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PRUDENTIAL | Prudential Plc 2011 Full Year Results Eev | RNS

RNS Number : 2081Z
Prudential PLC
13 March 2012
 



European Embedded Value (EEV) basis results

 

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

 

Results analysis by business area

  

Note

2011 

2010 


  



note (vi)


  


£m 

£m 

Asian operations



  

New business:



  


Excluding Japan

1,076 

902 


Japannote (v)


(1)


Total


1,076 

901 

Business in force

3

688 

549 

Long-term business


1,764 

1,450 

Eastspring Investments


80 

72 

Development expenses


(5)

(4)

Total


1,839 

1,518 

US operations



  

New business

2

815 

761 

Business in force

3

616 

697 

Long-term business


1,431 

1,458 

Broker-dealer and asset management


24 

22 

Total


1,455 

1,480 

UK operations



  

New business

2

260 

365 

Business in force

3

593 

571 

Long-term business


853 

936 

General insurance commission


40 

46 

Total UK insurance operations


893 

982 

M&G


357 

284 

Total


1,250 

1,266 

Other income and expenditure



  

Investment return and other income


22 

30 

Interest payable on core structural borrowings


(286)

(257)

Corporate expenditure


(219)

(223)

Unwind of expected asset management marginnote (ii)


(53)

(44)

Total


(536)

(494)

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


45 

-

Solvency II implementation costsnote (iv)


(56)

(46)

Restructuring costsnote (iv)


(19)

(28)

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


3,978 

3,696 

Analysed as profits (losses) from:



  

New business:



  


Excluding Japan

2,151 

2,028 


Japannote (v)


(1)


Total


2,151 

2,027 

Business in force

3

1,897 

1,817 

Long-term business


4,048 

3,844 

Asset management


461 

378 

Other results


(531)

(526)

Total


3,978 

3,696 

 

Notes

(i)   EEV basis operating profit based on longer-term investment returns excludes the recurrent items of short-term fluctuations in investment returns, the mark to market value movements on core borrowings, the shareholders' share of actuarial and other gains and losses on defined benefit pension schemes, and the effect of changes in economic assumptions. In addition for 2010, operating profit excluded costs associated with the terminated AIA transaction and the gain arising upon the dilution of the Group's holding in PruHealth. The amounts for these items are included in total EEV profit attributable to shareholders. The Company believes that operating profit, as adjusted for these items, better reflects underlying performance. Profit before tax and basic earnings per share include these items together with actual investment returns. This basis of presentation has been adopted consistently throughout these results.

(ii)  The value of future profits or losses from asset management and service companies that support the Group's covered businesses are included in the profits for new business and the in-force value of the Group's long-term business. The results of the Group's asset management operations include the profits from the management of internal and external funds. For EEV basis reporting, Group shareholders' other income is adjusted to deduct the unwind of the expected margin for the year arising from the management of the assets of the covered business (as defined in note 1(a)). The deduction is on a basis consistent with that used for projecting the results for covered business. Group operating profit accordingly includes the variance between actual and expected profit in respect of covered business.

(iii) In 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 operating profit for 2011 on an IFRS basis of £42 million and an additional £3 million recognised on the EEV basis.

(iv) Restructuring costs comprise the charge of £(16) million recognised on an IFRS basis and an additional £(3) million recognised on the EEV basis for the shareholders' share of restructuring costs incurred by the PAC with-profits fund. Solvency II implementation costs comprise the charge of £(55) million recognised on an IFRS basis and an additional £(1) million recognised on the EEV basis.

(v)  For 2010, new business profits for the Group's Japanese insurance subsidiary, which ceased writing new business with effect from 15 February 2010, have been presented separately from those of the remainder of the Group.

(vi) The comparative results have been prepared using previously reported average exchange rates for the year.

 

Summarised consolidated income statement



Note

2011 

2010 




£m 

£m 

Operating profit based on longer-term investment returns




Asian operations


1,839 

1,518 

US operations


1,455 

1,480 

UK operations:





UK insurance operations


893 

982 


M&G


357 

284 




1,250 

1,266 






Other income and expenditure


(536)

(494)

RPI to CPI inflation measure change on defined benefit pension schemes


45 

Solvency II implementation costs


(56)

(46)

Restructuring costs


(19)

(28)

Operating profit based on longer-term investment returns


3,978 

3,696 

Short-term fluctuations in investment returns

5

(907)

(30)

Mark to market value movements on core borrowings

9

(14)

(164)

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





pension schemes


23 

(11)

Effect of changes in economic assumptions

6

(158)

(10)

Costs of terminated AIA transaction

4

(377)

Gain on dilution of Group holdings

13

Profit before tax attributable to shareholders (including actual investment returns)


2,922 

3,107 

Tax attributable to shareholders' profit

11

(776)

(530)

Profit for the year


2,146 

2,577 






Attributable to:





Equity holders of the Company


2,142 

2,573 


Non-controlling interests


Profit for the year


2,146 

2,577 

 

Earnings per share (in pence)

  


Note

2011 

2010 

Based on operating profit including longer-term investment returns, after


 

 


related tax and non-controlling interests of £2,930 million


 

 


(2010: £2,700 million*)

12

115.7 p

106.9 p

Based on profit after tax and non-controlling interests of £2,142 million


 

 


(2010: £2,573 million)

12

84.6 p

101.9 p

* Operating earnings per share for 2010 has been determined after excluding an exceptional tax credit of £158 million which primarily related to the impact of a settlement agreed with the UK tax authorities - see note 11

 

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 

Movement in shareholders' equity (excluding non-controlling interests)





Note

2011 

2010 






£m 

£m 

Profit for the year attributable to equity shareholders


2,142 

2,573 

Items taken directly to equity:





Exchange movements on foreign operations and net investment hedges:






Exchange movements arising during the year


(90)

659 



Related tax


(68)

34 


Dividends


(642)

(511)


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


17 

75 


Reserve movements in respect of share-based payments


44 

37 


Treasury shares:






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


(30)

(4)



Movement in Prudential plc shares purchased by unit trusts







consolidated under IFRS


(5)


Mark to market value movements on Jackson assets backing surplus and






required capital:






Mark to market value movements arising during the year


96 

105 



Related tax


(34)

(37)

Net increase in shareholders' equity

10

1,430 

2,934 

Shareholders' equity at beginning of year (excluding non-controlling interests)

7,10

18,207 

15,273 

Shareholders' equity at end of year (excluding non-controlling interests)

7,10

19,637 

18,207 

 










 






2011 



2010 

 

Comprising: 

Note

Long-term business operations 

Asset management    and other operations  

Total     

Long-term business operations 

Asset management and other operations  

Total    





£m

£m

£m

£m

£m

£m

Asian operations:







 


Net assets of operations


8,510 

211 

8,721 

7,445 

197 

7,642 


Acquired goodwill


235 

61 

296 

236 

61 

297 




8,745 

272 

9,017 

7,681 

258 

7,939 

US operations:







 


Net assets of operations


5,082 

113 

5,195 

4,799 

106 

4,905 


Acquired goodwill


16 

16 

16 

16 




5,082 

129 

5,211 

4,799 

122 

4,921 

UK insurance operations:







 


Net assets of operations

6,058 

29 

6,087 

5,970 

33 

6,003 

M&G:







 


Net assets of operations


229 

229 

254 

254 


Acquired goodwill


1,153 

1,153 

1,153 

1,153 




1,382 

1,382 

1,407 

1,407 





6,058 

1,411 

7,469 

5,970 

1,440 

7,410 

Other operations:







 


Holding company net borrowings at market value

9

(2,188)

(2,188)

(2,212)

(2,212)


Other net assets


128 

128 

149 

149 




(2,060)

(2,060)

(2,063)

(2,063)

Shareholders' equity at end of year (excluding







 


non-controlling interests)

19,885 

(248)

19,637 

18,450 

(243)

18,207 

Representing:







 


Net assets


19,650 

(1,478)

18,172 

18,214 

(1,473)

16,741 


Acquired goodwill


235 

1,230 

1,465 

236 

1,230 

1,466 





19,885 

(248)

19,637 

18,450 

(243)

18,207 

 





 

 

Net asset value per share (in pence)


 

 





2011 

2010 

Based on EEV basis shareholders' equity of £19,637 million (2010: £18,207 million)


771 p

715 p

Number of issued shares at year end (millions)


2,548 

2,546 

Return on embedded value*


16%

18%

* Return on embedded value is based on EEV operating profit after related tax and non-controlling interests as a percentage of opening EEV basis shareholders' equity. The 2010 return has been determined after excluding an exceptional tax credit of £158 million, which primarily related to the impact of a settlement agreed with the UK tax authorities.

Summary statement of financial position











Note

2011 

2010 





£m 

£m 

Total assets less liabilities, before deduction for insurance funds


243,760 

231,667 

Less insurance funds:*





Policyholder liabilities (net of reinsurers' share) and unallocated






surplus of with-profits funds


(234,643)

(223,636)


Less shareholders' accrued interest in the long-term business


10,520 

10,176 





(224,123)

(213,460)

Total net assets

7,10

19,637 

18,207 







Share capital


127 

127 

Share premium


1,873 

1,856 

IFRS basis shareholders' reserves


7,117 

6,048 

Total IFRS basis shareholders' equity

7

9,117 

8,031 

Additional EEV basis retained profit

7

10,520 

10,176 

Total EEV basis shareholders' equity (excluding non-controlling interests)

7,10

19,637 

18,207 

*

Including liabilities in respect of insurance products classified as investment contracts under IFRS 4.

Notes on the EEV basis results

 

1Basis of preparation, methodology and accounting presentation

 

The EEV basis results have been prepared in accordance with the EEV Principles issued by the European Insurance CFO Forum in May 2004 and expanded by the Additional Guidance on EEV disclosures published in October 2005. Where appropriate, the EEV basis results include the effects of adoption of International Financial Reporting Standards (IFRS).

 

The directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles.

The EEV basis results for 2011 and 2010 have been derived from the EEV basis results supplement to the Company's statutory accounts for 2011. The supplement included an unqualified audit report from the auditors.

               

(a)Covered business

The EEV results for the Group are prepared for 'covered business', as defined by the EEV Principles. Covered business represents the Group's long-term insurance business for which the value of new and in-force contracts is attributable to shareholders. The EEV basis results for the Group's covered business are then combined with the IFRS basis results of the Group's other operations.

 

The definition of long-term business operations is consistent with previous practice and comprises those contracts falling under the definition of long-term insurance business for regulatory purposes together with, for US operations, contracts that are in substance the same as guaranteed investment contracts (GICs) but do not fall within the technical definition. Under the EEV Principles, the results for covered business incorporate the projected margins of attaching internal asset management.

 

With two principal exceptions, covered business comprises the Group's long-term business operations. The principal exceptions are for the closed Scottish Amicable Insurance Fund (SAIF) and for the presentational treatment of the financial position of the Group's principal defined benefit pension scheme, the Prudential Staff Pension Scheme (PSPS). A small amount of UK group pensions business is also not modelled for EEV reporting purposes.

 

SAIF is a ring-fenced sub-fund of the Prudential Assurance Company (PAC) long-term fund, established by a Court approved Scheme of Arrangement in October 1997. SAIF is closed to new business and the assets and liabilities of the fund are wholly attributable to the policyholders of the fund.

 

The PSPS deficit funding liability attaching to the shareholder-backed business is included in the total for Other operations, reflecting the fact that the deficit funding is being paid for by the parent company, Prudential plc. The changes in financial position of the Scottish Amicable and M&G pension scheme are reflected in the EEV results for UK insurance operations and Other operations respectively.

 

(b)Methodology

(i)Embedded value

Overview

The embedded value is the present value of the shareholders' interest in the earnings distributable from assets allocated to covered business after sufficient allowance has been made for the aggregate risks in that business. The shareholders' interest in the Group's long-term business comprises:

 

·  present value of future shareholder cash flows from in-force covered business (value of in-force business), less deductions for:

        - the cost of locked-in required capital,

        - the time value of cost of options and guarantees,

·  locked-in required capital, and

·  shareholders' net worth in excess of required capital (free surplus).

 

The value of future new business is excluded from the embedded value.

 

Notwithstanding the basis of presentation of results (as explained in note 1(c)(iv)) no smoothing of market or account balance values, unrealised gains or investment return is applied in determining the embedded value or profit before tax. Separately, the analysis of profit is delineated between operating profit based on longer-term investment returns and other constituent items, as explained in note 1(c)(i).

 

Valuation of in-force and new business

The embedded value results are prepared incorporating best estimate assumptions about all relevant factors including levels of future investment returns, expenses, persistency and mortality. These assumptions are used to project future cash flows. The present value of the future cash flows is then calculated using a discount rate which reflects both the time value of money and the non-diversifiable risks associated with the cash flows that are not otherwise allowed for.

 

Best estimate assumptions

Best estimate assumptions are used for the cash flow projections, where best estimate is defined as the mean of the distribution of future possible outcomes. The assumptions are reviewed actively and changes are made when evidence exists that material changes in future experience are reasonably certain.

 

Assumptions required in the calculation of the value of options and guarantees, for example relating to volatilities and correlations, or dynamic algorithms linking liabilities to assets, have been set equal to the best estimates and, wherever material and practical, reflect any dynamic relationships between the assumptions and the stochastic variables.

 

Principal economic assumptions

The EEV basis results for the Group's operations have been determined using economic assumptions where the long-term expected rates of return on investments and risk discount rates are set by reference to year end rates of return on government bonds (the 'active' basis).

 

Expected returns on equity and property asset classes are derived by adding a risk premium, based on the long-term view of Prudential's economists, to the risk-free rate.

     

The total profit that emerges over the lifetime of an individual contract as calculated using the embedded value basis is the same as that calculated under the IFRS basis. Since the embedded value basis reflects discounted future cash flows, under this methodology the profit emergence is advanced thus more closely aligning the timing of the recognition of profits with the efforts and risks of current management actions, particularly with regard to business sold during the year.

 

New Business

The contribution from new business represents profits determined by applying operating assumptions as at the end of the year.

 

In determining the new business contribution for UK immediate annuity business, which is interest rate sensitive, it is appropriate to use assumptions reflecting point of sale market conditions, consistent with how the business is priced. For other business within the Group, end of period economic assumptions are used.

 

Valuation movements on investments

With the exception of debt securities held by Jackson, investment gains and losses during the year (to the extent that changes in capital values do not directly match changes in liabilities) are included directly in the profit for the year and shareholders' equity as they arise.

 

The results for any covered business conceptually reflects the aggregate of the IFRS results and the movements on the additional shareholders' interest recognised on the EEV basis. Thus the start point for the calculation of the EEV results for Jackson, as for other businesses, reflects the market value movements recognised on the IFRS basis.

 

However, in determining the movements on the additional shareholders' interest, the basis for calculating the Jackson EEV result acknowledges that for debt securities backing liabilities the aggregate EEV results reflect the fact that the value of in-force business instead incorporates the discounted value of future spread earnings. This value is not affected generally by short-term market movements on securities that are broadly speaking held for the longer-term.

 

Fixed income securities backing the free surplus and required capital for Jackson are accounted for at fair value. However, consistent with the treatment applied under IFRS for Jackson securities classified as available-for-sale, movements in unrealised appreciation on these securities are accounted for in equity rather than in the income statement, as shown in the movement in shareholders' equity.

 

Cost of capital

A charge is deducted from the embedded value for the cost of capital supporting the Group's long-term business. This capital is referred to as required capital. The cost is the difference between the nominal value of the capital and the discounted value of the projected releases of this capital allowing for investment earnings (net of tax) on the capital.

 

The annual result is affected by the movement in this cost from year-to-year which comprises a charge against new business profit and generally a release in respect of the reduction in capital requirements for business in force as this runs off.

 

Where required capital is held within a with-profits long-term fund, the value placed on surplus assets in the fund is already discounted to reflect its release over time and no further adjustment is necessary in respect of required capital.

 

Financial options and guarantees

Nature of options and guarantees in Prudential's long-term business

Asian operations

Subject to local market circumstances and regulatory requirements, the guarantee features described below in respect of UK business broadly apply to similar types of participating contracts principally written in the PAC Hong Kong branch, Singapore and Malaysia. Participating products have both guaranteed and non-guaranteed elements.

 

There are also various non-participating long-term products with guarantees.  The principal guarantees are those for whole of life contracts with floor levels of policyholder benefits that accrue at rates set at inception and do not vary subsequently with market conditions.

 

US operations (Jackson)

The principal options and guarantees in Jackson are associated with the fixed annuity and variable annuity (VA) lines of business.

 

Fixed annuities provide that, at Jackson's discretion, it may reset the interest rate credited to policyholders' accounts, subject to a guaranteed minimum. The guaranteed minimum return varies from 1.0 per cent to 5.5 per cent (2010: 1.5 per cent to 5.5 per cent), depending on the particular product, jurisdiction where issued, and date of issue. At 31 December 2011, 85 per cent (2010: 83 per cent) of the account values on fixed annuities relates to policies with guarantees of 3 per cent or less. The average guarantee rate is 2.8 per cent for 2011 (2010: 2.9 per cent).

 

Fixed annuities also present a risk that policyholders will exercise their option to surrender their contracts in periods of rapidly rising interest rates, possibly requiring Jackson to liquidate assets at an inopportune time.

 

Jackson issues VA contracts where it contractually guarantees to the contract holder either: a) return of no less than total deposits made to the contract adjusted for any partial withdrawals, b) total deposits made to the contract adjusted for any partial withdrawals plus a minimum return, or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the specified contract anniversary. These guarantees include benefits that are payable at specified dates during the accumulation period (Guaranteed Minimum Withdrawal Benefit (GMWB)), as death benefits (Guaranteed Minimum Death Benefits (GMDB)) or as income benefits (Guaranteed Minimum Income Benefits (GMIB)). Jackson reinsures and hedges these risks using equity options and futures contracts. These guarantees generally protect the policyholder's value in the event of poor equity market performance.

 

Jackson also issues fixed index annuities that enable policyholders to obtain a portion of an equity-linked return while providing a guaranteed minimum return. The guaranteed minimum returns would be of a similar nature to those described above for fixed annuities.

 

UK insurance operations

The only significant financial options and guarantees in the UK insurance operations arise in the with-profits fund and SAIF.

 

With-profits products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses: annual and final. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular product. Unlike annual bonuses, final bonuses are guaranteed only until the next bonus declaration. The with-profits fund also held a provision on the Pillar I Peak 2 basis of £90 million at 31 December 2011 (2010: £24 million) to honour guarantees on a small amount of guaranteed annuity option products.

 

Beyond the generic features and the provisions held in respect of guaranteed annuities described above, there are very few explicit options or guarantees of the with-profits fund such as minimum investment returns, surrender values, or annuity values at retirement and any granted have generally been at very low levels. At 31 December 2011, guarantees on certain with-profits deferred annuity business were in the money as a result of the low level of interest rates at that date.

 

The Group's main exposure to guaranteed annuity options in the UK is through SAIF and a provision on the Pillar I Peak 2 basis of £370 million (2010: £336 million) was held in SAIF at 31 December 2011 to honour the guarantees. As SAIF is a separate sub-fund of the Prudential Assurance Company long-term fund which is attributable to policyholders of the fund, the movement in the provision has no direct impact on shareholders.

 

Time value

The value of financial options and guarantees comprises two parts. One is given by a deterministic valuation on best estimate assumptions (the intrinsic value). The other part arises from the variability of economic outcomes in the future (the time value).

 

Where appropriate, a full stochastic valuation has been undertaken to determine the time value of the financial options and guarantees.

     

The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations. Assumptions specific to the stochastic calculations reflect local market conditions and are based on a combination of actual market data, historic market data and an assessment of long-term economic conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling of individual asset classes but with an allowance for correlation between the various asset classes. Details of the key characteristics of each model are given in note 17(a).

 

(ii) Level of required capital

In adopting the EEV Principles, Prudential has based required capital on its internal targets for economic capital subject to it being at least the local statutory minimum requirements. Economic capital is assessed using internal models but, when applying the EEV Principles, Prudential does not take credit for the significant diversification benefits that exist within the Group. For with-profits business written in a segregated life fund, as is the case in Asia and the UK, the capital available in the fund is sufficient to meet the required capital requirements. For shareholder-backed business the following capital requirements apply:

 

•     Asian operations: the level of required capital has been set at the higher of local statutory requirements and the economic capital requirement;

•     US operations: the level of required capital has been set to an amount at least equal to 235 per cent of the risk-based capital required by the National Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL); and

•     UK insurance operations: the capital requirements are set at the higher of Pillar I and Pillar II requirements for shareholder-backed business of UK insurance operations as a whole, which for 2011 and 2010 was Pillar I.

 

(iii) Allowance for risk and risk discount rates

Overview

Under the EEV Principles, discount rates used to determine the present value of future cash flows are set equal to risk-free rates plus a risk margin. The risk margin should reflect any non-diversifiable risk associated with the emergence of distributable earnings that is not allowed for elsewhere in the valuation. Prudential has selected a granular approach to better reflect differences in market risk inherent in each product group. The risk discount rate so derived does not reflect an overall Group market beta but instead reflects the expected volatility associated with the cash flows for each product category in the embedded value model.

 

Since financial options and guarantees are explicitly valued under the EEV methodology, discount rates under EEV are set excluding the effect of these product features.

 

The risk margin represents the aggregate of the allowance for market risk, additional allowance for credit risk where appropriate, and allowance for non-diversifiable non-market risk. No allowance is required for non-market risks where these are assumed to be fully diversifiable. The majority of non-market and non-credit risks are considered to be diversifiable.

 

Market risk allowance

The allowance for market risk represents the beta multiplied by an equity risk premium. Except for UK shareholder-backed annuity business (as explained below) such an approach has been used for all of the Group's businesses.

 

The beta of a portfolio or product measures its relative market risk. The risk discount rates reflect the market risk inherent in each product group and hence the volatility of product cash flows. These are determined by considering how the profits from each product are affected by changes in expected returns on various asset classes. By converting this into a relative rate of return it is possible to derive a product specific beta.

 

Product level betas reflect the most recent product mix to produce appropriate betas and risk discount rates for each major product grouping.

 

Additional credit risk allowance

The Group's methodology is to allow appropriately for credit risk. The allowance for total credit risk is to cover:

 

•     expected long-term defaults,

•     credit risk premium (to reflect the volatility in downgrade and default levels), and

•     short-term downgrades and defaults.

 

These allowances are initially reflected in determining best-estimate returns and through the market risk allowance described above. However, for those businesses which are largely backed by holdings of debt securities these allowances in the projected returns and market risk allowances may not be sufficient and an additional allowance may be appropriate.

 

The practical application of the allowance for credit risk varies depending upon the type of business as described below.

 

Asian operations

For Asian operations, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are sufficient. Accordingly no additional allowance for credit risk is required.

 

US business (Jackson)

For Jackson business, the allowance for long-term defaults is reflected in the Risk Margin Reserve charge which is deducted in determining the projected spread margin between the earned rate on the investments and the policyholder crediting rate.

 

The risk discount rate incorporates an additional allowance for credit risk premium and short-term down grades and defaults.  In determining this allowance a number of factors have been considered. These factors, in particular, include:

 

·    How much of the credit spread on debt securities represents an increased credit risk not reflected in the Risk Margin Reserve (RMR) long-term default assumptions, and how much is liquidity premium. In assessing this effect consideration has been given to a number of approaches to estimating the liquidity premium by considering recent statistical data; and

·    Policyholder benefits for Jackson fixed annuity business are not fixed. It is possible in adverse economic scenarios to pass on a component of credit losses to policyholders (subject to guarantee features) through lower crediting rates. Consequently, it is only necessary to allow for the balance of the credit risk in the risk discount rate.

 

After taking these and related factors into account and, based on market conditions from 2009 to 2011, the risk discount rate for general account business includes an additional allowance of 200 basis points (2010: 150 basis points) for credit risk. For VA business, the additional allowance has been set at one-fifth (equivalent to 40 basis points (2010: 30 basis points)) of the non-VA business to reflect the proportion of the VA business that is allocated to holdings of general account debt securities.  The level of the additional allowance is assessed at each reporting period to take account of prevailing credit conditions and as the business in force alters over time.

 

The level of allowance differs from that for UK annuity business for investment portfolio differences and to take account of the management actions available in adverse economic scenarios to reduce crediting rates to policyholders, subject to guarantee features of the products.

 

UK business

(1) Shareholder-backed annuity business

For Prudential's UK shareholder-backed annuity business, Prudential has used a market consistent embedded value (MCEV) approach to derive an implied risk discount rate which is then applied to the projected best estimate cash flows.

 

In the annuity MCEV calculations, the future cash flows are discounted using the swap yield curve plus an allowance for liquidity premium based on Prudential's assessment of the expected return on the assets backing the annuity liabilities after allowing for expected long-term defaults, a credit risk premium, an allowance for a 1 notch downgrade of the portfolio subject to credit risk and an allowance for short-term defaults. For the purposes of presentation in the EEV results, the results on this basis are reconfigured. Under this approach the projected earned rate of return on the debt securities held is determined after allowing for expected long-term defaults and, where necessary, an additional allowance for an element of short-term downgrades and defaults to bring the allowance in the earned rate up to best estimate levels. The allowances for credit risk premium and the remaining element of short-term downgrade and default allowances are incorporated into the risk margin included in the discount rate, as shown in note 17(a).

 

(2) With-profit fund non-profit annuity business

For UK non-profit annuity business including that written by Prudential Annuities Limited (PAL) the basis for determining the aggregate allowance for credit risk is consistent with that applied for UK shareholder-backed annuity business (as described above). The allowance for credit risk in PAL is taken into account in determining the projected cash flows to the with-profits fund, which are in turn discounted at the risk discount rate applicable to all of the projected cash flows of the fund.

 

(3) With-profit fund holdings of debt securities

The UK with-profits fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus. The assumed earned rate for with-profit holdings of corporate bonds is defined as the risk-free rate plus an assessment of the long-term spread over gilts, net of expected long-term defaults. This approach is similar to that applied for equities and properties for which the projected earned rate is defined as the risk-free rate plus a long-term risk premium.

     

Allowance for non-diversifiable non-market risks

Finance theory cannot be used to determine the appropriate component of beta for non-diversifiable non-market risks since there is no observable risk premium associated with it that is akin to the equity risk premium. Recognising this, a pragmatic approach has been applied.

 

A base level allowance of 50 basis points is applied to cover the non-diversifiable non-market risks associated with the Group's businesses. For the Group's US business and UK business other than shareholder-backed annuity, no additional allowance is necessary. For UK shareholder-backed annuity business a further allowance of 50 basis points is used to reflect the longevity risk which is of particular relevance. For the Group's Asian operations in China, India, Indonesia, Philippines, Taiwan, Thailand and Vietnam, additional allowances are applied for emerging market risk ranging from 100 to 250 basis points.

 

(iv) Management actions

In deriving the time value of financial options and guarantees, management actions in response to emerging investment and fund solvency conditions have been modelled. Management actions encompass, but are not confined to investment allocation decisions, levels of reversionary and terminal bonuses and credited rates. Bonus rates are projected from current levels and varied in accordance with assumed management actions applying in the emerging investment and fund solvency conditions.

 

In all instances, the modelled actions are in accordance with approved local practice and therefore reflect the options actually available to management. For the PAC with-profits fund, the actions assumed are consistent with those set out in the Principles and Practices of Financial Management.

 

(v) With-profits business and the treatment of the estate

The proportion of surplus allocated to shareholders from the PAC with-profits fund has been based on the present level of 10 per cent. The value attributed to the shareholders' interest in the estate is derived by increasing final bonus rates (and related shareholder transfers) so as to exhaust the estate over the lifetime of the in-force with-profits business. In any scenarios where the total assets of the life fund are insufficient to meet policyholder claims in full, the excess cost is fully attributed to shareholders. Similar principles apply, where appropriate, for other with-profit funds of the Group's Asian operations.

 

(vi) Pension costs

The Group operates three defined benefit schemes in the UK. The largest scheme is the Prudential Staff Pension Scheme (PSPS). The other two, smaller schemes are the Scottish Amicable and M&G scheme.

 

Under IFRS the surpluses or deficits attaching to these schemes are accounted for in accordance with the provisions of IAS 19 that apply the principles of IFRIC 14, providing guidance on assessing the limit in IAS 19 on the amount of surplus in a defined benefit pension scheme that can be recognised as an asset.

 

Under the EEV basis the IAS 19 basis surpluses (to the extent not restricted under IFRIC 14) or deficits are initially allocated in the same manner. The shareholders' 10 per cent interest in the PAC with-profits fund estate is determined after inclusion of the portion of the IAS 19 basis surpluses or deficits attributable to the fund. Adjustments under EEV in respect of accounting for surpluses or deficits on the Scottish Amicable Pension Scheme are reflected as part of UK long-term business operations and for other defined benefit schemes the adjustments are reflected as part of 'Other operations', as shown in note 7.

 

Separately, the projected cash flows of in-force covered business include the cost of contributions to the defined benefit schemes for future service based on the contribution basis applying to the schemes at the time of the preparation of the results.

 

(vii) Debt capital

Core structural debt liabilities are carried at market value. As the liabilities are generally held to maturity or for the long-term, no deferred tax asset or liability has been established on the difference, compared to the IFRS carrying value. Accordingly, no deferred tax credit or charge is recorded in the results for the reporting period in respect of the mark to market value adjustment.

 

(viii) Foreign currency translation

Foreign currency profits and losses have been translated at average exchange rates for the year. Foreign currency assets and liabilities have been translated at year end rates of exchange. The purpose of translating the profits and losses at average exchange rates, notwithstanding the fact that EEV profit represents the incremental value added on a discounted cash flow basis, is to maintain consistency with the methodology applied for IFRS basis reporting.

 

(c) Accounting presentation

(i) Analysis of profit before tax

To the extent applicable, the presentation of the EEV profit for the year is consistent with the basis that the Group applies for analysis of IFRS basis profits before shareholder taxes between operating and non-operating results. Operating results reflect the underlying results including longer-term investment returns (which are determined as described in note 1(c)(ii) below) and incorporate the following:

 

·      new business contribution, as defined in note 1(b)(i),

·      unwind of discount on the value of in-force business and other expected returns, as described in note 1(c)(iv) below,

·      the impact of routine changes of estimates relating to non-economic assumptions, as described in note 1(c)(iii) below, and

·      non-economic experience variances, as described in note 1(c)(v) below.

 

Non-operating results comprise the recurrent items of short-term fluctuations in investment returns, the shareholders' share of actuarial and other gains and losses on defined benefit pension schemes, the mark to market value movements on core borrowings and the effect of changes in economic assumptions.

  

In addition, for 2010 the Company incurred costs associated with the terminated AIA transaction and the Group's holding in PruHealth was diluted. The effect of both of these items has been shown separately from operating profits based on longer-term investment returns.

 

(ii) Operating profit

For the investment element of the assets covering the net worth of long-term insurance business, investment returns are recognised in operating results at the expected long-term rate of return. These expected returns are calculated by reference to the asset mix of the portfolio. For the purpose of calculating the longer-term investment return to be included in the operating result of the PAC with-profits fund of UK operations, where assets backing the liabilities and unallocated surplus are subject to market volatility, asset values at the beginning of the reporting period are adjusted to remove the effects of short-term market movements as explained in note 1(c)(iv) below.

 

For the purpose of determining the long-term returns for debt securities of US operations for fixed annuity and other general account business, a risk margin charge is included which reflects the expected long-term rate of default based on the credit quality of the portfolio. For Jackson, interest-related realised gains and losses are amortised to the operating results over the maturity period of the sold bonds and for equity-related investments, a long-term rate of return is assumed, which reflects the aggregation of end of year risk-free rates and equity risk premium. For US variable annuity separate account business, operating profit includes the unwind of discount on the opening value of in force adjusted to reflect end of year projected rates of return with the excess or deficit of the actual return recognised within non-operating profit, together with the related hedging activity.

     

For UK annuity business, rebalancing of the asset portfolio backing the liabilities to policyholders may from time to time take place to align it more closely with the internal benchmark of credit quality that management applies. Such rebalancing will result in a change in the projected yield on the asset portfolio and the allowance for default risk. The net effect of these changes is reflected in the result for the year. In general, the effect is booked in operating results.

 

(iii) Effect of changes in operating assumptions

Operating profit includes the effect of changes to operating assumptions on the value of in force at the end of the period. For presentational purposes, the effect of change is delineated to show the effect on the opening value of in force with the experience variance being determined by reference to the end of period assumptions.

 

(iv) Unwind of discount and other expected returns

The unwind of discount and other expected returns is determined by reference to the value of in-force business, required capital and surplus assets at the start of the period as adjusted for the effect of changes in economic and operating assumptions reflected in the current period.

 

For UK insurance operations the amount included within operating results based on longer-term investment returns represents the unwind of discount on the value of in-force business at the beginning of the period (adjusted for the effect of current period assumption changes), the unwind of discount on additional value representing the shareholders' share of smoothed surplus assets retained within the PAC with-profits fund (as explained in note 1(b)(v) above), and the expected return on shareholders' assets held in other UK long-term business operations. Surplus assets retained within the PAC with-profits fund are smoothed for this purpose to remove the effects of short-term investment volatility from operating results. In the summary statement of financial position and for total profit reporting, asset values and investment returns are not smoothed.

 

(v) Operating experience variances

Operating profits include the effect of experience variances on non-economic assumptions, which are calculated with

reference to the embedded value assumptions at the end of the reporting year, such as persistency, mortality and morbidity, expenses and other factors. Further details are shown in note 17(b).

 

(vi) Pension costs

Profit before tax

Movements on the shareholders' share of surpluses (to the extent not restricted by IFRIC 14) and deficits of the Group's defined benefit pension schemes adjusted for contributions paid in the year are recorded within the income statement. Consistent with the basis of distribution of bonuses and the treatment of the estate described in note 1(b)(iv) and (v), the shareholders' share incorporates 10 per cent of the proportion of the financial position attributable to the PAC with-profits fund. The financial position is determined by applying the requirements of IAS 19.

 

Actuarial and other gains and losses

For pension schemes in which the IAS 19 position reflects the difference between the assets and liabilities of the scheme, actuarial and other gains and losses comprise:

 

•     the difference between actual and expected return on the scheme assets,

•     experience gains and losses on scheme liabilities,

•     the impact of altered economic and other assumptions on the discounted value of scheme liabilities, and

•     for pension schemes where the IAS 19 position reflects a deficit funding obligation, actuarial and other gains and losses includes the movement in estimates of deficit funding requirements.

 

These items are recorded in the income statement but, consistent with the IFRS basis of presentation, are excluded from operating results based on longer-term investment returns.

 

(vii) Effect of changes in economic assumptions

Movements in the value of in-force business at the beginning of the period caused by changes in economic assumptions, net of the related change in the time value of cost of option and guarantees, are recorded in non-operating results.

 

(viii) Taxation

The profit for the year for covered business is in most cases calculated initially at the post-tax level. The post-tax profit for covered business is then grossed up for presentation purposes at the rates of tax applicable to the countries and periods concerned. In the UK the rate applied for 2011 is 25 per cent (2010: 27 per cent). For Jackson, the US federal tax rate of 35 per cent is applied to gross up movements on the value of in-force business. The overall tax rate includes the impact of tax effects determined on a local regulatory basis. For Asia, similar principles apply subject to the availability of taxable profits. Tax payments and receipts included in the projected cash flows to determine the value of in force business are calculated using rates that have been substantively enacted by the end of the reporting period. Possible future changes of rate are not anticipated.

 

(ix) Inter-company arrangements

The EEV results for covered business incorporate the effect of the reinsurance arrangement of non-profit immediate pension annuity liabilities of SAIF (which is not covered business) to PRIL. In addition, the analysis of free surplus and value of in-force business takes account of the impact of contingent loan arrangements between Group companies.

 

(x) Foreign exchange rates

Foreign currency results have been translated as discussed in note 1(b)(viii), for which the principal exchange rates are as follows:

 

 

Local currency: £

Closing rate at

 31 Dec 2011

Average rate

for 2011

Closing rate at

31 Dec 2010 

Average rate

for 2010

Opening rate at

1 Jan 2010 

China

9.78 

10.37 

10.32 

10.46 

11.02 

Hong Kong

12.07 

12.48 

12.17 

12.01 

12.52 

India

82.53 

74.80 

70.01 

70.66 

75.15 

Indonesia

14,091.80 

14,049.41 

14,106.51 

14,033.41 

15,171.52 

Korea

1,790.32 

1,775.98 

 1,776.86 

 1,786.23 

1,880.45 

Malaysia

4.93 

4.90 

4.83 

4.97 

5.53 

Singapore

2.02 

2.02 

2.01 

2.11 

2.27 

Taiwan

47.06 

47.12 

45.65 

48.65 

51.65 

Vietnam

32,688.16 

33,139.22 

 30,526.26 

 29,587.63 

29,832.74 

US

1.55 

1.60 

1.57 

1.55 

1.61 

 

2 Analysis of new business contributionnote (iv)

 

 


  

2011 


  



Annual premium and contribution equivalents (APE)

Present value of new business premiums (PVNBP)

Pre-tax new business contribution

New business margin


  

New business premiums

note (i)


  

Single 

Regular 

(APE)

(PVNBP)


  



note (i) 

note (i) 

notes (ii),(iii) 


  


  

£m 

£m 

£m 

£m 

£m 

Asian operations

 1,456 

 1,514 

 1,660 

 8,910 

 1,076 

65 

12.1 

US operations

 12,562 

 19 

 1,275 

 12,720 

 815 

64 

6.4 

UK insurance operationsnote (vii)

 4,871 

 259 

 746 

 6,111 

 260 

35 

4.3 

Total

  

 18,889 

 1,792 

 3,681 

 27,741 

 2,151 

58 

7.8 


  







  


  







  

 

  

2010 


  

New business premiums

Annual   premium and contribution equivalents (APE)

Present value of new business premiums (PVNBP)

Pre-tax new business contribution

New business margin

note (i)


  

Single 

Regular 

(APE)

(PVNBP)


  



note (i) 

note (i) 

notes (ii),(iii) 


  


  

£m 

£m 

£m 

£m 

£m 

Asian operationsnotes (v),(vi)

1,104 

1,391 

1,501 

7,493 

902 

60 

12.0 

US operations

11,417 

22 

1,164 

11,572 

761 

65 

6.6 

UK insurance operationsnote (vii)

5,656 

254 

820 

6,842 

365 

45 

5.3 

Total

  

18,177 

1,667 

3,485 

25,907 

2,028 

58 

7.8 

 


  

New business margin (APE %)


   

2011 

2010 

Asian operations:note (v)




China

46 

47 


Hong Kong

66 

74 


India

20 

20 


Indonesia

87 

75 


Korea

43 

31 


Taiwan

19 

13 


Other

76 

79 

Weighted average for all Asian operations

65 

60 

 

Notes

(i)      New business margins are shown on two bases, namely the margins by reference to Annual Premium Equivalents (APE) and the Present Value of New Business Premiums (PVNBP) and are calculated as the ratio of the value of new business profit to APE and PVNBP. APE are calculated as the aggregate of regular new business amounts and one-tenth of single new business amounts. PVNBP are calculated as equalling single premiums plus the present value of expected premiums of new regular premium business, allowing for lapses and other assumptions made in determining the EEV new business contribution.

(ii)     In determining the EEV basis value of new business, premiums are included in projected cash flows on the same basis of distinguishing annual and single premium business as set out for statutory basis reporting.

(iii)    New business contributions represent profits determined by applying operating assumptions as at the end of the year. In general, the use of point of sale or end of period economic assumptions is not significant in determining the new business contribution for different types of business and across financial reporting periods. However, to obtain proper measurement of the new business contribution for business which is interest rate sensitive, it is appropriate to use assumptions reflecting point of sale market conditions, consistent with how the business was priced. In practice, the only area within the Group where this has a material effect is for UK shareholder-backed annuity business. For other business within the Group end of period economic assumptions are used.

(iv)    The amounts shown in the tables are translated at average exchange rates for the year.

(v)     The tables for 2010 exclude new business sales and contributions for Japanese insurance operations in which the Company ceased selling new business from 15 February 2010.

(vi)    The new business contribution in 2010 of £902 million for Asian operations includes a benefit of around £5 million arising from the application of the 'active' basis of economic assumption setting rather than the previously applied basis of an assessment of longer-term economic conditions, as described in note 17(a)(v).

(vii)   The new business margin for UK operations for 2010 of 45 per cent reflects the signing of bulk annuity buy-in insurance agreements with an APE of £93 million and new business profit of £106 million. In 2011 the new business margin of 35 per cent includes bulk annuity agreements with an APE of £33 million and new business profit of £28 million.

 

3 Operating profit from business in force

 

Group Summary

 

 

  

2011 

  

Asian operations

US

operations

UK

insurance

operations

Total 

  

note (i)

note (ii)

note (iii)


  

£m

£m

£m

£m

Unwind of discount and other expected returns

613 

349 

485 

1,447 

Effect of change in operating assumptions

10 

14 

79 

103 

Experience variances and other items

65 

253 

29 

347 

Total

688 

616 

593 

1,897 

  





  

2010 

  

Asian

operations

US

operations

UK

insurance

operations

Total 

  

note (i)

note (ii)

note (iii)


  

£m

£m

£m

£m

Unwind of discount and other expected returns

573 

369 

550 

1,492 

Effect of change in operating assumptions

(23)

(3)

(23)

Experience variances and other items

(1)

325 

24 

348 

Total

549 

697 

571 

1,817 

 

Notes

Analysis by business unit

(i)   Asian operations



  

2011 

2010 



  


note (j)



  

£m 

£m 


Unwind of discount and other expected returnsnote (a)

613 

573 


Effect of change in operating assumptions:





Mortality and morbiditynote (b)

126 

89 



Expensenote (c)

11 

(62)



Persistency and withdrawalsnote (d)

(140)

(75)



Othernote (e)

13 

25 



  

10 

(23)


Experience variance and other items:





Mortality and morbiditynote (f)

58 

45 



Expensenote (g)

(31)

(39)



Persistency and withdrawalsnote (h)

10 

(48)



Other note (i)

28 

41 



  

65 

(1)


Total Asian operations

688 

549 

 

Notes

(a)    The increase in unwind of discount and other expected returns to £613 million in 2011 from £573 million in 2010 mainly arises from the growth in the opening value of the in-force book, partially offset by the effect of the reduction in interest rates.

(b)   The credit of £126 million in 2011 for mortality and morbidity assumption changes arises as follows:



  

2011 



  

£m



Malaysianote (1)

69 



Indonesianote (2)

33 



Singapore

19 



Other



  

126 

 

(1)   The credit in Malaysia of £69 million relates to revised mortality and morbidity assumptions, reflecting recent experience.

(2)   The credit in Indonesia of £33 million represents the effect of revised morbidity assumptions of £48 million, the revision of reinsurance rates of £8 million, offset by modelling enhancements for the cost of reinsurance of £(23) million.

 

The credit of £89 million in 2010 for mortality and morbidity assumption changes mainly arose in Indonesia of £72 million comprising £36 million for relaxation of morbidity assumptions and £36 million to reflect recent experience in relation to protection benefits provided by unit-linked policies.

(c)    The overall credit of £11 million in 2011 for expense assumption changes mainly arises from altered assumptions for maintenance expenses, reflecting recent experience, principally in Singapore of £34 million and Indonesia of £11 million, partly offset by a charge in India of £(30) million. 

        The charge of £(62) million in 2010 for expense assumption changes includes a charge in Korea of £(40) million to reflect higher policy maintenance costs and a charge of £(16) million in Malaysia relating to altered maintenance expense assumptions.

(d)   The charge of £(140) million in 2011 for persistency and withdrawals assumption changes arises as follows:



  

2011 



  

£m 



Malaysianote (1)

(106)



Indianote (2)

(21)



Indonesia

(13)



Singapore

(4)



Other



  

(140)

 

(1) The charge of £(106) million in Malaysia includes £(108) million for the effect of strengthening partial withdrawal assumptions on PruSaver product riders to reflect recent experience. Policyholders' pattern and frequency of withdrawals from this savings rider is different from that of the underlying "host" contract, where both persistency and premium payment experience remains in line with assumptions.

(2) The charge in India of £(21) million mainly reflects lower persistency assumptions for paid-up policies for unit linked business.

 

The charge of £(75) million for 2010 for the effect of changes in persistency and withdrawals assumptions mainly arises in Indonesia of £(33) million, Malaysia of £(26) million and India of £(24) million partly offset by a credit in Hong Kong of £16 million. The charge in Indonesia of £(33) million primarily relates to Shariah and single premium policies for which lower renewal rates had been experienced. The charge in Malaysia of £(26) million reflects altered premium holiday and other lapse assumptions and the charge in India of £(24) million represents changes in persistency assumptions on linked business.

(e)   The credit of £13 million in 2011 for other operating assumptions principally represents the combined effect of a favourable change in assumed asset management margins, a reduction in investment expenses for Indonesia resulting from a growth in the asset portfolio, a decrease in policyholder bonuses in the Philippines, partly offset by the effect of altered profit sharing arrangements in relation to participating business in Vietnam.

(f)    The favourable effect of mortality and morbidity experience in 2011 of £58 million and in 2010 of £45 million reflects better than expected experience, principally arising in Hong Kong, Indonesia, Singapore and Malaysia.

(g)    The negative expense experience variance of £(31) million in 2011 (2010: £(39) million) comprises a charge of £(26) million (2010: £(18) million) for expense overruns for operations which are at a relatively early stage of development, for which actual expenses are in excess of those factored into the product pricing, together with £(6) million (2010: £(9) million) in Taiwan and £1 million (2010: £(12) million) of variance for other operations.

(h)   The positive persistency and withdrawals experience variance of £10 million in 2011 reflects a combination of favourable experience in Hong Kong and Indonesia, partially offset by individually small negative variances in other territories.

The negative persistency and withdrawals experience variance of £(48) million in 2010 mainly arises in India of £(27) million relating to higher paid-ups and surrenders on unit-linked business and in Malaysia of £(26) million for higher partial withdrawals on unit-linked business as customers sought to monetise a proportion of their funds following two years of exceptional returns.

(i)    The credit of £28 million in 2011 for other experience and other items primarily arises in Indonesia of £24 million. The credit of £41 million in 2010 includes a credit of £24 million arising in Indonesia for the impact of additional riders being added to in-force policies during the year, funded from the policyholder unit-linked account balances.

(j)    The in-force operating profit for 2010 of £549 million reflects the effect of setting economic assumptions on an 'active' basis rather than the previously applied 'passive' basis as described in note 17(a)(v), the impact of which was to lower in-force operating profits in 2010 by £(58) million, principally for altered unwind of discount. 

 

(ii)  US operations  



  

2011 

2010 



  

£m 

£m 


Unwind of discount and other expected returnsnote (a)

349 

369 


Effect of changes in operating assumptions:





Persistencynote (b)

29 



Variable Annuity (VA) feesnote (c)

24 

27 



Mortalitynote (d)

(36)

10 



Othernote (e)

(3)

(38)



  

14 


Experience variances and other items:





Spread experience variancenote (f)

152 

158 



Amortisation of interest-related realised gains and lossesnote (g)

84 

82 



Othernote (h)

17 

85 



  

253 

325 


Total US operations

616 

697 

 

      Notes

(a)  The decrease in unwind of discount and other expected returns from £369 million for 2010 to £349 million for 2011 mainly reflects lower unwind of discount driven by the reduction in the 10-year US treasury rate, partly offset by an increase in opening value of in-force business.

(b)  The credit of £29 million for the effect of changes in persistency assumptions in 2011 arises on variable annuity business of a credit of £15 million and £14 million on other business. The credit of £15 million for VA business represents a credit of £32 million to reflect a decrease in lapse rates for selected product and policy duration combinations, partially offset by a charge of £(17) million to increase partial withdrawal rates in line with experience. The credit of £14 million for other business reflects updated persistency assumptions for life and fixed annuity business.

(c) The effect of the change of assumption for VA fees represents the capitalised value of the change in the projected level of policyholder advisory fees, which vary according to the size and mix of VA funds. The credit of £24 million for 2011 (2010: £27 million) reflects an increase in the projected level of fees paid by policyholders, according to the current fund size and mix.

(d)  The charge of £(36) million for 2011 for updated mortality assumptions primarily arises on variable annuity business to reflect recent mortality experience. The credit of £10 million for 2010 represents a credit of £29 million for business other than variable annuity, reflecting recent experience, partially offset by a negative effect on variable annuity business of £(19) million for a change in the modelling of mortality rates.

(e)  The charge of £(38) million for other operating assumption changes in 2010 includes the net effect of a number of items including a charge of £(19) million for the altered projection of life reserves run-off. 

(f)  The spread assumption for Jackson is determined on a longer-term basis, net of provision for defaults. The spread experience variance in 2011 of £152 million (2010: £158 million) includes the positive effect of transactions undertaken in 2010 and 2011 to more closely match the overall asset and liability duration.

(g)  The amortisation of interest-related gains and losses reflects the same treatment applied to the supplementary analysis of IFRS profit. When bonds that are neither impaired nor deteriorating are sold and reinvested there will be a consequent change in the investment yield. The realised gain or loss is amortised into the result over the period when the bonds would have otherwise matured to better reflect the long-term returns included in operating profits.      

(h)  Other experience variances and other items arise as follows:

 



  

2011 

2010 



  

£m

£m



Mortality experience variancenote (1)

(6)

21 



Expense experience variancenote (2)

12 

32 



Persistency experience variancenote (3)

21 

23 



Other  

(10)



  

17 

85 



  



 

(1)   The negative mortality experience variance of £(6) million in 2011 includes a provision of £(16) million in respect of unclaimed property for deceased policyholders.  The positive mortality experience variance of £21 million in 2010 primarily relates to life products.

(2)   The positive expense experience variances of £12 million in 2011 and £32 million in 2010 primarily represent favourable experience variance relating to marketing expenses.

(3)   The positive persistency experience variance of £21 million in 2011 mainly arises on annuity business and in 2010 the favourable experience variance of £23 million primarily arises on annuity and institutional business.

 

(iii)    UK insurance operations     




  

2011 

2010 




  

£m 

£m 


Unwind of discount and other expected returnsnote (a)

485 

550 


Effect of change in UK corporate tax ratenote (b)

79 

41 


Updated mortality assumptions, net of release of marginsnote (c)

(40)


Other itemsnote (d)

29 

20 


Total UK insurance operations

593 

571 

 

      Notes

(a)    The decrease in unwind of discount and other expected returns from £550 million for 2010 to £485 million for 2011 mainly arises from lower unwind on with-profits business, reflecting a decrease in both the risk discount rate and opening in-force value (as adjusted for the effects of changes in operating and economic assumptions).

(b)   In 2011 a change to reduce the UK corporate tax rate to 25 per cent with effect from 1 April 2012 was enacted. The effect of the change in tax rate of £79 million in 2011 represents the pre-tax benefit of the reduction in tax rate from 27 per cent to 25 per cent, arising from the increase in the present value of the post-tax projected cash flows of the in-force business, grossed up for notional tax. The effect of the change in tax rate of £41 million for 2010 represents the pre-tax benefit of the reduction in the tax rate from 28 per cent to 27 per cent.

(c)   In 2010 the Continuous Mortality Investigation (CMI) model and Core Projection parameters were reviewed and a custom parameterisation of the CMI model was made where some aspects of the pattern of convergence from current rates of improvements to long-term rates of improvement were altered. The assumption change shown above for 2010 of a charge of £(40) million represents the effect of the implementation of the custom parameterisation on the opening value of in-force business at 1 January 2010, offset by the effects of other mortality assumption changes and the release of margins on the base mortality assumptions.

(d)   Other items of £29 million for 2011 includes £45 million for the effects of annuity portfolio rebalancing.  In 2010, other items of £20 million includes a credit of £37 million for changes in operating expense assumptions relating to renewal expense assumptions on shareholder-backed annuity business.

 

4 Costs of terminated AIA transaction in 2010

 

In 2010, pre-tax costs of £377 million (post tax £284 million) were incurred in relation to the proposed, and subsequently terminated transaction, to purchase AIA Group Limited and related rights issue.

 

5 Short-term fluctuations in investment returns

 

Short-term fluctuations in investment returns, net of the related change in the time value of cost of options and guarantees, arise as follows:

 

Group Summary




  

2011 

2010 


  

   £m 

£m 

Insurance operations:




Asianote (i)

(155)

287 


USnote (ii)

(491)

(678)


UKnote (iii)

(141)

336 


  

(787)

(55)

Other operationsnote (iv)

(120)

25 

Total

(907)

(30)

 

Notes

Analysis by business unit

(i)  Asian operations

For 2011, short-term fluctuations in investment returns in Asian operations of £(155) million are driven by lower equity markets reducing future expected fee income, mainly arising in Singapore £(105) million and Korea £(22) million. The 2011 short-term fluctuations in investment returns also include £(28) million of adverse variance arising in other territories. This principally comprises fluctuations arising

in India of £(53) million reflecting lower equity market returns, in Vietnam of £(33) million for unrealised losses on bonds and equities and Taiwan of £(30) million for losses on bonds and CDOs, partially offset by a credit in Hong Kong of £96 million primarily relating to positive returns on bonds backing participating business.

 

For 2010, short-term fluctuations in investment returns in Asian operations of £287 million primarily reflect the favourable performance in equity markets across the territories, primarily arising in Indonesia £55 million, Hong Kong £51 million, Taiwan £40 million, Malaysia £37 million and Singapore £16 million. Also included for 2010 is an unrealised gain of £30 million on the Group's 8.66 per cent stake in China Life Insurance Company of Taiwan, which at 31 December 2010 was valued at £100 million.

 

(ii)

US operations




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





  

2011 

2010 





  

£m 

£m 


Debt securities investment return related experiencenote (a)

(74)

(351)


Investment return related impact due primarily to changed expectation of profits on in-force  





variable annuity business in future periods based on current period equity returns, net of related hedging activity for equity related productsnote (b)

(418)

(332)


Actual less long-term return on equity based investments and other items


Total Jackson

(491)

(678)

 

Notes

(a)  The charge relating to fixed income securities comprises the following elements:

-    the excess of actual realised losses over the amortisation of interest related realised losses recorded in the profit and loss account,

-    credit loss experience (versus the longer-term assumption), and

-    the impact of de-risking activities within the portfolio, which accounts for the majority of the 2010 charge.

(b)  This item reflects the net the impact of:

(1)  variances in projected future fees arising from the effect of market fluctuations on the growth in separate account asset values in the current reporting period, and

(2)  related hedging activity.

 

In 2011 there was a negative 0.5 per cent rate of return for the variable annuity separate account assets. This compared with an assumed longer-term rate of return of 5.4 per cent. Consequently the asset values, and therefore projected future fees at 31 December 2011, were lower than assumed. As a consequence of this lower level of return, net of the impact of relating hedging effects, there was a short-term fluctuation of £(418) million.

In 2010 there was a 14.5 per cent return which compared with an assumed longer-term rate of return of 6.8 per cent. However, despite this excess return, there was an overall charge of £(332) million which arose from the effects of related hedging activity.

 

(iii)

UK insurance operations




The short-term fluctuations in investment returns for UK insurance operations represents:




  

2011 

2010 


  

£m 

£m 


With-profitsnote (a)

(201)

218 


Shareholder-backed annuitynote (b)

56 

84 


Unit-linked and othernote (c)

34 


  

(141)

336 

 

 

Notes

(a)  For with-profits business the amounts reflect the excess (deficit) of the actual investment return on the investments of the PAC with-profits fund (covering policyholder liabilities and unallocated surplus) against the assumed long-term rate for the year. For 2011 the charge of £(201) million reflects the actual investment return of 3.2 per cent against the assumed long-term rate of 5.1 per cent, primarily reflecting the fall in equity markets and widening of corporate bond credit spreads, partially offset by the increase in asset values as a result of the reduction in bond yields. For 2010 the credit of £218 million reflects the actual investment return of 12.0 per cent against the assumed long-term rate of 6.7 per cent.

(b)  Short-term fluctuations in investment returns for shareholder-backed annuity business comprise (1) gains on surplus assets reflecting reductions in corporate bond and gilt yields in 2011 and 2010 and (2) the effect of mismatching for assets and liabilities of different durations and other short-term fluctuations in investment returns.

(c)  The short-term fluctuations in investment returns for unit-linked business represents the increase in capitalised value of future fees arising from the positive movements in market values experienced during the year.

 

(iv)   Other operations

      Short-term fluctuations in investment returns for other operations in 2011 of £(120) million (2010: £25 million) represent unrealised value movements on investments, principally on centrally held swaps to manage foreign exchange and certain macro-economic exposures of the Group.

 

6 Effect of changes in economic assumptions

 

The effects of changes in economic assumptions for in-force business, net of the related change in the time value of cost of options and guarantees, included within profit before tax (including actual investment returns) arise as follows:

 

Group Summary


  

  

2011 

2010 

  

£m 

£m 

Asian operationsnote (i)

279 

(71)

US operationsnote (ii)

(144)

(1)

UK insurance operationsnote (iii)

(293)

62 

Total

(158)

(10)

 

Notes

Analysis by business unit

(i)   Asian operations

The effect of changes in economic assumptions for Asian operations in 2011 of a credit of £279 million principally arises in Singapore £160 million, Malaysia £97 million and Indonesia £94 million, primarily reflecting the positive impact of discounting health and protection profits at lower rates, driven by the decrease in risk-free rates as shown in note 17(a). There is a partial offset arising in Hong Kong of £(57) million, primarily reflecting the reduction in fund earned rates for  participating business.

 

For 2010, the effect of changes in economic assumptions in Asian operations of £(71) million primarily represents the effect of de-risking certain asset portfolios in Hong Kong and Singapore totalling £(73) million, together with the effects of routine adjustments for changes in economic factors and the effect of altering the basis of setting economic assumptions to the 'active' basis as described in note 17(a)(v).

 

(ii)  US operations

The effect of changes in economic assumptions for US operations reflects the following:



  

2011 

2010 



  

£m 

£m 


Effect of changes in 10-year treasury rates, beta and equity risk premium:note (a)





Fixed annuity and other general account business  

282 

111 



Variable Annuity (VA) business

(333)

(112)


Increase in risk margin allowance for credit risknote (b)

(93)



  

(144)

(1)

 

Notes

(a)  For Jackson, the charge for the effect of changes in economic assumptions represents the aggregate of the effects of changes to projected returns and the risk discount rate. The risk discount rate, as discussed in note 1(b)(iii), represents the aggregate of the risk-free rate and margin for market risk, credit risk and non-diversifiable non-market risk.

      For fixed annuity and other general account business the effect of changes to the risk-free rate, which is defined as the 10-year treasury rate, is reflected in the risk discount rate. This discount rate is in turn applied to projected cash flows which principally reflect projected spread, which is largely insensitive to changes in the risk-free rate. Secondary effects on the cash flows also result from changes to assumed future yield and resulting policyholder behaviour.  For VA business, changes to the risk-free rate are also reflected in determining the risk discount rate. However, the projected cash flows are also reassessed for altered investment returns on the underlying separate account assets from which fees are charged. For 2011, the effect of these changes resulted in an overall credit for fixed annuity and other general account business of £282 million (2010: £111 million) and a charge for VA business of £(333) million (2010: £(112) million) reflecting the reduction of 1.4 per cent (2010: a reduction of 0.6 per cent) in the risk-free rate (as shown in note 17(a)).

(b)  For 2011 the effect of £(93) million for the increase in the risk margin allowance within the risk discount rate for credit risk represents 50 basis points increase in the risk discount rate for spread business (from 150 basis points in 2010 to 200 basis points in 2011), and 10 basis points for VA business (from 30 basis points in 2010 to 40 basis points in 2011), representing the proportion of business invested in the general account, as described in note 1(b)(iii).

       

(iii)    UK insurance operations

The effect of changes in economic assumptions of a charge of £(293) million for UK insurance operations for 2011 comprises the effect of:




2011 

2010 




Shareholder-backed annuity business

With-profits and other business

Total

Shareholder-

backed

annuity

business

With-profits

and other business

Total




note (a)

note (b)


note (a)

note (b)





£m

£m

£m

£m

£m

£m


Effect of changes in expected









long-term rates of return

58 

(1,113)

(1,055)

(102)

(80)

(182)


Effect of changes in risk discount rates

240 

627 

867 

55 

183 

238 


Other changes

(20)

(85)

(105)

(6)

12 



278 

(571)

(293)

(53)

115 

62 

 

 

Notes

(a)  For shareholder-backed annuity business the overall effect of changes in expected long-term rates of return and risk discount rates for the years shown above reflect the combined effects of the changes in assumptions which incorporate a default allowance for both best estimate defaults and in respect of the additional credit risk provisions, as shown in note 17(a).

(b)  For with-profits and other business the charge in 2011 of £(1,113) million for the effect of changes in expected long-term rates of return arises from the reduction in fund earned rates as shown in note 17(a), driven by the (1.5) per cent decrease in gilt rates and reduction in additional returns assumed on corporate bonds, reflecting changes in asset mix. The credit in 2011 of £627 million for the effect of changes in risk discount rates reflects the (1.35) per cent reduction in the risk discount rate as shown in note 17(a), driven by the (1.5) per cent decrease in gilt rates, partly offset by the impact of an increase in beta for with-profits business.

 

7 Shareholders' equity (excluding non-controlling interests) - segmental analysis

 



  


2011 

2010 



  

Note

£m 

£m 

Asian operations




Long-term business:  





Net assets of operations - EEV basis shareholders' equitynote (iii)


8,510 

7,445 


Acquired goodwillnote (i)


235 

236 



  


8,745 

7,681 

Eastspring Investments:note (i)





Net assets of operations


211 

197 


Acquired goodwill


61 

61 



  


272 

258 



  


9,017 

7,939 

US operations




Jackson - EEV basis shareholders' equity (net of surplus note borrowings of £177





million (2010: £172 million))


5,082 

4,799 

Broker-dealer and asset management operationsnote (i)





Net assets of operations


113 

106 


Acquired goodwill


16 

16 



  


129 

122 



  


5,211 

4,921 

UK operations




Insurance operations:





Long-term business operations:






Smoothed shareholders' equity


6,097 

5,911 



Actual shareholders' equity less smoothed shareholders' equity


(39)

59 



EEV basis shareholders' equity


6,058 

5,970 


Othernote (i)


29 

33 



  


6,087 

6,003 

M&G:note (i)





Net assets of operations


229 

254 


Acquired goodwill


1,153 

1,153 



  


1,382 

1,407 



  


7,469 

7,410 

Other operations




Holding company net borrowings at market value

9

(2,188)

(2,212)

Other net assets note (i)


128 

149 



  


(2,060)

(2,063)

Total


19,637 

18,207 



  

2011 

2010 

  

Statutory

IFRS basis

shareholders'

equity

Additional

retained profit

on an EEV

basis

EEV basis

share-

holders'

equity

Statutory

IFRS basis

shareholders'

equity

Additional

retained profit

on an EEV

basis

EEV basis

share-

holders'

equity

Representing:

£m

£m

£m

£m

£m

£m

Asian operations

2,349 

6,396 

8,745 

2,149 

5,532 

7,681 

US operations

4,271 

811 

5,082 

3,815 

984 

4,799 

UK insurance operations

2,552 

3,506 

6,058 

2,115 

3,855 

5,970 

Total long-term business operations

9,172 

10,713 

19,885 

8,079 

10,371 

18,450 

Other operationsnote (ii)

(55)

(193)

(248)

(48)

(195)

(243)

Group total

9,117 

10,520 

19,637 

8,031 

10,176 

18,207 

Notes

(i)  With the exception of the share of the Prudential Staff Pension Scheme (PSPS) deficit (as explained below), the amounts shown for net assets of non-covered business, together with acquired goodwill, have been determined on the statutory IFRS basis.

     The share of the PSPS deficit attributable to the PAC with-profits fund is included in 'Other operations' net assets. The overall pension scheme deficit, net of tax, attributable to shareholders relating to PSPS is determined as shown below:




2011 

2010 




£m 

£m 


IFRS basis deficit (relating to shareholder-backed operations)

(5)

(10)


Additional EEV deficit (relating to shareholders' 10 per cent share of the IFRS basis





deficit attributable to the PAC with-profits fund)

(1)

(3)


EEV basis

(6)

(13)

 

(ii)  The additional retained profit on an EEV basis for Other operations primarily represents the mark to market value difference on holding company net borrowings of a charge of £(187) million (2010: £(177) million), as shown in note 9.

(iii) The EEV basis shareholders' equity for Asian long-term business for 2010 of £7,445 million includes the £(39) million effect of moving from a passive to an active basis of economic assumption setting as described in note 17(a)(v).

 

8 Analysis of movement in free surplus

 

Free surplus is the excess of the net worth over the capital required to support the covered business. Where appropriate, adjustments are made to the regulatory basis net worth from the local regulatory basis so as to include backing assets movements at fair value rather than cost so as to comply with the EEV Principles. Prudential has based required capital on its internal targets for economic capital subject to it being at least the local statutory minimum requirements, as described in note 1(b)(ii).

 




   

2011 




  

 Long-term business

Asset management and UK general insurance commission

Free surplus of long-term business, asset management and UK general insurance commission




  

note 14

note (ii)


Long-term business and asset management operationsnote (i)

£m

£m

£m

Underlying movement:





New business

(553)

(553)


Business in force:






Expected in-force cash flows (including expected return on net assets)

1,972 

363 

2,335 



Effects of changes in operating assumptions, operating experience







variances and other operating items

168 

168 



RPI to CPI inflation measure change on defined benefit pension schemes

20 

13 

33 




  

1,607 

376 

1,983 

Changes in non-operating itemsnote (iii)

(507)

(24)

(531)




  

1,100 

352 

1,452 

Net cash flows to parent companynote (iv)

(829)

(276)

(1,105)

Exchange movements, timing differences and other itemsnote (v)

(180)

(84)

(264)

Net movement in free surplus

91 

(8)

83 

Balance at 1 January 2011

2,748 

590 

3,338 

Balance at 31 December 2011

2,839 

582 

3,421 

Representing:





Asian operations

1,067 

211 

1,278 


US operations

1,220 

113 

1,333 


UK operations

552 

258 

810 




  

2,839 

582 

3,421 

1 January 2011




Representing:





Asian operations

1,045 

197 

1,242 


US operations

1,163 

106 

1,269 


UK operations

540 

287 

827 




  

2,748 

590 

3,338 

 

Notes

(i)    All figures are shown net of tax.

(ii)   For the purposes of this analysis, free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis shareholders' equity as shown in note 7.

(iii)  Changes in non-operating items
This represents short-term fluctuations in investment returns, the shareholders' share of actuarial and other gains and losses on defined benefit pension schemes and the effect of changes in economic assumptions for long-term business operations.
Short-term fluctuations in investment returns primarily reflect temporary market movements on the portfolio of investments held by the Group's shareholder-backed operations.

(iv)  Net cash flows to parent company for long-term business operations reflect the flows as included in the holding company cash flow at transaction rates.

(v)   Exchange movements, timing differences and other items represent:

 



  

2011 



  

Long-term business

Asset management and UK general insurance commission

Total



  

£m

£m

£m


Exchange movementsnote 14

(15)

(2)

(17)


Mark to market value movements on Jackson assets backing surplus and






 required capitalnote 14

62 

62 


Othernote (vi)

(227)

(82)

(309)


  

(180)

(84)

(264)

 

(vi) Other primarily reflects the effect of repayment of contingent loan funding, as shown in note 14(ii), together with timing differences, intra-group loans and other non-cash items.

 

9 Net core structural borrowings of shareholder-financed operations

 

 


  

2011 

2010 


  

IFRS basis

Mark to

market

value

adjustment

EEV

basis at

market

value

IFRS

basis

Mark to

market

value

adjustment

EEV

basis at

market

value


  


note (ii)



note (ii)



  

£m

£m

£m

£m

£m

£m

Holding company* cash and  








short-term investments

(1,200)

(1,200)

(1,232)

(1,232)

Core structural borrowings -  








central fundsnote (i)

3,201 

187 

3,388 

3,267 

177 

3,444 

Holding company net borrowings

2,001 

187 

2,188 

2,035 

177 

2,212 

Core structural borrowings - Prudential Capitalnote (iii)

250 

250 

250 

250 

Core structural borrowings - Jackson  

160 

17 

177 

159 

13 

172 

Net core structural borrowings of  








shareholder-financed operations

2,411 

204 

2,615 

2,444 

190 

2,634 

* Including central finance subsidiaries.  







 

Notes



(i)

EEV basis holding company borrowings comprise:





2011 

2010 



£m 

£m 


Perpetual subordinated capital securities (Innovative Tier 1)

1,813 

1,491 


Subordinated debt (Lower Tier 2)

949 

1,372 


Senior debt

626 

581 



3,388 

3,444 

 

In January 2011, the Company issued US$550 million perpetual subordinated capital securities which has been used to finance the repayment of the €500 million subordinated debt in December 2011.

 

In accordance with the EEV Principles, core borrowings are carried at market value. As the liabilities are generally held to maturity or for the long-term, no deferred tax asset or liability has been established on the market value adjustment above.

     

(ii) The movement in the mark to market value adjustment represents:

 




2011 

2010 


Mark to market movement in balance sheet:

£m 

£m 


Beginning of year

190 

30 


Change:





Income statement

14 

164 



Foreign exchange effects

(4)


End of year

204 

190 

 

(iii) The core structural borrowing by Prudential Capital of £250 million represents a bank loan taken out in 2010 which was made in two tranches: £135 million maturing in June 2014 and £115 million maturing in December 2012.

 

10 Reconciliation of movement in shareholders' equity (excluding non-controlling interests)

 

 



  

2011 



  

Long-term business operations





  

Asian operations

US operations

UK

insurance operations

Total

long-term business

Other operations

Group

total



  



  



  

£m

£m

£m

£m

£m

£m

Operating profit (based on longer-term








investment returns)







Long-term business:








New businessnote 2

1,076 

815 

260 

2,151 

2,151 


Business in forcenote 3

688 

616 

593 

1,897 

1,897 




1,764 

1,431 

853 

4,048 

4,048 

Asia development expenses

(5)

(5)

(5)

UK general insurance commission

40 

40 

M&G

357 

357 

Eastspring Investments

80 

80 

US broker-dealer and asset management

24 

24 

Other income and expenditure

(536)

(536)

RPI to CPI inflation measure change on defined benefit








pension schemes

27 

27 

18 

45 

Solvency II implementation costs

(4)

(8)

(12)

(44)

(56)

Restructuring costs

(19)

(19)

(19)

Operating profit based on longer-term








investment returns

1,759 

1,427 

853 

4,039 

(61)

3,978 

Short-term fluctuations in investment returnsnote 5

(155)

(491)

(141)

(787)

(120)

(907)

Mark to market value movements on core borrowingsnote 9

(4)

(4)

(10)

(14)

Shareholders' share of actuarial and other gains and








losses on defined benefit pension schemes

20 

20 

23 

Effect of changes in economic assumptionsnote 6

279 

(144)

(293)

(158)

(158)

Profit (loss) before tax (including actual investment









returns)

1,883 

788 

439 

3,110 

(188)

2,922 

Tax (charge) credit attributable to shareholders'  








profit (loss):note 11








Tax on operating profit

(402)

(487)

(221)

(1,110)

66 

(1,044)


Tax on short-term fluctuations in investment returns

10 

157 

35 

202 

210 


Tax on shareholders' share of actuarial and other









gains and losses on defined benefit pension schemes

(5)

(5)

(1)

(6)


Tax on effect of changes in economic assumptions

(58)

50 

72 

64 

64 

Total tax (charge) credit

(450)

(280)

(119)

(849)

73 

(776)

Non-controlling interests

-

-

(4)

(4)

Profit (loss) for the year

1,433 

508 

320 

2,261 

(119)

2,142 

Other movements







Exchange movements on foreign operations








and net investment hedgesnote (i)

(87)

42 

(45)

(45)

(90)

Related tax

(68)

(68)

Intra-group dividends (including statutory transfers)note (iii)

(302)

(330)

(218)

(850)

850 

External dividends

(642)

(642)

Reserve movements in respect of share-based payments

44 

44 

Investment in operationsnote (iii)

32 

36 

(36)

Other transfersnote (iv)

(11)

(18)

(28)

28 

Movement in own shares held in respect of share-








based payment plans

(30)

(30)

Movement in Prudential plc shares purchased by








unit trusts consolidated under IFRS

(5)

(5)

New share capital subscribed

17 

17 

Mark to market value movements on Jackson assets








backing surplus and required capital:









Mark to market value movements arising during the year

96 

96 

96 



Related tax

(34)

(34)

(34)

Net increase (decrease) in shareholders' equity

1,065 

283 

88 

1,436 

(6)

1,430 

Shareholders' equity at 1 January 2011notes (ii) and 7

7,445 

4,799 

5,970 

18,214 

(7)

18,207 

Shareholders' equity at 31 December 2011notes (ii) and 7

8,510 

5,082 

6,058 

19,650 

(13)

19,637 

 

Notes

(i)    Profits are translated at average exchange rates, consistent with the method applied for statutory IFRS basis results. The amounts recorded above for exchange rate movements reflect the difference between 2011 and 2010 exchange rates as applied to shareholders' equity at 1 January 2011 and the difference between 31 December 2011 and average rates for the year ended 31 December 2011.

(ii)   For the purposes of the table above, goodwill related to Asia long-term operations (as shown in note 7) is included in Other operations.

(iii)  Total intra-group dividends and investment in operations represent:

 

 




Total

long-term business operations



  



UK insurance operations



  

Asian operations

US operations

Other operations


  

Total

  

£m 

£m 

£m 

£m 

£m 

£m 

Intra-group dividends (including statutory transfers)note (a)

(302)

(330)

(218)

(850)

850 

Investment in operationsnote (b)

32 

36 

(36)

Totalnote (c)

(270)

(330)

(214)

(814)

814 

 

Notes

(a)  Intra-group dividends (including statutory transfers) represent dividends that have been declared in the year  and amounts accrued in respect of statutory transfers.

(b)  Investment in operations reflects increases in share capital. 

(c)  For long-term business operations, the difference between the total above of £814 million for intra-group dividends (including statutory transfers) and investment in operations and the net cash flows to parent company of £829 million (as shown in note 8) primarily relates to timing differences arising on statutory transfers, intra-group loans and other non-cash items.

 

(iv)     Other transfers from long-term business operations to Other operations in 2011 represent:

 






Total

long-term

business operations





UK insurance operations



Asian operations

US operations





£m 

£m 

£m 

£m 


Adjustment for net of tax asset management projected profits of covered business

(15)

(3)

(22)

(40)


Other adjustments

4  

4  

4  

12  



(11)

1  

(18)

(28)

 

11 Tax attributable to shareholders' profit

 

 

The tax charge comprises:


  

2011 

2010 


  

£m 

£m 

Tax charge on operating profit based on longer-term investment returns:



Long-term business:




Asian operationsnote (i)

402 

329 


US operations

487 

509 


UK insurance operationsnote (i)

221 

260 


  

1,110 

1,098 

Other operations

(66)

(106)

Total tax charge on operating profit based on longer-term investment returns, excluding




exceptional tax credit  

1,044 

992 

Exceptional tax creditnote (ii)

(158)

Total tax charge on operating profit based on longer-term investment returns,




 including exceptional tax credit  

1,044 

834 

Tax credit on items not included in operating profit:



Tax credit on short-term fluctuations in investment returnsnote (iii)

(210)

(222)

Tax charge (credit) on shareholders' share of actuarial and other gains and losses on defined




 benefit pension schemes  

(2)

Tax (credit) charge on effect of changes in economic assumptions  

(64)

13 

Tax credit on costs of terminated AIA transaction

(93)

Total tax credit on items not included in operating profit  

(268)

(304)

Tax charge on profit attributable to shareholders (including




tax on actual investment returns)

776 

530 

 

Notes

(i)   Including tax relief on Asia development expenses and restructuring costs borne by UK insurance operations.

(ii)  The 2010 tax charge on operating profit based on longer-term investment returns of £834 million included an exceptional tax credit of £158 million which primarily related to the impact of a settlement agreed with the UK tax authorities.

(iii) In 2010, the tax charge on short-term fluctuations in investment returns of £(222) million included a credit of £52 million for a net present value reduction in US deferred tax liabilities following changes to variable annuity reserving in accordance with revised statutory guidance.

 

12 Earnings per share (EPS)

 

 



2011 

2010 



£m

£m

Operating EPS:

 

  


Operating profit before tax

3,978 

3,696 


Tax excluding exceptional tax credit

(1,044)

(992)


Non-controlling interests

(4)

(4)

Operating profit after tax and non-controlling interests excluding exceptional tax credit

2,930 

2,700 

Exceptional tax credit*

158 

Operating profit after tax and non-controlling interests including exceptional tax credit

2,930 

2,858 

Operating EPS (pence) excluding exceptional tax credit

115.7 p

106.9 p

Exceptional tax credit (pence)

- p

6.3 p

Operating EPS (pence) including exceptional tax credit

115.7 p

113.2 p

Total EPS:

 

 


Profit before tax

2,922 

3,107 


Tax

(776)

(530)


Non-controlling interests

(4)

(4)

Total profit after tax and non-controlling interests

2,142 

2,573 

Total EPS (pence) including exceptional tax credit

84.6 p

101.9 p

Average number of shares (millions)

2,533 

2,524 

*

The 2010 tax charge attributable to shareholders' profit included an exceptional tax credit of £158 million which primarily related 


to the impact of a settlement agreed with the UK tax authorities.

 

 



 

 


The average number of shares reflects the average number in issue adjusted for shares held by employee trusts and consolidated unit trusts and OEICs which are treated as cancelled.

 

13 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.

     

A gain of £3 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.

 

14 Reconciliation of net worth and value of in-force businessnote(i)

 

 


  

2011 


  




Value of

Total


  

Free Surplus

Required

Total net

in-force

long-term


  

capital

 worth

business

business


  

note  8



note (vii)



  

£m

£m

£m

£m

£m

Group







  






Shareholders' equity at 1 January 2011

2,748 

3,415 

6,163 

12,051 

18,214 

New business contributionnotes (iv), (v)

(553)

406 

(147)

1,683 

1,536 

Existing business - transfer to net worth

1,862 

(339)

1,523 

(1,523)

Expected return on existing business

110 

84 

194 

880 

1,074 

Changes in operating assumptions and experience variances  

168 

(42)

126 

173 

299 

RPI to CPI inflation measure change on defined benefit pension schemes

20 

20 

20 

Changes in non-operating assumptions and experience variances

(507)

(78)

(585)

(83)

(668)

Profit after tax from long-term business

1,100 

31 

1,131 

1,130 

2,261 

Exchange movements on foreign operations and net investment hedges

(15)

(14)

(31)

(45)

Intra-group dividends (including statutory transfers)







and investment in operationsnote (ii)

(1,028)

(1,028)

214 

(814)

Mark to market value movements on Jackson  







assets backing surplus and required capital

62 

62 

62 

Other transfers from net worth

(28)

(28)

(28)

Shareholders' equity at 31 December 2011

2,839 

3,447 

6,286 

13,364 

19,650 


  






Representing:






Asian operations






Shareholders' equity at 1 January 2011

1,045 

790 

1,835 

5,610 

7,445 

New business contributionnote (v)

(297)

97 

(200)

1,011 

811 

Existing business - transfer to net worth

597 

21 

618 

(618)

Expected return on existing business

58 

58 

424 

482 

Changes in operating assumptions and experience variances

52 

(40)

12 

52 

64 

Changes in non-operating assumptions and experience variances

(49)

(3)

(52)

128 

76 

Profit after tax from long-term business

361 

75 

436 

997 

1,433 

Exchange movements on foreign operations and net investment hedges

(23)

(5)

(28)

(59)

(87)

Intra-group dividends (including statutory transfers)







and investment in operationsnote (ii)

(305)

(305)

35 

(270)

Other transfers from net worth

(11)

(11)

(11)

Shareholders' equity at 31 December 2011

1,067 

860 

1,927 

6,583 

8,510 


  






 

US operations






 

Shareholders' equity at 1 January 2011

1,163 

1,505 

2,668 

2,131 

4,799 

 

New business contributionnote (v)

(202)

232 

30 

500 

530 

 

Existing business - transfer to net worth

754 

(288)

466 

(466)

 

Expected return on existing business

42 

46 

88 

139 

227 

 

Changes in operating assumptions and experience variances

154 

156 

27 

183 

 

Changes in non-operating assumptions and experience variancesnote (iii)

(432)

(132)

(564)

132 

(432)

 

Profit after tax from long-term business

316 

(140)

176 

332 

508 

 

Exchange movements on foreign operations and net investment






 


hedges

14 

28 

42 

 

Intra-group dividends (including statutory transfers) and  






 


investment in operations

(330)

(330)

(330)

 

Mark to market value movements on Jackson assets backing






 


surplus and required capital

62 

62 

62 

 

Other transfers to net worth

 

Shareholders' equity at 31 December 2011

1,220 

1,371 

2,591 

2,491 

5,082 

 

 


  







  

2011 


  

Free Surplus

Required capital

Total net worth

Value of

in-force business

Total

long-term business


  

note  8



note (vii)



  

£m

£m

£m

£m

£m

UK insurance operations






Shareholders' equity at 1 January 2011

540 

1,120 

1,660 

4,310 

5,970 

New business contributionnote (v)

(54)

77 

23 

172 

195 

Existing business - transfer to net worth

511 

(72)

439 

(439)

Expected return on existing business

10 

38 

48 

317 

365 

Changes in operating assumptions and experience variances

(38)

(4)

(42)

94 

52 

RPI to CPI inflation measure change on defined benefit pension







schemes

20 

20 

20 

Changes in non-operating assumptions and experience variances

(26)

57 

31 

(343)

(312)

Profit after tax from long-term business

423 

96 

519 

(199)

320 

Intra-group dividends (including statutory transfers)







and investment in operationsnote (ii)

(393)

(393)

179 

(214)

Other transfers from net worth

(18)

(18)

(18)

Shareholders' equity at 31 December 2011

552 

1,216 

1,768 

4,290 

6,058 

 

Notes

(i)    All figures are shown net of tax.

(ii)   The amounts shown in respect of free surplus and the value of in-force business for Asian and UK insurance operations for intra-group dividends (including statutory transfers) and investment in operations include the repayment of contingent loan funding. Contingent loan funding represents amounts whose repayment to the lender is contingent upon future surpluses emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall.

(iii)  For US operations, changes in non-operating assumptions and experience variances for required capital reflects a release to free surplus following a reduction in the required asset risk charges arising from improvements to quality of the investment portfolio.

(iv)  The movements arising from new business contribution are as follows:

 



  

2011 

2010 


  

£m 

£m 


Free surplus invested in new business:





Excluding Japan

(553)

(643)



Japannote (vi)

(2)



Totalnote (vi)

(553)

(645)


Required capital

406 

461 


Total net worth

(147)

(184)


Value of in-force business

1,683 

1,616 


Total post-tax new business contribution

1,536 

1,432 

 



  







      (v)       Free surplus invested in new business is as follows:








  

2011 



  

Asian operations (excluding Japan) 

US operations

UK insurance operations

Total

long-term

business operations

(excluding

Japan)

Japan

Total

long-term

business operations



  

note (vi)



note (vi)

note (vi)




  

£m

£m

£m

£m

£m

£m


Pre-tax new business contributionnote 2

1,076 

815 

260 

2,151 

2,151 


Tax

(265)

(285)

(65)

(615)

(615)


Post-tax new business contribution

811 

530 

195 

1,536 

1,536 


Free surplus invested in new business

(297)

(202)

(54)

(553)

(553)


Post-tax new business contribution per £1 million









 free surplus invested

2.7 

2.6 

3.6 

2.8 

2.8 

 



  

2010 



  

Asian operations (excluding Japan)

US operations

UK insurance operations

Total

long-term

business operations

(excluding

Japan)

Japan

Total

long-term

business operations



  

note (vi)



 note (vi)

note (vi)

note (vi)



  

£m

£m

£m

£m

£m

£m


Pre-tax new business contributionnote 2

902 

761 

365 

2,028 

(1)

2,027 


Tax

(230)

(266)

(99)

(595)

(595)


Post-tax new business contribution

672 

495 

266 

1,433 

(1)

1,432 


Free surplus invested in new business

(278)

(300)

(65)

(643)

(2)

(645)


Post-tax new business contribution per £1 million









 free surplus invested

2.4 

1.7 

4.1 

2.2 

(0.5)

2.2 

 

(vi)  New business contribution and free surplus invested in new business for the Group's Japanese insurance subsidiary, which ceased selling new business with effect from 15 February 2010, have been presented separately from those of the remainder of the Group.

(vii) The value of in-force business includes the value of future margins from current in-force business less the cost of holding required capital and represents:

 



  

2011 



  

Asian

operations

US

operations

UK

insurance

operations

Group



  

£m

£m

£m

£m


Value of in-force business before deduction of cost of capital and of  







guarantees

6,922 

3,222 

4,598 

14,742 


Cost of capital

(317)

(135)

(241)

(693)


Cost of time value of guaranteesnote (viii)

(22)

(596)

(67)

(685)


Net value of in-force business

6,583 

2,491 

4,290 

13,364 



  







  

2010 



  

Asian

operations

US

operations    

UK

insurance

operations

Group



  

£m

£m

£m

£m


Value of in-force business before deduction of cost of capital and of







guarantees

5,941 

2,584 

4,635 

13,160 


Cost of capital

(321)

(183)

(236)

(740)


Cost of time value of guaranteesnote (viii)

(10)

(270)

(89)

(369)


Net value of in-force business

5,610 

2,131 

4,310 

12,051 



  





 

(viii) The change in the cost of time value of guarantees for US operations from £(270) million in 2010 to £(596) million in 2011 primarily relates to Variable Annuity (VA) business, mainly arising from the new business written in the year, reflecting the increase in VA sales, and the reduction in the expected long-term rate of return for US equities of 1.4 per cent, driven by the reduction in US 10-year treasury bond rate, as shown in note 17(a).

 

15 Expected transfer of value of in-force business to free surplus

 

The discounted value of in-force business and required capital can be reconciled to the 2011 and 2010 totals in the tables below for the emergence of free surplus as follows:

 

  

2011 

2010 

  

£m 

£m 

Required capitalnote 14

3,447 

3,415 

Value of in-force (VIF)note 14

13,364 

12,051 

Add back: deduction for cost of time value of guaranteesnote 14

685 

369 

Other itemsnote

(1,214)

(845)

  

16,282 

14,990 

 

Note

"Other items" represent amounts incorporated into VIF where there is no definitive timeframe for when the payments will be made or receipts received. In particular, other items includes the deduction of the value of the shareholders' interest in the estate, the value of which is derived by increasing final bonus rates so as to exhaust the estate over the lifetime of the in-force with-profits business. This is an assumption to give an appropriate valuation. To be conservative this item is excluded from the expected free surplus generation profile below.

 

Cash flows are projected on a deterministic basis and are discounted at the appropriate risk discount rate. The modelled cash flows use the same methodology underpinning the Group's embedded value reporting and so is subject to the same assumptions and sensitivities.

 

The table below shows how the VIF generated by the in-force business and the associated required capital is modelled as emerging into free surplus over future years.

 



2011 



Expected period of conversion of future post tax distributable earnings and required capital flows to free surplus


2011 Total as shown above

1-5 years

6 -10 years

11-15 years

16 -20 years

21-40 years

40+ years


£m

£m

£m

£m

£m

£m

£m

Asian operations

7,387 

2,582 

1,596 

1,012 

732 

1,262 

 203 

US operations

4,267 

2,241 

1,287 

490 

173 

76 

 - 

UK insurance operations

4,628 

1,864 

1,166 

743 

453 

394 

 8 

Total

16,282 

6,687 

4,049 

2,245 

1,358 

1,732 

211 


100%

41%

25%

14%

8%

11%

1%











2010 



Expected period of conversion of future post tax distributable earnings and required capital flows to free surplus


2010 Total as shown above

1-5 years

6 -10 years

11-15 years

16 -20 years

21-40 years

40+ years


£m

£m

£m

£m

£m

£m

£m

Asian operations

6,329 

2,304 

1,407 

866 

591 

1,009 

152 

US operations

4,078 

2,358 

1,007 

421 

173 

119 

 - 

UK insurance operations

4,583 

1,792 

1,173 

755 

468 

389 

Total

14,990 

6,454 

3,587 

2,042 

1,232 

1,517 

158 


100%

43% 

24% 

14% 

8% 

10%

1%

 

16 Sensitivity of results to alternative assumptions

 

(a) Sensitivity analysis - economic assumptions

The tables below show the sensitivity of the embedded value as at 31 December 2011 (31 December 2010) and the new business contribution after the effect of required capital for 2011 and 2010 to:

 

•  1 per cent increase in the discount rates;

•  1 per cent increase and decrease in interest rates, including all consequential changes (assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);

•  1 per cent rise in equity and property yields;

•  10 per cent fall in market value of equity and property assets (embedded value only);

•  holding company statutory minimum capital (by contrast to required capital), (embedded value only);

•  5 basis point increase in UK long-term expected defaults; and

•  10 basis point increase in the liquidity premium for UK shareholder-backed annuities.

 

In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions.

 

New business profit per operating profit summary





  

2011 

  




Total

  



UK

long-term

  

Asian

US

insurance

business

  

operations 

operations 

operations 

operations 

  

£m

  





New business profit for 2011note 10

260  

Discount rates - 1% increase

 (139)

 (45)

 (36)

 (220)

Interest rates - 1% increase

2  

81  

5  

88  

Interest rates - 1% decrease

 (72)

 (117)

 (6)

 (195)

Equity/property yields - 1% rise

50  

92  

11  

153  

Long-term expected defaults - 5 bps increase

 (8)

 (8)

Liquidity premium - 10 bps increase

16  

16  

  





  

2010 

  




Total

  



UK

long-term

  

Asian

US

insurance

business

  

operations 

operations 

operations 

operations 

  

£m

  





New business profit for 2010

365 

Discount rates - 1% increase

(111)

(51)

(53)

(215)

Interest rates - 1% increase

(7)

34 

(8)

19  

Interest rates - 1% decrease

(20)

(40)

(52)

Equity/property yields - 1% rise

41 

63 

12 

116 

Long-term expected defaults - 5 bps increase

(13)

(13)

Liquidity premium - 10 bps increase

26 

26 

 

  





Embedded value of long-term business operations





  

2011 

  



UK

Total

  

Asian

US

insurance

long-term

  

operations

operations

operations

 operations

  

£m

£m

£m

£m

  





31 December 2011note 10

8,510 

5,082 

6,058 

19,650 

Discount rates - 1% increase

 (771)

 (147)

 (443)

 (1,361)

Interest rates - 1% increase

 (376)

 (106)

 (343)

 (825)

Interest rates - 1% decrease

253  

58  

400  

711  

Equity/property yields - 1% rise

329  

185  

205  

719  

Equity/property market values - 10% fall

 (159)

16  

 (326)

 (469)

Statutory minimum capital

114  

92  

4  

210  

Long-term expected defaults - 5 bps increase

 (98)

 (98)

Liquidity premium - 10 bps increase

196  

196  

  





 

 

  

2010 

  



UK

Total

  

Asian

US

insurance

long-term

  

operations

operations

operations

operations

  

£m

£m

£m

£m

  





31 December 2010note 10

7,445 

4,799 

5,970 

18,214 

Discount rates - 1% increase

 (643)

 (164)

 (437)

 (1,244)

Interest rates - 1% increase

 (220)

 (148)

 (254)

 (622)

Interest rates - 1% decrease

176  

103  

336  

615  

Equity/property yields - 1% rise

308  

120  

227  

655  

Equity/property market values - 10% fall

 (174)

 (5)

 (339)

 (518)

Statutory minimum capital

104  

127  

5  

236  

Long-term expected defaults - 5 bps increase

 (87)

 (87)

Liquidity premium - 10 bps increase

174  

174  

 

The sensitivities shown above are for the impact of instantaneous changes on the embedded value of long-term business operations and include the combined effect on the value of in-force business and net assets at the balance sheet dates indicated. If the change in assumption shown in the sensitivities were to occur, then the effect shown above would be recorded within two components of the profit analysis for the following year. These are for the effect of economic assumption changes and, to the extent that asset value changes are included in the sensitivities, within short-term fluctuations in investment returns. In addition to the sensitivity effects shown above the other components of the profit for the following year would be calculated by reference to the altered assumptions, for example new business contribution and unwind of discount, together with the effect of other changes such as altered corporate bond spreads.

(b) Sensitivity analysis - non-economic assumptions

The tables below show the sensitivity of the embedded value as at 31 December 2011 (31 December 2010) and the new business contribution after the effect of required capital for 2011 and 2010 to:

 

·   10 per cent proportionate decrease in maintenance expenses (a 10 per cent sensitivity on a base assumption of £10 per annum would represent an expense assumption of £9 per annum);

·   10 per cent proportionate decrease in lapse rates (a 10 per cent sensitivity on a base assumption of 5 per cent would represent a lapse rate of 4.5 per cent per annum); and

·   5 per cent proportionate decrease in base mortality and morbidity rates (ie increased longevity).

 

New business profit per operating profit summary






  

2011 


  

Asian operations

US

operations

UK

insurance

operations

Total

long-term

business

operations


  

£m

£m

£m

£m


  





New business profit for 2011note 10

1,076 

815 

260 

2,151 

Maintenance expenses - 10% decrease

26 

11 

44 

Lapse rates - 10% decrease

92 

24 

10 

126 

Mortality and morbidity - 5% decrease

60 

(9)

60 

Change representing effect on:






Life business

60 

72 


UK annuities

(12)

(12)


  






  

2010 


  

Asian operations

US

operations

UK

insurance

operations

Total

long-term

business

operations


  

£m

£m

£m

£m

  





New business profit for 2010

901 

761 

365 

2,027 

Maintenance expenses - 10% decrease

27 

41 

Lapse rates - 10% decrease

81 

31 

120 

Mortality and morbidity - 5% decrease

50 

(20)

37 

Change representing effect on:






Life business

50 

58 


UK annuities

(21)

(21)

 

Embedded value of long-term business operations






  

2011 


  

Asian

operations

US

operations

UK

insurance

operations

Total

long-term

business

operations


  

£m

£m

£m

£m

  





31 December 2011note 10

8,510 

5,082 

6,058 

19,650 

Maintenance expenses - 10% decrease

117 

44 

52 

213 

Lapse rates - 10% decrease

342 

157 

65 

564 

Mortality and morbidity - 5% decrease

289 

92 

(227)

154 

Change representing effect on:






Life business

289 

92 

12 

393 


UK annuities

(239)

(239)


  






  

2010 


  

Asian

operations

US

operations

UK

insurance

operations

Total

long-term

business

operations


  

£m

£m

£m

£m

  





31 December 2010note 10

7,445 

4,799 

5,970 

18,214 

Maintenance expenses - 10% decrease

104 

39 

48 

191 

Lapse rates - 10% decrease

293 

158 

67 

518 

Mortality and morbidity - 5% decrease

233 

81 

(181)

133 

Change representing effect on:






Life business

233 

81 

12 

326 


UK annuities

(193)

(193)

 

Effect of proposed changes in UK corporation tax rate

The 2011 results include the effect of the change in the UK corporate tax rate that has been enacted to revise the rate to 25 per cent from 1 April 2012. The impact of further reductions in the UK corporate tax rate of one per cent per annum to 23 per cent in 2014 would be an increase in the net of tax value of in-force business of UK insurance operations at 31 December 2011 of around £60 million.

 

17 Assumptions

 

(a) Principal economic assumptions

Deterministic assumptions

The tables below summarise the principal financial assumptions:

Assumed investment returns reflect the expected future returns on the assets held and allocated to the covered business at the valuation date.

 

Equity risk premiums in Asia range from 3.25 per cent to 8.7 per cent for both years. In the US and the UK, the equity risk premium is 4.0 per cent for both years.

 

Asian Operationsnotes (i),(ii),(v)













31 December 2011 %



China

Hong Kong

India 

Indonesia

Japan

Korea 

Malaysia  

Philippines   

Singapore

Taiwan 

Thailand 

Vietnam



  

notes

(ii),(iv)





notes

(iii),(iv)


note

(iv) 




Risk discount rate:

  













New business

10.0 

3.85 

13.75 

11.15 

-

7.1 

6.4 

12.2 

3.9 

5.0 

10.1 

19.6 


In force

10.0 

3.7 

13.75 

11.15 

4.7 

7.1 

6.5 

12.2 

4.65 

5.0 

10.1 

19.6 

Expected long-term 

  













rate of inflation

2.5 

2.25 

4.0 

5.0 

0.0

3.0 

2.5 

4.0 

2.0 

1.0 

3.0 

6.5 

Government bond

  













yield

3.5 

1.9 

8.75 

6.1 

1.0 

3.8 

3.7 

5.4 

1.6 

1.3 

3.3 

12.9 



  














31 December 2010 %



China

Hong

Kong

India 

Indonesia

Japan

Korea 

Malaysia

Philippines

Singapore

Taiwan 

Thailand 

Vietnam


  

notes

(ii),(iv)





notes

(iii),(iv)


note

(iv) 




Risk discount rate:

  













New business

10.45 

5.1 

13.1 

13.0 

4.9 

7.9 

7.0 

13.2 

5.4 

5.0 

10.5 

18.85 


In force

10.45 

5.1 

13.1 

13.0 

4.9 

8.1 

7.1 

13.2 

6.1 

5.2 

10.5 

18.85 

Expected long-term

  













rate of inflation

2.5 

2.25 

4.0 

5.0 

0.0

3.0 

2.5 

4.0 

2.0 

1.0 

3.0 

5.5 

Government bond

  













yield

3.95 

3.3 

8.1 

7.75 

1.1 

4.6 

4.0 

6.4 

2.7 

1.6 

3.8 

12.1 


  



 


  

Asia total %

 


  

2011 

2010 

 

Weighted risk discount rate:note (i)



 


New business (excluding Japan)

7.4 

8.4 

 


In force

6.9 

8.1 

 

 

Notes

(i)      The weighted risk discount rates for Asian operations shown above have been determined by weighting each country's risk discount rates by reference to the EEV basis new business result and the closing value of in-force business. The risk discount rates for individual Asian territories reflect the movement in government bond yields, together with the effects of movements in the allowance for market risk and changes in product mix.

(ii)     For Hong Kong the assumptions shown are for US dollar denominated business which comprises the largest proportion of the in-force business. For other territories, the assumptions are for local currency denominated business which reflects the largest proportion of the in-force business.

(iii)    The risk discount rate for Malaysia reflects both the Malaysia life and Takaful operations.

 

(iv)    The mean equity return assumptions for the most significant equity holdings in the Asian operations were:

 



2011 

2010 



%  


Hong Kong

5.9 

7.3 


Malaysia

9.7 

10.0 


Singapore

7.7 

8.7 

 

          To obtain the mean, an average over all simulations of the accumulated return at the end of the projection period is calculated. The annual average return is then calculated by taking the root of the average accumulated return minus 1.

(v)  In preparing the EEV basis results for 2011 and 2010 the 'active' basis of economic assumption setting has been applied for all Asian operations.

     

      Previously, the EEV basis results for Japan, Korea and US dollar denominated business written in Hong Kong were determined on the 'active' basis. For other Asian countries the investment return assumptions and risk discount rates were based on an assessment of longer-term economic conditions (the 'passive' basis). The altered approach with effect from full year 2010 to determine the EEV basis results for all Asian territories on an active basis of economic assumption setting is in line with the Group's other operations, and reflects the fact that markets in a number of Asian countries are becoming increasingly developed.

 

The effect of the change in 2010 to move to an 'active' basis for Asia operations was as follows:




  





  

2010 


Effect on:

£m


Pre-tax operating profits from:





New businessnote 2




Business in-forcenote 3

(58)




Total

(53)


Short-term fluctuations in investment returns and changes in economic assumptions

16 


Total profit before tax

(37)


Shareholders' equity as at 31 December 2010

(39)

 

US operations  






  

2011 

2010 




  

Assumed new business spread margins:note (iii)




Fixed Annuity business*note (i)

1.75 - 2.0 

2.0 


Fixed Index Annuity business

2.25 

2.5 


Institutional business

1.0 

-




  



Risk discount rate:note (iv)




Variable annuity

6.7 

7.8 


Non-variable annuity

4.6 

5.6 


Weighted average total:note (ii)





New business

6.5 

7.6 



In force

6.0 

6.9 

US 10-year treasury bond rate at end of year

1.9 

3.3 

Pre-tax expected long-term nominal rate of return for US equities

5.9 

7.3 

Expected long-term rate of inflation

2.0 

2.3 

*    including the proportion of variable annuity business invested in the general account

 

Notes

(i)   For new business issuances in 2011, the assumed spread margin for fixed annuity business and for the proportion of variable annuity business invested in the general account is assumed to grade from 1.75 per cent to 2.0 per cent over 5 years. For new business issuances in 2010, the assumed spread margin for fixed annuity business and for the proportion of variable annuity business invested in the general account applies from inception.

(ii)  The weighted average risk discount rates reflect the mix of business between variable annuity and non-variable annuity business. The decrease in the weighted average risk discount rates from 2010 to 2011 primarily reflects the decrease in the US 10-year Treasury bond rate of 140 basis points, partly offset by the effect of the increase in additional allowance for credit risk (as described in note (iii) below) and the impact of the increase in allowance for market risk.

(iii) Credit risk treatment

      The projected cash flows incorporate the expected long-term spread between the earned rate and the rate credited to policyholders. The projected earned rates reflect book value yields which are adjusted over time to reflect projected reinvestment rates. Positive net cash flows are assumed to be reinvested in a mix of corporate bonds, commercial mortgages and limited partnerships. The yield on those assets is assumed to grade from the current level to a yield that allows for a long-term assumed credit spread on the reinvested assets of 1.25 per cent over 10 years. The yield also reflects an allowance for a risk margin reserve (RMR) which for 2011 is 27 basis points (2010: 26 basis points) for longer-term defaults as described in note 1(b)(iii), which represents the allowance as at the valuation date applied in the cash flow projections of the value of the in-force business.

     

      In the event that longer-term default levels are higher, then unlike for UK annuity business where policyholder benefits are not changeable, Jackson has some discretion to adjust crediting rates, subject to contract guarantee levels and general market competition considerations.

(iv) For US operations, the risk discount rates shown above include an additional allowance for a combination of credit risk premium and short-term downgrade and default allowance for general account business of 200 basis points (2010: 150 basis points) and for variable annuity business of 40 basis points (2010: 30 basis points) to reflect the fact that a proportion of the variable annuity business is allocated to the general account (as described in note 1(b)(iii)).

 

           

UK insurance operations





  

2011 

2010 



  

Shareholder-backed annuity business:note (iv)



Risk discount rate:




New businessnote (i)

7.7 

7.3 


In forcenote (ii)

8.6 

9.9 

Pre-tax expected long-term nominal rate of return for shareholder-backed annuity business:




New business:





Fixed annuities

4.95 

4.9 



Inflation-linked annuities

4.4 

5.1 


In force:note (ii)





Fixed annuities

4.5 

5.1 



Inflation-linked annuities

4.1 

5.2 

Other business:note (iv)



Risk discount rate:note (iii)





New business

5.3 

6.9 



In force

5.65 

7.0 

Pre-tax expected long-term nominal rates of investment return:





UK equities

6.5 

8.0 



Overseas equities

5.9 to 9.9

7.3 to 10.2



Property

5.2 

6.7 



Gilts

2.5 

4.0 



Corporate bonds

4.0 

5.7 



Expected long-term rate of inflation

3.0 

3.55 

Post-tax expected long-term nominal rate of return for the PAC with-profits fund:





Pension business (where no tax applies)

5.1 

6.7 



Life business

4.4 

5.9 

 

Notes

(i)    The new business risk discount rate for shareholder-backed annuity business incorporates a default allowance for best estimate defaults in respect of assets purchased with new business monies received in 2011. The increase in the risk discount rate from 2010 to 2011 reflects the profile of the release of additional credit risk provisions, appropriate to the new business assets, over the projected lifetime of this business. These additional provisions comprise of a 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 allowance for short-term defaults.

(ii)   For shareholder-backed annuity business, the movement in the pre-tax long-term nominal rates of return and the risk discount rates for in-force business reflect the combined effect of changes in asset yields and changes to the aggregate credit risk allowances as shown in note (iv) below

(iii)  The risk discount rates for new business and business in force for UK insurance operations other than shareholder-backed annuities reflect weighted rates based on the type of business.

(iv)  Credit spread treatment

For with-profits business, the embedded value reflects the discounted value of future shareholder transfers. These transfers are directly affected by the level of projected rates of return on investments, including debt securities. The assumed earned rate for with-profit holdings of corporate bonds is defined as the risk-free rate plus an assessment of the long-term spread over gilts, net of expected long-term defaults. This approach is similar to that applied for equities and properties for which the projected earned rate is defined as the risk-free rate plus a long-term risk premium.

     

           For UK shareholder-backed annuity business, different dynamics apply both in terms of the nature of the business and the EEV methodology applied. For this type of business the assets are generally held to maturity to match long duration liabilities. It is therefore appropriate under EEV methodology to include a liquidity premium in the economic basis used. The appropriate EEV risk discount rate is set in order to equate the EEV with a 'market consistent embedded value' including liquidity premium. The liquidity premium in the 'market consistent embedded value' is derived from the yield on the assets held after deducting an appropriate allowance for credit risk. For Prudential Retirement Income Limited (PRIL), which has approximately 90 per cent of UK shareholder-backed annuity business, the allowance for credit risk for the in-force business at 31 December 2011 is made up of:

 

(a)  15 basis points for fixed annuities and 14 basis points for inflation-linked annuities in respect of long-term expected defaults. This is 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.

(b)  52 basis points for fixed annuities and 47 basis points for inflation-linked annuities in respect of additional provisions which comprise a 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 allowance for short-term defaults.

 

The credit assumptions used and the residual liquidity premium element of the bond spread over swap rates is as  follows:

 



  

2011 

2010 


New businessnote (1)

(bps)

(bps)


Bond spread over swap rates

139 

117 


Total credit risk allowancenote (2)

35 

38 


Liquidity premium

104 

79 

 



  

2011 

2010 


In-force business

(bps) 

(bps) 


Bond spread over swap rates

201 

160 


Credit risk allowance:





Long-term expected defaults

15 

16 



Additional provisions

51 

52 


Total credit risk allowancenote (2)

66 

68 


Liquidity premium

135 

92 

 

Notes

(1) The new business liquidity premium is based on the weighted average of the point of sale liquidity premium.

(2) Specific assets are allocated to the new business for the year with the appropriate allowance for credit risk which was 35 basis points (2010: 38 basis points). The reduced allowance for new business in comparison to that for the in-force book reflects the assets held and other factors that influence the necessary level of provision.

     

The overall allowance for credit risk is prudent by comparison with historic rates of default and would be sufficient to withstand a wide range of extreme credit events over the expected lifetime of the annuity business.

    

Stochastic assumptions

The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations described above. Assumptions specific to the stochastic calculations, such as the volatilities of asset returns, reflect local market conditions and are based on a combination of actual market data, historic market data and an assessment of longer-term economic conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling of individual asset classes but with allowance for correlation between the various asset classes.

 

Details are given below of the key characteristics and calibrations of each model.

 

Asian operations

•  The same asset return models as described for UK insurance operations below, appropriately calibrated, have been used for Asian operations. The principal asset classes are government and corporate bonds. Equity holdings are much lower than in the UK whilst property holdings do not represent a significant investment asset.

•  The stochastic cost of guarantees is primarily only of significance for the Hong Kong, Korea, Malaysia and Singapore operations.

•  The mean stochastic returns are consistent with the mean deterministic returns for each country. The expected volatility of equity returns ranges from 18 per cent to 35 per cent, and the volatility of government bond yields ranges from 0.9 per cent to 2.4 per cent for both years.

 

US operations (Jackson)

•  Interest rates are projected using a log-normal generator calibrated to historical US Treasury yield curves;

•  Corporate bond returns are based on Treasury securities plus a spread that has been calibrated to current market conditions and varies by credit quality; and

•  Variable annuity equity returns and bond interest rates have been stochastically generated using a log-normal model with parameters determined by reference to historical data. The volatility of equity fund returns for 2011 and 2010 ranges from 19 per cent to 32 per cent, depending on the risk class and the class of equity, and the standard deviation of interest rates ranges from 2.1 per cent to 2.4 per cent (2010: 2.0 per cent to 2.4 per cent).

 

UK insurance operations

•  Interest rates are projected using a two-factor model calibrated to the initial market yield curve;

•  The risk premium on equity assets is assumed to follow a log-normal distribution;

•  The corporate bond return is calculated as the return on a zero-coupon bond plus a spread. The spread process is a mean reverting stochastic process; and

•  Property returns are modelled in a similar fashion to corporate bonds, namely as the return on a risk-free bond, plus a risk premium, plus a process representative of the change in residual values and the change in value of the call option on rents.

 

Mean returns have been derived as the annualised arithmetic average return across all simulations and durations.

     

For each projection year, standard deviations have been calculated by taking the square root of the annualised variance of the returns over all the simulations. These have been averaged over all durations in the projection. For equity and property, the standard deviations relate to the total return on these assets. The standard deviations applied for all years are as follows:

 



2011 

2010 



Equities:




UK

20 

18 


Overseas

18 

18 

Property

15 

15 

 

(b)Demographic assumptions

Persistency, mortality and morbidity assumptions are based on an analysis of recent experience but also reflect expected future experience. Where relevant, when calculating the time value of financial options and guarantees, policyholder withdrawal rates vary in line with the emerging investment conditions according to management's expectations.

 

(c)Expense assumptions

Expense levels, including those of service companies that support the Group's long-term business operations, are based on internal expense analysis investigations and are appropriately allocated to acquisition of new business and renewal of in-force business. Exceptional expenses are identified and reported separately. It is Prudential's policy not to take credit for future cost reduction programmes until the savings have been delivered.

 

For Asian life operations, the expenses comprise costs borne directly and recharged costs from the Asian regional head office, that are attributable to covered business. The assumed future expenses for these operations also include projections of these future recharges. Development expenses are charged as incurred.

 

Corporate expenditure comprises:

 

·      Expenditure for group head office, to the extent not allocated to the PAC with-profits funds, together with Solvency II implementation and restructuring costs, which are charged to the EEV basis results as incurred; and

·      Expenditure of the Asian regional head office that is not allocated to the covered business or asset management operations, and is charged as incurred. These costs are primarily for corporate related activities and included within corporate expenditure.

 

(d)Taxation and other legislation

Current taxation and other legislation have been assumed to continue unaltered except where changes have been announced and substantively enacted in the year.

 

18 New business premiums and contributionsnotes (i),(ii)

 

 


  

     Single

     Regular

Annual premium and contribution equivalents (APE)

 Present value of new business premiums (PVNBP)


  

2011 

2010 

2011 

2010 

2011 

2010 

2011 

2010 


  

£m

£m

£m

£m

£m

£m

£m

£m

Group insurance operations









Asia - ex India

 1,321 

 1,019 

 1,426 

 1,211 

 1,559 

 1,313 

 8,444 

 6,911 

Indianote (iii)

 135 

 85 

 88 

 180 

 101 

 188 

 466 

 582 

Asia

 1,456 

 1,104 

 1,514 

 1,391 

 1,660 

 1,501 

 8,910 

 7,493 

US

 12,562 

 11,417 

 19 

 22 

 1,275 

 1,164 

 12,720 

 11,572 

UK

 4,871 

 5,656 

 259 

 254 

 746 

 820 

 6,111 

 6,842 

Group total

 18,889 

 18,177 

 1,792 

 1,667 

 3,681 

 3,485 

 27,741 

 25,907 

Group total - ex India

 18,754 

 18,092 

 1,704 

 1,487 

 3,580 

 3,297 

 27,275 

 25,325 

Asian insurance operations









Hong Kong

 180 

 107 

 313 

 276 

 331 

 287 

 2,023 

 1,693 

Indonesia

 250 

 141 

 338 

 269 

 363 

 283 

 1,435 

 1,011 

Malaysia

 79 

 58 

 215 

 198 

 223 

 204 

 1,225 

 1,153 

Philippines

 95 

 64 

 20 

 17 

 30 

 23 

 153 

 108 

Singapore

 371 

 318 

 198 

 143 

 235 

 175 

 1,855 

 1,357 

Thailand

 11 

 15 

 26 

 25 

 27 

 26 

 102 

 100 

Vietnam

 1 

 1 

 42 

 41 

 42 

 41 

 143 

 148 

SE Asian operations

incl Hong Kong

 987 

 704 

 1,152 

 969 

 1,251 

 1,039 

 6,936 

 5,570 

China note (iv)

 46 

 103 

 54 

 48 

 59 

 58 

 294 

 336 

Korea

 71 

 66 

 94 

 89 

 101 

 96 

 542 

 486 

Taiwan

 217 

 146 

 126 

 105 

 148 

 120 

 672 

 519 

Total Asian operations - ex India

 1,321 

 1,019 

 1,426 

 1,211 

 1,559 

 1,313 

 8,444 

 6,911 

Indianote (iii)

 135 

 85 

 88 

 180 

 101 

 188 

 466 

 582 

Total Asian operations

 1,456 

 1,104 

 1,514 

 1,391 

 1,660 

 1,501 

 8,910 

 7,493 

US insurance operations









Fixed annuities

 472 

 836 

 - 

 - 

 47 

 84 

 472 

 836 

Fixed index annuities

 934 

 1,089 

 - 

 - 

 93 

 109 

 934 

 1,089 

Life

 10 

 11 

 19 

 22 

 20 

 23 

 168 

 166 

Variable annuities

 10,909 

 9,481 

 - 

 - 

 1,091 

 948 

 10,909 

 9,481 

Wholesale

 237 

 - 

 - 

 - 

 24 

 - 

 237 

 - 

Total US insurance operations

 12,562 

 11,417 

 19 

 22 

 1,275 

 1,164 

 12,720 

 11,572 

UK and Europe insurance operations









Direct and partnership annuities

 328 

 593 

 - 

 - 

 33 

 59 

 328 

 593 

Intermediated annuities

 241 

 221 

 - 

 - 

 24 

 22 

 241 

 221 

Internal vesting annuities

 1,223 

 1,235 

 - 

 - 

 122 

 124 

 1,223 

 1,235 

Total individual annuities

 1,792 

 2,049 

 - 

 - 

 179 

 205 

 1,792 

 2,049 

Corporate pensions

 184 

 228 

 215 

 198 

 233 

 221 

 1,224 

1,099 

Onshore bonds

 1,779 

 1,660 

 - 

 - 

 178 

 166 

 1,781 

1,660 

Other products

 780 

 774 

 44 

 56 

 122 

 133 

 978 

1,089 

Wholesalenote (v)

 336 

 945 

 - 

 - 

 34 

 95 

 336 

945 

Total UK and Europe









insurance operations

 4,871 

 5,656 

 259 

 254 

 746 

 820 

 6,111 

 6,842 

Group Total

 18,889 

 18,177 

 1,792 

 1,667 

 3,681 

 3,485 

 27,741 

 25,907 

Group total - ex India

 18,754 

 18,092 

 1,704 

 1,487 

 3,580 

 3,297 

 27,275 

 25,325 


  









 

Notes

(i)      The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profits for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS income statement. 

       

         Annual Premium Equivalents (APE) are calculated as the aggregate of regular new business amounts and one-tenth of single new business amounts and are subject to roundings. The Present Value of New Business Premiums (PVNBP) are calculated as equalling single premiums plus the present value of expected premiums of new regular premium business, allowing for lapses and other assumptions made in determining the EEV new business contribution. 

 

         New business premiums reflect those premiums attaching to covered business, including premiums for contracts classified as investment products for IFRS basis reporting. New business premiums for regular premium products are shown on an annualised basis. Internal vesting business is classified as new business where the contracts include an open market option. 

(ii)     For 2010, the table above excludes new business sales for the Group's Japanese insurance subsidiary, which ceased selling new business with effect from 15 February 2010.

(iii)    New business in India is included at Prudential's 26 per cent interest in the India life operation.

(iv)    New business in China is included at Prudential's 50 per cent in the China life operation.

(v)     UK wholesale sales for 2010 and 2011 include amounts for a small number of bulk annuity buy-in insurance agreements with an APE of £93 million and £33 million respectively.

 

19 Post balance sheet events

 

On 22 February 2012, M&G completed transactions to (i) exchange bonus share rights for equity holdings with the employees of PPM South Africa and (ii) the sale of a 10 per cent holding in the majority of the business to Thesele Group, a minority shareholder, for cash. Following these transactions M&G's holding in the majority of the business reduced from 75 per cent to 47 per cent. Under IFRS requirements the divestment is accounted for as the disposal of the 75 per cent holding and an acquisition of a 47 per cent holding at fair value. As a consequence of the IFRS application, the transactions give rise to a gain on dilution of approximately £40 million. On an EEV basis, consistent with IFRS, this amount will be accounted for in the Group 2012 summarised consolidated income statement as a gain on dilution, excluded from the Group's EEV operating profit based on longer-term investment returns.

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
FR DMGMFMZVGZZZ



Prudential plc (Prudential) is an international financial services group, with operations in Asia, the United States and the United Kingdom. Prudential is structured around four main business units: Prudential Corporation Asia (incorporating the asset management business, Eastspring Investments), Jackson, Prudential UK insurance operations and M&G. Prudential Corporation Asia has operations in Hong Kong, Malaysia, Singapore, Indonesia and other Asian countries. Its core business is health, protection, either attached to a life policy or on a standalone basis, other life insurance (including participating business) and mutual funds. It also provides selected personal lines property and casualty insurance, group insurance, institutional fund management and consumer finance (Vietnam only). On September 4, 2012, the Company completed the acquisition of SRLC America Holding Corp (SRLC). more »

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Change
-4.0  -0.3%
P/E (fwd)
14.2
Yield (fwd)
2.5
Mkt Cap (£m)
38,564