in 2007 due to lower spread income and the impact of persistency adjustments. Operating assumption changes were less favourable than the prior year by £17 million including the impact of updated persistency and lapse rates during 2007. One-off items favourably affected the spread income variance by £40 million during 2007.
IFRS operating profit for the long-term business was £444 million, up 21 per cent on the prior year of £367 million at CER, primarily reflecting an increase in fee income and continued low mortality rates during 2007. Higher fee income was driven primarily 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 guaranteed optional benefits. In 2007, IFRS spread income included a number of non-recurring items, totalling £26 million net of DAC amortisation (2006: £31 million at CER).
At 31 December 2007, Jackson had more than £41 billion in US GAAP assets. Of this total, £15 billion were separate account assets, an increase of £4 billion from year-end 2006, further increasing Jackson’s earnings from fee-based products.
During the second half of 2007, equity market volatility increased materially primarily due to liquidity concerns and valuation issues in the US sub-prime mortgage market. Much of the market movement was due to concerns regarding the risk in this market that resulted in a tightening in the level of credit available. While the financial services industry was hardest hit by these events, losses were generally limited to those companies with significant levels of sub-prime or Alt-A mortgage exposure. Jackson’s exposure to the sub-prime mortgage market is limited at only £237 million at the end of 2007. Most of this exposure is in fixed rate, residential mortgagebacked securities that are AAA rated and hold first liens on the underlying collateral. Exposure to Alt-A was £660 million and direct exposure to monoline insurers was £23 million.
The average IRR on new business was up slightly to 19 per cent, primarily due to a larger proportion of variable annuity sales in 2007.
The UK business remains focused on maximising value from the opportunity afforded by the fast growing need for retirement solutions. With an ageing population and the concentration of UK wealth in the mass affluent and high net worth sectors, the retirement and near-retirement population will represent the fastest growing segments of the market over the next 10 years. Low savings rates and high levels of consumer debt, combined with a shift in responsibility for providing income during retirement from Government and employers towards individuals, have resulted in individuals being inadequately provided for during increasingly long periods of retirement. These consumers will have a need for high-quality financial advice and service and are increasingly seeking guarantees and longevity protection from their financial products.
‘A strong Retail performance saw a four per cent increase in sales and a 17 per cent increase in new business profit to £223 million, demonstrating the continuing benefits of selectively participating in product lines that can deliver attractive returns.’
Prudential UK has a unique combination of competitive advantages including its significant longevity experience, multi-asset management capabilities and its brand and financial strength. These put it in a strong position to pursue its value-driven strategy in its two principal businesses: Retail and Wholesale.
In addition, the Retail business has used its brand and strength with Discovery to build branded distribution in Health and Protection, further using the joint venture to access Discovery’s Vitality concept and lifestyle protection capabilities.
Prudential UK’s strategy in the Wholesale market is to participate selectively in bulk annuity and back-book buy-outs, where Prudential UK is able to win business based on its financial strength, superior track record, market-leading investment capability as well as its extensive annuitant mortality risk assessment capabilities. The Wholesale business, which has been in operation for over 10 years and has already written more than 400 bulk buy-outs, has a strong track record in the risk management of pension schemes for corporate clients and insurers wishing to reduce or eliminate their investment or longevity liabilities. Prudential UK will maintain a strict focus on value, only participating in transactions that generate an acceptable rate of return.
Current year initiatives Prudential UK’s key priorities in 2007 were: — Maintaining leadership position in individual annuities. — Building share of the equity release market. — Growing the volume of products that utilise Prudential’s multi-asset management expertise.
— Deepening relationships with chosen distributors including the introduction of customer-agreed remuneration across some product lines.
During 2007, Prudential UK maintained its market leadership in individual annuities, where it has continued to create value by maintaining high retention rates. This has been augmented by partnership deals with insurers such as Zurich, Royal London and Save and Prosper. We also announced a new partnership with Barclays, where Prudential will be the preferred supplier of conventional annuity products to their retail customers in the UK.
Capitalising on the need for inflation protection in retirement, Prudential remains the market leader in the growing with-profits annuity market, with over 75 per cent market share. Early in 2007 Prudential made a number of product enhancements including the facility to accept Protected Rights monies, which was a first in the with-profit annuity market.
In the fourth quarter, Prudential UK launched an income drawdown product. This product helps customers manage their pension through the various stages of retirement, and offers flexibility whilst providing potential for growth through investment. Together with the Flexible Lifetime Annuity this gives Prudential a full range of retirement income solutions.
Investing in property has been an increasingly important component for many people saving for their retirement.
The agreement announced in 2007 with Capita to outsource a large proportion of its in-force and new business policy administration is another important milestone for the UK business. This agreement will deliver £60 million per annum of savings to Prudential UK, and is an important element in achieving its total cost-saving target of £195 million.
The contract will result in approximately 3,000 employees transferring to Capita and helps the UK deliver its long-term cost savings strategy by removing fixed costs from the business and achieving significant operating efficiencies. This provides a significant reduction in long-term expense risk by providing certainty on per-policy costs as the number of policies in the mature life and pensions book decreases over the coming years. Unit costs per policy are expected to reduce by over 30 per cent by 2011.
Financial performance Total APE sales of £897 million were in line with 2006 and there was a four per cent increase in new business profit to £277 million, reflecting an improved new business margin of 31 per cent in an increasingly competitive market. The 2006 comparator included credit life sales of £63 million and associated new business profit of £20 million written under a single contract that was not renewed in 2007.
‘A strong Retail performance saw a four per cent increase in sales and a 17 per cent increase in new business profit.’
In the wholesale bulk annuity and insurer back-book market, Prudential UK achieved a 26 per cent year-on-year increase with sales in 2007 of £180 million. In the fourth quarter Prudential completed the transfer of Equitable Life’s portfolio of in-force with-profit annuities. In the previous year, Prudential UK completed two back-book insurer deals with
a total volume of £143 million. New business profits relating to the Wholesale business were £54 million in 2007.
EEV basis operating profit based on longer-term investment returns of £859 million, before restructuring costs of £8 million, were up 25 per cent on 2006. The in-force operating profit of £582 million was up 39 per cent on 2006, due to the increase in profits arising from the unwind of the in-force book (reflecting an increased opening embedded value) and a £67 million positive operating assumption change in 2007 reflecting the change in the long-term tax rate assumption from 30 per cent to 28 per cent. A charge in respect of a mortality operating assumption change on annuity and deferred annuity pension business of £312 million was fully offset by the release of excess margins previously held.
IFRS operating profit increased six per cent to £528 million before restructuring costs of £7 million. This reflects a seven per cent increase in profits attributable to the with-profits business which contributed £394 million, reflecting strong investment performance and its impact on terminal bonuses. The net impact of the mortality strengthening and release of margins held in other assumptions under the IFRS basis was a positive net £34 million.
In 2007, Prudential received a £4 million net commission payment from Winterthur relating to general insurance sales under the Prudential brand in the UK. From early 2008, on settlement of an advance payment made by Winterthur in 2002, the business expects to receive approximately £30 million a year in commission payments, although this will depend on the new business volumes and persistency rates.
Prudential UK writes with-profit annuity, with-profits bond and with-profits corporate pension business in its life fund with other products backed by shareholder capital. The weighted average post-tax IRR on the shareholder capital allocated to new business growth in the UK was 14 per cent, excluding the Equitable Life deal (18 per cent including this business).
+4% EEV new business profit £m £223m £54m £76m £129m £190m 2005 £114m
Global The Prudential Group’s asset management businesses provide value to the insurance businesses within the Group by delivering sustained superior performance. They are also important profit generators in their own right, having 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)
The Group’s asset management businesses operate different models and under different brands tailored to their markets and strengths, however they continue to work together by managing money for each other with clear regional specialism, distribute each others’ products and share knowledge and expertise, such as credit research.
Each business and its performance in 2007 is summarised in this and the following pages.
M&G is comprised of the M&G asset management business and Prudential Capital.
M&G’s retail strategy is based on obtaining maximum value from a single manufacturing function through a multi-channel, multi-geography distribution approach. Over the last five years, M&G’s retail business has expanded beyond the UK into the major European markets, the Middle East, South America and Asia. By operating through multiple channels, M&G’s retail business is well placed to profit from current trends away from direct selling towards intermediation, and the growth of online fund platforms and third-party product wrappers.
M&G’s wholesale strategy centres on leveraging the skills developed primarily for internal funds to create higher-margin products for external clients. In recent years, this strategy has consolidated M&G’s position at the forefront of the leveraged finance, structured credit and infrastructure investment markets. The same strategy is now being applied to develop the more traditional pooled and segregated fixed income areas of M&G’s wholesale business.
M&G has significant scale in all major asset classes: it is believed to be one of the largest active managers in the UK stock market, one of the largest bond investors in the UK and
Retail one of the UK’s largest property investors. In addition, M&G has profitable businesses in a number of specialist areas such as leveraged loans, structured credit, infrastructure finance and macro investment.
Current year initiatives Delivering fund performance remains critical and is the key determinant of success for an asset management business. M&G has continued to deliver market-leading investment performance in 2007 with impressive results. M&G’s retail funds have performed exceptionally well, with 45 per cent delivering top-quartile performance1. In addition, 86 per cent of M&G’s segregated institutional funds have met or exceeded their benchmark performance1.
Overall, the demand for asset management products in M&G’s distribution markets continued to grow strongly in 2007 driven, in part, by the same retirement-related demographic trends that are creating opportunities for the Group as a whole.
With a diversified business across different asset classes and across retail and wholesale markets, both in the UK and internationally, M&G remains well positioned for a variety of macro-economic and market conditions.
Operating profit from asset management operations 203 161 26 161 26 Operating profit from Prudential Capital 51 43 19 43 19 *Revenue excludes income earned by Prudential Capital and by investment funds controlled by the asset management operations. †Based on longer-term investment returns.
Wholesale markets are demanding increasingly sophisticated and tailored products and there is 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. In 2007, M&G launched three new funds aimed at the institutional and pensions markets – the M&G Alpha Opportunities Fund, M&G Secured Property Income Fund and the M&G Secured Debt Fund. All of these funds offer innovative alternatives to traditional fixed income assets and leverage off M&G’s expertise and scale in both property and private finance.
M&G’s infrastructure investment business has grown from inception in 2005 to manage £471 million (2007 year end fair value) in its principal fund, Infracapital. The business contributed £7.1 million to M&G profits in 2007.
In order to support its retail and wholesale strategy, M&G places a high priority on the recruitment, development and retention of top-quality staff. In a highly competitive market for the best talent, this entails providing an inclusive and supportive environment as well as offering appropriate levels of compensation. At the same time, M&G has a policy of prudent cost control, ensuring that top-line growth is translated into enhanced operational gearing. During 2007 turnover of staff remained in line with industry averages at 10 per cent and the company spent £2.1 million on training and development programmes.
M&G continues to target increased diversity in profitgenerating activities. In 2007, 80 per cent of underlying profits were generated as a result of managing external funds, compared to 23 per cent in 2003.
A Internal B Wholesale C Retail D Absolute return E Unallocated F 2003 total G 2007 total
Underlying and total operating profit 2003-2007 £m £175m £28m £27m £26m £134m 2005 £24m£96m 2004 £80m £13m2003 £51m
M&G has performed strongly against the other three measures. Net sales for 2007 of £5.0 billion (2006: £6.1 billion) were driven by both the retail £2.7 billion (2006: £3.1 billion) and wholesale £2.3 billion (2006: £3.0 billion) businesses. Gross inflows of £14.7 billion were the highest on record, offset to some extent by higher gross redemptions, particularly in the more volatile international retail marketplace.
The continued strong growth in external funds under management, coupled with a small decline in the value of funds managed for Prudential, has resulted in an increasing mix of higher-yielding business for M&G. This has supported an increase in gross margin (revenue as a proportion of FUM) from 28.0 basis points in 2003 to 30.8 in 2007.
The mutual fund industry continues to diversify its investments; expectations are for a significant increase in net flows over the coming years. Bank distribution continues to dominate in most markets in Asia, and Prudential has established strong relationships with both regional and local banks and places great emphasis on providing good service.
Greater deregulation and higher allocations by sovereign wealth and other institutional investors in foreign investments is driving the growth of offshore funds in the market and Prudential is also developing its institutional asset management business in Asia, winning mandates of £0.5 billion during 2007.
The United Arab Emirates operation also made good progress with 13 distribution agreements signed since launch a year ago and with funds under management of £397 million.
Financial performance Prudential’s asset management business achieved record net inflows for 2007 of £3 billion, up 23 per cent on 2006. The growth in net flows was primarily driven by strong performance in India, Taiwan and Japan. Funds under management in these three countries increased by 65 per cent, 49 per cent and 46 per cent respectively. In total during 2007, retail funds under management grew by 39 per cent to £17.4 billion.
IFRS profits from asset management operations were £72 million, up 53 per cent on 2006. Operating profits in terms of basis points on funds under management increased from 18 basis points in 2006 to 21 in 2007. The asset management business requires very little capital to support its growth and in 2007 it remitted a net £31 million to the Group.
Current year initiatives During 2007, PPMA successfully leveraged its investment management capabilities as evidenced by: — Obtaining over £329 million of funds under management in the Jackson variable annuity programme.
National Planning Holdings (NPH), Jackson’s affiliated independent broker-dealer network, is comprised of four broker-dealer firms, including INVEST Financial Corporation, Investment Centers of America, National Planning Corporation and SII Investments.
Curian Capital (Curian), Jackson’s registered investment adviser, provides innovative fee-based separately managed accounts and investment products to advisers through a sophisticated technology platform. Curian expands Jackson’s access to advisers and provides a complement to Jackson’s core annuity product lines.
Current year initiatives During 2007, Curian implemented its Simplified Proposal Process, which allows financial professionals to generate proposals in a matter of minutes, while maintaining the flexibility and customisation that make separately managed accounts an attractive alternative to traditional investment vehicles. Curian also expanded its wholesaling force during the year in an effort to accelerate growth.
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 and Lower Tier 2. Up to 15 per cent of Tier 1 can be in the form of hybrid debt and called ‘Innovative Tier 1’. At 31 December 2007, the Group held £763 million of Innovative Tier 1 capital, in the form of perpetual securities, and £932 million of Lower Tier 2 capital. Following the implementation of the IGD, it is advantageous to the Group from a regulatory capital standpoint to raise its longterm debt in hybrid form and it is the Group’s policy to take advantage of favourable market conditions as they arise to do so.
Further information on the sensitivity of the Group’s financial instruments to market risk and the use of derivatives is also provided in notes D1 to D4 and G2 and G3 of the financial statements on pages 169 to 211 and pages 237 to 244 respectively.
After adjusting for holding company cash and short-term investments of £1,456 million, net core structural borrowings at 31 December 2007 were £1,036 million compared with £1,493 million at 31 December 2006. This reflects the net cash inflow of £445 million (including £527 million net proceeds from the sale of Egg), exchange conversion gains of £49 million and other adjustments of negative £37 million.
The Group’s core debt is managed to be within a target level consistent with its current debt ratings. At 31 December 2007, the gearing ratio (debt, net of cash and short-term investments, as a proportion of EEV shareholders’ funds plus debt) was 6.6 per cent compared with 11.2 per cent at 31 December 2006.
Explanation of balance sheet structure – Capital Tiers £m 2007 £763m 2006 £763m
Prudential plc enjoys strong debt ratings from Standard & Poor’s, Moody’s and Fitch. Prudential long-term senior debt is rated A+ (stable outlook), A2 (stable outlook) and AA- (stable outlook) from Standard & Poor’s, Moody’s and Fitch respectively, while short-term ratings are A-1, P-1 and F1+.
Based on EEV basis operating profit from continuing operations and interest payable on core structural borrowings, interest cover was 16.1 times in 2007 compared with 13.1 times in 2006.
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.
Amounts at risk are covered by cash or by corresponding assets.
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 per cent 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.
The European Commission (EC) published a draft framework directive on 10 July 2007 containing high-level principles. The directive is now being reviewed by the European Parliament and the Council of Ministers. The EC expects the institutions to agree the Solvency II framework directive in the second half of 2008. The principles in the directive will be supplemented by implementing measures that will be adopted by the EC and EU member states. Solvency II is then intended to be implemented during 2012. It is important that the EU policy makers keep up the progress to enable implementation by the suggested date.
Prudential is also actively engaged in policy discussions mainly through its participation in the Chief Risk Officer (CRO) Forum of major European insurance firms. We have been emphasising the importance of Solvency II delivering an economic based approach for groups reflecting diversification benefits across all the group’s insurance activities; an appropriate level playing field, in particular in connection with the treatment of operations outside the European Economic Area (EEA); and the provision of instruments of group support that enhance the efficiency of capital management within the EEA.
United States The capital adequacy position of Jackson remains strong, with the capital ratio improving from 9.8 per cent in 2006 to 10.6 per cent in 2007. Jackson’s statutory capital, surplus and asset valuation reserve position of £2,251 million at 31 December 2007 improved year-on-year by £327 million, after deducting the £122 million of capital remitted to the parent company. Jackson’s financial strength is rated AA by Standard & Poor’s and A1 by Moody’s.
The with-profits sub-fund delivered a pre-tax return of 7.2 per cent in 2007, and over the last five years the fund has achieved a total return of 91 per cent. 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 PAC’s Long Term Fund reduced its exposure to property and increased the quality of its corporate bond portfolio. The fund includes the assets of the Equitable Life with-profit annuity business, transferred during the year, which were almost entirely fixed interest corporate bonds.
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
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 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 six per cent, representing a deficit of £243 million.
The finalisation of the valuation as at 5 April 2005 was accompanied by changes to the basis of funding for the scheme with effect from that date. Deficit funding amounts designed to eliminate the actuarial deficit over a 10-year period have been and are being made based on that valuation. 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 £70 million to £75 million per annum over a 10-year period. In 2007, total contributions for the calendar year including expenses and augmentations were £82 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 yearend, 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 significant proportion of their assets in equity investments, the volatility can be particularly significant. For 2007, a £23 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 £90 million for net actuarial gains. These gains primarily represent the effect of changes in economic assumptions which more than offsets the losses from the effect of strengthened mortality assumptions for the UK pension schemes.
In 2007, the new business profit mix was 63 per cent unitlinked, 15 per cent non-linked and 22 per cent Accident & Health products.
Unit-linked products combine savings with protection and the cash value of the policy depends on the value of the underlying unitised funds. Participating products provide savings with protection where the basic sum assured can be enhanced by a profit share (or bonus) from the underlying fund as determined at the discretion of the insurer. Nonparticipating products offer savings with protection where the benefits are guaranteed or determined by a set of defined market related parameters. Accident & Health products provide mortality or morbidity benefits and include health, disablement, critical illness and accident covers. Accident & Health products are commonly offered as supplements to main life policies but can also be sold separately.
The profits from participating policies are shared between the policyholder and insurer (typically in a 90:10 ratio) in the same way as with-profits business in the UK. Under unit-linked products the profits that arise from managing the policy, its investments and the insurance risk accrue entirely to shareholders, with investment gains accruing to the policyholder within the underlying unitised fund. The profits from Accident & Health and non-participating products consist of any surplus remaining after paying policy benefits.
Interest-sensitive fixed annuities are used for asset accumulation in retirement planning and for providing income in retirement and offer flexible payout options. The contract holder pays Jackson a premium, which is credited to the contract holder’s account. Periodically, interest is credited to the contract holder’s account and administrative charges are deducted, as appropriate. Jackson may reset the interest rate on each contract anniversary, subject to a guaranteed minimum, in line with state regulations. When the annuity matures, Jackson either pays the contract holder the amount in the contract holder account or begins making payments to the contract holder in the form of an immediate annuity product. This latter product is similar to a UK annuity in payment. Fixed annuity policies are subject to early surrender charges for the first six to nine years of the contract. In addition, the contract may be subject to a market value adjustment at the time of surrender. During the surrender charge period, the contract holder may cancel the contract for the surrender value.
Jackson’s profits on fixed annuities arise primarily from the spread between the return it earns on investments and the interest credited to the contract holder’s account (net of any surrender charges or market value adjustment) less expenses. Jackson’s fixed annuities continue to be a profitable book of business, benefiting from favourable spread income in recent years. However, the fixed annuity portfolio could be impacted by the continued low interest rate environment as lower crediting rates could result in increased surrenders and lower sales as customers seek alternative investment opportunities. However, if customers become more risk averse to equity-based returns due to recent market volatility, fixed annuities could be viewed as an attractive alternative to variable annuities.
Fixed index annuities (formerly referred to as equityindexed annuities) are similar to fixed annuities in that the contract holder pays Jackson a premium, which is credited to the contract holder’s account and periodically, interest is credited to the contract holder’s account and administrative charges are deducted, as appropriate. Jackson guarantees an annual minimum interest rate, although actual interest credited may be higher and is linked to an equity index over its indexed option period. Jackson’s profit arises from the investment income earned and the fees charged on the contract, less the expenses incurred, which include the costs of the guarantees, and the interest credited to the contract. Fixed index annuities are subject to early surrender charges for the first five to 12 years of the contract. During the surrender charge period, the contract holder may cancel the contract for the surrender value. Fixed index annuities continue to be a profitable product, benefiting from favourable spread and the effective management of equity risk. The fixed index book provides a natural offsetting equity exposure to the guarantees issued in conjunction with Jackson’s variable annuity products, which allows for an efficient hedging of the net equity exposure.
Variable annuities are tax-advantaged deferred annuities where the rate of return depends upon the performance of the underlying portfolio, similar in principle to UK unit-linked products. They are also used for asset accumulation in retirement planning and to provide income in retirement. The contract holder can allocate the premiums between a variety of variable sub-accounts with a choice of fund managers and/or guaranteed fixed-rate options. The contract holder’s premiums allocated to the variable accounts are held apart from Jackson’s general account assets, in a separate account, which is analogous to a unit-linked fund. The value of the portion of the separate account allocated to variable sub-accounts fluctuates with the underlying investments. Variable annuity policies are subject to early surrender charges for the first four to seven years of the contract. During the surrender charge period, the contract holder may cancel the contract for the surrender value. Jackson offers one variable
Other corporate information continued annuity that has no surrender charges. Jackson offers a choice of guaranteed benefit options within its variable annuity product portfolio, which customers can elect and pay for. These include the guaranteed minimum death benefit (GMDB), which guarantees that, upon death of the annuitant, the contract holder or beneficiary receives a minimum value regardless of past market performance. These guaranteed death benefits might be expressed as the return of original premium, the highest past anniversary value of the contract, or as the original premium accumulated at a fixed rate of interest. In addition, there are three other types of guarantee: guaranteed minimum withdrawal benefits (GMWB), guaranteed minimum accumulation benefits (GMAB) and guaranteed minimum income benefits (GMIB). GMWBs provide a guaranteed return of the principal invested by allowing for periodic withdrawals that are limited to a maximum percentage of the initial premium. One version of the GMWBs provides for a minimum annual withdrawal amount that is guaranteed for the contract holder’s life without annuitisation. GMABs generally provide a guarantee for a return of a certain amount of principal after a specified period. GMIBs provide for a minimum level of benefits upon annuitisation regardless of the value of the investments underlying the contract at the time of annuitisation. The GMIB is reinsured.
United Kingdom In common with other UK long-term insurance companies, Prudential UK’s products are structured as either with-profits (or participating) products, or non-participating products including annuities in payment and unit-linked products. Depending upon the structure, the level of shareholders’ interest in the value of policies and the related profit or loss varies.
The EEV basis not only provides a good indicator of the value being added by management in a given accounting period but it also demonstrates whether shareholder capital is being deployed to best effect. Indeed insurance companies in many countries use comparable bases of accounting for management purposes.
The value added from new business (being the present value of the future profits arising from new business written in the year) is a key metric used in the management of the business. The change in value of business in force at the start of the year demonstrates how the existing book is being managed. Together they provide management and shareholders with valuable information about the underlying development of the business and the success or otherwise of management actions.
Principles Risk is defined as the uncertainty that Prudential faces in successfully implementing its strategies and objectives. This includes all internal or external events, acts or omissions that have the potential to threaten the success and survival of Prudential.
The Group’s policy is to proactively identify, assess, control, and monitor risk. This forms an essential element of delivering the Group’s performance ambition. In so doing, material risks will only be retained where this is consistent with Prudential’s risk appetite framework, i.e.: — The retention of the risk contributes to value creation. — The Group is able to withstand the impact of an adverse outcome.
— The Group has the necessary capabilities, expertise, processes and controls to manage the risk.
c Control Implement risk mitigation strategies and remedial actions where exposures are deemed ‘inappropriate’ and manage the response to extreme events.
d Communication Communicate the Group risk, capital and profitability position to internal and external stakeholders and rating agencies.
Categorisation model A common risk language is used across the Group, which allows meaningful comparisons to be made between different business units. Risks are broadly categorised as shown below.
Governance The Group’s internal control processes are detailed in the Group Governance Manual. This is supported by the Group Risk Framework, which provides an overview of the Group-wide philosophy and approach to risk management.
Liquidity risk The risk that a business, though solvent on a balance sheet basis, either does not have the financial resources to meet its obligations as they fall due or can secure them only at excessive cost.
Non-financial risks Operational risk The risk of direct or indirect loss resulting from inadequate or failed internal processes, people or systems, or from external events. This includes legal and regulatory compliance risk.
Business Exposure to forces in the external environment that could significantly change the environment risk fundamentals that drive the business’s overall objectives and strategy.
For joint ventures where the Group does not control management, the business unit party to the arrangement must satisfy itself that suitable governance and risk management arrangements are in place to protect the Group’s interests and comply with the Group’s requirements in respect of any operations it performs in support of the joint venture’s activities.
Risk management Primary responsibility for strategy, performance management and risk control lies with the Prudential plc Board of directors (the Board), the Group Chief Executive and the chief executives of each business unit. Additionally, the Board has delegated responsibility to the Approvals Committee to approve actions which could significantly change the risk profile of any business, capital commitments and divestments within defined materiality thresholds, and certain legal matters involving trademarks, contracts, material guarantees and specific interactions with third parties.
Group executive management: The Group Chief Executive has overall responsibility for the risks facing the Group. The Group Chief Executive recommends to the Board the amount and type of risk that the Group is prepared to accept, and recommends risk management strategies as well as an overall framework for managing the risks faced by the Group with support from the Group Executive Committee, Group Finance Director and Group level risk committees. The Group Chief Executive provides regular updates to the Board on the risk position and risk policy.
Group Risk Group Risk’s mandate is to establish and embed a strategic risk, capital and value management framework and risk management culture, consistent with Prudential’s risk appetite, that protects and enhances the Group’s embedded and franchise value.
Group Risk is responsible for the continued enhancement and evolution of the Group Risk Framework; provides functional leadership to the business units for the oversight of risk management across the Group; and acts as secretariat to the Group ALCo and GORC.
Risk appetite The Group risk appetite framework sets out the Group’s overall tolerance to risk exposures, approach to risk and return optimisation and management of risk. The Board and Group Executive Committee have set up Group-level risk appetite statements concerning the key risk exposures faced by the Group. The Group risk appetite statements set out the Group’s risk tolerance, or risk appetite, to ‘shocks’ to the key financial risk exposures (market, credit and insurance risk).
Prudential employs a range of risk mitigation strategies aimed at reducing the impact of a variety of risks. Key mitigation strategies include: adjustment of asset portfolios to reduce investment risks (such as duration mismatches or overweight counterparty exposures); use of derivatives to hedge market risks; reinsurance programmes to limit insurance risk; and corporate insurance programmes to limit impact of operational risks. Revisions to business plans (such as reassessment of bonus rates on participating business and scaling back of target new business volumes) may also be used as a mitigating strategy.
Meet Group solvency requirement and hold sufficient resources to pay dividends and fund new business
Asset liability management Prudential manages its assets and liabilities locally, in accordance with local regulatory requirements and reflecting the different types of liabilities of each business unit. Stochastic asset-liability modelling is carried out locally by the business units to perform dynamic solvency testing and assess economic capital requirements. Reserve adequacy testing under a range of scenarios is also carried out, including scenarios prescribed by local regulatory bodies.
The Group distinguishes between two distinct types of ’economic capital’ approaches: — Group economic capital Prudential’s Group economic capital is calculated using an integrated model of Groupwide risk, capturing dependencies and diversification benefits between different business units and risk categories. The capital requirement is determined based on a multi-year projection, thus taking into account the long-term nature of Prudential’s liabilities. The Group economic capital position is calculated using the Group Solvency Model (GSM) – an integrated stochastic assetliability model of the Group economic solvency position. Projected economic scenarios in the GSM are generated using a stochastic economic scenario generator that captures the correlations between different asset classes and geographies.
— One-year Value at Risk Capital (1yr VaR Capital) 1yr VaR Capital is defined as the capital required to withstand a maximum loss over a time period of one year, consistent with a confidence level of 99.5 per cent. This measure was developed internally as part of Prudential’s RAP approach to risk/return optimisation within the Group risk appetite framework. This measure captures the risk arising from individual risk types, and generally allows for diversification by using a correlation matrix approach. The methodology is continually being developed and improved. In addition to its risk management applications, the 1yr VaR Capital framework is used for Individual Capital Assessments in the UK and anticipated to form the basis of Prudential’s capital modelling for future regulatory reporting developments, such as Solvency II.
These measures provide a consistent basis for comparing the risk profiles and capital requirements of different business units. The Group economic capital position and risk profile is reported to the Board annually, with more frequent updates on an ad hoc basis. Group Risk is responsible for developing and maintaining the economic capital models, and for calculating the Group economic capital position.
Methodology Prudential’s internal Group economic capital requirement is defined as the minimum amount of capital that the Group needs to hold in order to remain economically solvent over a 25-year horizon, given a target probability of insolvency appropriate for AA-rated debt. The target confidence level is based on historic default rates for AA-rated debt, and varies over the time horizon of the projection. The economic capital requirement is calculated for in-force liabilities only, excluding the impact of future new business and dividend distribution.
Results As at 31 December 2006, the Group economic capital requirement was £1.6 billion, compared to available capital resources of £4.5 billion. The Group economic capital requirement quoted is after allowance for diversification benefits between risk types and business units, and inclusive of the local regulatory capital requirements at the business unit level. The economic capital requirement is calculated for in-force liabilities only, excluding the impact of future new business and dividend distributions.
The allocation of economic capital (diversified) by risk type is shown below. The largest risk exposure continues to be credit risk, which reflects the relative size of the exposure in Jackson and Prudential UK. However, credit risk has reduced due to the sale of Egg and Jackson’s maturing fixed annuity business. The market risk exposure mainly reflects equity risk in Jackson and interest rate risk in Taiwan. An increasingly significant component of the underwriting risk is attributable to longevity risk, which has increased due to the growth in annuity business being written in the UK shareholder fund.
Group capital position at year end 2006 Excluding Egg £4,467m £1,620m £2,847m
Group capital position at year end 2005 Including Egg £4,114m £1,719m £2,395m
Market risk Market risk is the risk that arises from adverse changes in the value of, or income from, assets and changes in interest rates or exchange rates. Prudential’s businesses are inherently subject to market fluctuations and general economic conditions.
In the UK, this is because a significant part of Prudential’s shareholders’ profit is related to bonuses for policyholders declared on its with-profits products, which are broadly based on historic and current rates of return on equity, real estate and fixed income securities, as well as Prudential’s expectations of future investment returns.
For some non-linked investment products, in particular those written in some of the Group’s Asian operations, it may not be possible to hold assets which will provide cash flows to exactly match those relating to policyholder liabilities. This is particularly true in those countries where bond markets are not developed and in certain markets, such as Taiwan, where regulated surrender values are set with reference to the interest rate environment prevailing at time of policy issue. This results in a mismatch due to the duration and uncertainty of the liability cash flows and the lack of sufficient assets of a suitable duration. This residual asset-liability mismatch risk can be managed but not eliminated. Where interest rates for these markets remain lower than those implied by surrender values over a sustained period this could have an adverse impact on the Group’s reported profit.
For each of the major components of market risk, described in more detail below, Prudential has put in place policies and procedures to set out how each risk should be managed and monitored, and the approach to setting an appropriate risk appetite.
Foreign exchange risk Prudential currently operates in the UK, the US, 13 countries in Asia and Europe. 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 translation of results into pounds sterling. The currency exposure relating to the translation of reported earnings is not separately managed. Consequently, this could impact on the Group’s gearing ratios (defined as debt over debt plus shareholders’ funds). The impact of gains or losses on currency translations is recorded as a component within the statement of changes in equity.
Prudential does not generally seek to hedge foreign currency revenues, as these are substantially retained locally to support the growth of the Group’s business and meet local regulatory and market requirements. However, where foreign surplus is deemed to be supporting UK capital or shareholders’ interests this exposure is hedged if it is deemed optimal from an economic perspective. Currency borrowings and derivatives are used to manage exposures within the limits that have been set.
The Group manages this risk by adopting close asset-liability matching criteria, to minimise the impact of mismatches between the value of assets and liabilities from interest rate movements. Interest rate risk is also controlled through the use of a variety of derivative instruments, including futures, options and swaps, in order to hedge against unfavourable market movements in interest rates inherent in the underlying assets and liabilities. The impact of exposure to sustained low interest rates is regularly monitored.
In particular, Jackson actively hedges its exposure to the guarantees arising from its variable annuity business. Where possible, Jackson will seek to find offsetting exposures across its asset and liability portfolios and to conduct its hedging activities on a macro basis, and relies on option-based strategies to address extreme risks. Although the macro approach and the hedging of extreme events are not consistent with the way certain accounting methods test for effectiveness, our view is that the efficiency of execution and the need to hedge on an economic basis outweighs the need to avoid any short-term accounting volatility.
Financial assets are graded according to current credit ratings issued by the rating agencies. Financial assets are classified within the range of AAA to D ratings, with AAA being the highest possible rating. Typically, around 95 per cent of the Group’s assets are rated within the investment grade category (BBB- and higher). The level of financial assets which fall outside the range of the ratings is also monitored on an ongoing basis, and this tends to be less than one per cent of shareholder assets at any given point in time.
For example, the assumption that Prudential makes about future expected levels of mortality is particularly relevant for its UK annuity business where, in exchange for their accumulated pension fund, pension annuity policyholders receive a guaranteed payment, for as long as they live. Prudential conducts rigorous research into longevity risk using data from its substantial annuitant portfolio. As part of its pension annuity pricing and reserving policy, Prudential UK assumes that current rates of mortality continuously improve over time at levels based on adjusted data from the Continuous Mortality Investigations (CMI) medium cohort table projections as published by the Institute and Faculty of Actuaries.
Liquidity risk Liquidity risk is the risk that a business, though solvent on a balance sheet basis, either does not have the financial resources to meet its obligations as they fall due or can secure the resources only at excessive cost.
For Prudential Group, there is a committed corporate credit facility for liquidity.
Quantitative analysis is carried out for operational risks with material and potential direct losses (i.e. excluding opportunity costs and lost revenue). For each risk, the analysis describes the possible manifestations of the risk and the controls against it in each business unit and, on this basis, frequency and severity parameters are assigned to each risk. The effect of operational risk on the Group as a whole is analysed by aggregating the individual risks using a Group operational risk capital model, allowing for the correlations and diversification effects between different risk types and business units.
Prudential recognises that its stakeholders, including its customers, employees, shareholders and the communities around its businesses, increasingly support those companies that define and exhibit sound values around trust, ethics and environmental responsibility. These values have been fundamental to Prudential since its foundation 160 years ago.
Management and policy The Group’s internal control processes are detailed in the Group Governance Manual. The manual includes the Group Code of Business Conduct, its CR Policy and its Health and Safety Policy. While business units are required to establish any additional processes required for compliance with local statutory and regulatory requirements, the Group’s policies often go further than local/domestic legislative requirements.
Below the Board, the Corporate Responsibility Committee is a specialist Group-wide committee chaired by the Group Finance Director. It is responsible for reviewing business conduct and social and environmental policy and ensures consistency of approach across the Group’s international businesses.
Group Code of Business Conduct Prudential’s Group Code of Business Conduct (the Code) sets out the ethical standards the Board requires of itself, its employees, agents and others working on behalf of the Group, in their dealings with employees, customers, shareholders, suppliers, competitors, the wider community and the environment. This policy is in force across the Group and compliance by all business units is mandatory. The Code is published both internally on the Group Head Office (GHO) intranet and externally on the Prudential website. It is also integrated within the Group Governance Manual and is covered by the annual compliance certification process. In 2007, the Code was revised to incorporate a clause on anti-money laundering and financial crime. This is now available on Prudential’s website at www.prudential.co.uk
To obtain feedback from our stakeholders and to ensure our brand values are maintained, Prudential conducts periodic surveys on a range of topics such as: how the Company is perceived; what it does well, and where it could improve.
Prudential extended its initiative to Asia in 2004, with an innovative programme called ‘Investing in Your Future’, which focuses on women, who are often responsible for planning their family’s financial needs. This was first launched in China and rolled out in Vietnam in 2005 and to India in 2006. To date, more than 14,400 women have graduated from the programme in Asia.
Prudential recognises that many employees already make a significant contribution to charities as volunteers in their own free time. The Chairman’s Award was set up to recognise this considerable involvement in the local community and to give all the Group’s employees the opportunity to get involved with a local charitable project by increasing the value of the community support they offer through additional contributions.
Employees We strive to create an environment in Prudential that attracts and retains the right people – those who are committed and able to deliver top performance for our customers and shareholders. We understand that to support our aim of being a leading international retail financial services company we need to have the right people in the right number at the right time.
Employee engagement We recognise that key to the success of our business is having engaged and committed staff. We believe that effective communication is invaluable in achieving this goal. Each of our business units has its own intranet site which is used to keep staff updated on the performance of the business and other relevant issues. They also provide staff with an opportunity to pose questions to their business Chief Executive. Annually the Group Chief Executive hosts a conference for our top 100 people (Group Leadership Team) to provide direction on the strategic intent of the Group and help them to fulfil their business roles within the context of the requirements of the Group.
Training and development Prudential has a long history of success – from its early roots in the UK right through to today’s international, diverse and innovative business. Our continued success depends on investing in people today and developing the next generation of leadership.
In 2007, we implemented a series of Group-wide management development programmes to assess senior talent within the business and identify the development activity they need to be credible successors to future leadership roles. These programmes help us benchmark our best people in a consistent way and will support the movement of senior people around the Group.
Also in 2007, we introduced the Momentum Programme; a Group-wide initiative designed to identify high-potential individuals early in their careers and provide them with stretching opportunities to grow and develop the skills needed to manage an international business. This programme is open to both internal and external candidates and has attracted applicants from across the world.
In Asia, employee education is provided across the Group’s Asian markets through PRUuniversity, which is available to all staff and is offered in a number of languages. Programmes covering management, leadership, technical and business skills as well as a comprehensive range of self-improvement materials including language courses are available with many being endorsed by external learning institutions.
We see the quality of our people as a key component of our success and will continue to invest in both short and long-term development activity over the coming years.
Working together To support the Group’s ambitions it is important that the HR teams maintain a consistent approach to our people agenda across the Group through having a shared strategy and by working together on joint projects. To effect this the worldwide leadership team of the HR function meets regularly throughout the year and the senior professionals worldwide meet in function groups quarterly and as a senior team annually. However, within our diverse organisation we recognise that a one size fits all approach would not be appropriate therefore individual business units need to assess the needs of their business and use the relevant parts of the tools and processes which are developed to support their individual business.
Jackson measures its customer service quality through annual benchmarking surveys. Prudential Corporation Asia has also developed a regional survey, to assess the likelihood of its customers recommending Prudential Corporation Asia to their family and friends.
In the US, Jackson has carefully monitored and worked to minimise any negative environmental impact since it moved to its current headquarters in 2000, working with state and local authorities on new projects which protect the environment.
Clark Manning FSA MAAA Executive director Clark Manning has been an executive director of Prudential since January 2002. He is also President and Chief Executive Officer of Jackson National Life. He was previously Chief Operating Officer, Senior Vice President and Chief Actuary of Jackson National Life, which he joined in 1995. Prior to that, he was Senior Vice President and Chief Actuary for SunAmerica Inc, and prior to that Consulting Actuary at Milliman & Robertson Inc. Clark has more than 25 years' experience in the life insurance industry, and holds both a bachelor's degree in actuarial science and an MBA from the University of Texas. He also holds professional designations of Fellow of the Society of Actuaries (FSA) and Member of the American Academy of Actuaries (MAAA).
Michael McLintock Executive director Michael McLintock has been an executive director of Prudential since September 2000. He is also Chief Executive of M&G, a position he held at the time of M&G's acquisition by Prudential in 1999. Michael joined M&G in 1992. He is also a non-executive director of Close Brothers Group plc.
Sir Winfried Bischoff Independent non-executive director Sir Winfried Bischoff has been an independent non-executive director of Prudential since 2 August 2007. Sir Win has been Chairman of Citi Europe and a Member of The Management, Operating and Business Heads Committees of Citigroup Inc since May 2000. He was Acting Chief Executive Officer of Citigroup Inc from 5 November 2007 to 11 December 2007, when he was appointed Chairman of Citigroup Inc. In addition, Sir Win is Chairman of the European Advisory Board of Citigroup Inc., and has been a non-executive director of The McGraw-Hill Companies, New York and of Eli Lilly and Company, Indianapolis since June 2000, and of Land Securities since November 1999. Prior to that, Sir Win joined the Company Finance Division of J. Henry Schroder & Co. Limited, London, in 1966 and in 1971, he was appointed as Managing Director of Schroders Asia Limited, Hong Kong. He returned to London in January 1983, and was appointed Chairman of J. Henry Schroder & Co. in October 1983. Sir Win was appointed Group Chief Executive of Schroders plc in December 1984 and as Chairman of
Keki Dadiseth FCA Independent non-executive director and member of the Remuneration Committee Keki Dadiseth has been an independent non-executive director of Prudential since April 2005. During 2006, he was appointed as a non-executive director of ICICI Prudential Life Assurance Company Limited and ICICI Prudential Trust Limited. He is also a member of the Advisory Board of Marsh & McLennan Companies Inc. and an International Advisor to Goldman Sachs. In addition, Keki is a director of Nicholas Piramal Limited, Siemens Limited, Britannia Industries Limited and The Indian Hotels Company Limited, all quoted on the Bombay Stock Exchange. He is also a director of the Indian School of Business and acts as a trustee of a number of Indian charities. Before he retired from Unilever in 2005, Keki was Director, Home and Personal Care, responsible for the HPC business of Unilever worldwide, a Board member of Unilever PLC and Unilever N.V. and a member of Unilever's Executive Committee. He joined Hindustan Lever Ltd in India in 1973.
Bridget Macaskill Independent non-executive director, Chairman of the Remuneration Committee and member of the Nomination Committee Bridget Macaskill has been an independent non-executive director of Prudential since September 2003. She rejoined the Board of Prudential having previously resigned due to a potential conflict of interest in 2001. She has been a member of the Remuneration Committee since 2003 and became Chairman of the Remuneration Committee in May 2006. Bridget is a non-executive director of the Federal National Mortgage Association (Fannie Mae) and Scottish & Newcastle PLC. She was previously a nonexecutive director of J Sainsbury Plc. Prior to that she spent 18 years at OppenheimerFunds Inc, a major New York based investment management company, the final 10 years of which she was Chief Executive Officer.
Kathleen O'Donovan ACA Independent non-executive director and Chairman of the Audit Committee Kathleen O'Donovan has been an independent non-executive director of Prudential since May 2003. She has been a member of the Audit Committee since 2003 and became Chairman of the Audit Committee in May 2006. Kathleen is a non-executive director and Chairman of the Audit Committees of Great Portland Estates PLC and Trinity Minor plc, and a non-executive director of ARM Holdings plc. She is also Chairman of the Invensys Pension Scheme. Previously, she was a non-executive director and Chairman of the Audit Committees of the EMI Group plc and the Court of the Bank of England, and a non-executive director of O2 plc. Prior to that, Kathleen was Chief Financial Officer of BTR and Invensys, and before that she was a partner at Ernst & Young.
Governance and the role of the Board The Board is responsible to shareholders for creating and delivering sustainable shareholder value through the management of the Group’s business. This governance report explains Prudential’s governance policies and practices, and sets out how the Board manages the business for the benefit of shareholders, promoting long-term shareholder interest.
The governance rules applicable to all UK companies admitted to the Official List of the UK Listing Authority are set out in the Combined Code, published by the Financial Reporting Council in June 2003, and revised in 2006. The directors believe that good corporate governance is central to achieving the Group’s objectives and maximising shareholder value, and are committed to high standards of corporate governance. The Board supports the Combined Code, and confirms that it has complied with all of the provisions set out in Section 1 throughout the financial year ended 31 December 2007, and has applied the principles as set out below and in the Directors’ Remuneration Report.
Board composition, appointments and election/re-election As at 31 December 2007, the Board comprised the Chairman, six executive directors and eight independent non-executive directors. During the year, Sir Winfried Bischoff and Ann Godbehere were appointed by the Board as non-executive directors on 2 August 2007, and Roberto Mendoza retired as a non-executive director after seven years in office on 17 May 2007, with effect from the conclusion of the Annual General Meeting. Tidjane Thiam will join the Board as Chief Financial Officer on 25 March 2008. The biographies of all current directors and Tidjane Thiam are set out on pages 87 to 88.
Non-executive directors are usually appointed for an initial three-year term, commencing with their election by shareholders at the first Annual General Meeting following their appointment. Each appointment is reviewed towards the end of this period against performance and the requirements of the Group’s businesses. Non-executive directors are typically expected to serve for two three-year terms from their initial election by shareholders, although the Board may invite them to serve for an additional period. The terms and conditions of appointment of all directors are available for inspection at the Company’s registered office during normal business hours and at the Annual General Meeting.
The Board is actively engaged in succession planning for both executive and non-executive roles to ensure composition is periodically renewed, and that the Board retains its effectiveness at all times. This is delivered through an established review process that is applied across all businesses and covers both director and senior management succession and development. The Board reviews the outcomes of the review annually and actions arising from the review are implemented as part of the management development agenda.
We believe that our non-executive directors bring a wide range of business, financial and global experience to the Board and its committees. Our executive directors, who head up the main businesses of the Group, each bring an in-depth understanding to the Board of their particular business, its markets and its challenges, ensuring coverage of the breadth and depth of the Group’s principal activities.
Role of the Board The roles of Chairman and Group Chief Executive are separate and clearly defined, and the scope of these roles has been approved by the Board so that no individual has unfettered powers of decision. The Chairman is responsible for the leadership and governance of the Board as a whole and the Group Chief Executive for the management of the Group and the implementation of Board strategy and policy on the Board’s behalf. In discharging his responsibilities, the Group Chief Executive is advised and assisted by the Group Executive Committee, comprising all the business unit heads and a Group Head Office (GHO) team of functional specialists.
Powers of directors The management and control of the business and affairs of the Company are vested in the Board. The Board may exercise all powers conferred on it by the Memorandum of Association, the Articles of Association, and the Companies Acts. This includes the powers of the Company to borrow money and to mortgage or charge any of its assets (subject to limitations in the Companies Acts and the Articles) and to give a guarantee, security or indemnity in respect of a debt or other obligation of the Company. The Board may exercise all powers and do everything within the power of the Company, other than matters required by the Companies Acts to be dealt with in general meeting.
Board and committee meetings and attendance During 2007, the Board met 11 times and held a separate strategy meeting. Each year, at least one of the Board meetings is held at one of the Group’s business operations to facilitate a fuller understanding of the business. In January 2007, a Board meeting was held in Mumbai, and the Board visited the Group’s various operations in Mumbai, and attended a day of presentations given by senior managers of Prudential Corporation Asia. These presentations covered the diversity of businesses across Asia and included presentations by the Indian joint venture companies with ICICI, and by the country heads of a number of our different operations. The Board also spent half a day visiting the Group’s Mumbai operations centre and meeting senior operations managers.
Barry Stowe 11 (11) n/a n/a n/a Mark Tucker 11 (11) n/a n/a n/a
5 Attended all scheduled Board meetings, but was unable to attend one of the additional Board meetings due to a prior commitment.
7 Resigned as a director on 17 May 2007. 8 Unable to attend one scheduled Board meeting due to a long-standing prior commitment, and unable to attend one of the additional Board meetings due to a prior commitment.
Ongoing development Throughout their period in office, directors are continually updated on the Group’s businesses and the regulatory and industry-specific environments in which it operates, as well as on their legal and other duties and obligations as directors where appropriate. These updates can be in the form of written reports to the Board or meetings with senior executives and, where appropriate, external sources. Non-executive directors serving on key committees are also updated regularly on matters specific to the relevant committee in order to enhance their knowledge and effectiveness throughout their term in office.
In 2007, the evaluation of the Board as a whole and of the Chairman was carried out by an independent consultant, following a briefing by the Chairman and the Senior Independent Director. Each director and the members of the Group Executive Committee completed a questionnaire and were interviewed by the independent consultant. The questions asked were based on the Combined Code and on previously identified matters, and sought views on the effectiveness of the Board as a whole, and on the Chairman’s performance. The independent consultant prepared a report based on the various discussions held and presented and discussed the overall results of the evaluation with the Board in February 2008. The Board, without the Chairman present, met under the chairmanship of the Senior Independent Director to review the performance of the Chairman. The use of external providers for this purpose is kept under review.
Internal and external support All directors have direct access to the services of the Company Secretary who advises them on all corporate governance matters, on Board procedures, and on compliance with applicable rules and regulations. In order to ensure good information flows, full Board and committee papers are provided to the directors by the Company Secretary in the ordinary course approximately one week before each Board or committee meeting.
Directors’ interests Details of each director’s interests in shares of the Company are set out in the Directors’ Remuneration Report on page 113.
Directors’ indemnities and protections The Company has arranged appropriate insurance cover in respect of legal action against directors and senior managers of companies within the Prudential Group. In addition, the Articles of Association of the Company permit the directors and officers of the Company to be indemnified in respect of liabilities incurred as a result of their office. Prudential also provides protections for directors and senior managers of companies within the Group against personal financial exposure they may incur in their capacity as such. These include qualifying third party indemnity provisions (as defined by the relevant Companies Act) for the benefit of directors of Prudential, including, where applicable, in their capacity as directors of other companies within the Group. These indemnities were in force during 2007 and remain in force.
In line with the Turnbull guidance, the certification provided above does not apply to certain material joint ventures where the Group does not exercise full management control. In these cases, the Group satisfies itself that suitable governance and risk management arrangements are in place to protect the Group’s interests. In addition, the Group company who is party to the joint venture must, in respect of any services it provides in support of the joint venture, comply with the requirements of the Group Governance Framework, which maps out the internal approvals processes. In line with the Group Risk Framework and as set out within the section on Risk Management on pages 72 to 80, the management of the relevant business unit discusses material issues and risks and includes them, where appropriate, in the regular risk reports to the Group.
Board Committees The Board has established audit, remuneration and nomination committees as standing committees of the Board with written terms of reference, which are kept under regular review. These committees are key elements of the Group’s governance framework, and reports on each are included below: Audit Committee Report This report sets out the responsibilities of the Group Audit Committee (the Committee) and the activities carried out by the Committee during the year to meet its objectives.
The Committee’s terms of reference, which are set by the Board and kept under regular review, are available on our website at aboutpru/corporategovernance/ Alternatively, copies may be obtained upon request from the Company Secretary, at the Company’s registered office.
Membership The Committee is comprised exclusively of independent non-executive directors of the Company, as set out below: Kathleen O’Donovan ACA (Chairman) Keki Dadiseth FCA (until 31 December 2007) Ann Godbehere FCGA (from 1 October 2007) James Ross (until 31 December 2007) Lord Turnbull KCB CVO
A detailed forward agenda has been in operation for a number of years which is continually updated to ensure all matters for which the Committee is responsible are addressed at the appropriate time of year. The Committee’s business during the year included the following: — Review of half-year and full-year results, press releases and annual report and accounts; — examination of critical accounting policies and key judgmental areas; — review of US filings and related external audit opinion; — review of changes in and implementation of Group
Accounting Policies in compliance with International Accounting Standards and practices; — approval of external auditor’s management representation letter, review of external auditor’s full-year memorandum, external audit opinion and final management letter; — monitoring of auditor independence and the external auditor’s plans and audit strategy, the effectiveness of the external audit process, the external auditor’s qualifications, expertise and resources, and making recommendations for the re-appointment of the external auditor; — monitoring of the framework and effectiveness of the Group’s systems of internal control and Turnbull compliance statement, including Sarbanes-Oxley procedures; — monitoring the effectiveness of the Group Risk Framework and reviewing the half-yearly key risk report; — review of the internal audit plan and resources, and monitoring of the audit framework and internal audit effectiveness; — monitoring the effectiveness of compliance processes and controls, and performance against the Group Compliance Plan; — review of its own effectiveness, using external consultants, and review of its terms of reference; and
— review of anti-money laundering procedures, and allegations received via the employee confidential reporting lines.
During the year, the Committee’s standing agenda items also included other reports from group-wide internal audit, group risk, group compliance and group security functions. In addition, the Committee received presentations on a range of topics including financial control, risk management, and actuarial assumptions and methodologies.
The Committee Chairman reported to the Board on matters of particular significance after each Committee meeting, and the minutes of Committee meetings were circulated to all Board members.
Financial reporting As part of its review of financial statements before recommending their publication to the Board, the Committee focused on: critical accounting policies and practices and any changes, decisions requiring a major element of judgement, unusual transactions, clarity of disclosures, significant audit adjustments, the going concern assumption, compliance with accounting standards, and compliance with obligations under the Combined Code and other applicable laws and regulations.
Business unit audit committees Each business unit has its own audit committee whose members and chairmen are independent of the respective business unit. The chairmen of these committees report regularly to the Committee, and their meetings are attended by senior management of the respective business unit, including the business units’ chief executives and heads of finance, risk, compliance and internal audit. Business unit audit committees have adopted standard terms of reference across the Group, with only minor variations to address overseas requirements or particular requirements of the business. All terms of reference include escalation of significant matters to the Committee, approval of the business unit internal audit plans and overseeing the adequacy of internal audit resources. Also included are presentations from external auditors, and private meetings with local external auditors and the business unit heads of internal audit. During the year, the business unit audit committees reviewed and approved their respective internal audit plans, resources and the results of internal audit work.
Internal audit The Committee regards its relationship with the internal audit function as pivotal to the effectiveness of its own activities. Group-wide Internal Audit plays an important role in supporting the Committee to fulfil its responsibilities under the Combined Code and the Sarbanes-Oxley Act, and provides independent assurance on the Company’s processes of identification and control of risk. The Committee agreed the work programme of the internal audit function to be undertaken during 2007. Each of the Group’s business units has an internal audit team, the heads of which report regularly to the Group-wide Internal Audit Director. Internal audit resources, plans and work are overseen by the Committee and by business unit audit committees. Across the Group, total internal audit headcount stands at 135. The Group-wide Internal Audit Director reports functionally to the Committee and for management purposes to the Group Chief Executive.
The Committee assesses the effectiveness of the internal audit function by means of regular reviews, some of them carried out by external advisers, and through ongoing dialogue with the Group-wide Internal Audit Director. External reviews of internal audit arrangements and standards were also conducted in 2006 and 2007 to ensure that the activities and resources of the function are most effectively organised to support the oversight responsibilities of the Committee. These reviews, performed by Deloitte, confirmed that the internal audit function complies with the Institute of Internal Auditors’ international standards for the professional practice of internal auditing and is operating effectively.
External audit The Committee has a key oversight role in relation to the external auditor, KPMG Audit Plc, whose primary relationship is with the Committee. The Group’s Auditor Independence Policy ensures that the independence and objectivity of the external auditor is not impaired. The policy sets out four key principles which underpin the provision of non-audit services by the external auditor, namely that the auditor should not: — Audit its own firm’s work; — make management decisions for the Group; — have a mutuality of financial interest with the Group; or — be put in the role of advocate for the Group.
Re-appointment of auditor The Group operates a policy under which at least once every five years a formal review is undertaken by the Committee to assess whether the external audit should be re-tendered. The external audit was last put out to competitive tender in 1999 when the present auditor was appointed. In 2005, 2006 and 2007 the Committee formally considered the need to re-tender the external audit service and concluded that, given the significant changes in accounting, audit and regulatory requirements, the interests of the Company were better served by retaining the existing auditor through a period of continuing change. In addition, the Committee concluded that there was nothing in the performance of the auditor requiring a change. During the year, following the approval of the 2006 Annual Report, a new lead audit partner was appointed by KPMG Audit Plc, in line with the Auditing Practices Board Ethical Statements and the Sarbanes-Oxley Act.
Review of Committee effectiveness During the year, the Committee undertook a formal review of its own effectiveness, conducted by an independent consultant who prepared a report on the findings and presented this to the Committee at its meeting in October. Recommendations to improve processes identified by the review were discussed by members, and improvements are being implemented during 2008. The Committee is satisfied, based on the findings of this review, that it had been operating as an effective audit committee, meeting all applicable legal and regulatory requirements. Further reviews of the effectiveness of the Committee will be undertaken regularly, and will from time to time be conducted by external consultants.
Membership The Committee is comprised exclusively of independent non-executive directors of the Company, as set out below: Bridget Macaskill (Chairman) Keki Dadiseth FCA Michael Garrett James Ross (from 1 January 2008)
Membership The Committee is comprised of independent non-executive directors and the Chairman, as set out below: Sir David Clementi FCA MBA (Chairman) Bridget Macaskill James Ross
During 2007, the Committee met formally twice. The members of the Committee discussed candidates on a number of other occasions throughout the year, as required by the recruitment process. The Chairman also updates the full Board on Committee matters on a regular basis. During the year, the Committee recommended to the Board the appointment of Sir Winfried Bischoff and Ann Godbehere as non-executive directors, who were appointed by the Board on 2 August 2007, and the appointment of Tidjane Thiam as an executive director, which will become effective on 25 March 2008. Full biographical details of these new directors are set out on pages 87 and 88.
C orporate governance place. During the year, the Committee continued the search for additional non-executive directors, which is an ongoing process, and employed professional search consultants to oversee the initial phase.
Should major shareholders wish to meet newly appointed directors, or any of the directors generally, they are welcome to do so.
The Group maintains a corporate website www.prudential.co.uk containing a wide range of information of interest to private and institutional investors, including the Group’s financial calendar. The shareholder information section on pages 340 to 341 contains further details which may be of interest to shareholders.
Company constitution The Company is governed by the Companies Acts and other applicable legislation, and by its Memorandum and the Articles of Association. The Memorandum and Articles of Association are available on Prudential’s website at memorandum/
Rights and obligations The rights and obligations attaching to the Company’s shares are set out in full in the Company’s Articles of Association. There are no voting restrictions on the ordinary shares, and each share carries one vote on a poll. If votes are cast on a show of hands, each shareholder present in person or by proxy has one vote regardless of the number of shares held, in accordance with the Companies Acts. Where, under an employee share plan operated by the Company, participants are the beneficial owners of the shares but not the registered owners, the voting rights are normally exercisable by the registered owner, either at the trustee’s discretion or at the direction of the participants, in accordance with the relevant plan rules. Rights to dividends under the various schemes are set out in note I2 on pages 276 to 277.
Some of the Company’s employee share plans include restrictions on transfer of shares while the shares are subject to the plan. As described in the Directors’ Remuneration Report, non-executive directors use a proportion of their fees to purchase shares in the Company which may not normally be transferred during a director’s period of office. In addition, all directors hold a number of qualification shares, which they would also be expected to retain during their tenure of office.
Significant shareholdings As at 13 March 2008, the Company had received notification in accordance with Rule 5.1.2 R of the UK Listing Authority’s Disclosure and Transparency Rules from Legal & General Investment Management Limited and in accordance with Section 198 of the Companies Act 1985 from Barclays PLC of holdings of 5.17 per cent and 3.025 per cent respectively of the Company’s issued ordinary share capital at the time of notification.
Details of shares issued during 2006 and 2007 are given in note H11 on page 258. Shares issued in 2005 dis-applying pre-emption rights amounted to 745,478, which were issued under the Group’s share option schemes. The total number of shares issued dis-applying pre-emption rights amounted to less than 7.5 per cent over the last three years.
Other information Financial reporting The directors have a duty to report to shareholders on the performance and financial position of the Group and are responsible for preparing the financial statements on pages 127 to 299 and the supplementary information on pages 302 to 332. It is the responsibility of the auditor to form independent opinions, based on its audit of the financial statements and its review of the EEV basis supplementary information; and to report its opinions to the Company’s shareholders and to the Company, respectively. Its opinions are given on pages 301 and 334.
Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the Group. The criteria applied in the preparation of the financial statements are set out in the statement of directors’ responsibilities on page 300.
In discharging these objectives, the Committee helps to support the certifications by the Group Chief Executive and the Group Finance Director of the effectiveness of disclosure procedures and controls required by Section 302 of the Act.
Payment policy It is the policy of the Group to agree terms of payment when orders for goods and services are placed and to pay in accordance with those terms. Trade creditor days, based on the ratio of amounts which were owed to trade creditors at the year-end to the aggregate of the amounts invoiced by trade creditors during the year, were 22 days.
Significant agreements that take effect, alter or terminate upon a change of control of the Company following a takeover bid Under the agreements governing Prudential Corporation Holdings Limited’s life insurance and fund management joint ventures with China International Trust & Investment Corporation (Citic), if there is a change of control of the Company, Citic may terminate the agreements and either (i) purchase the Company’s entire interest in the joint venture or require the Company to sell its interest to a third party designated by Citic or (ii) require the Company to purchase all of Citic’s interest in the joint venture. The price of such purchase or sale is to be the fair value of the shares to be transferred, as determined by the auditor.
Creditors – policy on payment and practice Corporate governance report 99
In addition, the risk factors set out on pages 336 to 339 are incorporated by reference into this directors’ report.
The primary objectives of our remuneration policy remain to attract high calibre executives, to encourage them to contribute to the success of Prudential by achieving returns for our shareholders, and to reward them based on the Company’s success and their individual contributions. The policy supports the Company’s strategy and goals, and aims to comply with good practice in the UK, whilst not losing sight of the need to take account of competitive conditions in local markets – in other words by ‘thinking globally and acting locally’.
— a significant element of performance-related reward will be provided in the form of shares
These principles, which the Committee reviews regularly, will also provide the basis for setting the remuneration policy and the potential awards for Prudential’s executive directors in 2008.
The members of the Remuneration Committee during 2007, listed below, are all independent non-executive directors: Bridget Macaskill (Chairman) Keki Dadiseth Michael Garrett James Ross joined the Committee from 1 January 2008.
During last year, the Committee addressed its regular tasks of agreeing the executive directors’ incentive payments for the previous year, confirming incentive award structures for the current year and setting salaries for 2008. In addition, the Committee: — reviewed the comparator group of companies to be used under the Group Performance Share Plan
— agreed the terms for the appointment of Tidjane Thiam — reviewed the remuneration of senior managers throughout the Group.
The Committee keeps the remuneration policy under review to ensure it is effectively aligned with the performance and development of Prudential’s business. To that end the Committee will undertake a review in 2008 of our remuneration arrangements for the executive directors and senior executives. The Committee will consult with major shareholders should any material changes or new proposals be made.
Directors’ Remuneration Regulations The 2007 Directors’ Remuneration Report has been approved by the Board and, as required by The Directors’ Remuneration Report Regulations 2002 (the Regulations), a resolution will be put to shareholders at the Annual General Meeting inviting them to consider and approve it. This report complies with the requirements of the Regulations and KPMG Audit Plc has audited the sections contained on pages 114 to 123.
Scope of role and market position, as well as individual’s contribution and experience, taking into account total remuneration, market movement of salaries in comparator organisations.
In all cases the deferred shares are normally only released after three years. Dividends accumulate for the benefit of award holders during the deferral period. Bonuses awarded are not pensionable.
Total remuneration levels are set by reference to the levels in their relevant markets.
Provide another guaranteed element set at an appropriate level compared with peers.
The structure of plans is determined by market practice and local legislation.
Further details are set out in the section on ‘All-employee plans’ on page 106.
Group Performance Share Plan (Group PSP) The Group PSP delivers shares to participants subject to performance over a three-year period. The performance measure for the award is Prudential’s Total Shareholder Return (TSR) performance over the performance period compared with the TSR performance of an index comprised of peer companies. TSR is measured on a local currency basis which is considered to have the benefits of simplicity and directness of comparison. The vesting schedule is set out in the following table and graph. The unvested portion of any award lapses. The Committee reviews the peer companies annually and for the 2007 awards decided to include Standard Life (which became a public company for the first time in 2006). No further changes were made to the comparator companies for the 2008 awards. Companies in the index for 2007 and 2008 are: Aegon, Allianz, Aviva, Axa, Friends Provident, Generali, ING, Legal & General, Manulife, Old Mutual and Standard Life.
Prudential’s TSR relative to the index Percentage of at the end of the performance period award that vests
Prudential is intending to change its supplementary basis of reporting from EEV to Market Consistent Embedded Value (MCEV). The development of the MCEV Principles and Guidance by the CFO Forum of European Insurance Companies is currently at an advanced stage and they are likely to be issued by mid 2008.
The Remuneration Committee will keep the targets for the awards under review to ensure that the vesting outcomes are not materially distorted up or down by such a change.
The M&G long-term incentive arrangements for Michael McLintock are discussed on pages 108 and 109.
All-employee plans UK-based executive directors are eligible to participate in the Prudential HM Revenue & Customs (HMRC) approved UK Savings Related Share Option Scheme (SAYE scheme) and the Asia-based executive director can participate in the equivalent International SAYE scheme. The schemes allow employees to save towards the exercise of options over Prudential plc shares, at an option price set at the beginning of the savings period at a discount of up to 20 per cent to the market price. Savings contracts may be up to £250 per month for three or five years, or additionally in the UK scheme seven years. On maturity at the end of the set term, participants may exercise their options within six months of the end of the savings period and purchase Prudential plc shares. If an option is not exercised within six months, participants are entitled to a refund of their cash contributions plus interest if applicable under the rules. Shares are issued to satisfy options that are exercised. No options may be granted under the schemes if the grant would cause the number of shares which have been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and other share option schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed 10 per cent of the Company’s ordinary share capital at the proposed date of grant.
Pensions policy The executive director employed in the US is eligible to participate in a 401K approved pension scheme, on the same basis as all other US based employees, into which contributions of six per cent of basic salary up to a maximum of US$225,000, were made in 2007. He is also eligible to participate in the profit sharing element of Jackson’s IRS-approved Defined Contribution Retirement Plan. The plan is an all-employee plan that provides eligible participants with annual profit sharing, depending on the financial results of Jackson for the plan year, with a maximum of six per cent of salary capped at US$13,200 in 2007.
Philip Broadley Group Finance Director £567,100 110% 160% n/a Clark Manningnote 1 President & Chief Executive Officer Jackson US$1,050,000 c320% 230% 230% Michael McLintocknote 2 Chief Executive M&G £320,000 –2 100% –2
Nick Prettejohn Chief Executive Prudential UK & Europe £650,000 110% 130% 130% Barry Stowe Chief Executive Prudential Corporation Asia £550,000 110% 130% 130% Mark Tucker Group Chief Executive £975,000 125% 200% n/a
Notes 1 In addition to the Annual Bonus Plan, Clark Manning participates in a 10 per cent share of a senior management ̀ bonus pool based on the profits of Jackson. Clark Manning’s annual bonus figure includes a notional figure for his participation in the senior management bonus pool reflecting exceptional performance.
UK executive directors are offered a combination of HMRC approved pension schemes and supplementary provisions. Participation in the HMRC approved pension schemes is on the same basis as other employees who joined at the same date as the executive director in question. For defined benefit schemes, our policy is to retain a notional scheme earnings cap, set at £108,600 and £112,800 for the 2006/07 and 2007/08 tax years respectively. No employees with employment offers after 30 June 2003 are eligible for membership of any defined benefit schemes.
For UK executive directors hired after 30 June 2003 the Company’s policy is to provide a supplement of 25 per cent of salary. This includes, where relevant, any Company contributions to the staff defined contribution pension plan, which UK executive directors would be eligible to join. This plan has no salary cap.
Current remuneration structure for executive directors The structure for the remuneration of Prudential’s Group Chief Executive and executive directors will not change between 2007 and 2008, except in the case of Michael McLintock where new arrangements are proposed for 2008, described in detail on page 108. The following table summarising the structure includes the salaries of the executive directors from 1 January 2008 for information.
Changes from previous policy Apart from the change to Michael McLintock’s 2007 LTIP award, which is detailed in the section below, the only change to policy that was made in 2007 was an amendment to the rules covering deferred share awards from annual incentive plans, confirming that the shares would normally be made available at the end of the period and clarifying the treatment of leavers.
Remuneration arrangements for 2008 onwards A full review of the remuneration arrangements for Michael McLintock was undertaken in 2007. Our major shareholders were consulted in October and November 2007 on the proposed arrangements to apply from 2008.
Salary and benefits No change is proposed to Michael McLintock’s salary which is set at a competitive level relative to the asset management sector. Additionally no changes to the benefits policy are proposed for 2008.
Any bonus award up to £500,000 will be paid in cash and half of any bonus awarded over £500,000 will be in the form of an award of Prudential shares deferred for three years. Dividends will accumulate during the deferral period on any deferred shares. This deferral policy will be applied to awards from 2008, including the 2007 annual bonus award.
The number of phantom shares in the award will depend on the performance of M&G in the financial year prior to the award being made and an assessment of Michael McLintock’s contribution. Thus the award to be made in 2008 will be related to the business performance in 2007. For median performance, the new plan has been calibrated to provide a similar level of reward as the current plan. In recognition of M&G’s strong performance in 2007, it is proposed that an award of phantom shares with a face value of £1,141,176 and an expected value of £1,940,000 be made in 2008. This award is subject to shareholder approval of the plan.
— The scaling back will be on a straight-line basis from 0 per cent to 100 per cent of the award between zero profit and the achievement of profits equal to the average.
Directors’ service contracts and letters of appointment Executive directors have contracts that terminate on their normal retirement date. Following the new Age Discrimination legislation in the UK, the normal retirement date for the executive directors except Clark Manning was changed to the date of their 65th birthday. The normal retirement date for Clark Manning is the date of his 60th birthday.
Tidjane Thiam Tidjane Thiam is due to join Prudential on 25 March 2008 as Chief Financial Officer and will join the Board on the same day. The appointment as a director will be subject to a vote at the Annual General Meeting in May.
These awards will be valued taking the relative share prices of his previous employer at his date of leaving and the Company at his date of joining. Hence the value will be disclosed in the 2008 Directors’ Remuneration Report.
Non-executive directors’ remuneration Non-executive directors are not eligible to participate in annual incentive plans, long-term incentive plans or pension arrangements. Their fees are determined by the Board and reflect their individual responsibilities including committee membership as appropriate. The Board reviews the fees annually and the last change was made in 2007.
Sir Winfried Bischoff £60,000 Keki Dadiseth £70,000 Michael Gararett £70,000 Ann Godbehere £75,000 Bridget Macaskill £82,500 Kathleen O’Donovan £100,000 James Ross £95,000 Lord Turnbull £75,000
Directors’ shareholdings Shareholding guidelines As a condition of serving, all executive and non-executive directors are currently required to have beneficial ownership of 2,500 ordinary shares in the Company. This interest in shares must be acquired within two months of appointment to the Board if the director does not have such an interest upon appointment.
Date of initial appointment Commencement date Expiry date of by the Board of current term* current term
Bridget Macaskill 1 September 2003 AGM 2007 AGM 2010 Kathleen O’Donovan 8 May 2003 AGM 2007 AGM 2010 James Ross 6 May 2004 AGM 2005 AGM 2008 Lord Turnbull 18 May 2006 AGM 2006 AGM 2009 *Under the terms of their letters of appointment, the non-executive directors serve for an initial term of three years following their election by shareholders at the Annual General Meeting after their appointment by the Board.
Until the guideline is met, at least half the shares released from long-term incentive awards after tax should be retained by the executive director.
Philip Broadley 1 x salary 143% Clark Manning 1 x salary 51% Michael McLintock† 2 x salary 792% Nick Prettejohn 1 x salary 74% Barry Stowe‡ 1 x salary 95% Mark Tucker† 2 x salary 248%
Directors’ shareholdings The interests of directors in ordinary shares of the Company are set out below and include shares acquired under the Share Incentive Plan, the deferred annual incentive awards detailed in the table on Other Share Awards on pages 120 and 121, and interests in shares awarded on appointment.
The interests of directors in shares of the Company include changes between 31 December 2007 and 13 March 2008. All interests are beneficial.
Note that the table above compares Prudential’s TSR performance against the TSR performance of the FTSE 100 index over five years. The performance condition within the Group Performance Share Plan compares Prudential’s TSR performance against a group of insurers over three years.
Non-executive directors Sir Winfried Bischoff (from 2 August 2007) 25 25 –
3 Michael McLintock’s 2007 annual incentive contains a deferral element as described in the section on ‘Michael McLintock remuneration arrangements’ on page 108. It is anticipated that a deferred share award from the 2007 annual bonus valued at £640,000 will be made. This is included in the 2007 bonus figure.
7 Barry Stowe’s benefits include those relating to his expatriate status including costs of £88,288 related to housing. 8 It is anticipated that for Mark Tucker a deferred share award from the 2007 annual bonus valued at £453,600 will be made. This is included in the 2007 bonus figure. 9 Keki Dadiseth was paid allowances totalling £9,400 in 2007 in respect of his accommodation expenses in London whilst on the Company’s business, in lieu of reimbursing hotel costs as is the usual practice for directors who are not resident in the UK.
Remuneration for 2007 The following sections provide information on payments, outstanding conditional incentive awards and shares released in 2007 for each executive director.
2007 Annual Incentive Plan structures Annual bonus awards for all executive directors are determined by the Company’s financial performance and the contribution of the individual. Greater weighting is given to the financial measures. The balance between the Group and business unit measures reflect the Committee’s view for each executive director on the structure required to ensure the appropriate focus. The table below sets out the weightings between the Group and Business Unit measures and personal performance.
Annual Incentive Plans – Performance in 2007 The main business measures considered by the Remuneration Committee and incorporated into the annual incentive plans are IFRS profit, EEV profit and cash flow. The measures for Jackson are different and are identified later in this section.
The 2007 results under the main business measures were: Group UK Asia M&G notes 2,3 notes 2,4 note 5
IFRS profit from continuing operations £1,213m £528m £246m £254m EEV profit from long-term business £2,532m £859m £1,046m – Net cash flow £-82m £-142m £37m –
EEV profit from long-term business Increase Increase Increase – of 25% of 25% of 34%
Clark Manning’s annual plan includes free cash generated and the result was 21 per cent above business plan levels. Clark Manning also participates in the Jackson Bonus pool which in 2007 was based principally on US GAAP profits (up 26 per cent compared with 2006) and New Business EEV profits (up 19 per cent compared with 2006).
The Committee is fully satisfied that it has considered each case carefully, applied appropriate judgement and that the bonus award has been made for each executive director taking into account the overall performance of the Company in 2007.
Share rights granted under the share-based long-term incentive plans Releases or rights
Year of 1 Jan 2007 in 2007 original 2007 31 Dec 2007 Date of end of initial (Number of (Number of award (Number (Number performance
Plan (share element) 2006 72,324 –5 31 Dec 08 600,132 –
Nick Prettejohn Group Performance Share Plan 2006 149,964 149,9643 31 Dec 08
Group Performance Share Plan 2007 130,071 745 130,0714 31 Dec 09
Barry Stowe Group Performance Share Plan 2007 105,706 745 105,7064 31 Dec 09
Year of outstanding at awards made outstanding at Date of end of initial 1 Jan 2007 in 2007 in 2007 31 Dec 2007 performance
Clark Manning Business Unit Performance Plan (Cash element) 2006 577 577 31 Dec 08
Mark Norbom Business Unit Performance Plan (Cash element) 2006 361 –5 31 Dec 08
Barry Stowe Business Unit Performance Plan (Cash element) 2007 325 325 31 Dec 09
Business Unit Performance Plan Awards under the Business Unit Performance Plan are described on page 106.
Notes Performance levels under current awards at 31 December 2007: Note Plan Award year Performance levels under current awards at 31 December 2007 1 Restricted Share Plan 2004 The ranking of the Company’s TSR was ranked at 56th percentile at the end of the three-year performance period ending on 31 December 2006 and as a result the 2004 awards lapsed.
5 Mark Norbom The 2005 RSP, 2006 GPSP and the 2006 BUPP awards for Mark Norbom lapsed on the termination of his employment.
Business-specific cash-based long-term incentive plans Details of all outstanding awards under cash-based long-term incentive plans up to and including 2007 are set out in the table below. The performance period for all awards is three years.
Year of 1 Jan 2007 in 2007 made in 2007 31 Dec 2007 performance
For the 2004 award the results led to a payment of US$4,028,896. The face values of the awards for Clark Manning are converted at the average exchange rate for 2007 which was US$2.0015 = £1 (2006: US$1.8430 = £1). For the 2005 Business Cash LTIP, the compound annual growth rate in appraisal value was 22.8 per cent and as a result a payment of US$4,416,308 will be made.
Following consultations with shareholders an award with a face value of £1,333,000 was made in 2007 under the share element of the M&G Chief Executive Long-Term Incentive Plan.
Mark Norbom Mark Norbom’s awards under the Business Cash LTIP for 2004 vested as a result of Asia’s performance and a payment of £412,751 was made in 2007. On the termination of his employment his award under the 2005 Business Cash LTIP lapsed.
Other share awards The table below sets out the share awards that have been made to executive directors under their appointment terms and those deferred from annual incentive plan payouts. The values of the deferred share awards are included in the bonus and total figures in the directors’ remuneration table on page 114. The number of shares is calculated using the average share price over the three business days commencing on the day of the announcement of the Group’s annual financial results for the relevant year. For the 2006 awards the average share price was 681.5 pence.
Deferred 2005 annual incentive awardnote 1 2006 31,954 789 32,7431,2 31 Dec 08
Deferred 2004 annual incentive award 2005 93,750 2,317 96,067 – 31 Dec 07 96,067 31 Dec 07 475 712
Deferred 2006 annual incentive awardnote 1 2007 81,438 2,012 83,4501,4 31 Dec 09
Deferred 2004 annual incentive awardnote 1 2005 33,965 33,965 –7 31 Dec 07 33,965 08 Feb 07 475 715
(Number (Number (Number (Number (Number (Number restricted (Number Date of award release of shares) of shares) of shares) of shares) of shares) of shares) period of shares) release (pence) (pence)
Notes 1 Under the annual bonus plans, the element of bonus for performance above specified levels are made in the form of a share award deferred for three years. The value of the 2006 deferred share award is included in the total 2006 figure in the Directors’ Remuneration table on page 114. 2 In 2007, a deferred share award from his 2006 annual bonus valued at £211,947 was made to Philip Broadley. This is included in the 2006 total in the
8 In order to secure the appointment of Nick Prettejohn, he was awarded rights to Prudential plc shares that vest as set out in the table. In normal circumstances, releases are conditional on Nick Prettejohn being employed by Prudential at the date of vesting. If there is a change of control of Prudential he may be entitled to retain any unvested awards.
In order to compensate for the loss of share options, Barry Stowe was also awarded 1,255 Prudential plc ADRs in 2007.
Outstanding share options Options outstanding under the Savings-Related Share Option (SAYE) Scheme are set out below. The SAYE is open to all UK and certain overseas employees. Options under this scheme up to HM Revenue & Customs (HMRC) limits are granted at a 20 per cent discount and cannot normally be exercised until a minimum of three years has elapsed. No payment has been made for the grant of any options. The price to be paid for exercise of these options is shown in the table below. No variations to any outstanding options have been made.
Notes 1 Gains of £11,339 were made by directors in 2007 on the exercise of share options. (2006: nil). 2 No price was paid for the award of any option. 3 The highest and lowest share prices during 2007 were 811 pence and 618 pence respectively.
Philip Broadley participates in a non-contributory scheme that provides a pension of one-sixtieth of Final Pensionable Earnings for each year of service on retirement at age 60. Michael McLintock participates in a contributory scheme that provides a target pension of two-thirds of Final Pensionable Earnings on retirement at age 60 for an employee with 30 years or more potential service, for which his contribution is four per cent of basic salary. In both cases Final Pensionable Earnings are capped by a notional scheme earnings cap which replicates the HMRC earnings cap in force before A-Day (6 April 2006).
Philip Broadley and Michael McLintock are entitled to supplements based on the portion of their basic salary not covered for pension benefits under a HMRC approved scheme. They are also provided with life assurance cover of four times salary.
Nick Prettejohn is paid a salary supplement and he is a member of the staff defined contribution pension plan, which provides death in service benefits including life assurance of four times salary. The Company contributions to the pension plan and his salary supplement are in total 25 per cent of his salary.
Additional pension Transfer value of accrued earned during year benefit at 31 Dec ended 31 Dec 2007 note 3
Age at service at benefit at earned to earned to directors assurance 31 Dec 2007 31 Dec 2007 31 Dec 2007 31 Dec 2006 31 Dec 2006 2007 B 2006 A during 2007 arrangements note 1 note 2 note 4
Sir David Clementi 58 – – – – – – – 15
Nick Prettejohn 47 – – – – – – – 74 Barry Stowe 50 – – – – – – – – Mark Tucker 50 – – – – – – – 11
Total contributions to directors’ pension arrangements including cash supplements for pension purposes were £1,163,687 (2006: £1,161,410) of which £166,557 (2006: £138,937) related to money purchase schemes.
The following tables and referenced disclosure notes show the results reported in the statutory financial statements on pages 127 to 299 and supplementary EEV basis results on pages 302 to 332. This page does not form part of the statutory financial statements.
Profit after tax attributable to equity holders of the Company IFRS income statement 127 £1,022m £874m Basic earnings per share IFRS income statement 127 41.8p 36.2p Dividends per share declared and paid in reporting period IFRS note B3 155 17.42p 16.44p Shareholders’ equity, excluding minority interests IFRS balance sheet 131 £6,201m £5,488m
Operating profit from continuing operations based on longer-term investment returns 152 £1,213m £1,050m
Profit from continuing operations before tax attributable IFRS income statement to shareholders (including actual investment returns) IFRS note B1 127 and 152 £1,166m £1,372m
Operating earnings per share from continuing operations after related tax and minority interests IFRS note B2 154 33.8p 30.9p
Dividends per share in respect of the reporting period (including interim dividend of 5.70p (2006: 5.42p) and final dividend of 12.30p (2006: 11.72p) declared after the end of the reporting period) IFRS note B3 155 18.00p 17.14p
Short-term fluctuations in investment returns 303 £174m £738m Mark to market value movements on core borrowings EEV income 303 £223m £85m Shareholders’ share of actuarial gains and losses on statement defined benefit pension schemes 303 £116m £207m Effect of changes in economic assumptions and time value of cost of options and guarantees 303 £748m £59m
Operating earnings per share from continuing operations after related tax and minority interests EEV note 14 321 74.9p 62.1p
Notes IFRS basis results The preparation of statutory IFRS basis results and supplementary IFRS basis information is consistent with that applied for the 2006 results and financial statements.
Summary of statutory and supplementary IFRS and EEV basis results Year ended 31 December 2007
Financial statem ents 126 Index to Group financial statements 127 Consolidated income statement 128 Consolidated statement of changes in equity 130 Consolidated balance sheet 132 Consolidated cash flow statement 133 Notes on the Group financial statements 290 Balance sheet of the parent company 291 Notes on the parent company financial statement 300 Statement of directors' responsibilities in respect of the Annual Report and the financial statements 301 Independent auditor's report to the members of Prudential plc 302 EEV basis supplementary information 306 Notes on the EEV basis supplementary information 333 Statement of directors' responsibilities in respect of the EEV basis supplementary information 334 Independent auditor's report to Prudential plc on the EEV basis supplementary information
Notes on the Group financial statements Section A: Background 133 A1: Nature of operations 133 A2: Basis of preparation 133 A3: Critical accounting policies, estimates and judgements 139 A4: Significant accounting policies 150 A5: New accounting pronouncements
Section B: Summary of results 152 B1: Supplementary analysis of profit from continuing operations before tax attributable to shareholders 154 B2: Earnings per share 155 B3: Dividends 156 B4: Exchange translation 156 B5: New business 159 B6: Group balance sheet 164 B7: Internal funds under management
Section D: Life assurance businesses 169 D1: Group overview 177 D2: UK insurance operations 189 D3: US insurance operations 204 D4: Asian insurance operations 212 D5: Capital position statement for life assurance businesses
Section G: Financial assets and liabilities 233 G1: Financial instruments – designation and fair values 237 G2: Market risk 242 G3: Derivatives and hedging 245 G4: Derecognition, securitisation and collateral 245 G5: Impairment of financial assets
Section H: Other information on balance sheet items 246 H1: Intangible assets attributable to shareholders 248 H2: Intangible assets attributable to the PAC with-profits fund 249 H3: Reinsurers’ share of insurance contract liabilities 249 H4: Tax assets and liabilities 251 H5: Accrued investment income and other debtors 252 H6: Property, plant and equipment 253 H7: Investment properties 255 H8: Investments in associates and joint ventures 257 H9: Assets and liabilities held for sale 257 H10: Cash and cash equivalents 257 H11: Shareholders’ equity: Share capital, share premium and reserves 259 H12: Insurance contract liabilities and unallocated surplus of with-profits funds 259 H13: Borrowings 262 H14: Provisions and contingencies 266 H15: Other liabilities
Section I: Other notes 267 I1: Staff and pension plans 276 I2: Share-based payments 280 I3: Key management remuneration 280 I4: Fees payable to auditor 281 I5: Related party transactions 281 I6: Subsidiary undertakings 284 I7: Commitments 284 I8: Cash flows
Parent company 290 Balance sheet of the parent company 291 Notes on the parent company financial statements 300 Statement of directors’ responsibilities in respect of the Annual Report and the financial statements 301 Independent auditor’s report to the members of Prudential plc
Acquisition costs and other operating expenditure F3 (4,523) (4,212) Finance costs: interest on core structural borrowings of shareholder-financed operations F4 (168) (177)
Profit before tax* 1,185 2,221 Tax attributable to policyholders’ returns (19) (849)
Profit before tax attributable to shareholders B1 1,166 1,372 Tax expense F5 (401) (1,241) Less: tax attributable to policyholders’ returns 19 849 Tax attributable to shareholders’ profits F5 (382) (392)
Profit from continuing operations after tax 784 980 Discontinued operations (net of tax) J1 241 (105)
Attributable to: Equity holders of the Company 1,022 874 Minority interests 3 1
Earnings per share Basic (based on 2,445m and 2,413m shares respectively): Based on profit from continuing operations attributable to the equity holders of the Company 31.9p 40.5p Based on profit (loss) from discontinued operations attributable to the equity holders of the Company 9.9p (4.3)p
The presentation of the 2006 comparative results has been adjusted to reclassify Egg as discontinued operations.
Related change in amortisation of deferred income and acquisition costs 88 88 88
Total income and expense for the year 1,022 13 (105) (2) 928 3 931
Reserve movements in respect of share-based payments 18 18 18 Change in minority interests arising principally from purchase and sale of venture investment companies and property partnerships of the PAC with-profits fund and of other investments (28) (28)
Treasury shares Movement in own shares in respect of share-based payment plans 7 7 7 Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS 4 4 4
Net increase (decrease) in equity 1 6 800 13 (105) (2) 713 (30) 683
Consolidated statement of changes in equity Year ended 31 December 2007
Unrealised valuation movements on US life operations securities classified as available-for-sale: D3(a) Unrealised holding losses arising during the year (208) (208) (208) Less losses included in the
Treasury shares Movement in own shares in respect of share-based payment plans 6 6 6 Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS 0 0 0
Net increase (decrease) in equity 3 258 404 (298) (78) 5 294 (40) 254 At beginning of year 119 1,564 3,236 173 105 (3) 5,194 172 5,366
Intangible assets attributable to PAC with-profits fund: In respect of acquired subsidiaries for venture fund and other investment purposes H2(a) 192 830 Deferred acquisition costs H2(b) 19 31
Held for sale assets H9 30 463 Cash and cash equivalents G1,H10 4,951 5,071
Core structural borrowings of shareholder-financed operations: Subordinated debt (other than Egg) H13 1,570 1,538
The consolidated financial statements on pages 127 to 289 were approved by the Board of directors on 13 March 2008.
Sir David Clementi Mark Tucker Philip Broadley Chairman Group Chief Executive Group Finance Director
Total profit before tax* 1,407 2,071 Changes in operating assets and liabilities: Banking customer accounts (9) (276) Other non-investment and non-cash assets (817) (232) Policyholder liabilities (including unallocated surplus) 12,017 13,540 Other liabilities (including operational borrowings) 962 1,136
Cash flows from investing activities Purchases of property, plant and equipment H6 (231) (174) Proceeds from disposal of property, plant and equipment 61 34 Costs incurred on purchase of Egg minority interests – (6) Acquisition of subsidiaries, net of cash balances I6(iv) (77) (70) Disposal of Egg, net of cash balances I6(iii) (538) – Disposal of other subsidiaries, net of cash balances I6(v) 157 114 Deconsolidation of investment subsidiaries I6(v) (91) –
Cash flows from financing activities Structural borrowings of the Group: I8
Net (decrease) increase in cash and cash equivalents (160) 1,585 Cash and cash equivalents at beginning of year 5,071 3,586 Effect of exchange rate changes on cash and cash equivalents 40 (100)
In the US, the Group’s principal subsidiary is Jackson National Life Insurance Company (Jackson). The Group also has operations in Hong Kong, Malaysia, Singapore, Taiwan and other Asian countries.
A2: Basis of preparation The consolidated financial statements consolidate the Group and the Group’s interest in associates and jointly-controlled entities. The parent company financial statements present information about the Company as a separate entity and not about the Group.
The critical accounting policies in respect of the items discussed below are critical for the Group’s results insofar as they relate to the Group’s shareholder-financed business, in particular for Jackson. The policies are not critical in respect of the Group’s with-profits business. Accordingly, explanation is provided in this note and cross-referenced notes as to why the distinction between with-profits business and shareholder-backed business is relevant.
For Jackson, applying the MSB as applicable to overseas operations, the assets and liabilities of insurance contracts are accounted for under insurance accounting prescribed by US GAAP. For the assets and liabilities of insurance contracts of Asian operations, the local GAAP is applied with adjustments, where necessary, to comply with UK GAAP. For the operations in Taiwan, Vietnam and Japan, countries where local GAAP is not appropriate in the context of the previously applied MSB, accounting for insurance contracts is based on US GAAP. For participating business the liabilities include provisions for the policyholders’ interest in realised investment gains and other surpluses that, where appropriate, and in particular for Vietnam, have yet to be declared as bonuses.
to Jackson’s derivative book; — the complexity of asset and liability matching of US life insurers such as those with Jackson’s product range; and finally — whether it is possible or desirable, without an unacceptable level of costs and constraint on commercial activity, to achieve the accounting hedge effectiveness required under IAS 39.
Under IAS 39, unless carried at amortised cost (subject to impairment provisions where appropriate) under the held-tomaturity category, debt securities are also carried at fair value. The Group has chosen not to classify any financial assets as held-to-maturity. Debt securities of Jackson are designated as available-for-sale with value movements being recorded as movements within shareholders’ equity.
Investments Determining the fair value of unquoted investments The Group holds certain financial investments which are not quoted on active markets. Their fair values are determined in full or in part by using valuation techniques. If the market for a financial investment of the Group is not active, the Group establishes fair value by using quotations from independent third parties, such as brokers or by using valuation techniques. The fair values of investments valued using a valuation technique at 31 December 2007 was £9,854 million (2006: £8,211 million). Of this amount £5,739 million (2006: £4,503 million) is held by with-profits operations, for which value movements do not affect directly shareholder results, and £4,115 million (2006: £3,708 million) is held by shareholder-backed operations. The valuation techniques include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option adjusted spread models and, if applicable, enterprise valuation and may include a number of assumptions relating to variables such as credit risk and interest rates. Changes in assumptions relating to these variables could positively or negatively impact the reported fair value of these instruments. Additional details are explained in note G1.
A3: Critical accounting policies, estimates and judgements continued Determining impairments relating to financial assets Available-for-sale securities Financial investments carried on an available-for-sale basis are represented by Jackson’s and, prior to the sale of Egg in May 2007, Egg’s debt securities portfolio. These are considered to be impaired if there has been a significant or prolonged period of decline in fair value below amortised cost or if there is any other objective evidence of impairment. The consideration of this requires management’s judgement. Among the factors considered is whether the decline in fair value results from a change in quality of the security itself, or from a downward movement in the market as a whole and the likelihood of recovering the carrying value based on the current and short-term prospects of the issuer.
Assets held at amortised cost Financial assets classified as loans and receivables under IAS 39 are carried at amortised cost using the effective interest rate method. The loans and receivables include loans collateralised by mortgages, deposits and loans to policyholders. In estimating future cash flows, the Group looks at the expected cash flows of the assets and applies historical loss experience of assets with similar credit risks that has been adjusted for conditions in the historical loss experience which no longer exist or for conditions that are expected to arise. The estimated future cash flows are discounted using the financial asset’s original or variable effective interest rate and exclude credit losses that have not yet been incurred.
Insurance contracts Product classification IFRS 4 requires contracts written by insurers to be classified as either ‘insurance contracts’ or ‘investment contracts’ depending on the level of insurance risk transferred. If significant insurance risk is transferred by the contract then it is classified as an insurance contract. Contracts that transfer financial risk but not significant insurance risk are termed investment contracts. Furthermore, some contracts, both insurance and investment, contain discretionary participating features representing the contractual right to receive additional benefits as a supplement to guaranteed benefits: a that are likely to be a significant portion of the total contract benefits; b whose amount or timing is contractually at the discretion of the insurer; and c that are contractually based on asset or fund performance, as discussed in IFRS 4.
A detailed explanation of the basis of liability measurement is contained in note D2(e)(ii). The Group’s other with-profits contracts are written in with-profits funds that operate in some of the Group’s Asian operations. The liabilities for these contracts and those of Prudential Annuities Limited, which is a subsidiary company of the PAC with-profits funds, are determined differently. For these contracts the liabilities are estimated using actuarial methods based on assumptions relating to premiums, interest rates, investment returns, expenses, mortality and surrenders. The assumptions to which the estimation of these reserves is particularly sensitive are the interest rate used to discount the provision and the assumed future mortality experience of policyholders.
For liabilities determined using the basis described above for UK regulated with-profits funds, and the other liabilities described in the preceding paragraph, changes in estimates arising from the likely range of possible changes in underlying key assumptions have no direct impact on the reported profit.
ii Other contracts Contracts, other than those of with-profits funds, are written in shareholder-backed operations of the Group. The significant shareholder-backed product groupings and the factors that may significantly affect IFRS results due to experience against assumptions or changes of assumptions vary significantly between business units. For some types of business the effect of changes in assumptions may be significant, whilst for others, due to the nature of the product, assumption setting may be of less significance. The nature of the products and the significance of assumptions are discussed in notes D2, D3 and D4. From the perspective of shareholder results the key sensitivity relates to assumed future investment returns for the Taiwan life operation as described below.
The principal non-participating business in the Group’s Asian operations, for which changes in estimates and assumptions are important from year to year, is the traditional whole-life business written in Taiwan. The premiums for the in-force business for these contracts 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 an allowance for mortality and expenses. The required rates of guarantee have fallen over time as interest rates have reduced from a high of eight per cent to current levels of around two per cent. The current low 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 £45 million a year.
Pensions The Group applies the requirements of IAS 19, ‘Employee benefits’, to its defined benefit pension schemes. Due to the inclusion of actuarial gains and losses in the income statement rather than being recognised directly in equity, the results of the Group are affected by changes in interest rates for corporate bonds that affect the rate applied to discount projected pension payments and changes in mortality assumptions.
For SAPS the ratio is estimated to be 50/50 between the WPSF and shareholders’ funds.
The Group has designated certain financial assets as fair value through profit and loss as these assets are managed and their performance is evaluated on a fair value basis. These assets represent all of the Group’s financial assets except all loans and receivables and debt securities held by Jackson and, prior to its sale in May 2007, Egg. Debt securities held by Jackson and Egg (prior to its sale) are accounted for on an available-for-sale basis. The use of the fair value option is consistent with the Group’s risk management and investment strategies.
Impairments The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets not held at fair value through profit and loss is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (a loss event) and that a loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of financial assets is impaired includes observable data that comes to the attention of the Group. For assets designated as available-for-sale, the impairment is measured as the difference between the amortised cost of the asset and its fair value which is removed from the available-for-sale reserve within equity and recognised in the income statement.
If, in subsequent periods, an impaired debt security held on an available-for-sale basis or an impaired loan or receivable recovers in value (in part or in full), and this recovery can be objectively related to an event occurring after the impairment, then the previously recognised impairment loss is reversed through the income statement (in part or in full).
Derivatives and hedge accounting Derivative financial instruments are used to reduce or manage investment, interest rate and currency exposures, to facilitate efficient portfolio management and for investment purposes. The Group’s policy is that amounts at risk through derivative transactions are covered by cash or by corresponding assets.
A4: Significant accounting policies continued iii Cash flow hedges – the effective portion of changes in the fair value of derivatives designated as cash flow hedges is recognised in equity. Movements in fair value relating to the ineffective portion are booked in the income statement. Amounts recognised directly in equity are recorded in the income statement in the periods in which the hedged item affects profit or loss.
For UK with-profits funds the derivative programme is undertaken as part of the efficient management of the portfolio as a whole. As noted in section D2 value movements on the with-profits funds investments are reflected in changes in asset-share liabilities to policyholders or the liability for unallocated surplus. Shareholders’ profit or equity is not affected directly by value movements on the derivatives held.
In cases where the Group takes possession of the collateral under its securities lending programme, the collateral, and corresponding obligation to return such collateral, are recognised in the consolidated balance sheet. To further minimise credit risk, the financial condition of counterparties is monitored on a regular basis.
Where the transfer does not result in the Group transferring the right to receive the cash flows of the financial assets, but does result in the Group assuming a corresponding obligation to pay the cash flows to another recipient, the financial assets are also accordingly derecognised providing all of the following conditions are met: — The Group has no obligation to pay amounts to the eventual recipients unless it collects the equivalent amounts from the original asset; — the Group is prohibited by the terms of the transfer contract from selling or pledging the original asset; and — the Group has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay.
Under IFRS, investment contracts (excluding those with discretionary participation features) are required to be accounted for as financial liabilities in accordance with IAS 39 and, where relevant, the provisions of IAS 18 in respect of the attaching investment management features of the contracts. The Group’s investment contracts primarily comprise certain unit-linked savings contracts in the UK and Asia and contracts with fixed and guaranteed terms in the US (such as guaranteed investment contracts and annuity-certains).
The WPBR is primarily based on the retrospective calculation of accumulated asset shares but is adjusted to reflect future policyholder benefits and other outgoings.
The FPRL must include a market consistent valuation of costs of guarantees, options and smoothing, less any related charges, and this amount is determined using either a stochastic approach, hedging costs or a series of deterministic projections with attributed probabilities.
A4: Significant accounting policies continued Other UK insurance contracts Other UK insurance contracts that contain significant insurance risk include unit-linked, annuity and other non-profit business. For the purposes of local regulations, segregated accounts are established for linked business for which policyholder benefits are wholly or partly determined by reference to specific investments or to an investment-related index. The interest rates used in establishing policyholder benefit provisions for pension annuities in the course of payment are adjusted each year. Mortality rates used in establishing policyholder benefit provisions were based on published mortality tables adjusted to reflect actual experience.
Jackson accounts for the majority of its investment portfolio on an available-for-sale basis (see investment policies above) whereby unrealised gains and losses are recognised directly in equity. As permitted by IFRS 4, Jackson has used shadow accounting. Under shadow accounting, to the extent that recognition of unrealised gains or losses on available-for-sale securities causes adjustments to the carrying value and amortisation patterns of DAC and deferred income, these adjustments are recognised directly in equity to be consistent with the treatment of the gains or losses on the securities.
For the operations in Taiwan, Vietnam and Japan, countries where local GAAP is not appropriate in the context of the previously applied MSB, accounting for insurance contracts is based on US GAAP. For these three operations the business written is primarily non-participating and linked business. The future policyholder benefit provisions for non-linked business are determined using the net level premium method, with an allowance for surrenders, maintenance and claim expenses. Rates of interest used in establishing the policyholder benefit provisions vary by operation depending on the circumstances attaching to each block of business. Where appropriate, liabilities for participating business for these three operations include provisions for the policyholders’ interest in realised investment gains and other surpluses that have yet to be declared as bonuses.
A4: Significant accounting policies continued Reinsurance In the normal course of business, the Group seeks to reduce loss exposure by reinsuring certain levels of risk in various areas of exposure with other insurance companies or reinsurers. An asset or liability is recognised in the consolidated balance sheet representing premiums due to or payments due from reinsurers and the share of benefits and claims recoverable from reinsurers. The measurement of reinsurance assets is consistent with the measurement of the underlying direct insurance contracts.
The Group has consolidated some special purpose entities (SPEs), such as funds holding collateralised debt obligations (CDOs), where equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. These SPEs are consolidated because the Group is deemed to control them under IFRS.
Other interests in entities, where significant influence is not exercised, are carried as investments at fair value through profit and loss.
A4: Significant accounting policies continued Deferred taxes are provided under the liability method for all relevant temporary differences, being the difference between the carrying amount of an asset or liability in the balance sheet and its value for tax purposes. IAS 12, ‘Income Taxes’ does not require all temporary differences to be provided for, in particular, the Group does not provide for deferred tax on undistributed earnings of subsidiaries where the Group is able to control the timing of the distribution and the temporary difference created is not expected to reverse in the foreseeable future. The tax effects of losses available for carry forward are recognised as an asset.
A4: Significant accounting policies continued Goodwill Goodwill arising on acquisitions of subsidiaries and businesses is capitalised and carried on the Group balance sheet as an intangible asset at initial value less any accumulated impairment losses. Goodwill impairment testing is conducted annually and when there is an indication of impairment. For the purposes of impairment testing, goodwill is allocated to cash generating units. These cash generating units reflect the smallest group of assets that includes the goodwill and generates cash flows that are largely independent of the cash inflows from other groups of assets. If the carrying amount of the cash generating unit exceeds its recoverable amount then the goodwill is considered impaired. Impairment losses are recognised immediately in the income statement and may not be reversed in future periods.
Foreign exchange The Group’s consolidated financial statements are presented in pounds sterling, the Group’s presentation currency. Accordingly, the results and financial position of foreign subsidiaries must be translated into the presentation currency of the Group from their functional currencies, i.e. the currency of the primary economic environment in which the entity operates. All assets and liabilities of foreign subsidiaries are converted at year end exchange rates whilst all income and expenses are converted at average exchange rates where this is a reasonable approximation of the rates prevailing on transaction dates. The impact of these currency translations is recorded as a separate component of equity.
These key elements are of most importance in determining the operating results based on longer-term investment returns of Jackson.
There are three exceptions to the basis described above for determining operating results based on longer-term investment returns. These are for: — Unit-linked and US variable annuity business.
— Assets covering non-participating business liabilities that are interest rate sensitive.
For UK annuity business policyholder liabilities are determined by reference to current interest rates. The value movements of the assets covering liabilities are closely correlated with the related change in liabilities. Accordingly asset value movements are recorded within the operating results based on longer-term investment returns. Policyholder liabilities include a margin for asset defaults which, if they occur, are recorded as a component of short-term fluctuations in investment returns.
Items excluded from operating profit based on longer-term investment returns Items excluded from operating profit based on longer-term investment returns but included in profit before tax attributable to shareholders of continuing operations, include short-term fluctuations in investment returns (i.e. actual less longer-term returns), actuarial gains and losses on defined benefit pension schemes and exceptional items.
Accounting pronouncements adopted in 2007 IFRS 7, ‘Financial Instruments: Disclosures’ IFRS 7 replaces IAS 30, ‘Disclosures in the Financial Statements of Banks and Similar Financial Institutions’, which dealt with disclosures for banking operations, and the disclosure requirements of IAS 32, ‘Financial Instruments: Disclosure and Presentation’. The latter, therefore, becomes a standard dealing wholly with presentation of financial instruments. IFRS 7 is intended to complement the principles for recognising, measuring and presenting financial assets and financial liabilities in IAS 32 and IAS 39, ‘Financial Instruments: Recognition and Measurement’. The objective of IFRS 7 is to require entities to provide disclosures in their financial statements to enable the users of financial statements to evaluate the significance of financial instruments for the entity’s financial position and performance and the nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages those risks. Consequential amendments have been made to other standards as a result of the release of IFRS 7, notably IAS 1, ‘Presentation of Financial Statements’, and IFRS 4, ‘Insurance Contracts’.
IFRS 7 was issued in August 2005 and became effective for annual periods beginning on or after 1 January 2007.
Amendment to IAS 1, ‘Capital Disclosures’ As a result of the issue of IFRS 7, IAS 1 was amended in August 2005 to include a requirement to disclose information on the entity’s objectives, policies and processes for managing capital. This amendment became effective for annual periods beginning on or after 1 January 2007.
The additional disclosures required by IFRS 7, revised IFRS 4 and amendment to IAS 1 are shown in the relevant sections of the notes on the Group financial statements. The adoption of these pronouncements represents a change in accounting policy and the comparative 2006 figures have been disclosed accordingly.
The adoption of IFRIC 9 did not have a material impact on the financial statements of the Group.
SOP 05-1,’Accounting by Insurance Enterprise for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts’ As explained in note A3, the assets and liabilities of the insurance contracts of Jackson and certain Asian operations, where the local GAAP is not well established, are accounted for based on insurance accounting prescribed by US GAAP. This is permitted by IFRS 4, where the assets and liabilities of life assurance contracts classified as insurance contracts with discretionary participating features under this standard are accounted for under previously applied GAAP, which in the case of Jackson and these certain Asian operations is US GAAP.
A5: New accounting pronouncements continued SOP 05-1 became effective and was adopted by Jackson and those certain Asian operations from January 2007. The adoption of the provisions of SOP 05-1 did not have a material impact on the financial statements of the Group.
Amendment to IFRS 2, ‘Share-based Payment: Vesting Conditions and Cancellations’ The amendment to IFRS 2 clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. It also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. This amendment is effective for accounting periods beginning on or after 1 January 2009.
The Group is currently assessing the impact of the aforementioned standards, interpretations and amendments on its financial statements. Apart from IFRS 8, all of the other aforementioned pronouncements have not been adopted for use in the EU at 31 December 2007.
US operations Jacksonnotes ii,iii 444 398 Broker dealer and asset management (including Curian losses of £5m (2006: £8m)) 8 10
Operating profit based on longer-term investment returns is a supplemental measure of results. For the purposes of measuring operating profit, investment returns on shareholder-financed business are based on expected long-term rates of return. The expected long-term rates of return are intended to reflect historical real rates of return and, where appropriate, current inflation expectations adjusted for consensus economic and investment forecasts. The significant operations that require adjustment for the difference between actual and long-term investment returns are Jackson and certain businesses of the Group’s Asian operations. The amounts included in operating results for long-term capital returns for debt securities comprise two components. These are a risk margin reserve based charge for expected defaults, which is determined by reference to the credit quality of the portfolio, and amortisation of interest-related gains and losses for operating results based on longer-term results to the date when sold bonds would otherwise have matured.
ii Effect of changes to assumptions, estimates and bases of determining life assurance liabilities The results of the Group’s long-term business operations are affected by changes of assumptions and bases of preparation. These are described in notes D2(g), D3(g) and D4(f). In particular, the operating result for UK insurance operations for 2007 and 2006 benefited from credits of £34 million and £46 million respectively. The 2007 benefit of £34 million arose on annuity and pension business. The 2006 credit of £46 million arose from regulatory changes.
B1: Supplementary analysis of profit from continuing operations before tax attributable to shareholders continued Notes continued
Market value movements on equity-based derivatives and embedded derivatives are also recorded within operating profits based on longer-term investment returns so as to be consistent with the market related effects on fees and reserve movements for equity-based products. Market value movements on other derivatives are excluded from operating profit, and are included in short-term fluctuations in investment returns.
The short-term fluctuations in investment returns for 2007 primarily reflect temporary market value movements on the portfolio of investments held by the Group’s shareholder-backed operations. There were no default losses in debt securities in 2007.
The short-term fluctuations for Asian operations in 2007 primarily reflect value movements on Vietnam offset by value movements in Taiwan on the value of debt securities arising from increases in interest rates and a £30 million reduction of an investment in a CDO fund, partially offset by strong equity market movements in Vietnam. For 2006, the £134 million of short-term fluctuations mainly arose in Vietnam due to strong equity returns.
Risk margin charge to operating profit based on longer-term investment returns 48 54
Interest related Actual interest related realised gains (losses) in year 31 (15) Amortisation of current and prior year interest related realised gains and losses to operating profit based on longer-term investment returns (37) (45)
In addition, for US operations, included within the movements in shareholders’ equity is a net reduction in value of Jackson’s debt securities of £244 million. This reduction reflects a combination of increases due to reduction in US interest rates offset by the impact of widened credit spreads in the US bond market. These movements do not reflect defaults or permanent impairments. Additional details on the values of the Jackson portfolio are described in note D3.
B1: Supplementary analysis of profit from continuing operations before tax attributable to shareholders continued Notes continued v Shareholders’ share of actuarial gains and losses on defined benefit pension schemes £m £m
Based on profit for the year from continuing operations 1,166 (382) (3) 781 31.9p 31.9p
Net of tax Basic Diluted Before tax Tax Minority and minority earnings earnings
Based on profit for the year from continuing operations 1,372 (392) (3) 977 40.5p 40.5p
Based on profit for the year 1,222 (347) (1) 874 36.2p 36.2p *Discontinued operations relate entirely to UK Banking operations following the sale on 1 May 2007 of Egg Banking plc to Citi. Note I6 provides details of the sale of Egg.
Weighted average shares for calculation of basic earnings per share 2,445 2,413 Shares under option at end of year 9 10 Number of shares that would have been issued at fair value on assumed option exercise (6) (7)
Dividends declared and paid in reporting period Parent company: Interim dividend (2007: 5.70p, 2006: 5.42p per share) 140 131 Final dividend for prior period (2006: 11.72p, 2005: 11.02p per share) 286 267
As a result of shares issued in lieu of dividends of £176 million (2006: £76 million), dividends paid in cash, as set out in the consolidated cash flow statement, were £255 million (2006: £323 million).
A final dividend of 12.30 pence per share was proposed by the directors on 13 March 2008. Subject to shareholders’ approval, the dividend will be paid on 20 May 2008 to shareholders on the register at the close of business on 11 April 2008. The dividend will absorb an estimated £304 million of shareholders’ funds. A scrip dividend alternative will be offered to shareholders.
B5: New business continued Insurance products – new business premiums and contributions (note i)
GIC – Medium Term Notes 527 437 – – 53 44
Market Market gross and other 1 Jan 2007 inflows Redemptions movements 31 Dec 2007 2006 £m
Annual premium and contribution equivalents are calculated as the aggregate of regular new business amounts and one-tenth of single new business amounts. 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.
v Subsequent to 29 September 2007 following expiry of the previous management agreement CITIC–Prudential Life Insurance Company Ltd (CITIC-Prudential), the Group’s life operation in China, has been accounted for as a joint venture. Prior to this date CITIC–Prudential was consolidated as a subsidiary undertaking (see note H8). The totals above include 100 per cent of total premiums for CITIC-Prudential up to 29 September 2007 and 50 per cent thereafter, being the Group’s share after this date.
Asset management The asset management segment is comprised of both internal and third-party asset management services, inclusive of portfolio and mutual fund management, where the Group acts as an advisor, and broker-dealer activities. The nature of the products and the managing of the business differ from the risks inherent in the other business segments, and the regulatory environment of the asset management industry differs from that of the other business segments.
Discontinued banking operations This segment, prior to the sale of Egg in the first half of 2007, consisted of products provided by the Group’s online banking subsidiary, Egg. The nature of these products and the managing of the business differed from the risks inherent in the other business segments, and the regulatory environment of the banking industry differed from that of the other business segments. Note I6 includes details of the disposal of Egg Banking plc in the first half of 2007.
Segment assets by geographical segment UK 161,696 US 42,758 Asia 20,789 Intra-group eliminations (5,499)