Prudential plc is a holding company, subsidiaries of which are authorised and regulated by the Financial Services Authority (FSA).
Prudential is Europe’s leading life insurer in Asia in terms of market coverage and number of top five market positions and one of the region’s largest foreign owned fund managers.
Value (EEV) basis, was £1,712 million, an increase of 33 per cent.
As of 15 March, we estimate that the Group’s capital surplus at the end of 2005 on a regulatory basis, as measured by the Financial
Group’s consolidated accounts, results of overseas operations are converted at rates of exchange based on the average for the year, whilst shareholders’ funds are converted at year end rates of exchange.
sales in 2005, up from just six per cent in 2003. The remaining 13 per cent of APE sales were generated by the Direct to
Customer channel which focuses primarily on the sale of annuities to individual pension customers.
Bank in Hong Kong). Prudential also prioritises economic capital efficiency, profitability and customer centricity in its Asian product portfolio as seen, for example, with the introduction of unit-linked products across the region, an emphasis on regular premium policies (89 per cent of APE sales in 2005), life stage themed marketing and purposely limiting participation in the lowest margin and highly tactical sectors.
Currently 75 per cent of Prudential’s new business APE comes from its tied agency distribution and whilst this will remain the primary channel for some time, there is the potential to further expand alternate channels, particularly banks and direct marketing.
Asia £m unless otherwise stated 2005 (at CER) change 2005 (at RER) change *Based on longer-term investment returns. Underlying IFRS operating profit of £28 million, offset by £16 million of charges related to bond funds in Taiwan.
Despite this market environment, Egg managed to increase margins on credit cards via increased pricing and through focusing on the active management of its existing customer base to maximise borrowing balances. The degree of deterioration in credit quality was at a level substantially below the market.
The Offer valued the existing issued share capital of Egg at approximately £973 million, a 15 per cent premium to the market capitalisation of Egg of £845 million on 30 November 2005, being the last Business Day prior to announcement of the Offer.
Prudential delivered strong sales growth during 2005 with total new insurance sales up 13 per cent to £13.8 billion at constant exchange rates (CER). This resulted in record insurance sales of £2.1 billion on the annual premium equivalent (APE) basis, an increase of 15 per cent on 2004. At reported exchange rates
International Accounting Standards Board (IASB) allowed adoption of these three standards from 1 January 2005. The Group has chosen to adopt this approach. However, mindful of the impact on the Group’s insurance operations, particularly Jackson National Life
to £876 million. At RER, in-force profit was up 49 per cent.
The new business margin achieved on variable annuity business in 2005 was 50 per cent compared with 36 per cent in 2004. The improved margin was driven by economic assumption changes, and a full year of benefit associated with the re-pricing mentioned above. The economic assumption changes include an increase in the equity risk premium from three per cent to four per cent which
I Short-term fluctuations in investment returns (+£1,001m) J Effect of changes in economic assumptions (-£349m) K Tax, minority interests and others (-£619m) L FX movements (+£442m) M External dividends (-£380m) N Closing 2005 shareholders’ funds (+£10,301m)
We intend to maintain our current dividend policy, with the level of dividend growth being determined after considering the opportunities to invest in those areas of our business offering attractive growth prospects, our financial flexibility and the development of our statutory profits over the medium to long term.
The unallocated surplus of the with-profits funds represents assets in the Life Fund which have not yet been allocated either to policyholders or shareholders and which are not generally available to the Group other than as they emerge through the statutory transfer of the shareholders’ share of the surplus as it emerges from the fund over time.
However, the in-force book in Taiwan, predominantly made up of whole of life policies, has an embedded value that is sensitive to interest rate changes. A one per cent decrease in interest rates, along with consequential changes to assumed investment returns for all asset classes, market values of fixed interest assets and risk discount rates, would result in a £174 million decrease in Taiwan’s embedded value. A similar one per cent positive shift in interest rates would increase embedded value by £106 million. Sensitivity of the embedded value to interest rate changes varies considerably across the region. In aggregate, a one per cent decrease in interest rates, along with all consequential changes noted above, would result in only a six per cent decrease to Asia’s embedded value.
Statutory IFRS basis shareholders’ funds at 31 December 2005 were £5.2 billion. This compares with £4.7 billion on the pro forma
With-profits contracts are long-term contracts with relatively low guaranteed amounts; this, combined with the strong financial position of the fund, enables Prudential to invest primarily in equities and property. At the end of 2005, the equity backing ratio
As a result, no change in employers’ contributions from the current 12.5 per cent of salaries has been required until now.
The PSPS valuation as at 5 April 2005 is currently being finalised and is expected to show a small deficit on the actuarial basis. The
Surpluses and deficits on the Group’s defined benefit schemes are apportioned to the PAC life fund and shareholders’ funds based on estimates of employees’ service between them. Previously, for the purposes of memorandum FRS 17 disclosure, the deficit on the
In other respects we expect that the EEV basis of reporting to be similar to the achieved profits basis.
A Opening 2004 EEV basis shareholders’ funds B New business EEV profits C In-force EEV profits D Other E Short-term fluctuations in investment returns, change in cost of guarantees, effect of changes in economic assumptions and shareholders’ share of actuarial and other gains and losses of defined benefit pension schemes F Dividends G Closing 2005 EEV basis shareholders’ funds
KPMG highlighted that Prudential would benefit from conducting another formal review of the material CR risks for the business. In response to this, a CR risk workshop was organised in February 2006, with participation from all of the business units.
In Asia, for example, employee education is provided across our Asian markets through PRUuniversity, which is available to all staff and is offered in 12 languages. Programmes are centrally credited and many are endorsed by external learning institutions. The courses cover CR, management and leadership, technical and business skills as well as a comprehensive range of self-improvement material including language courses.
Michael Garrett has been an independent nonexecutive director of Prudential since September 2004. He worked for Nestlé from 1961, becoming
Independent non-executive director and member of the Audit Committee. Aged 48
The non-executive directors bring a wide range of business, financial and global experience to the Board. Biographical details of the current Board members appear on pages 36 and 37. The roles of Chairman and Group Chief Executive are separate and clearly defined, and have been approved by the Board so that no individual has unfettered powers of decision. The Chairman is responsible for the leadership and governance of the Board as a whole and the Group Chief Executive for the management of the
A corporate governance framework approved by the Board maps out the internal approvals processes and those matters which may be delegated. These principally relate to the operational management of the Group’s businesses and include pre-determined authority limits delegated by the Board to the Group Chief
The Committee’s principal oversight responsibilities cover: ■ Internal control and risk management; ■ internal audit; ■ external audit (including auditor independence); and
During the year, the Audit Committee assessed the qualification, expertise and resources, effectiveness and independence of the external auditor. In addition to the questioning of the external auditor and the Group Finance Director that is a regular feature of meetings, the review of the effectiveness of the external audit process was conducted through a questionnaire-based exercise administered by Group Internal Audit, supplemented by interviews with senior finance staff and Audit Committee members.
Committee, including their relevant experience, are set out on page 37.
Chairman and executive directors. During 2005, a total of 11 meetings were held. In framing its remuneration policy, the
The Group Operational Risk Committee is the senior management forum responsible for oversight of the non-financial operational risks, business environment risks, and strategic risks facing the
Annual incentive payouts for executive directors depend on performance and are paid in cash or shares as indicated below.
As part of the remuneration review, a guideline is being introduced that executive directors should hold a substantial number of shares according to the following schedule. The executive directors will be encouraged to build up their shareholding over a five-year period (with an interim target of one times salary after three years).
No benefits are pensionable. The executive directors’ pension arrangements and life assurance provisions are set out in the pensions and life assurance section on pages 56 and 57.
Date of initial Commencement Expiry date appointment date of current of current
Committee chairmanship fee is £40,000 per annum. An additional fee of £15,000 per annum is paid to the other members of the
During the period in which he was Chairman of Egg, Roberto
Jonathan Bloomer (until 5 May 2005; note 1) 279 150 26 455 1,120
6. For the 2004 conditional RSP award to Mark Wood, the ranking of the Company’s TSR in the month prior to his date of resignation of his directorship was 61st percentile and as a result no release will be made from this award.
Group’s businesses and likely future developments are reviewed in the Chairman’s statement on pages 2 and 3, the Group Chief
The Group is exposed to financial risk through its financial assets, financial liabilities, and policyholder liabilities. The financial risk factors affecting the Group include market risk, foreign exchange risk, credit risk and liquidity risk. Information on the financial risk management objectives and policies of the Group and the exposure of the Group to the financial risk factors is given in
Its equal opportunities policy is to be fair, responsible and caring in all aspects of the business. The Group seeks to ensure all employees and applicants to its businesses are given equal opportunity in all aspects of employment to ensure that the
Taiwan and India; and since 2003 in Korea. On average 13 per cent of employees in those countries covered by the ISSOS currently participate. In addition, since 2002 Prudential has operated the
Finance costs: interest on core structural borrowings of shareholder-financed operations F4
The consolidated financial statements on pages 62 to 195 were approved by the Board of Directors on 15 March 2006.
A3: Critical accounting policies, estimates and judgements continued Supplementary analysis of results and earnings attributable to shareholders
Previously under UK GAAP, the Group used operating profit based on longer-term investment returns before amortisation of goodwill as a supplemental measure of its results. For the purposes of measuring operating profit, investment returns on shareholder-financed business were based on the expected longer-term rates of return. For debt securities, the longer-term returns (including losses arising on the recognition of permanent diminutions in value) were averaged over five years for inclusion in operating profit. Under IFRS, the Group continues to use operating profit based on longer-term investment returns as a supplemental measure of its results, although the basis of calculation has been improved, as disclosed in note A4 (b) (iv) on page 81.
The UK GAAP basis applied in 2004 was the MSB, which closely reflected the Peak 1 regulatory basis of the UK FSA with the addition of deferred acquisition costs. For 2005, this basis has been replaced under a policy improvement to align with the UK accounting standard
JNL were carried at amortised cost as permitted by paragraph 24 of schedule 9A to the Companies Act 1985. The amortised cost basis of valuation was appropriate under the provisions of the ABI SORP for JNL’s redeemable debt securities as they were deemed held as part of a portfolio of such securities intended to be held to maturity.
Group’s policy is that collateral in excess of 100 per cent of the fair value of securities loaned is required from all securities borrowers and typically consists of cash, debt securities, equity securities or letters of credit.
The unallocated surplus represents the excess of assets over policyholder liabilities for the Group’s with-profits funds. In 2005, as allowed under IFRS 4, the Group has opted to continue to record unallocated surplus of with-profits funds wholly as a liability. The annual excess
The future policyholder benefit provisions for JNL’s conventional protection-type policies are determined using the net level premium method under US GAAP principles and assumptions as of the issue date as to mortality, interest, policy lapses and expenses plus provisions for adverse deviations. For non-conventional protection-type policies, the policyholder benefit provision included within policyholder liabilities in the consolidated balance sheet is the policyholder account balance.
Where the Group holds investments in Open-ended Investment Companies (OEICs) and unit trusts and the Group’s ownership share falls marginally below 50 per cent due to the fluctuating nature of the internal and external participation in these vehicles, the Group will continue to consolidate the OEIC or unit trust when the fall in percentage ownership below 50 per cent is deemed to be temporary.
Assets and liabilities in the consolidated financial statements are only reported on a net basis when there is a legally enforceable right to offset and there is an intention to settle on a net basis.
In general, a Group is required to determine its IFRS accounting policies and apply those retrospectively to determine its opening balance sheet under IFRS. However, in accordance with IFRS 1, the Group has applied the mandatory exceptions and certain optional exemptions from full retrospective application of IFRS.
Minority share of equity of consolidated venture investments companies and property partnerships of the PAC with-profits fund (note i) 32 32
Under IAS 39, except for loans and receivables, and unless designated under the very restrictive held-to-maturity classification on an asset by asset basis, most financial assets, including all derivatives, are measured at fair value. To this extent IAS 39 is consistent with the basis of valuation applied under UK GAAP for most financial assets of the Group’s UK and Asian insurance operations. On application of IAS 39, movements in the fair value of investments are recorded either in the income statement or directly in equity, depending upon the designation and the application of hedge accounting rules. Derivative instruments are carried at fair value with value movements being recorded in the income statement. Hedge accounting, whereby value movements on derivatives and hedged items are recorded together in the income statement, is permissible only if certain criteria are met regarding documentation and continued measurement of hedge effectiveness.
Investments of long-term business, banking and other operations: Investment properties 13,303 13,303
As indicated above, under UK GAAP, the Group used operating profit based on longer-term investment returns before amortisation of goodwill as a supplemental measure of its results. For the purposes of measuring operating profit, investment returns on shareholderfinanced business were based on the expected longer-term rates of return. For debt securities, the longer-term returns (including losses arising on the recognition of permanent diminutions in value) were averaged over five years for inclusion in operating profit.
The supplemental earnings information in the statutory basis financial statements is presented in note B1. The 2004 and 2005 analyses are not comparable because the comparative 2004 results do not incorporate the effects of adoption of IAS 32, IAS 39 and IFRS 4 and are thus inconsistent with the basis of preparation for the 2005 results. A comparison of supplemental earnings information based on the IFRS basis results for 2005 and pro forma IFRS results for 2004, which reflect the estimated effects of adoption of these three standards on the 2004 results of the Group’s insurance operations, is included in the supplementary IFRS results within the Group’s annual report.
as not containing significant insurance risk. These products are described as investment contracts or other financial instruments under
Liabilities Banking customer accounts (note G1) – – 5,830 5,830 – – – – 5,830 Policyholder liabilities and unallocated surplus of with-profits funds: Investment contract liabilities with discretionary participation features
When presenting regulatory returns to the UK supervisory authorities, the calculation of the statutory liabilities for solvency purposes on the FSA’s Peak 1 basis is required to incorporate a ‘resilience’ reserve that is sufficient to ensure that assets equal to the statutory reserves
The factors that affect the amount, timing and uncertainty of future cash flows from insurance contracts depend upon the businesses concerned as described in subsequent sections. In general terms, the Group is managed by reference to a combination of measures.
The business covered for determining EEV basis results includes investment contracts (i.e. contracts with insignificant insurance risk as defined under IFRS 4) as well as insurance contracts (i.e. those that contain significant insurance risk). Investment contracts form a relatively small part of the Group’s long-term business as demonstrated by the carrying values of policyholder liabilities shown in the
■ non-participating business – return on assets covering the Taiwan whole of life policies.
Investments of long-term business, banking and other operations: Financial investments: Equity securities and portfolio holdings in
Asset shares broadly reflect the value of premiums paid plus the investment return on the assets notionally attributed to the policy, less the other items to be charged such as expenses and the cost of the life insurance cover.
Equity securities and portfolio holdings in unit trusts 8,574 273 8,847 – 8,847
The products offered include variable life insurance, term life insurance and interest-sensitive life insurance.
Prudential is exposed primarily to the following risks in the US arising from fluctuations in interest rates: ■ The risk of loss related to meeting guaranteed rates of accumulation following a sharp and sustained fall in interest rates; ■ the risk of loss related to policyholder withdrawals following a sharp and sustained increase in interest rates; and
On a net basis, put-swaptions hedge against significant upward movements in interest rates;
D3: US operations continued ■ equity index futures contracts and equity index call and put options are used to hedge JNL’s obligations associated with its issuance of fixed index immediate and deferred annuities and certain VA guarantees. These annuities and guarantees contain embedded options which are fair valued for accounting and financial reporting purposes; ■ total return swaps in which JNL receives equity returns or returns based on reference pools of assets in exchange for short-term floating rate payments based on notional amounts, are held for both hedging and investment purposes; and
The GMDB liability is determined each period end by estimating the expected value of death benefits in excess of the projected account balance and recognising the excess rateably over the accumulation period based on total expected assessments. At 31 December 2005, the GMDB liability was valued using a series of deterministic investment performance scenarios, a mean investment return of 8.4 per cent
The principal determinants of variations in operating profit based on longer-term returns are: ■ Growth in the size of assets under management covering the liabilities for the contracts in force; and
Summary policyholder liabilities (net of reinsurance) and unallocated surplus at 31 December 2005
In Asia, Prudential sells with-profits and unit-linked policies and, although the with-profits business generally has a lower terminal bonus element than in the UK, the investment portfolio still contains a proportion of equities and, to a lesser extent, property. Non-participating business is largely backed by debt securities or deposits. With the principal exception of Taiwan’s whole of life policy book, as described in section (h) below, the exposure to market risk of the Group arising from its Asian operations is at modest levels. This arises from the fact that the Group’s Asian operations have a balanced portfolio of with-profits, unit-linked and other types of business.
As regards smoothing of maturity and death benefits, in normal circumstances the Company does not expect most pay-out values on policies of the same duration to change by more than 10 per cent up or down from one year to the next, although some larger changes may occur to balance pay-out values between different policies. Greater flexibility may be required in certain circumstances, for example following a significant rise or fall in market values (either sudden or over a period of years) and in such situations the PAC board may decide to vary the standard bonus smoothing limits to protect the overall interests of policyholders.
Investment return, net of tax and investment management expenses 1,329 Decrease in inadmissible assets 309 Decrease in cost of guarantees 547 Decrease in cost of bonus smoothing 195 Increase in the value of PAL and non-profit business 212 Other 23
Stochastic modelling of assets and liabilities is undertaken in UK, JNL and Asia to assess the economic capital requirements under different confidence intervals and time horizons. In addition, reserve adequacy testing under a range of scenarios and dynamic solvency testing is carried out, including under certain scenarios mandated by the UK, US and Asian regulators.
For the purpose of reducing interest rate risk, Egg uses a number of derivative instruments such as interest rate swaps and forward rate agreements (see note G3).
Allowances for impairment losses on loans and advances to customers (335)
Egg has certain credit-related commitments in the form of unused credit limits on credit cards and pre-approved but unused borrowing limits on mortgages and personal loans. At 31 December 2005, these unused limits, included in off-balance sheet items above, amounted to £9,061 million, £14 million and £29 million respectively. Egg is potentially exposed to a loss totalling these amounts, but it is unlikely that such a loss would arise as these credit facilities were granted only on the basis of the customers having achieved certain credit standards.
Egg holds significant concentrations of credit risk with other financial institutions. At 31 December 2005, this was estimated at £10.9 billion of which £5.7 billion related to derivative financial instruments and £2.3 billion to credit default swaps. Egg also has significant credit exposure in asset-backed security products which totalled approximately £496 million at 31 December 2005. With regard to loans and advances to customers, Egg has significant concentrations of credit risk in respect of its unsecured lending on credit cards, personal loans and mortgage lending secured on property in the UK.
These services are charged at appropriate arm’s length prices, typically priced as a percentage of funds under management.
Also the supplementary basis of profit analysis adopted by the Group, as shown in note B1, is not comparable between 2004 and 2005.
Variance from expected tax charge (note ii) 7 3 (3) 14 21
(ii) Variances from expected tax charge for results attributable to shareholders The principal variances arise from differences between the standard corporation tax rate and actual rates for ‘other’ operations. This is due to a number of factors including: (a) The settlement of outstanding issues with HM Revenue and Customs at amounts below those previously provided. (b) The tax credit arising from relief for excess expenses in respect of the shareholder-backed protection business. (c) Prior year adjustments arising from routine revisions of tax returns.
Fair value Total through profit Available- Loans and carrying and loss for-sale receivables value Fair value 2005 £m £m £m £m £m
These bids are not based on full knowledge and hence analysis of the investments but represent the best estimate of the worst case decline in market value of these securities. The broker bids for these securities at 31 December 2005 totalled £514 million, a difference of £186 million.
In relation to interest rate exposure, the following table sets out the earlier of contractual maturities and repricing dates for applicable classes of financial instruments, excluding investment contracts without discretionary participation features: After After After After Total 1 year 1 year to 5 years to 10 years to 15 years to Over No stated carrying or less 5 years 10 years 15 years 20 years 20 years maturity value 2005 £m £m £m £m £m £m £m £m
The Group has designated perpetual subordinated capital securities totalling US$1.55 billion as a net investment hedge to hedge the currency risks related to the net investment in JNL. The carrying value of the subordinated capital securities was £865 million as at
Egg group. The impairment has been reflected in discontinued operations (note F6) in the consolidated income statement.
As noted above, the entire goodwill relating to the Japanese life operation of £120 million has been deemed to be impaired following impairment testing carried out in 2005. This testing was based on a recoverable amount for the Japanese company that was determined by calculating its value in use based on net present value cash flow projections. Such projections reflected existing business over the expected duration of the contracts and expected new business. A risk discount rate of 5 per cent was applied to the projected cash flows.
DAC, including shadow DAC, resulting from implementation of IFRS investment measurement bases.
Balance at 31 December 2004 and 1 January 2005 following adoption of IFRS 4* 919 Amount included in income statement 242 Foreign exchange translation differences 42
H9: Assets and liabilities held for sale Assets and liabilities held for sale comprise investment property and consolidated venture subsidiaries of the PAC with-profits fund.
As at 31 December 2005, there were two venture subsidiaries classified as held for sale, Upperpoint Distribution Limited and Taverner
At 31 December 2005, there were options subsisting under Save As You Earn schemes to subscribe for 12,503,956 (2004: 13,254,966) shares at prices ranging from 266 pence to 715 pence (2004: 266 pence to 723 pence) and exercisable by the year 2012 (2011). In addition, there are 4,668,534 (2004: 5,153,308) conditional options outstanding under the RSP exercisable at nil cost in the balance of a 10-year period.
(2004: £61 million) in respect of further compensation. The movement in this provision has no impact on the Group’s profit before tax.
Other pension costs comprises £54 million (2004: £45 million) relating to defined benefit schemes and £23 million (2004: £18 million)
The discussions with the Scheme Trustee have also led to an altered expectation as to future discretionary increases. Previously, it had been the custom to award discretionary increases by reference to inflation levels. It is now intended that discretionary increase will in most circumstances not exceed 2.5 per cent.
In assessing the underlying economic position of the Group in respect of the defined benefit pension schemes, two factors need to be taken into account. These are: (i) The deficits on the PSPS and Scottish Amicable schemes are partially attributable to the PAC with-profits fund; and
Movements on the pension scheme deficits (determined on the ‘economic basis’), to the extent attributable to shareholder operations are as follows: Actuarial and other
There is a deferment period, currently three years, at the end of which the award vests to an extent that depends on the performance of the Group’s shares including notional reinvested dividends and on the Group’s underlying financial performance. After vesting, the award may then 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. Currently, the trust holds at least the maximum number of shares conditionally awarded and not yet forfeited or exercised. The RSP replaced the Executive Share Option Scheme in 1995 and all options under this prior plan had been exercised at 31 December 2005.
Egg established a discretionary employee benefit trust, the Egg Employee Trust, by a trust deed dated 26 April 2000 between Egg and
Restricted share plan 3 Year Sharesave Scheme 5 Year Sharesave Scheme
Further assurance services associated with: Implementation of Sarbanes-Oxley requirements 2.2 1.8
Egg Banking plc is a subsidiary of Egg plc. At 31 December 2005, the ordinary shares of Egg plc were listed and there was only one class of shares which were 78 per cent owned by the Company, 1 per cent owned by other companies within the Prudential Group and 21 per cent owned by shareholders external to the Prudential Group. In December 2005, the Company announced its intention to acquire the whole of the issued and to be issued shares of Egg not already owned by the Prudential Group as set out in note I8.
of total Group assets. At 31 December 2005, the PAC long-term fund’s excess of assets over its required minimum solvency margin (as per line 42 of Form 2 of the PAC FSA regulatory returns) was estimated to be £11,783 million (2004: £4,665 million) and the statutory capital and surplus of JNL was US$3,434 million (£2,000 million) (2004: US$3,141 million (£1,636 million)). The Group capital position statement for life assurance businesses is set out in note D5.
I6: Subsidiary undertakings continued The table below identifies the net assets acquired and reconciles this amount to the consideration paid for the aggregated ventures acquisitions in 2005: Fair value on acquisition £m
Goodwill of £312 million and cash and cash equivalents of £32 million were disposed of. Note that, in addition, two venture subsidiaries were classified as held for sale at 31 December 2005 (see note H9).
Future minimum lease payments for non-cancellable operating leases are due for the following periods: Not later than 1 year 61 58
Effect of adoption of FRS 17 on pension liabilities (83) (83)
Company Limited owned by the Company was increased from 97 per cent to 99 per cent.
Egg Banking plc is a subsidiary of Egg plc. At 31 December 2005, the ordinary shares of Egg plc, were listed and there was only one class of shares which were 78 per cent owned by the Company, 1 per cent owned by other companies within the Prudential Group and 21 per cent owned by shareholders external to the Prudential Group. In December 2005, the Company announced its intention to acquire the whole of the issued and to be issued shares of Egg not already owned by the Prudential Group as set out in note 14.
Core structural borrowings: US$1,000m 6.5% Perpetual Subordinated Capital Securities (note iii) 554 512 554 512
(vi) Under the terms of the Group’s arrangements with its main UK banker, the bank has a right of set off between credit balances (other than those of long-term funds) and all overdrawn balances of those Group undertakings with similar arrangements.
Adjustment from post-tax longer-term investment returns to post-tax actual investment returns
Based on profit from continuing operations after related tax and minority interests of £745m (2004: £669m) 31.5p 31.5p
Cumulative effect of changes in accounting principles on adoption of IAS 32, IAS 39 and IFRS 4, net of applicable taxes, at 1 January 2005: Statutory IFRS basis 226 –
The PAC long-term fund is rated Aa1 (stable outlook) by Moody’s,
Movement in shareholders’ capital and reserves (excluding minority interests) – EEV basis Year ended 31 December 2005
(2004: £648 million) was held in SAIF at 31 December 2005 to honour the guarantees.
The risk discount rates reflect the market risk inherent in each product group and hence the volatility of product cash flows. They are determined by considering how the profits from each product are impacted by changes in expected returns on various asset classes, and by converting this into a relative rate of return it is possible to derive a product specific beta.
In all instances the modelled actions are in accordance with approved local practice and therefore reflect the options actually available to management. For the PAC with-profits sub-fund, the actions assumed are consistent with those set out in the Principles and Practices of
with-profits sub-fund estate is determined after deduction of the portion of the IAS 19 basis deficits attributable to the fund. Adjustments under EEV in respect of accounting for deficits on deferred benefit schemes are reflected as part of other operations, as shown in note 13.
The stochastic cost of guarantees are only of significance for the Hong Kong, Singapore, Malaysia and Taiwan operations.
There are no inter-company arrangements such as reinsurance or loans associated with covered business for which adjustment has been required in preparing the EEV basis results.
Investment returns, including investment gains, in respect of long-term insurance business are recognised in operating results at the expected long-term rate of return. For the purposes of calculating longer-term investment return to be included in operating results of UK operations, where equity holdings are a significant proportion of investment portfolios, values of assets at the beginning of the reporting period are adjusted to remove the effects of short-term market volatility.
Movements in the value of in-force business caused by changes to economic assumptions and the time value of cost of options and guarantees, (which is primarily due to economic experience over the year and changes in economic assumptions) are recorded in non-operating results.
(i) Jackson National Life net of tax profit Before capital charge 150 106 Capital charge (13) (12)
Share of profits of venture investment companies and property partnerships of the PAC
Operating EPS from continuing operations: Operating profit before tax 1,712 1,274
Holding company net borrowings (1,724) (1,299) Core structural borrowings – Jackson National Life (183) (162)
Transition adjustment, net of tax, on adoption of IAS 32, IAS 39 and IFRS 4
Proceeds from issues of share capital by parent company 55 55
Additional retained profit on an EEV basis 3,351 (62) 815 4,104 (205) 3,899
*Statutory basis shareholders’ funds at 1 January 2005 reflect the adoption of IAS 32, IAS 39 and IFRS 4.
Existing business – transfer to net worth 850 (146) 704 (704) –
Changes of non-operating assumptions and experience variances (161) 143 (18) 493 475
(iii) The movements arising from new business contribution are as follows: £m £m
The tables below show the sensitivity of the embedded value as at 31 December 2005 (2004) and the new business contribution after the effect of required capital for 2005 and 2004 to: ■ 10 per cent proportionate decrease in maintenance expenses (a 10 per cent sensitivity on a base expense 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 5 per cent would represent a lapse rate of 4.5 per cent per annum); ■ 5 per cent proportionate decrease in base mortality and morbidity rates (i.e. increased longevity). UK
Change representing effect on: Embedded value of long-term operations for 2004
In preparing the EEV supplementary information, the directors have: ■ Prepared the supplementary information in accordance with the
May 2004 by the 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 208 to 214. The
The Company will be offering a scrip dividend alternative in respect of the final dividend of 11.02 pence per ordinary share for the year ended 31 December 2005. The number of new shares each shareholder who elects to take scrip will be entitled to receive is calculated by dividing the total cash dividend due on each holding of shares as at the record date (24 March 2006) by the reference price for each new ordinary share.
Registrars. Further information about ShareGift may be obtained on 020 7337 0501 or from www.ShareGift.org There are no implications for capital gains tax purposes (no gain or loss) on gifts of shares to charity and it is also possible to obtain income tax relief.