Group overview
Shareholders' funds
On the EEV basis, which recognises the shareholders' interest in long-term businesses, shareholders' funds at 30 June 2008 were £14 billion, a decrease of £0.6 billion from the 31 December 2007 level. This reduced level of shareholders' funds results from: total EEV basis operating profit of £1,430 million; a £(1.9) billion unfavourable movement in short-term fluctuations in investment returns; a £189 million negative movement due to changes in economic assumptions and in time value of cost of options and guarantees; a positive movement on the mark to market of core debt of £171 million; a negative movement in the actuarial gains on the defined benefit pension schemes of £98 million; and dividend payments of £(177) million net of scrip dividend take-up, made to shareholders.
The £(1.9) billion of unfavourable short-term fluctuations were made up of: £(959) million in the UK life business due primarily to a negative return of 6.8 per cent in the with-profits fund over the period (the FTSE 100 fell 13 per cent in the first six months of the year) against an expected return of 4.1 per cent; £(297) million in the US primarily due to variable annuity equity and fixed interest performance below the long-term assumption; and £(536) million in Asia primarily due to investment returns below long-term assumptions, including Vietnam, Singapore, Hong Kong and Taiwan.
The shareholders' funds at the end of first half of 2008 of £14 billion comprise of £3.7 billion for the Asian long-term business operations, £3.6 billion for the US long-term business operations, £6.0 billion for the UK long-term business operations and £0.7 billion for other operations.
At the year end the embedded value for the Asian long-term business was £3.7 billion. The established markets of Hong Kong, Singapore and Malaysia contribute £2,806 million to the embedded value generated across the region, with Korea at £312 million and Indonesia at £211 million making further substantial contributions. Prudential’s other markets, excluding Taiwan, in aggregate contribute £505 million in embedded value. Taiwan has a negative embedded value of £128 million, this positive movement against prior year (the first half of 2007: negative £157 million) is a reflection of an increase in new business and a change in economic assumptions.
The current mix of new business in Taiwan is weighted heavily towards unit-linked and protection products, representing 65 per cent and 15 per cent of new business APE in the first half of 2008, respectively. As a result, interest rates have little effect on new business profitability and a one per cent reduction in assumed interest rates would reduce new business margins in Taiwan by less than one percentage point. However, the in-force book in Taiwan, predominantly made up of whole of life policies, has an embedded value that is sensitive to interest rate changes. A one per cent decrease in interest rates, along with consequential changes to assumed investment returns for all asset classes, market values of fixed interest assets and risk discount rates, would result in a £96 million decrease in Taiwan’s embedded value. A similar one per cent positive shift in interest rates would increase embedded value by £58 million. On the assumption that bond yields remained flat during the first half of 2008 and then trended towards 5.5 per cent in December 2014, this would have reduced the first half of the 2008 Taiwan embedded value by £61 million. Sensitivity of the embedded value to interest rate changes varies considerably across the region. In aggregate, a one per cent decrease in interest rates, along with all consequential changes noted above, would result in a negligible percentage change to Asia’s embedded value.
Statutory IFRS basis shareholders' funds at 30 June 2008 were £5.6 billion. This compares with £6.1 billion at 31 December 2007 at RER after adjusting for the £(139) million reduction on a change in accounting policy for pension costs. This decrease primarily reflects: operating profit of £674 million, offset by an unfavourable movement in short-term fluctuations in investment return of £(684) million; unrealised value change on Jackson debt securities of £(433) million; and dividend payments to shareholders net of scrip take-up of £(177) million.
Analysis of movement in EEV shareholders' funds £m
31 December 2007 to 30 June 2008
- Opening shareholders' funds – 14,600
- New business operating profits – 602
- In-force operating profits including Asian development costs – 806
- Asset management and other operating profit – 181
- Other income and expenditure – (159)
- Short-term fluctuations in investment returns – (1,949)
- Effect of changes in economic assumptions – (189)
- Change in mark to market value of external borrowings – 171
- Actuarial gains and losses on defined benefit pension schemes – (98)
- Dividends, net of scrip dividend take-up – (177)
- Other – 27
- Tax – 162
- Closing shareholders' funds – 13,977
