ANNUAL REPORT 2001 - Prudential plc

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NOTES ON THE ACHIEVED PROFITS BASIS SUPPLEMENTARY INFORMATION CONTINUED 4. Investment Return (i) Profit before tax With the exception of fixed interest investments held by Jackson National Life, investment gains during the period (to the extent that changes in capital values do not directly match changes in liabilities) are included in the profit for the year and shareholders’ funds as they arise. In the case of Jackson National Life, it is assumed that fixed income investments will normally be held until maturity. Therefore unrealised gains and losses on these securities are not reflected in either the achieved profits or statutory basis results and, except on realisation or impairment of investments, only income received and the amortisation of the difference between cost and maturity values are recognised to the extent attributable to shareholders. (ii) Operating profit Investment returns, including investment gains, in respect of long-term insurance business are recognised in operating results at the expected long-term rate of return. For the purposes of calculating investment return to be recognised in operating results of UK operations, where equity holdings are a significant proportion of investment portfolios, values of assets at the beginning of the reporting period are adjusted to remove the effects of short-term market volatility. For the purposes of determining the longer-term returns for 2001, realised gains and losses arising (including impairment losses) on debt securities of Jackson National Life have been averaged over five years and combined with actual interests and dividends. For equity related investments of Jackson National Life a longer-term rate of return of 7.75% has been assumed. This has been applied to the monthly average carrying value of such investments after excluding the estimated effect of short-term market movements. In prior periods longer-term investment returns included within UK basis operating profit were estimated as the aggregate of investment income and averaged realised gains and losses for both fixed maturities and other types of security. Comparative results have not been restated for the refinement of policy as the effect is immaterial to the results for those periods. 5. Supplemental Earnings Information The Group's supplemental measure of its results and reconciliation of Achieved Profits basis operating profit based on longer-term investment returns before amortisation of goodwill to Achieved Profits basis profit on ordinary activities, including the related basic earnings per share amounts, are as follows: Before Minority Basic tax Tax** Post-tax interests** Net Earnings £m £m £m £m £m per share** 2001 Based on operating profit after tax and minority interests before amortisation of goodwill and merger break fee 1,186 (370) 816 12 828 41.9p Adjustment for amortisation of goodwill (95) – (95) – (95) (4.8)p Adjustment from post-tax longer-term investment returns to post-tax actual investment returns (after related minority interests)* (1,402) 422 (980) 13 (967) (48.9)p Effect of change of economic assumptions (482) 167 (315) – (315) (16.0)p Adjustment for merger break fee, net of related expenses 338 (6) 332 – 332 16.8p Based on loss for the financial year after minority interests (455) 213 (242) 25 (217) (11.0)p 2000** Based on operating profit after tax and minority interests before amortisation of goodwill 1,029 (288) 741 11 752 38.4p Adjustment for amortisation of goodwill (84) – (84) – (84) (4.3)p Adjustment from post-tax longer-term investment returns to post-tax actual investment returns (after related minority interests)* (440) 104 (336) 13 (323) (16.5)p Adjustment for profit on flotation of Egg and business disposals 223 (57) 166 – 166 8.5p Based on profit for the financial year after minority interests 728 (241) 487 24 511 26.1p The average number of shares for 2001 is 1,978m (1,959m). * The adjustment from post-tax longer-term returns to post-tax actual investment returns includes investment return that is attributable to external equity investors in two investment funds managed by PPM America. These two funds are consolidated as quasi-subsidiaries but have no net impact on pre-tax or post-tax operating profit. Total profit, before and after tax, incorporating the adjustment from longerterm returns to actual investment returns includes losses of £13m (£13m) attributable to these minority interests. ** The tax charge, minority interests and earnings per share for 2000 have been restated for minor changes to reflect the implementation of FRS 19 on deferred taxation (see note 15). 78 Prudential plc Annual Report 2001
6. Cost of Capital On the achieved profits basis, a charge is deducted from the annual result and the balance sheet value for the cost of capital supporting solvency requirements for the Group’s long-term business. This cost is the difference between the nominal value of solvency capital and the present value, at risk discount rates, of the projected release of this capital and investment earnings on the capital. The annual result is impacted by the movement in this cost from year to year which comprises a charge against new business profit with a partial offset for the release of capital requirements for business in force. Where solvency capital is held within a with-profits long-term fund, the value placed on surplus assets in the fund is already discounted to reflect its release over time and no further adjustment is necessary in respect of solvency capital. However, where business is funded directly by shareholders, principally at Jackson National Life, the solvency capital requires adjustments to reflect the cost of that capital. In determining the cost of capital of Jackson National Life, it has been assumed that an amount equal to 200% of the risk based capital required by the US supervisory authorities must be retained. The impact of the related capital charge is to reduce Jackson National Life’s shareholders’ funds by £222m (£222m). 7. Foreign Currency Translation Foreign currency revenue has been translated at average exchange rates for the year. Foreign currency assets and liabilities have been translated at year-end rates of exchange. 8. Operating Profit from New Business 2001 2000 Pre-tax Tax Post-tax Pre-tax Tax Post-tax £ m £ m £ m £m £m £m UK Operations 243 (73) 170 230 (69) 161 Jackson National Life* 167 (94) 73 221 (101) 120 Prudential Asia 255 (74) 181 153 (44) 109 Prudential Europe 8 (2) 6 9 (3) 6 Total 673 (243) 430 613 (217) 396 *Jackson National Life net of tax profit: Before capital charge 108 155 Capital charge (note 6) (35) (35) After capital charge 73 120 9. Operating Profit from Business in Force 2001 2000 £m £m UK Operations* Unwind of discount 384 429 Change of renewal expense assumption resulting from closure of direct sales force (2000 change of persistency assumption) 15 30 Cost of strengthened assumption for required capital for shareholder backed business (16) – Experience variances and other items (6) 19 377 478 Jackson National Life Unwind of discount 200 218 Return on surplus assets (over target surplus) 44 34 Averaged realised investment (losses) gains (note 10) (74) 19 Experience variances against current assumptions: Spread (12) 39 Persistency (7) (24) Mortality and morbidity (2) (10) Expenses (16) (37) Loss from strengthening operating assumptions (2000 – persistency and expense assumptions) (13) (258) Other 16 17 136 (2) 79 Prudential plc Annual Report 2001
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PRUDENTIAL PLC ANNUAL REPORT 2001
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PRUDENTIAL AT A GLANCE PRUDENTIAL
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GROUP FINANCIAL HIGHLIGHTS 2001 200
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GROUP CHIEF EXECUTIVE’S REVIEW WE
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The fastest growing age group in th
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est growth prospects in the market
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Egg 2001 was another year of outsta
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Over the last five years, JNL has m
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equivalent (APE) basis were £434 m
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69 per cent). The new business marg
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differences and other items. The in
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However, we have not been discussin
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CORPORATE SOCIAL RESPONSIBILITY REV
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Executive Directors 1. Jonathan Blo
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Nomination Committee Sir Roger Hurn
Page 31 and 32: REMUNERATION REPORT The Remuneratio
Page 33 and 34: Directors’ Long-term Incentive Pl
Page 35 and 36: Directors’ Share Options The Rest
Page 37 and 38: DIRECTORS’ REPORT Principal Activ
Page 39 and 40: SUMMARY OF STATUTORY BASIS RESULTS
Page 41 and 42: Restated † 2001 2000 Long-term Bu
Page 43 and 44: CONSOLIDATED STATEMENT OF TOTAL REC
Page 45 and 46: Restated † 2001 2000 Liabilities
Page 47 and 48: CONSOLIDATED CASH FLOW STATEMENT YE
Page 49 and 50: 3. Significant Accounting Policies
Page 51 and 52: Reinsurance In the normal course of
Page 53 and 54: Linked business funds Certain long-
Page 55 and 56: 5. Supplemental Earnings Informatio
Page 57 and 58: 7. Segmental Information - New Busi
Page 59 and 60: 9. Segmental Information - Net Asse
Page 61 and 62: 11. Jackson National Life - Additio
Page 63 and 64: 15. Investment Expenses and Charges
Page 65 and 66: 16. Tax continued 2001 2000 £m £m
Page 67 and 68: 21. Fees Payable to Auditors KPMG K
Page 69 and 70: 27. Share Capital and Share Premium
Page 71 and 72: 31. Borrowings continued 2001 2000
Page 73 and 74: 32. Contingencies and Related Oblig
Page 75 and 76: INDEPENDENT AUDITORS’ REPORT TO T
Page 77 and 78: 2001 2000 1999 1998 1997 Analysis b
Page 79 and 80: SUMMARISED CONSOLIDATED PROFIT AND
Page 81: NOTES ON THE ACHIEVED PROFITS BASIS
Page 85 and 86: 10. Short-term Fluctuations in Inve
Page 87 and 88: 14. Reconciliation of Movement in S
Page 89 and 90: THE ACHIEVED PROFITS BASIS OF FINAN
Page 91 and 92: HOW TO CONTACT US Prudential plc La
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ANNUAL REPORT 2001 - Prudential plc

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