IFRS basis

IFRS basis operating profit

Group operating profit before tax from continuing operations based on longer-term investment returns on the IFRS basis after restructuring costs was £674 million an increase of 13 per cent on the first six months of 2007 at CER.

The increase in Asia’s operating profit of 28 per cent for long-term business before development expenses primarily reflects improved profitability in Indonesia and Singapore which have increased by 41 per cent and 24 per cent respectively as a result of a significant increase in renewal premiums partially offset by lower investment returns. New business strain remained at approximately 10 per cent of APE in the first half of 2008.

In the US, IFRS operating profit of £232 million was up six per cent on the first half of 2007 at CER. This is mainly due to increasing fee income and higher derivative income on the variable annuity business reflecting the increase in the market value of the net short derivative positions due to falling equity prices. The decision to acquire additional hedging protection in the derivative markets in 2007 at favourable prices demonstrated its value in the IFRS operating profit in the context of falling equity markets experienced in the first half of 2008. The US operations' results are based on US GAAP, adjusted where necessary to comply with IFRS, with the Group's basis of presenting operating profit is based on longer-term investment returns. Longer-term returns for the US operations' fixed income securities incorporate a risk margin reserve (RMR) charge for longer-term defaults and amortisation of interest-related realised gains and losses.

In the UK, IFRS operating profit for the long-term business increased by 14 per cent to £286 million in the first half of 2008. This reflected increased annuity profits while profits attributable to the with-profits business were in line with prior year.

M&G's operating profit for the first half of 2008 was £146 million, an increase of four per cent over the first half of 2007. The negative impact from equity and property market declines, primarily on retail and PRUPIM revenues, was offset by incremental income from net investment flows in 2007 as well as encouraging growth in the Infracapital business within Fixed Income.

The Asian asset management operations reported operating profits of £29 million, a decline of (15) per cent, due to the volatility in equity and bond markets which affected assets under management and net flows, coupled with a shift in asset mix to bond and money market funds, which attract a lower fee rate.

The operating profit from the US broker-dealer and asset management businesses was £6 million.

The charge for other income and expenditure of £110 million, an improvement of £16 million over the first half of 2007, included £47 million profit crystallised on the sale of a seed capital investment in an Indian mutual fund offset by £28 million expenditure relating to the assessment of the reattribution of the inherited estate.

IFRS basis profit after tax

The following year-on-year comparisons are presented on a RER basis.

Total IFRS basis loss before tax and minority interests was £(102) million in the first half of 2008, compared with a profit of £655 million for the first half of 2007. The decrease reflects adverse short-term fluctuations in investment returns of £(684) million and a negative movement against the prior year in actuarial gains and losses attributable to shareholder-backed operations in respect of the Group's defined benefit pension schemes.

In the calculation of IFRS operating profit longer-term investment return assumptions are used rather than actual investment returns achieved. The actual movements in asset values beyond the longer-term assumptions appear in the profit and loss account as short-term fluctuations in investment returns, with the exception of Jackson where unrealised gains or losses on debt securities feature directly as movements to shareholder reserves.

Short-term fluctuations in investment returns are the difference between the actual investment return for shareholder-backed business and the longer-term investment return assumed in operating profit.

The £(684) million charge for short-term fluctuations in investment returns comprises £(264) million, £(181) million and £(82) million from the Asian operations, US operations and UK operations respectively. In addition, there was a charge of £157 million for other short-term fluctuations in investment returns; £24 million unrealised losses on an Indian mutual fund investment: the subsequent sale of the investment resulting in a transfer of £47 million to operating profits. £49 million of the £157 million charge relates to value movements on swaps held centrally to manage Group's assets and liabilities. £26 million of the charge reflects value movements, net of hedge effects on Prudential Capital's bond portfolio. The residual £11 million charge relates to a value movement on a centrally held investment.

The fluctuations for the Asian operations primarily reflect £(149) million for Vietnam reflecting a significant fall in the Vietnamese bond and equity markets, the latter falling by 58 per cent in the first half of the year and £69 million for Taiwan which reflects the decrease of 12 per cent in the Taiwanese equity market, and a £29 million reduction in the value of an investment in a CDO fund.

In the US the charge for short-term fluctuations in investment returns was £(181) million. During the first half of 2008 the US life insurance operations recorded net credit losses of £(108) million. This charge is reflected in two parts of the accounting presentation of the results. Included within the IFRS operating profit based on longer-term investment returns is a risk margin reserve (RMR) charge, representing long-term expected credit defaults, of £23 million. After deducting the RMR charge and related charges in amortisation of deferred acquisition costs, the difference between the credit related losses and the RMR charge in the year was a charge of £(73) million which is recorded within short-term fluctuations in investment returns. The other £(108) million of charge for short-term fluctuations for the US primarily relates to equity type investment, derivatives used to hedge the fixed annuity and other general account business.

The fluctuations for the UK operations primarily reflect reduced asset values in Prudential Retirement Income Limited (PRIL), the shareholder-backed annuity business, from widened credit spreads on corporate bond securities.

The loss after tax and minority interests was £(116) million compared with a profit of £661 million in the first half of 2007. The effective rate of tax on operating profits, based on longer-term investment returns, was 29 per cent (HY 2007: 34 per cent). The effective rate of tax at the total IFRS profit level for continuing operations was 12 per cent (HY 2007: 36 per cent). The effective tax rates in the first half of 2008 were broadly in line with those expected except for some Asian operations where there is a restriction on the ability to recognise deferred tax assets on regulatory basis losses.