H: Other information on statement of financial position items

a Goodwill

 

Download as excel file

  2010 £m 2009 £m
Cost    
At 1 January 1,430 1,461
Disposal of Taiwan Agency business (44)
Additional consideration paid on previously acquired businesses 13
Acquisition of UOB Life Assurance Limited in Singapore 144
Exchange differences 15
At 31 December 1,586 1,430
Aggregate impairment    
At 1 January and 31 December (120) (120)
Net book amount at 31 December 1,466 1,310

Impairment testing

Goodwill does not generate cash flows independently of other groups of assets and thus is assigned to cash generating units (CGUs) for the purposes of impairment testing. These CGUs are based upon how management monitors the business and represent the lowest level to which goodwill can be allocated on a reasonable basis. An allocation to CGUs of the Group's goodwill attributable to shareholders is shown below:

 

Download as excel file

  2010 £m 2009 £m
M&G 1,153 1,153
Other 313 157
  1,466 1,310

'Other' represents goodwill amounts allocated across CGUs in Asia and US operations. Other goodwill amounts are not individually material. During 2010 £141 million (SGD313 million) of goodwill was recognised upon the acquisition of UOB Life Assurance Limited. Upon translation at the year end exchange rate, the carrying value of this UOB Life Assurance goodwill at 31 December 2010 was £156 million.

Assessment of whether goodwill may be impaired

Goodwill is tested for impairment by comparing the CGU's carrying amount, including any goodwill, with its recoverable amount.

With the exception of M&G, the goodwill attributable to shareholders in the statement of financial position mainly relates to acquired life businesses. The Company routinely compares the aggregate of net asset value and acquired goodwill on an IFRS basis of acquired life business with the value of the business as determined using the EEV methodology, as described in note D1. Any excess of IFRS over EEV carrying value is then compared with EEV basis value of current and projected future new business to determine whether there is any indication that the goodwill in the IFRS statement of financial position may be impaired. The assumptions underpinning the Group's EEV basis of reporting are included in the EEV basis supplementary information in this Annual Report. In particular at 31 December 2010, the EEV of the CGU containing the UOB Life Assurance goodwill (being the Singapore insurance operations) materially exceeded its IFRS net asset value and so no impairment was deemed to arise.

M&G

The recoverable amount for the M&G CGU has been determined by calculating its value in use. This has been calculated by aggregating the present value of future cash flows expected to be derived from the M&G operating segment (based upon management projections).

The discounted cash flow valuation has been based on a three-year plan prepared by M&G, and approved by management, and cash flow projections for later years.

The value in use is particularly sensitive to a number of key assumptions as follows:

  1. The set of economic, market and business assumptions used to derive the three-year plan. The direct and secondary effects of recent developments, e.g. changes in global equity markets, are considered by management in arriving at the expectations for the financial projections for the plan.
  2. The assumed growth rate on forecast cash flows beyond the terminal year of the plan. A growth rate of 2.5 per cent (2009: 2.5 per cent) has been used to extrapolate beyond the plan period representing management's best estimate view of the long-term growth rate of the business after considering the future and past growth rates and external sources of data.
  3. The risk discount rate. Differing discount rates have been applied in accordance with the nature of the individual component businesses. For retail and institutional business a risk discount rate of 12 per cent (2009: 12 per cent) has been applied to post-tax cash flows. The pre-tax risk discount rate was 16 per cent (2009: 16 per cent). Management have determined the risk discount rate by reference to an average implied discount rate for comparable UK listed asset managers calculated by reference to risk-free rates, equity risk premiums of five per cent and an average 'beta' factor for relative market risk of comparable UK listed asset managers. A similar approach has been applied for the other component businesses of M&G.
  4. That asset management contracts continue on similar terms.

Management believes that any reasonable change in the key assumptions would not cause the recoverable amount of M&G to fall below its carrying amount.

Japanese life company

The aggregate goodwill impairment of £120 million at 31 December 2010 and 2009 relates to the goodwill held in relation to the Japanese life operation which was impaired in 2005.

b Deferred acquisition costs and other intangible assets attributable to shareholders

The deferred acquisition costs and other intangible assets in the Group consolidated statement of financial position attributable to shareholders comprise:

 

Download as excel file

  2010 £m 2009 £m
Deferred acquisition costs (DAC) related to insurance contracts as classified under IFRS 4 4,316 3,823
Deferred acquisition costs related to investment management contracts, including life assurance contracts classified as financial instruments and investment management contracts under IFRS 4 110 107
  4,426 3,930
Present value of acquired in-force policies for insurance contracts as classified under IFRS 4 70 52
Present value of future profits of acquired investment management contracts, including life assurance contracts classified as financial instruments and investment management contracts under IFRS 4 1
Distribution rights 113 66
  183 119
Total of deferred acquisition costs and other intangible assets 4,609 4,049
 

Download as excel file

  Deferred acquisition costs    
  UK
£m
US(i)
£m
Asia
£m
Asset
management
£m
Other
intangibles
£m
Total
2010
£m
Total
2009
£m

Note

  1. The DAC amount in respect of US insurance operations includes £2,834 million (2009: £1,938 million) in respect of variable annuity business, £1,229 million (2009: £1,164 million) in respect of other business and £(520) million (2009: £(10) million) in respect of cumulative shadow DAC.
Balance at 1 January 124 3,092 706 8 119 4,049 5,349
Additions 19 851 210 5 50 1,135 1,071
Acquisition of UOB Life Assurance Ltd 12 12
Amortisation to the income statement:    
Operating profit (20) (334) (208) (4) (13) (579) (469)
Amortisation related to short-term fluctuations in investment returns 358 358 153
  (20) 24 (208) (4) (13) (221) (316)
Exchange differences 72 50 15 137 (550)
Change in shadow DAC related to movement in unrealised appreciation of Jackson’s securities classified as available-for-sale (see note D3(g) for explanation) (496) (496) (1,069)
Dilution of holding in PruHealth (7) (7)
DAC movement on sale of Taiwan agency business (436)
Balance at 31 December 116 3,543 758 9 183 4,609 4,049

Deferred acquisition costs related to insurance contracts attributable to shareholders

The movement in deferred acquisition costs relating to insurance contracts attributable to shareholders is as follows:

 

Download as excel file

  2010 £m 2009 £m
Deferred acquisition costs at 1 January 3,823 5,097
Additions 1,064 1,054
Amortisation (190) (286)
Exchange differences 122 (537)
Change in shadow DAC related to movement in unrealised appreciation of Jackson’s securities classified as available-for-sale (496) (1,069)
Dilution of holding in PruHealth (7)
DAC movement on sale of Taiwan agency business (436)
Deferred acquisition costs at 31 December 4,316 3,823

Deferred acquisition costs related to investment management contracts attributable to shareholders

Incremental costs associated with the origination of investment management contracts written by the Group's insurance and asset management businesses are capitalised and amortised as the related revenue is recognised.

 

Download as excel file

  2010 £m 2009 £m
At 1 January    
Gross amount 162 148
Accumulated amortisation (55) (40)
Net book amount 107 108
Additions (through internal development) 21 14
Amortisation (18) (15)
At 31 December 110 107
Comprising:    
Gross amount 183 162
Accumulated amortisation (73) (55)
Net book amount 110 107

Present value of acquired in-force business of long-term business contracts attributable to shareholders

The present value of acquired in-force business (PVAIF) relating to investment contracts without discretionary participation features represents the contractual right to benefit from providing these investment management services in the future. The fair value is measured as the present value of the future profits of the investment management component of these contracts. These contracts are accounted for under the provisions of IAS 18. The PVAIF balance relating to insurance contracts is accounted for under UK GAAP as permitted by IFRS 4.

The present value of future profits of acquired investment management contracts which was fully amortised during the year related to unit-linked contracts acquired as part of the M&G acquisition in 1999.

Amortisation is charged to the 'acquisition costs and other operating expenditure' line in the income statement over the period of provision of asset management services as those profits emerge.

 

Download as excel file

  2010 £m 2009 £m
  Insurance
business
Investment
management
Insurance
business
Investment
management
At 1 January    
Cost 175 12 184 12
Accumulated amortisation (123) (11) (120) (11)
Net book amount 52 1 64 1
Acquisition of UOB Life Assurance Ltd (note I1) 12
Exchange differences 10 (6)
Amortisation charge (4) (1) (6)
At 31 December 70 52 1
Comprising:    
Cost 203 175 12
Accumulated amortisation (133) (123) (11)
Net book amount 70 52 1

Distribution rights attributable to the Asian insurance operations

Distribution rights relate to facilitation fees paid in respect of the bancassurance partnership arrangements in Asia for the bank distribution of Prudential's insurance products for a fixed period of time. The distribution rights amounts are amortised over the term of the distribution contracts.

 

Download as excel file

  2010 £m 2009 £m

Note

  1. In addition to the acquired assets and liabilities of UOB Life Assurance in 2010, as explained in note I1, the Group entered into distribution agreements with UOB for consideration of SGD 110 million (£50 million). The distribution rights have been accounted for as an intangible asset.
At 1 January    
Gross amount 79 84
Accumulated amortisation (13) (5)
  66 79
Additions(i) 50 3
Amortisation charge (8) (9)
Exchange differences 5 (7)
At 31 December 113 66
Comprising:    
Gross amount 136 79
Accumulated amortisation (23) (13)
  113 66

a Goodwill in respect of acquired investment subsidiaries for venture fund and other investment purposes

 

Download as excel file

  2010 £m 2009 £m
At 1 January 124 174
Additions in the year (note I8(iii)) 42
Impairment (50)
At 31 December 166 124

All the goodwill relates to the UK insurance operations segment.

The venture fund investments consolidated by the Group relates to investments by PAC with-profits fund managed by M&G. The goodwill shown in the table above relates to these venture fund investments. Goodwill is tested for impairment for these investments by comparing the investment's carrying value including goodwill with its recoverable amount. The recoverable amount of the investments is determined by calculating their fair value less costs to sell. The fair value is determined by using a discounted cash flow valuation. The valuations are based on cash flow projections to 2015 prepared by management after considering the historical experience and future growth rates of the business. The key assumption applied in the calculations is the risk discount rate ranging from 10 to 14 per cent derived by reference to risk-free rates and an equity premium risk. In 2010, no goodwill was deemed to be impaired following the impairment testing carried out. In 2009, following the impairment testing carried out, £50 million of the goodwill was deemed to be impaired.

In 2009, the impairment charge was recorded under 'acquisition costs and other expenditure' but was also taken account of in determining the charge/credit in the income statement for the transfer to the liability for unallocated surplus of with-profits funds. Accordingly, the charge did not affect shareholders' profits or equity.

b Deferred acquisition costs and other intangible assets

Other intangible assets in the Group consolidated statement of financial position attributable to with-profits funds consist of:

 

Download as excel file

  2010 £m 2009 £m
Deferred acquisition costs related to insurance contracts attributable to the PAC with-profits fund 13 9
Distribution rights attributable to with-profits funds of the Asian insurance operations 97 97
  110 106

Deferred acquisition costs related to insurance contracts attributable to the PAC with-profits fund

The movement in deferred acquisition costs relating to insurance contracts attributable to the PAC with-profits fund is as follows:

 

Download as excel file

  2010 £m 2009 £m
At 1 January 9 13
Additions 9
Amortisation charge (5) (4)
At 31 December 13 9

The above costs relate to non-participating business written by the PAC with-profits sub-fund.

No deferred acquisition costs are established for the participating business.

Distribution rights attributable to with-profit funds of the Asian insurance operations

Distribution rights relate to facilitation fees paid in relation to the bancassurance partnership arrangements in Asia for the bank distribution of Prudential's insurance products for a fixed period of time. The distribution rights amounts are amortised over the term of the distribution contracts.

 

Download as excel file

  2010 £m 2009 £m
At 1 January    
Gross amount 103 115
Accumulation amortisation (6) (2)
  97 113
Additions
Amortisation charge (4) (4)
Exchange differences 4 (12)
At 31 December 97 97
Comprising:    
Gross amount 108 103
Accumulated amortisation (11) (6)
  97 97
 

Download as excel file

  2010 £m 2009 £m
Insurance contract liabilities 1,167 1,114
Claims outstanding 177 73
  1,344 1,187

The movement on reinsurers' share of insurance contract liabilities is as follows:

 

Download as excel file

  2010 £m 2009 £m
At 1 January 1,114 1,176
Movement in the year 31 24
Foreign exchange translation differences 22 (86)
At 31 December 1,167 1,114

Assets

Of the £555 million (2009: £636 million) current tax recoverable, the majority is expected to be recovered in one year or less.

Deferred tax asset

 

Download as excel file

  2010 £m 2009 £m
Unrealised losses on investments 449 1,156
Balances relating to investment and insurance contracts 11 20
Short-term timing differences 1,152 1,228
Capital allowances 16 18
Unused deferred tax losses 560 286
Total 2,188 2,708

The deferred tax asset at 31 December 2010 and 2009 arises in the following parts of the Group:

 

Download as excel file

  2010 £m 2009 £m
UK insurance operations:    
SAIF 2 2
PAC with-profits fund (including PAL) 108 141
Other 104 149
US insurance operations 1,391 1,944
Asian insurance operations 98 132
Other operations 485 340
Total 2,188 2,708

The decrease in deferred tax asset primarily relates to the reduction in unrealised losses on investments due to the improved investment markets.

Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted.

The taxation regimes applicable across the Group apply separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax assets. Accordingly, for the 2010 results and statement of financial position at 31 December 2010, the possible tax benefit of approximately £143 million (2009: £257 million), which may arise from capital losses valued at approximately £0.5 billion (2009: £1.2 billion), is sufficiently uncertain that it has not been recognised. In addition, a potential deferred tax asset of £298 million (2009: £607 million), which may arise from tax losses and other potential temporary differences totalling £1.2 billion (2009: £2.1 billion) is sufficiently uncertain that it has not been recognised. Forecasts as to when the tax losses and other temporary differences are likely to be utilised indicate that they may not be utilised in the short-term.

Liabilities

The current tax liability decreased to £831 million (2009: £1,215 million) due to an exceptional tax credit which primarily relates to the impact of a settlement agreed with the UK tax authorities together with the ability to recognise a tax credit on costs incurred in relation to the terminated AIA transaction.

Deferred tax liability

 

Download as excel file

  2010 £m 2009 £m
Unrealised gains on investments 1,678 1,744
Balances relating to investment and insurance contracts 1,057 961
Short-term timing differences 1,477 1,159
Capital allowances 12 8
Total 4,224 3,872

The increase in deferred tax liability primarily relates to the rise in deferred acquisition costs (shown within short-term timing differences above) as a result of the increase in insurance new business during the year.

Unprovided deferred income tax liabilities on temporary differences associated with investments in subsidiaries, associates and interests in joint ventures are considered to be insignificant due to the availability of various UK tax exemptions and reliefs.

The UK government's tax rate change to 27 per cent has had the effect of reducing the UK with-profits and shareholder-backed business elements of the net deferred tax balances as at 31 December 2010 by £11 million. The tax change to 27 per cent is effective from 1 April 2011 but enacted at 31 December 2010.The subsequent proposed phased rate changes to 24 per cent are expected to have the effect of reducing the UK with-profits and shareholder-backed business elements of the net deferred tax balances at 31 December 2010 by £65 million.

 

Download as excel file

  2010 £m 2009 £m
Accrued investment income    
Interest receivable 1,844 1,718
Other 824 755
Total 2,668 2,473
Other debtors    
Premiums receivable:    
From policyholders 141 148
From intermediaries 28 17
From reinsurers 27 82
Other 707 515
Total 903 762
Total accrued investment income and other debtors 3,571 3,235

Of the £3,571 million (2009: £3,235 million) of accrued investment income and other debtors, £151 million (2009: £134 million) is expected to be settled after one year or more.

Property, plant and equipment comprise Group occupied properties, development property (until 2009) and tangible assets. A reconciliation of the carrying amount of these items from the beginning of the year to the end of the year is as follows:

 

Download as excel file

  Group
occupied
property
£m
Development
property
£m
Tangible
assets
£m
Total
£m
  • *In line with the 2008 IASB Annual Improvements Project, all development properties were reclassified as investment properties with effect from 1 January 2009.
At 1 January 2009  
Cost 292 131 717 1,140
Accumulated depreciation (29) (476) (505)
Net book amount 263 131 241 635
Year ended 31 December 2009  
Opening net book amount 263 131 241 635
Exchange differences (9) (31) (40)
Depreciation charge (4) (70) (74)
Additions 2 89 91
Disposals (including amounts disposed of with the Taiwan agency business) (99) (15) (114)
Reclassified as investment property* (131) (131)
Closing net book amount 153 214 367
At 1 January 2010  
Cost 173 661 834
Accumulated depreciation (20) (447) (467)
Net book amount 153 214 367
Year ended 31 December 2010  
Opening net book amount 153 214 367
Exchange differences 5 9 14
Depreciation charge (4) (68) (72)
Additions 19 74 93
Arising on acquisitions of subsidiaries 220 220
Disposals (10) (10)
Closing net book amount 173 439 612
At 31 December 2010  
Cost 197 908 1,105
Accumulated depreciation (24) (469) (493)
Net book amount 173 439 612

The total property, plant and equipment relates to continuing operations only

Capital expenditure: property, plant and equipment by segment

 

Download as excel file

  2010 £m 2009 £m
Insurance operations:    
UK 23 5
US 25 12
Asia 28 65
Asset management operations:    
M&G 2
US 1 1
Asia 4 2
Total segment 83 85
Unallocated corporate 10 6
Total 93 91

Investment properties principally relate to the PAC with-profits fund and are carried at fair value. A reconciliation of the carrying amount of investment properties at the beginning and end of the year is set out below:

 

Download as excel file

  2010 £m 2009 £m
  • * In line with changes issued by the IASB as part of its Annual Improvement Project in May 2008 (as shown in note H6) all development properties with a total cost of £131 million have been reclassified as investment properties at 1 January 2009. At this date these investments had a fair value of £152 million. The initial gain of £21 million is included as part of 'net loss from fair value adjustments'.
At 1 January 10,905 11,992
Reclassification of development property* 131
Additions:    
Resulting from acquisitions 267 184
Resulting from expenditure capitalised 44 133
Resulting from acquisitions through business combinations 1
Disposals (including amounts disposed of with the Taiwan agency business) (390) (1,220)
Net gain (loss) from fair value adjustments 636 (203)
Net foreign exchange differences 38 (113)
Transfers to held for sale assets (254)
Transfers to owner occupied properties 1
At 31 December 11,247 10,905

The income statement includes the following items in respect of investment properties:

 

Download as excel file

  2010 £m 2009 £m
Rental income from investment properties 625 755
Direct operating expenses (including repairs and maintenance expenses) arising from investment properties that generated rental income during the year 125 131

Further information on the investment property held by the UK insurance operations is included in note D2(a).

Investment properties of £3,435 million (2009: £3,177 million) are held under finance leases. A reconciliation between the total of future minimum lease payments at the statement of financial position date and their present value is shown below:

 

Download as excel file

  2010 £m 2009 £m
Future minimum lease payments at 31 December 1,107 1,683
Future finance charges on finance leases (972) (1,517)
Present value of minimum lease payments 135 166
Future minimum lease payments are due as follows:    
Less than 1 year 7 9
1 to 5 years 28 38
Over 5 years 1,072 1,636
Total 1,107 1,683
The present values of these minimum lease payments are:    
Less than 1 year 7 8
1 to 5 years 24 38
Over 5 years 104 120
Total 135 166

Contingent rent is that portion of the lease payments that is not fixed in amount but is based on the future value of a factor that changes other than with the passage of time. There was no contingent rent recognised as income or expense in 2010 and 2009.

The Group's policy is to rent investment properties to tenants through operating leases. Minimum future rentals to be received on non-cancellable operating leases are receivable in the following periods:

 

Download as excel file

  2010 £m 2009 £m
Less than 1 year 601 662
1 to 5 years 2,121 2,282
Over 5 years 5,616 7,792
Total 8,338 10,736

The total minimum future rentals to be received on non-cancellable sub-leases for land and buildings at 31 December 2010 are £3,366 million (2009: £3,684 million).

Investments in associates

The Group had three associates at 31 December 2010 (2009: three) that are accounted for using the equity method. The Group's associates are a 30 per cent interest in The Nam Khang, a Vietnamese property developer, a 30 per cent interest in Apollo Education and Training Organisation Vietnam and a 25 per cent interest in PruHealth, following the loss of joint control in the period (see note I2). OYO Developments Limited a 25 per cent associate was disposed during the year.

The Group also has investments in associates which meet the IAS 28 criteria for measurement at fair value through profit and loss in accordance with IAS 39.

Associates accounted for using the equity method

A summary of the movements in investments in associates accounted for using the equity method in 2010 and 2009 is set out below:

 

Download as excel file

  Share of
capital
£m
Share of
reserves
£m
Share of
net assets
£m
Goodwill
£m
Total
carrying
value
£m
Balance at 1 January 2009 12 (4) 8 2 10
Exchange translations and other movements (7) 4 (3) (1) (4)
Share of loss for the year after tax
Balance at 31 December 2009 5 5 1 6
Transfer of PruHealth to associates (note I2) 1 65 66 66
Acquisition/capital injection in PruHealth 9 9 9
Exchange translation and other movements (3) (1) (4) (4)
Share of loss for the year after tax (6) (6) (6)
Balance at 31 December 2010 12 58 70 1 71

There have been no changes recognised in the other comprehensive income of associates that would also be recognised in the other comprehensive income by the Group.

The Group's share of the assets, liabilities, revenues and profit and loss of associates accounted for using the equity method at 31 December 2010 and 2009 is as follows:

 

Download as excel file

  2010 £m 2009 £m
  • *The 2010 amounts include the Group's share of PruHealth's revenue and profit and loss for the five months ended 31 December 2010.
    Prior to August 2010, PruHealth was accounted for as a joint venture (see note I2 and the note below).
Financial position    
Total assets (excluding goodwill) 70 5
Total liabilities
Net assets 70 5
Results of operations    
Revenue* 39 1
Loss in the year* (6)

Associates carried at fair value through profit and loss

The Group's associates that are carried at fair value through profit and loss comprise investments in OEICs, unit trusts, funds holding collateralised debt obligations, property unit trusts, and venture capital investments of the PAC with-profits fund where the Group has significant influence. These investments are incorporated both in the UK and overseas, and some have year ends which are non-coterminous with that of the Group. In these instances, the investments are recorded at fair value at 31 December 2010 based on valuations or pricing information at that specific date. The aggregate fair value of associates carried at fair value through profit and loss where there are published price quotations is approximately £5 billion (2009: £6 billion) at 31 December 2010.

The aggregate assets of these associates are approximately £6 billion (2009: £9 billion). Aggregate liabilities, excluding liabilities to unit holders and shareholders for unit trusts and OEICs, are approximately £1 billion (2009: £2 billion). Fund revenues, with revenue arising in unit trusts and OEICs deemed to constitute the investment return for these vehicles, were approximately £0.4 billion (2009: £0.8 billion) and net loss in the year, excluding unit trusts and OEICs where all investment returns accrue to unit holders or shareholders respectively, was approximately £0.1 billion (2009: profit of £0.2 billion).

Investments in joint ventures

Joint ventures represent activities over which the Group exercises joint control through contractual agreement with one or more parties. The Group's significant joint ventures, which are accounted for using proportionate consolidation, comprise various joint ventures relating to property investments where the Group has a 50 per cent interest as well as the following interests:

 

Download as excel file

Investment % held Principal activity Country
CITIC Prudential Life Insurance Company Limited 50 Life assurance China
CITIC Prudential Fund Management Company Limited 49 Asset management China
Prudential ICICI Asset Management Company Limited 49 Asset management India
Prudential BSN Takaful Berhad 49 General and life insurance Malaysia
BOCI Prudential Asset Management Limited 36 Asset management China
ICICI Prudential Life Insurance Company Limited 26 Life assurance India

The investments noted in the table above have the same accounting year end as the Group, except for ICICI Prudential Life Insurance Company Limited and Prudential ICICI Asset Management Company Limited. Although these investments have reporting periods ending 31 March, 12 months of financial information up to 31 December is recorded. Accordingly, the information covers the same period as that of the Group.

The summarised financial data for the Group's share of investments in joint ventures is as follows:

 

Download as excel file

  2010 £m 2009 £m
  • *The 2010 amounts include the Group's share of PruHealth's results for the seven months ended 31 July 2010. On 1 August 2010 the Group's interest in PruHealth was diluted and the Group's investment was reclassified as an associate (see note I2 and the note above).
Financial position    
Current assets 327 386
Non-current assets 3,386 2,462
Total assets 3,713 2,848
Current liabilities (329) (150)
Non-current liabilities (3,093) (2,392)
Total liabilities (3,422) (2,542)
Net equity 291 306
Results of operations    
Revenues* 1,195 974
Expenses* (1,135) (945)
Net profit (loss) 60 29

There are several minor service agreements in place between the joint ventures and the Group. During 2010, the aggregate amount of the transactions was £29.7 million (2009: £14.1 million) and the balance outstanding as at 31 December 2010 was £69.5 million (2009: £54.6 million).

The joint ventures have no significant contingent liabilities to which the Group is exposed nor does the Group have any significant contingent liabilities in relation to its interest in the joint ventures.

Investment properties are classified as held for sale when contracts have been exchanged but the sale has not been completed at the period end. At 31 December 2010 the value of assets held for sale was £257 million (2009: £3 million).

Gains on disposal of held for sale assets are recorded in 'investment return' within the income statement.

Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments with less than 90 days maturity from the date of acquisition. Cash and cash equivalents included in the cash flow statement comprise the following statement of financial position amounts:

 

Download as excel file

  2010 £m 2009 £m
Cash 6,167 5,071
Cash equivalents 464 236
Total cash and cash equivalents 6,631 5,307

Cash and cash equivalents held centrally are considered to be available for general use by the Group. These funds amount to £523 million and £895 million at 31 December 2010 and 2009, respectively. The remaining funds are considered not to be available for general use by the Group, and include funds held for the benefit of policyholders.

 

Download as excel file

  2010 £m 2009 £m
Share capital and share premium    
Share capital 127 127
Share premium 1,856 1,843
Reserves    
Retained earnings 4,982 3,964
Translation reserve 454 203
Available-for-sale reserve 612 134
Total shareholders’ equity 8,031 6,271

A summary of the ordinary shares in issue is set out below:

Share capital and share premium

 

Download as excel file

  2010
  Number of
ordinary
shares
Share
capital
£m
Share
premium
£m
Issued shares of 5p each fully paid:  
At 1 January 2010 2,532,227,471 127 1,843
Shares issued under share option schemes 2,455,227 13
Shares issued in lieu of cash dividends 10,911,808 62
Reserve movements in respect of shares issued in lieu of cash dividends (62)
At 31 December 2010 2,545,594,506 127 1,856
 

Download as excel file

  2009
  Number of
ordinary
shares
Share
capital
£m
Share
premium
£m
Issued shares of 5p each fully paid:  
At 1 January 2009 2,496,947,688 125 1,840
Shares issued under share option schemes 605,721 3
Shares issued in lieu of cash dividends 34,674,062 2 136
Reserve movements in respect of shares issued in lieu of cash dividends (136)
At 31 December 2009 2,532,227,471 127 1,843

Amounts recorded in share capital represent the nominal value of the shares issued. The difference between the proceeds received on issue of shares, net of issue costs, and the nominal value of shares issued is credited to the share premium account. Shares issued in lieu of cash dividends are considered to take the legal form of bonus issue shares and have been accounted for as such.

At 31 December 2010, there were options outstanding under Save As You Earn schemes to subscribe for 12,802,482 (2009: 12,230,833) shares at prices ranging from 288 pence to 572 pence (2009: 266 pence to 572 pence) and exercisable by the year 2016 (2009: 2016).

The cost of own shares of £75 million as at 31 December 2010 (2009: £75 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans and savings-related share option schemes. At 31 December 2010, 4.5 million (2009: 5.3 million) Prudential plc shares with a market value of £30 million (2009: £34 million) were held in such trusts. Of this total, 4.4 million (2009: 4.8 million) shares were held in trusts under employee incentive plans. In 2010, the Company purchased 5.7 million (2009: 3.4 million) shares in respect of employee incentive plans at a cost of £32 million (2009: £17 million). The maximum number of shares held in the year was 5.3 million which was at the beginning of the year.

Of the total shares held in trust, 0.1 million (2009: 0.5 million) shares were held by a qualifying employee share ownership trust. These shares are expected to be fully distributed in the future on maturity of savings-related share option schemes.

The shares purchased each month are as follows:

 

Download as excel file

    Share Price  
2010 Number of
shares
Low
£
High
£
Cost
£
January 9,338 6.38 6.38 59,530
February 11,638 5.68 5.68 66,046
March 3,908,274 5.16 6.09 20,884,460
April 11,129 5.63 5.63 62,601
May 14,638 5.59 5.59 81,753
June 190,991 5.26 5.66 1,075,712
July 13,457 5.14 5.14 69,102
August 10,016 5.86 5.86 58,644
September 13,727 5.25 5.84 78,539
October 11,634 6.37 6.37 74,108
November 385,321 5.74 6.49 2,244,770
December 1,153,611 6.04 6.65 7,445,358
Total 5,733,774     32,200,623
 

Download as excel file

    Share Price  
2009 Number of
shares
Low
£
High
£
Cost
£
January 19,852 3.83 3.94 76,575
February 19,926 3.52 3.52 70,140
March 1,112,209 2.02 3.50 3,837,968
April 22,164 3.38 3.38 74,859
May 32,416 4.45 6.59 173,242
June 26,594 4.44 7.31 145,230
July 342,062 3.86 4.30 1,374,929
August 14,059 4.85 4.85 68,144
September 12,435 5.50 5.50 68,393
October 10,332 6.34 6.34 65,453
November 10,576 6.04 6.04 63,879
December 1,739,591 6.06 6.35 10,941,847
Total 3,362,216     16,960,659

The Group has consolidated a number of authorised investment funds where it is deemed to control these funds under IFRS. Some of these funds hold shares in Prudential plc. The total number of shares held by these funds at 31 December 2010 was 9.8 million (2009: 10.6 million) and the cost of acquiring these shares of £47 million (2009: £50 million) is included in the cost of own shares. The market value of these shares as at 31 December 2010 was £65 million (2009: £67 million).

During 2010 and 2009 respectively, these funds made 833,618 net disposals and 1,414,263 net acquisitions of Prudential shares for a net decrease of £3 million and a net increase of £3 million to book cost.

All share transactions were made on an exchange other than the Stock Exchange of Hong Kong.

The Company did not buy back any of its own shares during 2010 or 2009.

Reserves

The translation reserve represents cumulative foreign exchange translation differences taken directly to equity in accordance with IFRS, net of related tax. In accordance with IFRS 1, cumulative translation differences are deemed to be zero at 1 January 2004, the date of transition to IFRS.

The available-for-sale reserve represents gains or losses arising from changes in the fair value of available-for-sale securities of Jackson, net of the related change in amortisation of deferred income and acquisition costs and of the related tax.

Movement in year

 

Download as excel file

  Insurance
contract
liabilities
£m
Unallocated
surplus
of with-
profits funds
£m
At 1 January 2009 136,030 8,414
Income and expense included in the income statement 19,765 1,559
Foreign exchange translation differences (6,574) 46
Disposal of Taiwan agency business (3,508)
At 1 January 2010 145,713 10,019
Income and expense included in the income statement 22,412 245
Foreign exchange translation differences 3,193 (11)
Dilution of holding in PruHealth (27)
At 31 December 2010 171,291 10,253

Notes B6, D2c, D3c and D4c provide further analysis of the movement in the year of the Group's policyholder liabilities and unallocated surplus of the with-profits funds.

Movement in year

 

Download as excel file

Core structural borrowings of shareholder-financed operations

  2010 £m 2009 £m
  Innovative
Tier 1*
Innovative
Tier 2*
Senior Total Total
  • *These debt classifications are consistent with the treatment of capital for regulatory purposes, as defined in the FSA Handbook.
  • The senior debt ranks above subordinated debt in the event of liquidation.

Notes

  1. The €500 million 5.75 per cent borrowings have been swapped into borrowings of £333 million with interest payable at six month £LIBOR plus 0.962 per cent.
  2. The €20 million borrowings were issued at 20-year Euro Constant Maturity Swap (capped at 6.5 per cent). These have been swapped into borrowings of £14 million with interest payable at three month £LIBOR plus 1.2 per cent.
  3. The US$250 million 6.75 per cent borrowings and the US$300 million 6.5 per cent borrowings can be converted, in whole or in part, at the Company's option and subject to certain conditions, on any interest payment date falling on or after 23 March 2010 and 23 March 2011 respectively, into one or more series of Prudential preference shares.
  4. The £250 million PruCap bank loan was made in two tranches: £135 million maturing in June 2014, currently drawn at a cost of six month £LIBOR plus 1.2 per cent and £115 million maturing in August 2012, currently drawn at a cost of twelve month £LIBOR plus 1.41 per cent.
  5. The Jackson borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.
  6. Maturity analysis
    The following table sets out the contractual maturity analysis of the Group's core structural borrowings:
Central operations    
Subordinated debt:    
€500m 5.75% Subordinated Notes 2021note i   428   428 443
€20m Medium-Term Subordinated Notes 2023note ii   17   17 18
£435m 6.125% Subordinated Notes 2031   428   428 428
£400m 11.375% Subordinated Notes 2039   382   382 380
US$1,000m 6.5% Perpetual Subordinated Capital Securities 639     639 619
US$250m 6.75% Perpetual Subordinated Capital Securitiesnote iii 160     160 155
US$300m 6.5% Perpetual Subordinated Capital Securitiesnote iii 192     192 192
US$750m 11.75% Perpetual Subordinated Capital Securities 472     472 456
  1,463 1,255 2,718 2,691
Senior debt:    
£300m 6.875% Bonds 2023     300 300 300
£250m 5.875% Bonds 2029     249 249 249
  549 549 549
Total central operations 1,463 1,255 549 3,267 3,240
PruCap    
£250m bank loannote iv     250 250
Jackson    
US$250m 8.15% Surplus Notes 2027note v   159   159 154
Total notes vi, vii 1,463 1,414 799 3,676 3,394

Download as excel file

  2010 £m 2009 £m
Less than 1 year
1 to 2 years 115
2 to 3 years
3 to 4 years 135
4 to 5 years
Over 5 years 3,426 3,394
Total 3,676 3,394
  1. Management analyses the net core structural borrowings position as follows:

Download as excel file

  2010 £m 2009 £m
Total core structural borrowings (as above) 3,676 3,394
Less: Holding company cash and short-term investments (recorded within the consolidated statement of financial position) (1,232) (1,486)
Net core structural borrowings of shareholder-financed operations 2,444 1,908

Operational borrowings attributable to shareholder-financed operations

 

Download as excel file

  2010 £m 2009 £m

Notes

  1. In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and funds.
  2. This represents senior debt issued through the Federal Home Loan Bank of Indianapolis and was secured on collateral posted with FHLB by Jackson.
  3. Piedmont is an investment trust investing in certain asset-backed and mortgage-backed securities in the US. These borrowings pertain to debt instruments issued to external parties.
  4. Other borrowings represents amounts whose repayment to the lender is contingent on future surpluses emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on the contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall.
  5. In addition to the listed debt above, £200 million Floating Rate Notes were issued by Prudential plc in October 2010 which mature in April 2011. These Notes have been wholly subscribed by a Group subsidiary and accordingly have been eliminated on consolidation in the Group financial statements. These Notes were originally issued in October 2008 and have been reissued upon their maturity.
  6. Maturity analysis
    The following table sets out the contractual maturity analysis of the Group's operational borrowings attributable to shareholder-financed operations
Borrowings in respect of short-term fixed income securities programmes    
Commercial paper 2,311 2,031
Medium-Term Notes 2010 7
Bank Notes 2013 249
  2,560 2,038
Non-recourse borrowings of US operationsnote i    
Jacksonnote ii 10
Investment subsidiaries 20 20
Piedmont and CDO fundsnote iii 60 183
  90 203
Other borrowings    
Bank loans and overdrafts 5 148
Obligations under finance leases 2 3
Other borrowingsnote iv 347 359
  354 510
Totalnotes v, vi 3,004 2,751

Download as excel file

  2010 £m 2009 £m
Less than 1 year 2,496 2,183
1 to 2 years 98 121
2 to 3 years 401 239
3 to 4 years 172
4 to 5 years 6
Over 5 years 9 30
Total 3,004 2,751

Borrowings attributable to with-profits operations

 

Download as excel file

  2010 £m 2009 £m

Notes

  1. In all instances the holders of the debt instruments issued by these funds do not have recourse beyond the assets of those funds.
  2. The interests of the holders of the bonds issued by Scottish Amicable Finance plc, a subsidiary of the Scottish Amicable Insurance Fund, are subordinate to the entitlements of the policyholders of that fund.
  3. Maturity analysis

    The following table sets out the contractual maturity analysis of the Group's borrowings attributable to with-profits operations:

Non-recourse borrowings of consolidated investment fundsnote i 1,287 1,016
£100m 8.5% Undated Subordinated Guaranteed Bonds of Scottish Amicable Finance plcnote ii 100 100
Other borrowings (predominantly obligations under finance leases) 135 168
Totalnote iii 1,522 1,284

Download as excel file

  2010 £m 2009 £m
Less than 1 year 96 33
1 to 2 years 635 77
2 to 3 years 99 706
3 to 4 years 74 1
4 to 5 years 1 1
Over 5 years 617 466
Total 1,522 1,284

Provisions

 

Download as excel file

  2010 £m 2009 £m
Provision in respect of defined benefit pension schemes:I3    
Deficit, gross of deferred tax, based on scheme assets held, including investments in Prudential insurance policies:    
Attributable to PAC with-profits fund (i.e. absorbed by the liability for unallocated surplus) 106 122
Attributable to shareholder-financed operations (i.e. to shareholders’ equity) 114 128
  220 250
Add back: Investments in Prudential insurance policies 227 187
Provision after elimination of investments in Prudential insurance policies and matching policyholder liability from Group statement of financial position 447 437
Other provisions (see below) 282 206
Total provisions 729 643

Analysis of other provisions:

 

Download as excel file

  2010 £m 2009 £m
At 1 January 206 155
Charged to income statement:    
Additional provisions 182 148
Unused amounts released (10) (13)
Used during the year (106) (75)
Exchange differences 10 (9)
At 31 December 282 206
Comprising:    
Legal provisions 20 15
Restructuring provisions 26 17
Other provisions 236 174
Total 282 206

Of the other provisions balance of £282 million (2009: £206 million), £141 million (2009: £148 million) is expected to be settled within one year. Employer contributions expected to be paid into defined benefit pension schemes within one year are shown in note I3.

Legal provisions

Of the legal provisions of £20 million (2009: £15 million), £19 million (2009: £11 million) relates to Jackson. Jackson has been named in civil proceedings, which appear to be substantially similar to other class action litigation brought against many life insurers in the US, alleging misconduct in the sale of insurance products. During 2010 and 2009, £1 million and £9 million was paid respectively. In 2010, Jackson established an additional £9 million reserve for potential litigation. We expect the provision balance to be utilised over the next six years.

Restructuring provisions

Restructuring provisions of £26 million (2009: £17 million) primarily relate to restructuring activities of UK insurance operations. The provisions pertain to property liabilities resulting from the closure of regional sales centres and branches and staff terminations and other transformation costs to enable streamlining of operations.

These activities resulted in additional provisions in 2010 of £14 million. During 2010, £2 million (2009: £1 million) of unused provision was released, and £3 million (2009: £3 million) was paid.

We expect the provision balance to be paid out within the next six years.

Other provisions

Other provisions of £236 million (2009: £174 million) include provisions of £200 million (2009: £143 million) relating to staff benefit schemes which are mostly benefits that will generally be paid out within the next three years. During 2010, another £148 million (2009: £112 million) was provided (including exchange movement of £2 million (2009: £6 million)), £6 million (2009: £10 million) of unused provision was released and £92 million (2009: £54 million) was paid. Other provisions also include £28 million (2009: £27 million) relating to various onerous contracts where, in 2010, an additional £10 million (2009: £15 million) was provided and £8 million (2009: £4 million) was used. Other provisions also include £4 million (2009: £4 million) of regulatory provisions, where £nil (2009: £9 million) was provided, £1 million (2009: £2 million) of unused provision was released and £nil (2009: £3 million) was paid.

Contingencies and related obligations

Litigation regarding the Prudential Staff Pension Scheme (PSPS) and other matters

The Company is currently awaiting the decision of the English High Court in a case that was heard in early 2011 involving PSPS. This case relates to the defined benefit section of PSPS and was heard at the request of the trustees of the scheme who are seeking to clarify the Company's obligations relating to discretionary pension increases.

In the event that the English High Court decides that the obligations relating to discretionary pension increases are greater than the Company currently believes, the assumptions applied for IAS 19 reporting purposes, and therefore the level of surplus of the Scheme may be affected. The Court decision might also affect the level of future deficit funding agreed concurrently with the next actuarial valuation as at 5 April 2011.

The impact of such changes on the deficit funding obligations of the shareholders' funds of the Group would be determined in the context of the pre-existing features applicable to the PSPS scheme described below:

  1. Although underlying surpluses of the scheme are not recognised for IAS 19 Group accounting purposes under IFRIC 14, the surplus determined on the actuarial valuation basis would be considered in the context of setting altered levels of future deficit funding, and
  2. the allocation of any such altered future deficit funding between the PAC life fund and shareholder-backed operations would be in a 70/30 ratio. This ratio was determined following detailed consideration in 2005 of the source of previous contributions and has been applied from then when deficit funding has been required.

Additional details on the Prudential Staff Pension Scheme and these features are included in note I3.

Consistent with the Company's expectations as to the decision of the Court, no amount has been provided in the 2010 financial statements for this item.

In addition to the legal proceedings relating to Jackson mentioned under the legal provisions section above, and PSPS, the Group is involved in other litigation and regulatory issues.

Whilst the outcome of each of the above matters cannot be predicted with certainty, the Company believes that the ultimate outcome of such litigation and regulatory issues will not have a material adverse effect on the Group's financial condition, results of operations, or cash flows.

Pension mis-selling review

The pensions review by the UK insurance regulator of past sales of personal pension policies required all UK life insurance companies to review their cases of potential mis-selling and record a provision for the estimated costs. The Group met the requirement of the FSA to issue offers to all cases by 30 June 2002.

The table below summarises the change in the pension mis-selling provision for the years ended 31 December 2010 and 2009. The change in the provision is included in benefits and claims in the income statement and the movement in unallocated surplus of with-profits funds has been determined accordingly.

 

Download as excel file

  2010 £m 2009 £m
Balance at beginning of year 322 345
Changes to actuarial assumptions and method of calculation 37 20
Discount unwind 2 3
Redress to policyholders (46) (44)
Payment of administrative costs (1) (2)
Balance at end of year 314 322

The pension mis-selling provision is included within the liabilities in respect of investment contracts with discretionary participation features under IFRS 4.

The pension mis-selling provision at 31 December 2010 set out above of £314 million is stochastically determined on a discounted basis. The average discount rate implied in the movement in the year is four per cent. The undiscounted amounts at 31 December 2010 expected to be paid in each of the years ending 31 December are as follows:

 

Download as excel file

  2010 £m
Year ended 31 December  
2011 40
2012 10
2013 9
2014 10
2015 9
Thereafter 441
Total undiscounted amount 519
Aggregate discount (205)
Discounted pension mis-selling provision at 31 December 2010 314

The directors believe that, based on current information, the provision, together with future investment return on the assets backing the provision, will be adequate to cover the costs of pension mis-selling including administration costs. Such provision represents the best estimate of probable costs and expenses. However, there can be no assurance that the current provision level will not need to be increased.

The costs associated with the pension mis-selling review have been met from the inherited estate (see below). Accordingly, these costs have not been charged to the asset shares used in the determination of policyholder bonus rates. Hence policyholders' pay-out values have been unaffected by pension mis-selling.

In 1998, Prudential stated that deducting mis-selling costs from the inherited estate would not impact its bonus or investment policy and it gave an assurance that if this unlikely event were to occur, it would make available support to the fund from shareholder resources for as long as the situation continued, so as to ensure that policyholders were not disadvantaged. The assurance was designed to protect both existing policyholders at the date it was announced, and policyholders who subsequently purchased policies while the pension mis-selling review was continuing.

The bonus and investment policy for each type of with-profits policy is the same irrespective of whether or not the assurance applies and this is expected to continue for the foreseeable future. Hence removal of the assurance for new business has had no impact on policyholder returns.

Mortgage endowment products review

In common with several other UK insurance companies, the Group used to sell low-cost endowment products related to repayment of residential mortgages. At sale, the initial sum assured is set at a level such that the projected benefits, including an estimate of the annual bonus receivable over the life of the policy, will equal or exceed the mortgage debt. Because of a decrease in expected future investment returns since these products were sold, the FSA is concerned that the maturity value of some of these products will be less than the mortgage debt. The FSA has worked with insurance companies to devise a programme whereby the companies write to customers indicating whether they may have a possible shortfall and outline the actions that the customers can take to prevent this possibility.

The Group is exposed to mortgage endowment products in respect of policies issued by Scottish Amicable Life plc (SAL) and the Scottish Amicable Life Assurance Society (SALAS) which were transferred into SAIF. At 31 December 2010, provisions of £2 million (2009: £4 million) in respect of the SAL policies and £20 million (2009: £35 million) in SAIF were held within policyholder liabilities to cover potential compensation in respect of mortgage endowment product mis-selling claims. As SAIF is a separate sub-fund of the Prudential Assurance long-term business fund, wholly attributable to the policyholders of the fund, this provision has no impact on shareholders.

In addition, in the year ended 31 December 2010 Prudential Assurance's main with-profits fund paid compensation of £2 million (2009: £2 million) in respect of mortgage endowment products mis-selling claims and at 31 December 2010 held a provision of £32 million (2009: £47 million) in respect of further compensation. The movement in this provision has no impact on the Group's profit before tax.

In May 2006, the Group introduced a deadline for both Prudential and Scottish Amicable mortgage endowment complaints. Impacted customers have three years to lodge a mis-selling complaint in line with the time limit prescribed by the FSA and the ABI.

Guaranteed annuities

Prudential Assurance used to sell guaranteed annuity products in the UK and at 31 December 2010 held a provision of £24 million (2009: £31 million) within the main with-profits fund within policyholder liabilities to honour guarantees on these products. The Group's main exposure to guaranteed annuities in the UK is through SAIF and at 31 December 2010 a provision of £336 million (2009: £284 million) was held in SAIF to honour the guarantees. As SAIF is a separate sub-fund of the Prudential Assurance long-term business fund, wholly attributable to the policyholders of the fund, the movement in this provision has no impact on shareholders.

Other matters

Inherited estate of the PAC long-term fund

The assets of the with-profits sub-fund (WPSF) within the long-term insurance fund of The Prudential Assurance Company Limited (PAC) comprise the amounts that it expects to pay out to meet its obligations to existing policyholders and an additional amount used as working capital. The amount payable over time to policyholders from the WPSF is equal to the policyholders' accumulated asset shares plus any additional payments that may be required by way of smoothing or to meet guarantees. The balance of the assets of the WPSF is called the 'inherited estate' and has accumulated over many years from various sources.

The inherited estate, as working capital, enables PAC to support with-profits business by providing the benefits associated with smoothing and guarantees, by providing investment flexibility for the fund's assets, by meeting the regulatory capital requirements that demonstrate solvency and by absorbing the costs of certain significant events or fundamental changes in its long-term business without affecting the bonus and investment policies. The size of the inherited estate fluctuates from year to year depending on the investment return and the extent to which it has been required to meet smoothing costs, guarantees and other events.

Support for long-term business funds by shareholders' funds

As a proprietary insurance company, PAC is liable to meet its obligations to policyholders even if the assets of the long-term funds are insufficient to do so. The assets, represented by the unallocated surplus of with-profits funds, in excess of amounts expected to be paid for future terminal bonuses and related shareholder transfers ('the excess assets') in the long-term funds could be materially depleted over time by, for example, a significant or sustained equity market downturn, costs of significant fundamental strategic change or a material increase in the pension mis-selling provision. In the unlikely circumstance that the depletion of the excess assets within the long-term fund was such that the Group's ability to satisfy policyholders' reasonable expectations was adversely affected, it might become necessary to restrict the annual distribution to shareholders or to contribute shareholders' funds to the long-term funds to provide financial support.

In 1997, the business of SALAS, a mutual society, was transferred to PAC. In effecting the transfer, a separate sub-fund, SAIF, was established within PAC's long-term business fund. This sub-fund contains all the with-profits business and all other pension business that was transferred. No new business has been or will be written in the sub-fund and the sub-fund is managed to ensure that all the invested assets are distributed to SAIF policyholders over the lifetime of SAIF policies. With the exception of certain amounts in respect of the unitised with-profits life business, all future earnings arising in SAIF are retained for SAIF policyholders. Any excess (deficiency) of revenue over expense within SAIF during a period is attributable to the policyholders of the fund. Shareholders have no interest in the profits of SAIF but are entitled to the asset management fees paid on this business. With the exception of certain guaranteed annuity products mentioned earlier in this note, and certain products which include a minimum guaranteed rate of accumulation, the majority of SAIF with-profits policies do not guarantee minimum rates of return to policyholders.

Should the assets of SAIF be inadequate to meet the guaranteed benefit obligations to the policyholders of SAIF, the PAC long-term fund would be liable to cover any such deficiency. Due to the quality and diversity of the assets in SAIF and the ability of SAIF to revise guaranteed benefits in the event of an asset shortfall, the directors believe that the probability of either the PAC long-term fund or the Group's shareholders' funds having to contribute to SAIF is remote.

Guarantees and commitments

Guarantee funds in both the UK and the US provide for payments to be made to policyholders on behalf of insolvent life insurance companies. These guarantee funds are financed by payments assessed on solvent insurance companies based on location, volume and types of business. The Group estimated its reserve for future guarantee fund assessments for Jackson, included within other liabilities to be £16 million at 31 December 2010 (2009: £15 million). Similar assessments for the UK businesses were not significant. The directors believe that the reserve is adequate for all anticipated payments for known insolvencies.

At 31 December 2010, Jackson has unfunded commitments of £363 million (2009: £339 million) related to its investments in limited partnerships and of £88 million (2009: £89 million) related to commercial mortgage loans. These commitments were entered into in the normal course of business and the directors do not expect a material adverse impact on the operations to arise from them.

Jackson owns debt instruments issued by securitisation trusts managed by PPM America. At 31 December 2010, the support provided by certain forbearance agreements Jackson entered into with the counterparty to certain of these trusts could potentially expose Jackson to maximum losses of £332 million, if circumstances allowed the forbearance period to cease. Jackson believes that, so long as the forbearance period continues, the risk of loss under the agreements is remote.

The Group has provided other guarantees and commitments to third-parties entered into in the normal course of business but the Company does not consider that the amounts involved are significant.

 

Download as excel file

  2010 £m 2009 £m
Creditors arising from direct insurance and reinsurance operations 821 615
Interest payable 66 83
Other items 242 179
Total 1,129 877
 

Feedback

Your comments and ideas help us to shape future reports to suit your needs.

Tell us your views

Shareholder services

Get the most out of your shareholding in Prudential.

View shareholder services