EEV basis 129 25 iv Net core structural borrowings of shareholder-financed operations comprise: Mark to IFRS Mark to EEV IFRS market value EEV basis market value basis basis adjustment basis £m £m £m £m £m £m
Core structural borrowings – Jackson (at market value) (125) (22) (147) (127) (31) (158)
*Including central finance subsidiaries. In accordance with the EEV Principles, core borrowings are carried at market value.
Asian US insurance business Other Group operations operations operations operations operations total
Asian asset management operations 72 72 US broker-dealer and asset management 13 13
Operating profit from continuing operations based on longer-term investment returns 1,031 627 851 2,509 33 2,542
Short-term fluctuations in investment returns9 226 (9) (42) 175 (1) 174 Mark to market value movements on core borrowings10 9 9 214 223 Shareholders’ share of actuarial gains and losses on defined benefit pension schemes11 116 116 Effect of changes in economic assumptions and time value of cost of options and guarantees12 210 89 449 748 748
Profit from continuing operations before tax (including actual investment returns) 1,467 716 1,258 3,441 362 3,803
Unrealised valuation movements on Egg securities classified as available-for-sale (2) (2) Movement on cash flow hedges (3) (3)
Related tax 3 3 Intra group dividends (including statutory transfer) (98) (123) (286) (507) 507 External dividends (426) (426) Reserve movements in respect of share-based payments 18 18 Investment in operationsnote ii 103 95 198 (198)
Net increase in shareholders’ equity 1,178 302 684 2,164 732 2,896
Shareholders’ equity at 31 December 2007note iii,15 3,726 3,605 6,497 13,828 951 14,779 326 Prudential plc Annual Report 2007
Analysed as: Statutory IFRS basis shareholders’ equity 1,258 2,690 1,364 5,312 889 6,201 Additional retained profit on an EEV basis 2,468 915 5,133 8,516 62 8,578
Analysed as: Statutory IFRS basis shareholders’ equity 1,176 2,656 1,263 5,095 393 5,488 Additional retained profit on an EEV basis 1,372 647 4,550 6,569 (174) 6,395
EEV basis shareholders’ equity at 1 January 2007 2,548 3,303 5,813 11,664 219 11,883
Shareholders’ equity at 1 January 2007note ix 1,015 2,866 3,881 7,783 11,664 New business contributionnotes ii,iii (544) 308 (236) 1,101 865 Existing business – transfer to net worthnote v 963 (225) 738 (738) 0 Other movementsnote vi
Changes in non-operating assumptions and experience variances and minority interestsnote vi 136 (77) 59 616 675
Mark to market value movements on Jackson assets backing surplus and required capital (13) – (13) – (13) Other transfers from net worthnote x (40) – (40) – (40)
Notes i All figures are shown net of tax. ii The movements arising from new business contribution are as follows: note iii 2006 £m £m
Total long-term business 5 865 727 iii The new business contribution arises as follows: Value of
Value of Free Total net in-force Total surplus Required worth business long-term note vii capital note iv note viii business £m £m £m £m £m 328 Prudential plc Annual Report 2007
Value of Free Total net in-force Total surplus Required worth business long-term note vii capital note iv note viii business £m £m £m £m £m
Asian operations Expected return on existing business 28 9 37 231 268 Changes in operating assumptions and experience variances (61) 2 (59) 90 31 Changes in non-operating assumptions and experience variances and
US operations Expected return on existing business 34 40 74 82 156 Changes in operating assumptions and experience variances 194 (28) 166 (77) 89 Changes in non-operating assumptions and experience variances and
UK insurance operations Expected return on existing business 37 (1) 36 393 429 Changes in operating assumptions and experience variances (44) 2 (42) 28 (14) Changes in non-operating assumptions and experience variances and
Total long-term business Expected return on existing business 99 48 147 706 853 Changes in operating assumptions and experience variances 89 (24) 65 41 106 Changes in non-operating assumptions and experience variances and vii Movements in free surplus arising from profit for the year from long-term business operations are as follows: Cost of Total Increase in acquiring in-force free surplus new transfer to Other arising from business net worth movements profit note iii note v note vi in the year £m £m £m £m viii Value of in-force business includes the value of future margins from current in-force business less the cost of holding encumbered capital. ix Included in the EEV basis shareholders’ funds of long-term business operations of £13,828 million (2006: £11,664 million) is £349 million
a Sensitivity analysis – economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2007 (31 December 2006) and the new business contribution after the effect of encumbered capital for 2007 and 2006 to: — One per cent increase in the discount rates; — one per cent increase and decrease in interest rates, including all consequential changes (assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates); — one per cent rise in equity and property yields; — 10 per cent fall in market value of equity and property assets (not applicable for new business contribution); and — holding company statutory minimum capital (by contrast to economic capital).
Embedded in the in the value at starting starting 31 Dec 2007 bond rate bond rate £m £m £m
Embedded value of Interest rates long-term 1% 1% operations increase decrease 2006 £m £m £m
— five per cent proportionate decrease in base mortality and morbidity rates (i.e. increased longevity).
Change representing effect on: Embedded value of long-term operations at 31 December 2007
The directors have chosen to prepare supplementary information in accordance with the EEV Principles issued in May 2004 by the CFO Forum of European Insurance Companies and expanded by the Additional Guidance on European Embedded Value Disclosures issued in October 2005.
We have audited the EEV basis supplementary information (the supplementary information) of Prudential plc on pages 302 to 332 in respect of the year ended 31 December 2007. The supplementary information has been prepared in accordance with the European Embedded Value Principles issued in May 2004 by the CFO Forum of European Insurance Companies and expanded 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 306 to 313. The supplementary information should be read in conjunction with the Group financial statements which are on pages 127 to 299.
Respective responsibilities of directors and auditor As described in the statement of directors’ responsibilities on page 333, the directors’ responsibilities include preparing the supplementary information on the EEV basis in accordance with the EEV Principles. Our responsibilities, as independent auditor, in relation to the supplementary information are established in the UK by the Auditing Practices Board, by our profession’s ethical guidance and the terms of our engagement.
A number of factors (risk factors) affect Prudential’s operating results, financial condition and trading price. The risk factors mentioned below should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. The information given is as of the date of this report, is not updated, and any forward-looking statements are made subject to the reservations specified below under ‘Forward-Looking Statements’.
In the US, fluctuations in interest rates can affect results from Jackson National Life Insurance Company (Jackson), which has a significant spread-based business and where the majority of investments are in fixed-income securities. The spread is the difference between the rate of return Jackson is able to earn on the assets backing the policyholders’ liabilities and the amounts that are credited to policyholders in the form of benefit increases, subject to minimum crediting rates. Jackson also writes a significant amount of variable annuities that offer capital or income protection guarantees. Any cost of the guarantees that remain unhedged will affect the Company’s results.
Due to the geographical diversity of Prudential’s businesses, it is subject to the risk of exchange rate fluctuations. Prudential’s international operations in the US and Asia, which represent a significant proportion of operating profit and shareholders’ funds, generally write policies and invest in assets denominated in local currency. Although this practice limits the effect of exchange rate fluctuations on local operating results, it can lead to significant fluctuations in Prudential’s consolidated financial statements upon translation of results into pounds sterling. The currency exposure relating to the translation of reported earnings is not separately managed. Consequently, this could impact on the Group’s gearing ratios (defined as debt over debt plus shareholders’ funds). The impact of gains or losses on currency translations is recorded as a component within the statement of changes in equity.
Prudential 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 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. For instance, regulators in jurisdictions in which Prudential operates may change the level of capital required to be held by individual businesses. Also these changes could include possible changes in the regulatory framework for pension arrangements and policies, the regulation of selling practices and solvency requirements. In the UK several proposed and potential regulatory changes could have significant effect on the types of products Prudential provides to its customers and intermediaries and how those products are priced, distributed and sold. These include the Financial Services Authority’s (FSA’s) Treating Customers Fairly initiative, the FSA’s review of retail distribution, the proposed regulatory change affecting the pensions market and the implementation of the new European Union (EU) solvency framework for insurers (Solvency II) which should be implemented by member states during 2012.
A dditional inform ation at the Group level than otherwise necessary in respect of some of its individual businesses to accommodate, for example, short-term movements in global foreign exchange rates, interest rates, deterioration in credit quality and equity markets. In addition, changes in the local regulatory environment of countries where this is deemed equivalent to the EU could affect the calculation of the Group’s solvency position. The application of Solvency II requirements to international groups is still unclear and there is a risk of inconsistent application in different member states which may place Prudential at a competitive disadvantage to other European and non-European financial services groups.
Various jurisdictions in which Prudential operates have created investor compensation schemes that require mandatory contributions from market participants in some instances in the event of a failure of a market participant. As a major participant in the majority of its chosen markets, circumstances could arise where Prudential, along with other companies, may be required to make additional material contributions.
European Embedded Value (EEV) basis results are published as supplementary information. The EEV basis is a value based reporting method for Prudential’s long-term business which is used by market analysts and which underpins a significant part of the key performance indicators used by the Company’s management for both internal and external reporting purposes. The Chief Financial Officers’ (CFO) Forum will be publishing principles and guidance for calculating EEV results on a market-consistent basis. Prudential intends to adopt the market-consistent approach in 2008. This will result in a restatement of reported EEV results and change the reporting basis of future results.
Prudential’s businesses are conducted in highly competitive environments with developing demographic trends and Prudential’s continued profitability depends on its 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 its 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 with local experience, particularly in Asia, may limit the Group’s potential to grow its business as quickly as planned.
Jackson’s competitors in the US include major stock and mutual insurance companies, mutual fund organisations, banks and other financial services companies such as AIG, AXA, Hartford, Lincoln National, MetLife and TIAA-CREF.
Prudential’s financial strength and credit ratings, which are used by the market to measure its ability to meet policyholder obligations, are an important factor affecting public confidence in most of Prudential’s products, and as a result its competitiveness. Changes in methodologies and criteria used by rating agencies could result in downgrades that do not reflect changes in the general economic conditions or Prudential’s financial condition. Downgrades in Prudential’s ratings could have an adverse effect on its ability to market products and retain current policyholders. In addition, the interest rates Prudential pays on its borrowings are affected by its debt credit ratings, which are in place to measure Prudential’s ability to meet its contractual obligations. Prudential believes the credit rating downgrades it experienced in 2002 and 2003, together with the rest of the UK insurance industry, and in 2006 by Standard & Poor’s to bring Prudential into line with the standard rating agency notching between operating subsidiary financial strength rating and the credit rating for other European insurance holding companies, have not to date had a discernible impact on the performance of its business.
Prudential Assurance Company’s (PAC’s) financial strength is rated Aa1 (negative outlook) by Moody’s, AA+ (stable outlook) by Standard & Poor’s and AA+ (stable outlook) by Fitch.
Further, because of the long-term nature of much of Prudential’s business, accurate records have to be maintained for significant periods. Prudential’s systems and processes incorporate controls which are designed to manage and mitigate the operational risks associated with its activities. For example, any weakness in the administration systems or actuarial reserving processes could have an impact on its results of operations during the effective period. Prudential has not experienced or identified any operational risks in its systems or processes during 2007, or which have subsequently caused, or are expected to cause, a significant negative impact on its results of operations.
Prudential needs to make assumptions about a number of factors in determining the pricing of its products and for reporting the results of its long-term business operations. For example, the assumption that Prudential makes about future expected levels of mortality is particularly relevant for its UK annuity business. In exchange for a premium equal to the capital value of their accumulated pension fund, pension annuity policyholders receive a guaranteed payment, usually monthly, for as long as they are alive. Prudential conducts rigorous research into longevity risk, using data from its substantial annuitant portfolio. As part of its pension annuity pricing and reserving policy, Prudential UK assumes that current rates of mortality continuously improve over time at levels based on adjusted data from the Continuous Mortality Investigations (CMI) medium cohort table projections (as published by the Institute and Faculty of Actuaries). If mortality improvement rates significantly exceed the improvement assumed, Prudential’s results of operations could be adversely affected.
Financial calendar 2007 final dividend – deadline for new scrip dividend mandates 2 May 2008
Dividend mandates Shareholders may find it convenient to have their dividends paid directly to their bank or building society account. If you wish to take advantage of this facility, please call Equiniti and request a ‘Dividend Mandate’ form. Alternatively, you may download a form from prudential-plc/investors/shareholder_services/
The scrip reference price is calculated as the average of the middle market quotations for the Company’s shares as derived from the Daily Official List of the London Stock Exchange for the five business days which commenced on 9 April 2008.
Share dealing services The Company’s Registrars, Equiniti, offer a postal dealing facility for buying and selling Prudential plc ordinary shares, 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
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 is available on our website at shareholder_services/forms/ or may be obtained from Equiniti. Further information about ShareGift may be obtained on 020 7337 0501 or from There are no implications for capital gains tax purposes (no gain or loss) on gifts of shares to charity and it is also possible to obtain income tax relief.
Irish branch register The Company operates a branch register for Irish shareholders. All enquiries regarding Irish branch register accounts should be directed to Capita Corporate Registrars Plc, Unit 5, Manor Street Business Park, Manor Street, Dublin 7. Telephone: 00 353 1 810 2400.
This Annual Report is printed on paper made from 100 per cent recycled post-consumer waste. The paper is Forest Stewardship Council (FSC) accredited. This Annual Report can be recycled.