ANNUAL REPORT 2001 - Prudential plc

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NOTES ON THE ACHIEVED PROFITS BASIS SUPPLEMENTARY INFORMATION CONTINUED 15. Implementation of FRS 19 on Deferred Taxation The Company has adopted FRS 19 on deferred taxation in its 2001 financial statements with restated comparative results for 2000. The principal impact of the change from the accounting policy applied under SSAP 15 is to provide additional deferred tax on unrealised appreciation on investments. The additional deferred tax provision is reflected in the fund for future appropriations for with-profits long-term business and in the profit and loss reserve for shareholder backed long-term business. Consistent with previous practice and the achieved profits methodology, expected future tax cash flows related to in force and new long-term business effectively continue to be discounted. The Company has chosen not to adopt the discounting option available under FRS 19 in respect of the deferred tax provisions of non long-term business operations. 16. Results Sensitivity to Alternative Assumptions (i) Estimated results for 2000 based on economic assumptions applied for the 2001 results (a) Operating profit Memorandum only Estimated Estimated profit from new business pre-tax unwind of Pre-tax Tax Post-tax discount £ m £ m £ m £ m UK Operations 208 (62) 146 361 Jackson National Life* 206 (113) 93 198 Prudential Asia 156 (45) 111 54 Prudential Europe 9 (3) 6 7 Total 579 (223) 356 620 *Jackson National Life: Before capital charge 132 Capital charge (39) After capital charge 93 (b) Shareholders' funds If the economic assumptions applied for 2001 had been in place at 31 December 2000 the achieved profits basis shareholders' funds at that date would have been lower by £315m. This represents a pre-tax loss of £482m less related tax credit of £167m. These figures are analysed by business operation in note 14. (ii) Estimated impact on 2001 results based on alternative assumptions The key assumptions that affect the Group’s results are economic, in particular expected rates of investment return and risk discount rates. The sensitivity of the 2001 results to changes in these assumptions is set out below: (a) 2001 Pre-tax operating profit from new business Pre-tax expected long-term nominal rates of investment return: Increase in rates of 1% 105 Decrease in rates of 1% (99) Risk discount rates: Increase in rates of 1% (72) Decrease in rates of 1% 83 (b) 31 December 2001 shareholders' funds Pre-tax expected long-term nominal rates of investment return: Increase in rates of 1% 824 Decrease in rates of 1% (779) Risk discount rates: Increase in rates of 1% (494) Decrease in rates of 1% 592 17. UK Re-engineering Costs Details of the re-engineering costs charged in the year are explained in note 8 on page 54. After including amounts borne by the main with-profits fund but attributed to shareholders, the costs recognised on the achieved profits basis were £64m. 18. Development Expenses Development expenses (excluding Asia regional head office costs) were up from £21m to £48m largely due to branding and re-launch costs of our operations in Japan, and higher development expenses in Europe including costs of establishing our business in Germany. Group Total £m 84 Prudential plc Annual Report 2001
THE ACHIEVED PROFITS BASIS OF FINANCIAL REPORTING The achieved profits basis of financial reporting is based on conventional accounting principles and recognises profit as it accrues over the life of an insurance contract. Although total profit from each contract calculated under this method is the same as under the modified statutory basis of reporting used for the main accounts, the timing of profit recognition is advanced. The achieved profits basis can be illustrated by considering an individual contract. Using prudent best estimate assumptions of the main elements of future income and expenditure – investment return, claims, lapses, surrenders and administration expenses – the total profit expected to be earned from the contract can be estimated at the time of its sale. The total profit expected to be earned is then allocated to individual financial years by application of a discount rate, which allows for both the time value of money and the risk associated with the future shareholder cash flows. Provided that the actual outcome is in line with the original assumptions, profits will be earned in each accounting period as the discount rate unwinds. The balance of profit not allocated to future years is recognised in the year of sale and is known as the profit from new business. The unwind of the discount rate and variances between actual and assumed experience during the remainder of the contract period produce the profit on business in force. The additional profit recognised at an earlier stage under the achieved profits method is retained within the long-term funds and is known as the shareholders’ accrued interest in the long-term business. The achieved profits basis is designed to report profit which reflects business performance during the year under review, particularly new business sales and fluctuations between actual and assumed experience. The use of the achieved profits basis does not affect either the cash surpluses which are released to shareholders’ funds from the longterm funds, which continue to be determined by the directors following statutory actuarial valuations of the funds, or amounts available for dividend payments to shareholders. The additional profit recognised using the achieved profits basis is represented by the shareholders’ accrued interest in the long-term business and, when combined with shareholders’ funds reported on the statutory basis, provides an improved measure of total shareholders’ funds of the Group. INDEPENDENT AUDITORS’ REPORT ON THE ACHIEVED PROFITS BASIS SUPPLEMENTARY INFORMATION TO THE MEMBERS OF PRUDENTIAL PLC We have reviewed the supplementary information on pages 75 to 84 which have been prepared on the basis set out in note 1 on page 77. Respective Responsibilities of Directors and Auditors The directors are responsible for the preparation of the Annual Report, including as described on page 25, the financial statements and supplementary information. Our responsibilities are outlined on page 71. Basis of Opinion Our review included examination, on a test basis, of evidence relevant to the amounts and disclosures in the supplementary information. It also included tests of calculation and of the extraction of data from the underlying records. Opinion In our opinion, the achieved profits basis Group profit for the year ended 31 December 2001 and shareholders’ interest in the longterm business at that date have been properly prepared on the basis of the assumptions set out on page 77 and in accordance with the methodology and disclosure requirements contained in the guidance on ‘Supplementary Reporting for long-term insurance business (the achieved profits method)’, issued by the Association of British Insurers in December 2001. KPMG Audit Plc Chartered Accountants Registered Auditor London 14 March 2002 85 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
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REMUNERATION REPORT The Remuneratio
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Directors’ Long-term Incentive Pl
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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 and 82: NOTES ON THE ACHIEVED PROFITS BASIS
Page 83 and 84: 6. Cost of Capital On the achieved
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Page 87: 14. Reconciliation of Movement in S
Page 91 and 92: HOW TO CONTACT US Prudential plc La
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ANNUAL REPORT 2001 - Prudential plc

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