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PRUDENTIAL | Prudential Plc 2011 Full Year Results Ifrs | RNS

RNS Number : 2080Z
Prudential PLC
13 March 2012
 



STATUTORY BASIS RESULTS

 

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS

 

CONSOLIDATED INCOME STATEMENT

 


   

2011 


2010 

Year ended 31 December  

 £m 


 £m 

Gross premiums earned  

25,706 


24,568 

Outward reinsurance premiums  

(429)


(357)

Earned premiums, net of reinsurance  note C

25,277 


24,211 

Investment return  

9,360 


21,769 

Other income  

1,869 


1,666 

Total revenue, net of reinsurance   

36,506 


47,646 

Benefits and claims  

(31,060)


(40,608)

Outward reinsurers' share of benefit and claims  

746 


335 

Movement in unallocated surplus of with-profits funds  

1,025 


(245)

Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance  

(29,289)


(40,518)

Acquisition costs and other expenditure note H

(5,005)


(4,799)

Finance costs: interest on core structural borrowings of shareholder-financed operations  

(286)


(257)

Total charges, net of reinsurance   

(34,580)


(45,574)

Profit before tax (being tax attributable to shareholders' and policyholders' returns)*

1,926 


2,072 

Tax credit (charge) attributable to policyholders' returns  

17 


(611)

Profit before tax attributable to shareholders note C

1,943 


1,461 

Tax charge note J

(432)


(636)

Less: tax attributable to policyholders' returns  

(17)


611 

Tax charge attributable to shareholders' returns** note J

(449)


(25)

Profit for the year  

1,494 


1,436 

Attributable to:  



  


Equity holders of the Company  

1,490 


1,431 


Non-controlling interests  


Profit for the year  

1,494 


1,436 

 


   



  

Earnings per share (in pence)  

2011 


2010 

Based on profit attributable to the equity holders of the Company: note K



 


Basic  

58.8 

p

56.7 p


Diluted  

58.7 

p

56.6 p


   



  


   



  

 


  




  

Dividends per share (in pence)


2011 


2010 

 Dividends relating to reporting year:note L




  


Interim dividend


7.95 

p

6.61 p


Final dividend


17.24

p

17.24 p

Total


25.19

p

23.85 p

Dividends declared and paid in reporting year:note L




 


Current year interim dividend


7.95 

p

6.61 p


Final / second interim dividend for prior year


17.24 

p

13.56 p

Total


25.19 

p

20.17 p

*       This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. The 2010 profit before tax is stated after £377 million of pre-tax costs of the terminated AIA transaction. See note I.

**     The 2010 tax charge attributable to shareholders' return included an exceptional tax credit of £158 million which primarily related to the impact of a settlement agreed with the UK tax authorities.


INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 


  

2011 

2010 


  

£m

 £m 


  



Profit for the year

1,494 

1,436 


  



Other comprehensive income:



Exchange movements on foreign operations and net investment hedges:




Exchange movements arising during the year

(32)

217 


Related tax

(68)

34 


  

(100)

251 


  



Available-for-sale securities:



Unrealised valuation movements on securities of US insurance operations classified as available-for-sale:  




Unrealised holding gains arising during the year

912 

1,170 


Deduct net (gains) / add back net losses included in the income statement on disposal and impairment

(101)

51 

Total note T

811 

1,221 

Related change in amortisation of deferred income and acquisition costs  

(331)

(496)

Related tax

(168)

(247)


  

312 

478 


  



Other comprehensive income for the year, net of related tax

212 

729 


  



Total comprehensive income for the year

1,706 

2,165 


  



Attributable to:




Equity holders of the Company

1,702 

2,160 


Non-controlling interests

Total comprehensive income for the year

1,706 

2,165 

 

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 





2011 






Share  capital 

Share  premium 

Retained  earnings 

Translation  reserve 

Available 

-for-sale  securities  reserve 

Shareholders'

equity 

Non- controlling  interests 

Total 

 equity 

Year ended 31 December 2011

£m 

£m 

£m 

£m 

£m 

£m 

£m 

£m 

Reserves









Profit for the year

1,490 

1,490 

1,494 

Other comprehensive income









Exchange movements on foreign operations and net investment hedges, net of related tax

(100)

(100)

(100)

Unrealised valuation movements, net of related change in amortisation of deferred income and acquisition costs and related tax

312 

312 

312 

Total other comprehensive income

(100)

312 

212 

212 

Total comprehensive income for the year

1,490 

(100)

312 

1,702 

1,706 










Dividends

(642)

(642)

(642)

Reserve movements in respect of share-based payments

44 

44 

44 

Change in non-controlling interests arising principally from purchase and sale of property partnerships of the PAC with-profits fund and other consolidated investment funds

(5)

(5)










Share capital and share premium









New share capital subscribed

17 

17 

17 










Treasury shares









Movement in own shares in respect of share-based payment plans

(30)

(30)

(30)

Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS

(5)

(5)

(5)

Net increase / (decrease) in equity

17 

857 

(100)

312 

1,086 

(1)

1,085 










At beginning of year

127 

1,856 

4,982 

454 

612 

8,031 

44 

8,075 

At end of year

127 

1,873 

5,839 

354 

924 

9,117 

43 

9,160 

 

 

 

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 





2010 






Share  capital 

Share  premium 

Retained  earnings 

Translation  reserve 

Available 

-for-sale  securities  reserve 

Shareholders'

equity 

Non- controlling  interests 

Total 

 equity 


£m 

£m 

£m 

£m 

£m 

£m 

£m 

£m 

Reserves









Profit for the year

1,431 

1,431 

1,436 

Other comprehensive income









Exchange movements on foreign operations and net investment hedges, net of related tax

251 

251 

251 

Unrealised valuation movements, net of related change in amortisation of deferred income and acquisition costs and related tax

478 

478 

478 

Total other comprehensive income

251 

478 

729 

729 

Total comprehensive income for the year

1,431 

251 

478 

2,160 

2,165 










Dividends

(511)

(511)

(511)

Reserve movements in respect of share-based payments

37 

37 

37 

Change in non-controlling interests arising principally from purchase and sale of property partnerships of the PAC with-profits fund and other consolidated investment funds










Share capital and share premium









New share capital subscribed (including shares issued in lieu of cash dividends)

75 

75 

75 

Reserve movements in respect of shares issued in lieu of cash dividends

(62)

62 










Treasury shares









Movement in own shares in respect of share-based payment plans

(4)

(4)

(4)

Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS

Net increase in equity

13 

1,018 

251 

478 

1,760 

12 

1,772 










At beginning of year

127 

1,843 

3,964 

203 

134 

6,271 

32 

6,303 

At end of year

127 

1,856 

4,982 

454 

612 

8,031 

44 

8,075 

 

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

31 December 2011

 


2011 

2010 




  

£m 

£m 




  



Assets



Intangible assets attributable to shareholders:




Goodwillnote O

1,465 

1,466 


Deferred acquisition costs and other intangible assetsnote P

5,069 

4,667 


Total

6,534 

6,133 

  



Intangible assets attributable to with-profits funds:




In respect of acquired subsidiaries for venture fund and other investment purposes  

178 

166 


Deferred acquisition costs and other intangible assets

89 

110 


Total

267 

276 

Total  

6,801 

6,409 

  



Other non-investment and non-cash assets:




Property, plant and equipment

748 

554 


Reinsurers' share of insurance contract liabilities

1,647 

1,344 


Deferred tax assetsnote J

2,276 

2,188 


Current tax recoverable

546 

555 


Accrued investment income

2,710 

2,668 


Other debtors

987 

903 


Total  

8,914 

8,212 

  



Investments of long-term business and other operations:




Investment properties

10,757 

11,247 


Investments accounted for using the equity method

70 

71 


Financial investments*:





Loansnote R

9,714 

9,261 



Equity securities and portfolio holdings in unit trusts

87,349 

86,635 



Debt securitiesnote S

124,498 

116,352 



Other investments

7,509 

5,779 



Deposits  

10,708 

9,952 

Total  

250,605 

239,297 




  



Properties held for sale

257 

Cash and cash equivalents

7,257 

6,631 

Total assetsnote M

273,580 

260,806 

 

*Included within financial investments are £7,843 million (2010: £8,708 million) of lent securities.

 

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

31 December

 


  

2011 

2010 


£m 

£m 

Equity and liabilities




  



Equity



Shareholders' equity   

9,117 

8,031 

Non-controlling interests

43 

44 

Total equity

9,160 

8,075 


  



Liabilities



Policyholder liabilities and unallocated surplus of with-profits funds:




Insurance contract liabilities

180,363 

171,291 


Investment contract liabilities with discretionary participation features

29,745 

25,732 


Investment contract liabilities without discretionary participation features

16,967 

17,704 


Unallocated surplus of with-profits funds

9,215 

10,253 


Total  

236,290 

224,980 


  



Core structural borrowings of shareholder-financed operations:  




Subordinated debt

2,652 

2,718 


Other

959 

958 


Total note U

3,611 

3,676 


  



Other borrowings:




Operational borrowings attributable to shareholder-financed operationsnote V

3,340 

3,004 


Borrowings attributable to with-profits operationsnote V

972 

1,522 


  



Other non-insurance liabilities:




Obligations under funding, securities lending and sale and repurchase agreements

3,114 

4,199 


Net asset value attributable to unit holders of consolidated unit trusts and similar funds

3,840 

3,372 


Deferred tax liabilitiesnote J

4,211 

4,224 


Current tax liabilities

930 

831 


Accruals and deferred income

736 

707 


Other creditors

2,544 

2,321 


Provisions  

529 

729 


Derivative liabilities

3,054 

2,037 


Other liabilities

1,249 

1,129 


Total

20,207 

19,549 

Total liabilities

264,420 

252,731 

Total equity and liabilitiesnote M

273,580 

260,806 

 

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 



   

2011 

2010 

Year ended 31 December 2011  

£m 

£m 

Cash flows from operating activities   



Profit before tax (being tax attributable to shareholders' and policyholders' returns)note (i)

1,926 

2,072 

Non-cash movements in operating assets and liabilities reflected in profit before tax:  




Investments   

(8,854)

(24,594)


Other non-investment and non-cash assets   

(1,038)

(1,161)


Policyholder liabilities (including unallocated surplus)  

10,874 

24,287 


Other liabilities (including operational borrowings)  

(845)

1,332 

Interest income and expense and dividend income included in result before tax  

(7,449)

(7,514)

Other non-cash items note (ii)

18 

139 

Operating cash items:  




Interest receipts   

6,365 

6,277 


Dividend receipts  

1,302 

1,412 


Tax paid  

(561)

(302)

Net cash flows from operating activities  

1,738 

1,948 

Cash flows from investing activities  



Purchases of property, plant and equipment  

(124)

(93)

Proceeds from disposal of property, plant and equipment  

10 

Acquisition of subsidiaries, net of cash balance note (iii)

(53)

(145)

Net cash flows from investing activities  

(167)

(234)

Cash flows from financing activities  



Structural borrowings of the Group:  




Shareholder-financed operations notes (iv) and W:




Issue of subordinated debt, net of costs

340 


Redemption of senior debt  

(333)


Bank loan  

250 


 Interest paid   

(286)

(251)


With-profits operations  notes (v) and Y:





Interest paid  

(9)

(9)

Equity capital note (vi):




Issues of ordinary share capital  

17 

13 


Dividends paid   

(642)

(449)

Net cash flows from financing activities  

(913)

(446)

Net increase in cash and cash equivalents  

658 

1,268 

Cash and cash equivalents at beginning of year  

6,631 

5,307 

Effect of exchange rate changes on cash and cash equivalents  

(32)

56 

Cash and cash equivalents at end of year   

7,257 

6,631 

 

Notes

(i)      This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders.

(ii)     Other non-cash items consist of the adjustment of non-cash items to profit before tax together with, other net items, net purchases of treasury shares and other net movements in equity.

(iii)    The acquisition of subsidiaries in 2011 related to the PAC with-profits fund's purchase of Earth and Wind and Alticom venture investments with an outflow of £53 million. In 2010 the acquisition of United Overseas Bank Life Assurance Limited (UOB) resulted in an outflow of cash from investing activities of £133 million with the remaining outflow of £12 million relating to the PAC with-profits fund purchase of Meterserve.

(iv)    Structural borrowings of shareholder-financed operations comprise the core debt of the parent company, a PruCap bank loan and Jackson surplus notes. Core debt excludes borrowings to support short-term fixed income securities programmes, non-recourse borrowings of investment subsidiaries of shareholder-financed operations and other borrowings of shareholder-financed operations. Cash flows in respect of these borrowings are included within cash flows from operating activities.

(v)     Interest paid structural borrowings of with-profits operations relate solely to the £100 million 8.5 per cent undated subordinated guaranteed bonds which contribute to the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced sub-fund of the PAC with-profits fund. Cash flows in respect of other borrowings of with-profits funds, which principally relate to consolidated investment funds, are included within cash flows from operating activities.

(vi)    Cash movements in respect of equity capital in 2010 exclude scrip dividends. The scrip dividend alternative has been replaced by the Dividend Re-investment Plan (DRIP) from the 2010 final dividend.

 

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS

 

NOTES ON THE IFRS BASIS RESULTS

 

A      Basis of preparation and audit status

 

The statutory basis results included in this announcement have been extracted from the audited financial statements of the Group for the year ended 31 December 2011. These statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU) as required by EU law (IAS Regulation EC1606/2032). EU-endorsed IFRSs may differ from IFRSs issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by the EU. At 31 December 2011, there were no unendorsed standards effective for the two years ended 31 December 2011 affecting the consolidated financial information of the Group and there were no differences between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to the Group. The auditors have reported on the 2011 statutory accounts. The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 31 December 2011 or 2010 but is derived from these accounts.

 

Statutory accounts for 2010 have been delivered to the registrar of companies, and those for 2011 will be delivered following the Company's Annual General Meeting. The auditors have reported on these accounts. Their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

 

B      Significant accounting policies

 

The accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group's consolidated financial statements for the year ended 31 December 2010, except for the adoption of the new accounting pronouncements in 2011 as described below. 

Accounting pronouncements adopted in 2011

The Group has adopted the following accounting pronouncements in 2011 but their adoption has had no material impact on the results and financial position of the Group:

•     Improvements to IFRSs (2010), which includes minor changes to seven IFRSs;

•     Amendments to IAS 12, 'Income taxes';

•     Amendments to IAS 24, 'Related party disclosures';

•     Amendments to IFRIC 14, 'Prepayment of a minimum funding requirement'; and

•     IFRIC 19, 'Extinguishing financial liabilities with equity instruments'.

 

This is not intended to be a complete list of accounting pronouncements effective in 2011 as only those that could have an impact upon the Group's financial statements have been discussed.

 

Adoption of altered US GAAP requirements for Group IFRS reporting in 2012

In October 2010, the Emerging Issues Task Force of the US Financial Accounting Standards Board issued Update No 2010-26 on 'Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts'. The update was issued to address perceived diversity by companies preparing financial statements in accordance with US GAAP as regards the types of acquisition costs being deferred. Under US GAAP, costs that can be deferred and amortised are those that 'vary with and are primarily related to the acquisition of insurance contracts'. The Update requires insurers to capitalise only those incremental costs directly related to acquiring a contract for financial statements for reporting periods starting after 15 December 2011. All other indirect acquisition expenses are required to be charged to the income statement as incurred expenses. Accordingly, the main impact of the Update is to disallow insurers from deferring costs that are not directly related to successful sales. 

 

Under the Group's IFRS reporting, Prudential has the option to either continue with its current basis of measurement or improve its accounting policy under IFRS 4 to acknowledge the issuance of the Update. Prudential has chosen to continue with its current basis of measurement for reporting of its 2011 results and improve its policy in 2012 to apply the US GAAP update on the retrospective basis to the results of its US insurance operation Jackson National Life.  The reason and timing for the change is to achieve consistency with the basis expected to be applied by peer competitor companies in the US market in their US GAAP financial statements. To ensure consistency it is also intended to make the change on the retrospective basis in 2012 for the Asian operations that historically have effectively applied US GAAP for measuring insurance assets and liabilities. 

 

The effect of the change is as follows:

 










Year ended 31 December 2011


Year ended 31 December 2010


As reported

under

 current

 policy

Effect of

change

Under new

policy

from

1 Jan

 2012


As reported

under

 current

 policy

Effect of

change

Under new

policy

from

1 Jan

 2012


£m

£m

£m


£m

£m

£m









Profit after tax and non controlling interests

1,490  

(75)

1,415  


1,431  

(125)

1,306  









Shareholders' equity

9,117  

(553)

8,564  


8,031  

(510)

7,521  

 

C    Segment disclosure - income statement

 


  

2011 

2010 


  

£m 

£m 

Asian operations  



Insurance operations note E(i)

709 

536 

Development expenses

(5)

(4)

Total Asian insurance operations after development expenses

704 

532 

Eastspring Investments

80 

72 

Total Asian operations

784 

604 


  



US operations



Jackson (US insurance operations) note E(ii)

694 

833 

Broker-dealer and asset management  

24 

22 

Total US operations

718 

855 


  



UK operations



UK insurance operations:note E (iii)




Long-term business  

683 

673 


General insurance commission note (i)

40 

46 

Total UK insurance operations

723 

719 

M&G

357 

284 

Total UK operations

1,080 

1,003 

Total segment profit

2,582 

2,462 


  



Other income and expenditure  



Investment return and other income

22 

30 

Interest payable on core structural borrowings  

(286)

(257)

Corporate expenditure note H

(219)

(223)

Total  

(483)

(450)

RPI to CPI inflation measure change on defined benefit pension schemesnote (ii)

42 

Solvency II implementation costs

(55)

(45)

Restructuring costs note (iii)

(16)

(26)

Operating profit based on longer-term investment returns  

2,070 

1,941 

Short-term fluctuations in investment returns on shareholder-backed business note F

(148)

(123)

Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes note (iv)

21 

(10)

Costs of terminated AIA transaction note I

(377)

Gain on dilution of Group holdings note G

30 

Profit before tax attributable to shareholders  

1,943 

1,461 

Notes

(i)      UK operations transferred its general insurance business to Churchill in 2002, with general insurance commission representing the net commission received net of expenses for Prudential-branded general insurance products as part of this arrangement.

(ii)     During 2011 the Group altered its inflation measure basis for future statutory increases to pension payments for certain tranches of its UK defined benefit pension schemes. This reflects the UK Government's decision to replace the basis of indexation from RPI with CPI. This resulted in a credit to the operating profit before tax of £42 million.

(iii)    Restructuring costs are incurred in the UK as part of EEV covered business and represent one-off expenses incurred in securing expense savings. 2011: £16 million (2010: £26 million).

(iv)    The shareholders' share of actuarial and other gains and losses on defined benefit pension schemes reflects the aggregate of actual less expected returns on scheme assets, experience gains and losses, the effect of changes in assumptions and altered provisions for deficit funding, where relevant. 

 

 

Determining operating segments and performance measure of operating segments

 

The Group's operating segments determined in accordance with IFRS 8, are as follows:

 

Insurance operations

-    Asia

-    US (Jackson)

-    UK

 

Asset management operations 

-    M&G (including Prudential Capital)

-    Eastspring investments (the new brand name for Asian asset management)

-    US broker-dealer and asset management (including Curian)

 

The Group's operating segments are also its reportable segments with the exception of Prudential Capital which has been incorporated into the M&G operating segment for the purposes of segment reporting.

 

The performance measure of operating segments utilised by the Company is IFRS operating profit attributable to shareholders based on longer-term investment returns. This measure excludes the recurrent items of short-term fluctuations in investment returns and the shareholders' share of actuarial and other gains and losses on defined benefit pension schemes. In addition for 2010 this measure excluded costs associated with the terminated AIA transaction and gain arising upon the dilution of the Group's holding in PruHealth. Operating earnings per share is based on operating profit based on longer-term investment returns, after tax and non-controlling interests.

 

Segment results that are reported to the Group Executive Committee include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items are mainly in relation to the Group Head Office and the Asian Regional Head Office.

 

Except in the case of the assets backing the UK annuity business, unit-linked and US variable annuity separate account liabilities, operating profit based on longer-term investment returns for shareholder-financed business is determined on the basis of expected longer-term investment returns. In the case of assets backing the UK annuity business, unit-linked and US variable annuity separate account liabilities, the basis of determining operating profit based on longer-term investment returns is as follows:

 

•        Assets backing UK annuity business liabilities. For UK annuity business, policyholder liabilities are determined by reference to current interest rates. The value movements of the assets covering liabilities are closely correlated with the related change in liabilities. Accordingly, asset value movements are recorded within the 'operating results based on longer-term investment returns'. Policyholder liabilities include a margin for credit risk. Variations between actual and best estimate expected impairments are recorded as a component of short-term fluctuations in investment returns.

 

•        Assets backing unit-linked and US variable annuity business separate account liabilities. For such business, the policyholder unit liabilities are directly reflective of the asset value movements.

Accordingly, the operating results based on longer-term investment returns reflect the current period value movements in unit liabilities and the backing assets.

 

In the case of other shareholder-financed business, the measurement of operating profit based on longer-term investment returns reflects the particular features of long-term insurance business where assets and liabilities are held for the long-term and for which the accounting basis for insurance liabilities under current IFRS is not generally conducive to demonstrating trends in underlying performance of life businesses exclusive of the effects of short-term fluctuations in market conditions. In determining the profit on this basis, the following key elements are applied to the results of the Group's shareholder-financed operations.

 

(a)    Debt and equity-type securities

Longer-term investment returns for both debt and equity-type securities comprise longer-term actual income receivable for the period (interest/dividend income) and longer-term capital returns.

 

In principle, for debt securities, the longer-term capital returns comprise two elements. The first element is a risk margin reserve (RMR) based charge for the expected level of defaults for the period, which is determined by reference to the credit quality of the portfolio. The difference between impairment losses in the reporting period and the RMR charge to the operating result is reflected in short-term fluctuations in investment returns. The second element is for the amortisation of interest-related realised gains and losses to operating results based on longer-term investment returns to the date when sold bonds would have otherwise matured.

 

The shareholder-backed operation for which the distinction between impairment losses and interest-related realised gains and losses is in practice relevant to a significant extent is Jackson. Jackson has used the ratings by Nationally Recognised Statistical Ratings Organisations (NRSRO) or ratings resulting from the regulatory ratings detail issued by the National Association of Insurance Commissioners (NAIC) developed by external third parties such as PIMCO or Black Rock Solutions to determine the average annual RMR. Further details of the RMR charge, as well as the amortisation of interest related realised gains and losses, for Jackson are shown in note F(b).

 

For debt securities backing non-linked shareholder-financed business of the UK insurance operations (other than the annuity business) and of the Asian insurance operations, the realised gains and losses are principally interest related. Accordingly, all realised gains and losses to date for these operations are being amortised over the period to the date those securities would otherwise have matured, with no explicit RMR charge.

 

At 31 December 2011 the level of unamortised interest-related realised gains and losses related to previously sold bonds for the Group was a net gain of £462 million (31 December 2010: £373 million).

 

For equity-type securities, the longer-term rates of return are estimates of the long-term trend investment return for income and capital having regard to past performance, current trends and future expectations. Equity-type securities held for shareholder-financed operations other than the UK annuity business, unit-linked and US variable annuity are of significance for the US and Asian insurance operations. Different rates apply to different categories of equity-type securities.

 

As at 31 December 2011, the equity-type securities for US insurance non-separate account operations amounted to £902 million (31 December 2010: £852 million). For these operations, the longer term rates of return for income and capital applied in 2011 ranged from 5.9 per cent to 7.5 per cent for equity-type securities such as common and preferred stock and portfolio holdings in mutual funds and from 7.9 per cent to 9.5 per cent for certain other equity-type securities such as investments in limited partnerships and private equity funds (2010: 6.5 per cent to 7.9 per cent and 8.5 per cent to 9.9 per cent, respectively).

 

For Asian insurance operations, investments in equity securities held for non-linked shareholder-financed operations amounted to £590 million as at 31 December 2011 (31 December 2010: £506 million). Of this balance, £88 million (31 December 2010: £101 million) related to the Group's 7.37 per cent (31 December 2010: 8.66 per cent) stake in China Life Insurance Company of Taiwan. This £88 million (31 December 2010: £101 million) investment is in the nature of a trade investment for which the determination of longer-term investment returns is on the basis as described in note (e) below. For the investments representing the other equity securities which had year end balances of £502 million (31 December 2010: £405 million), the rates of return applied in the years 2011 and 2010 ranged from 1.7 per cent to 13.8 per cent with the rates applied varying by territory.

 

The longer-term rates of return discussed above for equity-type securities are determined after consideration by the Group's in-house economists of long-term expected real government bond returns, equity risk premium and long-term inflation. These rates are broadly stable from period to period but may be different between countries, reflecting, for example, differing expectations of inflation in each territory. The assumptions are for returns expected to apply in equilibrium conditions. The assumed rates of return do not reflect any cyclical variability in economic performance and are not set by reference to prevailing asset valuations.

 

(b)    US variable and fixed index annuity business

 

The following value movements for Jackson's variable and fixed index annuity business are excluded from operating profit based on longer-term investment returns:

 

•  Fair value movements for equity-based derivatives;

•  Fair value movements for embedded derivatives for Guaranteed Minimum Withdrawal Benefit (GMWB) 'not for life' and fixed index annuity business, and Guaranteed Minimum Income Benefit (GMIB) reinsurance (see note);

•  Movements in accounts carrying value of GMDB and GMWB 'for life' liabilities, for which, under the 'grandfathered' US GAAP applied under IFRS, for Jackson insurance assets and liabilities the measurement basis gives rise to a muted impact of current period market movements;

•  Fee assessments and claim payments, in respect of guarantee liabilities; and

•  Related changes to amortisation of deferred acquisition costs for each of the above items.

 

Note:      US operations - Embedded derivatives for variable annuity guarantee features

The Guaranteed Minimum Income Benefit (GMIB) liability, which is fully reinsured, subject to a deductible and annual claim limits, is accounted for in accordance with FASB ASC Subtopic 944-80 Financial Services - Insurance - Separate Accounts (formerly SOP 03-1) under IFRS using 'grandfathered' US GAAP. As the corresponding reinsurance asset is net settled, it is considered to be a derivative under IAS 39 and the asset is therefore recognised at fair value. As the GMIB benefit is economically reinsured the mark to market element of the reinsurance asset is included as a component of short-term fluctuations in investment returns.

 

(c)    Other derivative value movements

Generally, derivative value movements are excluded from operating results based on longer-term investment returns (unless those derivative value movements broadly offset changes in the accounting value of other assets and liabilities included in operating profit). The principal example of non-equity based derivatives (for example interest rate swaps and swaptions) whose value movements are excluded from operating profit arises in Jackson. Non-equity based derivatives are primarily held by Jackson as part of a broadly-based hedging programme for features of Jackson's bond portfolio (for which value movements are booked in the statement of comprehensive income rather than the income statement), product liabilities (for which US GAAP accounting as grandfathered under IFRS 4 does not fully reflect the economic features being hedged), and the interest rate exposure attaching to equity based embedded derivatives..

 

(d)    Other liabilities to policyholders and embedded derivatives for product guarantees

Under IFRS, the degree to which the carrying values of liabilities to policyholders are sensitive to current market conditions varies between territories depending upon the nature of the 'grandfathered' measurement basis. In general, in those instances where the liabilities are particularly sensitive to routine changes in market conditions, the accounting basis is such that the impact of market movements on the assets and liabilities is broadly equivalent in the income statement, and operating profit based on longer-term investments returns is not distorted. In these circumstances, there is no need for the movement in the liability to be bifurcated between the elements that relate to longer-term market conditions and short-term effects.

 

However, for some types of business movements in liabilities do require bifurcation to ensure that at the net level (i.e. after allocated investment return and change for policyholder benefits) the operating result reflects longer-term market returns.

 

Examples where such bifurcation is necessary are:

 

(i)      Asia

•        Vietnamese participating business

For the participating business in Vietnam the liabilities include policyholders' interest in investment appreciation and other surplus. Bonuses paid in a reporting period and accrued policyholders' interest in investment appreciation and other surpluses primarily reflect the level of realised investment gains above contract specific hurdle levels. For this business, operating profit based on longer-term investment returns includes the aggregate of longer-term returns on the relevant investments, a credit or charge equal to movements on the liability for the policyholders' interest in realised investment gains (net of any recovery of prior deficits on the participating pool), less amortisation over five years of current and prior movements on such credits or charges.

 

The overall purpose of these adjustments is to ensure that investment returns included in operating results equal longer-term returns but that in any one reporting period movements on liabilities to policyholders caused by investment returns are substantially matched in the presentation of the supplementary analysis of profit before tax attributable to policyholders.

 

•        Non-participating business

Bifurcation for the effect of determining the movement in the carrying value of liabilities to be included in operating results based on longer-term investment returns, and the residual element for the effect of using year end rates is included in short-term fluctuations and in the income statement.

 

•        Guaranteed Minimum Death Benefit (GMDB) product features

For unhedged GMDB liabilities accounted for under IFRS using 'grandfathered' US GAAP, such as in the Japanese business, the change in carrying value is determined under FASB ASC subtopic 944-80, Financial Services - Insurance - Separate Accounts (formerly SOP 03-1), which partially reflects changes in market conditions. Under the company's segmental basis of reporting the operating profit reflects the change in liability based on longer-term market conditions with the difference between the charge to the operating result and the movement reflected in the total result included in short-term fluctuations in investment returns.

 

(ii)     UK shareholder-backed annuity business

With one exception, the operating result based on longer-term investment returns reflects the impact of all value movements on policyholder liabilities for annuity business in PRIL and the PAC non-profit sub-fund.

 

The exception is for the impact on credit risk provisioning of actual downgrades during the period. As this feature arises due to short-term market conditions, the effect of downgrades, if any, in a particular period, on the overall provisions for credit risk is included in the category of short-term fluctuations in investment returns.

 

The effects of other changes to credit risk provisioning are included in the operating result, as is the net effect of changes to the valuation rate of interest due to portfolio rebalancing to align more closely with the Group's internal benchmark.

 

(e)  Fund management and other non-insurance businesses

For these businesses it is inappropriate to include returns in the operating result on the basis described above.  Instead, it is appropriate to generally include realised gains and losses (including impairments) in the operating result with unrealised gains and losses being included in short-term fluctuations. For this purpose impairments are calculated as the credit loss determined by comparing the projected cash flows discounted at the original effective interest rate to the carrying value. In some instances it may also be appropriate to amortise realised gains and losses on derivatives and other financial instruments to operating results over a time period that reflects the underlying economic substance of the arrangements.

 

Additional segmental analysis of revenue

The additional segmental analyses of revenue from external customers excluding investment return and net of outward reinsurance premiums are as follows:

 


2011 


Asia 

US 

UK 

Intragroup 

Total 


£m 

£m 

£m 

£m 

£m 

Revenue from external customers:






Insurance operations

7,307 

12,516 

5,740 

25,563 

Asset management

290 

653 

923 

(323)

1,543 

Unallocated corporate

40 

40 

Intragroup revenue eliminated on consolidation

(93)

(68)

(162)

323 

Total revenue from external customers

7,504 

13,101 

6,541 

27,146 














2010 


Asia 

US 

UK 

Intragroup 

Total 


£m 

£m 

£m 

£m 

£m 

Revenue from external customers:






Insurance operations

6,373 

11,710 

6,476 

(10)

24,549 

Asset management

248 

597 

768 

(314)

1,299 

Unallocated corporate

29 

29 

Intragroup revenue eliminated on consolidation

(77)

(72)

(175)

324 

Total revenue from external customers

6,544 

12,235 

7,098 

25,877 

 

Revenue from external customers is made up of the following:

 




2011 

2010 




£m 

£m 

Earned premiums, net of reinsurance



25,277 

24,211 

Fee income from investment contract business and asset management (presented as 'Other income')



1,869 

1,666 

Total revenue from external customers



27,146 

25,877 

                                                                                                                                                                                     

In their capacity as fund managers to fellow Prudential Group subsidiaries, M&G, Eastspring Investments and US asset management businesses generate fees for investment management and related services. These services are charged at appropriate arm's length prices, typically priced as a percentage of funds under management. Intragroup fees included within asset management revenue were earned by the following asset management segment:

 



2011

£m

2010

£m





Intragroup revenue generated by:




M&G

162 

165 


Eastspring Investments

93 

77 


US broker-dealer and asset management (including Curian)

68 

72 

Total intragroup fees included within asset management segment

323 

314 

 

In 2010 a further £10 million of intragroup revenue was recorded between UK insurance operations for services, typically charged as a percentage of funds under management.

 

Revenue from external customers of Asian, US and UK insurance operations shown above are net of outwards reinsurance premiums of £226 million, £72 million, and £131 million respectively (2010: £146 million, £83 million and £128 million respectively).

 

 

D    Profit before tax - Asset management operations

 

The profit included in the income statement in respect of asset management operations for the year is as follows:

 


  

M&G 

US 

Eastspring

Investments

note (iv)

Total  

2011 

Total  

2010 


  

£m 

£m 

£m 

£m 

£m 

Revenue, (excluding revenue of consolidated investment funds and NPH broker-dealer fees)

1,042 

249 

292 

1,583 

1,423 

Revenue of consolidated investment fundsnote (i)

11 

NPH broker-dealer feesnote (i)

405 

405 

369 

Gross revenue

1,051 

654 

292 

1,997 

1,803 

Charges, (excluding charges of consolidated investment funds and NPH broker-dealer fees)

(710)

(225)

(212)

(1,147)

(1,003)

Charges of consolidated investment fundsnote (i)

(9)

(9)

(11)

NPH broker-dealer feesnote (i)

(405)

(405)

(369)

Gross charges

(719)

(630)

(212)

(1,561)

(1,383)

Profit before tax

332 

24 

80 

436 

420 

Comprising:



  



Operating profit based on longer-term investment returnsnote (ii)

357 

24 

80 

461 

378 

Short-term fluctuations in investment returns note (iii)

(29)

 - 

 - 

(29)

47 

Shareholder's share of actuarial gains and losses on defined benefit pension schemes

 - 

 - 

(5)

Profit before tax

332 

24 

80 

436 

420 

 

Notes

(i)         Under IFRS 8, disclosure details are required of segment revenue. The segment revenue of the Group's asset management operations is required to include two items that are for amounts which, reflecting their commercial nature, are also wholly reflected as charges within the income statement. After allowing for these charges, there is no effect on profit from these two items which are:

(a)  Investment funds which are managed on behalf of third parties and are consolidated under IFRS in recognition of the control arrangements for the funds. The gains and losses of these funds are non-recourse to M&G and the Group, and

(b)  NPH broker-dealer fees which represent commissions received, which are then paid on to the writing brokers on sales of investment products.

 

The presentation in the table above shows the amounts attributable to these two items so that the underlying revenue and charges can be seen.

 

(ii)     M&G operating profit based on longer-term investment returns: 

 




2011 

2010 




£m 

£m 


Asset management fee income

702 

612 


Other income


Staff costs

(285)

(263)


Other costs

(141)

(123)


Underlying profit before performance-related fees

280 

229 


Performance-related fees

21 

17 


Operating profit from asset management operations

301 

246 


Operating profit from Prudential Capital

56 

38 


Total M&G operating profit based on longer-term investment returns

357 

284 

 

The difference between the fees and other income shown above in respect of asset management operations, and the revenue figure for M&G shown (excluding consolidated investment funds) in the main table primarily relates to total revenue of Prudential Capital (including short-term fluctuations) of £96 million (2010: £136 million) and commissions which have been netted off in arriving at the fee income of £702 million (2010: £612 million) in the table above. The difference in the presentation of commission is aligned with how management reviews the business.

(iii)   Short-term fluctuations in investment returns for M&G are primarily in respect of unrealised value movements on Prudential Capital's bond portfolio.

(iv)    Included within Eastspring Investments revenue and charges are £44 million of commissions (2010: £60 million).

 

E     Key assumptions, estimates and bases used to measure insurance assets and liabilities

 

(i)      Asian insurance operations

In 2011, IFRS operating profit based on longer-term investment returns for Asian insurance operations included a net £38 million credit arising from a small number of items that are not anticipated to reoccur in future periods. In 2010, one-off changes made to reserving assumptions resulted in a release from liabilities of £19 million.

 

(ii)     US insurance operations

Accelerated amortisation of deferred acquisition costs

Jackson National Life has consistently applied its basis of amortising deferred acquisition costs. The basis involves a mean reversion technique for dampening the effects of short-term market movements on expected gross profits, against which deferred acquisition costs are amortised. To the extent that the mean reversion methodology does not fully dampen the effects of market returns there is a charge or credit for accelerated or decelerated amortisation. For 2011 there was a charge for accelerated amortisation of £232 million (2010: £11 million). Further details are explained in note P.

 

(iii)   UK insurance operations

Annuity business: allowance for credit risk

For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit risk. The allowance is reflected in the deduction from the valuation rate of interest for discounting projected future annuity payments to policyholders that would have otherwise applied. Since mid-2007 there has been a significant increase in the actual and perceived credit risk associated with corporate bonds as reflected in the significant widening that has occurred in corporate bond spreads. Although bond spreads over swap rates have narrowed from their peak in March 2009, they are still high compared with the levels seen in the years immediately preceding the start of the dislocated markets in 2007. The allowance that should therefore be made for credit risk remains a particular area of judgement.

 

The additional yield received on corporate bonds relative to swaps can be broken into the following constituent parts:

(a)  the expected level of future defaults;

(b) the credit risk premium that is required to compensate for the potential volatility in default levels;

(c)  the liquidity premium that is required to compensate for the lower liquidity of corporate bonds relative to swaps; and

(d) the mark-to-market risk premium that is required to compensate for the potential volatility in corporate bond spreads (and hence market values) at the time of sale.

The sum of (c) and (d) is often referred to as 'liquidity premium'.

 

The allowance for credit risk comprises (i) an amount for long-term best estimate defaults and (ii) additional provisions for credit risk premium, downgrade resilience, and short-term defaults.

 

The weighted components of the bond spread over swap rates for shareholder-backed fixed and linked annuity business for PRIL at 31 December 2011 and 31 December 2010,  based on the asset mix at the relevant balance sheet date are shown below.

 

31 December 2011

Pillar 1 

 regulatory   basis 

 (bps)

Adjustment 

from  regulatory to  IFRS basis 

 (bps)

IFRS 

 (bps)

Bond spread over swap rates note (i)

201 


201 

Credit risk allowance





Long-term expected defaults note (ii)

15 

15 


Additional provisionsnote (iii)

51 

(24)

27 

Total credit risk allowance

66 

(24)

42 

Liquidity premium

135 

24 

159 


  




31 December 2010

Pillar 1 

 regulatory   basis 

 (bps)

Adjustment 

from  regulatory to  IFRS basis 

 (bps)

IFRS 

 (bps)

Bond spread over swap rates note (i)

160 

160 

Credit risk allowance





Long-term expected defaults note (ii)

16 

16 


Additional provisionsnote (iii)

52 

(26)

26 

Total credit risk allowance

68 

(26)

42 

Liquidity premium

92 

26 

118 

Notes

(i)      Bond spread over swap rates reflect market observed data.

(ii)     Long-term expected defaults are derived by applying Moody's data from 1970 to 2009 and the definition of the credit rating used is the second highest credit rating published by Moody's, Standard and Poor's and Fitch. 

(iii)    Additional provisions comprise credit risk premium, which is derived from Moody's data from 1970 to 2009, an allowance for a 1 notch downgrade of the portfolio subject to credit risk, and an additional allowance for short-term defaults.

 

The very prudent Pillar 1 regulatory basis reflects the overriding objective of maintaining sufficient provisions and capital to ensure payments to policyholders can be made. The approach for IFRS aims to establish liabilities that are closer to 'best estimate'.

 

Movement in the credit risk allowance for PRIL for the year ended 31 December 2011

The movement during 2011 of the average basis points allowance for PRIL on Pillar 1 regulatory and IFRS bases are as follows:

 





Pillar 1

 Regulatory

 basis

IFRS


(bps)

Total 

(bps)

Total 




Total allowance for credit risk at 31 December 2010

68 

42 

Credit rating changes

Asset trading

(1)

(1)

Asset mix (effect of market value movements)

(2)

(1)

New business and other

(1)

Total allowance for credit risk at 31 December 2011

66 

42 

 

In prior periods, surplus from favourable default experience has been retained within short-term allowances for credit risk on both the Pillar 1 and IFRS bases. For full year 2011 the retention of such surpluses continues to be applied to IFRS but not for Pillar 1.

 

Overall the movement has led to the credit allowance for Pillar 1 purposes to be 33 per cent (2010: 43 per cent) of the bond spread over swap rates. For IFRS purposes it represents 20 per cent (2010: 26 per cent) of the bond spread over swap rates.

 

The reserves for credit risk allowance at 31 December 2011 for the UK shareholder annuity fund were as follows:

 


Pillar 1

 Regulatory

 basis

IFRS


Total 

£bn 

Total 

£bn 




PRIL

1.8 

1.2 

PAC non-profit sub-fund

0.2 

0.1 

Total

2.0 

1.3 

 

Mortality and other assumption changes

2011

In 2011, for the shareholder-backed business, the aggregate effect of assumption changes other than the allowance for credit risk described above was a net charge to the shareholder results of £9 million, comprising a number of individually small assumption changes.

 

2010

Prior to 31 December 2010, Prudential's annuity business liabilities were determined using the Continuous Mortality Investigation ('CMI') medium cohort projections with a floor. In November 2009 a new mortality projection model was released by the CMI. This new model was applied in determining the 31 December 2010 valuation results with calibration to reflect an appropriate view of future mortality improvement. In recognition of the trend in assumed mortality improvements the Company had in previous years included margins in its annuity liabilities. In determining the results for the year ended 31 December 2010 the appropriate level of these margins was reassessed. 

 

The net effect of applying the new model, releases of margins, and changes to other related mortality assumption for shareholder-backed business was a credit of £8 million in the 2010 results. With a £38 million benefit from altered expense assumptions the overall credit for shareholder-backed business in 2010 was £46 million.

 

F     Short-term fluctuations in investment returns on shareholder-backed business

 


  

2011 

2010 


  

£m 

£m 

Insurance operations:




Asia note (ii)

(92)

114 


US note (iii)

(95)

(378)


UK note (iv)

159 

116 

Other operations  




- Other note (v)

(120)

25 

Totalnote (i)

(148)

(123)

 

Notes

(i)      General overview of defaults

The Group did not experience any defaults on its shareholder-backed debt securities portfolio in 2011 and 2010.

(ii)     Asian insurance operations

The fluctuations for Asian insurance operations of negative £92 million (2010: positive £114 million) in part reflects equity market falls in Taiwan and a partial reversal of unrealised gains recognised in prior years on the Group's  7.37 per cent (2010:8.66 per cent) stake in China Life Insurance Company of Taiwan.

(iii)    US insurance operations

         The short-term fluctuations in investment returns for US insurance operations comprise the following items:

 


  

2011 

2010 


  

£m 

£m 

Short-term fluctuations relating to debt securities:



Charges in the year  




Defaults


Losses on sales of impaired and deteriorating bonds  

(32)

(99)


Bond write downs  

(62)

(124)


Recoveries / reversals

42 

10 


Total charges in the yearnote (a)

(52)

(213)

Less: Risk margin charge included in operating profit based on longer-term investment returnsnote (b)

70 

73 


  

18 

(140)

Interest related realised gains:




Arising in the year

158 

224 


Less: Amortisation of gains and losses arising in current and prior years to operating profit based on longer-term investment returns

(84)

(82)


  

74 

142 

Related change to amortisation of deferred acquisition costs

(4)

(3)

Total short-term fluctuations related to debt securities

88 

(1)

Derivatives (other than equity related): market value movement (net of related change to amortisation of deferred acquisition costs)note (c)

472 

(15)

Net equity hedge results (principally guarantees and derivatives, net of related change to amortisation of deferred acquisition costs) note (d)

(632)

(365)

Equity type investments: actual less longer-term return (net of related change to amortisation of deferred acquisition costs)C

Other items (net of related change to amortisation of deferred acquisition costs)

(23)

Total

(95)

(378)

 

The short-term fluctuations shown in the table above are stated net of the related change to amortisation of deferred acquisition costs of £359 million (2010: £358 million) See note P.

Notes

(a)     The charges on the debt securities of Jackson comprise the following:

 




Defaults 

Bond 

 write 

 downs 

Losses on sale 

 of impaired 

 and deteriorating 

 bonds 

Recoveries/

 reversals 

Total 

2011 

Total 

2010 




£m 

£m  

£m 

£m 

£m 

£m 

Residential mortgage-backed securities:








Prime (including agency)

(19)

(6)

(25)

(56)


Alt-A

(2)

(5)

(1)

(54)


Sub-prime

(1)

(13)

Total residential mortgage-backed securities

(21)

(12)

(26)

(123)

Corporate debt securities


(18)

(14)

(37)

Other

(41)

(2)

31 

(12)

(53)

Total


(62)

(32)

42 

(52)

(213)

 

(b)     The risk margin reserve (RMR) charge for longer-term credit related losses included in operating profit based on longer-term investment returns of Jackson for 2011 is based on an average annual RMR of 25 basis points (2010: 26 basis points) on average book values of US$44.4 billion (2010: $44.2 billion) as shown below:

 


2011 


2010 

Moody's rating category

 (or equivalent under

 NAIC ratings of MBS)

 Average book value

RMR


Annual expected loss


 Average book value

RMR


Annual expected loss


US$m

%

US$m

£m


US$m

%

US$m

£m











A3 or higher

21,255 

0.08 

(17)

(11)


20,622 

0.06 

(12)

(8)

Baa1, 2 or 3

20,688 

0.26 

(54)

(34)


20,785 

0.26 

(53)

(34)

Ba1, 2 or 3

1,788 

1.04 

(19)

(11)


1,935 

1.04 

(20)

(13)

B1, 2 or 3

474 

3.01 

(14)

(9)


500 

2.99 

(15)

(10)

Below B3

211 

3.88 

(8)

(5)


321 

3.88 

(13)

(8)

Total

44,416 

0.25 

(112)

(70)


44,163 

0.26 

(113)

(73)











Related change to amortisation of deferred acquisition costs (see below)

27 

17 




28 

18 

Risk margin reserve charge to operating profit for longer-term credit related losses

(85)

(53)




(85)

(55)

 

Consistent with the basis of measurement of insurance assets and liabilities for Jackson's IFRS results, the charges and credits to operating profits based on longer-term investment returns are partially offset by related changes to amortisation of deferred acquisition costs.

 

(c)     The gain of £472 million (2010: loss of £15 million) is principally for the value movement of non-equity freestanding derivatives held to manage interest rate exposures, duration matching and for the GMIB reinsurance asset that is considered to be a derivative under IAS 39.

        

         Under IAS 39, unless hedge accounting is applied value movements on derivatives are recognised in the income statement. For the derivatives programme attaching to the fixed annuity and other general account business, the Group has continued its approach of not seeking to apply hedge accounting under IAS 39. This decision reflects the inherent constraints of IAS 39 for hedge accounting investments and life assurance assets and liabilities under 'grandfathered' US GAAP under IFRS 4.

 

(d)     The amount of £632 million in 2011 (2010: £365 million) relates to the net equity hedge accounting effect of the equity-based derivatives and associated guarantee liabilities of Jackson's variable and fixed index annuity business. The details of the value movements excluded from operating profit based on longer-term investment returns are as described in note C. The principal movements are for (i) value for free standing and GMWB 'not for life' embedded derivatives, (ii) accounting values for GMDB and GMWB 'for life' guarantees and (iii) related changes to DAC amortisation. These movements include the effect of lower interest rates which were particularly significant in 2011. The value movements on derivatives held to manage this and other interest rate exposure are included in the £472 million (2010: loss of £15 million) described above in note (c).

        

In addition to the items discussed above, for US insurance operations, included within the statement of comprehensive income is an increase in net unrealised gains on debt securities classified as available-for-sale of £811 million (2010: increase in net unrealised gains of £1,221 million). Temporary market value movements do not reflect defaults or impairments. Additional details on the movement in the value of the Jackson portfolio are included in note T.

(iv)    UK insurance operations

The short-term fluctuations gain for UK insurance operations of £159 million (2010: £116 million) principally reflect net investment gains arising in the period on fixed income assets backing the capital of the shareholder-backed annuity business.

 

(v)     Other operations

Short-term fluctuations of other operations were negative £120 million (2010: positive £25 million) representing unrealised value movements on investments, including centrally held swaps to manage foreign exchange and certain macro-economic exposures of the Group.

 

G    Changes to Group's holdings

 

2010

On 1 August 2010, Discovery Holdings of South Africa, the Group's joint venture partner in its investment in PruHealth, completed the acquisition of the entire share capital of Standard Life Healthcare, a wholly-owned subsidiary of the Standard Life Group, for £138 million. Discovery funded the purchase of the Standard Life Healthcare transaction, and contributed Standard Life Healthcare to PruHealth as a capital investment on completion. As a result of the transaction, Discovery increased their shareholding in PruHealth from the previous level of 50 per cent to 75 per cent, and Prudential's shareholding was reduced from 50 per cent of the previous joint venture structure to 25 per cent of the new structure with the much enlarged business.

 

As a result of this dilution in holding and the consequential loss of control, PruHealth was reclassified from a joint venture to an associate and the entity was no longer proportionally consolidated from the date of the transaction. In accordance with IAS 31 'Interests in joint ventures' a gain of £30 million arose in 2010 upon the dilution, representing the difference between the fair value of the enlarged 25 per cent investment still held and the book value of the original 50 per cent investment holding.

 

H      Acquisition costs and other expenditure

 


2011 

2010 


£m 

£m 

Acquisition costs incurred

2,264 

2,024 

Acquisition costs deferred less amortisation of acquisition costs

(635)

(918)

Administration costs and other expenditure

3,524 

3,496 

Movements in amounts attributable to external unit holders

(148)

197 

Total acquisition costs and other expenditure

5,005 

4,799 

 

The acquisition costs as shown on the table above relate to policy acquisition costs. Acquisition costs from business combinations are included within other expenditure.

 

Included within total acquisition costs and other expenditure is depreciation of £95 million (2010: £70 million).

 

The total amounts for acquisition costs and other expenditure shown above includes Corporate Expenditure shown in note C (Segment disclosure - income statement).The charge for Corporate Expenditure comprises:

 



2011 

2010 



£m 

£m 

Group head office




Regular and project costs

(156)

(150)


Provision for property leases and other non-recurrent items

(12)

(25)



(168)

(175)

Asia regional office




Gross costs

(86)

(90)


Recharges to Asia operations

35 

42 



(51)

(48)

Total

(219)

(223)

 

I        Costs of terminated AIA transaction in 2010

 

The following costs were incurred in the first six months of 2010 in relation to the proposed, and subsequently terminated transaction, to purchase AIA Group Limited and related rights issue. 

 

 


2010 


£m 



AIG termination break fee

153 

Underwriting fees

58 

Costs associated with foreign exchange hedging

100 

Adviser fees and other

66 

Total costs before tax

377 

Associated tax relief

(93)

Total costs after tax

284 

 

Of the £377 million total costs before tax, the £100 million associated with foreign exchange hedging has been recorded within 'Investment return' and the other £277 million has been recorded as 'Other expenditure' within 'Acquisition costs and other expenditure' in the consolidated income statement.

 

J     Tax

 

i        Tax charge

The total tax charge comprises:

 


2011 


2010 



Current

 tax

Deferred

 tax

Total


Total


Tax charge

£m 

£m 

£m 


£m 


UK tax

(475)

455 

(20)


(313)


Overseas tax

(267)

(145)

(412)


(323)


Total tax charge*

(742)

310 

(432)


(636)


*The 2010 tax charge attributable to shareholders' returns included an exceptional tax credit of £158 million which primarily related to the impact of a settlement agreed with the UK tax authorities.

 

The current tax charge of £742 million includes £16 million (2010: charge of £13 million) in respect of the tax charge for Hong Kong. The Hong Kong current tax charge is calculated as 16.5 per cent for all periods on either (i) five per cent of the net insurance premium or (ii) the estimated assessable profits, depending on the nature of the business written.

 

The total tax charge comprises tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders as shown below.

 


2011 


2010 



Current

 tax

Deferred

tax

Total


Total


Tax charge

£m 

£m 

£m 


£m 


Tax credit (charge) to policyholders' returns

(410)

427 

17 


(611)


Tax charge attributable to shareholders

(332)

(117)

(449)


(25)


Total tax charge

(742)

310 

(432)


(636)


 

The principal reason for the reduction in the tax charge attributable to policyholders' returns relates to a decrease in deferred tax on unrealised gains and losses on investments.

 

The tax charge attributable to shareholders of £449 million for 2011 (2010: charge of £25 million) comprises:

 


2011 


2010 



Current

 tax

Deferred

tax

Total


Total


Tax charge attributable to shareholders

£m 

£m 

£m 


£m 


UK tax

(135)

17 

(118)


187 


Overseas tax

(197)

(134)

(331)


(212)


Total tax charge

(332)

(117)

(449)


(25)


 

An explanation of the movement in tax charge attributable to shareholders is shown in note (iii) below.

 

ii       Deferred tax

The statement of financial position contains the following deferred tax assets and liabilities:

 


2011 

2010 


Deferred tax  assets 

Deferred tax  liabilities 

Deferred tax  assets 

Deferred tax  liabilities 


£m 

£m 

£m 

£m 

Unrealised gains and losses on investments

297 

(1,566)

449 

(1,678)

Balances relating to investment and insurance contracts

13 

(949)

11 

(1,057)

Short-term timing differences

1,513 

(1,687)

1,152 

(1,477)

Capital allowances

15 

(9)

16 

(12)

Unused tax losses

438 

-

560 

-

Total

2,276 

(4,211)

2,188 

(4,224)

 

Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted.

 

The taxation regimes applicable across the Group often apply separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax assets. Accordingly, for the 2011 results and financial position at 31 December 2011 the possible tax benefit of approximately £158 million (31 December 2010: £143 million), which may arise from capital losses valued at approximately £0.7 billion (31 December 2010: £0.5 billion), is sufficiently uncertain that it has not been recognised. In addition, a potential deferred tax asset of £147 million (31 December 2010: £298 million), which may arise from trading tax losses and other potential temporary differences totalling £0.6 billion (31 December 2010: £1.2 billion) is sufficiently uncertain that it has not been recognised. Of these, losses of £142 million will expire within the next 9 years. The remaining losses have no expiry date.

 

In the two tables that follow the Group has provided a further breakdown of the recognised deferred tax assets for both the short-term timing differences and unused tax losses split by business unit set out in the table at (ii) above. In addition we have detailed the period of estimated recoverability for each respective business unit. For these and each category of deferred tax asset recognised their recoverability against forecast taxable profits are not significantly impacted by any current proposed changes to future accounting standards.

 


2011 


Short-term timing differences

£m 

Expected period of recoverability

Asia

65 

3 to 5 years

JNL

1,206 

70% to 90% within 10 years *

UK Long Term Business

141 

1 to 7 years

Other

101 

3 to 10 years

Total

1,513 


* The remainder is expected to be recovered within 20 years

 


2011 


Unused tax losses

£m 

Expected period of recoverability

Asia

28 

3 to 5 years

UK Long Term Business

11 

1 to 3 years

Other

399 

1 to 3 years

Total

438 


 

Under IAS 12, 'Income Taxes', deferred tax is measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on the tax rates (and laws) that have been enacted or are substantively enacted at the end of the reporting periods.

 

The UK government's tax rate change to 25 per cent (from the current 26 per cent which was effective from 1 April 2011) has had the effect of reducing the UK with-profits and shareholder-backed business element of the net deferred tax balances as at 31 December 2011 by £26 million. The tax change to 25 per cent is effective from 1 April 2012 but has been enacted at 31 December 2011.

 

The subsequent proposed phased rate changes to 23 per cent are expected to have the effect of reducing the UK with-profits and shareholder-backed business elements of the net deferred tax balances at 31 December 2011 by £45 million.

 

iii     Reconciliation of tax charge on profit attributable to shareholders

 



  

Asian  insurance  operations 

US insurance  operations 

UK insurance  operations 

Other  operations 

Total 

2011 

£m (except for tax rates)

Profit (loss) before tax attributable to shareholders:







Operating profit based on longer-term investment returns note (iii)

704 

694 

723 

(51)

2,070 


Short-term fluctuations in investment returns  

(92)

(95)

159 

(120)

(148)


Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes  

18 

21 


Total

612 

599 

900 

(168)

1,943 

Expected tax rate:note (i)







Operating profit based on longer-term investment returns note (iii)

24%

35%

27%

27%

28%


Short-term fluctuations in investment returns  

20%

35%

27%

27%

28%


Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes

0%

0%

27%

27%

27%

Expected tax (charge) credit based on expected tax rates:







Operating profit based on longer-term investment returns note (iii)

(169)

(243)

(195)

14 

(593)


Short-term fluctuations in investment returns  

18 

33 

(43)

32 

40 


Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes

(5)

(1)

(6)

Total

(151)

(210)

(243)

45 

(559)

Variance from expected tax charge: note (ii)







Operating profit based on longer-term investment returns note (iii)

47 

43 

50 

145 


Short-term fluctuations in investment returns  

(20)

(24)

(36)


Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes

Total

27 

43 

14 

26 

110 

Actual tax (charge) credit:







Operating profit based on longer-term investment return

(122)

(200)

(190)

64 

(448)


Short-term fluctuations in investment returns

(2)

33 

(35)


Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes

(4)

(1)

(5)


Gain on dilution of Group's holdings


Total  

(124)

(167)

(229)

71 

(449)

Actual tax rate:  







Operating profit based on longer-term investment returns

17%

29%

26%

125%

22%


Total profit

20%

28%

25%

42%

23%

 

 

 

 

 

 



  

Asian  insurance  operations 

US insurance  operations 

UK insurance  operations 

Other  operations 

Total 

2010 

£m (except for tax rates)

Profit (loss) before tax attributable to shareholders:







Operating profit based on longer-term investment returns note (iii)

532 

833 

719 

(143)

1,941 


Short-term fluctuations in investment returns  

114 

(378)

116 

25 

(123)


Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes  

(5)

(5)

(10)


Costs of terminated AIA transaction

(377)

(377)


Gain on dilution of Group's holdings

30 

30 


Total

646 

455 

860 

(500)

1,461 

Expected tax rate:note (i)







Operating profit based on longer-term investment returns note (iii)

22%

35%

28%

28%

29%


Short-term fluctuations in investment returns  

25%

35%

28%

28%

52%


Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes

28%

28%

20%


Costs of terminated AIA transaction

28%

28%


Gain on dilution of Group's holdings

28%

28%

Expected tax (charge) credit based on expected tax rates:







Operating profit based on longer-term investment returns note (iii)

(117)

(292)

(201)

40 

(570)


Short-term fluctuations in investment returns  

(29)

132 

(32)

(7)

64 


Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes


Costs of terminated AIA transaction

106 

106 


Gain on dilution of Group's holdings

(8)

(8)

Total

(146)

(160)

(240)

140 

(406)

Variance from expected tax charge: note (ii)







Operating profit based on longer-term investment returns note (iii)

59 

43 

18 

237 

357 


Short-term fluctuations in investment returns  

21 

28 


Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes


Costs of terminated AIA transaction

(13)

(13)


Gain on dilution of Group's holdings

Total

80 

43 

26 

232 

381 

Actual tax (charge) credit:







Operating profit based on longer-term investment returns, excluding exceptional tax creditnote (iii)

(58)

(249)

(183)

119 

(371)


Exceptional tax credit*

158 

158 


Operating profit based on longer-term investment return

(58)

(249)

(183)

277 

(213)


Short-term fluctuations in investment returns

(8)

132 

(32)

92 


Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes


Costs of terminated AIA transaction

93 

93 


Gain on dilution of Group's holdings


Total  

(66)

(117)

(214)

372 

(25)

Actual tax rate:  







Operating profit based on longer-term investment returns

11%

30%

25%

194%

11%


Total profit

10%

26%

25%

74%

2%

Actual tax rate (excluding exceptional tax credit*):  







Operating profit based on longer-term investment returns

11%

30%

25%

83%

19%


Total profit

10%

26%

25%

43%

13%


  






*  The tax charge attributable to shareholders' return included an exceptional tax credit of £158 million which primarily related to the impact of a settlement agreed with the UK tax authorities.

Notes

(i)      Expected tax rates for profit (loss) attributable to shareholders:

•     The expected tax rates shown in the table above reflect the corporation tax rates generally applied to taxable profits of the relevant country jurisdictions.

•     For Asian operations the expected tax rates reflect the corporation tax rates weighted by reference to the source of profits of operations contributing to the aggregate business result.

•     The expected tax rate for Other operations reflects the mix of business between UK and overseas operations, which are taxed at a variety of rates. The rates will fluctuate from year to year dependent on the mix of profits.

 

(ii)     For 2011 and 2010, the principal variances arise from a number of factors, including:

(a)  Asian long-term operations

For 2011 and 2010, profits in certain countries which are not taxable along with utilising brought forward tax losses on which no deferred tax assets were previously recognised partly offset by the inability to fully recognise deferred tax assets on losses being carried forward. The increase in the overall Asia tax rate from 2010 to 2011 primarily reflects recent fiscal developments in Indonesia affecting the life insurance industry.

 

(b)  Jackson

For 2011 and 2010, the benefit reflects the deduction from taxable income of a proportion of dividends received attributable to the variable annuity business.

 

(c)  UK insurance operations

                For 2011 the benefit reflects the effect of the reduction in UK corporation tax rate on deferred tax liabilities and the different tax bases of UK life business, partially offset by routine revisions to prior period tax returns. For 2010, the benefit arises from routine revisions to prior period tax returns and the different tax bases of UK life business.

 

(d)  Other operations

For 2011 the settlement of outstanding issues with HMRC at an amount below that previously provided, partly offset by prior year adjustments arising from the revisions of prior period tax returns.  For 2010, an exceptional tax credit which primarily related to the impact of the settlement agreed with the UK tax authorities and the ability to recognise a deferred tax credit on various tax losses which we were previously unable to recognise, partly offset by the inability to fully recognise a tax credit in respect of non deductible capital costs incurred in relation to the terminated AIA transaction.

 

(iii)       Operating profit based on longer-term investment returns is net of attributable restructuring costs and development expenses.

                             Related tax charges are determined on the basis of current taxation legislation.

 

K    Supplementary analysis of earnings per share

 



2011 



Before

 tax

  note C

Tax

      note J

Non-controlling interests

Net of tax

and non-controlling  interests 

Basic

earnings

 per share 

Diluted

 earnings

 per share 



£m 

£m 

£m 

£m 

Pence 

Pence 

Based on operating profit based on longer-term investment return

2,070 

(448)

(4)

1,618 

63.9 p

63.8 p

Short-term fluctuations in investment returns on shareholder-backed business

(148)

(144)

(5.7)p

(5.7)p

Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes

21 

(5)

16 

0.6 p

0.6 p

Based on profit  for the year

1,943 

(449)

(4)

1,490 

58.8 p

58.7 p

 


 

2010 


 

Before 

 tax 

  note C 

Tax 

note J 

Non-

controlling 

 interests 

Net of tax

and non-controlling  interests 

Basic 

earnings 

 per share 

Diluted 

 earnings 

 per share 


 

£m 

£m 

£m 

£m 

Pence 

Pence 

Based on operating profit based on longer-term investment returns, excluding exceptional tax credit

1,941 

(371)

(5)

1,565 

62.0 p

61.9 p


Exceptional tax credit*

158 

158 

6.3 p

6.3 p

Based on operating profit based on longer-term investment return

1,941 

(213)

(5)

1,723 

68.3 p

68.2 p

Short-term fluctuations in investment returns on shareholder-backed business

(123)

92 

(31)

(1.2)p

(1.2)p

Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes

(10)

(7)

(0.3)p

(0.3)p

Costs of terminated AIA transaction

(377)

93 

(284)

(11.3)p

(11.3)p

Gain on dilution of Group's holdings

30 

30 

1.2 p

1.2 p

Based on profit  for the year

  

  



 

 

including exceptional tax credit

1,461 

(25)

(5)

1,431 

56.7 p

56.6 p


 

 

 



 

 

*    The tax charge attributable to shareholders' return included an exceptional tax credit of £158 million which primarily related to the impact of a settlement agreed with the UK tax authorities.

 

Earnings per share are calculated based on earnings attributable to ordinary shareholders, after related tax and non-controlling interests.

 

The weighted average number of shares for calculating earnings per share:



2011 

2010 



(in millions)

(in millions)

Weighted average number of shares for calculation of:




Basic earnings per share

2,533 

2,524 


Diluted earnings per share

2,538 

2,529 

 

L     Dividend

 

Dividends per share (in pence)

2011 

2010 

Dividends relating to reporting year:

 

 


Interim dividend

7.95 p 

6.61 p 


Final dividend

17.24p 

17.24 p 

Total

25.19p 

23.85 p 

Dividends declared and paid in reporting year:

 

 


Current year interim dividend

7.95 p 

6.61 p 


Final/second interim dividend for prior year

17.24 p 

13.56 p 

Total

25.19 p 

20.17 p 

 

Dividend per share

Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are approved by shareholders. The final dividend for the year ended 31 December 2010 of 17.24 pence per ordinary share was paid to eligible shareholders on 26 May 2011 and the 2011 interim dividend of 7.95 pence per ordinary share was paid to eligible shareholders on 22 September 2011.

The 2011 final dividend of 17.24 pence per ordinary share will be paid on 24 May 2012 in sterling to shareholders on the principal register and the Irish branch register at 6.00 p.m. BST on Friday, 30 March 2012 (the 'Record Date'), and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30 p.m. Hong Kong time on the Record Date (HK Shareholders). Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about five days after the payment date of the dividend to shareholders on the principal register. The final dividend will be paid on or about 31 May 2012 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte.) Limited (CDP) at 5.00 p.m. Singapore time on the Record Date (SG Shareholders). The dividend payable to the HK Shareholders will be translated using the exchange rate quoted by the WM Company at the close of business on 12 March 2012. The exchange rate at which the dividend payable to the SG Shareholders will be translated into SG$ will be determined by CDP. The dividend will distribute an estimated £439 million of shareholders' funds.

In line with 2010, shareholders on the principal register and Irish branch register will be able to participate in a Dividend Reinvestment Plan.

M   Statement of financial position - analysis of Group position by segment and business type

 

(i)     Group statement of financial position analysis

To explain more comprehensively the assets, liabilities and capital of the Group's businesses, it is appropriate to provide analyses of the Group's statement of financial position by operating segment and type of business.

 


  










 Position at 31 December 2011:











  

Insurance operations








  

UK 

US 

Asia 

Total 

 insurance 

 operations 

Asset 

 management 

 operations 

Unallocated 

to a segment 

 (central  operations) 

Intra 

-group  eliminations 

2011 

Group 

total 

2010 

Group 

total 

By operating segment

£m 

£m 

£m 

£m 

£m 

£m 

£m 

£m 

£m 

Assets










Intangible assets attributable to shareholders:











Goodwill note O

235 

235 

1,230 

1,465 

1,466 


Deferred acquisition costs and other intangible assets note P

113 

3,900 

1,027 

5,040 

16 

13 

5,069 

4,667 

Total

113 

3,900 

1,262 

5,275 

1,246 

13 

6,534 

6,133 

Intangible assets  attributable to with-profits funds:











In respect of acquired subsidiaries for venture fund and other investment purposes

178 

178 

178 

166 


Deferred acquisition costs and other intangible assets

83 

89 

89 

110 


Total

184 

83 

267 

267 

276 

Total

297 

3,900 

1,345 

5,542 

1,246 

13 

6,801 

6,409 

Deferred tax assets note J

231 

1,392 

115 

1,738 

129 

409 

2,276 

2,188 

Other non investment and non-cash assets  

4,771 

1,542 

1,024 

7,337 

1,000 

4,532 

(6,231)

6,638 

6,024 

Investment of long term business and other operations:note (i)











Investment properties

10,712 

35 

10 

10,757 

10,757 

11,247 


Investments accounted for using the equity method

70 

70 

70 

71 

Financial investments:











Loans note R

3,115 

4,110 

1,233 

8,458 

1,256 

9,714 

9,261 


Equity securities and portfolio holdings in unit trusts

36,722 

38,036 

11,997 

86,755 

594 

87,349 

86,635 


Debt securities note S

77,953 

27,022 

17,681 

122,656 

1,842 

124,498 

116,352 


Other investments

4,568 

2,376 

470 

7,414 

78 

17 

7,509 

5,779 


Deposits

9,287 

167 

1,165 

10,619 

89 

10,708 

9,952 

Total investments

142,427 

71,746 

32,556 

246,729 

3,859 

17 

250,605 

239,297 

Properties held for sale  

257 

Cash and cash equivalents  

2,965 

271 

1,977 

5,213 

1,735 

309 

7,257 

6,631 

Total assets

150,691 

78,854 

37,017 

266,562 

7,969 

5,280 

(6,231)

273,580 

260,806 



 

 

 

 

 


  

Insurance operations








  

UK 

US 

Asia 

Total 

 insurance 

 operations 

Asset 

 management 

 operations 

Unallocated 

to a segment 

 (central  operations) 

Intra 

-group  eliminations 

2011 

Group 

total 

2010 

Group 

total 

By operating segment

£m 

£m 

£m 

£m 

£m 

£m 

£m 

£m 

£m 

Equity and liabilities










Equity










Shareholders' equity  

2,581 

4,271 

2,349 

9,201 

1,783 

(1,867)

9,117 

8,031 

Non-controlling interests

33 

38 

43 

44 

Total equity

2,614 

4,271 

2,354 

9,239 

1,788 

(1,867)

9,160 

8,075 

Liabilities










Policyholder liabilities and unallocated surplus of with-profits funds:











Insurance contract liabilities

82,732 

67,278 

30,353 

180,363 

180,363 

171,291 


Investment contract liabilities with discretionary participation features

29,348 

397 

29,745 

29,745 

25,732 


Investment contract liabilities without discretionary participation features

14,944 

1,911 

112 

16,967 

16,967 

17,704 


Unallocated surplus of with-profits funds

9,165 

50 

9,215 

9,215 

10,253 

Total policyholder liabilities and unallocated surplus of with-profits funds

136,189 

69,189 

30,912 

236,290 

236,290 

224,980 

Core structural borrowings of shareholder financed operations:










Subordinated debt

2,652 

2,652 

2,718 

Other

160 

160 

250 

549 

959 

958 

Total note U

160 

160 

250 

3,201 

3,611 

3,676 

Operational borrowings attributable to shareholder financed operations note V

103 

127 

141 

371 

13 

2,956 

3,340 

3,004 

Borrowings attributable to with-profits operations note V

972 

972 

972 

1,522 

Other non-insurance liabilities:











Obligations under funding, securities lending and sale and repurchase agreements

1,945 

1,169 

3,114 

3,114 

4,199 


Net asset value attributable to unit holders of consolidated unit trusts and similar funds

2,043 

18 

1,101 

3,162 

678 

3,840 

3,372 


Deferred tax liabilities note J

1,349 

2,093 

513 

3,955 

251 

4,211 

4,224 


Current tax liabilities note J

553 

116 

669 

106 

155 

930 

831 


Accruals and deferred income

321 

103 

424 

290 

22 

736 

707 


Other creditorsnote (ii)

2,829 

548 

660 

4,037 

4,493 

245 

(6,231)

2,544 

2,321 


Provisions

266 

13 

47 

326 

133 

70 

529 

729 


Derivative liabilities

1,298 

887 

480 

2,665 

182 

207 

3,054 

2,037 


Other liabilities

209 

379 

590 

1,178 

31 

40 

1,249 

1,129 

Total

10,813 

5,107 

3,610 

19,530 

5,918 

990 

(6,231)

20,207 

19,549 

Total liabilities

148,077 

74,583 

34,663 

257,323 

6,181 

7,147 

(6,231)

264,420 

252,731 

Total equity and liabilities

150,691 

78,854 

37,017 

266,562 

7,969 

5,280 

(6,231)

273,580 

260,806 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes

(i)        Within other non-investment and non-cash assets are premiums receivable of £265 million (2010: £196 million) which are all due within one year except for a small number of products where charges are levied against premiums in future years.

(ii)       Other creditors amounts are due within one year.

 

Further segmental analysis: 

The non-current assets of the Group comprise goodwill, intangible assets other than DAC and present value of acquired in-force business and property, plant and equipment included within 'other non-investment and non-cash assets'. Items defined as financial instruments or related to insurance contracts are excluded. The Group's total non-current assets at 31 December comprise:

 


2011

£m

2010

£m

UK including insurance operations, M&G and Central operations

1,906 

1,708 

US

144 

131 

Asia*

681 

615 

Total

2,731 

2,454 

*No individual country in Asia held non-current assets at the end of the year which exceeds 10 per cent of the Group total.

 

(ii)    Group statement of financial position - additional analysis by business type

 


  


Shareholder-backed business





  

Participating  funds 

Unit-linked 

 and variable 

 annuity 

Non-linked 

 business 

Asset 

management 

 operations 

Unallocated 

 to a  segment 

 (central  operations) 

Intra-group  eliminations 

2011 

 Group 

 total 

2010 

 Group 

 total 


  

£m 

£m 

£m 

£m 

£m 

£m 

£m 

£m 

Assets









Intangible assets attributable to shareholders:










Goodwill note O

235 

1,230 

1,465 

1,466 


Deferred acquisition costs and other intangible assets note P

5,040 

16 

13 

5,069 

4,667 

Total

5,275 

1,246 

13 

6,534 

6,133 

Intangible assets  attributable to with-profits funds:










In respect of acquired subsidiaries for venture fund and other investment purposes

178 

178 

166 


Deferred acquisition costs and other intangible assets

89 

89 

110 


Total

267 

267 

276 

Total

267 

5,275 

1,246 

13 

6,801 

6,409 

Deferred tax assets note J

101 

1,635 

129 

409 

2,276 

2,188 

Other non investment and non-cash assets  

2,622 

457 

4,258 

1,000 

4,532 

(6,231)

6,638 

6,024 

Investment of long term business and other operations:










Investment properties

8,461 

682 

1,614 

10,757 

11,247 


Investments accounted for using the equity method

70 

70 

71 

Financial investments:










Loans note R

2,747 

5,711 

1,256 

9,714 

9,261 


Equity securities and portfolio holdings in unit trusts

26,047 

59,890 

818 

594 

87,349 

86,635 


Debt securities note S

57,232 

8,861 

56,563 

1,842 

124,498 

116,352 


Other investments

4,423 

113 

2,878 

78 

17 

7,509 

5,779 


Deposits

7,207 

1,544 

1,868 

89 

10,708 

9,952 

Total investments

106,117 

71,090 

69,522 

3,859 

17 

250,605 

239,297 

Properties held for sale  

257 

Cash and cash equivalents  

2,564 

1,245 

1,404 

1,735 

309 

7,257 

6,631 

Total assets

111,671 

72,794 

82,097 

7,969 

5,280 

(6,231)

273,580 

260,806 

 

 

 

 

 

 

 


  


Shareholder-backed business






  

Participating  funds 

Unit-linked  and  variable  annuity 

Non-linked 

  business 

Asset 

 management 

 operations 

Unallocated 

 to a segment 

 (central  operations) 

Intra-group 

 eliminations 

2011 

Group 

total 

2010 

Group 

total 

  

£m 

£m 

£m 

£m 

£m 

£m 

£m 

£m 

Equity and liabilities









Equity









Shareholders' equity  

9,201 

1,783 

(1,867)

9,117 

8,031 

Non-controlling interests

33 

43 

44 

Total equity

33 

9,206 

1,788 

(1,867)

9,160 

8,075 

Liabilities









Policyholder liabilities and unallocated surplus of with-profits funds:










Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)

93,569 

71,129 

62,377 

227,075 

214,727 


Unallocated surplus of with-profits funds

9,215 

9,215 

10,253 

Total policyholder liabilities and unallocated surplus of with-profits funds

102,784 

71,129 

62,377 

236,290 

224,980 

Core structural borrowings of shareholder-financed operations: note U









Subordinated debt

2,652 

2,652 

2,718 

Other

160 

250 

549 

959 

958 

Total

160 

250 

3,201 

3,611 

3,676 

Operational borrowings attributable to shareholder financed operations note V

370 

13 

2,956 

3,340 

3,004 

Borrowings attributable to with-profits operations note V

972 

972 

1,522 

Deferred tax liabilities

1,215 

33 

2,707 

251 

4,211 

4,224 

Other non-insurance liabilities

6,667 

1,631 

7,277 

5,913 

739 

(6,231)

15,996 

15,325 

Total liabilities

111,638 

72,794 

72,891 

6,181 

7,147 

(6,231)

264,420 

252,731 

Total equity and liabilities

111,671 

72,794 

82,097 

7,969 

5,280 

(6,231)

273,580 

260,806 

 

N    Statement of financial position - analysis of segment by business type

 

i        UK insurance operations

 

Overview

 

•        In order to show the statement of financial position by reference to the differing degrees of policyholder and shareholder economic interest of the different types of fund and business, the analysis below is structured to show separately assets and liabilities of  the Scottish Amicable Insurance Fund (SAIF), the PAC with-profits sub-fund (WPSF), unit-linked assets and liabilities and annuity (principally PRIL) and other long-term business.

 

•        £92.6 billion of the £142.4 billion of investments are held by SAIF and the PAC WPSF. Shareholders are exposed only indirectly to value movements on these assets.

 

 


  

  

PAC with-profits fund note (i)


Other funds and subsidiaries




  

Scottish 

 Amicable 

 Insurance 

 Fund 

 note (ii) 

Excluding 

 Prudential 

 Annuities 

 Limited 

Prudential 

 Annuities 

 Limited 

 note (iii) 

Total 

 note (iv) 


Unit-linked 

 assets and 

 liabilities 

Annuity 

 and other 

 long-term 

 business 

Total 

       2011         Total 

2010           Total 

By operating segment

£m 

£m 

£m 

£m 


£m 

£m 

£m 

£m 

£m 

Assets

  


  

  







Intangible assets attributable to shareholders:

 


  

  








Deferred acquisition costs and other intangible assets


113 

113 

113 

120 

Total


113 

113 

113 

120 

Intangible assets  attributable to with-profits funds:

  


  

  








In respect of acquired subsidiaries for venture fund and other investment purposes

178 

178 


178 

166 


Deferred acquisition costs


13 


Total

184 

184 


184 

179 


Total

184 

184 


113 

113 

297 

299 

Deferred tax assets

99 

101 


130 

130 

231 

214 

Other non investment and non-cash assets  

413 

1,799 

107 

1,906 


364 

2,088 

2,452 

4,771 

4,631 

Investment of long term business and other operations:

  


  

  








Investment properties

571 

7,164 

726 

7,890 


682 

1,569 

2,251 

10,712 

11,212 


Investments accounted for using the equity method


70 

70 

70 

69 

Financial investments:

  


  

  








Loans note R

143 

1,752 

78 

1,830 


1,142 

1,142 

3,115 

2,302 


Equity securities and portfolio holdings in unit trusts

2,448 

20,685 

170 

20,855 


13,394 

25 

13,419 

36,722 

40,519 


Debt securities note S

4,349 

37,696 

5,633 

43,329 


6,115 

24,160 

30,275 

77,953 

74,304 


Other investmentsnote (v)

281 

3,550 

306 

3,856 


87 

344 

431 

4,568 

3,998 


Deposits

693 

6,155 

236 

6,391 


966 

1,237 

2,203 

9,287 

9,022 

Total investments

8,485 

77,002 

7,149 

84,151 


21,244 

28,547 

49,791 

142,427 

141,426 

Properties held for sale


254 

Cash and cash equivalents  

112 

1,636 

191 

1,827 


666 

360 

1,026 

2,965 

2,839 

Total assets

9,010 

80,720 

7,449 

88,169 


22,274 

31,238 

53,512 

150,691 

149,663 

 

 

 

 


  

 

PAC with-profits fund note (i)


Other funds and subsidiaries




  

Scottish 

 Amicable 

 Insurance 

 Fund 

 note (ii) 

Excluding 

 Prudential 

 Annuities 

 Limited 

Prudential 

 Annuities 

 Limited 

 note (iii)

Total 

 note (iv)


Unit-linked 

 assets and 

 liabilities 

Annuity 

 and other 

 long-term 

 business 

Total 

2011           Group 

Total 

2010           Group 

Total 


  

£m 

£m 

£m 

£m 


£m 

£m 

£m 

£m 

£m 

Equity and liabilities

 


 

 







Equity

 


 

 







Shareholders' equity  


2,581 

2,581 

2,581 

2,148 

Non-controlling interests

33 

33 


33 

35 

Total equity

33 

33 


2,581 

2,581 

2,614 

2,183 

Liabilities

 


 

 







Policyholder liabilities and unallocated surplus of with-profits funds:

  


 

 








Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)

8,555 

67,098 

5,323 

72,421 


21,281 

24,767 

46,048 

127,024 

125,530 


Unallocated surplus of with-profits funds (reflecting application of 'realistic' basis provisions for UK regulated with-profits funds) note (vi)

7,743 

1,422 

9,165 


9,165 

10,187 

Total

8,555 

74,841 

6,745 

81,586 


21,281 

24,767 

46,048 

136,189 

135,717 

Operational borrowings attributable to shareholder financed operations


102 

103 

103 

162 

Borrowings attributable to with-profits funds

17 

955 

955