SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of July 2005
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
LAURENCE POUNTNEY HILL,
LONDON, EC4R 0HH, ENGLAND
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82-
Enclosures:
'INTERIM RESULTS'
Embargo: 7.05am Wednesday 27th July 2005
PRUDENTIAL PLC 2005 INTERIM RESULTS
- New business APE of GBP1,129 million, up 34% on first half 2004
- New business achieved profit of GBP413 million, up 37%, with Group margin
of 37% (HY2004: 36%)
- Total achieved profit from continuing operations of GBP834 million, up
31% on first half 2004
- Total statutory profit from continuing operations of GBP469 million, up
25% on first half 2004
- Achieved profit shareholders' funds of GBP9.3 billion (end 2004: GBP8.8
billion)
- Interim dividend of 5.3 pence per share (HY2004: 5.19 pence per share)
Commenting, Mark Tucker, Group Chief Executive said:
"These results demonstrate the Group is performing well. We have delivered
double-digit sales growth in all our markets, while maintaining margins at a
Group level. We are taking advantage of our strong presence across the diverse
markets in which we operate.
"My priority is to maintain our focus on delivery of superior performance,
enhancement of earnings and capital efficiency in order to make the most of
these opportunities.
"As you would expect, I am actively reviewing longer-term trends and
opportunities in order to anticipate the changing needs of our customers. This
attention to the longer-term will help ensure that the actions we take today lay
the foundations for an even stronger position for Prudential in the future. I
will talk more about our evolving thinking with our third quarter new business
figures in October.
"We face a number of challenges, but we remain confident of achieving the growth
and return targets we have set out across each of our businesses and we are
optimistic about prospects in the longer-term."
Operational highlights:
Prudential's UK and Europe insurance operations are making good progress with
sales of GBP541 million on an APE basis, 50% ahead of last year, including the
Phoenix Life & Pensions Limited transaction, which increased APE sales by GBP145
million in the period. Excluding this transaction, sales growth was 10% compared
to an estimated market growth of 2-3%; and the primary drivers of growth were
strong sales of unit-linked bonds (up 100%), individual annuities (up 12%) and
bulk annuities (up 67%). The internal rate of return on new business written in
the first half was 13%, moving towards our target of 14% by the end of 2007. New
business margin was 30%, although some reduction from the 2004 year-end level is
still expected for the full year 2005 due to changing product mix as Prudential
UK builds its shareholder-backed business.
In the US, sales increased by 18% on an APE basis with margins improving to 37%
(HY 2004:34%) as a result of improved profitability from both variable annuities
and Guaranteed Investment Contracts (GICs). The acquisition of Life of Georgia
was completed in May and the integration of that business remains on track to be
completed by the end of 2005. Jackson is a low-cost high quality operator that
has shown an ability to innovate in the US market and deliver cash back to the
Group.
In Asia, sales growth in the first half of the year was 26% on an APE basis,
with particularly strong growth in Korea, India, Indonesia, Malaysia and China.
The new business margin was lower at 49% (full year 2004: 54%) primarily due to
a combination of changes in country and product mix. In July we announced our
9th and 10th licences in China, further strengthening our presence in this
exciting market. Trading conditions in Japan remain tough and we have taken the
decision to impair goodwill in our life insurance business by GBP95 million in
these results.
M&G enjoyed a strong start to the year with net investment in-flows of GBP1.7
billion and growth in underlying profit of 15% to GBP68 million. Total profit
for the period was GBP83 million.
Egg's first half profit from the core UK business was GBP13 million after
charging GBP10 million for restructuring costs. We remain focused on optimising
the performance of the Egg business and the value of the Group's investment for
Prudential's shareholders.
We continue to look to improve capital efficiency and earlier in July we took
advantage of good market conditions in the US retail market to raise $300
million of perpetual subordinated capital securities, which will qualify as
Group regulatory capital. The primary use of the proceeds will be to re-finance
our outstanding non-qualifying GBP150 million bond maturing in 2007.
- ENDS -
Enquiries:
Media Investors / analysts
Jon Bunn 020 7548 3559 James Matthews 020 7548 3561
William Baldwin-Charles 020 7548 3719 Marina Novis 020 7548 3511
Joanne Davidson 020 7548 3708
Notes to Editors
1. The comparative International Financial Reporting Standards results are
prepared on a "proforma" basis which reflects the estimated effect on the 2004
results as if IAS 32, IAS 39 and IFRS 4 had been applied from 1 January 2004 to
the Group's insurance operations together with the discretionary change for the
basis of determining longer-term investment returns, as disclosed on 2 June
2005.
Achieved profits basis results have been restated for the consequential impact
of the adoption of International Financial Reporting Standards at 1 January 2004
together with the discretionary change for the basis of determining longer-term
investment returns, as disclosed on 2 June 2005.
The 2004 interim dividend per share has been restated to reflect the bonus
element of the October 2004 rights issue.
Period on period percentage increases are stated on a constant exchange rate
basis.
2. There will be a conference call today for wire services at 7.45am (BST)
hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance
Director. Dial in telephone number: 0800 358 2705. Passcode: 155439#.
3. A presentation to analysts will take place at 9.30am (BST) at Governor's
House, Laurence Pountney Hill, London, EC4R 0HH. An audio cast of the
presentation and the presentation slides will be available on the Group's
website, www.prudential.co.uk.
4. There will be a conference call for investors and analysts at 2.30pm (BST)
hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group Finance
Director. Please call from the UK +44 (0)20 8609 0205 and from the US +1 866 793
4279. Pin number 487687#. A recording of this call will be available for replay
for one week by dialling: +44 (0)20 8609 0289 from the UK or +1 866 676 5865
from the US. The conference reference number is 129574.
5. High resolution photographs are available to the media free of charge at
www.newscast.co.uk (+44 (0) 207 608 1000).
6. An interview with Mark Tucker, Group Chief Executive, (in video/audio/ text)
will be available on www.cantos.comand www.prudential.co.ukfrom 7.05am on 27th
July 2005.
7. Annual premium equivalent (APE) sales comprise regular premium sales plus
one-tenth of single premium insurance sales.
8. New business achieved profits represent the present value of the future cash
flows we expect to receive from new business written in the year, less the costs
of acquiring that new business and the cost of holding the capital required to
back it.
9. Total number of Prudential plc shares in issue as at 30th June 2005 was
2,383,761,711.
10. Financial Calendar 2005:
Ex-dividend date Wednesday 17 August 2005
Record date Friday 19 August 2005
Q3 new business figures Wednesday 26 October 2005
Payment of interim dividend Friday 28 October 2005
11. In addition to the financial statements provided with this press release,
additional financial schedules are available on the Group's website at
www.prudential.co.uk
*Prudential plc, a company incorporated and with its principal place of business
in the United Kingdom, and its affiliated companies constitute one of the
world's leading financial services groups. It provides insurance and financial
services directly and through its subsidiaries and affiliates throughout the
world. It has been in existence for over 150 years and has GBP187 billion in
assets under management, (as at 31 December 2004). Prudential plc is not
affiliated in any manner with Prudential Financial, Inc, a company whose
principal place of business is in the United States of America.
Forward-Looking Statements
This statement may contain certain "forward-looking statements" with respect to
certain of Prudential's plans and its current goals and expectations relating to
its future financial condition, performance, results, strategy and objectives.
Statements containing the words "believes", "intends", "expects", "plans",
"seeks" and "anticipates", and words of similar meaning, are forward-looking. By
their nature, all forward-looking statements involve risk and uncertainty
because they relate to future events and circumstances which are beyond
Prudential's control including among other things, UK domestic and global
economic and business conditions, market related risks such as fluctuations in
interest rates and exchange rates, and the performance of financial markets
generally; the policies and actions of regulatory authorities, the impact of
competition, inflation, and deflation; experience in particular with regard to
mortality and morbidity trends, lapse rates and policy renewal rates; the
timing, impact and other uncertainties of future acquisitions or combinations
within relevant industries; and the impact of changes in capital, solvency or
accounting standards, and tax and other legislation and regulations in the
jurisdictions in which Prudential and its affiliates operate. This may for
example result in changes to assumptions used for determining results of
operations or re-estimations of reserves for future policy benefits. As a
result, Prudential's actual future financial condition, performance and results
may differ materially from the plans, goals, and expectations set forth in
Prudential's forward-looking statements. Prudential undertakes no obligation to
update the forward-looking statements contained in this statement or any other
forward-looking statements it may make.
BUSINESS REVIEW
GROUP
Results Highlights
Half Year Half Year Half Year
CER Change RER Change
2005 2004 2004
GBPm GBPm GBPm
--------------------------------------------------------------------------------
Annual premium 1,129 844 34% 849 33%
equivalent (APE)
sales
Net Investment Flows 2,539 792 221% 777 227%
New Business Achieved 413 302 37% 305 35%
Profit (NBAP)
NBAP Margin 37% 36% 36%
Total Achieved profits 834 638 31% 638 31%
basis operating profit* -
Total International 469 374 25% 375 25%
Financial Reporting
Standards (IFRS)
operating profit *+
Achieved profits basis 9.3 7.2 29% 7.2 29%
shareholders funds
(GBPbn) -
IFRS shareholders 5.0 3.4 47% 3.4 47%
funds (GBPbn) +
--------------------------------------------------------------------------------
* Continuing operations - excluding Jackson Federal Bank (JFB) and Egg's France
and Funds Direct businesses.
+ The comparative IFRS results shown above are prepared on a 'proforma' basis
which reflects the estimated effect on the 2004 results as if IAS 32, IAS 39 and
IFRS4 had been applied from 1 January 2004 to the Group's insurance operations
together with the discretionary change for the basis of determining longer-term
investment returns, as disclosed on 2 June 2005.
- Achieved profits basis results have been restated for the consequential impact
of the adoption of IFRS at 1 January 2004 together with the discretionary change
for the basis of determining longer-term investment returns as disclosed on 2
June 2005.
In the Business Review and Financial Review, period-on-period comparisons of
financial performance are on a Constant Exchange Rate (CER) basis, unless
otherwise stated.
The Group has had a good first half as illustrated by growth in all the key
performance measures shown above. This is the result of strong contributions
across all regions.
Growth in APE sales and aggregate new business achieved profit (NBAP) margin of
37 per cent led the Group to achieve NBAP growth of 37 per cent. This, together
with growth from the fund management operations and the increase in profits from
the in-force insurance business, driven primarily by the US, led to an increase
of 31 per cent over the first half of 2004 in achieved profits basis operating
profits. The in-force achieved profit for the half year includes a GBP132
million charge in respect of a persistency assumption change in the UK and a
credit in the US of GBP141 million reflecting an operating assumption change
following price increases introduced on two blocks of in-force term life
business. In aggregate, net assumption changes were positive GBP16 million, with
net positive experience variances and other items of GBP39 million.
On an international financial reporting standards basis (IFRS), operating
profits were up 25 per cent on the same period of last year driven primarily by
the growth in profits from the UK and Asian insurance operations.
Basic earnings per share on the achieved profits basis for the half year after
minority interests were 21.7 pence for the half year of 2005, compared with a
restated figure of 19.8 pence for the prior year. Basic earnings per share,
based on total IFRS profit for the half year after minority interests, were 12.7
pence, down 1.5 pence from the restated 2004 half year figure on a proforma
basis of 14.2 pence primarily reflecting the impairment of purchased goodwill
associated with the Japanese life business.
Impact of Currency Movements
Prudential has a diverse international mix of businesses with a significant
proportion of its profit generated outside the UK. In preparing the Group's
consolidated accounts, results of overseas operations are converted at rates of
exchange based on the average of the year to date, whilst shareholders' funds
are converted at period-end rates of exchange.
Changes in exchange rates from year to year have an impact on the Group's
results when these are converted into pounds sterling for reporting purposes. In
some cases, these exchange rate fluctuations can mask underlying business
performance. For example, growth in the US total achieved profit basis operating
profit was 95 per cent at reported exchange rates (RER), compared to 101 per
cent at CER.
Consequently, the Board has for a number of years reviewed the Group's
international performance on a CER basis. This basis eliminates the impact from
conversion, the effects of which do not alter the long-term value of
shareholders' interests in the non-UK businesses.
In the Business Review and Financial Review, period-on-period comparisons of
financial performance are on a CER basis, unless otherwise stated.
INSURANCE
UNITED KINGDOM AND EUROPE
Half Year Half Year
2005 2004 Change
GBPm GBPm
------------------------------------------------------------------------------
APE Sales 541 361 50%
NBAP 159 88 81%
NBAP Margin* 30% 25%
Total Achieved profits basis operating 182 240 (24%)
profit
Total IFRS operating profit 187 153 22%
------------------------------------------------------------------------------
* excluding APE sales in respect of SAIF DWP rebates
Prudential UK and Europe delivered an increase in APE sales of 50 per cent
relative to the same period in 2004. This includes APE sales of GBP145 million
from the acquisition of the portfolio of in-force pension annuities from Phoenix
Life & Pensions ("PLP"), a subsidiary of Resolution Life Ltd, in June 2005.
Excluding the PLP transaction, sales increased by 10 per cent. This compares
favourably with the total UK medium to long-term savings market growth of 2 per
cent in the first quarter (based on data from the Association of British
Insurers).
NBAP increased by 81 per cent, reflecting the growth in sales volumes and an
increase in the NBAP margin to 30 per cent from 25 per cent at the half year
2004 (full-year 2004: 27 per cent). Total achieved profits basis operating
profit decreased 24 per cent to GBP182 million primarily due to a GBP132 million
charge relating to an assumption change in respect of persistency. Increased
annuity sales contributed to the 22 per cent increase in IFRS operating profit
to GBP187 million.
The GBP132 million charge reflects a strengthening of persistency assumptions
across a number of products, primarily in respect of with-profit bonds. This
assumption change reflects Prudential's current experience and, post tax,
represents 3 per cent of the overall embedded value of the UK business.
Prudential continues actively to manage the conservation of the in-force book.
The primary drivers of growth for the UK business were strong sales of
unit-linked bonds, bulk annuities and individual annuities. APE sales of
unit-linked bonds doubled compared with the same period last year to GBP36
million, reflecting Prudential UK's progress in the IFA unit-linked bond market.
Bulk annuity sales increased by 67 per cent to GBP35 million, driven by 31 bulk
annuity scheme wins (excluding the PLP transaction). Individual annuity sales
were strong across all distribution channels with APE sales of GBP111 million up
12 per cent. In particular, with-profit annuities attracted increased levels of
interest, with APE sales doubling on half year 2004 levels to GBP7 million.
Corporate pension APE sales fell 14 per cent to GBP85 million, reflecting the
contraction seen in the corporate pensions market ahead of the change in
pensions legislation in April 2006 ('A-Day'). In response to the move away from
defined benefit schemes to defined contribution schemes in the market,
Prudential UK announced an agreement with AON in May to support the launch of
their new defined contribution (DC) pension solution for employers.
APE sales through Prudential's European operations increased 200 per cent to
GBP12 million, reflecting growing bond sales through new and existing
distributors.
In June, Prudential UK added a capital guarantee option to the PruFund
Investment Plan. This guarantee provides capital security combined with the
potential for growth which addresses a primary concern of advisers with low to
medium risk investor clients.
The demand for lifetime mortgages is projected to grow significantly over the
next few years and Prudential UK will launch shortly its own lifetime mortgage
product, the Prudential Property Value Release Plan. Unlike many other lifetime
mortgage products currently on the market, this innovative product will allow
customers much greater flexibility and control over when they draw down funds
and thereby reduce total interest charges over the lifetime of the loan.
Prudential UK has made good progress with the new multi-tie networks. Most
recently, it has been appointed as a provider for Sesame's new regulated
multi-tie proposition, Sesame Select. Sesame is one of the UK's leading
providers of support services to 8,150 financial advisers. As a result of this
and other previously announced appointments, Prudential UK is well positioned to
increase its market share in the depolarised marketplace as this develops over
the next couple of years.
Prudential UK was appointed to the Barclays multi-tie panel during the first
half of 2005 and this went live on 1 June. In addition, Prudential began to
write business in June through its distribution agreements with St James's Place
and National Australia Bank. These will augment growth already being achieved
under the existing agreements with Lloyds TSB, Alliance and Leicester, Pearl and
Zurich.
The With-Profits Fund benefited from a pre-tax investment return of 7.4 per cent
in the first half of 2005 compared with 3 per cent in the comparable period of
2004. Over the last five years (to 30 June 2005), the With-Profits Fund has
delivered a pre-tax return of 28.9 per cent compared with the return on the FTSE
All Share (Total Return) index over the same period of negative 1.5 per cent.
The fund remains strong with an inherited estate estimated to be around GBP7.3
billion as at 30 June 2005, on a deterministic valuation basis, compared with
approximately GBP6.5 billion at the end of 2004. The PAC long-term fund is
currently rated AA+ by Standard & Poor's, Aa1 by Moody's and AA+ by Fitch
Ratings.
There will be a number of significant changes in the retirement savings market
as a result of the Government pensions reforms due to come into force on 'A-Day'
in April 2006. These include a single tax regime for pensions, greater
investment flexibility for consumers (allowing, for example, residential
property to be held within a pension) and increased annual contribution limits.
When combined with the increase in charges to stakeholder products announced
last year and its success in winning positions on multi-ties, this creates an
opportunity for Prudential UK to increase its presence in retirement provision.
Prudential UK is developing a number of propositions that take advantage of the
increased flexibility and contribution limits created by the pensions reforms.
It will launch a series of products, the first of which will be a new personal
pension that will be available in advance of A-Day.
Market growth in the first half of 2005 is unlikely to be in excess of 5 per
cent and Prudential UK does not anticipate a significant improvement in the
second half of the year. Recent trading in certain segments of the UK market has
been difficult and, most notably, competition within the protection and
individual annuity markets intensified in the second quarter. However, we expect
to continue to outperform the market in the second half of the year. We remain
confident that we can achieve overall growth of 10 per cent in 2005.
UNITED STATES
Half Year Half Year Half Year
CER Change RER Change
2005 2004 2004
GBPm GBPm GBPm
--------------------------------------------------------------------------------
APE sales 275 234 18% 240 15%
NBAP 102 79 29% 82 24%
NBAP Margin 37% 34% 34%
Total Achieved profits 429 213 101% 220 95%
basis operating profit*
Total IFRS operating 169 151 12% 155 9%
profit*
--------------------------------------------------------------------------------
* Continuing operations - excluding Jackson Federal Bank (JFB) which was sold in
October 2004
Period-on-period comparisons of financial performance are on a Constant Exchange
Rate (CER) basis, unless otherwise stated
Jackson National Life (JNL) continued to focus on the value of new product
sales, rather than top line growth. APE sales for the first half of 2005 were 18
per cent higher than prior year, new business achieved profits were up 29 per
cent and IFRS operating profits were up 12 per cent over the first half of 2004.
At the 2005 half year, JNL had over $65 billion in assets under management. Of
this, $15 billion related to variable annuity assets an increase of $1.6 billion
compared to 2004 year-end, further diversifying JNL's earnings towards fee-based
income.
On 18 May 2005 JNL completed the purchase of Life Insurance Company of Georgia
from ING at a purchase price of GBP142 million, subject to post-closing
adjustments. Following completion, JNL began to move Life Insurance Company of
Georgia policies onto its low cost and scaleable platform. Full integration of
the business remains on track to be completed by year-end 2005.
The 18 per cent growth in APE sales to GBP275 million during the first half of
2005 was driven by stronger variable annuity (VA), fixed index annuity (FIA) and
institutional sales, partially offset by decreased sales of fixed annuities.
Total APE retail sales for the first half of 2005 of GBP195 million were up 11
per cent on prior year.
New business achieved profit of GBP102 million was 29 per cent above the prior
year, reflecting both an 18 per cent increase in APE sales and an increase in
margin from 34 per cent to 37 per cent half year on half year. The increase in
margin primarily reflects increased profitability from the re-pricing in May
2004 of JNL's unbundled VA 'Perspective II' and increased GIC profitability due
to longer average maturities available on contracts sold in the first half of
2005. In addition, there has been an increase in the spread assumption for FIA.
JNL generated record VA APE sales of GBP118 million during the first half of the
year, up 21 per cent on the prior year, in a market that JNL believes was weaker
than last year. This reflects the company's innovative product offering and
distribution capabilities. In the three months to 31 March 2005, JNL ranked 2nd
in VA net flows and 13th in total VA new sales. JNL's 'Perspective II' product
ranked 1st overall in VA product net flows and 3rd in total VA new sales. JNL
was one of only five of the top 25 VA providers in the US to increase VA assets
from year-end 2004 to the end of the first quarter 2005. The rate of take up of
the fixed account option remained low, with 25 per cent of variable annuity
premium going into fixed accounts during the first half of 2005 compared with 26
per cent for the first half of 2004.
Fixed annuity APE sales of GBP41 million were down 27 per cent on prior year,
reflecting the flattened yield curve in the US which has made rates on short
term certificates of deposit more attractive to customers. As a result of the
fall in volumes, JNL ranked 11th in total individual fixed annuity sales at the
end of the first quarter of 2005, down from 4th during the same period in the
prior year.
Lower fixed annuity sales were partially offset by fixed index annuity APE sales
of GBP30 million, an increase of 100 per cent over the prior year, reflecting
customers' increasing preference when selecting fixed products to have the
potential for higher returns linked to equity index performance. JNL has
benefited from its approach to educating broker dealers about this complex
product, while at the same time offering lower commissions and investing the
savings into providing value to the policyholders through enhanced benefits.
Institutional APE sales for the first half of 2005 were GBP80 million, up 38 per
cent on prior year results. JNL took advantage of several attractive issuance
opportunities during the first half of 2005. APE sales of institutional products
in the second half of 2005 are anticipated to be in the region of GBP25 million.
Total achieved profits basis operating profit at the half year 2005 was GBP429
million compared to GBP213 million in the prior year. This primarily reflects
the increase in new business achieved profits, an operating assumption change
following price increases introduced on two older, less profitable books of term
life business and a favourable spread variance.
The growth in IFRS operating profit of 12 per cent from the prior year primarily
reflects an increase in spread and fee income over the first half of 2004,
together with an increase in profits from Prudential's US fund manager, PPMA.
The 2004 half year result benefited from two one-off items, a favourable legal
settlement of GBP28 million (GBP20 million after related change to amortisation
of deferred acquisition costs) and a positive GBP7 million adjustment arising
from the adoption of SOP 03-01 'Accounting and Reporting by Insurance
Enterprises for Certain Non-traditional Long Duration Contracts and for Separate
Accounts'.
JNL remains well positioned for the remainder of the year to deliver sales at
twice the expected US market growth rate of 4 per cent, since current market
conditions continue to favour those financial services companies that have a
range of variable and fixed annuity product offerings, a strong
relationship-based distribution model, low cost structure and the ability to
deliver high quality service.
ASIA
Half Year Half Year Half Year
CER Change RER Change
2005 2004 2004
GBPm GBPm GBPm
--------------------------------------------------------------------------------
APE sales 313 249 26% 248 26%
NBAP 152 135 13% 135 13%
NBAP Margin 49% 54% 54%
Total Achieved profits 226 174 30% 169 34%
basis operating profit*
Total IFRS operating 116 59 97% 58 100%
profit*
--------------------------------------------------------------------------------
*excluding the fund management business, development and Asia regional head
office expenses
Period-on-period comparisons of financial performance are on a Constant Exchange
Rate (CER) basis, unless otherwise stated
Prudential's well diversified portfolio of life insurance businesses in Asia
have shown strong growth with first half year sales on an APE basis of GBP313
million, up 26 per cent on the same period in 2004 with 87 per cent of APE sales
generated by more profitable regular premium products. Sales in the first half
of 2005 primarily reflect the continued strong growth of its Korean and Indian
operations combined with solid performances from the more established operations
of Malaysia, Singapore and Hong Kong. The businesses in Indonesia and China also
showed very good sales growth.
Total NBAP increased by 13 per cent over the first half of 2004 to GBP152
million, reflecting the sales increase offset by NBAP margins that decreased
from 54 per cent for the full year 2004 to 49 per cent. This represents a change
in geographic mix (reduction of 2 percentage points) largely due to a higher
proportion of new business from the relatively lower margin markets of Korea and
India; a change of product mix (reduction of 1 percentage point) with an
increased proportion of lower margin products in Taiwan and Singapore; and a
change of assumptions (reduction of 2 percentage points), primarily driven by
low interest rates in Taiwan.
In-force operating profits in Asia of GBP74 million for the first half of 2005
represent an increase of 90 per cent over the same period for 2004 and IFRS
profits increased to GBP116 million from GBP59 million in 2004 including a
contribution of GBP44 million from exceptional items.
Prudential's Korean Life operation has rapidly become a material contributor to
APE sales with first half sales of GBP60 million, an increase of 82 per cent
over the same period in 2004. This increase clearly demonstrates the flexibility
of its multi-channel distribution model, with in-house financial consultants and
general agents currently the dominant distribution channels supported by
contributions from direct marketing and bancassurance. Since its launch in 2004,
the proportion of the higher margin variable universal life product sold has
increased steadily such that it now accounts for 80 per cent of Korea's APE
sales.
Prudential's Indian life insurance joint venture with ICICI remains firmly in
position as the number one private sector life insurance company as reported in
the Insurance Regulatory and Development Authority journal in India.
Prudential's 26 per cent share of the joint venture's half year APE sales was
GBP27 million, up 59 per cent over the first half of 2004. The business
continues to extend its geographic reach in India with 74 branches to date and
has grown its tied agency force by 16 per cent this year. Prudential intends to
increase its equity stake in this operation when regulations permit. However,
there is no clear indication when this will be.
The life insurance joint venture with CITIC in China is still relatively small
in terms of new business volumes but is growing rapidly with a 67 per cent
increase in APE sales to GBP10 million compared to the first half of 2004 of
GBP6 million. Progress continues to be made in establishing CITIC Prudential as
the leading foreign joint venture life insurer in terms of geographic coverage,
with 6 new city licences added during 2005 bringing the total to 10. In
addition, the operation also has a national licence for the sale of group life
insurance.
Despite some slowdown in the market for regular premium unit-linked products,
Prudential's Singapore life operation delivered APE sales growth of 17 per cent
over 2004, driven in part by the new partnership agreement with Maybank. Earlier
this year, the business also entered into a distribution agreement with
SingPost. In Hong Kong Prudential's long-term partnership with Standard
Chartered Bank helped drive good growth against a competitive market generating
GBP50 million of sales, up 11 per cent over the same period last year.
In Malaysia, Prudential's life business has market leading agent productivity
and a popular range of unit-linked products. APE sales of GBP29 million were up
38 per cent compared to the first half 2004.
The Indonesian operation posted record quarterly APE sales of GBP11 million,
exceeding their previous high achieved in the first quarter of 2004 by 22 per
cent, to generate GBP21 million in APE sales in the first half of 2005, 40 per
cent above the first half of 2004.
The Taiwanese life operation continues to face a challenging environment of
falling interest rates, which are now at historic lows. First half 2005 APE
sales of GBP62 million are in line with last year. Second quarter APE sales in
Taiwan increased 52 per cent over the first quarter following the launch of a
pensions orientated linked product with a higher investment content.
Total APE sales contribution from the remaining four markets of Japan, the
Philippines, Thailand and Vietnam are collectively down 5 per cent, primarily
due to a slow market in Vietnam. As reported previously, the development of the
Japanese life business has been slower than expected and to reflect this there
has been an impairment of GBP95 million of the purchased goodwill associated
with this business.
In March the first stage of Prudential's Asian regional operations centre was
launched. Located in Malaysia, Prudential Services will leverage Prudential's
increasing scale and presence in Asia to drive operating synergies and
efficiencies. The shared services operation and call centre will initially
service the Singapore and Malaysia life businesses.
Prudential's Asia strategy remains firmly in place and its focus continues to be
on long term, profitable and sustainable growth.
Fund Management
M&G
Half Year Half Year
2005 2004 Change
GBPm GBPm
--------------------------------------------------------------------------------
Gross investment flows 3,579 2,177 64%
Net Investment flows 1,680 (90)
Underlying profits before PRF 68 59 15%
Total IFRS operating profit 83 79 5%
--------------------------------------------------------------------------------
M&G delivered underlying profits (excluding performance related fees (PRFs)) of
GBP68 million in the first half of 2005, a 15 per cent increase compared to the
same period last year. Excluding the GBP7 million of one-off items in the 2004
result, underlying operating profits were 31 per cent higher than last year.
This reflects M&G's strengths in retail fund management, institutional fixed
income, pooled life and pension funds, property and private finance, allied with
a continued focus on cost control.
Total operating profit of GBP83 million was 5 per cent higher than 2004, with
growth at the underlying level being offset by lower PRFs. It should be noted
that although the GBP15 million of PRFs earned in the first half of 2005 is down
compared to GBP20 million in 2004, it still represents an unusually strong
result, driven as before primarily by private equity realisations by PPM
Capital. Income from PRFs is expected to be significantly lower in future years.
M&G delivered record gross retail fund inflows of GBP1.6 billion in the first
half of 2005, more than double the previous year. The core UK operation produced
gross fund inflows up 48 per cent on last year at GBP686 million as a result of
its retail brand presence, good fund performance and diversified product range
in equities, fixed income and property. Robust growth was also generated in the
international businesses, with gross inflows more than tripling on last year.
Total net retail fund inflows of GBP448 million were six times those of half
year 2004.
M&G's institutional businesses delivered gross fund inflows of GBP2.0 billion,
up 43 per cent on last year. This was boosted by a one-off contribution of
GBP967 million from Prudential Property Investment Managers (PruPIM), related to
the transfer of 50 per cent of Prudential's economic interests in three UK
shopping centres into new external vehicles which PruPIM continues to manage.
M&G's scale and strong market position in fixed income and private finance was
demonstrated by the successful launch to external investors of two
Collateralised Debt Obligations (CDOs) of EUR445 million collectively. This
brings the total number of CDOs launched since 2001 to eight. These strong gross
flows were also reflected in net institutional sales of GBP1.2 billion in the
first half of 2005, compared to a net outflow of GBP164 million in the first
half of 2004.
Asia Fund Management
Half Year Half Year Half Year
CER Change RER Change
2005 2004 2004
GBPm GBPm GBPm
--------------------------------------------------------------------------------
Net investment flows 698 697 0% 677 3%
Total IFRS operating 2 10 (80%) 10 (80%)
profit*
--------------------------------------------------------------------------------
* IFRS operating profit in 2005 was GBP12 million, offset by GBP10 million of
exceptional charges related to bond funds in Taiwan
Period-on-period comparisons of financial performance are on a Constant Exchange
Rate (CER) basis, unless otherwise stated
Funds under management in Asia at the half year increased by 33 per cent to
GBP9.7 billion over the year-end 2004 with net inflows of GBP698 million in line
with the first half of 2004. The fund management business continues to expand
its geographic presence with the launch of a new operation in Vietnam. Both
asset management businesses in Japan and Korea delivered strong results and in
May 2005 Morningstar ranked PCA Asset Management Japan as one of the five
fastest growing fund management businesses in Japan for the six months to 31
March 2005.
The Prudential ICICI Asset Management Company joint venture in India has
increased its funds under management to US$4 billion. Earlier this year
Prudential's joint venture partner agreed to purchase an additional 6 per cent
share of Prudential ICICI Asset Management Company. The transaction is expected
to complete later this year and will bring ICICI Group's share to 51 per cent
while Prudential will hold 49 per cent.
The Taiwanese business has experienced a substantial decline in funds under
management over the last year due to high levels of market redemptions in bond
funds, particularly foreign managed funds. Prudential Taiwan restructured its
bond portfolios to enhance liquidity during the first half of 2005 and this has
given rise to a one-off exceptional charge of GBP10 million to operating
profits.
BANKING
Egg
Half Year Half Year
2005 2004 ** Change
GBPm GBPm
--------------------------------------------------------------------------------
IFRS Operating Profit from Continuing
Operations *
UK banking business 23 36 (36%)
Other (10) (3) (233%)
--------------------------------------------------------------------------------
13 33 (61%)
--------------------------------------------------------------------------------
Net interest income * 146 145 1%
--------------------------------------------------------------------------------
Non-interest income * 105 94 12%
--------------------------------------------------------------------------------
* Continuing operations - excludes Egg France and Funds Direct.
** 2004 comparatives restated to IFRS basis, except for adjustments for IAS 32
and IAS 39 which have been adopted from 1 January 2005.
Egg's core UK banking operation delivered a profit of GBP23 million for the
first half of 2005, compared with GBP36 million for the same period in 2004.
Revenues from the UK business grew five per cent over the same period in 2004,
primarily reflecting the increased revenues earned from the credit card
business. The credit card business has performed well, with balance growth of
five per cent for the first half of 2005, compared with two per cent for the
industry.
The growth in revenue from the card business was partly offset by reduced
commission income from sales of associated insurances on loans. This reflects
that, as planned, personal loan disbursements have slowed down in the first half
of 2005 from the record level achieved in 2004 following Egg's decision to
tighten its lending criteria.
In comparison with the same period in 2004, the impairment charge on loans and
advances to customers also increased in the first half of 2005, driven by the
growth in unsecured lending balances and the stage of life cycle of the book.
Credit quality remains strong and the impairment charge for the second quarter
of 2005 reduced slightly from the previous quarter.
Egg's total profit from continuing operations for the first half of 2005 was
impacted by a GBP10 million restructuring charge. This process was completed in
the second quarter of 2005. The aim of the reorganisation was to align the cost
base with Egg's strategy to focus on its core UK business with estimated annual
savings of GBP12 million.
The exit process from France was completed in the first quarter this year. The
total costs incurred were lower than the provision established in July 2004 and
GBP5 million of this was released in the first quarter. During 2005, Egg closed
Funds Direct, its investment wrap platform business and provided for an exit
charge of GBP3 million.
FINANCIAL REVIEW
SALES AND FUNDS UNDER MANAGEMENT
Prudential delivered strong sales growth during the first half of 2005 with
total new insurance sales up 45 per cent to GBP8 billion at constant exchange
rates (CER). This resulted in insurance sales of GBP1.1 billion on the annual
premium equivalent (APE) basis, an increase of 34 per cent on 2004. At reported
exchange rates (RER), APE sales were up 33 per cent on the half year of 2004.
Total gross investment sales were GBP13.2 billion, up 8 per cent on 2004 at CER.
Net investment sales of GBP2.5 billion were over three times net investment
sales in 2004 at CER. Strong gross inflows across a number of markets were
offset by the high level of redemptions in Taiwan.
Total investment funds under management increased by 12 per cent at RER from
GBP37.1 billion at 31 December 2004, to GBP41.7 billion at 30 June 2005,
reflecting net investment flows of GBP2.5 billion and net market and other
movements of GBP2.1 billion.
At 30 June 2005, funds under management were GBP214 billion, an increase of 9
per cent from 2004 year end at RER, as a result of strong inflows and favourable
market movements.
ACHIEVED PROFITS BASIS OPERATING PROFIT
Total achieved basis operating profit from continuing operations of GBP834
million was up 31 per cent at both CER and RER reflecting strong growth from
Prudential's insurance and fund management businesses.
Half Year Half Year Half Year
CER Change RER Change
2005 2004* 2004*
GBPm GBPm GBPm
--------------------------------------------------------------------------------
NBAP 413 302 37% 305 35%
Business in-force 412 327 26% 326 26%
--------------------------------------------------------------------------------
Long-term business 825 629 31% 631 31%
Asia development (8) (9) 11% (10) 20%
expenses
Other operating 17 18 6% 17 13%
results
--------------------------------------------------------------------------------
Total 834 638 31% 638 31%
--------------------------------------------------------------------------------
*Achieved profits basis results have been restated for the consequential impact
of the adoption of International Financial Reporting Standards at 1 January 2004
together with the discretionary change for the basis of determining longer-term
investment returns as disclosed on 2 June 2005.
Group NBAP from long-term business of GBP413 million was up 37 per cent on the
prior year at CER, reflecting strong growth across all regions: up 81 per cent
in the UK, up 29 per cent in the US and up 13 per cent in Asia. The Group's
average new business margin increased from 36 per cent for the first half of
2004 to 37 per cent for the first half of 2005.
During the first half of 2004, 62 per cent of the Group's NBAP was generated
from its overseas operations.
Total in-force achieved profit of GBP412 million was up 26 per cent on 2004 at
both CER and RER. This resulted from strong growth in the US and Asian
operations offset by a fall in the UK.
UK and Europe Insurance Operations
Achieved profits basis operating profit of GBP182 million was down 24 per cent
on 2004.
New business achieved profit of GBP159 million was up 81 per cent on the first
half of 2004, reflecting both a 50 per cent increase in APE sales and an
increase in NBAP margin from 25 per cent in 2004 to 30 per cent in 2005.
The increase in margin primarily reflects a favourable sales mix and the
positive effect of economic assumptions offset by lower annuity yield margins.
The favourable sales mix reflects the increased annuity sales, including the
Phoenix Life and Pensions bulk annuity transaction and lower sales of less
profitable pensions offset by increased unit-linked bond sales. Notwithstanding
the current performance achieved in the first half of 2005, some reduction in
overall margin from the 2004 year end level is still expected for the full-year
2005 due to changing product mix as Prudential UK builds its shareholder-backed
business.
The weighted average post-tax Internal Rate of Return (IRR) on the capital
allocated to new business growth in the UK for the first half of 2005 was 13 per
cent. This remains in line with the target of 14 per cent for the 2007 financial
year.
In-force profit of GBP23 million was 85 per cent lower than the first half of
2004 reflecting a GBP132 million charge in relation to an assumption change.
The GBP132 million charge reflects a strengthening of persistency assumptions
across a number of products, primarily in respect of with-profits bonds. In the
case of PruBond, which accounts for a significant proportion of the assumption
change, Prudential expected surrenders to fall after the bonus declaration in
February 2005. In the event, following the bonus declaration, customers have
continued to surrender their policies leading to a strengthening of the
assumption by 40 per cent. The assumption changes reflect Prudential's current
experience and, post tax, represent 3 per cent of the overall embedded value of
the UK business. Prudential continues actively to manage the conservation of the
in-force book.
US Operations
In the US, achieved operating profit from long-term operations was GBP417
million, up 94 per cent at CER and up 88 per cent at RER from the prior year.
At CER, new business achieved profit increased by 29 per cent to GBP102 million,
reflecting an 18 per cent increase in APE sales and an increase in margin from
34 per cent to 37 per cent at the half year. At RER, NBAP was up 24 per cent.
The increase in margin reflects increased profitability from the re-pricing in
May 2004 of JNL's unbundled VA 'Perspective II', and increased GIC profitability
due to longer average maturities available on contracts sold in the first half
of 2005. In addition there has been an increase in spread assumption for Fixed
Index Annuities, from the long-term assumption of 175bps to 190bps reflecting
the spread being achieved.
For JNL, the average IRR on new business in the first half of 2005 was 13 per
cent.
At CER, the in-force profit for the half year increased significantly from
GBP136 million in the prior year to GBP315 million. At RER, in-force profit
increased from GBP140 million to GBP315 million. This increase is primarily due
to a favourable spread variance of GBP44 million and an operating assumption
change following price increases introduced on two older books of term life
business (GBP141 million).
As a discretionary change of accounting policy, implemented at the same time as
the adoption of IFRS, the Group has replaced the previous basis of five year
averaging of gains and losses on bonds with a method that more closely reflects
longer-term returns.
On the new basis, longer-term returns on fixed income securities comprise two
elements. The first element is a risk margin reserve (RMR) charge for long-term
default experience of GBP27 million for the half year 2005. The present value of
future RMR charges is reflected in the opening embedded value. The second
element is amortisation of GBP26 million of interest related realised gains and
losses. These gains and losses are amortised to operating profit over the bonds'
original maturities.
The excess or deficit of actual realised gains and losses for fixed income
securities for the period over these components of longer-term returns is
included in short-term fluctuations in investment returns as a separate
component of total profit for the period.
Following this change of policy for JNL's achieved profits basis operating
profit the component for longer-term returns for fixed income securities is
expected in the future to be a more stable feature than on the previous basis,
which was affected by the volatility of realised gains and losses over a five
year period. Total profit, including actual investment returns, is unaffected by
the change. Further details of the change of policy are explained in the notes
to the Achieved Profits and IFRS basis results. In the six months to 30 June
2005, JNL experienced a net realised gain of GBP1 million on its corporate bond
portfolio. This is reflected in total achieved basis profit before tax.
Asia Operations
Achieved profits basis operating profit from long-term operations (excluding
development and regional head office costs) was GBP226 million for the half
year, up 30 per cent at CER and 34 per cent at RER on half year 2004.
Total NBAP increased by 13 per cent over the first half of 2004 to GBP152
million, reflecting the sales increase offset by NBAP margins that decreased
from 54 per cent for the full year of 2004 to 49 per cent. This decrease is
driven by a change in geographic mix (reduction of 2 percentage points) largely
due to a higher proportion of new business from the relatively lower margin
markets of Korea and India, a change of product mix (reduction of 1 percentage
point) with an increased proportion of lower margin products in Taiwan and
Singapore, and a change of assumptions (reduction of 2 percentage points)
primarily driven by low interest rates in Taiwan.
We expect to be able to maintain the average NBAP margins in Asia at or around
current levels given our planned mix of business in 2005.
In-force operating profits in Asia of GBP74 million for the first half of 2005
represent an increase of 90 per cent over the same period for 2004 at CER, which
included changes of assumptions.
In Asia, IRRs on new business at a country level are targeted to be 10 per cent
over the country risk discount rate. Risk discount rates vary from 5 to 19 per
cent depending upon the maturity of the market. These target rates of return are
average rates and the marginal return on capital on a particular product could
be above or below the target.
Non-insurance Operations
M&G
M&G's underlying profit before performance related fees (PRFs) was GBP68
million, an increase of 15 per cent on the first half of 2004. However,
adjusting the 2004 result for the GBP7 million of one-off provision releases
that were disclosed last year, profits improved by GBP16 million or 31 per cent,
over the same period last year. Underlying profits continue to be driven forward
by revenue growth from existing and new business lines, including new business
flows, higher market levels in many of the segments in which M&G operates and
the ability to extend existing skills and relationships into new markets. This
is combined with a continuing emphasis on cost control.
Total operating profit, including PRF, of GBP83 million was 5 per cent higher
than in 2004, with strong growth at the underlying level being partly offset by
lower PRFs. In 2005, M&G earned GBP15 million in PRFs (first half 2004: GBP20
million), of which GBP12 million was contributed by PPM Capital (first half
2004: GBP19 million). It should be noted that both years are unusually high
reflecting the realisation of a series of profitable investments by PPM Capital.
Income from PRFs is expected to be significantly lower in future years.
US broker dealer and fund management businesses
The broker dealer and fund management operations reported a total profit of
GBP18 million, compared with GBP9 million in the first half of 2004. This
reflects an increase in profits from PPM America, arising primarily due to a
one-off GBP6 million revaluation of an investment vehicle managed by PPMA.
Curian
Curian provides innovative fee-based separately managed accounts. Curian
incurred a loss of GBP6 million compared to a loss GBP11 million in the prior
year, as the business continues to build scale.
Asian fund management business
Profit from the Asian fund management operations was GBP2 million for the half
year, down 80 per cent from 2004 on CER, primarily reflecting a one-off charge
of GBP10 million resulting from restructuring of the bond portfolios in Taiwan
during the first half of 2005. Excluding this, operating profit grew by 20 per
cent.
Egg
Egg's total continuing operating profit for the first half of 2005 was GBP13
million, compared with GBP33 million in the same period last year. Impairment
charges on loans and advances to customers increased in the first half of 2005,
driven by the growth in unsecured lending balances and reflecting the stage of
life cycle of the book. Despite the strong revenue from the credit card
business, the revenue generated from the associated insurances on loans were
lower than the same period in 2004, reflecting the planned reduction in personal
loan disbursements compared to the record level achieved in 2004 following Egg's
decision to tighten its lending criteria.
Egg's total profit was further impacted by a GBP10 million restructuring charge.
The aim of the restructuring was to align the cost base with Egg's strategy to
focus on its core UK business and the estimated annual savings from this
reorganisation are GBP12 million.
Other
Asia's development expenses (excluding the regional head office expenses) for
the half year decreased by 11 per cent at CER to GBP8 million, compared with
GBP9 million in 2004. These development expenses primarily relate to
repositioning the insurance operation in Japan.
Other net expenditure of GBP93 million compared to GBP102 million in 2004 at
CER. This reflected an increase in investment return and other income as a
result of the interest earned on the net proceeds from the 2004 rights issue
offset by higher interest payable and head office costs. Head office costs
(including Asia regional head office costs of GBP14 million) were GBP50 million,
up GBP10 million on 2004 at CER. The increase mainly reflects the substantial
work being undertaken for the implementation of IFRS, European Embedded Values,
Sarbanes Oxley and other regulatory costs.
Total Achieved Profits Basis - Result Before Tax for Continuing Operations
(Period-on-period comparisons below are based on RER)
Total Achieved Profit before tax and minority interests was GBP816 million up 26
per cent from GBP650 million in the first half of 2004. This reflects an
increase in operating profit from GBP638 million to GBP834 million together with
a favourable movement of GBP381 million in short-term fluctuations in investment
returns from negative GBP76 million to positive GBP305 million. This is offset
by a negative movement of GBP241 million due to changes in economic assumptions;
an adverse movement of GBP75 million in actuarial gains and losses on defined
benefit pension schemes from positive GBP67 million for the half year 2004 to
negative GBP8 million for the half year 2005; and a goodwill impairment charge
of GBP95 million.
The UK component of short-term fluctuations in investment returns of GBP275
million reflects the difference between an actual investment return delivered in
the first half of 2005 for the with-profits life fund of 7.4 per cent and the
long-term assumed return of 3.3 per cent for the half year.
The US short-term fluctuations in investment returns of GBP11 million include a
positive GBP42 million in respect of the difference between actual investment
returns and long-term returns included in operating profit. For the first half
of 2005, the primary factor was a return in excess of assumptions on limited
partnership investments. It also includes a negative GBP31 million in relation
to changed expectations of future profitability on variable annuity business
in-force due to the actual separate account return being lower than the
long-term return reported within operating profit.
In Asia, short-term investment fluctuations were positive GBP29 million,
compared with negative GBP38 million last year. These gains mainly reflect lower
bond yields in Taiwan and the resulting unrealised gains.
Negative economic assumption changes of GBP220 million in 2005 compared with
positive economic assumption changes of GBP21 million in 2004. Economic
assumption changes in 2005 comprised negative GBP11 million in the UK and
negative GBP230 million in Asia offset by positive GBP21 million in the US.
In the UK, economic assumption changes of negative GBP11 million reflect an
increase in the future investment return assumption and an increase in the risk
discount rate. An increase in the equity premium from 2.5 per cent to 3 per cent
was offset partly by a decrease in the 15 year gilt rate. This has resulted in
an overall movement in the risk discount rate from 7.2 per cent at 31 December
2004, to 7.3 per cent.
US economic assumption changes of GBP21 million primarily reflect the decrease
in the risk discount rate following a fall in the 10 year treasury bond rate,
offset by reductions in the projected fund earned and crediting rates.
Asia's negative economic assumption change of GBP230 million reflects the effect
of lower bond yields in Taiwan and other markets, which necessitated a reduction
in fund earning rate assumptions.
The negative charge of GBP8 million for actuarial gains and losses on the
Group's defined benefit pension schemes reflects the consequential impact of
accounting for these schemes on a basis consistent with that applied for IFRS
reporting. The actuarial gains and losses reported for Achieved Profits reflect
the amounts attributable to shareholders, including the 10 per cent interest of
the deficits attributable to the PAC with-profits funds. The movements primarily
reflect short-term volatility in the values of the scheme assets and changes in
market bond rates that are used for discounting projected future benefit cash
flows.
Total Achieved Profits Basis - Result After Tax for Continuing Operations
Profit after tax and minority interests was GBP511 million compared with GBP424
million in 2004. The tax charge of GBP300 million compares with a tax charge of
GBP215 million in the first half of 2004. Minority interests in the Group
results were negative GBP5 million.
The effective tax rate at an operating profit level was 29 per cent. This
compares with effective rates on the operating profits for the 2004 half year
and full year of 30 per cent and 28 per cent respectively. The effective tax
rate at the total achieved profit level of 37 per cent was higher than the 29
per cent effective rate on operating profit primarily due to the effect of
impairment of goodwill (which does not attract tax relief), and the impact of
short-term fluctuations in investment returns and changes in economic
assumptions not all of which are tax affected.
EUROPEAN EMBEDDED VALUE BASIS REPORTING
Prudential believes that embedded value reporting provides investors with a
truer measure of the underlying profitability of the Group's long-term
businesses and is a valuable supplement to statutory accounts.
As a signatory to the European CFO Forum's European Embedded Value (EEV)
Principles, Prudential will adopt EEV methodology for its 2005 year-end results.
This will replace the Achieved Profits basis, the current supplementary basis of
reporting. The effect of implementation of EEV was outlined in the announcement
on 2 June 2005.
The main impact on the results, compared to the Achieved Profits basis, arises
from the effect of changes to the assumed level of locked in capital allocated
to each business, the adoption of product-specific risk discount rates, and an
explicit valuation of the time value of options and guarantees. The EEV results
also include the value of future profits from service companies (including fund
management operations) that support the Group's long-term businesses.
STATUTORY BASIS RESULTS
Impact of IFRS basis reporting
Prudential is required to implement International Financial Reporting Standards
(IFRS) from a restated opening position as at 1 January 2004. Details of the
effects of the changes are included in the notes to the financial statements and
were announced on 2 June 2005. The three areas of change that are of particular
relevance to Prudential's results are:
- Altered profit recognition for UK and Europe unit-linked business,
- Altered valuation bases for JNL derivatives and fixed income
securities, and
- Recognition of the shareholders' share of deficits on defined benefit
pension schemes in shareholders' equity.
The Group has also applied a discretionary change of accounting treatment which
relates to the basis of determining longer-term returns for fixed interest
securities included in operating profits. Total profit before tax is unaffected
by this change.
Operating profits have not been significantly altered by the implementation of
IFRS. However, total profit before tax now includes value movements on
derivatives that JNL uses for economic hedging together with actuarial gains and
losses on the Group's defined benefit pension schemes, and are expected to be
more volatile as a result. In addition, IFRS basis shareholders' funds will be
more volatile from period to period for market value movements on fixed income
securities of JNL which are classified as available for sale.
Prudential does not expect the adoption of IFRS to have a significant impact on
its business or its underlying financial position.
Basis of presentation
IFRS has been implemented such that IAS 32 and IAS 39 (dealing with financial
instruments) apply from 1 January 2005 rather than the beginning of 2004. This
is the approach taken by most of the banking industry and reflects the Group's
ownership of Egg. IFRS 4, Insurance Contracts, has also been applied from 1
January 2005. The Group's statutory IFRS basis financial statements reflect this
basis of application.
Prudential's approach to IAS 39 adoption is however, important to the reporting
and understanding of the Group's insurance businesses, particularly for JNL.
Included within this report as supplementary information are 'Proforma' results
that reflect the effects of IFRS 4 and IAS 39 had these standards been applied
to Prudential's insurance operations in 2004.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
IFRS Basis Operating Profits (based on longer term investment returns)
Total operating profit before tax, based on longer-term investment returns for
continuing operations on the IFRS basis was GBP469 million, GBP95 million up on
the proforma IFRS basis result for the first half of 2004 at CER. At RER,
operating profit was up GBP94 million.
Proforma* Proforma*
Half Year Half Year Half Year
CER Change RER Change
2005 2004 2004
GBPm GBPm GBPm
--------------------------------------------------------------------------------
Insurance business
UK and Europe 187 153 22% 153 22%
US 157 153 3% 157 0%
Asia 116 59 97% 58 100%
Asia development (8) (9) 11% (10) 20%
expenses
--------------------------------------------------------------------------------
452 356 27% 358 26%
--------------------------------------------------------------------------------
Fund management
business
M&G 83 79 5% 79 5%
US broker dealer and 18 9 100% 9 100%
fund management
Curian (6) (11) 45% (11) 45%
Asia fund 2 10 (80%) 10 (80%)
management
--------------------------------------------------------------------------------
97 87 11% 87 11%
--------------------------------------------------------------------------------
Banking
Egg (UK) 13 33 (61%) 33 (61%)
--------------------------------------------------------------------------------
Other income and (93) (102) 9% (103) 10%
expenditure
--------------------------------------------------------------------------------
Operating profits 469 374 25% 375 25%
from continuing
operations
--------------------------------------------------------------------------------
* The comparative IFRS results shown above are prepared on a 'proforma' basis
which reflects the estimated effect on the 2004 results as if IAS 32, IAS 39 and
IFRS4 had been applied from 1 January 2004 to the Group's insurance operations
together with the discretionary change for the basis of determining longer-term
investment returns, as disclosed on 2 June 2005.
In UK and Europe, IFRS operating profit was GBP187 million in 2005, an increase
of 22 per cent on 2004. This reflected an GBP8 million increase in profit from
the with-profits fund, reflecting bonus rates announced in February 2005 and an
increase in annuity sales.
The US operations' result of GBP169 million, which is based on US GAAP, adjusted
where necessary to comply with IFRS and the Group's basis of presenting
operating profit based on longer-term investment returns, was up 12 per cent on
the proforma 2004 result at CER. At RER, operating profit based on longer-term
investment returns for continuing operations was 9 per cent higher than the
proforma basis 2004 result.
In determining the US results, longer-term returns for fixed income securities
reflect the altered basis which is to incorporate an RMR charge for longer-term
defaults and amortisation of interest related realised gains and losses.
The US result of GBP169 million, up 12 per cent on the proforma 2004 result at
CER, reflects increased spread and fee income offset by higher DAC amortisation,
together with increased profits from PPMA. The 2004 half year result benefited
from two one-off items, a favourable legal settlement of GBP28 million (GBP20
million after related change to amortisation of deferred acquisition costs) and
a positive GBP7 million adjustment arising from the adoption of SOP 03-01
'Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional
Long Duration Contracts and for Separate Accounts'. In 2005 the increase in PPMA
profits arose primarily due to a one-off GBP6 million revaluation of an
investment vehicle managed by PPMA.
In Asia, IFRS profits increased to GBP118 million from GBP69 million at CER in
2004 (excluding development and regional head office costs). This includes a
contribution of GBP34 million from exceptional items, of which the largest is a
one-off reserve release due to the introduction of a risk based capital
regulatory framework in Singapore. This result also reflects the steady increase
in the operating profit from the established life insurance operations
(Singapore, Malaysia and Hong Kong) of GBP57 million for the half year as well
as the Indonesian and Vietnamese life businesses starting to make meaningful
contributions.
IFRS basis - total profit before tax for continuing operations (Period-on-period
comparisons below are based on RER)
Total IFRS basis profit before tax and minority interests for 2005 was GBP460
million. This compares with GBP488 million on the proforma basis for the half
year 2004. The decrease reflects: growth in operating profit of GBP94 million;
an improvement in short-term fluctuations in investment return, up GBP29 million
from the first half of 2004 to positive GBP94 million; offset by a goodwill
impairment charge of GBP95 million in relation to the Japanese Life business and
a GBP56 million negative movement from the prior year in actuarial gains and
losses attributable to shareholder-backed operations in respect of the Group's
defined benefit pension schemes.
The development of the Japanese life business has been slower than expected and
to reflect this there has been an impairment of the purchased goodwill
associated with this business by GBP95 million to GBP25 million.
A primary component of the GBP94 million of short-term fluctuations in
investment returns is for value movements in JNL's derivative book. Prudential
has chosen not to seek to attempt to hedge account under IAS 39 for these
derivatives. To do so would have required changes to the way JNL manage its
assets and liabilities which the Group believes would not be in the economic
interests of the business.
For 2005, value movements on JNL's derivatives contributed positive GBP36
million to the GBP94 million of total short-term fluctuations in investment
returns. This compares with positive GBP92 million of JNL derivative value
movement within proforma IFRS basis 2004 short-term fluctuations in investment
returns.
IFRS basis - total profit after tax for continuing operations
Profit after tax and minority interests was GBP299 million compared with GBP307
million in 2004. The effective rate of tax on operating profits, based on
longer-term investment returns, was 29 per cent. This compares with an effective
rate of 31 per cent for half year 2004 and 30 per cent for full year 2004 on the
proforma basis.
The effective rate of tax at the total IFRS profit level for 2005 was 34 per
cent. This compares with an effective rate of 35 per cent for half year 2004 and
29 per cent for full year 2004 on the proforma basis.
EARNINGS PER SHARE
Earnings per share based on achieved profit basis operating profit after tax and
related minority interests were 25.2 pence, compared with a restated figure of
21.1 pence for the 2004 half year. Earnings per share on an IFRS operating
profit basis after tax and related minority interests were 14.0 pence compared
with a restated figure of 12.2 pence for the 2004 half year on the proforma
basis.
Basic earnings per share, based on total achieved profit basis profit, were 21.7
pence compared with a restated figure of 19.8 pence for the 2004 half year.
Basic earning per share, based on total IFRS profit were 12.7 pence compared
with a restated figure of 14.2 pence for the 2004 half year on the proforma
basis.
DIVIDEND PER SHARE
The interim dividend per share of 5.3 pence represents a 2 per cent increase on
the 2004 interim dividend of 5.19 pence (as restated for the bonus element of
the October 2004 rights issue) and will be paid on 28 October 2005. We intend to
maintain our current dividend policy, with the level of dividend growth being
determined after considering the opportunities to invest in those areas of our
business offering attractive growth prospects, our financial flexibility and the
development of our statutory profits over the medium to long-term.
SHAREHOLDERS' FUNDS
On the achieved profits basis, which recognises the shareholders' interest in
long-term businesses, shareholders' funds at 30 June 2005 were GBP9.3 billion,
an increase of GBP0.5 billion from the 2004 year end level after restating for
relevant IFRS changes. This 6 per cent increase primarily reflects: total
achieved profits basis operating profit of GBP834 million; a GBP305 million
favourable movement in short-term fluctuations in investment returns; and the
positive impact of GBP242 million for foreign exchange movements. These were
offset by: a GBP220 million negative movement due to changes in economic
assumptions; a tax charge of GBP300 million; dividend payments of GBP213 million
made to shareholders (net of scrip dividend); and the impairment charge of GBP95
million in respect of purchased goodwill associated with the Japanese life
business.
Statutory IFRS basis shareholders' funds at 30 June 2005 were GBP5.0 billion.
This compares with GBP4.8 billion on the proforma IFRS basis, at 31 December
2004. The increase primarily reflects: profit after tax of GBP300 million and
positive foreign exchange movements of GBP183 million, offset by dividend
payments to shareholders (net of scrip dividend) of GBP213 million.
CASH FLOW
The table below shows the Group holding company cash flow. Prudential believes
that this format gives a clearer presentation of the use of the Group's
resources than the format of the statement required by IFRS.
Half Year Half Year
2005 2004
GBPm GBPm
--------------------------------------------------------------------------------
Cash remitted by business units
UK life fund transfer* 194 208
Asia 58 62
M&G 27 38
--------------------------------------------------------------------------------
Total cash remitted to group 279 308
Net interest paid (54) (77)
Dividends paid (252) (214)
Scrip dividends and share options 40 61
--------------------------------------------------------------------------------
Cash remittances after interest and dividends 13 78
Tax received 36 -
Corporate activities (36) (30)
--------------------------------------------------------------------------------
Cash flow before investment in businesses 13 48
Capital invested in business units
UK and Europe (9) (28)
Asia (80) (88)
--------------------------------------------------------------------------------
Decrease in cash (76) (68)
--------------------------------------------------------------------------------
* in respect of prior year's bonus declarations
The Group holding company received GBP279 million in cash remittances from
business units in the first half of 2005 (2004: GBP308 million) comprising the
shareholders statutory life fund transfer of GBP198 million relating to the 2004
bonus declarations, of which GBP194 million was remitted from the UK and GBP4
million from Asia, together with other remittances from subsidiaries of GBP81
million. Prudential expects the life fund transfer to continue broadly at this
level.
In the second half of 2005 a GBP100 million special dividend is due from the PAC
shareholders' funds in respect of profits arising from earlier business
disposals, and an estimated payment of $150 million is expected from JNL.
After net dividends and interest paid, there was a net cash inflow of GBP13
million (2004: GBP78 million). The Group holding company paid GBP36 million in
respect of corporate activities during the first half of 2005 and received GBP36
million in respect of tax.
The group invested GBP89 million (2004: GBP116 million) during the first half of
the year, including GBP9 million in its UK operations and GBP80 million in Asia.
Net investment in Asia was GBP91 million for the 2004 full year and is expected
to remain broadly the same in 2005. Prudential continues to expect that its
Asian operations will be a net capital provider to the Group in 2006. The
capital requirement for the UK business is expected to be up to GBP250 million
for 2005. The UK business has managed its capital efficiently in the first half
of 2005 but we expect it to draw significantly more capital in line with
expectations in the second half of the year.
In aggregate, the first six months of 2005 saw a decrease in cash of GBP76
million (2004: GBP68 million).
SHAREHOLDERS' BORROWINGS AND FINANCIAL FLEXIBILITY
Net core structural borrowings at 30 June 2005 were GBP1,364 million compared
with GBP1,236 million at 31 December 2004. This reflects the net cash outflow of
GBP76 million and exchange conversion losses of GBP52 million.
The Group also has access to GBP1,400 million committed bank facilities provided
by 14 major international banks and a GBP500 million committed securities
lending liquidity facility.
The Group is funded centrally, except for Egg, which is responsible for its own
financing. The Group's core debt is managed to be within a target level
consistent with its current debt ratings. At 30 June 2005, the gearing ratio, on
an achieved profits basis including hybrid debt (net of cash and short-term
investments) was 13 per cent compared with 12 per cent at 31 December 2004.
Prudential plc enjoys strong debt ratings from Moody's, Standard & Poor's and
Fitch Ratings. Prudential's long-term senior debt is rated A2 (stable outlook)
by Moody's, AA- (negative outlook) by Standard & Poor's and AA- (stable outlook)
by Fitch Ratings. Prudential's short-term debt is rated as P-1 by Moody's, A1+
by Standard & Poor's and F1+ by Fitch Ratings.
Based on the achieved profits basis operating profit from continuing operations
and interest payable on core structural borrowings, interest cover was 11 times
for the first half of 2005 compared with 10 times for the first half of 2004.
In July 2005, US$300 million of perpetual subordinated capital securities priced
at 6.5 per cent were raised via a US retail offer. The proceeds of this issue
qualify as Group regulatory capital for Financial Groups Directive purposes and
will be used to repay the non-qualifying GBP150 million senior debt maturing in
2007. This issuance of hybrid debt capital remains part of Prudential's
financing plan as set out in the 2004 annual report.
FUNDS UNDER MANAGEMENT
Funds under management across the Group at 30 June 2005 totalled GBP214 billion
compared with GBP197 billion at 31 December 2004. The total includes GBP177
billion of Group internal funds under management and GBP37 billion of external
funds under management.
UNALLOCATED SURPLUS OF WITH-PROFITS FUNDS
The accounting basis of recognition of surpluses in the PAC long-term fund has
altered for the main PAC with-profit funds. For 2004 reporting the unallocated
surplus, previously known as the Fund for Future Appropriations (FFA) reflected
the excess of assets over liabilities of the fund with technical provisions
being determined on a basis consistent with the Peak 1 regulatory approach and
with deferral of acquisition costs. The Peak 1 basis reflects bonuses declared
to date with no explicit valuation of guarantees and options. For 2005, as part
of the implementation of IFRS 4, the Group has effectively adopted the
provisions of the UK reporting standard FRS 27 (Life Assurance).
FRS 27 follows closely the requirements of the FSA's new realistic regime with
the following key features for the UK regulated with-profits funds:
- De-recognition of deferred acquisition costs
- Establishing realistic liabilities that reflect policyholder benefits
based on asset shares (i.e. including projected future bonuses), and
- Explicitly valuing product options and guarantees on a market
consistent basis.
Under FRS 27 the liabilities are adjusted to exclude the shareholders' share of
future cost of bonuses that is recognised for regulatory purposes, with a
corresponding increase to the unallocated surplus. After these adjustments and
IFRS measurement changes the unallocated surplus of the PAC with-profits fund at
the 1 January 2005 was GBP8.0 billion.
At 30 June 2005, the PAC unallocated surplus was GBP8.8 billion. The change of
GBP0.8 billion in the unallocated surplus of the PAC with-profit fund between 1
January 2005 and 30 June 2005 reflects the return on the assets representing the
surplus; and the reduced cost of the product guarantees.
FINANCIAL STRENGTH OF THE UK LONG-TERM FUND
United Kingdom
The fund is very strong with an inherited estate measured on an essentially
deterministic valuation basis estimated to be around GBP7.3 billion compared
with approximately GBP6.5 billion at the end of 2004. On a realistic basis, with
liabilities recorded on a market consistent basis, the free assets of the fund
are estimated to be valued at around GBP6.3 billion before a deduction for the
risk capital margin.
The size of the inherited estate fluctuates from year to year depending on the
investment return and the extent to which it has been required to meet smoothing
costs, guarantees and other events.
The Company believes that it would be beneficial if there were greater clarity
as to the status of the inherited estate and therefore it has discussed with the
Financial Services Authority (FSA) the principles that would apply to any
re-attribution of the inherited estate. No conclusions have been reached.
Furthermore, the Company expects that the entire inherited estate will need to
be retained within the long-term fund for the foreseeable future to provide
working capital and so it has not considered any distribution of the inherited
estate to policyholders and shareholders.
The PAC long-term fund is rated AA+ by Standard & Poor's, Aa1 by Moody's and AA+
by Fitch Ratings.
PRUDENTIAL PLC 2005 UNAUDITED INTERIM RESULTS
RESULTS SUMMARY
Achieved Profits Basis Results
following implementation of Restated Restated
International Financial Half Year Half Year Full Year
Reporting Standards ("IFRS") 2005 2004 2004
GBPm GBPm GBPm
-------------------------------------------------------------------------------
UK and Europe Insurance 182 240 450
Operations
M&G 83 79 136
Egg 13 33 61
-------------------------------------------------------------------------------
UK and Europe Operations 278 352 647
US Operations 429 220 413
Asian Operations 228 179 391
Other Income and Expenditure (101) (113) (212)
(including Asia development
expenses)
-------------------------------------------------------------------------------
Operating profit from 834 638 1,239
continuing operations based on
longer-term investment returns
before exceptional items
Goodwill impairment charge (95) - -
Short-term fluctuations in 305 (76) 587
investment returns
Shareholders' share of (8) 67 (12)
actuarial gains and losses on
defined benefit pension
schemes
Effect of changes in economic (220) 21 (100)
assumptions
-------------------------------------------------------------------------------
Profit on ordinary activities 816 650 1,714
from continuing operations
before tax
-------------------------------------------------------------------------------
Operating earnings per share 25.2p 21.1p 41.5p
from continuing operations
after minority interest
Basic earnings per share 21.7p 19.8p 53.3p
Shareholders' funds, excluding GBP9.3bn GBP7.2bn GBP8.8bn
minority interest
-------------------------------------------------------------------------------
IFRS Basis Results
Half Year Half Year Full Year
2005 2004 2004
Statutory IFRS basis results GBPm GBPm GBPm
-------------------------------------------------------------------------------
Total profit after tax for the 300 233 517
period after minority
interest
Basic earnings per share 12.7p 11.2p 24.4p
Shareholders' funds, excluding GBP5.0bn GBP3.4bn GBP4.5bn
minority interest
-------------------------------------------------------------------------------
Supplementary IFRS basis Based on Based on Based on
information statutory IFRS proforma IFRS proforma IFRS
results Half results Half results Full
Year 2005 Year 2004 Year 2004
GBPm GBPm GBPm
-------------------------------------------------------------------------------
Operating profit from continuing 469 375 699
operations based on longer-term
investment returns before exceptional
items
Total profit after tax for the period 300 294 602
after minority interest
Operating earnings per share from 14.0p 12.2p 22.7p
continuing operations after minority
interest
Basic earnings per share 12.7p 14.2p 28.4p
Shareholders' funds, excluding GBP5.0bn GBP3.4bn GBP4.8bn
minority interest
-------------------------------------------------------------------------------
Half Year Half Year Full Year
2005 2004 2004
-------------------------------------------------------------------------------
Declared Dividends Per Share 5.30p 5.19p 15.84p
relating to reporting period
Funds under Management GBP214bn GBP182bn GBP197bn
-------------------------------------------------------------------------------
To provide consistency the achieved profits basis results reflect the
application of the changes of policy the Group expects to apply in its full year
2005 IFRS basis financial statements, as described below, to the extent
applicable. The 2004 results have been restated accordingly.
The statutory basis financial statements included within this report are
referred to throughout as "Statutory IFRS basis" results.
These statutory IFRS basis results reflect the application of:
(i) Measurement changes arising from policies the Group expects to apply on the
adoption of all IFRS standards, other than IAS32 ("Financial Instruments:
Disclosure and Presentation"), IAS39 ("Financial Instruments: Recognition and
Measurement"), and IFRS4 ("Insurance Contracts"), from 1 January 2004. The half
year 2005 results include the expected effect of these three standards from 1
January 2005.
(ii) Changes to the format of the results and other presentational changes that
the Group expects to apply in its full year 2005 financial statements in so far
as they affect the summary results included in this interim report.
(iii) Compared to supplementary results and earnings per share basis information
previously provided under UK GAAP, a discretionary change of policy for the
basis of determining longer-term investment returns included in operating profit
based on longer-term investment returns.
The proforma IFRS basis results included in this report are included as
supplementary information and are not results that form part of the Group's
financial statements. The proforma IFRS results reflect the application of the
statutory IFRS changes noted above and the estimated effect on the Group's
results for 2004 if IAS32, IAS39 and IFRS4 had been applied from 1 January 2004
to the Group's insurance operations.
ACHIEVED PROFITS BASIS RESULTS
RESULTS SUMMARY
Restated Restated
Half Year Half Year Full Year
2005 2004 2004
GBPm GBPm GBPm
-----------------------------------------------------------------------------------
UK and Europe Insurance 182 240 450
Operations
M&G 83 79 136
Egg 13 33 61
-----------------------------------------------------------------------------------
UK and Europe Operations 278 352 647
US Operations 429 220 413
Asian Operations 228 179 391
Other Income and Expenditure (101) (113) (212)
(including Asia development
expenses)
-----------------------------------------------------------------------------------
Operating profit from continuing 834 638 1,239
operations based on longer-term
investment returns before
exceptional items
Goodwill impairment charge (95) - -
Short-term fluctuations in 305 (76) 587
investment returns
Shareholders' share of actuarial (8) 67 (12)
gains and losses on defined
benefit pension schemes
Effect of changes in economic (220) 21 (100)
assumptions
-----------------------------------------------------------------------------------
Profit from continuing operations 816 650 1,714
before tax (including actual
investment returns)
Tax (300) (215) (491)
-----------------------------------------------------------------------------------
Profit from continuing operations 516 435 1,223
after tax before minority
interest
Discontinued operations (net of 1 (17) (94)
tax)
-----------------------------------------------------------------------------------
Total profit for the period 517 418 1,129
-----------------------------------------------------------------------------------
Attributable to:
Equity holders of the 512 411 1,130
parent company
Minority interest 5 7 (1)
-----------------------------------------------------------------------------------
Total profit for the period 517 418 1,129
-----------------------------------------------------------------------------------
Earnings Per Share
-----------------------------------------------------------------------------------
Continuing operations
From operating profit, based on 25.2p 21.1p 41.5p
longer-term investment returns,
after tax and related minority
interest
Adjustment for goodwill impairment (4.0)p - -
charge
Adjustment from post-tax long-term 9.1p (3.5)p 18.6p
investment returns to post-tax
actual investment returns (after
related minority interest)
Adjustment for post-tax (0.3)p 2.3p (0.3)p
shareholders' share of actuarial
gains and losses on defined
benefit pension schemes
Adjustment for post-tax effect of (8.3)p 0.5p (3.4)p
changes in economic assumptions
-----------------------------------------------------------------------------------
Based on profit from continuing 21.7p 20.4p 56.4p
operations after minority
interest
-----------------------------------------------------------------------------------
Discontinued operations
Based on profit (loss) from 0.0p (0.6)p (3.1)p
discontinued operations after
minority interest
-----------------------------------------------------------------------------------
Total - based on total profit for 21.7p 19.8p 53.3p
the period after minority interest
-----------------------------------------------------------------------------------
Average number of shares (million) 2,361 2,075 2,121
-----------------------------------------------------------------------------------
Dividends Per Share
-----------------------------------------------------------------------------------
Dividends relating to reporting
period
Interim dividend (2005 5.30p 5.19p 5.19p
and 2004)
Final dividend (2004) - - 10.65p
-----------------------------------------------------------------------------------
Total 5.30p 5.19p 15.84p
-----------------------------------------------------------------------------------
Dividends declared and paid in
reporting period
Current period interim - - 5.19p
dividend
Final dividend for prior 10.65p 10.29p 10.29p
period
-----------------------------------------------------------------------------------
Total 10.65p 10.29p 15.48p
-----------------------------------------------------------------------------------
TOTAL INSURANCE AND INVESTMENT PRODUCTS NEW BUSINESS
INSURANCE PRODUCTS AND INVESTMENT PRODUCTS*
Insurance Products * Investment Products * Total
Half Half Full Half Half Full Half Half Full
Year Year Year Year Year Year Year Year Year
2005 2004 2004 2005 2004 2004 2005 2004 2004
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------------------------------------------------------------------------------------------
UK and Europe 4,600 2,709 6,538 3,579 2,177 5,845 8,179 4,886 12,383
Operations
US 2,705 2,348 4,420 217 200 418 2,922 2,548 4,838
Operations
Asian 674 521 1,172 9,421 9,584 18,845 10,095 10,105 20,017
Operations
----------------------------------------------------------------------------------------------------------------------
Group Total 7,979 5,578 12,130 13,217 11,961 25,108 21,196 17,539 37,238
----------------------------------------------------------------------------------------------------------------------
INSURANCE PRODUCTS - NEW BUSINESS PREMIUMS AND CONTRIBUTIONS*
Single Regular Annual Premium and
Contribution Equivalents
Half Half Full Half Half Full Half Half Full
Year Year Year Year Year Year Year Year Year
2005 2004 2004 2005 2004 2004 2005 2004 2004
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------------------------------------------------------------------------------------------
UK and Europe
Insurance
Operations
Direct to
customer
Individual 365 306 630 - - - 37 31 63
annuities
Individual 14 12 19 5 6 10 6 7 12
pensions and
life
Department of 234 252 265 - - - 23 25 27
Work and
Pensions
rebate
business
----------------------------------------------------------------------------------------------------------------------
Total 613 570 914 5 6 10 66 63 102
----------------------------------------------------------------------------------------------------------------------
Business to
Business
Corporate 114 77 153 67 75 137 78 83 152
pensions
Individual 98 94 229 - - - 10 9 23
annuities
Bulk 321 210 474 - - - 32 21 47
annuities
----------------------------------------------------------------------------------------------------------------------
Total 533 381 856 67 75 137 120 113 222
----------------------------------------------------------------------------------------------------------------------
Intermediated
distribution
Life 551 446 1,001 3 2 5 58 46 105
Individual 557 545 1,180 - - - 56 55 118
annuities
Individual and 62 150 189 14 16 25 20 31 44
corporate
pensions
Department of 80 92 89 - - - 8 9 9
Work and
Pensions
rebate
business
----------------------------------------------------------------------------------------------------------------------
Total 1,250 1,233 2,459 17 18 30 142 141 276
----------------------------------------------------------------------------------------------------------------------
Partnerships
Life 426 341 790 1 1 2 44 35 81
Individual and 1,569 48 1,249 - - - 157 5 125
bulk
annuities
----------------------------------------------------------------------------------------------------------------------
1,995 389 2,039 1 1 2 201 40 206
----------------------------------------------------------------------------------------------------------------------
Europe
Life 119 36 89 - - 2 12 4 11
----------------------------------------------------------------------------------------------------------------------
Total UK and 4,510 2,609 6,357 90 100 181 541 361 817
Europe
----------------------------------------------------------------------------------------------------------------------
Insurance
Operations
US
Operations
Fixed 410 573 1,130 - - - 41 57 113
annuities
Fixed index 296 158 429 - - - 30 16 43
annuities
Variable 1,185 1,006 1,981 - - - 118 101 198
annuities
Life 6 4 16 5 6 12 6 6 14
Guaranteed 187 32 180 - - - 19 3 18
Investment
Contracts
GIC - Medium 616 569 672 - - - 61 57 67
Term Notes
----------------------------------------------------------------------------------------------------------------------
Total 2,700 2,342 4,408 5 6 12 275 240 453
----------------------------------------------------------------------------------------------------------------------
Asian
Operations
China 5 5 9 9 6 16 10 7 17
Hong Kong 147 108 255 35 35 78 50 46 103
India (Group's 2 3 5 27 17 33 27 17 33
26% interest)
Indonesia 27 21 38 18 14 28 21 16 32
Japan 11 7 17 2 3 7 3 4 9
Korea 10 27 36 59 27 60 60 30 64
Malaysia 6 3 7 29 21 61 29 21 62
Singapore 117 96 199 23 20 47 35 30 67
Taiwan 72 30 88 55 57 143 62 60 151
Other 4 4 8 16 17 37 16 17 38
----------------------------------------------------------------------------------------------------------------------
Total 401 304 662 273 217 510 313 248 576
----------------------------------------------------------------------------------------------------------------------
Group Total 7,611 5,255 11,427 368 323 703 1,129 849 1,846
----------------------------------------------------------------------------------------------------------------------
Annual premium and contribution equivalents are calculated as the aggregate of
regular new business amounts and one tenth of single new business amounts.
INVESTMENT PRODUCTS - FUNDS UNDER MANAGEMENT *
1 Jan 2005 Gross Inflows Redemptions Market and 30 June 2005
other Movements
GBPm GBPm GBPm GBPm GBPm
----------------------------------------------------------------------------------------------
UK and Europe 28,705 3,579 (1,899) 786 31,171
Operations
US Operations 550 217 (56) 43 754
Asian Operations 7,832 9,421 (8,723) 1,225 9,755
----------------------------------------------------------------------------------------------
Group Total 37,087 13,217 (10,678) 2,054 41,680
----------------------------------------------------------------------------------------------
* The format of the tables shown above is consistent with the distinction
between insurance and investment products as applied for previous financial
reporting periods. Products categorised as "insurance" refer to those classified
as contracts of long-term insurance business for regulatory reporting purposes,
i.e. falling within one of the classes of insurance specified in part II of
Schedule 1 to the Regulated Activities Order under FSA regulations.
The details shown above for insurance products include contributions for
contracts that are classified under IFRS 4 "Insurance Contracts" as not
containing significant insurance risk. These products are described as
investment contracts under IFRS4. Contracts included in this category are
primarily certain unit linked and similar contracts written in UK and Europe
Insurance Operations and Guaranteed Investment Contracts written in US
operations.
Investment products referred to in the tables above are unit trust, mutual funds
and similar types of fund management arrangements. These are unrelated to
insurance products that are classified as "investment contracts" under IFRS 4,
as described above, although similar IFRS recognition principles apply to the
acquisition costs and fees attaching to this type of business.
ACHIEVED PROFITS BASIS RESULTS
OPERATING PROFIT FROM CONTINUING OPERATIONS BASED ON LONGER-TERM INVESTMENT
RETURNS BEFORE EXCEPTIONAL ITEMS
Results Analysis by Business Area Half Year Restated Restated
2005 Half Year Full Year
GBPm 2004 2004
GBPm GBPm
------------------------------------------------------------------------------
UK and Europe Operations
New business 159 88 220
Business in force 23 152 230
------------------------------------------------------------------------------
Long-term business 182 240 450
M&G 83 79 136
Egg 13 33 61
------------------------------------------------------------------------------
Total 278 352 647
------------------------------------------------------------------------------
US Operations
New business 102 82 156
Business in force 315 140 271
------------------------------------------------------------------------------
Long-term business 417 222 427
Broker dealer and fund management 18 9 15
Curian (6) (11) (29)
------------------------------------------------------------------------------
Total 429 220 413
------------------------------------------------------------------------------
Asian Operations
New business 152 135 312
Business in force 74 34 60
------------------------------------------------------------------------------
Long-term business 226 169 372
Fund management 2 10 19
Development expenses (8) (10) (15)
------------------------------------------------------------------------------
Total 220 169 376
------------------------------------------------------------------------------
Other Income and Expenditure
Investment return and other income 45 16 44
Interest payable on core structural (84) (74) (154)
borrowings
Corporate expenditure:
Group Head Office (36) (23) (51)
Asia Regional Head Office (14) (18) (29)
Charge for share based payments for (4) (4) (7)
Prudential schemes
------------------------------------------------------------------------------
Total (93) (103) (197)
------------------------------------------------------------------------------
Operating profit from continuing 834 638 1,239
operations based on longer-term
investment returns before exceptional
items
------------------------------------------------------------------------------
Analysed as profits (losses) from:
New business 413 305 688
Business in force 412 326 561
------------------------------------------------------------------------------
Long-term business 825 631 1,249
Asia development expenses (8) (10) (15)
Other operating results 17 17 5
------------------------------------------------------------------------------
Total 834 638 1,239
------------------------------------------------------------------------------
ACHIEVED PROFITS BASIS RESULTS
SUMMARISED CONSOLIDATED BALANCE SHEET
Half Year Restated Restated
2005 Half Year Full Year 2004
GBPm 2004 GBPm
GBPm
------------------------------------------------------------------------------
Total assets less liabilities, 160,255 137,376 148,639
excluding insurance funds
Less insurance funds*:
Technical provisions (net of (155,266) (134,024) (144,149)
reinsurers' share) and
unallocated surplus of
with-profits funds
Less shareholders' accrued 4,317 3,884 4,272
interest in the long-term
business
------------------------------------------------------------------------------
(150,949) (130,140) (139,877)
------------------------------------------------------------------------------
Total net assets 9,306 7,236 8,762
------------------------------------------------------------------------------
Share capital 119 101 119
Share premium 1,561 553 1,558
Other statutory basis shareholders' 3,309 2,698 2,813
funds (following adoption of IFRS)
Additional achieved profits basis 4,317 3,884 4,272
retained profit
------------------------------------------------------------------------------
Shareholders' capital and reserves 9,306 7,236 8,762
(excluding minority interest)
------------------------------------------------------------------------------
MOVEMENT IN SHAREHOLDERS' CAPITAL AND RESERVES (excluding minority interest)
Half Year 2005 Restated Restated
GBPm Half Year 2004 Full Year 2004
GBPm GBPm
------------------------------------------------------------------------------------------
Profit for the period (net of minority 512 411 1,130
interest)
Items taken directly to equity:
Cumulative effect of changes in (25) - -
accounting principles on adoption of
IAS32, IAS39 and IFRS4, net of
applicable taxes, at 1 January
2005
Unrealised valuation movements on 4 - -
securities classified as
available-for-sale from 1 January
2005
Movement on cashflow hedges (7) - -
Exchange movements 242 (53) (240)
Related tax 30 5 12
Proceeds from rights issue, net of - - 1,021
expenses
Other new share capital subscribed 40 61 119
Dividends (253) (214) (323)
Reserve movements in respect of 6 3 10
share based payments
Own shares:
Own shares purchased in respect 0 0 (4)
of share based payment plans
Movement on Prudential plc (5) 0 14
shares purchased by unit trusts
newly consolidated under IFRS
------------------------------------------------------------------------------------------
Net increase in shareholders' capital and 544 213 1,739
reserves
------------------------------------------------------------------------------------------
Shareholders' capital and reserves at
beginning of period (excluding minority
interest)
As previously reported 8,596 7,005 7,005
Adjustments on implementation of 166 18 18
statutory IFRS (excluding IAS32,
IAS39 and IFRS4)
------------------------------------------------------------------------------------------
As restated 8,762 7,023 7,023
------------------------------------------------------------------------------------------
Shareholders' capital and reserves at end 9,306 7,236 8,762
of period (excluding minority interest)
------------------------------------------------------------------------------------------
Comprising
------------------------------------------------------------------------------------------
UK and Europe Operations:
Long-term business 4,433 3,580 4,051
M&G:
Net assets 275 333 300
Acquired goodwill 1,153 1,153 1,153
Egg 266 353 273
------------------------------------------------------------------------------------------
6,127 5,419 5,777
------------------------------------------------------------------------------------------
US Operations 3,114 2,570 2,596
Asian Operations:
Net assets 1,815 1,482 1,736
Acquired goodwill 197 292 292
Other operations:
Holding company net borrowings (1,224) (2,055) (1,106)
Other net liabilities (723) (472) (533)
------------------------------------------------------------------------------------------
9,306 7,236 8,762
------------------------------------------------------------------------------------------
* Including liabilities in respect of insurance products classified as
investment contracts under IFRS4.
ACHIEVED PROFITS BASIS RESULTS
BASIS OF PREPARATION OF RESULTS
The achieved profits basis results have been prepared in accordance with the
guidance issued by the Association of British Insurers in December 2001
"Supplementary Reporting for long-term insurance business (the achieved profits
method)".
Under this guidance, for most countries long-term expected rates of return on
investments and risk discount rates are set by reference to period end rates of
return on fixed income securities. This "active" basis of assumption setting has
been applied in preparing the results of the Group's UK, European and US
long-term business operations. For the Group's Asian operations, the active
basis is appropriate for business written in Japan and Korea and for US dollar
denominated business written in Hong Kong. An exception to this general rule is
that for countries where long-term fixed income securities markets are
underdeveloped, investment return assumptions and risk discount rates should be
based on an assessment of long-term economic conditions. Except for the
countries listed above, this alternative basis is appropriate for the Group's
Asian operations.
The key economic assumptions are set out below:
Half Year Half Year Full Year
2005 2004 2004
-----------------------------------------------------------------------------------------------
UK and Europe Insurance
Operations
Pre-tax expected long-term
nominal rates of investment
return:
UK equities 7.2% 7.6% 7.1%
Overseas equities 7.0% to 7.9% 7.3% to 8.3% 6.8% to 7.8%
Property 6.5% 6.8% 6.3%
Gilts 4.2% 5.1% 4.6%
Corporate bonds 5.1% 6.1% 5.5%
Assets of PAC with-profits 6.6% 7.1% 6.5%
fund (applying the rates
listed above to the
investments held by the
fund)
Expected long-term rate of 2.8% 3.1% 2.9%
inflation
Post-tax expected long-term
nominal rate of return:
Pension business (where no 6.6% 7.1% 6.5%
tax applies)
Life business 5.8% 6.2% 5.7%
Risk margin included within the 3.1% 2.6% 2.6%
risk discount rate
Risk discount rate 7.3% 7.7% 7.2%
US Operations
Expected long-term spread 1.75% 1.75% 1.75%
between earned rate and rate
credited to policyholders
US 10 year treasury bond rate 4.0% 4.6% 4.3%
at end of period
Risk margin included within the 3.1% 3.1% 3.1%
risk discount rate
Risk discount rate 7.1% 7.7% 7.4%
Asian Operations
Weighted pre-tax expected 7.0% 6.8% 6.6%
long-term nominal rate of
investment return
Weighted expected long-term 3.2% 3.1% 3.0%
rate of inflation
Weighted risk discount rate 10.0% 9.9% 9.6%
The risk margin for UK and Europe Insurance Operations has been increased to 3.1
per cent following re-assessment in the light of the intention to use the
European Embedded Value basis for 2005 year end reporting (see note (g))
The economic assumptions shown above for the Asian Operations have been
determined by weighting each country's assumptions by reference to the achieved
profits basis operating results for new business written in the relevant period.
NOTES ON THE UNAUDITED ACHIEVED PROFITS BASIS RESULTS
(a) The achieved profits basis results for the 2005 and 2004 Half Years are
unaudited. The results for the 2004 Full Year are also unaudited and have been
derived from the achieved profits basis supplement to the Company's statutory
accounts for that year and then adjusted for the application of IFRS where
appropriate as described in note (d). The supplement included an unqualified
audit report from the auditors.
(b) Under the achieved profits basis, the operating profit from new business
represents the profitability of new long-term insurance business written in the
period and the operating profit from business in force represents the
profitability of business on the books at the start of the period. These results
are combined with the statutory basis results of the Group's other operations
including banking and fund management business. The effects of short-term
fluctuations in investment returns and of changes in economic assumptions on
shareholders' funds at the start of the reporting period are excluded from
operating profit but included in total profit. In the directors' opinion, the
achieved profits basis results provide a more realistic reflection of the
performance of the Group's long-term business operations than results under the
statutory basis.
(c) The proportion of surplus allocated to shareholders from the UK with-profits
business has been based on the present level of 10 per cent. Future bonus rates
have been set at levels which would fully utilise the assets of the with-profits
fund over the lifetime of the business in force.
(d) The achieved profits basis results for the Group reflect the application of
the changes the Group expects to apply in its full year 2005 IFRS basis
financial statements to the extent applicable. The results of long-term business
operations are significantly altered only for the changed basis of determining
longer-term returns credited to operating results.
The significant changes of policy that affect the 2004 and 2005 results for
non-insurance operations principally relate to pension costs, goodwill, the
timing basis of recognition of external dividends, and altered measurement of
acquisition costs and front end fees of fund management business. The detail of
these policy changes is described in note B to the statutory basis financial
statements. The change in respect of pension costs is augmented under the
Achieved Profits basis to reflect the Group's 10 per cent interest in the share
of the deficits of the UK defined benefit pension schemes that are attributable
to the PAC with-profits fund.
The impact of adoption of IAS39 and IFRS4 from 1 January 2005 is restricted
under the Achieved Profits basis to non-insurance operations, as described in
the statutory financial statements. Results attributable to shareholders for
long-term businesses are not affected. In particular, the investment and
derivative value volatility reflected in the statutory basis results for JNL
does not feature due to the methodology of the achieved profits basis. The
methodology seeks to value the future emergence of surplus, which in the case of
JNL's type of business is unaffected by temporary valuation movements.
ACHIEVED PROFITS BASIS RESULTS
NOTES ON THE UNAUDITED ACHIEVED PROFITS BASIS RESULTS (CONTINUED)
(e) The impact of restating the Half Year and Full Year 2004 achieved profits
basis results for the changes of policy on adoption of IFRS and discretionary
changes to longer-term investment returns is as follows:
Half Year 2004 Full Year 2004
As previously Change Restated As previously Change Restated
published published
GBPm GBPm GBPm GBPm GBPm GBPm
Operating 587 51 638 1,144 95 1,239
profit from
continuing
operations
based on
longer-term
investment
returns (note
(i))
Amortisation (48) 48 0 (94) 94 0
of goodwill
(note (ii))
Short-term (26) (50) (76) 679 (92) 587
fluctuations
in investment
returns (note
(iii))
Shareholders' - 67 67 - (12) (12)
share of
actuarial
gains and
losses on
defined
benefit
pension
schemes
Effect of 21 - 21 (100) - (100)
change in
economic
assumptions
-------------------------------------------------------------------------------------
Profit from 534 116 650 1,629 85 1,714
continuing
operations
before tax
attributable
to
shareholders
(including
actual
investment
returns)
-------------------------------------------------------------------------------------
Shareholders' 7,222 14 7,236 8,596 166 8,762
funds
(excluding
minority
interest)
(note (iv))
-------------------------------------------------------------------------------------
(i) Operating profit from continuing operations, based on longer-term investment
returns
Half Year 2004 Full Year 2004
GBPm GBPm
Discretionary change to longer-term
investment returns:
US Operations 56 110
Asian Operations (6) (9)
IFRS changes 1 (6)
-------------------------------
Total changes 51 95
Operating profit - as previously published 587 1,144
-------------------------------
Operating profit - as restated 638 1,239
-------------------------------
(ii) Amortisation of goodwill
Under IFRS3 ("Business Combinations") and IFRS1 ("First-time Adoption of
International Financial Reporting Standards") goodwill as previously reported at
the date of adoption of IFRS, which is 1 January 2004, is left unaltered subject
to annual impairment testing. Amortisation charges reported on the previous
basis are no longer permitted.
(iii) Short-term fluctuations in investment returns including investment return
attributable to minority interest in consolidated investment funds
Half Year 2004 Full Year 2004
GBPm GBPm
Discretionary change to longer-term
investment returns (as above):
US Operations (56) (110)
Asian Operations 6 9
IFRS changes 0 9
------------- -------------
Total changes (50) (92)
Short-term fluctuations in investment (26) 679
returns - as previously published ------------- -------------
Short-term fluctuations in investment (76) 587
returns - as restated ------------- -------------
(iv) Shareholders' funds (excluding minority interest)
Half Year 2004 Full Year 2004
GBPm GBPm
Changes consequent on adoption of IFRS:
Timing difference on recognition of 109 253
dividend declared after balance sheet
date
Shareholders' share of deficit on UK
defined benefit pension schemes (net of
deferred tax):
Statutory IFRS basis (73) (115)
Additional change for shareholders' (30) (47)
10% interest on the achieved profits
basis in the deficit attributable to
the PAC with-profits fund
Goodwill 48 94
Other items (net of related tax) (40) (19)
------------- -------------
------------- -------------
Total changes 14 166
Shareholders' funds, net of minority 7,222 8,596
interest - as previously published ------------- -------------
Shareholders' funds, net of minority 7,236 8,762
interest - as restated ------------- -------------
(f) Consistent with prior periods for the Taiwan operation, the projections
include an assumption of phased progression from current rates to the long-term
expected rates over a remaining period of eight years. This takes into account
the effect on bond values of interest rate movements. The principal cause of the
GBP220m charge for the effect of changed economic assumptions is the reduction
in short-term earned rates in Taiwan. This reduction has the effect of delaying
the emergence of the expected long-term rates.
(g) In its Full Year 2005 financial statements, the Group intends to replace the
use of the Achieved Profits basis methodology by the European Embedded Value
(EEV) principles issued by the CFO forum of the major European Life Insurers in
May 2004. Details of the Group's application of the EEV principles are available
at the Group's web-site, www.prudential.co.uk.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
SUMMARY INCOME STATEMENT
Half Year 2005 Half Year 2004 Full Year 2004
GBPm GBPm (note C) GBPm (note C)
----------------------------------------------------------------------------------
Insurance contract revenues 8,159 7,397 16,099
Investment income (including 9,560 3,245 15,742
realised gains and losses, and
unrealised appreciation of
investments categorised under
IAS39 as "fair value through
profit and loss")
Other income 982 886 2,026
----------------------------------------------------------------------------------
Total revenue (note D) 18,701 11,528 33,867
----------------------------------------------------------------------------------
Benefits and claims for insurance (14,919) (8,582) (26,584)
contracts, and movement in
unallocated surplus of
with-profits funds determined
after charging taxes borne by
policyholders and unallocated
surplus of with-profits funds and
unit linked policies
Acquisition costs and other (3,036) (2,208) (5,526)
operating expenditure
Interest on structural borrowings (104) (94) (196)
of shareholder financed
operations (including Egg) and
with-profits operations
----------------------------------------------------------------------------------
Total charges (note D) (18,059) (10,884) (32,306)
----------------------------------------------------------------------------------
IFRS basis income before tax 642 644 1,561
(representing income net of
post-tax transfers to unallocated
surplus of with-profits funds,
before tax attributable to
policyholders and unallocated
surplus of with-profits funds,
unit linked policies and
shareholders) (notes B and D)
Income tax expense attributable (182) (249) (711)
to policyholders and unallocated
surplus of with-profits funds and
unit linked policies
----------------------------------------------------------------------------------
Profit from continuing operations 460 395 850
(including actual investment
returns) before tax attributable
to shareholders (notes B, D and
E)
Income tax (expense) benefit
attributable to shareholders:
Total income tax expense* (338) (387) (951)
(note M)
Less: Income tax 182 249 711
attributable to
policyholders and
unallocated surplus of
with-profits funds and unit
linked policies
----------------------------------------------------------------------------------
Income tax expense attributable (156) (138) (240)
to shareholders (note M)
Profit from continuing operations 304 257 610
after tax
Discontinued operations (net of 1 (17) (94)
tax)
----------------------------------------------------------------------------------
Profit for the period 305 240 516
----------------------------------------------------------------------------------
Attributable to:
Equity holders of the 300 233 517
parent company
Minority interest 5 7 (1)
----------------------------------------------------------------------------------
Profit for the period 305 240 516
----------------------------------------------------------------------------------
Earnings Per Share
----------------------------------------------------------------------------------
Basic (based on 2,361 million,
2,075 million and 2,121 million
shares respectively)
Based on profit from 12.7p 11.8p 27.5p
continuing operations after
minority interest
Based on profit (loss) from 0.0p (0.6)p (3.1)p
discontinued operations
after minority interest
----------------------------------------------------------------------------------
12.7p 11.2p 24.4p
----------------------------------------------------------------------------------
Diluted (based on 2,364 million,
2,078 million and 2,124 million
shares respectively)
Based on profit from continuing 12.7p 11.8p 27.5p
operations after minority interest
Based on profit (loss) from 0.0p (0.6)p (3.1)p
discontinued operations after
minority interest
----------------------------------------------------------------------------------
12.7p 11.2p 24.4p
----------------------------------------------------------------------------------
Dividends Per Share
----------------------------------------------------------------------------------
Dividends relating to reporting period
Interim dividend (2005 and 2004) 5.30p 5.19p 5.19p
Final dividend (2004) - - 10.65p
----------------------------------------------------------------------------------
Total 5.30p 5.19p 15.84p
----------------------------------------------------------------------------------
Dividends declared and paid in reporting
period
Current period interim dividend - - 5.19p
Final dividend for prior period 10.65p 10.29p 10.29p
----------------------------------------------------------------------------------
Total 10.65p 10.29p 15.48p
----------------------------------------------------------------------------------
* Total income tax expense comprises tax attributable to policyholders and
unallocated surplus of with profits funds, unit linked policies and
shareholders.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
Half Year 2005 Half Year 2004 Full Year 2004
CHANGES IN EQUITY Share- Minority Total Share- Minority Total Share- Minority Total
holders' interest equity holders' interest equity holders' interest equity
equity equity equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------------------------------------------------------------------------------
Statement of
Recognised Income
and Expense
Net income 300 5 305 233 7 240 517 (1) 516
Items taken directly
to equity:
Exchange 183 183 (32) (32) (172) (172)
movements
Movement on cash (7) (1) (8)
flow hedges
Unrealised
valuation
movements on
securities
classified as
available-for-sale
from 1 January
2005 (see note H)
Gross change (63) 1 (62)
Related change 14 14
to amortisation
of deferred
acquisition
costs
Related tax 48 48 5 5 12 12
------------------------------------------------------------------------------------------------------------------
Total recognised 475 5 480 206 7 213 357 (1) 356
income for the
period
------------------------------------------------------------------------------------------------------------------
Cumulative effect of 236 (3) 233
changes in
accounting policies
on adoption of
IAS32, IAS39, and
IFRS4, net of
applicable taxes at
1 January 2005 (noteG)
------------------------------------------------------------------------------------------------------------------
Total recognised 711 2 713 206 7 213 357 (1) 356
income and expense
------------------------------------------------------------------------------------------------------------------
Half Year 2005 Half Year 2004 Full Year 2004
Share- Minority Total Share- Minority Total Share- Minority Total
holders' interest equity holders' interest equity holders' interest equity
equity equity equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------------------------------------------------------------------------------
Reconciliation of
movement on
equity
Share capital and
share premium
Proceeds from 1,021 1,021
rights issue, net
of expenses
Other new share 40 40 61 61 119 119
capital
subscribed
Treasury shares
Consideration 0 0 0 0 (4) (4)
paid for own
shares
purchased in
respect of
share based
payment
plans
Movement on (5) (5) 0 0 14 14
Prudential
plc shares
purchased by
unit trusts
newly
consolidated
under IFRS
Other reserves
Total recognised 711 2 713 206 7 213 357 (1) 356
income for the
period (as shown
above)
Dividends (253) (253) (214) (214) (323) (323)
Reserve movements 6 6 3 3 10 10
in respect of
share based
payments
Change in minority (9) (9) 27 27 9 9
interest arising
principally from
purchase and sale
of venture
investment
companies and
property
partnerships of
the PAC
with-profits
fund
------------------------------------------------------------------------------------------------------------------
Net increase in 499 (7) 492 56 34 90 1,194 8 1,202
equity
------------------------------------------------------------------------------------------------------------------
At beginning of
period:
As previously 4,281 71 4,352 3,240 107 3,347 3,240 107 3,347
reported
under UK
GAAP
Changes 209 74 283 56 30 86 56 30 86
arising from
adoption of
IFRS
------------------------------------------------------------------------------------------------------------------
As restated under 4,490 145 4,635 3,296 137 3,433 3,296 137 3,433
IFRS
------------------------------------------------------------------------------------------------------------------
At end of period 4,989 138 5,127 3,352 171 3,523 4,490 145 4,635
------------------------------------------------------------------------------------------------------------------
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
SUMMARY BALANCE SHEET 30 June 30 June 2004 GBPm 31 December
2005 (note F) 2004
GBPm GBPm (note F)
------------------------------------------------------------------------------------------
Assets
--------
Goodwill:
Attributable to PAC with-profits fund 457 565 754
(in respect of venture investment
subsidiaries)
Attributable to shareholders 1,366 1,504 1,461
(principally in respect of the
acquisitions of M&G and Asian
businesses)
------------------------------------------------------------------------------------------
Total 1,823 2,069 2,215
------------------------------------------------------------------------------------------
Deferred acquisition costs:
PAC with-profits fund (note I) - 875 798
Other operations (note H) 1,858 2,088 2,122
------------------------------------------------------------------------------------------
Total 1,858 2,963 2,920
------------------------------------------------------------------------------------------
Other non-investment and non-cash assets:
Reinsurers' share of contract 648 775 1,018
provisions
Income tax recoverable 193 235 159
Deferred tax assets 1,067 830 827
Accrued investment income 1,726 1,760 1,731
Other debtors 3,388 2,163 1,179
Other 768 500 952
------------------------------------------------------------------------------------------
Total 7,790 6,263 5,866
------------------------------------------------------------------------------------------
Investments of long term business, banking
and other operations:
Investment properties 12,721 11,739 13,538
Financial investments:
Deposits 6,784 3,134 5,173
Equity securities and portfolio 61,560 49,977 54,466
holdings in unit trusts
Fixed income securities 79,442 76,448 76,301
Loans and receivables 13,202 11,901 12,430
Other 3,530 1,950 2,564
------------------------------------------------------------------------------------------
Total investments 177,239 155,149 164,472
------------------------------------------------------------------------------------------
Cash and cash equivalents 3,704 2,872 4,429
------------------------------------------------------------------------------------------
Total assets 192,414 169,316 179,902
------------------------------------------------------------------------------------------
Equity and liabilities
------------------------
Equity
Shareholders' equity (note K) 4,989 3,352 4,490
Minority interest 138 171 145
------------------------------------------------------------------------------------------
Total equity 5,127 3,523 4,635
------------------------------------------------------------------------------------------
Liabilities
Banking customer accounts 6,451 6,699 6,607
Insurance liabilities:
Contract liabilities (including amounts
in respect of contracts
classified as investment contracts 147,031 122,981 128,981
under IFRS4 from 1 January 2005) -
(note I)
Unallocated surplus of with-profits
funds (note I):
Reflecting application of 8,883 - -
'realistic' basis provisions for UK
regulated with-profits funds.
Reflecting previous UK GAAP basis of - 11,818 16,186
provisioning
------------------------------------------------------------------------------------------
Total insurance liabilities 155,914 134,799 145,167
------------------------------------------------------------------------------------------
Core structural borrowings of shareholder
financed operations other than Egg:
Subordinated debt 1,460 1,327 1,429
Other 1,223 1,269 1,368
------------------------------------------------------------------------------------------
Total 2,683 2,596 2,797
------------------------------------------------------------------------------------------
Egg subordinated debt capital 468 451 451
Operational borrowings attributable to 6,244 6,800 6,421
shareholder financed operations (note L)
Borrowings attributable to with-profits funds 1,665 1,849 2,077
(note L)
Other non-insurance liabilities:
Obligations under funding, stock lending and 3,774 4,469 3,504
sale and repurchase agreements
Net asset value attributable to unit holders 1,073 719 808
of consolidated unit trusts and similar
funds
Income tax liabilities 958 1,038 1,054
Deferred tax liabilities 2,681 1,995 2,244
Accruals and deferred income 1,514 1,354 1,700
Other creditors 2,690 1,962 1,502
Provisions and other liabilities 1,172 1,062 935
------------------------------------------------------------------------------------------
Total 13,862 12,599 11,747
------------------------------------------------------------------------------------------
Total liabilities 187,287 165,793 175,267
------------------------------------------------------------------------------------------
Total equity and liabilities 192,414 169,316 179,902
------------------------------------------------------------------------------------------
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
SUMMARY CASH FLOW STATEMENT Half Year 2005 Half Year 2004
GBPm GBPm
--------------------------------------------------------------------------------
Net cash flows from operating activities (note
(i))
IFRS basis income, net of post-tax transfers to 642 644
unallocated surplus of with-profits funds, before
tax attributable to policyholders and unallocated
surplus of with-profits funds, unit linked
policies and shareholders (note D)
Changes in operating assets and liabilities (693) (151)
Other items (52) (160)
--------------------------------------------------------------------------------
(103) 333
--------------------------------------------------------------------------------
Net cash flows from investing activities
Net cash flows from purchases and disposals of (52) (35)
property and equipment
Acquisition of subsidiaries of business operations (141) -
(Life Insurance Company of Georgia) (note (ii))
--------------------------------------------------------------------------------
(193) (35)
--------------------------------------------------------------------------------
Net cash flows from financing activities
Structural borrowings of the Group:
Shareholder financed operations (note
(iii))
(Redemption) Issue (171) 41
Interest paid (95) (85)
With-profits operations (note (iv))
Interest paid (9) (9)
Equity capital:
Issues of ordinary share capital 40 61
Dividends paid to shareholders (253) (214)
--------------------------------------------------------------------------------
(488) (206)
--------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash 59 (20)
equivalents
--------------------------------------------------------------------------------
Net (decrease) increase in cash and cash (725) 72
equivalents
Cash and cash equivalents at beginning of period 4,429 2,800
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period (note 3,704 2,872
(v))
--------------------------------------------------------------------------------
Notes
(i) The adjusting items to IFRS basis income include changes in operating assets
and liabilities, and other items comprising adjustments in respect of non-cash
items, operational interest receipts and payments, dividend receipts, income tax
paid and cash flows in respect of assets categorised as available for sale
investments. The most significant elements of the adjusting items are the
changes in operating assets and liabilities made up as follows:
Half Year 2005 Half Year 2004
GBPm GBPm
Deferred acquisition costs (excluding changes (35) (34)
taken directly to equity)
Other non-investment and non-cash assets (1,379) (1,048)
Investments (7,870) (2,613)
Banking customer accounts (240) (838)
Insurance liabilities (including unallocated 8,534 1,694
surplus)
Other liabilities including operational 297 2,688
borrowings
---------------------------------------------------------------------------
Changes in operating assets and liabilities (693) (151)
---------------------------------------------------------------------------
(ii) Purchases and sales of subsidiaries shown above are those of business
operations. Purchases and sales of venture subsidiaries of the PAC with-profits
fund and cash flows of investment funds that are subject to changes in
consolidation status are accounted for in the same way as for cash flows in
respect of portfolio investments, that is within operating cash flows.
(iii) Structural borrowings of shareholder financed operations consists of the
core debt of the parent company and related finance subsidiaries, Jackson
National Life surplus notes and Egg debenture loans. Core debt excludes
borrowings to support short-term fixed income securities reinvestment programmes
and non-recourse borrowings of investment subsidiaries of shareholder financed
operations. Cash flows in respect of these borrowings are included within
operating cash flows.
(iv) Structural borrowings of with-profits operations relate solely to the
GBP100m 8.5% undated subordinated guaranteed bonds which contribute to the
solvency base of the Scottish Amicable Insurance Fund (SAIF) a ring fenced
sub-fund of the PAC with-profits fund. Cash flows on other borrowings of
with-profits funds, which principally relate to venture investment subsidiaries,
are categorised as operating activities in the presentation above.
(v) Previously, under UK GAAP, following the requirements of FRS1 ("Cash Flow
Statements"), the Group's statutory basis cash flow statement excluded the cash
flows of long-term business funds. Under IFRS the cash flow statement comprises
consolidated cash flows for the Group as a whole, including those of long-term
business funds. Of the cash and cash equivalents amounts of GBP3,704m and
GBP2,872m, GBP42m and GBP93m represent cash and cash equivalents of the parent
company and related finance subsidiaries.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS
A Basis of preparation and audit status
EU law (IAS Regulation EC 1606 / 2002) requires that the next annual
consolidated financial statements of the Group, for the year ending 31 December
2005, be prepared in accordance with International Financial Reporting Standards
(IFRS) adopted for use in the EU.
This interim financial information has been prepared on the basis of the
recognition and measurement requirements of those standards in issue that either
are endorsed by the EU and effective (or available for early adoption) at 31
December 2005 or are expected to be endorsed and effective (or available for
early adoption) at 31 December 2005, the Group's first IFRS annual reporting
date.
Compared to the UK GAAP basis of presentation, the statutory IFRS basis results
reflect the application of:
(i) Measurement and recognition changes arising from policies the Group expects
to apply on the adoption of all IFRS standards, other than IAS32 ("Financial
Instruments: Disclosure and Presentation"), IAS39 ("Financial Instruments:
Recognition and Measurement"), and IFRS4 ("Insurance Contracts"), from 1 January
2004. The half year 2005 results include the expected effect of these three
standards from 1 January 2005.
(ii) Changes to the format of the results and other presentational changes that
the Group expects to apply in its full year 2005 financial statements in so far
as they affect the summary results included in this interim report.
In addition, compared to the basis of preparing supplementary results and
earnings per share basis information previously provided under UK GAAP, a
discretionary change of policy for the basis of determining longer-term
investment returns included in operating profit based on longer-term investment
returns has been applied in respect of the policy for determining longer-term
investment returns included in operating profits. Details of the change are
described in note B.
The statutory IFRS basis results for the 2005 and 2004 half years are unaudited.
References to UK GAAP results throughout the statutory basis financial
statements contained in this report reflect the Group's previously published
results for the 2004 half year and full year. The UK GAAP basis results for the
2004 half year are unaudited. The 2004 full year UK GAAP results have been
derived from the 2004 statutory accounts. The auditors have reported on the 2004
statutory accounts and they have been delivered to the Registrar of Companies.
The auditors' report was not qualified and did not contain a statement under
section 237(2) or (3) of the Companies Act 1985.
B Significant changes of basis of preparation and accounting policy
The changes of accounting policy that arise on the conversion to IFRS basis
reporting are numerous and extend to many items of income, expenditure, assets
and liabilities. Comprehensive details of the changes were included with the
announcement of restated 2004 comparative results on 2 June 2005 and are
available at the Group's web-site at www.prudential.co.uk or on request. The
policy changes from the 2004 UK GAAP audited financial statements which are of
significance to reported results are as follows:-
2004 and 2005 results
Basis of preparation
Under UK GAAP, the Group's consolidated financial statements were previously
prepared in accordance with applicable accounting standards under UK GAAP
including being in accordance with the Statement of Recommended Practice issued
in November 2003 by the Association of British Insurers.
The statutory basis financial statements included in this report have been
prepared on the basis of policies expected to be applied under IFRS for the year
ending 31 December 2005. The 2004 full year results included in the IFRS
financial information within this report establish the comparative financial
information in summary format that the Group expects to be included in the
Group's first set of IFRS financial statements for the year ending 31 December
2005. However, due to the continuing work of the IASB and possible amendments to
the interpretative guidance, the Group's accounting policies and consequently
the information presented may change for the Group's full year 2005 results.
The date of adoption of IFRS is 1 January 2004. As at that date the Group has
applied all IASB standards on a basis prescribed or permitted by those standards
in the preparation of its consolidated financial statements.
In general, a Group is required to determine its IFRS accounting policies and
apply those retrospectively to determine its opening balance sheet under IFRS.
However, in accordance with IFRS1 ("First-time Adoption of International
Financial Reporting Standards"), the Group has applied the mandatory exceptions
and certain optional exemptions from full retrospective application of IFRS.
Significant exemptions from full retrospective application elected by the Group
are as follows:
Business combinations
The Group has elected not to apply retrospectively the provisions of IFRS3
("Business Combinations") to business combinations that occurred prior to 1
January 2004. At the date of adoption, therefore, no adjustment was made between
UK GAAP and IFRS shareholders' funds for any historical business combination.
Consistent with this approach, goodwill recognised in the opening balance sheet
at 1 January 2004 for acquired businesses that have previously been consolidated
is the same as previously shown under UK GAAP. Goodwill on newly consolidated
entities, for example on venture fund investments, is determined by reference to
net assets at transition date.
Comparatives
The Group has taken advantage of the exemption within IFRS that allows
comparative information presented in the first year of adoption of IFRS not to
comply with the standards IAS32, IAS39 and IFRS4.
Consolidation principles
Inter-company transactions
Previously, under UK GAAP, all inter-company transactions were eliminated on
consolidation except for investment management fees charged by M&G and the
Group's US and Asia fund management operations to long-term business funds.
Under IFRS, all inter-company transactions are eliminated on consolidation.
Investment management fees charged by M&G, and the Group's US and Asia fund
management operations to long-term business funds are recorded within
inter-segment revenue and expenditure as set out in note D but eliminated on
consolidation in the summary income statement.
Entities subject to consolidation
Previously, under UK GAAP, the assets and liabilities and results of entities
were consolidated where Prudential had a controlling interest under the terms of
Companies Act legislation, FRS2 ("Accounting for subsidiary undertakings") and
other relevant UK GAAP interpretations.
Entities are consolidated under IFRS if they fall within the scope of IAS27
("Consolidated and Separate Financial Statements") and the IFRIC interpretation,
SIC12 ("Consolidation - Special Purpose Entities"), of the IASB. Under IFRS,
certain investment vehicles are newly consolidated due to the requirements
differing from UK GAAP.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED)
B Significant changes of basis of preparation and accounting policy (continued)
2004 and 2005 results (continued)
Basis of presentation of tax charges
Under Companies Act requirements, previously, tax charges attributable to
policyholders and unallocated surplus of with-profits funds and unit linked
policies were charged, together with tax charges attributable to the long-term
business result attributable to shareholders, as an expense in the long-term
business technical account of the Company's Act format of the profit and loss
account. In the non-technical section (i.e. the summary profit and loss section
attributable to shareholders) the post-tax balance transferred from the
long-term business technical account was grossed up by attributable shareholder
tax to derive the pre-shareholder tax long-term business result. Tax charges in
the non-technical account reflected the aggregate of the shareholder tax on the
long-term business result and on the Group's other results.
Under UK Listing Authority rules, profit before tax is required to be presented.
This requirement, coupled with the fact that IFRS does not contemplate tax
charges which are attributable to policyholders and unallocated surplus of
with-profits funds and unit linked policies, necessitates the reporting of total
tax charges within the presented results. The result before all taxes i.e.
'profit before tax' is shown in the income statement as "IFRS basis income
(representing income, net of post-tax transfers to unallocated surplus of
with-profits funds, before tax attributable to policyholders and unallocated
surplus of with-profits funds, unit linked policies and shareholders)".
Separately, within the income statement "Profit from continuing operations
(including actual investment returns) before tax attributable to shareholders"
is shown after deduction of taxes attributable to policyholders and unallocated
surplus of with-profits funds and unit linked policies. Tax charges on this
measure of profit reflect the tax charges attributable to shareholders. In
determining the tax charges attributable to shareholders, the Group has applied
a methodology consistent with that previously applied under UK GAAP reflecting
the broad principles underlying the tax legislation on life assurance companies.
Pension costs
Under UK GAAP, the Group applied the provisions of SSAP24 ("Pension Costs").
Consistent with the surplus financial position of the Prudential Staff Pension
Scheme (PSPS) (which accounts for 90 per cent of the liabilities of the Group's
defined benefit pension schemes) at 5 April 2002, when the scheme was last
subject to a full triennial actuarial valuation, and the scheme rules over
minimum levels of funding, no SSAP24 basis prepayment or provision has been
reported in the Group's UK GAAP balance sheet. Additional disclosures were made
in the notes to the Group's financial statements concerning the Group's UK
defined benefit schemes, applying the methodology prescribed by FRS17
("Retirement Benefits").
Under IAS19 ("Employee Benefits") the impact of the surplus or deficit of
defined benefit pension schemes on the consolidated net assets of the Group is
determined by the difference between the market value of assets held within the
schemes and the net present value of projected future cash flows based on
accrued liabilities. The net present value is determined by applying a discount
rate based on the yield at the balance sheet date on high quality corporate
bonds.
The deficits on the Group's defined benefit pension schemes are apportioned
between shareholders' equity and unallocated surplus of the PAC with-profits
fund based on the weighted cumulative activity attaching to the contributions
paid into the schemes in the past. For the PSPS scheme it is currently estimated
that 80 per cent of the deficit is attributable to the PAC with-profits fund and
20 per cent to shareholder backed operations.
The IAS income statement charge for pension costs comprises two items, namely
(a) The aggregate of the actuarially determined service cost of the currently
employed personnel, the unwind of discount on liabilities at the start of the
period, less the expected investment return on the scheme assets at the start of
the reporting period, and
(b) Actuarial gains and losses. These gains and losses arise from changes in
assumptions, the difference between actual and expected investment return on the
scheme assets, and experience gains and losses on liabilities.
Goodwill
Under UK GAAP, with effect from 1 January 1998, goodwill arising from
acquisitions was reflected as an asset on the balance sheet and amortised
through the consolidated profit and loss account on a straight line basis over
its estimated useful life, not exceeding 20 years. Prior to 1 January 1998,
goodwill relating to acquisitions was charged directly to shareholders' funds.
As permitted under the transitional arrangements of FRS10, ("Goodwill and
Intangible Assets"), amounts previously charged to shareholders' funds were not
reinstated as assets in the UK GAAP balance sheet.
Under IFRS, the goodwill balance at 1 January 2004 reflects the carrying value
of UK GAAP goodwill for previously consolidated entities at that date on the
basis described above, as well as goodwill on certain newly consolidated
entities. Under IFRS, goodwill is no longer amortised. However, impairment
testing is required annually and on adoption. In addition, as prescribed by
IFRS1 ("First-time Adoption of International Financial Reporting Standards"),
goodwill previously charged to shareholders' funds on transition is not
transferred to the income statement upon disposal of the relevant entity. For
half year 2005 an impairment charge in respect of goodwill attaching to the
Japan Life Insurance business was appropriate.
Share based payments
The Group offers share awards and option plans for certain key employees and a
Save As You Earn (SAYE) plan for all UK and certain overseas employees. The
arrangements for distribution to employees of shares held in trusts relating to
share award plans and for entitlement to dividends depend upon the particular
terms of each plan. Shares held in trusts relating to non-SAYE plans are
conditionally gifted to employees. Previously, under UK GAAP, compensation for
non-SAYE plans was recorded over the periods to which share awards or options
were earned based on intrinsic value. No costs were required to be recorded for
SAYE plans.
Under IFRS, share based payments are accounted for on a fair value basis. The
fair value is recognised in the income statement over the relevant vesting
period and adjusted for lapses and forfeitures with the number of shares
expected to lapse or be forfeited estimated at each balance sheet date prior to
the vesting date. The only exception is where the share based payment depends
upon vesting outcomes attaching to market based performance conditions such as
in the case of the Restricted Share Plan. Under these circumstances additional
modelling is required to take into account these market based performance
conditions which effectively estimate the number of shares expected to vest. No
subsequent adjustment is then made to the fair value charge for shares that do
not vest on account of these performance conditions not being met.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED)
B Significant changes of basis of preparation and accounting policy (continued)
2004 and 2005 results (continued)
Shareholders' dividends
Previously, under UK GAAP, shareholders' dividends were accrued in the period to
which they related regardless of when they were declared. Under IFRS, dividends
declared after the balance sheet date in respect of the prior reporting period
are treated as a non-adjusting event. The appropriation reflected in the
movement on capital and reserves for a half year period therefore reflects the
final dividend in respect of the prior year.
Additional significant changes for the 2005 results
Adoption of IAS32, IAS39 and IFRS4
The Group has chosen to apply the exemption within IFRS that allows comparative
information presented in the first year of adoption of IFRS not to comply with
IAS32 ("Financial Instruments: Disclosure and Presentation"), IAS39 ("Financial
Instruments: Recognition and Measurement") and IFRS4 ("Insurance Contracts").
These standards have been formally adopted on 1 January 2005. The principal
effects of adopting these standards arises in the Group' UK and Europe long-term
business contracts, JNL's fixed income securities and derivative instruments,
and Egg's banking assets, liabilities and derivatives positions.
Long-term business
On adoption of these standards, the measurement basis of assets and liabilities
of long-term business contracts is dependent upon the classification of the
contracts under IFRS4 as either "insurance" contracts, if the level of insurance
risk in the contracts is significant, or "investment" contracts, if the risk is
insignificant. Insurance contracts are permitted to be accounted for under
previously applied GAAP. The Group has chosen to apply this approach. However,
as an improvement to accounting policy, permitted by IFRS, the Group has applied
the requirements of the UK standard FRS27 ("Life Assurance") to its UK
with-profits funds as explained in note I. For those "investment" contracts with
discretionary participating features, IFRS4 also permits the continued
application of previously applied GAAP. The Group has chosen to apply this
approach.
For those "investment" contracts that do not contain discretionary participating
features, IAS39 and, where the contract includes an investment management
element, IAS18 ("Revenue") apply measurement principles to the assets and
liabilities attaching to the contract that may diverge from those previously
applied under UK GAAP. The changes primarily arise in respect of deferred
acquisition costs, deferred income reserves and provisions for future expenses
commonly called "sterling reserves".
Under UK GAAP, acquisition expenses are deferred with amortisation on a basis
commensurate with the anticipated emergence of margins under the contract. Under
IFRS, acquisition costs for investment contracts are deferred to the extent that
is appropriate to recognise an asset that represents the entity's contractual
right to benefit from providing investment management services and is amortised
as the entity recognises the related revenue. IAS18 further reduces the costs
potentially capable of deferral to incremental costs only. Deferred acquisition
costs are amortised to the income statement in line with service provision.
Deferred income provisions for front end fees and similar arrangements are
required to be established for investment management contracts under IAS18 with
amortisation over the expected life of the contract in line with service
provision. In contrast to UK GAAP, sterling reserves are not permitted to be
recognised under IFRS. An additional feature is that investment contracts are
closer in nature to a deposit style arrangement between the policyholder and the
company. Under IFRS premiums and withdrawals for these contracts are recorded
within the balance sheet directly as a movement on the policyholder liability.
After making these and other consequential changes, the IFRS income statement
reflects fee income on the contracts, expenses and taxation rather than the UK
GAAP basis revenue account.
The investment contract classification applies primarily to certain unit linked
and similar contracts in the UK Insurance Operations and Guaranteed Investment
Contracts of Jackson National Life (JNL). However, significant differences
between the timing of recognising profitability under UK GAAP and IFRS bases are
confined to the UK contracts only.
JNL fixed income securities and derivative instruments
Under IAS39, except for loans and receivables, and unless designated under the
very restrictive held to maturity classification on an asset by asset basis,
most financial assets, including derivatives, are carried in the balance sheet
at fair value. To this extent IAS39 is consistent with the basis of valuation
applied under UK GAAP for most financial assets of the Group's UK and Asian
insurance operations. On application of IAS39, movements in the fair value of
investments are recorded either in the income statement or directly to
shareholders' reserves in the balance sheet, depending upon the designation and
the impact of hedge accounting rules. Derivative instruments are carried at fair
value with value movements being recorded in the income statement. Hedge
accounting, whereby value movements on derivatives and hedged items are recorded
together in the performance statements, is permissible only if certain criteria
are met regarding the establishment of documentation and continued measurement
of hedge effectiveness.
The changes from UK GAAP to the basis applied from 1 January 2005 arising from
these valuation requirements are concentrated on the accounting for the
investments and derivatives of JNL. Previously the fixed income securities of
JNL, unless impaired, were accounted for at amortised cost with derivatives
similarly treated. On adoption of IAS39, the Group has decided to account for
JNL's fixed income securities on an "available-for-sale" (AFS) basis whereby the
fixed income securities are accounted for at fair value with movements in fair
value being recorded in the Statement of Recognised Income and Expense i.e.
directly to shareholders' reserves rather than the income statement. Value
movements for JNL's derivatives are however booked in the income statement as
required by IAS39.
The Group has decided not to seek to hedge account for the majority of JNL's
derivatives under IAS39. To do so would require a wholesale re-configuration of
JNL's derivative book into much smaller components than currently applied by JNL
through its economic hedge programme, and accompanied by an extra layer of
hedging instruments, beyond what is economically rational.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED)
B Significant changes of basis of preparation and accounting policy (continued)
Additional significant changes for the 2005 results (continued)
Egg
The changes of policy for Egg arising from the adoption of IAS39 arise primarily
in respect of determination of effective interest rates, impairment losses on
loans and advances to customers, carrying values of wholesale financial
instruments and equity savings products.
For credit card receivables, under UK GAAP, the carrying amount of credit card
receivables with low or zero rate interest on balance transfers are carried at
cost with interest being accrued at 0% during the incentive period and then at
the standard rate thereafter. Under IAS39, these receivables are measured on an
amortised cost basis.
For loans and advances to customers, specific and formulated provisions are
raised against non-performing loans and a general provision against the balance.
Under IAS39, an impairment loss is only recognised when there is objective
evidence that a debt is impaired.
Wholesale instruments, under UK GAAP, were previously accounted for on an
accruals cost basis. Under IAS39, certain wholesale financial instruments are
required to be measured at fair value, and depending on whether they have been
classified as fair value through the profit and loss or available-for-sale, the
changes in fair value are recognised in the income statement or in equity
respectively. The adjustments for wholesale financial instruments also include
the impact of designating some of Egg's derivatives as cash flow hedges.
Certain equity savings products contain embedded derivatives. Previously these
derivatives have been accounted for on an amortised cost basis. Under IAS39,
they are required to be fair valued.
Supplemental earnings information and discretionary non-IFRS change of policy
for longer-term investment returns
Previously, under UK GAAP, the Group used operating profit based on longer-term
investment returns before amortisation of goodwill as a supplemental measure of
its results. For the purposes of measuring operating profit, investment returns
on shareholder financed business were based on the expected longer-term rates of
return. For fixed income securities, the longer-term returns (including losses
arising on the recognition of permanent diminutions in value) were averaged over
five years for inclusion in operating profit.
Under IFRS, the Group continues to use operating profit based on longer-term
investment returns as a supplemental measure of its results, as disclosed in
note E. For the purposes of measuring operating profit, investment returns on
shareholder financed business continue to be based on the expected longer-term
rate of return. However, for fixed income securities, the five year averaging
approach described above has been replaced with a basis that more closely
reflects longer-term experience. The amount included in operating results for
longer-term capital returns comprises two components. These are a risk margin
reserve based charge for expected defaults, which is determined by reference to
the credit quality of the portfolio, and amortisation of interest related
realised gains and losses to operating results to the date when sold bonds would
have otherwise matured. This change has been applied following a comprehensive
review of the Group's accounting policies and is unrelated to the requirements
of IFRS.
Items excluded from operating profit, but included in total pre-tax profit of
continuing operations, include goodwill impairment charges, short-term
fluctuations in investment returns (i.e. actual less longer-term returns) and
actuarial gains and losses on defined benefit pension schemes. For the purposes
of distinguishing actuarial gains and losses on defined benefit pension schemes,
the component for short-term fluctuations in investment returns is determined by
reference to plan assets plus any Prudential policies held by the scheme. Total
profits are unaffected by the change of basis of determining longer-term
investment returns.
The supplemental earnings information in the statutory basis financial
statements is presented for 2005 but not for 2004 comparative results. This is
because the comparative 2004 results do not incorporate the effects of adoption
of IAS32, IAS39 and IFRS4 and are thus inconsistent with the basis of
preparation for the 2005 results. A comparison of supplemental earnings
information based on the statutory IFRS basis results for 2005 and proforma IFRS
results for 2004, which reflect the estimated effects of adoption of these three
standards on the 2004 results of the Group's insurance operations is included in
the supplementary IFRS results within this report.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED)
C Reconciliations of summary income statements
Half Year 2004 Full Year 2004
IFRS adjustments IFRS adjustments
----------------------------------------- ---------------------------------------------
UK Presentation Recognition, Statutory UK GAAP Presentation Recognition, Statutory
GAAP of measurement IFRS (note C of measurement IFRS
(note C UK GAAP and basis (i)) UK GAAP and basis
(i)) in IFRS other in IFRS other
format changes format changes
(note C (i))(note C (ii)) (note C (i))(note C (ii))
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------------------------------------------------------------------------
Insurance contract 7,397 0 0 7,397 16,099 0 0 16,099
revenues
Investment 2,380 987 (122) 3,245 13,917 2,074 (249) 15,742
income
UK fund management 79 (79) 0 0 136 (136) 0 0
result
US broker dealer (2) 2 0 0 (14) 14 0 0
and fund
management
result
Asia fund 10 (10) 0 0 19 (19) 0 0
management
result
UK banking result 30 (30) 0 0 63 (63) 0 0
(continuing
operations)
Other 0 350 536 886 0 760 1,266 2,026
income
---------------------------------------------------------------------------------------------------------
Total revenue 9,894 1,220 414 11,528 30,220 2,630 1,017 33,867
---------------------------------------------------------------------------------------------------------
Benefits and (8,410) (7) (165) (8,582) (26,598) (37) 51 (26,584)
claims for
insurance
contracts, and
movement in
unallocated
surplus of
with-profits funds
determined after
charging taxes
borne by
policyholders and
unallocated
surplus of
with-profits funds
and unit linked
policies
Acquisition costs (901) (1,119) (188) (2,208) (2,069) (2,397) (1,060) (5,526)
and other
operating
expenditure
Interest on (94) (94) (196) (196)
structural
borrowings
Amortisation of (48) 0 48 0 (94) 0 94 0
goodwill
(continuing
operations)
---------------------------------------------------------------------------------------------------------
Total charges (9,359) (1,220) (305) (10,884) (28,761) (2,630) (915) (32,306)
---------------------------------------------------------------------------------------------------------
IFRS basis income, 535 109 644 1,459 102 1,561
net of post-tax
transfers to
unallocated
surplus of
with-profits
funds, before tax
attributable to
policyholders and
unallocated
surplus of
with-profits
funds, unit linked
policies and
shareholders
Income tax (226) (23) (249) (701) (10) (711)
attributable to
policyholders and
unallocated
surplus of
with-profits funds
and unit linked
policies
---------------------------------------------------------------------------------------------------------
Profit from 309 86 395 758 92 850
continuing
operations
(including actual
investment
returns) before
tax attributable
to shareholders
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Income tax
(expense) benefit
attributable to
shareholders:
Total tax (354) (33) (387) (947) (4) (951)
attributable
to
policyholders
and
unallocated
surplus of
with-profits
funds, unit
linked
policies and
shareholders
Less: Income 226 23 249 701 10 711
tax
attributable
to
policyholders
and
unallocated
surplus of
with-profits
funds and unit
linked
policies
---------------------------------------------------------------------------------------------------------
Income tax (128) (10) (138) (246) 6 (240)
attributable to
shareholders
---------------------------------------------------------------------------------------------------------
Profit from 181 76 257 512 98 610
continuing
operations after
tax
Discontinued (18) 1 (17) (94) (94)
operations (net of
tax)
---------------------------------------------------------------------------------------------------------
Profit for the 163 77 240 418 98 516
period
---------------------------------------------------------------------------------------------------------
Attributable to:
Equity holders 156 77 233 428 89 517
of the parent
company
Minority 7 0 7 (10) 9 (1)
interest
---------------------------------------------------------------------------------------------------------
Profit for the 163 77 240 418 98 516
period
---------------------------------------------------------------------------------------------------------
Notes
C (i) UK GAAP results
The UK GAAP basis results shown above reflect those previously recorded in the
technical accounts and non-technical account of the Group's profit and loss
account under Companies Act requirements. These results are then reconfigured to
be consistent with the format expected to be applied for reporting in the
Group's 2005 full year financial statements under IFRS.
C (ii) Recognition, measurement and other changes
Changes to profit from continuing operations (including actual investment
returns) before and after tax attributable to shareholders, for Half Year 2004
and Full Year 2004 reflect the expected effects of IFRS adoption. In summary the
effects are for:
Half Year 2004 Full Year 2004
GBPm GBPm
Egg - primarily relates to charges for 1 (2)
share based payments in respect of Egg
shares
Additional pension costs and share based (2) (4)
payments costs in respect of Prudential plc
shares not allocated by business unit
Amortisation of goodwill not permitted 48 94
under IFRS
Actuarial gains and losses of defined 48 (7)
benefit schemes recognised under IFRS
Value movements of US investment funds (9) 2
newly consolidated under IFRS
Share of profits of venture investment 0 9
companies and property partnerships of the
PAC with-profits fund, newly consolidated
under IFRS, that is attributable to
external investors.
-------- --------
Total changes before tax 86 92
Related tax (10) 6
-------- --------
Total changes after tax 76 98
-------- --------
Changes to revenue, charges, and related tax of the Group's with-profits funds
principally relate to measurement differences on investments, consolidation
criteria for venture and subsidiaries, and pension cost accounting. The total
change to IFRS basis income for these changes for Half Year 2004 and Full Year
2004 after related tax adjustments was GBP160m and GBP(22)m respectively. These
amounts have been reflected by changes of an equal and opposite amount to
transfers to unallocated surplus with no net effect on shareholder results. For
Half Year 2004, GBP126m of that GBP160m change relates to pension costs due to
actuarial gains on the Group's UK defined benefit pension schemes.
A summarised explanation of the changes of accounting policies that give rise to
these adjustments is contained in note B.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED)
Half Year Half Year
D Segment disclosure 2005 GBPm 2004 GBPm
-------------------------------------- ------- --------
Revenue
---------
Long-term business, including revenue of PAC venture fund and other 17,679 10,661
investment subsidiaries
Banking 682 591
Broker dealer and fund management 420 384
Unallocated corporate 67 35
Intragroup revenue eliminated on consolidation (147) (143)
-------------------------------------- ------- --------
18,701 11,528
Total revenue per income statement
-------------------------------------- ------- --------
Charges (before income tax attributable to policyholders and unallocated
surplus of long-term insurance funds)
-------------------------------------------------------------------------
Long-term business, including expenditure of PAC venture fund and other (16,964) (10,082)
investment subsidiaries and post-tax transfers to unallocated surplus of
with-profits funds
Banking (669) (558)
Broker dealer and fund management (329) (291)
Unallocated corporate (244) (96)
Intragroup charges eliminated on consolidation 147 143
-------------------------------------- ------- --------
(18,059) (10,884)
Total charges per income statement
-------------------------------------- ------- --------
Segment results - Revenue less charges
Long-term business 715 579
Banking 13 33
Broker dealer and fund management 91 93
Unallocated corporate (177) (61)
-------------------------------------- ------- --------
IFRS basis income, net of post-tax transfers to unallocated surplus of 642 644
with-profits funds, before tax attributable to policyholders and
unallocated surplus of with-profits funds, unit linked policies, and
shareholders
Income tax attributable to policyholders and unallocated surplus of (182) (249)
with-profits funds and unit linked policies
-------------------------------------- ------- --------
Profit from continuing operations (including actual investment returns) 460 395
before tax attributable to shareholders ------- --------
--------------------------------------
E Supplementary analysis of profit from continuing operations (including actual
investment returns) before tax attributable to shareholders and related earnings
per share
Profit from continuing operations Half Year Half Year Full year
before tax 2005 GBPm 2004 GBPm 2004 GBPm
--------------------------------- ------- ------- -------
Operating profit from continuing 469
operations based on longer-term
investment returns before exceptional
items
Goodwill impairment charge (95) Not Not
Short-term fluctuations in investment 94 applicable applicable
returns on shareholder backed
business
Shareholders' share of actuarial gains (8) (see note E (see note E
and losses on defined benefit pension (i)) (i))
schemes
--------------------------------- ------- ------- -------
Profit from continuing operations 460
(including actual investment returns)
before tax attributable to
shareholders
--------------------------------- ------- ------- -------
Earnings per share from continuing
operations
From operating profit based on 14.0p
longer-term investment returns after tax
and related minority interest of GBP331m
Adjustment for goodwill impairment (4.0)p Not Not
charge
Adjustment from post-tax longer-term 3.0p applicable applicable
investment returns to post-tax actual
investment returns (after related
minority interest)
Adjustment for post-tax shareholders' (0.3)p (see note E(i)) (see note E
share of actuarial gains and losses on (i))
defined benefit pension schemes
--------------------------------- ------- ------- -------
Based on profit from continuing 12.7p
operations after minority interest of
GBP299m
--------------------------------- ------- ------- -------
Note
E (i) The supplementary analysis of statutory IFRS basis results shown above has
been presented only for half year 2005. Details have not been provided for 2004
as the results would not be comparable. This is due to IAS32, IAS39 and IFRS4
being only adopted from 1 January 2005.
Additional analysis of the 2005 result, and proforma basis comparative results
for 2004 as if these standards had been applied by the Group's insurance
operations from 1 January 2004, is provided as supplementary information to
these financial statements. The analysis on those pages does not form part of
the financial statements.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED)
F Reconciliations of equity and balance sheets
At 1 January 2004 Shareholders' Minority Total
equity interest equity
GBPm GBPm GBPm
-----------------------------------------------------------------------------------
Changes on adoption of statutory IFRS basis
----------------------------------------------
Treasury shares adjustment for Prudential plc (40) (40)
shares held by unit trusts newly consolidated
under IFRS (note F(i))
Minority share of equity of consolidated 32 32
venture investments companies and property
partnerships of the PAC with-profits fund
(note F(i))
Shareholders' share of deficits (net of tax) (110) (110)
of UK defined benefit pension schemes (note F
(ii))
Timing difference on recognition of dividend 214 214
declared after balance sheet date (note F
(iii))
Other items (8) (2) (10)
-----------------------------------------------------------------------------------
Total 56 30 86
Equity at 1 January 2004
----------------------------
As previously published under UK GAAP 3,240 107 3,347
-----------------------------------------------------------------------------------
As restated under statutory IFRS 3,296 137 3,433
-----------------------------------------------------------------------------------
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED)
F Reconciliations of equity and balance sheets (continued)
At 30 June 2004 Effect of changes on implementation of IFRS
Recognition and measurement changes
-------------------------------------------------------------------
UK Newly Defined Other Grossing- Total Statutory
GAAP consoli- benefit recognition up IFRS IFRS
dated pension and and changes basis
entities schemes measurement other
(note F accounting changes format
(i)) (note F (note F changes
(ii)) (iii))
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------------------------------------------------------------------
Assets
Goodwill:
Attributable to 565 565 565
PAC with-profits
fund
Attributable to 1,456 48 48 1,504
shareholders
Investments: per IFRS 2,124 (21) 153,046 155,149 155,149
balance sheet
Investments: per UK 120,061 (120,061) (120,061) 0
GAAP analysis
(non-linked, linked
and banking business
assets)
Other items 42,717 1,366 56 122 (32,163) (30,619) 12,098
----------------------------------------------------------------------------------------------
Total assets 164,234 4,055 56 149 822 5,082 169,316
----------------------------------------------------------------------------------------------
Equity and
liabilities
Equity
Attributable to 3,320 (51) (78) 161 32 3,352
shareholders of the
parent company
Minority interest 103 70 (2) 68 171
----------------------------------------------------------------------------------------------
Total equity 3,423 19 (78) 159 100 3,523
----------------------------------------------------------------------------------------------
Liabilities
Banking customer 6,699 6,699 6,699
accounts: per IFRS
balance sheet
Banking business 12,245 (12,245) (12,245) 0
liabilities: per UK
GAAP balance sheet
Insurance liabilities:
Contract 123,091 (115) 5 (110) 122,981
liabilities
(non-linked and
linked business)
Unallocated 12,110 28 (312) (8) (292) 11,818
surplus of
with-profits
funds
Borrowings: per IFRS
balance sheet
Core structural 2,596 2,596 2,596
borrowings of
shareholder
financed
operations
(excluding Egg)
Other borrowings 1,086 9 6,156 7,251 7,251
attributable to
shareholder
financed
operations
Borrowings 1,642 98 109 1,849 1,849
attributable to
with-profits
funds
Borrowings: per UK 4,589 (4,589) (4,589) 0
GAAP balance sheet
(subordinated
liabilities, debenture
loans and other
borrowings)
Dividend payable 109 (109) (109) 0
Other non-insurance 8,667 1,280 561 (5) 2,096 3,932 12,599
liabilities
----------------------------------------------------------------------------------------------
Total liabilities 160,811 4,036 134 (10) 822 4,982 165,793
----------------------------------------------------------------------------------------------
Total equity and 164,234 4,055 56 149 822 5,082 169,316
liabilities
----------------------------------------------------------------------------------------------
At 31 December 2004 Effect of changes on implementation of IFRS
Recognition and measurement changes
-------------------------------------------------------------------
UK Newly Defined Other Grossing Total Statutory
GAAP consoli- benefit recognition -up IFRS IFRS
dated pension and and changes basis
entities schemes measurement other
(note F accounting changes format
(i)) (note F (note F changes
(ii)) (iii))
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------------------------------------------------------------
Assets
Goodwill:
Attributable to 754 754 754
PAC with-profits
fund
Attributable to 1,367 94 94 1,461
shareholders
Investments: per IFRS 1,978 35 162,459 164,472 164,472
balance sheet
Investments: per UK 129,468 (129,468) (129,468) 0
GAAP analysis
(non-linked, linked
and banking business
assets)
Other items 43,741 1,477 102 50 (32,155) (30,526) 13,215
----------------------------------------------------------------------------------------------
Total assets 174,576 4,209 102 179 836 5,326 179,902
----------------------------------------------------------------------------------------------
Equity and
liabilities
Equity
Attributable to 4,281 (30) (117) 356 209 4,490
shareholders of the
parent company
Minority interest 71 76 (2) 74 145
----------------------------------------------------------------------------------------------
Total equity 4,352 46 (117) 354 283 4,635
----------------------------------------------------------------------------------------------
Liabilities
Banking customer 6,607 6,607 6,607
accounts: per IFRS
balance sheet
Banking business 11,216 (11,216) (11,216) 0
liabilities: per UK
GAAP balance sheet
Insurance liabilities:
Contract 129,101 (125) 4 1 (120) 128,981
liabilities
(non-linked and
linked business)
Unallocated 16,686 6 (472) (34) (500) 16,186
surplus of
with-profits
funds
Borrowings: per IFRS
balance sheet
Core structural 2,797 2,797 2,797
borrowings of
shareholder
financed
operations
(excluding Egg)
Other borrowings 972 9 5,891 6,872 6,872
attributable to
shareholder
financed
operations
Borrowings 1,828 105 144 2,077 2,077
attributable to
with-profits
funds
Borrowings: per UK 4,673 (4,673) (4,673) 0
GAAP balance sheet
(subordinated
liabilities, debenture
loans and other
borrowings)
Dividend payable 253 (253) (253) 0
Other non-insurance 8,295 1,357 816 (6) 1,285 3,452 11,747
liabilities
----------------------------------------------------------------------------------------------
Total liabilities 170,224 4,163 219 (175) 836 5,043 175,267
----------------------------------------------------------------------------------------------
Total equity and 174,576 4,209 102 179 836 5,326 179,902
liabilities
----------------------------------------------------------------------------------------------
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED)
F Reconciliations of equity and balance sheets (continued)
Notes
F(i) Newly consolidated entities
Under IAS27 and SIC12, the Group is required to consolidate the assets and
liabilities of certain entities which have previously not been consolidated. The
principal change to shareholders' equity arises from an adjustment in respect of
Prudential plc shares held by unit trusts that are newly consolidated. These
shares are accounted for as treasury stock and the cost of purchase of GBP44m,
GBP44m and GBP29m is deducted from shareholders' equity at 1 January 2004, 30
June 2004 and 31 December 2004 respectively. The change to the minority share of
equity reflects external parties' interest in consolidated venture investment
companies and property partnerships of the PAC with-profits fund. Measurement
changes to the carrying value of these companies that are attributable to the
PAC with-profits fund share are reflected in unallocated surplus.
F(ii) Defined benefit pension schemes accounting
Provisions for deficits on the Group's defined benefit pension schemes are
absorbed by the unallocated surplus of the PAC with-profits fund and
shareholders' funds on a basis that reflects the weighted cumulative activity
attaching to the contributions paid in the past, and after deduction of deferred
tax. The M&G scheme held Prudential Group's Insurance policies as scheme assets
of GBP115m at 30 June 2004 and GBP125m at 31 December 2004. The asset and
liability are eliminated on consolidation.
F(iii) Other recognition and measurement changes
Under IFRS, dividends declared after the balance sheet date are not recognised
as a liability. In addition, goodwill under IFRS represents the balance sheet
carrying value at adoption date as discussed in note B. Adjustments in the table
are to write-back amortisation previously charged under UK GAAP from 1 January
2004.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED)
G Effect of adoption of IAS32, IAS39, and IFRS4 at 1 January 2005
Effect of adoption of IAS32, IAS39 and IFRS4
Recognition and measurement changes
-----------------------------------------------------------------------
Statutory UK Jackson Banking Grossing- Total Statutory
IFRS and National and up effect IFRS
basis Europe Life non- and basis
at insurance (note insurance other at 1 Jan
31 operations G(ii)) operations format 2005
Dec (note G (note changes
2004 (i)) G(iii))
(note F)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------------------------------------------------------------------
Assets
Goodwill:
Attributable to PAC 754 754
with-profits fund
Attributable to 1,461 1,461
shareholders
Deferred acquisition
costs:
PAC with-profits 798 (798) (798) 0
fund (note I)
Other operations 2,122 43 (456) (413) 1,709
Investments 164,472 (145) 1,262 145 55 1,317 165,789
Other assets (excluding 10,295 26 66 (118) (26) 10,269
deferred acquisition
costs and goodwill)
----------------------------------------------------------------------------------------------
Total assets 179,902 (874) 872 27 55 80 179,982
----------------------------------------------------------------------------------------------
Equity and liabilities
Equity
Attributable to 4,490 (12) 273 (25) 236 4,726
shareholders of the
parent company
Minority interest 145 (3) (3) 142
----------------------------------------------------------------------------------------------
Total equity 4,635 (12) 273 (28) 233 4,868
----------------------------------------------------------------------------------------------
Liabilities
Banking customer 6,607 84 84 6,691
accounts
Insurance liabilities:
Contract 128,981 7,020 (51) 6,969 135,950
liabilities
(non-linked and
linked business)
Unallocated surplus 16,186 (7,840) (7,840) 8,346
of with-profits
funds
Borrowings:
Core structural 2,797 2,797
borrowings of
shareholder
financed operations
(excluding Egg)
Other borrowings 6,872 207 62 269 7,141
attributable to
shareholder
financed
operations
Borrowings 2,077 2,077
attributable to
with-profits
funds
Other non-insurance
liabilities:
Deferred tax 2,244 (91) 218 (6) 121 2,365
liabilities
Other 9,503 49 225 (85) 55 244 9,747
----------------------------------------------------------------------------------------------
Total liabilities 175,267 (862) 599 55 55 (153) 175,114
----------------------------------------------------------------------------------------------
Total equity and 179,902 (874) 872 27 55 80 179,982
liabilities
----------------------------------------------------------------------------------------------
Notes
A summary explanation of the requirements of IAS32, IAS39 and IFRS4 and basis of
application by the Group is contained in note B. The changes shown above reflect
the impact of re-measurement for :
G (i) UK and Europe Insurance Operations
(a) Certain unit linked and similar contracts that do not contain significant
insurance risk and are thus categorised as investment contracts under IFRS4. The
net of tax shareholder impact is to reduce shareholders' equity at 1 January
2005 by GBP8m
(b) Changes to insurance assets and liabilities of the PAC with-profits fund
following the improvement of accounting policy applied on adoption of IFRS4. The
changes correspond to those applicable if the Group had adopted FRS27 under UK
GAAP. As a result of the policy improvement, liabilities, deferred acquisition
costs, deferred tax and unallocated surplus of UK regulated with-profits fund
are remeasured as described in Note I. At 1 January 2005, the unallocated
surplus is subject to a transition adjustement of GBP(7.8)bn. Shareholders'
equity is not affected by this change.
The unallocated surplus of GBP8.3bn at 1 January 2005 post IAS39 and IFRS4
adoption, comprises GBP8.0bn for the PAC with-profits fund and GBP0.3bn for
Asian subsidiaries. The GBP8.0bn for the PAC with-profits fund represents:
GBPbn
Regulatory basis realistic surplus of with-profits sub fund and SAIF 6.0
Add back: Regulatory basis provision for future shareholder 2.9
transfers --------
8.9
Value of non-participating business not explicitly allocated to asset (0.9)
shares --------
Accounts Basis 8.0
========
Other reconciling items for the differences between regulatory and accounts
basis carrying values of assets and liabilities net to less than GBP0.05 billion
G (ii) Jackson National Life
Under IAS39, JNL's fixed income securities and derivative financial instruments
are re-measured to fair value from the lower of amortised cost and, if relevant,
impairment value. Fair value movements on fixed income securities, net of
"shadow" changes to deferred acquisition costs and related deferred tax are
recorded directly to equity. Fair value movements on derivatives are recorded in
the income statement.
G (iii) Banking and non-insurance operations
Under IAS39, for Egg, changes to opening equity at 1 January 2005 arise from
altered policies for effective interest rate on credit card receivables,
impairment losses on loans and advances, fair value adjustments on wholesale
financial instruments and embedded derivatives in equity savings products. The
net effect on shareholders' equity of these changes, after tax, is a deduction
of GBP15m. A further GBP10m reduction in equity arises on certain centrally held
financial instruments and derivatives.
IFRS BASIS RESULTS
STATUTORY BASIS RESULTS
NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED)
H Jackson National Life - Fixed income securities
Statement of Recognised Income and Expense
IAS32 and IAS39 have been adopted from 1 January 2005. Accordingly, for 2004
under IFRS, financial instruments continue to be accounted for under previous
GAAP. For Jackson National Life fixed income securities have been accounted for
at amortised cost, unless impaired. From 1 January 2005, these assets have been
classified as available-for-sale under IAS39 with valuation at fair value.
Unrealised gains and losses and reclassification adjustments for gains and
losses included in net income are recorded from 1 January 2005 within the
Statement of Recognised Income and Expense.
Balance sheet
Due to the change in the valuation basis referred to above, the carrying values
of the fixed income securities of Jackson National Life in the Group balance
sheet that have been included are not comparable. The fair value of the fixed
income securities at 31 December 2004 was GBP22.5bn. After deduction of related
changes to deferred acquisition costs and deferred tax, there was a
consequential impact on shareholders' equity at 1 January 2005, on adoption of
IAS32 and IAS39, of GBP397m for the changed basis of valuation of Jackson's
securities, as shown in note G.
I Unallocated surplus of with-profits funds
The unallocated surplus of with-profits funds reflects the excess of assets over
technical provisions and other liabilities and represents amounts that have yet
to be allocated to policyholders and shareholders. For the Group's 2004
financial statements, and as applied for IFRS purposes for 2004 in these
financial statements, the technical provisions in respect of insurance and
investment contracts of UK regulated with-profits funds have been determined in
accordance with the modified statutory basis of accounting that applied under UK
GAAP. With the exception of minor accounting adjustments, the technical
provisions reflect the UK regulatory basis of reporting which effectively
constitutes the Peak 1 basis under the new FSA regime.
On this basis the unallocated surplus of the PAC with-profits fund for 30 June
2004 and 31 December 2004 was GBP11,858m and GBP16,301m respectively. After
inclusion of the unallocated surplus of with-profits funds of Asian subsidiaries
the unallocated surplus in the consolidated Group balance sheet at 30 June 2004
and 31 December 2004 was GBP12,110m and GBP16,686m. Following changes arising
from the application of IFRS requirements applicable for 2004, the IFRS basis
unallocated surplus for the Group is altered as described in Note F.
The FSA's Peak 2 calculation under the new realistic regime which came fully
into effect for the first time for 2004 regulatory reporting requires the value
of liabilities for UK regulated with-profits funds to be calculated as:
- a with-profits benefits reserve (WPBR); plus
- future policy related liabilities (FPRL); plus
- the realistic current liabilities of the fund.
The WPBR is primarily based on the retrospective calculation of accumulated
asset shares but is adjusted to reflect future expected policyholder benefits
and other outgoings. By contrast, the Peak 1 basis addresses, at least
explicitly, only declared bonuses.
The FPRL must include a market consistent valuation of costs of guarantees,
options and smoothing, less any related charge, and this amount must be
determined using either a stochastic approach, hedging costs or a series of
deterministic projections with attributed probabilities. Under the Peak 1 basis
there is an allowance on a deterministic basis for the intrinsic value of these
costs. The cost of guarantees, options and smoothing is very sensitive to the
bonus, Market Value Reduction and investment policy the Company employs and
therefore the stochastic modelling incorporates a range of management actions
that would help to protect the fund in adverse investment scenarios. The
management actions assumed are consistent with the management policy for
with-profits funds and the disclosures in the publicly available Principles and
Practices of Financial Management.
On adoption of IFRS 4 at 1 January 2005, the Group has chosen to improve its
accounting policy in respect of the insurance assets and liabilities of UK
regulated with-profits funds. The improvement is consistent with the
requirements of FRS27 that apply for life assurers reporting under UK GAAP in
2005.
The Peak 2 approach underpins the requirements of FRS27. The main changes that
are required for UK regulated with-profits funds are:
- De-recognition of deferred acquisition costs and related deferred
tax
- Inclusion of the FSA Peak 2 basis of the value of in-force
non-participating business written by the PAC with profits
sub-fund, and the Scottish Amicable Insurance Fund; and
- Replacement of modified statutory basis liabilities for
with-profits business with adjusted realistic basis liabilities.
Adjusted realistic liabilities represent the Peak 2 realistic liabilities for
with-profits business included in Form 19 of the FSA regulatory returns, but
after excluding the element for shareholders' share of future bonuses. This
latter item is recognised as a liability for the purposes of regulatory returns
but for accounting purposes shareholder transfers are recognised only on
declaration.
For accounting purposes, to the extent that the value of non-participating
business has been taken into account in determining projected policyholder
benefits, deduction is made from the gross regulatory value of realistic
liabilities. The balance is deducted from the accounting balance of unallocated
surplus.
In determining accounting basis liabilities and unallocated surplus an
adjustment is also required where the regulatory and accounting carrying values
of assets and liabilities differ for altered measurement or recognition
criteria. For the Group's UK with-profits funds the main additional item for
which adjustment is necessary is the attributable share of deficit of the
Group's UK defined benefit pension schemes, net of related tax.
The impact of the changes at 1 January 2005, on adoption of IFRS4, are shown in
note G. At 30 June 2005, the unallocated surplus of GBP8.9 bn comprises GBP8.8
bn for the PAC with-profits funds and GBP0.1 bn for Asian subsidiaries. The
GBP8.8 bn for the PAC with-profits fund represents:
GBPbn
Estimated regulatory basis realistic surplus of the PAC with-profits 7.1
sub-fund and SAIF
Add back: Provision for future shareholder transfers 3.0
---------
10.1
Estimated value of non-participating business not explicitly (0.8)
allocated to asset shares
Provision for share of deficit of UK defined benefit pension (0.5)
schemes
---------
8.8
=========
The GBP0.1bn of unallocated surplus for Asia subsidiaries almost wholly relates
to the Malaysian life business. Following local regulatory changes which affect
the presentation of the balance sheet, unallocated surplus of the Singapore
with-profits business is now amalgamated with policyholder liabilities.
J Dividend
The interim dividend of 5.3p per share will be paid on 28 October 2005 to
shareholders on the register at the close of business on 19 August 2005. A scrip
dividend alternative will be offered to Shareholders.
K Shareholders' equity
30 June 30 June 31 December
2005 GBPm 2004 GBPm 2004 GBPm
------------------------------------------------------------------------------
Share capital 119 101 119
Share premium 1,561 553 1,558
Other reserves 3,309 2,698 2,813
------------------------------------------------------------------------------
Total 4,989 3,352 4,490
------------------------------------------------------------------------------
L Other borrowings
30 June 30 June 31 December
2005 GBPm 2004 GBPm 2004 GBPm
------------------------------------------------------------------------------
Operational borrowings attributable to
shareholder financed operations:
Borrowings in respect of short-term 1,131 1,203 1,079
fixed income securities programmes
Non-recourse borrowings of investment 1,195 1,602 1,155
subsidiaries managed by PPM America
Borrowings in respect of banking 3,888 3,967 4,159
operations
Other borrowings 30 28 28
------------------------------------------------------------------------------
Total 6,244 6,800 6,421
------------------------------------------------------------------------------
Borrowings attributable to with-profits funds
Non-recourse borrowings of venture fund 695 950 1,107
investment subsidiaries of the with-profits
sub-fund of the PAC long-term fund
Structural borrowings (subordinated debt of 100 100 100
the Scottish Amicable Insurance Fund)
Other borrowings (predominantly external 870 799 870
funding of consolidated investment vehicles)
------------------------------------------------------------------------------
Total 1,665 1,849 2,077
------------------------------------------------------------------------------
M Tax charge
The total tax charge of GBP338m for the 2005 half year (2004 half year GBP387m)
comprises GBP217m (GBP308m) UK tax and GBP121m (GBP79m) overseas tax. This tax
charge comprises tax attributable to policyholders and unallocated surplus of
with-profits funds, unit linked policies and shareholders. The tax charge
attributable to shareholders of GBP156m for the 2005 half year (2004 half year
GBP138m) comprises GBP52m (GBP63m) UK tax and GBP104m (GBP75m) overseas tax.
N Acquisitions
In May 2005, Jackson National Life completed the purchase of Life Insurance
Company of Georgia from ING Groep NV for GBP142m, subject to post-completion
adjustments. There was no goodwill arising on the transaction.
SUPPLEMENTARY IFRS BASIS RESULTS
Additional IFRS basis information to enable consistent comparison of results for
Prudential's insurance operations
This information does not form part of the interim statutory IFRS basis
financial statements.
The information shown for Half Year 2005 is based on the statutory IFRS basis
results as shown in the Group's interim financial statements, and the basis of
preparation and significant changes of accounting policies from those previously
applied under UK GAAP, described therein. In particular, the Half Year 2005
results include the effects of adoption of the standards IAS32, IAS39 and IFRS4
for the Group's insurance and other operations from 1 January 2005. The 2004
comparative results in those statements are therefore prepared on an
inconsistent basis.
The "Proforma IFRS basis" comparative results shown below for 2004, reflect the
estimated effect on the Group's 2004 results if IAS32, IAS39, and IFRS4 had been
applied from 1 January 2004 to the Group's insurance operations.
The main purpose of providing this proforma information is to present the
operating results for the UK and Europe insurance business and short-term
fluctuations in investment returns for Jackson National Life on a consistent
basis. Under IAS39 and IFRS4, the assets and liabilities of certain unit linked
and similar contracts of the UK and Europe insurance business are subject to
re-measurement. For Jackson National Life (JNL) derivatives held for economic
hedging purposes are fair valued under IAS39 with value movements recorded in
the income statement giving rise to significant levels of volatility. In
addition fixed income securities of JNL are fair valued with value movements
taken directly to shareholder reserves through the Statement of Recognised
Income and Expense.
Based on Proforma IFRS Proforma IFRS
statutory IFRS basis results basis results
basis results
Half Year Half Year Full Year
Summary results 2005 GBPm 2004 GBPm 2004 GBPm
------------------------------------------------------------------------------
Operating profit from 469 375 699
continuing operations based on
longer-term investment returns
before exceptional items (note
1)
Goodwill impairment charge (95) - -
Short-term fluctuations in 94 65 293
investment returns (note 2)
Shareholders' share of (8) 48 (7)
actuarial gains and losses on
defined benefit pension
schemes
------------------------------------------------------------------------------
Profit from continuing 460 488 985
operations before tax
attributable to shareholders
(including actual investment
returns)
Tax attributable to (156) (170) (290)
shareholders
------------------------------------------------------------------------------
Net income from continuing 304 318 695
operations
Discontinued operations (net of 1 (17) (94)
tax)
------------------------------------------------------------------------------
Profit for the period 305 301 601
------------------------------------------------------------------------------
Attributable to:
Equity holders of the parent 300 294 602
company
Minority interest 5 7 (1)
------------------------------------------------------------------------------
Profit for the period 305 301 601
------------------------------------------------------------------------------
Earnings per share
Continuing operations
-----------------------
From operating profit, based on
longer-term investment returns
after tax and related minority
interest of GBP331m
(GBP254m, GBP481m) 14.0p 12.2p 22.7p
Adjustment for goodwill (4.0)p - -
impairment charge
Adjustment from post-tax
longer-term investment returns
to post-tax actual investment
returns (after related minority 3.0p 1.0p 9.0p
interest)
Adjustment for post-tax (0.3)p 1.6p (0.2)p
shareholders' share of
actuarial gains and losses on
defined benefit pension
schemes
------------------------------------------------------------------------------
Based on profit from continuing 12.7p 14.8p 31.5p
operations after minority
interest of GBP299m (GBP307m,
GBP669m)
------------------------------------------------------------------------------
Discontinued operations
-------------------------
Based on post-tax profit (loss) 0.0p (0.6)p (3.1)p
from discontinued operations
(after minority interest)
------------------------------------------------------------------------------
Based on profit for the period 12.7p 14.2p 28.4p
after minority interest
------------------------------------------------------------------------------
SUPPLEMENTARY IFRS BASIS RESULTS
Additional IFRS basis information to enable consistent comparison of results for
Prudential's insurance operations
This information does not form part of the interim statutory IFRS basis
financial statements
Based on Proforma IFRS Proforma IFRS
statutory IFRS basis results basis results
basis results
Half Year Half Year Full Year
Statement of Recognised Income and Expense 2005 GBPm 2004 GBPm 2004 GBPm
----------------------------------------------------------------------------------------------------
Net income for the period after minority interest 300 294 602
Items taken directly to equity:
Exchange movements 183 (37) (191)
Movement on cash flow hedges (7) - -
Unrealised valuation movements on securities
classified as available for sale:
Gross change (63) (562) (106)
Related change to amortisation of deferred 14 265 74
acquisition costs
Related tax 48 113 23
----------------------------------------------------------------------------------------------------
Total recognised income for the period 475 73 402
----------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting
principles on adoption of IAS32, IAS39 and IFRS4,
net of applicable taxes, at 1 January 2005
Statutory IFRS basis 236 - -
less: Proforma adjustment reflected in (261) - -
adjusted shareholders' equity at 1 January
2005 (as reflected in statement of movement on
shareholders' equity - see below) for impact
of adoption of IAS32, IAS39 and IFRS4 for
insurance operations
----------------------------------------------------------------------------------------------------
Proforma IFRS basis (i.e. transitional (25) - -
adjustment in respect of banking and other
non-insurance operations)
----------------------------------------------------------------------------------------------------
450 73 402
Total recognised income and expenses
----------------------------------------------------------------------------------------------------
Reconciliation of movement on consolidated
shareholders' equity (excluding minority interest)
---------------------------------------------------
Total recognised income for the period (as above) 450 73 402
Proceeds from rights issue, net of expenses - - 1,021
Other new share capital subscribed 40 61 119
Dividends (253) (214) (323)
Reserve movements in respect of share based 6 3 10
payments
Consideration paid for own shares:
Consideration paid for own shares purchased in 0 0 (4)
respect of share based payment plans
Prudential plc shares purchased by unit trusts (5) 0 14
newly consolidated under IFRS
----------------------------------------------------------------------------------------------------
Net increase in shareholders' equity 238 (77) 1,239
----------------------------------------------------------------------------------------------------
Shareholders' equity at beginning of period
---------------------------------------------
UK GAAP - as previously published 4,281 3,240 3,240
Changes arising from adoption of statutory IFRS 209 56 56
----------------------------------------------------------------------------------------------------
Statutory IFRS basis 4,490 3,296 3,296
Proforma basis adjustments for estimated impact if 261 216 216
IAS32, IAS39, and IFRS4 had been adopted from 1
January 2004 for insurance operations
----------------------------------------------------------------------------------------------------
Proforma IFRS basis 4,751 3,512 3,512
----------------------------------------------------------------------------------------------------
Shareholders' equity at end of period 4,989 3,435 4,751
----------------------------------------------------------------------------------------------------
SUPPLEMENTARY IFRS BASIS RESULTS
Additional IFRS basis information to enable consistent comparison of results for
Prudential's insurance operations
This information does not form part of the interim statutory IFRS basis
financial statements
NOTES ON THE SUPPLEMENTARY IFRS BASIS RESULTS
1 Operating profit from continuing operations based on longer-term investment
returns before exceptional items
Based on Proforma IFRS Proforma IFRS
statutory IFRS basis results basis results
basis results
Half Year Half Year Full Year
Results analysis by business 2005 GBPm 2004 GBPm 2004 GBPm
area
---------------------------------------------------------------------------------
UK and Europe Operations
UK and Europe Insurance 187 153 296
Operations
M&G 83 79 136
Egg 13 33 61
---------------------------------------------------------------------------------
Total 283 265 493
---------------------------------------------------------------------------------
US Operations
Jackson National Life 157 157 296
Broker dealer and fund 18 9 15
management
Curian (6) (11) (29)
---------------------------------------------------------------------------------
Total 169 155 282
---------------------------------------------------------------------------------
Asian Operations
Long-term business 116 58 117
Fund management 2 10 19
Development expenses (8) (10) (15)
---------------------------------------------------------------------------------
Total 110 58 121
---------------------------------------------------------------------------------
Other income and expenditure
Investment return and other 45 16 44
income
Interest payable on core (84) (74) (154)
structural borrowings
Corporate expenditure:
Group Head Office (36) (23) (51)
Asia Regional Head Office (14) (18) (29)
Charge for share based payments (4) (4) (7)
for Prudential schemes
---------------------------------------------------------------------------------
Total (93) (103) (197)
---------------------------------------------------------------------------------
Operating profit from 469 375 699
continuing operations based on
longer-term investment returns
before exceptional items
---------------------------------------------------------------------------------
2 Short-term fluctuations in investment returns
Based on Proforma IFRS Proforma IFRS
statutory IFRS basis results basis results
basis results
Half Year Half Year Full Year
2005 GBPm 2004 GBPm 2004 GBPm
---------------------------------------------------------------------------------
US Operations:
Movement in market value 36 92 144
of derivatives used for
economic hedging
purposes
Actual less longer-term 24 13 61
investment returns for
other items
Asian Operations 17 (42) 37
Other Operations 17 2 51
---------------------------------------------------------------------------------
94 65 293
---------------------------------------------------------------------------------
INDEPENDENT REVIEW REPORT BY KPMG AUDIT PLC TO PRUDENTIAL PLC, extracted from
the Interim Report 2005
"Introduction
We have been engaged by the Company to review the financial information set out
on page 16 and pages 21 to 34 prepared on an IFRS basis and the financial
information set out on page 15 and pages 17 to 20 prepared on an achieved
profits basis and we have read the other information contained in the interim
report and considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.
This report is made solely to the Company in accordance with the terms of our
engagement to assist the Company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the Company those matters we are required to state to it
in this report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the Company for
our review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of and has been approved by the directors. The directors are
responsible for preparing the interim report in accordance with the Listing
Rules which require that the accounting policies and presentation applied to the
interim figures should be consistent with those applied in preparing the
preceding annual financial statements except where any changes, and the reasons
for them, are disclosed.
As disclosed in note A to the financial information, the next annual financial
statements of the Group will be prepared in accordance with IFRS adopted for use
in the European Union. The accounting policies that have been adopted in
preparing the financial information are consistent with those that the directors
currently intend to use in the next annual financial statements. There is,
however, a possibility that the directors may determine that some changes to
these policies are necessary when preparing the full annual financial statements
for the first time in accordance with those IFRSs adopted for use by the
European Union.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
Review of interim financial information issued by the Auditing Practices Board
for use in the United Kingdom. A review consists principally of making enquiries
of Group management and applying analytical procedures to the financial
information and underlying financial data and, based thereon, assessing whether
the accounting policies and presentation have been consistently applied unless
otherwise disclosed. A review is substantially less in scope than an audit
performed in accordance with Auditing Standards and therefore provides a lower
level of assurance than an audit. Accordingly, we do not express an audit
opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2005.
KPMG Audit Plc
Chartered Accountants
London
26 July 2005"
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date 27 July 2005
PRUDENTIAL PUBLIC LIMITED COMPANY
By: /s/ Clare Staley
Head of Group Media Relations