b Sale of Taiwan agency business in 2009 In 2009, the Company sold the assets and liabilities of its agency distribution business and its agency force in Taiwan to China Life Insurance Company Ltd of Taiwan for the nominal sum of NT$1. In addition, the Company invested £45 million to purchase a 9.99 per cent stake in China Life through a share placement. The business transferred represented 94 per cent of Prudential’s in-force liabilities in Taiwan and included Prudential’s legacy interest rate guaranteed products. The sale was completed on 19 June 2009. The Company retains its interest in life insurance business in Taiwan through its retained bank distribution partnerships and its direct investment in China Life made in 2009. At 31 December 2010 the Company’s interest in China Life was 8.66 per cent (2009: 9.99 per cent). The effect on the IFRS income statement was a pre-tax loss of £621 million comprising a loss on sale of £559 million and trading losses before tax up to the date of sale of £62 million. After allowing for tax and other adjustments, the reduction to shareholders’ equity was £607 million. The loss on disposal of £559 million includes cumulative foreign exchange gains of £9 million recycled through the profit and loss account as required by IAS 21. Cash and cash equivalents disposed of were £388 million and restructuring and other costs incurred in cash in the year were £64 million. In addition, the Company invested £45 million in China Life as described above. Accordingly, the cash outflow for the Group arising from the sale of the Taiwan agency business, as shown in the consolidated statement of cash flows, was £497 million.
a Staff and employment costs The average number of staff employed by the Group during the year was: Business operations: Asian operations 17,988 19,502 US operations 3,545 3,371 UK operations 4,459 4,516
Other pension costs comprises £58 million (2009: £57 million) relating to defined benefit schemes and £37 million (2009: £38 million) relating to defined contribution schemes of continuing operations. Of the defined contribution scheme costs, £26 million (2009: £27 million) related to overseas defined contribution schemes. The £58 million (2009: £57 million) relating to defined benefit schemes comprises a charge of £27 million (2009: £29 million) relating to PSPS and a charge of £31 million (2009: £28 million) for other schemes. Consistent with the derecognition of the Company’s interest in the underlying IAS 19 surplus of PSPS as described in note (b)(i)1 below, the £27 million (2009: £29 million) for PSPS represents the cash cost of contributions for ongoing service of active members and the unwind of discount on the opening provision for deficit funding for PSPS. The charge of £31 million (2009: £28 million) for other schemes comprises £18 million (2009: £19 million) charge on an economic basis, reflecting the total assets of the schemes, and a further £13 million (2009: £9 million) charge to adjust for amounts invested in Prudential insurance policies to arrive at the IAS 19 basis charge. The loss of £26 million (2009: £138 million) for actuarial and other gains comprises a loss of £15 million (2009: £155 million) for actuarial and other losses on an economic basis and £11 million actuarial gains (2009: £17 million) to adjust for amounts invested in Prudential insurance policies. The derivation of these amounts is shown in note (b)(i)7.
The tables used for PSPS immediate annuities in payment at 31 December 2010 were: Male: 108.6 per cent PNMA00 with improvements in line with a custom calibration of the CMI’s 2009 mortality model, with a long-term mortality improvement rate of 1.75 per cent per annum; and Female: 103.4 per cent PNFA00 with improvements in line with a custom calibration of the CMI’s 2009 mortality model, with a long-term mortality improvement rate of 1.00 per cent per annum.
The tables used for PSPS immediate annuities in payment at 31 December 2009 were: Male: 108.6 per cent PNMA00 with medium cohort improvements subject to a floor of 1.75 per cent up to the age of 90, decreasing linearly to zero by age of 120; and Female: 103.4 per cent PNFA00 with 75 per cent medium cohort improvements subject to a floor of 1.00 per cent up to the age of 90 and decreasing linearly to zero by age of 120.
The assumed life expectancies on retirement at age 60, based on the mortality table used was: 2010 years 2009 years
In July 2010, the UK Government announced plans to use the Consumer Price Index (CPI) in place of the Retail Price Index (RPI) in its determination of the statutory minimum pension increases for private sector occupational pension schemes. In December 2010, the Government published the statutory revaluation order for 2011 which confirms the change to use CPI. In addition, the Government has also published in December 2010 a consultation paper which sets out the Government’s views on the impact that the switch from RPI to CPI will have on the private sector occupational pension schemes. The consultation period closed on 2 March 2011. For the Group’s UK defined benefit schemes, the pensions in deferment and/or pensions in payment for certain tranches of these schemes are subject to statutory increases in accordance with the schemes’ rules and may therefore be affected by the Government’s decision to change the indexation from RPI to CPI. Other tranches, where RPI is specified in the scheme rules, are unaffected. The above has no impact on the results for the year ended 31 December 2010. The impact of this change, if and when made, will be recognised in a future period. Using the underlying information as at 31 December 2010, the estimated effect of such a change would give rise to an accounting benefit of approximately £30 million to the Group’s operating profit based on longer-term investment returns and profit attributable to shareholders before tax and £20 million shareholders’ equity.
Economic deficit – as explained in note 5 below (220) (250) Exclude: investments in Prudential insurance policies (offset on consolidation in the Group financial statements against insurance liabilities) (227) (187)
Estimated pension scheme deficit – economic basis Movements on the pension scheme deficit (determined on the ‘economic basis’) are as follows, with the effect of the application of IFRIC 14 being shown separately: 2010 £m
Less: amount attributable to PAC with-profits fund (285) (11) 71 (39) (264)
EFFECT OF IFRIC 14 Surplus (deficit) (588) (38) 94 – (532) Less: amount attributable to PAC with-profits fund 407 29 (66) – 370
WITH THE EFFECT OF IFRIC 14 Surplus (deficit) (250) (45) (15) 90 (220) Less: amount attributable to PAC with-profits fund 122 18 5 (39) 106
EFFECT OF IFRIC 14 Surplus (deficit) (793) 23 182 – – (588) Less: amount attributable to PAC with-profits fund 550 (17) (126) – – 407
a The components of the (charge) credit to operating results (gross of allocation of the share attributable to the PAC with-profits fund) are as follows: Service cost (38) (34) Finance (expense) income: Interest on pension scheme liabilities (294) (277) Expected return on assets 325 240
The net charge to operating profit (gross of the share attributable to the PAC with-profits fund) of £45 million (2009: £48 million) is made up of a charge of £27 million (2009: £29 million) relating to PSPS and a charge of £18 million (2009: £19 million) for other schemes. This net charge represents: Underlying IAS 19 charge for other pension schemes (18) (19) Cash costs for PSPS (23) (25) Unwind of discount on opening provision for deficit funding for PSPS (4) (4)
Consistent with the derecognition of the Company’s interest in the underlying IAS 19 surplus of PSPS, the charge to operating profit on longer-term investment returns for PSPS reflects the cash cost of contributions for ongoing service of active members. In addition, the charge to the operating results also includes a charge for the unwind of discount on the opening provision for deficit funding for PSPS.
Actuarial and other gains and losses after the effect of IFRIC 14 (15) (155)
The net charge for actuarial and other gains and losses is recorded within the income statement but, within the segmental analysis of profit, the shareholders’ share of actuarial and other gains and losses (i.e. net of allocation of the share to the PAC with-profits funds) is excluded from operating profit based on longer-term investment returns. The 2010 actuarial losses of £109 million primarily reflects the effect of decrease in risk discount rates and the change in economic assumptions underlying PSPS commutation factors partially offset by the effect of decreases in inflation rates and the excess of market returns over long-term assumptions. Consistent with the derecognition of the Company’s interest in the underlying IAS 19 surplus of PSPS, the actuarial gains and losses do not include those of PSPS. In addition, as a result of applying IFRIC 14, the Group has recognised a provision for deficit funding in respect of PSPS. The change in 2010 in relation to this provision recognised above as other gains and losses on defined benefit pension schemes was £nil (2009: £48 million).
iii In addition to PSPS, there are two smaller schemes in the UK, the Scottish Amicable Pension Scheme, and the M&G Pension Scheme, with a combined deficit at 31 December 2010 of £173 million (2009: £175 million), gross of tax. There is also a small scheme in Taiwan, with a negligible amount of deficit at 31 December 2010 and 2009. As part of the sale of the Taiwan agency business in June 2009 the Group has settled the majority of the obligations under the Taiwan scheme relating to the employees who were transferred out.
The movements in the deficit on the ‘economic basis’ between scheme assets and liabilities were: Current service cost (13) (11) Other finance income (5) (8) Cash costs and unwind of discount on opening provision for deficit funding for PSPS (27) (29)
6 Movement in IAS 19 basis financial position The change in the present value of the benefit obligation and the change in fair value of the assets for the total of the PSPS, Scottish Amicable, M&G and Taiwan schemes over the period were as follows: 2010 £m
Service cost – current charge only (13) (13) Interest cost (43) (43) Expected return on plan assets 25 13 38 38
Cash costs and unwind of discount on the opening provision for deficit funding for PSPS (29) (29) Movement in the provision for deficit funding for PSPS (48) (48) Disposal of Taiwan agency business, including
Set up obligation for deficit funding for PSPS (47) (75) (65) (102) (143) Adjustment in respect of investment of PSPS in Prudential policies 118 101 103 140 126
† In determining the expected return on scheme assets for 2010, the 5.9 per cent (2009: 4.5 per cent) rate shown below has been applied to the opening assets.
Fair value of scheme assets, end of year (IAS 19 basis) 5,659 5,224 5,057 5,150 4,988 Present value of the benefit obligation, end of year (5,692) (5,174) (4,673) (5,015) (5,210)
Experience adjustments on scheme liabilities (4) 76 145 (14) 18 Percentage of scheme liabilities at 31 December (0.07)% 1.47% 3.10% 0.28% (0.35)% Experience adjustments on scheme assets (IAS 19 basis) 287 100 (277) (7) 140 Percentage of scheme assets at 31 December 5.07% 1.91% (5.48)% (0.14)% 2.81%
The experience adjustments on scheme liabilities in 2008 of a gain of £145 million related mainly to the ‘true up’ reflecting improvements in data consequent upon the 2008 triennial valuation of PSPS. Total employer contributions expected to be paid into the Group defined benefit schemes for the year ending 31 December 2011 amounts to £94 million (2010: £88 million).
Discount rate Decrease by 0.2% from 5.45% to 5.25% Increase in scheme liabilities by: PSPS 3.6% Scottish Amicable 5.2% M&G 5.1%
Mortality rate Increase life expectancy by one year Increase in scheme liabilities by: PSPS 2.1% Scottish Amicable 2.5% M&G 2.9%
Discount rate Increase by 0.2% from 5.8% to 6.0% Decrease in scheme liabilities by: PSPS 3.2% Scottish Amicable 4.8% M&G 4.9%
The sensitivity of the underlying pension scheme liabilities to changes in discount, inflation and mortality rates as shown above does not directly equate to an impact on the profit or loss attributable to shareholders or shareholders’ equity due to the effect of the application of IFRIC 14 on PSPS and the allocation of a share of the interest in financial position of the PSPS and Scottish Amicable schemes to the PAC with-profits fund as described above. The sensitivity to the changes in the key variables as shown in the table above has no significant impact on the pension costs included in the Group’s operating results. This is due to the pension costs charged in each of the periods presented being derived largely from market conditions at the beginning of the period. After applying IFRIC 14 and to the extent attributable to shareholders, any residual impact from the changes to these variables is reflected as actuarial gains and losses on defined benefit pension schemes within the supplementary analysis of profits. The relevance of this to each of the three UK schemes is described further below. For PSPS, the underlying surplus of the scheme of £485 million (2009: £513 million) has not been recognised under IFRIC 14. Any change in the underlying scheme liabilities to the extent that it is not sufficient to alter PSPS into a liability in excess of the deficit funding provision will not have an impact on the Group’s results and financial position. Based on the underlying financial position of PSPS as at 31 December 2010, none of the changes to the underlying scheme liabilities for the changes in the variables shown in the table above have had an impact on the Group’s 2010 results and financial position. In the event that a change in the PSPS scheme liabilities results in a deficit position for the scheme which is recognisable, the deficit recognised affects the Group’s results and financial position only to the extent of the amounts attributable to shareholder operations. The amounts attributable to the PAC with-profits fund are absorbed by the liability for unallocated surplus and have no direct effect on the profit or loss attributable to shareholders or shareholders’ equity. The deficit of the Scottish Amicable pension scheme has been allocated approximately 50 per cent to the PAC with-profits fund and 50 per cent to the shareholders. Accordingly, half of the changes to the scheme liabilities for the changes in the variables shown in the table above would have had an impact on the Group’s shareholder results and financial position. The M&G pension scheme is wholly attributable to shareholders.
ii Other pension plans The Group operates various defined contribution pension schemes including schemes in Jackson and Asia. The cost of the Group’s contributions for continuing operations to these schemes in 2010 was £37 million (2009: £38 million).
The Group maintains 10 main share award and share option plans relating to Prudential plc shares, which are described below. The Group Performance Share Plan (GPSP) is the incentive plan in which all executive directors and other senior executives within the Group can participate. This scheme was established as a replacement for the Restricted Share Plan (RSP) under which no further awards could be made after March 2006. Awards are granted either in the form of a nil cost option, conditional right over shares, or such other form that shall confer to the participant an equivalent economic benefit, with a vesting period of three years. The performance measure for the awards is that Prudential’s Total Shareholder Return (TSR) outperforms an index comprising of peer companies. Vesting of the awards between each performance point is on a straight line sliding scale basis. Participants are entitled to the value of reinvested dividends that would have accrued on the shares that vest. Beginning in 2010, newly issued shares will be used in settling the awards that vest and are released. The RSP was, until March 2006, the Group’s long-term incentive plan for executive directors and other senior executives designed to provide rewards linked to shareholder return. Each year participants were granted a conditional option to receive a number of shares. There was a deferment period of three years at the end of which the award vested to an extent that depended on the performance of the Group’s shares including notional reinvested dividends and on the Group’s underlying financial performance. After vesting, the option may be exercised at zero cost at any time, subject to closed period rules, in the balance of a 10-year period. Shares are purchased in the open market by a trust for the benefit of qualifying employees.
The Business Unit Performance Plan (BUPP) is an incentive plan created to provide a common framework under which awards would be made to senior employees in the UK, Jackson and Asia including the Chief Executive Officers. Awards under this plan are based on growth in Shareholder Capital Value on the European Embedded Value (EEV) basis with performance measured over three years. Upon vesting of awards made up to 2008, half of the awards will be released as shares and the other half released in cash. Since the year ended 31 December 2009 all awards made will be settled in shares after vesting. Participants are entitled to receive the value of reinvested dividends over the performance period for those shares that vest. The growth parameters for the awards are relevant to each region and vesting of the awards between each performance point is on a straight line sliding scale basis. Beginning in 2010, newly issued shares will be used in settling the awards that vest and are released. During 2009, the Remuneration Committee decided that future BUPP awards for the UK business unit would be based on the same relative TSR measure applied to GPSP awards. As a result, 2010 awards made under the UK BUPP reflect those TSR conditions applied to 2010 GPSP awards. The Group maintains four share option schemes satisfied by the issue of new shares. 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 directors can participate in the equivalent International SAYE scheme. Dublin-based employees are eligible to participate in the Prudential International Assurance Sharesave Plan, and Hong Kong-based agents can participate in the Non-employee Savings Related Share Option Scheme. The schemes allow participants to save towards the exercise of options over Prudential plc shares, at an option price set at the beginning of the savings period as determined by reference to the average market value of the ordinary shares on the three business days immediately preceding the invitation at a discount of 20 per cent to the market price. Participants may save up to £250 per month for three or five 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. The exercise period of the options granted may be advanced to an earlier date in certain circumstances, for example on retirement, and may be extended in certain circumstances, for example on the death of the participant the personal representative may exercise the options beyond the normal exercise period. 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. UK-based executive directors are also eligible to participate in the Company’s HMRC approved Share Incentive Plan which allows all UK-based employees to purchase shares of Prudential plc (partnership shares) on a monthly basis out of gross salary. For every four partnership shares bought, an additional matching share is awarded, purchased on the open market. Dividend shares accumulate while the employee participates in the plan. Partnership shares may be withdrawn from the scheme at any time. If the employee withdraws from the plan within five years, the matching shares are forfeit and if within three years, dividend shares are forfeit. Jackson operates a performance-related share award which, subject to the prior approval of the Jackson Remuneration Committee, may grant share awards to eligible Jackson employees in the form of a contingent right to receive shares or a conditional allocation of shares. These share awards have vesting periods of four years and are at nil cost to the employee. Award holders do not have any right to dividends or voting rights attaching to the shares. The shares are held in the employee share trust in the form of American Depository Receipts which are tradable on the New York Stock Exchange. The Prudential Corporation Asia Long-Term Incentive Plan (PCA LTIP) is an incentive plan created in 2008 for senior employees and Chief Executive Officers to replace the Asia Business Unit Performance Plan (BUPP). Awards under the new PCA LTIP will vest after three years subject to the employee being in employment at the time of vesting without any performance conditions. Awards will be discretionary and on a year by year basis determined by Prudential’s full year financial results and the employee’s contribution to the business. All awards will be in Prudential shares except for countries where share awards are not feasible due to securities and/or tax reasons, where awards will be replaced by the cash value of the shares that would otherwise have been transferred. Certain senior executives have annual incentive plans with awards paid in cash up to the target level of their plan. The portion of any award for above target performance is made in the form of awards of shares deferred for three years, with the release of shares subject to close periods. The shares are held in the employee share trust and shares equivalent to dividends otherwise payable will accumulate for the benefit of award holders during the deferral period up to the release date. In addition, there are other share awards including the Prudential Corporation Asia Deferred Bonus Plan (PCA DBP), Prudential Capital Deferred Bonus Plan (PruCap DBP) and other arrangements. There are no performance conditions attaching to these deferred bonus plans and awards vest in full subject to the individual being employed by Prudential at the end of the vesting period. The other arrangements relate to various awards that have been made without performance conditions to individual employees, typically in order to secure their appointment or ensure retention.
The following table provides a summary of the range of exercise prices for Prudential plc options outstanding at 31 December 2010.
Between £0 and £1 – – – – – Between £1 and £2 – – – – –
The following table provides a summary of the range of exercise prices for Prudential plc options outstanding at 31 December 2009.
The years shown above for weighted average remaining contractual life include the time period from end of vesting period to expiration of contract. The weighted average fair values of Prudential plc options and awards granted during the period are as follows: Weighted average fair value Weighted average fair value
The fair value amounts relating to all options including conditional nil cost options above were determined using the Black-Scholes and the Monte Carlo option-pricing models using the following assumptions: GPSP SAYE
between Prudential and an index constructed from a simple average of the TSR growth of 11 companies is required. For grants in 2010, an average index volatility and correlation of 35 per cent and 82 per cent respectively, were used. Changes to the subjective input assumptions could materially affect the fair value estimate. When options are granted or awards made to employees, an estimate is made of what percentage is more than likely to vest, be forfeited, lapse or cancelled based on historical information. Based on these estimates, compensation expense to be accrued at that date is calculated and amortised over the vesting period. For early exercises of options or release of awards due to redundancy, death or resignation, the compensation expense is immediately recognised and for forfeitures due to employees leaving the Group, any previously recognised expense is reversed. However, if an employee loses their award because of the Group’s failure to meet the performance criteria, previously recognised expense is not reversed. During the year, the Group granted share options to certain non-employee independent financial advisors. Those options were measured using the Black-Scholes option pricing model with assumptions consistent with those of other share options. These transactions were measured using an option model because the Group does not receive a separate and measurable benefit from those non-employees in exchange for the options granted. As such, the fair value of the options themselves is more readily determinable than the services received in return.
Key management constitutes the directors of Prudential plc as they have authority and responsibility for planning, directing and controlling the activities of the Group. Total key management remuneration amounts to £21,677,000 (2009: £20,989,000). This comprises salaries and short-term benefits of £9,594,000 (2009: £11,570,000), post-employment benefits of £926,000 (2009: £1,132,000), leaving benefits of £ nil (2009: £915,000) and share-based payments of £11,157,000 (2009: £7,372,000). Post-employment benefits comprise the change in the transfer value of the accrued benefit relating to directors’ defined benefit pension schemes in the year and the total contributions made to directors’ other pension arrangements. The share-based payments charge is the sum of £7,320,000 (2009: £5,270,000), which is determined in accordance with IFRS 2, ‘Share-Based Payments’ (see note I4) and £3,837,000 (2009: £2,102,000) of deferred share awards.
The fees for services relating to the AIA transaction of £5.5 million were primarily comprised of the following services: • Accountants’ Report on historical financial information on Prudential Group • Consulting Actuaries’ Report on AIA EEV information • Technical accounting advice • Financial due diligence • Working capital review • Synergies review • Extraction comfort
Transactions between the Company and its subsidiaries are eliminated on consolidation. In addition, the Company has transactions and outstanding balances with certain unit trusts, OEICs, collateralised debt obligations and similar entities which are not consolidated and where a Group company acts as manager. These entities are regarded as related parties for the purposes of IAS 24. The balances are included in the Group’s statement of financial position sheet at fair value or amortised cost in accordance with their IAS 39 classifications. The transactions are included in the income statement and include amounts paid on issue of shares or units, amounts received on cancellation of shares or units and paid in respect of the periodic charge and administration fee. Further details of the aggregate assets, liabilities, revenues, profits or losses and reporting dates of entities considered to be associates under IFRS are disclosed in note H8. Executive officers and directors of the Company may from time to time purchase insurance, asset management or annuity products marketed by Group companies in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons. Apart from the transactions with directors referred to below, no director had interests in shares, transactions or arrangements that require disclosure, other than those given in the directors’ remuneration report. Key management remuneration is disclosed in note I5.
The acquisition costs associated with this transaction were expensed as incurred and totalled less than £1 million. Goodwill represents management’s expectation of future income streams and is not allowable for tax. As noted above the transaction increased the previously held stake from 50 per cent to 100 per cent. The fair value of the existing stake at the date of the transaction was £25 million. As the investment was held in the Group’s balance sheet as a financial instrument classified as at fair value through profit and loss no gain or loss arises as a result of the transaction. There were no new acquisitions or disposals by the PAC with-profits fund in 2009. However, during 2009, the holding in the voting equity interest of Red Funnel increased from 90 per cent to 100 per cent. Red Funnel is a venture capital holding owned by the PAC with-profits fund managed by M&G. Other than the above there were no other material acquisitions or disposals of subsidiaries during 2010 or 2009.
Future minimum lease payments for non-cancellable operating leases fall due during the following periods: Not later than 1 year 70 63 Later than 1 year and not later than 5 years 236 178 Later than 5 years 120 104
The total minimum future sublease rentals to be received on non-cancellable operating leases for land and buildings for the year ended 31 December 2010 were £nil (2009: £nil). Minimum lease rental payments for the year ended 31 December 2010 of £92 million (2009: £105 million) are included in the consolidated income statement.
ii Capital commitments The Group has provided, from time to time, certain guarantees and commitments to third-parties including funding the purchase or development of land and buildings and other related matters. The contractual obligations to purchase or develop investment properties at 31 December 2010 was £28 million (2009: £nil).
I. Selected historical financial information of Prudential 354 Selected historical financial information of Prudential
II. IFRS profit and loss information 357 (a) Analysis of long-term insurance business pre-tax IFRS
GMWB liabilities 367 (b) IFRS shareholders' funds summary by business unit and net asset value per share
Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance (40,518) (41,195) 10,824 (26,785) (28,267)
Acquisition costs and other expenditure (4,799) (4,572) (2,459) (4,859) (4,489) Finance costs: interest on core structural borrowings of
Loss on sale of Taiwan agency business – (559) – – –
Profit (loss) before tax (being tax attributable to shareholders’ and policyholders’ returns) 1 2,072 1,564 (2,074) 1,058 2,111
Tax (charge) credit attributable to policyholders’ returns (611) (818) 1,624 5 (830)
Costs of terminated AIA transaction (377) – – – – Gain on dilution of holding in PruHealth 30 – – – – Loss on sale and results of Taiwan agency business – (621) 1 (37) 49
Profit (loss) from continuing operations before tax attributable to shareholders2 1,461 746 (450) 1,063 1,281
Operating earnings per share (reflecting operating profit based on longer-term investment returns after related tax and non-controlling interests and including 2010 exceptional tax credit) (in pence) 68.3p 47.5p 38.1p 31.3p 28.8p
Mark to market value movements on core borrowings (164) (795) 656 223 85 Shareholders’ share of actuarial and other gains and losses on
Effect of changes in economic assumptions (10) (910) (398) 632 163 Costs of terminated AIA transaction (377) – – – – Gain on dilution of holding in PruHealth 3 – – – – Profit on sale and results of Taiwan agency business – 91 (248) 267 77
Profit (loss) from continuing operations before tax attributable to shareholders 3,107 1,743 (2,106) 3,670 3,222
Operating earnings per share (reflecting operating profit based on longer-term investment returns after related tax and non-controlling interests and including 2010 exceptional tax credit) (in pence) 113.2p 88.8p 85.1p 69.2p 58.2p
3 New business sales exclude the results of the Japanese life operation which ceased writing new business in February 2010, and the results of the Taiwan agency business for which the sale process was completed in June 2009.
vi Acquisition costs and administration expenses represent expenses incurred in the period attributable to shareholders. It excludes items such as restructuring costs and Solvency II costs which are not included in the segment profit for insurance as well as items that are more appropriately included in other source of earnings lines (e.g. investment expenses are netted off investment income as part of spread income or fee income as appropriate).
Long-term business operating profit 410 618 606 – 1,634 Asset management operating profit 55 4 238 – 297 GI commission – – 51 – 51 Other income and expenditure* – – – (418) (418)
Spread income 38 461 35 – 534 Fee income 54 292 57 – 403 With-profits 30 – 395 – 425 Insurance margin 198 161 (12) – 347 Margin on revenues 672 – 314 – 986 Expenses Acquisition costs (619) (451) (172) – (1,242) Administration expenses (331) (217) (212) – (760) DAC adjustments 173 – 32 – 205 Expected return on shareholder assets 16 89 108 – 213
Long-term business operating profit 231 335 545 – 1,111 Asset management operating profit 52 7 286 – 345 GI commission – – 44 – 44 Other income and expenditure* – – – (288) (288)
Total operating profit based on longer-term investment returns 283 342 875 (288) 1,212 * Including restructuring and Solvency II implementation costs.
Note i During 2010 the Group amended its presentation of operating profit for its US insurance operations to remove the net equity hedge accounting effect associated with Jackson’s variable annuity and fixed index annuity products, which are now classified in the Group’s supplementary analysis of profit before tax attributable to shareholders as part of short-term fluctuations in investment returns. 2009 and 2008 operating profit have been amended accordingly and so net equity hedge effects of £159 million negative and £71 million positive have been removed from the previously stated operating profits of £1,405 million and £1,283 million to give restated values of £1,564 million and £1,212 million, respectively.
• Margin on revenues has increased by £252 million, reflecting the growth in the size of the portfolio and changes in country mix.
• Acquisition costs – the costs as a percentage of APE new business sales has fallen over the period 2008-2010, reflecting management’s continued focus on capital management activities, such as the closure of Japan to new business in the first quarter of 2010 and changes to business and country mix. The analysis above uses shareholder acquisition costs as a proportion of total APE, excluding with-profits sales from the denominator the margin would become 2010: 53 per cent, 2009: 56 per cent and 2008: 58 per cent.
• Administration expenses – margin has reduced from 339 bps in 2009 in part reflecting operational leverage benefit and a shift in mix towards countries with highly efficient business models (e.g. Indonesia).
Analysis of US operating profit drivers: • Spread income benefited from the effect of transactions to more closely match the overall asset and liability duration in 2010. Excluding this effect (£108 million), spread margin in 2010 would have been 205 bps. The increase over the 2009 margin of 179 bps is due in part to decreased crediting rates on fixed annuities.
• Fee income margins are based on the average of the opening and closing separate account balances. In normal years this is expected to be a reasonable proxy for the average balances throughout the year. In 2009 separate account flows were weighted towards the end of the year artificially lowering the 2009 margin. Using an average based on end of month balances, margins show little movement between years, (2010: 200 bps; 2009: 203 bps; 2008: 200 bps) indicating that absolute revenue amounts are growing in line with separate accounts values. Separate account values increased between 2008 and 2010 both as a result of strong sales and improving equity markets.
• Insurance margin represents operating profits from insurance risks, including variable annuity guarantees and other sundry net income. Positive net flows into variable annuity business with life contingent and other guarantees have helped to improve the margin from £154 million in 2009 to £188 million in 2010.
2008 acquisition costs as a percentage of APE sales were 63 per cent, lower than 2009 and 2010. This is primarily because sales of GICs in 2008 (APE £120 million), on which no acquisition costs are incurred, reduces the margin for that year. Excluding GIC APE sales the acquisition cost ratio for 2008 becomes 76 per cent, in line with 2009.
• Administration expenses margin has increased to 63 bps in 2010, partly as a result of higher asset based commission, which lowers acquisition costs but increases the expenses classified as administration expenses in the table above.
DAC adjustments (1) (3) 32 Expected return on shareholder assets 98 125 108 * The ratio for acquisition costs is calculated as a percentage of APE including with-profits sales. Acquisition costs include only those relating to shareholders.
The ratio above expresses the percentage of shareholder acquisition costs as a percentage of total APE sales. It is therefore impacted by the level of with-profits sales in the year. Acquisition costs as a percentage of shareholder-backed new business sales were 36 per cent in 2010 (49 per cent in 2009), with the most significant impact being the effect of the bulk annuity deal.
• Administration expenses have fallen by £60 million to £113 million and the ratio from 48 bps in 2009 to 27 bps in 2010. This is primarily the result of cost savings initiatives initiated by the UKIO in line with the business’ stated objectives.
II(b): ASIAN OPERATIONS – ANALYSIS OF IFRS OPERATING PROFIT BY TERRITORY
Operating profit based on longer-term investment returns for Asian operations is analysed as follows: Chinanote ii (12) 4 Hong Kong 51 48 Indianote iii 60 12 Indonesia 157 102 Japan (6) (18) Korea 12 6 Malaysia – Underlying results 97 65 – Exceptional creditnote i 63 Philippines 2 2 Singapore 129 112 Taiwan bancassurance businessnote iv (4) (7)
TOTAL LONG-TERM BUSINESS OPERATING PROFIT 532 410 Asset management 72 55
ii China’s operating loss of £12 million is after a net charge of £17 million for local reserving changes and associated impacts that have been reflected in the Group’s IFRS accounts. Excluding this effect, China’s underlying result is a £5 million profit.
iv Sale of Taiwan agency business In order to facilitate comparisons of operating profit based on longer-term investment returns that reflect the Group’s retained operations, the results attributable to the Taiwan agency business for which the sale process was completed in June 2009 are excluded from analysis of operating profit.
v Analysis of operating profit between new and in-force business The result for insurance operations comprises amounts in respect of new business and business in-force as follows: New business strain (excluding Japan) (56) (72)
New business strain (including Japan) (57) (78) Business in force 593 494
The IFRS new business strain corresponds to approximately four per cent of new business APE premiums for 2010 (2009: approximately six per cent of new business APE).
Operating income before performance-related fees 615 185 88 229 1,117 Performance-related fees 17 6 – – 23
Operating income before performance-related fees 470 157 89 183 899 Performance-related fees 12 3 – – 15
* Operating income is net of commissions and includes performance related fees. † Margin represents operating income as a proportion of the related funds under management (FUM). Opening and closing internal and external funds managed by the respective entity have been used to derive the average. Any funds held by the Group’s insurance operations which are managed by third parties outside of the Prudential Group are excluded from these amounts.
bps * Operating income is net of commissions and includes performance-related fees. † Margin represents operating income as a proportion of the related funds under management (FUM). Opening and closing internal and external funds managed by the respective entity have been used to derive the average. Any funds held by the Group’s insurance operations which are managed by third-parties outside of the Prudential Group are excluded from these amounts.
‘Not for life’ Guaranteed Minimum Withdrawal Benefits (GMWB) are accounted for as ‘embedded derivatives’. Where the economic characteristics and risks of embedded derivatives are not closely related to the economic characteristics and risks of the host insurance contract, and where the contract is not measured at fair value with the changes in fair value recognised in the income statement, the embedded derivative is bifurcated and carried at fair value as a derivative in accordance with IAS 39. In Jackson, the embedded derivative liabilities for GMWB liabilities are fair valued using the economic assumptions shown below, in line with IAS 39 (FAS 157 – ‘Fair Value Measurements’.)
The two reserving methodologies typically produce quite different patterns of results. It is the variation in assumptions, and the way the two reserving methods react to emerging experience, that produces potentially significant differences in reserve patterns through time.
The chart below compares the assumption bases for the two methods in general terms as well as showing representative comparative values as of 31 December 2010. The comparative values for the projected earned rate and AA corporate bond rate are the 10-year rate in both cases, and the comparative value for volatility is the 5-year rate.
To provide an approximate translation of values from the SOP 03-1 basis to the IAS 39 basis, the table below shows estimates of the impact of changing each primary economic assumption from the SOP 03-1 values to the IAS 39 values.
Two other items are shown in addition: a reconciling item to account for the difference in how each method adjusts for emerging economic experience (labelled as the ‘method’ component below), and a further adjustment to recognise the impact of additional fees collected over and above those considered for reserving purposes (i.e. the difference between fees actually collected and the hypothetical fee assessment referenced earlier).
Total per 31 December 2010 financial statements 450 Change in assumed fund earned rate 2 375 25 n/a 400 Change in discount rate 3 200 50 n/a 250 Change in equity volatility assumption 4 225 0 n/a 225
Hypothetical fair value with full fee recognition 8 670 (320) 350
Notes 1 Note GMWB benefits have reported components on both an SOP 03-1 and IAS 39 basis. 2 Change in fund earned rate: 8.4 per cent to 3.4 per cent, producing significantly higher values of future benefit payments due to lower future assumed fund growth and therefore greater potential for future guaranteed benefit payouts. For GMWBs, future fee income is less dramatically affected, given that for most benefit forms fee income is based on a more stable benefit base rather than a current account value.
5 Generally, it is expected that the SOP 03-1 methodology will ‘lag’ market events in terms of reflecting their impact in the reserve calculation. This is because of the retrospective aspect of the calculation described above. This line item is also the balancing item in the reconciliation so contains any cross-effects from other variables.
In all cases, values shown above, were they to be reflected in actual financial statements, would be significantly offset by an adjustment to deferred acquisition costs, which is impacted by changes in gross profit elements of the variable annuity product. Thus, for example, it might be expected that the GMDB impacts shown would be offset by some 70 to 75 per cent of the change illustrated, and the GMWB impacts shown would be offset by some 50 to 55 per cent of the change illustrated. The table below illustrates the approximate impact on shareholders’ equity.
Estimated increase/(decrease) in liability 700 (100) Related adjustments to: DAC (475) (50)
III(b): IFRS SHAREHOLDERS’ FUNDS SUMMARY BY BUSINESS UNIT AND NET ASSET VALUE PER SHARE
US OPERATIONS Jackson (net of surplus note borrowings) 3,815 3,011 Broker-dealer and asset management operations: Net assets of operation 106 95 Acquired goodwill 16 16
OTHER OPERATIONS Holding company net borrowings (2,035) (1,754) Shareholders' share of provision for future deficit funding of the Prudential Staff Pension Scheme
(net of tax) (10) (16) Other net assets (liabilities) 177 (30)
Note i Based on the closing issued share capital as at 31 December 2010 of 2,546 million shares (2009: 2,532 million shares).
Business area Asian operations 30.9 23.7 US operations 63.6 49.6 UK operations 145.2 135.6
Internal funds under management 239.7 208.9 External fundsnote i 100.4 80.9
Note i External funds shown above for 2010 of £100.4 billion (2009: £80.9 billion) comprise £111.4 billion (2009: £89.8 billion) in respect of investment products, as published in the New Business schedules (see Note B5) less £11.0 billion (2009: £8.9 billion) that are classified within internal funds.
Investment propertiesnote i – – 0.1 0.1 11.5 11.0 11.6 11.1 Equity securities 14.5 11.4 31.5 21.0 40.7 37.0 86.7 69.4 Debt securities 14.1 10.0 26.4 22.8 75.9 69.1 116.4 101.9 Loans and receivables 1.3 1.2 4.2 4.3 3.8 3.3 9.3 8.8 Other investments 1.0 1.1 1.4 1.4 13.3 15.2 15.7 17.7
Note i As included in the investments section of the consolidated statement of financial position at 31 December 2010 except for £0.4 billion
(2009: £0.2 billion) investment properties which are held-for-sale or occupied by the Group and, accordingly under IFRS, are included in other statement of financial position captions.
The following translation rates have been applied: Closing Average Closing Average
Total Asian insurance operations after development costs 532 445 Asset management 72 58
US operations Jacksonnote iii 833 626 Broker-dealer, asset management and Curian operations 22 4
Other income and expenditure (450) (396) Restructuring costs (26) (23) Solvency II costs (45) –
The ‘as published’ shareholders’ funds for 2010 and 'memorandum’ shareholders’ funds for 2009 have been calculated by applying closing period end 2010 exchange rates.
iii The Company has amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge accounting credit/charge (incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. The 2009 ‘memorandum’ operating profit amounts have been amended accordingly.
Long-term operations 1,450 1,190 Asset management 72 58 Development expenses (4) (6)
The ‘as published’ shareholders’ funds for 2010 and ‘memorandum’ shareholders’ funds for 2009 have been calculated by applying closing period end 2010 exchange rates.
All options were granted at £nil consideration. No options have been granted to substantial shareholders, suppliers of goods or services (excluding options granted to agents under the Non-employee Savings Related Share Option Scheme) or in excess of the individual limit for the relevant scheme.
The options schemes will terminate as follows, unless the directors resolve to terminate the plans at an earlier date: • UK Savings Related Share Option Scheme: 8 May 2013 • International Savings Related Share Option Scheme: 19 May 2011 • Prudential International Assurance Sharesave Plan: 19 May 2011 • Non-employee Savings Related Share Option Scheme: 9 May 2012
The weighted average share price of Prudential plc for the year ended 31 December 2010 was £5.68 (2009: £4.17). Particulars of options granted to directors are included in the Directors’ Remuneration Report on page 124. The closing price of the shares immediately before the dates on which the options were granted during the current period was £6.16. The following analyses show the movement in options for each of the option schemes for the year ended 31 December 2010.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £5.70.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £5.47.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £5.59.
FIXED ASSETS Investments: Shares in subsidiary undertakings 5 9,410 10,071 Loans to subsidiary undertakings 5 849 899
Amounts owed to subsidiary undertakings (1,084) (1,279) Tax payable (169) (379) Sundry creditors (19) (4) Accruals and deferred income (59) (41)
LESS LIABILITIES: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Subordinated liabilities 7 (2,718) (2,687)
CAPITAL AND RESERVES Share capital 10 127 127 Share premium 10 1,856 1,843 Profit and loss account 11 2,284 1,856
The financial statements of the parent company on pages 375 to 386 were approved by the Board of directors on 8 March 2011 and signed on its behalf.
Prudential plc (the Company) is a parent holding company. The Company together with its subsidiaries (collectively, the Group) is an international financial services group with its principal operations in the UK, the US and Asia. The Group operates in the UK through its subsidiaries, primarily The Prudential Assurance Company Limited, Prudential Annuities Limited, Prudential Retirement Income Limited and M&G Investment Management Limited. In the US, the Group’s principal subsidiary is Jackson National Life Insurance Company. The Group also has operations in Hong Kong, Malaysia, Singapore, Indonesia and other Asian countries. The Company is responsible for the financing of each of its subsidiaries.
The financial statements of the Company, which comprise the balance sheet and related notes, are prepared in accordance with Part 15 of the Companies Act 2006, which applies to companies generally. The Company has taken advantage of the exemption under Section 408 of the Companies Act 2006 from presenting its own profit and loss account.
The financial statements are prepared in accordance with applicable accounting standards under UK Generally Accepted Accounting Practice (UK GAAP), including Financial Reporting Standards (FRS) and Statements of Standard Accounting Practice (SSAP).
The amendments to FRS 20 ‘Group cash settled share-based payment transactions’ which expanded FRS 2 to bring into scope group cash-settled share-based payment transactions became effective for the Company in 2010. These amendments incorporated the guidance in UITF 41, ‘Scope of FRS 20’ and UITF 44, ‘Group and Treasury Share Transactions’ which were withdrawn as a result. In particular, the amendments specify that the entity which has the obligation to settle the share-based payment arrangement shall recognise it as an ‘equity-settled transaction’ if it is settled in its own equity instruments and as ‘cash-settled transaction’ otherwise, no matter which entity in the Group receives the goods or service in the arrangement. The Company’s share-based payment accounting treatment prior to 2010 was consistent with these amendments and accordingly, there was no impact on the Company’s results and financial position upon the adoption of these amendments.
Derivatives Derivative financial instruments are used to reduce or manage interest rate and currency exposures. Derivative financial instruments are carried at fair value with changes in fair value included in the profit and loss account.
Under FRS 26, hedge accounting is permissible only if certain criteria are met regarding the establishment of documentation and continued measurement of hedge effectiveness. For derivative financial instruments designated as fair value hedges, the movements in the fair value are recorded in the profit and loss account with the accompanying change in fair value of the hedged item attributable to the hedged risk.
The Group’s UK subsidiaries each file separate tax returns. In accordance with UK tax legislation, where one domestic UK company is a 75 per cent owned subsidiary of another UK company or both are 75 per cent owned subsidiaries of a common parent, the companies are considered to be within the same UK tax group. For companies within the same tax group, trading profits and losses arising in the same accounting period may be offset for the purposes of determining current and deferred taxes.
PROFIT AFTER TAX Profit for the financial year of the Company in accordance with UK GAAP 881 913
Shareholders’ equity of the Company in accordance with IFRS 4,216 3,773 Share in the IFRS net equity of the Group 3,815 2,498
SHAREHOLDERS’ EQUITY OF THE GROUP IN ACCORDANCE WITH IFRS 8,031 6,271
The ‘IFRS adjustment’ lines in the above tables represent the difference in the accounting treatment for pension schemes between UK GAAP and IFRS. Under UK GAAP, the parent company’s interest in the surplus of one of the pension schemes recognised on the balance sheet represents the element which is recoverable through reduced future contributions. Under IFRS, as the terms of the relevant trust deed restrict shareholders’ access to any underlying surplus, not only is the underlying IAS 19 basis surplus not recognised, but the Company’s share of the obligation for deficit funding has also to be recognised on the balance sheet.
The shares in the IFRS profit and net equity of the Group represent the Company’s equity in the earnings and net assets of its subsidiaries and associates.
The principal subsidiary undertakings of the Company at 31 December 2010, all wholly-owned, were: Main activity Country of incorporation
Core structural borrowings: ¤500m 5.75% Subordinated Notes 2021note i 428 443 – – 428 443 £300m 6.875% Bonds 2023 300 300 – – 300 300 ¤20m Medium-Term Subordinated Notes 2023note ii 17 18 – – 17 18 £250m 5.875% Bonds 2029 249 249 – – 249 249 £435m 6.125% Subordinated Notes 2031 428 428 – – 428 428 £400m 11.375% Subordinated Notes 2039 382 380 – – 382 380 US$1,000m 6.5% Perpetual Subordinated Capital Securities 639 619 – – 639 619 US$250m 6.75% Perpetual Subordinated Capital Securitiesnote iii 160 155 – – 160 155 US$300m 6.5% Perpetual Subordinated Capital Securitiesnotes iii, iv 192 188 – – 192 188 US$750m 11.75% Perpetual Subordinated Capital Securities 472 456 – – 472 456
Total core structural borrowings 3,267 3,236 – – 3,267 3,236 Other borrowings: Commercial papernote v – – 2,311 2,031 2,311 2,031 Medium-Term Notes 2010 – – – 7 – 7 Floating Rate Notes 2011note vi – – 200 200 200 200 Medium-Term Notes 2013note v – – 249 – 249 –
Borrowings are repayable as follows: Within 1 year or on demand – – 2,511 2,238 2,511 2,238 Between 1 and 5 years – – 249 – 249 –
The majority of UK Prudential staff are members of the Group’s pension schemes. The largest scheme is the Prudential Staff Pension Scheme (the ‘Scheme’) which is primarily a closed defined benefit scheme. At 31 December 2010, on the FRS 17, ‘Retirement Benefits’ basis of valuation, the underlying pension liabilities of the Scheme accounted for 86 per cent (2009: 86 per cent) of the liabilities of the Group’s defined benefit schemes.
At 31 December 2005, the allocation of surpluses and deficits attaching to the Scheme between the Company and the unallocated surplus of the Prudential Assurance Company’s (PAC) with-profits funds was apportioned in the ratio 30/70 between the Company and the PAC with-profits fund following detailed consideration of the sourcing of previous contributions. This ratio was applied to the base deficit position at 1 January 2006 and for the purpose of determining the allocation of the movements in that position up to 31 December 2010. The FRS 17 service charge and ongoing employer contributions are allocated by reference to the cost allocation for current activity.
Defined benefit schemes 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. The Scheme was last actuarially valued as at 5 April 2008 using the projected unit method. The next triennial valuation of the Scheme is scheduled to take place as at 5 April 2011.
The 2008 valuation demonstrated the Scheme to be 106 per cent funded by reference to the Scheme Solvency Target that forms the basis of the Scheme’s statutory funding objective. Accordingly, the total contributions to be made by the Group to the Scheme, representing the annual accrual cost and deficit funding, were reduced from the previous arrangement of £70-£75 million per annum to £50 million per annum effective from 1 July 2009. As the Scheme was in a surplus position at the valuation date, no formal recovery plan was required. However, recognising that there had been a significant deterioration in the value of the Scheme’s assets from 5 April 2008 to the date of the finalisation of the valuation, an additional funding akin to deficit funding was agreed with the Scheme Trustees subject to a reassessment when the next valuation is completed.
In 2010, total contributions for the year, including expenses and augmentations, were £55 million (2009: £67 million). Using external actuarial advice provided by the professionally qualified actuaries, Towers Watson, for the valuation of the Scheme, the most recent full valuations have been updated to 31 December 2010 applying the principles prescribed by FRS 17.
The key assumptions adopted were: Rate of inflation 3.55 3.7 Rate of increase in salaries 5.55 5.7 Rate of increase in pension payments for inflation: Guaranteed (maximum 5%) 3.55 3.7 Guaranteed (maximum 2.5%) 2.5 2.5 Discretionary 2.5 2.5 Rate used to discount Scheme liabilities 5.45 5.8
In line with the guidance of UITF 48, the above has no impact on the results for the year ended 31 December 2010. For the Government’s announcement to have had an effect on the 2010 results, it would have been necessary for communication of the altered arrangement to have been made to the members of the schemes for which benefits are paid by reference to RPI, as a constructive obligation. No such communication has been completed. Accordingly, the Company has not recognised this change for the year ended 31 December 2010. The impact of the change, if and when made, will be recognised in a future period. However, as the Company is only able to recognise a restricted FRS 17 surplus for the Scheme, any reduction in the underlying Scheme liabilities has no effect on the profit or shareholders’ funds of the Company.
Pension credit (charge) and actuarial (losses) gains of the Scheme The pension credit (charge) recognised in the Company’s profit and loss account is as follows: Pension credit (charge): 2010 £m 2009 £m
Operating charge: Service costs (25) (23) Finance income (expense): Interest on Scheme liabilities (251) (242) Expected return on Scheme assets 287 213
The pension charge attributable to the Company is net of the apportionment to the PAC with-profits fund and is related to the surplus recognised on the balance sheet of the Company.
(2008: 5%) (2007: 0%) (2006: 3%) of assets) 275 85 (259) (12) 141 Experience gains (losses) on Scheme liabilities (0% (2009: 1%)
Total actuarial (losses) gains (2% (2009: 5%) (2008: 2%) (2007: 7%) (2006: 8%) of Scheme liabilities) (94) (230) 68 302 390
The actuarial gains (losses) attributable to the Company are net of the apportionment to the PAC with-profits fund and are related to the surplus recognised in the balance sheet of the Company. In 2010, the actuarial losses attributable to the Company included an amount credited of £14 million (2009: £66 million) for the adjustment to the unrecognised portion of surplus which has not been deducted from the pension charge.
The actuarial losses before tax of £14 million (2009: £3 million) attributable to the Company are recorded in the statement of total recognised gains and losses. Cumulative actuarial gains as at 31 December 2010 amount to £74 million (2009: £88 million).
Total employer contributions expected to be paid into the Scheme for the year ending 31 December 2011 amount to £54 million, reflecting the annual accrual cost and deficit funding, and expenses.
11: PROFIT OF THE COMPANY AND RECONCILIATION OF THE MOVEMENT IN SHAREHOLDERS’ FUNDS
Net increase in shareholders’ funds 441 581 Shareholders’ funds at beginning of year 3,826 3,245
b Information on transactions of the directors with the Group is given in note I7 ‘Related party transactions’ of the notes on the financial statements of the Group.
c The Company employs no staff. d Fees payable to the Company’s auditor for the audit of the Company’s annual accounts were £0.1 million (2009: £0.1 million).
In January 2011, the Company issued US$550 million 7.75% Tier 1 subordinated debt, primarily to retail investors. The proceeds, net of costs, were US$539 million and are intended to finance the repayment of the ¤500m Tier 2 subordinated debt in December 2011.
Following the Board’s decision to rebase the dividend upwards and subject to shareholders’ approval, a final dividend for 2010 of 17.24 pence per ordinary share will be paid on 26 May 2011 in sterling to shareholders on the principal and Irish branch registers at 6.00pm BST on Friday, 1 April 2011 (the Record Date), and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on the Record Date (HK Shareholders).
Holders of US American Depositary Receipts will be paid their dividend in US dollars on or about five days after the payment date of the dividend to shareholders on the principal register. The dividend will be paid on or about 2 June 2011 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte) Limited (CDP) at 5.00pm Singapore time on the Record Date (SG Shareholders).
The dividend payable to the HK Shareholders will be translated at the exchange rate ruling at the close of business on 8 March 2011. The exchange rate at which the dividend payable to the SG Shareholders will be translated will be determined by the CDP.
Company law requires the directors to prepare Group and parent company financial statements for each financial year. Under that law the directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS
Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/ private.cfm
Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
US OPERATIONS New business 2 761 664 Business in force 3 697 569
OTHER INCOME AND EXPENDITURE Investment return and other income 30 22 Interest payable on core structural borrowings (257) (209) Corporate expenditure (220) (203) Charge for share-based payments for Prudential schemes (3) (5) Charge for expected asset management marginii (44) (38)
Long-term business 3,844 3,208 Asset management 378 297 Other results (526) (415)
Notes i EEV basis operating profit based on longer-term investment returns excludes the recurrent items of short-term fluctuations in investment returns, the mark to market value movements on core borrowings, the shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes, and the effect of changes in economic assumptions. In addition, for 2010, operating profit excludes costs associated with the terminated AIA transaction and the gain arising upon the dilution of the Group’s holding in PruHealth. For 2009, operating profit excluded the non-recurrent cost of hedging the Group IGD capital surplus included within short-term fluctuations in investment returns and the profit on sale and results of the sold Taiwan agency business.
The amounts for these items are included in total EEV profit attributable to shareholders. The Company believes that operating profit, as adjusted for these items, better reflects underlying performance. Profit before tax and basic earnings per share include these items together with actual investment returns. This basis of presentation has been adopted consistently throughout this supplementary information.
OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNS Asian operations 1,518 1,154 US operations 1,480 1,237 UK operations: UK insurance operations 982 921 M&G 284 238 1,266 1,159
Other income and expenditure (494) (433) Solvency II implementation costs (46) – Restructuring costs (28) (27)
PROFIT FROM CONTINUING OPERATIONS BEFORE TAX (INCLUDING ACTUAL INVESTMENT RETURNS) 3,107 1,743
PROFIT FROM CONTINUING OPERATIONS AFTER TAX BEFORE NON-CONTROLLING INTERESTS 2,577 1,262
Attributable to: Equity holders of the Company 2,573 1,245 Non-controlling interests 4 3
From operating profit based on longer-term investment returns, after related tax and non-controlling interests of £2,700m* (2009: £2,221m) 12 106.9p 88.8p
New share capital subscribed (including shares issued in lieu of cash dividends) 75 141 Reserve movements in respect of share-based payments 37 29 Treasury shares: Movement in own shares held in respect of share-based payment plans (4) 3 Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS 3 (3) Mark to market value movements on Jackson assets backing surplus and required capital (gross movement) 105 205 Related tax (37) (72)
Net increase in shareholders’ equity 10 2,934 317 Shareholders’ equity at beginning of year (excluding non-controlling interests) 7,10 15,273 14,956
Asian operations: Net assets of operations 7,445 197 7,642 5,781 161 5,942 Acquired goodwill 236 61 297 80 61 141
UK insurance operations: Net assets of operations 5,970 33 6,003 5,439 37 5,476 M&G: Net assets of operations – 254 254 – 173 173 Acquired goodwill – 1,153 1,153 – 1,153 1,153
Other operations: Holding company net borrowings at market value 9 – (2,212) (2,212) – (1,780) (1,780) Other net assets (liabilities) – 149 149 – (65) (65)
Based on EEV basis shareholders’ equity of £18,207 million (2009: £15,273 million) 715p 603p Number of issued shares at year end (millions) 2,546 2,532
Share capital 127 127 Share premium 1,856 1,843 IFRS basis shareholders’ reserves 6,048 4,301
The supplementary information on pages 389 to 433 was approved by the Board of directors on 8 March 2011 and signed on its behalf.
The EEV basis results have been prepared in accordance with the EEV Principles issued by the CFO Forum of European Insurance Companies in May 2004 and expanded by the Additional Guidance on EEV Disclosures published in October 2005. Where appropriate, the EEV basis results include the effects of adoption of International Financial Reporting Standards (IFRS).
SAIF is a ring-fenced sub-fund of the Prudential Assurance Company (PAC) long-term fund, established by a Court approved Scheme of Arrangement in October 1997. SAIF is closed to new business and the assets and liabilities of the fund are wholly attributable to the policyholders of the fund.
In 2010, the approach has been altered to determine the EEV basis results for all Asian territories on an active basis of economic assumption setting, in line with the Group’s other operations, and reflecting the fact that markets in a number of Asian countries are becoming increasingly developed.
For those Asian operations whose EEV basis results were previously determined on the ‘passive’ basis of economic assumption setting, the effect of the change in 2010 to move to an ‘active’ basis is as follows: £m
For 2010 and 2009, for all the Group’s operations, expected returns on equity and property asset classes are derived by adding a risk premium, based on the long-term view of Prudential’s economists to the risk free rate.
However, in determining the movements on the additional shareholders’ interest, the basis for calculating the Jackson EEV result acknowledges that for debt securities backing liabilities the aggregate EEV results reflect the fact that the value of in-force business instead incorporates the discounted value of future spread earnings. This value is not affected generally by short-term market movements on securities that are broadly speaking held for the longer-term.
Fixed annuities provide that, at Jackson’s discretion, it may reset the interest rate credited to policyholders’ accounts, subject to a guaranteed minimum. The guaranteed minimum return varies from 1.5 per cent to 5.5 per cent (2009: 1.5 per cent to 5.5 per cent), depending on the particular product, jurisdiction where issued, and date of issue. At 31 December 2010, 83 per cent (2009: 82 per cent) of the account values on fixed annuities relates to policies with guarantees of 3 per cent or less. The average guarantee rate is 2.9 per cent (2009: 3.0 per cent).
Jackson issues VA contracts where it contractually guarantees to the contract holder either: a) return of no less than total deposits made to the contract adjusted for any partial withdrawals, b) total deposits made to the contract adjusted for any partial withdrawals plus a minimum return, or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the specified contract anniversary. These guarantees include benefits that are payable at specified dates during the accumulation period (Guaranteed Minimum Withdrawal Benefit (GMWB)), as death benefits (Guaranteed Minimum Death Benefits (GMDB)) or as income benefits (Guaranteed Minimum Income Benefits (GMIB)). Jackson reinsures and hedges these risks using equity options and futures contracts. These guarantees generally protect the policyholder’s value in the event of poor equity market performance.
• UK insurance operations: the capital requirements are set at the higher of Pillar I and Pillar II requirements for shareholder-backed business of UK insurance operations as a whole, which for 2010 and 2009 was Pillar I.
Since financial options and guarantees are explicitly valued under the EEV methodology, discount rates under EEV are set excluding the effect of these product features.
Market risk allowance The allowance for market risk represents the beta multiplied by an equity risk premium. Except for UK shareholder-backed annuity business (as explained below) such an approach has been used for all of the Group’s businesses.
Additional credit risk allowance The Group’s methodology is to allow appropriately for credit risk. The allowance for credit risk is to cover: • expected long-term defaults; • credit risk premium (to reflect the volatility in default levels); and • short-term downgrades and defaults.
US business For Jackson business, the allowance for long-term defaults is reflected in the risk margin reserve charge which is deducted in determining the projected spread margin between the earned rate on the investments and the policyholder crediting rate.
The risk discount rate incorporates an additional allowance for credit risk premium and short-term defaults for general account business of 150 basis points and for variable annuity business of 30 basis points to reflect the fact that a proportion of the variable annuity business is allocated to the general account.
b With-profit fund PAL annuity business For UK annuity business written by PAL the basis for determining the aggregate allowance for credit risk is consistent with that applied for UK shareholder-backed annuity business and includes provision for short-term defaults and credit risk premium. The allowance for credit risk in PAL is taken into account in determining the projected cash flows to the with-profits fund, which are in turn discounted at the risk discount rate applicable to all of the projected cash flows of the fund.
c With-profit fund holdings of debt securities The UK with-profits fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus. The assumed earned rate for with-profit holdings of corporate bonds is defined as the risk-free rate plus an assessment of the long-term spread over gilts, net of expected long-term defaults. This approach is similar to that applied for equities and properties for which the projected earned rate is defined as the risk-free rate plus a long-term risk premium.
A base level allowance of 50 basis points is applied to cover the non-diversifiable non-market risks associated with the Group’s businesses. For the Group’s US business and UK business for other than shareholder-backed annuity, no additional allowance is necessary. For UK shareholder-backed annuity business, an additional allowance of 50 basis points is used to reflect the longevity risk which is of particular relevance. For the Group’s Asian operations in China, India, Indonesia, Philippines, Taiwan, Thailand and Vietnam, additional allowances are applied for emerging market risk ranging from 100 to 250 basis points.
Prudential plc Annual Report 2010 1 BASIS OF PREPARATION, METHODOLOGY AND ACCOUNTING PRESENTATION > CONTINUED
v With-profits business and the treatment of the estate The proportion of surplus allocated to shareholders from the PAC with-profits fund has been based on the present level of 10 per cent. The value attributed to the shareholders’ interest in the estate is derived by increasing final bonus rates (and related shareholder transfers) so as to exhaust the estate over the lifetime of the in-force with-profits business. In those few extreme scenarios where the total assets of the life fund are insufficient to meet policyholder claims in full, the excess cost is fully attributed to shareholders. Similar principles apply, where appropriate, for other with-profit funds of the Group’s Asian operations.
Under IFRS the surpluses or deficits attaching to these schemes are accounted for in accordance with the provisions of IAS 19 that apply the principles of IFRIC 14, providing guidance on assessing the limit in IAS 19 on the amount of surplus in a defined benefit pension scheme that can be recognised as an asset.
Non-operating results comprise the recurrent items of short-term fluctuations in investment returns, the shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes, the mark to market value movements on core borrowings and the effect of changes in economic assumptions.
For UK insurance operations the amount included within operating results based on longer-term investment returns represents the unwind of discount on the value of in-force business at the beginning of the period (adjusted for the effect of current period assumption changes), the unwind of discount on additional value representing the shareholders’ share of smoothed surplus assets retained within the PAC with-profits fund (as explained in note 1b(v) above), and the expected return on shareholders’ assets held in other UK long-term business operations. Surplus assets retained within the PAC with-profits fund are smoothed for this purpose to remove the effects of short-term investment volatility from operating results. In the summary statement of financial position and for total profit reporting, asset values and investment returns are not smoothed.
vii Taxation The profit for the year for covered business is in most cases calculated initially at the post-tax level. The post-tax profit for covered business is then grossed up for presentation purposes at the effective rates of tax applicable to the countries and periods concerned. In the UK the effective rate applied for 2010 is 27 per cent (2009: 28 per cent). For Jackson, the US federal tax rate of 35 per cent is applied to gross up movements on the value of in-force business. The overall tax rate includes the impact of tax effects determined on a local regulatory basis. For Asia, similar principles apply subject to the availability of taxable profits.
viii Inter-company arrangements The EEV results for covered business incorporate the effect of the reinsurance arrangement of non-profit immediate pension annuity liabilities of SAIF (which is not covered business) to PRIL. In addition, the analysis of free surplus and value of in-force business takes account of the impact of contingent loan arrangements between Group companies.
ix Foreign exchange rates Foreign currency results have been translated as discussed in note 1b(viii), for which the principal exchange rates are as follows: Local currency: £ Closing rate at 31 Dec 2010 Average rate for 2010 Closing rate at 31 Dec 2009 Average rate for 2009 Opening rate at 1 Jan 2009
Asian operationsnote v 785 1,131 1,209 5,982 725 60 12.1 US operationsnote vii 8,885 24 912 9,048 664 73 7.3 UK insurance operationsnote viii 4,768 246 723 5,902 230 32 3.9
Asian operations:note v China 47 50 Hong Kong 74 70 India 20 19 Indonesia 75 73 Korea 31 44 Taiwan 13 18 Other 79 87 Weighted average for all Asian operations 60 60
Notes i New business margins are shown on two bases, namely the margins by reference to Annual Premium Equivalents (APE) and the Present Value of
New Business Premiums (PVNBP) and are calculated as the ratio of the value of new business profit to APE and PVNBP. APE are calculated as the aggregate of regular new business amounts and one-tenth of single new business amounts. PVNBP are calculated as equalling single premiums plus the present value of expected premiums of new regular premium business, allowing for lapses and other assumptions made in determining the EEV new business contribution.
ii In determining the EEV basis value of new business written in the period the policies incept, premiums are included in projected cash flows on the same basis of distinguishing annual and single premium business as set out for statutory basis reporting.
iv The amounts shown in the tables are translated at average exchange rates for the period. v The tables above include new business for the Taiwan bank distribution operation. New business excludes the Taiwan Agency business, which was sold in June 2009 (as explained in note 19) and the Japanese insurance operations, in which the Company ceased selling new business from 15 February 2010.
vi The new business contribution in 2010 of £902 million for Asian operations includes a benefit of around £5 million arising from the application of the ‘active’ basis of economic assumption setting rather than the previously applied basis of an assessment of longer-term economic conditions, as described in note 1b.
Unwind of discount and other expected returns 489 344 588 1,421 Effect of change in operating assumptions (12) 101 – 89 Experience variances and other items (85) 124 52 91
Unwind of discount and other expected returnsa 573 489 Effect of change in operating assumptions: Mortality and morbidityb 89 26 Expensec (62) (32)
Experience variance and other items: Mortality and morbidityf 45 52 Expenseg (39) (43)
c The charge of £(62) million in 2010 for expense assumption changes includes a charge in Korea of £(40) million, to reflect higher policy maintenance costs. Also included for 2010 is a charge of £(16) million in Malaysia relating to altered maintenance expense assumptions. The charge of £(32) million for strengthened expense assumptions in 2009 arises principally in Hong Kong of £(23) million with the balance arising across the regions.
d The charge of £(75) million in 2010 for the effect of changes in persistency assumptions mainly arises in Indonesia (£(33) million), Malaysia (£(26) million) and India (£(24) million) partly offset by a credit in Hong Kong (£16 million). The charge in Indonesia of £(33) million primarily relates to Shariah and single premium policies for which lower renewal rates have been experienced. The charge in Malaysia of £(26) million reflects altered premium holiday and other lapse assumptions and the charge in India of £(24) million represents changes in the paid-up assumption on linked business.
g The expense experience variance of £(39) million in 2010 (2009: £(43) million) includes a charge of £(18) million (2009: £(16) million) for expense overruns for operations which are at a relatively early stage of development, for which actual expenses are in excess of those factored into the product pricing. Also included in 2010 is £(9) million arising in Taiwan (2009: £(8) million) reflecting over-runs whilst the business rebuilds scale following the sale of the Agency business and in 2009, an expense variance of £(10) million arose in Korea, reflecting the lower level of sales in the period.
i The credit of £41 million in 2010 for other experience and other items includes a credit of £24 million arising in Indonesia for the impact of additional riders being added to in-force policies during the year, funded from the policyholder unit linked account balances.
j The in-force operating profit for 2010 of £549 million reflects the effect of setting economic assumptions on an ‘active’ basis rather than the previously applied ‘passive’ basis as described in note 1(b), the impact of which was to lower in-force operating profits in 2010 by £58 million, principally for altered unwind of discount.
Unwind of discount and other expected returnsa 369 344 Effect of changes in operating assumptions: Guaranteed Minimum Withdrawal Benefit (GMWB) policyholder behaviourb – 156 Mortalityc 10 33 Variable Annuity (VA) feesd 27 (13)
3 101 Experience variances and other items: Spread experience variancef 158 (3) Amortisation of interest-related realised gains and lossesg 82 59 Expenseh 32 40 Mortalityi 21 32 Persistencyj 23 7 Other 9 (11)
d The effect of the change of assumption for VA fees represents the capitalised value of the change in the projected level of policyholder advisory fees, which vary according to the size and mix of VA funds. The credit of £27 million for 2010 reflects an increase in the projected level of fees paid by policyholders, according to the current fund mix. The negative effect of the change in 2009 of £(13) million represents a reduction in the level of fees.
Notes a The decrease in unwind of discount and other expected returns from 2009 of £588 million to £550 million in 2010 mainly arises from the impact of the reduction in discount rates, reflecting the decrease in gilt rates of 0.4 per cent. b The Continuous Mortality Investigation (CMI) model and Core Projection parameters have been reviewed and a custom parameterisation of the CMI model has been made where some aspects of the pattern of convergence from current rates of improvements to long-term rates of improvement have been altered. The assumption change shown above of a charge of £(40) million represents the effect of the implementation of the custom parameterisation on the opening value of in-force business at 1 January 2010, offset by the effects of other mortality assumption changes and the release of margins on the base mortality assumptions.
c The credit of £37 million in 2010 for changes in operating expense assumptions relates to renewal expense assumptions on shareholder backed annuity business.
For 2010 short-term fluctuations for Asian operations of £287 million primarily reflect the favourable performance in equity markets across the territories. The short-term fluctuations for other operations in 2010 of £88 million include an unrealised gain of £30 million on the Group’s 8.66 per cent stake in China Life Insurance Company of Taiwan, which at 31 December 2010 was valued at £100 million. For 2009, the short-term fluctuations in investment returns in Asia of £437 million reflect the effect of strong equity market performance in particular for participating business and unit-linked business where the in-force value benefits from increases in shareholder transfers and from the capitalisation of increased projected fees due to the higher asset base at the end of the year.
ii US operations The fluctuations for US operations comprise the following items: Actual realised losses less default assumption and amortisation of interest-related gains and losses for fixed income securities and related swap transactionsa (351) (367)
b The charge in 2009 of £(144) million for actual less long-term return on equity based investments and other items primarily relates to the shortfall of actual return against the expected return on investments in limited partnerships.
Notes a For with-profits business the credit for 2010 of £218 million reflects the positive 12.0 per cent actual investment return on the investments of the PAC with-profits fund (covering policyholder liabilities and unallocated surplus) against the assumed long-term rate of 6.7 per cent. The credit of £430 million for 2009 reflects the positive variance of 8.6 per cent against the assumed long-term investment return.
b Short-term fluctuations in investment returns for shareholder-backed annuity business include gains (losses) on surplus assets relative to the expected return due to a fall (rise) in yields, the difference between actual and expected default experience and mismatching profits and losses arising from the impacts of changes in yields on assets and liabilities of differing durations. The short-term fluctuations in investment returns for 2010 of a credit of £84 million represent better than expected default experience of £64 million, higher than expected gains arising on surplus assets of £55 million, partially offset by mismatching losses of £(21) million, and other impacts of £(14) million. The charge of £(40) million for 2009 represents mismatching losses of £(105) million, partially offset by better than expected default experience of £22 million with the remaining balance of £43 million consisting of positive movements in other asset values partially offset by losses on surplus assets.
iv IGD hedge costs During the severe equity market conditions experienced in the first quarter of 2009, coupled with historically high equity volatility, the Group entered into exceptional short-dated hedging contracts to protect against potential tail-events on the IGD capital position, in addition to the regular operational hedging programmes. The hedge contracts have expired and have not been renewed.
v Other operations Short-term fluctuations in investment returns of other operations, in addition to the previously discussed IGD hedge costs for 2009, arise from: Unrealised value movements on swaps held centrally to manage Group assets and liabilities (25) 28 Unrealised value movements on Prudential Capital bond portfolio 48 66 Unrealised value movements on investments held by other operations 2 11
The effects of changes in economic assumptions for in-force business, net of the related change in the time value of cost of options and guarantees, included within the profit from continuing operations before tax (including actual investment returns) arise as follows: Asian operationsnote i (71) (174) US operationsnote ii (1) (518) UK insurance operationsnote iii 62 (218)
Notes i The charge of £(71) million in Asian operations for the effect of changes in economic assumptions in 2010 primarily represents the effect of derisking certain asset portfolios in Hong Kong and Singapore of £(73) million, together with the impact of the reduction in fund earned rates and risk discount rates as shown in note 16(a), including the effect of altering the basis of setting economic assumptions to the ‘active’ basis as described in note 1(b). The charge for 2009 of £(174) million primarily reflects increases in risk discount rates and fund earned rates, with the largest impact arising for Hong Kong US dollar denominated business arising from the increase in US dollar government bond yields, partly offset by a credit of £96 million for the effect of altered economic assumptions for Indonesia and Korea arising from a change in the application of the Group’s methodology for these operations (as discussed in note 16a).
Notes a For Jackson, the charge for the effect of changes in economic assumptions represents the aggregate of the effects of changes to projected returns and the risk discount rate. The risk discount rate, as discussed in note 1b(iii), represents the aggregate of the risk-free rate and margin for market risk, credit risk and non-diversifiable non-market risk.
For fixed annuity and other general account business the effect of changes to the risk-free rate, which is defined as the 10-year treasury rate, is reflected in the risk discount rate. This discount rate is in turn applied to projected cash flows which principally reflect projected spread, which is largely insensitive to changes in the risk-free rate. Secondary effects on the cash flows also result from changes to assumed future yield and resulting policyholder behaviour. For VA business, changes to the risk-free rate are also reflected in determining the risk discount rate. However, the projected cash flows are also reassessed for altered investment returns on the underlying separate account assets from which fees are charged. For 2010, the effect of these changes resulted in an overall credit for fixed annuity and other general account business of £111 million and a charge of £(112) million for VA business reflecting the reduction of 0.6 per cent in the risk-free rate (as shown in note 16a).
b For 2010 and 2009, the Group has included an additional allowance for credit risk. In determining this allowance a number of factors were considered. These factors, in particular, include: i How much of the credit spread on debt securities represents an increased credit risk not reflected in the Risk Margin Reserve (RMR) long-term default assumptions, and how much is liquidity premium. In assessing this effect consideration has been given to a number of approaches to estimating the liquidity premium by considering statistical data over the four years from 2006 to 2009; and ii Policyholder benefits for Jackson fixed annuity business are not fixed. It is possible in adverse economic scenarios to pass on a component of credit loss to policyholders (subject to guarantee features) through lower crediting rates. Consequently, it is only necessary to allow for the balance of the credit risk in the risk discount rate.
After taking these and other more detailed factors into account and, based on market conditions in late 2009, the risk discount rate for general account business was increased by 150 basis points as an additional allowance for credit risk. For VA business, the additional allowance increase was set at 20 per cent of the non-VA business increase to reflect the fact that a proportion of the VA business is allocated to general account holdings of debt securities. For 2010 these additional allowances have been maintained at 2009 levels. The additional allowance to be applied in future reporting periods will be altered, as necessary, for future credit conditions and as the business in force alters over time.
(Decrease) increase in expected long-term rates of return (102) (80) (182) (284) 191 (93) Decrease (increase) in risk discount rates 55 183 238 240 (311) (71)
US OPERATIONS Jackson – EEV basis shareholders’ funds (net of surplus note borrowings of £172 million
UK OPERATIONS Insurance operations: Long-term business operations: Smoothed shareholders’ funds 5,911 5,547 Actual shareholders’ funds less smoothed shareholders’ funds 59 (108) EEV basis shareholders’ funds 5,970 5,439 Other note i 33 37
Asian operations 2,149 5,532 7,681 1,462 4,399 5,861 US operations 3,815 984 4,799 3,011 1,111 4,122 UK insurance operations 2,115 3,855 5,970 1,902 3,537 5,439
ii The additional retained profit on an EEV basis for ‘Other operations’ represents the mark to market value difference on holding company net borrowings of a charge of £(177) million (2009: charge of £(26) million) and the effect of accounting for pension costs for the Prudential Staff Pension Scheme.
iv The EEV basis shareholders’ funds for Asian long-term business of £7,445 million for 2010 have been determined after including the £(39) million effect of moving from a passive to an active basis of economic assumption setting, as described in note 1b.
1,284 336 1,620 Net cash flows to parent companynote iv (735) (200) (935) Exchange movements, timing differences and other itemsnote v 134 (12) 122
Representing: Asian operations 1,045 197 1,242 US operations 1,163 106 1,269 UK operations 540 287 827 1 January 2010 Representing: Asian operations 801 161 962 US operations 749 95 844 UK operations 515 210 725
Notes i All figures are shown net of tax. ii For the purposes of this analysis, free surplus for asset management operations and the UK general insurance commission is taken to be IFRS
basis shareholders’ funds as shown in note 7. iii Changes in non-operating items This represents short-term fluctuations in investment returns, the shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes and the effect of changes in economic assumptions for long-term business operations. Short-term fluctuations in investment returns primarily reflect temporary market movements on the portfolio of investments held by the
iv Net cash flows to parent company for long-term business operations reflect the flows as included in the holding company cash flow at transaction rates.
Exchange movementsnote 13 78 18 96 Mark to market value movements on Jackson assets backing surplus and required capitalnote 13 68 – 68 Other (12) (30) (42)
Holding company* cash and short-term investments (1,232) – (1,232) (1,486) – (1,486)
Core structural borrowings – central fundsnote i 3,267 177 3,444 3,240 26 3,266
Holding company net borrowings 2,035 177 2,212 1,754 26 1,780 Core structural borrowings – PruCapnote iii 250 – 250 – – – Core structural borrowings – Jackson 159 13 172 154 4 158
Net core structural borrowings of shareholder – financial operations 2,444 190 2,634 1,908 30 1,938 * Including central finance subsidiaries.
In May 2009, the Company repaid maturing £249 million senior debt and in the same month the Company issued £400 million subordinated notes in part to replace the maturing debt.
End of year 190 30 iii The £250 million PruCap bank loan was made in two tranches: £135 million maturing in June 2014 and £115 million maturing in August 2012.
Long-term business: New business: Excluding Japannote 2 902 761 365 2,028 – 2,028 Japan (1) – – (1) – (1)
Short-term fluctuations in investment returnsnote 4 287 (678) 336 (55) 25 (30) Mark to market value movements on
Shareholders’ share of acturial and other gains and losses on defined benefit pension schemes – – (5) (5) (6) (11)
Effect of changes in economic assumptionsnote 5 (71) (1) 62 (10) – (10) Cost of terminated AIA transactionnote 6 – – – – (377) (377) Gain on dilution of holding in PruHealthnote 18 – – 3 3 – 3
PROFIT (LOSS) FROM CONTINUING OPERATIONS BEFORE TAX (INCLUDING ACTUAL INVESTMENT RETURNS) 1,662 766 1,297 3,725 (618) 3,107
Tax on operating profitnote iii (329) (509) (260) (1,098) 264 (834) Tax on short-term fluctuations in investment returns (12) 325 (91) 222 – 222 Tax on shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes – – – – 2 2
Tax on effect of changes in economic assumptions 4 – (17) (13) – (13) Tax on costs of terminated AIA transactionnote 6 – – – – 93 93
PROFIT (LOSS) FOR THE YEAR 1,325 582 929 2,836 (263) 2,573
SHAREHOLDERS’ EQUITY AT 31 DECEMBER 2010notes ii and 7 7,445 4,799 5,970 18,214 (7) 18,207
Notes i Profits are translated at average exchange rates, consistent with the method applied for statutory IFRS basis results. The amounts recorded above for exchange rate movements reflect the difference between 2010 and 2009 exchange rates as applied to shareholders’ funds at 1 January 2010 and the difference between 31 December 2010 and average 2010 rates for profits.
ii For the purposes of the table above, goodwill related to Asia long-term operations (as shown in note 7) is included in Other operations. iii The tax charge attributable to shareholders’ profit includes an exceptional tax credit of £158 million as detailed in note 11(ii). iv The charge of £(79) million for Other operations relating to the acquisition of UOB Life represents cash consideration paid of £(220) million offset by goodwill arising on the acquisition of £141 million (as shown in note 17). v Total intra-group dividends and investment in operations represent: Asian operations £m
Intra-group dividends (including statutory transfer) (365) (81) (398) (844) 844 –
a Investment in operations reflects increases in share capital. b For long-term business operations, the difference between the total above of £(720) million for intra-group dividends (including statutory transfer) and investment in operations and the net cash flows to parent company of £(735) million (as shown in note 8) primarily relates to timing differences, intra-group loans and other non-cash items.
vi Other transfers from long-term business operations to Other operations in 2010 represent: Asian operations £m
The tax charge (credit) comprises: TAX CHARGE ON OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNS: Long-term business: Asian operationsnote i 329 239 US operations 509 416 UK insurance operationsnote i 260 245
Total tax credit on items not included in operating profit (304) (385)
TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES FROM CONTINUING OPERATIONS (INCLUDING TAX ON ACTUAL INVESTMENT RETURNS) 530 481
Operating profit after tax and non-controlling interests including exceptional tax credit 2,858 2,221 Operating EPS (pence) excluding exceptional tax credit 106.9p 88.8p Exceptional tax credit (pence) 6.3p – Operating EPS (pence) including exceptional tax credit 113.2p 88.8p
13 RECONCILIATION OF NET WORTH AND VALUE OF IN-FORCE BUSINESS note i 2010 £m
GROUP SHAREHOLDERS’ EQUITY AT 1 JANUARY 2010 2,065 2,994 5,059 10,283 15,342 New business contribution:notes ii,iii
PROFIT AFTER TAX AND NON-CONTROLLING INTERESTS FROM LONG-TERM BUSINESS 1,284 254 1,538 1,298 2,836
REPRESENTING: ASIAN OPERATIONS SHAREHOLDERS’ EQUITY AT 1 JANUARY 2010 801 585 1,386 4,395 5,781 New business contribution:notes ii,iii
PROFIT AFTER TAX AND NON-CONTROLLING INTERESTS FROM LONG-TERM BUSINESS 472 81 553 772 1,325
Exchange movements on foreign operations and net investment hedges 57 76 133 397 530
Acquisition of United Overseas Bank (UOB) Life 18 48 66 13 79 Intra-group dividends (including statutory transfer) and
Exchange movements on foreign operations and net investment hedges 21 43 64 60 124
UK INSURANCE OPERATIONS Shareholders’ equity at 1 January 2010 515 1,004 1,519 3,920 5,439 New business contributionnote ii (65) 107 42 224 266 Existing business – transfer to net worth 498 (63) 435 (435) – Expected return on existing business 5 37 42 361 403 Changes in operating assumptions and experience variances 26 (7) 19 (47) (28) Changes in non-operating assumptions and experience variances and non-controlling interests (74) 42 (32) 320 288
PROFIT AFTER TAX AND NON-CONTROLLING INTERESTS FROM LONG-TERM BUSINESS 390 116 506 423 929
Intra-group dividends (including statutory transfer) and investment in operationsnote v (344) – (344) (33) (377)
Notes i All figures are shown net of tax. ii The movements arising from new business contribution and new business capital usage are as follows: 2010 £m
Pre-tax new business contributionnote 2 902 761 365 2,028 (1) 2,027 Tax (230) (266) (99) (595) – (595)
Post-tax new business contribution per £1 million free surplus invested 2.4 1.7 4.1 2.2 (0.5) 2.2
13 RECONCILIATION OF NET WORTH AND VALUE OF IN-FORCE BUSINESS note i > CONTINUED
Free surplus invested in new business (231) (326) (103) (660) (15) (675)
Total net worth (184) (224) Value of in-force business 1,616 1,355
iv The value of in-force business includes the value of future margins from current in-force business less the cost of holding required capital and represents: 2010 £m
Value of in-force business before deduction of cost of capital and guarantees 5,941 2,584 4,635 13,160 Cost of capitala (321) (183) (236) (740) Cost of time value of guaranteesb,c (10) (270) (89) (369)
Net value of in-force business 5,610 2,131 4,310 12,051 2009 £m
14 EXPECTED TRANSFER OF VALUE OF IN-FORCE BUSINESS TO FREE SURPLUS
Asian operations 4,911 1,716 1,121 687 455 932 US operations 3,739 2,129 980 364 153 113 UK insurance operations 4,022 1,591 1,035 653 401 342
Interest rates – 1% decrease 176 103 336 615 Equity/property yields – 1% rise 308 120 227 655 Equity/property market values – 10% fall (174) (5) (339) (518) Statutory minimum capital 104 127 5 236 Long-term expected defaults – 5 bps increase – – (87) (87) Liquidity premium – 10 bps increase – – 174 174 2009 £m
Interest rates – 1% decrease 231 55 298 584 Equity/property yields – 1% rise 255 82 213 550 Equity/property market values – 10% fall (147) (10) (298) (455) Statutory minimum capital 28 123 6 157 Long-term expected defaults – 5 bps increase – – (76) (76) Liquidity premium – 10 bps increase – – 152 152
b Sensitivity analysis – non-economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2010 (31 December 2009) and the new business contribution after the effect of required capital for 2010 and 2009 to: • 10 per cent proportionate decrease in maintenance expenses (a 10 per cent sensitivity on a base assumption of £10 per annum would represent an expense assumption of £9 per annum); • 10 per cent proportionate decrease in lapse rates (a 10 per cent sensitivity on a base assumption of five per cent would represent a lapse rate of 4.5 per cent per annum); and
NEW BUSINESS PROFIT FOR 2010 As reportednote 10 901 761 365 2,027
NEW BUSINESS PROFIT FOR 2009 As reported 713 664 230 1,607
Notes i In preparing the EEV basis results for 2010 the ‘active’ basis of economic assumption setting has been applied for all Asian operations.
ii The weighted risk discount rates for Asian operations shown above have been determined by weighting each country’s risk discount rates by reference to the EEV basis new business result and the closing value of in-force business.
vi In 2009, the Group reconsidered the application of the Group’s methodology for certain less established operations, with a consequent change in the risk discount rates used for Indonesia and Korea and a change in the assumed capital requirement to better align with internal management and pricing bases, primarily in China, Indonesia, Philippines and Vietnam.
First five years: January to June issues 2.0 2.75 July to December issues 2.0 2.25 Long-term assumption 2.0 2.0 Fixed Index Annuity business: January to June issues 2.5 3.5 July to December issues 2.5 2.5 Risk discount rate: Variable annuity 7.8 8.2 Non-variable annuity 5.6 6.2 Weighted average total:note ii New business 7.6 7.8 In force 6.9 7.2 US 10-year treasury bond rate at end of period 3.3 3.9 Pre-tax expected long-term nominal rate of return for US equities 7.3 7.9 Expected long-term rate of inflation 2.3 2.4
Notes i For new business issuances in 2010, the assumed spread margin for fixed annuities and for the proportion of variable annuity business invested in the general account of 2.0 per cent applies from inception for all durations and reflects the combined effects of net annualised yields on new assets of 4.8 per cent and crediting rates. The spread assumptions for 2009 of 2.75 per cent for January to June issuances and 2.25 per cent for July to December issuances, reflected the exceptional combined benefit of high investment yields which were 6.4 per cent for 2009, and lower crediting rates. The assumptions for 2009 included a provision that crediting rates and spreads would normalise in the future. Therefore, the assumption for new business spreads shown above were set at the higher new level for the first five years before reducing over the following 10 years with the valuation of new business taking into account an assumed associated risk of increased lapse under certain interest rate scenarios.
ii The weighted average risk discount rates reflect the mix of business between variable annuity and non-variable annuity business. The decrease in the weighted average risk discount rates from 2009 to 2010 primarily reflects the decrease in the US 10-year Treasury bond rate of 60 bps, partly offset by a change in the product mix with the 2010 results seeing an increase in the proportion of new and in-force business arising from Variable Annuity business.
In the event that longer-term default levels are higher, then unlike for UK annuity business where policyholder benefits are not changeable, Jackson has some discretion to adjust crediting rates, subject to contract guarantee levels and general market competition considerations.
New business 7.3 8.7 In force 9.9 10.2 Pre-tax expected long-term nominal rate of return for shareholder-backed annuity business:note iii
Fixed annuities 5.1 5.6 Inflation-linked annuities 5.2 5.8 OTHER BUSINESS: Risk discount rate:notes ii,iv New business 6.9 7.7 In force 7.0 7.4 Pre-tax expected long-term nominal rates of investment return: UK equities 8.0 8.4 Overseas equities 7.3 to 10.2 7.9 to 10.3 Property 6.7 6.7 Gilts 4.0 4.4 Corporate bondsnote iv 5.7 6.1 Expected long-term rate of inflation 3.55 3.7 Post-tax expected long-term nominal rate of return for the PAC with-profits fund: Pension business (where no tax applies) 6.7 6.9 Life business 5.9 6.0
iv Credit spread treatment For with-profits business, the embedded value reflects the discounted value of future shareholder transfers. These transfers are directly affected by the level of projected rates of return on investments, including debt securities. For 2010 and 2009 results the assumed earned rate for with-profit holdings of corporate bonds is defined as the risk-free rate plus an assessment of the long-term spread over gilts, net of expected long-term defaults. This approach is similar to that applied for equities and properties for which the projected earned rate is defined as the risk-free rate plus a long-term risk premium.
For UK shareholder-backed annuity business, different dynamics apply both in terms of the nature of the business and the EEV methodology applied. For this type of business the assets are generally held to maturity to match long duration liabilities. It is therefore appropriate under EEV methodology to include a liquidity premium in the economic basis used. The appropriate EEV risk discount rate is set in order to equate the EEV with a ‘market consistent embedded value’ including liquidity premium. The liquidity premium in the ‘market consistent embedded value’ is derived from the yield on the assets held after deducting an appropriate allowance for credit risk. The risk discount rate in EEV reflects the excess of the total allowance for credit risk over the best estimate default assumptions. For Prudential Retirement Income Limited (PRIL), which has approximately 88 per cent of UK shareholder-backed annuity business, the allowance for credit risk for the in-force business at 31 December 2010 is made up of: a 16 basis points for fixed annuities and 14 basis points for inflation-linked annuities in respect of long-term expected defaults. This is derived by applying Moody’s data from 1970 to 2009 uplifted by between 100 per cent (B) and 200 per cent (AAA) according to credit rating, to the asset portfolios.
The credit assumptions used and the residual liquidity premium element of the bond spread over swap rates is as follows: IN-FORCE BUSINESS 2010 (bps) 2009 (bps)
Bond spread over swap rates 117 198 Total credit risk allowance2 38 54
Notes 1 The new business liquidity premium is based on the weighted average of the point of sale liquidity premium. 2 For 2010 and 2009, specific assets were allocated to the year’s new business with the appropriate allowance for credit risk which was 38 basis points (2009: 54 basis points). The reduced allowance for new business in comparison to that for the in-force book reflects the assets held and other factors that influence the necessary level of provision.
UK insurance operations below. The principal asset classes are government and corporate bonds. Equity holdings are much lower than in the UK whilst property holdings do not represent a significant investment asset.
Mean returns have been derived as the annualised arithmetic average return across all simulations and durations. For each projection year, standard deviations have been calculated by taking the square root of the annualised variance of the returns over all the simulations. These have been averaged over all durations in the projection. For equity and property, the standard deviations relate to the total return on these assets. The standard deviations applied are as follows: b Demographic assumptions Persistency, mortality and morbidity assumptions are based on an analysis of recent experience but also reflect expected future experience. Where relevant, when calculating the time value of financial options and guarantees, policyholder withdrawal rates vary in line with the emerging investment conditions according to management’s expectations.
d Taxation and other legislation Current taxation and other legislation have been assumed to continue unaltered except where changes have been announced and the relevant legislation passed.
Goodwill arose on the acquisition of UOB Life Assurance Limited in Singapore because the acquisition included revenue and cost synergies. These synergies could not be recognised as assets separately from goodwill because they are not capable of being separated from the Group and sold, transferred, licensed, rented or exchanged, either individually or together with any related contracts and did not arise from contractual or other legal rights. None of the goodwill arising on this transaction is expected to be deductible for tax purposes.
On 1 August 2010, Discovery Holdings of South Africa, the Group’s joint venture partner in its investment in PruHealth completed the acquisition of the entire share capital of Standard Life Healthcare, a wholly-owned subsidiary of the Standard Life Group, for £138 million. Discovery funded the purchase of the Standard Life Healthcare transaction, and contributed Standard Life Healthcare to PruHealth as a capital investment on completion. As a result of the transaction, Discovery have increased their shareholding in PruHealth from the previous level of 50 per cent to 75 per cent, and Prudential’s shareholding has been reduced from 50 per cent of the previous joint venture structure to 25 per cent of the new structure with the much enlarged business. A gain of £3 million arises upon the dilution, representing the difference between the fair value of the enlarged 25 per cent investment still held and the book value of the original 50 per cent investment holding.
In 2009, the Company sold the assets and liabilities of its agency distribution business and its agency force in Taiwan to China Life Insurance Company Ltd of Taiwan for the nominal sum of NT$1. In addition, the Company invested £45 million to purchase a 9.99 per cent stake in China Life through a share placement. The sale was completed on 19 June 2009. The Company retained its interest in life insurance business in Taiwan through its retained bank distribution partnerships and its direct investment of 9.99 per cent in China Life made in 2009. At 31 December 2010 the Company’s interest in China Life was 8.66 per cent. The profit on sale and results for the period of ownership comprise: £m
Proceeds – Net asset value attributable to equity holders of Company after the effect of completion and other adjustments and provision for restructuring costs 135 Goodwill written off (44)
SE Asian operations inc. Hong Kong 704 524 969 715 1,039 767 5,570 4,153 China (Group’s 50% interest) 103 72 48 38 58 45 336 253 India (Group’s 26% interest) 85 47 180 163 188 168 582 581 Korea 66 38 89 118 96 122 486 568 Taiwan 146 104 105 97 120 107 519 427
US INSURANCE OPERATIONS Fixed annuities 836 1,053 – – 84 105 836 1,053 Fixed index annuities 1,089 1,433 – – 109 143 1,089 1,433 Life 11 10 22 24 23 25 166 173 Variable annuities 9,481 6,389 – – 948 639 9,481 6,389
Annual Premiums Equivalents (APE) are calculated as the aggregate of regular new business amounts and one-tenth of single new business amounts and are subject to roundings. The Present Value of New Business Premiums (PVNBP) are calculated as equalling single premiums plus the present value of expected premiums of new regular premium business, allowing for lapses and other assumptions made in determining the EEV new business contribution.
iii New business sales for the Group’s Japanese insurance subsidiary, which ceased selling new business with effect from 15 February 2010, have been presented separately from the remainder of the Group.
In preparing the EEV supplementary information, the directors have: • Prepared the supplementary information in accordance with the EEV Principles; • identified and described the business covered by the EVM; • applied the EVM consistently to the covered business; • determined assumptions on a realistic basis, having regard to past, current and expected future experience and to any relevant external data, and then applied them consistently; • made estimates that are reasonable and consistent; and • described the basis on which business that is not covered business has been included in the supplementary information, including any material departures from the accounting framework applicable to the Group’s financial statements.
We have audited the EEV basis supplementary information (‘the supplementary information’) of Prudential plc (‘the Company’) for the year ended 31 December 2010 set out on pages 389 to 433. The financial reporting framework that has been applied in the preparation of the supplementary information is the European Embedded Value Principles issued in May 2004 by the European CFO Forum as supplemented by the Additional Guidance on European Embedded Value Disclosures issued in October 2005 (together ‘the EEV Principles’) using the methodology and assumptions set out on pages 395 to 400 and 425 to 430 respectively. The supplementary information should be read in conjunction with the Group financial statements which are on pages 153 to 352.
Opinion on supplementary information In our opinion, the EEV basis supplementary information of the Company for the year ended 31 December 2010 has been properly prepared, in all material respects, in accordance with the EEV Principles using the methodology and assumptions set out on pages 395 to 400 and 425 to 430 respectively.
G BAINBRIDGE FOR AND ON BEHALF OF KPMG AUDIT PLC Chartered Accountants London
INDEPENDENT AUDITOR’S REPORT TO PRUDENTIAL PLC ON THE EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
438 Risk factors 443 Shareholder information 445 How to contact us
During the period of market dislocation in 2008 and the first half of 2009, Prudential had to operate against a challenging background of unprecedented volatility in the global capital and equity markets and interest rates and widespread economic uncertainty. Government interest rates fell to historic lows in the US, global credit spreads widened to historic levels, and credit markets seized up reducing liquidity. These factors had a significant adverse effect on Prudential’s business and profitability during that period. Although global markets partially stabilised in 2009 and 2010, interest rates remain low, and many of the challenges of 2008 persist in the credit markets. New challenges may continue to emerge.
Prudential is subject to the risk of potential sovereign debt credit deterioration owing to the amounts of sovereign debt obligations held in its investment portfolio Prudential is subject to the risk of potential sovereign debt credit deterioration and default. Investment in sovereign debt obligations involves risks not present in debt obligations of corporate issuers. Investing in such instruments creates exposure to the direct or indirect consequences of political, social or economic changes (including changes in governments, heads of states or monarchs) in the countries in which the issuers are located and the creditworthiness of the sovereign. In addition, the issuer of the debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or pay interest when due in accordance with the terms of such debt, and Prudential may have limited recourse to compel payment in the event of a default. A sovereign debtor’s willingness or ability to repay principal and to pay interest in a timely manner may be affected by, among other factors, its cash flow situation, its relations with its central bank, the extent of its foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s policy toward local and international lenders, and the political constraints to which the sovereign debtor may be subject. Periods of economic uncertainty may affect the volatility of market prices of sovereign debt to a greater extent than the volatility inherent in debt obligations of other types of issues. If a sovereign were to default on its obligations, this could have a material adverse effect on Prudential’s financial condition and results of operations.
Prudential conducts its businesses subject to regulation and associated regulatory risks, including the effects of changes in the laws, regulations, policies and interpretations and any accounting standards in the markets in which it operates Changes in government policy, legislation (including tax) or regulatory interpretation applying to companies in the financial services and insurance industries in any of the markets in which Prudential operates, which in some circumstances may be applied retrospectively, may adversely affect Prudential’s product range, distribution channels, capital requirements and, consequently, reported results and financing requirements. Also, regulators in jurisdictions in which Prudential operates may change the level of capital required to be held by individual businesses or could introduce possible changes in the regulatory framework for pension arrangements and policies, the regulation of selling practices and solvency requirements. Furthermore, as a result of the recent interventions by governments in response to global economic conditions, it is widely expected that there will be a substantial increase in government regulation and supervision of the financial services industry, including the possibility of higher capital requirements, restrictions on certain types of transaction structure, and enhanced supervisory powers.
The Group’s accounts are prepared in accordance with current International Financial Reporting Standards (IFRS) applicable to the insurance industry. The International Accounting Standards Board (IASB) introduced a framework that it described as Phase I, which permitted insurers to continue to use the statutory basis of accounting for insurance assets and liabilities that existed in their jurisdictions prior to January 2005. In July 2010, the IASB has published an Exposure Draft for its Phase II on insurance accounting, which would introduce significant changes to the statutory reporting of insurance entities that prepare accounts according to IFRS. The IASB has indicated a target date of June 2011 for issuing a final standard but it remains uncertain whether and how the proposals in the Exposure Draft will become definitive IFRS and when such changes might take effect.
Regulators particularly, but not exclusively, in the US and the UK are moving towards a regime based on principles-based regulation which brings an element of uncertainty. These regulators are increasingly interested in the approach that product providers use to select third-party distributors and to monitor the appropriateness of sales made by them. In some cases, product providers can be held responsible for the deficiencies of third-party distributors.
Prudential’s businesses are conducted in highly competitive environments with developing demographic trends and continued profitability depends on management’s ability to respond to these pressures and trends The markets for financial services in the UK, US and Asia are highly competitive, with several factors affecting Prudential’s ability to sell its products and continued profitability, including price and yields offered, financial strength and ratings, range of product lines and product quality, brand strength and name recognition, investment management performance, historical bonus levels, developing demographic trends and customer appetite for certain savings products. In some of its markets, Prudential faces competitors that are larger, have greater financial resources or a greater market share, offer a broader range of products or have higher bonus rates or claims-paying ratios. Further, heightened competition for talented and skilled employees and agents with local experience, particularly in Asia, may limit Prudential’s potential to grow its business as quickly as planned.
In Asia, the Group’s principal regional competitors are international financial companies, including Allianz, AXA, ING, AIA and Manulife. In a number of markets, local companies have a very significant market presence.
Annual General Meeting The 2011 Annual General Meeting (AGM) will be held on 19 May 2011 at 11.00am in the Churchill Auditorium at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE. The directors believe the AGM is an important opportunity to communicate directly with shareholders. The Notice of Meeting and all other details for the AGM are available at our website www.prudential.co.uk/ investors/AGM information
By telephone: Textel: 0871 384 2255 (for hard of hearing) Calls to 0871 numbers are charged at 8p per minute from a BT landline. Other telephone providers costs may vary. International shareholders tel: +44 (0)121 415 7026
Cash dividend alternative The Company has introduced a new Dividend Re-investment Plan (DRIP). It will be offered for the first time in connection with the 2010 final dividend. Consequently, the scrip dividend scheme has been discontinued.
Once shareholders have signed up to the DRIP they will automatically receive shares for all future dividends in respect of which a DRIP alternative is offered. The election may be cancelled at any time by the shareholder. Further details of the DRIP and the timetable are available on the Company’s website at www.prudential.co.uk/prudential-plc/investors
Ex dividend date 30 March 2011 30 March 2011 31 March 2011 30 March 2011 Record date 1 April 2011 1 April 2011 1 April 2011 1 April 2011
Share dealing services The Company’s Registrars, Equiniti, offer a postal dealing facility for buying and selling Prudential plc ordinary shares; please see the Equiniti address above or telephone 0871 384 2248. They also offer a telephone and internet dealing service, Shareview, which provides a simple and convenient way of selling Prudential plc shares. For telephone sales call 0871 384 2020 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 ShareGift (Registered Charity 1052686). The relevant share transfer form may be obtained from our website www.prudential.co.uk/prudential-plc/investors/ shareholder_services/forms or from Equiniti. Further information about ShareGift may be obtained on +44 (0)20 7930 3737 or from www.ShareGift.org There are no implications for capital gains tax purposes (no gain or loss) on gifts of shares to charity in the UK and it is also possible to obtain income tax relief.
Prudential UK & Europe 3 Sheldon Square London W2 6PR Tel: +44 (0)20 7334 9000 www.pru.co.uk
Institutional Analyst and Investor Enquiries Tel: +44 (0)20 7548 3300 E-mail: investor.relations@prudential.co.uk
Prudential plc is a company incorporated, some of whose subsidiaries are authorised and regulated by the Financial Services Authority (FSA).
Prudential plc is a holding company, some of whose subsidiaries are authorised and regulated by the Financial Services Authority (FSA).