4. INVESTMENT RETURN (i) Profit Before Tax With the exception of fixed income investments held by Jackson National Life, investment gains and losses during the period (to the extent that changes in capital values do not directly match changes in liabilities) are included in the profit for the year and shareholders’ funds as they arise.
(ii) Operating Profit Investment returns, including investment gains, in respect of long-term insurance business are recognised in operating results at the expected long-term rate of return. For the purposes of calculating investment return to be recognised in operating results of UK operations, where equity holdings are a significant proportion of investment portfolios, values of assets at the beginning of the reporting period are adjusted to remove the effects of short-term market volatility.
For the purposes of determining the long-term returns, realised gains and losses arising (including impairment losses) on debt securities of Jackson National Life have been averaged over five years and combined with actual interest income and dividends. For equity-related investments of Jackson National Life, a long-term rate of return of 8.0% has been assumed. This has been applied to the monthly average carrying value of such investments after excluding the estimated effect of short-term market movements.
Effect of changes in economic assumptions (100) 29 (71) – (71) (3.4)p Adjustment for post-tax profit on business disposals 48 (19) 29 – 29 1.4p Adjustment for post-tax Egg France closure cost (113) 32 (81) 17 (64) (3.0)p
Based on profit for the financial year after minority interests 1,521 (485) 1,036 10 1,046 49.1p 2003 (Restated)(ii)
Adjustment for amortisation of goodwill (98) – (98) – (98) (4.7)p Adjustment from post-tax long-term investment returns to post-tax actual investment returns (after related
Based on profit for the financial year after minority interests 838 (355) 483 2 485 23.4p
(ii) The average number of shares for 2004 is 2,129m. As a result of the Rights Issue in 2004, the average number of shares for 2003 has been restated to 2,076m and earnings per share have been restated accordingly.
Where solvency capital is held within a with-profits long-term fund, the value placed on surplus assets in the fund is already discounted to reflect its release over time and no further adjustment is necessary in respect of solvency capital. However, where business is funded directly by shareholders, principally at Jackson National Life, the solvency capital requires adjustments to reflect the cost of that capital.
On the achieved profits basis of reporting, the impact of adoption of FRS 17 for long-term business would be limited to: (i) balance sheet recognition of the FRS 17 basis net pensions scheme asset or liability; (ii) for that element of the net pensions scheme asset or liability that is attributable to the PAC with-profits fund, an adjustment of the Group’s Fund for Future Appropriations by an equal but opposite amount; and
(iii) for shareholder financed long-term business, an adjustment of the composition of achieved profits basis shareholders’ funds between the components of the modified statutory basis shareholders’ funds and additional shareholders’ reserves (reflecting the additional shareholders’ interest recognised on the achieved profits basis).
Further details are shown in note 17 on pages 81 to 83 of the Group's financial statements.
(ii) Jackson National Life net of tax profit: Before capital charge 95 95 Capital charge (note 6) (21) (19)
Jackson National Life Unwind of discount 139 145 Return on surplus assets (over target surplus) 36 33 Averaged realised losses on bonds in excess of long-term default assumption(iii) (note 10) (56) (66) Experience variances against current assumptions: Spread(iii) (iv) 43 (17)
(ii) The £66m (£50m) cost of strengthened persistency assumption relates to the closed book of personal pension policies sold by the now discontinued direct salesforce. The £34m charge for other items in 2004 includes £21m of costs associated with complying with new regulatory requirements and restructuring and £13m of negative experience variances. The £100m charge for other items for 2003 includes a £35m adverse experience variance for persistency; a £29m restructuring charge; an adverse annuitant mortality assumption change of £18m; a strengthening of renewal expense assumptions of £29m; other positive assumption changes of £30m; and £19m of other negative items and experience variances.
(iii) The charge for average realised losses shown above is as compared to the long-term default assumption for fixed income securities, which is now presented as part of the determination of spread variance. The charge for the default assumption is calculated using a weighted risk margin reserve (RMR) approach. An RMR charge is individually assigned to asset classes based on credit ratings and, where necessary, credit analysis. This is then weighted by reference to the carrying value of the investments.
Variance excluding long-term default assumption 100 54 Less: Long-term default assumption (note 10) (57) (71)
(v) The 2004 £56m charge for changes to operating assumptions primarily relates to Singapore, mainly for persistency, and a strengthening of renewal expense assumptions in Vietnam. The £27m charge in 2003 for changes to operating assumptions primarily reflects expense assumption changes in Japan.
Actual investment returns on investments less long-term returns included within operating profit(iii) 183 96 Investment return related gain due primarily to changed expectation of profitability on variable annuity business arising from current year equity returns* 24 36 *This adjustment arises due to market returns for 2004 and 2003 being higher than the assumed long-term rate of return. This gives rise to higher than expected year end values of variable annuity assets under management with a resulting effect on the projected value of future account values, and hence future profitability.
Actual less averaged losses excluded from operating result but included in profit before tax 295 161
(v) Short-term fluctuations for Asian Operations for 2004 of £48m primarily reflect bond value movements and rising equity markets.
11. EFFECT OF CHANGES IN ECONOMIC ASSUMPTIONS The losses on changes in economic assumptions included within the profit on ordinary activities before tax arise as follows: £m £m
12. TAXATION CHARGE The profit for the year is in most cases calculated initially at the post-tax level. The post-tax profit is then grossed up for presentation purposes at the effective rates of tax applicable to the countries and periods concerned. In the UK this is the UK corporation tax rate of 30%. For Asia, similar principles apply subject to the availability of taxable profits. For Jackson National Life the profit is calculated at the pre-tax level and the effective tax rate is the rate expected to be applicable on average over the remaining lifetimes of the policies.
Tax on items not included in operating profit Tax charge on short-term fluctuations in investment returns 212 212 Tax credit on effect of changes in economic assumptions (29) (130) Tax charge on profit on business disposals 19 – Tax credit on Egg France closure cost (32) –
Before capital charge: Excluding assets in excess of target surplus 1,749 1,741 Assets in excess of target surplus 949 842
After capital charge 2,532 2,419 Broker-dealer and fund management 64 71
Held within Other Operations relating to M&G and acquired Asian businesses 1,352 1,445 Held within US Operations 15 53 Held within Egg – 6
Operating profit (loss) before amortisation of goodwill 450 334 366 1,150 (46) 1,104
Short-term fluctuations in investment returns (note 10) 402 207 48 657 22 679 Effect of changes in economic assumptions (note 11) (19) (53) (28) (100) (100) Profit on business disposals 41 41 7 48 Egg France closure cost (113) (113)
Tax (note 12): Tax on short-term fluctuations in investment returns (121) (73) (12) (206) (6) (212) Tax on effect of changes in economic assumptions 6 19 4 29 29 Tax on profit on business disposals (16) (16) (3) (19) Tax on Egg France closure cost 32 32
Exchange movements, net of related tax of £12m (177) (73) (250) 21 (229) Development costs included above (net of tax) borne centrally 2 2 (2) Intragroup dividends (including statutory transfer) (130) (66) (44) (240) 240 External dividends (362) (362)
Shareholders’ capital and reserves at 31 December 2004 (note 13) 4,051 2,532 1,672 8,255 341 8,596
14. RECONCILIATION OF MOVEMENT IN SHAREHOLDERS’ FUNDS CONTINUED Long-term business operations
Components of achieved profits basis shareholders' funds: Value of in-force business(iii) 3,444 777 1,174 5,395 5,395
(iii) Value of in-force business includes the value of future margins from current in-force business less the cost of holding statutory solvency capital.
Operating profit UK and Europe Insurance Operations 178 (53) 125 332
(ii) Estimated impact on 2004 and 2003 results based on alternative assumptions The key assumptions that affect the Group’s results are economic, in particular expected rates of investment return and risk discount rates. The sensitivities of the 2004 and 2003 results to changes in these assumptions are set out below: £m £m
Pre-tax operating profit from new business for the year Pre-tax expected long-term nominal rates of investment return: Increase in rates of 1% 79 75 Decrease in rates of 1% (82) (81)
Risk discount rates: Increase in rates of 1% (86) (74) Decrease in rates of 1% 102 87
An explanation of the achieved profits basis of reporting is provided on pages 27 and 28 of the Group’s financial statements.
In preparing the achieved profits basis supplementary information, the directors are required to: ■ select suitable methodologies and then apply them consistently; ■ determine assumptions on a realistic basis, having regard to past, current and expected future experience and to any relevant external data, and then apply them consistently; ■ state whether applicable accounting standards have been followed in relation to the residual assets, subject to any material departures disclosed and explained in the supplementary information; and
■ prepare the supplementary information on the going concern basis unless it is inappropriate to presume that the Group will continue in business.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RELATION TO THE ACHIEVED PROFITS BASIS SUPPLEMENTARY INFORMATION
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR As described above, the directors’ responsibilities include preparing the supplementary information on the achieved profits basis in accordance with the guidance issued by the Association of British Insurers. Our responsibilities, as independent auditor, in relation to the supplementary information are established in the United Kingdom by the Auditing Practices Board, by our profession’s ethical guidance and the terms of our engagement.
Under the terms of engagement we are required to report to the Company our opinion as to whether the supplementary information has been properly prepared in accordance with the guidance using the methodology and assumptions set out on page 116. We also report if we have not received all the information and explanations we require for this audit.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the achieved profits basis supplementary information is free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of the supplementary information.
OPINION In our opinion, the achieved profits basis supplementary information for the year ended 31 December 2004 has been properly prepared in accordance with the guidance using the methodology and assumptions set out on page 116.
INDEPENDENT AUDITOR’S REPORT TO PRUDENTIAL PLC ON THE ACHIEVED PROFITS BASIS SUPPLEMENTARY INFORMATION
DIRECTORS' SHAREHOLDINGS As reported on page 46, at 22 March 2005, directors' interests in ordinary shares of Prudential plc changed from the position reported on page 46 as follows: Mark Wood 157,221 144,235
As reported on page 46, as at 22 March 2005 there were no changes to directors' interests in shares of Egg plc.
SHAREHOLDERS As reported on page 54, at 22 March 2005 the Company had received a further notification in accordance with Sections 198 to 208 of the Companies Act 1985 from Cater Allen Limited of a shareholding of 3.73 per cent of the Company’s ordinary share capital.
SHAREHOLDER ENQUIRIES Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA
SCRIP DIVIDEND ALTERNATIVE The Company will again be offering a scrip dividend alternative in respect of the final dividend of 10.65 pence per ordinary share for the year ended 31 December 2004. The number of new shares each shareholder who elects to take scrip will be entitled to receive is calculated by dividing the total cash dividend due on each holding of ordinary shares as at the record date (18 March 2005) by the reference price for each new ordinary share.
The reference price is calculated as the average of the middle market quotations for the Company's ordinary shares as derived from the Daily Official List of the London Stock Exchange for the five business days which commenced on 16 March 2005. Further details of the scrip dividend alternative will be mailed to shareholders in early April 2005.
SHARE DEALING SERVICES The Company's Registrar, Lloyds TSB Registrars, offers a postal dealing facility for buying and selling Prudential plc ordinary shares, telephone 0870 2424244. They also offer a telephone and internet dealing service, Shareview, which provides a simple and convenient way of selling Prudential plc ordinary shares. For telephone sales call 0870 8500852 between 8.30am and 4.30pm, Monday to Friday, and for internet sales log on to www.shareview.co.uk/dealing
SHAREGIFT Shareholders who only have a small number of shares whose value makes it uneconomic to sell them may wish to consider donating them to charity through ShareGift, an independent charity share donation scheme. The relevant share transfer form may be obtained from Lloyds TSB Registrars. ShareGift is administered by the Orr Mackintosh Foundation, registered charity number 1052686. Further information about ShareGift may be obtained by telephone on 020 7337 0501 or from www.sharegift.org There are no implications for capital gains tax purposes (no gain or loss) on gifts of shares to charity and it is now also possible to obtain income tax relief.
FORM 20-F The Company is subject to the reporting requirements of the Securities and Exchange Commission (SEC) in the US as such requirements apply to foreign companies and files its Form 20-F with the SEC. Copies of Form 20-F can be found on the Company's website at www.prudential.co.uk or on the SEC's website at www.sec.gov
PRUDENTIAL CORPORATION ASIA 13th Floor One International Finance Centre 1 Harbour View Street Central Hong Kong www.prudentialcorporation-asia.com
PRUDENTIAL PUBLIC LIMITED COMPANY Incorporated and registered in England and Wales