Notes a For with-profits business the charge represents the negative actual investment return on the PAC with-profits fund of (19.7) per cent against an assumed rate of 6.6 per cent. b Short-term fluctuations in investment returns on shareholder-backed annuity business represent the unrealised loss on surplus assets and default experience. c The charge of £(111) million relates primarily to unit-linked business and predominantly represents the capitalised loss of future fees from the fall in market values experienced during the year.
For 2007, the short-term fluctuations in investment returns for UK insurance operations of £(42) million primarily reflects value movements on the bond holdings of PRIL’s shareholders’ funds due to the net effect of widened credit spreads and reduced interest rates together with the difference between the actual investment returns for the with-profits life fund of 7.2 per cent and the gross long-term assumed rate of 7.85 per cent.
On the EEV basis this (charge) gain includes a 10 per cent share of the actuarial gains and losses on the share attributable to the PAC with-profits fund for the Scottish Amicable Pension Scheme. Consistent with the derecognition of the Company’s interest in the underlying surplus for PSPS, under the change of accounting policy described in note 20, it is not appropriate to report actuarial gains and losses for PSPS. The other losses for PSPS of £(5) million represent the change during 2008 in the provision for the deficit funding obligation.
12 Effect of changes in economic assumptions and time value of cost of options and guarantees
The (losses) profits on changes in economic assumptions and time value of cost of options and guarantees resulting from changes in economic factors for in-force business included within the (loss) profit from continuing operations before tax (including actual investment returns) arise as follows: Change in Change in time value time value
Notes i The effect of changes in economic assumptions in Asia for 2008 of a charge of £(34) million includes a negative effect in Taiwan of £(185) million reflecting a charge of £(239) million for the impact of extending the phased bond yield progression period in Taiwan out by five years from 31 December 2013 to 31 December 2018, as described in note 3, offset by the impact in other territories, mainly reflecting the reduction in risk discount rates.
Notes continued iii The effect of changes in economic assumptions of a charge of £(783) million for UK insurance operations comprises the effect of: Shareholderbacked With-profits annuity and other business business Total
Increase (decrease) in portfolio yields 83 (1,082) (999) (Increase) decrease in risk discount rates (394) 668 274 Other changes (6) (52) (58)
b For with-profits and other business the decrease in fund earned rates and risk discount rates primarily reflects the reduction in gilt rates of (0.85) per cent.
iv The effect of changes in time value of cost of options and guarantees of a charge of £(50) million primarily relates to with-profits business reflecting the effect of the reduction in fund earned rates, as described in iii(b) above.
Asian operationsnotes ii,iii 329 252 US operations 205 197 UK insurance operationsnotes ii,iii 269 236
ii Including tax relief on Asia development expenses and restructuring costs borne by UK insurance operations. iii The tax charge for 2008 includes the notional tax gross up of £4 million attaching to the change of corporate tax rate in Indonesia and in 2007 of £26 million attaching to the change of corporate tax rates in China, Malaysia, Singapore and the UK. iv The 2007 comparatives for the tax charges for continuing operations shown above exclude discontinued banking operations, which were sold on
Operating EPS from continuing operations: Operating profit before tax 2,961 2,530
Operating profit after tax and minority interests from continuing operations 2,191 1,821 Operating EPS from continuing operations (pence) 88.6p 74.5p
Total (loss) profit after tax and minority interests from continuing operations (1,338) 2,722 Total EPS from continuing operations (pence) (54.1)p 111.3p
Net assets of operations 167 111 Acquired goodwillnote ii 61 61
US operations Jackson (net of surplus note borrowings of £154m (2007: £147m):note iv
Smoothed shareholders’ fundsnote vii 5,437 6,031 Actual shareholders’ funds less smoothed shareholders’ funds (518) 466 EEV basis shareholders’ funds 4,919 6,497
Net assets of operations 147 271 Acquired goodwillnote ii 1,153 1,153
Other operations Holding company net borrowings at market valuenote iv (818) (873) Other net liabilitiesnote iii (501) (143)
This capital is referred to as encumbered capital. The cost is the difference between the nominal value of the capital and the discounted value of the projected releases of this capital allowing for investment earnings (net of tax) on the capital. Where encumbered capital is held within a with-profits sub-fund, the value placed on surplus assets in the fund is already discounted to reflect its release over time and no further adjustment is necessary in respect of encumbered capital.
IFRS basis deficit (relating to shareholder-backed operations) (31) (41) Additional EEV deficit (relating to shareholders’ 10 per cent share of the IFRS basis deficit attributable to the PAC
In accordance with the EEV Principles, core borrowings are carried at market value.
v In determining the cost of capital for Jackson, it has been assumed that an amount at least equal to 235 per cent of the risk-based capital required by the National Association of Insurance Commissioners (NAIC) at the Company Action Level must be retained. The related capital charge reflects the assumptions discussed in note 3b, together with the adjustments to required capital described in note 6iii.
vii UK long-term business smoothed shareholders’ funds reflect an adjustment to the assets of the PAC with-profits fund, for the purposes of determining the unwind of discount included in operating profits, to remove the short-term volatility in market values of assets. Shareholders’ funds in the balance sheet are determined on an unsmoothed basis.
Long-term business: Asia development expenses (26) (26) (26) UK general insurance commission 44 44
Operating profit from continuing operations based on longer-term investment returns 1,283 586 1,023 2,892 69 2,961
Profit (loss) from continuing operations before tax (including actual investment returns) 191 (443) (2,217) (2,469) 363 (2,106)
Related tax 119 119 Intra group dividends (including statutory transfer) (36) (169) (296) (501) 501 – External dividends (453) (453) Reserve movements in respect of share-based payments 18 18 Investment in operationsnote ii 389 – 322 711 (711) –
Movement in own shares in respect of share-based payment plans 3 3 Movement on Prudential plc shares purchased by unit trusts consolidated under IFRS (25) (25) New share capital subscribed 170 170 Mark to market value movements on Jackson assets backing surplus and required capital (148) (148) (148)
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 2008 and 2007 exchange rates as applied to shareholders’ funds at 1 January 2008 and the difference between 31 December 2008 and average 2008 rates for profits.
ii Investment in operations reflects increases in share capital. This includes certain non-cash items as detailed in note 17(b)(x). iii For the purposes of the table above, goodwill related to Asia long-term operations (as shown in note 15) is included in Other operations. iv Other transfers (from) to long-term business operations to other operations in 2008 represent: Total UK long-term
Adjustment for net of tax asset management projected profits of covered business (15) (3) (17) (35)
Comprising: Value of in-force business before deduction of cost of capital and of guarantees 4,590 2,838 4,263 11,691
Surplus Required Total net business long-term of in-force business for 2008note i note iv capital worth note v business
Changes in non-operating assumptions and experience variances and minority interests (915) 165 (750) (3,145) (3,895)
(Loss) profit on ordinary activities after tax and minority interests from long-term business (1,295) 424 (871) (935) (1,806)
Mark to market value movements on Jackson assets backing surplus and required capital (148) (148) (148) Other transfers to net worthnote vii 4 4 4
Existing business – transfer to net worth 459 (85) 374 (374) – Expected return on existing business (8) 61 53 283 336 Changes in operating assumptions and experience variances (181) 178 (3) 71 68 Changes in non-operating assumptions and experience
(Loss) profit on ordinary activities after tax and minority interests from long-term business (494) 452 (42) 60 18
Intra-group dividends (including statutory transfer) and investment in operations 353 353 353 Other transfers from net worth (3) (3) (3)
Value of Free in-force TotalReconciliation of net worth and value surplus Required Total net business long-term of in-force business for 2008note i note iv capital worth note v business
Existing business – transfer to net worth 379 (226) 153 (153) – Expected return on existing business 37 40 77 75 152 Changes in operating assumptions and experience variances: Adjustments in respect of certain statutory reserves, required capital and surplus note borrowingsnote viii (110) (137) (247) 207 (40)
(Loss) profit on ordinary activities after tax and minority interests from long-term business (590) (65) (655) 402 (253)
and investment in operations (169) (169) (169) Mark to market value movements on Jackson assets backing surplus and required capital (148) (148) (148) Other transfers to net worth 40 40 40
Changes in non-operating assumptions and experience variances and minority interests 212 (91) 121 (2,446) (2,325)
(Loss) profit on ordinary activities after tax and minority interests from long-term business (211) 37 (174) (1,397) (1,571)
Intra-group dividends (including statutory transfer) and investment in operations 158 158 (132) 26
UK insurance operations (293) 947 31 iv Free surplus is the market value of the net worth in excess of the capital required to support the covered business. Where appropriate, adjustments are made to the regulatory basis net worth from the local regulatory basis so as to include backing assets movements at fair value rather than cost so as to comply with the EEV principles.
v Value of in-force business includes the value of future margins from current in-force business less the cost of holding encumbered capital. vi Included in the EEV basis shareholders’ funds of long-term business operations of £14,522 million (2007: £13,828 million) is £409 million
2 The adjustment to reduce required capital for US operations represents a current year refinement to align the amount with the required level which has been set as an amount at least equal to 235 per cent of the risk-based capital required by National Association of Insurance Commissioners at the Company Action Level, which is sufficient to meet the economic capital requirement.
3 The surplus note borrowings have been reflected as contributing to the capital in the net worth but with the obligation deducted from the value of in-force business.
Underlying movement New business (825) 472 (353) 1,290 937 Business in force – expected transfer 1,413 (416) 997 (997) –
– unwind of discount, effects of changes in operating assumptions, operating experience variances and other operating itemsnote vii (11) 299 288 928 1,216
Investment movements and economic effects: UKIO additional allowance for short-term credit risknote iv (770) 41 (729) 705 (24) Jackson impairment losses in excess of longer term expected
Effect of changes in economic assumptionsnote vii 34 192 226 (649) (423)
vii The underlying movement in free surplus includes £85 million for the effect of rebalancing the asset portfolio for UK annuity business, as described in note 6iv c. The effect of changes in economic assumptions on free surplus includes a credit of £166 million in respect of rebalancing as described in note 12.
Other items includes the deduction of the value of the shareholders’ interest in the Estate, the value of which is derived by increasing final bonus rates so as to exhaust the estate over the lifetime of the in-force with-profits business. This is an assumption to give an appropriate valuation. To be conservative this item is excluded from the value of the Estate from the expected free surplus generation profile below. Offset against this value are amounts treated as capital for regulatory purposes (and hence treated as capital for net worth purposes) but which are deducted in full against the VIF (i.e. the full undiscounted value).
The table below shows how the VIF generated by the in-force business at 31 December 2008 and the associated required capital is modelled as emerging into free surplus over future years.
19 Sensitivity of results to alternative assumptions a Sensitivity analysis – economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2008 (31 December 2007) and the new business contribution after the effect of encumbered capital for 2008 and 2007 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 2008 bond rate bond rate £m £m £m
If it had been assumed in preparing the 2008 results for Taiwan that interest rates remained at the current level of around 1.4 per cent until 31 December 2009 and the progression period in bond yields was delayed by a year so as to end on 31 December 2019, there would have been a reduction in the Taiwan embedded value of £(74) million.
• five per cent proportionate decrease in base mortality and morbidity rates (i.e. increased longevity).
20 Adoption of the principles of IFRIC 14 for accounting for pension schemes
Operating profit from continuing operations based on longer-term investment returns 2,992 (31) 2,961 2,542 (12) 2,530
(Loss) profit for the year (1,292) (46) (1,338) 3,062 (99) 2,963 Other movements in reserves 1,694 1,694 (166) (166) Shareholders’ equity at beginning of year 14,779 (179) 14,600 11,883 (80) 11,803
Shareholders’ equity at end of year 15,181 (225) 14,956 14,779 (179) 14,600
The changes reflect the aggregate of those under IFRS, as shown in note I1 to the IFRS Financial Statements, and the shareholders’ 10 per cent interest in the PAC with-profits element of the effect of the adoption of IFRIC 14 for accounting for pension schemes reflected under EEV reporting.
The movement in shareholders’ EEV equity of the total Taiwan life business for 2008 comprised: £m
Operating profit based on longer-term investment returns from: New business 120 Business in force (16)
Investment by parent companynote i 93 Exchange and other reserve movements (53)
Note i Comprising £66 million for solvency capital and £27 million for business development.
This report is made solely to the Company in accordance with the terms of our engagement. Our audit work has been undertaken so that we might state to the Company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our audit work, for this report, or for the opinions we have formed.
Basis of audit opinion We conducted our audit having regard to International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the supplementary information. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the supplementary information, and of whether the accounting policies applied in the preparation of the supplementary information are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.
Opinion In our opinion, the EEV basis supplementary information for the year ended 31 December 2008 has been properly prepared in accordance with the EEV Principles using the methodology and assumptions set out on pages 322 to 330.
Independent auditor’s report to Prudential plc on the European Embedded Value (EEV) basis supplementary information
Prudential's businesses are inherently subject to market fluctuations and general economic conditions.
• in certain illiquid or closed markets, determining the value at which financial instruments can be realised is highly subjective. Processes to ascertain value and estimates of value require substantial elements of judgement, assumptions and estimates (which may change over time).
In the United Kingdom, a significant part of Prudential’s shareholders’ profit is related to bonuses for policyholders declared on its with-profits products, which are broadly based on historic and current rates of return on equity, real estate and fixed income securities, as well as Prudential’s expectations of future investment returns. For all lines of business, fluctuations in financial risk factors will affect the Company’s results. In 2008, Prudential has had to operate against a challenging background of unprecedented volatility in capital and equity markets, interest rates and widespread economic uncertainty.
These factors have significantly contributed to the substantial increases in Jackson’s unrealised losses. Jackson also writes a significant amount of variable annuities that offer capital or income protection guarantees. There could be unforeseen market circumstances where the derivatives that it enters into to hedge its market risks may not fully offset its losses, and any cost of the guarantees that remain unhedged will also affect the Company’s results.
The resolution of several issues affecting the financial services industry could have a negative impact on Prudential’s reported results or on its reputation or on its relations with current and potential customers.
Regulators particularly, but not exclusively, in the United States and the United Kingdom 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. In some cases product providers can be held responsible for the deficiencies of third-party distributors.
Jackson’s competitors in the United States 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.
Downgrades in Prudential’s financial strength and credit ratings could significantly impact its competitive position and hurt its relationships with creditors or trading counterparties. 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’s long-term senior debt is rated as A2 (stable outlook) by Moody’s, A+ (stable outlook) by Standard & Poor’s and AA– (stable outlook) by Fitch.
Prudential operates, and in certain markets is required by local regulation to operate, through joint ventures. Prudential’s ability to exercise management control over its joint venture operations and its investment in them depends on the terms of the joint venture agreements, in particular, the allocation of control among, and continued co-operation between, the joint venture participants. Prudential may also face financial or other exposure in the event that any of its joint venture partners fails to meet its obligations under the joint venture or encounters financial difficulty. In addition, a significant proportion of the Group’s product distribution is carried out through arrangements with third-parties not controlled by Prudential and is dependent upon continuation of these relationships. A temporary or permanent disruption to these distribution arrangements could affect Prudential’s results of operations.
Shareholder enquiries Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA
Textel: 0871 384 2255 (for hard of hearing) Calls to 0871 numbers are charged at 8p per minute from a BT landline. Other telephony providers’ costs may vary. International shareholders
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/forms
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 plc/investors/shareholder_services/forms or from Equiniti. Further information about ShareGift may be obtained on +44 (0) 20 7930 3737 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 Registrars (Ireland), Unit 5, Manor Street Business Park, Manor Street, Dublin 7.
American Depositary Receipts (ADRs) The Company’s ordinary shares are listed on the New York Stock Exchange in the form of American Depositary Shares, evidenced by ADRs and traded under the symbol PUK. Each American Depositary Share represents two ordinary shares. All enquiries regarding ADR holder accounts should be directed to JP Morgan, the authorised depositary bank, at JPMorgan Chase & Co, P O Box 64504, St.Paul, MN 55164-0504, USA, telephone +1 651 453 2128 or log on to
Form 20-F The Company is subject to the reporting requirements of the Securities and Exchange Commission (SEC) in the USA as such requirements apply to foreign companies and files its Form 20-F with the SEC. Copies of Form 20-F can be found on our website at or on the SEC’s website at