Financial review

IFRS basis operating profit based on longer-term investment returns

Download as excel file

  AER CER
Half year
2012

£m
Half year
2011
note (i)
£m
Change


%
Half year
2011
note (i)
£m
Change


%

Notes

  1. The Group has adopted altered US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement as if the new accounting policy had always applied, as described in note B to the IFRS financial statements.
  2. During the first half of 2011 the Group altered its assumptions for future statutory increases to pension payments for its UK defined benefit pension schemes. This reflects the UK government's decision to change the basis of indexation from RPI to CPI.
Insurance business          
Long-term business:          
Asia 409 324 26 322 27
US 442 340 30 349 27
UK 336 332 1 332 1
Development expenses (3) (2) (50) (2) (50)
Long-term business profit 1,184 994 19 1,001 18
UK general insurance commission 17 21 (19) 21 (19)
Asset management business:          
M&G (including Prudential Capital) 199 199 199
Eastspring Investments 34 43 (21) 44 (23)
Curian 7 5 40 5 40
US broker-dealer and asset management 10 12 (17) 12 (17)
  1,451 1,274 14 1,282 13
Other income and expenditure (255) (253) (1) (253) (1)
RPI to CPI inflation measure change on defined benefit pension schemes(note ii) 42 42
Solvency II implementation costs (27) (27) (27)
Restructuring costs (7) (8) 13 (8) 13
Total IFRS basis operating profit based on longer-term investment returns 1,162 1,028 13 1,036 12

In the first half of 2012, the Group's IFRS operating profit based on longer-term investment returns was £1,162 million, an increase of 13 per cent from the first half of 2011.

In Asia, IFRS operating profit for long-term business increased by 26 per cent from £324 million in the first half of 2011 to £409 million in the first half of 2012. Profits from in-force business grew by 23 per cent between the two periods from £365 million to £449 million, reflecting an increasing contribution from health and protection business and the continued growth of the business in the region. New business strain has reduced from £41 million in the first half of 2011 to £40 million in the first half of 2012.

Hong Kong, Indonesia, Singapore and Malaysia, Prudential's largest markets in Asia, continue to see profits grow strongly, with operating profits from long-term business1 up 27 per cent from £255 million in the first half of 2011 to £323 million in the first half of 2012. Indonesia continues to see strong organic growth, with operating profit1 up 29 per cent from £95 million to £123 million. Hong Kong's operating profit1 increased by 52 per cent to £47 million (2011: £31 million), reflecting the continued growth of the portfolio. Singapore increased by 29 per cent to £93 million (2011: £72 million)1 and Malaysia's operating profit1 at £60 million (2011: £57 million) increased by 5 per cent. Other territories contributed operating profits1 of £69 million (2011: £44 million), an increase of 57 per cent, and have all made positive contributions to this metric.

The US long-term business operating profit increased by 30 per cent from £340 million in the first half of 2011 to £442 million in the first half of 2012. The strong performance is attributed to growth in fee income, up 25 per cent to £408 million, driven by the continued high sales of variable annuity business which has enhanced separate account balances. The operating profit in the first half of 2012 further benefited from absence of non-recurring DAC amortisation of £66 million recognised in the first half of 2011. Partially offsetting these increases are higher non-deferrable acquisition costs from the growing variable annuity business and reduced spread income.

In Prudential's UK business, total IFRS operating profit was £353 million, in line with same period last year (2011: £353 million). Long-term business generated £336 million (2011: £332 million). The with-profits business contributed £146 million, compared with £154 million in 2011, in line with reductions in policy bonus rates. Profit from UK general insurance commission continued to decline as expected at £17 million (2011: £21 million) as the business matures and in-force policy numbers fall.

Total operating profit for the first half of 2012 from M&G and Prudential Capital was £199 million, comparable to operating profit earned in the first half of 2011. The impact of strong net inflows in the first half of 2012 has been offset by the effect of lower average market levels in the period.

Eastspring Investments reported operating profits of £34 million, down by 21 per cent from the £43 million recognised in the first half of 2011. This reflects lower average margins on funds under management following a shift in business mix towards bonds and a higher proportion of institutional business, together with increased costs as the business develops the Eastspring Investments platform.

The charge for other income and expenditure has increased from £253 million in the first half of 2011 to £255 million in the first half of 2012.

A total of £27 million of Solvency II implementation costs were incurred in the first half of 2012 (2011: £27 million) as we continue to make progress in our preparedness to implement the new regime.

IFRS basis results – analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver

Download as excel file

  AER AER CER
Half year 2012 Half year 2011 note (v) Half year 2011
  Operating
profit

£m
Average
liability
note (ii)
£m
Margin
note (i)
bps
Operating
profit

£m
Average
liability
note (ii)
£m
Margin
note (i)
bps
Operating
profit

£m
Average
liability
note (ii)
£m
Margin
note (i)
bps

Notes

  1. Margin represents the operating return earned in the period as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus. The margin is on an annualised basis in which half year profits are annualised by multiplying by two.
  2. For UK and Asia, opening and closing policyholder liabilities have been used to derive an average balance for the period, as this is seen as a good proxy for average balances throughout the period. The calculation of average liabilities for Jackson is derived from month-end balances throughout the period as opposed to opening and closing balances only, and liabilities held in the general account for variable annuity living and death guaranteed benefits are excluded from the calculation of the average as no spread income is earned on these balances. These changes were introduced in full year 2011 and half year 2011 has been amended for consistency albeit impacts are minimal.
  3. Acquisition cost ratio represents shareholder acquisition costs as a percentage of total APE.
  4. DAC adjustments have been adjusted for the retrospective application of the accounting policy improvement described in the basis of preparation and note B of the IFRS financial statements.
  5. Starting from full year 2011 and following the reduction in 2010 of the Group’s interest in the PruHealth and PruProtect businesses from 50 per cent to 25 per cent, the profits of these businesses have been shown as a single line in the insurance margin consistent with associate accounting principles. Half year 2011 results reflect this change.
Spread income 536 61,109 175 533 55,687 191 543 56,301 193
Fee income 509 74,795 136 423 68,435 124 429 69,062 124
With-profits 164 94,103 35 171 92,701 37 171 92,702 37
Insurance margin 420     345     347    
Margin on revenues 704     638     635    
Expenses:                  
Acquisition costs note (iii) (972) 2,030 (48)% (900) 1,824 (49)% (911) 1,840 (50)%
Administration expenses (555) 135,904 (82) (497) 124,122 (80) (500) 125,363 (80)
DAC adjustments note (iv) 248     150     156    
Expected return on shareholder assets 130     131     131    
Operating profit based on longer-term investment returns 1,184     994     1,001    

Spread income earned in the first half of 2012 was £536 million, consistent with the amount received in the prior year of £533 million. The margin secured has fallen from 191 basis points in the first half of 2011 to 175 basis points in the first half of 2012 principally due to the anticipated spread compression in the US general account business, down from 262 basis points in 2011 to 238 basis points in 2012.

Fee income has increased by 20 per cent to £509 million, driven by the 9 per cent increase in the Group’s average unit-linked liabilities, which principally reflects the £3.8 billion net inflows into Jackson’s separate accounts as well as positive net flows in Asia’s linked business in the first half of 2012. The fee income margin has increased from 124 basis points to 136 basis points in the first half of 2012 as Jackson contributes a greater proportion to the total, where the fee margin is higher.

Insurance margin has increased by 22 per cent to £420 million in the first half of 2012 driven by the continuing growth in the in-force book in Asia, which has a relatively high proportion of risk-based products and an increase in variable annuity guarantee fees in the US, in line with the growth in the business.

Margin on revenues principally comprises amounts deducted from premiums to cover acquisition costs and administration expenses. The margin has increased by 10 per cent from £638 million in first half of 2011 to £704 million in first half of 2012. This increase is driven by Asia and reflects higher premium income in the period.

Acquisition costs have increased in absolute terms to £972 million, broadly in line with the increased new business sales. Expressed as a percentage of new business APE, 2012 has seen a marginal decrease from 49 per cent in the first half of 2011 to 48 per cent in 2012.

Administration expenses have increased to £555 million, reflecting the growth of the business in the year.

DAC adjustments are a net benefit to the result as the deferral of current year's acquisition costs exceeds the amortisation of previously deferred costs. This net benefit increased from £150 million in the first half of 2011 to £248 million in the first half of 2012. This increase primarily arises in US, following a fall in DAC amortisation to more usual levels in 2012. 2011 included a £66 million charge for accelerated DAC amortisation, representing the reversal of the benefit received in 2008 from the mean reversion formula.

IFRS basis results – margin analysis of asset management pre-tax IFRS operating profit based on longer-term investment returns by driver

Download as excel file

Half year 2012 £m
M&G
note (i)
Eastspring
Investments

PruCap

US

Total

Operating income note (i) 354 96 59 142 651
Operating profit based on longer-term investment returns 175 34 24 17 250
Average funds under management (FUM) including 47% proportional share of PPM South Africa £200.6bn
Average funds under management (FUM) excluding PPM South Africa £196.8bn £52.1bn
Margin based on operating income note (ii) 36 bps 37 bps
Cost/income ratio note (iii) 53% 66%
Half year 2011 £m
M&G
note (i)
Eastspring
Investments

PruCap

US

Total

Notes

  1. Operating income is presented net of commissions and excludes performance-related fees, and for M&G carried interest on private equity investments. Following the divestment in the first half of 2012 of M&G’s holding in PPM South Africa from 75 per cent to 47 per cent and its treatment from 2012 as an associate, M&G’s operating income and expense no longer includes any element from PPM South Africa, with the share of associate’s results being presented in a separate line. In order to avoid period on period distortion, in the table above the 2011 operating income, margin and cost/income ratio reflect the retrospective application of the basis of presentation for 2011 results.
  2. Margin represents operating income as defined in note (i) above as a proportion of average funds under management (FUM), being the average of opening and closing FUM, excluding PPM South Africa. The margin is on an annualised basis in which the half year resultant figure is multiplied by two. For half year 2012, the opening balance of M&G’s FUM has been adjusted to remove the proportional share of PPM South Africa divested following the change in treatment to associate at the beginning of the period.
  3. Cost/income ratio represents cost as a percentage of operating income as defined above. M&G’s operating income and expense excludes any contribution from M&G’s associate, PPM South Africa.
Operating income note (i) 330 98 55 125 608
Operating profit based on longer-term investment returns 172 43 27 17 259
Average funds under management (FUM), including 100% share of PPM South Africa £200.5bn        
Average funds under management (FUM), excluding PPM South Africa £191.4bn £52.2bn      
Margin based on operating income note (ii) 34 bps 38 bps      
Cost/income ratio note (iii) 55% 59%      

M&G’s asset management fee margin increased from 34 basis points in the first half of 2011 to 36 basis points in the first half of 2012. This reflects a shift in funds under management mix towards higher margin retail business which at 30 June 2012 represented 23 per cent of total funds under management, excluding PPM South Africa (31 December 2011: 21 per cent; 30 June 2011: 21 per cent). Retail margin fell by 1 basis point to 96 basis points as a result of a change in fund mix towards lower margin bond funds and channel diversification towards platform business. M&G continues to focus on cost control and the efficiencies created as the scale of the business grows. The benefit of this operational leverage is evident in the reduction in the cost/income ratio from 55 per cent in the first half of 2011 to 53 per cent in the first half of 2012.

At Eastspring Investments, fee margin declined from 38 basis points in the first half of 2011 to 37 basis points in the first half of 2012, with an increase in the funds under management mix towards institutional business including internal clients (68 per cent for 2012 compared to 62 per cent for 2011). The equity markets correction experienced in Asia and globally in the second half of 2011 has contributed to this asset mix shift. Institutional margins have remained stable across the periods. Lower operating income coupled with higher costs in 2012 as the business continues to invest in future growth opportunities have contributed to a higher cost/income ratio of 66 per cent in the first half of 2012 compared to 59 per cent in the first half of 2011.

IFRS basis profit after tax

Download as excel file

Half year
2012 £m
Half year
2011* £m

* The Group has adopted altered US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement as if the new accounting policy had always applied, as described in note B to the IFRS financial statements.

Operating profit based on longer-term investment returns 1,162 1,028
Short-term fluctuations in investment returns:    
Insurance operations (78) 65
Other operations 46 28
  (32) 93
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 87 (7)
Gain on dilution of Group holdings 42
Profit before tax attributable to shareholders 1,259 1,114
Tax charge attributable to shareholders’ profit (307) (283)
Non-controlling interests (2)
Profit for the period attributable to equity holders of the Company 952 829

IFRS basis profit after tax

The total profit before tax attributable to shareholders was £1,259 million in the first half of 2012, compared with £1,114 million in the first half of 2011. The improvement predominantly reflects the increase in operating profit based on longer-term investment returns.

In calculating the IFRS operating profit, we use longer-term investment return assumptions rather than actual investment returns arising in the year. The difference between actual investment returns recorded in the income statement and longer-term returns is shown in the analysis of profits as short-term fluctuations in investment returns.

IFRS short-term fluctuations in investment returns

Short-term fluctuations in investment returns for our insurance operations comprise positive £42 million for Asia, negative £125 million for US operations and positive £5 million in the UK.

The positive short-term fluctuations of £42 million for our Asia operations include unrealised gains on the fixed interest and equity investments in Vietnam and Taiwan, including on the Group’s investment in China Life insurance Company of Taiwan, offset by the impact of falling interest rates in Hong Kong.

Negative fluctuations of £125 million in our US operations mainly represent the net unrealised value movement on derivatives held to manage the Group’s interest rate and equity exposures.

The positive short-term fluctuations of £5 million for our UK operations largely reflect the net effect of lower interest rates on shareholder-backed business.

Short-term fluctuations for other operations were positive £46 million representing net unrealised gains in the period on centrally held derivatives to manage foreign exchange and certain macroeconomic exposures of the Group and appreciation on Prudential Capital’s bond portfolio.

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

The shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes of positive £87 million (2011: negative £7 million) mainly reflects the partial recognition of actuarial surplus in the Prudential Staff Pension Scheme following the results of the triennial valuation, further details of which are given in the pension fund section of this review.

Gain on dilution of Group holdings

On 22 February 2012, M&G completed transactions to (i) exchange bonus share rights for equity holdings with the employees of PPM South Africa and (ii) the sale of a 10 per cent holding in the majority of the business to Thesele Group, a minority shareholder, for cash. Following these transactions M&G’s majority holding in the business reduced from 75 per cent to 47 per cent. Under IFRS requirements, the divestment of M&G’s holding in PPM South Africa is accounted for as the disposal of the 75 per cent holding and an acquisition of a 47 per cent holding at fair value resulting in a reclassification of PPM South Africa from a subsidiary to an associate. The transactions therefore give rise to a gain on dilution of £42 million, which has been excluded from the Group’s IFRS operating profit based on longer-term investment returns.

Effective tax rates

The effective rate of tax on operating profit based on longer-term investment returns was 25 per cent (2011: 22 per cent). The 2011 effective rate had benefited from utilising carried forward tax losses for which no deferred tax asset had been recognised.

The effective rate of tax at the total IFRS profit level was 24 per cent (2011: 25 per cent).

EEV basis operating profit based on longer-term investment returns

Download as excel file

AER CER
Half year
2012
£m
Half year
2011
£m
Change
%
Half year
2011
£m
Change
%

Note

During the first half of 2011 the Group altered its assumptions for future statutory increases to pension payments for its UK defined benefit pension schemes. This reflects the UK government’s decision to change the basis of indexation from RPI to CPI.

Insurance business:          
Asia 872 774 13 778 12
US 805 831 (3) 852 (6)
UK 490 537 (9) 537 (9)
Development expenses (3) (2) 50 (2) 50
Long-term business profit 2,164 2,140 1 2,165 (0)
UK general insurance commission 17 21 (19) 21 (19)
Asset management business:          
M&G (including Prudential Capital) 199 199 199
Eastspring Investments 34 43 (21) 44 (23)
Curian 7 5 40 5 40
US broker-dealer and asset management 10 12 (17) 12 (17)
  2,431 2,420 2,446 (1)
Other income and expenditure (285) (281) 1 (281) 1
RPI to CPI inflation measure change on defined benefit pension schemes note 45   45
Solvency II implementation costs (29) (28) (4) (28) (4)
Restructuring costs (8) (9) 11 (9) 11
Total EEV basis operating profit 2,109 2,147 (2) 2,173 (3)

Despite the current macroeconomic environment, Prudential Group’s total EEV basis operating profit based on longer-term investment returns was £2,109 million in the first half of 2012, compared to £2,147 million in the first half of 2011.

Long-term business profit generated by the Group was £2,164 million (2011: £2,140 million). This profit comprises:

  • New business profit of £1,141 million (2011: £1,069 million);
  • In-force profit of £1,026 million (2011: £1,073 million); and
  • Negative £3 million for development expenses (2011: negative £2 million).

New business profit at £1,141 million was 7 per cent higher than last half year, reflecting an 11 per cent increase in new business APE. Group new business margin remained strong at 56 per cent albeit 3 percentage points lower than 2011. The considerably lower interest rates compared to the first half of 2011 (UK lower by 170 basis points, US lower by 150 basis points) has dampened our overall new business margins by an estimated 6 percentage points. The effect of this on the overall new business profit was more than compensated by higher sales volumes, pricing actions and business mix. The overall new business economics remain robust.

At 61 per cent, the new business margin for the Asia business was lower than the 63 per cent recorded in 2011, driven primarily by the impact of the low interest rates (particularly in Hong Kong) on assumed future returns. The US new business profit margin was 61 per cent (2011: 68 per cent), with the 150 basis points fall in 10-year Treasury yields since 30 June 2011 adversely impacting margins by 11 percentage points, offset by proactive pricing actions and business mix. The UK new business margin at 37 per cent was up 1 per cent compared to last half year (2011: 36 per cent), and includes the benefit of a single bulk annuity buy-in written in each period. Retail new business profit margins increased from 32 per cent to 34 per cent reflecting a change in product mix to include a greater proportion of sales of higher margin individual annuities and with-profits bonds.

The contribution to operating profit from life in-force business was £1,026 million (2011: £1,073 million) and comprises £764 million (2011: £825 million) from the unwind of the discount on the opening embedded value and other expected returns, and £262 million (2011: £248 million) from the effect of operating assumption changes, experience variances and other items. The unwind of discount and other expected returns is £61 million lower than the first half of 2011 with the growth in the business being offset by the effect on this profit measure of lower interest rates. The economic effects have adversely impacted the unwind and other expected returns by £110 million.

In the first half of 2012, at £872 million (2011: £774 million), Asia is the highest contributor to the Group’s life profit, as it was in full year 2011. Included in this profit is £325 million of profit from in-force business (2011: £309 million). Operating assumption changes and experience variances netted to an overall small positive of £4 million for the first six months (2011: negative £24 million) with individual components remaining relatively modest.

US life in-force profit was lower at £363 million (2011: £373 million) reflecting the impact of lower interest rates as highlighted above. Jackson’s actual performance continues to exceed that assumed with positive experience and operating assumptions of £165 million (2011: £170 million). Within these amounts, swap transactions undertaken from 2010 to more closely match the overall asset and liability duration contributed enhanced profits with an overall spread gain of £98 million (2011: £81 million).

UK life in-force profit was £338 million for the first six months of 2012 (2011: £391 million). Lower gilt yields led to a reduction in the contribution from the unwind of the discount on the opening embedded value and return on net worth relative to last half year by £44 million to £245 million. Disciplined management of the in-force book has enabled the business to continue to deliver returns beyond those anticipated, generating profits from experience and operating assumption changes of £93 million (2011: £102 million). Included in both half years are the beneficial effects on future profits arising from the reduction in UK corporation taxes enacted in both periods; in the first half of 2012 this amounted to £43 million, while in the first half of 2011 this amounted to £46 million.

Operating profit from the asset management business and other non-long-term businesses decreased slightly to £267 million, from £280 million in the first half of 2011.

Other income and expenditure totalled a net expense of £285 million, slightly higher than the £281 million incurred in the first half of 2011.

EEV basis profit after tax and non-controlling interests

Download as excel file

Half year
2012
£m
Half year
2011
£m
EEV basis operating profit based on longer-term investment returns 2,109 2,147
Short-term fluctuations in investment returns:    
Insurance operations 179 (139)
Other operations 46 28
  225 (111)
Mark to market value movements on core borrowings (113) (74)
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 103 (8)
Effect of changes in economic assumptions (371) (111)
Gain on dilution of Group holdings 42
Profit before tax 1,995 1,843
Tax charge attributable to shareholders’ profit (554) (572)
Non-controlling interests (2)
Profit after non-controlling interests 1,441 1,269

EEV basis profit after tax and non-controlling interests

EEV operating profit is based on longer-term investment return assumptions rather than actual investment returns achieved. Short-term fluctuations in investment returns represent the difference between the actual investment return and those assumed in arriving at the reported operating profit.

EEV Short-term fluctuations in investment returns

Short-term fluctuations in investment returns for insurance operations of positive £179 million comprised of positive £216 million for Asia, negative £62 million for our US operations and positive £25 million in the UK.

For our Asia business, short-term fluctuations of positive £216 million (2011: negative £63 million) principally reflects unrealised bond and equity gains following market movements in the period, including a gain on the Group’s investment in China Life Insurance Company of Taiwan.

In our US business, short-term fluctuations in investment returns were negative £62 million (2011: negative £91 million). This includes the net value movements on derivatives held to manage the Group’s equity and interest rate exposures offset by the positive impact of market movements on the expected level of future fee income from the variable annuity separate accounts.

For our UK business, the short-term fluctuations in investment returns were positive £25 million (2011: positive £15 million). This arises principally because the actual return on the with-profits fund in the first half of 2012 of 3.2 per cent was higher than the longer-term assumed rate of 2.5 per cent.

Mark to market value movements on core borrowings

The mark to market value movements on core borrowings of negative £113 million in the first half of 2012 reflects movements in the period of market interest rates and credit spreads on Prudential’s borrowings.

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

The shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes on the EEV basis comprises the IFRS charge attributable to shareholders, and the shareholders’ share of movements in the scheme assets and liabilities attributable to the PAC with-profits fund. On the EEV basis there was a gain of £103 million (2011: charge of £8 million) mainly reflecting the partial recognition of actuarial surplus in the Prudential Staff Pension Scheme following the results of the triennial valuation, further details of which are given in the pension fund section of this review.

Effect of changes in economic assumptions

The effect of changes in economic assumptions of negative £371 million, comprises negative £254 million for Asia, negative £79 million for the US and negative £38 million for the UK. These reflect the aggregate effects of the reduction in long-term yields and the associated decrease in risk discount rates.

The adverse changes in economic assumptions for Asia of £254 million primarily reflects the impact of reduced long-term yields on fund earned rates in Hong Kong and Vietnam, together with the effect of narrowing corporate bond spreads in Singapore.

In our US business, the economic effects have a positive effect on future fixed annuity spread profits which is more than offset by the negative effect on future variable annuity fee income.

In the UK, the negative £38 million arises principally on with-profits business, where the lower long-term returns applied at 30 June 2012 are assumed to reduce future policyholder bonuses with consequential adverse impact on the shareholders’ transfer.

Gain on dilution of Group holdings

On 22 February 2012, M&G completed transactions to (i) exchange bonus share rights for equity holdings with the employees of PPM South Africa and (ii) the sale of a 10 per cent holding in the majority of the business to Thesele Group, a minority shareholder, for cash. Following these transactions M&G’s majority holding in the business reduced from 75 per cent to 47 per cent. Under IFRS requirements, the divestment of M&G’s holding in PPM South Africa is accounted for as the disposal of the 75 per cent holding and an acquisition of a 47 per cent holding at fair value resulting in a reclassification of PPM South Africa from a subsidiary to an associate. As a consequence of the IFRS application, the transactions therefore give rise to a gain on dilution of £42 million, which has been excluded from the Group’s EEV operating profit based on longer-term investment returns.

Effective tax rates

The effective rate of tax on operating profit based on longer-term investment returns was consistent with 2011 at 27 per cent. The effective rate of tax at the total EEV profit level was 28 per cent (2011: 31 per cent), with the first half of 2011 being adversely impacted by a one-off adjustment in the US in respect of prior years.

Earnings per share (EPS)

Download as excel file

Half year
2012
pence
Half year
2011
pence

Note

  1. The Group has adopted altered US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement as if the new accounting policy had always applied, as described in note B to the IFRS financial statements.
Basic EPS based on operating profit after tax and non-controlling interests    
IFRSnote 34.5 31.4
EEV 60.7 61.5
Basic EPS based on total profit after tax and non-controlling interests    
IFRSnote 37.5 32.7
EEV 56.8 50.1

Dividend per share

Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are approved by shareholders. The final dividend for the year ended 31 December 2011 of 17.24 pence per ordinary share was paid to eligible shareholders on 24 May 2012.

In light of the continued strong performance of the business and the Group’s focus on a growing dividend, the Board has approved an interim dividend of 8.4 pence per share (2011: 7.95 pence), representing an increase of 5.7 per cent over 2011.

The 2012 interim dividend of 8.4 pence per ordinary share will be paid on 27 September 2012 in sterling to shareholders on the principal register and the Irish branch register at 6.00pm BST on Friday, 24 August 2012 (Record Date), and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30pm. Hong Kong time on the Record Date (HK Shareholders). Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about 5 October 2012. The interim dividend will be paid on or about 4 October 2012 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte) Limited (CDP) at 5.00pm. Singapore time on the Record Date (SG Shareholders). The dividend payable to the HK Shareholders will be translated using the exchange rate quoted by the WM Company at the close of business on 9 August 2012. The exchange rate at which the dividend payable to the SG Shareholders will be translated into SG$, will be determined by CDP. The dividend will distribute an estimated £215 million of shareholders’ funds.

Shareholders on the principal register and Irish branch register will be able to participate in a Dividend Reinvestment Plan.

The Board will maintain its focus on delivering a growing dividend, which will continue to be determined after taking into account our Group’s financial flexibility and our assessment of opportunities to generate attractive returns by investing in specific areas of the business. The Board believes that in the medium term a dividend cover of around two times is appropriate.

Download as excel file

IFRS EEV
Half year
2012

£m
Half year
2011
note (a)
£m
Full year
2011
note (a)
£m
Half year
2012

£m
Half year
2011

£m
Full year
2011

£m
Operating profit based on longer-term investment returns 1,162 1,028 2,027 2,109 2,147 3,978
Items excluded from operating profit 97 86 (199) (114) (304) (1,056)
Total profit before tax 1,259 1,114 1,828 1,995 1,843 2,922
Tax and non-controlling interests (307) (285) (413) (554) (574) (780)
Profit for the period 952 829 1,415 1,441 1,269 2,142
Exchange movements, net of related tax (54) (62) (105) (125) (101) (158)
Unrealised gains and losses on Jackson securities classified as available for sale note (b) 196 109 349
Dividends (440) (439) (642) (440) (439) (642)
New share capital subscribed 14 15 17 14 15 17
Other 60 17 9 78 42 71
Net increase in shareholders’ funds 728 469 1,043 968 786 1,430
Shareholders’ funds at beginning of the period 8,564 7,521 7,521 19,637 18,207 18,207
Shareholders’ funds at end of the period 9,292 7,990 8,564 20,605 18,993 19,637
Comprising:            
Long-term business            
Free surplus note (c)       2,778 2,883 2,839
Required capital       3,623 3,307 3,447
Net worth       6,401 6,190 6,286
Value of in-force       14,001 12,656 13,364
Total       20,402 18,846 19,650
Other business note (d)       203 147 (13)
Total note (e)       20,605 18,993 19,637

Notes

  1. The Group has adopted altered US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement as if the new accounting policy had always applied, as described in note B to the IFRS financial statements.
  2. Net of related changes to deferred acquisition costs and tax.
  3. Free surplus for long-term business has fallen by £61 million from the £2.8 billion held at 31 December 2011. The £645 million free surplus generated by the long-term business (net of new business investment and market related movements) in the period, has been used to pay £647 million to the holding company.
  4. Shareholders’ funds for other than long-term business comprises:

    30 Jun
    2012
    £m
    30 Jun
    2011
    £m
    31 Dec
    2011
    £m
    Asset management operations note 1,888 1,860 1,783
    Holding company net borrowings (2,258) (2,364) (2,188)
    Other, net 573 651 392
    Total shareholders' funds for other business 203 147 (13)

    Note

    Including goodwill of £1,230 million for 30 June 2012, 30 June 2011 and 31 December 2011.

  5. EEV shareholders’ funds excluding goodwill attributable to shareholders at 30 June 2012 is £19,138 million (30 June 2011: £17,524 million; 31 December 2011: £18,172 million).

IFRS

Statutory IFRS basis shareholders’ funds at 30 June 2012 were £9.3 billion. This compares to £8.6 billion at 31 December 2011 and represents an increase of £0.7 billion, equivalent to 8 per cent.

The movement primarily reflects the profit for the period after tax and non-controlling interests of £952 million and the increase in the level of net unrealised gains on Jackson’s debt securities of £196 million from the position at 31 December 2011, offset by the payment of dividends of £440 million.

EEV

On an EEV basis, which recognises the shareholders’ interests in long-term business, shareholders’ funds at 30 June 2012 were £20.6 billion, an increase of £1.0 billion from the 31 December 2011 level, equivalent to 5 per cent. This increased level of shareholders’ funds primarily reflects the profit after tax of £1,441 million, offset by dividend payments of £440 million.

The shareholders’ funds at 30 June 2012 relating to long-term business of £20.4 billion comprise £8.8 billion (up 4 per cent from 31 December 2011) for our Asia long-term business operations, £5.3 billion (up 3 per cent from 31 December 2011) for our US long-term business operations and £6.3 billion (up 4 per cent from 31 December 2011) for our UK long-term business operations.

The total movement in free surplus net of tax in the period can be analysed as follows:

Download as excel file

2012 £m 2011 £m
Half year Half year Full year

Note

  1. During the first half of 2011 the Group altered its assumptions for future statutory increases to pension payments for its UK defined benefit pension schemes. This reflects the UK government’s decision to change the basis of indexation from RPI to CPI.
Free surplus generation      
Expected in-force cash flows (including expected return on net assets) 1,271 1,218 2,335
– Life operations 1,080 1,010 1,972
– Asset management operations 191 208 363
Changes in operating assumptions and experience variances 132 139 168
RPI to CPI inflation measure change on defined benefit pension schemes note 33 33
Underlying free surplus generated in the period from in-force business 1,403 1,390 2,536
Investment in new business (364) (297) (553)
Underlying free surplus generated in the period 1,039 1,093 1,983
Market-related items (156) (44) (531)
Gain on dilution of Group holdings 42
Free surplus generated in the period from retained businesses 925 1,049 1,452
Net cash remitted by the business units (726) (690) (1,105)
Other movements and timing differences (171) (136) (264)
Total movement during the period 28 223 83
Free surplus at 1 January 3,421 3,338 3,338
Free surplus at end of period 3,449 3,561 3,421
Comprised of:      
Free surplus relating to long-term insurance business 2,778 2,883 2,839
Free surplus of other insurance business 13 48 29
IFRS net assets of asset management businesses excluding goodwill 658 630 553
Total free surplus 3,449 3,561 3,421

Overview

The Group manages its internal cash flow by focusing on the free surplus generated by the life and asset management businesses. Remittances are, however, made as and when required by the holding company with excess surplus being left in the businesses where it can be redeployed most profitably. The tables below set out the Group’s free surplus generation, and the holding company cash flow statement for the period.

Free surplus generation

Sources and uses of free surplus generation from the Group’s insurance and asset management operations

The Group’s free surplus at the end of the period comprises free surplus for the insurance businesses, representing the excess of the net worth over the required capital included in the EEV results, and IFRS net assets for the asset management businesses excluding goodwill. The free surplus generated during the period comprises the movement in this balance excluding foreign exchange, capital movements, and other reserve movements. Specifically, it includes amounts maturing from the in-force operations during the period less the investment in new business, the effect of market movements and other items.

For asset management operations we have defined free surplus generation to be total post-tax IFRS profit for the period. The Group’s free surplus generated also includes the general insurance commission earned during the period and excludes shareholders’ other income and expenditure and centrally arising restructuring and Solvency II implementation costs.

During the first half of 2012 Prudential generated underlying free surplus from the in-force book of £1,403 million (2011: £1,390 million). 2011 benefited from a one-off credit of £33 million arising from a reduction in the liabilities of the Group’s defined benefit pension schemes following the UK government’s decision to change the basis of indexation from RPI to CPI, together with strong operating variances. Changes in operating assumptions and experience variances were £132 million in the first half of 2012 compared with £139 million in 2011. These variances included £1 million from Asia (2011: negative £29 million) and £14 million from the UK (2011: positive £60 million), where 2011 benefited from non-recurring items. The US continued to record strong positive variances of £117 million (2011: £108 million), which includes favourable spread experience in the period.

Underlying free surplus generated from in-force business has been used by our life businesses to invest in new business. Investment in new business has increased by 23 per cent to £364 million in the first half of 2012. This compares to a 11 per cent increase in sales and a 7 per cent increase in new business profits. The higher increase in capital consumed principally reflects a change in business mix in the US, with a higher proportion of more capital intensive general account business and a fall in interest rates which has led to a lower valuation rate used to set reserves in the US and Hong Kong on policy inception.

Market-related movements of negative £156 million in the first half of 2012 includes negative £168 million from the US, principally reflecting the valuation movements of derivatives, net of movements in reserves held for variable annuity guarantees given market movements in the period and negative £115 million in the UK. Offsetting these amounts are positive £80 million in Asia, reflecting in part the effects of lower bond yields in Taiwan and Vietnam and positive £47 million from our asset management business.

Free surplus also benefited by £42 million as a result of the divestment of M&G’s holding in PPM South Africa from 75 per cent to 47 per cent.

Value created through investment in new business by life operations

Download as excel file

Half year 2012 £m
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Group
Total
Free surplus invested in new business (162) (180) (22) (364)
Increase in required capital 48 151 44 243
Net worth invested in new business (114) (29) 22 (121)
Value of in-force created by new business 528 317 94 939
Post-tax new business profit for the period 414 288 116 818
Tax 133 154 36 323
Pre-tax new business profit for the period 547 442 152 1,141
New business sales (APE) 899 719 412  
New business margins (% APE) 61% 61% 37%  
Internal rate of return note >20% >20% >20%  

Download as excel file

AER
Half year 2011 £m
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Group
Total
Free surplus invested in new business (129) (135) (33) (297)
Increase in required capital 49 123 40 212
Net worth invested in new business (80) (12) 7 (85)
Value of in-force created by new business 430 310 101 841
Post-tax new business profit for the period 350 298 108 756
Tax 115 160 38 313
Pre-tax new business profit for the period 465 458 146 1,069
New business sales (APE) 743 672 409  
New business margins (% APE) 63% 68% 36%  
Internal rate of return note >20% >20% >20%  

Download as excel file

CER
Half year 2011 £m
Asia
insurance operations
US
insurance operations
UK
insurance operations
Group Total

Note

The internal rate of return (IRR) is equivalent to the discount rate at which the present value of the post-tax cash flows expected to be earned over the lifetime of the business written in shareholder-backed life funds is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is equal to the amount required to pay acquisition costs and set up statutory reserves less premiums received, plus encumbered capital. The impact of the time value of options and guarantees is included in the calculation.

Free surplus invested in new business (129) (139) (33) (301)
Increase in required capital 49 126 40 215
Net worth invested in new business (80) (13) 7 (86)
Value of in-force created by new business 433 319 101 853
Post-tax new business profit for the period 353 306 108 767
Tax 115 164 38 317
Pre-tax new business profit for the period 468 470 146 1,084
New business sales (APE) 743 688 409  
New business margins (% APE) 63% 68% 36%  
Internal rate of return note >20% >20% >20%  

Overall, the Group wrote £2,030 million of sales on an APE basis in the first half of 2012 (2011: £1,824 million) generating a post-tax new business contribution to embedded value of £818 million (2011: £756 million). To support these sales, we invested £364 million of capital (2011: £297 million) equivalent to 26 per cent (2011: 21 per cent) of underlying free surplus generated by the life in-force and asset management businesses. The 2012 reinvestment rate of 26 per cent is trending back towards 2010 norms. A favourable business mix, together with other one-off factors, meant that 2011 had a reinvestment rate of 21 per cent, lower than the recent average.

In Asia, investment in new business was £162 million, a 26 per cent increase over the £129 million invested in the first half of 2011. This compares to a 21 per cent increase in new business sales (APE) in the period. For each £1 million of free surplus invested we generated £2.6 million of post-tax new business contribution to embedded value (2011: £2.7 million) the change being driven in part by the impact of lower interest rates on the level of reserves established on policy inception particularly in Hong Kong. The average free surplus undiscounted payback period for business written in the first half of 2012 was four years (2011: four years).

In the US, investment in new business was £180 million (2011: £135 million) and compares to a 7 per cent increase in APE new business sales in the period. For each £1 million of free surplus invested we generated £1.6 million of post-tax new business contribution to embedded value (2011: £2.2 million). This lower return reflects both a higher proportion of general account business being sold in the year and following falls in interest rates, a more punitive valuation interest rate used to establish liabilities upon policy inception. The average free surplus undiscounted payback period for business written in the first half of 2012 was two years (2011: two years).

In the UK, investment in new business was lower, at £22 million compared to £33 million in the same period last year. This investment generated APE sales which were comparable to prior year at £412 million in 2012 (2011: £409 million). For each £1 million of free surplus invested we generated £5.3 million of post-tax new business contribution to embedded value higher than the £3.3 million achieved in 2011 predominantly due to a change in business mix to an increased level of higher margin annuity business and with-profits business, which benefits from no capital investment by shareholders being required. Prudential competes selectively in the UK’s retirement savings and income market, focusing on writing profitable new business, sustainable cash generation and capital preservation, rather than pursuing top-line sales growth. The average free surplus undiscounted payback period for shareholder-backed business written in the first half of 2012 was three years (2011: five years).

Holding company cash flow

Download as excel file

2012 £m 2011 £m
Half year Half year Full year

Note

Including central finance subsidiaries.

Net cash remitted by business units      
UK net remittances to the Group      
UK Life fund paid to the Group 216 223 223
Shareholder-backed business:      
Other UK paid to the Group 14 42 116
Group invested in UK (42)
Total shareholder-backed business 14 42 74
Total UK net remittances to the Group 230 265 297
US remittances to the Group 247 320 322
       
Asia net remittances to the Group      
Asia paid to the Group:      
Long-term business 170 147 289
Other operations 31 20 55
  201 167 344
Group invested in Asia:      
Long-term business (12) (50)
Other operations (75) (50) (88)
  (75) (62) (138)
Total Asia net remittances to the Group 126 105 206
       
M&G remittances to the Group 98 213
PruCap remittances to the Group 25 67
Net remittances to the Group from business units 726 690 1,105
Net interest paid (136) (135) (282)
Tax received 89 100 181
Corporate activities (70) (70) (139)
Solvency II costs (31) (36) (56)
Total central outflows (148) (141) (296)
Operating holding company cash flow before dividend note 578 549 809
Dividend paid (440) (439) (642)
Operating holding company cash flow after dividend note 138 110 167
Issue of hybrid debt, net of costs 340 340
Repayment of subordinated debt (333)
Hedge purchase cost (equity tail risks) (48)
Other cash payments (68) (205) (205)
Total holding company cash flow 22 245 (31)
Cash and short-term investments at beginning of period 1,200 1,232 1,232
Foreign exchange movements (1) (1)
Cash and short-term investments at end of period 1,222 1,476 1,200

Holding company cash flow

We continue to manage cash flows across the Group with a view to achieving a balance between ensuring sufficient net remittances from the businesses to cover the progressive dividend (after corporate costs) and maximising value for shareholders through the retention of the free surplus generated at business unit level, so that it can be reinvested in the profitable opportunities available to the Group. On this basis, the holding company cash flow statement at an operating level should ordinarily balance close to zero before exceptional cash flows, but from time to time additional remittances from business operations will be made to provide the Group with greater financial flexibility at the corporate centre.

Operating holding company cash flow for the first half of 2012 before the shareholder dividend was £578 million, £29 million higher than 2011. After deducting the shareholder dividend the operating holding company cash flow was positive £138 million (2011: positive £110 million).

Cash remittances to the Group from business units

As previously highlighted, the Group focuses on the generation of free surplus by each of the Group’s business units and then determines the use of this surplus, balancing between financing new business growth, retaining surplus capital in operations to absorb the effect of market shocks and remitting funds to the Group to cover central outgoings, including the shareholder dividend.

The holding company received £726 million of net cash remittances from the business units in the first half of 2012, an increase of £36 million from the first half of 2011.

Asia continues to be cash positive, with its remittances to the Group in the first half of 2012 at £126 million (2011: £105 million). Asia remains on track to meet the £300 million net remittance objective in 2013.

Cash received from Jackson of £247 million for 2012 is lower than the £320 million remitted in the first half of 2011 as annual remittances return to a more sustainable level. This follows the exceptional release of excess surplus made in the prior year.

The UK insurance operations remitted £230 million in the first half of 2012 (2011: £265 million). Total shareholder-backed business net remittances in the first half of 2012 were £14 million (2011: £42 million). Cash from the annual with-profits transfer to shareholders reduced from £223 million to £216 million in 2012. The UK remains on track to deliver £350 million of cash to the Group in 2013.

M&G and PruCap collectively remitted £123 million in the first half of 2012, as the asset management businesses returned to the normal practice of remitting funds in both halves of the year.

In the course of 2009 and 2010, the Group raised certain financing contingent on future profits of the UK and Hong Kong life insurance operations which increased the cash remitted by business units by £245 million in aggregate. This was done in order to increase the financial flexibility of the Group during the investment market crisis. Since then principal and interest repayments have reduced the cash available to be remitted to the Group by these businesses. At the beginning of 2012 there was a remaining balance of £145 million to be paid. Based on current plans, payment of this amount will reduce the 2012 remittances from these businesses.

Net central outflows and other movements

Net central outflows increased to £148 million in the first half of 2012 (2011: £141 million). Lower Solvency II spend in the first half of 2012 was offset by lower tax receipts in the same period.

After central costs, there was a net cash inflow before dividend of £578 million in the first half of 2012 compared to £549 million in the first half of 2011. The dividend paid was £440 million in the first half of 2012 compared to £439 million in the same period in 2011.

Outside of the normal recurring central cash flow items and in light of the heightened risks surrounding the Eurozone, we incurred £48 million for short-dated hedges to provide downside protection against severe equity market falls. We also incurred £68 million of other cash payments in the first half of 2012, representing payments to the UK tax authorities following the settlement reached in 2010 on historic tax issues. A final instalment of a similar amount will be paid in 2013.

The overall holding company cash and short-term investment balances at 30 June 2012 was broadly level with the balance held at the end of 2011 at £1.2 billion. The company seeks to maintain a central cash balance in excess of £1 billion.

Summary

Download as excel file

30 Jun
2012
£m
30 Jun
2011*
£m
31 Dec
2011*
£m

* The Group has adopted altered US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2011 comparative component of EEV shareholders' funds for the IFRS basis shareholders' equity and the additional EEV basis retained profit have been adjusted for the retrospective application of the improvement as if the new accounting policy had always applied as described in note B to the IFRS financial statements. Total EEV shareholders' funds for the half year 2011 and full year 2011 are not altered by the change of IFRS policy.

Goodwill attributable to shareholders 1,467 1,469 1,465
Investments 260,298 245,282 250,605
Holding company cash and short-term investments 1,222 1,476 1,200
Other 19,638 20,470 19,475
Total assets 282,625 268,697 272,745
Less: liabilities
Policyholder liabilities 236,419 221,432 227,075
Unallocated surplus of with-profits funds 9,802 10,872 9,215
246,221 232,304 236,290
Less: shareholders' accrued interest in the long-term business (11,313) (11,003) (11,073)
234,908 221,301 225,217
Core structural borrowings of shareholders' financed operations (IFRS book value basis) 3,596 3,998 3,611
Other liabilities including non-controlling interest 23,516 24,405 24,280
Total liabilities and non-controlling interest 262,020 249,704 253,108
EEV basis net assets 20,605 18,993 19,637
Share capital and premium 2,014 1,998 2,000
IFRS basis shareholders' reserves 7,278 5,992 6,564
IFRS basis shareholders' equity 9,292 7,990 8,564
Additional EEV basis retained profit 11,313 11,003 11,073
EEV basis shareholders' equity (excluding non-controlling interest) 20,605 18,993 19,637

Financial instruments

The Group is exposed to financial risk through its financial assets, financial liabilities and policyholder liabilities. The key financial risk factors that affect the Group include market risk, credit risk and liquidity risk. Information on the Group’s exposure to financial risk factors, and our financial risk management objectives and policies, is provided both in the Risk and Capital Management section and the financial statements. Further information on the sensitivity of the Group’s financial instruments to market risk and its use of derivatives is also provided in the financial statements.

The Group’s investments are discussed in further detail in the 'Risk and capital management' section B.1.b ‘Credit risk’.

Download as excel file

Half year
2012 £m
Half year
2012 £m
Shareholder-backed business Asia US UK Total Total
At 1 January 18,269 69,189 46,048 133,506 122,183
Premiums 1,938 7,303 2,018 11,259 10,782
Surrenders (949) (2,083) (1,307) (4,339) (4,142)
Maturities/Deaths (98) (451) (1,170) (1,719) (1,626)
Net cash flows 891 4,769 (459) 5,201 5,014
Investment-related items and other movements 497 1,906 1,507 3,910 2,832
Foreign exchange translation differences (233) (600) (833) (1,453)
At 30 June 19,424 75,264 47,096 141,784 128,576
With-profits funds
Policyholder liabilities 94,635 92,856
Unallocated surplus 9,802 10,872
Total at 30 June 104,437 103,728
Total policyholder liabilities including unallocated surplus at 30 June 246,221 232,304

Policyholder liabilities and unallocated surplus of with-profits funds

Policyholder liabilities relating to shareholder-backed business grew by £8.3 billion from £133.5 billion at 31 December 2011 to £141.8 billion at 30 June 2012.

The increase reflects positive net flows (premiums (net of charges) less surrenders, maturities and deaths) of £5.2 billion in the first half of 2012 (2011: £5.0 billion), driven by strong inflows in the US (£4.8 billion) and Asia (£0.9 billion). Net flows in Asia have increased by 11 per cent to £891 million in the first half of 2012 (2011: £803 million). Additionally, the rate of surrenders in Asia (expressed as a percentage of opening liabilities) was 5.2 per cent in the first half of 2012 which is broadly in line with the equivalent rate in the first half of 2011.

Other movements include negative foreign exchange movements of £833 million (2011: negative £1,453 million) together with positive investment-related and other items of £3,910 million. Investment-related and other items increased from £2,832 million in the first half of 2011 to £3,910 million in the first half of 2012 principally following improvements in the bond and equity markets during the period.

During the first half of 2012, the unallocated surplus, which represents the excess of assets over policyholder liabilities for the Group’s with-profits funds on an IFRS basis, reduced by 10 per cent from £10.9 billion at 30 June 2011 to £9.8 billion at 30 June 2012.

Download as excel file

Shareholders’ net borrowings at 30 June 2012:

30 June 2012 £m 31 Dec 2011 £m
IFRS
basis
Mark to
market
value
EEV
basis
IFRS
basis
Mark to
market
value
EEV
basis
Perpetual subordinated Capital securities
(Innovative Tier 1)
1,808 47 1,855 1,823 (10) 1,813
Subordinated notes (Lower Tier 2) 830 140 970 829 120 949
2,638 187 2,825 2,652 110 2,762
Senior debt:
2023 300 73 373 300 56 356
2029 249 33 282 249 21 270
Holding company total 3,187 293 3,480 3,201 187 3,388
Prudential Capital 250 250 250 250
Jackson surplus notes (Lower Tier 2) 159 26 185 160 17 177
Total 3,596 319 3,915 3,611 204 3,815
Less: Holding company cash and short-term investments (1,222) (1,222) (1,200) (1,200)
Net core structural borrowings of shareholder-financed operations 2,374 319 2,693 2,411 204 2,615

Shareholders’ net borrowings and ratings

The Group’s core structural borrowings at 30 June 2012 totalled £3.6 billion on an IFRS basis, comparable to £3.6 billion at 31 December 2011.

After adjusting for holding company cash and short-term investments of £1,222 million, net core structural borrowings at 30 June 2012 were £2,374 million compared with £2,411 million at 31 December 2011. The decrease of £37 million represents the net fall in borrowings of £15 million, mainly reflecting the foreign exchange movements in the period, together with a £22 million rise in holding company cash and short-term investments.

In addition to its core structural borrowings set out above, Prudential also has in place an unlimited global commercial paper programme. As at 30 June 2012, we had issued commercial paper under this programme totalling £516 million, US$2,390 million, €317 million, CHF20 million and AU$12 million. The central treasury function also manages our £5 billion medium-term note (MTN) programme, covering both core and non-core borrowings. In April 2012 Prudential refinanced an existing internal £200 million issue under this programme. Under the programme at 30 June 2012 the outstanding subordinated debt was £835 million, US$1,300 million and €20 million and the senior debt outstanding was £250 million. In addition, Prudential’s holding company has access to £2.1 billion of syndicated and bilateral committed revolving credit facilities, provided by 17 major international banks, expiring between 2013 and 2017. Apart from small drawdowns to test the process, these facilities have never been drawn, and there were no amounts outstanding at 30 June 2012. The commercial paper programme, the MTN programme and the committed revolving credit facilities are all available for general corporate purposes and to support the liquidity needs of Prudential’s holding company and are intended to maintain a strong and flexible funding capacity.

Prudential manages the Group’s core debt within a target level consistent with its current debt ratings. At 30 June 2012, the gearing ratio (debt, net of cash and short-term investments, as a proportion of EEV shareholders’ funds plus net debt) was 10.3 per cent, compared with 10.9 per cent at 31 December 2011. Prudential plc has strong debt ratings from Standard & Poor’s, Moody’s and Fitch. Prudential’s long-term senior debt is rated A+, A2 and A from Standard & Poor’s, Moody’s and Fitch, while short-term ratings are A-1, P-1 and F1 respectively.

The financial strength of PAC is rated AA by Standard & Poor’s, Aa2 by Moody’s and AA by Fitch.

Jackson National Life Insurance Company’s financial strength is rated AA by Standard & Poor’s, A1 by Moody’s and AA by Fitch.

Financial position on defined benefit pension schemes

The Group currently operates three defined benefit schemes in the UK, of which by far the largest is the Prudential Staff Pension Scheme (PSPS) and two smaller schemes, Scottish Amicable (SAPS) and M&G.

Defined benefit schemes in the UK are generally required to be subject to a full actuarial valuation every three years, in order to assess the appropriate level of funding for schemes in relation to their commitments. The valuation of PSPS as at 5 April 2011, was finalised in the second quarter of 2012. The valuation demonstrated the scheme to be 111 per cent funded by reference to the Scheme Solvency Target that forms the basis of the scheme’s funding objective. Given the strength of the scheme, future funding (excluding expenses) has been reduced to the minimum level of contributions required under the scheme rules effective from July 2012. Excluding expenses, we estimate the actual cash contribution to the fund will fall to £6 million per annum from the £50 million per annum paid previously. The valuation basis under IAS 19 for the Group financial statements differs markedly from the full triennial actuarial valuation basis. The agreement to recognise contributions at the minimum level permitted means that the Group now recognises on its IFRS statement of financial position part of the surplus valued in accordance with IAS 19, which represents the amount which is recoverable through the reduced future contributions. At 30 June 2012 the total IAS 19 surplus, measured on an economic basis net of related tax relief, was £1,253 million (31 December 2011: £1,391 million), of which £147 million (2011: £nil) has been recognised by the Group.

The actuarial valuation of SAPS as at 31 March 2008 demonstrated the scheme to be 91 per cent funded. Based on this valuation and subsequent agreement with the Trustees, £13.1 million per annum of deficit funding is currently being paid into the scheme. The actuarial valuation of SAPS as at 31 March 2011 is currently being finalised, but we anticipate the current level of funding to continue, extending our commitment to pay deficit funding.

The actuarial valuation of the M&G pension scheme as at 31 December 2008 demonstrated the scheme to be 76 per cent funded. Based on this valuation, deficit funding amounts designed to eliminate the actuarial deficit over a five year period have been agreed with £14.1 million being paid in each of 2010 and 2011 half years and £9.3 million per annum for the subsequent three years. In 2011, the Group agreed with the Trustee to pay an additional funding of £1.2 million per annum from January 2012 until the conclusion of the actuarial valuation as at 31 December 2011, which is currently in progress.

As at 30 June 2012, on the Group IFRS statement of financial position, the shareholders’ share of the net surplus for these UK schemes amounted to a £59 million surplus net of related tax relief (31 December 2011: £17 million net liability). The total share attributable to the PAC with-profits fund amounted to a net surplus of £92 million net of related tax relief (31 December 2011: £38 million net liability).

Financial strength of the UK Long-term Fund

On a realistic valuation basis, with liabilities recorded on a market consistent basis, the free assets were valued at approximately £6.1 billion at 30 June 2012 (31 December 2011: £6.1 billion), before a deduction for the risk capital margin. The value of the shareholders’ interest in future transfers from the UK with-profits fund is estimated at £2.1 billion (31 December 2011: £2.0 billion). The financial strength of PAC is rated AA by Standard & Poor’s, Aa2 by Moody’s and AA by Fitch Ratings.

Despite the continued volatility in financial markets, Prudential UK’s with-profits fund performed relatively strongly achieving a 3.2 per cent pre-tax investment return for policyholder asset shares during the first half of 2012.

 
 

Reporting tools

Save pages of the report
to download, print or email

View your pages

Feedback

Your comments and ideas help us
to shape future reports to suit your
needs

Tell us your views