pru201303136k3.htm
 
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 March, 2013
 
 
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:
Prudential plc Full Year 2012 - EEV
 
European Embedded Value (EEV) basis results
 
Operating profit based on longer-term investment returnsnote (i)
 
Results analysis by business area
   
Note
2012 £m
2011 £m
       
note (v)
Asia operations
      
New business
2
1,266 
1,076 
Business in force
3
694 
688 
Long-term business
  
1,960 
1,764 
Eastspring investments
  
75 
80 
Development expenses
  
(7)
(5)
Total
  
2,028 
1,839 
US operations
      
New business
2
873 
815 
Business in force
3
737 
616 
Long-term business
  
1,610 
1,431 
Broker-dealer and asset management
  
39 
24 
Total
  
1,649 
1,455 
UK operations
      
New business
2
313 
260 
Business in force
3
553 
593 
Long-term business
  
866 
853 
General insurance commission
  
33 
40 
Total UK insurance operations
  
899 
893 
M&G
  
371 
357 
Total
  
1,270 
1,250 
Other income and expenditure
      
Investment return and other income
  
13 
22 
Interest payable on core structural borrowings
  
(280)
(286)
Corporate expenditure
  
(231)
(219)
Unwind of expected asset management marginnote (ii)
  
(56)
(53)
Total
  
(554)
(536)
RPI to CPI inflation measure change on defined benefit pension schemesnote (iii)
  
- 
45 
Solvency II implementation costsnote (iv)
  
(50)
(56)
Restructuring costsnote (iv)
  
(22)
(19)
Operating profit based on longer-term investment returnsnote (i)
  
4,321 
3,978 
Analysed as profits (losses) from:
      
New business
2
2,452 
2,151 
Business in force
3
1,984 
1,897 
Long-term business
  
4,436 
4,048 
Asset management
  
485 
461 
Other results
  
(600)
(531)
Total
  
4,321 
3,978 
 
 
Notes
 
(i)   EEV basis operating profit based on longer-term investment returns excludes the recurrent items of short-term fluctuations in investment returns, the mark to market value movements on core borrowings, the shareholders' share
       of actuarial and other gains and losses on defined benefit pension schemes, and the effect of changes in economic assumptions. In addition for 2012, operating profit excludes the gain arising on the acquisition of REALIC and
       the dilution of the Group's holding in PPM South Africa. The amounts for these items are included in total EEV profit attributable to shareholders. The Company believes that operating profit, as adjusted for these items, better
       reflects underlying performance. Profit before tax and basic earnings per share include these items together with actual investment returns.
 
(ii)  The value of future profits or losses from asset management and service companies that support the Group's covered insurance businesses are included in the profits for new business and the in-force value of the Group's long-
       term business. The results of the Group's asset management operations include the profits from the management of internal and external funds. For EEV basis reporting, Group shareholders' other income is adjusted to deduct
       the unwind of the expected margin for the year arising from the management of the assets of the covered business (as defined in note 1(a)) by the Group's asset management businesses. The deduction is on a basis consistent
       with that used for projecting the results for covered insurance business. Group operating profit accordingly includes the variance between actual and expected profit in respect of management of the covered business assets.
 
(iii) During 2011 the Group altered its inflation measure basis for future statutory increases to pension payments for certain tranches of its UK defined benefit pension schemes. This reflected the UK Government's decision to
       replace the basis of indexation from RPI with CPI. This resulted in a credit to operating profit for 2011 on an IFRS basis of £42 million and an additional £3 million recognised on the EEV basis.
 
(iv) Restructuring costs comprise the charge of £(19) million recognised on an IFRS basis and an additional £(3) million recognised on the EEV basis for the shareholders' share of restructuring costs incurred by the PAC with-
       profits fund. Solvency II implementation costs comprise the charge of £(48) million recognised on an IFRS basis and an additional £(2) million recognised on the EEV basis.
 
(v)  The comparative results have been prepared using previously reported average exchange rates for the year.
 
 
Summarised consolidated income statement
  
 
Note
2012 £m
2011 £m
Operating profit based on longer-term investment returns
      
Asia operations
  
2,028 
1,839 
US operations
  
1,649 
1,455 
UK operations:
      
 
UK insurance operations
  
899 
893 
 
M&G
  
371 
357 
     
1,270 
1,250 
Other income and expenditure
  
(554)
(536)
RPI to CPI inflation measure change on defined benefit pension schemes
  
- 
45 
Solvency II implementation costs
  
(50)
(56)
Restructuring costs
  
(22)
(19)
Operating profit based on longer-term investment returns
  
4,321 
3,978 
Short-term fluctuations in investment returns
6
538 
(907)
Mark to market value movements on core borrowings
10
(380)
(14)
Shareholders' share of actuarial and other gains and losses on defined benefit
      
 
pension schemes
7
62 
23 
Effect of changes in economic assumptions
8
(16)
(158)
Gain on dilution of Group's holdings
4
42 
-
Gain on acquisition of REALIC
5
453 
-
Profit before tax attributable to shareholders (including actual
      
 
investment returns)
  
5,020 
2,922 
Tax attributable to shareholders' profit
12
(1,207)
(776)
Profit for the year
  
3,813 
2,146 
         
Attributable to:
      
 
Equity holders of the Company
  
3,813 
2,142 
 
Non-controlling interests
  
- 
4 
Profit for the year
  
3,813 
2,146 
 
Earnings per share (in pence)
    
 
Note
2012 £m
2011 £m
Based on operating profit including longer-term investment returns, after
      
 
related tax and non-controlling interests of £3,176 million
      
 
(2011: £2,930 million)
13
125.0 p
115.7 p
Based on profit after tax and non-controlling interests of £3,813 million
      
 
(2011: £2,142 million)
13
150.1 p
84.6 p
 
Dividends per share (in pence)
    
   
2012 £m
2011 £m
Dividends relating to reporting year:
    
 
Interim dividend
    8.40 p 
7.95 p 
 
Final dividend
20.79 p 
17.24 p 
Total
29.19 p 
25.19 p 
Dividends declared and paid in reporting year:
    
 
Current year interim dividend
 8.40 p 
7.95 p 
 
Final dividend for prior year
17.24 p 
17.24 p 
Total
25.64 p 
25.19 p 
 
Movement in shareholders' equity (excluding non-controlling interests)
  
       
Note
2012 £m
2011 £m
Profit for the year attributable to equity shareholders
  
3,813 
2,142 
Items taken directly to equity:
      
 
Exchange movements on foreign operations and net investment hedges:
      
   
Exchange movements arising during the year
  
(467)
(90)
   
Related tax
  
(2)
(68)
 
Dividends
  
(655)
(642)
 
New share capital subscribed
  
17 
17 
 
Reserve movements in respect of share-based payments
  
42 
44 
 
Treasury shares:
      
   
Movement in own shares in respect of share-based payment plans
  
(13)
(30)
   
Movement in Prudential plc shares purchased by unit trusts
      
     
consolidated under IFRS
  
36 
(5)
 
Mark to market value movements on Jackson assets backing surplus and
      
   
required capital:
      
   
Mark to market value movements arising during the year
  
53 
96 
   
Related tax
  
(18)
(34)
Net increase in shareholders' equity
11
2,806 
1,430 
Shareholders' equity at beginning of year (excluding non-controlling interests)
11
19,637 
18,207 
Shareholders' equity at end of year (excluding non-controlling interests)
11
22,443 
19,637 
 
         
31 December 2012 £m
31 December 2011 £m
Comprising: 
  
Long-term
business operations 
Asset
management
and other operations  
Total
Long-term
business
operations 
Asset
management
and other operations  
Total 
Asia operations:
              
 
Net assets of operations
  
9,462 
207 
9,669 
8,510 
211 
8,721 
 
Acquired goodwill
  
239 
61 
300 
235 
61 
296 
         
9,701 
268 
9,969 
8,745 
272 
9,017 
US operations:
              
 
Net assets of operations
  
6,032 
108 
6,140 
5,082 
113 
5,195 
 
Acquired goodwill
  
- 
16 
16 
 - 
16 
16 
         
6,032 
124 
6,156 
5,082 
129 
5,211 
UK insurance operations:
              
 
Net assets of operations
  
6,772 
25 
6,797 
6,058 
29 
6,087 
M&G:
              
 
Net assets of operations
  
- 
392 
392 
 - 
229 
229 
 
Acquired goodwill
  
- 
1,153 
1,153 
 - 
1,153 
1,153 
         
- 
1,545 
1,545 
 - 
1,382 
1,382 
         
6,772 
1,570 
8,342 
 6,058 
1,411 
7,469 
Other operations:
              
 
Holding company net borrowings
            
   
  at market value
  
- 
(2,282)
(2,282)
 - 
(2,188)
(2,188)
 
Other net assets
  
- 
258 
258 
 - 
128 
128 
         
- 
(2,024)
(2,024)
 - 
(2,060)
(2,060)
Shareholders' equity at end of year
            
 
(excluding non-controlling interests)
22,505 
(62)
22,443 
19,885 
(248)
19,637 
Representing:
              
 
Net assets (liabilities)
  
22,266 
(1,292)
20,974 
19,650 
(1,478)
18,172 
 
Acquired goodwill
  
239 
1,230 
1,469 
235 
1,230 
1,465 
         
22,505 
(62)
22,443 
19,885 
(248)
19,637 
 
       
       
2012 
2011 
Net asset value per share (in pence)
      
Based on EEV basis shareholders' equity of £22,443 million (2011: £19,637 million)
  
878 p
771 p
Number of issued shares at year end (millions)
  
2,557 
2,548 
           
Return on embedded value*
  
16%
16%
* Return on embedded value is based on EEV operating profit after related tax and non-controlling interests, as shown in note 13, as a percentage of opening EEV basis shareholders' equity.
 
Summary statement of financial position
  
       
31 December
31 December
     
Note
2012 £m
2011 £m**
Total assets less liabilities, before deduction for insurance funds
  
274,863 
243,207 
Less insurance funds:*
      
 
Policyholder liabilities (net of reinsurers' share) and unallocated
      
   
surplus of with-profits funds
  
(264,504)
(234,643)
 
Less shareholders' accrued interest in the long-term business
  
12,084 
11,073 
       
(252,420)
(223,570)
Total net assets
11
 22,443 
 19,637 
           
Share capital
  
128 
127 
Share premium
  
1,889 
1,873 
IFRS basis shareholders' reserves
  
8,342 
6,564 
Total IFRS basis shareholders' equity
 11
10,359 
8,564 
Additional EEV basis retained profit
 11
12,084 
11,073 
Total EEV basis shareholders' equity (excluding non-controlling interests)
 11
22,443 
19,637 
 
*   Including liabilities in respect of insurance products classified as investment contracts under IFRS 4.
 
**  For IFRS reporting purposes, the Group has adopted updated 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 IFRS elements and additional EEV basis shareholders' interest for the comparative results for 2011 have been adjusted from those previously published for the retrospective application of the change as if the new accounting policy had always applied. This has resulted in a reallocation of £553 million for 2011 from IFRS basis shareholders' reserves to shareholders' accrued interest in the long-term business, with no overall effect on the EEV basis results.                                                                              
Notes on the EEV basis results
 
1 Basis of preparation, methodology and accounting presentation
 
The EEV basis results have been prepared in accordance with the EEV Principles issued by the European Insurance CFO Forum in May 2004 and expanded by the Additional Guidance on EEV disclosures published in October 2005. Where appropriate, the EEV basis results include the effects of adoption of International Financial Reporting Standards (IFRS).
 
The directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles. The EEV basis results for 2012 and 2011 have been derived from the EEV basis results supplement to the Company's statutory accounts for 2012. Except for the consequential effects of the change in accounting policy for deferred acquisition costs for IFRS reporting, as described in the footnotes to the summary statement of financial position, the 2011 results have been derived from the EEV basis results supplement to the Company's statutory accounts for 2011. The supplement included an unqualified audit report from the auditors.
               
(a) Covered business
The EEV results for the Group are prepared for 'covered business', as defined by the EEV Principles. Covered business represents the Group's long-term insurance business for which the value of new and in-force contracts is attributable to shareholders. The EEV basis results for the Group's covered business are then combined with the IFRS basis results of the Group's other operations. Under the EEV Principles, the results for covered business incorporate the projected margins of attaching internal asset management.
 
The definition of long-term business operations is consistent with previous practice and comprises those contracts falling under the definition for regulatory purposes together with, for US operations, contracts that are in substance the same as guaranteed investment contracts (GICs) but do not fall within the technical definition.
 
With two principal exceptions, covered business comprises the Group's long-term business operations. The principal exceptions are for the closed Scottish Amicable Insurance Fund (SAIF) and for the presentational treatment of the financial position of the Group's principal defined benefit pension scheme, the Prudential Staff Pension Scheme (PSPS), as described in note 1(c)(vi). A small amount of UK group pensions business is also not modelled for EEV reporting purposes.
SAIF is a ring-fenced sub-fund of the Prudential Assurance Company (PAC) long-term fund, established by a Court approved Scheme of Arrangement in October 1997. SAIF is closed to new business and the assets and liabilities of the fund are wholly attributable to the policyholders of the fund.
 
(b) Methodology
(i) Embedded value
Overview
The embedded value is the present value of the shareholders' interest in the earnings distributable from assets allocated to covered business after sufficient allowance has been made for the aggregate risks in that business. The shareholders' interest in the Group's long-term business comprises:
 
 
•     present value of future shareholder cash flows from in-force covered business (value of in-force   
 
   business), less deductions for:
 
         - the cost of locked-in required capital;
 
         - the time value of cost of options and guarantees;
 
•     locked-in required capital; and
 
•     shareholders' net worth in excess of required capital (free surplus).
 
The value of future new business is excluded from the embedded value.
 
Notwithstanding the basis of presentation of results (as explained in note 1(c)(iv)) no smoothing of market or account balance values, unrealised gains or investment return is applied in determining the embedded value or profit before tax. Separately, the analysis of profit is delineated between operating profit based on longer-term investment returns and other constituent items (as explained in note 1(c)(i)).
 
Valuation of in-force and new business
The embedded value results are prepared incorporating best estimate assumptions about all relevant factors including levels of future investment returns, expenses, persistency and mortality. These assumptions are used to project future cash flows. The present value of the future cash flows is then calculated using a discount rate which reflects both the time value of money and the non-diversifiable risks associated with the cash flows that are not otherwise allowed for.
 
Best estimate assumptions
Best estimate assumptions are used for the cash flow projections, where best estimate is defined as the mean of the distribution of future possible outcomes. The assumptions are reviewed actively and changes are made when evidence exists that material changes in future experience are reasonably certain.
 
Assumptions required in the calculation of the value of options and guarantees, for example relating to volatilities and correlations, or dynamic algorithms linking liabilities to assets, have been set equal to the best estimates and, wherever material and practical, reflect any dynamic relationships between the assumptions and the stochastic variables.
 
Principal economic assumptions
The EEV basis results for the Group's operations have been determined using economic assumptions where the long-term expected rates of return on investments and risk discount rates are set by reference to year end rates of return on government bonds.
 
Expected returns on equity and property asset classes and corporate bonds are derived by adding a risk premium, based on the Group's long-term view, to the risk-free rate.
     
The total profit that emerges over the lifetime of an individual contract as calculated using the embedded value basis is the same as that calculated under the IFRS basis. Since the embedded value basis reflects discounted future cash flows, under this methodology the profit emergence is advanced, thus more closely aligning the timing of the recognition of profits with the efforts and risks of current management actions, particularly with regard to business sold during the year.
 
New business
In determining the EEV basis value of new business, premiums are included in projected cash flows on the same basis of distinguishing annual and single premium business as set out for statutory basis reporting.
 
New business premiums reflect those premiums attaching to covered business, including premiums for contracts classified as investment products for IFRS basis reporting. New business premiums for regular premium products are shown on an annualised basis. Internal vesting business is classified as new business where the contracts include an open market option.
 
The contribution from new business represents profits determined by applying operating assumptions as at the end of the year.
 
For UK immediate annuity business and single premium Universal Life products in Asia, primarily Singapore, the new business contribution is determined by applying economic assumptions reflecting point of sale market conditions. This is consistent with how the business is priced as crediting rates are linked to yields on specific assets and the yield locked-in when the assets are purchased at the point-of-sale of the policy. For other business within the Group, end of period economic assumptions are used.
 
New business profitability is a key metric for the Group's management of the development of the business. In addition, new business margins are shown by reference to annual premium equivalents (APE) and the present value of new business premiums (PVNBP) and are calculated as the ratio of the value of new business profit to APE and PVNBP. APE are calculated as the aggregate of regular new business amounts and one-tenth of single new business amounts. PVNBP are calculated as equalling single premiums plus the present value of expected premiums of new regular premium business, allowing for lapses and other assumptions made in determining the EEV new business contribution.
 
Valuation movements on investments
With the exception of debt securities held by Jackson, investment gains and losses during the year (to the extent that changes in capital values do not directly match changes in liabilities) are included directly in the profit for the year and shareholders' equity as they arise.
 
The results for any covered business conceptually reflect the aggregate of the IFRS results and the movements on the additional shareholders' interest recognised on the EEV basis. Thus the start point for the calculation of the EEV results for Jackson, as for other businesses, reflects the market value movements recognised on the IFRS basis.
 
However, in determining the movements on the additional shareholders' interest, the basis for calculating the Jackson EEV result acknowledges that, for debt securities backing liabilities, the aggregate EEV results reflect the fact that the value of in-force business instead incorporates the discounted value of future spread earnings. This value is not affected generally by short-term market movements on securities that broadly speaking, are held for the longer-term.
 
Fixed income securities backing the free surplus and required capital for Jackson are accounted for at fair value. However, consistent with the treatment applied under IFRS for Jackson securities classified as available-for-sale, movements in unrealised appreciation on these securities are accounted for in equity rather than in the income statement, as shown in the movement in shareholders' equity.
 
Cost of capital
A charge is deducted from the embedded value for the cost of capital supporting the Group's long-term business. This capital is referred to as required capital. The cost is the difference between the nominal value of the capital and the discounted value of the projected releases of this capital allowing for investment earnings (net of tax) on the capital.
 
The annual result is affected by the movement in this cost from year-to-year which comprises a charge against new business profit and generally a release in respect of the reduction in capital requirements for business in force as this runs off.
 
Where required 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 required capital.
 
Financial options and guarantees
Nature of financial options and guarantees in Prudential's long-term business
Asia operations
Subject to local market circumstances and regulatory requirements, the guarantee features described below in respect of UK business broadly apply to similar types of participating contracts principally written in the PAC Hong Kong branch, Singapore and Malaysia. Participating products have both guaranteed and non-guaranteed elements.
 
There are also various non-participating long-term products with guarantees. The principal guarantees are those for whole of life contracts with floor levels of policyholder benefits that accrue at rates set at inception and do not vary subsequently with market conditions.
 
US operations (Jackson)
The principal financial options and guarantees in Jackson are associated with the fixed annuity and variable annuity (VA) lines of business.
 
Fixed annuities provide that, at Jackson's discretion, it may reset the interest rate credited to policyholders' accounts, subject to a guaranteed minimum. The guaranteed minimum return varies from 1.0 per cent to 5.5 per cent for 2012 and 2011, depending on the particular product, jurisdiction where issued, and date of issue. For 2012 86 per cent (2011: 85 per cent) of the account values on fixed annuities are for policies with guarantees of 3 per cent or less. The average guarantee rate is 2.8 per cent for 2012 and 2011.
 
Fixed annuities also present a risk that policyholders will exercise their option to surrender their contracts in periods of rapidly rising interest rates, possibly requiring Jackson to liquidate assets at an inopportune time.
 
Jackson issues VA contracts where it contractually guarantees to the contract holder either: a) return of no less than total deposits made to the contract adjusted for any partial withdrawals; b) total deposits made to the contract adjusted for any partial withdrawals plus a minimum return; or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the specified contract anniversary. These guarantees include benefits that are payable at specified dates during the accumulation period (Guaranteed Minimum Withdrawal Benefit (GMWB)), as death benefits (Guaranteed Minimum Death Benefits (GMDB)) or as income benefits (Guaranteed Minimum Income Benefits (GMIB)). These guarantees generally protect the policyholder's value in the event of poor equity market performance. Jackson hedges the GMDB and GMWB guarantees through the use of equity options and futures contracts, and fully reinsures the GMIB guarantees.
 
Jackson also issues fixed index annuities that enable policyholders to obtain a portion of an equity-linked return while providing a guaranteed minimum return. The guaranteed minimum returns would be of a similar nature to those described above for fixed annuities.
 
UK insurance operations
For covered business the only significant financial options and guarantees in the UK insurance operations arise in the with-profits fund.
 
With-profits products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses - annual and final. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular product. Unlike annual bonuses, final bonuses are guaranteed only until the next bonus declaration. The with-profits fund also held a provision on the Pillar I Peak 2 basis of £47 million at 31 December 2012 (31 December 2011:
£90 million) to honour guarantees on a small number of guaranteed annuity option products.
 
The only material guaranteed surrender values relate to investments in the PruFund range of with-profits funds. For these products the policyholder can choose to pay an additional management charge.  In return, at the selected guarantee date, the fund will be increased if necessary to a guaranteed minimum value (based on the initial investment adjusted for any prior withdrawals). The with-profits fund held a reserve of £52 million at 31 December 2012 (31 December 2011: £59 million) in respect of this guarantee.
 
The Group's main exposure to guaranteed annuity options in the UK is through the non-covered business of SAIF. A provision on the Pillar I Peak 2 basis of £371 million was held in SAIF at 2012 (2011: £370 million) to honour the guarantees. As described in note 1(a) above, the assets and liabilities are wholly attributable to the policyholders of the fund. Therefore the movement in the provision has no direct impact on shareholders.
 
Time value
The value of financial options and guarantees comprises two parts. One is given by a deterministic valuation on best estimate assumptions (the intrinsic value). The other part arises from the variability of economic outcomes in the future (the time value).
 
Where appropriate, a full stochastic valuation has been undertaken to determine the time value of the financial options and guarantees.
 
The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations. Assumptions specific to the stochastic calculations reflect local market conditions and are based on a combination of actual market data, historic market data and an assessment of long-term economic conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling of individual asset classes but with an allowance for correlation between the various asset classes. Details of the key characteristics of each model are given in
notes 17(iv),(v) and (vi).
 
In deriving the time value of financial options and guarantees, management actions in response to emerging investment and fund solvency conditions have been modelled. Management actions encompass, but are not confined to investment allocation decisions, levels of reversionary and terminal bonuses and credited rates. Bonus rates are projected from current levels and varied in accordance with assumed management actions applying in the emerging investment and fund solvency conditions.
 
In all instances, the modelled actions are in accordance with approved local practice and therefore reflect the options actually available to management. For the PAC with-profits fund, the actions assumed are consistent with those set out in the Principles and Practices of Financial Management which explains how regular and final bonus rates within the discretionary framework are determined, subject to the general legislative requirements applicable.
 
(ii) Level of required capital
In adopting the EEV Principles, Prudential has based required capital on its internal targets for economic capital subject to it being at least the local statutory minimum requirements. Economic capital is assessed using internal models but, when applying the EEV Principles, Prudential does not take credit for the significant diversification benefits that exist within the Group. For with-profits business written in a segregated life fund, as is the case in Asia and the UK, the capital available in the fund is sufficient to meet the required capital requirements. For shareholder-backed business the following capital requirements apply:
 
 
•     Asia operations: the level of required capital has been set at the higher of local statutory requirements
 
      and the economic capital requirement;
 
•     US operations: the level of required capital has been set to an amount at least equal to 235 per cent of
 
      the risk-based capital required by the National Association of Insurance Commissioners (NAIC) at the
 
      Company Action Level (CAL); and
 
•     UK insurance operations: the capital requirements are set at the higher of Pillar I and Pillar II requirements
 
      for shareholder-backed business of UK insurance operations as a whole.
 
(iii) Allowance for risk and risk discount rates
Overview
Under the EEV Principles, discount rates used to determine the present value of future cash flows are set equal to risk-free rates plus a risk margin. The risk margin should reflect any non-diversifiable risk associated with the emergence of distributable earnings that is not allowed for elsewhere in the valuation. Prudential has selected a granular approach to better reflect differences in market risk inherent in each product group. The risk discount rate so derived does not reflect an overall Group market beta but instead reflects the expected volatility associated with the cash flows for each product category in the embedded value model.
 
Since financial options and guarantees are explicitly valued under the EEV methodology, discount rates under EEV are set excluding the effect of these product features.
 
The risk margin represents the aggregate of the allowance for market risk, additional allowance for credit risk where appropriate, and allowance for non-diversifiable non-market risk. No allowance is required for non-market risks where these are assumed to be fully diversifiable.
 
Market risk allowance
The allowance for market risk represents the beta multiplied by an equity risk premium. Except for UK shareholder-backed annuity business (as explained below) such an approach has been used for all of the Group's businesses.
 
The beta of a portfolio or product measures its relative market risk. The risk discount rates reflect the market risk inherent in each product group and hence the volatility of product cash flows. These are determined by considering how the profits from each product are affected by changes in expected returns on various asset classes. By converting this into a relative rate of return it is possible to derive a product specific beta.
Product level betas reflect the most recent product mix to produce appropriate betas and risk discount rates for each major product grouping.
 
Additional credit risk allowance
The Group's methodology is to allow appropriately for credit risk. The allowance for total credit risk is to cover:
 
•     expected long-term defaults;
•     credit risk premium (to reflect the volatility in downgrade and default levels); and
•     short-term downgrades and defaults.
 
These allowances are initially reflected in determining best estimate returns and through the market risk allowance described above. However, for those businesses which are largely backed by holdings of debt securities these allowances in the projected returns and market risk allowances may not be sufficient and an additional allowance may be appropriate.
 
The practical application of the allowance for credit risk varies depending upon the type of business as described below.
 
Asia operations
For Asia operations, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are sufficient. Accordingly no additional allowance for credit risk is required.
 
In 2012 the basis of determining projected rates of return for holdings of corporate bonds was refined so as to comprise the risk-free rate plus an assessment of long-term spread over the risk-free rate. Previously market spreads at the reporting date, rather than long-term spreads, were applied. The main effects of this change are for holdings in Hong Kong, Korea, Malaysia and Singapore. The new basis aligns with the approach for UK with-profit holdings of corporate bonds and, more generally, is consistent with the use of long-term risk premiums for holdings of other categories of investments across the Group's operations.
 
US operations (Jackson)
For Jackson business, the allowance for long-term defaults is reflected in the Risk Margin Reserve (RMR) charge which is deducted in determining the projected spread margin between the earned rate on the investments and the policyholder crediting rate.
 
The risk discount rate incorporates an additional allowance for credit risk premium and short-term downgrades and defaults. In determining this allowance a number of factors have been considered. These factors, in particular, include:
 
 
·    How much of the credit spread on debt securities represents an increased credit risk not reflected in the RMR long-term default assumptions, and how much is liquidity premium (which is the premium required by investors to
      compensate for the risk of longer-term investments which cannot be easily converted into cash, and converted at the fair market value). In assessing this effect, consideration has been given to a number of approaches to
      estimating the liquidity premium by considering recent statistical data; and
 
·    Policyholder benefits for Jackson fixed annuity business are not fixed. It is possible in adverse economic scenarios to pass on a component of credit losses to policyholders (subject to guarantee features) through lower
      investment return rates credited to policyholders. Consequently, it is only necessary to allow for the balance of the credit risk in the risk discount rate.
 
After taking these and related factors into account and based on market conditions, the risk discount rate for general account business includes an additional allowance of 150 basis points (2011: 200 basis points) for credit risk. For VA business, the additional allowance has been set at one-fifth (equivalent to 30 basis points (2011: 40 basis points)) of the non-VA business to reflect the proportion of the VA business that is allocated to holdings of general account debt securities. The level of the additional allowance is assessed at each reporting period to take account of prevailing credit conditions and as the business in force alters over time.
 
The level of allowance differs from that for UK annuity business for investment portfolio differences and to take account of the management actions available in adverse economic scenarios to reduce crediting rates to policyholders, subject to guarantee features of the products.
 
UK operations
(1) Shareholder-backed annuity business
For Prudential's UK shareholder-backed annuity business, Prudential has used a market consistent embedded value (MCEV) approach to derive an implied risk discount rate which is then applied to the projected best estimate cash flows.
 
In the annuity MCEV calculations, the future cash flows are discounted using the swap yield curve plus an allowance for liquidity premium based on Prudential's assessment of the expected return on the assets backing the annuity liabilities after allowing for expected long-term defaults, a credit risk premium, an allowance for a 1 notch downgrade of the portfolio subject to credit risk and an allowance for short-term defaults. For the purposes of presentation in the EEV results, the results on this basis are reconfigured. Under this approach the projected earned rate of return on the debt securities held is determined after allowing for expected long-term defaults and, where necessary, an additional allowance for an element of short-term downgrades and defaults to bring the allowance in the earned rate up to best estimate levels. The allowances for credit risk premium, 1 notch downgrade and the remaining element of short-term downgrade and default allowances are incorporated into the risk margin included in the discount rate, as shown in note 17(iii).
 
(2) With-profits fund non-profit annuity business
For UK non-profit annuity business including that written by Prudential Annuities Limited (PAL) the basis for determining the aggregate allowance for credit risk is consistent with that applied for UK shareholder-backed annuity business (as described above). The allowance for credit risk in PAL is taken into account in determining the projected cash flows to the with-profits fund, which are in turn discounted at the risk discount rate applicable to all of the projected cash flows of the fund.
 
(3) With-profits fund holdings of debt securities
The UK with-profits fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus. The assumed earned rate for with-profit holdings of corporate bonds is defined as the risk-free rate plus an assessment of the long-term spread over gilts, net of expected long-term defaults. This approach is similar to that applied for equities and properties for which the projected earned rate is defined as the risk-free rate plus a long-term risk premium.
     
Allowance for non-diversifiable non-market risks
The majority of non-market and non-credit risks are considered to be diversifiable. Finance theory cannot be used to determine the appropriate component of beta for non-diversifiable non-market risks since there is no observable risk premium associated with it that is akin to the equity risk premium. Recognising this, a pragmatic approach has been applied.
 
A base level allowance of 50 basis points is applied to cover the non-diversifiable non-market risks associated with the Group's businesses. For the Group's US business and UK business other than shareholder-backed annuity, no additional allowance is necessary. For UK shareholder-backed annuity business a further allowance of 50 basis points is used to reflect the longevity risk which is of particular relevance. For the Group's Asia operations in China, India, Indonesia, Philippines, Taiwan, Thailand and Vietnam, additional allowances are applied for emerging market risk ranging from 100 to 250 basis points.
 
(iv) With-profits business and the treatment of the estate
The proportion of surplus allocated to shareholders from the PAC with-profits fund has been based on the present level of 10 per cent. The value attributed to the shareholders' interest in the estate is derived by increasing final bonus rates (and related shareholder transfers) so as to exhaust the estate over the lifetime of the in-force with-profits business. In any scenarios where the total assets of the life fund are insufficient to meet policyholder claims in full, the excess cost is fully attributed to shareholders. Similar principles apply, where appropriate, for other with-profits funds of the Group's Asia operations.
 
(v) Debt capital
Core structural debt liabilities are carried at market value. As the liabilities are generally held to maturity or for the long-term, no deferred tax asset or liability has been established on the difference, compared to the IFRS carrying value. Accordingly, no deferred tax credit or charge is recorded in the results for the reporting period in respect of the mark to market value adjustment.
 
(vi) Foreign currency translation
Foreign currency profits and losses have been translated at average exchange rates for the year. Foreign currency assets and liabilities have been translated at year end rates of exchange. The purpose of translating the profits and losses at average exchange rates, notwithstanding the fact that EEV profit represents the incremental value added on a discounted cash flow basis, is to maintain consistency with the methodology applied for IFRS basis reporting.
 
(c) Accounting presentation
(i) Analysis of profit before tax
To the extent applicable, the presentation of the EEV profit for the year is consistent with the basis that the Group applies for analysis of IFRS basis profits before shareholder taxes between operating and non-operating results. Operating results reflect the underlying results including longer-term investment returns (which are determined as described in note 1(c)(ii) below) and incorporate the following:
 
 
·      new business contribution, as defined in note 1(b)(i);
 
·      unwind of discount on the value of in-force business and other expected returns, as described in note 1(c)(iv) below;
 
·      the impact of routine changes of estimates relating to non-economic assumptions, as described in note 1(c)(iii) below; and
 
·      non-economic experience variances, as described in note 1(c)(v) below.
 
Non-operating results comprise the recurrent items of short-term fluctuations in investment returns, the shareholders' share of actuarial and other gains and losses on defined benefit pension schemes, the mark to market value movements on core borrowings and the effect of changes in economic assumptions.
 
In addition, for 2012 the gain recognised on the acquisition of REALIC and the gain on dilution of the Group holding's in PPM South Africa have been shown separately from operating profits based on longer-term investment returns.
 
(ii) Operating profit
For the investment element of the assets covering the net worth of long-term insurance business, investment returns are recognised in operating results at the expected long-term rate of return. These expected returns are calculated by reference to the asset mix of the portfolio. For the purpose of calculating the longer-term investment return to be included in the operating result of the PAC with-profits fund of UK operations, where assets backing the liabilities and unallocated surplus are subject to market volatility, asset values at the beginning of the reporting period are adjusted to remove the effects of short-term market movements as explained in note 1(c)(iv) below.
 
For the purpose of determining the long-term returns for debt securities of US operations for fixed annuity and other general account business, a risk margin charge is included which reflects the expected long-term rate of default based on the credit quality of the portfolio. For Jackson, interest-related realised gains and losses are amortised to the operating results over the maturity period of the sold bonds and for equity-related investments, a long-term rate of return is assumed, which reflects the aggregation of end of year risk-free rates and equity risk premium. For US variable annuity separate account business, operating profit includes the unwind of discount on the opening value of in-force adjusted to reflect end of year projected rates of return with the excess or deficit of the actual return recognised within non-operating profit, together with the related hedging activity.
     
For UK annuity business, rebalancing of the asset portfolio backing the liabilities to policyholders may, from time to time, take place to align it more closely with the internal benchmark of credit quality that management applies. Such rebalancing will result in a change in the projected yield on the asset portfolio and the allowance for default risk. The net effect of these changes is included in the result for the year.
 
(iii) Effect of changes in operating assumptions
Operating profit includes the effect of changes to operating assumptions on the value of in-force at the end of the period. For presentational purposes, the effect of change is delineated to show the effect on the opening value of in-force with the experience variance being determined by reference to the end of period assumptions.
 
(iv) Unwind of discount and other expected returns
The unwind of discount and other expected returns is determined by reference to the value of in-force business, required capital and surplus assets at the start of the period as adjusted for the effect of changes in economic and operating assumptions reflected in the current period.
 
For UK insurance operations the amount included within operating results based on longer-term investment returns represents the unwind of discount on the value of in-force business at the beginning of the period (adjusted for the effect of current period assumption changes), the unwind of discount on additional value representing the shareholders' share of smoothed surplus assets retained within the PAC with-profits fund (as explained in note 1(c)(ii) above), and the expected return on shareholders' assets held in other UK long-term business operations. Surplus assets retained within the PAC with-profits fund are smoothed for this purpose to remove the effects of short-term investment volatility from operating results. In the summary statement of financial position and for total profit reporting, asset values and investment returns are not smoothed. At 31 December 2012 the shareholders' interest in the smoothed surplus assets used for this purpose only, were £121 million lower (31 December 2011: £39 million higher) than the surplus assets carried in the statement of financial position.
 
(v) Operating experience variances
Operating profits include the effect of experience variances on non-economic assumptions, which are calculated with reference to the embedded value assumptions at the end of the reporting year, such as persistency, mortality and morbidity, expenses and other factors. Further details of these assumptions are shown in notes 17(vii),(viii) and (ix).
 
(vi) Pension costs
Profit before tax
Movements on the shareholders' share of surpluses (to the extent not restricted by IFRIC 14) and deficits of the Group's defined benefit pension schemes adjusted for contributions paid in the year are recorded within the income statement. Consistent with the basis of distribution of bonuses and the treatment of the estate described in notes 1(b)(i) and (iv), the shareholders' share incorporates 10 per cent of the proportion of the financial position attributable to the PAC with-profits fund. The financial position is determined by applying the requirements of IAS 19.
 
Actuarial and other gains and losses of defined benefit pension schemes
For the Group's defined benefit pension schemes the EEV results reflect the IAS 19 position booked for IFRS reporting. Consistent with this approach, to the extent of recognition of any surplus, the actuarial and other gains and losses include:
 
 
•     the difference between actual and expected return on the scheme assets;
 
•     experience gains and losses on scheme liabilities;
 
•     the impact of altered economic and other assumptions on the discounted value of scheme liabilities; and
 
•     for pension schemes where the IAS 19 position reflects a deficit funding obligation, actuarial and other
 
      gains and losses includes the movement in estimates of deficit funding requirements.
 
In addition, this item includes the effect of partial recognition of the Prudential Staff Pension Scheme surplus that arose in 2012. This partial recognition reflects the impact of the 5 April 2011 triennial valuation that was completed in 2012. Under that valuation there was sufficient actuarial surplus to permit a reduction in employer contributions to the minimum level under the trust deed rules, thereby allowing recoverability of part of the surplus in future years.
 
These items are recorded in the income statement but, consistent with the IFRS basis of presentation, are excluded from operating results based on longer-term investment returns.
 
(vii) Effect of changes in economic assumptions
Movements in the value of in-force business at the beginning of the period caused by changes in economic assumptions, net of the related change in the time value of cost of option and guarantees, are recorded in non-operating results.
 
(viii) Taxation
The profit for the year for covered business is in most cases calculated initially at the post-tax level. The post-tax profit for covered business is then grossed up for presentation purposes at the rates of tax applicable to the countries and periods concerned. In the UK the rate applied for 2012 is 23 per cent (2011: 25 per cent). For Jackson, the US federal tax rate of 35 per cent is applied to gross up movements on the value of in-force business. The overall tax rate includes the impact of tax effects determined on a local regulatory basis. For Asia, similar principles apply subject to the availability of taxable profits. Tax payments and receipts included in the projected cash flows to determine the value of in-force business are calculated using rates that have been substantively enacted by the end of the reporting period. Possible future changes of rate are not anticipated. See note 17(ix) for further details.
 
(ix) Inter-company arrangements
The EEV results for covered business incorporate the effect of the reinsurance arrangement of non-profit immediate pension annuity liabilities of SAIF (which is not covered business) to PRIL. In addition, the analysis of free surplus and value of in-force business takes account of the impact of contingent loan arrangements between Group companies.
 
(x) Foreign exchange rates
Foreign currency results have been translated as discussed in note 1(b)(vi), for which the principal exchange rates are as follows:
 
Local currency: £
Closing rate at
31 Dec 2012
Average rate
for 2012
Closing rate at
31 Dec 2011
Average rate
for 2011
Opening rate at
1 Jan 2011 
China
10.13 
10.00 
 9.78 
 10.37 
 10.32 
Hong Kong
12.60 
12.29 
 12.07 
 12.48 
 12.17 
India
89.06 
84.70 
 82.53 
 74.80 
 70.01 
Indonesia
15,665.76 
14,842.01 
 14,091.80 
 14,049.41 
 14,106.51 
Korea
1,740.22 
1,785.07 
 1,790.32 
 1,775.98 
 1,776.86 
Malaysia
4.97 
4.89 
 4.93 
 4.90 
 4.83 
Singapore
1.99 
1.98 
 2.02 
 2.02 
 2.01 
Taiwan
47.20 
46.88 
 47.06 
 47.12 
 45.65 
Vietnam
33,875.42 
33,083.59 
 32,688.16 
 33,139.22 
 30,526.26 
US
1.63 
1.58 
 1.55 
 1.60 
 1.57 
 
2 Analysis of new business contribution
 
   
2012 £m
    
       
Annual premium and contribution equivalents (APE)
Present
value of new business premiums (PVNBP)
Pre-tax new business contribution
  
   
New business premiums
  
New business margin
   
Single 
Regular 
  
(APE )
%
(PVNBP)
%
Asia operations
 1,568 
 1,740 
  
 1,897 
 10,544 
 1,266 
 67 
 12.0 
US operations
 14,504 
 12 
  
 1,462 
 14,600 
 873 
 60 
 6.0 
UK insurance operations
 6,286 
 207 
  
 836 
 7,311 
 313 
 37 
 4.3 
Total
  
 22,358 
 1,959 
  
 4,195 
 32,455 
 2,452 
 58 
 7.6 
                   
   
2011 £m
    
       
Annual   premium and contribution equivalents (APE)
Present
value of new business premiums (PVNBP)
Pre-tax new business contribution
  
   
New business premiums
  
New business margin
   
Single 
Regular 
  
(APE)
%
(PVNBP)
%  
Asia operations
 1,456 
 1,514 
  
 1,660 
 8,910 
 1,076 
65 
12.1 
US operations
 12,562 
 19 
  
 1,275 
 12,720 
 815 
64 
6.4 
UK insurance operations
 4,871 
 259 
  
 746 
 6,111 
 260 
35 
4.3 
Total
  
 18,889 
 1,792 
  
 3,681 
 27,741 
 2,151 
58 
7.8 
 
   
New business contribution £m
   
2012 
2011 
Asia operations:
    
 
China
 26 
                                   27 
 
Hong Kong
 210 
 218 
 
India
19 
20 
 
Indonesia
 476 
314 
 
Korea
 26 
43 
 
Taiwan
 48 
28 
 
Other
461 
426 
Total Asia operations
 1,266 
1,076 
         
 
3 Operating profit from business in force
 
 
(i)  Group Summary
 
 
2012 £m
  
2011 £m
 
Asia operations
US
operations
UK
insurance
operations
Total 
  
Asia
operations
US
operations
UK
insurance
operations
Total 
 
note (ii)
note (iii)
note (iv)
    
note (ii)
note (iii)
note (iv)
  
Unwind of discount and other expected returns
599 
412 
482 
1,493 
  
613 
349 
485 
1,447 
Effect of changes in operating assumptions*
20 
35 
87 
142 
  
10 
14 
79 
103 
Experience variances and other items
75 
290 
(16)
349 
  
65 
253 
29 
347 
Total
694 
737 
553 
1,984 
  
688 
616 
593 
1,897 
* as shown below
                  
                   
 
(ii)  Asia operations
     
2012 £m
2011 £m
 
Unwind of discount and other expected returnsnote (a)
599 
613 
 
Effect of changes in operating assumptions:
    
   
Mortality and morbiditynote (b)
94 
126 
   
Persistency and withdrawalsnote (c)
(34)
(140)
   
Expensenote (d)
(48)
11 
   
Other
8 
13 
     
20 
10 
 
Experience variance and other items:
    
   
Mortality and morbiditynote (e) 
57 
58 
   
Persistency and withdrawalsnote (f) 
50 
10 
   
Expensenote (g)  
(30)
(31)
   
Other note (h) 
(2)
28 
     
75 
65 
 
Total Asia operations
694 
688 
 
Notes
 
(a)   The decrease in unwind of discount and other expected returns of £(14) million from £613 million in 2011 to £599 million in 2012 mainly reflects the £(43) million effect of lower risk discount rates driven by the reduction in interest
         rates, partly offset by the £29 million effect of the growth in the opening in-force value (adjusted for assumption changes), on which the discount rates are applied.
 
(b)   The credit of £94 million in 2012 for mortality and morbidity assumption changes primarily reflects mortality improvements in Hong Kong and Singapore and revised assumptions for critical illness business in Singapore in line
        with recent experience. In 2011, the £126 million reflected £69 million arising in Malaysia, £33 million in Indonesia and a net £24 million for other operations.
 
(c)   The charge of £(140) million for 2011 principally arose in Malaysia for partial withdrawals. The 2012 charge reflects a number of offsetting items including further adjustments to partial withdrawals in Malaysia.
 
(d)   The charge of £(48) million for expense assumption changes in 2012 principally arises in Malaysia and reflects changes to the pension entitlements of agents.
 
(e)   The favourable effect of mortality and morbidity experience in 2012 of £57 million (2011: £58 million) reflects continued better than expected experience, principally arising in Hong Kong, Indonesia, Malaysia and Singapore.
 
(f)    The positive persistency and withdrawals experience variance of £50 million in 2012 (2011: £10 million) reflects a combination of favourable experience in Hong Kong and Indonesia.
 
(g)   The negative expense experience variance of £(30) million in 2012 (2011: £(31) million) principally reflects expense overruns for operations which are currently sub-scale (China, Malaysia Takaful and Taiwan) and in India where 
        the business model is being adapted in response to the regulatory changes introduced in recent years.
 
(h)   The charge of £(2) million in 2012 for other items reflects the broadly offsetting effects of the realised gain on the sale of the Group's 7.74 per cent stake in China Life of Taiwan and charges for other non-recurrent items.
 
 
(iii)  US operations  
     
2012 £m
2011 £m
 
Unwind of discount and other expected returnsnote (a)
412 
349 
 
Effect of changes in operating assumptions:
    
   
Persistencynote (b)
45 
29 
   
Variable annuity (VA) feesnote (c)
(19)
24 
   
Mortalitynote (d)
33 
(36)
   
Othernote (e)
(24)
(3)
     
35 
14 
 
Experience variances and other items:
    
   
Spread experience variancenote (f)
205 
152 
   
Amortisation of interest-related realised gains and lossesnote (g)
91 
84 
   
Other
(6)
17 
     
290 
253 
 
Total US operations
737 
616 
 
Notes
 
(a) The increase in unwind of discount and other expected returns of £63 million from £349 million for 2011 to £412 million for 2012 includes the £67 million effect of the increase in opening value of in-force business (after economic assumption changes), an impact of £19 million relating to the post-acquisition unwind of discount for REALIC, partly offset by the £(23) million effect of lower risk discount rates driven by the 0.1 per cent  reduction in the 10-year US treasury rate together with the decrease in additional allowance for credit risk as explained in note 1(b) (iii).
 
(b)  The effect of changes in persistency assumptions of £45 million in 2012 primarily relate to VA business.
 
(c) The effect of the change of assumption for VA fees represents the capitalised value of the change in the projected level of policyholder advisory fees, which vary according to the current size and mix of VA funds.
 
(d)  The credit of £33 million in 2012 for the effect of updated mortality assumptions principally relates to life business, representing a credit of £86 million for the modelling of projected mortality improvement, partially offset by a charge of £(53) million for other regular mortality updates to reflect recent experience.
 
  In 2011 the charge of £(36) million for updated mortality assumptions primarily arose on variable annuity business.
 
(e)  The charge of £(24) million in 2012 for other operating assumption changes includes a charge of £(12) million for the impact of altered assumptions for Guaranteed Minimum Withdrawal Benefit utilisation and £(12) million for other items.
 
(f)  The spread assumption for Jackson is determined on a longer-term basis, net of provision for defaults. The spread experience variance in 2012 of £205 million (2011: £152 million) includes the positive effect of transactions undertaken to more closely match the overall asset and liability duration.
 
(g)  The amortisation of interest-related gains and losses reflects the fact that when bonds that are neither impaired nor deteriorating are sold and reinvested there will be a consequent change in the investment yield. The realised gain or loss is amortised into the result over the period when the bonds would have otherwise matured to better reflect the long-term returns included in operating profits.           
 
 
(iv)    UK insurance operations      
       
2012 £m
2011 £m
 
Unwind of discount and other expected returnsnote (a)
482 
485 
 
Effect of change in UK corporate tax ratenote (b)
87 
79 
 
Other itemsnote (c)
(16)
29 
 
Total UK insurance operations
553 
593 
 
     Notes
 
(a)   The decrease in unwind of discount and other expected returns of £(3) million from £485 million in 2011 to £482 million for 2012 reflects the £(17) million effect of lower risk discount rates driven by the reduction in interest rates, partly offset by the £14 million effect of an increase in the opening in-force value (after economic assumption changes) on which the discount rates are applied.
 
(b)   The effect of the change in tax rate of £87 million in 2012 represents the benefit of the reduction in tax rate from 25 per cent to 23 per cent. Consistent with the Group's approach of grossing up the movement in the net of tax value of in-force for shareholder tax, the £87 million benefit is presented gross (2011: £79 million, 27 per cent to 25 per cent).
 
(c)    Other items in 2012 of £(16) million includes a charge of £(52) million for the strengthening of mortality assumptions, net of reserve releases and the effects of portfolio rebalancing for annuity business.
 
4 Changes to Group's holdings
 
PPM South Africa
 
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 49.99 per cent. Under IFRS requirements, the divestment is accounted for as the disposal of the 75 per cent holding and an acquisition of a 49.99 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 gave rise to a gain on dilution of £42 million. Consistent with the Group's treatment for  IFRS reporting, this amount has been treated as a gain on dilution of holdings which is shown separately from operating profit based on longer-term investment returns in the Group's supplementary analysis of profit.
 
5  Acquisition of Reassure America Life Insurance Company (REALIC)
 
On 4 September 2012, the Group through its indirect wholly-owned subsidiary,  Jackson National Life Insurance Company completed the acquisition of 100 per cent issued share capital of SRLC America Holding Corp. (SRLC), and its primary operating subsidiary, Reassure America Life Insurance Company (REALIC). The purchase consideration, which remains subject to final agreement under the terms of the transaction with Swiss Re, is £370 million (US$587 million). The Embedded value of REALIC on the date of acquisition, calculated in accordance with the Group's methodology and assumptions as set out in note 1 was £823 million. The acquisition increases the scale of the Group's life business in the US, helping Jackson to diversify earnings by increasing the amount of income from underwriting activities thereby enhancing the quality of earnings in a capital efficient manner. The earnings of REALIC are derived from seasoned, long duration cash flows, generated principally from term life, whole life and basic universal life products.
 
The gain arising from the acquisition of REALIC is excluded from the Group's EEV operating profit based on longer-term investment returns and is calculated as follows:
 
         
Total EEV
         
£m
         
note (ii)
Embedded value of acquired businessnote (i)
        
823 
Total purchase consideration
        
(370)
Gain arising on acquisition
        
453 
 
Notes
 
(i)    The embedded value of the acquired business has been determined by applying the same methodology as applied for Jackson's non-variable annuity business. A risk discount rate of 4.3 per cent at the date of acquisition on 4
        September 2012 has been used.
 
(ii)   The amounts shown above have been translated at the 4 September 2012 exchange rate of US$1.59/£.
 
6 Short-term fluctuations in investment returns
 
Short-term fluctuations in investment returns, net of the related change in the time value of cost of options and guarantees, arise as follows:
(i)  Group Summary
    
     
2012 £m
2011 £m
 
Insurance operations:
    
   
Asianote (ii)
395 
(155)
   
USnote (iii)
(254)
(491)
   
UKnote (iv)
315 
(141)
     
456 
(787)
 
Other operations:
    
   
Economic hedge value movementnote (v)
(32)
 - 
   
Othernote (vi)
114 
(120)
   
Total
538 
(907)
 
(ii)  Asia operations
       For 2012, the positive short-term fluctuations in investment returns of £395 million in Asia operations were driven by unrealised gains on bonds and higher equity markets, principally arising in Hong Kong of £139 million mainly 
       relating to positive returns on bonds backing participating business, Singapore of £114 million primarily relating to increasing future expected fee income for unit-linked business and unrealised gains on bonds, Taiwan of £56
       million for unrealised gains on bonds and CDOs and India of £30 million.
       For 2011, short-term fluctuations in investment returns of £(155) million were driven by lower equity markets reducing future expected fee income, mainly arising in Singapore of £(105) million and Korea of £(22) million. The 2011
       short-term fluctuations in investment returns also included £(28) million of adverse variance arising in other territories. This principally comprises fluctuations arising in India of £(53) million reflecting lower equity market returns, 
       in Vietnam of £(33) million for unrealised losses on bonds and equities and Taiwan of £(30) million for losses on bonds and CDOs, partially offset by a credit in Hong Kong of £96 million primarily relating to positive returns on
       bonds backing participating business.
 
(iii)
 US operations
    
 
 The short-term fluctuations in investment returns for US operations comprise the following items:
  
         
2012 £m
2011 £m
 
Investment return related experience on fixed income securitiesnote (a)
(99)
(74)
 
Investment return related impact due primarily to changed expectation of profits on in-force
    
   
variable annuity business in future periods based on current period equity returns, net of related hedging activity for equity related productsnote (b)
(183)
(418)
 
 Actual less long-term return on equity based investments and other items
28 
1 
 
 Total Jackson
(254)
(491)
             
 
 
Notes
 
(a)  The charge relating to fixed income securities comprises the following elements:
 
-  the excess of actual realised losses over the amortisation of interest related realised gains and losses recorded in the profit and loss account;
 
-  credit loss experience (versus the longer-term assumption); and
 
-  the impact of de-risking activities within the portfolio.
 
(b)  This item reflects the net impact of:
 
-  variances in projected future fees arising from the effect of market fluctuations on the growth in separate account asset values in the current reporting period; and
 
-  related hedging activity.
In 2012 there was a 14.8 per cent rate of return for the variable annuity separate account assets compared with an assumed longer-term rate of return of 5.3 per cent. Consequently, the asset values and therefore projected future fees at 31 December 2012 were higher than assumed. However, net of the impact of related hedging effects there is a short-term fluctuation of £(183) million.
In 2011 there was a negative 0.5 per cent rate of return for the variable annuity separate account assets. This compared with an assumed longer-term rate of return of 5.4 per cent. Consequently, the asset values and therefore projected future fees at 31 December 2011 were lower than assumed.
 
(iv)
UK insurance operations
    
       
 
The short-term fluctuations in investment returns for UK insurance operations arise from the following types of business:
       
   
2012 £m
2011 £m
 
With-profitsnote (a)
285 
(201)
 
Shareholder-backed annuitynote (b)
(3)
56 
 
Unit-linked and other
33 
4 
   
315 
(141)
 
 
Notes
 
(a)  For with-profits business the amounts reflect the excess (deficit) of the actual investment return on the investments of the PAC with-profits fund (covering policyholder liabilities and unallocated surplus) against the assumed long-term rate for the year. For 2012 the credit of £285 million reflects the actual investment return of 9.8 per cent against the assumed long-term rate of 5.0 per cent for the year.
       For 2011 the charge of £(201) million reflects the actual investment return of 3.2 per cent against the assumed long-term rate of 5.1 per cent, primarily reflecting the fall in equity markets and widening of corporate bond  
       credit spreads, partially offset by the increase in asset values as a result of the reduction in bond yields.
 
(b) Short-term fluctuations in investment returns for shareholder-backed annuity business comprise: (1) gains on surplus assets reflecting reductions in corporate bond and gilt yields; (2) the difference between actual and expected default experience; and (3) the effect of mismatching for assets and liabilities of different durations and other short-term fluctuations in investment returns.
 
 
(v)    Economic hedge value movements
        This item represents the costs on short-dated hedge contracts taken out in the first half of 2012 to provide downside protection against severe equity market falls through a period of particular uncertainty with respect to the
        Eurozone. The hedge contracts were terminated in the second half of 2012.
 
(vi)  Other
        Short-term fluctuations of Other operations in 2012 of £114 million primarily represent unrealised fair value movements on Prudential Capital's bond portfolio. Short-term fluctuations of Other operations in 2011 of £(120) million
        represent unrealised value movements on investments, including centrally held swaps to manage foreign exchange and certain macro-economic exposures of the Group.
 
7 Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes
 
The credit for the shareholders' share of actuarial and other gains and losses comprises:
 
       
   
2012 £m
2011 £m
IFRS basis
50 
21 
Additional shareholders' interest (note 1(c)(vi))
12 
2 
EEV basis total
62 
23 
 
8 Effect of changes in economic assumptions
 
The effects of changes in economic assumptions for in-force business, net of the related change in the time value of cost of options and guarantees, included within profit before tax (including actual investment returns) arise as follows:
 
(i)   Group Summary
    
       
2012 £m
2011 £m
   
Asia operationsnote (ii)
(149)
279 
   
US operationsnote (iii)
85 
(144)
   
UK insurance operationsnote (iv)
48 
(293)
   
Total
(16)
(158)
           
 
(ii)     Asia operations
          The effect of changes in economic assumptions for Asia operations in 2012 of £(149) million principally arises in Hong Kong of £(320) million, primarily reflecting the effect on projected cash flows of de-risking the asset
          portfolio and the reduction in fund earned rates on participating business, driven by the very low interest rate environment, and in Vietnam of £(47) million, following the fall in bond yields. There are partial offsets which in total
          are £218 million, principally arising in Malaysia and Indonesia, mainly reflecting the positive impact of discounting projected health and protection profits at lower rates, driven by the decrease in risk discount rates.
 
          The effect of changes in economic assumptions for 2011 of a credit of £279 million principally arose in Singapore of £160 million, Malaysia of £97 million and Indonesia of £94 million, primarily reflecting the positive impact of
          discounting projected health and protection profits at lower rates, driven by the decrease in risk-free rates. There is a partial offset arising in Hong Kong of £(57) million, primarily reflecting the reduction in fund earned rates for
          participating business.
 
 
 
(iii)    US operations
           The effect of changes in economic assumptions for US operations reflects the following:
 
       
2012 £m
2011 £m
   
Effect of changes in 10-year treasury rates, beta and equity risk premium:note (a)
    
     
Fixed annuity and other general account business
20 
282 
     
Variable annuity (VA) business
(83)
(333)
   
Decrease (increase) in additional allowance for credit risknote (b)
148 
(93)
       
85 
(144)
 
 
Notes
 
(a)  For Jackson the effect of changes in economic assumptions represents the aggregate of the effects of changes to projected returns and the risk discount rate. The risk discount rate, as discussed in note 1(b)(iii), represents the aggregate of the risk-free rate and margin for market risk, credit risk and non-diversifiable non-market risk.
 
      For fixed annuity and other general account business the effect of changes to the risk-free rate, which is defined as the 10-year treasury rate, is reflected in the risk discount rate. This discount rate is in turn applied to projected cash flows which principally reflect projected spread, which is largely insensitive to changes in the risk-free rate. Secondary effects on the cash flows also result from changes to assumed future yield and resulting policyholder behaviour. For VA business, changes to the risk-free rate are also reflected in determining the risk discount rate. However, the projected cash flows are also reassessed for altered investment returns on the underlying separate account assets on which fees are charged. In 2012, for fixed annuity and other general account business the credit of £20 million principally arises from the effect of a lower discount rate on the opening value of the in-force book, driven by the 10 basis points reduction in the risk-free rate (as shown in note 17(ii)), partially offset by the effect for the acquired REALIC book reflecting the 20 basis point increase in the risk-free rate from the 4 September acquisition date.
 
      For 2011 the credit of £282 million reflected the 140 basis points reduction in the risk-free rate. For VA business, the charge of £(83) million (2011: £(333) million) reflects the 10 basis points reduction (2011: a reduction of 140 basis points) in the risk-free rate (as shown in note 17(ii)).
 
(b)  For 2012 the £148 million effect of the decrease in the additional allowance within the risk discount rate for credit risk reflects the reduction in credit spreads and represents a 50 basis points decrease for spread business, including the acquired REALIC business (from 200 basis points in 2011 to 150 basis points in 2012), and 10 basis points decrease for VA business (from 40 basis points in 2011 to 30 basis points in 2012), representing the proportion of business invested in the general account (as described in note 1(b)(iii)).            
 
      For 2011 the effect of £(93) million for the increase in the risk margin allowance within the risk discount rate for credit risk represented a 50 basis points increase for spread business and 10 basis points increase for VA business.
 
 
(iv)   UK insurance operations
The effect of changes in economic assumptions of a credit of £48 million for UK insurance operations for 2012 comprises the effect of:
 
           
       
2012 £m
2011 £m
 
Shareholder-backed annuity businessnote (a)
    
   
Effect of change in:
    
   
Expected long-term rates of return, risk discount rates and other changes
140 
278 
     
Tax regimenote (b)
(46)
- 
       
94 
278 
 
With-profits and other businessnote (c)
    
   
Effect of changes in expected long-term rates of return
(62)
(1,113)
   
Effect of changes in risk discount rates
24 
627 
   
Other changes
(8)
(84)
       
(46)
(570)
   
48 
(292)
 
 
Notes
 
(a) For shareholder-backed annuity business the overall effect of changes in expected long-term rates of return and risk discount rates for the years shown above reflect the combined effects of the changes in economic assumptions, which incorporate a default allowance for both best estimate defaults and in respect of the additional credit risk provisions (as shown in note 17(iii)).
 
(b) The change in the insurance tax regime was enacted on 17 July 2012. The effect of £(46) million reflects the change in pattern of taxable profits for shareholder-backed annuity business arising from the acceleration of tax payments due to the altered timing of relief on regulatory basis provisions.
 
(c) For with-profits and other business the total charge in 2012 of £(46) million reflects the changes in fund earned rates and risk discount rate (as shown in note 17(iii)), driven by the 20 basis points decrease in the gilt rate.
 
 For 2011, the charge of £(1,113) million for the effect of changes in expected long-term rates of return arises from the reduction in fund earned rates, driven by the 1.5 per cent decrease in gilt rates and reduction in additional returns assumed on corporate bonds, reflecting changes in asset mix. The credit of £627 million for the effect of changes in risk discount rates reflects the 1.35 per cent reduction in the risk discount rate, driven by the 1.5 per cent decrease in gilt rates, partly offset by the impact of an increase in beta for with-profits business. Beta allowances are explained in note 1(b)(iii).
 
9 Analysis of movement in free surplus
 
Free surplus is the excess of the net worth over the capital required to support the covered business. Where appropriate, adjustments are made to the regulatory basis net worth from the local regulatory basis so as to include backing assets movements at fair value rather than cost so as to comply with the EEV Principles.
 
       
2012 £m
       
 Long-term business
Asset management and UK general insurance commission
Free surplus of long-term business, asset management and UK general insurance commission
Long-term business and asset management operationsnote (i)
note 14
note (iii)
  
Underlying movement:
      
 
Investment in new businessnote (ii)
(618)
- 
(618)
 
Business in force:
      
   
Expected in-force cash flows (including expected return on net assets)
2,019 
386 
2,405 
   
Effects of changes in operating assumptions, operating experience
      
     
variances and other operating items
295 
- 
295 
       
1,696 
386 
2,082 
Changes in non-operating itemsnote (iv)
(163)
84 
(79)
Gain on dilution of Group's holdingsnote 4
- 
42 
42 
Effect of acquisition of REALICnotes  5 and (v)
(169)
- 
(169)
       
1,364 
512 
1,876 
Net cash flows to parent companynote (vi)
(921)
(279)
(1,200)
Exchange movements, timing differences and other itemsnote (vii)
(325)
(83)
(408)
Net movement in free surplus
118 
150 
268 
Balance at 1 January 2012
2,839 
582 
3,421 
Balance at 31 December 2012
2,957 
732 
3,689 
Representing:
      
 
Asia operations
974 
207 
1,181 
 
US operations
1,211 
108 
1,319 
 
UK operations
772 
417 
1,189 
       
2,957 
732 
3,689 
Balance at 1 January 2012
      
Representing:
      
 
Asia operations
1,067 
211 
1,278 
 
US operations
1,220 
113 
1,333 
 
UK operations
552 
258 
810 
       
2,839 
582 
3,421 
 
 
Notes
 
(i)       All figures are shown net of tax.
 
(ii)      Free surplus invested in new business is for the effects of setting aside required capital and incurring acquisition costs. 
 
(iii)     For the purposes of this analysis, free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis shareholders' equity.
 
(iv)     Changes in non-operating items This represents short-term fluctuations in investment returns, the shareholders' share of actuarial and other gains and losses on defined benefit pension schemes and the effect of changes in
          economic assumptions for long-term business operations.
 
          Short-term fluctuations in investment returns primarily reflect temporary market movements on the portfolio of investments held by the Group's shareholder-backed operations.
 
(v)      The effect on free surplus of the purchase of REALIC reflects the difference between the consideration of £370 million and the free surplus of REALIC at the acquisition date.
 
(vi)     Net cash flows to parent company for long-term business operations reflect the flows as included in the holding company cash flow at transaction rates.
 
(vii)   Exchange movements, timing differences and other items represent:
 
 
     
2012 £m
     
Long-term business
Asset management and UK general insurance commission
Total
 
Exchange movementsnote 14
(92)
(13)
(105)
 
Mark to market value movements on Jackson assets backing surplus
      
   
and required capitalnote 14
35 
- 
35 
 
Othernote (viii)
(268)
(70)
(338)
   
(325)
(83)
(408)
 
 
 
(viii)   Other primarily reflects the effect of repayment of contingent loan funding, as shown in note 14(ii), together with intra-group loans, timing differences and other non-cash items.
 
10 Net core structural borrowings of shareholder-financed operations
 
   
2012 £m
  
2011 £m
   
IFRS basis
Mark to
market
value
adjustment
EEV
basis at
market
value
  
IFRS basis
Mark to
market
value
adjustment
EEV
basis at
market
value
     
note
      
note
  
Holding company* cash and
              
 
short-term investments
(1,380)
- 
(1,380)
  
(1,200)
- 
(1,200)
Core structural borrowings -
              
 
central funds
3,126 
536 
3,662 
  
3,201 
187 
3,388 
Holding company net borrowings
1,746 
536 
2,282 
  
2,001 
187 
2,188 
Core structural borrowings - Prudential
              
 
Capital
275 
- 
275 
  
250 
- 
250 
Core structural borrowings - Jackson
153 
43 
196 
  
160 
17 
177 
Net core structural borrowings of
              
 
shareholder-financed operations
2,174 
579 
2,753 
  
2,411 
204 
2,615 
* Including central finance subsidiaries.
              
 
Note
The movement in the mark to market value adjustment represents:
 
 
Mark to market movement in balance sheet:
2012 £m
2011 £m
 
Beginning of year
204 
190 
 
Change reflected in:
    
   
Income statement
380 
14 
   
Foreign exchange effects
(5)
- 
 
End of year
579 
204 
 
11 Reconciliation of movement in shareholders' equity (excluding non-controlling interests)
 
     
2012 £m
     
Long-term business operations
        
     
Asia operations
  
US
operations
  
UK
insurance operations
  
Total
long-term business
operations
  
Other operations
  
Group
Total
               
               
     
note (i)
              
note (i)
    
Operating profit (based on longer-term
                      
 
investment returns)
                      
Long-term business:
                      
 
New businessnote 2
1,266 
  
873 
  
313 
  
2,452 
  
- 
  
2,452 
 
Business in forcenote 3
694 
  
737 
  
553 
  
1,984 
  
- 
  
1,984 
     
1,960 
  
1,610 
  
866 
  
4,436 
  
- 
  
4,436 
Asset management
- 
  
- 
  
- 
  
- 
  
485 
  
485 
Other results
(7)
  
(2)
  
(29)
  
(38)
  
(562)
  
(600)
Operating profit based on longer-term
                      
 
investment returns
1,953 
  
1,608 
  
837 
  
4,398 
  
(77)
  
4,321 
Short-term fluctuations in investment returnsnote 6
395 
  
(254)
  
315 
  
456 
  
82 
  
538 
Mark to market value movements on core borrowingsnote 10
- 
  
(28)
  
- 
  
(28)
  
(352)
  
(380)
Shareholders' share of actuarial and other gains and
                      
 
losses on defined benefit pension schemesnote 7
 - 
  
 - 
  
(16)
  
(16)
  
 78 
  
 62 
Effect of changes in economic assumptionsnote 8
(149)
  
85 
  
48 
  
(16)
  
- 
  
(16)
Gain on dilution of Group's holdingsnote 4
 - 
  
 - 
  
 - 
  
 - 
  
 42 
  
 42 
Gain on acquisition of REALICnote 5
 - 
  
 453 
  
 - 
  
 453 
  
 - 
  
 453 
Profit before tax (including actual investment returns)
2,199 
  
1,864 
  
1,184 
  
5,247 
  
(227)
  
5,020 
Tax (charge) credit attributable to shareholders' profit:note 12
                      
 
Tax on operating profit
(420)
  
(513)
  
(168)
  
(1,101)
  
(44)
  
(1,145)
 
Tax on short-term fluctuations in investment returns
(60)
  
91 
  
(72)
  
(41)
  
(3)
  
(44)
 
Tax on shareholders' share of actuarial and other
                      
   
gains and losses on defined benefit pension schemes
 - 
  
 - 
  
 4 
  
 4 
  
(18)
  
(14)
 
Tax on effect of changes in economic assumptions
36 
  
(29)
  
(11)
  
(4)
  
- 
  
(4)
Total tax charge
(444)
  
(451)
  
(247)
  
(1,142)
  
(65)
  
(1,207)
Profit (loss) for the year
1,755 
  
1,413 
  
937 
  
4,105 
  
(292)
  
3,813 
Other movements
                      
Exchange movements on foreign operations
                      
 
and net investment hedges, net of tax
(271)
  
(252)
  
- 
  
(523)
  
54 
  
(469)
Intra-group dividends (including statutory transfers)note (ii)
(544)
  
(252)
  
(207)
  
(1,003)
  
1,003 
  
- 
Investment in operationsnote (ii)
4 
  
- 
  
- 
  
4 
  
(4)
  
- 
External dividends
 - 
  
 - 
  
 - 
  
 - 
  
(655)
  
(655)
Reserve movements in respect of share-based payments
 - 
  
 - 
  
 - 
  
 - 
  
 42 
  
 42 
Other transfers
8 
  
6 
  
(16)
  
(2)
  
2 
  
 - 
Treasury shares movements
 - 
  
 - 
  
 - 
  
 - 
  
23 
  
23 
New share capital subscribed
 - 
  
 - 
  
 - 
  
 - 
  
 17 
  
 17 
Mark to market value movements on Jackson assets
                      
 
backing surplus and required capital net of tax
 - 
  
 35 
  
 - 
  
 35 
  
 - 
  
 35 
Net increase in shareholders' equity
952 
  
950 
  
714 
  
2,616 
  
190 
  
2,806 
Shareholders' equity at 1 January 2012 note (i)
8,510 
  
5,082 
  
6,058 
  
19,650 
  
(13)
  
19,637 
Shareholders' equity at 31 December 2012note (i)
9,462 
  
6,032 
  
6,772 
  
22,266 
  
177 
  
22,443 
                             
Representing:
                        
 
Statutory IFRS basis shareholders' equity
2,290 
  
4,343 
  
3,008 
  
9,641 
  
718 
  
10,359 
  
 
Additional retained profit (loss) on an EEV basis note (iii)
7,172 
  
1,689 
  
3,764 
  
12,625 
  
(541)
  
12,084 
  
 
 EEV basis shareholders' equity
9,462 
  
6,032 
  
6,772 
  
22,266 
  
177 
  
22,443 
  
                             
Balance at 1 January 2012
                        
Representing:
                        
 
Statutory IFRS basis shareholders' equity
2,071 
  
3,761 
  
2,552 
  
8,384 
  
180 
  
8,564 
  
 
Additional retained profit (loss) on an EEV basis note (iii)
6,439 
  
1,321 
  
3,506 
  
11,266 
  
(193)
  
11,073 
  
 
 EEV basis shareholders' equity
8,510 
  
5,082 
  
6,058 
  
19,650 
  
(13)
  
19,637 
  
                         
                             
                                     
Notes
 
(i)    For the purposes of the table above, goodwill related to Asia long-term operations is included in Other operations.
 
(ii)     Intra-group dividends (including statutory transfers) represent dividends that have been declared in the year and amounts accrued in respect of statutory transfers. For long-term business operations, the difference between 
         the net amount of £999 million for intra-group dividends (including statutory transfers) and investment in operations shown above and the net cash flows to parent company of £921 million (as shown in note 9) primarily relates
         to  intra-group loans, timing differences arising on statutory transfers and other non-cash items.
 
(iii)   The additional retained profit on an EEV basis for Other operations primarily represents the mark to market value adjustment for holding company net borrowings of a charge of £(536) million (2011: £(187) million) (as shown in 
         note 10).
 
 .
 
12 Tax attributable to shareholders' profit
 
The tax charge comprises:
  
   
2012 £m
2011 £m
Tax charge on operating profit based on longer-term investment returns:
    
Long-term business:
    
 
Asia operations
420 
402 
 
US operations
513 
487 
 
UK insurance operations
168 
221 
   
1,101 
1,110 
Other operations
44 
(66)
Total tax charge on operating profit based on longer-term investment returns
1,145 
1,044 
Tax charge (credit) on items not included in operating profit:
    
Tax charge (credit) on short-term fluctuations in investment returns
44 
(210)
Tax charge on shareholders' share of actuarial and other gains and losses on defined
    
 
 benefit pension schemes
14 
6 
Tax charge (credit) on effect of changes in economic assumptions
4 
(64)
Total tax charge (credit) on items not included in operating profit
62 
(268)
Tax charge on profit attributable to shareholders (including
    
 
tax on actual investment returns)
1,207 
776 
 
13 Earnings per share (EPS)
   
2012 £m
  
2011 £m
   
Operating
Total*
  
Operating
Total
Profit before tax
4,321 
5,020 
  
3,978 
2,922 
Tax
(1,145)
(1,207)
  
(1,044)
(776)
Non-controlling interests
- 
- 
  
(4)
(4)
Profit after tax and non-controlling interests
 3,176 
 3,813 
  
2,930 
2,142 
EPS (pence)
125.0 p
150.1 p
  
115.7 p
84.6 p
Average number of shares (millions)
2,541 
2,541 
  
2,533 
2,533 
*Total profit in 2012 includes a gain of £453 million relating to the acquisition of REALIC - see note 5.
 
14 Reconciliation of net worth and value of in-force for long-term businessnote(i)
 
   
2012 £m
               
Total
           
Value of
  
long-term
   
Free
Required
Total net
  
in-force
  
business
   
Surplus
capital
 worth
  
business
  
operations
   
note  9
      
note (vi)
    
Group
              
                 
Shareholders' equity at 1 January 2012
2,839 
3,447 
6,286 
  
13,364 
  
19,650 
New business contributionnotes (iii), (iv)
(618)
454 
(164)
  
1,955 
  
1,791 
Existing business - transfer to net worth
1,923 
(324)
1,599 
  
(1,599)
  
- 
Expected return on existing business
96 
85 
181 
  
929 
  
1,110 
Changes in operating assumptions and experience variances
295 
50 
345 
  
51 
  
396 
Changes in non-operating assumptions and experience variances
(163)
109 
(54)
  
409 
  
355 
Gain on acquisition of REALICnotes 5 and (v)
(169)
169 
- 
  
453 
  
453 
Profit after tax from long-term business
1,364 
543 
1,907 
  
2,198 
  
4,105 
Exchange movements on foreign operations and net investment
              
 
hedges
(92)
(92)
(184)
  
(339)
  
(523)
Intra-group dividends (including statutory transfers) and investment in
       operationsnote (ii)
(1,187)
- 
(1,187)
  
188 
  
(999)
Mark to market value movements on Jackson
              
 
assets backing surplus and required capital
35 
- 
35 
  
- 
  
35 
Other transfers from net worth
(2)
- 
(2)
  
- 
  
(2)
Shareholders' equity at 31 December 2012
2,957 
3,898 
6,855 
  
15,411 
  
22,266 
                 
Representing:
              
Asia operations
              
Shareholders' equity at 1 January 2012
1,067 
860 
1,927 
  
6,583 
  
8,510 
New business contributionnote (iv)
(292)
97 
(195)
  
1,177 
  
982 
Existing business - transfer to net worth
635 
(3)
632 
  
(632)
  
- 
Expected return on existing business
56 
- 
56 
  
413 
  
469 
Changes in operating assumptions and experience variances
80 
25 
105 
  
(23)
  
82 
Changes in non-operating assumptions and experience variances
114 
16 
130 
  
92 
  
222 
Profit after tax from long-term business
593 
135 
728 
  
1,027 
  
1,755 
Exchange movements on foreign operations and net investment
              
 
hedges
(38)
(25)
(63)
  
(208)
  
(271)
Intra-group dividends (including statutory transfers) and investment in
       operationsnote (ii)
(656)
- 
(656)
  
116 
  
(540)
Other transfers to net worth
8 
- 
8 
  
- 
  
8 
Shareholders' equity at 31 December 2012
974 
970 
1,944 
  
7,518 
  
9,462 
 
US operations
              
Shareholders' equity at 1 January 2012
1,220 
1,371 
2,591 
  
2,491 
  
5,082 
New business contributionnote (iv)
(281)
271 
(10)
  
578 
  
568 
Existing business - transfer to net worth
777 
(242)
535 
  
(535)
  
- 
Expected return on existing business
40 
48 
88 
  
180 
  
268 
Changes in operating assumptions and experience variances
219 
19 
238 
  
21 
  
259 
Changes in non-operating assumptions and experience variances
(330)
31 
(299)
  
164 
  
(135)
Gain on acquisition of REALICnotes 5 and (v)
(169)
169 
- 
  
453 
  
453 
Profit after tax from long-term business
256 
296 
552 
  
861 
  
1,413 
Exchange movements on foreign operations and net investment
              
 
hedges
(54)
(67)
(121)
  
(131)
  
(252)
Intra-group dividends (including statutory transfers)
(252)
- 
(252)
  
- 
  
(252)
Mark to market value movements on Jackson assets backing
              
 
surplus and required capital
35 
- 
35 
  
- 
  
35 
Other transfers to net worth
6 
- 
6 
  
- 
  
6 
Shareholders' equity at 31 December 2012
1,211 
1,600 
2,811 
  
3,221 
  
6,032 
 
UK insurance operations
              
Shareholders' equity at 1 January 2012
552 
1,216 
1,768 
  
4,290 
  
6,058 
New business contributionnote (iv)
(45)
86 
41 
  
200 
  
241 
Existing business - transfer to net worth
511 
(79)
432 
  
(432)
  
- 
Expected return on existing business
- 
37 
37 
  
336 
  
373 
Changes in operating assumptions and experience variances
(4)
6 
2 
  
53 
  
55 
Changes in non-operating assumptions and experience variances
53 
62 
115 
  
153 
  
268 
Profit after tax from long-term business
515 
112 
627 
  
310 
  
937 
Intra-group dividends (including statutory transfers)note (ii)
(279)
- 
(279)
  
72 
  
(207)
Other transfers from net worth
(16)
- 
(16)
  
- 
  
(16)
Shareholders' equity at 31 December 2012
772 
1,328 
2,100 
  
4,672 
  
6,772 
 
Notes
  (i)    All figures are shown net of tax.
 
(ii)   The amounts shown in respect of free surplus and the value of in-force business for Asia and UK insurance operations for intra-group dividends (including statutory transfers) and investment in operations  include the repayment of contingent loan funding. Contingent loan funding represents amounts whose repayment to the lender is contingent upon future surpluses emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall.
(iii)  The movements arising from new business contribution are as follows:
 
     
2012 £m
2011 £m
 
Free surplus invested in new business
(618)
(553)
 
Increase in required capital
454 
406 
 
Reduction in total net worth
(164)
(147)
 
Increase in the value associated with new business
1,955 
1,683 
 
Total post-tax new business contribution
1,791 
1,536 
 
    (iv)   Free surplus invested in new business is as follows:
                        
     
2012 £m
  
2011 £m
     
Asia operations
  
US operations
  
UK
insurance operations
  
Total
long-term
business operations
  
Asia operations
  
US operations
  
UK
insurance operations
  
Total
long-term
business operations
 
Pre-tax new business contributionnote 2
1,266 
  
873 
  
313 
  
2,452 
  
1,076 
  
815 
  
260 
  
2,151 
 
Tax
(284)
  
(305)
  
(72)
  
(661)
  
(265)
  
(285)
  
(65)
  
(615)
 
Post-tax new business contribution
982 
  
568 
  
241 
  
1,791 
  
811 
  
530 
  
195 
  
1,536 
 
Free surplus invested in new business
(292)
  
(281)
  
(45)
  
(618)
  
(297)
  
(202)
  
(54)
  
(553)
 
Post-tax new business contribution
                              
   
per £1 million free surplus invested
3.4 
  
2.0 
  
5.4 
  
2.9 
  
2.7 
  
2.6 
  
3.6 
  
2.8 
 
 
(v)   The effect on free surplus of the purchase of REALIC reflects the difference between the consideration of £370 million and the free surplus of REALIC at the acquisition date. The REALIC free surplus represents the excess of net worth over required capital. The incremental  value of in-force of £453 million represents the amount which is recognized on the EEV reporting basis over and above the net worth.
 
(vi)  The value of in-force business includes the value of future margins from current in-force business less the cost of holding required capital and represents:
 
     
2012 £m
  
2011 £m
     
Asia
operations
  
US
operations
  
UK
insurance
operations
  
Total
long-term
business
operations
  
Asia
operations
  
US
operations
  
UK
insurance
operations
  
Total
long-term
business
operations
             
note
                    
 
Value of in-force business
                              
   
before deduction of cost of
                              
   
capital and time value of guarantees
7,903 
  
3,992 
  
4,916 
  
16,811 
  
6,922 
  
3,222 
  
4,598 
  
14,742 
 
Cost of capital
(352)
  
(121)
  
(244)
  
(717)
  
(317)
  
(135)
  
(241)
  
(693)
 
Cost of time value of guarantees
(33)
  
(650)
  
- 
  
(683)
  
(22)
  
(596)
  
(67)
  
(685)
 
Net value of in-force business
7,518 
  
3,221 
  
4,672 
  
15,411 
  
6,583 
  
2,491 
  
4,290 
  
13,364 
 
 
Note
A provision for the cost of time value of options and guarantees for UK insurance operations is no longer required.
 
15 Expected transfer of value of in-force business to free surplus
 
The discounted value of in-force business and required capital can be reconciled to the 2012 and 2011 totals in the tables below for the emergence of free surplus as follows:
 
 
2012 £m
2011 £m
Required capitalnote 14
3,898 
3,447 
Value of in-force (VIF)note 14
15,411 
13,364 
Add back: deduction for cost of time value of guaranteesnote 14
683 
685 
Other itemsnote
(1,401)
(1,214)
 
18,591 
16,282 
 
Note
'Other items'  represent amounts incorporated into VIF where there is no definitive timeframe for when the payments will be made or receipts received. In particular, other items includes the deduction of the value of the shareholders' interest in the estate, the value of which is derived by increasing final bonus rates so as to exhaust the estate over the lifetime of the in-force with-profits business. This is an assumption to give an appropriate valuation. To be conservative this item is excluded from the expected free surplus generation profile below.
 
Cash flows are projected on a deterministic basis and are discounted at the appropriate risk discount rate. The modelled cash flows use the same methodology underpinning the Group's embedded value reporting and so is subject to the same assumptions and sensitivities.
 
The table below shows how the VIF generated by the in-force business and the associated required capital is modelled as emerging into free surplus over future years.
 
               
   
2012 £m
   
Expected period of conversion of future post tax distributable earnings and required capital flows to free surplus
 
2012 Total as shown above
1-5 years
6 -10 years
11-15 years
16 -20 years
21-40 years
40+ years
Asia operations
8,410 
2,987 
1,873 
1,181 
840 
1,297 
232 
US operations
5,439 
2,723 
1,607 
698 
301 
110 
- 
UK insurance operations
4,742 
1,890 
1,185 
756 
456 
445 
10 
Total
18,591 
7,600 
4,665 
2,635 
1,597 
1,852 
242 
 
100%
41%
25%
14%
9%
10%
1%
               
   
2011 £m
   
Expected period of conversion of future post tax distributable earnings and required capital flows to free surplus
 
2011 Total as shown above
1-5 years
6 -10 years
11-15 years
16 -20 years
21-40 years
40+ years
Asia operations
7,387 
2,582 
1,596 
1,012 
732 
1,262 
 203 
US operations
4,267 
2,241 
1,287 
490 
173 
76 
 - 
UK insurance operations
4,628 
1,864 
1,166 
743 
453 
394 
 8 
Total
16,282 
6,687 
4,049 
2,245 
1,358 
1,732 
211 
 
100%
41%
25%
14%
8%
11%
1%
 
16 Sensitivity of results to alternative assumptions
 
(a) Sensitivity analysis - economic assumptions
The tables below show the sensitivity of the embedded value as at 31 December 2012 (31 December 2011) and the new business contribution after the effect of required capital for 2012 and 2011 to:
 
 
•     1 per cent increase in the discount rates;
 
•     1 per cent increase and decrease in interest rates, including all consequential changes (assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates); 
 
•     1 per cent rise in equity and property yields;
 
•     10 per cent fall in market value of equity and property assets (embedded value only);
 
•     holding company statutory minimum capital (by contrast to required capital), (embedded value only);
 
•     5 basis point increase in UK long-term expected defaults; and
 
•     10 basis point increase in the liquidity premium for UK annuities.
 
 
In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions.
 
New business contribution
                  
   
2012 £m
  
2011 £m
   
Asia operations
US operations
UK insurance operations
Total
long-term
business
operations
  
Asia operations
US operations
UK insurance operations
Total
long-term
business
operations
                     
New business contributionnote 2
1,266 
873 
313 
2,452 
  
1,076 
815 
260 
2,151 
Discount rates - 1% increase
(163)
(40)
(38)
(241)
  
(139)
(45)
(36)
(220)
Interest rates - 1% increase
33 
104 
6 
143 
  
2 
81 
5 
88  
Interest rates - 1% decrease
(106)
(161)
(11)
(278)
  
(72)
(117)
(6)
(195)
Equity/property yields - 1% rise
48 
97 
13 
158 
  
50 
92 
11 
153 
Long-term expected defaults - 5 bps
                  
 
increase
- 
- 
(10)
(10)
  
- 
- 
(8)
(8)
Liquidity premium - 10 bps increase
- 
- 
20 
20 
  
- 
- 
16 
16 
                     
 
Embedded value of long-term business operations
              
                     
   
2012 £m
  
2011 £m
         
Total
        
Total
       
UK
long-term
      
UK
long-term
   
Asia
US
insurance
business
  
Asia
US
insurance
business
   
operations
operations
operations
 operations
  
operations
operations
operations
 operations
                     
Shareholders' equitynote 11
9,462 
6,032 
6,772 
22,266 
  
8,510 
5,082 
6,058 
19,650 
Discount rates - 1% increase
 (879)
 (209)
 (482)
 (1,570)
  
 (771)
 (147)
 (443)
 (1,361)
Interest rates - 1% increase
 (218)
 (124)
 (328)
 (670)
  
 (376)
 (106)
 (343)
 (825)
Interest rates - 1% decrease
85  
49  
399  
533  
  
253  
58  
400  
711  
Equity/property yields - 1% rise
328  
230  
202  
760  
  
329  
185  
205  
719  
Equity/property market values - 10%
                  
 
fall
 (159)
 (69)
 (309)
 (537)
  
 (159)
16  
 (326)
 (469)
Statutory minimum capital
108  
89  
4  
201  
  
114  
92  
4  
210  
Long-term expected defaults - 5 bps
                  
 
increase
- 
- 
 (112)
 (112)
  
- 
- 
 (98)
 (98)
Liquidity premium - 10 bps increase
- 
- 
224  
224  
  
- 
- 
196  
196  
 
The sensitivities shown above are for the impact of instantaneous changes on the embedded value of long-term business operations and include the combined effect on the value of in-force business and net assets at the balance sheet dates indicated. If the change in assumption shown in the sensitivities were to occur, then the effect shown above would be recorded within two components of the profit analysis for the following year. These are for the effect of economic assumption changes and, to the extent that asset value changes are included in the sensitivities, within short-term fluctuations in investment returns. In addition to the sensitivity effects shown above, the other components of the profit for the following year would be calculated by reference to the altered assumptions, for example new business contribution and unwind of discount, together with the effect of other changes such as altered corporate bond spreads. In addition for Jackson, the fair value movements on assets backing surplus and required capital which are taken directly to shareholders' equity would also be affected by changes in interest rates.
 
(b)Sensitivity analysis - non-economic assumptions
The tables below show the sensitivity of the embedded value as at 31 December 2012 (31 December 2011) and the new business contribution after the effect of required capital for 2012 and 2011 to:
 
 
·   10 per cent proportionate decrease in maintenance expenses (a 10 per cent sensitivity on a base assumption of £10 per annum would represent an expense assumption of £9 per annum);
 
·   10 per cent proportionate decrease in lapse rates (a 10 per cent sensitivity on a base assumption of 5 per cent would represent a lapse rate of 4.5 per cent per annum); and
 
·   5 per cent proportionate decrease in base mortality and morbidity rates (ie increased longevity).
 
New business contribution
              
   
2012 £m
  
2011 £m
   
Asia operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
  
Asia operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
                     
New business contributionnote 2
1,266 
873 
313 
2,452 
  
1,076 
815 
260 
2,151 
Maintenance expenses - 10% decrease
32 
13 
4 
49 
  
26 
11 
7 
44 
Lapse rates - 10% decrease
95 
26 
7 
128 
  
92 
24 
10 
126 
Mortality and morbidity - 5% decrease
76 
5 
(11)
70 
  
60 
9 
(9)
60 
Change representing effect on:
                  
 
Life business
76 
5 
3 
84 
  
60 
9 
3 
72 
 
UK annuities
- 
- 
(14)
(14)
  
- 
- 
(12)
(12)
 
Embedded value of long-term business operations
              
   
2012 £m
  
2011 £m
   
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
  
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
                   
Shareholders' equitynote 11
9,462 
6,032 
6,772 
22,266 
  
8,510 
5,082 
6,058 
19,650 
Maintenance expenses - 10% decrease
137 
50 
56 
243 
  
117 
44 
52 
213 
Lapse rates - 10% decrease
333 
225 
66 
624 
  
342 
157 
65 
564 
Mortality and morbidity - 5% decrease
387 
178 
(273)
292 
  
289 
92 
(227)
154 
Change representing effect on:
                  
 
Life business
387 
178 
13 
578 
  
289 
92 
12 
393 
 
UK annuities
- 
- 
(286)
(286)
  
- 
- 
(239)
(239)
 
(c) Effect of proposed change in UK corporation tax rate
 
The proposed rate change from 23 per cent to 22 per cent announced in the 2012 Budget on 21 March 2012 has been reduced by a further 1 per cent to 21 per cent in the Autumn Statement on 5 December 2012. The change from 23 per cent to 21 per cent is expected to be effective 1 April 2014 and when substantively enacted it would have the impact of increasing the net of tax value of in-force business of UK insurance operations at 31 December 2012 by around £65 million.
 
17 Assumptions
 
Deterministic assumptions
The tables below summarise the principal financial assumptions:
 
Assumed investment returns reflect the expected future returns on the assets held and allocated to the covered business at the valuation date.
 
(i) Asia operationsnotes (a),(b),(d)
                      
                             
   
31 December 2012 %
  
   
China
Hong Kong
India 
Indonesia
Japan
Korea 
Malaysia
Philippines
Singapore
Taiwan 
Thailand 
Vietnam
  
     
notes
(b),(d)
        
notes
(c),(d)
  
note
(d) 
        
Risk discount rate:
                          
 
New business
10.1 
3.8 
13.2 
9.4 
-
7.4 
5.8 
11.1 
3.6 
3.25 
10.3 
17.2 
  
 
In force
10.1 
3.5 
13.2 
9.4 
4.5 
7.2 
5.8 
11.1 
4.3 
3.4 
10.3 
17.2 
  
Expected long-term 
                          
 
rate of inflation
2.5 
2.25 
4.0 
5.0 
0.0
3.0 
2.5 
4.0 
2.0 
1.0 
3.0 
5.5 
  
Government bond
                          
 
yield
3.6 
1.8 
8.2 
5.3 
0.8 
3.2 
3.5 
4.35 
1.3 
1.2 
3.5 
10.5 
  
                             
   
31 December 2011 %
  
   
China
Hong Kong
India 
Indonesia
Japan
Korea 
Malaysia
Philippines
Singapore
Taiwan 
Thailand 
Vietnam
  
   
notes
(b),(d)
        
notes
(c),(d)
  
note
(d) 
        
Risk discount rate:
                          
 
New business
10.0 
3.85 
13.75 
11.15 
-
7.1 
6.4 
12.2 
3.9 
5.0 
10.1 
19.6 
  
 
In force
10.0 
3.7 
13.75 
11.15 
4.7 
7.1 
6.5 
12.2 
4.65 
5.0 
10.1 
19.6 
  
Expected long-term
                          
 
rate of inflation
2.5 
2.25 
4.0 
5.0 
0.0
3.0 
2.5 
4.0 
2.0 
1.0 
3.0 
6.5 
  
Government bond
                          
 
yield
3.5 
1.9 
8.75 
6.1 
1.0 
3.8 
3.7 
5.4 
1.6 
1.3 
3.3 
12.9 
  
       
   
Asia Total %
   
2012 
2011 
Weighted risk discount rate:note (a)
    
 
New business
6.8 
7.4 
 
In force
6.1 
6.9 
                                   
 
 
Equity risk premiums in Asia range from 3.25 per cent to 8.8 per cent for 2012 (2011: 3.25 per cent to 8.7 per cent).
 
Notes
 
(a)    The weighted risk discount rates for Asia operations shown above have been determined by weighting each country's risk discount rates by reference to the EEV basis new business result and the closing value of in-force business. The changes in the risk discount rates for individual Asia territories reflect the movements in government bond yields, together with the effects of movements in the allowance for market risk and changes in product mix.
 
(b)    For Hong Kong the assumptions shown are for US dollar denominated business. For other territories, the assumptions are for local currency denominated business. 
 
(c)    The risk discount rate for Malaysia reflects both the Malaysia life and Takaful operations.
 
(d)    The mean equity return assumptions for the most significant equity holdings in the Asia operations were:
 
 
   
2012 %
2011 %
 
Hong Kong
5.8 
5.9 
 
Malaysia
9.5 
9.7 
 
Singapore
7.35 
7.7 
       
 
(ii)  US operations
        
       
2012 %
  
2011 %
  
Assumed new business spread margins:notes (a), (c)
        
 
Fixed Annuity business*
        
   
January to June issues 
1.4 
**
1.75 
**
   
July to December issues
1.1 
**
1.75 
**
 
Fixed Index Annuity business
        
   
January to June issues 
1.75 
**
2.25 
  
   
July to December issues
1.35 
**
2.25 
  
 
Institutional business
1.25 
  
1.0 
  
               
Risk discount rate:note (d)
        
 
Variable annuity
6.5 
  
6.7 
  
 
Non-variable annuity
4.0 
  
4.6 
  
 
Weighted average total:note (b)
        
   
New business
6.3 
  
6.5 
  
   
In force
5.6 
  
6.0 
  
US 10-year treasury bond rate at end of year
1.8 
  
1.9 
  
Pre-tax expected long-term nominal rate of return for US equities
5.8 
  
5.9 
  
Equity risk premium
4.0 
  
4.0 
  
Expected long-term rate of inflation
2.5 
  
2.0 
  
 
*    including the proportion of variable annuity business invested in the general account
 
**  grading up linearly by 25 basis points to a long-term assumption over five years
 
 
Notes
 
(a)  The assumed new business spread margins shown above are the rates at inception. For fixed annuity business (including  the proportion of variable annuity business invested in the general account) in both years the assumed spread margin grades up linearly by 25 basis points to the long-term assumption over five years. In 2012 for fixed index annuity business the assumed spread margin also grades up linearly by 25 basis points to the long-term assumption over five years. For fixed index annuity business in 2011 and institutional business in both years the assumption applies from inception (ie no grading).
 
 (b) The weighted average risk discount rates reflect the mix of business between variable annuity and non-variable annuity business. The decrease in the weighted average risk discount rates from 2011 to 2012 primarily reflects the decrease in the US 10-year Treasury bond rate of 10 basis points together with the effect of the decrease in additional allowance for credit risk (as described in note (d) below).
 
(c)  Credit risk treatment
 
      The projected cash flows incorporate the expected long-term spread between the earned rate and the rate credited to policyholders. The projected earned rates reflect book value yields which are adjusted over time to reflect projected reinvestment rates. Positive net cash flows are assumed to be reinvested in a mix of corporate bonds, commercial mortgages and limited partnerships. The yield on those assets is assumed to grade from the current level to a yield that allows for a long-term assumed credit spread on the reinvested assets of 1.25 per cent over 10 years. The yield also reflects an allowance for a risk margin reserve which for 2012 is 28 basis points (2011: 27 basis points) for long-term defaults (as described in note 1(b)(iii)), which represents the allowance as at the valuation date applied in the cash flow projections of the value of the in-force business.
 
      In the event that long-term default levels are higher, then unlike for UK annuity business where policyholder benefits are not changeable, Jackson has some discretion to adjust crediting rates, subject to contract guarantee levels and general market competition considerations.
 
(d)  For US operations, the risk discount rates shown above include an additional allowance for a combination of credit risk premium and short-term downgrade and default allowance for general account business of 150 basis points (2011: 200 basis points) and for variable annuity business of 30 basis points (2011: 40 basis points) to reflect the fact that a proportion of the variable annuity business is allocated to the general account (as described in note 1(b)(iii)).
 
(iii)  UK insurance operations
    
     
2012 %
2011 %
Shareholder-backed annuity business:note (d)
    
Risk discount rate:
    
   
New businessnote (a)
6.9 
7.7 
   
In forcenote (b)
7.95 
8.6 
Pre-tax expected long-term nominal rate of return for shareholder-backed annuity business:
    
   
New business
4.2 
4.85 
   
In forcenote (b)
3.9 
4.4 
Other business:note (d)
    
Risk discount rate:note (c)
    
   
New business
5.2 
5.3 
   
In force
5.6 
5.65 
Equity risk premium
4.0 
4.0 
Pre-tax expected long-term nominal rates of investment return:
    
   
UK equities
6.3 
6.5 
   
Overseas equities
5.8 to 9.6
5.9 to 9.9
   
Property
5.1 
5.2 
   
Gilts
2.3 
2.5 
   
Corporate bonds
3.9 
4.0 
   
Expected long-term rate of inflation
2.9 
 3.0 
Post-tax expected long-term nominal rate of return for the PAC with-profits fund:
    
   
Pension business (where no tax applies)
5.0 
5.1 
   
Life business
4.35 
4.4 
 
Notes
 
(a)   The new business risk discount rate for shareholder-backed annuity business incorporates an allowance for best estimate defaults and additional credit risk provisions, appropriate to the new business assets, over the projected lifetime of this business. These additional provisions comprise of a credit risk premium, which is derived from Moody's data from 1970 to 2009, an allowance for a 1 notch downgrade of the portfolio subject to credit risk and an allowance for short-term defaults.
 
(b)   For shareholder-backed annuity business, the movements in the pre-tax long-term nominal rates of return and the risk discount rates for in-force business mainly reflect the effect of changes in asset yields.
 
(c)   The risk discount rates for new business and business in force for UK insurance operations other than shareholder-backed annuities reflect weighted rates based on the type of business.
 
(d)   Credit spread treatment
         For with-profits business, the embedded value reflects the discounted value of future shareholder transfers. These transfers are directly affected by the level of projected rates of return on investments,
         including  debt securities.  The assumed earned rate for with-profit holdings of corporate bonds is defined as the risk-free rate plus an assessment of the long-term spread over gilts, net of expected long-term defaults. This  
        approach is similar to that applied for equities and properties for which the projected earned rate is defined as the risk-free rate plus a long-term risk premium.   
 
 For UK shareholder-backed annuity business, different dynamics apply both in terms of the nature of the business and the EEV methodology applied. For this type of business the assets are generally held to maturity to match long duration liabilities. It is therefore appropriate under EEV methodology to include a liquidity premium in the economic basis used. The appropriate EEV risk discount rate is set in order to equate the EEV with a 'market consistent embedded value' including liquidity premium. The liquidity premium in the 'market consistent embedded value' is derived from the yield on the assets held after deducting an appropriate allowance for credit risk. For Prudential Retirement Income Limited, which has approximately 90 per cent of UK shareholder-backed annuity business, the allowance for credit risk for the in-force business at 31 December 2012 is made up of:
 
(1) 15 basis points in respect of long-term expected defaults derived by applying Moody's data from 1970 to  
 
 2009 and the definition of the credit rating used is the second highest credit rating published by Moody's,
 
 Standard and Poor's and Fitch.
 
(2) 50 basis points in respect of additional provisions which comprise a credit risk premium, which is derived from
 
 Moody's data from 1970 to 2009, an allowance for a 1 notch downgrade of the portfolio subject to credit risk
 
 and an allowance for short-term defaults.
 
 
The credit assumptions used and the residual liquidity premium element of the bond spread over swap rates is as  follows:
 
 
     
31 December
31 December
     
2012 
2011 
New business*
(bps)
(bps)
 
Bond spread over swap rates
 150 
139 
 
Total credit risk allowance**
 35 
35 
 
Liquidity premium
 115 
104 
In-force business
    
 
Bond spread over swap rates
 161 
201 
 
Total credit risk allowance
 65 
66 
 
Liquidity premium
 96 
 135 
 
*       The new business liquidity premium is based on the weighted average of the point of sale liquidity premia.
 
**     Specific assets are allocated to the new business for the period with the appropriate allowance for credit risk  
 
  which was 35 basis points for 2012 and 2011.
 
The overall allowance for credit risk is prudent by comparison with historic rates of default and would be sufficient to withstand a wide range of extreme credit events over the expected lifetime of the annuity business.
    
Stochastic assumptions
The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations described above. Assumptions specific to the stochastic calculations, such as the volatilities of asset returns, reflect local market conditions and are based on a combination of actual market data, historic market data and an assessment of longer-term economic conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling of individual asset classes but with allowance for correlation between the various asset classes.
 
Details are given below of the key characteristics and calibrations of each model.
 
(iv)  Asia operations
      
•  The same asset return models as described for UK insurance operations below, appropriatelycalibrated, have been used for Asia operations. The principal asset classes are government and  corporate bonds. Equity   holdings are much lower than in the UK whilst property holdings do not represent a significant investment asset;
      
•  The stochastic cost of guarantees is primarily only of significance for the Hong Kong, Korea, Malaysia and Singapore operations; and
      
•  The mean stochastic returns are consistent with the mean deterministic returns for each country. The expected volatility of equity returns ranges from 18 per cent to 35 per cent, and the volatility of government bond yields ranges from 0.9 per cent to 2.3 per cent (2011: 0.9 per cent to 2.4 per cent).
 
(v)  US operations (Jackson)
     
•  Interest rates are projected using a log-normal generator calibrated to historical US Treasury yield  curves;
     
•  Corporate bond returns are based on Treasury securities plus a spread that has been calibrated to current market conditions and varies by credit quality; and
     
•  Variable annuity equity returns and bond interest rates have been stochastically generated using a log-normal model with parameters determined by reference to historical data. The volatility of equity fund returns ranges from 19 per cent to 32 per cent for all periods throughout these results, depending on  the risk class and the class of equity, and the standard deviation of interest rates ranges from 2.2 per cent to 2.5 per cent (2011: 2.1 per cent to 2.4 per cent). 
 
(vi)  UK insurance operations
 
      
•  Interest rates are projected using a two-factor model calibrated to the initial market yield curve;
      
•  The risk premium on equity assets is assumed to follow a log-normal distribution;
      
•  The corporate bond return is calculated as the return on a zero-coupon bond plus a spread. The spread  process is a mean reverting stochastic process; and
      
•  Property returns are modelled in a similar fashion to corporate bonds, namely as the return on a risk- free bond, plus a risk premium, plus a process representative of the change in residual values and the change in value of the call option on rents.
 
Mean returns have been derived as the annualised arithmetic average return across all simulations and durations.
     
For each projection year, standard deviations have been calculated by taking the square root of the annualised variance of the returns over all the simulations. These have been averaged over all durations in the projection. For equity and property, the standard deviations relate to the total return on these assets. The standard deviations applied for both years are as follows:
 
   
2012 %
2011 %
Equities:
    
 
UK
20 
20 
 
Overseas
18 
18 
Property
15 
15 
 
(vii) Demographic assumptions
Persistency, mortality and morbidity assumptions are based on an analysis of recent experience but also reflect expected future experience. Where relevant, when calculating the time value of financial options and guarantees, policyholder withdrawal rates vary in line with the emerging investment conditions according to management's expectations.
 
(viii) Expense assumptions
Expense levels, including those of service companies that support the Group's long-term business operations, are based on internal expense analysis investigations and are appropriately allocated to acquisition of new business and renewal of in-force business. Exceptional expenses are identified and reported separately. For mature business, it is Prudential's policy not to take credit for future cost reduction programmes until the savings have been delivered. For businesses which are currently sub-scale (China, Malaysia Takaful and Taiwan) and India (where the business model is being adapted in response to the regulatory changes introduced in recent years), expense overruns are permitted provided these are short-lived.
For Asia operations, the expenses comprise costs borne directly and recharged costs from the Asia regional head office, that are attributable to covered business. The assumed future expenses for these operations also include projections of these future recharges. Development expenses are charged as incurred.
 
Corporate expenditure comprises:
 
·      Expenditure for group head office, to the extent not allocated to the PAC with-profits funds, together with Solvency II implementation and restructuring costs, which are charged to the EEV basis results as incurred; and
 
·      Expenditure of the Asia regional head office that is not allocated to the covered business or asset management operations, and is charged as incurred. These costs are primarily for corporate related activities and included
        within corporate expenditure.
 
(ix) Taxation and other legislation
Current taxation and other legislation have been assumed to continue unaltered except where changes have been announced and substantively enacted in the year.
 
The sensitivity of the embedded value as at 31 December 2012 to the effect of the forthcoming change in the UK corporate tax rates is shown in note 16(c).
 
18 New business premiums and contributionsnote (i)
 
   
     Single
  
     Regular
  
Annual premium and contribution equivalents (APE)
  
 Present value of new business premiums
(PVNBP)
   
2012 £m 
2011 £m 
  
2012 £m 
2011 £m 
  
2012 £m 
2011 £m 
  
2012 £m 
2011 £m 
Group insurance
                      
operations
                      
Asia
 1,568 
 1,456 
  
 1,740 
 1,514 
  
 1,897 
 1,660 
  
 10,544 
 8,910 
US
 14,504 
 12,562 
  
 12 
 19 
  
 1,462 
 1,275 
  
 14,600 
 12,720 
UK
 6,286 
 4,871 
  
 207 
 259 
  
 836 
 746 
  
 7,311 
 6,111 
Group Total
 22,358 
 18,889 
  
 1,959 
 1,792 
  
 4,195 
 3,681 
  
 32,455 
 27,741 
Asia insurance
                      
operations
                      
Hong Kong
 157 
 180 
  
 380 
 313 
  
 396 
 331 
  
 2,316 
 2,023 
Indonesia
 359 
 250 
  
 410 
 338 
  
 446 
 363 
  
 2,097 
 1,435 
Malaysia
 98 
 79 
  
 208 
 215 
  
 218 
 223 
  
 1,388 
 1,225 
Philippines
 172 
 95 
  
 28 
 20 
  
 45 
 30 
  
 254 
 153 
Singapore
 399 
 371 
  
 261 
 198 
  
 301 
 235 
  
 2,314 
 1,855 
Thailand
 12 
 11 
  
 36 
 26 
  
 37 
 27 
  
 140 
 102 
Vietnam
 1 
 1 
  
 44 
 42 
  
 45 
 42 
  
 159 
 143 
SE Asia operations inc. Hong Kong
 1,198 
 987 
  
 1,367 
 1,152 
  
 1,488 
 1,251 
  
 8,668 
 6,936 
Chinanote (ii)
 37 
 46 
  
 53 
 54 
  
 56 
 59 
  
 277 
 294 
Korea
 94 
 71 
  
 86 
 94 
  
 95 
 101 
  
 438 
 542 
Taiwan
 172 
 217 
  
 138 
 126 
  
 156 
 148 
  
 723 
 672 
Indianote (iii)
 67 
 135 
  
 96 
 88 
  
 102 
 101 
  
 438 
 466 
Total Asia operations
 1,568 
 1,456 
  
 1,740 
 1,514 
  
 1,897 
 1,660 
  
 10,544 
 8,910 
US insurance
                      
operations
                      
Fixed annuities
 581 
 472 
  
 - 
 -
  
 58 
 47 
  
 581 
 472 
Fixed index annuities
 1,094 
 934 
  
 - 
 -
  
 109 
 93 
  
 1,094 
 934 
Life
 6 
 10 
  
 12 
 19 
  
 12 
 20 
  
 102 
 168 
Variable annuities
 12,445 
 10,909 
  
 - 
 -
  
 1,245 
 1,091 
  
 12,445 
 10,909 
Wholesale
 378 
 237 
  
 - 
 -
  
 38 
 24 
  
 378 
 237 
Total US insurance
                      
operations
 14,504 
 12,562 
  
 12 
 19 
  
 1,462 
 1,275 
  
 14,600 
 12,720 
UK and Europe
                      
insurance operations
                      
Direct and partnership
                      
 
annuities
 297 
 328 
  
 - 
 -
  
 30 
 33 
  
 297 
 328 
Intermediated annuities
 653 
 241 
  
 - 
 -
  
 65 
 24 
  
 653 
 241 
Internal vesting annuities
 1,456 
 1,223 
  
 - 
 -
  
 146 
 122 
  
 1,456 
 1,223 
Total individual  annuities
 2,406 
 1,792 
  
 - 
 - 
  
 241 
 179 
  
 2,406 
 1,792 
Corporate pensions
 303 
 184 
  
 159 
 215 
  
 189 
 233 
  
 1,045 
 1,224 
Onshore bonds
 2,275 
 1,779 
  
 - 
 -
  
 228 
 178 
  
 2,277 
 1,781 
Other products
 894 
 780 
  
 48 
 44 
  
 137 
 122 
  
 1,175 
 978 
Wholesale
 408 
 336 
  
 - 
 -
  
 41 
 34 
  
 408 
 336 
Total UK and Europe
                      
insurance operations
 6,286 
 4,871 
  
 207 
 259 
  
 836 
 746 
  
 7,311 
 6,111 
Group Total
 22,358 
 18,889 
  
 1,959 
 1,792 
  
 4,195 
 3,681 
  
 32,455 
 27,741 
                         
Notes
 
(i)    The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profits for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS income statement.
 
(ii)   New business in China is included at Prudential's 50 per cent interest in the China life operation.
 
(iii)  New business in India is included at Prudential's 26 per cent interest in the India life operation.
 
19 Other developments
 
 
Acquisition of Thanachart Life Assurance Company Limited
 
 
On 5 November 2012, Prudential plc , through its subsidiary Prudential Life Assurance (Thailand) Public Company Limited ('Prudential Thailand') entered into an agreement to acquire 100 per cent of Thanachart Life Assurance Company Limited ('Thanachart Life'), a wholly-owned life insurance subsidiary of Thanachart Bank Public Company limited ('Thanachart Bank'). The consideration for Thanachart Life is THB 17.5 billion (£352 million at the year end exchange rate) settled in cash on completion, with a further payment of THB 0.5 billion (£10 million) payable 12 months after completion, subject to a post-completion adjustment to reflect the net asset value as at the completion date. The transaction is subject to regulatory approval and is expected to close in the first half of 2013. Upon completion of the transaction, Thanachart Life will become a wholly-owned subsidiary of Prudential Thailand.
 
As part of the deal, Prudential Thailand and Thanachart Bank have entered into an agreement to establish an exclusive 15-year partnership to develop jointly their bancassurance business in Thailand. This transaction builds on Prudential's strategy of focusing on the highly attractive markets of South-east Asia and is in line with the group's multichannel distribution strategy.
 
Additional Unaudited Financial Information
 
A      New Business Schedules
 
BASIS OF PREPARATION
 
The format of the schedules is consistent with the distinction between insurance and investment products as applied for previous financial reporting periods. With the exception of some US institutional business, products categorised as 'insurance' refer to those classified as contracts of long-term insurance business for regulatory reporting purposes, ie 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 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 or other financial instruments under IFRS. Contracts included in this category are primarily certain unit-linked and similar contracts written in UK Insurance Operations, and Guaranteed Investment Contracts and similar funding agreements written in US Operations.
 
New business premiums for regular premium products are shown on an annualised basis. Internal vesting business is classified as new business where the contracts include an open market option. New business premiums reflect those premiums attaching to covered business, including premiums for contracts designed as investment products for IFRS reporting.
 
Investment products referred to in the tables for funds under management are unit trusts, mutual funds and similar types of retail fund management arrangements. These are unrelated to insurance products that are classified as investment contracts under IFRS 4, as described in the preceding paragraph, although similar IFRS recognition and measurement principles apply to the acquisition costs and fees attaching to this type of business.
 
New Business Profit has been determined using the European Embedded Value (EEV) methodology and assumptions set out in our 2012 Full Year EEV Preliminary Announcement.
 
In determining the EEV basis value of new business written in the period policies incept, premiums are included in projected cash flows on the same basis of distinguishing annual and single premium business as set out for statutory basis reporting.
 
Annual premium equivalent (APE) sales are subject to rounding.
 
Notes to Schedules A(i) - A(vi)
 
 
(1a)    Insurance and investment new business for overseas operations has been calculated using average exchange rates. The applicable rate for Jackson for 2012 is 1.58.
 
(1b)    Insurance and investment new business for overseas operations for 2011 has been calculated using constant exchange rates. The applicable rate for Jackson is 1.58.
 
(2)      New business values are all presented pre-tax.
 
(3)      Annual Equivalents, calculated as regular new business contributions plus 10 per cent of single new business contributions, are subject to roundings. PVNBPs are calculated as equalling single premiums plus the present value of expected premiums of new regular premium business. In determining the present value, allowance is made for lapses and other assumptions applied in determining the EEV new business profit.
 
(4)      Balance includes segregated and pooled pension funds, private finance assets and other institutional clients. Other movements reflect the net flows arising from the cash component of a tactical asset allocation fund managed by PPM South Africa.
 
(5)      New business in India is included at Prudential's 26 per cent interest in the India life operation. 
 
(6)      Balance Sheet figures have been calculated at the closing exchange rate.
 
(7)      Sales are converted using the year-to-date average exchange rate applicable at the time. The sterling results for individual quarters represent the difference between the year-to-date reported sterling results at successive quarters and will include foreign exchange movements from earlier periods.
 
(8)      New business in China is included at Prudential's 50 per cent interest in the China life operation. 
 
(9)      Mandatory Provident Fund (MPF) product sales in Hong Kong are included at Prudential's 36 per cent interest in Hong Kong MPF operation.
 
(10)    Investment flows for the year exclude Eastspring Money Market Funds (MMF) gross inflows of £51,463 million (2011: £55,902 million) and net outflows of £226 million (2011 net outflows: £512 million).
 
(11)    From 1 January 2012, Prudential Portfolio Managers South Africa (Pty) Limited is no longer a subsidiary of M&G following the restructuring transaction whereby M&G's ownership has been diluted following the equitisation of the staff incentive scheme and reduced further by the sale of an additional 10 per cent equity stake to an empowerment company as encouraged under Broad Based Black Economic Empowerment legislation. Only 49.99 per cent of funds under management and flows from the South African associate company will be included in M&G's results from 2012 onwards whereas 100 per cent has been included up to the end of 2011.
 
Schedule A(i) - Reported Exchange Rates
PRUDENTIAL PLC - NEW BUSINESS - 2012
INSURANCE OPERATIONS
 
                         
 
Single
    
Regular
  
Annual Equivalents(3)
PVNBP
 
2012 
2011 
  
2012 
2011 
  
2012 
2011 
  
2012 
2011 
  
 
YTD
YTD
+/- (%)
YTD
YTD
+/- (%)
YTD
YTD
+/- (%)
YTD
YTD
+/- (%)
 
£m
£m
  
£m
£m
  
£m
£m
  
£m
£m
  
Group Insurance Operations
                        
Asia
 1,568 
 1,456 
8%
 1,740 
 1,514 
15%
 1,897 
 1,660 
14%
 10,544 
 8,910 
18%
US(1a) (7)
 14,504 
 12,562 
15%
 12 
 19 
(37%)
 1,462 
 1,275 
15%
 14,600 
 12,720 
15%
UK
 6,286 
 4,871 
29%
 207 
 259 
(20%)
 836 
 746 
12%
 7,311 
 6,111 
20%
Group Total
 22,358 
 18,889 
18%
 1,959 
 1,792 
9%
 4,195 
 3,681 
14%
 32,455 
 27,741 
17%
                         
Asia Insurance Operations(1a) (7)
                        
Hong Kong
 157 
 180 
(13%)
 380 
 313 
21%
 396 
 331 
20%
 2,316 
 2,023 
14%
Indonesia
 359 
 250 
44%
 410 
 338 
21%
 446 
 363 
23%
 2,097 
 1,435 
46%
Malaysia
 98 
 79 
24%
 208 
 215 
(3%)
 218 
 223 
(2%)
 1,388 
 1,225 
13%
Philippines
 172 
 95 
81%
 28 
 20 
40%
 45 
 30 
50%
 254 
 153 
66%
Singapore
 399 
 371 
8%
 261 
 198 
32%
 301 
 235 
28%
 2,314 
 1,855 
25%
Thailand
 12 
 11 
9%
 36 
 26 
38%
 37 
 27 
37%
 140 
 102 
37%
Vietnam
 1 
 1 
- 
 44 
 42 
5%
 45 
 42 
7%
 159 
 143 
11%
SE Asia Operations inc. Hong Kong
 1,198 
 987 
21%
 1,367 
 1,152 
19%
 1,488 
 1,251 
19%
 8,668 
 6,936 
25%
China(8)
 37 
 46 
(20%)
 53 
 54 
(2%)
 56 
 59 
(5%)
 277 
 294 
(6%)
Korea
 94 
 71 
32%
 86 
 94 
(9%)
 95 
 101 
(6%)
 438 
 542 
(19%)
Taiwan
 172 
 217 
(21%)
 138 
 126 
10%
 156 
 148 
5%
 723 
 672 
8%
India(5)
 67 
 135 
(50%)
 96 
 88 
9%
 102 
 101 
1%
 438 
 466 
(6%)
Total Asia Operations
 1,568 
 1,456 
8%
 1,740 
 1,514 
15%
 1,897 
 1,660 
14%
 10,544 
 8,910 
18%
                         
US Insurance Operations(1a) (7)
                        
Fixed Annuities
 581 
 472 
23%
 - 
 - 
N/A
 58 
 47 
23%
 581 
 472 
23%
Fixed Index Annuities
 1,094 
 934 
17%
 - 
 - 
N/A
 109 
 93 
17%
 1,094 
 934 
17%
Life
 6 
 10 
(40%)
 12 
 19 
(37%)
 12 
 20 
(40%)
 102 
 168 
(39%)
Variable Annuities
 12,445 
 10,909 
14%
 - 
 - 
N/A
 1,245 
 1,091 
14%
 12,445 
 10,909 
14%
Wholesale
 378 
 237 
59%
 - 
 - 
N/A
 38 
 24 
58%
 378 
 237 
59%
Total US Insurance Operations
 14,504 
 12,562 
15%
 12 
 19 
(37%)
 1,462 
 1,275 
15%
 14,600 
 12,720 
15%
                         
UK & Europe Insurance Operations
                        
Direct and Partnership Annuities
 297 
 328 
(9%)
 - 
 - 
N/A
 30 
 33 
(9%)
 297 
 328 
(9%)
Intermediated Annuities
 653 
 241 
171%
 - 
 - 
N/A
 65 
 24 
171%
 653 
 241 
171%
Internal Vesting Annuities
 1,456 
 1,223 
19%
 - 
 - 
N/A
 146 
 122 
20%
 1,456 
 1,223 
19%
Total Individual Annuities
 2,406 
 1,792 
34%
 - 
 - 
N/A
 241 
 179 
35%
 2,406 
 1,792 
34%
Corporate Pensions
 303 
 184 
65%
 159 
 215 
(26%)
 189 
 233 
(19%)
 1,045 
 1,224 
(15%)
On-shore Bonds
 2,275 
 1,779 
28%
 - 
 - 
N/A
 228 
 178 
28%
 2,277 
 1,781 
28%
Other Products
 894 
 780 
15%
 48 
 44 
9%
 137 
 122 
12%
 1,175 
 978 
20%
Wholesale
 408 
 336 
21%
 - 
 - 
N/A
 41 
 34 
21%
 408 
 336 
21%
Total UK & Europe Insurance Operations
 6,286 
 4,871 
29%
 207 
 259 
(20%)
 836 
 746 
12%
 7,311 
 6,111 
20%
Group Total
 22,358 
 18,889 
18%
 1,959 
 1,792 
9%
 4,195 
 3,681 
14%
 32,455 
 27,741 
17%
 
Schedule A(ii) - Constant Exchange Rates
PRUDENTIAL PLC - NEW BUSINESS - 2012
INSURANCE OPERATIONS
 
                         
 
Single
    
Regular
  
Annual Equivalents(3)
PVNBP
 
2012 
2011 
  
2012 
2011 
  
2012 
2011 
  
2012 
2011 
  
 
YTD
YTD
+/- (%)
YTD
YTD
+/- (%)
YTD
YTD
+/- (%)
YTD
YTD
+/- (%)
 
£m
£m
  
£m
£m
  
£m
£m
  
£m
£m
  
Group Insurance Operations
                        
Asia  (1b) (7)
 1,568 
 1,442 
9%
 1,740 
 1,498 
16%
 1,897 
 1,642 
16%
 10,544 
 8,862 
19%
US(1b) (7)
 14,504 
 12,711 
14%
 12 
 19 
(37%)
 1,462 
 1,290 
13%
 14,600 
 12,871 
13%
UK
 6,286 
 4,871 
29%
 207 
 259 
(20%)
 836 
 746 
12%
 7,311 
 6,111 
20%
Group Total
 22,358 
 19,024 
18%
 1,959 
 1,776 
10%
 4,195 
 3,678 
14%
 32,455 
 27,844 
17%
                         
Asia Insurance Operations(1b) (7)
                        
Hong Kong
 157 
 183 
(14%)
 380 
 318 
19%
 396 
 336 
18%
 2,316 
 2,055 
13%
Indonesia
 359 
 237 
51%
 410 
 320 
28%
 446 
 343 
30%
 2,097 
 1,358 
54%
Malaysia
 98 
 79 
24%
 208 
 216 
(4%)
 218 
 224 
(3%)
 1,388 
 1,227 
13%
Philippines
 172 
 98 
76%
 28 
 21 
33%
 45 
 31 
45%
 254 
 158 
61%
Singapore
 399 
 377 
6%
 261 
 201 
30%
 301 
 239 
26%
 2,314 
 1,888 
23%
Thailand
 12 
 11 
9%
 36 
 25 
44%
 37 
 26 
42%
 140 
 102 
37%
Vietnam
 1 
 1 
0%
 44 
 42 
5%
 45 
 42 
7%
 159 
 143 
11%
SE Asia Operations inc. Hong Kong
 1,198 
 986 
22%
 1,367 
 1,143 
20%
 1,488 
 1,241 
20%
 8,668 
 6,931 
25%
China(8)
 37 
 48 
(23%)
 53 
 56 
(5%)
 56 
 61 
(8%)
 277 
 304 
(9%)
Korea
 94 
 70 
34%
 86 
 94 
(9%)
 95 
 101 
(6%)
 438 
 539 
(19%)
Taiwan
 172 
 219 
(21%)
 138 
 127 
9%
 156 
 149 
5%
 723 
 676 
7%
India(5)
 67 
 119 
(44%)
 96 
 78 
23%
 102 
 90 
13%
 438 
 412 
6%
Total Asia Operations
 1,568 
 1,442 
9%
 1,740 
 1,498 
16%
 1,897 
 1,642 
16%
 10,544 
 8,862 
19%
                         
US Insurance Operations (1b) (7)
                        
Fixed Annuities
 581 
 477 
22%
 - 
 - 
N/A
 58 
 48 
21%
 581 
 477 
22%
Fixed Index Annuities
 1,094 
 945 
16%
 - 
 - 
N/A
 109 
 94 
16%
 1,094 
 945 
16%
Life
 6 
 10 
(40%)
 12 
 19 
(37%)
 12 
 20 
(40%)
 102 
 170 
(40%)
Variable Annuities
 12,445 
 11,038 
13%
 - 
 - 
N/A
 1,245 
 1,104 
13%
 12,445 
 11,038 
13%
Wholesale
 378 
 241 
57%
 - 
 - 
N/A
 38 
 24 
58%
 378 
 241 
57%
Total US Insurance Operations
 14,504 
 12,711 
14%
 12 
 19 
(37%)
 1,462 
 1,290 
13%
 14,600 
 12,871 
13%
                         
UK & Europe Insurance Operations
                        
Direct and Partnership Annuities
 297 
 328 
(9%)
 - 
 - 
N/A
 30 
 33 
(9%)
 297 
 328 
(9%)
Intermediated Annuities
 653 
 241 
171%
 - 
 - 
N/A
 65 
 24 
171%
 653 
 241 
171%
Internal Vesting Annuities
 1,456 
 1,223 
19%
 - 
 - 
N/A
 146 
 122 
20%
 1,456 
 1,223 
19%
Total Individual Annuities
 2,406 
 1,792 
34%
 - 
 - 
N/A
 241 
 179 
35%
 2,406 
 1,792 
34%
Corporate Pensions
 303 
 184 
65%
 159 
 215 
(26%)
 189 
 233 
(19%)
 1,045 
 1,224 
(15%)
On-shore Bonds
 2,275 
 1,779 
28%
 - 
 - 
N/A
 228 
 178 
28%
 2,277 
 1,781 
28%
Other Products
 894 
 780 
15%
 48 
 44 
9%
 137 
 122 
12%
 1,175 
 978 
20%
Wholesale
 408 
 336 
21%
 - 
 - 
N/A
 41 
 34 
21%
 408 
 336 
21%
Total UK & Europe Insurance Operations
 6,286 
 4,871 
29%
 207 
 259 
(20%)
 836 
 746 
12%
 7,311 
 6,111 
20%
Group Total
 22,358 
 19,024 
18%
 1,959 
 1,776 
10%
 4,195 
 3,678 
14%
 32,455 
 27,844 
17%
 
Schedule A(iii) - Reported Exchange Rates
PRUDENTIAL PLC - NEW BUSINESS - 2012
TOTAL INSURANCE NEW BUSINESS APE - BY QUARTER
 
                 
 
2011 
2012 
 
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
 
£m
£m
£m
£m
£m
£m
£m
£m
Group Insurance Operations
                
Asia
 367 
 376 
 404 
 513 
 443 
 456 
 429 
 569 
US(1a)(7)
 322 
 350 
 316 
 287 
 332 
 387 
 414 
 329 
UK
 199 
 210 
 160 
 177 
 189 
 223 
 205 
 219 
Group Total
 888 
 936 
 880 
 977 
 964 
 1,066 
 1,048 
 1,117 
                 
Asia Insurance Operations(1a)(7)                
                
Hong Kong
 77 
 74 
 78 
 102 
 85 
92 
 96 
 123 
Indonesia
 74 
 84 
 81 
 124 
 97 
109 
 97 
 143 
Malaysia
 44 
 47 
 59 
 73 
 45 
53 
 47 
 73 
Philippines
 6 
 8 
 8 
 8 
 10 
11 
 12 
 12 
Singapore
 47 
 56 
 60 
 72 
 72 
69 
 76 
 84 
Thailand
 5 
 6 
 9 
 7 
 11 
8 
 9 
 9 
Vietnam
 8 
 11 
 10 
 13 
 7 
11 
 11 
 16 
SE Asia Operations inc. Hong Kong
 261 
 286 
 305 
 399 
 327 
 353 
 348 
 460 
China(8)
 18 
 17 
 11 
 13 
 17 
16 
 13 
 10 
Korea
 28 
 27 
 26 
 20 
 21 
24 
 22 
 28 
Taiwan
 29 
 30 
 36 
 53 
 43 
45 
 24 
 44 
India(5)
 31 
 16 
 26 
 28 
 35 
18 
 22 
 27 
Total Asia Insurance Operations
 367 
 376 
 404 
 513 
 443 
 456 
 429 
 569 
                 
US Insurance Operations(1a)(7)
                
Fixed Annuities
 13 
 10 
 10 
 14 
 16 
 15 
 14 
 13 
Fixed Index Annuities
 20 
 22 
 26 
 25 
 25 
 25 
 29 
 30 
Life
 5 
 6 
 5 
 4 
 4 
 4 
 3 
 1 
Variable Annuities
 284 
 305 
 262 
 240 
 279 
 332 
 359 
 275 
Wholesale
 - 
 7 
 13 
 4 
 8 
 11 
 9 
 10 
Total US Insurance Operations
 322 
 350 
 316 
 287 
 332 
 387 
 414 
 329 
                 
UK & Europe Insurance Operations
                
Direct and Partnership Annuities
 10 
 8 
 8 
 6 
 7 
7 
 7 
 9 
Intermediated Annuities
 5 
 7 
 6 
 6 
 10 
15 
 16 
 24 
Internal Vesting annuities
 27 
 29 
 32 
 34 
 31 
35 
 38 
 42 
Total Individual Annuities
 42 
 44 
 47 
 46 
 48 
 57 
 61 
 75 
Corporate Pensions
 78 
 69 
 43 
 43 
 49 
55 
 44 
 41 
On-shore Bonds
 43 
 41 
 43 
 51 
 55 
51 
 55 
 67 
Other Products
 36 
 28 
 27 
 31 
 37 
33 
 31 
 36 
Wholesale
 - 
 28 
 - 
 6 
 - 
27 
 14 
 - 
Total UK & Europe Insurance Operations
 199 
 210 
 160 
 177 
 189 
 223 
 205 
 219 
Group Total
 888 
 936 
 880 
 977 
 964 
 1,066 
 1,048 
 1,117 
 
Schedule A(iv) - Constant Exchange Rates
PRUDENTIAL PLC - NEW BUSINESS - 2012
TOTAL INSURANCE NEW BUSINESS APE - BY QUARTER
 
                 
 
2011 
2012 
 
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
 
£m
£m
£m
£m
£m
£m
£m
£m
Group Insurance Operations
                
Asia
 366 
 374 
 398 
 504 
 443 
 456 
 429 
 569 
US(1b) (7)
 326 
 359 
 322 
 283 
 332 
 387 
 414 
 329 
UK
 199 
 210 
 160 
 177 
 189 
 223 
 205 
 219 
Group Total
 891 
 943 
 880 
 964 
 964 
 1,066 
 1,048 
 1,117 
                 
Asia Insurance Operations(1b)(7)
                
Hong Kong
 79 
 76 
 79 
 102 
 85 
 92 
 96 
 123 
Indonesia
 71 
 80 
 75 
 117 
 97 
 109 
 97 
 143 
Malaysia
 44 
 47 
 59 
 74 
 45 
 53 
 47 
 73 
Philippines
 7 
 8 
 8 
 8 
 10 
 11 
 12 
 12 
Singapore
 49 
 58 
 59 
 73 
 72 
 69 
 76 
 84 
Thailand
 5 
 6 
 9 
 6 
 11 
 8 
 9 
 9 
Vietnam
 8 
 11 
 11 
 12 
 7 
 11 
 11 
 16 
SE Asia Operations inc. Hong Kong
 263 
 286 
 300 
 392 
 327 
 353 
 348 
 460 
China(8)
 19 
 18 
 12 
 12 
 17 
 16 
 13 
 10 
Korea
 28 
 27 
 26 
 20 
 21 
 24 
 22 
 28 
Taiwan
 29 
 29 
 37 
 54 
 43 
 45 
 24 
 44 
India(1b) (7) (5)
 27 
 14 
 23 
 26 
 35 
 18 
 22 
 27 
Total Asia Insurance Operations
 366 
 374 
 398 
 504 
 443 
 456 
 429 
 569 
                 
US Insurance Operations(1b) (7)
                
Fixed Annuities
 13 
 11 
 10 
 14 
 16 
 15 
 14 
 13 
Fixed Index Annuities
 21 
 22 
 27 
 24 
 25 
 25 
 29 
 30 
Life
 5 
 5 
 5 
 5 
 4 
 4 
 3 
 1 
Variable Annuities
 287 
 314 
 266 
 237 
 279 
 332 
 359 
 275 
Wholesale
 - 
 7 
 14 
 3 
 8 
 11 
 9 
 10 
Total US Insurance Operations
 326 
 359 
 322 
 283 
 332 
 387 
 414 
 329 
                 
UK & Europe Insurance Operations
                
Direct and Partnership Annuities
 10 
 8 
 8 
 6 
 7 
 7 
 7 
 9 
Intermediated Annuities
 5 
 7 
 6 
 6 
 10 
 15 
 16 
 24 
Internal Vesting annuities
 27 
 29 
 32 
 34 
 31 
 35 
 38 
 42 
Total Individual Annuities
 42 
 44 
 47 
 46 
 48 
 57 
 61 
 75 
Corporate Pensions
 78 
 69 
 43 
 43 
 49 
 55 
 44 
 41 
On-shore Bonds
 43 
 41 
 43 
 51 
 55 
 51 
 55 
 67 
Other Products
 36 
 28 
 27 
 31 
 37 
 33 
 31 
 36 
Wholesale
 - 
 28 
 - 
 6 
 - 
 27 
 14 
 - 
Total UK & Europe Insurance Operations
199 
210 
160 
177 
189 
223 
205 
219 
Group Total
891 
943 
880 
964 
964 
1,066 
1,048 
1,117 
 
Schedule A(v) - Reported Exchange Rates
PRUDENTIAL PLC - NEW BUSINESS - 2012
INVESTMENT OPERATIONS - BY QUARTER
 
 
2011 
2012 
 
Q1
Q2
Q3
Q4 
Q1
Q2 
Q3
Q4
 
£m
£m
£m
£m 
£m
£m 
£m
£m 
Group Investment Operations
                
Opening FUM
107,491 
108,234 
109,901 
102,535 
106,984 
109,507 
110,204 
120,709 
Net Flows(10)
1,891 
1,019 
487 
1,621 
2,116 
3,251 
6,975 
6,165 
 - Gross Inflows
9,186 
8,482 
8,599 
7,538 
9,183 
9,305 
13,228 
13,783 
 - Redemptions
(7,295)
(7,463)
(8,112)
(5,917)
(7,067)
(6,054)
(6,253)
(7,618)
Other Movements
(1,148)
648 
(7,853)
2,828 
407 
(2,554)
3,530 
2,624 
Total Group Investment Operations
108,234 
109,901 
102,535 
106,984 
109,507 
110,204 
120,709 
129,498 
                 
M&G
                
                 
Retail
                
Opening FUM
42,506 
44,018 
45,603 
41,427 
44,228 
47,972 
48,352 
51,951 
Net Flows
1,310 
1,486 
(172)
1,271 
2,398 
1,876 
1,863 
1,705 
 - Gross Inflows
5,474 
4,900 
4,322 
4,353 
6,055 
4,995 
4,903 
5,528 
 - Redemptions
(4,164)
(3,414)
(4,494)
(3,082)
(3,657)
(3,119)
(3,040)
(3,823)
Other Movements
202 
99 
(4,004)
1,530 
1,346 
(1,496)
1,736 
1,223 
Closing FUM
44,018 
45,603 
41,427 
44,228 
47,972 
48,352 
51,951 
54,879 
                 
Institutional(4)
                
Opening FUM
46,820 
47,364 
47,747 
45,921 
47,720 
45,371 
46,291 
52,215 
Net Flows
367 
(241)
(116)
480 
(631)
1,298 
4,505 
3,867 
 - Gross Inflows
1,445 
1,571 
2,105 
1,811 
954 
2,697 
5,643 
5,688 
 - Redemptions
(1,078)
(1,812)
(2,221)
(1,331)
(1,585)
(1,399)
(1,138)
(1,821)
Other Movements
177 
624 
(1,710)
1,319 
(1,718)
(378)
1,419 
907 
Closing FUM
47,364 
47,747 
45,921 
47,720 
45,371 
46,291 
52,215 
56,989 
Total M&G Investment Operations
91,382 
93,350 
87,348 
91,948 
93,343 
94,643 
104,166 
111,868 
                 
PPM South Africa FUM included in Total M&G
8,772 
8,695 
7,396 
7,872 
3,757 
3,584 
3,848 
4,391 
                 
Eastspring - excluding MMF(10)
                
                 
Equity/Bond/Other(9)
                
Opening FUM
16,358 
14,943 
14,565 
13,404 
13,007 
13,970 
13,423 
14,508 
Net Flows
64 
(272)
713 
(252)
333 
50 
838 
521 
 - Gross Inflows
2,031 
1,911 
2,088 
1,147 
2,120 
1,552 
2,407 
2,446 
 - Redemptions
(1,967)
(2,183)
(1,375)
(1,399)
(1,787)
(1,502)
(1,569)
(1,925)
Other Movements
(1,479)
(106)
(1,874)
(145)
630 
(597)
247 
428 
Closing FUM(6)
14,943 
14,565 
13,404 
13,007 
13,970 
13,423 
14,508 
15,457 
                 
Third Party Institutional Mandates
                
Opening FUM
1,807 
1,909 
1,986 
1,783 
2,029 
2,194 
2,138 
2,035 
Net Flows
150 
46 
62 
122 
16 
27 
(231)
72 
 - Gross Inflows
236 
100 
84 
227 
54 
61 
275 
121 
 - Redemptions
(86)
(54)
(22)
(105)
(38)
(34)
(506)
(49)
Other Movements
(48)
31 
(265)
124 
149 
(83)
128 
66 
Closing FUM(6)
1,909 
1,986 
1,783 
2,029 
2,194 
2,138 
2,035 
2,173 
                 
                 
                 
Total Eastspring Investment Operations
16,852 
16,551 
15,187 
15,036 
16,164 
15,561 
16,543 
17,630 
                 
US
                
Curian Capital - FUM(6)
3,873 
4,268 
4,291 
4,705 
5,118 
5,212 
6,421 
7,061 
 
Schedule A(vi) - Reported Exchange Rates
PRUDENTIAL PLC - NEW BUSINESS -2012
TOTAL INSURANCE NEW BUSINESS PROFIT
 
                 
 
2011 
2012 
 
Q1
Q2
Q3
Q4
Q1
Q2 
Q3
Q4 
 
YTD
YTD
YTD
YTD
YTD
YTD 
YTD
YTD 
 
£m
£m
£m
£m
£m
£m 
£m
£m 
Annual Equivalent(3)
                
Total Asia Insurance Operations
367 
743 
1,147 
1,660 
443 
899 
1,328 
1,897 
Total US Insurance Operations
322 
672 
988 
1,275 
332 
719 
1,133 
1,462 
Total UK & Europe Insurance Operations
199 
409 
569 
746 
189 
412 
617 
836 
Group Total
888 
1,824 
2,704 
3,681 
964 
2,030 
3,078 
4,195 
                 
New business profit(2)
                
Total Asia Insurance Operations
213 
465 
719 
 1,076 
260 
547 
828 
1,266 
Total US Insurance Operations
220 
458 
622 
815 
214 
442 
683 
873 
Total UK & Europe Insurance Operations
65 
146 
194 
260 
62 
152 
227 
313 
Group Total
498 
1,069 
1,535 
2,151 
536 
1,141 
1,738 
2,452 
 
New business margin (% of APE)
                
Total Asia Insurance Operations
58%
63%
63%
65%
59%
61%
62%
67%
Total US Insurance Operations
68%
68%
63%
64%
64%
61%
60%
60%
Total UK & Europe Insurance Operations
33%
36%
34%
35%
33%
37%
37%
37%
Group Total
56%
59%
57%
58%
56%
56%
56%
58%
                 
PVNBP(3)
                
Total Asia Insurance Operations
1,935 
3,939 
6,221 
8,910 
2,303 
4,725 
7,074 
10,544 
Total US Insurance Operations
3,206 
6,689 
9,858 
12,720 
3,307 
7,180 
11,308 
14,600 
Total UK & Europe Insurance Operations
1,551 
3,264 
4,603 
6,111 
1,580 
3,495 
5,264 
7,311 
Group Total
6,692 
13,892 
20,682 
27,741 
7,190 
15,400 
23,646 
32,455 
                 
New business profit(2)
                
Total Asia Insurance Operations
213 
465 
719 
1,076 
260 
547 
828 
1,266 
Total US Insurance Operations
220 
458 
622 
815 
214 
442 
683 
873 
Total UK & Europe Insurance Operations
65 
146 
194 
260 
62 
152 
227 
313 
Group Total
498 
1,069 
1,535 
2,151 
536 
1,141 
1,738 
2,452 
                 
New business margin (% of PVNBP)
                
Total Asia Insurance Operations
11.0%
11.8%
11.6%
12.1%
11.3%
11.6%
11.7%
12.0%
Total US Insurance Operations
6.9%
6.8%
6.3%
6.4%
6.5%
6.2%
6.0%
6.0%
Total UK & Europe Insurance Operations
4.2%
4.5%
4.2%
4.3%
3.9%
4.3%
4.3%
4.3%
Group Total
7.4%
7.7%
7.4%
7.8%
7.5%
7.4%
7.4%
7.6%
 
B. Reconciliation of expected transfer of value of in-force (VIF) and required capital business to free surplus
The tables below show how the VIF generated by the in-force long-term business and the associated required capital is modelled as emerging into free surplus over the next 40 years. Although a small amount (less than 2 per cent) of the Group's embedded value emerges after this date analysis of cash flows emerging in the years shown in the tables is considered most meaningful. The modelled cash flows use the same methodology underpinning the Group's embedded value reporting and so are subject to the same assumptions and sensitivities.
 
In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in-force business at 31 December 2012, the tables also present the expected future free surplus to be generated from the investment made in new business during 2012 over the same 40 year period.
 
Expected transfer of value of in-force (VIF) and required capital business to free surplus
                     
   
2012 £m
   
Undiscounted expected generation from
all in-force business at 31 December*
  
Undiscounted expected generation from
2012 long-term new business written*
Expected period of emergence
Asia
US
UK
Total
  
Asia
US
UK
Total
2013 
719 
785 
446 
1,950 
  
105 
269 
27 
401 
2014 
761 
572 
483 
1,816 
  
129 
108 
23 
260 
2015 
724 
600 
464 
1,788 
  
129 
113 
23 
265 
2016 
686 
557 
444 
1,687 
  
99 
37 
20 
156 
2017 
654 
587 
430 
1,671 
  
98 
115 
23 
236 
2018 
628 
551 
415 
1,594 
  
86 
77 
22 
185 
2019 
617 
514 
401 
1,532 
  
91 
64 
18 
173 
2020 
610 
524 
389 
1,523 
  
94 
115 
18 
227 
2021 
598 
445 
380 
1,423 
  
89 
95 
18 
202 
2022 
585 
390 
372 
1,347 
  
95 
78 
18 
191 
2023 
557 
353 
365 
1,275 
  
85 
73 
17 
175 
2024 
538 
298 
356 
1,192 
  
85 
56 
17 
158 
2025 
525 
229 
349 
1,103 
  
80 
45 
17 
142 
2026 
521 
204 
343 
1,068 
  
82 
39 
17 
138 
2027 
510 
179 
330 
1,019 
  
107 
33 
17 
157 
2028 
506 
154 
317 
977 
  
80 
27 
17 
124 
2029 
492 
134 
309 
935 
  
77 
22 
17 
116 
2030 
478 
126 
299 
903 
  
76 
18 
17 
111 
2031 
453 
106 
289 
848 
  
71 
14 
17 
102 
2032 
437 
117 
281 
835 
  
82 
14 
17 
113 
2033-2037
1,911 
145 
1,170 
3,226 
  
307 
19 
77 
403 
2038-2042
1,554 
(21)
916 
2,449 
  
234 
(25)
78 
287 
2043-2047
1,251 
- 
514 
1,765 
  
187 
- 
51 
238 
2048-2052
926 
- 
300 
1,226 
  
141 
- 
36 
177 
Total free surplus expected to emerge in the next 40 years
17,241 
7,549 
10,362 
35,152 
  
2,709 
1,406 
622 
4,737 
 
 
* The analysis excludes amounts incorporated into VIF at 31 December 2012 where there is no definitive timeframe for when the payments will be made or receipts received. In particular it excludes the value of the shareholders' interest in the estate. It also excludes any free surplus emerging after 2052. 
 
The above amounts can be reconciled to the new business amounts as follows:
 
New business
2012 £m
   
Asia
US
UK
Total
Undiscounted expected free surplus generation for years 2013-2052
2,709 
1,406 
622 
4,737 
Less: discount effect
(1,499)
(406)
(348)
(2,253)
Discounted expected free surplus generation for years 2013-2052
1,210 
1,000 
274 
2,484 
Discounted expected free surplus generation for years 2052+
41 
- 
3 
44 
Less: Free surplus investment in new business
(292)
(281)
(45)
(618)
Other items**
23 
(151)
9 
(119)
Post-tax EEV new business profit
982 
568 
241 
1,791 
Tax
284 
305 
72 
661 
Pre-tax EEV new business profit
1,266 
873 
313 
2,452 
           
 
 
**    Other items represent the impact of the time value of options and guarantees on new business, foreign exchange effects and other non-modelled items. Foreign exchange effects arise as EEV new business profit amounts are translated at average exchange rates and the expected free surplus generation uses year end closing rates.
 
The undiscounted expected free surplus generation from all in-force business at 31 December 2012 shown below can be reconciled to the amount that was expected to be generated as at 31 December 2011 as follows:
 
 
2012 
2013 
2014 
2015 
2016 
2017 
Other
Total
  
Group
£m
£m
£m
£m
£m
£m
£m
£m
  
2011 expected free surplus generation for years 2012-2051
1,777 
1,634 
1,556 
1,512 
1,502 
1,414 
24,667 
34,062 
  
Less: Amounts expected to be realised in the current year
(1,777)
 - 
 - 
 - 
 - 
 - 
 - 
(1,777)
  
Add: Expected free surplus to be generated in year 2052 *
 - 
 - 
 - 
 - 
 - 
 - 
 175 
175 
  
Foreign exchange differences
 - 
(45)
(42)
(41)
(42)
(38)
(594)
(802)
  
New business
 - 
401 
260 
265 
156 
236 
3,419 
4,737 
  
Acquisition of REALIC
 - 
45 
35 
44 
38 
41 
738 
941 
  
Operating movements
 - 
(2)
28 
32 
24 
17 
(2,165)
(2,184)
  
Non-operating and other movements **
 - 
(83)
(21)
(24)
9 
1 
  
2012 expected free surplus generation for years 2013-2052
 - 
1,950 
1,816 
1,788 
1,687 
1,671 
26,240 
35,152 
  
 
 
2012 
2013 
2014 
2015 
2016 
2017 
Other
Total
  
Asia
£m
£m
£m
£m
£m
£m
£m
£m
  
2011 expected free surplus generation for years 2012-2051
674 
647 
634 
595 
590 
564 
13,998 
17,702 
  
Less: Amounts expected to be realised in the current year
(674)
 - 
 - 
 - 
 - 
 - 
 - 
(674)
  
Add: Expected free surplus to be generated in year 2052 *
 - 
 - 
 - 
 - 
 - 
 - 
 135 
135 
  
Foreign exchange differences
 - 
(24)
(22)
(20)
(20)
(18)
(460)
(564)
  
New business
 - 
105 
129 
129 
99 
98 
2,149 
2,709 
  
Operating movements
 - 
(21)
- 
9 
- 
(6)
(2,125)
(2,067)
  
Non-operating and other movements
 - 
12 
20 
11 
17 
16 
  
2012 expected free surplus generation for years 2013-2052
 - 
719 
761 
724 
686 
654 
13,697 
17,241 
  
 
 
2012 
2013 
2014 
2015 
2016 
2017 
Other
Total
  
US
£m
£m
£m
£m
£m
£m
£m
£m
  
2011 expected free surplus generation for years 2012-2051
680 
485 
450 
480 
484 
438 
2,996 
6,013 
  
Less: Amounts expected to be realised in the current year
(680)
 - 
 - 
 - 
 - 
 - 
 - 
(680)
  
Add: Expected free surplus to be generated in year 2052 *
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
  
Foreign exchange differences
 - 
(21)
(20)
(21)
(22)
(20)
(134)
(238)
  
New business
 - 
269 
108 
113 
37 
115 
764 
1,406 
  
Acquisition of REALIC
 - 
45 
35 
44 
38 
41 
738 
941 
  
Operating movements
 - 
(4)
7 
14 
20 
18 
84 
107 
  
Non-operating and other movements
 - 
11 
(8)
(30)
- 
(5)
  
2012 expected free surplus generation for years 2013-2052
 - 
785 
572 
600 
557 
587 
4,448 
7,549 
  
 
 
2012 
2013 
2014 
2015 
2016 
2017 
Other
Total
  
UK
£m
£m
£m
£m
£m
£m
£m
£m
  
2011 expected free surplus generation for years 2012-2051
423 
502 
472 
437 
428 
412 
7,673 
10,347 
  
Less: Amounts expected to be realised in the current year
(423)
 - 
 - 
 - 
 - 
 - 
 - 
(423)
  
Add: Expected free surplus to be generated in year 2052*
 - 
 - 
 - 
 - 
 - 
 - 
40 
40 
  
New business
 - 
27 
23 
23 
20 
23 
506 
622 
  
Operating movements
 - 
23 
21 
9 
4 
5 
(124)
(224)
  
Non-operating and other movements **
 - 
(106)
(33)
(5)
(8)
(10)
  
2012 expected free surplus generation for years 2013-2052
 - 
446 
483 
464 
444 
430 
8,095 
10,362 
  
 
* Excluding 2012 new business.
** Includes an adjustment of £102 million to the cashflows for which there is no definitive timeframe for their emergence and therefore which have been removed from the cashflows presented at 31 December 2012.
 
At 31 December 2012 the total free surplus expected to be generated over the next five years (years 2013-2017 inclusive), using the same assumptions and methodology as underpin our embedded value reporting was £8.9 billion, an increase of £1.3 billion from the £7.6 billion expected over the same period at the end of 2011.
 
This increase primarily reflects the new business written in 2012, which is expected to generate £1,318 million of free surplus over the next five years. Operating movements contributed positive £99 million. The acquisition of REALIC contributed positive expected cashflows of £203 million over the next five years. Non-operating and other items, including foreign exchange movements, reduced expected free surplus generation for the next five years by £326 million.
 
At 31 December 2012 the total free surplus expected to be generated on an undiscounted basis in the next forty years is £35 billion, up from the £34 billion expected at end of 2011. This is after allowing for adverse market movements in the period, with a £0.8 billion reduction due to foreign exchange and negative market movements in Asia as a result of lower fund earned rates. A significant proportion of these market movements arise in Hong Kong reflecting both the projected derisking of the asset portfolio for participating business and  lower local government bond yields (fall of 90 basis points) and Singapore where government bond yields have fallen by 30 basis points. The overall growth in the undiscounted value of free surplus, notwithstanding these impacts, reflects both our ability to write new business on attractive economics and to manage the in-force book for value.
 
Actual underlying free surplus generated in 2012 from life business in-force at the end of 2011 was £2.3 billion inclusive of £0.3 billion of changes in operating assumptions and experience variances. This compares with the expected 2012 realisation at the end of 2011 of £1.8 million. This can be analysed further as follows:
 
 
Asia
US
UK
Total
 
£m
£m
£m
£m
Transfer to free surplus in 2012
635 
777 
511 
 1,923 
Expected return on free assets
56 
40 
 - 
 96 
Changes in operating assumptions and experience variances
80 
219 
(4)
 295 
Underlying free surplus generated from in-force life business in 2012
771 
 1,036 
507 
 2,314 
         
2012 free surplus expected to be generated at 31/12/2011
674 
680 
423 
 1,777 
         
 
The equivalent discounted amounts of the undiscounted totals shown previously are outlined below:
                   
 
2012 £m
 
Discounted expected generation from all
in-force business at 31 December
  
Discounted expected generation from long-
term 2012 new business written
Expected period of emergence
Asia
US
UK
Total
  
Asia
US
UK
Total
2013 
687 
766 
418 
 1,871 
  
101 
260 
26 
387 
2014 
679 
526 
426 
 1,631 
  
113 
98 
21 
232 
2015 
604 
520 
385 
 1,509 
  
106 
96 
19 
221 
2016 
537 
455 
346 
 1,338 
  
76 
30 
16 
122 
2017 
480 
456 
315 
 1,251 
  
69 
87 
17 
173 
2018 
434 
404 
284 
 1,122 
  
57 
55 
15 
127 
2019 
401 
352 
258 
 1,011 
  
56 
44 
12 
112 
2020 
375 
344 
234 
 953 
  
55 
74 
11 
140 
2021 
345 
277 
213 
 835 
  
48 
58 
11 
117 
2022 
318 
230 
196 
 744 
  
48 
45 
10 
103 
2023 
282 
210 
180 
 672 
  
40 
39 
9 
88 
2024 
255 
168 
164 
 587 
  
37 
27 
8 
72 
2025 
232 
124 
150 
 506 
  
32 
21 
8 
61 
2026 
215 
106 
138 
 459 
  
30 
17 
8 
55 
2027 
197 
90 
124 
 411 
  
36 
14 
7 
57 
2028 
198 
75 
110 
 383 
  
28 
10 
7 
45 
2029 
181 
64 
100 
 345 
  
26 
8 
6 
40 
2030 
167 
59 
91 
 317 
  
23 
6 
6 
35 
2031 
153 
50 
81 
 284 
  
21 
5 
6 
32 
2032 
141 
53 
74 
 268 
  
22 
5 
5 
32 
2033-2037
545 
77 
246 
 868 
  
77 
5 
20 
102 
2038-2042
359 
33 
133 
 525 
  
49 
(4)
15 
60 
2043-2047
240 
- 
47 
 287 
  
33 
- 
7 
40 
2048-2052
153 
- 
19 
 172 
  
27 
- 
4 
31 
Total discounted free surplus expected to emerge in the next 40 years
 8,178 
 5,439 
 4,732 
 18,349 
  
 1,210 
 1,000 
 274 
 2,484 
 
The above amounts can be reconciled to the Group's financial statements as follows:
  
 
Total
 
£m
Discounted expected generation from all in-force business for years 2013-2052
18,349 
Discounted expected generation from all in-force business for years after 2052
242 
Discounted expected generation from all in-force business at 31 December 2012
18,591 
Add: Free surplus of life operations held at 31 December 2012
2,957 
Less: Time value of guarantees
(683)
Other non-modelled items* note 15
1,401 
Total EEV for life operations
22,266 
 
 
* These relate to items where there is no definitive timeframe for when the payments will be made or receipts received and are, consequently, excluded from the amounts incorporated into the tables above showing the expected generation of free surplus from in-force business at 31 December 2012. In particular it excludes the value of the shareholders' interest in the estate.
 

 
 
 
 
 
 
 
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 13 March 2013
 
 
PRUDENTIAL PUBLIC LIMITED COMPANY
   
 
By: /s/ Clive Burns
   
 
Clive Burns
 
Head of Group Secretariat