F: Income statement notes

 

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  Year ended 31 December 2010 £m
  Insurance operations   Asset management (note E1) Total segment Unallo– cated corporate Group total
  UK US Asia   M&G US Asia
Gross premiums earned 6,371 11,817 6,380   24,568 24,568
Outward reinsurance premiums (128) (83) (146)   (357) (357)
Earned premiums, net of reinsurance 6,243 11,734 6,234   24,211 24,211
Investment returnnote ii 14,374 4,576 2,744   186 1 3 21,884 (115) 21,769
Other income 233 (24) 139   768 597 248 1,961 (295) 1,666
Total revenue, net of reinsurance 20,850 16,286 9,117   954 598 251 48,056 (410) 47,646
Benefits and claims (18,674) (15,472) (6,462)   (40,608) (40,608)
Outward reinsurers’ share of benefits and claims 243 49 43   335 335
Movement in unallocated surplus of with-profits fundsnote iv 70 (315)   (245) (245)
Benefits and claims and movements in unallocated surplus of with-profits funds, net of reinsurance (18,361) (15,423) (6,734)   (40,518) (40,518)
Acquisition costs and other operating expenditurenote F3 (1,093) (395) (1,662)   (628) (576) (179) (4,533) (266) (4,799)
Finance costs: interest on core structural borrowings of shareholder-financed operations (13)   (13) (244) (257)
Total charges, net of reinsurance (19,454) (15,831) (8,396)   (628) (576) (179) (45,064) (510) (45,574)
Profit (loss) before tax (being tax attributable to shareholders’ and policyholders’ returns)note i 1,396 455 721   326 22 72 2,992 (920) 2,072
Tax charge attributable to policyholders’ returns (536) (75)   (611) (611)
Profit (loss) from continuing operations before tax attributable to shareholders 860 455 646   326 22 72 2,381 (920) 1,461

This is represented in the segmental analysis of profit from continuing operations before tax attributable to shareholders in note B1 as follows:

 

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  Year ended 31 December 2010 £m
  Insurance operations   Asset management Total segment Unallo– cated corporate Group total
  UK US Asia   M&G US Asia
Operating profit based on longer-term investment returnsnote iii 719 833 532   284 22 72 2,462 (521) 1,941
Short-term fluctuations in investment returns on shareholder-backed business 116 (378) 114   47 (101) (22) (123)
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes (5)   (5) (10) (10)
Costs of terminated AIA transaction   (377) (377)
Gain on dilution of holding in PruHealth investment 30   30 30
Profit (loss) from continuing operations before tax attributable to shareholders 860 455 646   326 22 72 2,381 (920) 1,461
 

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  Year ended 31 December 2009 £m
  Insurance operations   Asset management (note E1) Total segment Unallo– cated corporate Group total
  UK US Asia   M&G US Asia
Gross premiums earned 5,757 9,197 5,345   20,299 20,299
Outward reinsurance premiums (122) (82) (119)   (323) (323)
Earned premiums, net of reinsurance 5,635 9,115 5,226   19,976 19,976
Investment returnnote ii 17,366 5,070 4,357   420 68 74 27,355 (466) 26,889
Other income 176 (18) 110   379 432 143 1,222 12 1,234
Total revenue, net of reinsurance 23,177 14,167 9,693   799 500 217 48,553 (454) 48,099
Benefits and claims (18,521) (13,297) (8,083)   (39,901) (39,901)
Outward reinsurers’ share of benefits and claims 214 12 39   265 265
Movement in unallocated surplus of with-profits fundsnote iv (1,893) 334   (1,559) (1,559)
Benefits and claims and movements in unallocated surplus of with-profits funds, net of reinsurance (20,200) (13,285) (7,710)   (41,195) (41,195)
Acquisition costs and other operating expenditurenote F3 (1,508) (383) (1,536)   (505) (496) (162) (4,590) 18 (4,572)
Finance costs: interest on core structural borrowings of shareholder-financed operations (13)   (13) (196) (209)
Loss on sale of Taiwan agency business (559)   (559) (559)
Total charges, net of reinsurance (21,708) (13,681) (9,805)   (505) (496) (162) (46,357) (178) (46,535)
Profit (loss) before tax (being tax attributable to shareholders’ and policyholders’ returns)note i 1,469 486 (112)   294 4 55 2,196 (632) 1,564
Tax charge attributable to policyholders’ returns (750) (68)   (818) (818)
Profit (loss) from continuing operations before tax attributable to shareholders 719 486 (180)   294 4 55 1,378 (632) 746

This is represented in the segmental analysis of profit from continuing operations before tax attributable to shareholders in note B1 as follows:

 

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  Year ended 31 December 2009 £m
  Insurance operations   Asset management Total segment Unallo– cated corporate Group total
  UK US Asia   M&G US Asia

Notes

  1. The measure is the formal profit (loss) before tax measure under IFRS but is not the result attributable to shareholders.
  2. Investment return principally comprises:
    • Interest and dividends;
    • Realised and unrealised gains and losses on securities and derivatives classified as fair value through profit and loss under IAS 39; and
    • Realised gains and losses, including impairment losses, on securities classified as available-for-sale under IAS 39.
  3. The Group has amended the presentation of operating profit for its US insurance operations to remove the net equity hedge accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. The 2009 comparatives have been amended accordingly. Note A4d(ii) explains the effect of the change.
  4. The movement in unallocated surplus of with-profits funds for Asia above includes movement relating to the Hong Kong branch of PAC. For the purpose of the presentation of unallocated surplus of with-profits funds within the statement of financial position, the Hong Kong branch balance is shown within the unallocated surplus of the PAC with-profits sub-fund.
Operating profit based on longer-term investment returnsnote iii 657 618 410   238 4 55 1,982 (418) 1,564
Short-term fluctuations in investment returns on shareholder-backed business 108 (132) 31   70 77 (200) (123)
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes (46)   (14) (60) (14) (74)
Loss on sale and results for Taiwan agency business (621)   (621) (621)
Profit (loss) from continuing operations before tax attributable to shareholders 719 486 (180)   294 4 55 1,378 (632) 746
 

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  2010 £m 2009 £m
Long-term business premiums    
Insurance contract premiums 23,647 19,347
Investment contracts with discretionary participation feature premiums 750 789
Inwards reinsurance premiums 171 163
Less: reinsurance premiums ceded (357) (323)
Earned premiums, net of reinsurancenote iv 24,211 19,976
Investment return    
Realised and unrealised gains and losses on securities at fair value through profit and loss 14,728 18,175
Realised and unrealised losses and gains on derivatives at fair value through profit and loss (891) 1,164
Realised losses on available-for-sale securities, previously recognised in other comprehensive income (51) (420)
Realised losses on loans (12) (115)
Interestnotes i,ii 5,976 5,575
Dividends 1,394 1,755
Other investment return 625 755
Investment return 21,769 26,889
Fee income from investment contract business and asset managementnotes iii,iv 1,666 1,234
Total revenue 47,646 48,099

Notes

  1. The segmental analysis of interest income is as follows:
 
  2010 £m 2009 £m
Insurance operations:    
UK 4,371 3,848
US 1,014 1,051
Asia 412 522
Asset management operations:    
M&G 127 140
US 2
Asia 2 2
Total segment 5,926 5,565
Unallocated corporate 50 10
Total 5,976 5,575
  1. Interest income includes £21 million (2009: £17 million) accrued in respect of impaired securities.
  2. Fee income includes £11 million (2009: £1 million) relating to financial instruments that are not held at fair value through profit and loss.
    These fees primarily related to prepayment fees, late fees and syndication fees.
  3. The following table provides additional segmental analysis of revenue from external customers:
 
  2010 £m
  Asia US UK Intragroup Total
Revenue from external customers:          
Insurance operations 6,373 11,710 6,476 (10) 24,549
Asset management 248 597 768 (314) 1,299
Unallocated corporate 29 29
Intragroup revenue eliminated on consolidation (77) (72) (175) 324
Total revenue from external customers 6,544 12,235 7,098 25,877
 
  2009 £m
  Asia US UK Intragroup Total
Revenue from external customers:          
Insurance operations 5,336 9,097 5,822 (11) 20,244
Asset management 213 499 513 (271) 954
Unallocated corporate 12 12
Intragroup revenue eliminated on consolidation (70) (67) (145) 282
Total revenue from external customers 5,479 9,529 6,202 21,210

Revenue from external customers is made up of the following:

 
  2010 £m 2009 £m
Earned premiums, net of reinsurance 24,211 19,976
Fee income from investment contract business and asset management (included within ‘Other income’) 1,666 1,234
Total revenue from external customers 25,877 21,210

In their capacity as fund managers to fellow Prudential Group subsidiaries, M&G, the US and the Asian asset management businesses earn fees for investment management and related services. Intragroup fees included within asset management revenue were £314 million (2009: £271 million) earned £165 million (2009: £134 million) by M&G, £72 million (2009: £67 million) by the US asset management segment and £77 million (2009: £70 million) by the Asian asset management segment. In 2010, the remaining £10 million (2009: £11 million) of intragroup revenue was recognised by UK insurance operations. These services are charged at appropriate arm's length prices, typically priced as a percentage of funds under management.

Revenue from external customers of Asian, US and UK insurance operations shown above are net of outwards reinsurance premiums of £146 million, £83 million and £128 million respectively (2009: £119 million, £82 million and £122 million respectively).

In Asia, revenue from external customers from no individual country exceeds 10 per cent of the Group total. The largest country is Hong Kong with a total revenue from external customers of £1,246 million (2009: £1,013 million).

Due to the nature of the business of the Group, there is no reliance on any major customers.

 

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  2010 £m 2009 £m
Acquisition costs incurrednotes i,ii 2,024 1,796
Acquisition costs deferred less amortisation of acquisition costs (918) (763)
Administration costs and other expenditure 3,496 2,924
Movements in amounts attributable to external unit holdersnote v 197 615
Total acquisition costs and other expenditurenotes iii,iv,vi 4,799 4,572

Notes

  1. The acquisition costs as shown on the table above relate to policy acquisition costs. Acquisition costs from business combinations are included within other expenditure. Acquisition costs in 2010 comprise amounts related to insurance contracts of £941 million (2009: £871 million), and investment contracts and asset management contracts of £165 million (2009: £162 million).
  2. There were no fee expenses relating to financial liabilities held at amortised cost included in acquisition costs in 2010 and 2009.
  3. The total depreciation and amortisation expense is £309 million (2009: £377 million). Of this amount, £226 million (2009: £305 million) relates to amortisation of deferred acquisition costs of insurance contracts and asset management contracts, which is primarily borne by the insurance operations. The segmental analysis of total depreciation and amortisation expense is as follows:
 

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  2010 £m 2009 £m
Insurance operations:    
UK 35 25
US (6) 88
Asia 258 246
Asset management operations:    
M&G 8 2
US 2 2
Asia 4 4
Total segment 301 367
Unallocated corporate 8 10
Total 309 377
  1. Interest expense, excluding interest on core structural borrowings of shareholder-financed operations, amounted to £113 million (2009: £89 million) and is included within total acquisition costs and other operating expenditure as part of investment management expenses. The segmental analysis of this interest expense is as follows:
 

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  2010 £m 2009 £m
Insurance operations:    
UK 28 28
US 33 32
Asia 13 1
Asset management operations:    
M&G 19
US
Asia
Total segment 93 61
Unallocated corporate 20 28
Total 113 89
  1. Movements in amounts attributable to external unit holders comprises £61 million (2009: £310 million) for UK insurance operations £136 million (2009: £305 million) for Asian insurance operations.
  2. The total amounts for acquisition costs and other expenditure shown above includes Corporate Expenditure shown in note B1 (Segment disclosure – income statement). The charge for Corporate Expenditure comprises:
 

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  2010 £m 2009 £m
Group head office:    
Regular and project costs (147) (140)
Provision for property leases and other non-recurrent items (25) (6)
  (172) (146)
Asia regional office:    
Gross costs (90) (95)
Recharges to Asia operations 42 38
  (48) (57)
Total (220) (203)
     

Finance costs consist of £244 million (2009: £196 million) interest on core debt of the parent company and £13 million (2009: £13 million) on US insurance operations’ surplus notes.

a Total tax charge by nature of expense

An analysis of the total tax benefit (expense) of continuing operations recognised in the income statement by nature of benefit (expense) is as follows:

 

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  2010 £m 2009 £m
Current tax expense:    
Corporation tax (378) (500)
Adjustments in respect of prior years 287 (29)
Total current tax (91) (529)
Deferred tax arising from:    
Origination and reversal of temporary differences (518) (340)
Expense in respect of a previously unrecognised tax loss, tax credit or temporary difference
from a prior period
(27) (4)
Total deferred tax charge (545) (344)
Total tax charge (636) (873)

The total tax expense arises as follows:

 

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  2010 £m 2009 £m
Current tax expense:    
UK (61) (527)
Foreign (30) (2)
  (91) (529)
Deferred tax (charge) credit:    
UK (252) (368)
Foreign (293) 24
  (545) (344)
Total (636) (873)

The current tax charge of £91 million includes £13 million for 2010 (2009: charge of £6 million) in respect of the tax charge for Hong Kong. The Hong Kong current tax charge is calculated as 16.5 per cent for all periods on either (i) five per cent of the net insurance premium or (ii) the estimated assessable profits, depending on the nature of the business written.

The total tax charge of £636 million for 2010 (2009: charge of £873 million) comprises a charge of £313 million (2009: charge of £895 million) for UK tax and a charge of £323 million (2009: credit of £22 million) for overseas tax.

This tax charge comprises tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders. The tax charge attributable to shareholders of £25 million for 2010 (2009: charge of £55 million) comprises a credit of £187 million (2009: charge of £176 million) for UK tax and a charge of £212 million (2009: credit of £121 million) for overseas tax. The tax charge attributable to shareholders' returns includes an exceptional tax credit of £158 million which primarily relates to the impact of a settlement agreed with the UK Tax authorities. This exceptional tax credit is recorded within 'Adjustments in respect of prior years'. In addition, adjustments in respect of prior years also includes other changes that arose as a result of routine revision of tax returns.

The total deferred tax (charge) arises as follows:

 

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  2010 £m 2009 £m
Unrealised gains and losses on investments (217) (35)
Balances relating to investment and insurance contracts (28) (12)
Short-term timing differences (431) (105)
Capital allowances (8) 1
Unused tax losses 139 (193)
Deferred tax charge (545) (344)

In 2010, a deferred tax charge of £287 million (2009: charge of £546 million) has been taken through other comprehensive income. Other movements in deferred tax totalling a £40 million charge is mainly comprised of foreign exchange movements. When these amounts are taken with the deferred tax charge shown above the result is an increase of £0.9 billion in the Group's net deferred tax liability (2009: increase of £0.8 billion).

b Reconciliation of effective tax rate

The total tax charge is attributable to shareholders and policyholders as summarised in the income statement.

i Summary of pre-tax profit and tax (charge)

The income statement includes the following items:

 

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  2010 £m 2009 £m
Profit before tax 2,072 1,564
Tax charge attributable to policyholders’ returns (611) (818)
Profit before tax attributable to shareholders 1,461 746
Tax attributable to shareholders’ profits:    
Tax charge (636) (873)
Less: tax attributable to policyholders’ returns 611 818
Tax (charge) attributable to shareholders’ returns (25) (55)
Profit from continuing operations after tax 1,436 691

ii Overview

For the purposes of explaining the relationship between tax expense and accounting profit, it is appropriate to consider the sources of profit and tax by reference to those that are attributable to shareholders and policyholders, as follows:

 

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  2010 £m   2009 £m

* For the column entitled 'Attributable to policyholders', the profit before tax represents income, net of post-tax transfers to unallocated surplus of with-profits funds, before tax attributable to policyholders and unallocated surplus of with-profits funds and unit-linked policies.

  Attributable to shareholders   Attributable to policyholders*   Total   Attributable to shareholders   Attributable to policyholders*   Total
Profit before tax 1,461   611   2,072   746   818   1,564
Taxation charge:                      
Expected tax rate 28%   100%   49%   31%   100%   67%
Expected tax charge (406)   (611)   (1,017)   (233)   (818)   (1,051)
Variance from expected tax chargenote v(ii) 381     381   178     178
Actual tax (charge) (25)   (611)   (636)   (55)   (818)   (873)
Average effective tax rate 2%   100%   31%   7%   100%   56%

Due to the requirements of the financial reporting standards IAS 1 and IAS 12, the profit (loss) before tax and tax charge reflect the aggregate of amounts that are attributable to shareholders and policyholders.

Profit (loss) before tax comprises profit attributable to shareholders and pre-tax profit attributable to policyholders of linked and with-profits funds and unallocated surplus of with-profits funds.

The total tax charge for linked and with-profits business includes tax expense on unit-linked and with-profits funds attributable to policyholders, the unallocated surplus of with-profits funds and the shareholders' profits. This feature arises from the basis of taxation applied to life and pension business, principally in the UK, but with similar bases applying in certain Asian operations, and is explained in note (iii) below.

Furthermore, the basis of preparation of Prudential's financial statements incorporates the additional feature that, as permitted under IFRS 4, the residual equity of the Group's with-profits funds, i.e. unallocated surplus, is recorded as a liability with transfers to and from that liability reflected in pre-tax profits. This gives rise to anomalous effective tax rates for profits attributable to policyholders (as described in note (iv) below).

In meeting the reconciliation requirements set out in paragraph 81(c) of IAS 12, the presentation shown in this disclosure note seeks to ensure that the explanation of the relationship between tax expense and accounting profit draw properly the distinction between the elements of the profit and tax charge that are attributable to policyholders and shareholders as explained below in notes (iv) and (v) respectively. Due to the nature of the basis of taxation of UK life and pension business (as described in note (iii) below), and the significance of the results of the business to the Group, it is inappropriate to seek to explain the effective tax rate on profit before tax by the traditional approach that would apply for other industries.

The shareholder elements are the components of the profit and tax charge that are of most direct relevance to investors, and it is this aspect that the IAS 12 reconciliation requirement is seeking to explain for companies that do not need to account for both with-profits and unit-linked funds, where tax is borne by the Company on the policyholders' behalf and which is not contemplated by the IFRS requirement.

iii Basis of taxation for UK life and pension business

Different rules apply under UK tax law for taxing pension business and life insurance business and there are detailed rules for apportioning the investment return and profits of the fund between the types of business.

The investment return referable to pension business, and some other less significant classes of business, is exempt from taxation, but tax is charged on the profit that shareholders derive from writing such business at the corporate rate of tax. The rules for taxing life insurance business are more complex. Initially, the UK regime seeks to tax the regulatory basis investment return less management expenses (I-E) on this business as it arises. However, in determining the actual tax charge, a calculation of the shareholder profits for taxation purposes from writing life insurance business also has to be made and compared with the I-E profit.

If the shareholder profit is higher than the I-E amount, extra income is attributable to the I-E calculation until the I-E profit equals the shareholder profit. If on the other hand, the I-E profit is the greater, then an amount equal to the shareholder profit is taxed at the corporate rate of tax, with the remainder of the I-E profit being taxed at the lower policyholder rate of tax.

The purpose of this approach is to ensure that the Company is always at a minimum taxed on the profit, as defined for taxation purposes by reference to the Company's regulatory returns (rather than IFRS basis results), that it has earned. The shareholders' portion of the long-term business is taxed at the shareholders' rate, with the remaining portion taxed at rates applicable to the policyholders.

It is to be noted that the calculations described are determined using data from the regulatory basis returns rather than the IFRS basis results. The differences between the regulatory and accounting bases are very significant and extremely complex, rendering any explanation in general purpose financial statements to be of little if any use to users.

iv Profits attributable to policyholders and related tax

As noted above, it is necessary under IFRS requirements to include the total tax charge of the Company (both policyholder and shareholder elements) in the tax charge disclosed in the income statement.

For with-profits business, total pre-tax profits reflect the aggregate of profits attributable to policyholders and shareholders. However, amounts attributable to the equity of with-profits funds are carried in the liability for unallocated surplus. Also, as described in note (iii), UK with-profits business is taxed on a basis that affects policyholders' unallocated surplus of with-profits funds and shareholders. For the PAC with-profits sub-fund, transfers to and from unallocated surplus are recorded in the income statement, so that after charging the total tax borne by the fund, the net balance reflects the statutory transfer from the fund for the year. The statutory transfer represents 10 per cent of the actuarially determined surplus for the year that is attributable to shareholders.

For SAIF, similar transfers are made. However, in the case of SAIF, a net nil balance is derived, reflecting the lack of shareholder interest in the financial performance of the fund (other than through asset management arrangements).

The accounting anomaly that arises under IFRS is that due to the fact that the net of tax profit attributable to with-profits policyholders is zero, the Company's presentation of pre-tax profit attributable to policyholders reflects an amount that is the mirror image of the tax charge attributable to policyholders.

For unit-linked business, pre-tax profits also reflect the aggregate of profits attributable to policyholders and shareholders. The pre-tax profits attributable to policyholders represent fees earned that are used to pay tax borne by the Company on policyholders' behalf. The net of tax profit attributable to policyholders for unit-linked business is thus zero.

The combined effect of these features is such that providing a reconciliation of the tax charge attributable to policyholders to an expected charge based on the standard corporate rate of tax on IFRS basis profits attributable to policyholders is not relevant.

In summary, for accounting purposes, in all cases and for all reporting periods, the apparent effective rate for profit attributable to policyholders and unallocated surplus is 100 per cent. However, it is to be noted that the 100 per cent rate does not reflect a rate paid on the profits attributable to policyholders. It instead reflects the basis of accounting for unallocated surplus coupled with the distinction made for performance reporting between sources of profit attributable to shareholders, policyholders and unallocated surplus and IFRS requirements in respect of reporting of all pre-tax profits and all tax charges irrespective of policyholder or shareholder economic interest.

v Reconciliation of tax charge on profit attributable to shareholders for continuing operations:

 

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  2010 £m (except for tax rates)
  Asian insurance operations US insurance operations UK insurance operations Other operations Total
  • *The tax charge attributable to shareholders' return includes an exceptional tax credit of £158 million which primarily relates to the impact of a settlement agreed with the UK tax authorities.
Profit (loss) before tax attributable to shareholders:          
Operating profit based on longer-term investment returnsnote iii 532 833 719 (143) 1,941
Short-term fluctuations in investment returns 114 (378) 116 25 (123)
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes (5) (5) (10)
Cost of terminated AIA transaction       (377) (377)
Gain on dilution of holding in PruHealth 30 30
Total 646 455 860 (500) 1,461
Expected tax rates:note i          
Operating profit based on longer-term investment returnsnote iii 22% 35% 28% 28% 29%
Short-term fluctuations in investment returns 25% 35% 28% 28% 52%
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 28% 28% 20%
Cost of terminated AIA transaction 28% 28%
Gain on dilution of holding in PruHealth 28% 28%
Expected tax (charge) credit based on expected tax rates:          
Operating profit based on longer-term investment returnsnote iii (117) (292) (201) 40 (570)
Short-term fluctuations in investment returns (29) 132 (32) (7) 64
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 1 1 2
Cost of terminated AIA transaction 106 106
Gain on dilution of holding in PruHealth (8) (8)
Total (146) (160) (240) 140 (406)
Variance from expected tax charge:note ii          
Operating profit based on longer-term investment returnsnote iii 59 43 18 237 357
Short-term fluctuations in investment returns 21 7 28
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 1 1
Cost of terminated AIA transaction (13) (13)
Gain on dilution of holding in PruHealth 8 8
Total 80 43 26 232 381
Actual tax (charge) credit:          
Operating profit based on longer-term investment returns, excluding exceptional tax creditnote iii (58) (249) (183) 119 (371)
Exceptional tax credit* 158 158
Operating profit based on longer-term investment returns (58) (249) (183) 277 (213)
Short-term fluctuations in investment returns (8) 132 (32) 92
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 1 2 3
Cost of terminated AIA transaction 93 93
Gain on dilution of holding in PruHealth
Total (66) (117) (214) 372 (25)
Actual tax rate:          
Operating profit based on longer-term investment returns 11% 30% 25% 194% 11%
Total profit 10% 26% 25% 74% 2%
Actual tax rate (excluding exceptional tax credit):*          
Operating profit based on longer-term investment returns 11% 30% 25% 83% 19%
Total profit 10% 26% 25% 43% 13%
 

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  2009* £m (except for tax rates)
  Asian insurance operations US insurance operations UK insurance operations Other operations Total
  • *The Group has amended the presentation of operating profit for its US insurance operations to remove the net equity hedge accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. The 2009 comparatives have been amended accordingly. Note A4d(ii) explains the effect of the change.
Profit (loss) before tax attributable to shareholders:          
Operating profit based on longer-term investment returnsnote iii 410 618 657 (121) 1,564
Short-term fluctuations in investment returns 31 (132) 108 (130) (123)
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes (46) (28) (74)
Loss on sale and results for Taiwan agency business (621) (621)
Total (180) 486 719 (279) 746
Expected tax rates:note i          
Operating profit based on longer-term investment returnsnote iii 24% 35% 28% 28% 30%
Short-term fluctuations in investment returns 25% 35% 28% 36% 45%
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 28% 28% 28%
Loss on sale and results for Taiwan agency business 25% 25%
Expected tax (charge) credit based on expected tax rates:          
Operating profit based on longer-term investment returnsnote iii (98) (216) (184) 34 (464)
Short-term fluctuations in investment returns (8) 46 (30) 47 55
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 13 8 21
Loss on sale and results for Taiwan agency business 155 155
Total 49 (170) (201) 89 (233)
Variance from expected tax charge:note ii          
Operating profit based on longer-term investment returnsnote iii 35 76 (29) 8 90
Short-term fluctuations in investment returns 15 196 14 225
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes
Loss on sale and results for Taiwan agency business (137) (137)
Total (87) 272 (29) 22 178
Actual tax (charge) credit:          
Operating profit based on longer-term investment returnsnote iii (63) (140) (213) 42 (374)
Short-term fluctuations in investment returns 7 242 (30) 61 280
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 13 8 21
Loss on sale and results for Taiwan agency business 18 18
Total (38) 102 (230) 111 (55)
Actual tax rate:          
Operating profit based on longer-term investment returns 15% 23% 32% 35% 24%
Total profit (21)% (21)% 32% 40% 7%
Notes
  1. Expected tax rates for profit (loss) attributable to shareholders:
    • The expected tax rates shown in the table above reflect the corporation tax rates generally applied to taxable profits of the relevant country jurisdictions.
    • For Asian operations the expected tax rates reflect the corporation tax rates weighted by reference to the source of profits of operations contributing to the aggregate business result.
    • The expected tax rate for Other operations reflects the mix of business between UK and overseas operations, which are taxed at a variety of rates. The rates will fluctuate from year to year dependent on the mix of profits.
  2. For 2010 and 2009, the principal variances arise from a number of factors, including:
    1. Asian long-term operations
      For 2010 and 2009, profits in certain countries which are not taxable partly offset by the inability to fully recognise deferred tax assets on losses being carried forward.
    2. Jackson
      For 2010, the benefit of a deduction from taxable income of a proportion of dividends received attributable to the variable annuity business. For 2009, the ability to fully recognise deferred tax assets on losses brought forward which we were previously unable to recognise together with income subject to a lower level of taxation and the benefit of a deduction from taxable income of a proportion of dividends received attributable to the variable annuity business.
    3. UK insurance operations
      For 2010, routine revisions to prior period tax returns. For 2009, adjustments in respect of prior year tax charge and different tax bases of UK life business.
    4. Other operations
      For 2010, an exceptional tax credit which primarily relates to the impact of the settlement agreed with the UK tax authorities and the ability to recognise a deferred tax credit on various tax losses which we were previously unable to recognise, partly offset by the inability to fully recognise a tax credit in respect of non deductible capital costs incurred in relation to the terminated AIA transaction. For 2009, the ability to recognise a deferred tax asset on various tax losses which we were previously unable to recognise partly offset by adjustments in respect of the prior year tax charge.
    5. For 2009, the actual tax rate in relation to Asia excluding the result for the sold Taiwan agency business would have been 13 per cent.
  3. Operating profit based on longer-term investment returns is net of attributable restructuring costs and development expenses.

Investment return is attributable to policyholders and shareholders. A key feature of the accounting policies under IFRS is that the investment return included in the income statement relates to all investment assets of the Group, irrespective of whether the return is attributable to shareholders, or to policyholders or the unallocated surplus of with-profits funds, the latter two of which have no net impact on shareholders’ profit. The table below provides a breakdown of the investment return for each regional operation attributable to each type of business.

 

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  2010 £m 2009 £m
Asian operations    
Policyholder returns    
Assets backing unit-linked liabilities 1,279 2,539
With-profits business 1,039 1,519
  2,318 4,058
Shareholder returns 429 373
Total 2,747 4,431
US operations    
Policyholder returns    
Assets held to back (separate account) unit-linked liabilities 3,520 3,760
Shareholder returns    
Realised gains and losses (including impairment losses on available-for-sale bonds) 21 (529)
Value movements on derivative hedging programme for general account business 20 340
Interest/dividend income and value movements on other financial instruments for which fair value movements are booked in the income statement 1,016 1,567
  1,057 1,378
Total 4,577 5,138
UK operations    
Policyholder returns    
Scottish Amicable Insurance Fund (SAIF) 1,075 1,438
Assets held to back unit-linked liabilities 2,119 2,947
With-profits fund (excluding SAIF) 8,815 10,461
  12,009 14,846
Shareholder returns    
Prudential Retirement Income Limited (PRIL) 1,717 1,827
Other business 834 1,113
  2,551 2,940
Total 14,560 17,786
Unallocated corporate    
Shareholder returns (115) (466)
Group Total    
Policyholder returns 17,847 22,664
Shareholder returns 3,922 4,225
Total 21,769 26,889

The returns as shown in the table above, are delineated between those returns allocated to policyholders and those allocated to shareholders. In making this distinction, returns allocated to policyholders are those from investments in which shareholders have no direct economic interest, namely:

  • unit-linked business in the UK, Asia and SAIF in the UK, for which the investment return is wholly attributable to policyholders;
  • separate account business of US operations, the investment return of which is also wholly attributable to policyholders; and
  • with-profits business (excluding SAIF) in the UK and Asia (in which the shareholders' economic interest, and the basis of recognising IFRS basis profits, is restricted to a share of the actuarially determined surplus for distribution (in the UK 10 per cent)). Except for this surplus the investment return of the with-profit funds is attributable to policyholders (through the asset-share liabilities) or the unallocated surplus, which is accounted for as a liability under IFRS 4.

The investment return related to the types of business above does not impact shareholders' profits directly. However, there is an indirect impact, for example, investment-related fees or the effect of investment return on the shareholders' share of the cost of bonuses of with-profits funds.

Investment returns for unit-linked and similar products have reciprocal impact on benefits and claims, with a decrease in market returns on the attached pool of assets affecting policyholder benefits on these products. Similarly for with-profits funds there is a close correlation between increases or decreases in investment returns and the level of combined charge for policyholder benefits and movement on unallocated surplus that arises from such returns.

Shareholder returns

For shareholder-backed non-participating business of the UK (comprising PRIL and other non-linked non-participating business) and of the Asian operations, the investment return is not directly attributable to policyholders and therefore does impact shareholders' profit directly. However, it should be noted that for UK shareholder-backed annuity business, principally PRIL, where the durations of asset and liability cash flows are closely matched, the discount rate applied to measure liabilities to policyholders (under 'grandfathered' UK GAAP and under IFRS 4) reflects movements in asset yields (after allowances for the future defaults) of the backing portfolios. Therefore, the net impact on the shareholders' profits of the investment return of the assets backing liabilities of the UK shareholder-backed annuity business is after taking into account the consequential effect on the movement in policyholder liabilities.

Changes in shareholder investment returns for US operations reflect primarily movements in the investment income, movements in the value of the derivative instruments held to manage the general account assets and liability portfolio, and realised gains and losses. However, separately reflecting Jackson's types of business an allocation is made to policyholders through the application of crediting rates. The shareholder investment return for US operations also includes the fair value movement of the derivatives and the movement on the related liabilities of the variable annuity guarantees under Jackson's dynamic hedging programme.

The majority of the investments held to back the US non-participating business are debt securities for which the available-for-sale designation is applied for IFRS basis reporting. Under this designation the return included in the income statement reflects the aggregate of investment income and realised gains and losses (including impairment losses). However, movements in unrealised appreciation or depreciation are recognised in other comprehensive income. The return on these assets is attributable to shareholders.

Benefits and claims represent payments, including final bonuses, to policyholders in respect of maturities, surrenders and deaths plus the change in technical provisions (which primarily represents the movement in amounts owed to policyholders). Benefits and claims are amounts attributable to policyholders. The movement in unallocated surplus of with-profits funds represents the transfer to (from) the unallocated surplus each year through a charge (credit) to the income statement of the annual excess (shortfall) of income over expenditure of the with-profits funds, after declaration and attribution of the cost of bonuses to policyholders and shareholders.

Benefits and claims and movements in unallocated surplus of with-profits funds net of reinsurance can be further analysed as follows:

 

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  2010 £m
  Asia US UK Total
Claims incurred (2,595) (4,348) (9,941) (16,884)
Increase in policyholder liabilities (3,824) (11,075) (8,490) (23,389)
Movement in unallocated surplus of with-profits funds (315) 70 (245)
  (6,734) (15,423) (18,361) (40,518)
 

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  2009 £m
  Asia US UK Total
Claims incurred (1,814) (4,092) (9,875) (15,781)
Increase in policyholder liabilities (6,230) (9,193) (8,432) (23,855)
Movement in unallocated surplus of with-profits funds 334 (1,893) (1,559)
  (7,710) (13,285) (20,200) (41,195)
 

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