Operating earnings per share from continuing operations after related tax and minority interests* 74.9p 62.1p Basic earnings per share 125.2p 91.7p Shareholders' equity, excluding minority interests £14.8bn £11.9bn
Asian households are changing rapidly: they are becoming wealthier, smaller and older, with a growing need for financial solutions.
The US life insurance industry remains highly fragmented and competition for market share is intensifying through aggressive pricing. Life insurers find themselves competing with other financial services providers, particularly mutual fund companies and banks, for a share of retirement savings assets in the US.
Prudential is focusing on the retirement savings and income market in the UK. The accumulation market is huge, with over 50 per cent of total assets including pensions, housing equity and liquid assets, held by those approaching, or in, retirement. In addition, wealth is concentrated in the mass affluent and high net worth individuals. With an ageing population and wealth concentration, the retirement and near-retirement population will represent the fastest-growing segments of the market over the next 10 years.
The agency force across the region increased by 125,000 to 410,000 during the year and there was significant expansion in India where average agent numbers more than doubled to 238,000. Throughout the rest of the region the average number of agents increased by 10 per cent to 112,000. Agency productivity has also moved ahead strongly in a number of markets including Singapore, Hong Kong and Vietnam. The continuing success of our multi-distribution approach led to sales through non-agency channels increasing by 44 per cent and we added a number of important new distribution relationships.
United Kingdom Prudential UK’s strategy is to concentrate on those areas of the retirement savings and income markets where it can generate attractive returns, capitalising on its longevity experience, multi-asset management capabilities, brand and financial strength.
Group — Improve Group holding company cash flow and maintain robust capital position
— We launched the ‘What’s your number?’ retirement campaign in six Asian markets, and new health products in Singapore, India and Hong Kong.
— We nominated a Policyholder Advocate. A decision whether to proceed will be made in the first half of 2008.
The margin at 31 per cent (2006: 30 per cent) remained high in comparison to the overall UK market as did the internal rate of return which was 18 per cent including the Equitable Life transaction and 14 per cent excluding it. Our target internal rate of return in the UK is 14 per cent.
Asset management The Group’s asset management businesses had another excellent year. Our international investment management expertise continues to add value to our insurance operations and also supported the growth in external funds under management to £69 billion at the end of 2007 (2006: £57 billion).
New business premiums reflect premiums attaching to covered business and premiums for contracts classified as investment products or other financial instruments under IFRS.
In broad terms, IFRS profits for long-term business contracts reflect the aggregate of statutory transfers from with-profits funds and profits on a traditional accounting
Operating profit from the asset management business was £334 million (2006: £260 million), up 28 per cent on 2006, driven by growth in M&G and Asia Asset Management.
Actuarial gains and losses on defined benefit pension schemes: 116 207 Effect of change in economic assumptions: 748 (1)
Dividend per share The directors recommend a final dividend for 2007 of 12.30 pence per share payable on 20 May 2008 to shareholders on the register at the close of business on 11 April 2008. The interim dividend for 2007 was 5.70 pence per share. The total dividend for the year, including the interim dividend and the recommended final dividend, amounts to 18.00 pence per share compared with 17.14 pence per share for 2006, an increase of five per cent. The total cost of dividends in respect of 2007 was £444 million.
In 2007 Prudential continued to broaden its range of linked products. These included the new Global Property Fund in Singapore and a new Takaful range in Indonesia, launched in September 2007. In Taiwan, a new variable annuity product and an agency incentive programme contributed to the growth in new business of 71 per cent for the year.
Around the world, Prudential manages over £267 billion of assets. These include the underlying funds for our insurance businesses, as well as nearly £70 billion of external funds. The growth in our funds under management is underpinned by our strong track record of investment performance, which is also a key driver of success for our insurance businesses.
Prudential Capital operating profit 2003-2007 £m £51m £43m £30m 2005 £43m £20m2003
Current year initiatives NPH increased sales of Jackson’s enhanced product offering and the overall distribution of the network during the year. NPH also introduced several operational enhancements, which increased the efficiency of its production processes. In addition, NPH executed a focused recruitment initiative to expand the total assets under management and the representative base of INVEST Financial Corporation.
Core structural borrowings at 31 December 2007 included £1,473 million at fixed rates of interest with maturity dates ranging from 2009 to perpetuity. Of the core borrowings £888 million were denominated in US dollars, to hedge partially the currency exposure arising from the Group’s investment in Jackson.
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 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 conversion of results into pounds sterling. The currency exposure relating to the conversion of reported earnings is not separately managed, as it is not in the economic interests of the Group to do so. The impact of gains or losses on currency conversions is recorded as a component of shareholders’ funds within the statement of recognised income and expense. The impact of exchange rate fluctuations in 2007 is discussed elsewhere in this financial review.
The IGD surplus as at 31 December 2007 will be submitted to the FSA by 30 April 2008 but is currently estimated to be around £1.4 billion. This includes a gain of around £0.3billion that arose during 2007 from the sale of Egg Banking plc.
During 2007, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) invited the EU insurance industry to participate in the third quantitative impact study, which provided useful input for supervisors and industry alike. The EU insurance industry will be participating in a fourth quantitative impact study during the first half of 2008 with a view to providing further quantitative input into the calibration of the capital requirements. This study will include a particular focus on groups. Participation in these exercises involves a substantive commitment and is expected to yield benefits by providing evidence leading to a truly risk-based capital requirement.
Prudential aims to be in a position to determine whether reattribution is in the best interests of policyholders and shareholders in the first half of 2008.
Mutual funds During 2007, Jackson launched a line of retail mutual funds as a complement to the broad product offering.
The EEV basis is a value-based method of reporting in that it reflects the change in value of the business over the accounting period. This value is called the shareholders’ funds on the EEV basis which, at a given point in time, is the value of future profits expected to arise from the current book of long-term insurance business plus the net worth of the Company. In determining these expected profits, Prudential makes full allowance for the risks attached to their emergence and the associated cost of capital and takes into account recent experience in assessing likely future persistency, mortality and expenses.
In addition to business unit operational limits on credit risk, counterparty risk limits are also set at the Group level. Limits on total Group-wide exposures to a single counterparty are specified for different credit rating ‘buckets’. Actual exposures are monitored against these limits on a quarterly basis.
A two-tier approach is used to apply the limits at business unit level. Firstly, indicative business unit risk limits are calculated; these ensure that, if each business unit keeps within its limits, the Group risk position would be within the Group limits. Secondly, the impact on the risk position is considered as part of Group Risk’s scrutiny of large transactions or departures from plan proposed by individual business units.
The bonus strategy on participating business is an integral part of the asset-liability management approach for participating business; and
Risk reporting Group Risk and other GHO oversight functions have individually defined and publicised frameworks, escalation criteria and processes for the timely reporting of risks and incidents by business units. As appropriate, these risks and incidents are escalated to the various Group-level oversight and risk committees and the Board.
Business unit local economic capital Business units must also monitor their own economic capital requirements locally on a ‘stand alone’ basis (without allowance for diversification effects with the rest of the Group). The business unit economic capital assessments allow management to put the local regulatory capital requirements into an economic context. These assessments must be reported annually, and included in the business unit financial condition reports.
Stakeholder dialogue Stakeholder engagement enables employees and relevant external groups to help shape what Prudential does and ensure that their reasonable expectations are translated into business value. This means listening to and working with our stakeholders and being very clear about our intentions and priorities.
Improving financial capability The Group’s core financial education programme remains focused on the need to play our part in enabling consumers to make the right decisions for their individual savings/financial needs. Such decisions range from debt management to savings. Informing and empowering consumers to make such decisions will, Prudential believes, build better and more permanent relationships between consumers and providers.
Philip Broadley FCA Group Finance Director (until 25 March 2008) Philip Broadley has been an executive director of Prudential and Group Finance Director since May 2000. He is currently Vice-Chairman of the 100 Group of Finance Directors, having previously been its Chairman from 2005 until 2007, and he was a member of the Insurance Advisory Group of the International Accounting Standards Board. Philip is also President of the Przezornosc Charitable Foundation, which has been established in Poland in recognition of former policyholders with whom the Company lost contact. Previously, he was with the UK firm of Arthur Andersen, where he became a partner in 1993. Philip will stand down as a director at the next Annual General Meeting on 15 May 2008.
Schroders plc in May 1995, until the acquisition of Schroders, an investment banking business, by Citigroup Inc. in May 2000. In addition, Sir Win was a non-executive director of Cable and Wireless plc from 1991 and Deputy Chairman from 1995 to 2003. His other non-executive directorships included: IFIL Finanziaria di Partecipazioni SpA, Italy (1999-2004), Siemens Holdings Plc (2001-2003), and Akbank T.A.S. (2007-2008).
4 Appointed as a director on 2 August 2007 and as a member of the Audit Committee on 1 October 2007.
Performance evaluation Prudential continued its programme of annual evaluations of the performance of the Board and its Committees in respect of 2007, in line with the requirements of the Combined Code. The aim was to improve the effectiveness of the Board and its committees, and enhance the Group’s performance.
— review and consider, and where applicable follow up on, matters raised by other components of the disclosure process. These may include, to the extent they are relevant to the disclosure process, any matters to be raised with the Group Audit Committee, the internal auditors or the external auditor of the Company’s internal controls.
I am pleased to present the 2007 remuneration report for Prudential, setting out our remuneration policy for senior executives and the amounts paid to directors in 2007.
In 2006 we discussed our remuneration policy with shareholders who subsequently approved the introduction of new long-term incentive plans for our executive directors and selected senior executives. The review affirmed a set of remuneration principles which has guided the Remuneration Committee in determining its general approach and in making decisions about the remuneration of individual executive directors in 2007.
The Remuneration Principles which the Committee has applied are: — a high proportion of total remuneration will be delivered through performance-related reward
Pe rc en ta ge o f a w ar d th at v es ts 100%
Pe rc en ta ge o f a w ar d th at v es ts
Michael McLintock remuneration arrangements In the 2006 accounts we indicated that the remuneration structures of Michael McLintock would be reviewed in 2007. As a result of this, an additional award was made under the current LTIP in 2007 and a new structure is proposed for 2008.
— Awards will be forfeited if investment performance is in the fourth quartile, irrespective of any profit growth.
Basic fee 60,000 Audit Committee Chairman – additional fee 40,000 Audit Committee member – additional fee 15,000 Remuneration Committee Chairman – additional fee 22,500 Remuneration Committee member – additional fee 10,000 Senior Independent Director – additional fee 25,000
Total non-executive directors 573 573 497 *Benefits include, where provided, cash allowances for cars, the use of a car and driver, medical insurance, security arrangements and expatriate benefits. † Pension supplements that are paid in cash are included in the table. The policy on pensions is described in the section on ‘Pensions policy’ on page 106.
Notes 1 It is anticipated that for Clark Manning a deferred share award from the 2007 annual bonus valued at $200,000 will be made. This is included in the 2007 bonus figure. 2 Clark Manning’s bonus figure excludes a contribution of £6,745, from a profit sharing plan, which has been made into a 401K retirement plan. This is included in the table on pension contributions on page 123.
Plan name award shares) shares) (pence) of shares) of shares) period
6 In 2007, a deferred share award from his 2006 annual bonus valued at £492,744 was made to Mark Tucker. This is included in the 2006 total in the Directors’ Remuneration table on page 114.
Dilution Prudential currently meets its obligations under its share plans by funding an employee trust which acquires shares on the open market either at the time of grant or by maintaining sufficient shares in the trust to meet the requirements as awards vest. Shares relating to options granted under all-employee share plans are satisfied by new issue shares. The combined dilution from all outstanding options at 31 December 2007 was 0.1 per cent of the total share capital at the time.
Where supplements for pension purposes are paid in cash, the amounts are included in the table on Directors’ Remuneration on page 114.
Directors’ pensions and life assurance continued Details of directors’ pension entitlements under HMRC approved defined benefit schemes and supplements that are in the form of contributions to pension arrangements paid by the Company are set out in the following table.
EEV basis results The EEV basis results are extracted from supplementary information and are not results that form part of the Group’s financial statements. Supplementary information The results shown above distinguish ‘operating profits based on longer-term investment returns’ from ‘profits before tax’. The reconciling items are presented in accordance with the Group’s policy as described in the Group’s financial statements and supplementary information. Items excluded from operating profit based on longer-term investment returns represent primarily the effects of altered investment market conditions (short-term fluctuations) and actuarial gains and losses on defined benefit pension schemes. For EEV, the operating profit based on longerterm investment returns figure also excludes the mark to market value movements on core borrowings, the effect of changes in economic assumptions and the time value of the cost of options and guarantees.
Section E: Asset management (including US broker dealer) and other operations 222 E1: Income statement for asset management operations 223 E2: Balance sheet for asset management operations 224 E3: Regulatory capital positions 224 E4: Sensitivity of profit and equity to market and other financial risk 224 E5: Other operations
Unrealised valuation movements on US life operations securities classified as available-for-sale: D3(a) Unrealised holding losses arising during the year (231) (231) (231) Less gains included in the
The usage of these bases of accounting has varying effects on the way in which product options and guarantees are measured. For UK regulated with-profits funds, for the 2007 and 2006 results, options and guarantees are valued on a market consistent basis. The basis is described in note D2(e)(ii). For other operations a market consistent basis is not applied under the accounting basis described in note A4. Details of the guarantees, basis of setting assumptions, and sensitivity to altered assumptions are described in notes D3 and D4.
Valuation and accounting presentation of fair value movements of derivatives and debt securities of Jackson Under IAS 39, derivatives are required to be carried at fair value. Unless net investment hedge accounting is applied, value movements on derivatives are recognised in the income statement. Except in respect of variable annuity business, the value movements on derivatives held by Jackson are separately identified within the short-term fluctuations in investment returns identified as part of the Group’s supplementary analysis of results described below and in note B1. Derivative value movements in respect of variable annuity business are included within the operating profit based on longer-term investment returns.
A3: Critical accounting policies, estimates and judgements continued Valuation assumptions i Contracts of with-profits funds The Group’s insurance contracts and investment contracts with discretionary participating features are primarily with-profits and other protection type policies. For UK regulated with-profits funds, the contract liabilities are valued by reference to the UK Financial Services Authority’s (FSA) realistic basis. In aggregate, this basis has the effect of placing a value on the liabilities of UK with-profits contracts, which reflects the amounts expected to be paid based on the current value of investments held by the with-profits funds and current circumstances.
The Group uses the trade date method to account for regular purchases and sales of financial assets with the exception of Egg’s loans and advances to customers which were on a settlement day basis.
Use of fair values The Group uses current bid prices to value its quoted investments. Actively traded investments without quoted prices are valued using external broker bid prices. If there is no active established market for an investment, the Group applies an appropriate valuation technique such as a discounted cash flow technique.
Income statement treatment Premiums and claims Premium and annuity considerations for conventional with-profits policies and other protection type insurance policies are recognised when due. Premiums and annuity considerations for linked policies, unitised with-profits and other investment type policies are recognised when received or, in the case of unitised or unit-linked policies, when units are issued. These amounts exclude any taxes or duties assessed based on premiums.
UK regulated with-profits funds Prudential’s long-term business written in the UK comprises predominantly life insurance policies under which the policyholders are entitled to participate in the returns of the funds supporting these policies. Business similar to this type is also written in certain of the Group’s Asian operations subject to local market and regulatory conditions. Such policies are called with-profits policies. Prudential maintains with-profits funds within the Group’s long-term business funds, which segregate the assets and liabilities and accumulate the returns related to that with-profits business. The amounts accumulated in these with-profits funds are available to provide for future policyholder benefit provisions and for bonuses to be distributed to with-profits policyholders. The bonuses, both annual and final, reflect the right of the with-profits policyholders to participate in the financial performance of the with-profits funds. Shareholders’ profits with respect to bonuses declared on with-profits business correspond to the shareholders’ share of the cost of bonuses as declared by the Board of directors. The shareholders’ share currently represents one-ninth of the cost of bonuses declared for with-profits policies.
Liability adequacy The Group performs liability adequacy testing on its insurance provisions to ensure that the carrying amounts of provisions (less related DAC and present value of in-force business – see policy on Business Acquisitions and Disposals) is sufficient to cover current estimates of future cash flows. When performing the liability adequacy test, the Group discounts all contractual cash flows and compares this amount to the carrying value of the liability. Any deficiency is immediately charged to the income statement.
Segments In accordance with IAS 14, ‘Segment Reporting’ the Group reports its results and certain other financial information by primary and secondary segments. The Group’s primary segments are its business segments, namely, long-term business, asset management and, prior to the sale of Egg in the first half of 2007, banking operations. The Group’s secondary segments are its geographical segments, namely, UK, US and Asia.
A4: Significant accounting policies continued Operating profit based on longer-term investment returns The Group continues to use operating profit based on longer-term investment returns as a supplemental measure of its results. For the purposes of measuring operating profit, investment returns on shareholder-financed business are based on the expected longer-term rates of return. Except as discussed below, in determining profit on this basis the following key elements are applied to the results of the Group’s shareholder-financed operations.
ii Derivative value movements Value movements for Jackson’s equity-based derivatives and variable annuity product embedded derivatives are included in operating profits based on longer-term investment returns. The inclusion of these movements is so as to broadly match with the results on the Jackson variable annuity book that pertain to equity market movements.
A5: New accounting pronouncements The following standards, interpretations and amendments have either been effective and adopted in 2007 or have been issued but are not yet effective in 2007, including those which have not yet been adopted in the EU. This is not intended to be a complete list as only those standards, interpretations and amendments that are anticipated to have an impact upon the Group’s financial statements have been discussed.
The charge for share-based payments for Prudential schemes is for the SAYE and Group performance-related schemes. vii UK restructuring costs are allocated as follows: £m £m
Number of shares A reconciliation of the weighted average number of ordinary shares used for calculating basic and diluted earnings per share is set out as below: 2007 millions 2006 millions
Details of the primary reporting segments are as follows: Long-term business This segment comprises long-term products that contain both a significant and insignificant element of insurance risk. The products are managed together and not classified in this way other than for accounting purposes. This segment also includes activity of the PAC with-profits funds’ venture investments managed by PPM Capital and other investment subsidiaries held for the purpose of supporting the Group’s long-term business operations.
Other non-investment and non-cash assetsG1,H3-H6 4,733 1,588 602 6,923 415 2,917 (4,151) 6,104 342 6,446
Borrowings attributable to with-profits fundsG1,H13 1,776 – – 1,776 – – – 1,776 – 1,776
ii Major risks The Group publishes separately within its Group Annual Report a section on key risk factors, which discusses inherent risks in the business and trading environment.
Notes on the Group financial statements D: Life assurance businesses continued
Other non-participating business Interest rate and price risk Long-term interest rates
D1: Group overview continued Shareholder-backed business The factors that may significantly affect the IFRS results of UK shareholder-backed business are the mortality experience and assumptions and credit risk attaching to the annuity business of Prudential Retirement Income Limited and the PAC non-profit sub-fund.
iii Wholly-owned subsidiary of the PAC WPSF that writes annuity business. iv Excluding policyholder liabilities of the Hong Kong branch of PAC.
i With-profits business SAIF Shareholders have no interest in the profits of SAIF but are entitled to the asset management fees paid on the assets of the fund.
D3: US insurance operations a Summary results and balance sheet i Results and movements on shareholders’ equity
iv Institutional products Jackson’s institutional products consist of GICs, funding agreements (including agreements issued in conjunction with Jackson’s participation in the US Federal Home Loan Bank programme) and medium-term note funding agreements. At 31 December 2007, institutional products accounted for 12 per cent of policy and contract liabilities (2006: 12 per cent). Under a traditional GIC, the policyholder makes a lump sum deposit. The interest rate paid is fixed and established when the contract is issued. If deposited funds are withdrawn earlier than the specified term of the contract, an adjustment is made that approximates a market value adjustment.
— credit default swaps, represent agreements under which Jackson has purchased default protection on certain underlying corporate bonds held in its portfolio. These contracts allow Jackson to sell the protected bonds at par value to the counterparty in the event of their default in exchange for periodic payments made by Jackson for the life of the agreement.
D4: Asian insurance operations a Summary balance sheet at 31 December 2007 Asian insurance
The following table summarises the credit quality of the debt securities of the Asian insurance operations as at 31 December 2007 by rating agency rating: With-profits Unit-linked Other business business business Total £m £m £m £m
For the traditional business in Taiwan, the economic scenarios used to calculate the IFRS results reflect the assumption of a phased progression of bond yields from current rates to long-term expected rates. The projections assume that the current bond yields of around 2.5 per cent (2006: 2 per cent) trend towards 5.5 per cent (2006: 5.5 per cent) at 31 December 2013 (2006: 2013).
D4: Asian insurance operations continued The adequacy of the Taiwan insurance contract liabilities is also sensitive to movements in short-term movements in market interest rates. This is because a reduction in the current interest rates would alter the progression rate to the long-term rate and the assumed timing of attainment of the rate may be insufficient and they would have been deferred. If the interest rates at 31 December 2006 of circa 2 per cent had been lower by 0.5 per cent and the date for the attainment of the long-term rate deferred by one year to 2014 the effect on the net premium reserve would have been a charge of approximately £60 million.
If the interest rate at 31 December 2007 of circa 2.5 per cent had been lower by 0.5 per cent with the same progression period and long-term rate the net premium reserve would have been adequate and no charge would have been necessary.
Investment contracts without discretionary participation features (principally unit-linked and similar contracts in the UK and GIC liabilities of Jackson)note vi 14 14 12,059 1,922 37 14,032
iii Consolidated investment funds The M&G balance sheet shown above includes investment funds which are managed on behalf of third parties and that are consolidated under IFRS in recognition of the control arrangements for the funds. The balance sheet includes cash and cash equivalents of £1,253 million, £(19) million of other net assets and liabilities and the net asset value attributable to external unit holders of £1,234 million in respect of these funds, which are non-recourse to M&G and the Group.
E3: Regulatory capital positions Asset management operations in the UK, Hong Kong, Singapore, Vietnam and China are subject to regulatory requirements based on fixed operating expenses and other operating considerations. The movement in the year of the surplus regulatory capital position of these operations, combined with the movement in the IFRS basis shareholders’ funds for other asset management operations, is as follows: Asset management operations
A 10 per cent increase in these rates and those of other Asian operations would have reduced reported profit before tax attributable to shareholders and shareholders’ equity, excluding goodwill attributable to Asia and PPM America asset management operations, by £7 million (2006: £14 million) and £18 million (2006: £19 million) respectively.
Primary segment information The segment results for the years ended 31 December 2007 and 2006 are as follows: Revenue Long-term business 31,555 34,197 Asset management 1,397 1,080 Unallocated corporate 182 38 Intra group revenue eliminated on consolidation (268) (284)
Total charges include £11,295 million (2006: £12,130 million) of non-cash expenses other than depreciation and amortisation mainly relating to changes in technical reserves and pension actuarial and other gains and losses. The majority of this amount is borne by the long-term business segment.
F4: Finance costs: Interest on core structural borrowings of shareholder-financed operations Finance costs consist of £158 million (2006: £166 million) interest on core debt of central companies and £10 million (2006: £11 million) on US operations’ surplus notes.
It is to be noted that the calculations described are determined using data from the regulatory basis returns rather than the IFRS basis results. The differences between the regulatory and accounting bases are very significant and extremely complex rendering any explanation in general purpose financial statements to be of little if any use to users.
iii For 2006, operating profit based on longer-term investment returns is net of attributable restructuring costs and development expenses. iv The results from continuing operations shown above exclude those in respect of discontinued banking operations. On 1 May 2007, the Company sold
G1: Financial instruments – designation and fair values continued 2006 £m
Investment contracts without discretionary participation features 1,922 – 12,110 14,032 Other liabilities (including derivatives) 422 243 1,206 1,871
The table below shows the maturity profile for investment contracts on an undiscounted basis to the nearest billion. This maturity profile has been based on the cash flow projections of expected benefit payments as part of the determination of the value of in-force business when preparing EEV basis results.
US insurance operations – Sub-prime (AAA) 237 – Alt-A (77% AAA, 17% AA) 660
The financial assets, of which 86 per cent (2006: 90 per cent) are held by the PAC with-profits fund, allow the PAC with-profits fund to obtain exposure to foreign equity markets.
In addition, Jackson has had a collar fair value hedge in place since 1 March 2005. This common stock equity collar transaction was entered into to protect Jackson’s unrealised gain of US$5.9 million on an equity investment. The hedge expires in March 2008.
Securitisation At 31 December 2006 Egg had an outstanding balance of UK credit card receivables in its trust vehicle, Arch (Term) Limited, created in 2002 for the purpose of asset-backed securitisation, of £2.8 billion. The note holders in securitisations from this vehicle had a proportional interest in each account balance in the trust. As at 31 December 2006, the value of this interest was £2.3 billion. This securitisation did not qualify for derecognition under IAS 39 and the total portfolio was, therefore, included in loans and receivables. The funding giving rise to the note-holders’ interest was included within operational borrowings attributable to shareholder-financed operations. Following the disposal of Egg the Group no longer holds these balances.
(2006: 30 per cent) of these losses related to the disposal of fixed maturity securities of six (2006: six) individual issuers, which were disposed of to rebalance the portfolio in the US operations in response to the unstable mortgage lending market in the US.
For 2007, the difference between the carrying value and book cost of equity securities in gross unrealised loss position was £nil (2006: £(1) million). For 2007 the amounts of gross unrealised losses for fixed maturity securities classified as available-forsale under IFRS in an unrealised loss position was £439 million (2006: £256 million) (see note D3 for further details).
The value in use is particularly sensitive to a number of key assumptions as follows: i The assumed growth rate on forecast cash flows beyond the terminal year of the budget. A growth rate of 2.5 per cent has been used to extrapolate beyond the plan period.
H2: Intangible assets attributable to the PAC with-profits fund a Goodwill and other acquired intangible assets in respect of acquired investment subsidiaries 2007 £m
H2: Intangible assets attributable to the PAC with-profits fund continued The fair value of each entity prior to deconsolidation following the disposal of PPM Capital was calculated in accordance with the International Private Equity and Venture Capital Valuation Guidelines which set out industry best practice for determining the fair value of private equity investments. The guidelines require that an enterprise value is calculated for each investment, typically using an appropriate multiple applied to the company’s maintainable earnings. All amounts relating to financial instruments ranking higher in a liquidation than those controlled by the Group prior to the disposal of PPM Capital were then deducted from the enterprise value and a marketability discount applied to the result to give a fair value attributable to the instruments previously controlled by the Group. The marketability discount ranged from 10 per cent to 30 per cent, depending on the Group’s level of control over a realisation process.
The profit on sale before tax of £1.7 million was included in investment income in the consolidated income statement. The investments noted in the table above have the same accounting year end as the Group, except for Prudential ICICI Asset
There are several minor service agreements in place between the joint ventures and the Group. During 2007, the aggregate amount of the transactions was £5.4 million and the balance outstanding as at 31 December 2007 was £4.7 million.
H11: Shareholders’ equity: Share capital, share premium and reserves The authorised share capital of the Company is £220 million (2006: £220 million) (divided into 4,000,000,000 (2006: 4,000,000,000) ordinary shares of 5 pence each and 2,000,000,000 sterling preference shares of 1 pence each) and US$20 million (divided into 2,000,000,000 US dollar preference shares of 1 cent each) and Euros 20 million (divided into 2,000,000,000 Euro preference shares of 1 cent each). None of the preference shares have been issued. A summary of the ordinary shares in issue is set out below: Share capital and share premium Ordinary share capital: 2,470 million (2006: 2,444 million) Shares issued 123 122 Share premium 1,828 1,822 Reserves Retained earnings 4,440 3,640 Translation reserve (112) (125) Available-for-sale and hedging reserves (78) 29
At 31 December 2007, there were options outstanding under Save As You Earn schemes to subscribe for 9,017,442 (2006: 10,722,274) shares at prices ranging from 266 pence to 695 pence (2006: 266 pence to 715 pence) and exercisable by the year 2014 (2013). In addition, there are 2,037,220 (2006: 4,113,481) conditional options outstanding under the RSP and 3,485,617 (2006: 1,623,637) under the GPSP exercisable at nil cost within a 10-year period.
v Interest on the US$300 million 6.5 per cent borrowings was swapped into floating rate payments at three month US$Libor plus 0.0225 per cent. In January 2008, this was swapped back into fixed rate payments at 6.5 per cent.
In May 2006, the Group introduced a deadline for both Prudential and Scottish Amicable mortgage endowment complaints. Impacted customers have three years to lodge a mis-selling complaint in line with the time limit prescribed by the FSA and the ABI.
PAC believes that it would be beneficial if there were greater clarity as to the status of the inherited estate. As a result, PAC has announced that it has begun a process to determine whether it can achieve that clarity through a reattribution of the inherited estate. As part of this process a Policyholder Advocate has been nominated to represent policyholders’ interests. This nomination does not mean that a reattribution will occur.
UK-based executive directors are eligible to participate in the Prudential HM Revenue & Customs (HMRC) approved UK Savings Related Share Option Scheme (SAYE scheme) and the Asia-based executive director can participate in the equivalent International SAYE scheme. The schemes allow employees to save towards the exercise of options over Prudential plc shares, at an option price set at the beginning of the savings period at a discount of up to 20 per cent to the market price. Savings contracts may be up to £250 per month for three or five years, or additionally in the UK scheme seven years. On maturity at the end of the set term, participants may exercise their options within six months of the end of the savings period and purchase Prudential plc shares. If an option is not exercised within six months, participants are entitled to a refund of their cash contributions plus interest if applicable under the rules. Shares are issued to satisfy options that are exercised. No options may be granted under the schemes if the grant would cause the number of shares which have been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and other share option schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed 10 per cent of the Company’s ordinary share capital at the proposed date of grant.
The weighted average share price of Prudential plc for the year ended 31 December 2007 was £7.15 compared to £6.25 for the year ended 31 December 2006.
I2: Share-based payments continued 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: Other RSP and Other GPSP options GPSP options
The Company accounted for the purchase of minority interests using the economic entity method. Accordingly, £167 million was charged to retained earnings representing the difference between the consideration paid (including expenses) of £251 million and the share of net assets acquired of £84 million.
v PAC with-profits fund disposals and deconsolidation of venture fund investments
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. At 31 December 2007, the aggregate amount of contractual obligations to purchase and develop investment properties amounted to £64 million (2006: £146 million). The vast majority of these commitments have been made by the PAC with-profits fund.
We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
Other income and expenditure Investment return and other income 7 45 8 Interest payable on core structural borrowings (168) (177) Corporate expenditure: Group Head Office (GHO) (117) (83) Asia Regional Head Office (38) (36)
Operating profit from continuing operations based on longer-term investment returns 2,542 2,133
In the annuity MCEV calculations, the future cash flows were discounted using the gilt yield curve plus 84 basis points for fixed annuities and 24 basis points for inflation-linked annuities (2006: gilt yield curve plus 34 basis points for both products). The 84 basis points and 24 basis points for 2007 were based on our assessment of the liquidity premium available in the yield on the assets backing the annuity liabilities.
Risk discount rate: Expected long-term rate of inflation 4.0 2.25 5.0 6.0 0.0 2.75 4.0 2.25 5.5 6.5 0.0 2.75
Expected long-term spread between earned rate and rate credited to policyholders for single premium deferred annuity business 1.75 1.75
The principal exchange rates applied are: Closing rate at Average Closing rate at Average Opening rate Local currency: £ 31 Dec 2007 for 2007 31 Dec 2006 for 2006 at 1 Jan 2006
Annual licence fee paymentsnotes 1, 3 (13) (14) Expense overruns in respect of tariff agreement with SAIFnotes 2, 3 (14) (16) Adjustments to the policyholder and shareholder taxes for non-participating business of the PAC long-term fund, after grossing up for notional tax – (26)
3 Charges in respect of items 1 and 2 above are reflected in the EEV and IFRS results on an annual basis. 4 The charge for other items includes a positive persistency experience variance of £1 million (2006: negative variance of £9 million).
Long-term business: Asian operationsnote i 226 286 Jacksonnote ii (9) 63 UK insurance operationsnote iii (43) 378
Share of profits of venture investment companies and property partnerships of the PAC with-profits fund that are consolidated into Group results but are attributable to external investors 1 0
Tax charge (credit) on items not included in operating profit Tax charge on short-term fluctuations in investment returns 22 212 Tax charge on shareholders’ share of actuarial gains and losses on defined benefit pension schemes 32 62 Tax charge (credit) on effect of changes in economic assumptions and time value of cost of options and guaranteesnote iv 213 (4)
Asian US insurance business Other GroupEEV basis shareholders’ equity operations operations operations operations operations total at 31 December 2007 £m £m £m £m £m £m
Value of Free Total net in-force TotalReconciliation of net worth and value of in-force surplus Required worth business long-term business for 2007note i note vii capital note iv note viii business
Shareholders’ equity at 31 December 2007note ix 1,468 2,870 4,338 9,490 13,828
Opinion In our opinion, the EEV basis supplementary information for the year ended 31 December 2007 has been properly prepared in accordance with the EEV Principles using the methodology and assumptions set out on pages 306 to 313.
Once signed up to the evergreen scrip, shareholders will automatically receive shares for all future scrip dividends. This election can be cancelled at any time by the shareholder. Further details of the scrip dividend scheme are available on the Company website at prudential-plc/investors/shareholder_services/