ANNUAL REPORT 2001 - Prudential plc

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